Model Portfolio and Themes for 2025

Hello and welcome to an updated model portfolio and themes that I believe are suited for 2025.  

Modern Portfolio Theory is all about finding uncorrelated investments in order to reduce the standard deviation of moves in the portfolio.  This would, in theory, allow somebody to take on more leverage.  However, when there is a selloff, as the cliche goes, correlation goes to 1.  The only real way to reduce portfolio variance in a selloff, which is the only time it matters, is to have short positions.  Shorting is very difficult, it’s not for everyone, and I have been avoiding it as a topic for the substack as it would likely not add value to most of my readers.  So that leaves a bit of a dilemma, the only reason for portfolio theory is to reduce volatility so that you can use more leverage, but you need the volatility reduction on the way down, and all longs are correlated in a selloff as fund managers are margin called and become forced sellers of everything, driving down all prices together.  The only conclusion for a long term investor seems to be that diversification is overrated unless you are shorting and using leverage.

There is also a constant back and forth between investing along macro themes vs investing in good businesses agnostic to the major trends.  I use the macro trends, as best as I can predict them, to focus on where to look for undervalued small cap stocks. But sometimes I find an undervalued small cap stock that will likely have macro headwinds instead.  I find myself constantly confronted with tradeoffs, should I overlook insider selling just to own something exposed to Artificial Intelligence, for example?  Or should I invest in something with near term headwinds, but the business is great and the management is aligned?   I originally created model portfolio weights by theme, but then I realized that there were some individual names that I absolutely needed to dramatically overweight without regard for major themes.

So without further ado, for paid subscribers please find my model portfolio below, and an obnoxious amount of exposition defending it.  Hopefully the results at the end of 2025 will be the best defense of the thought process contained within.