The Compound and Friends - Statement Risk

Episode Date: June 27, 2025

On episode 197 of The Compound and Friends, ⁠⁠⁠⁠Michael Batnick⁠⁠⁠⁠ and ⁠⁠⁠⁠Downtown Josh Brown⁠⁠⁠⁠ are joined by Cole Wilcox, Founder, CEO and CIO of Longboard Asset Management to discuss: all things trend following, using systems to overcome emotion, technical analysis, Nvidia, the new generation of investors, and much more! This episode is sponsored by Public. Find out more at: https://public.com/compound Sign up for The Compound Newsletter and never miss out: ⁠⁠⁠⁠thecompoundnews.com/subscribe⁠⁠⁠⁠ Instagram: ⁠⁠⁠⁠instagram.com/thecompoundnews⁠⁠⁠⁠ Twitter: ⁠⁠⁠⁠twitter.com/thecompoundnews⁠⁠⁠⁠ LinkedIn: ⁠⁠⁠⁠linkedin.com/company/the-compound-media/⁠⁠⁠⁠ TikTok: ⁠⁠⁠⁠tiktok.com/@thecompoundnews⁠⁠⁠⁠ Public disclosure: All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA & SIPC. Public Investing offers a High-Yield Cash Account where funds from this account are automatically deposited into partner banks where they earn interest and are eligible for FDIC insurance; Public Investing is not a bank. Cryptocurrency trading services are offered by Bakkt Crypto Solutions, LLC (NMLS ID 1890144), which is licensed to engage in virtual currency business activity by the NYSDFS. Cryptocurrency is highly speculative, involves a high degree of risk, and has the potential for loss of the entire amount of an investment. Cryptocurrency holdings are not protected by the FDIC or SIPC. *Rate as of 3/5/25. APY is variable and subject to change. **Terms and Conditions apply. Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of ⁠⁠⁠⁠Ritholtz Wealth Management⁠⁠⁠⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠⁠⁠⁠https://ritholtzwealth.com/advertising-disclaimers⁠⁠⁠⁠. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: ⁠⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

So are you trend following Pudgy penguins? I saw an ETF filed maybe perhaps. I swear to God. Yeah. So there was a tweet yesterday going around that it sounded like a joke, but it was not a joke. It was like sneaker discovery in space for the blockchain. Did you see this? Wait, what? What do you mean sneaker discovery in space?

A footwear startup is teaming up with two space companies. Okay, so let me read it over. A footwear startup is teaming up with two space companies to design a shoe in orbit as part of a mission to make artificial intelligence and blockchain less expensive and more eco-friendly than it is on Earth. Why does anyone need this? That's a Bloomberg article. I feel like I would need to be high. I didn't understand what you just said.

Are you bullish on that though, generally? Yeah, it sounds great. You got to see this specifics, but it sounds good. I've learned in the world that we live in today, the crazier, dumber the idea sounds, like the better it's probably going to work out. The company is called WeBlockchain. The degenerate economy we block it's amazing unbelievable what's the story I was wondering I see the videos what's the

story with the it's a dumbish thing hold on let's all avid croquet players so um oh they're not botched their croquet these are not I always thought they were botchy not botchy balls what's the story? Curb your enthusiasm? No, dude. It's a visual motif. We have behind us the same colors that are in the foreground. Nicole's cackling. It's a motif. Can I ask you a question, honestly? Nicole, stay here. This is about to be insulting.

No, it's not. Not to be a dick. And most sentences that start that way are's not. Not to be a dick. And most sentences that start that way are not great. Not to be a dick. Can you imagine if you designed the room that we record the show in? No, honestly. It would be like, it would be a college like Bob Marley poster, Blacklight poster, maybe Pam Anderson on the wall, with one piece of tape missing.

She was my number one. Right? Yeah. Okay, we'd be sitting on milk cr with one piece of tape missing. She was my number one. Right? Yeah. OK, we'd be sitting on milk crates. No style. No aesthetic. Be like an alien, some alien thing would have to be there. Vic, whatever, it's a podcast, who gives a shit?

I'm not a stylist, Josh is right. Come on, like we got to, there's got to be some judge to what we're doing here. Daniel, back me up as the in-house graphic artist. What we show on screen is important, right? Okay, there's got to be like a vibe to it. Yeah, you're right. It's a motif. I'm here for it. Okay. Do you have alternative suggestions?

I'm all in. I didn't ask. It was eye-catching. I always wondered. You asked the right question. I gave a good answer. So, you might not be aware of this. Let me tell you something that you don't know. Nothing escapes me. Nothing escapes my omnipotence. You know the chart that we used a long time ago

showing the distribution of returns for individual stocks and how few of them beat the index? Basin binder. No, no, no. This guy. That's your shit? Originally. Actually, he lifted it from you. He lifted it from no. This guy! You? That's your shit? Originally. Actually, the Bass and binder, he lifted it from you.

He lifted it from us. Did he credit you? Yeah. Because I'll find that son of a bitch. No. He's a good guy. He actually lives in Arizona, so. Oh, really? Okay. ASU. Shout out to ASU. So what gave you the impetus to look at that?

What was the question that you had in your mind that you said, I want to research this? It was kind of a random discovery, you know, actually we were Doing this study on does trend following work on stocks and we started to look at that and then just looking at the data It just was like seemed very weird that the distribution was so different and what we would learn in school But kind of normal bell curve distribution type thing. I was like, wait a minute these Doesn't look anything like what I was taught. Okay, just kind of we bell curve distribution type thing. I was like, wait a minute, these doesn't look anything like what I was taught.

And just kind of, we'll get, we'll get into that today. I didn't realize that that was, I, I knew your paper does trend following work. And then you followed up this trend following still work. Yeah. We had another paper called the capitalism distribution. Okay. And that's, that's where that work, you know, kind of came. What did he do in his, in his updating of your research that was different than what you guys did? The Besson binder.

He just took it. I think our data went back to in the late 80s, something like that. He took it back for the whole crisp data set to 1950s or 30s something. So the goal of that is like to show people or the research shows people that most stocks end up being losers in the fullness of time? So here's my interpretation and it's subjective. Most stocks are not worth buying and holding forever. Most of the value creation of the United States and all stock markets are concentrated in

the hands of a very few. We all know that. My only issue with the paper is that it assumes that people buy at inception and hold forever. And we know that's not good because most stocks eventually die, right? But there is- That's not how most people invest.

That's not how most people invest. There are still opportunities. Now I'm not here to like advocate for day trading or heavy trading, but there are opportunities to make money from the time, in between the time the company comes into the market versus the time they leave. You know what I mean?

Yeah. I mean, I think index funds benefit from it though. Sure. Because they own everything. Well, they end up with the survivors. Well, the whole conclusion of the paper, not wrongfully so, is index funds are probably the way to go.

I mean, I think for the average person, that's probably true. I mean, the average person is better off doing that than picking stocks based upon the math. It's not good odds for the average person to pick a stock. So don't be average. Don't be average. Just pick the best stocks.

That's my whole philosophy. That's all I ever do. I mean, this is a life philosophy. Who picks the losers? Why would you pick the worst stocks? What the hell is wrong with you? I think there's a lot of people who first come into investing. And their first instinct is to buy cheap stocks,

because buy low, sell high. And they think that that's going to to be their edge is like, they're going to buy the 52 week low list. It's maybe not the worst possible strategy, but it's got to be up there. It's up there. It might be the worst possible strategy. Right. But that's the instinct because people think about, oh, in real estate, like you want to buy a building that's cheap and then you want value. I think in the stock market, if your starting point is, what are the cheapest stocks?

Like, apps and everything, you're buying companies where there are chronic issues. A few of them are mispriced and will work, but most of them are cheap for a reason. Yeah, I think people, when they buy stocks, they forget that they're buying a company. And they really should just be saying, what is this company? And how much is it going to earn and grow over time?

Because ultimately my performance in the stock is going to be dictated by that. That's so true. If you are going to bottom fish, you better be doing fundamental research and be good at it too. Yeah, because they're just looking at it's, oh, it's down off the high. It's like, well, I don't know, was it a good company back then? Is it a good company now? I don't know.

That's what you should be focused on. Warren Buffett said it. Most tournaments don't turn around. now? I don't know. That's what you should be focused on. Warren Buffett said it. Most tournaments don't turn around. Yeah. I agree with that. So I was on TV today. We were talking about JetBlue.

It's a $4 stock. First of all, nobody could buy a $4 stock. Like institutions cannot buy them. There are people that will bottom fish and buy $4 stocks. But what happens is you immediately collapse the universe of potential investors to a tiny slice of people that operate in markets with a lot of capital. I dare you.

Well, if you've ever flown on JetBlue, you know why it's a $4 stock. I fly on JetBlue all the time, totally understand it. I wish there was a stock of JFK Terminal 5, I would short it. I just want to shortinal 5, I would short it. Just through the, I just want to short the, just if I could short the terminal I would. So I totally get it. I can't believe you still fly JFK. Let's start the show.

Nicole, let's go. Do we fly out of JFK as supposed to where? You avoid it like it's AIDS. I have to fly in to come here because there's no direct. It's 20 minutes from my house. Where should I fly out of? LGA. Every time.

40 minutes from my house. Dude. Nope. You walk right through. No. You're wrong. No. So dumb. I know. I do both.

Alright. Come on, do it. Say the thing. The Comet Friends episode 197. Alright. Thank you, Enich. Ladies and gentlemen, Miss Nicole. Whoa, whoa, whoa.

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That's public.com slash compound, paid for by Public Investing. Full disclosures and podcast description. ["The Compound and Friends"] Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ridholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any

investment decisions. Clients of Ridholtz Wealth Management may maintain positions in the securities discussed in this podcast. All right, we are live. This is the number one investing show anywhere. I don't care what you've heard. I don't care what data you've seen. It's not true.

We have a very special guest today. I'm so excited to introduce him to all of you. He is a first time guest here on the compound and friends. His name is Cole Wilcox. Cole is the founder, CEO, and CIO of Longboard Asset Management, specializing in alternative investment strategies. Cole has over 20 years of investment experience building alternative investment portfolios. Cole, welcome to the show, dude.

Thanks for having me. What part of Arizona are you from? Us, Costale, Fairbanks Valley. You grew up there? Yeah, I'm born there. You're a third generation native. Oh wow. Okay. I want to talk to you about your initial market experience because I think you and I are the

same age. 47. I'm 48. Yeah, I'll be 48 in September. So I think we've started investing in 97, 98, 99. That's my formative years, unfortunately, because I'm locked into that paradigm mentally now. But it seems like you probably had a similar experience that I did just in terms of the

stock market and what was happening in those early years. Do you find yourself to be ever defaulting back to well back in 1999, as often as I do, because I struggle with that. Not 1999, but the whole cycle. Yeah, yeah. If you've gone through that kind of boom bust multiple times. 97 to 02. 97 to 02. Yeah. You had a you had a bust, a boom and a major bust after that. And you saw people get rich. You saw people completely get destroyed and the impact that it has on their lives. So I don't think you that's embedded into your early like DNA, like those people who grew up as depression babies, like they experience that it's just,

it affected how they think about life. For me, it affected how I think about risk, how I think about the risk that is involved in investing and, you know, to be realistic about these sequences because I've lived through it. If you didn't live through that cycle, you know, what came after that, you know, was well, so here's the problem for me. So in 22, it looked very similar to the early stages of 2000 2001. And we ended up with a 35% bear market in the NASDAQ that I thought could be negative 70%

because I had had that experience. And there's this idea in the markets where your experiences contribute to this long-term market wisdom. And I think there is some truth to that, but also. I don't. Okay, so I want to hear why in a second, but they can also negatively color

the way that you look at things. And you are looking for analogies all the time. Like this looks just like that. So when I'm living through 2022 and I'm seeing the bubble, the IPO bubble burst, all I can think about is it's early, it's early, it's early. This is going to go way lower. And of course it it doesn't. But I know exactly why I felt that way in that moment, because I lived through it very early and it was formative. Yeah. Well, I think it's very natural for people to build those biases and their experiences build biases. And it's very dangerous to invest or reason by analogy in anything. It is a known thing. So I know that and I

know my own personal biases and that's why I focused on building systematic strategies because I'm just like any other human. I have those real things but a systematic approach doesn't have that memory. Exactly. And that's the major benefit of it. It has that memory, but you're coding it in. Like, it's a systematic approach based on historical volatility and returns. The memory is there. No opinions. The opinion's not there.

Yeah, well, it's the math is there. It's like you just do what is statistically the most probable. You don't talk yourself out of it, you know, after you do the math. Which is, I think, where the bias has come in. Well, I think it's different this time, when it's not different this time. But what are you saying? You're saying that people don't have those biases?

I'm saying they're absolutely doing it. It hurts them. Oh, OK. So nobody disagrees with that. We all agree. No, I'm saying that I think that experience and wisdom in life are great. I think in the market, it can be treacherous.

I think it was Peter Bernstein's book who wrote about how, was it Bernstein? I can't remember. In the 1950s, when the yields of bonds crossed above stocks, any time they converged, it was a sell signal for stocks. Stocks got too expensive. Every time. It worked historically like 10 out of 10.

It was like the yield curve indicator. And then one time, it just stopped working. It never worked ever again. And then forever more, bonds yielded more than stocks. And I think that once you have that muscle memory, things change a lot over time. And especially if you have a traumatic experience early in your formative years like you did and like you did, you see that every time stocks fall. And I think that, yes, there are positive lessons that you can learn from your own history,

but I think people over-index to what happens early in the career. Experiences overrated in investments. Totally, because people become experts on an earlier version of the world. I'm seeing that from someone, but I don't know who. And I think that's what happens, and it stays with you. Well, it's also the own internal ego.

Like, you over-emphasize your own personal experience, and that's all you know. If you're able to do backtesting and run research and look at 100 years of data, then you get all of these other lifetimes of experiences that you can contrast with your own personal link, it extends the data set with which you can evaluate what you want to do. I think that's the issue is that people who don't have the data, and can't do that research are not able to build a more balanced viewpoint of reality. I think valuations too, like where your experience is your worst enemy because companies have

gotten better at being companies and as a result, we are systematically paying higher and higher multiples for earnings. Like we just are. There's a lot of fundamental reasons why. There's a lot of macroeconomic reasons why. And a lot of people got anchored to the P-E ratios they remember as being a stock market bottom. Or margins mean reverting.

Margins were a very mean reverting series historically. And then came the tech giants that just ripped that up. So that doesn't exist anymore. How could you have known? And so when you see, I think the most wrong people on TV are when people say, I've seen this movie before. No you haven't. Yeah.

So like if you think about like an early 80s paradigm where the S&P bottoms at 10, right? It's like, well stocks don't bottom until we get to 10. We were never going to get to 10 times earnings. There's too much money that needs to be invested in stocks. And there's a different investor populace now with a higher risk appetite. And they're earlier in their investing careers and have a high and just they're not anchored to like those historical moments. So that's the thing where I have to check myself the most often. It's like I think this because I live through it, but it doesn't always have to be the

same as things used to be. And we're going to talk a little bit about cycles and stuff like that, because I'd love to get your take on this concept. But in addition to the fact that the markets change, the people investing change, businesses change, the speed of the world is completely different than what it was in the era where it was phone calls and snail mail. So we should expect cycles to speed up. So this is where I want to start. Am I imagining that we're having one month recessions and one week bear markets or do you feel the same way? I think it feels that way because of the news cycle and social media and it speeds up how

we feel about the markets. Yeah. But I don't think it's any, you know, just different than the time that it's ever been. I just think the speed at which information gets diffused and reacted to is at just a higher amplitude than it used to be. The V-shaped recoveries are different though. Like that wasn't a feature of markets in the 80s and 90s as information took longer to disseminate amongst investors.

I mean, I think it feels that way. 1998, huge V-shaped recovery, right? We thought we were going out of business with long-term capital management. Less than six months later, we're back at highs. So flash crashes, even in this cycle, happened like 2010. Flash crash, the mark is down 8 10 percent the intraday so I just it's been there like the whole time the quant

crash there's different things that you've seen different cycles that have happened so but I agree it feels that way I just don't think it is really different does it matter who's in the marketplace because one of the things I think I think is that if you have a huge wave of younger people who at the margin are controlling what stock prices do, and they're not saddled with any of this baggage of two-year-long bear markets like 2002. They don't have that as part of their history or their experience. They are more willing to buy those dips and they're more willing to turn a dip into a V-shape recovery because they can't imagine a scenario where the market

spends two years pricing in bad news. So I've lived through that, but that's in an analog time. And now everything is digital. And it's like, all right, here's the news, it's bad. I sell something the next day. Okay, I guess I'll buy something else. I feel like it's who is in the market that's contributing to the V shape more than anything else. Yeah, well, I think that the younger generation, despite the bad rep that they get with degenerate economy and leverage trading and daily options, I actually see investor behavior being

far, the average young person is a serious investor is a better investor. Oh, definitely. Before, because they, but they should be, they have more access to information, they see what the average young person is a serious investor is a better investor than before. Oh, definitely. But they should be. They have more access to information. They see what works, what doesn't work. There's just a lot out there where their behavior on average, I think, is much better than young people of the 1980s. They're more informed. The wake-up call to that was like the response to the spring 2023 bank runs, right? They didn't budge. Vanguard data, nobody sold anything. I don't know who was selling, but it was not the retail regular investor. They just lived through it and they were just like, whatever.

I don't think that you could have said that about prior errors and the financial crisis. People were actively selling stocks in 401ks. They just don't do it anymore. And I think it's because they've built on the experiences of the past. People learn lessons. They learn what happens when I panic and I do all these things to my long term investments. It looks stupid after. And now I don't think anyone does that anymore. No. And when it's they don't do it because it's paid them not to do it. You know, we've been in a probable market by the dip, you know, has worked. And until it because it's paid them not to do it. We've been in a probable market, buy the dip has worked.

And until it doesn't work for them, I think you should expect them to continue to do that. They're not going to proactively change and like, oh, I need to think about what might happen in the next 1997 to 2002 cycle. I'm just going to react to what my personal experience is, which is buy the dip works. So we never had the 97 to 02 experience.

But what we did have, we did have a 20-month bear market where their favorite stocks lost 2 thirds of their value and they didn't leave. Like they're still in the game. What is that, late 21? 2022 to the bottom of, it was October 23. It was January 22, that was when we topped. And we bottomed in October of 23.

So that was almost two full years of pain. But they've had more pain, I think, also outside of the stock market. Think about the pain that they experience in Bitcoin. Like multiple 60s. They're not phased. They're not phased. They have the laser eyes.

They're just locked in diamond hand owners of stocks for young people who are really serious about investing these days. Yeah. I think that's cool. I like that the Gen Z's kind of kicked the door down during covid. That was their moment where they all discovered investing all at once. Like it was an amazing thing. The amount of brokerage accounts that were opened in 2020 and 2021

broke every record we have on the books and stayed open. Well, they didn't leave. They didn didn't leave but I'm just saying like I Can't think of another time where an entire generation all started investing at once They and that's what they did and they have the tools think about like Robinhood might you know, my son who's 15 all his friends have Robinhood accounts. They they trade their Oh, yeah, and there's a start so much younger. So much younger. And public. Shout out to public. Sponsor the show. Screw Robinhood.

Public. Right. I agree with that. Does the story. So you've been in this business for a while, talking about systematic investing, removing the biases. This is a good way to insulate yourself

from the what should I do? Because we'll just listen to the market. Don't worry about your opinion. Your opinion, everybody else's opinion, it's in price. And there are trends, we follow them for better, for worse. It's not perfect. There's like everything else, there's no perfect strategy. But does that story resonate more with investors today

than it did in say the early 2000s when it was still sort of a novel approach? Oh yeah, for sure. I think alternative investments in general, especially after 08, you know, because like the people saw the benefit of having alternatives and 0 to 02 helped, 08 really put the hammer down of like,

you really should have these diversified portfolios with other risk management strategies, things that have low correlation. You can't just rely on stocks and diversification across a wide portfolio of stocks because it can all just go down at the same time. of stocks can all just go down at the same time. Your stocks and bonds can go down at the same time. Your stocks, bonds, commodities, and real estate can all go down at the same time.

So, it was really, really, you know, everything, everything broke. There was no place to hide. Even gold. Even gold. The gold valid after. After because in the liquidity crisis, everything, you know, is going down. It's just a giant sucking sound for liquidity. So let's talk a little bit about your investing philosophy and how you actually invest.

And then I have some questions based on that. But let's just set the table for the listeners. Who is Colwell Cox, the investor? Colwell Cox, the investor, is somebody who believes in a diversification, right? You need to run tain a diversified portfolio. I don't think trend following is the only thing that you should have in your portfolio. I think it's a piece of a well-thought out strategy that is designed to compound wealth over time, protect you through all the different market cycles, knowing that you're probably

not going to be very good at predicting what's going to come. So build something that can kind of get you through everything. And most importantly, and this is where I come out as an investor, the most important thing in investing is to remove the double zero from the roulette wheel of investing, you know, that the wipeout, the wipeout, where you've made all of these bets, you bet every number on the board, but you still lost because it hit double zero

and they take all your chips. You have to build something that removes that. Because if you do it, then you've already won, right? Over the long term, you just have to run your strategy and do what you need to do. And I think that for what I do and our philosophy of trend following and kind of our approach is an excellent tool for removing that

double zero from your portfolio. Why? How does trend following help you do that? Well, it's two ways. One of them is just the most important thing is avoiding permanent loss of capital in investing. And while the young people wouldn't agree with this, because they only have their data set, I can go back 100 years, 200 years, look at the cycle of the stock market. There will be periods of time of absolute horrific pain as an equity investor. We have asset bull markets, we have bear markets,

we have occasionally once a generation of depression. I don't know if that is going to happen now or next year, but it will eventually happen. The trend following does an excellent job of kind of removing the highly destructive permanent loss of capital in those massive drawdowns of 20 to 60%. And more importantly- How does it do that? Well by preserving capital. So it's a capital preservation strategy that as we kind of rotate, as trends change, we're rotating more into low correlated treasury bills and preserving capital and just reducing the drawdown, right?

So if my drawdown is only 20, right, I only need a 30% return, get back to new highs. If it's 50, I got to make 100% return to get back to new highs. So you're putting yourself ahead of the game by playing very good defense in bad markets. And just mathematically. The second part, I think, is even more important, goes back to the behavioral aspect of it. You're getting invested and you're able to stay invested and stay disciplined because you don't lose so much money. You don't go down so much that you deviate from your plan.

I can't tell you how many people I saw deviate from equities like a boomer generation in OA, they just freaked out. I can't deal with the pain anymore. I'm concerned that stocks are going to go to zero, and I moved to bonds or I moved to something else, which is super destructive. This is bad timing. It was a wrong time to panic. But going down, we know psychologically human beings just don't like losses. And the worse it gets, the more painful it is. And then that changes your behavior. And that's the like, the worst thing you can do is deviate from a plan. We built a trend following strategy in house, Michael did most of the heavy lifting, because that that was the question we were trying to answer. How do we keep people from

blowing out their entire portfolio in one of those types of market moments, which admittedly are rare. How do we make sure that people just don't throw everything away because of a moment like that? And to us, there's a lot of answers. We looked at a lot of other people's answers. But the real thing is like, when you are in a slow crashing market, before it becomes a fast crashing market, take some exposure off. And client by client, it varies how appropriate it is, how much you need to do that.

The question is not, does a trend following strategy help investors hold on to their portfolio? The question is, what is the cost of it? Isn't that like the hardest part of what you do is like, hey, this ain't going to be free There are going to be markets where? Because we're trend following there might be a whipsaw We might have to get out of something and then buy it back higher Like what's the cost of that relative to other ways to hedge risk? Yeah, and it's it's and for me It's two kinds of cost there's like real mathematical costs

Like you actually cost you money. And then there's the emotional cost and the psycho psychological cost of doing stuff where it's more in your head. It's not in your head, not really in your wallet over time. But they but they matter. Because if it's in your head, it affects what you do. And then it affects your wallet. Yeah. Yeah. So that's but but that that trade off of is it worth doing? And what am I giving up? What am I gaining? What do I have to pay in fees?

What am I getting in return? What's the value proposition there? That's the most important kind of question. I think it depends on who you are, what your priorities are, where you're at in your life cycle. And you just got to, for some people I would say trend following

will make any sense for them. Like the- If you're 20 years old, you should be buying more when this would trigger a sale. Yeah. It just doesn't matter. Yeah, it's the dollar amount that you're protecting. How much time and duration you have. Maybe if you get whacked and you lose 50% in a stock when you're 20, maybe that's a good thing. Good, buy more, keep buying. Or it's a good lesson for you to learn and go through time so that you'll not do those kinds of crazy risky things in the future when you have more money

and when you have no duration left to kind of figure it out. So a couple of things that attract me to try and follow. And I agree with you. It works as part of a broader diversified portfolio. It works really well in concert with strategic asset allocation. Two things. Number one, it gives you the ability to ride a bull market,

which is really hard. And especially if you are an advisor and you are telling your clients, this part of your portfolio is going to protect us to varying degrees from downside deviation, if that portion can't survive a bull market, it's dead. It's worthless. If the market is doubled and this thing is flat, clients will never stick with it. So it allows you to stay fully invested when the trend tells you to. Number two, and perhaps more important, is the buy back, buying back in.

Trend following, we just experienced this. We bought back higher. It's not fun, but it doesn't matter. Yeah, it doesn't feel good to buy back higher, but it's a lot better than waiting for a return to previous levels that just never happened. So if you were a trend follower and you sold in December 2007 and you got back in March or whatever or April, May, this gives you the buy signal objectively and unemotionally.

And getting back in after you've sold is almost impossible if it's discretionary. Especially if've sold is almost impossible. Yeah. If it's discretionary. Especially if you sold it a loss. Impossible. Psychologically people don't do it. There's all kinds of psychological studies that prove that this is not what the average person... I mean there are some maybe non-normal people that deviate from this, but for the general bell curve of the population it's not going to happen.

They shouldn't be doing it. They're just going to get themselves in trouble with it. I also think trend is the least bullshitty, uh, like the least bullshitty way of deciding whether or not I'm buying and staying long or I'm getting out. Meaning you could have all these formulas. Like, uh, we look at the fed model of like, you know, earnings versus like what the, what the yield is on a T bill and all this shit, you know, earnings versus like what the yield is on a T-bill and all this shit. You could have economic indicators that are subjective. Prices gives you everything you need to know.

The economy changes. If you just focus on price to dictate whether or not you're buying and selling, you're pulling into some total of all of those other things. It's reflecting everyone's opinions about everything. How could it not be the least bullshitty way of doing it? Well, not only is it bullshitty, it's also engineering wise,

just the principles of engineering is like the most elegant. It has the least amount of variables, it has the least amount of moving parts, it has the least degrees of freedom, so it's, and you're not going to like, you know, there's a lot of different ways to come up with all these great correlation here, there, and stories and tell yourself how it works. Yeah, magazine covers, there's a lot of different ways to come up with all these great correlation, you know, here, there and stories and tell yourself magazine covers. There's a million different things you can look at. The price is the price. It's also your trade, your,

your investing and you're taking signals and you're doing something off of ultimately, what is the fundamental principles of accounting? If it went up, you made money from an accounting world. If it went down, you lost money. Like that's what's going to determine whether or not your PNL was positive or negative. All the rest of the stuff is just a narrative that ultimately you can trade off of those narratives, but it's still going to come down to price and whether or not it went up or down as to whether or not you're, you know, with the value. So we've always thought that way. When somebody makes a statement, price is truth, it's not the same thing as saying the price is right.

The market over prices and under prices itself and assets every day. It's not, we're not saying price is the absolute correct price all the time. Price is always the truth of how people feel about the market because that's where they're buying and selling. It's what the market's expectations are at any point of what's gonna happen in the future

But like any prediction market the expectations can be wrong. They move they can be right. They could be right correct odds They're just a representation of the odds. That doesn't mean that they're setting the odds correctly. Yes Yeah, they're gonna be wrong less times than you are if you're just making it up. I think prices are wrong. Okay? Yeah Do you so do you believe in technical analysis in general or are there areas of technical analysis where you say? Alright, I get that there are some people who focus on this but I I've been able to throw that out because It's not really important to what I do I don't want to knock that like the technical. No, we're trying to get you into a fight. Yeah.

Trend following is technical analysis. Trend following is technical analysis. It's not pattern recognition. It's not like Ichimoku nonsense, but no offense, but it's technical. To me, the trend following is... Oh, wait a minute. You don't consider yourself a technician.

You're a quant. I'm neither. I'm just like a pragmatic person who... An astrologer. What do you call yourself? Like you're disciplined. You don't tell people you're technical? No, I just...

You're a trend follower. I'm just a trend follower. I'm just an investor. That's its own world, basically. It's a universe within technicals. It absolutely is. It's right within the CMT, trend following is a big component. But he's not looking for patterns.

I understand. In my world, and it's like, I think of market technicians, like I have a pattern, here's a chart, I think this is gonna happen. It's like the William O'Neill, CanSlim. The mark. Yeah. There's no back testing objectiveness, right,

to these things. Like, I'm like more like an actuary, right, where I can look at the probability distribution of all the data and say, hey, here's the actuarial distributions. I'm coming up with the math of what I'm doing based upon, you know, that and probability distributions.

I'm not like chart patterns or whatever. I'm not saying they're like related. It's kind of like cousins like, oh, look, there was a breakout. Well, they're both focused. Because breakouts happen in uptrends. Yes. Obviously. But what happened in downtrends.

Where they're related is that it's a focus on the price. Yes. Where they were where they were laid it is that it's a focus on the price Yes versus a focus on the underlying business or who's the CEO or what products is the company about to launch? That's where they were laid. That's true But and for me personally I also come back to at the end of the day price trends are all gonna come down to Fundamentals, I mean like over time companies that grow their earnings, companies that grow their competitive advantage, companies that grow their earnings power are the ones where their equities are going to go up. We totally, you and I completely agree on that.

It's not like magic where it's like, oh, there's a chart and it goes up. Like, there's a reason that this energy or this fuel exists for these massive 50 bag or 100 bag companies are solving problems in the world. They're creating real value. The marketplace is rewarding those companies with superior profit margins or whatever it be for the value that they create in the world. You can't divorce those two from one another. You will never see-

You can short term, but long term, the voting machine versus the weighing machine. You're right. Yeah. Yeah. If you zoom out, even to a monthly basis, revenue, maybe not revenue, net income, free cash flow, price follows that, it just does. Not every day, not always, but over time they converge. Yeah, and I'm different from a trend following standpoint.

Most people, when you think about trend as a category or trend following. I think about commodity traders and CTAs. Commodities, currencies, CTAs, like that kind of world. That's the unit, the multi-asset portfolio, it's long short, they're selling low correlation, maybe they make money in a down market. But they're just trading trends.

If you ask, well, why do these trends exist? Why do you make money? I really have a great answer for that. What's the DNA of like corn? I just know it works, I don't know why. Why are you short sugar? Yeah, because it went down. I'm like, that's fine. It can be in the data. You're like, well, the math says it works. Look, it's worked historically. On the stock trend following side

of it, it's like, I can tell you, I am supremely confident that the system of capitalism and the taking risk and innovation and the rest of, is going to create massive winners. There are gonna be companies get created and form public and they're gonna be huge winners, 50 bagger, 100 baggers, and that's gonna leave behind, and they're gonna create massive economic value and that's going to leave behind these long-term trends. And a trend following strategy is gonna benefit

from that, and it's like an ongoing system that would just pump out these things. I don't feel that same way or can't make that same argument for why is there going to be a mega trend in short corn. There are risk transfer markets, the hedger speculators. I know there's this whole other argument about it. There's supply demand of the underlying. There are mechanical issues with delivery. There's a lot of the underlying, there are mechanical issues with delivery. There's a lot more that's involved. There's a lot of stuff going on. In the stock world though, it's just very simple.

I'm confident that there are going to be massive winners. I'm also confident there's going to be a bunch of shitty companies and stocks that go to zero and you have to do both. Trend following is a fantastic mechanism for ensuring that you own those future winners without having to be very good at predicting them. And more importantly, or equally important, it's good about clipping aggressively the losers that are going to be destructive to your life. I mean, most people that are running businesses are not good businesses. Most businesses are bad businesses, mediocre managers, people that are diluting the shit out of shareholders.

Like they're not, it's a minority of companies that actually are these great quality businesses that have real competitive advantages that grow and turn out to be mega wealth creators for shareholders. So you mentioned looking at a hundred or 200 years of data. Do you have to, in the way that you formulate your strategies or the way you execute, do you have to like update and account for the fact that as we talked about everything is faster and the length of time that it might have taken for a bear market to become a bull market again in the 1970s is going to be a very different length

of time as it is now? Or can you like just look at the fullness of a data set that long and just say human nature is what it is and whatever would have worked in a back test historically would probably still work. I think it depends on what kind of trend follower, you know, like when you say there's different speeds at which people do trend following. If somebody might have been a short term trend follower, or maybe more like momentum guys, I would put in the short-term category.

They're buying and selling, maybe they're average whole time. Swing traders. Swing traders. The stocks that we own in our process are held in duration for multiple years. We're capturing mega trends, things we own for a long period of time. And by being in stocks that make new highs,

and just sitting on our ass and waiting for them to kind of play out as they continue to do and not interrupting the compounding of winners that you have kind of in your portfolio. So what I would say is yes, market speeds change stuff evolves over time, but a new high 100 years ago and the math of it is the same thing today. There's no difference between a new high 100 years ago and a new high today. So that's very important. is the same thing today. There's no difference between a new high 100 years ago and a new high today. So that's very important. And one of my weaknesses, and I think this is common amongst all discretionary traders is the temptation to sell your winners, right? Because we know how hard they are to

come by, so you want to lock in your gains. Josh is very good at it. Josh has been in Shake Shack for 11 years, NVIDIA for a decade. Like he's very good at that. I'm not. So I have all of these stocks today hitting my screen that are at 52 week highs, and I am fighting the very- You can't wait to sell them. I am fighting the very human urge to lock in profits, especially the way that we just had this V-shaped rally. So how do I know when the trend has changed?

What do you look for to know that the trend is broken? I mean, there's a lot of different ways- Tell me the answer. That anybody could do it. But somebody could run a very simple moving average, 200 day moving average number, or 300 day or 200 week, depending upon the speed and time frame

that you're kind of looking at, that you don't have to be a rocket scientist to figure out what is a trend up, down, to get in, to get out. I love that answer. What indicators, other than moving averages, are relevant to your work, if any? The only thing that really matters to us are, you know, new highs and new lows and what's the kind of volatility of the stock because if you're average true range, yeah, like average true range.

I think that's a powerful tool that doesn't get talked about enough. Can you explain to the audience what average true range is and how a trend follower would utilize it So an average true range is is recognizing that different stocks have different volatility profiles So if you kind of look back the last 90 days There's 500 stocks in the SP 500 each one of those is gonna have a different path traveled in that 90-day box mmm, if we use volatility as a risk proxy, you know, and you want to have a portfolio kind of had equal risk between the two positions, then you wouldn't want to have the same amount of money invested in a stock that's twice.

So it's a position sizing. This particular position is an average true range, let's say a five, this one is two and a half. You would want to own double the amount of the one with two and a half because you're lowering the volatility of the whole portfolio. Correct. And you'd have equal kind of proportional risk between the two positions. Also, if you think about a trend follower, it goes into the stop loss calculation. If you have a high volatility stock and you put the stock very close in a volatile stock, you're going to get chopped in and out of

that. If you do the same stop loss and something has less volatility, it's not going to be as sensitive. So it has an effect also on the stop loss and how much you get whipsawed kind of in and out. So it's important. In other words, like- You can't use a 10% stop loss on like the willy-mo-neal IBD thing because if I have 50% volatility, I'm guaranteed to get stopped out in a 10% stop loss, maybe not necessarily in something as much lower vol. So let's take a name like Nvidia as an example.

Nvidia is a stock that can go for three months nowhere, and then it could go on a six month run where it makes a new high every week, right? When it's trending higher, you look at a 21 day ATR, it's probably tight, because the stock's not going up 8% a day. It's going up a quarter of a point a day, but it's driving people crazy,

because it doesn't let them in. So it's got a low ATR, it's making highs, it's unfortunately too far above its moving average for that to be a useful stop. Like you talk about some of these in video rallies we've seen, there have been periods of time where it was 100% above its moving average for that to be a useful stop. Like you talk about some of these in video rallies we've seen, there have been periods of time where it was 100% above its 200 day.

Like what the hell are you going to do? That's your stop? Okay, so those are the types of stocks where you have to say to yourself, I better take a look at at least what its beta is or its average range so that I don't put a stop in that I get hit on tomorrow. Like that's the kiss of death for trend following.

Yeah, the kiss of death, yeah, doing that. The kiss of death. The kiss of death. The kiss of death. All right, I'm looking at you. You taking a picture? That is a mouthful. But the other thing that you can do,

and this is what we do, is you also have to remember you can be in a trade and volatility profiles change. They're not static. They can be high. They can then rotate to low. You can adjust the position size through the cycle. So in that world where Nvidia is way above its 200 day, you're like, well, the distance to stop, if my stop is a 200 day moving average, is very far away, and you're uncomfortable

with that delta or the risk there, well, you can take some of the position off to reduce the open wrist. You don't have to change the stop loss or the robustness of it. You could just change how much you're exposed to it in order to be happier. You know, I like the answer that you gave earlier about, you know, you're like, I don't know,

200 day, 100, whatever, whatever you like. I think people tend to overcomplicate the shit out of it. It doesn't, the more bells and whistles, the more inputs, you're not getting more precision. You're just getting more noise. It doesn't matter. I mean, it matters if you're due to short term.

It's not robust and you're just trading in and out. But if you get outside the noise factor, it doesn't really matter. What does matter is that you execute it consistently, robustly, and take every trade and do it. That's the part where people mess it up, right? They just don't have the ability to do that discipline. Well, if you start cherry picking,

all right, I'm about to get stopped by it on this, but I think they have a big announcement coming Monday. Like, if you start down that road, then you don't have a process anymore. You have what most investors have, which is just random. Dude, you can't ignore your intuition. Right, but I'm saying you have to decide at some point early on, especially if you're a professional,

this is either science or it's an art project. Some art projects turn out really well, but if you're selling that as science, that's really bad. Yeah, I personally don't recommend trend following strategies for average investor people know, investor, you know, people. I think if you like the strategy. All of our listeners are above average investors.

Yeah. Thank God. Yeah. Yeah. We're safe. We're safe. I want to talk about your does trend following work on stocks and then why you chose to update it January of this year.

In quant circles, people refer to it as a landmark paper. Do you know that? No. Okay. Because I was doing some homework. What is a quant circle? Because that sounds like a not good thing. In some circles where people talk about equity market research, there are people who have

referred to your paper as landmark. So I threw that in there. Why was that? When did you first write does trend following work on stocks? And why do you think there are people who look at that as a really important thing that you published? Um, when did we do it? 20 years ago. 2005. Yeah. Was the publication of that paper. And for me, I was doing trend following, and I was allocating, like running like a hedge fund fund to funds, and I was investing with trend following managers, but they were multi asset, you know, longshore currency commodity, the typical traditional trend following

thing that CTA world that you see from. And I asked them like, how come you don't do, there's all these massive trends, here's the data of individual stocks, why don't you, nobody in the entire industry, there's like these massive trends, here's the date of individual stock, why don't you, nobody in the entire industry, there's like hundreds of billions of dollars invested there, nobody was doing trend following on stocks. Meaning they would trend follow an index. Stock index. Like the futures.

But you're talking that at the individual security level. Very specific individual security level. I'll tell you why nobody did it, because it probably took you forever. It's probably a huge project. It was a huge project, put the stuff together, but I mean these are multi-billion dollar hedge funds, like they can figure it out,

it's not like with all these PhDs on staff, like it wasn't, they definitely could do it. Okay. And they, I think it's just a bias where, you know, they're in the futures world, they're comfortable with these indexes, but I was like, so there was just a really untapped opportunity, nobody had done the work,

and we saw it as an opportunity to go and like, let's do something that was new. Nobody needed another research paper to show you that trend following worked on corn. Like that had been done so many times by so many people. And that's where it kind of came from. And I was kind of shocked that nobody had done it. And then we decided to turn it into an investable product. I'm more shocked that 20 years later, we're still the only firm that I know of in the world that's actually running a fund and doing this. So what happens after you publish this? What are the conclusions from the 05 paper? The 05 paper, I would say three

conclusions. One, it was definitely a robust, like it works effectively on individual stocks, and you can build a better stock market mousetrap better, not meaning it makes more money than, you know, the stock market after all, you know, transaction costs focused on like risk, adjust the risk, adjusted returns. You can get the same or slightly better return than being a passive diversified equity investor, but do it with substantially less drawdown, substantially less volatility correlation, beta, whatever.

And then ultimately a better emotional experience. Like your behavior is going to be better if you're in a, you know, stable or ride along the way. So that's kind of what I mean by better. It's not something that's going to like double the rate of return of the stock market. But if I get something with way less risk and a better emotional experience and get the same, and it doesn't cost me anything. It's like, actually I'm getting the same thing as an index or better.

That was my definition. What were the other two conclusions? That it was very, very uncorrelated to multi-asset trend following. Oh, wow. So, you have $300 billion right now as an industry that's allocated to multi-asset trend. And this multi-asset trend following on stocks is very uncorrelated to that whole sector. And it has like three times the return. The last 10 years, the SG trend index, which is like the hedge fund index of the. Yeah, it's not, it's not great. 2%. Yeah. But people love it because it's

or they use it because it's the most negatively to non correlated asset. So it's a great portfolio diversifier. And it's a great portfolio diversifier and it has the potential to make money in a market crisis like once every 10 years. So, but in the last 10 years, like you would have been real much happier with us as running this trend following thing on stocks and the compound annual growth rate that you got

and we have lower drawdowns than this diversified. So it didn't look like the other funds that are in this basket. Doesn't, yeah, it doesn't look like the other funds in the basket. It has the same style, same risk management, same philosophy, everything, but it's uncorrelated. So it makes a great diversifier. Putting them together makes the investor experience of investing in trend. You're way happier with that experience than kind of the, I owned managed futures or systematic

trend for 10 years. I was happy in 2022 and I was angry every other year because of the under performance drag and things like that. So I- Are you SMA only or a mutual fund as well? We run a mutual fund and we offer SMA. People wanted to do an SMA, but our primary product is a mutual fund.

So you put the paper out and you built the fund based on the findings. So now that we know A, B, C, and D, here's how we would build the mousetrap that people could actually put money into. Yes. Okay, now you did that in a time before active ETFs. Like there's really no such thing at that time.

There's ETFs, but most active strategies are in mutual funds. If you were starting today, would you have built the product differently? Would you start with an ETF? If I was doing it today, I would do an ETF. Okay. Only because, and we will, you know, you asked me, what is the most thing that I'm most excited about,

you know, in the future is the, hopefully the coming potential of mutual funds being able to ETFs as a share class. I think it's gonna be great for the industry, levels the playing field. It's gonna be great for consumers. It's gonna lower price, increase access choice. The taxable ramifications. All of the above. But I would do the ETF because that's obviously like the vehicle of choice. This is what people push the buy button for these days. Yeah, that's kind of like VHS, you know, was the mutual fund structure, the DVD is the ETF. And then like going even beyond that is streaming is like the next generation, maybe tokenization of stuff or whatever.

There's an ETF for almost everything except for individual trend filing stocks as far as I know. There are ETFs that do trend filing on large cap indexes and probably other indexes, but I don't think I've ever seen one on individual securities. I don't know of any company or any manager in the public world or even the private world that is doing systematic trend this way on individual securities. Well, think about how many decisions you have to make to do this. Number one, you have to say, well, if I'm only buying stocks that are in uptrends, right? What if there are no stocks in uptrends? Like that's the thing that's going to happen at some point. What do I hold when I'm

not in stocks? Like what's the default risk off position or positions? Three, is there going to be a sector cap? Like what if it's all tech stocks? Do I just own all the tech stocks and nothing else is an uptrend? Like you have to make each of those decisions along the way to come up with an idea, which requires a ton of testing.

And like a lot of companies are just going to default doing something easier. Well, they're going to do something very simple in that way, or they're going to try to concentrate in one sector. Can you get it down to 50 stocks? And it's like, well, I could if I knew which one of those 50 stocks are going to be the winners. The reason I have to do the Russell 3000 as a total starting point is because I don't

know what the next big winner is going to be. You have to be where the momentum is. You don't know how many stocks that's going to be. You don't know what sectors. So you cap weighted at all or cap adjust? No, it's the opposite of that. So we've all weighed or we risk weight each position. So we tend to have very small, equally dispersed positions

across everything. The delta between our largest position and smallest position is not nearly as big as what you would see in a cap weighted. In a healthy uptrend, how many stocks-ish would you own? You know, like 500. We tend to own about 20% of the investable universe. OK. And then when you risk off, what does the portfolio look like?

Is it like T-bills or less stock? How do you do that? Cash and T-bills. OK. Have you ever experienced a reconstitution where your gut is telling you, oh my God, I really hope the rules let me sell because I want to sell right now? Every year.

Okay. I mean, HIMS, do you think I really want to own that growth stock of HIMS, get the growth stock? Right. But your rules are your rules and you have to just knuckle through it. That's like part of the deal. Yeah. If it's rules-based, it's rules-based. Or wait, we bought, I remember in the crazy COVID time, we bought GameStop, came into the portfolio to break it.

I was like, that wasn't good. But on the flip side, when you have a quick trend change and HIMSS shrinks, get it? You got to sell. Got to sell. Yeah. Okay. What do you compare yourselves to when you're showing the fund to family offices or wealth managers?

Like what box do you put yourself in? Systematic trend. But not because we do what everybody else is doing, a systematic trend, because we're doing something creative that adds value that's low correlated to their existing strategies. So why not showing yourself against the core long stock ETF? No, and it's like, it's not really, it's kind of a waste of time to talk to an investor who doesn't believe in trend. Right. So first we want to like find people who have already invested in this

space. I I'm trying to convert people that this like you're already converted. You, you have invested in the strategy. You like it, but you're not very satisfied maybe with the experience of this multi-asset trend, like the streakiness of it. That's a, that's a great conversation for you. It's like, look, I know you get why this is worth doing. You just might not have the right, you have the wrong boat. Or you have an insufficient kind of boat. I'm not saying multi-asset trend is bad. I'm saying it's kind of incomplete. If you put in this, there's the benefit of adding trend on stocks or what it is that we do is that you're going to get something as a 3X higher CAGR there and it's very, very low correlated to what

you're doing, but it still has all of the risk management, the trend diversity. And so those two component pieces blended together is going to give you a much smoother ride, a much more consistent ride relative to just owning multi-asset trend standalone where you're happy once a decade. John, can we see chart one on screen? What are we looking at here? These are the 10 largest AUM

systematic trend mutual funds over the last 10 years. So this is the universe that you're comparing yourself to basically. Okay. So I gather these look very different under the hood in terms of what they're doing. Why is yours so far away from all of theirs on the correlation matrix? The blue thing, the SG trend is the benchmark. So that's an index of like the 10 largest systematic trend hedge funds. And then the other ones are the mutual funds are trying to give you some return there. So you can see they're all very correlated to the index because they're all doing long short multi asset trend.

So some varying degrees, there's very little differences between them. Ours is over here, we don't do multi asset, we're just doing specifically stock trends has had a much higher ability to generate a rate of return. And the way it makes money and when it makes money, how it makes money or loses money, underperforms outperforms is obviously just very different than if you have a portfolio that's for asset classes, long, short, it's a totally different underlying. So it's so funny, you reach that conclusion with data, we reach that conclusion with behavior. So we know a couple of things about our clients

and like individual investors in general. The first thing that we know is, for the most part, the FOMO that causes an investor to abandon their strategy or fire their advisor is like 90% about the S&P 500. Meaning the COSPE in Korea is up 30% this year. My clients don't have FOMO about South Korea. They don't give a shit. It's not relevant. So the first thing I know if I'm building a strategy that's a risk management strategy for trend following is I'm not going to include long, short, neutral, whatever, to asset classes that aren't relevant to the client's behavior. Because what we're trying to do is manage people's behavior.

So in the case of FOMO, we're trying to make sure that clients don't see the market galloping away from them and why aren't I more long. Okay. So right off the bat, I'm not interested in multi-trend. My clients don't know what corn is doing. They don't care what oil is doing. They don't care what oil is doing. They're unaware of foreign markets for the most part on a granular basis. It's not important to them. I will get fired if the S&P has a 27% year and I'm way underweight. 100% I'll

get fired. So I already understand that very basic premise. So adding more bells and whistles to our strategy, oh, why don't we put Bitcoin in? Why don't we put this in? Why don't we put that in? Right off the bat, no. Because that's its own world. This is about stocks. We're trying to manage people's behavior and psychology stocks. That's the first way that I thought about it. You're kind of doing a similar thing. It's like, look, yeah, there are a million things that you could trend follow, but we're doing stocks. Yeah, but our clients are all financial advisors. I mean,

that's who we work with. And I also ran a multi asset. You've seen it up close. Yeah, fun. So I mean, I, in 2012, we launched a multi asset fund, we were top performing fund, I raised over a billion dollars for the fund and then watched it go from a billion to zero from 2016 to 2020. It didn't go to zero because the performance was, you know, pad or the strategy didn't work or didn't deliver low correlated returns is because of the relative underperformance, you know, of the S&P 500 to that thing, the statement risk for financial advisors. Statement risk is really key. Defending it every year, year and a year. It becomes impossible. Why do we own this? Why do we own this?

How do you defend this thing for nine years with your client going, no, you're like, you just become chicken little. And your clients don't want to hear it. And meanwhile, the advisor down the street's like, your advisor's an idiot. He doesn't know what he's doing. He's got you in some high fee managed futures.

Like, what is that? But on the institutional side Statement risk is less or more because they're sophisticated and they can ride strategies through a bear market for that strategy But maybe not as much as people would think it's different I think the psychology of what they're benchmarking against they have their own psychological Biases and things that are affecting that but it's different own psychological biases and things that are affecting that, but it's different than the kinds of emotions that are affecting. In the institutional world, my experience is there's a lot of hurting.

As long as you're doing what XYZ down the street is doing, I'm cool with that if you're all in the same club. If you're all investing in Bernard Madoff, I'm going to invest in Bernard Madoff. They're not even really thinking about what's the underlying due diligence. So if everybody says trend makes sense and go there and the consultants say that it's okay They're gonna stick it in well. I was gonna say it part of what drives the hurting is Fear of reputational risks so if everybody if everybody believes in this manager I'm not picking on anyone if everyone's like oh no Bridgewater

They're that's like the way to do that for global macro, then everyone's in Bridgewater because no one's going to look like an asshole to their client even if it goes down. And the decision making, I think a lot of it is just like protecting career risk kind of thing. Like I'm just going to do the thing because if we all invest in this

and it doesn't work out, doesn't matter because everybody's kind of getting, you know, fired, then they're not the owner of the capital. See, when you guys are you guys are working directly with the owner of your capital, and then you're working with the emotions of the owner of your capital, and you can't be in a state of conflict between you and your and your in your investors, the actual retirees, you won't survive. We will not stick with an asset manager that forces us to apologize to clients every quarter. Why are you underperforming your peers?

Why are you underperforming your benchmark? We can't, because we're here to have a career. Do you notice better behavior, speaking of behavior, do you notice better behavior amongst investors in your mutual fund versus your SMA? Because inside the SMA they could be like, why is he selling Nvidia? Or why is he selling Tesla?

Are they less likely to boot you if they don't see the underlying? Because they don't see what you're doing in the mutual fund until 45 days after the quarter ends. But they could see what you're doing in the SMA daily. At the end of the day, I think it all comes down to did it work or did it not work relative to what they wanted.

When we see redemptions and people leave is when you have a drawdown, you know, you lose money. Maybe they recently invested and then the market goes down like, oh, I don't know about this. And then they kind of like short term turnover, but for people who kind of are in it and stick with it, we this strategy, well, I'll tell you this compared to multi asset trend, we have a lot higher retention rates and a lot higher retention rates and a lot higher customer client satisfaction with this trend approach on stocks than we did with multi-asset.

That is like, you know, obvious. I think because it's easier to understand what you're doing. Like if you're trend follower multi-asset, you could literally be doing anything. The portfolio could own like almost anything. Stocks is stocks. So I think that retention is like, people get what they're doing in that strategy.

Yeah, but I think that if I, you know, stocks are stocks, but if I delivered a 2% return, I don't think they'd be very happy with that. Are there certain asset classes that lend themselves better to trend following than others? And why do you think that is? Well, yes. So, well, asset classes, I don't know.

Certain commodities or certain instruments. I think that- Are there some that just flat out don't work? I mean, historically speaking, like cocoa didn't work in the, for like a hundred, you know, it was like very long decades and decades didn't work. And then it recently worked. But you would not have liked,

you would have been better off without having cocoa for those decades prior to that. Worked meaning it conforms to something that you could chart and you could- But you made money trading it that way. I think cocoa just constantly was like a false signal trade. You just basically did nothing but be a money furnace if you were doing trend following on cocoa. For me, I think markets that have large risk premiums and that are not efficient create bigger trends. But trend following works better or best on anything where you'll get large outliers that come from it, like the individual stocks.

You can get a 50 hundred Hundred fold return from an individual company that's gonna leave a trend speaking of large outliers Did you ever try crypto like in your personal account trend following on that because that works very well there Well, I don't trend following crypto I've just been like a diamond hand a coddler, you know of it but it does work if you just bought the high and had like a the the Carlos Artini from the Concretum group who we Co-authored the paper with wrote another paper not with me but with his group that did trend following on like all of the

Coins and the efficacy of it's actually a great I would imagine worked very well Yeah, but that's part of the robustness if you if you say this works here This the next question is well well, does it work international stocks? Does it work small caps? Does it work crypto is now a legitimate robustifier, if you will, if you're doing like research, does this work? Yeah, but one of like, as an example in our thing, largest public company, or the public company that has the largest Bitcoin holdings is MSTR and MicroStrategy, and we've owned it for years. So our trend strategy picked up and had MicroStrategy

in there. Probably have Coinbase right now. Coinbase, you know, the other ones that have exposure. But the point about trends is, you should not do trend following on something that doesn't have to propensity to have those outlier movements. So if you think

why would I want to do trend following on the S&P, the 500 largest, most diversified kind of thing, all the world's intelligence discounting the price on it versus doing bottom-up trend on idiosyncratic trends of individual companies where they're less efficient markets, you're going to get these monster trends that come out of it if you're going to get these monster trends that kind of come out of it. If you're trying to create something that is a different return stream than a market index. So I want to ask you one more question on this. Why do you think we haven't yet seen trend following sector funds?

Because it strikes me that that's a real opportunity that people would be interested in just from a marketing standpoint. I don't know if it would work. But like if somebody said, okay, I love what you're doing. I really don't care to earn the return of the S&P 500 that way, but I'm really interested. Give me semiconductors, but I only want to own the ones that are going up and I want the risk management from trend following or give me biotechs that are trending or something. Like why haven't we seen those yet? And should I launch one? Maybe.

Okay. They didn't work, the sector rotation funds. It got blown up. Are you describing something else? I don't think I'm saying sector rotation. I'm saying picking individual stocks in those sectors. What'll happen is- You see what I mean?

The trend following will work on all those sectors. Let's say you just created a platform and I'm going to do trend following in every sector and I'm just going to have the sector strategy. It owns top performing stocks in each one of the sectors. But a separate fund for each. A separate fund for each one. So give me like, let's do tech stocks. Yeah.

Give me trend following tech stocks. That would be a hot product. Right now. At least right now. Yeah, right now. Well, that's all that matters. Yeah. We'll worry about the future in the future.

But I'm saying, so it would work. What'll happen is you'll have huge dispersion of returns from strategy A to strategy Z depending upon what was the best sector. So energy probably in the last decade would suck. Okay, stipulated. Tech would have been great. Same way if you just bought the sector straight up. If I just buy like the oil services stocks in a sector ETF. Yeah.

Granted, it'll have great seasons, it'll have terrible seasons, this is life. But what if I said I want to own the sector, the sector is clearly in favor, but I want the extra return that comes with only owning the best stocks in that sector on a trend basis. It's weird to me that nobody did this yet. Yeah, we definitely could do it. We could do it for you as a custom SMA if you want. Okay.

Why do you think it hasn't been done? Just we haven't gotten there yet? Or the interest isn't there? I mean, we don't even have another fund other than us that's doing trend on individual stocks. It's crazy, right? All right. So you're still like a pioneer. It's still early.

Yeah, still early. Okay. Anything we didn't cover on the trend following side or anything that you think is like a big misunderstood piece of how this all works? Thoughts on the mayor? Anything? Anything about the socialist paradise we're about to build in New York City? Lovely.

Yeah, it'll be great. What could go wrong? Any parting thoughts on trend following? Parting thoughts on trend following is I know there's a lot of investors in trend following You know today that understand the non correlated benefits of it and have it in their portfolios But I also know that they're not a hundred percent satisfied with the experience of owning trend and Call me Got it. Yeah, exactly. Dude. This is this is so much fun. Did you have fun on the show today? That was great

Yes, All right. We always end the show by asking people what they look forward to. Your answer is ETFs is a share class of existing mutual funds. Isn't that already legal or they didn't approve it yet? Not yet. Not to my knowledge. I think it's still in the- Why? Vanguard does it currently. They have an exception. They had an exception from the SEC and then they're, but they are the only ones that have been able to do it so far. But everybody's lobbied, like, you know, everybody's filed the application.

Kind of like when everybody filed the Bitcoin. Yeah. They're lining up. They're like, well, wait, wait, wait. So it's a hurry up and wait situation. You think that's going to happen now? I do. Okay.

I think in this administration it's going to happen. Why does this matter? As somebody who operates a mutual fund, what will you be able to do as soon as this happens? Well, it's a cost savings. You can launch an ETF on the same wrapper. I don't have to start a new fund, take on all the extra capex associated with all the operational expenses. So by being able to have a share class of an existing fund, I can take that operational

scale offer my product and services to ETF buyers only, new generation of people, but I can also lower costs because I'm expanding my total addressable potential market without increasing the cost burden. And I'm able to transition, you know, like why was it good for Disney, you know, had all this content when DVDs came around because they gave them a whole new market with the existing content.

They didn't have to go create new movies. They just were able to put it over here. No doubt I would do, if I were a finance person without a job right now, looking for like what's the next opportunity, I would set myself up as a consultant to open and mutual fund companies. I would be like the conversion guy,

like pay me consulting fee, I'll come in, I'll show you how we can create ETFs as a share class of your existing funds and it'll be a project basis How you pay me I feel like somebody could start that business right now and make themselves a couple million bucks a year What do you think about that? Yeah, I mean, I think if there's a need just like there's a need for AI consultants show people How to kind of do it. I think if somebody called you up and said, alright, are you ready for this? The SEC is about to let you create a share class. And you were like, well, I have some questions. That person quoted you a fee.

I'll tell you what, hire me. I'll help you do this. You pay it. I'm sure that McKenzie is going to be making millions off of this, you know, for people like a whole deck like they've do within New York City where like I saw this presentation here and it was like about millions of dollars to show them that they should get containers like trash cans. It was crazy. Yeah. Okay, Michael. What are you looking forward to? Um, I am looking forward to no more travel until future proof in September shutting it down

We just did in Chicago this week. Yep done those overnight trips are they kill you right? I'm tired It's a lot of it's a lot of turnaround the Lake Como I'm going to, which we talked about this. Yeah, when are you going? Last week of July, so, and first week of August. Okay, I'm leaving this coming week. So, I'll let you know if I come across anything I think you should know about. How long are you going for?

Two weeks. Two weeks. How are you able to do that? All right, I'm going six nights. My wife's made for me. I'm going for six nights. Are you staying on the lake? Yes. We're staying at the Mandarin Oriental. What town is that in? Mandarin Oriental should cop my room for plugging him on the show.

What town is that in? I don't know. I don't know. So I want to check out like all the hotels I'm not staying at. I'm staying. I think I'm staying at a good one, but I want to like make sure that I see everything. Yeah, there was, send me the, I think there was another one we were going to say, I can't remember the name of it, but it was like really, I found out you had to wear like a dinner jacket and be super formal to go to dinner.

I'm like, I don't want to go. Oh shit, is that where I'm staying? I think you might be staying there. It's a beautiful place, but then I found out that it was real. Okay. Going to be like, eh. All right, I'll, after the trip,

I'll send you my itinerary, I'll let you know what we did. Are you flying into Milan? Flying to Milan, spend a send you my itinerary. Are you flying into Milan? You and I have the same thing that we're looking forward to. I want to thank the staff this week. You guys absolutely crushed it. on the Unlock channel if you're a financial advisor. We are putting out extremely high quality conversations on the Unlock. Make sure you check out Dave Nadeg

talking with Michael Batnick about how AI will affect the financial advisory world. I had Rick Edelman on earlier this week, if you missed that, that was a good one on crypto and Rick's recommended allocation. And we did a whole animal spirits. We did everything. We did it all.

Guys, thank you so much for watching. Thank you for listening all week. We appreciate you. Like and subscribe. We'll see you soon. All right. That was like the dress rehearsal. I just wanted you to get a sense of like the...

Just get used to it. Want to take a break and then we'll move on? All right. That was like the dress rehearsal. I just wanted you to get a sense of like the... Just get used to it. Want to take a break and then we'll move on? All right. That was like the dress rehearsal. I just wanted you to get a sense of like the... Get used to it.