How to Build a Portfolio That Outperforms For a Century

of questions over how long can this continue? Are we on the verge of some sort of big change in the market as central banks unleash fiscal stimulus and interest rates remain at or close to the zero bound. Are we going to get inflation? Are we going to get stagflation? Are we going to see perhaps even deflation? Is there any way we're ever going to get out of this

regime of low inflation? And I think whenever we have these big turning points in markets, or when we have lots of people talking about the potential for big turning points and markets, we also have a lot of opinions on how those are going to go and what type of portfolio would perform best, And of course we've seen a lot of handwringing recently around growth versus value sixty forty what happens when both bonds and stocks fall at the same time. It's on today's show we're going to

be discussing exactly this idea. How do you build a portfolio that can withstand these regime changes and basically outperform over a really long time horizon. And I'm excited to say our guest for this episode is Chris Cole, the founder of Artemis Capital. He's appeared on all lots previously, digging deep into the low volatility regime of the past years. It's great to have him back. He publishes some excellent research. Chris, thanks for coming on the show again. Thanks Tracy, it's

great to be back on the show. So, uh, I guess my first question is you know the reason we're having this discussion is you published a paper called the Allegory of the Hawk and Serpent, How to grow and protect wealth for a hundred years now. Most investors aren't really looking at their portfolios on a hundred year basis. What sparked your interest in that kind of time frame?

What's really interesting about in particular the last forty years, is that there's a tremendous recency bias that market participants have. The last forty years are incredibly unusual comparative to overall history, and I believe, as I make the case in the paper, that recency biases is now a systemic risk. The price appreciation for a classic sixty forty portfolio over the last ninety three years has come from just the twenty two

years between night four to two thousand seven. So what we've had is this incredible out performance of both stocks and bonds that has been from a reinforcing cycle, and we use the allegory of the serpent for that, and that's been led by falling interest rates. Rates fell from seventeen percent to zero percent. There's been incredible favorable demographics as baby boomers to come into the workforce, falling taxes.

Taxes have fallen to near a hundred year lows, globalization on precedent of monetary policy, and we now have some of the highest levels of both governments and corporate debt in American history. So as a result of this, there's been this incredible out performance of stocks and bonds over the last forty years. But the trillion dollar question that I think is important for any allocator is is this repeatable?

And I actually believe that the factors that drove this generational boom in the stocks and bonds are are now reversing. We're now on a framework where debts at all time highs, the middle class hasn't seen real wage growth since the nineteen seventies, and demographics are really poor, and interest rates can't go any lower. So investors expecting the games in the last four years are likely to be extremely disappointed.

And so to kind of understand what the next twenty years are going to look like and how to build a portfolio that will last um and can manage through this period of secular change, what I did is I went back through history and I recreated all of these financial engineering strategies, UH using I think defensible assumptions over the last years. And we know that you know, history

doesn't repeat, but it rhymes. And my my goal was to figure out what portfolio can consistently perform to every market cycle, whether it's secular growth, whether it's inflation, whether it's deflation. And I think I came up with some really interesting answers in my paper last year in the follow up paper that I just released that really answers the questions as to what type of portfolio really sustains

wealth and capital appreciation and limits draw downs. And the answer that I got is radically different from the type of portfolio that many institutions and retail investors are currently are currently allocating too. I have so many questions already, but one that jumps out at me is going back a hundred years and trying to reconstruct modern portfolios against financial assets in the nine twenties and nineteen thirties. How

exactly did you do that? Because I'm looking at the paper, and you know, you look at things like naked call selling, how that perform during the Great Depression? I'm just curious how you recreated, uh, those portfolios. Absolutely, it's a It's

an incredible question. And I think one of the one of the things that I think is very important to understand about about this exercise is that we don't necessarily say that these portfolios are realized performance, but they are best effort at understanding how a given financial engineering strategy might have performed in the past. And I think there's a lot of defensible assumptions you know, first of all,

we start with a wealth of observable data. There is data that we can gather off from history, namely the composite SMP five hundred prices, from stock data the top companies at a given point in time. There's obviously gold data, interest rate data, there's data on commodities and that that's a starting point um and we use that data from

the global financial database. From there, what we can do is we can construct some UH and replicate some basic strategies like risk parity volatility targeting UH sixty forty portfolios. Those are relatively easy to replicate using that that kind of base level data. Now, Artemis is a long volatility trading shop. We what we do is we we provide volatility,

long volatility and defensive solutions for our investors. So one of the most type of popular strategies that has been employed by many institutions are volatility overwriting strategies, either for income or defensive purposes. And what we wanted to do is to test these going back ninety three years. Of course, how do you test a volatility strategy prior to the existence of the options market, And that's that's not necessarily

something that's easy to do. So obviously you have to make some assumptions and it becomes a bit of an intellectual exercise, but I think the assumptions are very defensible if one understands them. What we first did is we we took options data that exists from the President. We're able to solve for a volatility service. Volatility surface describes the pricing of volatility at various out of the money points, both for calls inputs. So that's the realized data, the

real data that we have. Now we don't have that data going back obviously in the nineteen thirties or the nineteen seventies, but we do have data on how equity markets performed. We can calculate, for example, realized volatility on ten thirty sixty day time frames. We can calculate the rolling performance and next draw downs of equity markets over

those times, so those are observable inputs. So using our arbitrage SBI ball surface that we solve for from real data, we then were able to run a multi multi variable regression to actually look at the last years and fit

a volatility surface based on observable market data. And then what we did is we used that fitted data to an essence, run various option trading strategies using a theoretical volatility fit, and then we looked and compared that to some of the most popular CBO vol indices, like the

buy right index and the put right index. And what we were able to do is we were able to replicate those indices using our theoretical volatility indications to generally over a point eight five correlation and almost exacting performance. So from there, what we're able to do now that we have this kind of in sample history, we were then able to apply that methodology to create a theoretical

volatility imply volatility service going all the way back. Now, there are limitations in this because what you're naturally assuming is that the way market participants price volatility over the last thirty years would be very similar, would would be similar to the way they would price it in the thirties and the seventies and the fifties. Now we don't

know that for certain, right we don't. We're willing to make that assumption to an essence, give give ourselves a fairly realistic assessment on how strategies like UH put writing or strategies like naked call selling would perform during those time periods, and we received some very interesting results that really give allocators a a sense on how these strategies would perform outside of the incredible regime of the last

forty years. So you replicate the volatility performance from you know, over a hundred years ago or ninety three years ago, as you mentioned, you find that a technique that a lot of investors who have been using in recent years to pump up returns um again going short volatility doesn't perform as well, or hasn't performed as well way back then, Like, why exactly did that happen? What were the market conditions in place that you think allowed for the under performance

of short fall. Well, you know, obviously over the many years, I've been a critic of short volatility and that strategy, and I also believe that long volatility is one of the one of the most under allocated assets that is out there today, and I think this paper and some more analysis that we provided give support to that. So I think saying short volatility strategies and what I mean by that these are strategies that sell put options, or maybe they sell call options, might be call overwriting by

right programs. These are strategies that that institutions have employed in many ways to generate excess yield. Over the last four years, they performed exceptionally well, largely because we've been in an environment that has emphasized stability. Every single time equity markets draw down, central banks are able to respond, and that has produced an extremely mean reverting environment. That's not always been the case. And let me kind of

explain why. Let's look at a period like the nine over the entire decade of the nineteen thirties, volatility realized at about that's incredible. So you know, Vaul was realizing two thousand eight. Imagine two thousand eight for an entire decade. Obviously, that does terrible things. Two portfolio that's continuously selling options meality. But one of the surprise takeaways and I think people

would would appreciate appreciate this after the last year. You know, like the original paper came out before the COVID crisis and in many ways kind of predicted a lot of the problems that we're experienced in the COVID crisis. Uh in the in the reflation afterwards, Well naked call selling was among the worst strategies that we looked at you would think naked put selling would be or put put writing would be the worst strategy. Naked call selling was terrible.

Why was naked call selling so bad? Well, if we go back to the Great Depression, you have these incredible drawdowns and equity markets. Central banks responded either by cutting rates, by implementing programs, or by devaluing goal and you had equally insane rallies in the market that were as violent as the draw downs. So that that's something I think that's so important for people to understand and really was foreshadowing the We have this huge drop in March two

thousand twenty, we had this big explosion in April. Well, if we look at the Great Depression, you know, after a brutal three year decline of the market, rallied seventy two percent in just one point five months in ninety two, and that was after the signing of the Banking Act. In nineteen thirty three, the market had an eight percent rebound in just four point five months after Roosevelt devalued

the dollar. So you have these violent rallies that occur during these periods of deflationary crises, and if you're selling call options into those violent rallies. You can clearly understand how bad that is. If you're doing covered call over writing, it's clear how bad that is. Another period that was really violent was the seventies where you had this kind of right tail skew realization. Now, what does that mean. Prior to the devaluation of gold in markets, markets used

to trend. Equity markets used to trend. They were auto correlated. And what that meant is that if yesterday was up, today it was likely to be up, and the next day was likely to be up. So we reached this kind of secular peak in trending of equity markets in the nine seventies, and after the devaluation of gold, which empowered central banks to be reactive, we began a multi decade period where mean reversion ruled and last year represented the highest peak in mean reversion. Another way of saying

that is nega voutle correlation. But really it's like if yesterday was up, today was likely to be down, and vice versa. The mean reversion and markets reached all time highs in over a hundred years of history in trending markets. That's really bad for short vault selling strategies because volatility is comprised of well, naturally vall. You have the vega, that's the volatility. But there's another component to options, which is the gamma. In another way of saying, gammas trend.

So in for the greater part of seventy years, option buyers would have profited from trend. But over the last forty years, mean reversion has ruled, and that's largely been been connected to the decline and interest rates and the proactivity of central banks. So that's another reason why some of these short volatility strategies dramatically underperformed. And we're incredible, uh, I mean not only underperformed, I mean resulted in complete

and cataclismic loss of capital for about seventy years. I'd love to get your take on how the volatility strategy is actually performed last year, like in March, and whether or not we've seen them build back up in the months since, because I think that might help us get a sense of like the direction that we're going in now. There's a question as to what portfolio is most robust

and how do you build a robust portfolio. And one of the conclusions that we had doing this ninety years study of history was that to achieve a portfolio that is optimal, what investors should do is that they should prioritize long term correlations between asset classes over access returns. And so we devised a portfolio that's radically different than what many institutional portfolios have. That what this portfolio does

is it diversifies assets based on market regimes. And by market regime, I mean regimes like inflation, deflation, and growth. It diversifies assets based on market regime rather than asset classes. So is an asset class diversification tool. Or the other diversification diversification tool used by many investors is trailing volatility and correlations. That's what's used by the strategies like risk Perry.

So the portfolio that we really recommended to perform consistently over over ninety three years is obviously about about equity, about high quality bonds, and this is where it gets interesting approximately gold and precious metals. And I'll call that feat alternative. Some people might actually put crypto in that today. Obviously you can't test crypto going back trend and momentum strategies.

These would be managed future strategies that profit off trends and commodities or currencies, and then finally long volatility and defensive hedgie. What ends up happening in these different asset classes. Obviously, obviously equities performed during periods of secular growth. Fixed income performs during periods of relatively stable inflation and UH and deflation.

But you have a limit on fixed income at zero bound obviously, and that that that's occurred in the history before it happened kind of in the nine Now, long volatility and trend and momentum perform in periods of deflation, tremendous deflation, and tremendous inflation, So deflation like the thirties, inflation like the seventies, and obviously fat alternatives like precious metal perform in periods like the nineteen seventies where you

have tremendous stagflation and negative real rates. So you have you're diversifying based on these market regimes. Now, we published this paper at the beginning of last year. We didn't have the opportunity to see in the future about what would happen throughout two thousand twenty. I released a new paper that talked about how this recommended portfolio performed through

two thousand twenty. It was exceptional performance, because, as you know, two thousand twenty was like an entire business cycle condensed into twelve months. The whole business cycle from January to March that was like a nineteen thirties deflation. Then from April to about August, we had this incredible fiat devaluation with ten trillion dollars in global stimulus and this speculative asset growth. That's that's uh, you know, some almost kind

of similar to type of scenario. As we entered the the wintertime, we went into a reflationary scenario that began to resemble kind of the onset of stagflation in the late sixties. I mean that's where you have struggles and interest rates. Interest rates began to rise at perform, but then you have this expectation of a reset deepening of the yield curve, and commodities began to perform. I mean,

lumber reached all time highs copper was exploding. So if we look at how this portfolio that we call the Dragon portfolio formed in that deflationary period in the first part of the year, well, long volatility strategies were the huge winners. They actually we're able to fill the gap where equities drew down. So actually for this portfolio, that first quarter gained about where sixty portfolios and risk parity portfolios had huge underperformance because they were overreliant on bonds

as their defensive protection. So long volatility strategies is so well and protected and helped you make money during that quarter. Then during the FIATA valuation and the kind of growth period after Central Bank stepped in, gold took its turn performing in the summer, along with definitely crypto and other assets like that, and then we had a huge outperformance and equities. Then by the fall, we began to see gold began to sell off, and we began to see

equities continued their upward trajectory. Fixed income began to sell off, but trending commodities managed futures began to outperform, profiting from the trends in commodities markets and the trends in these other asset classes. So we had an entire business cycle condensed into twelve months, and at each point these assets, these market regime diversification benefits of the portfolio became really clear.

And this concept of this dragon portfolio that we introduced actually would have returned close to last year where the portfolio and risk parity portfolios only returned about on average with over three times the max draw down. For people who read our paper, this should not be a surprise. It should not be a surprise because we saw this happen in previous market cycles. But you have to look at the periods outside the last forty years to understand that.

So I get the contention that if you're building a portfolio that's going to outperform in these big regime changes, then in when you basically had a compressed business cycle, as you mentioned, it would do phenomenally well. But most people would agree that was an extremely unusual year, and I think most investment professionals are probably more used to trying to pinpoint the regime changes as they come, rather than build a portfolio that's going to outperform all types

of regimes for a hundred years. Right Like, there outlook is always going to be you know, ten, twenty, maybe thirty or forty years, but it's going to be much much shorter than what you're talking about. So I guess my question is like, how useful is this for your average financial advisor or investor, and how do you encourage people to think on a longer term horizon, or think about diversification across regime changes rather than just trying to

pinpoint when a particular change is taking place in markets. Yeah, I think one of the one of the phrases that we say is do not fear, do not predict, prepare. So if you are able to perfectly time and predict the regime changes, and I tell you I can't, you know, but if you're able to do that, you're Stanley Druckon Miller, You're George Soros, and you should be a billionaire, right. Um, The average retail investor, the average institutional investor, is not

able to necessarily time those changes perfectly. And even if they're able to do so, if you're managing a fifty billion dollar portfolio, if you're an institution, or a ten billion dollar portfolio. I you're an institution, it's difficult to tilt the portfolio. You have to choose some portfolio allocation. And you know, my point is that the average pension fund in America is approximately equity linked investments and approximately

in kind of fixed income and alternatives in cash. What many of these institutions have done is they've crowded in two assets like private equity kind of pretending that they're diversifiers. But if you look at some of the Cambridge studies, private equity has tremendous correlation to the business cycle. It's not a diversifying asset by market regime. No, they've jumped into vcs' is the same thing you jump into real estate. It's the same problem. These are all asset classes that

are correlated to business cycles. Their long GDP asset classes that are correlated to one growth regime. Now, in the past, you could rely on fixed income to provide diversification, but when fixed incomes at the zero bound, it fails to provide great diversification. And anyone who studies the nineties would have seen that problem. When we recreated risk parity portfolios which rely heavily on fix income and lever the fixed income.

There's tremendous underperformance in the nineties when rates were near the zero bound. So these institutions are assuming the last forty years will repeat, and they're in essence levering equity linked, not levering, but they're they're relying on this expectation of equity link performance and these kind of false diversifiers to

reach their seven point to five percent return targets. I think this is a huge mistake because if you remove the last forty years, their performance is closer to to five percent annualized abysmal, you know, using the allocations that they have. So if they're not able to mate that seven point five percent return target, you know, recency bias becomes a problem that all of us are going to

pay for. And the reason being there's about one point four trillion dollar US state and local pension deficit right now, and that's assuming that they are able to hit their return targets. If there's under performance, as one would expect given current valuations and the current correlation mix of their investments, you can expect that deficit to rise to anywhere between three trillion dollars all the way to up to nine

trillion dollars. So in the last stimulus bill, there's a lot of controversy over eighty five billion dollars in bailouts for union pensions. And I'm not going to get another politics on that, but if you can imagine that there's a lot of tension over billion dollars, what's going to happen when when the government's going to need to step in and bail out PBOC and stay in the local pension systems to the tune of three trillion dollars. It's a big problem. Recency bias is a big, big issue.

The problem with many of these institutions that they bought into the sharp ratio myth, the sharp ratio. They look at these investments, be at private equity and these other investments and they say, okay, what's the sharp ratio? We want to we want to put together all of these

investments that have high sharp ratios. Well, the sharp ratio if you go back and you read the original paper that William Sharp wrote, you know, capital asset Prices, that was the paper they wrote when it is thirty years or old in nine four, it's clear that a sharp ratio is not intended for components of the portfolio. The sharp ratio should only be used for the aggregated portfolio. You can't use a sharp ratio too to make judgments on individual managers. Well, why why is that? Well, I'd

like to use this analogy to sports. When you're looking at evaluating players to add to your favorite sports team. If you're a general manager, you want to add players that help you win. That's what you want what we all know, whether your favorite sports basketball or whether it's soccer, there are players on mediocre to bad teams with gaudy statistics and maybe they have really good scoring averages or goals averages, but they their statistics are padded and they

don't help their team win. And the reason is maybe they don't play good defense, or maybe they dominate the ball, maybe they have high turnovers, and maybe they're not making hustle players that help their team win. So as a result of that, sports management has gotten really smart about selecting players and advanced statistics that measure or how a player helps the team win. These are things like winds over replacement value and plus minus ratios. Well, we have

no metric for that in the investment industry. So what ends up happening is that these institutions by into this myth of sharp ratios and they keep layering on investments that have high sharp ratios. But what ends up happening is that when you can put together a bunch of investments that have high sharp ratio, but your portfolio will have lower risk adjusted returns and higher drawdowns, it's really amazing.

And the reason is is that the sharp ratio doesn't take into account the skew or the extreme right or left hils of the investment. It doesn't take into the account the correlations of that investment versus the rest of your portfolio. So what happens here is that people have bought into this myth that layering on top these managers that have high sharp ratios will help them. It actually is hurting your portfolio. And likewise, just like in sports,

there's some players with less impressive statistics. They may not look good on paper, they're sharp, their their their point averages might be lower, but they're doing things like playing vests. They're helping the team win and that shows up in the advanced metrics. Is this the moneyball theory for market investment? It is? It is, and we are working on a new paper that will develop this will come out in the next couple of weeks that actually develops some of

these advanced metrics for institutions. But my point being is that investments like long volatility, which don't look that good on paper, you know, don't They don't have great sharp ratios, but when you add them to your portfolio, they push your portfolio out on the efficient frontier and result in

a better risk adjusted return for your portfolio. Assets like gold, commodity trend advisors, and long volatility and defensive hedging, even though they don't look a great on a sharp ratio basis, you put them into the portfolio and they help your portfolio win. That's what you really care about, and that's what the average US pension institution and the average retail

investor fails I think to fully comprehend. And this is so important because this sharp ratio problem is a social problem because if we don't fix this, we are all going to end up paying for it. So I really am passionate about this. I really believe this. I think the math proves this out, the history proves this out, and I think these are some of the most undervalued assets that one could put in the portfolio, even though

they may not look at that good on paper. We need to stop evaluating the player and we need to start evaluating the team. Now, that's how that's the secret to building better portfolios. Right. So the idea is that the whole of the portfolio can be stronger than the individual components. Right, that's absolutely right. You know, paper, we talked about this idea where you can choose two assets. There are two assets that have high sharp ratios, but

they're highly correlated with another. There's another asset that is a negative sharp ratio, but it's anti correlated. Actually, you'd rather put together the negative sharp ratio that's anti correlated with the with the one that there is a positive sharp ratio, then the two sharp ratio the too high sharp racial investment investments together. That results in a better portfolio. And it's just mathematically true. But for some reason we

don't seem to see this. But sports, oddly, general managers like Daryl Morey and you know, the h the managers the Warriors understand this, this principle as applied to sports, even though we're lacking it in investment management. There's one

other thing I want to ask you. You mentioned um social value just then, and this idea that if we're going to solve things like massive underfunding of pensions, then people should grasp this concept of building a sort of total portfolio versus just going after high returns in the short term. There's one other thing that that kind of caught my interest in the paper where you talk about

the potential for wealth distribution in some regimes. So this idea that, um, you can get a backlash to a market crash, you can get sort of populist pressures on politicians that result in wealth redistribution, higher tax rates, things like that, And I think a lot of people would argue that maybe that's where we're heading. Now, how do you actually protect a portfolio from wealth re distribution and what does your dragon portfolio do it or perform in

that scenario. Well, it's it's really interesting and complex question, and it really delves into a detailed analysis on the individual components. So people have to realize that how this ties in the last forty years because it's not just been rates that have been going lower, but it's been

taxes that have been going lower. So a huge tax cuts starting in the nine So that combination of low taxes, globalization, lower and lower taxes, and lower interest rates has resulted in this huge build up of debt and tremendous outperformance in in in equity linked assets, private equity and all these other long GDP assetss we'll call them because that's

what they are. Well, as we moved to an income rey just distribution type of world that presents a heavy, heavy burden on equities, on real estate, on private equity. It's a big issue for two reasons. First of all, you know, excessive regulation is going to cause problems in those asset classes. Obviously, if you're allocated seventy percent in

those assets, that's that's a huge issue. Um. The second driver is that, look, we have the highest fiscal deficits since World War Two, and they're likely only only to be going up. We have unprecedented monetary policy, and we have the highest levels of corporate debt in American history as a percentage to GDP. These are all true facts. So the problem with keeping interest rates so low is

that it exacerbates the wealth divide. In addition to all of these extreme factors on the excessive debt, we also have the highest income disparity in American history that is equaled only by the Great Depression prior to the Great Depression. This puts tremendous political pressure. You can't just keep rates low and do the Japan experiment because you're gonna have a social social explosion. And you know, I talked about

this in the New York Times. I gave an article back in two thousand seventeen that was prior to my Orables paper where I talked about the blow up involved, and I said, well, you know, if the if the FED wants to suppress volatility indefinitely, well that's something that you know, they can do that, But volatility can never be destroyed. It can only be transmuted in form and time.

So if you're going to suppress asset price volatility using monetary policy, that volatility is going to come out in a different way, and that way is through social instability. And I said, hey, my, you know my hedge fund, which seeks to protect against market crashes. Now that's something I feel pretty confident about being able to protect against. But what you can never protect against is a social revolution, and I think we're starting to see the seeds of that.

Of course, one of the ways that governments can stem that off is by fiscal stimulus giving on money. But that's stagflationary, that's tremendously stagflationary, and so I think that's the that's the route that maybe is the path at least resistance, where you know you have you can destroy debt in two ways. You can default on the debt or you can print money, and you can do tremendous stimulus and you can inflate your way out of the debt,

and we maybe choosing the inflation route. Well, that's going to rereak havoc on the institutional portfolio because people don't realize this. Equities, what is in the seventies were in a great depression on a real adjusted basis. So the draw down on a real basis after inflation was was as bad as the draw down in the es. But the reason that people didn't feel it that that that was that bad was because we were inflating away the problems. Of course that led to you know, rent control and

all these other issues. So if we go the inflation stagflation route, you're going to see equities destroyed on a real adjusted basis, and you're going to see bonds obviously destroyed because rates go up. Well, guess what performs that environment if we go back to our Dragon portfolio. Well, at any point in the Dragon portfolio has two out of the five thematic regime classes me so what performs really well in a stagflationary environment, Well, precious metals and gold.

You had a price increase in gold, we'd presume that crypto would be part of that um but there's a lot of questions on crypto. The other thing that performs extra extremely well is commodity trend and trending trending commodities, So the ct A Sleep portfolio performs really well. So those are strategies that take into account momentum. And so we're seeing that this year, you know where lumber prices are exploding d all time highest coppers up, all these

commodities are trending tremendously higher. So in this sense, if you have of your portfolio allocated two assets that can play off of the stagflation, you're gonna be okay, You're gonna do well. That will make up for your suffering stock and bond exposure. In addition, long volatility can make

money in right tail events and stagflation as well. If we go into kind of a Japan environment, well, you know that that's a scenario where long volatility tends to outperform, and you know you have stability and fixed income and it kind of has stable returns in in inequities. So I think you can't necessarily. It goes back to that idea, don't predict, prepare, and and thrive from change. And and that's when we look at risk in terms of thematic baskets.

Regardless of what regime you're in, at least two to three of the thematic baskets or market regime baskets are outperforming and that saves your portfolio, and that that way you don't necessarily need to predict the winds of political change. All you need to do is to have a balanced allocation so you're prepared throughout any regime. I really stressed that this is something that the investment allocation problem, the portfolio allocation problem, is a social problem. We have a

window of opportunity. This is both on a pension systems institutional investors and for individual investors. There's a window of opportunity to create portfolios that are rebut dust and are able to thrive through these different regimes. You know, my paper of the allegory, the Hawk Conserpent released last year in January, and the follow up to that paper that chronicled how those ideas performed in two thou twenty that was just released, really make the case, and I think

a very important case that this is. This is this is vital if you want to profit and be able to survive periods of secular change. And this is not just an intellectual argument about portfolio construction. It is a social problem if we don't address this, because the pension underfunding is going to get massive and we are going to pay for that. Now, we could pay for it through government bailouts, or we could pay for it through

loss of purchasing power from inflation. But the asset allocation problem is a social problem, and I think institutions and retirees really need to strongly look at diversifiers that profit from left and right tail events and profit from trend and those are asset classes underlooked asset classes like long volatility, commodity trend and precious metals and fiat alternatives, and those are just as important as equities in the portfolio. Chris, what's the name of the new paper? The new paper

which is available on our website. It's called Rise of the Dragon. I I love these UH metaphors and visuals, UM, but I really encourage people to do deep dives into the papers because I think there's a lot of quantitative analytics. UM. Everyone read the first paper. People didn't. Actually, not a lot of people read the appendix, which was twice as long as the paper and contained much more detailed quantitative notes. Um. So you know, both of those papers are available on

our website www. Artemus cm dot com, and occasionally tweet about these things too. Yeah, I'll mention your handle at the end of this. But in the meantime, everyone has some you know, light weekend reading in the form of a twenty page appendix from your paper. So that's sorry, a detailed twenty page abendonment talks about a ball surface and and rispirity replication to the thirties. So all right, Chris, it's lovely having you on as always. That was Chris Cole,

the founder of Artemis Capital. Thank you so much. Thank you, Tracy. Great to be back. So I'm going to avoid recording a monologue here because I think it would be weird for me to talk to myself about what I found interesting in that conversation. But I do encourage you to take a look at Chris's paper. It's not very often that you get to see someone modeling volatility surfaces from the Great Depression, so whenever you get that chance, you

should seize it. All right, this has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. You can also follow our guest Chris Cole. He is at vall under Dash Christopher, and you should also follow all of the Bloomberg Podcast. You can find them on Twitter at podcast. You should definitely follow our producer Laura Carlson. She is on Twitter at Laura M Carlson. And you should follow

Bloomberg's head of podcast, francesco Leavie. She is at Francesca Today. Thanks for listening, t