RPF0321-Michael_Melissinos
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00:00:30.000 | Today on Radical Personal Finance, we talk about what it's like to actually build from
00:00:35.100 | nothing. And I mean absolutely nothing. From nothing. What is it like to build an investment
00:00:43.040 | management firm? And here, I'm not talking about the type of financial advisor that I
00:00:48.680 | was, helping people with their financial planning. I'm talking about somebody who's managing
00:00:53.520 | an investment firm. My guest today is Michael Melissinos. He started from nothing, worked
00:00:59.840 | his way up, and has been systematically building a standalone investment advisory business.
00:01:09.120 | And through the context of that business, we're going to talk about how to learn investing.
00:01:14.560 | We're going to talk about an investment strategy known as trend following, which is where Michael
00:01:19.520 | is an expert. And we're also going to talk about building a life and how to decide between
00:01:26.320 | taking a job and building a business.
00:01:45.760 | Welcome to the Radical Personal Finance podcast. My name is Joshua Sheets and I'm your host.
00:01:49.560 | Thank you for being with me. I'd like to talk about investing. And we're going to talk on
00:01:55.360 | this show in the future with seasoned portfolio managers. My guest today, he's not unseasoned,
00:02:02.280 | but he's also not a 30-year veteran. And so some of the emotion and the challenge and
00:02:08.280 | the learning process is still fresh and raw. And I think that's going to benefit you. Michael
00:02:18.480 | Melissinos is a listener of the show sometimes and he reached out to me and said, "Hey, would
00:02:22.160 | you like to interview me? I got an interesting story." And I said, "Absolutely." And I think
00:02:26.200 | he's got something very valuable to talk about.
00:02:29.400 | We talk about the specifics of trading strategies. So those of you who are interested in trading
00:02:35.320 | and in different trends – well, specifically in trend following but in different types
00:02:39.360 | of investment strategies, you will enjoy this interview today. It's a fairly lengthy one
00:02:44.200 | so I'm going to get right to it. One sponsor for today's show is Trade King. Trade King
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00:02:59.040 | have all of the tools, all the education, all of the advanced models that you need.
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00:03:41.800 | Michael welcome to Radical Personal Finance.
00:03:43.400 | Michael Radkin, Radical Personal Finance
00:03:44.400 | Hey. Thank you. Thank you for having me.
00:03:46.480 | This interview today will be interesting because I want to use your story to provide some insight
00:03:52.440 | for my audience into what it's like to actually build an investment business. So to begin
00:03:59.040 | with, I'd like you simply to share your story. How did you wind up in a position of
00:04:04.240 | running an investment management firm?
00:04:07.480 | Oh boy. All right. Well, the drive to start one has always been there. I was a sports
00:04:19.160 | kid growing up. That's all I did with my time. So I always had the drive to compete,
00:04:25.880 | always had the drive to be the best or just challenge myself and stuff like that. I was
00:04:36.880 | born in 1984, so I watched a lot of old football, Super Bowl type stuff. So I got really into
00:04:45.080 | Joe Montana, really into Jerry Rice and got really into when the Yankees got good because
00:04:51.280 | I grew up in New Jersey, so I was a born Yankee fan. When the Yankees got good in '96,
00:04:59.800 | mid '90s and just started dominating, that's when my, I think, drive to separate myself
00:05:09.240 | and not fit in and not just get a job and not be like everyone else. I needed to be
00:05:15.200 | one of these guys that I used to watch, Derek Jeter, like I said, Montana and those guys.
00:05:21.320 | And I just fell in love with absolutely crushing everybody at everything, in my case, sports.
00:05:29.040 | So when, obviously I go through school, play sports, I played baseball in college, but
00:05:36.400 | then I broke my leg in a really bad car accident going to actually a pro tryout. And that was
00:05:42.560 | pretty much it for my career because I had a bad break. It was rod and screws inserted
00:05:50.520 | into my shin. It was disgusting. So fast forward, I get out of college, no longer playing. And
00:05:58.720 | then what do I do? I do the classic human thing and wimp out. I go and take a job. I
00:06:08.360 | take a job in public accounting, if you will. And nothing wrong with accounting, nothing
00:06:13.200 | wrong with accountants.
00:06:14.200 | Wasn't you.
00:06:15.200 | But come on, you know, Joe Montan is not being an accountant after he's done playing football,
00:06:22.360 | you know. Come on. So this, it didn't really sync up and I always had like, God damn, I'm
00:06:29.520 | giving in, I'm listening to my dad, my uncle, my mom, because my uncle is a big accountant
00:06:35.120 | guy and he's like, you know, it gives you the best career path, yada, yada, yada. So
00:06:39.960 | okay, I don't know anything, fine. So I did that and almost immediately, probably within
00:06:47.520 | like a few days, I was like, no, nope, this is not it. Nope. But still did the human thing,
00:06:58.000 | right? And, you know, began talking to myself, talk myself out of moving, moving fast. And
00:07:04.400 | I sat there for 10 months, you know, went through the busy season type of thing and,
00:07:09.360 | you know, just went through that. So there goes 10 months doing something I didn't want
00:07:15.240 | to do. It didn't like that. Then I called my friend at Bear Stearns and is my friend
00:07:21.640 | since T-ball. I went to high school with him. We were neighbors growing up. And I said,
00:07:26.720 | John, dude, I need, I need to get out of here. I got to get on the front line somehow. And
00:07:33.160 | Bear Stearns, people who don't know is, was a, at the time, one of the older investment
00:07:39.200 | banks in the world. And it is now since gone. And that's where the story really gets good.
00:07:45.400 | So I ultimately get the job at Bear. And what was the job that you got there? Yeah, it was
00:07:52.120 | on a, what's called a market intelligence team. It's basically a made up team for when
00:07:57.200 | you're in a really good part of the business cycle and you start making shit up, start
00:08:01.760 | making jobs up that don't really do anything. But, you know, so what I did was I, I covered
00:08:10.120 | the healthcare and biotech sector. So I worked with the, the healthcare traders, interpret
00:08:20.640 | news, prepare for events. And in healthcare, you have a lot of events like drug, drug approval
00:08:27.720 | dates and conferences, stuff like this. So I basically had to know everything about every
00:08:34.200 | stock that we covered and knew what was important coming up. And if anything new, if any news
00:08:41.200 | hit the tape that that was important, uh, I had to know what it meant for what stocks
00:08:46.120 | and what had that affected earnings and yada yada, like pretty much know everything about
00:08:51.040 | everything. So it took up a lot of time. He was like, get up at four o'clock in the morning
00:08:56.240 | every day in the office at five and then be home at nine or something every day. And,
00:09:00.920 | um, you know, quickly, you know, I started in October. So then in March, obviously is
00:09:08.520 | when things got a little wild. So March bear goes down and then I'm sitting there with
00:09:15.880 | the aha of, okay, maybe this isn't it either. Because during this time, you know, starting
00:09:23.400 | from, from that summer when I worked in accounting, which was summer 2007 through, through when
00:09:30.760 | bear went down, which is March Oh eight, I was researching and reading, um, reading into
00:09:37.680 | what I do now, which is, which is the kind of, which is the kind of trading that I do
00:09:42.720 | now, which is called trend following trading. Um, and you know, just lightly learning about
00:09:49.560 | it. And then I, and then I started to get to the point where I started following the
00:09:52.520 | firms that were already, that were trading this way, these trend following firms. And,
00:09:57.120 | uh, uh, weirdly enough, they're not, they're not your brand name, wall street type of guys.
00:10:03.640 | They're not on CNBC. They don't, they don't, uh, basically don't come into the public at
00:10:10.200 | all. Um, but probably the most famous one is, is John Henry, the owner of the red socks.
00:10:15.720 | He was a major trend following trader before he basically gave all that up just to become
00:10:20.880 | a sports owner. So, um, uh, so we started, you know, learning and seeing how these guys,
00:10:30.440 | these traders would do really well when it seemed like everyone else wasn't doing well
00:10:36.480 | and seemed like when everyone else didn't know what the hell was going on and everyone's
00:10:39.600 | run around with their hair caught on fire. So that was a big aha. When I started seeing
00:10:43.520 | these guys make a lot of money, when everyone around me was losing their job and losing
00:10:48.880 | their bonus or losing their, you know, their stock money, especially at bear, like a lot
00:10:53.880 | of guys lost everything. So that was my first big, huh? I could do this. All right. But
00:11:00.760 | still I'm going to wimp out and just stick with my job for a bit cause I don't really
00:11:04.400 | know what I'm doing yet. So got into the more, more of the reading, more of the research.
00:11:11.600 | And at that point, you know, I was still working at a JP Morgan's JP Morgan bought bear. And
00:11:16.400 | then I started, uh, I started working, uh, working on creating some trading strategies
00:11:22.920 | and I, you know, I use a lot of numbers and it's easy to, uh, you know, uh, you know,
00:11:27.920 | with trend following, it's usually systematic. So usually creating like a set of rules that
00:11:32.760 | are quantified, you know, use numbers for, to make decisions. And, um, you know, so that
00:11:38.560 | was my, um, that was where a lot of us, I spent a lot of my time doing that over the
00:11:43.800 | coming months. And then October Oh eight happens. And that's another major aha. And that was
00:11:48.840 | a major, major point for, uh, these trend following guys to really do well. And they
00:11:55.040 | had been doing well for many, many years before this, but I was new to this. So I was the
00:11:59.760 | first to, you know, I was starting to experience it in real time. You know, you can look at
00:12:04.040 | back track records all you want, but you don't really know where the numbers come from, how
00:12:10.040 | they happen because you didn't really live through the events and stuff. So I started
00:12:13.840 | to see the real time proof and I could, I could couple it with the feeling of being
00:12:20.000 | on the front line. Like, Oh, this is how it's done. Ah, all right. I could do this. And
00:12:25.640 | then I, then I started getting more confident with that. I can, I can actually do the thing
00:12:31.000 | and start something on my own. And, um, so we all got laid off in January Oh nine. Um,
00:12:38.520 | that whole team I was on and, and then I started to, uh, say, all right, this is it. This is,
00:12:46.720 | they cut the cord for me. I can, I can get out now. And this was, yeah, this is January
00:12:50.640 | or not. So I, uh, you know, I took a job as, as a trader and then I, you know, wanted to
00:12:57.640 | learn, learn the stuff. So I did that. And basically on the side, I just kept creating
00:13:02.460 | my model, kept creating my strategy for when I was going to launch. So ultimately it went
00:13:09.040 | down for another two years. Just a big, big, big, awful. So for you entrepreneurs out there
00:13:16.720 | listening, uh, thinking about, you know, how all the, all the guys doing it now, it's so
00:13:22.520 | easy. They're just like bread. It's, it's in their blood and they just do it. Yeah.
00:13:26.680 | Right. You know, sometimes it takes, um, it takes some, I don't know what it takes, but
00:13:33.800 | here I, here I had the proof that it worked. I understood why it was working, you know,
00:13:41.200 | for what I ultimately was going to do. And I had the inner drive to do it, but something
00:13:48.040 | was keeping me back. You know, it was just, you know, fear of the unknown, lack of confidence
00:13:53.440 | or something. I don't know. Um, so somewhere in me that was stopping me. So, so I sat through
00:14:00.760 | another couple of good market, uh, cycles for, for this trend following strategy and
00:14:06.660 | trend following does really well when there's persistent trends, when there's not the choppiness
00:14:13.580 | up and down, up and down. Um, when there's big dislocations like, like what we've recently
00:14:19.560 | seen in oil, that's a real good period for, for trend following. Cause it's a big, easy
00:14:24.400 | trend to follow. Right. So, so ultimately sat through, you know, all the QE quantitative
00:14:31.560 | easing one, two, and then, you know, in QE two and the back half of 2010 was when there
00:14:37.600 | was another really good period, a lot of commodities, a lot of good trends. And these guys did really
00:14:42.880 | well again. And I'm like, God damn it. Like I missed another great period to do well,
00:14:51.600 | you know, because it's not, you know, for, for, you know, it's, this is not like, uh,
00:14:57.560 | maybe other, other sectors of, um, uh, of startup culture where, you know, you can kind
00:15:03.960 | of get, if you get onto a good, uh, business model, you can kind of get persistent growth
00:15:09.240 | and persistent, um, steady, you know, profits and stuff like that, you know, with markets,
00:15:16.640 | this is, this is something different because there's good periods and there's bad periods.
00:15:21.480 | There's no persistent good period ever. Um, it only comes in waves. So of course, what
00:15:28.320 | do I do? I sit through the next good period. I get so frustrated to say, that's it. January
00:15:35.520 | 11, that that's what we're starting. I started and I started right after a good period. Now,
00:15:42.080 | what happened? I got the tail end of the good period and walked straight into the whole
00:15:47.360 | flush full cycle, bad period, which there was no trends to follow. Right. So I got a
00:15:55.800 | little taste of it. My first six months I was, I believe I was up, you know, six, uh,
00:16:01.400 | I'm sorry, like 25% or something. And my first initial investors were like, God, this is
00:16:06.680 | great. Okay. This is a good continue. I said, this is not going to continue. This is the
00:16:10.280 | kiss of death. Um, that was back when like gold topped and everything. And there were
00:16:15.520 | really good trends at that, at that time. But then everything slowed down because then
00:16:20.280 | I believe the fed and other central banks, they started, you know, changing their policies.
00:16:24.840 | And when, and when, when we live in the, um, the, you know, the economic model that we
00:16:30.960 | live in, where we have central bank intervention and intervention, um, we get a lot of this
00:16:37.640 | back and forth sometimes, you know, where they, they see things, they see trends, uh,
00:16:44.680 | develop that they don't like and they say, Oh, we've got to pull back. So what do they
00:16:48.640 | do? They knock the trends down and everything, you know, everything kind of stays in its
00:16:52.800 | tight window and you know, it builds pressure in those windows until at some point things
00:16:58.360 | break out and then they run. And that's when I do well. But, uh, but yeah, I wore, I walked
00:17:03.800 | right into that tightening window where, where markets weren't doing much. And, uh, I was
00:17:09.880 | like, God damn, you know, and it, it was annoying, but it was a really good lesson, um, to want
00:17:17.280 | to not rush into anything, uh, to, you know, to when you have the feeling, when you have
00:17:24.760 | the drive, you know, sometimes it's just best just to go, don't think and just go. If you're
00:17:29.640 | ready, you kind of know you're ready. Let's go. Don't try to be perfect. I tried to be
00:17:33.160 | perfect and, uh, it got me into the, into the slop. Um, so yeah, I mean, you know, I
00:17:40.920 | don't think the details of like how I started the fun, I mean, is that, you think that's
00:17:45.600 | important? We'll get into that in a moment, but first I want to ask this question. So
00:17:49.520 | you say that during that time you were at Bear Stearns and, and, uh, later JP Morgan,
00:17:54.440 | um, during that time you were watching many traders and portfolio managers get creamed,
00:18:00.920 | but you said that the, the trend, the trend followers didn't get creamed. First, what
00:18:05.920 | would be your evidence or proof that they didn't? And number two, why not? What was
00:18:10.760 | different about trend following as a strategy, um, that made that succeed in that, in that
00:18:16.000 | market? Yeah. Uh, so I was, I was watching the, the, the firms themselves and you know,
00:18:25.240 | watching their monthly performance, uh, their, their performance numbers. Um, and you know,
00:18:31.400 | uh, do you want me to give you a couple of names of like the firms? Sure. That'd be great.
00:18:35.400 | Yeah. Um, so the biggest and baddest one, uh, not necessarily the best, but, uh, the
00:18:40.720 | biggest and best one is called Witten Capital, W I N T O N. They're a big, big firm in London.
00:18:49.520 | Uh, then we have a Chesapeake Capital. We have Tactical Investment Management. It's
00:18:56.280 | another one. EMC, uh, Capital, um, a couple other ones, Dunn, Dunn Capital, D U N N he's
00:19:05.440 | in a Stewart, Florida. Um, so I don't know if that's close to you. Um, and, uh, John
00:19:12.560 | Henry was still around. He's no longer a firm though. Um, there's a couple other from Abraham.
00:19:18.080 | There's like, you know, there's, there's dozens of them, but I'm naming, I'm naming like the
00:19:21.280 | longest, uh, the guys with the longest track records, the guys who I looked up. So why
00:19:26.240 | did they, why did they not get creamed? Because they're trend followers. They're no, they
00:19:31.880 | don't stick with positions that go against the trend. So naturally when, to, when, um,
00:19:42.000 | let's say 2008 hits, right. What, what were the trends, right? Stocks were going down,
00:19:47.120 | funds were going up, dollar was going up, uh, commodities going down. Right. So, and
00:19:55.240 | they did so for an extended period of time, these weren't day or week long trends that,
00:20:02.280 | you know, stocks went down for a week and then they came back up. No, they persisted
00:20:05.540 | down for months, you know, down, down, down, you know, sure they had their bounces, but
00:20:10.160 | they went down, down, down, same, same thing for the other trends. So what the trend followers
00:20:16.360 | do is that they position themselves with that longterm momentum, right? So they're not,
00:20:21.960 | they're not buying stocks like, Oh, these are going down at some point later, they're
00:20:26.480 | going to come back up. So let's get, let's buy in now and, and, and improve our dollar
00:20:32.160 | cost average, you know, and keep betting that, uh, that it's going to go up later, even though
00:20:37.680 | it's going down now. So they would inherently put themselves, you know, if you, if you invested
00:20:44.480 | like that, which a lot of people do, a lot of fundamental strategies are like that. They,
00:20:49.200 | they bet, you know, they buy low and sell high, right? Trend followers do the opposite.
00:20:55.920 | They buy high, sell low and betting that that momentum is going to continue. So in 2008,
00:21:04.000 | um, October, they just had short positions that they probably were getting short stocks
00:21:10.880 | in this case, uh, probably in late 2007 and, and they just held through the whole decline.
00:21:18.800 | You got to look at a chart. I can't, we go, can't pop up a chart right now, but the, but
00:21:22.840 | the rollover downtrend started in late 2007. So, or early 2009 or early 2008. So it wasn't
00:21:31.320 | like, Oh, these guys got a huge short position put on and in October and they made a ton.
00:21:37.480 | No, they were just, no, we've been short for many months, dude. Like, I don't know what
00:21:42.360 | you guys are doing, uh, type of a thing. And, and, um, you know, same thing with the bonds,
00:21:48.400 | you know, like usually when, when stocks get hit pretty good and people run to safety,
00:21:52.800 | they run to bonds, you know, and run to the dollar. So they were positioned with those
00:21:57.880 | trends. Um, and when those trends persisted, they do really well. So right now, like 2014,
00:22:06.080 | uh, was a good one because the dollar went, dollar went up, currencies went down and same
00:22:12.640 | thing, bonds, bonds went up. So another, that was another really good year for all of us.
00:22:17.120 | Um, we were just positioned with those trends. We were not, we were staying in the now of,
00:22:23.240 | of the trend. You know, we were respecting the trend. We're not, we don't look at what
00:22:27.520 | a lot of guys do is say, look, the longterm of value of stocks is X right now. It's the
00:22:37.200 | price is X minus 10. So that means there's good value. So that means it's a good buy.
00:22:43.080 | Well, they don't understand that, that, that value could keep decreasing for a long time
00:22:49.120 | or in a, in a significant way before it ever comes back to where they think the value really
00:22:54.840 | is. You know, that's, that's the problem with fundamental, um, fundamental strategies that
00:23:02.240 | they're inherently putting themselves on the wrong side of the trend. Uh, most of the time,
00:23:08.440 | you know, to get that good value, you know, I mean, that's, that's where that buy low,
00:23:12.960 | sell high comes from, you know,
00:23:14.200 | What are the mistakes? Um, what is, is the mistake or what are the mistakes that you
00:23:19.880 | would make, uh, or could make as a trend portfolio of trend following portfolio manager that
00:23:26.440 | would lead to your getting creamed?
00:23:29.440 | Oh, first thing you could do is not follow your rules. You could, you know, let's say
00:23:36.480 | this rule, like the easy, easy trend following rule. Um, a lot of people uses, uh, moving
00:23:44.200 | average crossovers, right? You just, it's very boring. It's very stupid, you know, to
00:23:49.880 | the lead to the guy just watching. But let's say you have that 50 moving average crossover
00:23:54.840 | the 200 you buy when it crosses up, you sell and it crosses down.
00:23:58.440 | So explain what a moving average crossover is, uh, and explain what that, what the market
00:24:03.000 | conditions would be when that's happening.
00:24:05.560 | Sure. All right. So moving average is, let's say, let's say we take a 50 day, right? So
00:24:11.840 | we sum up, we take the average price of the past 50 days. All right. And same thing with,
00:24:18.640 | with the 200, right? Take, take the average price of the last 200 days. All right. The
00:24:23.840 | 200 day is going to, is going to react more slowly to price changes than the 50 would.
00:24:30.560 | All right. Cause the 50 is taking a more recent average. All right. Um, I think that makes
00:24:38.080 | sense, right? It would change even, even it would be more, more sensitive if you took
00:24:43.880 | a 10 day, you know, that thing would wiggle around much more than a 200. What 200 is going
00:24:48.520 | to be very smooth. So these, these, the object of these moving averages to smooth the price
00:24:53.880 | trend out, right. Is to get the general direction of the trend, not every little wiggle. Um,
00:25:00.680 | so when you have a market that's coming out of a bottom or it's coming out of a, of a
00:25:07.280 | long consolidation period, it start to, it start to drift upwards. Um, then you get this,
00:25:15.080 | you get the, you get the 50 day crossing above the 200 day. Right. And a trend follower would
00:25:20.720 | say, okay, now the trend is up. All right. Now we have, now we have confirmation it's
00:25:26.440 | up. Um, so we take a long position with that and we're going to stick with that until it
00:25:31.560 | crosses down. Now, what you could do, right. Uh, to, to kill yourself as a trend following
00:25:38.080 | trader is to one, not take that trend. All right. So you, do you don't, you don't capture
00:25:45.480 | if it ultimately becomes a big winner. All right. You don't cat, you don't capture it
00:25:50.160 | or you say, you know what, this is wrong. I bet it's going to come down because I was
00:25:54.480 | on CNBC and all these guys are saying blah, blah, blah, that it's going to go down. This
00:25:58.560 | is not, this is not correct. And you know what? I was looking at the fundamentals too.
00:26:02.000 | And the fundamentals, they don't support an uptrend here. This is, this is, it looks weird.
00:26:06.440 | No, I can't. No, I'm actually going to short this thing. Cause I bet we're going to continue
00:26:10.720 | in this choppy period and it's going to bounce off of it's, you know, a lot of guys are going
00:26:16.080 | to take this signal. The momentum is going to run out and it's going to come back down.
00:26:20.680 | So, you know, I'm going to, I'm going to short this thing. Uh, you could kill yourself that
00:26:24.680 | way too, because you're again, putting yourself on the, on the wrong side of the, of the trend.
00:26:29.960 | And um, you know, maybe you'll be right. You know, that's trading is not an exact science.
00:26:35.400 | It's not physics. Um, so you could kill yourself sure by not taking the trend, missing out
00:26:41.800 | on a big winner, taking, you know, disobeying what, what the, what your strategy says in
00:26:47.360 | this case, taking the long by taking a short, God forbid you ever did that. Um, and stick
00:26:53.320 | with that trend. You stick with that loser if it keeps running up. Um, or, or you can
00:26:58.760 | get sloppy with your risk management, which is not a fun topic, but risk management is
00:27:04.920 | essentially position sizing, how big of a position you take, um, at all times. So some
00:27:11.560 | guys like to think they know everything and they get overconfident or overaggressive and
00:27:17.360 | they take too big of a position that, you know, that, that, that they can afford. And
00:27:23.280 | if they're on the wrong side of the trend, um, you know, they can lose their money pretty
00:27:27.760 | fast. Um, so say, you know, you budget for, you know, uh, every position you take, you're
00:27:34.120 | going to risk 1% of your capital on it. Right. So if you lose, you know, you lose 10 in a
00:27:39.520 | row, you lose 10% of your money. It takes you a long time for you to lose your money.
00:27:44.280 | Right. Um, cause you're betting like a fixed fractional bet. Now, well you could, some
00:27:50.040 | guys could do is like, you know, I'm going to get away from that. I want a bigger position
00:27:53.840 | because I feel like this trend is going to be the mother of all trends. Like these gold,
00:27:59.000 | like these gold bugs who think gold's going to go to 10,000 one day or something. So there
00:28:03.280 | can, they sit there with a massive, massive position. And, and then what happens? Like
00:28:09.240 | it goes down, they lose a ton and then they have to ultimately have to sit there. You're
00:28:14.000 | like, cause they don't want to move. They're like, well, it's going to go up someday. So
00:28:17.480 | I'm just going to keep buying it. So they, their risk manager gets sloppy because they're
00:28:21.880 | not cutting the loss fast. They're sitting with the loss or they're betting more than
00:28:27.160 | they can afford to lose. And, uh, you know, God forbid you get into, you know, uh, the
00:28:32.480 | derivatives and the futures and stuff like that. You don't know what you're doing. You
00:28:36.120 | lose your money really fast. Um, so, you know, for, for the trend following guys, they're
00:28:43.960 | really successful at it. They, they do their work to build a system of rules, like what
00:28:52.000 | markets to trade, when to buy, when to sell, how much positions to hold, stuff like that.
00:28:58.460 | They have all these questions answered, like a system that would pass through NASA, like
00:29:03.000 | with flying colors. There's no, there's no ambiguity. There's no room for discretionary,
00:29:09.400 | um, decision-making on the fly, stuff like that. So, you know, we do all this stuff before
00:29:16.440 | we ever commit a dollar. We do all this, we do all this research. We make sure we test
00:29:22.560 | all these rules and we do this for wherever we, we, we ever, uh, take a position in the
00:29:29.120 | markets before we ever risk a dollar, because we want to make sure we're know what we're
00:29:32.520 | doing and we know how this thing is going to work before, before we just start getting
00:29:36.660 | into the markets where, you know, that's, that's a not, that's not a fun or safe place
00:29:42.120 | to be with money on the line if you don't know what you're doing. Um, so then after
00:29:47.400 | we, you know, build a system that we're comfortable with, that we can follow, we, all our job
00:29:52.240 | is then is to execute the thing, execute it day after day after day, uh, through good
00:29:57.320 | times and bad. And, um, you know, maybe, maybe, you know, you do some research, uh, constantly
00:30:02.920 | to see if you can improve it, but this is not, these are not going to be improvements
00:30:07.080 | that you're going to be doing every day, every week, every month. These are like slow evolutionary
00:30:11.800 | type of improvements over years of, uh, of work. So, um,
00:30:18.680 | So three follow up questions on that, which all go together. Um, number one, if this is
00:30:24.720 | a system of rules that you as a human being have pulled out, why do you think that you
00:30:31.360 | as a human being are able to see them? Wouldn't a computer, uh, algorithm be better at finding
00:30:38.600 | them and then, uh, adjusting them? Number two, which is associated, what, what value
00:30:44.160 | do you as a human being have going forward? If you're just going to put rules in place,
00:30:48.120 | wouldn't the computer program be better at that? And then number three, why are you involved
00:30:52.520 | at all when you could just automate the trading?
00:30:55.520 | Uh, okay. So starting off, we do use algorithms, you know, but the human has to find them and
00:31:05.200 | you know, really when you use the computer, the computer is just a tool to organize everything
00:31:12.840 | and make it simpler and make it faster. It's not, there's, you don't buy trend following
00:31:19.060 | or fundamental or any other trade trading strategy, uh, software on the shelf and, and
00:31:28.920 | just input it in and then just blindly and blindly follow those rules. Like, no, you
00:31:33.560 | need to, you need to, you need to go in. You still, it requires a human to find what works.
00:31:40.140 | And then he uses an algorithm to make it easy to execute every day. You know, like if I
00:31:46.720 | had an algorithm for a, um, for a toothbrush robot to do my teeth while I didn't need to
00:31:54.180 | stand there and move my own thing while I did something else, I would do that because
00:31:58.280 | it would save me time. Sure. Like why do I need to stand there like an idiot for two
00:32:03.120 | minutes and move my hand back and forth in space, um, driving a brush against my mouth
00:32:09.520 | like that? That's a waste of time and take it to trading. It's a waste of time to, to
00:32:18.520 | use my brain, right? Cause I'm not always going to be sharp, right? Computers always
00:32:23.240 | sharp, right? Um, it's like, like today I told you before we even started recording,
00:32:26.760 | I'm a little foggy today. I might be off my game, right? The computer is not off its game,
00:32:31.540 | but the rules that I put into the computer are from me, but they're from me at the best
00:32:38.400 | version of, of my energy, right? Because again, the computer's not going to wake up today
00:32:44.200 | and be, be annoyed at something. Um, it's going to just do it. It's going to do it.
00:32:49.520 | So that's a way of, of rerouting the, the energy to always be efficient. Right. Um,
00:32:57.240 | and I don't change the rules every day. Like if I use just myself, right, if I was like
00:33:01.760 | a discretionary guy and I was just watching TV and going through reports and, and talking
00:33:07.160 | to people and trying to get a feel of what's going on, that still doesn't, it still doesn't
00:33:13.680 | tell me really with any consistently when, when I should be buying, when to sell and,
00:33:20.360 | and how much risk to take. Um, you need to have a coded definite rule for each section
00:33:29.840 | of, of, of a trading system. So, so you know, so you could test it against like historical
00:33:35.800 | data, you know, so you know if it works or not, you know, you need to know if what you're
00:33:40.800 | doing in, in real time works, you know, like we look at, you know, we don't have a, we
00:33:48.040 | don't have robot athletes now, but I bet you I could create, you know, I can, I can, I
00:33:55.560 | can gather all the mechanics of a, if I was going to go for a pitchers, gather all the
00:34:00.640 | mechanics of a, of historically great pitchers and create a robot that, that use the efficient
00:34:09.160 | mechanics and like, you know, obviously I can't, I can't make them play because you
00:34:12.920 | know, they don't do that. It's still have to do it through humans. But, but basically
00:34:16.360 | I create something like that where I can create a real, a real good version of, of a, of a
00:34:25.800 | trend following system, but just use the computer to execute it. That, that, that's all it is.
00:34:32.760 | It's not, it's not, it's not like the compu, it's not like I don't know what the computer's
00:34:37.680 | doing. I told it what to do. So it's just doing it a much faster, cleaner way that I
00:34:43.800 | could do it.
00:34:44.800 | In the world of trend following, do you as a portfolio manager believe that your system
00:34:49.560 | is unique? Is it a proprietary secret unique to you?
00:34:54.640 | It's unique to me in that I believe only I could follow the rules day after day. I feel
00:35:02.160 | like any system, any rules, like you take like dieting, you know, there's a lot of diets
00:35:08.120 | that work, a lot of training regimens that work. You need to find what works for you
00:35:13.880 | because ultimately the only way to get the results of it is that you have to do it. And
00:35:18.720 | you know, whether you're going to be a trend follower, whether you're going to be a paleo
00:35:22.080 | CrossFit guy or a bodybuilder guy or whatever, whatever you look, whatever look and whatever,
00:35:29.360 | whatever results you want, you're going to have to, you know, do your work to create
00:35:33.560 | something that's, that's yeah, unique to you.
00:35:37.360 | Trend following is unique to me because I, I, I like to be on the right side of nature.
00:35:42.680 | I like to, I like to obey natural law, natural principles that, that work everywhere, not
00:35:50.240 | in just trading. This isn't, trend following isn't specific to just trading. I like to
00:35:54.160 | say on a deep, deep level, trend following principles are not, it's not a training strategy.
00:36:03.440 | It's a life strategy applied to trading. It could be, it could be useful anywhere. I always
00:36:10.760 | made, I believe I made the, on some other podcasts I've been on, the analogy to dating,
00:36:16.680 | you know, you know, so trend following principles are, are pretty basic, but you can obviously
00:36:23.760 | apply them in many different ways. So the, the, the core principles are obviously to
00:36:29.240 | trade with the trend, to diversify, you know, to, to open yourself up to follow as many
00:36:35.860 | trends as possible. Don't, don't pigeonhole yourself to just be, oh, I'm a stock trend
00:36:40.880 | follower. Like why, you know, expose yourself to anything, you know, be able to capture
00:36:45.960 | trends in anything. And then, you know, so we have those two and then we have ride the
00:36:50.400 | winners, right? So we're sticking with what works. We're cutting the losses. We don't
00:36:55.160 | hold what doesn't, what isn't working. All right. So if we buy something and it goes
00:36:59.880 | up for a little bit and then it starts to fall, starts to fall, starts to fall. We have
00:37:03.720 | our exit point in there already. It says, all right, this isn't working out. So then
00:37:10.520 | we also have like the risk management, the you know, the position sizing, as I talked
00:37:14.600 | about knowing how much to bet per trade, how much open, open risk to hold in anyone position
00:37:21.880 | at any time. And you have your limits for your position. You have your limits for your
00:37:26.880 | sector and portfolio. You can get really complicated with this stuff, but it's basically just to
00:37:31.280 | protect your ass, right? And don't bet more than you can afford to lose. That's, that's
00:37:35.560 | the day and bet enough to where that when you win, you're going to make some money.
00:37:41.060 | And then like the rule of all rules, as I said many times, it's to stick to your system,
00:37:45.320 | to follow your rules. You have to do it. Like all the back tests, all the research in the
00:37:50.540 | world can tell you that it works, but if you don't do it, it's as good as dead. And you
00:37:55.000 | could probably, you know, everyone could probably identify with that and that they've tried
00:38:01.540 | many different types of diets and are training workouts and they do it for a week or a few
00:38:06.380 | weeks and they're done and they don't see any, they don't see any results.
00:38:09.300 | Let's talk a little bit about your business. So you built the confidence, you built your
00:38:13.860 | model, you tested it, you said, "Hey, I feel good about this. I think there's some opportunity
00:38:18.420 | here." If you trained yourself to become such a hotshot investor, why didn't you just take
00:38:25.500 | and trade your own money? Why would you get involved in the professional money management
00:38:30.620 | side of things?
00:38:31.620 | I am not a hotshot trader.
00:38:33.740 | I was trying to bait you a little bit.
00:38:35.780 | No way. No way. I'm actually probably the most boring trader you ever set eyes on because
00:38:41.580 | most of the time just sitting around, you know, waiting for the rules to tell me to
00:38:48.140 | do something. You know, I'm not looking at, I have one screen and I look at the markets
00:38:56.100 | few times a day. That's it. I'm not making trades in today. I'm not a hotshot at all.
00:39:02.780 | So this is a very boring calculated type of a thing.
00:39:06.300 | So why wouldn't I trade my own money? Well, I started when I was 26, so I didn't have
00:39:11.340 | much money. And, you know, I don't know if I, like I hear a lot of old traders, right?
00:39:19.940 | They give the money back, right? They give back their client money and they just start
00:39:24.160 | to manage their own money over time. And I feel that this is maybe what's maybe unique
00:39:30.900 | to me is that I'm not, I'm in this for like the teamwork. I mean, sure. Like you can make
00:39:36.260 | money any number of ways. And if I was a money hungry guy, I probably wouldn't be running
00:39:41.180 | a fund nowadays because it's not that good of a business, right? It's a little harder
00:39:45.540 | to get clients to people for people to give you their money, right? People don't want
00:39:49.820 | to do that right now. They want to invest in startups. So if I was a money hungry guy,
00:39:54.580 | I'd be probably getting into startup culture and stuff like that, right? Because that's
00:39:59.420 | the hot trend now. So, um, I like managing money for other people because when I was
00:40:06.940 | sitting back at bear during those big events, like when it went down and then at JP Morgan
00:40:12.820 | during the crisis, during the financial crisis in October, I thought, you know, this shit
00:40:19.060 | isn't going to happen to me. It's not going to happen to me. It's not having my friends,
00:40:23.180 | not my family. We're not going to be one of these guys running around here. It loses everything
00:40:26.900 | in 20 years. Like no, no way. And I wanted to take my team mentality that I had all my
00:40:35.300 | life, you know, with my, you know, playing on sports teams. And remember at that point
00:40:39.980 | I was a year and a half or something, two years of not playing baseball anymore. I,
00:40:44.700 | I missed it. I miss being with the guys, you know, miss being with my friends all day.
00:40:49.940 | And um, I wanted to create that, but in a business, you know, I wanted to create a team.
00:40:56.180 | I wanted to create a loyal tribe that guys that would follow me, that would, that would
00:41:00.780 | believe in me. And ultimately I was making, I was calling the shots on, on the trading,
00:41:05.500 | but, but we had to work together to make sure that they didn't quit out when I was struggling
00:41:11.580 | and that they weren't getting sloppy, like putting in all their money when I was doing
00:41:15.140 | well, you know, before the ultimate drop at some point later. So I, uh, you know, I really
00:41:22.180 | want, I started with that. I started, you know, like I wanted to protect my friends,
00:41:27.060 | my family and my own money first. And then, you know, later on, then we can get into maybe
00:41:32.540 | getting some bigger clients and stuff like that to, you know, like advance my financial
00:41:38.900 | status or something. Uh, but that's like, that's later. That's not, that's not what
00:41:43.500 | drives you. Um, I mean, I'm sure it is for some people and some, a lot of fun managers
00:41:49.600 | out there, you know, they're just like copycat, uh, type of fun managers that, uh, you know,
00:41:56.100 | all we got to do is just like hit up our boys, uh, raise a ton of money and slap two and
00:42:01.060 | 20 on it. And we can have a couple of decent years and we're, and we're done. We retire.
00:42:05.540 | See like for them, it's not about, it's all about the money, you know, and that, and they're
00:42:10.940 | not good. And it's like, no wonder they're not good. No wonder hedge funds suck today
00:42:16.300 | because they're all copycats. Like they're all trying to, trying to copy the mutual funds
00:42:21.060 | or this or that. And, and they're, um, they're not anything. They're not in it for anything
00:42:25.880 | other than, you know, trying to make a little bit more, right. Stuff like that, that that's
00:42:30.260 | not, I'm not about that. I'm in, I'm in this for, I want to know every one of my investors.
00:42:36.020 | I want to know every one of my, um, you know, uh, if I have any coworkers or anything like
00:42:41.100 | that, I want, I want to know everybody. And I want to, and I want to know that everyone's
00:42:45.300 | in this. I don't want to have a team that, that is just bringing in accounts. I don't
00:42:50.620 | know anybody. And it feels like there's just names on a paper and I, you know, you know,
00:42:57.060 | there's no feel there. There's no, there's no like camaraderie there. And you know, that's
00:43:03.140 | ultimately what I loved about, about the sports game. You know, like, it's not just me celebrating
00:43:08.020 | by myself, you know, that's, that's miserable. Um, so that's, you know, that's why I got
00:43:17.580 | into this game. Um, and I believe that trend following in general is unique, um, unique
00:43:25.300 | in the world today because there's not many of us doing it. You know, there's, there's
00:43:29.900 | some of us, right. There's some big guys, there's some small guys, but generally trend
00:43:34.380 | following doesn't feel comfortable. It's, it, it's, it's painful to, to continuously
00:43:41.300 | cut losses, to, to, to say you're wrong, to, to bet hot, you know, to, to take positions
00:43:47.940 | that, that are high, you know, um, you know, that you don't see any value, right. You're
00:43:53.140 | just betting with the momentum, like you're, you're, you're, you're, you're betting things
00:43:58.180 | as they break out. And a lot of times things don't continuously break out. They come back,
00:44:02.660 | you know, they mean revert, you know, so you're betting, you know, you're how, how you win
00:44:07.020 | in this game is that you, you constantly cut losses.
00:44:11.060 | Majority of the time you're losing, losing, losing, and you get occasional big winners
00:44:16.580 | and that's where you make most of the money is these infrequent, but large winners. And
00:44:22.740 | that's not comfortable to do to wait around and, and to sit through like people want to
00:44:27.700 | be active. They want to day trade. They want to, they want to get it right. They want to
00:44:32.260 | make 10 bets and be right. Eight times like that is not how it's going to happen with
00:44:37.380 | trend following. So I, because you're, you're, again, you're like, you're like a mini bubble
00:44:41.580 | catcher. You're trying to catch these little mini major moves.
00:44:45.380 | Uh, and sometimes you get big, big moves, um, that, that pay you, uh, like, but it's,
00:44:51.140 | it's an infrequent payout type of a type of a game. And that's, and that's very difficult
00:44:56.660 | for human beings to, to do. Um, and, um, but I feel like I'm one of those unique human
00:45:04.540 | beings that, that like maybe most entrepreneurs, they, they love the pain. They love, they
00:45:12.660 | love going it, doing it themselves. They love, um, you know, if they have, if they have it
00:45:18.420 | be an army of one, we'll do it. Um, and we love doing the hard stuff that gets you to,
00:45:25.380 | you know, the success, so to speak. So I feel like trend following is that, is that type
00:45:30.820 | of a strategy that, uh, it works just because most people can't do it, you know? And again,
00:45:36.500 | in like markets we trade, we're not trading against physics. Like you, there's reason
00:45:40.220 | why there's no, there's no orbit markets because they go one way and they don't oscillate at
00:45:46.340 | all. Right. There's no, uh, you know, there's no rotation of the act on the axis markets.
00:45:53.220 | Everyone's on, everyone's on the one side. Like, wow. And I take the other side. It doesn't
00:45:57.140 | spin any other way. Right. Um, but in markets you're treating it, you know, other people,
00:46:02.980 | you know, like some guy, I think it was cool saying, uh, in physics you're trading against,
00:46:11.220 | you're trading against God. And in the markets you're trading as God's creatures and God's
00:46:16.900 | creatures are like, you know, irrational. They're very different. They're different.
00:46:26.100 | So we don't, uh, you know, when you play a game that doesn't abide by the laws of physics,
00:46:31.420 | you know, things go back and forth, back and forth. Um, it's, yeah, that's a tough game
00:46:37.060 | because you know, you'd like for everything to be smooth. But if that was the case, there'd
00:46:41.060 | be no markets. Yeah. I've got, I've got some, some, some questions that touch on important
00:46:45.580 | themes that I want to get to before we run out of time. So, um, consider these a little
00:46:49.500 | bit more rapid fire questions. Uh, you don't have to give a 10 second answer, but one to
00:46:53.140 | two minutes. What is your most memorable trade from the last year or so? I, I'd have to say
00:47:00.620 | oil. Um, last year. So yeah, oil. I mean, I've got short oil in July of 2014. Uh, I
00:47:08.740 | know that cause my dad, uh, asked me one time and I told him, and that was the year I got
00:47:13.620 | engaged. Um, and I didn't know at the time that that'd be the start of something big,
00:47:19.460 | but, uh, 70, 60% later, um, it was, it's been a big winner. Um, and that same process I
00:47:28.660 | take every other trade, like, Oh, I don't know if this is going to work, but I got it.
00:47:33.140 | I got to take it and let's see if it works. Uh, some of them work out and a lot of them
00:47:38.580 | don't. And this one did. And, um, yeah, it was the most memorable, memorable because
00:47:42.820 | everyone likes to talk about oil. Like, like, like they like to talk about gold. Like it's
00:47:46.940 | like the only two commodities that anyone knows. Um, Oh, what's oil doing? Oh. And,
00:47:51.660 | and, and oil affects everybody cause everyone drives. So, uh, you know, as we've gotten
00:47:57.420 | later into the cycle now, like as oil has gotten down to the twenties or thirties or
00:48:03.380 | something, um, everyone started to text me, call me, Oh, we still, you know, are you in
00:48:07.740 | this oil? I'm like, yeah, I've been, I've been in oil for a year and a half. Yeah. You're
00:48:11.300 | long oil now. No, no. Yeah. Yeah. Not, not as not in the same, um, aggressiveness, like
00:48:19.940 | I'd say 20% of the position that I, that I did have like still short it, but 20% of the
00:48:26.660 | size, not, not, not, not as, not as short, but, uh, but yeah, it's most memorable. And
00:48:32.500 | it's weird because going back to the physics thing and the market, like God's thing, you
00:48:37.300 | know, when I see everyone starting to call me and text me and becoming aware of the,
00:48:43.260 | the, uh, severity of the trend, I say, Oh, this is over. This is going to end because
00:48:49.500 | everyone's caught on now. Right. And when you get everyone on the one side, unlike physics,
00:48:54.860 | it goes the other way in the markets like that. And that's like, you know, that's, that's
00:48:59.460 | like the poker read stuff like that. That takes a lot of experience. I think to start
00:49:03.540 | to get good at that, like I would never base them a training system on like making reads
00:49:08.140 | like that. That's too hard. Wouldn't base it. But I think it's important for people
00:49:11.220 | to recognize it. And I'll give two examples that, that one, a historical for me, one very
00:49:15.820 | current. Um, when I was, I met a bunch of people in real estate and one of the guys
00:49:20.900 | that, um, this is back in about, uh, mid, mid to late two thousands. I forget the exact
00:49:26.940 | timing, but he was telling me the story of how he had made a killing in real estate and
00:49:31.740 | how he had gotten out of stocks in 2001, 2000 or so. And his reason for getting out of stocks
00:49:37.660 | was that he, um, he, uh, I had a taxi driver who the first thing they started talking about
00:49:45.060 | was how much money they had been made, made on their Apple stock or whatever the tech
00:49:48.180 | stock was. And he came home and said, if I, if a taxi driver in New York city is giving
00:49:52.760 | me stock advice, I'm out and just, and sold everything. Well, unfortunately he was telling
00:49:57.380 | me the story, but then he went on to lose a bunch of money in real estate cause he didn't,
00:50:02.780 | he didn't take into account that same indicator. If my house, if my maid or, or, or, uh, you
00:50:08.860 | know, the guy who works on my car is telling me about how much money they're making in
00:50:11.860 | real estate and the poor guy didn't pay attention. But I noticed that trend just a little bit
00:50:16.900 | of, Hey, everyone, everyone's getting into real estate, so therefore we've got a problem.
00:50:21.580 | But I think it's more interesting to practice, not necessarily with those big ones, but with
00:50:25.820 | other, with other things. I'll tell you the current one current as of March, 2016, we're
00:50:30.380 | recording this is Snapchat. And what's been funny is I've been watching, I'm, I've never
00:50:36.540 | really used Snapchat. It wasn't really, it was started with such a young thing, but I've
00:50:41.020 | been watching, uh, I've been watching the marketing people talk about how important
00:50:46.300 | it's going to be for an, for a year, um, for over a year. And now it's been a, it's been,
00:50:51.040 | some of them have been talking about it for longer, but I've been paying attention for
00:50:53.260 | a year. And now what's funny is still the early movers are just starting to catch on
00:50:58.940 | and my newsfeeds are flooded with little yellow ghosts everywhere. People saying, follow me
00:51:03.820 | on Snapchat, follow me on Snapchat. And so I share that with the audience to say, watch
00:51:07.540 | it and recognize it. And, um, there's a point in time at which with all trends, you can
00:51:12.860 | see it a lot of times with these technology trends that you're just in your normal life.
00:51:16.380 | There's a point in time at which it's useful to you to get on in line with the trend. Sometimes
00:51:20.920 | it's useful to you to be an early mover. Sometimes it's useful for you to follow it, but pay
00:51:25.080 | attention to what people are talking about and you can see these things, uh, whether
00:51:29.760 | it's an oil, real estate or Snapchat.
00:51:31.660 | Yeah. Um, and yeah, I think if you're an investor in Snapchat, it's, it's, you know, uh, granted
00:51:41.780 | probably the dynamics of the risk reward a little different because it's less liquid.
00:51:47.820 | There's not, there's not as many participants that hold the stock and all that stuff, but
00:51:51.900 | you get these like hyper growth things that like, you know, you're not going to invest
00:51:55.260 | in oil and it's not going to be a 40 X move. Like, no, you know, it's, you don't buy oil
00:52:02.580 | at a hundred and it goes to, you know, 4,000. Right. That doesn't happen unless you were
00:52:06.420 | like in hyperinflation or something. But, um, you can get those psychotic moves in,
00:52:13.900 | in these, in these, um, these budding startup companies. But, uh, but yeah, I mean a lot
00:52:20.900 | of times they're, they're a little frothy and, uh, and they come back to zip.
00:52:26.900 | What's the biggest mistake that you've made recently and how did it happen where you lost
00:52:31.520 | a bunch and you just totally were surprised? What was it and how did it happen?
00:52:36.380 | Biggest mistake I think, um, well I never, I never disobey my rules. Right. But, um,
00:52:48.540 | but there are, there are things that, you know, research wise that I feel like I, I
00:52:55.540 | could, I could be, I could have implemented a little earlier. So, so it's something like,
00:53:00.300 | um, we can, we can stick with oil. Um, so you know, if you're just, if you're following
00:53:06.780 | right now, I treated about 40, 40 markets, right. And about four or five of them are
00:53:11.980 | energy markets. So let's say you give each market the same, the same risk, right? You're,
00:53:19.580 | you're saying, okay, well I'm going to treat every market the same. And whenever I get
00:53:23.060 | a signal, I'm going to bet the same amount across the board. I'm not going to be biased.
00:53:27.140 | Right. I'm not going to say, oh, I'm going to bet two on oil and one on gold and three
00:53:31.540 | on stock. Like, no, it's all gotta be the same. It's like, uh, you know, it's the same
00:53:35.820 | bet throughout. Um, so if, when you do that though, you limit yourself, right. To per
00:53:45.380 | se, you, you create where the number of markets you trade is where you're going to have the
00:53:53.940 | risk. Right. So if you have five Mark five energy markets inherently, when you get signals,
00:53:59.860 | you're only going to have 5% of your, your, your risk in, in those markets. Right now,
00:54:04.980 | what happens if they become the best performers, right? You may want a little more, right?
00:54:11.740 | Sure. And, and what happens if they become highly correlated? Uh, you know, if they're
00:54:17.300 | still trending, that's a good thing because you got one big position crushing it. But
00:54:21.060 | ultimately at some point, you know, they may all start to go against you, you know, later
00:54:26.540 | on. So you gotta be, you know, you careful. So I started just training very, very, you
00:54:32.220 | know, primitive where it was just, like I said before, trading basing one, um, one,
00:54:39.420 | uh, flat percentage bet for each market, not incorporating this correlation stuff, um,
00:54:46.940 | or, uh, aggressiveness of the trend stuff to where like you're like rel using relative
00:54:51.180 | strength and things like that. So, so over the past year and a half where I've done well,
00:54:56.300 | you know, being short oil and other energy markets, I would have loved to have been more
00:55:02.340 | short, right? Because that would have meant like there was some of the other 35 markets
00:55:07.180 | that weren't doing much of anything, but I was still giving them their equal chance to
00:55:11.740 | do well now, not cause I don't want to reject any trades either. Cause you don't know what's
00:55:16.700 | going to be the next big, you know, you don't want to be in a point where you reject any
00:55:20.140 | trades. So while I held this position and energies like, damn, like I'm taking this,
00:55:26.340 | this is like the, you know, I'm hold, I'm sure I'm doing okay, but I've been taking
00:55:30.940 | this stupid position, cotton and cocoa and all these other markets that are not doing
00:55:35.460 | anything. I keep getting whipped out. Like I should really should have just been allocating
00:55:39.780 | more, um, of, of my capital to the, to the ones that are already winning and winning
00:55:44.980 | big. So that, that was a big, like frustrating point of mine. Um, point that I, I, I knew
00:55:53.300 | and now I know of, of ways that I could have had more, um, without sacrificing the diversification
00:55:58.860 | end without saying, all right, well, all right, we gotta, we gotta take all the, take all
00:56:03.140 | the allocation from these other markets and give it to oil. Like, no, I don't want to
00:56:07.140 | do that, but I know I can, I can at times, um, get a bigger position in the ones that
00:56:13.900 | are winning, um, then, uh, then the other ones that are kind of whipping me out back
00:56:18.660 | and forth, back and forth. So, um, yeah, that, that was annoying, but I know it's just, it's
00:56:24.660 | all a learning process, right? You know, it's like, okay, well next time I'm going to, I
00:56:28.900 | incorporate this stuff, um, into my, into my system now. And you know, you get, you
00:56:33.900 | get more, you just, you get better at, um, allocating your funds to the trends better,
00:56:43.460 | right? Like in the past I was open to all the trends, but now I'm going to be more,
00:56:48.340 | um, you know, still open to everything. But when things really start to prove themselves,
00:56:53.660 | um, I'm going to be in a position to, to take more of a position to take advantage. That's
00:56:59.980 | all.
00:57:00.980 | Pretend, um, pretend that I'm a boglehead and I'm just long head. Yeah. I always bogglehead.
00:57:08.980 | I'm a longterm. I just held index funds. I don't do any trading. I'm a buy and hold index
00:57:14.860 | funder. Uh, and you're trying to, uh, you're trying to say, Hey, listen, you ought to consider,
00:57:20.980 | uh, taking some of the money out of the index funds and investing it with me. What are some
00:57:24.660 | of the key points that you would touch on that would, that I would consider in making
00:57:29.300 | that decision?
00:57:30.300 | Sure. Well, you know, with passive investing on any one market and if you're doing it on
00:57:36.900 | stocks, okay. Um, just realize that every so often you're going to lose a lot, you know,
00:57:44.020 | it's going to go down. Um, and it may take you years for you to get back to your old,
00:57:50.780 | your old, uh, account value. Um, it's, you know, we just lived through 2000, 2015 where
00:57:58.180 | essentially, essentially went nowhere after all the taxes and the fees. Um, so, you know,
00:58:06.340 | if you can stomach living with an investment strategy like that, that you're susceptible
00:58:12.700 | to maybe 10 years of no gains, uh, I would say, I said, okay, go for it. Um, especially
00:58:18.500 | if you're younger, you know, fine. But, but at some point, you know, you don't want to
00:58:22.940 | be in a position where you're going to get older or where, or when you need them ability
00:58:31.460 | and that's going to wipe out half or 30% or more of my money. Um, and I'm going to be
00:58:37.460 | damn now I wanted to buy that house. Now I can't buy it because now I got 30 or 50% less
00:58:41.900 | in my accounts. You know, that's not a good business plan, you know? So with trend following,
00:58:48.340 | because it's a, because it's different and because it's, it's, um, a non correlated return
00:58:54.980 | stream, right? It makes money differently than a buy and hold would. Um, when you combine
00:59:01.580 | them to whatever degree, you know, like if you say, all right, I'll keep, I'll keep,
00:59:06.820 | uh, say you went half and half, right? Um, you, you're getting two different types of
00:59:14.500 | players. It's like, like building a lineup. Like you don't have a lineup of power hitters
00:59:19.660 | only or lineup of slap hitters only you want, you want some power here is you want some
00:59:23.820 | average here is you want some slap hitters and you want some contact guys, you know,
00:59:26.940 | like you want all different things. So you create a smoother, uh, return stream for yourself.
00:59:32.380 | So you have, you have more stability. You're not, you're not more, you're not susceptible
00:59:36.860 | to, or you're not as susceptible to a, to a sudden major loss or a, or an extended period
00:59:44.580 | of no gains. Like you, like people just had and stocks. Um, so when you incorporate this
00:59:50.580 | stuff, you're, you're opening yourself up to one profiting from trends in different
00:59:55.420 | markets. You know, if you're just trading stocks, it's one market, one, um, and one
01:00:00.260 | country. Um, but when you open yourself up to maybe a trader like myself or another trend
01:00:05.900 | follower, a diversified guy, um, you're, we're trading dozens of markets in all different
01:00:11.460 | sectors and all different countries, all different continents. So one, you're more open to, to
01:00:18.260 | catching trends if, and when trends go cold in your stock portfolio, right? Like, Oh,
01:00:24.940 | well, you know, that that's fine. That things are cold here because things are hot over
01:00:28.220 | here and now we just moved our money. So now we're, now we're, now we're doing well over
01:00:32.340 | here. And also trend following has the inherent, inherent, um, uh, mechanism to cut losses.
01:00:42.280 | If you're a buy and holder, you're sitting with your losses. Like you, you never get
01:00:48.100 | out. Now there's easy times to when things start to roll over, right? Um, to where you
01:00:56.140 | use like, like the moving average, we talked about before, like when you get out and you
01:00:59.620 | protect your ass, you because maybe it will, maybe it's a false signal. Maybe it does,
01:01:04.660 | you know, give you a short signal and it comes right back up. Like in damn, like you missed
01:01:08.220 | out on the bottom or something. But in those, like I said before about the infrequency of
01:01:13.340 | those major trends, most of the time you may be right, holding it might be the right thing,
01:01:19.460 | but sometimes it won't be. And you can't afford to lose half or more of your money. Um, for
01:01:27.420 | any reason, like that's just not a good business plan. You shouldn't be, you shouldn't open
01:01:31.300 | yourself up to that. Like that, that to me seems silly and unnecessary. Like you don't
01:01:35.580 | need to do that. You don't need to play that way. Um, so you know, if people can't get
01:01:41.220 | past there, Oh no, I just always hold stocks no matter what. Um, and which I may add that
01:01:47.420 | all stock indexes are trend following systems. Um, they're not very good ones, but they,
01:01:53.500 | they are in that they they're diversified, uh, throughout the stock sector. They, they
01:02:00.340 | allocate, um, more of the weight to the, to the winners, uh, and they allocate less to
01:02:06.620 | the, to the losers. Um, so they are inherently a little bit of a trend following system.
01:02:10.500 | So, um, anyway, um, you know, so when you combine these two ideologies, these two philosophies,
01:02:20.020 | these, you, you get, you get different return streams and when you combine them, you get
01:02:23.980 | a more, you get more of a smoother, smoother, um, you know, performing type of a thing.
01:02:29.180 | You get more, as you say, you improve the risk reward, right? So one way to, one good
01:02:34.960 | way to measure risk, uh, I would say reward in relation to risk is what I like to use
01:02:40.340 | is the, uh, the MAR ratio, which is the compound annual returns divided by the max loss, right?
01:02:46.780 | A lot of guys like to use the sharp, which is the compound returns divided by the standard
01:02:52.020 | deviation, the annualized standard deviation. But you know, standard deviation could be
01:02:56.700 | positive, right? You can have deviation on the upside and that doesn't, that doesn't
01:03:01.140 | make much sense to me. Um, so other guys may use like the Sortino, which is just the downside
01:03:06.620 | deviation, but I like to use the max loss because that, that is where, that's where
01:03:13.220 | the edges are. That's where people lose their discipline was when they start losing money.
01:03:17.620 | And if they, you know, if they lose too much, um, that's when they start to quit. So, so
01:03:23.020 | like typically, um, you know, just to like compare like risk reward ratios, um, like
01:03:32.420 | buying hold typically has 0.1 to 0.3 is there is there a ratio like a stock like the SMP
01:03:42.260 | has about seven, seven and change compounding returns over many, many decades with 50 plus
01:03:49.660 | percent losses. If you go back to 29, you know, it's like 80, 90% loss. So their, their
01:03:56.080 | risk reward isn't that good over, over long periods of time during pockets of time, like
01:04:00.540 | in the past five years, it's been insane. It's been great, right? You have a 200% run
01:04:04.420 | up with a 10% loss, like max loss. That's, that's awesome. Right? That's very good. But
01:04:09.660 | over long periods of time, um, that's where that ratio sits that 0.1 to 0.3 now, but diversified
01:04:18.020 | trend following, um, systems, uh, they usually have MARs of usually 0.3 to 0.7 and they,
01:04:26.060 | they achieve higher, um, higher risk reward, um, ratios because they're not sitting with
01:04:33.260 | these big, big losses at times, right? They're cutting losses. So it takes, it takes more,
01:04:39.180 | it takes more of a, um, of a consolidation type of a period where a lot, you get a lot
01:04:44.420 | of strings of losses in a row to really, uh, to really kill a trend follower. But the,
01:04:50.140 | the, the thing is, because, because of how markets work, things consolidate for periods
01:04:55.300 | of time and then they run, things run for periods of time and then they go back to consolidate,
01:04:59.860 | you know, so all you got to do is get through the windows of time where things aren't that
01:05:03.460 | good, uh, without, without much loss. Um, and you do that by cutting them and not betting
01:05:09.580 | aggressively, uh, or, or, or over aggressively, um, to where you get to that next set of trends.
01:05:15.820 | Um, now it's, it's a different philosophy and it's, it's a different, it may seem more
01:05:21.060 | common sense to, to some people like, oh yeah, why would I want to buy and hold stocks ever
01:05:26.020 | any, anymore? Um, I don't know. I don't, I don't do that. All my money is in my phone.
01:05:31.420 | So, um, two, two final questions here and these are kind of going to be, these are going
01:05:36.020 | to lay you up nicely to mention your, your websites and your fund. Uh, but they're sincere
01:05:40.580 | questions, um, but they are going to lay you up nicely. Uh, why can't I just do this myself
01:05:46.740 | or can I just do this myself? If I want to learn trend following to trade my own portfolio,
01:05:51.180 | can I just do it myself? Yeah, absolutely. You can. I mean, and, and you know, if you're
01:05:56.660 | committed to it and you know, going back to the dieting and training, you need, you need
01:06:01.460 | to have the discipline to do it. If you're that guy, great. If you're looking for a cheap
01:06:05.420 | way out, you're probably not that guy, you know, because you're probably not going to
01:06:08.620 | do it. You know, like what, what's, what's, what sucks about a personal trainer is that
01:06:15.500 | he can't do it for you. You know, a, a personal trader with a D can do it for you because
01:06:24.260 | I don't need to be in your body to do, to do the things like, you know, so if discipline,
01:06:30.060 | uh, is a big issue for you and for most of the humans it is, and for most of the human,
01:06:36.100 | like discipline is for me an issue on things I don't really like, you know, like I'm not
01:06:40.980 | going to do this, I don't like it, you know, I'm going to give up on it, you know, but
01:06:44.940 | things that really into I'm doing it, I'm in it, I'm committed. Um, so, you know, for
01:06:50.900 | most investors, they're, they're not usually the committed ones. They're, they're, they,
01:06:56.500 | they just do it because, um, they were sold on that's where they should have their money.
01:07:01.420 | So if that's, if, if you're a passive investor, um, which is, which is cool. Um, passive at
01:07:07.900 | a lot of things, um, investing, not being one of them, but if you are, then, then, then,
01:07:13.500 | then you may consider, you know, outsourcing your, your investing to a disciplined human
01:07:20.380 | being, a guy who's into it, a guy who's on top, a guy who has his money invested in his
01:07:25.700 | own strategy, right? A guy who has personal interest in doing well. Um, and you know,
01:07:33.300 | that, that's the service I provide for people, you know, not everyone, not all my investors
01:07:37.420 | want to do this. You know, a lot of them could, I could teach this stuff to my mother or to
01:07:42.700 | my 10 year old cousin. It's not hard to do. It's not hard to, to grasp the principles
01:07:50.820 | and to actually create a system, I don't think. But, but in the hard part is doing it day
01:07:56.460 | after day after day after day. It's like, and you got to do it forever. I'm sorry, you
01:08:00.780 | can't take any days off. You know, that, that, that's where you start to lose the cell. You
01:08:06.820 | know, it's like, oh, I don't do that.
01:08:10.220 | >>So in that line, and, and, uh, uh, I'm running up against another interview scheduled after
01:08:16.100 | your, I'd, I'd probe you as far as how you learned it, but let me close with this question.
01:08:22.460 | If you, I've, I've avoided and talking about things like rates of return in order to, to
01:08:29.820 | keep you free of disclosure requirements, uh, things like that with, with the financial
01:08:35.060 | regulatory agencies.
01:08:36.220 | >>Yeah.
01:08:37.220 | >>So that's, if any audience is listening, that's why I haven't asked those questions
01:08:40.620 | of like, how much did you make last year, et cetera. Those types of claims need all
01:08:44.220 | kinds of regulatory documents associated with them. I just want to ask you this question.
01:08:49.380 | If I wanted to bring money to you and say, Hey, listen, Michael, will you please manage
01:08:54.840 | it for me? How do you want to be judged by me as a client? Do you want to be in by, in
01:09:00.260 | my examples are, do you want to be judged simply based upon my total return? Did you
01:09:03.820 | beat the S and P last, last year that I could do better within what then what Vanguard did
01:09:08.100 | for me? Do you want to be judged based upon limited downside? Do you want to be judged
01:09:12.020 | based upon less volatility? How do you as a portfolio manager, what do you think is
01:09:16.180 | a fair criteria and method to be judged by your clients?
01:09:21.140 | >>Uh, I say when people come to invest with me, I say, I don't, I don't require, but I
01:09:30.220 | recommend you stay invested for at least three to five years. Um, so you can get enough,
01:09:38.460 | you can get enough time, get enough, uh, get enough trends under our belt to, to compare
01:09:42.580 | ourselves to maybe the other options out there. Um, and probably, you know, I'd say compare
01:09:51.140 | me or judge me on my one absolute returns over the time period. Let's say it's, you
01:09:58.460 | know, three years, five years or something, um, versus other, other asset classes. And
01:10:03.980 | then, and then base me and then compare me and judge me on the, um, like I said before,
01:10:08.580 | that, that MAR ratio, um, how have my returns been relative to my losses? Um, because a
01:10:16.860 | lot of guys can, you know, maybe have a real, real high MAR ratio, but their absolute returns
01:10:24.860 | aren't high. It's like, well, you know, I want, I don't want an MAR of one, but returns
01:10:31.020 | of 2%, you know, that's, I don't want, I want like bigger returns. So then it's like, okay,
01:10:36.100 | we need to need to factor both in. I don't know how you want to weight them or whatever,
01:10:39.780 | but, um, you know, and I would say also it's in pockets of time, you know, comparing yourself
01:10:50.060 | versus versus other guys, it can get dangerous because there's always something that's going
01:10:55.940 | to be doing better. You know, most of the time, a trend following is usually never going
01:11:01.060 | to be the number one, uh, asset class because it's usually, it's usually an average or,
01:11:10.500 | or a little bit of a, um, of a non pure, uh, all in bet. You know, it's the best all in
01:11:19.340 | bet over the past year. It's probably like Netflix or something that went up like 200%,
01:11:24.500 | but you don't, you don't like, you don't want to start a Netflix fund, you know, because
01:11:29.780 | it, that, that's going to end that ride's going to end. So comparing yourself to, to
01:11:34.500 | like a stock or something, it's like, well, Mikey, why do I need you? I could just invest
01:11:38.100 | it all in Netflix. Like, well, yeah, dude. I mean, but that's, that's one opportunity.
01:11:43.820 | That's one trend in a short amount of time. Like, do you have any evidence, any research,
01:11:49.740 | anything that, that, that suggests that that's going to continue? Um, and that's a viable
01:11:54.860 | investment strategy is like, I'm just a buy and holder all in bet on Netflix. Like if
01:12:00.260 | yes, okay, go, go have a ball bro. But like if you want a, a stable, a more, a well researched
01:12:09.980 | thing, a system that is not susceptible to major sudden losses, then, then you may consider
01:12:16.260 | something else. I mean, with, with a little bit more diversification and, and, and more
01:12:20.660 | rules and stuff like that. But, but yeah, I mean, I, I value myself. Um, I, I judge
01:12:26.580 | myself on, on those two things. Like I want to achieve at least, at least double digit
01:12:32.700 | returns and I want to achieve an MAR of at least a half and that, that, those are my
01:12:39.940 | goals. And, and if I do those things for you, then I, then you can tell me, you know, job
01:12:45.700 | well done, but now go do it again and again and again for the years coming up. Uh, but
01:12:50.700 | that, that, those are, those are my goals with, with my returns. Um, I don't want single
01:12:57.300 | digit returns. Like, uh, I'm young and most of my investors a little more aggressive.
01:13:01.820 | So we, we shoot for bigger, bigger numbers. Um, you know, we were willing to take some
01:13:06.580 | of the volatility, but we're, we're also willing not to take that much. We want to be efficient
01:13:10.780 | with it. So efficient with our, with our strategy. So, um, that, yeah, I mean, again, double
01:13:18.620 | digit returns is what I, what I want. Um, you know, 12, 15, 20 at times. Um, and then,
01:13:28.380 | and then keeping the downside volatility to about, uh, you know, um, to like double those
01:13:35.020 | numbers, you know, so if I, so if I achieve, I achieve like 10% returns, I only want to
01:13:40.460 | be taking max losses of 20%. You know, I achieved 15. I want to be capping them at 30, you know,
01:13:46.780 | stuff like that. Um, that, that, that's what I want. I don't want the stock buy and hold
01:13:51.380 | thing of 7% returns with 50% drops that, no, that's not, that's not efficient to me. There's
01:13:59.260 | a better way to do it, at least in my opinion. And that's why, that's why I do it this way.
01:14:03.940 | Awesome, dude. You got two websites. You have a, a personal website. We'd talk a little
01:14:08.260 | bit about finance, a little bit about you at Michael melissinos.com. I'll link it. So
01:14:12.740 | it's spelled properly in the show notes, but it's M E L I S S I N O S.com. And then you
01:14:18.100 | have your firm's website at melissinostrading.com if anyone's interested in, in, in checking
01:14:23.580 | into some of that. Anything else that you'd like to share with the audience here as we
01:14:27.060 | close?
01:14:28.060 | Uh, no, I just say, just be honest about, about your investing. Like in order to do
01:14:36.140 | really well, the reason why the best investors, the best traders are the best is that because
01:14:42.540 | they've fully committed to their style and they know their style and they follow their
01:14:47.300 | style every day. They don't, they're not wishy washy. They're not going back and forth on
01:14:52.100 | their discipline. They're, they stick to it even when it's not fun. And disclaimer, most
01:14:57.380 | of the time it's not fun.
01:14:58.380 | Welcome to the world of investing.
01:15:01.100 | It's not, it's not supposed to be fun. It's just supposed to work. So, um, you know, that,
01:15:05.860 | that's what I'd say. Just be, just be honest with yourself. If you can't do it yourself,
01:15:09.740 | no big deal. It's not, you're not less of a man, less of a woman because of it. It's,
01:15:15.100 | it's perfectly normal, perfectly probably the smart thing to outsource things that you
01:15:20.140 | don't want to do and that you can't do as well. No big deal.
01:15:23.220 | Sweet. Dude, thanks for coming on the show.
01:15:26.100 | Thank you so much.
01:15:30.380 | Investing is something that really almost anybody can learn. If you're listening to
01:15:33.860 | a show like this and if you understand that you have an interest in it, well, I promise
01:15:38.900 | you, you can learn it. Uh, Michael can learn it. You can learn it. I can learn it. I do
01:15:44.260 | want to point out and just demonstrate to you, notice how the investment business works.
01:15:49.940 | Notice how a guy like Michael, uh, if you remember the question that I asked him, he
01:15:54.180 | builds a skill and then he goes and applies that skill to help other people. And that's
01:15:58.580 | how the investment business works. It provides in a tremendous way for investment advisors
01:16:03.980 | to build wealth while bringing a service to the marketplace. That's what all of us do.
01:16:08.140 | We go and we learn a skill and then we take that skill and we work to bring it to the
01:16:11.940 | marketplace to build our own wealth. And in the case of investment management, it's
01:16:16.300 | very clear you get to use other people's money, profit from it in the form of fees while hopefully,
01:16:22.420 | hopefully growing it. And that could provide the foundation for your own fortune. Consider
01:16:28.940 | if there's something in your industry, in your business, but it might be investing,
01:16:31.980 | but consider if there's some way that you can apply that concept in your own business.
01:16:36.540 | Hope that's useful to you. Thank you for listening to today's episode of the show. If you'd like
01:16:40.820 | to support the show directly, please consider becoming a patron of the show. Go to RadicalPersonalFinance.com/patron.
01:16:47.060 | RadicalPersonalFinance.com/patron. If this is your first time listening to Radical Personal
01:16:50.860 | Finance, welcome. Please consider subscribing to the show. I post regular episodes here
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01:17:16.100 | Be back with you soon.
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