A kind of stream of consciousness for today. David Barse from XOUT Capital, a custom index provider, was on ETFIQ today talking about all sorts topics including their first ETF, the GraniteShares XOUT U.S. Large Cap ETF (XOUT). The fund's strategy could be summed up as via negitiva, it figures out what to avoid in pursuit of hopefully higher returns. The short version is that the 500 largest domestic stocks are scored on various factors and the companies that score the worst are excluded. Click here if you want more.
This has been an important idea in how I manage portfolios ever since I started managing portfolios. The context for blogging about this was looking back at tech's more than 30% weighting in the S&P 500 during that bubble. Then in real time during the GFC when the financial sector grew to 22% of the S&P 500. A 30% weight is unsustainable, period. It is a result of excessive growth that results in mean reversion which means that sector (tech 20 years ago and financials ten years ago) will implode. I would say that 25% is likely also unsustainable even if it went to 30% before crashing. I would treat 20% as a flashing yellow light and would likely underweight that sector which is what I did with financials before that sector got wrecked. Not zero weight but underweight and that helped.
In a similar vein, avoiding or at least being underweight Japan has been a good way to outperform broad international indexes, the benchmark Nikkei 225 is down 42% from its high 30 years ago (the Nikkei has done pretty well over the last seven years though).
Via negativa, figuring out what to avoid or remove is important in other aspects of life too. Removing sugar (more realistically reducing sugar consumption) can solve/prevent a lot of health problems. Adding weightlifting to your routine removes a lot of problems (kind of a mixed metaphor there, sorry). Being strong enough to do basic things around your house or property to a pretty old age can solve/prevent a lot of problems. Avoiding debt once your retired can solve/prevent a lot of financial problems. Avoiding panic in the face of large declines solves a lot of problems. A strategy to avoid the full brunt of large market declines avoids a lot of problems. And so on. If you spend some time on this you will come up with examples that apply to your life.
Joe Moglia's quote that no one will care more about your outcomes (he actually said retirement) than you resonates with me in a big way. Via negativa then is about having the analytical ability to get out in front of issues for which there is visibility (example, there will be a real bear market at some point) and process/mitigate them.
And because I think it is relevant, a (not too) long post about Bob Weir's, yes that Bob Weir, successful commitment to fitness.