Resilience & Optionality Barbell Portfolio
Own durable compounders and cheap asymmetric bets — never anything in between.
- Difficulty
- Advanced
- Time to result
- ~ongoing to results
- Steps
- 7
- Confidence
- 90%
NZS Capital splits its entire portfolio into two deliberately different books managed with opposite rules. The 'resilient' half holds roughly 15 scale, network-effect, or catalog-style compounders further along their growth S-curve; these get large weights (up to ~7-8% for the best 'ROOT MOAT' names) and turn over only about 10% a year. The 'optionality' half holds around 40 smaller, earlier-stage, wide-outcome bets capped near 1.5% each, since most will be wrong. Nothing is sized between 1.5% and 3% — a deliberate no-man's-land that forces every position to be either a small speculative bet or a committed long-term holding. Positions only graduate from optionality to resilient once the range of future outcomes visibly narrows, at which point NZS explicitly adds capital rather than passively letting winners ride.
Origin
Grew out of NZS founders' study of complexity theory and the Santa Fe Institute, applied to public equities investing.
Core principles
- 01Concentrate capital in durable, slow-compounding businesses
- 02Distribute small bets across many asymmetric opportunities
- 03Never size a position in the ambiguous middle range
- 04Only add capital when a thesis structurally de-risks
- 05Trim optionality when the range of outcomes fails to narrow
How to run it
- 1
Define the resilient bucket
Select ~15 companies further along their S-curve with scale, catalog breadth, or network-effect advantages; target ~50%+ of the portfolio with low (~10%) annual turnover.
Pro tip Look for businesses where you could 'set it and forget it' for 10-30 years, like Texas Instruments or TSMC.
- 2
Define the optionality bucket
Build a distributed set of ~40 earlier-stage or wide-outcome positions, each capped near 1.5% of the portfolio, accepting most will underperform.
Watch out Expect to be wrong roughly 70% of the time in this bucket by design.
- 3
Enforce the position-size guardrail
Never hold a position sized between roughly 1.5% and 3% of the portfolio; this 'no-man's-land' forces a discipline of either small speculative sizing or full conviction sizing.
- 4
Hunt for ROOT MOATS
Identify resilient companies that are also layering optionality on top of their core business (e.g., a stable base plus a call option), and size these higher, up to 7-8% of the portfolio.
Pro tip Classic examples are Amazon (retail + AWS) and eBay (marketplace + PayPal).
- 5
Track key leverage points
For every position, identify the 3-4 catalysts that actually move the thesis and check in on those periodically instead of obsessing over exact quarterly numbers.
- 6
Graduate winners deliberately
When an optionality position's range of outcomes narrows (e.g., clear network effects, durable inflection), explicitly move it into the resilient bucket and add capital — even at a much higher price than your original entry.
Pro tip Make the decision explicit (e.g., 'move from 150bps to 250bps') so you're not passively avoiding buying more.
Watch out It is psychologically hard to buy more of something already up multiples — build a process that forces it.
- 7
Trim when outcomes don't narrow
If a stock spikes on a temporary tailwind but the business hasn't durably changed (e.g., Peloton during COVID), trim back to the optionality cap rather than letting it ride.
Watch out Letting a 5% starting position suffer a 50-70% drawdown crushes performance and leaves you unable to average down.
In the wild
In 1997 Amazon went public as a modest online bookstore; nobody's model foresaw AWS becoming a business of its own.
→ AWS became a dominant, hugely profitable platform, validating the pattern of buying a resilient core with a hidden, uncosted option attached.
When eBay's marketplace business stalled under a new CEO, NZS judged the resilient marketplace alone justified the price while PayPal was effectively priced at zero.
→ The marketplace recovered and PayPal became enormously valuable, making it a textbook root-moat win.
During the pandemic Peloton's stock went parabolic as a work-from-home beneficiary, but NZS judged the business too early in its life cycle to call resilient.
→ They trimmed the optionality position instead of letting it swell into an oversized, unvetted weight, protecting the portfolio ahead of the later drawdown.
Common mistakes
Letting Optionality Ride Unchecked
If a small starting position suffers a 50-70% drawdown while still large, it crushes performance and leaves you holding a position you're reluctant to add to.
Sizing Into the No-Man's-Land
Positions sized between 1.5% and 3% are neither a true small speculative bet nor a committed core holding, diluting the discipline of the barbell.
Is it for you?
Best for
Public equity or long-horizon investors managing large, diversified portfolios who want to combine compounding stability with asymmetric upside.
Not ideal for
Concentrated, high-conviction investors or early-stage venture investors who need to bet big on a handful of ideas.
From the transcript
“we we concentrate resilience that's about 15 names and it's just over half the portfolio. And then we distribute optionality. So, that's about 40 names…”
“It stands for resilience with out of the money optionality.”
From the episode
Complexity Investing & Semiconductors (with NZS Capital)