The Potomac Playbook For Market Risk and Marketing

Manish Khatta talks with Jay Coulter about the Potomac playbook for market risk and marketing.

The sun is shining on the equity markets, with indexes hitting all-time highs. But as President John F. Kennedy famously said:

"The time to repair your roof is while the sun is shining."

This sentiment was the launching point for a recent discussion between Jay Coulter and Manish Khatta, CEO of Potomac Funds, in their recent interview on the Resilient Advisor podcast.

Khatta shared his insights on navigating today's investment landscape and he also offered a refreshingly candid take on what it takes to market a financial firm effectively.

Rethinking the 60/40 Portfolio in Today's Market

For decades, the traditional stock-bond mix has been the go-to strategy for managing risk. However, Khatta argues that advisors need to change their attitude. The long-term bull market in bonds is over, and recent years have shown that this classic diversification tool isn't providing the protection it once did. He points out that the only reason investors aren't more upset about recent bond performance is due to the strong returns from the stock market.

Key challenges to the traditional model include:

1. Rising Correlations: When the correlation between stocks and bonds increases, the risk-reduction benefits of holding both diminishes.

2. Inflation's Impact: Historically, bonds struggle when inflation is above 3%. With the Fed terrified of repeating the mistakes of the 1970s and letting inflation roar back, the future of bonds remains uncertain.

3. The Diversification Dilemma: Over the last 5-10 years, many traditional diversification tools have failed to deliver, reducing returns without significantly reducing risk.

This environment forces advisors to decide whether to stick with the old 60/40 mantra or find a new way to diversify.

A "Moneyball" Approach to Managing Risk

So, if bonds aren't the answer, what is? Khatta advocates for a"barbell approach" combining cheap, passive index funds on one side with a tactical, risk-managed sleeve on the other. This is where Potomac’s proprietary "Composite System" comes into play.

Instead of relying on a single market indicator—which Khatta warns will eventually

fail—Potomac Funds combines multiple, uncorrelated stock market indicators into one quantitative system. He uses a brilliant analogy of the championship-winning Chicago Bulls of the 1990’s: you wouldn't want a team of five Michael Jordans. Success comes from having different players with different skills, like a Dennis Rodman for rebounds and a Scottie Pippen for defense. Similarly, the composite system uses various indicators that act as checks and balances on each other.

The system's goal is to provide a binary, data-driven answer: should we be invested in the market or not?. It's a "Moneyball" approach that aims for a high win rate, providing a mathematical edge rather than relying on headlines or emotions. This quant-based strategy determines whether to be invested or in cash, and what to invest in depends on the specific fund, ranging from high-yield bonds to leveraged S&P 500 exposure.

Marketing at Potomac Funds - Break the Mold

Beyond investment strategy, the interview highlighted Potomac Fund's unique approach to marketing. Khatta and his team have become known as keynote speakers at top marketing conferences—a rare feat for an asset management firm. Their secret? Transparency and a willingness to be themselves.

Khatta credits the pandemic with leveling the playing field. When everyone was sent home, a firm with 25 wholesalers had no advantage over Potomac Funds, which had five employees. Armed with a camera, a computer, and a distribution platform, they launched a "content bazooka," at one point producing five to seven original pieces a week.

Their marketing philosophy can be summarized as:

1. Data Over Feelings: This mantra applies to both their investing and their marketing.

2. Embrace Your Personality: Khatta’s advice to advisors starting from scratch is to never send out marketing that has anything to do with being a financial advisor. He argues that business is done with people you like, so you must own who you are.

3. Persistence is Key: They kept producing content even when early videos got only a handful of views, understanding the need to build a library over time.

4. Don't Fear the Haters: Khatta believes that if your marketing isn't generating some criticism, it’s probably not effective. He dismisses concerns about negative feedback, noting, "they know about me, I have no idea who they are, so who’s actually winning this game?"

From sending out branded whiskey bottles to posting an in-your-face picture of Altoids in the conference room, Potomac Fund’s marketing is designed to be authentic and memorable, a stark contrast to the "lighthouse and a compass" imagery common in the industry.

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