Fixed Deposits And Equities In The Barbell Strategy

If the all the risk-reward stories of the portfolio theory mutualfundwale don’t grab you, here’s an alternative strategy for the independent investor : The Barbell Strategy.

Here’s what it involves :

Building a portfolio that recalls a barbell. That is : On one side, there’s a basket of extremely safe investments. On the other side, there’s a basket of extremely speculative plays. The weight is distributed between two extremes, with almost nothing in the middle.

Here is how Nassim Nicholas Taleb , the renowned derivatives trader and arbitrageur explains the reasoning behind this strategy :

“If you know that you are vulnerable to prediction errors, and … accept that most “risk measures” are flawed, then your strategy is to be as hyper conservative and hyper aggressive as you can be instead of being mildly aggressive or conservative.”

This approach limits your downside risk – the total amount you can lose – while giving you exposure to potentially unlimited upside. And BTW, the two sides of the barbell don’t have to be equally weighted. Taleb suggests putting 85 to 90 per cent of your money in ultra-safe investments. The remaining 10 to 15 per cent should be placed in a whole lot of small, speculative bets with big payoffs .

My version of this strategy is to invest the interest from fixed deposits into the stocks of unlisted companies. Here’s how I’ve set up things:

So how well have I done? Doubled the money, perhaps, in 3 years. A bit hard to tell, as these stocks are far from liquid. But definitely better than just reinvesting or compounding in FDs.

So with all the multi-bagger stock recommendations flying round as the stock-markets remain buoyant, why these illiquid stocks ?To attend the AGMs and observe the main players, perhaps find allies. An extension of the Barbell Strategy to life beyond portfolio management. All with a limited investment in what could turn out to be totally unproductive ventures.

Have you used the Barbell Strategy ? What were the results ?