The other week, I met up with Andy and Ed to grab lunch at KST in Chinatown. It was our monthly catch up and while stuffing our faces with beef chow fun, baked pork chop rice, and fried buns, we chatted about our epic losing streak on SNKRS, the booming crypto gaming NFT space, JAVLIN Invest – the fintech startup I co-founded to help with portfolio risk analysis and optimization, and, most excitedly, our hopes for the Knicks now that the NBA was back. As we were each heading back to work, I texted Andy and Ed asking “What are your top sneakers to own?” Earlier, as we were chatting, they both mentioned how they didn’t understand exactly how portfolio optimization works, so all throughout lunch, I was pondering how to explain the mechanics of optimizing one’s equity portfolio. And then it hit me as we were lamenting our SNKRS losing streak, we can optimize a collection of sneakers!

 

So here is an attempt at optimizing our favorite sneakers to own to see how much our collection may be worth. I took some liberty since we only identified general sneakers such as Jordan 1s, but never specified which exact one. Our top sneakers to own, in order, are Jordan 1s, Jordan 11s, Jordan 4s, and Kobe 6s (my personal favorites are Jordan 3, but group consensus wins). I then went to StockX, searched for those sneakers and selected exact versions which I thought were either iconic and/or had enough historical price data.

 

The sneakers selected are (ranked):

  1. Jordan 1 Retro Bred (2016)
  2. Jordan 11 Retro Concord (2011)
  3. Jordan 4 Retro White Cement (2016)
  4. Kobe 6 Lakers Home (2011)

 

Here is a chart of past average monthly prices* that I hand painstakingly transcribed from StockX:

* If there were multiple prices in a month on StockX, I averaged the prices for the month.

 

I didn’t poll Andy and Ed for how many sneakers we would own of each in our favorites collection, so I decided as follows, assuming that we’d want to own more of our top ranked sneakers:

 

Jordan 1 Jordan 11 Jordan 4  Kobe 6
# of Pairs 4 3 2 1

 

This current collection of sneakers is worth $6,927, broken down as follows:

 

Jordan 1 Jordan 11 Jordan 4  Kobe 6
Price @ 10/2021 $920 $430 $579 $800
# of Pairs 4 3 2 1
Value of Sneaker Holding $3,680 $1,290 $1,157 $800
% Allocation of Holding 53.13% 18.62% 16.70% 11.55%

 

*** some technical jargon… feel free to skip ahead to the pretty chart below ***

 

There are several risk metrics used in mean-variance optimization used in the equity markets. I commandeered the four that we offer through JAVLIN Invest – Maximized Sharpe Ratio, Minimized Volatility, Minimized CVaR, and Maximized Return. Very quickly, Sharpe Ratio is a measure of risk-adjusted return, Volatility is a measure of how much the prices move (in this case monthly), and CVaR measures total expected loss (for a given time period). 

 

Now, typically, one finds an optimal allocation based on whatever risk metric chosen and then backtests that specific optimized allocation to a historical time period and compares it to a benchmark or the current portfolio’s allocation. While informative, such a backtest doesn’t show us what happens if we regularly repeat the optimization strategy at historical points in the past. So, once again, I commandeered JAVLIN Invest’s backtesting algorithms and performed a historical backtest for the past 4 years, rebalancing the collection’s allocation every June 30th to either the optimized allocation or the current collection’s allocation at 10/31/21 (table above).  

 

One important caveat that we cannot ignore – I am assuming we can easily get any number of pairs of sneakers (even fractional portions) whenever we want.

 

*** technical jargon finished ***

 

Here’s what our favorites collection may be worth if we optimized our collection against the current collection’s allocation.

Comparison of Starting to Ending Values

 

Current 

Allocation

 Max 

Return

 Max 

Sharpe

 Min 

CVaR

 Min Volatility
Starting Collection Value $6,927 $6,927 $6,927 $6,927 $6,927
Ending Collection Value $15,050 $25,663 $14,471 $15,579 $16,350
% Increase 217% 370% 209% 225% 246%

 

Final Optimal Allocations

 

Jordan 1 Jordan 11 Jordan 4 Kobe 6
Current 53.13% 18.62% 16.70% 11.55%
Max Return 4.55% 5.45% 3.00% 87.00%
Max Sharpe 40.43% 0.78% 51.09% 7.70%
Min CVaR 42.00% 1.01% 49.85% 7.14%
Min Volatility 19.60% 21.72% 58.06% 0.62%

 

Observations:

  • The Kobe 6’s have shown incredible returns in 2021, but from a risk perspective, the prices in 2021 show the sneaker is incredibly risky or volatile. So it is no surprise the risk metrics that account for volatility (Sharpe Ratio, CVaR, and Volatility) penalize the Kobe 6.
  • From a risk-adjusted return perspective, the stability of Jordan 4’s prices and the returns it has generated in the past 4 years, make it the best performing risk-adjusted sneaker to own, edging out the Jordan 1, which also performs very well from the same perspective.
  • The Maximized Return optimization crushes, which is expected as it allocates pretty much all-in to the Kobe 6. This optimization is the riskiest as evidenced by the boom and bust price history of the Kobe 6. This can be observed in the chart above where the Maximized Return optimization, prior to the last few months when the prices of Kobe 6 plummeted and then jumped, underperformed all the other allocations from July 2020 to July 2021.
  • From the data, Jordan 11’s look to be the worst investment on most measures centered around risk and return. However, it has been relatively stable, which isn’t much comfort to those looking for appreciation.

 

I hope I was able to demonstrate the possibilities of optimizing your sneaker collection and subsequently employing a data-driven approach to making any investment for your investment portfolio. But these are sneakers, therefore sentimentality plays a huge part. So when I shared these results with Andy and Ed, we all agreed that as much as we love the Kobe 6, balling in them, and the incredible returns shown in 2021, we still love our Jordan 1.

 

It must be noted, past historical performance is most definitely not indicative of future performance. Please invest responsibly.