Lesson #2 of 7:

“Don’t Let Good Cash Go To Waste"

From: Dan Murphy

Corona Del Mar, CA

(Did you miss Lesson #1? You’re going to want to check it out here.)

Our journey to becoming a one-man hedge fund begins at Portfolio Boss HQ (My desktop) …

PB Office Newport Beach

A fine day in Newport Beach, CA

After a brief ritual to celebrate — drinking a coffee while I booted up my computer — I fired up Portfolio Boss and dove right in …

Eager to see what I could work on to optimize my earnings.

The first thing I did was a general look over my whole portfolio.

Consistent growth, low drawdown (which we’ll touch on again in a later lesson), and high profits …

It was looking great!

But I knew that with some effort and ingenuity, it could be even stronger.

Immediately something jumped out at me.

The algorithms had a clear preference for the types of strategies they preferred.

ETFs with higher leverage were regularly chosen by the program vs ones with lower leverage.

[Leveraged ETFs are designed to amplify the returns of the index it is based on. If you trade a 3x leveraged ETF based on the S&P 500 it will react 3X more to the S&P 500 than a non-leveraged ETF would]

Given a choice between a handful of strategies it would almost always choose the ones with higher volatility.

This wasn’t necessarily a flaw …

In fact it’s one of the main features of the Meta ML technology.

This preference for high volatility allows you to get higher returns.

The opportunity to improve wasn’t in how the program was using the cash I had put in …

It was in how much of the cash it was using.

You see, leverage and volatility are double-edged swords … they mean higher gains … but they also mean higher risk and higher potential drawdown.

The answer to this was to lower the weight of highly leveraged ETFs in Portfolio Boss.

Leverage is a double edged sword that can leave your portfolio drowning in too much cash

What I found was that this left a lot of the money invested in the portfolio laying around as extra cash.

If having extra cash doesn’t sound so bad to you, believe me, I agree completely.

But this was cash that could have been making our one-man hedge fund even more money.

The portfolio was getting amazing returns but it was sitting on an untapped goldmine of investable cash.

And while the Meta ML was doing the “right thing” with the portfolio …

… Cash is safe after all …

If a bull market were to spring up out of nowhere (like the mini-bull run that’s been happening recently) …

All those gains would be missed.

This isn’t a new problem.

Many hedge funds have come up against this barrier and found different ways to handle it.

Many of them return excess cash to their investors.

This is why top hedge funds often have a waiting list …

They don’t want more cash — they just want the cash they do have to make as much money as possible.

So I started thinking …

How we could solve the “problem” of having too much cash in your portfolio for a one-man hedge fund?

I soon realized that the answer was in the question.

If we had excess cash hanging around in our portfolio … why not just make multiple portfolios?

This idea had a domino effect that led to many insights and optimizations.

I’ll share them with you in the later lessons, including the outsized benefits of “true diversification.”

First, I want to make sure you’re clear on the base principle.

“Move excess cash to multiple portfolios.”

The basic idea is this:

Say you have 125 strategies … the way we had it before was you would put all 125 into one Meta ML. 

It would pick the top ten or so strategies to trade. 

But what I discovered is that by dividing the strategies …

… Based on any number of different factors, from inception date, annual growth rate, volatility, etc …

Into four or five different “buckets.”

You could set the Meta ML to treat each bucket as a different portfolio.

After applying this the difference was immediately visible. 

I had a ton of extra cash to trade with.

(I’ll go into a clever trick about how you can optimize this even further a few lessons from now.)

It was just a tiny detail, but suddenly our cash was being used much more efficiently. 

I considered this bucket idea a pretty big win …

I’m sure you will, too if you apply it to your portfolio. 

But I wasn’t satisfied with leaving things there. 

I arranged a whole series of tests I called “the gauntlet” to prove that one person and a desktop could compete with the biggest players on Wall Street.

Make sure you check your email tomorrow to see the next free strategy …

And come back to see me go through “the gauntlet” and learn how you can use the same ideas to supercharge your portfolio.