Skip to content

Ultimate Question

Some Reflections on an Excellent Video

I recently watched an excellent video* by one of our fellow investors here on the platform (@felixfallax), and it gave me some pause for reflection. I often struggle with the balance between factual description of the portfolio progress and the desire to market it for what is, naturally, the rather selfish reason of increasing my AUM and therefore the PI program monthly compensation.

I totally agree with the premise of the video, where the ‘ultimate question to be asked of every PI should be linked to the two anchorings of strategy and benchmark, and seek to ascertain what the PI thinks his/her strategy’s edge over the benchmark is.

I think I get a flying colors pass on the strategy test. I have worn the keys on the keyboard posting both in the eToro feed, and on this site, explanations on how I came to do what I do, and how I do it. I also do not have a huge problem in explaining how I might have a general edge. I am patient, I stick to the plan, I learned not to panic, and I keep my eyes firmly on the macro events that might threaten the outer edges of the strategy.

What I’ve been struggling with is the benchmark. The received wisdom for absolute return funds (in my opinion, this is what more closely matches the type of investment that the Macchia69 portfolio is) is to choose an arbitrary percentage of growth to offer prospective investors to allow them to judge the return at the end or during the investment period. This is what I have done during this first year as a PI. My relative inexperience with the PI limitations in terms of both leverage** and max risk limits*** made me choose 50% as a benchmark. This was based on previous years’ experience while not being in the program, and it will be reduced to a more realistic level based on this year’s experience for next year.

The percentage benchmark, however, is not ideal, as it says nothing about the nature of the product. Being that I primarily work on the UK100 CFD, I thought of using it as a benchmark, and I showed a chart that does this on the website, but it does not completely satisfy me. I am convinced it does not offer a good benchmark, as I trade with high leverage, and the index itself is not leveraged at all. I thought to look at the performance of leveraged UK100 products, but they only appear at max 3 times leverage, and they are too automated to correctly reflect the high manual supervision nature of the Macchia69 portfolio.

But why is this a problem? Well, while a percentage benchmark is good enough to score the performance ex-post (i.e., answer the question ‘did you do as well as you thought you’d do?’), but it does so only at the end of the monitoring period. The problem is to be found in the ex-ante territory; there is no easy way to answer the question: ‘how does a Macchia69 copy compare to other investments available to me?’. I am not sure I have an answer for this problem. An option would be to chart Macchia69 against a variety of investment choices, but the problem is that it is difficult to find one that matches the risk/strategy profile that I employ, and it would be rather useless to chart against something which has a dramatically different risk profile or strategy.

I guess as the years roll on and I continue educating my copiers on the fact that: my portfolio is not low risk, that is proving to be quite rewarding, but it is not immune to sudden swings and has the potential for quite severe drawdowns, the results history will take care of some of the explanation.

For the coming year, I have decided that I’ll be setting a more realistic projection of 40% ± 10%. Apologies for the wide range, it is the result of a review of the current year and this range seems to keep the return curve fairly in check. Anyways even the lower bound (30%) is nothing to sneeze at.

Enjoy a safe new year’s eve celebration and a prosperous new year, or as we say in Scotland “lang may yer lum reek”

** PI can only go up to times 10 on indexes like the $UK100
*** PI must stay below MAX RISK 7 to stay in the program”