Asymmetric Portfolio Stats & How to Handle a Market Drop

The theory behind Asymmetric Investing is that if we buy and hold companies with 10x potential over a long period of time, we can beat the market by a wide margin. This relies on the limited downside and infinite upside potential of investing in stocks.

No stock can fall by over 100%. But stocks can go up WAY more than 100%.

The thesis is working.

Here’s a chart of the 23 stocks in the Asymmetric Portfolio and their return since the spotlight article was written.

The common perception of Asymmetric Investing is that it requires taking a lot of risk to get the returns you see above.

To the contrary, the stats behind the portfolio, which I highlighted to subscribers over the last two days, show a portfolio of profitable companies with good balance sheets. Stock performance has been driven by revenue growth, margin expansion, and multiple expansion, just like we want to see.

Here are some high-level portfolio stats:

• 12 of 23 stocks have a net cash balance

• 7 of 23 stocks have a P/E multiple under 30.4x, the multiple of the S&P 500

• 16 of 23 stocks have a P/S multiple under 10x

• 14 of 23 stocks have a 10% revenue growth rate or higher

  • 7 of 23 stocks are growing over 20% Y/Y

  • 5 of 23 stocks are growing over 30% Y/Y

• 18 of 23 stocks are generating positive free cash flow

• 109.8% is the average return of a stock in the portfolio for at least 1 year

There are only a couple of speculative stocks in the Asymmetric Portfolio, but for the most part, these are rock-solid companies compounding their market advantages over years and decades. Investing this way isn’t as risky as you might think.

Moving to the market overall, a pullback on Friday was big, but not enough to be more than a blip in a strong year for the market. And it looks like on Monday the market may claw back a lot of Friday’s losses.

The Asymmetric Portfolio fell under a 100% gain on Friday, but that’s the volatility I expect to experience from time to time.

In Case You Missed It

Here’s some of the content I put out this week.

• OpenAI’s Disruption & Trillion Dollar Gamble: The AI boom is built on OpenAI’s growth potential, and I see how it could be disruptive. And I can see how it all falls apart.

• State of the Portfolio Part 1: I give a snapshot of the valuation, balance sheet, and growth of every stock in the Asymmetric Portfolio.

• State of the Portfolio Part 2: The follow-up.

When Market Panic Hits

On Friday, my Twitter feed was filled with horror stories of people losing millions in moments after the stock market fell and crypto nosedived late in the day.

Most of these losses were in futures contracts and leveraged trades that I never touch, but it was a reminder that understanding your own risks and how you deal with inevitable market downturns is important.

What was I thinking about on Friday?

Don’t Use Leverage

Investing horror stories always start and end with leverage.

If you’re investing in stocks, all the leverage you need is in the fact that we have unlimited potential long-term.

Repeat after me, “Don’t use leverage.”

Don’t Be Afraid to Take a Profit

Do you own a stock that’s up 500% this year?

It’s OK to take a profit!

I like to say that my biggest mistakes were selling stocks that kept going up, but the flip side of that is that we’re in this to make money, and if you’ve made money, it’s OK to take it. This is especially true if the stock now has a nosebleed valuation.

Insiders sell from time to time.

Long-term investors like Warren Buffett sell.

I over-index to not selling, but I do sell stocks, and it’s OK to take some chips off the table, especially in this market.

Understand the Market’s Risks

There’s always risk in the market.

That’s why we can make money as investors.

But understanding where the risk is and when it’s time to dial down the risk meter is important.

For a year, I’ve been talking about how I’m uncomfortable with the market’s valuation in many ways. The P/E multiple of the S&P 500 (shown below) has never been this high in a non-recessionary period.

There’s the AI bubble that could burst.

The economy could go into a recession.

Owning utility stocks today comes with a certain kind of risk, but owning AI stocks that are on fire comes with a different set of risks. Understand how those risks could become reality at a moment’s notice.

As for the Asymmetric Portfolio, I’m very exposed to the market’s overall risk, but I have very little in the AI bubble directly, and I’ve been adding more “value” stocks in overlooked portions of the market this year. I’m comfortable with those risks in a way I wouldn’t be comfortable standing in front of the AI train today.

Understand Your Goals

The beginning of the monthly email I send, laying out what I’m buying in the Asymmetric Portfolio, starts with the rules I’ve built the portfolio around. The reason I do that is to lay out how I’m building a portfolio over a long period of time.

1. I want to be fully invested because missing the biggest up days is more harmful to returns than avoiding a few down days.

2. I invest each month and increase my allocation in down markets, which allows me to be less concerned about valuation.

3. I try not to ever sell.

These are rules I put in place because the Asymmetric Portfolio has long-term goals, and I’m adding capital each month.

That’s what makes sense for me, and I’ve built the portfolio so you can have a view into how I’m building a portfolio over time. But it’s not the only way to build a portfolio, and you can take bits and pieces from me and others to make investments that are appropriate for you.

We all have different goals and different risk tolerances.

If you understand your goals and how they fit into the market’s risks and the risk of any individual stock, you’re set for success.

Prepare Emotionally and Financially For Stocks to Drop

Remember, the stock market goes up more than it goes down, but it will eventually drop 20%, 30%, or even more. And when that happens, we all need to be prepared to handle the downturn and be able to take clear-minded action to take advantage when everyone else is in panic mode.

I’ve learned that I’m more comfortable when the market is in a tailspin than I am when we’re hitting all-time highs. That emotional state may be very different from how you feel.

I’ve also put mechanisms in place to take advantage of large drawdowns when they occur. I have a buy list ready and a plan to double (or more) my investments when the market hits a 20% drawdown.

I’m ready when the pullback comes, and some of my comfort comes from my preparation, and some comes from having gone through it multiple times before.

Friday was a preview of a market panic, but it was a fire drill, not the real thing.

We don’t know when the real panic will hit, but history says we’ll have one again.

Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor, or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please do your research before acquiring stocks.