Defining "Holistic Return"
An alternate return metric for individual investors to optimize on
This post reflects my personal opinions and research. It is not investment advice. Whiteout Capital is a publication of Eudemonia 0x1 LLC. Please read the full disclaimer: whiteoutcapital.com/legal-disclaimer.
My fellow investors,
Yesterday, I was following my 19-month-old son around our neighborhood as he pushed his plastic mower down the sidewalk, stopping at each tree to give it a hug and say, “I love you.” It’s moments like this that are a forceful reminder of what’s important in life.
I’ve realized in recent years that mainstream return metrics consider only financial return and are optimized for professional money managers who are bound by institutional mandates and fiduciary duties to prioritize risk-adjusted performance.
I’m an individual private investor with a family and a job outside of finance. As I’ve matured as a father, husband, and investor, I’ve realized that what’s best for my portfolio isn’t always what’s best for my family. That fact has inspired me to define a more comprehensive metric.
Rather than maximize solely on risk-adjusted return, I aim to optimize what I call “Holistic Return.” I define Holistic Return as follows:
In loose terms, Holistic Return increases when risk-adjusted returns are high and the effort, stress, time, and complexity are low—especially if I think I’ll enjoy the process.
In practice, this is a qualitative measure that I don’t formally calculate, but it’s become an important mental model I use to filter investment opportunities. This is particularly important for me because I’m on my own investing part-time. I don’t have a team, 40 hours per week, or unlimited resources, so when I do get an hour here or there, I want to be efficient.
My ultimate goal of investing is to improve the life of my family, and Holistic Return is the best metric I’ve come up with so far to measures that. Sometimes a little extra return doesn’t justify the cost elsewhere. Below, I’ll explain why.
Risk-Adjusted Return
I’m not reinventing the wheel here, nor do I use a strict formula to calculate this. If I have Investment 1 that I think can make X% return fairly safely and Investment 2 that can make X + 5% return, but might blow up and puts all of my capital at risk, I will favor Investment 1. I’m not a deep-value investor, and in certain cases I will dabble in riskier assets (some may argue all microcaps are risky), but I need the potential return to be significant enough that it compensates me for the risk.
Complexity
This is a factor that’s taken me a long time to recognize and can be applied in a few different ways.
The first is the complexity of the underlying investment itself. One of the reasons I love microcaps is because many of them are simple businesses that are easy to understand. I can dissect a company like California Nanotechnologies much quicker than I can a massive multinational, such as Johnson & Johnson.
Even within a given size of company there are some situations that are more complex than others. Cases where there’s lots of financial engineering, M&A, etc. are more complex than a company trying to make a really good widget. Beyond just the time it takes me to understand more complex investments, complexity also adds risk that I’ve misunderstood or missed something altogether.
These types of complexity hurt Holistic Return because they require more time to understand them at the same level, all else equal. When I was first researching California Nanotechnologies in early 2023 it was a $3m market cap, and it didn’t take long before I possibly understood the company better than most (if not any) non-insider investor. Contrast that with Johnson & Johnson—how long would it take me to understand that company better than any other investor?
The second type of complexity comes from the complexity of my estate. To measure this, I imagine how difficult or easy an investment would make the lives of my family if I were to die. Compare owning 20 ETFs in one brokerage account to owning 20 private companies that require some level of active work. One I would feel good about leaving behind, the other would be a lot more complicated for them to manage.
The final type of complexity comes from the structure of the investment. Back in 2018-2019, I experimented with private equity investments. I mostly did multi-family real estate, but also dabbled in a life settlement fund, micro LBO fund, and foreclosed single-family home fund.
The overall basket has done okay, but it will likely underperform the S&P over my hold and the complexity it’s added to my life would not be worth out-performance even if it existed. Here’s why:
Because these were private funds for accredited investors, you receive extremely limited information about the investment. If you don’t want to blindly trust the managers and do your own due diligence, it is very difficult, if not impossible, to do as thorough of research as you can do on a public company.
Most private funds are a lot less liquid than the stock market, and many of the investments I did have no liquidity options outside of trying to personally find a buyer and facilitate a transaction. I am stuck in these funds, and even though they are part of my capital, that capital is essentially inaccessible to me and not in my control.
These investments have made my tax situation immensely more complex and expensive. Each fund issues a K1, which I need before filing my own tax returns. This means that I have to track down a bunch of K1s, and several of them don’t arrive until August. I’m always forced to file an extension. CPAs also charge more for each K1, so my taxes are thousands of dollars more expensive per year to file because of these private investments. Moreover, the multi-family real estate investments require me to also file state tax returns in each state that the partnerships rent property, which adds even more cost and time. Good CPAs are in short supply and I’ve spent countless hours over the years hiring and firing them. If I deducted all the additional tax expenses and paid myself an hourly wage for the effort, I think the returns would look quite dismal.
I contrast all of this complexity with the theoretical scenario where I only have a brokerage account and I yearn for the day in the future when I’m out of all these private funds and I can go back to doing my own taxes by the April deadline. I also recently bought an >100-year-old house with lots of deferred maintenance and would love to trim some of these private positions to fund renovations if it were possible, but instead I’ve been forced to liquidate better, simpler investments from my brokerage account.
Stress
Over the years I’ve learned to pay more attention to how investments are affecting my overall wellbeing. When I’m building a position in something and I find myself worrying about it, waking up from a dream about it, etc., that has a negative return on my life. Investing for me is a tool to give myself and my family a better life. If I’m constantly preoccupied with my investments, glued to my phone, sleeping poorly, and generally irritable, what’s the point of even attempting to out-perform an index fund strategy? I’d rather go passive and enjoy life.
I’ve also found over time that how my body feels an investment is actually a pretty good predictor of performance. Most of my best investments have been ones where I often forgot about them for long stretches of time and rarely worried about short-term results. When I’m constantly thinking about an investment I’ve already researched well, it’s a strong signal that I need to reevaluate my position.
Time
I touched on time a bit in the complexity section, but I think it also deserves its own variable in the equation. My personal goal is to spend as much time with my family as I can, which inversely means spending as little time working and investing as possible.
One example where time and complexity aren’t the same is with position sizing. Even if I own low-complexity investments, managing 100 1% positions requires more time than 10 10% positions. This is one of the reasons my portfolio is concentrated. I just don’t have the time to truly understand and keep up with 30, 50, or 100 companies.
Another example would be with a hypothetical private investment I manage, such as renting out a single-family home where I’m the landlord. This is actually a pretty simple investment, but the amount of time it could take up is considerable.
Enjoyment
Life is short, and I don’t see the point in spending time researching or managing investments that I don’t find rewarding. You can decide whether this is lucky or unlucky, but I’m weird and I do genuinely find certain types of investing to be fulfilling. If I come across an investment and it looks promising, but I know it’s going to take a ton of work that I won’t enjoy, that’s a consideration I take into account. I’ll do things that I enjoy less if I’m compensated for it, but all else equal, I’ll follow what interests and excites me.
Bringing it all together
There you have it, my definition for Holistic Return, the metric I attempt to optimize instead of traditional risk-adjusted return.
As a solo investor with limited time and no institutional mandate, optimizing for life satisfaction—not just performance—is an important way I’ve evolved, especially since having my first kid.
Ultimately, Holistic Return is about life utility, not just capital efficiency. That’s the real return I’m after.
Until next time,
Zack
Legal Disclaimer
Whiteout Capital is a publication of Eudemonia 0x1 LLC, a Wyoming-based publishing company registered to do business in Colorado.
This newsletter does not provide investment advice. Full disclaimers: whiteoutcapital.com/legal-disclaimer.