Safety First: NASCAR driver Johanna Long and her helmet (Credit: Gearheads)
Bulletproof Investing: Week Eight Performance
Each week since the beginning of June, I have presented at least two hedged portfolios created by Portfolio Armor to my Bulletproof Investing subscribers. This is an "investing with a helmet on" approach, and these portfolios are designed to last six months. I have promised to publicly share the final performance of each of these portfolios. Here, I update the final performance of the three portfolios and the top 10 names I presented in the eighth week I offered my service.
Bulletproof Investing Background
For most of the time I've offered my service, I've presented the $1 million portfolio with the highest ratio of possible upside to possible downside over the next 6 months, and the $100,000 portfolio with the highest ratio of possible upside to downside. In many cases, as in week 8, the portfolios that scored best according to that ratio were hedged against smaller than 9% declines. Those tightly hedged portfolios have often underperformed their expected returns, so recently I've shifted to presenting portfolios hedged against larger declines.
One thing I've kept doing since the second week is presenting my system's top names each week, and also a portfolio comprised of them hedged against a >9% decline over 6 months. Let's look at what I presented in week 8 and how it did.
This was the $100,000 portfolio initially presented here. The data below was as of July 20th. The primary securities here were Aon (AON), Novartis (NVS), PerkinElmer (PKI), and Whole Foods, which was acquired by Amazon (AMZN). They were selected because they had the highest potential return estimates, net of hedging costs at the time when hedging against a >5% decline, and they had share prices low enough that you could buy a round lot of one of them for less than $25,000. E*Trade (ETFC) was added in a fine-tuning step to absorb leftover cash from rounding down to round lots of the first four names.
The worst case scenario for this portfolio was a decline of 4.82% (the "Max Drawdown"), and the best case scenario was a gain of 13.96% (the "Net Potential Return", or aggregate potential return net of hedging cost). The "Expected Return" of 4.74% was a ballpark estimate taking into account that actual returns, historically, have averaged 0.3x Portfolio Armor's potential return estimates.
Portfolio 1 Performance
Here's how the portfolio performed, net of hedging and trading costs, and assuming the hedges were opened at the worst ends of their respective spreads.
This was the $1,000,000 portfolio presented here initially. This portfolio had Amazon, ANSYS (ANSS), Cooper (COO), Hasbro (HAS), Intuitive Surgical (ISRG), Constellation Brands (STZ), and Whole Foods as primary securities, with Louisiana-Pacific (LPX) added in the fine-tuning step to absorb leftover cash from the process of rounding down dollar amounts of the primary securities to round lots.
The worst case scenario for this one was a decline of 6.73%; the best case scenario was a gain of 22.94%; and the ballpark estimate of an expected return was 7.21%.
Portfolio 2 Performance
You can see from a quick glance at the put option value column that Hasbro shares didn't do too well over this time frame. Nevertheless, this one returned 7.2%, almost exactly hitting its expected return of 7.21%.
This was the top names portfolio, hedged against a >9% decline, originally presented here, along with the list of top names.
The worst case scenario here was a Max Drawdown of 8.48%, the best case scenario, a gain of 19.36%, and the Expected Return was 6.57%.
Portfolio 3 Performance
This one returned 10.39%, which was better than its expected return of 6.7%, but not quite as good as the 14.62% returned by the SPDR S&P 500 ETF (SPY).
These were Portfolio Armor's top 10 names as of July 20th: Align Technology (ALGN), IAC/InterActive (IAC), JD.com (JD), ServiceNow (NOW), MercadoLibre (MELI), Netflix (NFLX), IPG Photonics (IPGP), Regeneron Pharmaceuticals (REGN), and Cooper (COO).
Top Names Performance
Takeaways From Week Eight
Portfolio 1 above is the first one I've presented in this service so far that posted a negative return, net of hedging and trading costs, but not the first one hedged against a >5% decline. The performance of portfolios hedged against such small declines has been weak due to them excluding most of Portfolio Armor's top overall names (which usually aren't hedgeable against declines as small as 5%), suggesting that someone who can only tolerate a 5% decline might be better off putting half of his money in portfolios hedged against a >10% decline, and the other half in cash.
The top ten names I presented to Bulletproof Investing subscribers on July 20th returned 25% on average over the next 6 months, compared to 14.62% for SPY. To see what this week's top names are, sign up for a two week free trial.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.