Our CEO Brent and I were talking the other day, as we regularly do, about investing. And more specifically about portfolio construction as in “what type of opportunity might we want to invest in next.” Because in a world like ours, where there aren’t thousands of opportunities listed and traded daily on efficient public markets, it helps to have an idea of what you’re looking for so you don’t miss it when you see it. That’s the importance of preparation when your chances to act are finite and intermittent.

As we talked that through, though, it also dawned on us that neither of us are classically trained in investing. And so while we now are well aware of things like the Kelly criterion and correlation coefficients for sizing and measuring bets, we had practical experience of the implications of those things before we had the specific technical knowledge. 

An implication of that is that there is healthy tension between the qualitative and the quantitative in the way we think about building a portfolio of investments, which you could probably guess just by eyeballing, without knowing the position sizes, valuation multiples, or financial condition of any of them, Permanent Equity’s portfolio. 

So what’s the method to the madness?

In thinking through how we have built our portfolio, five tenets emerged, learned over time, that I thought might be helpful to others who are trying to build a portfolio of anything, with portfolio here being defined as individual things that need to cohere in order to do one thing successfully.

1. Know what you’re trying to accomplish.

2. Don’t risk more than you can afford to lose.

3. Diversify, but not too much.

4. Only take risks you’re compensated for taking.

5. Everything is more correlated than you think.

The plan is to explain each of these in significantly greater depth (do I hear “white paper”?) at some point in the future, but for now, have a great weekend.

-Tim

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