Warren Buffett, Joel Greenblatt, and The Art of The Bubble
Hello Bubble Riders!!
It’s the fourth of July weekend in the US and I’m celebrating with friends and family. So, this week’s newsletter is a little different. Rather than a lesson, it’s an explanation of the goals we’re after at The Art of The Bubble.
What exactly can people expect using these principles?
Notably, starting this month, we are transitioning into Phase II. We have our own website, our own chat server (Discord), and a new payment processor, Patreon, and all of them are much better.
If you’re here for the free newsletter, then nothing will change for you. Just be sure to check your inbox for our letter in spam. I’ll be sending the free email using a plug-in on the new website TheArtOfTheBubble.com and your email service might not recognize it.
For all you paid subscribers, you already got an email explaining what’s up and my gift to you all for early support.
As always, if you have questions, jump on our Discord server (it literally takes 5 minutes to download and set up) and it’s as easy to use as texting.
For this newsletter, I want to explain the 3 portfolios that you all have expressed interest in, depending on your level of comfort and your goals. I’ll start with the slowest and most stable yield. Then I’ll build logically from there.
Even if you really just want 100% growth a year, this is the best way to understand why you need to take various steps.
The Warren Buffett – 15% CAGR = 100% in 5 Years
Two weeks ago, in Lesson 2 of the Yield Farming series, I reviewed Warren Buffett’s approach to investing and demonstrated a way to beat his returns with cryptos–mostly.
To recall, here is a chart of Buffett’s actual performance (with Berkshire Hathway) over the past five years.
That’s a 100% return in 5 years, or 14.9% compound annual growth rate (CAGR).
Now, with cryptocurrencies, you can theoretically stake a lot of UST coins on the Anchor platform and beat Buffett. But there is a problem with that.
If you remember how Mark Cuban lost $5 million, then you’ll recall that platform risk is the dark secret of crypto staking. Putting all your money on one platform exposes it to hacking, coding errors, and the possibility of implosion.
Compound Annual Growth Rate Solutions for Cryptocurrency
One way around that mess is to use several staking platforms: Crypto.com, SwissBorg, and Youhodler probably give the best yields. In the best case scenario, you might get around 13%. Most of you will probably only get 10%.
If you live in the US, you can probably only make 8% reliably by depositing your stablecoins. Remember, if you do buy NEXO tokens to get higher yields, then you no longer have a stablecoin yield farm, but a cryptocurrency investment in NEXO tokens.
So, is that it? Are you doomed?
Nope. But you will have to decide. Are you comfortable with an unquantifiable amount of platform risk? If so, just put everything on Anchor.
If you aren’t comfortable with that (I am not), then a better idea is to try some smart investment ideas. I’ll give you two fixes.
Fix #1 – The QQQ Strategy
I began my work as an investor writing algorithms to trade major indexes in response to economic data. I’ve explained that approach here.
This is the backbone of my strategy. There are no bubbles in a bad economy. So, I always check to see if this area of our world is healthy before I go to the next stages of my decisions (I then check industries, then individual companies or coins).
But, what if you used that indicator differently? What if you bought and sold the tech heavy QQQ index using that algorithm? What if, whenever the indicator said economic health was bad, you bought gold, and when it was good sold gold and bought the QQQ?
Well, here are the results of 22 years of data on exactly that strategy. It has a 76% win rate and a 14.39% annualized alpha relative to buying and holding the QQQ. Mind you it is buying and selling the exact same thing as the QQQ, so this is an “apples to apples” comparison.
The red line is the strategy, the blue line is the QQQ on its own.
That’s over 20% CAGR, so certainly better than Buffett. And while the QQQ does dip, this strategy is meant to identify those dips and respond quickly. It even avoided much of the March 2020 dip, which was caused by COVID not bad economics. (It also dips less than Buffett’s company).
Incidentally, if you don’t have access to the QQQ, you can buy the synth version with cryptocurrencies on https://terra.mirror.finance/trade.
Unlike dumping all your money into Anchor, then, this approach allows you to beat Warren Buffett by trading relatively non-risky things. Still, it’s perhaps not as much as we’d like, and it will be bumpy. So let’s turn to a different approach.
Fix #2 – Liquidity Pool Staking
With this kind of staking you deposit your coins on some decentralized exchange and collect fees from all the trading there using the coins you deposit.
Basically, this is your chance to be Robinhood, rather than use their services.
Here are some of the typical returns you can expect for Liquidity Pool (LP) staking. These are the yields for Polygon (MATIC) – with data from stakingrewards.com.
Yep, 64% beats the pants off Anchor’s 19.5% rate. And remember that Polygon is a Layer 2 scaling solution on Ethereum. So, it’s a solid project.
Here are the drawbacks:
- You still need to research where you are staking and make sure that the platform is a solid one. How trustworthy is Ethermon Validator, for example?
- You are betting on the coin. Yes, I like Polygon (MATIC), but it won’t make much money until this crypto winter ends. MATIC could even drop 50% from here, nullifying all my gains (a 50% drop needs a 100% recovery to put you back where you started). So, there is real financial risk involved here, unlike Anchor.
Bearing all that in mind, here is a reasonable way to beat Buffett with crypto staking and a little bit of tech investing.
Notably, if the coins in your LP Staking strategy do well, you’ll probably earn more. Just don’t count too much on that, since staked LP coins don’t (generally) earn as much as unstaked ones (due to impermanent loss, which is complicated so just ask on Discord).
Still, this does a decent job at diversifying the sources of your returns (= more certainty in results) and it’s built on pretty conservative estimations. Over 5 years, I think this approach stands a good chance of beating Buffett.
Now let’s use these same ideas to get better returns.
The Joel Greenblatt – 50% CAGR = 7.5x in 5 years
Greenblatt ran Gotham Capital in the 1990s and made an astounding 50%+ CAGR for the entire decade for his clients. You can read his (rather advanced) book here.
To achieve a similar return, your portfolio will have to invest. Using lending platforms won’t get you even close. Fortunately, the fixes just discussed give us exactly the tools to do this.
Here’s that portfolio composition.
Joel Greenblatt Compound Annual Growth Rate Portfolio
Recall that crypto LP (liquidity pool) staking is ultimately a bet on the coins you are staking. It is a form of bubble trading, then. So this portfolio is really 60% bubble trades, and 40% “safe” stuff.
The crypto lending is the safest stuff and will keep the volatility of this portfolio way down relative to just doing bubble trades. It also retains a lot of the upside of bubble trading. It’s a risk-parity approach to bubble trading.
But what about forgetting all that and just doing bubble trades? Let’s look at that next.
The Art of The Bubble – 100% CAGR = 32x in 5 years
This is the original idea and I’ve obviously out-performed this recently.
Still, its aim is to take an initial $10,000 and turn it into $10,000,000 in 10 years. Over any 5 years, it aims to make 32x. Mark Cuban is looking to do something like this in the crypto space through venture capital. So is Mike Novogratz. And so is Michael Saylor. Their job is much harder than ours, though, since we are using small sums, not literal billions of dollars.
You would think the breakdown of The Art of The Bubble strategy is obvious, that it’s just 100% bubble trades, but that’s not right. Here’s the actual distribution.
What you’ll notice is that under ideal conditions, this strategy uses leverage–at 10% over the initial investment.
It doesn’t take out a loan or use margin for that. Cryptocurrencies allow for a form of internal leveraging if you pick the right coins, in the right mix, and then stake a few of those coins in the right liquidity pools. It doesn’t change your investments at all, you just get a greater return and it slightly reduces volatility.
Obviously, paid subscribers will learn exactly what I’m doing when we get there.
Right now, of course, we’re in a crypto-winter. My actual portfolio is holding a lot of cash as I find ways to shuffle it about. The end result is that it looks closer to the Joel Greenblatt than this at present.
We’ve reviewed three strategies to use bubble trading and cryptocurrencies to produce impressive returns.
In order to actually beat Warren Buffett, it turns out that you either need to accept a lot of platform risk, or take on some investment risk. One way to take on investment risk is to use the Basic Economic Cycle indicator to buy and sell the QQQ. This indicator forms the foundation of bubble trading, but this approach is an “off label” use for the same signal.
You could additionally do some LP staking. The easiest way to do that during a crypto-winter is to dollar cost average. But you could also crash cost average and improve your returns.
Compound Annual Growth Rate Tips and Tricks to Achieve
The Warren Buffett approach is probably best for passive income that grows over time, since it is so stable. But you might be interested in growing your initial amount.
Then you might as well just invest intelligently. The Greenblatt portfolio takes a “risk parity” approach to bubble trading, keeping 40% in “safe stuff” and 60% in some form of bubble trade. This will reduce your volatility tremendously, and I expect that if I had enough data to back test this all, I would find that it is the “smartest” portfolio by traditional financial metrics (e.g. Sharpe and Sortino ratios, etc.).
The final portfolio approach is just to do The Art of The Bubble. The estimates I have represented here are averages. This year I closed out quite a few good trades — in cannabis and cryptos — for well more than a combined 10x (when annualized). I could stand to wait years yield farming at 10% returns before the average return dropped below those estimates. In fact, I “only” need to do about 300% over the next 4 years to hit the stated 5 year target.
I plan to repeat the 2020 run in the next 24 months. But all the same, you get the idea. These are estimates and averages. The portfolios are meant to clarify your aims. Paid subscribers see what I am actually doing at any point in time.
As always, if you have questions ask on Discord!
Happy 4th and happy trading!!
General financial disclaimer: This post is provided for entertainment purposes only. I am not giving you financial advice and I am not a financial advisor. You should expect no financial returns one way or another based on my statements. These points hold equally for any statements that could be attributed to The Art of The Bubble or any related business entities. If you decide to buy or invest in anything, then your returns and potential losses are your own. No statements about taxation are taxable advice and you are encouraged to consult your own tax professional. You are also encouraged to do your own due diligence before investing in anything.
Specific disclaimer: I own more stocks and bonds than I discuss here, but they are not relevant to bubble trading. Anything that is relevant, I let you know my position in them through the charts above.