It has been hard to talk about money and markets these past several weeks without acknowledging the (war) elephant in the room. When it comes to markets there has really been only one story- The war in Ukraine. Multiple sectors of the market have been impacted. In the energy sector, crude oil spiked to $138 barrel. Commodities like wheat have had parabolic increases, and the Russian sanctions continue to impact a variety of businesses around the world. The meta-market effect of the invasion of Ukraine has and continues to be creating extremely high levels of volatility. Talking about strategies for investing wisely during this period of human catastrophe and suffering can feel cruel or tone-deaf. At the same time, one of the primary purposes of good investing is to protect against market volatility. Creating strategies that protect against unforeseen events is one of the fundamental differences that separate good investments from unprofitable ones. Appropriately I was reminded of one of those strategies from a tidbit of news coming out of the conflict in Ukraine.
Elon Musk Should Stick to Space and Leave the Fighting to the Professionals
Several weeks before challenging Vladimir Putin to single combat via tweet, Elon Musk actually did something useful (Side note, Putin is actually a fairly accomplished Russian Sambo fighter, Elon should stick to rockets and leave the fighting to us). Musk announced that he was sending units for his Starlink internet satellite system to Ukraine. Starlink is a classic Elon visionary idea for global high-speed internet. SpaceX has been sending up hundreds of satellites into lower earth orbit that will deliver hi-speed internet almost anywhere around the globe. It has unbelievable potential for revolutionizing the availability of the internet for everybody from off-the-grid underserved populations in Africa to sailors crossing the ocean. The idea of satellites serving Ukraine as electricity and internet service is disrupted reminded me of a strategy of using satellites to help hedge against disruption in the market.
Gravitational force is a fundamental principle of the universe. This force is what causes the Earth to orbit the Sun, moons to orbit planets, and Starlinklink satellites to revolve around the Earth. Core Satellite investing is a strategy that builds upon this physical law of smaller objects orbiting larger ones. It is a strategy that encourages diversification of investments and can be used to build security into portfolios while aiming to outperform the broader stock market. The basic idea of the strategy is to weigh the portfolio with passive investments that track major market indices like the S&P 500. Then one can make an additional series of investments, call them satellites, that are more actively managed. The bulk of the portfolio, say 50% is in one of the large index funds that will track the returns of the overall stock market, call this the planet. The remainder of the portfolio is divided up into smaller positions. These tend to be specialized and can be actively managed funds or individual investments that can be more actively traded to lock in profitability; these are the satellite positions. An example of this strategy would be to hold 60% in an S&P 500 ETF as the core investment. You could take the remaining 40% and allocate 10% each to a series of investments of actively managed funds in four sectors – hi-yield bonds, EVs, biotech, and commodities for example. The stratagem helps to control for volatility and costs while minimizing risk while guaranteeing that at least the core portion of your portfolio will deliver market returns in a low-cost manner.
Your Conventional Arms Investment Versus your Special Ops Investments
An analogy that any SOFREP reader should relate to is to think of your portfolio like the military force structure. In the military you have your conventional forces or core assets that take on the big jobs, for the army, it’s the infantry and artillery and for the Navy, it’s the surface fleet. The infantry and surface ships are the military’s version of an S&P 500 Index fund. Now think of the remaining “satellite” as Special Operations or forces that face asymmetric threats. Special operations in many ways are meant to do the same thing as satellite investments. They both reduce risk, have very specialized purposes, can be deployed quickly, and provide access to areas of the market or globe that your core/conventional assets may not. Just like a Special Forces, ODA can address conflicts before they escalate, having some small exposure to a commodity fund or Crypto can potentially be a hedge against inflation. The U.S. military has many different Special Forces assets to address different mission sets. To put it in investing terminology the military portfolio is diversified.