The Derivative - Staging a Market Mutiny with Jason Buck and Taylor Pearson of Black Pearl

Episode Date: February 27, 2020

In this episode exploring the many facets of long volatility and tail risk exposure, we pick the brains of the founders of the Mutiny investment program, which invests in half a dozen VIX and volatility trading programs in a multi-manager, multi-strategy approach. Our topics include why the whole world is short vol, If squirrels and deer are the natural buyers of forest fire insurance, why Jason hates sports, debit card investing, the interesting idea of an entrepreneurial put option, and what in the world a Brazilian SuperBowl champion is. Enjoy! Black Pearl’s Mutiny investment program is an ensemble approach focused on providing investors tail risk protection across three different buckets of volatility exposure: Volatility Arbitrage, Straddles/Strangles, and Short Term Down Capture.  With each bucket containing its own ensemble of multiple investment managers focused on providing convex returns during a market sell off, with an eye towards limiting the bleed. Jason Buck: Email; Taylor Pearson LinkedIn, Twitter, Book: The End of Jobs, & his blog. Mutiny Website & Podcast. And last but not least, don't forget to subscribe to The Derivative, and follow us on Facebook, Twitter, or LinkedIn, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Part of that was, you know, if you take an entrepreneur's willpower and creativity, and you line that up with a risk-on environment, you can think you're a genius and you're just raking in all the monopoly money. But what happens when we go to risk off and all that leverage dries up, they take all that monopoly money away from you. So I was trying to think about

how do we hedge that downside risk? Thanks for listening to The Derivative by RCM Alternatives. I'm your host, Jeff Malek, and today we're joined by two guys I feel like I've known for 30 years, but who I've actually only known for a little more than one. We're here with Black Pearl Management's Jason Buck and Taylor Pearson, or as I sometimes conflate into one stage name, Buck Taylor. Welcome, guys. Glad to be here.

Like our new stage name. Love it. I like how we're calling it a stage name, Buck Taylor. Welcome, guys. Glad to be here. I like our new stage name. Love it. I like how we're calling it a stage name and not the other. So, Buck Taylor, we started working together about a year ago. You guys come into RCM with a crazy idea to build a portfolio of vol managers to help protect against market downmoves in real time. And since then, we've bounced about a thousand ideas off each other and different concepts, which I have to admit, it's been a lot of fun and intellectually challenging for me. So thanks for that. And you're both self-labeled entrepreneurs from different backgrounds. So let's get into how in the world you ended up at a hedge fund conference in Miami. Taylor, start off with you. You started out in digital marketing. That's

an interesting in into this space. How'd that work out? Yeah. So I, um, I guess my, my sort of like entry into the hedge fund space or, or, you know, what we're doing now. Uh, I graduated from college for at the bottom of the 2008, uh, financial collapse with a very useful degree in history from a very no name, small university in Alabama. That's better than I thought you're going to say the bottom of your class. No, I was, I was I thought you're going to say the bottom of your class. No, I was at the top of the class. The top of the class, the bottom of the market. Correct. Worst of the best. I'm the worst of the best.

And so I got really interested sort of in the whole like Nassim Taleb and just trying to understand. I didn't have any exposure to financial markets or really know anything about it. I didn't study finance. And sort of watching, you know, what was happening there, I got really interested in, yeah, Taleb's work, you know, complexity theory, ergodicity economics, all the things that kind of grew out of that, but I didn't really know where to go with that. And so started, some guys told me on the internet that if you could sell

things on the internet, that that was a useful skill. And so I got a job, worked in a marketing agency. I worked for an e-commerce company based out of California, manufactured in Asia. I went over to Asia for a while and was helping them set things up there. And so they're selling widgets? What were they selling? We were selling,

so our most interesting product line was high-end cat furniture, like stylish litter boxes. But we also also it was mostly hospitality equipment so we sold like portable bars like caterers would use at weddings we sold valet parking equipment like mostly to hotels event rental agencies the high-end cat furniture must have been gold for uh like digital marketing though for adwords and whatnot like it seems like a pretty specific search yeah it, it was a specific.

It was one of those, as you'd expect, the market's not that big. You could all get the product line. There's only so many people that will pay $300 for a litter box. But we found all those people. We own that market. Nice. $300. I gave something like $200.

To take away the smell as well? No, I think it just looked nice. Just like a pretty litter box. So then somewhere around there you wrote a book. And so, yeah, we, that company got sold in, um, trying to think 2014, 2015. Um, and I was kind of trying to figure out what to do. And I'd had a kind of a blog and some stuff I'd been doing on the side, writing, doing my own sort of marketing stuff. And I'd always wanted to write a book. And I was actually at a conference in Bangkok with Mike Cavell, uh, written, written a number of books on trend following. And Mike kind of started talking trash to me and, uh, telling me he didn't think I could do it and trying to psych me up to write a book. And so I said, you know,

fine, I'll, I'll do it. And so, uh, that's so weird. You had, you didn't want to write a book about markets and you weren't there to hear him talk about markets, right? It was just coincidence that it was a trend following guy, which is the RCM world was there at a conference telling you to write a book. Yeah. Some, I don't know, some weird change. It wasn't a, yeah, it wasn't a finance conference. It was like a, uh, startup kind of internet business, uh, conference. Then Mike obviously he's got his online stuff that he does and, uh, courses and all that. So he was there like kind of from that, then Mike obviously has got his online stuff that he does and courses and all that. So he was there like kind of from that angle.

But that was how we sort of connected. So what was the book? So the book was called The End of Jobs. It's kind of a future of work careers book. So kind of talking about, you know, what I had learned from, you know, my impression of how the world worked in college versus afterwards and sort of like how career paths were changing how you know the way my parents thought about careers was different from you know what I had seen in terms of what was actually working and you know obviously the big

story was just like the internet like there's this thing called the internet and it has some unique possibilities you know you can you know at that point I had a I had a blog that like a few thousand people read which was like a weird phenomenon, right? It's like, who am I? Like why did thousands of people like read stuff I write on the internet? Like it's, you know. Well, it's total democratizing, right? Of like, if you're smart and have good stuff to say, people are going to find you and read you. Right. Um, and so is this concept, did it tie into like millennials don't want to stay at one job for very long and things of that nature? It was more just like how to leverage the Internet to improve your career.

Right. You know, you can all the things you can do to sort of like if you think there's some of the big ideas, like one, this idea of kind of the long tail, which is a book by Chris Anderson is a wired editor. Basically, if you look at if you look at, say say, sales on the Amazon platform, something like 52% of sales are done through third-party sellers. So it's not Amazon that's actually fulfilling these orders. There's a great pod on Reset, I think, about those fulfillment centers, and there's a bunch of them in South Dakota. It's totally transformed a few small little towns that just repackage things all day long. Yeah. But so obviously there's all these small businesses that are like selling stuff like high end cat furniture that, you know,

you know, Walmart's not going to manufacture that. You know, Amazon's not going to go manufacture that, but in aggregate, that's a, there's a really long tail of those sort of opportunities that people can latch onto.

So kind of how those businesses work, you know, small software businesses, e-commerce businesses, you know, online productized service businesses, what those sort of things are, how you get into that. And so now you're, we're in New York City, but you moved down to Austin. Yes, I moved to New York maybe a year after that company got sold. And I was there for three years and then, uh, recently moved down to Austin. I think that's probably the average New York. Yeah.

Residency is probably around three years before you like, what am I doing? Yeah. I said, I was gonna stay two to four years and three years. I was like, yeah, there you go.

And now you have a new book coming out. Yeah. We're going to new book, um, called market treating the world. It is, uh, the title is a riff off of

Mark Andreessen. Jimmy Eatwell? Basically. Mark Andreessen, the Netscape founder, now venture capitalist, his riff, he had an op-ed, I think, in the Wall Street Journal maybe eight or ten years ago called Software is Eating the World.

You're just seeing software come to sort of dominate all these industries, FANG and all that kind of stuff. And so kind of a riff off of how, you know, part of what we say when we say software is in the world is like really what we're saying is software enabled markets are in the world, right? Like what is, you know, Facebook and Google are content markets, right? They're selling ads on one side and having, you know, user generation kind of the other side. You know, Amazon is like very obviously a marketplace um you know apple not so much but you know becoming more like service oriented moving more towards the app store is like a bigger part of their thing and then trying to

think about you know what does that look like further down the road so i've gotten interested in sort of the the bitcoin cryptocurrency space and you know what in what ways does that enable uh new markets and then how does just kind of the way in which markets exist today and where are they trending? I like it. Can I get a pre-version? Yeah, you're on the early tally list. I'm going to take probably 25% chance bet

that the book comes out of the end of markets. Your editor is going to convince you to change the name. Good, yeah. And start a series. The end of guy, yeah, I could do that. I like it um jason let's get over to you uh so you were in commercial real estate yes and so uh i got into commercial i went to uh college charleston played soccer there for a while and then um post-college

uh got into commercial my family's always kind of been in real estate business whether it's you know you know, flipping houses or real, you know, on the realtor side, on my mom's side. But kind of fell in love with commercial real estate and the complexities of it. So I started a commercial real estate development company in Charleston where we'd take, you know, two, 300 year old buildings along that King Street corridor and try to renovate them for highest and best use. Whether it was putting in offices, restaurants, apartments, kind of that sort of thing. I kind of liked it because it was a free option on restaurants, which I eventually got into the restaurant business. It was like, if you renovate in the building,

you put the restaurant on the ground floor. If the restaurant fails, you can lease that now, that space, that updated space, for three times more than you could before. So it's a great fiduciary responsibility for your investors because they have the real estate that's going to gain in value, and you get basically a free option on the restaurant so you know did commercial real estate obviously like i

said own some restaurants tried setting up a wi-fi mesh network for the city for internet service provider you know maybe a little too early on that one but uh always been a serial entrepreneur since i was a little kid um you know that stereotypical story i wish i was unique but you know i was selling bracelets in school like nine years old to making mixtapes and selling when i was 12 to you know playing nefarious businesses i'm sure what was what are the some of the songs on the mixtapes so what i would do is uh at the time yo mtv raps just came out so i'm dating myself yeah and uh but it would come on at one o'clock in the morning in our region because I grew up in Michigan. And I would set an alarm to get up, and I had a dual tape deck system,

and I figured out how to attach it to the TV. So when Yo! MTV Raps would come on, I'd sit there and I'd hit record when the video would come on, and it would record onto one tape. And then, you know, once the song was over, stop and wait for the commercials and just do that from like 1 to 2 o'clock in the morning. And then because I had a dual cassette,

then I'd burn those onto new cassettes, and then I'd take those to school and sell them for five bucks. Uh, MTV, his address is, if you want to assume exactly like you were the original Napster. Yeah, exactly.

The original Napster. Yeah. It was like analog, analog Napster, the Italian job movie with the guy who's, I am the original Napster. Yeah. And then how it relates to markets is,

you know, that also a stereotypical story. I convinced my dad to set up a stock account for me when I was like 13, 14 years old. And like a typical noob, I read an article about, and I don't even know where I read it, about American Standard, the toilet company, was going to move into China

and provide toilets for a billion people. So I was like, you know, die hard convincing my dad like this is it like i'm buying american standards that was my first stock i don't even know what happened like i'm sure who knows probably down like everybody's first um and then in 99 uh 80 98 99 i day traded a lot of the tech companies um using you know those first like e-trade accounts and everything and ran up like $2,000 into, I think it was $98,000. Thought I was a genius. And then basically lost it all overnight like everybody did. I was trading a stock at that time.

They were doing the sat phones, the satellite phones. It'll come to me in a minute. But the whole trade was they'd launch the new satellites. And if the launch was successful, the stock would pop. So people are literally, we would call in and you'd listen to the launch. There was like a conference line

to be like, three, two, one, launch. And there were a couple, I don't know why, like we'd already put someone on the moon, but these things would fail. They wouldn't deploy properly like 20% of the time.

You even had a more sophisticated idea than I had. At least you had a company you even had a more sophisticated idea than i had at least you had a company you even knew the name of so what i would do well i just forgot the name but well um curious on your thoughts on we work from your commercial commercial leasing background or commercial real estate background i think i think all the stuff all the issues with we work have been written right right? And I don't know if I have anything nuanced or new to add to it, other than, like, we were trying to build out. I remember I was, you know, that was one nice thing about Charleston was, like,

it was a little bit behind the times. So I could go to, like, New York, London, Paris, San Francisco, and see what was on the cutting edge of ideas, and I could bring them to Charleston, and I'd be, like, five years ahead, or what worked in other cities. And so I was like one of the first people trying to build out a communal office space in Charleston. But it was more on a long-term lease basis. So I wasn't, you know, trying to do the WeWork model.

But I worked on a lot of those more cutting edge concepts like that of like, you know, kind of, you know, almost piggybacking what what um taylor was working on it's like the new workspace is going to be a communal workspace where i can rent an office and you know beanbag chairs beer and you know coffee on tap kind of thing and uh foosball tables exactly so with a phone assist i just remembered the uh company was iridium satellite phones iridium uh so let's talk how did you guys hook up and uh what what did the how did the partnership form sure so i'll go back a little bit um so as i stated i was a primary business was commercial real estate development and obviously 2007 2008 2009 happened and that obviously decimated the business and um it was fairly like a really traumatic experience for me to go through that. One, just probably just for ego's sake, because

I thought, you know, I was smarter than everybody else. And I figured this out. And I was worth millions of dollars on paper. And it was a really devastating blow to not only lose that net worth statement, but more importantly, to lose my money, my family's money, friends' money. It was absolutely devastating. And if I'm to be quite frank about it, it took me years to really get over it. Like it was a probably a deep, dark depression if we were to call it that. And part of that process over the last decade was to figure out I never wanted to experience that again. Like I there's got to be something wrong with my business model, my own hubris, all these things I've got to figure out how to solve it. And part of that was, you know, if you take an entrepreneur's willpower and creativity and you line that up with a risk-on environment, you can think you're a genius and you're just

raking in all the monopoly money. But what happens when we go to risk-off and all that leverage dries up, they take all that monopoly money away from you. So I was trying to think about how do we hedge that downside risk? And so part of that was learning how to trade options, learning how to trade VIX, learning how to trade all these long volatility and tail risk events.

Because actually what we didn't get into what happened was, speaking of my stupidity in general, is like, as I saw the market turn in real estate in 2007, because I'm selling apartments and everything. And I see the, we're moving from these no doc loans to now I can't sell apartments because nobody can get loans. So you see it ahead of the curve. And I went to some of the oldest developers in Charleston. All these guys were probably over the age of 50, 60 years old. And I went to a group of like half a dozen of

them. And I was like, are you guys nervous? And to a man, they said, no, this time is different. What I didn't know then was how optimistic real estate developers are. And how many times this time different has been proven wrong. Exactly. But I saw the writing on the wall. And so just having to learn my own mistakes, I started shorting the market. I started teaching myself how to trade options,

which I shouldn't have taught myself, but this is like kind of pre-internet. So it's hard to find good information. So I actually shorted the banks and the housing stocks, but the timing and the out of the money puts were too far out and, you know, IV expanded. So I actually lost money shorting the housing and banking stocks. So I was right. Like I was nervous and I was right, but I didn't know how to trade options. Right. Which is the classic, if you're in a stock you just have to get the direction right you're in options you got to get the direction the timing and the

volatility right that's what i've said before 3d chess on the ocean with sharks with lasers on their heads exactly so i'm just burning through money just trying to trying to hedge my risk and and doing the exact opposite so i had to then after the crash, I had to teach myself options. Eventually, thinking about negative correlated assets got me into trading VIX, ARB, those sorts of things. So over that decade of figuring out, I didn't want to go through this again, so how do I hedge entrepreneurial risk? Through that decade, I had to teach myself about how do you trade options? How do you trade VIX? How do you trade long volatility?

So learned all those things. And then actually through working with you guys for the better part of, God, it's been over five, six years since I even found the RCM platform, is learning about the managers out there. I had to eventually realize that I'm a much better entrepreneur. So it's better for me to find the managers that can stare at the screens all day and trade better than I can. And then working with you guys and lawyers and everything, I started to figure out,

okay, how do you put a package together of an ensemble of these managers that can handle multiple path dependencies? And with the lawyers, how do you figure this out? So, you know, you can take smaller check sizes. How do you, how do you, what's the loophole to get my family and friends in there? How do I hedge entrepreneur risk instead of somebody that's worth a hundred million dollars? How does somebody that's worth a few hundred thousand dollars, how do they, how do they hedge themselves? And so that's what we all work together on is try to figure that out. And then eventually I realized that, you know, I'm going to need a platform to sell this to retail clients. I'm going to have to build up an audience. And because I spent the 10 years,

you know, figuring out how to build a business the right way and how to trade all these products and, and, and, and deep diving into this complex space, I didn't have an audience. I wasn't writing. I wasn't blogging. I wasn't anything. So I was like, I need to find the perfect partner that's already built a platform or else it's going to take me another decade. Is he in this room? And he happens to be in this room. And I just got serendipitously lucky enough that Taylor and I found each other online and developed a relationship over time online and really got to know each other well. And then we decided that we wanted to partner up and try and try to do this and i am immensely grateful and couldn't have found a better partner it's just amazing taylor was it did you guys find each other

on a dating app or where how online i had co-written an article with now a mutual friend of ours uh named gary that that runs a an algo fund in Chicago about crypto stable coins. We were just like interested in the space and how you do stable coins. And somehow Jason found that article and emailed us and we started talking about, yeah, sort of crypto and then trading and sort of through those conversations, it came out.

I was at the time trying to find, I mean, similar to Jason maybe earlier, I was, you know, like I want some sort of tail risk exposure. I want some sort of long volatility exposure. I'm trying to figure out the best way to sort of get that exposure personally, friends, family. Had a lot of people interested in that. I think in part, you know, I mentioned sort of like 2008 and coming out of that was a big influence on me. And then I had a lot of my, my writing, my consulting, I was doing consulting work after the e-commerce company got sold was about like this idea of like anti-fragility and robustness and, you know, how do we make companies more

robust or anti-fragile and, and, you know, that sort of trickled over into, into investment portfolios. And so I was like, yeah, you know, I think I mentioned to Jason, I had like a couple of funds and I was talking to them and he was like like no no you know you don't you know you need to do it this way and so we that ended up in a six month back and forth of you know him him talking me through like well you know this is where volatility arbitrage does bad and you haven't thought about this and you haven't thought about that and so uh yeah he i mean he had his black hatting it yeah and it was it was also our mutual love of taleb books and then and chris cole white papers from artemis that's really like that's where the meeting of the minds was and that's what we both knew we were searching for

very similar things so not to burst your guys bubble but you weren't unique in this search for tail risk right and the banks and there were tail risk funds coming out and all this stuff what what were you seeing in those that wasn't meeting the need well i think i guess you know partially from my i mean part of the problem from my perspective was just like distribution like i wasn't i didn't know how to find that stuff right it's like you can't go google like tail risk fund and it pops up like 50 options of like here's the different things with. Yeah, so maybe the banks were selling with their biggest clients with tens of millions of dollars. Right, I didn't have $10 million allocated to the strategy. And then, I mean, I think the, you know, obviously like I was interested,

for myself, for my friends, for my family, like people that, yeah, could write a $100K check or maybe, you know, a half a million dollar check, but not someone that could write a $10 million check. And so, you know, what that obviously like narrows down the sort of like investable, uh, universe there a lot. And then I think the, I mean, the thing that we spend a bunch of time talking about is sort of this, you know, traditionally in tail risk, you have this, um, this trade off between sort of like the bleed or the carry and good years, you know, when the market's up, you know, how much is the strategy down versus the, um, um you know how much protection you get in the risk on environment how

much sort of convexity you have in the but why weren't you guys saying like okay i need to put 40 in bonds or i need to do managed futures like what was you know like there's classic ways to diversify and hedge what was your what were you seeing of like yeah that's not for me i think i as we talked about like if our spirit animals are like nasim talib or chris cole it's like classic ways to diversify and hedge. What was your, what were you seeing of like, eh, that's not for me. I think I, as we talked about, like if our spirit animals are like Nassim Taleb or Chris Cole, it's like you read that stuff and you're, you're acutely aware that bonds have worked for 30 years.

But you know that if you look at the a hundred year history of the correlations, it's dramatically different. And I think that we're both like, and correct me if I'm wrong, we're like, we're very historically minded. Like we're both of us. I think if I'm wrong, we're very historically minded. Both of us, I think, about hundreds of years in cycles. And so it's really hard to have some sort of intellectual integrity

and just believe what's worked for the last 20, 30 years will work moving forward. Both of us have a really hard time with that, I think. And so, Taylor, don't discount that history major too much. There you go. All right. And I forgot to mention, or you forgot to mention where where in there did you work in the uh turkish rug bazaar so uh uh when i was 19 years old and when i was 21 years old i went to istanbul turkey for a summer i uh in charleston

i had worked in a restaurant that was run by a tur man from Istanbul and so he said if you ever want to uh you can go to Istanbul and you can make a fortune in commissions off selling Turkish rugs to American tourists and this is like pre-internet like yeah and I might because he needed an English speaker no they blessed my parents yeah basically but I just I just flew to Istanbul not knowing anybody or anything I had like a uh an address and a name and so I went to this guy and like he's the guy that owned the rug shop that made the rugs and everything he's really smart because he he knew that if he had at the time you know a white blonde kid from the midwest that american tourists coming off the cruise ships are much more likely to trust him than a native you know turk yeah and so that's so you loaded up the i was a street peddler yeah what's

that song constantinople you load that up in the walkman yes and head it over yeah this is this is how this is how crazy it was at the time i'm it's either my first or second time there i signed up for a hotmail account that's how new it was and that was cutting edge and i would maybe call my parents like once every two weeks because it was really expensive for like a few minutes yeah and so but and was he right you could make a small fortune yeah it's ever um and maybe just as much as i'm talking now you maybe don't realize i'm an extreme introvert so it's really difficult for me to approach people on the street so it's probably good for me to get me out of my shell but i wasn't very good at it to be honest with you because i it's just it's really difficult for me to approach people on the street. So it's probably good for me to get me out of my shell,

but I wasn't very good at it, to be honest with you, because it's kind of anathema to my personality. And the Cliff Notes version of your bio, Taylor, you were a Brazilian Super Bowl champion? Yeah. What in the world does that mean? Before I started doing marketing stuff, I got a job. I worked for years in English as a foreign language instructor in Brazil. And, uh, I met this like classic rock bar in Sao Paulo. And I ran into this guy, uh, played at Dartmouth, played college. And he's, uh, he's

like, Oh yeah. Like we know Brazil starting like a national football league. And you were a bit bigger at the time. Yeah. I played offensive line in college at a D3 school. And he was like, you should come play for us. And so I came and I joined his team. And it was like semi-pro. We got some comps and gym memberships and stuff. But it wasn't like we were getting paid. But yeah, we were in the championship.

It was on ESPN Brazil. We had like 10,000, 15,000 people in the stadium. No one knew the rules or what was going on, but they were yelling. We got to dig up the footage. Put it in the show notes. Yeah, we crushed them. I think it was like 54 to 7 or something. I love it.

And Jason, D1 soccer, what position were you? Center midfield primarily. So, yeah, I played at College of Charleston. Before that, i lived at the img academy in florida with like all the professional tennis players and i was lucky enough i played in um all over south america europe as a kid and got to travel the country why do you hate sports now then uh i was i grew up in a household where we weren't very sports orientated at separate like alternative sports my dad was a little weird so he was really into uh

america's cup sailing sailing triathlons. So we have that in common, the Ironman. Hold on. I was a professional sailor for a little bit, so I take offense that that's an alternative sport. You know it's alternative. Come on. So in my house, we didn't watch.

It's called the America's Cup. Yeah, exactly. We didn't watch NBA or NFL. We watched America's Cup. We watched Ironman. So we didn't watch any of those sports. And then growing up playing soccer, and my brother played ice hockey my sister was a gymnast all at like elite level um i just soccer was like the only sport and then nowadays i just really don't follow

i watch uh english soccer because it's nice to get up in the mornings and watch it on the weekends but i don't have like a team i follow or anything all right welcome back to the derivative i'm here with jason buck and taylor pearson designers of the mutiny investment program so we just learned uh finished up learning about these two athletes turned businessmen turned portfolio managers let's get into the portfolio approach you guys have created and you know what is the mutiny strategy all about? So the mutiny strategy is an idea of taking an ensemble approach to different managers inside the long volatility and tail risk space. And so what we think is when you have a risk off environment, you're going to have multiple path dependencies on how that comes to fruition. So we try to put together as many different path

dependencies as we could across an ensemble of seven managers. So that way, whatever that risk off environment is, we try to capture it. And so we create a structure of basically three buckets. We have a volatility arbitrage bucket that does relative value trades on the vol surfaces, whether that's calendar spreads or VIX versus S&P. The second bucket we use is dynamic options. So we have managers that do straddles on the S&P. The second bucket we use is dynamic options. So we have managers that do straddles on the S&P. And if they can't find cheap convexity there, then they'll look for

proxies. And they also do strangles on the S&P 500. The third bucket we use is just called short-term down capture, which is just using the Delta One futures. And they trade intraday short to S&P 500. And then we have another manager that follows that relay race from around the world. They'll trade intraday short futures in Asia, Europe, and the United States. And then we felt that that ensemble approach gave us a nice balance of return streams while we're waiting for that risk off event. But just in case our managers weren't in the market at the time, we thought we could add the piece of just continuous rolling puts and we could absorb that bleed through the returns of our other managers. So we kind of added this pseudo fourth bucket of permanent rolling puts just in

case you have some sort of exogenous event on a Sunday that nobody was expecting. Pretty good. A little four floor elevator. Taylor, how would you put that in layman's terms? Yeah, I was going to say Jason's the smart one. My dumbed-down for my self-explanation is, I mean, you start from the premise that diversification is good, right? You can increase your returns per unit of risk. In order to do that, you need negatively correlated assets. So if most people have most of their portfolios in equity exposure,

you want something that's negatively correlated to equities. The challenge with a lot of, and there are things that do that, the challenge with a lot of those strategies, say like the VIX exchange traded products, is that they tend to have very high negative bleed in good years, such that when the risk off tail event comes up, you've already sort of,

you've bled 90% of what you put into the strategy from the start. And it's not enough to sort of make up for that. And we got into that on the Principallium Alex Orris podcast of if you want long VIX exposure, the ETF has lost 99.99% of its value. So it's quite possibly the worst possible thing to get that long-term exposure. If you want negative correlation VIX exposure tomorrow, it's a great product. If you want it even the end of the week, not so great. If you want to hold it for a year,

it's literally the worst product you could do. So coming back, Ensemble, we're just talking about many different strategies or many different managers. What do you mean by Ensemble? Yeah, both. Different strategies. I guess the way I get my dumbed down version for myself is if you want to buy fire insurance on every forest in the world all the time, that's very expensive. You're going to bleed to death on that. And so, you know, what we want to do with

using active managers and active strategies is we want to take people that are buying, you know, they're using their own proprietary algos to say like, you know, this area has, you know, high winds and is really dry. And so, you know, the chance of a forest fire spiking off here is elevated. And, you know, you're just buying sort of insurance on that portion of the forest at that time. But the challenge with that is, you know, what if you miss the fire, right? You know, you're just buying sort of insurance on that portion of the forest at that time. But the challenge with that is, you know, what if you miss the fire, right? You know, you think it's in Northern California, it's in Southern California. And so the idea behind having an ensemble of both strategies and managers is, okay, each of these, as Jason says, has different path dependencies where they do well and different path dependencies where they do badly. But if we can take them and match them up. So the way we've tried to construct the portfolio

is such that the managers are uncorrelated to each other in risk on time, right? They have different sort of path to pension risk on times, but then they should, you know, the strategy should all flip to be correlated with each other, but negatively correlated to the equities markets in a risk off event. So two things there.

One, who's buying forest fire insurance? Squirrels and deer? Yeah, Bambi. Yeah, who gets injured in a forest fire? I mean, I guess people in California, but for the most part, there's no one who really needs forest fire insurance. But I get the metaphor. Secondly, you're saying you want a negative correlation.

The whole rest of the world is pitching non-correlation. What are your thoughts on that? Negative correlation would mean when the market goes up, you're going to lose money. How do you square that of, I need negative correlation to diversify? The ideal, if you could wave a magic wand, is you want non-correlation in risk on times and you want negative correlation and uh risk off time so

that i mean that's that's the that's the hypothetical ideal of what you're you're sort of trying to construct and then obviously that's you know there is no perfect you know thing that does that but that philosophically i guess that's where we kind of came came at it, trying to think of something that would fit that return profile. And I see it from a different way. And investors that we talked to at RCM, they're kind of getting fed up with non-correlation because they can't rely on it all the time. So they're saying, okay, December of 18,

managed futures lost 5%, stocks were down 8%. Like, why did that happen? This is supposed to be my diversifier. And you explained to Blue in the Face that non-correlation means a lot of the time they're going to do the exact same thing as stocks. A lot of the time they're going to do the exact opposite of stocks.

Average that all together over many years and you get a 0.06 correlation, non-correlation. In real time, any day or week or month, you could have very high positive correlation. To your point about when your clients come to you about that is that I think fundamentally people don't understand non-correlation. When you talk about non-correlation, what they envision in their head is actually negative correlation. So that's actually what we're just trying to service. And so not to use numbers per se,

but let's say in 2018, if you have negatively correlated assets, in 2018, the stock market's down, let's say roughly 5%. A portfolio that was long volatility tail risk was up, let's say 20%, right? So your blended rate, you're gonna be positive on that year.

Coming into 2019, the stock market rips higher and it's up 30%, but then your negatively correlated long-wall tail risk funds would be let's say down 5%. So you compound those blends over time, your log wealth is going to increase over time. That's why you want negatively

correlated assets. But to belabor the point a little, if you have the purely negative correlated, the VIX ETF, you're totally negating each other. So you can't have perfect negative correlation. You can't have perfect negative correlation, but what you can do through an ensemble of managers,

this is the whole point of active management, is they can try to reduce or truncate that left tail or bleed during the risk on times. So as the S&P is ripping higher and these guys are negatively correlated to the S&P, they're also trying to reduce that bleed. So they're actively trying to reduce that bleed. So that's why the correlations

are never going to be negative one is because that's where you achieve the outperformance is when you're actively managing that negative correlation with the long volatility and tail risk. That's where the power of the combination of short volatility and long volatility helps you achieve compounded growth rates

that are much higher with less drawdowns over time. Which is the classic modern portfolio theory. Portfolio mixture of non-correlated assets has a higher return, less volatility. I know we don't necessarily like to measure risk by volatility, but that's the classic approach, right, of a portfolio approach can accomplish that. I guess the logic is not that different from risk parity,

but just in terms of having things that are either uncorrelated or anticorrelated, but instead of deriving it from statistical correlations, we're trying to think about how can we derive it more fundamentally. And I would say you're very different in the approach versus a classic managed futures trend following approach that I say it in layman's terms of if the market does this, if you didn't come into the sell-off long stocks already,

if bonds are not already on an uptrend, if it lasts weeks to months long the down move then managed futures should perform you know kind of by definition it'll perform because it's going to get into all those moves uh and that's what upsets investors of like there's way too many ifs what jason would call path dependency um you guys set out to take away a lot of those ifs is that true? Yeah, a couple ways to look at it. You're going to see those path dependencies show up in either the volatility markets and the VIX futures markets.

You're going to see it show up in options pricing, which is a form of volatility trading as well. Or you're going to see it show up in drawdowns against the S&P in the futures markets. But going back to your point, it's a combo of both. So we try to use an ensemble of buckets for path dependencies. And then inside each bucket, we use an ensemble of managers inside each bucket. Because what I really want to do is to create a stronger signal that way.

So this is kind of a debatable point, but I don't necessarily believe in alpha. I only care about balancing out betas and then rebalancing those betas between them. So I want the different buckets of path dependencies. And then by having an ensemble of managers inside it, I can get the beta return of Val Arb, the beta return of dynamic options trading,

the beta return of short-term down capture. Because I want to make sure I capture that beta return because idiosyncratically, those managers might be all over the place, but the more of them I put inside that bucket, I might not get the highest return, but I'll get an ensemble return that's a stronger signal. And that allows me to balance out those betas between those buckets. So that way, we have the positions on for the different path dependencies. Got it. Now a classically trained market analyst's head would explode to say there's a vol R beta, right? Because there's not an ETF

or an easy way to trade it. So what you're just saying is you want as close as possible to that theoretical return stream that's provided by that type of strategy. Right, so if I have five different Vol-Ar managers and their returns are anywhere from 6% to 10%, I want to hit that 8% sweet spot every time. And then next year, the manager that returned 10%, he might return 6%, the one that returned 6% might return 10%,

and vice versa throughout the whole ensemble. But it makes sure i get a theoretical beta signal for that volar bucket so i get a much stronger signal than taking those idiosyncratic signals of just one manager and let's dive into each of those buckets a little bit so uh the first we were just talking about volar what is volar this i'm a stickler for definitions so always like the arbitrage definition bothers me because to me arbitrage should be a riskless profit right you're buying and selling two things at the same time and you're taking the spread that's what we all know is arbitrage but everybody's now expanded arbitrage into statistical arbitrage etc so we use colloquially volatility

arbitrage but what they are really is relative value trades um so basically we have different managers that look at different things within the the vic structure so one will trade the um the vix futures index versus the s&p futures index and they will look and they'll ratio that spread out based on their proprietary algorithms but it's basically a relative value trade between vix and s&p so there'll be like short vix short smp right and then the market goes down they're making money on the short smp part and they're losing money on the short fix part right and then your ratio is where the where the alpha allegedly is you know like it just use rough numbers for every vix contract you're going to need three smp contracts to kind of ratio that out because VIX is like three times more volatile

than the S&P so that's how they're going to try to relative value so it's just like any long short portfolio for lack of a better term Microsoft short IBM long forward short GM whatever you're doing that on VIX and S&P because technically

VIX is a derivative of an S&P the options on s&p and we get to multiple layers of derivatives but um i call it a quad derivative because it's a i think i go five out so you go four i go four out it's a futures which is a derivative on an index which is a derivative of options prices which is a derivative of a stock index i just go back for the the s&p index is a derivative of the actual company. And then the company's stock certificate is a derivative of the actual company underneath.

Oh, so it's a sexivative. Yeah. So anyway, we have managers that trade the relative value spread between VIX and S&P. And then we have managers that will trade the calendar spread on just VIX alone.

So you can go, let's say, short front month VIX and long back month VIX,. So you can go, let's say short front month VIX and long back month VIX, like three, four months out and try to ratio that spread out as well. And that allows you a much cleaner relative value trade because it's at least all on the VIX products. So you're not counting on the correlations between VIX and S&P. You're just working on the VIX term structure and how that relates from front month to back month. And the VIX and S&P. You're just working on the VIX term structure and how that relates from front month to back month. And the VIX term structure

just means the curve of the futures prices. Futures obviously have many months. So if I plot the VIX futures, the March future is going to be at whatever, 16. The April future might, or March, April, the April future might be at 16 and a half. The June future at 18. So I plot that on a graph, and it naturally kind of slopes upwards

because people don't know what's going to happen in six months. They think they know better what's going to happen next month. So that uncertainty out into the future is reflected in higher VIX prices. And that curve, and they'll typically buy the front month, sell the back month, because if there's an event, the front month, the event just happened now, the front month's going to back month. Because if there's an event, the front month, the event just happened now, the front month's going to spike a lot higher.

Exactly. And just to confuse everything, we like to use words like contango for the slope of that curve. Yes. And when it flips, when there is a spike, it quickly flips into backwardation. Correct. So we've had on our podcast a few of these managers.

You've had on the Mutiny podcast a few of these managers. Just want to share a few of the managers in that Volar bucket that you've been looking at. Sure. So when we were talking about the VIX versus S&P trade, for that part of the bucket, we used Pearl Capital out of San Francisco. And then for the actual VIX calendar spreads, we're using Principallium out of Switzerland.

And also we use Deepfield out of Switzerland as well for that bucket. Great. And then there's some others, Certeza and some others, that are on the list to add down the line. Yeah, we're constantly, via our work with you guys, we're constantly on the lookout for new managers or following managers, assessing their track record, seeing how they would fit into our ensemble.

Are they additive or are they just kind of similar to another manager? So we always have ones in the wings that I think we can add in the future. It's always an issue of regulations and AUM, right? And what are your thoughts on the law of diminishing returns? Yeah, that's why we try to follow, track, assess, talk to the managers, look at them over time, stress test them, because if they are just going to add to that signal, it's still actually not necessarily a terrible thing for a lot of diminishing returns if they are very similar to another manager. I mean, you really don't want to go beyond eight. I mean, that's really the sweet spot. But a lot of them, surprisingly, even though they trade very similar products and similar styles, their proprietary algos are going to be different enough where they'll have different return streams over the months.

They might equalize over a year or a business cycle, but if they're slightly uncorrelated month to month, quarter to quarter, that gives us a better way to rebalance between them and get a stronger signal and a better theoretical beta return I'm talking about. And a little, you believe, a little rebalancing premium as well. Yeah, yeah.

And we're talking, they could still be like 0.75 correlated or something. There's still going to be slight differences that pan out. So that's the Volar bucket. The next is the options bucket. Dynamic options. So for our Straddles bucket. So the other thing I forgot to mention is when we talk about our dynamic options, we wanted that to be the bulk of our portfolio because to steal a phrase, we view it as debit card investing. If we're only buying

options, we know exactly what we can lose. That is a death by a thousand cuts. We know exactly where the losses are and the gains are asymmetric and unknown and that's how we view life as both taylor and i alluded to at the beginning is we have a mutual love of anti-fragility of asymmetric payouts and you know trying to go after unknown upsides and and known downsides so in that um before you go there i gotta i gotta expand so you stole that from somebody debit card investing yeah from uh nancy davis oh all right um because But the other side of that doesn't get talked about enough. The flip side of that is credit card investing, which dive into that.

So credit card investing, you're basically borrowing risk from tomorrow instead of credit card borrowing against yourself out into the future. You're borrowing risk for tomorrow for something today. Until you default. Yeah, so you're saying debit card investing, no, I'm taking away

that risk i'm only buying what i can afford i'm not borrowing right and then have an asymmetric pay unknown asymmetric payout i just don't know if the credit card is the perfect technology i'm trying to find one for the flip side of the debit card investing right well it was uh i mean that's what kicked off the great depression right it was the portfolio people had like highly margined stock portfolios you could take out these huge huge margin loans and load up on stocks and then that whole collapse. But the quite clear opposite of a debit card is the credit card. Right, right.

I'm just thinking about like, you know, where we take small known losses for an asymmetric payout, you know, is a credit card small known gains for an asymmetric loss? I guess you could, that's why I say with default that it's the credit card companies that take it. They're taking that 22% VIG and small known default that it's the credit card companies that take it. They're taking that 22% VIG

and small known gain. It's the credit card company versus the investor side, right? Well, I think the consumer is taking small gains in terms of like, I just got my Starbucks and I have a new TV

and I got this thing, right? They're taking these small things in order for some big potential loss in the future of like, hey, crap, I can't pay for all this stuff. I got to go bankrupt. Or I look at it from the credit card issuer side.

They're getting that 22% VIG, which just looks like every month they're making their 2% roughly. And then once somebody defaults, you lose 100%. Right. But they only need five people at 22 to make it. Exactly. So anyway, so the dynamic options.

So like I said, only buying options, primarily on S&P. And for the straddle portion, we use Wayne Himmelsine, not a logical capital in LA. And Wayne is buying straddles on the S&P 500. If he can't find cheap convexity there, he'll toggle his exposure into proxies, whether it's gold fixing to come, etc. And what's really interesting about what wayne does um not to give away too much what he does is he's able to constantly have the straddles on which for most people if you constantly have straddle straddles on as you would assume you'd bleed to death but what wayne is constantly doing is he's toggling the position sizing and gamma scalping the position

so that helps negate a lot of his bleed and And he still always has that position on. So in case you had some sort of exogenous event, he's in the market. On the strangle side... Before you go there, let's explain what gamma scalping is. You're going to... So as a position moves away from the underlying, your options are going to reprice so then you can toggle your position sizing to gamma so gamma is a function of vega so as vega the volatility of the underlying moves you the gamma on the front month contracts are going to convexly or non-linearly expand so that gives a way a way to retoggle his position and scalp some of those profits from those moves and re-establish his straddle so it's a way of uh kind of scalping the market the best way i think to look at gamma scalping is you're actually if you do it right

you're negating your theta so you're going to have your time bleed being timed okay yeah data being timed okay so part of your option pricing when we're talking all these Greeks is you're going to have your theta, your time decay bleed. So the way you can make up for that is through gamma scalping. So a good gamma scalper is only going to negate their theta. You're never going to really make a profit

necessarily with gamma scalping, but you can negate that theta, which then that is the sword to Damocles over any sort of straddle or strangle position of buying options, right? And you need to be short the option in order to gamma scout? Or you're long the option? No, you can do long option and maybe toggle some futures. Or if you toggle your option position

and maybe you're at the money and moving a little bit out of the money, and it depends on the ratio of puts and calls you have. So he's adjusting his ratio of puts and calls and based on what the market's giving him for pricing. So he's searching for cheap convexity still all the time. And we should have defined beforehand that a strangle, you're basically buying puts and calls at the money, either side of the market, thinking that the market's going to break out one way or the other. Right. So if, let's just say for rough terms, if S&P is at 100, you're buying a call that says the market's going to go up from there at $100. And at the same time,

you're buying a put that says the market's going to go down from there at $100. Let's say you pay a dollar for each of those options. So you have $2 in, which means the market's going to go down from there at $100. Let's say you pay $1 for each of those options. So you have $2 in, which means the market needs to move more than $2 in any direction before you're in the money on your P&L. Right, 102 or 98. Right. And so you're betting, which is a long ball process. You're betting again, you're hoping volatility expands and it goes out. If the market stays the same, volatility is going to come down and those lose their value. And they lose the value because of time decay, because of theta. And so Wayne is doing his best to negate that theta decay

through gamma scalping the position on a daily basis. And then so that's the straddle position. And so using the same analogy, if S&P is at 100, a strangle would be when you go out of the money. So if the S&P is at 100, you buy a call starting at 110 and you buy a put starting at 90. You need the market to move below 90 or above 110 for you to make money. 10%.

But the cost is a lot less than being at the money. Let's say at the money you're paying just rough numbers. You're paying a premium, like we said, for either side, a dollar each. Once you're out of the money, it might be 10 cents each. But you need the market to move much more, but it's costing you a lot less. For that strangle position, we use Chris Cole and Artemis out of Austin money, it might be 10 cents each, but you need the market to move much more, but it's costing you a lot less. And for that strangle position, we use Chris Cole and Artemis out of Austin, Texas. And I classic, I think of the strangle more from the short side of selling the strangle and you're kind of strangling the volatility. Like you want it to stay in that,

in that same range. Right. But for, if someone's selling a strangle, there's someone who has to be buying it. Right. And, and the both parts of both the straddle and strangle especially the strangle especially when you're buying a strangle is you know 80 to 90 percent of the time you're going to look like an idiot the guy selling you that strangles is just cashing checks right he's he's got that like we talked about that income he's making return after return after return and then you know one in 10 year event comes along and he loses everything it's the turkey problem as nassim Taleb references. And so it boils back to the philosophically, this is exactly where Taylor and I want to be. We want to be buying as much options as possible. That's why the dynamic options make up the bulk of our portfolio. We use the other buckets around the periphery to just

help manage the bleed. But at the end of the day, we want those convex asymmetric bets to pay out in a risk off scenario. and we only want to be buying options as much as possible so talk to that a little bit because it would seem if you're building this in your garage you would not need the upside you wouldn't need the calls you'd only need the puts correct except for a melt-up can just be just as disastrous for a lot of people as well uh how so well because as because as the market melts up, you're increasing your risk. Okay.

Because you're building, as Hyman Minsky would say, an air pocket underneath those profits. And just as much as, we were talking about option pricing and the different Greeks, the primary input to option prices is implied volatility.

And as markets become more volatile and IV expands, both the price of puts and calls will expand and you can make money even on both sides of the trade. Right, and so they're using them a bit as a financing tool for the other side as well, right?

In a way, yeah. And so what it also allows them to do is in these risk-on times that we've been on, if you have a pop up in the markets, they're actually able to make a little bit of money there by having those calls on the books. Which will help finance and reduce the bleed over time. Right. And then there's market dynamics too then, which creates put skew, is most people want to buy insurance so that creates those puts are a little more

expensive. And right now calls are very cheap. So you're getting really cheap convexity. And I know you like to argue this, there's no such thing as cheap convexity and i agree but like for lack of a better term you're those calls are very cheap right from my standpoint is it's reflecting the probability that it'll happen no matter what what the price is that's what the market is setting the probability of the event happening at so it's neither cheap nor expensive it it is. It just is, yeah. But that's my philosophy background coming through. So that's the dynamic options bucket. And the third bucket? The third bucket we call short-term down capture

is trading short the S&P market. And for just short S&P intraday, we used 3D capital Eric Dugan out of Chicago. And his bones are made on just using his proprietary algos to research the world markets and different commodities, currencies, indices. And he uses that information to then short the S&P 500 futures when he thinks that the market's about to go down. And that's what he does incredibly well. Along those lines, we use Deepfield once again under Switzerland and they do something very similar intraday

on trying to follow those markets down, but they use the Asian, European, and US markets. So like in 1987, during the flash crash, you saw the cascade across world markets over a 24-hour period. Not the flash crash, the Black Monday. Yeah, Black Monday, sorry. There we go.

Well, it technically would have been in a flash crash. Before black monday yeah black monday sorry yeah well it technically would have been in a flash yeah but yeah before we were all humanly smart enough to come up with flash crash yeah so on black monday that relay race happened around the world so they would trade intraday and follow those markets around the world the reason we really like or uh the short-term down capture with the futures is because the delta one nature of the futures meaning it's just a directional call so what happens is in that like first leg down when um you know markets start to crash and we have all those options on the books they start to pay out handsomely the problem is when we go to reset those options the implied volatility is expanded so now those options are very expensive for lack of a better term so we're paying up for the fear

in the markets but the the delta one nature of the futures is we can just bet short the S&P 500 and we don't have to pay up for that fear. That's part of the dynamics in the option markets, which obviously leads me to another idea that we have around the philosophy of our ensemble portfolio is by having these different buckets, we have very different microstructures to the markets that we invest in. So the VIX is an entirely different market than like the S&P or the options market. So the VIX is going to have different structures around those traders.

When you're just buying options, just the Greeks of options lead to comebacks, payouts, and theta bleeds, and et cetera. So that's a different microstructure. When you just go short intraday the futures it's as we said it's it's delta one you're not paying up for that fear after the first or second leg down when fear is rampant in the markets so i like the bucket structure because it like it allows us to almost trade different microstructures different styles different managers so it's almost uh three forms of ensembles in a way to me it's like you have

managers ensembles you have a bucket ensemble and you have different microstructure of market ensembles i like that and i want to come back to the short-term down capture it seems like that's the most non-structural to use a vague term of the trades you have there like volarbs kind of structurally that's going to work the option structurally when it goes to work the the downside capture they just pure have to be right yeah they're called that the market is directionally right yeah so it yeah it seems a little counter thesis to the rest of it of it's a structural play right but you're saying you need it because sometimes those other pieces aren't going to catch that yeah like as taylor alluded to um part of creating this ensemble

came out the idea of, you know, when we were both initially looking for managers to invest in, we were maybe looking at like one manager, right? And every manager has their own idiosyncratic risk. And so what we found through you guys and through going to conferences and meeting with all these managers, we say, look, we all go for upside. We know you have upside. Tell us where you get hurt. And so then we find out where they can get hurt. And then we go out and seek managers or other buckets that can cover the positions where they get hurt. Now that leads to a lot of overlap and a lot of redundancy, which probably reduces our return. But we care more about the downside risk than the upside risk. The upside will take care of itself. We're

concerned about managing the downside. And so that's why you have these overlapping natures. And that's why you need those. So for example, like I was alluding to, the short-term down capture in the futures, those are great after that first or second leg down move. If the S&P just rips off 10, 20, 30% down, like we said, we go to roll those option positions, they're going to be prohibitively expensive. But those short futures are directional play.

We don't have to pay up for them. Right. And Taylor, I love what you guys are doing from that standpoint of a lot of strategies are just focused on this one narrow thing you're saying and a lot of time and effort went into that of like how do i identify each of these different paths that a down move could take and how do i get exposure to those so what drove that kind of thinking of i need to be more than just this one-trick pony? So I think coming back, you know, sort of the original, when Jason and I started talking about this,

and I think this has kind of been his hobby horse that he's been beating on for a long time, right, is how do you find something? You know, the ideal, again, the theoretical ideal is we want something that's negatively correlated to equity markets in a risk-off environment. When the equity markets are crashing, you want something that's going up, but you want something that's either uncorrelated or slightly correlated with equity markets and the risk-on times. And so the idea of these different buckets is, well, historically, and obviously we don't know if correlations hold into the future, but historically, these different buckets have not been correlated with each other. And so if you can have these different buckets and rebalance between them and risk on times, you're able to use that to effectively, you know, offset your bleed, you know, offset the cost of carrying the long volatility positions in good years. And so you're

trying to construct that return profile profile where you know you're you're flat most of the time but you still have that convexity position on for for when you need it when it seems like you're almost assuming one or more of the buckets is going to break or not hold water and so all right i need more buckets to put it yeah simply for you is it's it's this simple if we're out here pitching this like black swan idea right and we're saying we can cover you in a market crisis and allegedly you know they're few and far between like let's say a black swan event allegedly happens once every 10 years and we've been you know harboring your investments and your savings for like seven years and then that event happens and we miss it yeah we're a bunch of assholes

right like so it's like we have to have all these path dependencies that's what i wanted to get to it's more about self-preservation and looking yourselves in the mirror and because you're putting the bulk of your own money in these two of like i want to be protected no matter the way it unfolds right and i hope that came across as like this is entirely structured out of taylor and i scratching our own itch is this exactly we're doing this with our own portfolios our own family's money like you should have a doctor. Look at that. Yeah, exactly. The itch.

It's unfortunate for me. I scratch way too much. But that's all we're trying to do is how do we preserve our wealth over, hopefully we live a long time and we want to be able to be there throughout the market cycles and we want our savings to outpace inflation.

And that comes back to what I was saying earlier of the investors I'm talking to and they're getting fed up with the, it's kind of what you're saying. I've been holding this thing for this whole time and now it's a little shallow because they're like, and then this one month lost 5% in the stocks. I'm like, well, you were up 86% before that, so relax.

But the point being, they're feeling this of like, I'm doing this thing for this reason and then it doesn't do what I think it's going to do. And you can tell them all you want that, well, you're thinking wrong about it. But at the end of the day, it's their money, it's your money. And you're like, no, this is how I'm thinking about it. And this is what I want it to do when that happens. Yeah.

And like you said, we're allaying all our own personal fears. That's the whole bucket ensemble, the manager ensemble, the microstructure ensemble. It's all because Taylor and I don't want to lose money. We don't want to lose our own money. So whole point and and we don't we are not smart enough to predict the future so we're just trying to dumbly cover as many path dependencies as possible i would say you're not dumb enough to predict the future exactly uh and i kind of think of it uh jason you and i both grew up in Florida. It's like buying hurricane insurance, but instead of, you know, not to protect anything,

but just to make money. But you're going to buy it in Florida, Georgia, and South Carolina. So instead of just owning one state, and then inside Florida, you're going to have Miami, Palm Beach, Cocoa, whatever, you're going to have many cities. Inside South Carolina, you're going to have many cities. So you're, you know, buying that insurance, and you're buying it in many cities in each bucket in each state right well actually to cover your analogy as you know so many times how many times have you been watching the hurricane forecast watching it watching watching it's like it's going to direct

hit like charleston so you're like in charleston you're like direct hits three days out and then it takes a turn and goes up the coast and hits north carolina so to your point yeah you'd want to buy everything in south carolina everything in north carolina and to take that analogy further yeah so your guys look is like hey there's the cone of uncertainty of how this exactly this down move is going to happen i want to be at all points along that cone of uncertainty correct and then the fourth bucket which is if something if it goes totally outside of the Conan uncertainty and none of our brilliant manager picks and strategies and everything, if they all whiff, Charlie Brown, the long ball football, what's the fourth bucket?

How does that fit in? So as you pointed out, to limit some of the bleed, the managers might be in and out of the markets trying to limit their position sizing. And so we added back that rolling puts. And so what we mean by that is what we did is, um, you know, when you constantly have those puts on, you're obviously just paying up for insurance. So it's always going to be just a pure bleed. But the way we try to manage some of that is we created an ensemble approach even to our rolling puts. So we have

from anywhere from negative 15% attachment point to a negative 25% attachment point. And the attachment point just means from the market unit now, say from, use 100 again, if it goes down $15 all the way to $25, we use a blended approach to try to create an attachment point of negative $20. So a negative 20% attachment point. And we use Hari Krishnan out of Doherty Advisors

to manage that portfolio. So we actually have, even though it's almost like passively having the puts on, we even have an active manager managing an ensemble of different attachment points to try to limit that bleed as well. But we want those rolling puts permanently on and a permanent attachment point of negative 20%. Because like, as Jeff alluded to,

I'd say on a Sunday, some sort of terrorist event or something like that happens and somehow our other managers aren't in there. We always have those rolling puts on and they'll always pay off as soon as markets reopen. And the downside of that is that's costing you 2% to 4% a year. Yeah, depending on where the market's at

and the options pricing are at, like yeah, we're at like 2% to 3% a year right now. And so that's a bleed. But we felt we wanted to, once again,'s taylor nice money one we want that protection there and two we feel with the ensemble approach in our other three buckets we're able to generate enough returns where we're happy to eat that bleed on those puts and other people just can't eat that bleed they're unwilling to eat the bleed so it's well yes no there's tons of institutional money that eats that bleed all day long, which is the whole premise,

the whole reason there's short volatility managers is they're just going to sell that insurance all day long to this. And that's why the put skew exists and everything. Right. Let's switch gears a little. Taylor, what's your ideal investor look like? You've talked a little bit

about this kind of entrepreneurial call option or stuff like that. What's the ideal investor look like for you guys? Yes, I think, you know, the people we've talked to so far that are kind of interested, I think one is sort of like retirees, particularly like recent retirees that are like thinking, you know, people would classically do like a bond tent or something like that, where, you know, you're 70 and you just retired and you want to be very conservative for the next, you know, five or 10 years or whatever. So I think that's one segment. I think probably the biggest segment is, you know, small business owners, startup people, that sort of world where they have a lot of, you know, short vol exposure through their careers. And I think often, as Jason was saying, I think we both have entrepreneurial backgrounds

and to think about risk in a different way as a result of that. And so people that have that sort of mindset seem to be more intuitive for them. They don't think about risk in terms of volatility, but risk in terms of drawdown as well. I don't care if my revenue's up plus or minus 20%, you know, this month versus next month necessarily. Like what I care is like, is the business going to, uh, going to

go bankrupt? Um, and so I think that's, that's the other big segment. And then I think, you know, sort of as a part of that, you, you mentioned, um, you know, the, the kind of person that, you know, it'd be great in 2009, 2010, 2011, if you were flush with a lot of cash, right? There was a lot of opportunity to go out and buy, you know, buy real estate, buy stocks, buy a lot of assets that were for sale. If you, you know, you could put up and pay cash. I think Jason was telling a story about someone in a position like that that just went out to the Hamptons and offered 50 cents on the dollar

for every house they could find in the Hamptons. And, you know, they ended up buying like four of them right because at that at that time there were some people that just had to have that liquidity yeah quick side story my fraternity brother in college he was uh Polish uh which led into a good Polish joke and he would self-tell it so I don't feel bad but he's like his grandparents had immigrated they They came over. They were in New York. They couldn't grow potatoes on their land. They're like, whatever, a mile's worth of land in the sand. Might have been great grandparents, but they couldn't grow it in the sand.

So they left and moved to like Western New York from what is now the Hamptons. He's like, yeah, my great grandparents owned two miles of real estate on what is now the hamptons um but yeah i appreciate and i feel like nobody else is looking at it that way which is which is great because yeah you want to buy when there's blood in the streets and what what are the options hold cash for during a 180 s&p run like waiting for the downturn so you can buy all this real estate and i think i know a lot of small business owners that do that, you know, people that

have sold, you know, sold their business in the last three, four years. And yeah, they're just, they got a bank account, a savings account, and they're just sitting on the cash because they want to be in that sort of position. So I think, you know, the idea here is... Which is the class, like Warren Buffett, we're sitting here, right? He'd be like, no, I always want to have 30% cash or whatever he has has for that reason for when there's a value that i see so i can i can buy it and it's taylor's like coined as like this entrepreneurial put option like we're like a convex cash position in a way and i think that's it's fascinating from our backgrounds as entrepreneur we think about it

all the time it's like an entrepreneur you can't help yourself you have an idea and you drive it to fruition and the overall macro environment has nothing to do with that idea. So it can be really unfortunate when you're in the middle of your entrepreneurial journey on this business that you can't get out of your head, that then the macro forces of the markets in the world, all of a sudden liquidity dries up and it tanks. Well, if we have this entrepreneurial put option where you're driving your idiosyncratic risk with your business, and then you're investing your savings in a mutiny fund, and all of a sudden that crash happens, your is okay not only that you're sitting on this huge cash position you can go out there and buy up all your competitors or buy up their assets for pennies on the dollar it doesn't have to just be real estate you know it can be anything and a

lot of times you can buy up everybody in your industry right or buy a factory buy whatever buy new equipment or that cash allows your business to survive until the market takes a turn back, the recession clears and you're able to, it provides longevity in your business. So that's why we view it as like, this was created for entrepreneur, by entrepreneurs for entrepreneurs, primarily. Hopefully we're a broad swath of audience,

but we really like to help out entrepreneurs because that's the world we come from. And a lot of the people you've run across, Taylor, are, it seems, kind of hesitant market participants. We talked before about most hated rally ever. And there's a lot of people who made a lot of money in crypto and other entrepreneurial things who are just in cash, unsure how to access the stock market. Yeah, I think that... Or if they even want to access the stock market. I think some of them, not unrightly, they look at the stock market. Yeah, I think that's... Or if they even want to access the stock market. I think some of them, not unrightly, they look at the stock market and they don't understand.

This doesn't make sense. It's like, I don't know what's going on. What I do know is I just sold my software business for $5 or $10 million or whatever, and I understand how that business works. And so I'm going to sit around and wait until I can get back into that business. Right, but I don't understand

how Tesla is worth more than GM and Ford combined. Right right so i think that's um you know that's where a lot of people i got um mark cuban has his you know i have mixed feelings on mark cuban but uh has like something like kind of his like war chest theory right which i think he tends to sit on a lot of cash as well right he's looking for you know when is there some opportunity that i have that i have some some sort of credible edge on i mean if, if whatever, you sold a software company or something, whatever that space was, you were in the cybersecurity software space, there's a credible edge there, right?

You understand how that space works better than someone else. And if you're in a position to go acquire a company, to go buy a stake in a company or something and sort of that scenario where liquidity dries up, that's a really strong position to be in. And is it, your theory is that all of these entrepreneurs where liquidity dries up, that's a really strong position to be in. And is it, your theory is that all of these entrepreneurs are short volatility, they're basically long the stock market,

whether they actually are long the stock market at all. Like a stock market crash will crash the economy, there'll be a recession, there'll be tightening of credit, like all these things that will affect the entrepreneur, even if he doesn't own a share of Apple or Amazon or whatever. Yeah, I think, you know, our general thinking is that most people are more short of all than they realize, right?

You've got, you know, to what extent, you know, let's say you run a, you run a small business, like, you know, I guess small businesses don't tend to be as cyclical as, as the stock market, but they're still cyclical. You own a house, you know, that's going to be tied to the overall economy. You know, your clients can dry up, whatever that looks like. And so having, as Jason was saying, you know, you're good at building software companies in the cybersecurity space or something like a way to hedge out sort of that macro risk, like you don't know what the Fed is going to do and, you know, or whatever's going to happen in the stock market next month. So some way to hedge that risk and just focus on

what it is that you're really good at. Jeff, do you think it's too much of a stretch? Like we're talking about like the overall market risk. And like you said, you might not be in stocks, but you're correlated with the market more than you realize. And that's because we can maybe simplify it, look at it as more as liquidity. During risk on, liquidity is washed and everybody can buy your products. You can get loans for your business. You can do all those sorts of things. As soon as the market tanks, liquidity dries up and all those loans get called in.

And that's where you're tied to the markets because the markets are more a function of liquidity. During risk on, there's plenty of liquidity and everybody's happy. During risk on, liquidity dries up and that's when we have problems. That's 100%. And then you can compound that if you're in a lot of these, quote unquote, air quote, alternative investments that are hedge funds that use leverage, that borrow money. So not only is the small investor and everyone at risk from a capital tightening, the alternative

investments that you may be diversifying into protect yourself from that liquidity crisis needs liquidity in order to protect you from the liquidity crisis. So it's kind of can be a double-edged sword for a lot of these alternative investments out there. And that's why, because it's our money too, we only want to be in the futures and options market because of the cash settlement. So we have that, so we know the cash is going to be there. But even better is by buying those options, when somebody else fire in the crowd theater and everybody's rushing through that door and they're desperate for like put options guess who's sitting on the inventory that's us and we're there to rip your face off on that spread yeah no offense um and yeah and the real estate to bring

it back so like real estate especially you okay even if you're sitting on that cash like and you wanted to buy 10x your cash like you're going to have trouble getting those loans and doing right doing what you need to do at the depths of a of a crisis cash is incredibly king in that scenario yeah and i did like not sorry to go off on tangible what would be incredibly brilliant is you use that cash to buy up everything you can cash for pennies on the dollar you wait for the market to turn back around and however many years it takes and then you repackage the loans and draw your money back out that's all it's that simple and uh just quickly which we'll hope to get him on the pod one day but don wilson a prop trader in chicago who's done very well is was famous in 08 for doing just this like He was prop trading, made a ton of money

as the markets took down, and he was buying hotels in Aspen, whole blocks in Chicago. And then as the opportunities in the prop trading kind of slowed down, he was right there and had all these real estate assets. And cash is not cash, right? Cash right now is very different than cash in 08.

Oh, yeah. All of a sudden, the value of cash is completely different in a crisis. And what if you have cash in Germany right now Oh yeah. All of a sudden, like there's, the value of cash is completely different in a crisis. And what if you have cash in Germany right now? It's not only different, you're paying

somebody else to hold it. What were you going to say, Taylor? Unknown? No, I guess one way I think about too, going back to the

entrepreneurial put option, right, is you're, you know, usually the best investment you can make is in yourself, right? You know, I'm going to go take a weekend seminar on, you know, how to do AdWords or whatever, and that could pay off 100x to one, you know, I pay $1,000 and I could, you know, learn to do AdWords from a business and make a hundred times that money. And so being in a, you know, being in a position to be able to do that investment in you know yourself whatever your particular skill set is your background and to have that liquidity

when when no one else does isn't that's a nice combination um let's pivot for a second uh jason i hope you don't take this the wrong way but uh never you love to use some good ten dollar words oh man yeah from time to time uh in our portfolio construction debates yes and i even got you a nice christmas present with highly ergod ergodic yes on it um take me through some of these fancy words you like and what they mean for you in terms of the portfolio construction i'm gonna i can do the i can do the ergod i'm gonna let i'm gonna pass the actual definitions the words that taylor but i'm gonna defend myself for a second okay the words actually what i found is they come from a function of reading too much and so your vocabulary accidentally increases from reading too much and maybe because uh i'm a college dropout i have an insecurity so i always

read too much like we were talking about the other night before podcasts and youtube i used to average like 100 books a year and i think it's just a natural function of reading too much i mean i've noticed if i if i if i slow down my reading i like or if i haven't been reading for a while my vocabulary falls off a cliff and then as soon as i'm reading these words just come in your head and it's just from reading but and you're reading like thick heavy stuff yeah i read ridiculous stuff i have a problem but uh there was a quote once i loved there was something like he mispronounced the ten dollar words like somebody who was a reader that grew up in a family that didn't read so i may be able to read the words and i know how they're spelled but i wouldn't be surprised if i mispronounce them all the time

because i haven't heard them in real life but i'll let, as far as like ergodicity and everything, it's a... Taylor wanted that. Yeah, Taylor's going to field the definition. And for the people out there that are, you know, it's a concept they're trying to wrap their heads around. I'll be honest, it took me really almost probably a year to really grok in my bones what those concepts really meant and how to really apply them to your life so um ergodicity is as i understand it is the difference between a a time average and an ensemble average so the um the example is you know if you take 100 people and you give them each 100 and they go into casino and let's say they're counting cards

they're playing blackjack um they uh have an edge uh on average let's say they're counting cards, they're playing blackjack, they have an edge, on average, let's say, you know, whatever the edge is, they're going to win $50 over the course of that day. So on average, the average person is going to walk out of there with 150 bucks. And so it's great, right? It's like this is, I should keep doing this. I can, I can play this game forever. However, if you have one person, they start with a hundred dollars and they go in a hundred days in a row, unless you say they're, they start with $100 and they go in 100 days in a row, unless you say they're taking all their winnings back, they're not taking anything off the table. If in the ensemble, the 100 people, let's say one of those people went bust, right? One of them got

unlucky, even though they had an edge, right? You can still have a bad run of luck. If you have one person that's doing that over a sequence of 100 days and they go bust on day 27, there is no day 28, right? You blew it up. And so that's a non-ergotic scenario. The time average and the ensemble average are not the same. And so, I mean, that's the reality of most of life, right? Like I don't care that on average an investor makes X, Y, Z in this strategy. What I care about is how I do. I care about what my portfolio. Kind of back to the you can drown in a river that's on average three feet deep.

Right, because if the middle channel is 20 feet deep and super fast, that'll suck you under. I always explain it as we're all in our office in Chicago near the Sears Tower. No, we're not going to call it the Wilson Tower, Sears Tower. And we say, all right, we're all 10 of us walking over to the Bean, which is our sculpture there by the lake. All take different paths. If we all get there at the same time, it's ergodic, right?

If one guy gets there an hour ahead of the last guy, it's non-ergotic and the paths mattered very greatly. The other way I like to look at the vivid one is the Russian roulette example. Do you want to be one of six people pulling the trigger or do you want to be one guy that pulls the trigger six times? Historically, I think people called it sequencing risk. So throughout your lifetime, as you near retirement, you have sequencing risk. You can't handle a drawdown when you're 70 and a half and starting to have forced withdrawals out of your retirement funds. If you hit a drawdown at that period, as you're doing withdrawals, you're now exponentially compounding your drawdown.

Right. Or the people had to pay for college starting in 08, who just lost 50% of the college savings fund. Once again, that sequencing risk means the time, your time and your lifespan is not lining up with the ensemble average of returns over decades. And so the whole concept you're trying to solve with Mutiny is to make sure those, no matter the path, no matter the timing, that it's going to work out for the investor.

And I think it's part of like the way, it seems like the way a lot of finance works is based on this idea of expected value. That's how I'm going to make the most money. I'm going to do my discounted cash flow of all these things and say this one has the highest expected value. You said

Jason's trigger word. Yeah, I know. But that ignores what the drawdown is. This might have a very high expected value, but it could have a 90% drawdown. And when that happens, you may also need that money to pay for your spouse's surgery or your parents' whatever

or your kid's college or whatever. And so that sequencing risk, that volatility tends to cluster and happen at the same time, is part of what we're trying to solve for. So give me a couple of the other ones you like to use. I couldn't pull them off our text string. Oh, like time and ensemble probabilities? No, your $10 word.

Parando's Paradox is one. Yeah, you hate that one, Jeff. I'm trying to think. Because it's not something I think about often. They just come out. Yeah, they come out when come out. Yeah. Yeah. They come out when they do. Yeah.

We love, obviously, ergodics is the one you make fun of us a lot for. The original name from our fund that you made fun of is, ataraxia, which was, is, you know,

and stoic philosophy is unperturbed by external events, but you, you, you're glad we went with me at any fund instead of ataraxia. Both of our, our, the luckily the ladies in both of our lives uh nix that one but uh and it didn't quite fit you'd be rewarded for right not unperturbed it's like we think of it as like sleep at night portfolio that's what we are like we want to know when we go to bed at night and our savings are sitting there if we wake up to any sort of traumatic or unexpected news on, you know, in the morning news channel that we know we're good.

So let's talk a little bit. It doesn't quite matter for how you've put the portfolio together, but what are your thoughts on where the markets are at and what are some of the dangers are out there? And if you want to say that it's all BS narrative, who cares? Oh, it's the JP Morgan quote. I predict the market will fluctuate. Yeah. That's my prediction. This actually goes back to why you and you were asking me

why I don't watch sports. And one of the reasons is I can't stand pundits. And I can't stand people. You know what this guy needs to do? I can't believe he missed that shot like that's a no brain like that was a gimme it's like so you've got a stephen a smith poster on your wall yeah if you were if you were that good like you'd be on the field like you know what i'm saying like well some of them were on the field no but even if they were the newer guys are 10 times better athletes and so i don't even care like you're still you're relevant you're irrelevant. You're a relic.

And so part of that is like, punditry and predicting the future is impossible. So why bother? And that's the whole point of our portfolio. If you combine short volatility and long volatility assets, you never need to look at your portfolio again. Full stop.

Full stop. And I want to go back to a time, like pre-1980 maybe when you had your savings that you never thought about. Now people are looking at their smartphones 20 times a day to check their Robinhood account.

How is that helping you? I want people to go back to running their business, doing what they're great at, spending time with their family, enjoying their hobbies, and forget about your savings and retirement.

If you have long volatility and short volatility, you can sleep at night and forget about that and go about living your life and trying to predict the future and have a narrative fallacy about the future is entirely pointless and like yeah i could predict all sorts of stupid ideas for the future but who cares if they come true or not so where do you think you think the u.s will go negative interest rates i have no idea i couldn't care less right But I do appreciate about that what you guys are doing. It's not just a money-making, we want to build this business and make money for ourselves.

It's kind of, maybe it's because you're from California now, but you kind of have this philosophical need to live a good life. What did you call it? You had one of your ten dollar words for that at some point but you have this desire to like be true to yourself intellectually true and live this good life and and say hey i don't want to worry about this stuff so that's why i'm creating this thing i'm waiting for taylor to chime in right now because i know he's like because like that that's usually the the huckster that's trying to sell you false goods right it's like i'm doing

this for like the right reasons yeah right that's the we work we're doing we're not doing this for the money we're doing this because we're good people no it's that's where the skin in the game comes right right yeah huckster selling you the medicine like he better be drinking that medicine too but the uh and yeah and you have like this mattress will change your life and this right there's a lot there's way too much of that these days yeah but to your point i think and that's what i was alluding to is i think that people spend you know as you know i hate the idea of investments i hate that word because it's savings let's call it what it is you know you have production and then you have consumption and whatever's left over is savings and that savings going back to sequencing risk and ergodicity that savings needs to be there when you need it that's all it is and as soon as

somebody says investments they're going to sell you some fucking scam that can make 10%, 20% a year, but loses all your money. You don't want your money to make money. You want your savings to outpace inflation and be there when you need it. You make money in your career and in your business. You set aside that savings for later when you need it. You need it to outpace inflation. That's it. Go about your business. Go about about your business go about your family go about your hobbies enjoy your life live authentic to yourself and when you need the savings it should be there if you balance out short volatility and long volatility it's the best you can do my argument to that would be i only have a little bit of money i want it to grow and become more money that's how you lose money but right if you

have no money so to taylor's point how do you get to the investment you have enough to save invest in yourself invest in your career invest in your business make more money have more savings and keep setting it aside in an ergodic portfolio i would argue the grand scheme of americans can't invest in themselves properly enough to to make that. Well, I think, yeah, and I guess the trade-off that every individual can decide to make is if you have short volatility and long volatility, you can, you know, you can apply more leverage to that to try, you want to generate, you know,

if you want to take more risk for greater return, like that's your prerogative. But the most ergodic option you know this would be to uh you know if you're not using a lot of a modest amount of leverage you had shortfall and long well then yeah you're you know you're you're that's savings right that's you know if you're maximizing for for ergodicity you're maximizing for that that time averaging ensemble which being the same that's that's what savings should do right you're maximizing that over you know 400 years whatever long into the future, that that's still going

to be there. And then to your point, though, and for lack of a better term, if you want to still make money and compound, combining short volatility and long volatility is actually the only way to do it. That's going to maximize your log wealth. So if you want your money to actually grow, that's how you do it. So for lack of a better term, not say like holy grail portfolio or whatever, let's just take an example. Let's take 2018. Let's say you're 100% in S&P and 100% in like a long volatility tail risk portfolio.

The S&P is down 5%. The tail risk long volatility portfolio is up 20%. So combined, you're up 15% if you're 100-100, right? You rebalance that portfolio, you go into 2019, now the market rips up 30%, but now your long volatility tail rest stays down 10%. So you're up 20% on combining the two. So on 2018, you're up 15%. 2019, you're up 20%. Now you compounded at 15 and 20%. If you were an S&P only, you were down 5% and then up 30%. What maximizes your log wealth? It's compounding positive numbers maximizes your log wealth. So actually, even though you're protecting yourself

and you're truncating those left tails and reducing your drawdown risk, you actually end up wealthier over time by being a more boring portfolio. And what do you mean by log wealth? It's logarithmic. Yes, compound growth rate over time. Which is Einstein, the most powerful force in the universe. Isn't that what you do for every quote

just to sign it to Einstein? Yeah, I think that's misattributed. I think that's fake. Yeah really that's why i said that yeah but it's a good line let's look that up um so it's a weird thing like yeah i a boring portfolio is actually your best portfolio and i would feel right most of the people you're going to talk to of like i'm doing volatility arbitrage and all this stuff that doesn't sound very boring right and unfortunately that this is the hard part of our business as you know all too well is what we do sounds incredibly complex and it kind of is because to just buy implicit short vol assets like stocks and bonds you just hit the buy button it's

the simplest thing in the world but due to the way the markets work to have long volatility terrorist stuff is very complex and you need uh very active management to run that portfolio which creates an educational hurdle for us but that's kind of the way it works out right and it's like well if you want the goods you gotta right and so it's it's great on the on the short ball side you're not really paying for that and it's really simplified so you end up paying for just half you pay if you pay for the longfall side right but it seems most of the investing public would prefer simplicity over effect right like yeah almost like people i'd rather have this good looking fashionable jacket than the one that actually keeps me warm well i think yeah a lot of that's

like you know okay you're gonna buy the s&p 500 index like the complexity of all the companies that make that up what business they're in how their business right i mean it's an incredibly deep complex thing but it's just become the like that's just you know that's right and then etfs have already figured this out we're like right they're just doing it on one side of the ledger you guys that that just made me think about it in a great way for the first time it's it's the vehicle that reduced the complexity. So the ETF made the actual individual companies in the S&P 500 less complex, and the vehicle made it simple. So we're actually trying to make the long-volunteer risk simple through the vehicle mutiny fund.

Yeah. We're trying to just have you just buy, set, and forget. Mutiny program. Mutiny investment program, yeah. And the other thing we always say is counterintuitively, we achieve stability through volatility. Alright. I like it.

Alright, we're going to ask you some of your favorites here. Favorite book other than yours, Taylor? I'm going to go Finite and Infinite Games by James P. Kars. Okay. Give me the back page on that. He's, uh, the good news is you really only need to read the first chapter. He gets the whole idea across in like the first 35 pages, but he was a, he was a philosophy professor at NYU in like the

seventies and eighties. And, uh, basically the idea is, you know, there are two types of games, finite games and infinite games. Finite games are played by the rules towards a known end, and infinite games are played by playing with the rules towards some indefinite end. So if you're playing a baseball game, there's known rules, right? You have three strikes, and you've got to run on the bases, and at the end of the game, one team is going to win. But if you're a father playing catch with your son,

you're not trying to strike him out. You've never seen me throw a pitch. I eat my words. But you're playing to be able to keep playing the game, right? Victory is that you get to keep playing the game. There's a Trump allegory in there somewhere. But Jason, 100 a month a year all right so first of all taylor's finite infinite games phenomenal book love that answer

i hate this question i absolutely hate this question when people ask it because it just makes no sense to me just don't be a grinch and pick a book it's like no i'm not gonna do it because i i'm gonna take a stand on this because choosing a favorite for a piece of art to me is a waste of time. Or just like choose your favorite child. Exactly. It's similar. But like even now, but now I have hundreds of children, not even just two. You know, like I'm a.

Easy. Well. Exactly. Just recommend a book to the audience. No, I'm not going to do it. I take a stand. What is one of the most interesting books you've read in the past two months? On the past two months.

See, now you're getting better. Now you're getting better now you're getting smart i was actually just uh unfortunately rereading uh um benoit mandelbrot's uh misbehavior of markets so obviously that's very it's cheating because it's very uh adjacent to what we do um but i was just rereading that on my on my trip to miami how about non-investing because what do you read all market investing books no no no i uh i'm pretty profligate you know i'm a ten dollar word i'm very whorish i'll read almost anything and everything but if if primarily um centers around uh philosophy classic literature and then and and markets. You should try something. I'm trying to convince this guy and you to get on with me

and do a book podcast. But he reads incessantly. And his new thing is he's only this year going to read books by female authors. Oh, that's great. He thinks he's in a, he gets in his own bubble of like, I'm reading all these white men that are essentially coming from the same place.

I want these outside views. And so he's going to kind of have these. And then when he travels, I'm reading all these white men that are essentially coming from the same place. I want these outside views. And so he's going to kind of have these. And then when he travels, I'm only going to read books about Morocco or wherever I'm going. And they could be fiction. They could be by someone from that area. Anyway, interesting.

Favorite Texas barbecue spot, Taylor? I would say Terry Black's is the value pick. It's just outside of downtown and so it gets like one tenth of the traffic of all the most popular places chewies uh chews is mexican franklin's tex max franklin's and uh la barbecue are like the two uh two most well-known hot ones and they're like they're great but like the difference between like the first and the fifth best place is basically zero so you might as well go to the fifth best place because it's you prefer tex-mex or barbecue in texas or sushi no not sushi uh tex-mex i guess you can i mean

you can just eat i can eat mexican every day right you just fajitas and tacos you can just keep going uh taylor so you live in napa favorite uh excuse me jason live in napa favorite wine i knew you were gonna do this to favorite vineyard i knew you're gonna do this without getting yourself in trouble with your girlfriend i'm gonna get myself in tremendous amount of trouble because i'm a heretic and i don't really like the napa wine so i can't even pick a favorite uh there's very few I like and I try not to drink any of them. Really? So it's a big scam, the Napa? No, no, no.

It's subjective, right? This is the problem with art and choosing. It's subjective. And I was raised in restaurants in the Sommelier and my foundations were European wines. So my palate means much more European and Napa's different. Not that either is better.

They're just for different occasions that are different styles, different strokes for different folks. I'm a heretic that lives in the heart of the orthodoxy. You'd prefer French wines, you're saying? Yeah, like Burgundy's, that sort of thing. You tried Yellowtail?

Yeah, it's fantastic. I love it too. You're saying Texas has a lot of wine now. Texas is the second largest wine producing state in the country. It's about 1% or 0.1% of California. They must be very upset they're not first at something in terms of biggest. Growth rate is much higher than California. It's doubling year over year or something.

I'll give you one. You're not going to be able to find it, but it's called Ad Vivum made by Chris Phelps. There are a few winemakers in the Napa region that are making very old world styled wines and Chris is one of them and Chris is a legend, an underground legend because he used to make Dominus

and prior to that he worked at only American to ever make wine at Chateau Petrus which is one of the great wines of the world in France and he makes a small production called Ad Vivum and that's one of the Napa wines I'll definitely drink and I did have, when I've been in Napa a few times and you're going all these vineyards and i the first time i was there i'm like expecting some story of this little french man who came over with like a bag full of vines and they're like no this guy ran reno casinos exactly bought this

thing and it's like so commercial and huge bats and you're really gonna get me in trouble now so i've coined the term i call it surname laundering. So you make your money in some unglamorous thing, like you just said, like Reno or some sort of construction company in Iowa or you are a meat packer in Michigan, whatever. And you take all that wealth and you come out and buy a vineyard and you build a chateau and a winery. You lose a bunch of money.

But now your kids and grandkids are now seen as blue buds. So it's surname laundering. So you took your name that was made in a blue-collar business, which should be exalted, but it's not. And you use all that wealth to buy up vineyards and everything,

lose money, so then your kids and grandkids can live like a patrician class. It's a form of landed gentry, I think, in the modern times. Deep take. Hot take. Favorite podcast? to gentry i think in the modern times deep take hot take um favorite podcast i got hidden forces that's probably that's a good one that's good one my top one uh dimitri

cofinas so it's like actually half market stuff half like other he's kind of a big complexity science chaos kind of guy yeah that one makes me think a lot i think that one the econ talk i really like with russ roberts um because uh a lot of those hayekian takes are like very um counterintuitive to what we are our initial emotional reaction so it makes you think about it more um selma hayek yeah yeah selma selma hayek you know the great economist philosopher selma hayek uh i think yeah hayekian the road to mexican serfdom i love her talk on the pretense of knowledge when she delivered that at the grammys i cried exactly um and then i listen to a lot of comedy podcasts honestly i haven't got into those yet i should yeah listen like uh you know like burt

kreischer two bears one. Yeah, I love that. Mine is Binge Mode Star Wars. Well, yeah, that's you. Which leads me into my next question, which you might get kicked out of the studio, Jason, but favorite Star Wars character? Chewie. Chewie.

Can you do a Chewie? Perfect. First guest who said Chewie who actually did the Chewie the chewy i love it i've been practicing jason did you prepare yourself and i did not make one up you know i'm i am not a fan of star wars or sports yeah i i'm just i'm gonna get kicked out of the studio any minute now um i do not i like i don't even couldn't even han solo'd go with Han Solo just because the actor was. Harrison Ford? Yeah, I like Harrison Ford.

Or young Harrison Ford. I like young Harrison Ford. So I'll go with Han Solo. Done. All right. Well, thanks again to Jason and Taylor. For more on the Mutiny Investment Program, links to their website, white papers and whatnot,

will be in the show notes. We'll also add some links to Taylor's book and blog. And where can they find you guys on Twitter? We're at MutantEFund on Twitter. And I'm at Taylor Pearson me. It's pretty long. I know. There's some girl in Minnesota that's at Taylor Pearson.

I've been trying to buy an offer for six years. I got nothing. That's my life hack. I bought JeffMalik.com a long time ago and MyKidsNames.com and all that. A theory that in the future there's no phone numbers or anything. It's just like you are...

That is world's greatest dad. I have never thought about that. That was genius. I didn't, right? And they're like, what are you doing? World's greatest dad. We'll end it there. Thank you.

Thanks, Jeff. you've been listening to the derivative links from this episode will be in the episode description of this channel follow us on twitter at rcm alts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments. We'd love to hear from you.