Investing Philosophy: West to East

02/17/25 Prospero.ai Investing (195th) Edition (Weekend)

For those that missed it, there is valuable analysis in our Full Year 2024 results. We released it last week. It delves into how we beat the market by 79% last year.

Matt, who I met through this letter and normally writes these intros, cannot do it this week. So I asked myself: “what topic is best tackled exclusively by me?” The obvious answer is a deeper dive into my trading philosophy / approach at Prospero.

We live in a time where information is more and more uniform and easy to access — which reinforces my longstanding belief that your approach is more important than your information. And the right philosophy is the lynchpin of forming and applying that approach. Before I get into how I formed my philosophy, I’m going to get into some principles that helped me understand what problem I was solving. Here are 3 books that developed my trading philosophy.

1. Fooled by Randomness

2. Intelligent Investor

3. Built to Last

Fooled by Randomness teaches us the most important lesson. What most investors are convinced is skill, turns out to actually be luck. (The simplest way to understand this is that a certain % of investors will make money, simply because the market goes up much more than it goes down.)

The Intelligent Investor is important because it is just as much a history lesson as it is an investing lesson. Understanding what is timeless about the market cannot only keep you out of trouble in swings or Bear markets, but it can make what is different become more obvious.

Built to Last isn’t about investing at all. It’s about what makes companies and their approaches timeless. This book is foundational in my understanding of how to assess the long term value of individual companies. What is often referred to in Value Investing as “the leadership of the company”. This book taught me to expand my view past people, and analyze the company’s value and culture.

"The doer alone learneth." - Friedrich Nietzsche

For as long as I remember I had a goal of making the world a more fair place, and finance looked like an area in desperate need of that work. I started investing in stocks in middle school and worked at my first hedge fund when I was 17. When I was 24, I had an idea on how to loan modifications more accurately. Instead of using debt to income ratio to evaluate, I figured out that state laws would be better. Why? Because I discovered that the single biggest factor, regardless of debt or income on loan repayments, was the foreclosure timeline in the state. A number of people told me the model was impossible to build. I decided to prove them wrong so I put my head down and spent the next 3 months building it. I couldn’t code very well at that time, so I did it all in Microsoft Excel. I was told a few years ago that the company still uses that model. The concept of the "Übermensch," which translates to "Overman" or "Superman," is most prominently featured in Friedrich Nietzsche's book "Thus Spoke Zarathustra," where it is presented as an ideal human being who transcends herd mentality and creates their own values; essentially, a goal for humanity to strive towards.

Simply put, if you have aspirations of being a great investor, you’re going to need to know how to form ideas that others have not fathomed yet. I put that quote at the top because the path to being able to do this is not a short one. You will need to do a lot of doing and learning. But if you really want to know if you have skill or just plain luck you’re going to need to be scientific about it. Understand that investing is a hard thing and there is luck and randomness. Good processes will yield bad results and bad processes will yield good results. The only thing that matters is consistency both in your approach and the results landing as expected. You will know you have found some skill when your process works in Bull and Bear markets. It will be both solid enough to build portfolio foundations on top yet flexible enough to find different kinds of opportunities.

“Being at ease with not knowing, is crucial for answers to come to you.” - Eckhart Tolle

So you can think in unique and confident ways to make money consistently. Not from my perspective. This is actually the most dangerous stage for losing money. Myself and many others have fallen victim to this mentality. When you have success your ego can inflate and that can pull you away from your process.

Not only did I have to start my journey into Eastern Philosophy with Eckhart Tolle’s The Power of Now, the signals that Prospero created were a product of those teachings. The formulas that power the signals are what you get when you strip away our opinions on the market and replace them with numerical patterns and consistencies.

But these philosophies are not a closed loop. Nor does understanding a philosophy mean you will apply it well. Just last week I overextended my COIN position outside of market hours (not being able to see a signal update) on nothing more than a hunch that the stock would go up. Well that turned out to be not only wrong but a process which if put through the ringer, could have been easily identified as bad. I had recently done that well with PLTR earnings. But at least for PLTR it was in a clear upswing heading into that earnings and there was some numerical basis beyond a feeling.

That is an example of my ego still edging out my process. But we have a great example on the other side, where I needed to quiet everything down and re-apply the signals/process. For the first time ever after the Deepseek announcement the Prospero portfolio went below the market on an annualized basis, (as much as 20% below). I had a lot of ideas that morning, but I actually did not act them. I did my livestream, thought through the problem on air…and when I finished I sat down, looked at all of the metrics I had worked hard to build; and made a series of moves, 13 longs and 12 shorts over the next two days. At the close the following day we were 25/25 on the moves!

What was I waiting for all morning? Some peace or stillness or whatever you want to call it. The best way to battle ego is to calm yourself, know that you’ve found your process. A clear focus on process is the opposite of ego or impulse.

To bring this all home I will unify the philosophies. In football they say as a cornerback you have to have a “short memory.” Maybe that works if all you have to do is make sure another person isn’t going to catch a ball. But if you want to be a better investor I have a very simple process suggestion based on both of these philosophies.

1. Take all of the responsibility, immediately. It may not be all your fault, it may be comforting to blame institutions or the CEO of the company you invested in. But you can’t and won’t control those things, all you can control is doing better next time. And that requires changing what you can control, yourself. Then…

2. Forgive yourself quickly and comprehensively.

“If you think someone ruined your life, you are right it is you” - Friedrich Nietzsche

“In a village, [two monks] come across a young 17-year-old girl with a long kimono, trying to cross a very muddy road. But she's not daring to step into the mud. So one monk picks her up, carries her across the road through the mud, puts her down.

The monks walk on in silence for another four or five hours, just practicing noble silence.

Then, after four or five hours, they're getting close to their destination. One monk says to the monk who had picked up the girl, "You shouldn't have done that because monks are supposed to not even touch women. So you really shouldn't have picked up that girl. You're not supposed to do that."

The other monk says, "Oh, are you still carrying that girl? I put her down hours ago."

- Eckhart Tolle

A WORD FROM OUR CEO

We updated our short intro + learning videos to include our new full app tour as well as advice on how to use this letter.

We had some big gains with some old favorites APP, ASTS and back from the dead SMCI. Our paper trading portfolio is beating the S&P 500 by 174% annualized, with a win rate of 70% against SPY benchmarks.

We missed our Monday time so only one stream this week - Wednesday 2/19 at 3 PM ET.

Don’t have our app yet? Use it to track your investments with Prospero’s proprietary AI tech.

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Investing Philosophy: West to East

Market/Macro Update w/ Cap/ Value Analysis

QQQ and SPY Net Options Sentiment

Sector Analysis

How we view the Sector performance and momentum

Portfolio Strategy

Putting it all together to make a portfolio that first controls for risks but also has upside

Longs

Adds —> Keeps —> Drops

Shorts

Adds —> Keeps —> Drops

Portfolio Summary

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CAP/VALUE ANALYSIS

Growth stocks triumph once again! Mid-cap and Large-cap growth continue to outperform all other style categories. This week, Large-cap growth had the strongest showing, driven by significant earnings beats from companies like AppLovin and Airbnb. As we've observed, value stocks continue to struggle and are likely to face ongoing challenges due to prevailing uncertainties clouding their future.

SPY/QQQ NET OPTIONS SENTIMENT

SPY NOS remains erratic, despite the broader rally observed in SPY towards the end of the week. We maintain a conservative outlook on the broader market, identifying pockets of promise. However, the direction of sentiment remains unclear. We will adjust our portfolio strategy to reflect this uncertainty and proceed with caution.

QQQ NOS rebounded later last week, driven by strong tech earnings that fueled the rally with no signs of slowing down. This indicates that tech is fundamentally in a stronger position and better shielded from the macroeconomic uncertainties affecting the rest of the market. (In this moment, but as we’ve seen this can shift quickly) We will continue to rely on our signals and maintain an overweight position in Tech to capture upside while controlling for risk.

SECTOR ANALYSIS

Tech and Communication services led the way this week with a strong showing. Materials and Energy also performed decently but continue to face uncertainty due to prevailing macroeconomic factors. Financials were slightly worse off, struggling with similar challenges. Healthcare, on the other hand, took a significant hit, largely due to the incoming administration's critical stance towards traditional medicine. This has created a ripple effect across the sector, leading to notable declines.

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PORTFOLIO STRATEGY

While SPY continues to show mixed signals, QQQ has suddenly shifted to a bullish stance. Due to this change in market sentiment, we will run the portfolio net long this week, with a primary focus on market cap diversification. On the long side, we'll be targeting stocks that diversify our holdings and possess outstanding metrics. Conversely, on the short side, we'll adopt a defensive approach by selecting stocks with low NOS to hedge our larger cap and Technology focus in the long portion of our portfolio. 9 longs, 6 shorts.

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Long / Bull Moves

Long / Bull Moves - BKNG and CYBR adds/ XYZ, APP, GME, TSLA, SMCI and COIN holds/ META, LLY, VST, PM, AVAV, PLTR, ROOT, ASTS and TMDX drops

Adds

BKNG was added for its good Upside Breakout and Net Options Sentiment as well as its exposure to Consumer Cyclical. CYBR was added for its smaller market cap with good Tech Flow, Net Options and Momentum.

Holds

APP remained in our portfolio thanks to its high Net Options Sentiment and significant Upside Breakout. GME was retained for its solid Net Options Sentiment, especially for a smaller cap stock. TSLA was kept due to its perfect Upside Breakout and strong Net Options Sentiment. SMCI stayed in the portfolio for its good Tech Flow and Net Options. XYZ, was kept for our ongoing strategic interest in its Goose release. Finally, COIN was maintained for its high Upside Breakout and Net Options Sentiment..

Drops

META was removed due to its poor momentum score / trend. VST was also excluded for its poor momentum. PM was removed as it did not have any standout metrics. PLTR was dropped for its poor momentum. AVAV, ROOT, ASTS, and TMDX were all excluded as they lacked standout metrics and performed poorly in our screener. LLY was dropped on some important nuance, despite its great ranking in the screener we did not like the Healthcare sector or this Net Options Sentiment trend.

We talk about this nuance all the time but it is nice to be able to show it in a concrete application. 87 Net Options Sentiment is an excellent score for most stocks. And generally higher than we see the best stocks in value driven sectors like Financials and Energy. BUT this 87 in a bad trend + a bad trend/macro concern in the sector. That is how we wrap our heads around dropping, even with excellent screener performance.

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Short / Bear Moves

Short / Bear Moves - TROW, INFY, NVS, COMM and IRM adds/ TSM hold/ CRI, FYBR, CNC, AMKR, XRX, NAVI, JKHY, STX, WEX, MRVL and TER drops

Adds

TROW was added due to its favorable Net Options Sentiment. INFY was included for sector and market cap diversification, supported by its favorable Net Options and Tech Flow. NVS was selected for its Healthcare exposure, larger market cap, and low Net Options Sentiment. COMM was chosen for its Technology sector exposure and low Net Options Sentiment. IRM was added for its nearly zero Net Options Sentiment and larger market cap.

Holds

TSM was held for its higher market cap and low Tech Flow. And to balance out our Large Cap Growth long holdings.

Drops

CRI was dropped due to the recent strentgh of Consumer Cyclical. FYBR was removed as we didn't have the need to hedge any Communication Services exposure on the long side. Additionally, CNC, AMKR, XRX, NAVI, JKHY, STX, WEX, MRVL, and TER were all excluded because they performed poorly in our screener.

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Portfolio Summary

Long / Bull Moves - BKNG and CYBR adds/ XYZ, APP, GME, TSLA, SMCI and COIN holds/ META, LLY, VST, PM, AVAV, PLTR, ROOT, ASTS and TMDX drops

Short / Bear Moves - TROW, INFY, NVS, COMM and IRM adds/ TSM hold/ CRI, FYBR, CNC, AMKR, XRX, NAVI, JKHY, STX, WEX, MRVL and TER drops

9 Longs: APP, BKNG, GME, CYBR, XYZ, TSLA, SMCI and 2XCOIN

6 Shorts: TROW, INFY, NVS, COMM, IRM and TSM

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