The end of NFT royalties and the need for Web3 Strategy

 The end of NFT royalties is a good thing.

Web3 and NFT projects were built in a world that relied on royalty payments. But those royalties are going away, and a lot of people are worried about how their projects will survive without the revenue they generated.

The latest example in this regard is the move from @LooksRare platform.

Let's face it: NFTs have not lived up to their promise. We've been waiting for the "Web 3.0" we were promised, but all we've seen are cool artworks and in most cases - useless tokens.

The problem is that incentives were misaligned in NFT projects. Project teams were incentivized to get as many users as possible trading their NFT tokens, but that meant churning out new tokens without regard for customer needs or long-term vision.

It was all about getting money from trading fees, so they didn't care about delivering value to customers or building an ecosystem around their token—they just wanted more trading volume so they could collect more fees!

We need to change our thinking about how these tokens work and what they're for if we want them to succeed in the long term.

The end of royalties will help us do that by forcing project teams to rethink incentives and focus on delivering value instead of just focusing on trading volume.

One of our clients was growing their community, but they weren't sure how to keep growing. They had built a strong community around their NFT-based project, but the time had come for them to move beyond just trading, especially with the end of royalties on the horizon.

We recommended that needed a strategy that would allow them to grow their community while aligning it with the project's growth goals. This would require a solution that would be beneficial for both parties i.e. the project team and the community.

We worked together to develop a long-term vision and a strategy to reach that vision while engaging and benefiting the community. This allowed them to leverage their existing community and grow in accordance with their own goals in a true web3 manner rather than focused on royalties.

Linkage between Market Liquidity and Startups

 Yesterday the market was positive & people are excited. Today, it might be negative. Instead of reacting to the market, let's pause & reflect.

We discuss financial markets along with the web3 eco-system because both are closely linked.

Thread on traditional finance & Web 3

This becomes apparent when you start treating web3 communities or NFT projects as Startups.

Once this is established, the next step is to understand the interplay of web2 startups and Bull/Bear-driven liquidity cycle

When the bull market is in full swing, there are plenty of opportunities for startups to get funding and make a big name for themselves.

But what about when the market turns?

What does it take for a startup to succeed during a bear market?

Startup success is all about timing, and knowing how to time your project right is one of the best ways to ensure that your startup will be successful no matter what's going on in the economy.

In fact, it's not just about knowing when to launch your product—it's also about knowing when to pull back.

When you're working with funds that are tied up in projects that aren't yet profitable, it can be tempting to continue pushing forward until you reach profitability… or until you run out of money.

But as we've learned from watching startups fail, this kind of blind optimism is often what leads companies down the road toward failure.

If you want your business to succeed in a bear market and beyond, then here are some tips:

1) Know when it's time to pull back on your spending and focus on cash flow management.

There may be times when it seems like there simply isn't enough money coming in (or going out) at any given moment, but you always have a choice to either keep spending or stop.

The key is knowing when it's time to stop spending, which can be difficult for many entrepreneurs who are used to living on the edge.

2) Look for ways to cut costs and make more money with less expense.

One of the most common mistakes that startups make is continuing to spend money on things that don't actually move the needle—and this applies not only to advertising but also office space, employees, and anything else that doesn't directly contribute to revenue.

3) Get help.

If you're overwhelmed by the stress of trying to manage your business then it might be time to consider hiring a web 3 strategy consultant who can help set the vision and strategy that can be executed during the down months, so that the startup is ready for the next round of liq.

One who doesn't charge you an arm and a leg, rather invests in the business through sweat equity and long-term partnership so that the long-term incentives are aligned

Consistency in Investing

Market analysis is not easy. Few cardinal sins in markets revolve around having a pre-conceived notion, acting on it in advance, and then doubling down even when wrong.

The biggest problem is that no one really knows when they are right or wrong especially a person who is obsessed with markets. This is because such a person might consider different exit approaches based on different analysis techniques to justify whether to stay in a trade or to exit. This would lead to a late exit, just in time for the market to switch the direction. This switch might push that same person to again assume that his/her original bias was right and then stay with the trade for a long time.

This kind of behaviour happens often and result, many market participants lose money till two things happen:

1. They realize that short-term investment is a losing proposition and they buy and hold, in which case they are ultimately bailed out by the market. However, that could also be a losing approach if the underlying equity goes down to zero. Mostly works with index funds.

2. They become so good that the investment process becomes simple and repeatable

The term, simple is beautiful, has a lot of weight. Not because investing is simple but because investing is complex and a simple approach repeated multiple times with consistent risk management can improve the odds of success because of the law of large numbers in probability.

Investing is all about probability and having consistency in investing helps realize the impact of probability. So the key is to identify an approach with an edge and then mechanically repeat it without any emotions. If things don’t go according to plan for some time, objectively evaluate and enhance the underlying methodology to keep increasing the edge. Also, if new insights come to the front, evaluate before embedding and repeat.

Risk Management - A Key 2018 Lesson

2018 has been an year of many lessons. This year we have seen severe volatility across assets classes ranging from stocks to bonds, and from crypto assets to fiat currencies. This type of volatility has resulted in many high-profile casualties, where some hedge funds had to close because of substantial losses while other prominent fund managers are severely under-performing. For example, David Einhorn's Greenligh Capital is down -18% in 2018 through July. Such volatility also brings valuable lessons because it stress tests the investment methodology, process and approach, in a real-world environment, rather than in paper trading. One such lesson is the importance of risk management.

One important part of investing is that it is never stagnant, whether you invest in the stock market, bond market, real estate, digital assets, or world currencies. Investing also comes with inherent risks, and as you know about risk: No risk, no gain; high risk, high reward; low risk, low reward." However, the problem with risk-taking is many people do not understand how do you manage risk. This concept of risk management is very important because it not only helps in investing but also in other aspects of life.

In investing, risk management means that you adjust your portfolio and positioning to align with the most likely scenario, and avoid chasing anything at or below 50/50 chance. One of the best example of this in personal life is going to school. One goes to school and then college, spending money on tuition and living, in expectation of reward through professional growth and earnings. Why would one go to school if the possibility of personal/professional growth is only 50%, which would mean there is no point in spending money and working hard if one has 50% chance of growing without hard work.

Similar is the case with investing. We should invest where we expect our value to grow over time while understanding there will be times when things will not go according to plan. For example, many college graduates are laid-off but they bounce back. Similarly, in investing there are periods of great performance, and then there are times when the position moves either against you or doesn't do any thing. This is one of the primary lessons from personal investing career in 2018:

There are times when you make money, and then there are times when you protect what you have made.

This is very important and is a big part of dynamic risk-management. Through risk management, our strategies ensure that investors and their portfolios are prepared for draw-downs, both mentally and through appropriate positioning. In this regard, dynamic risk-management ensures that portfolio keeps dynamically updating based on market realities, and it is not left on the market to decide its fate.

One of the best examples in this regard are digital currency assets. Many investors entered the crypto markets in late 2017 in hopes that the crypto-currencies will go to the moon above what they had already realized through mid-2017. Not surprisingly, they peaked in Jan 2018 and have since declined over 90% in most cases, while the poster-child of the crypto asset world - Bitcoin, is down almost  -70% from the top. Many investors have been adding to their holdings all the way down, and have very recently started hoping for a rally to exit. This is a prime example of lack of risk-management.

Investors who managed their risk had defined exit points. Whether they entered early or late, they exited based on risk-management parameters. As a result, they are now waiting to invest again with less stress on a daily level. Effective risk-management helps in the following ways:

• Avoid persistent losses
• Maintain composure
• Prepare for new ventures and investments

While a traditional investment cycle could go from dis-information to disbelief to hype to hysteria to hope and then to demise, effective risk-management helps break that cycle while keeping the investor objective in their investing regimen. This would help protect investors from major losses. This brings us to the next lesson:

Gains are relative. There are periods of high and low return. Consistency is the key to long-term success.

This leads to a big question. If someone keeps investing in a sinking ship, how is that a wise decision? That is where risk management gains even more importance. One needs to consistently and preferable dynamically manage risk to ensure consistent investments are not made into sinking ships. This is what we try to do. We focus on entry, exit and current allocation levels to manage portfolio risk. This is accomplished through proprietary indicators and signals that span across fundamental and technical spectrum of markets. As a result, we don't promise and suggest that we will maximize the gains in an up-market but ensure that portfolios don't blow-up in case of extreme volatility events like of 2018. And we have seen in 2018 that while many famous investors faced difficulty, volatility of our portfolios always remained in check.

This has helped generate significant gains in 2016 and 2017. And ensured that our approach allowed investors to keep investing in a difficult 2018 market, so that when the volatility subsides or major themes become apparent, the investment base is larger and takes the most advantage of the gains. Some might use concept to defend the dollar-cost-average strategy, major problem with $-cost-average is the sinking-ship scenario. However, if you can invest in a sound risk-managed portfolio, in the long-run you will not be investing in a sinking ship, and therefore, the #-cost-averaging should yield significant long-term gains.

Before ending, I would like to share another lesson from 2018 related to investor participation in a bubble in any asset class but was very clear in case of Bitcoin and crypto currencies:

When the world enters, it is time to exit no matter how attractive it might seem.

This is easier said than done without a sound risk-management system because you could end up seeing your investment go up 300% without you. This is something that I have painfully experienced in the past. Therefore, in order to mitigate these risks and to take advantage of the benefits associated with effective risk-management, we dynamically manage the risk in our strategies. While this risk management sometimes results in lower near-term performance, it reduces portfolio volatility, keeps us unbiased, positions us for major investments, ensure that external noise doesn't influence the portfolio construction, and help generate consistent performance.

H1 2019 Performance Review - Jan thru June

H1 2018 has been very interesting. We started the year after an amazing 2017 and had a very good January. But January generated few sell signals and then everything got very interesting. SP500 declined sharply for two moths with a ~10% draw-down from January top to March bottom. 

While 2018 has not been a typical banner year of out-performance for our proprietary investment strategies, it has highlighted two very valuable aspects of these strategies, aligned with our goal of generating value for investors (not just trying to beat the market because just beating the market carries risk and additional tax/transaction costs): 

1. Consistent returns with dampened volatility in comparison with major stock indices
2. Uncorrelated performance: Returns not dependent on market performance

H1 2018 Performance Summary (excluding fees)

Q1 Market Recap

2018 started with an outstanding January with SP500 (TR) rallying more than 5.7%. During the same time our conservative strategy under-performed the market, while aggressive strategy out-performed SP500. 

At the end of January, we received a sell signal in the stock market because of which we ended our long positions and built a very small short portion. This sell signal played out very well as we moved in to February and witnessed a 10% decline in major US indices. From March through May, US markets tested key levels multiple times but did not break down. 

This is a very interesting observation because we were positioned to avoid loses due to the breakdown and potentially take advantage of the decline. As a result, our portfolios did not perform as well when the market avoided decline. But our purpose was to avoid losses to ensure long-term growth, rather than just buying and holding, which is also equal to buying and hoping.

The sell signal ended in May, and we went long stocks again in June. On the other hand, we have received several other buy signals in other assets, and have positioned our strategies to take advantage of such signals. 

Portfolio Strategies

We currently have two live strategies, and are working on 3 more strategies in Beta phase. Goal for both of these strategies is to generate absolute, uncorrelated returns: 

• Conservative (EPSB): Suitable for retirement accounts and risk-averse investors

• Aggressive (AEPSB): Suitable for risk taking investors, with longer-term invest goals

Note: Following strategy performance numbers do not include fees. Past performance doesn't guarantee future returns

Conservative Strategy: -0.6% vs +2.7% for SP500 (w/ dividends)

In 2018 conservative strategy has shown it's low-correlation and low-volatility characteristics with negligible correlation with SP500 monthly returns. This low correlation is also evident from performance since inception data. The monthly total draw-down for SP500 was ~6.5% vs -3.6% draw-down of the conservative strategy. Monthly volatility of this strategy has been half of SP500, which means once it starts out-performing again, it' risk adjusted returns will be outstanding. 

Aggressive Strategy: -6.1% vs +2.7% for SP500 (with dividends)

While aggressive strategy has under-performed SP500, it has also shown significantly lower volatility. And is positioned to benefit from aligned moves.

Management Fees Refund

Keeping all the good aspects aside, investment strategies have under-performed in 2018. If the year end performance is negative and less than SP500, we will refund investment management fees for 2018.

Conclusion

The best aspect of these strategies is that they enable the investor to concentrate on the work that is more important in life than losing sleep over investments through daily news. 

We don't think the volatility will subside right away, and could see another leg down but that will be a good buying opportunity, if no sell signals are generated. One of the best things one can do at this time, in regards with their portfolio, is to see if their portfolio is positioned to absorb increased volatility, and better yet, can they benefit from volatility.  Our strategies don't depend on market news, rather take into account underlying market tones to make investment decisions. This reduces transaction cost, dampens volatility, moves taxes to long-term bucket and generate consistent results for long-term benefits.

These strategies are open for investment. Please feel free to contact via subscription.ust@gmail.com for details. These strategies are being implemented via managed account setup through a Registered Investment Adviser. 

Please contact us for details. You can also sign-up for free email updates below: 

Q1 2018 Performance Evaluation

Q1 2018 has been very interesting. We started the year after an amazing 2017. In fact, we said the following words to define 2017 performance in Jan 2018: 

"2017 was a very unique year with respect to market performance. SP500 was up for every month of the year, a very unusual occurrence. When one combines this amazing performance with extremely low volatility, it gave us a Sharpe Ratio of more than 3.5. To be honest, if one can get a Sharpe Ratio of 3.5 from an asset class like SP500, one should never invest anywhere else. 

However, the problem is that the historical Sharpe Ratio of the US stock market from 1928 to 2016 is 0.4. This means that last year's performance was an anomaly and will likely not be repeated in the near future. Therefore, one needs to prepare for more volatile, low performance markets over the next few years."

However, Q1 2018 has confirmed our hypothesis that 2017's performance was an anomaly to be replaced by extreme volatility. During Q1 2018, both of our proprietary strategies have performed very well while market has experienced amazing volatility. As you know, our goal is to generate value for investors not just try to beat the market every day because beating the market everyday carries risk and additional tax/transaction costs. We have been delivering value for clients in following 4 ways:

1. Consistent / Absolute returns comparable to major stock indices
2. Uncorrelated performance - Deliver Alpha under different market condition
3. Differentiate by deploying techniques not used by mainstream investment gurus
4. Provide a unique market perspective

Performance Summary (excludes fees)

Q1 Market Recap

2018 started with an outstanding January with SP500 (TR) rallying more than 5.7%. During the same time our conservative strategy under-performed the market, while aggressive strategy out-performed. January confirmed what we hypothesized in the beginning i.e. our strategies are not designed to beat the market every month. This is very important to know because understanding the investment strategy increases confidence.

At the end of January, we received a sell signal in the stock market. This sell signal allowed us to end our long positions after ~2 years and build a very small portion of short positions. This sell signal played out very well as we moved in to February because we saw a sharp decline of more than 10% in major US indices. This decline caught many investors off-guard. However, the ensuing rally again increased the confidence of the bulls. During the rally phase, we continued to highlight the dangers of the rally, internal dynamics and IPM turn window with a suggestion that markets could top in early March.

Markets did indeed top in early March, and have now declined to 200 DMA. They are bouncing around the 200 DMA and are encouraging many buyers to enter the market at potential support level. March decline was attributed to different reasons on different occasions. It started with Facebook leaks, went into Tesla and ended on Amazon. 

We don't think the volatility will subside right away. We could see another leg down because the sell signal still remains in effect. With this backdrop of events, everyone should ask themselves if their portfolio is positioned to absorb increased volatility, and better yet, can they benefit from volatility. . 

In order to properly and profitably navigate through markets where extreme gyrations and news driven moves are the norm, one needs to maintain composure. Our strategies don't depend on market news, rather take into account underlying market tones to make investment decisions. This reduces transaction cost, dampens volatility, moves taxes to long-term bucket and generate consistent results for long-term benefits.

Portfolio Strategies

We currently have two live strategies, and are working on 3 more strategies in Beta phase. Goal for both of these strategies is to generate absolute, uncorrelated returns: 

• Conservative (EPSB): Suitable for retirement accounts and risk-averse investors

• Aggressive (AEPSB): Suitable for risk taking investors, with longer-term invest goals

Although past performance doesn't guarantee future results, Q1 2018 performance was very good for both strategies.  

Note: Following strategy performance numbers do not include fees.

Conservative Strategy: 1.81% vs -0.76% for SP500 (w/ dividends)

In 2018 conservative strategy has out-performance SP500 and had a negligible correlation with SP500 monthly returns. This low correlation is also evident from performance since inception data.  

Aggressive Strategy: 2.97% vs -0.76% for SP500 (with dividends)

Aggressive strategy has significantly outperformed SP500 so far in 2018. And the R-sq correlation coefficient is 0.03. In other words, our performance was independent of SP500's performance. 

Conclusion

The best aspect of these strategies is that they enable the investor to concentrate on the work that is more important in life than losing sleep over investments through daily news because we do the research and invest using proprietary algorithms. If an adviser or fund manager cannot generate uncorrelated returns, investors are better-off investing in a standard passive fund. But if the manager can generate uncorrelated performance, they generate Alpha. And successful managers are compensated for generating Apha.

These strategies are open for investment. Please feel free to contact via subscription.ust@gmail.com for details. These strategies are being implemented via managed account setup through a Registered Investment Adviser. As a result, you keep control over your assets. 

Please contact us for details. You can also sign-up for free email updates below: 

Interesting Market Circumstances

This post is an expansion of a 10 tweet thread posted on 3/12 by @survive_thrive on Twitter.

2018 has been a very interesting year for the stock market. We have seen market perform amazingly in January, one of the best January on record but soon gave back all the gains in a period of 10 days. 

This decline was accompanied by explosion of volatility, which caused many funds to experience their worst draw-down in decades. At the same time, many novice and experienced investors who were betting against VIX for years and had generated impressive gains over past few years were wiped out in 1 trading session.

This volatility and wipe-out highlights the importance of a well-balanced portfolio that can generate returns under different market conditions. Such portfolio construction cannot be accomplished by just following the market pundits on TV because they are paid to react to market rather than being level-headed, which could also be boring. We prefer being boring and consistent because long-term gains are dependent on lower draw-down than temporary rally.

In order to be level-headed, one needs to consider the market at its merits and dissect different aspects of the markets.

Currently, the stocks are at a very interesting point. Nasdaq recently reached all time highs while SP500 recouped most of early February decline. This development was significant enough to attract many prominent financial analysts on financial media and twitter to proclaim continuation of the uptrend. However, we remained cautious of this rally because of multiple reasons.

First of all, DJIA alongside other US and global indices have been rallying since 2016 (2 years) with a rather sharp rally since Nov 2016 US elections. This behavior is inherently unsustainable. Nothing goes straight-up. Similarly, nothing goes down in a straight line as well.  If a new rally phase starts at this point, it would mean that this rally would continue for few more months without a major correction. This kind of behavior, while possible, is highly unlikely.

Secondly, we received a proprietary sell signal at the end of Jan. This signal was used previously but this is the first time we are using it in actual portfolio allocation. This sell signal is a predictive signal and therefore, helps us in pre-empting the risk. However, it doesn’t mean that we have entered a new bear market. On the contrary, as per our bull/bear model, we remain in a bull market with strong momentum.

Thirdly, recent rally resulted in divergences. A divergence occurs when one index reaches a new high but is not accompanied by other indices. This shows reduced leadership, and signals weakness.

Fourthly, bond market has been declining since June 2016. And now we are hearing from many pundits that the long-term Bond Bull market has ended, and this is also evident from heavily short positions. As the sentiment sours towards Bonds, we approach a critical decision point in Bonds:

1.  Resumption of the rally: This possibility is supported by following observations –
1. Proprietary buy signal
2. Heavily negative sentiment towards Bonds
2. Confirmation of the Bear market   
1. Very close to confirming a bear market

While we could enter a full blow Bond bull market, its possibility remains lower. And even if we do enter a bear market, we will have many more opportunities on the short-side.

Keeping the above reasons in mind, we have established a very small (less than 10%) short position in the US stocks. This position will be active for few months till we receive another signal or this signal expires. Because we did not enter the short position right at the top because of reason mentioned earlier, we were underwater for some time but now are again in the green. And look forward to further gains.

However, one should keep in mind that investing against the primary trend is a dangerous game. Since the trend remains higher, our position size remains small and is supported by key sell signals.

Under such circumstances, our portfolio remains risk-neutral. Following chart shows the performance of our portfolio with respect to SP500. Our goal has never been to always beat the market. Instead, it is to reduce volatility and maximize long-term gains. We hope that soon this sideways action will resolve to the upside and generate the expected gains that we have seen in past years, while minimizing the downside risk.