Global Thinking: Portfolio Investment Strategy with Quantum Optimization

Did you know that if you had invested $100 in the 'Magnificent Seven' (Nvidia, Apple, Microsoft, Google, Tesla, Meta, and Amazon) a decade ago, today you would have more than $4,400? Tempting, indeed. So why not concentrate your entire equity portfolio in that sector? However, as Vanguard wisely points out in a recent article: "You can always find some asset that outperforms your diversified portfolio" (Why not invest in NVIDIA instead of the magnificent seven?). This oversimplification reveals precisely the key: adopting a global perspective in your investments not only mitigates risks but also opens the door to profit opportunities to beat the market that would otherwise go unnoticed. Let's see.

A Case Study: Fund Selection with Morningstar, An Optimal Solution?

There's nothing inherently wrong with using Morningstar or other analytical tools. The problem arises when these analyses don't take into account the global nature of what you want to achieve.

For example, if you only look at the individual risk of instruments and use this to limit your exposure or risk, you could end up with a portfolio that paradoxically has more risk than the individual instruments. Why? Because of correlations between assets. If two instruments are positively correlated, when one falls, it's more likely that the other will also fall, amplifying the total risk.

On the other hand, it could also happen that your portfolio has less risk than you initially planned to assume. This isn't necessarily good either if that lower risk implies a lower expected return that doesn't align with your objectives!

The Supermarket Analogy: Local vs. Global Optimization

Imagine you want to prepare a dish with the highest quality at the best possible price. You have two options:

• Go to the nearest supermarket and buy all the ingredients there (local optimization)

• Visit all available supermarkets and select from each the ingredients with the best quality-price ratio (global optimization)

  
  

The first solution is quick and convenient, but hardly optimal. The second involves more effort, but will lead you to a superior result. Something similar happens in investments.

Many investors, even professionals, operate with a "local supermarket" mentality. They use tools like Morningstar to evaluate funds individually, apply rigid filters, and make decisions based on disaggregated metrics, not collective ones.

But of course, adopting a global mindset requires effort and brings with it a technical difficulty that is far from trivial to solve. Let me illustrate this with another analogy.

The Gear That Doesn't Turn: When Local Doesn't Work Globally

Imagine a gear system like the one in the following image. Locally, each connection between toothed wheels makes sense. But when we observe the complete system, we discover that it's impossible for it to work: some wheel would have to rotate in opposite directions simultaneously.

This gear problem is a perfect metaphor for how many investment decisions work. We can exhaustively analyze each asset separately (local vision) and they may all seem like excellent investments, but when we combine them in a portfolio, the result can be disastrous, because, as a whole, the portfolio doesn't meet the global objectives that one desired. Perhaps the portfolio meets a volatility objective, but doesn't meet another of sector diversification. Or perhaps it meets a concentration requirement, but doesn't meet another of liquidity.

Building a portfolio is like assembling a puzzle. A puzzle of billions or trillions of pieces.

Quantum Technology to Optimize Portfolios

Instead of filtering and selecting the "top" assets according to individual criteria, at Inspiration-Q we are using quantum-inspired algorithms to solve these enormous optimization puzzles, where objectives are imposed at the level of the portfolio as a whole. This technology allows us to find those gear systems that rotate without problems; an orchestra that sounds good.

Instead of saying "I want the 10 funds with the highest historical returns" (local thinking), we apply global biases that affect the entirety of the portfolio. This allows us to balance multiple objectives simultaneously (return, risk, diversification...), and find portfolios that significantly exceed in quality those obtained with a purely local vision.

I'll explain it better with another comparison. The Spanish national team, champion of Euro 2024, didn't have the biggest individual stars of the tournament. While other teams bet on the most expensive players (France with Mbappé, England with Kane, Portugal with Cristiano), Spain built a system where each piece fit perfectly with the others. Luis de la Fuente didn't necessarily select the "best" players in each position, but those who would work best together. Players like Dani Olmo and Cucurella perhaps weren't individually the most outstanding in their positions globally, but they created extraordinary synergies. While other teams with bigger individual stars failed, Spain defeated all its rivals. Spain's combined market value was probably less than that of France or England, but its performance as a system was far superior.

This is how our approach to investing with global biases works: we don't simply look for assets with the best individual statistics, but those that, when interacting together, create a synergy that exceeds the sum of their parts.

Beyond Investments: Global Thinking as a Competitive Advantage

This approach is not limited to investments. In an increasingly complex and interconnected world, global thinking becomes a competitive advantage in any field.

Those who manage to establish connections between seemingly disparate disciplines, who understand complete systems instead of isolated components, and who can see patterns where others only see unconnected data, are those who are better positioned to lead and innovate.

To truly understand something, you must incorporate a global view. If we accept that everything is what it is due to how it relates to everything else, then our mission is not to create an archipelago of isolated knowledge, but to draw a complete atlas where everything is interconnected. A system of understanding is better when it explains more using less, and that is only achieved by densifying our mental relationships. The worst that can happen to us is to fall into islands of understanding.

Three basic exercises to cultivate more global thinking.

1. Evaluate complete systems: Before investing or making an important decision, ask yourself: "How will each element interact with the others?" or "If I change this component, what chain effects could it cause throughout the system?"

2. Look for unexpected connections: Dedicate time to exploring how different areas of knowledge or experience in your life relate (I leave you here a link to another post where I talk about it).

3. Cultivate intellectual diversity: Read, study, and converse outside your area of specialization. The most innovative ideas often arise at the intersections between fields (and if this idea motivates you, take a look at my book!).

Conclusion

Whether you're building an investment portfolio, developing a business strategy, or simply trying to make sense of the world, the ability to think globally will give you a significant advantage. Seek to draw an atlas, not an archipelago. And in that cartographic journey, you'll discover that everything makes more sense when you see the complete map.

What do you think? Have you experienced the benefits of global thinking in your professional life or in your investments? I'd love to read about your experiences in the comments.