Stratum Core
Wealth compounds multiplicatively.
A portfolio is one path through time, and a decline costs more to recover than an equal gain adds. Core rests on that asymmetry. It is built to limit the depth of its own decline, from sources of return that do not depend on the innovation cycle.
Role
Core limits the depth of the Stratum Capital portfolio’s declines.
Core is judged on its path: the depth and duration of its drawdowns, and its independence from Alpha. It is not judged on beating equity benchmarks in rising markets.
Accepted consequence
When valuation multiples expand in strong markets, Core is expected to lag growth benchmarks. The lag is a cost of the design and is stated in advance.
LagNo forecasting
No rule depends on a prediction of markets, sectors, rates or companies. Every input is a measured, trailing quantity.
InputsFixed share
Core is 30% of the portfolio. The share is fixed and does not change with any signal.
30%Physics
What Core rests on.
Each principle is a property of how returns, risk and information behave.
One trajectory
A portfolio is a single path, and wealth compounds multiplicatively along it. The growth rate experienced is approximately g = μ − σ²/2, where μ is the mean return and σ² its variance. Variance reduces compounding: at equal mean return, the less volatile path ends with more wealth.
ErgodicityDepth asymmetry
A drawdown of depth d requires a gain of d/(1 − d) to regain the prior peak. A 10% decline needs 11.1%, 25% needs 33.3%, 33% needs 49.3%, and 50% needs 100%. The cost of depth is convex, so protection matters most where depth is large.
ConvexitySample at the source period
Fundamentals change at the period in which they are reported. Measuring more slowly leaves stale data in the book. Reacting faster than the source changes reads noise and pays to trade it.
SamplingEqual fluctuation per position
A position adds about w²σ² to the book’s variance, ignoring correlation between positions. Unequal volatility therefore produces unequal contributions to risk.
EquipartitionFeedback, not prediction
Core responds to a measured quantity, the book’s own drawdown from its peak. It does not judge whether a decline will continue.
FeedbackDecoupling
The volatility of two combined return streams falls as the correlation between them falls. Core is built from sources of return that do not move with the innovation cycle, which is the space Alpha draws from, and avoids balance sheets that are leveraged claims on the credit system, which tend to move with a disturbance, not against it.
IndependenceMeasured flows only
Every input is realized and trailing, and was public before it was used. A quantity that cannot be measured is not assumed.
MeasurementRisk
Core owns equities and can lose value.
Will Core lag in rising markets?
In strong markets led by growth, yes. That is expected and is the accepted consequence of the design.
Can Core hold very few companies?
Yes. The method sets the count. It can hold one company, or none, in which case Core is held in cash.
Can the feedback response lose money?
Yes. It acts after a decline has already occurred and does not reverse on a forecast, so it can sell low and miss a recovery.
Does Core depend on outside data?
Yes. Some inputs come from third-party sources, and an input that is unavailable is treated as failing.
Does reconstruction have tax effects?
Yes. Core is reconstructed regularly, which produces turnover and, in taxable accounts, realized gains and losses.
Is Core offered on its own?
No. Core is 30% of the Stratum Capital portfolio.
Read the firm brochure.
The brochure sets out the portfolio, its risks and its conflicts.