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The Scientific Method

Speaking with folks about the blog in recent weeks, I’ve heard that personal stories have been some of the most impactful. My conversations with Kris and Pietros helped bring Composer to life. Writing 101, I know. But with investing, it’s not so straightforward. 

The investment community isn’t good at sharing. Investors desperately try to maintain their edge by keeping their best ideas and algorithms secret. The thought of alpha decay and being front-run keeps portfolio managers up at night.

However, communities have sprung up for retail investors. Twitter (Fintwit), Commonstock, and Reddit have vibrant discussions about markets and strategies. Perhaps retail investors are more willing to share their perspective because they aren’t trading billions of dollars and don’t have their returns meticulously compared to benchmarks. 

Retail investors are trying to fund retirement, put kids through school, and achieve financial independence, and a community sharing ideas, lessons learned, and empathy can be a helpful resource. This is probably why Bogleheads, the online forum of Jack Bogle disciples, has lasted so long. 

I recently saw this picture on Twitter (h/t @AgustinLebron3), and I shared it with the Composer team with the caption “Composer pushes retail investors towards the efficient frontier.”

The efficient frontier of investor sophistication courtesy of Agustin Lebron

From Fintwit courtesy of @AgustinLebron3

The goal for retail investors isn’t necessarily to beat the market but instead to build portfolios that meet each individual's unique objectives and risk tolerance. In other words, the goal is to get closer to this efficient frontier of investing. 

To that end, I think we can learn a lot from each other, and I am bullish on the investment community. I don’t mean encouraging each other to put our life savings into an options trade on Robinhood, but having conversations about portfolio construction and asset classes I’m all for. 

In the Lab

This past week, I sat down with a Composer power user who is constantly in the Composer lab, building and testing symphonies. Ram Samudrala is a professor whose research focuses on computational biology, genomics, and proteomics. Impressive, right? Save some science for the other professors.  

By now, you know the drill on these conversations. Ram's opinions and conclusions are his own, and should not be considered as investment advice. Investing involves the risk of loss, including principal and returns are not guaranteed. This writing is an uncompensated testimonial from a current Beta user of Composer.

Ram talks at ~1,000 words per minute, but I leaned closer and closer to Zoom to avoid missing anything. He has boundless energy and an incredibly sharp mind. 

A wily veteran, Ram has been investing for over 22 years, navigating the Dotcom Bubble and the Global Financial Crisis. He’s the middle reliever who has played in the post-season and been 30 games under .500. 

In addition, Ram is a student of investing. He became interested in algorithmic trading and taught himself to code so he could experiment with new strategies. 

Where does Composer come into the story? Scrolling through Reddit one day, Ram saw the Composer allocation chart and was hooked. 

Historical allocation chart from Composer

Historical Allocation Graph from Composer

I mean, it is beautiful.

From Ram on his investing journey and Composer:

“My interest in the stock market stems from the fact that it's a complex system, and that's what I've spent my career modeling, complex (biological) systems. I see a lot of parallels between market behavior and biological systems in terms of the dynamics and complexity.  It's a bit of problem-solving with game theory that makes it fun, and of course, Composer makes some parts of that easy.” 

The desire to understand and model complex systems is a common theme among Composer users. It shouldn’t be surprising, given that our CEO and co-founder was a data scientist in a past life. 

Speaking with Composer’s product manager, incidentally also a scientist by training, she shared,

“a symphony is a model of markets that you refine with the help of backtests. Then you test the model in the real world by investing and monitoring how it works! Learn, adjust, repeat.” 

Maybe the scientists are on to something. The scientific method for building symphonies.

The scientific method applied to systematic investing.

From Wikipedia

If I can be forgiven for slightly adapting the scientific method, I would propose the following: ‍

Economic principle: an investment strategy like momentum or Risk Parity that you want to test 

Research: search for relevant academic papers, threads on Twitter, and Reddit posts 

Build Symphony: represent the economic principle using Composer’s logic - start simple!

Backtest: run backtests over multiple periods

Analyze Data: evaluate returns and risks. Does the symphony perform as you would expect?

Refine: tweak the logic, signals, or assets to refine your idea

Repeat as necessary

Once you get this process down, you’ll be able to take existing symphonies and play around for hours. Or you’ll be on Twitter, read something that clicks, and fire up Composer to test it out. The scientific method will help you turn that spark of inspiration into action. 

My elementary school science teacher would be proud. 

Diversity of Thought 

During our conversation, Ram shared two links with me. One was an academic paper on Managing Diversification of Minimum Variance Portfolios, and the other was a Reddit thread. [1] I love the diversity of his influences. 

Ram takes a portion of his portfolio and puts it into experimental strategies. It’s a form of mental and portfolio diversification. His investment strategies combine his scientific training, theories from communities like Bogleheads and Reddit, and investment research. His approach captures something we’ve been talking about at Composer: smart investing should be fun. Ram actively enjoys the pursuit of understanding the market and building strategies to test his understanding. 

His take on Composer: it’s incredible how Composer makes it easy to create and implement strategies. Previously, Ram downloaded data from Yahoo Finance, coded a version of inverse volatility, and fought with brokerages to implement his ideas. 

I think it's incredible that Ram developed a version of inverse volatility. A focus on risk and managing volatility is common among Composer users. And in my opinion, it speaks to the caliber of investors attracted to the platform. It’s impressive because building around risk is a much more sophisticated way to think about portfolio construction. 

Composer brings this risk-based view to the forefront in two ways. First, symphonies are dynamic. Instead of answering the question of how they are invested as two percentages (60 40, anyone?), Composer investors can point to market factors like index returns, moving averages, or drawdowns. Or, investors can say their symphonies trade based on holdings’ attributes like recent volatility. This dynamism forces the conversation to be about statistics instead of asset allocation percentages.

Second, Composer backtests symphonies and provides data to consider risk more comprehensively. Volatility, drawdown, and Sharpe ratio are presented to users right next to returns, arming investors to make better-informed risk and return tradeoff decisions. 

Ram’s Lab

One thing that stuck with me is how Ram values community. He appreciates that he can ask an investor about their portfolio's underlying logic or inspiration and then discuss the pros and cons with other readers. And, upon reflection, It’s why I’ve enjoyed these conversations with Composer users so much. Investing is a creative endeavor and learning from each other makes us all better. We must consume to create.  

What has Ram been consuming? Well, lately, Ram has been interested in leveraged ETFs and has been active on r/LETFs on Reddit. 

He’s been tinkering with a variation of Hedgefundie’s Excellent Adventure and trying to move it closer to an institutional-like all-weather portfolio. The term “all-weather” refers to Ray Dalio’s original risk parity portfolio, which is intended to be held in perpetuity and to weather any market environment. 

The retail variant of risk parity often uses LETFs, and as we discussed the other week, volatility is the enemy of LETFs. Ram is looking to manage volatility by using a 200-day moving average as a Risk Off signal. Funny enough, I recently read Leverage for the Run, which argues that a 200-day moving average can be a good predictor of volatility and Drawdowns. We can debate the merits of this paper and using 200-day moving average as a signal, but that is exactly the point. That is community at work. 

From the Reddit Post Ram shared:

“As a fellow scientist, I appreciate the detail and rigor you put into this! Regardless of how I feel about the overall method and findings (I'm still trying to pick everything apart), this post is a great benchmark for the community! If more posts were written like this, we'd all be much smarter :D”

Obviously, not all Reddit comments are this nice, however many folks in the investment community are sharing thoughtful perspectives and asking constructive questions.

Composer Community 

I’m excited that folks like Ram are building on Composer. That is significant brainpower developing strategies that retail investors have never had access to before. Read Packy McCormick's blog on composability if you want to get as pumped as me about this concept. The ideas of Ram, and others like him, will build upon each other. 

Composer will continue growing more powerful, driven by a community of investors like you. And, we will all benefit whether we are symphony creators or simply investors looking for better options. Get excited.

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