How to accelerate your portfolio's performance?

When there is the wind, you can either build a wall to protect yourself or erect a windmill to harvest it. The stock market is volatile, and most good investors learn how to "build a wall" to protect themselves from volatility. However, great investors learn to harvest it.

According to Nassim Nicholas Taleb, the author of Antifragile, whatever that doesn't like volatility, is fragile. A teacup hates sudden movement because a sudden change means the demise of the teacup. Similarly, most stock market investors hate market volatility. There is an entire financial services industry built to create teacups, stable, low-volatility portfolios. Diversification is a classic example of "teacupification." Financial advisors and experts take clients' money and put in a diversified portfolio. They also ask the clients to be patient and give the portfolio enough time to overcome the volatility. Less risk, less reward, and longer time horizons are the typical ways investors deal with volatility. For my entire life as an investor, I have been in this camp.
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Avoiding risky stocks, such as recent IPOs, and giving my portfolio time to let volatility pass have made me an excellent investor. The evidence is my "Roll With Our CEO" portfolio. On Average, it has outperformed the S&P 500, the leading benchmark for gauging performance. I have overperformed the market, which is excellent. However, my overperformance in the market is not massive. In most years, I've overperformed the market by a few percentage points. In a few good years, I crushed the market by doubling the market return. It's great! I can continue doing so, and time can heal most money losses. You can do it too. Pick well managed, well-funded winners, let them grow over the years, and grow your investment with them. A few percentage overperformances every year, over a few decades, become good enough to retire safely. But, what if there was another way. What if instead of controlling volatility and protecting your portfolio from volatility, we could erect a windmill and harvest it? 

Introducing the "Windmill" portfolio

The windmill portfolio is a portfolio designed to harvest market volatility. It is built on the foundation that risk is reasonable and must be harvested not mitigated. Four pillars guide me in the creation and management of this portfolio:

• ​Focusing on small investment decisions: No single pick can cause the demise of the portfolio. In other words, by making small investments, every time I invest in a stock, I'm controlling the downside. The most I can lose with each decision is the small amount of money invested. However, the upside is potentially significant because the investment picks are by nature volatile and ready to jump. 
  
• Nothing wrong with locking gains: By nature, the portfolio is volatile. Therefore, it is very likely that a significant gain can turn to a major loss if not sold when there is a chance. So unlike a Buy & Hold portfolio, I may sell a stock after one day if I'd like to. I plan to sue the 10% rule. No single stock should be more than 10% of the portfolio.
  
• Invest as if the market will shut down tomorrow: While the portfolio's goal is to generate outside return and harvest volatility, there is no need to make take unnecessary risk. In the Stock Card universe, we define risk as a lack of information. That means investing in companies dealing with fraud, possibly getting delisted, or IPOs without clarity around the operations may mean high return and add uncalculated risks and uncertainties. As the old wisdom goals, I would only invest in companies that I would want to hold if the stock market shuts down tomorrow. 
  
• Only invest the money can afford to lose: This is a foundational pillar to every other portfolio, but it is worth reiterating it. The stock market is risky by nature. You may lose all of your money in the market. There have been moments in history that the market has lost a significant portion of its value, and it can happen again. Therefore, I would only invest the money that I can afford to lose. If I lose it, I would hate it, but I wouldn't also miss my next mortgage payment. 

With those criteria in mind, and as always, I would document and share my assessment of each stock added to the Windmill portfolio with our VIP subscribers. Make sure to follow the portfolio by clicking on the bell icon on the top-right corner of the portfolio page. I will also add the decision to my "Roll With Our CEO" portfolio since that portfolio includes every decision I have made since November of 2014. Roll With Our CEO portfolio is my overall report card as an investor if you'd like to call it. 

View and Follow the New Windmill Portfolio

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