Steady Strider:

In the hypothetical example below, the low volatility portfolios beat the market despite having average returns equal to or lower than market. This is because in market recoveries, it's easier to get back in the black if you don't go down as much to begin with. Even better, the low volatility plus portfolio goes up more than it goes down. That is the kind of portfolio we are trying to create with the Steady Strider.

Great- but how can this be done?

It's easy to create low volatility portfolios by seeing which stocks move less than the market as time goes on. But low volatility portfolios can be painful if the market is on a multi-year upward trend because they will lag the market several years in a row. If only there were a way to better keep up in these markets. We believe the secret to the low volatility plus portfolio is to identify a subset of low volatility companies with formidable competitive advantages that can earn high profits for more years than the typical investor would expect. We believe we can buy these companies cheaply from impatient investors and wait while the profits roll in, resulting in high dividends or the ability to reinvest into great businesses to create more profits in the future. Often, these companies have the flexibility to add debt to buy out impatient patient shareholders, leaving us with a greater portion of the profits.

A lot of great investment managers try to find companies like these using a large staff doing fundamental research. But we believe we can do just as well with our quantitative screening process, and offer our services at an attractive price. We use 14 different metrics to find companies that have low volatility, high profitability, and attractive valuations. Then we use a proprietary weighting scheme to try to increase the intensity to these factors and make sure the portfolio is well diversified.

We backtested the process over 20 years for US stocks and 15 years for international stocks. The backtest looked great, but we realize backtests can be gamed. To validate our thesis, we have been running a hypothetical portfolio since 1/12/2021. It has played out as expected and has actually outperformed the market in up months while protecting on the downside. The performance is here.

Delivering Market Returns With Less Downside