029 - Jason Buck - Mutiny Funds - Building a Cockroach Portfolio
Resilient Investing: The Cockroach Portfolio Approach
The concept of the “Cockroach Portfolio” is a novel take on building a robust investment strategy that thrives across diverse market conditions. Drawing inspiration from one of nature's most resilient creatures, this approach emphasizes adaptability, diversification, and risk mitigation. Jason Buck runs Mutiny Funds with a core belief that: “Offense wins games. Defense wins championships.”
Mutiny’s version of a diversified, all-weather portfolio therefore combines defensive-minded strategies, such as long volatility and trend, with offensive-minded strategies, such as stocks and bonds. Ensuring survival, and reducing draw-downs through time, provides the best opportunity for long-term capital growth.
This show is all about risk management. If you don’t know what ergodicity is, or how you can drown in a river that is 2 feet deep on average, listen in.
Below is a technical breakdown of a few of the key principles we discuss on the show:
- Average Returns and Sequencing Risk
Traditional investment strategies often rely on historical averages to project future outcomes. However, this approach overlooks sequencing risk, where the timing of returns significantly impacts the portfolio's long-term performance - especially for investors making periodic withdrawals or contributions. For instance, two portfolios with identical average returns can yield vastly different outcomes if one experiences early losses.
- Going Beyond Traditional Diversification
Conventional portfolios, such as the 60/40 stock-bond split, often fall short during extreme market conditions. The Cockroach Portfolio emphasizes “fractal diversification”, which layers diversification within and across asset classes. This approach includes:
- Geographical Diversification: Spreading investments across U.S., international, and emerging markets.
- Sectoral and Style Diversification: Allocating across industries, company sizes, and investment styles to mitigate concentrated risk.
- Temporal Diversification: Using assets with varying sensitivities to economic cycles and interest rates.
- Trend Following Strategies
Rather than predicting market movements, trend-following systems capitalize on prevailing price momentum. The Cockroach Portfolio applies this method across multiple markets (e.g., equities, bonds, commodities) and timeframes. It diversifies further through different trend-following algorithms to adapt to various volatility environments.
- Long Volatility for Downside Protection
Incorporating “long volatility strategies” (designed to perform in bear markets) serves as a defensive measure, thriving during periods of market turbulence. These strategies involve:
- Long options, which gain value in volatile markets.
- Volatility-linked instruments, ensuring profits during sharp market downturns.
This layer acts as a shock absorber, offsetting losses from traditional assets during crises. Insurance is the norm in many aspects of life, but strangely, (and unfortunately) not in investing.
- The Fiat Hedge
To guard against inflation and currency devaluation, the Cockroach Portfolio integrates:
- Gold: A timeless store of value during periods of fiat instability.
- Cryptocurrencies: A speculative hedge against systemic disruptions in traditional financial systems.
- Multi-Asset Carry Strategies
This advanced fixed-income strategy involves borrowing in currencies with low interest rates to invest in higher-yielding assets. The result is a yield spread that contributes to portfolio returns in calm market conditions. These strategies are fine-tuned using fractal diversification principles, targeting bonds of varying maturities and origins.
Key Takeaway: Preparing for the Unpredictable
The Cockroach Portfolio rejects reliance on historical trends, back-tests or singular asset classes. Instead, it adopts a proactive stance, balancing growth opportunities with defensive layers. Its guiding principle is simple yet profound: "Hope for the best, prepare for the worst." This adaptable, globally diversified framework positions investors to navigate both expected and unforeseen market conditions effectively.
For those seeking resilience in an ever-changing financial landscape, drawing some principles from this approach may serve as a robust blueprint for long-term success!
Get in Touch with Jason
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Mutiny Funds Website
I love this infographic on their website
