A Look Back At 2017

by: Bram de Haas

How did The Black Swan Portfolio and The Numeraire do in 2017?

Overstock and FRMO Corp were the most important contributors because of the surge in popularity of blockchain and cryptocurrency.

The cryptocurrencies Bitcoin and Ripple were our highest returning positions with gain of 1713% and 776%.

Psychemedics has been our primary detractor during the year.

The Black Swan Portfolio service includes two model portfolios made up of our selections. One aggressive portfolio which is called The Black Swan Portfolio, named after the service, and the other is a “cash alternative” portfolio called the Numeraire. A cash alternative that should as a whole be more robust to disasters like inflation, deflation, confiscation and devastation even though it contains some elements that, in isolation, are very volatile and risky.

The Black Swan Portfolio returned 49.23% in the last financial year. The Numeraire returned 9.73% in the last financial year.

Tracking returns is a big problem as it is very hard to do it accurately with a non-vanilla portfolio. These returns are gross of any taxes. In addition the specialized software provider is struggling to track special situations. There have been some sources of return that aren’t reflected in these return numbers. This return actually understates the real gross return.

While the accuracy of the numbers is somewhat questionable they are definitely indicating an outstanding result. No reasonable adjustments to the numbers will turn them into anything remotely resembling a bad result.

Since inception in 2015 the portfolio has compounded at 48% annualized.

We are on the right track by focusing on off the beaten path securities and investments that few want to research or own.

But we’ve especially been enormously lucky and don’t expect these type of returns to continue.

Performance of the model portfolios has been driven by a relatively small number of holdings. It is perhaps a better experience as a subscriber to have a large number of picks outperform by a modest margin. This is partly a problem of equities. The returns among equities tend to be driven by a few outliers (FANG is not that unusual). That’s one reason why indexing is attractive and why concentrated amateur portfolios tend to do horribly. At the same time it is probably worsened by our investment style.

Best performers

In absolute dollar value Overstock (OSTK) and FRMO Corp (OTCPK:FRMO) have contributed the most to our results in The Black Swan Portfolio (the aggressive portfolio). These companies appreciated between 153% and 112%. We were also able to take large positions in these companies because they offered excellent downside protection when we bought them. Both have strong balance sheets and undervalued assets. Neither had much in the way of liabilities with the potential to strangle them if things turned sour. Both situations have required patience for years but the market ultimately rerated the stocks in very short time.

The worst performer for the year has been Psychemedics Corp (PMD). This has been a fine investment since we first initiated it but it did not do well in 2017. The company’s Brazil expansion, on which the investment was originally predicated, turned out very well.

After a lawsuit targeting a local sales partner Psychemedics has been forced to reorganize how it does business. This severely impacted profit margins. Margins are likely to recover although not to their previous highs. Revenue is stable but we expect very modest growth rates for a while.

The widely discussed U.S. tax cuts should have a very favorable impact as Psychemedics pays a very high tax rate. It could also benefit the company indirectly by stimulating hiring, especially in the oil & gas industry.

The cryptocurrencies Bitcoin (COIN) and Ripples (XRP) have both done very well for our portfolios. Ripple is a component of our aggressive portfolio and offered the best year-to-date returns on a percentage basis with 766%. It was added relatively late in the year which makes this result even more of an outlier. Because of the modest sizing, its impact does not match that of our biggest winners.


Perhaps a function of the full blown bull market, the worst mistakes have been ones of omission as well as selling out of successful investments too early.

It’s hard to say to what extent these were true mistakes. In hindsight it is a fact we did not experience any significant drawdown in equities in 2017. Without the luxury of knowing what will happen we have to prepare for a wide range of outcomes.

If we had been able to run a number of simulations of the stock market development in 2017, we would have seen a distribution of outcomes. We ended up with a U.S. stock market return that’s near the top of the range of historic annual stock market returns, and every time we took money off the table or cut a more risky position on a good run to buy something safer, that did not turn out well. That doesn’t mean these were necessarily bad choices.

Selling too early does seem to be a recurring mistake. Once a position moves up and the share price isn’t backed up by a high net asset value per share I scale down too quickly to control risk. I'm learning about momentum strategies to see if there’s anything there that could help with the timing aspect of selling investments.


I do not devote a lot of space to the Numeraire usually. It is meant to function as the ultra safe part of a portfolio and it should not require a lot of fiddling month-to-month. Volatility is fine as long as I do not think there is a large chance we’ll face a permanent loss on these holdings. A permanent loss would be a loss that we can’t expect to recover even with a long term horizon.

This year our royalty companies, which represent investments in commodities through a medium that is more volatile but also offers higher returns as compared to investments through commodity ETFs holding futures, did exceedingly well.

The performance of the cryptocurrency Bitcoin, which we switched from the aggressive portfolio into the defensive portfolio as an alternative currency, surpassed our wildest imagination. We have updated the portfolio to reflect some of the more important spin-offs of Bitcoin that we received during our holding period. It may turn out these spin-off chains are an important source of Bitcoin return. We are not sure how it will develop but for now we will list the more important “dividends” as they get up and running and retain these.

Bitcoin has been great but we believe it is prudent to cut back on it in the defensive portfolio. If there is a major drawdown in 2018 it will influence the supposedly defensive portfolio too much. With crypto assets there’s very little certainty value that can be recaptured once lost. We will cut back on its percentage allocation to protect the portfolio its primary objective.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We are long every stock and cryptocurrency mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.