An Investment Q&A Session with Kane Kalas

Financial acuity is perhaps the most important skill not taught in schools. All individuals should educate themselves about investing in order to build a better tomorrow for themselves and their families. Access to financial markets has been limited historically, however, the internet boom has changed that, and today ordinary people have access to most of the same investment opportunities and investment data as the wealthy.

We had the opportunity to interview Kane Kalas about the basics of prudent investing. Kalas is an ex world-class professional poker player and is the son of Phillies Hall-of-Fame broadcaster Harry Kalas. He parlayed his poker success into success in the financial markets, changing his focus from poker to investing in his mid-twenties. Now he is the owner and managing principle of Crystal Oak Capital, a hedge fund based in San Juan, Puerto Rico.

Which Investing Style Is Most Successful?

“Any investing style can be profitable if you know what you’re doing,” answers Kalas.

Kalas classifies himself as primarily a quant and arbitrage trader but he says value investing, fixed income investing, growth investing, and momentum investing are all viable strategies if executed properly.

An important distinction is that, unlike most quant traders, who enter and exit positions frequently, usually within a matter hours or days, Kalas refers to himself as a quant investor, who uses quantitative analysis to identify profitable medium-to-long term trades.

“Increasingly, computer models are outperforming humans in all data and game-theory dependent fields. Algorithms today can analyze correlations between a vast number of variables and the price of a security, revealing relationships that would never have been imagined by human intuition.”

Bonds Or Stocks – Which is a Better Investment?

One asset that Kane Kalas tries to avoid exposure to is fiat currency.

“I believe inflation statistics are understated,” he says, “And most investors tend to underappreciate inflation risk.” For this reason, he suggests that stocks are generally a better investment option than bonds, since stocks have historically proven to be “a fantastic inflation hedge.”

To hammer the point home, Kalas continued, “Look, if the U.S. government calculated the CPI with the same methodology it used from 1921 through 1983, the current CPI would be over 10%. This should scare the hell out of investors in bonds and other low-yield fixed income products.”

Which Stocks Should I Own?

Very few investors are able to beat the performance of market indices. Even hedge funds have struggled to beat the S&P500 over the past decade. According to Kalas, a vast majority of stock brokers and financial planners have no investment expertise and push cookie cutter products designed to produce average returns. The result is clients pay fees while gaining no additional benefit compared to investing in index funds themselves.

So, what is Kalas’ advice? Ordinary investors should ditch the financial planners and simply park their savings in a highly diversified market index. He prefers the S&P500 because it has historically outperformed other indexes in terms of risk-adjusted returns.

“The only people who should consider paying others to handle their stock portfolio are high net worth, accredited investors,” says Kalas. “These investors meet the compliance criteria to gain access the world’s elite money managers who overwhelmingly work at hedge funds.”

Kane Kalas gave a final word of warning – do not try to time the market or sell off your holdings when the market goes down. He recited a quotation from the legendary investor Peter Lynch, “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.”

Should I Invest In Gold?

Most investors who are worried about inflation recommend investing in gold. Teasingly called “gold bugs,” these investors argue that gold has historically provided a store of value and is therefore a good inflation hedge.

Kane Kalas though, is not keen on the precious metal, claiming that digital currency poses a potential risk to the future value of gold.

“I believe eventually Blockchain technology is set to render gold entirely useless as a store of value,” Kalas remarks. Providing support for his thesis, Kalas explains digital assets are more portable, scarce, divisible, and fungible than gold. He also believes they are easier to store and harder to counterfeit.

Further tarnishing the precious metal, Kalas points out that gold has underperformed equities during times of low, medium, and high inflation.

So, should I Invest In Digital Assets?

Kalas is proud to be an early adopter of blockchain technology, having purchased Bitcoin for the first time in 2013. In general, he is bullish on digital assets, but unlike many in the crypto space, he is not a “hodler” (someone who holds onto cryptocurrency regardless of market conditions). In fact, Kalas publicly warned that the cryptocurrency market was temporarily overheated on the PokerGo talk show Real Talk in October 2018, after which Bitcoin collapsed over 40% in value by the end of the year. He has garnered a loyal following of cryptocurrency investors who follow closely his opinions and predictions in digital assets markets.

When asked how he feels about digital assets markets today, Kalas was not overly optimistic. “I am a medium-term bear,” said Kalas. “There are too many weak hands in the market right now. Alt coins with poor fundamentals, such as Dogecoin, for example, need to come way down. So do NFT’s.” According to Kalas elevated prices of alt coins and NFTs indicate there is still market euphoria and that there could be more selling in the future.

He is also worried about the affect that Grayscale has on the market. Grayscale owns several trusts with the sole mandate of owning cryptocurrency. The purpose of the trusts is to offer paper cryptocurrency products to investors, allowing them to gain exposure to digital assets in their brokerage accounts. Since Canada approved the first Bitcoin ETF earlier this year, the shares of Grayscale’s trusts have been trading at significant discounts-to-NAV. According to Kalas, as long as these shares continue to trade at discounts-to-NAV, it will cause a drag in cryptocurrency prices.

In the long run though, Kalas expects digital assets to continue to increase in both price and adoption. He is particularly optimistic about the future of Ethereum due to its potential to revolutionize contracts via its smart contract system. Kalas told us it is “somewhat likely” that a “flippening” occurs in the next five years, in which Ethereum surpasses Bitcoin in market capitalization.

Finally, Kalas notes, cryptocurrency is highly volatile. As such, he recommends for ordinary investors to limit their total exposure to digital assets.

Should I Sell Short on Bad Companies and Bad Digital Assets?

Selling short, or betting that the price of an asset will go down, is a very risky strategy usually only executed by professional traders. A short seller assumes asymmetric risk; when selling short, an investor could lose multiples of their initial investment on the downside, but only stand to gain 100% of their initial investment on the upside. In addition to these risks, short sellers usually are forced to pay prime brokers substantial borrow fees.

So, what is Kalas’ stance on short selling? Ordinary investors should never do it, he says.

“Crystal Oak Partners’ employs a long-short strategy, meaning that some of our positions are short sells,” Kalas explains, “however, I seriously urge ordinary investors against short selling. We sell short based on short-term euphoria resulting from over-hyped news, generally in small and micro-cap stocks. It’s a strategy that requires great data, in-depth knowledge, and significant trading experience.” He adds, “remember, when you’re selling short you are betting on the dollar against another asset. Unlike our long holdings, our short positions are all short-term trades. I have no interest in betting on the dollar against any asset in the long run and those who do could easily get destroyed by inflation.”

Summing it Up

-Ordinary investors should default to storing their savings in an index such as the S&P500.

-Inflation risk is high. Avoid dollar denominated investments unless yields are significant.

-Avoid financial planners and stock brokers.

-High net worth investors can achieve superior returns by investing with a hedge fund whose strategy meets their investment goals.

-Digital assets could have tremendous future upside potential but could fall in value further before then. Ordinary investors should not speculate on digital assets with too much of their savings due to extreme volatility.

-Ordinary investors should never sell short.

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes