Using History As A Guide, Without Being Married to the Past

 October 31, 2023

The only way to make sense out of change is to plunge into it, move with it, and join the dance.

—Alan Watts

As we have engaged with our clients over the past month, a consistent theme has emerged: a heightened sense of bearishness, fueled by negative news and declining stock prices. Such sentiment is not uncommon in challenging market conditions, and it underscores the importance of our core principles: adaptability, trend following, and disciplined execution.

At Komara Capital Partners, we pride ourselves on our ability to adapt to change. Markets are ever-evolving, and our strategies are designed to evolve with them. The specific rules rarely change. It’s the very idea that those simple rules are designed to be adaptive that make them unique. Our commitment to trend following is not simply a matter of preference; it is a deliberate choice grounded in the belief that trends, more often than not, provide a clear path forward. By following the trends, we align ourselves with the market’s direction, allowing us to navigate through the fever pitch of noise and uncertainty.

Discipline is the bedrock of our approach. It is what enables us to execute our strategies consistently, regardless of market conditions. Our disciplined approach ensures that we do not waver in the face of adversity; instead, we remain steadfast in our commitment to our clients and our investment principles.

In this month’s note we discuss our systematic investment strategy and the key components in its design. We believe the core tenets of our strategies are timeless principles that, if executed with supreme discipline, lead to better outcomes for investors over the long run.

But first, here’s a summary of the global asset classes utilized in our portfolios and their exposures for November.

Asset Allocation Update

November 2023 asset allocation changes grid for Komara Capital Partners risk-managed global portfolios

Adjustments can vary across strategies depending on each strategy's objectives.
What's illustrated above most closely reflects allocation adjustments for the Growth Strategy.

U.S. Equities

Exposure will increase slightly and move to baseline allocation. The intermediate-term trend remains negative, but the long-term trend is positive. As a result, U.S. equities will pick up exposure from weakening international equities. Within the asset class, exposure will remain skewed toward growth and large caps, with almost all other segments in downtrends across both timeframes.

International Equities

Exposure will decrease and move to its minimum allocation. Both foreign developed and emerging market equities now have downtrends across both timeframes.

Real Estate

Exposure will not change and is at its minimum allocation due to downtrends across both timeframes.

U.S. & International Treasuries

Exposure will not change and is at its minimum allocation due to downtrends across both timeframes.

Inflation-Protected Bonds

Exposure will not change and is at its minimum allocation due to persistent downtrends across both timeframes.


Exposure will increase, as gold pushes back into intermediate-term uptrend to coincide with the long-term uptrend.

Short-Term Fixed Income

Exposure will increase, as it receives allocations from weaker assets.

Asset-Level Overview

Equities & Real Estate

After opening the month higher, equity indexes quickly retreated to levels not seen since May. Equity investors would be hard-pressed to find a segment doing well for the month, as we close out October. The result is a continued emergence of downtrends and reduced exposure in our portfolios. The lone exception is U.S.-large-cap equities, which continue to hold onto a long-term uptrend. This means that despite being slightly weaker overall compared to September, U.S. exposure will experience a modest increase, rising to its baseline allocation. The increased exposure will come from weaker international equities, which now reside in downtrends across all timeframes.

It is worth noting that November will be a key month in determining how the portfolios will look as we close 2023. If equity prices remain at these levels or decline further, then it is increasingly likely that our portfolios will have minimum allocations to equities heading into December. On the other hand, a rally in November would likely lead to comparable exposure to our current stance for December and set the stage for an increase entering the new year.

In the case of real estate securities, October’s slide has prices revisiting levels not seen since the pandemic. At some point, this asset class could become an opportunity, but with trends entrenched in a downward direction, we will continue to avoid it except for only the strategic minimums.

Fixed Income & Alternatives

A meme recently made its rounds on our internal chat platform that accurately describes the state of the fixed income markets. In the first panel a man proudly states that he uses bonds to offset the risk of his stock portfolio. In the second panel, we see a drastic change in his expression as he wonders to himself, “But what offsets the risk of my bond portfolio?”

We have the luxury of being amused by this since our allocations to fixed income of any material duration has been at or near its minimum for almost two years now. Others have not been so lucky. With bond markets continuing to make new lows in this downtrend, we are a long way from adding back on exposure. As a result, our portfolios will continue to benefit from higher yields and lower risk associated with ultra-short-term instruments.

Gold exposure will increase. Both the intermediate- and long-term trends turned positive in October. This was presumably driven by the intensification of conflict in the Middle East. Gold has leveled off in recent days but is still below its 2023 high set in the second quarter.

Sourcing for this section:, Real Estate Vanguard ETF (VNQ), 1/1/2020 to 10/29/2023 and, Gold Trust Ishares (IAU), 1/1/2023 to 10/29/2023

3 Potential Catalysts For Trend Changes

Increasing Costs: An increasing selloff in the U.S. bond market drove the yield on the 10-year U.S. Treasury note to 5% for the first time in 16 years last week. Yields rise when bond prices fall and have climbed in earnest since January 2022, when investors began suspecting the Federal Reserve might raise interest rates to fight inflation. The selloff has grown more intense and potentially destabilizing in recent weeks. The swift rise in the last few weeks has been driven primarily by an increase in the term premium, which is the extra compensation investors demand for holding longer-dated investments. Some economists say the increase could be worth two or three Fed rate hikes.

Government Spending: Federal Reserve officials say high long-term bond yields are a key reason for their economic outlook and interest-rate decisions. The officials also say the ballooning federal deficit is a reason yields are rising. What they will not or cannot say is that political leaders should do something about the deficit.

Citizen Spending: U.S. economic growth surged this summer, as consumers spent at a blistering rate that will be difficult to sustain. During the third quarter, GDP expanded at a 4.9% seasonally- and inflation-adjusted annual rate. That is more than double the second-quarter pace. However, Americans’ after-tax, inflation-adjusted income decreased 1.0% during the third quarter, on the heels of a sizeable increase during the first half of the year. Savings as a share of income also fell in the third quarter. A slowdown in consumer spending would weigh on overall growth because it accounts for the majority U.S. economic output.

Sourcing for this section: The Wall Street Journal, “Bond Rout Drives 10-Year Treasury Yield to 5%,” 10/23/2023 and The Wall Street Journal, “U.S. Economy Grew a Strong 4.9%, Driven by Consumer Spree That May Not Last,” 10/26/2023

Simplicity And Consistency

History is a vast early warning system.

—Norman Cousins

With just two more monthly updates remaining in 2023, we find ourselves reflecting on what has been a year marked by notable shifts in investor sentiment. It is worth noting that even we, as believers in systematic asset management, are not immune to human tendencies such as recency bias, and our perspective may also be shaped by recent events. However, it is hard to recall a year that has experienced such pronounced swings in sentiment:

  • From fear at the beginning of 2023, due to memories of 2022’s inflation and interest rate-driven declines
  • To optimism at the midpoint of the year, fueled by hopes of declining or stabilizing interest rates and a rally in artificial intelligence and technology
  • Then back to fear again due to the looming threat of war in the Middle East

On the other hand, one could argue that’s all just fear in different forms. Fear of loss replaced by fear of missing out (FOMO) followed by more fear of loss.

Investors have beliefs about markets and money that develop and evolve as they grow and mature. Their environment (family, friends, co-workers, media, etc.) either reinforces or conflicts with those beliefs, cementing or chipping away at them.

As emotional beings, it is a constant battle to filter the noise and stick to a plan. It is why financial advisors are so important. It’s the reason even great players like Michael Jordan need great coaches like Phil Jackson to win championships.

The beauty of systematic trend following is in its simplicity and consistency. In our opinion, it is among the most adaptable strategies one can use. A rules-based process using price as its only input, if engineered in a robust way, is built for the long-term. The process uses data from the past but limits the influence of any set of historical conditions. Allow us to explain by breaking this down:

  • What is a robust strategy? The way we define it is one that can stand the test of time. Over very many different scenarios, it may never be the best strategy, but it will be skewed toward almost always providing a favorable outcome consistent with a reasonable goal. Based on our research, it will rarely have a negative outcome over a timeframe that matters to achieving the intended goal, and if it does have a negative outcome, it will likely still be better than the alternative.
  • How is a robust strategy built? Again, in our opinion, the best way to build a robust strategy is to do it over as much time/data as possible and with as few variables as possible. Using historical data to build a strategy is kind of like what Winston Churchill said about representative democracies: it’s the worst form, except for all the others. The most valuable feature of historical price data is that it gives a window into investor sentiment and behavior in reaction to various events, which in our opinion is really what drives markets. Look no further than 2023.

Having few variables is important because of a statistical concept called degrees of freedom. Degrees of freedom are the maximum number of logically independent variables used to calculate a statistical relationship (i.e., cause and effect). In a large sample, more variables mean more ability to find a significant relationship among the different possibilities. However, in a smaller sample, more variables can increase the ability of randomness to disrupt the model moving forward.

In financial markets, it is difficult to know whether a sample is large enough, so in our opinion it is better to err on the side of fewer variables. In the end, we are simply modeling investor behavior and incorporating rules to react as it changes. That’s how one builds a strategy for the long term, in our view.

While a systematic trend-following strategy uses historical price data, it is not married to the past to the same degree as a human-based decision-making process. Think about this way: a typical investor will make decisions based on all their experience, or at least the moments they recall in a more or less biased way. This can be individual moments, years, or even decades, depending on the individual. Now compare that to the typical trend-following process, or even the one we use. While our rules are developed over many decades, even hundreds of years of data, they never look at more than the last 200 trading days to make decisions in real time. This means that we are reacting to what is happening in the moment. Not only is the influence of past data minimized, it is outright ignored. In our opinion, this is the best way to build and then execute a robust strategy that can constantly adapt to what is happening in the markets. This is always important but has arguably never been more so than in 2023.

Let's Talk

If you have any questions about what transpired in the markets last month or portfolio positioning for the month ahead