How it all began

After selling my software company to a Nasdaq-listed competitor in 2011, I was confronted for the first time with the question of how to invest my capital. Until then, my partners and I had always invested everything back into our own company….

Accordingly, I wanted to be careful and not put all my eggs in one basket. So I went to the two biggest Swiss banks, told them the same story and entrusted them each with about 40% of my assets. With the remaining 20%, I finally opened an online trading account to try my own luck.

After researching and learning a lot about investment strategies, I bought my first stocks in January 2012. Since then, I’ve had a series of educational experiences marked by hard facts, big losses and nice gains …

In the beginning, I was completely focused on stocks and had a pretty simple method for picking high-yielding stocks: I looked for liquid stocks that were currently trading well below the average price target of at least three analysts. While this resulted in decent returns on average, the often extreme jumps were very nerve-wracking.

So I continued to research how the best experts were delivering sustainable stable returns in good times and bad. I learned more about people like top hedge fund manager Ray Dalio, index fund visionary Jack Bogle and legendary “Quant King” Jim Simons, founder of Renaissance Technologies.

Over time, three simple core principles crystallized for me. I could write several pages about each of the three, but for starters, here’s just a super condensed and simplified version.

Don’t lose Money

What sounds almost too obvious is nevertheless often neglected by most people: make sure to minimize losses and transaction costs, because every loss makes it harder to thrive and succeed.

If you suffered a 50% loss in your portfolio in 2008 (as many did), you required 100% growth to get back on track. If you had nerves of steel and didn’t run away screaming, it took over 4.5 years until September 2012 to get back to where you started in January 2008.

Meanwhile, someone who “only” lost 25% would have already made a 33% gain again in the same period.

In the long run, it’s also very important to keep an eye on transaction and custody fees. It surprised me that the total fees I paid to my banks ate up more than 50% of my profits!

Play with loaded Dice

Every strategy and every transaction (and actually every project in life for that matter!) should have an asymmetric risk-return ratio. As a rule of thumb, the return you expect should be about twice the risk you take.

Assuming you win half of your bets, your average profit would be 50%.  But more importantly, as long as you win at least a third of the time, you won’t lose any money.

As an example: Let’s say you make 10 trades where you can either win $200 or lose $100. If you win only 4 times and lose 6 times, you still have a net profit of 4 x $200 – 6 x $100 CHF = $200. 

Reduce the Noise

This third principle is the most important and it actually took me the longest to really understand it: You need to spread your investments over a series of uncorrelated (!) bets to reduce volatility (the “noise”) and thus minimize risk and optimize returns.

What does that mean exactly? Let’s look at the following five asset classes:

• Equities
• ­Bonds
• Commodities
• Real Estate
• Crypto Currencies

All of them have longer-term uptrends and all of them move up or down by a certain percentage each day. 

First of all, they don’t move up or down at exactly the same time (that’s why we call them “uncorrelated”) and, in addition, they don’t move up or down by the same average percentage per day (we say they have different “volatility”).

For example, stocks fluctuate up and down by about 2% per day, bonds usually fluctuate by less than 1%, and cryptocurrencies sometimes jump by over 10% in a single day.

Now the magic is in the mix: if we look at a portfolio with twice as many bonds as stocks, the absolute fluctuations of bonds are matched to the same amplitude of stocks. And since these fluctuations do not go in the same direction at the same time, they tend to cancel each other out. So the “noise” (and therefore the risk) is significantly reduced! When we add commodities, real estate, and cryptocurrencies weighted by their volatility (i.e., the magnitude of their daily fluctuations), we further reduce overall volatility and achieve an increasingly stable combined uptrend.

As a result, proper diversification across asset classes can significantly reduce your portfolio’s risk while optimizing average returns.

Based on very similar basic ideas, Ray Dalio and Jim Simons have built their billion dollar hedge fund empire.

ETFs as building Blocks

That’s all very well, but how does it translate into real life? How can you manage all these different asset classes without making it your full-time job?

The solution is exchange-traded funds (ETFs), which were invented by visionary investor John Bogle in 1976 and have become the most popular investment vehicle for retail investors since the late 1990s.

An ETF is a basket of securities that is traded on the stock market just like a regular stock. For example, there is an ETF called QQQ that contains the top 100 stocks on the Nasdaq technology exchange. Instead of buying the 100 stocks like Facebook, Apple or Google etc. individually, you can buy a single share of QQQ and have a small stake in all Nasdaq companies in your portfolio.

Meanwhile, there are also ETFs for bonds, for commodities like gold or oil, for real estate investments and recently even for cryptocurrencies.

Now anyone could easily create a well-diversified and balanced portfolio of any size with 5 to 10 ETFs from the five different asset classes. All you would need to do is spend a few minutes each month rebalancing your portfolio by buying or selling a couple of ETFs online and just make sure everything stays properly diversified. With this simple approach, you could reliably reduce your risk, maximize your return, and minimize your fees.

The Magic is in the Mix

In reality, however, it’s not immediately obvious how to choose the right ETFs each month and how to calculate the right weights for an optimally balanced portfolio according to your individual risk profile.

So, based on these core ideas, I started in 2016 to develop my own algorithms for such ETF rotation strategies to solve this puzzle.

What if I could fully automate my asset management with software and AI? Could I achieve better returns and even save costs? What sounds adventurous at first glance has actually become much easier today due to advances in technology.

The basic principles of modern portfolio theory, developed by Nobel Prize winner Harry Markowitz, have been known for decades and used by banks and investment professionals for years. Private individuals have simply not had access to the data, the necessary computing power and the corresponding financial products.

Based on these basic ideas, I researched, primarily for myself, various fully automated strategies that allowed me to generate stable returns of >20% per year based on a mix of freely tradable and highly liquid ETFs. 

Of course, it all looked a bit too good to be true. That’s why I was very cautious to talk about it for a long time. After running my strategies for a good year with my own money, I started sharing my monthly allocations with a few friends. Then, using my strategies, my “real money” portfolio actually produced annual returns of >40% for 2019 and 2020, despite the Corona crisis. 

Penta Capital Research

These results motivated me to further refine and test these strategies and professionalize the approach with a group of partners. This is how Penta Capital Research was born.

Our partner Peersuna, a regulated Swiss asset manager, then launched three public AMC funds based on our strategies in early 2021. These funds can now be bought or sold by any qualified investor, like stocks or ETFs, at any Swiss or European bank, on a daily basis and with no minimum amounts. Of course, all partners at Penta Capital Research have invested a significant portion of their own assets as seed capital. And now you can even publicly follow on a daily basis how our three PentaStrategies are performing:

• AMC Penta Universal – CH0565165864 (target return >10%/year, target volatility 10%, max drawdown approx. 15%).
• AMC Penta Progressive – CH0565165872 (target return >30%/year, target volatility 35%, max drawdown approx. 25%).
• AMC Penta Cryptomax – CH0587596948 (target return >50%/year, target volatility 50%, max. drawdown approx. 35%)

See our strategy page for more details on backtested historical performance over the last 10 years, net of all typical fees. Interestingly, the Cryptomax strategy would have even been consistently better than Bitcoin alone since 2014: better performance with less drawdowns and thus a much better risk-reward ratio than just buy-and-hold of Crypto.

Achieving Life-Goals

If one would follow the Penta Cryptomax strategy and history were to repeat itself, it would theoretically be possible to turn every $1,000 into over $3.8M within 10 years.

In reality, the outcome will probably be different, especially since it is difficult to estimate what economic life will look like in the next 10 years in the context of robotics, AI and quantum computing. It is likely that the stock market will perform significantly differently over the next 10 years than it has in the past, and strategies may need to be adjusted over time.

But I am confident and in the end, money is just a tool. The more you can earn, the richer you will become. But you will only be happier the more you can give back and help others.

Achieving wealth and financial freedom through wise investments is fascinating, but without the right purpose, success and money don’t mean much.

What ultimately makes the difference in life is love, gratitude and the opportunity to serve others.

Stay happy, healthy and prosperous!

Omar