Andreas Clenow Trend Following Lot Of Bets Meb Faber Show

TITLE: Andreas Clenow - Trend Following Is…About Taking A Lot Of Bets On A Very Large Number Of Ma CHANNEL: The Meb Faber Show DATE: 2019-11-25 ---TRANSCRIPT--- [Music] welcome to net favor show where the focus is on helping you grow and preserve your wealth join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow a wealthier and wiser better investing starts here met Faber is the co-founder and chief investment officer at Cambrian Destin management did it industry regulations he will not discuss any of cambree’s funds on this podcast all opinions expressed by podcast participants are solely their own opinions and do not request the opinion of Cambria invesment management for its affiliates for more information visit Cambria Investments Connor [Music] hey podcast listeners the year is winding down the decade is winding down but we got a great show for you today our guest is CIO of ACS asset management based out of Zurich where he manages alternative investment funds for institutional and qualified investors he’s also written a lot of books including following the trend diversified managed futures trading stocks on the move and his new one trading evolved anyone can build killer trading strategies in Python welcome to the show Andres clan al but you know last time I think we were hanging out would have been in New York City I tried to take you to one of the finest Japanese restaurants and he said no no no ma’am I’m ready for a burger so we both had our first Shake Shack our first Shake Shack adventure and they just opened up one next door to my office now so when you come visit me in LA we don’t even have to venture out we can just go next door sure give you a lot of excuses although the big thing here now is the veggie burgers the impossible burger the beyond burger which are probably just as bad for you but well I’ve known you for a while you’ve been one of my favorite authors and researchers and would love to dive into a bunch of your books today including the newest one you have out but I figured we’d start with the first book because this is one of my favorite books about the topic that is near and dear I think to both of our hearts trend-following and you put this when this come out like it’s not 10 years ago yet is it maybe 5 2013 and so this book called following the trend maybe talk to us a little bit about it were you how did you come to the appreciation or interest in trend-following you know a lot of people kind of stumble upon it up different ways and many many have also have abandoned it over time but how is it how is it something that popped up and then in interest for you well I mean not the trading per se I was doing that for before I was running some some city runs back then but the topic of writing a book about that came about when I was I was searching for good books on the topic I found good books about you know people who did it before about about the industry about famous people and so on but I didn’t find anything good about you know how does it actually work nobody I should explain the details so what what is this saying and how does the world how do you build the strategies whether they behave and want it behave the way they do and I just have a crazy idea one day to stop writing something I think part of the inspiration that came from a short research paper I think it was three pages or something from one of the Great’s in the business Nicole colloseum ever a nerd and quest partners in New York here on people like three four pages something like that just explaining trend-following and I thought this is spot-on here’s the first guy ever I saw we wrote something that it’s brilliant it just explains the whole business in a couple of sentences figure you could do something properly with this yeah you could do something longer you don’t know what it reads a couple of page research paper whose I’m racing so you know what I did was I went ahead I’m not either like see hundred page research paper instead and surprisingly that became quite popular hugs and surprises anybody with that oh my god you got some of the best gallery reviews including the one and only market wizard Jack Swagger talking about the book but you start out with kind of walk me through the book in general you know cuz it’s really a I wouldn’t say it’s a one-on-one level how to build a trend-following managed futures sort of style strategy but talk to us a little bit about how it all came together and about their just the very basic framework and thesis behind what you wrote about in the book business was very much misunderstood for for long reasons especially after the idea this is stellar year 2008 and he still are here because the strategy per se performed really really well that year as anybody who remember that year often saying that even for those automatic actually good performance that year with these kind of strategies it was nightmare years nobody want that yeah that year again but it was a horror over here but afterwards it was a lot of it’s not a mystic him out can embark on what this is and how they why doesn’t perform well is it performing not so what we ought to do is I don’t try to build and show a model that is the best possible trend model in the world this not at all what the book is about I try to build a what I call it a middle-of-the-road model so the average it’s not bad it’s not good it’s not you know it’s okay it works and I spend the entire book just explaining what is this thing how does it work what does it work when is it working not and I believe that haunted actually got attention and that’s the part of them still kind of grateful for some of the bigger headstones are not suing me for I need a reverse engineering chapter so basically I took this very simple trend model that I’ve built in the book it’s so simple that most people would look at that thinking that this is useless stuff you know obviously this nothing this simple could be you some hedge fund space right then I use that model and I correlated it against the largest and most successful futures hedge funds in the world and I show that if you just toggle minor changes just minor minor changes back and forth like you raise the risk lower the risk get a bit more towards commodity or Mortimer’s financials and you hit something like point seven two point nine correlation to the major seek a futures tranforming hedge funds in the world and these are very successful shops from my brilliant people and what I try to show is it’s not that complicated really you can explain the performance using a simple model you know it’s funny cuz this is probably my favorite chapter in the book and I think you and I shared some laughs about it in person because so much of my belief you know a lot of the big muscle movements of many strategies not just trend falling but value investing or or many other ideas at their core don’t seem all that complicated and we like to make them sound complicated and really complex cuz that’s easier to sell but what was the response from a lot of the funds today did they love you for writing this book or hey you or send you bottles of champagne or what using the time I after finished running the book I had a public contract an offer on the table and not signed yet from the American publishing house I care about the thought you know I looked through what I wrote I named thumbs I did all this reverse engineering where I basically show that’s you know some of this billion-dollar hedge funds do very simple stuff and you know charge two and twenty for it I realize maybe some of these guys can I let the sense of humor about you know about all of this and of course you guys know America is somewhat litigation happier at times I think I gotta take some steps to protect myself just in case and I cannot hearted my structure I make sure that I was very difficult to sue and then I changed my legal structure on the on the book contract I signed with the British publishing house so further protect myself in retrospect it turns out all of this was overly paranoia the one founder was mostly worried about I’m not going to say which one hear about the one fund a word the most about having a being bit sore about it they called me out of the book came out the CEO called me up the sales coming by sir I’d wanted to have a meeting have a chair and you know I said I love the book you want to explain that I was right and you want to explain why basically their side of it and they’re a great call I mean obviously to be so excited silikal here it come helps if you’re an alligator in the business right if you’re in position to ever get monitored hedge funds then they have a less of an incentive to you know start a fight with you but I think everybody took it great I had no negative comments with any of the hedge funds earned I was at the time I loved it and I’m looking forward to you eventually doing an update one day because I would love to see how these hold up out a sample to but let’s take a step back you know cuz I think a lot of the listeners trend-following means a lot of different things to a lot of different people and you and I probably have a pretty good understanding of what we say when we mean it but maybe talk a little bit about a trend palling portfolio in general what that looks like to you as both practitioner and an allocator you feel free to use some of the straps from the book and the jumping-off point I’d like to start with is a quote you have in the book and it’s something that we talk a lot about which is particularly after 2008 a lot of people saw benefits of a trend following strategy that prior had not really thought about it and then kind of got the opposite side of trend following strategy afterwards and so you say trend following trades fail most of the time but that’s ok trend following tends to have a fairly large amount of losing trades often as high as 70% and it’s not a strategy for those who like to be proven right all the time so maybe maybe jump off from there and just talk to us a little bit about how you see trend falling as portfolio in general thing to understand is the trend falling he’s very much in portfolio strategy in my view to run trend following bottle on a single market is this stuff luck is just begging to get hit badly twitter following is basically basically about taking a lot of bets on very and a very large number of markets independently so you see something starting to move in one direction you jump on a bad back in the direction do you see Google going up for instance I mean obviously you have to formulate mathematical rules about this but the logic is more or less it you see something moving gold oil something stuff moving if it moves up you buy moves down you go short and now you just wait if it turns around it goes against you you close up give us more loss that happens almost all the time over 70% of the time you take a small loss is annoying you keep loosing lucy loosing small losses but once in a while it just continues once in a while you get the big move and that big move is gonna pay for a lot of the losers and the problem here is that if we do this on one or two markets you can have this period for a long time we just keep losing and you keep losing until your portfolio is gone but if you do this on a lot of different markets especially a diversified market that is you trade everything from from gold soybeans to bombs to currencies equity markets trade everything in the same way with the same rules they will or is anyway they will almost all the time is something that keeps moving and that pays for losing trades so my view is it’s a is a game about large numbers you have to repeat the experiment over and over again you have a slightly higher probability than average you just keep rolling the dice and the nice thing you do in the book which i think is really interesting useful for a practitioner is you do sort of a year-by-year walkthrough cuz you know a lot of people you tell them on paper yeah you can have multiple losing trades in a row and then they have those losing trades in a row and then I forget it this is my systems broken or they want to mess with it or they think you know trend-following is dead and you kind of walk through that year by year and show kind of how these trades play out I think that’s a really useful exercise do you even recall and I’m blanking on it cuz it’s been a while since I read the book but I remember some of the strategies you published were so simple in their rules one of them I feel like was literally like is the market up or down in like the last year or something it was like the simplest rule on the planet I can’t remember if that was the one in the book or something you wrote about on your blog but do you remember the kind of strategy design from from the book yeah the one you mentioned actually published it much much later first of my website I believe but my latest book I had an example in there but in the book I spent I’d say 80% of the book it’s been a while since I’ve read it myself but I guess 80% of the book is about one single strategy which is quite simple it’s it’s a moving average breakup model basically a trend filter with it with the breakouts which is not terribly complex stuff but the trick as I as I explained in the book is about diversification the trick is not in the rules themselves I mean most people are focusing too much on the rules they just staring at the entry exit rules as if that is the most important thing and for some type of strategies Antron exit rules are actually important for trend-following not so much I mean how many times how many different ways can you follow trends really the rules themselves are not too important in terms of entry necks the rules are important when it comes to the diversification and the risk management of course I think this is a really insightful comment you just made because you know what if people spend 90% of their time thinking about particularly when younger but also even a lot of allocators I think is is these concepts of what do you use to get in what do you use like what what are the very specific system when so much of the performance in many ways because it’s gonna be dominated by these really really big massive trends and in long term huge gains power laws in many ways like almost like a venture capital portfolio so much of it comes down to you know the position sizing and how you build the portfolio maybe talk about a little bit about with that because I know having heard you give speeches in the past risk management and position sizing is something you’ve had a lot to say about in a and have a lot of ideas about yeah especially something that I like speaking about in conferences particularly when it comes to more retail oriented conferences because thing with the retail oriented conferences if you say things that are dead obvious in the Institute institutional space something that everybody who works in the business knows if I say it on a more retail conference people are shocked I say the biggest misunderstanding from people who don’t work in the business who are trading as a hobby is what risk is and how to measure it how much to take just general understanding of risk that that’s the biggest thing they can improve on and I’d say risk summarize risk is a matter of valuation change or is a value change per unit of time or potential value change per unit of time if those components are not in it’s not risk common question I got off the write in the book was yeah but how many percent do a risk per trade my first reaction was for body mean present per water per day per year what are we talking about I wasn’t even exposed to some of these concepts before about risk per trade are trying to be a any sundar standing out risk is the same thing goes with things like pyramiding and all of this retail oriented this is so-called money management things most of those things are gambling meselson have no basis in mathematics no basis in in finance basically to keep in mind is is about value variation per unit of time and it’s not if that’s not in your equation then it’s not risk so that’s on a measuring side and the other thing is of course how much of it to take and that goes hand-in-hand with how much are you aiming for am I putting a returnee aiming for because you cannot get free return in this business it’s not possible if you want to have a higher return you gotta take high risk skill that will only get you so far you can you can slightly tweak the equation you can get slightly slightly more return for slightly less risk are we talking small things you know if you’re gonna aim for higher chance you have to aim for high risk and understanding of this is the key thing in my view to understand finance yeah and I think along the same lines is also the understanding of expectations you know I’ve heard you speak about this before too we’re certainly a lot of retail and individual investors when you speak to them and even in many cases some institutions to you talk about what’s possible or feasible about what they expect from their portfolio returns and many people the expectations are dare we say it like a bit optimistic yeah what’s the difference anyway I think yes I agree that some institutions have two high-risk targets this is true but then we’re talking about different different scale in a very different scale and we’re talking about say hobby traders who have a different who have a slightly skewed perception of risk there’s an order of magnitude difference I was speaking in a conference a couple of years ago where I realized later that many of them had they came from the same school of thought of various reasons and I started asking around at the drink session of the conference but what what kind of return targets you have and the first guy told me 20% and that seemed to be something that by northern and agreed on and what I was just going to explain it 20% per years kind of not entirely realistic over time then somebody pointed out that I misunderstood they meant 20% per week yeah yeah and I I said you know have you tried taking 1.2 ^ 52 and multiplying by a trading account and you know I was stuck in that conversation recorded while explaining that if you can get 20% a week then quit whatever you’re doing and do that because you know nobody and history has done even a fraction of that you’re gonna make a base of look like both so in a year I mean you can buy your Caribbean island in a year and a half you know you can start your own little nation somewhere with that money but that is the difference you know retail traders waiting for I mean this case was ridiculous of course 20 percent per week is it is beyond magic but so even if you aim for a hundred seventy year overtime any even gear anything can happen right I mean hundreds of the year in one year is completely possible but if you’re aiming to spend a decade doubling your money every year well you’ve gotta be one of the richest people in the world if you’re able to do that I mean we talked about that a lot where our buddy Wes Craven written a piece called something like you know even God would get fired as an active manager because one looking at just I mean if you compound at 20 percent a year you which is essentially what Buffett’s done you eventually become one of the richest people in the world if you can do it and continue to do it and that’s the challenge but but the flipside for a lot of people is that that comes with fairly large draw downs and you mentioned Bezos I mean this is a perfect example because there’s been multiple times where Amazon stock has gone down 90% and a lot of people can’t sit through that I mean and Buffett and Berkshire talk about look if you can’t sit through 50% decline and quoted securities you shouldn’t be in the stock market and the same things of course applies to our world as well talk to me a little bit about I know you’re not just a trend follower but we’re so on the topic talk to me a little bit about trend falling and you know someone who’s been involved in this world for a long time seen a few different cycles how is your perspective or approach or anything else changed over the year is there any sort of beliefs you may have had a decade ago that you no longer or any sort of insights that you think have been additive what’s a any general takeaways the biggest lesson I probably learned over the past I don’t know I try to think back human yes I’ve been in the business but it just makes me depressed I’m all the Lucas you know I think the biggest thing I’ve come to realize is that it’s not about the strategy as much as it is about the business and the business has certainly changed a lot I the greatest respect for this few guys that are a few guys in this business only a handful who actually continues to do the same exact thing since well 80s or at least early nineties that’s not entirely good for business I believe because you have to separate right it’s business side and this is strategy side then not necessarily connected in any way clearly the business side benefits from having good results but you’ve got to follow the business side in the business well trend following has become commoditized I don’t actually mean that it’s a partner we do trade commodities here but what I mean is when I started doing trend following it was still fairly small strategy obviously I wasn’t part of the big gold rush or the early days with Eckhart and Dennis and this guy’s got the whole ball rolling but even when I got in he was still a fairly small strategy anybody can anybody could set something up you show good response you raise money you build a business out of it and I’m I’m the first one to admit I’m incredibly lucky to get in when I did but no it’s commoditized that is can you imagine someone today saying I’m startup idea I’m gonna start a mutual fund now I can do slightly better than the big players now that I the mutual fund and I’m gonna raise billions my mutual fund nobody’s gonna take you seriously right mutual fund is owned by I mean all business is owned by the large banks it’s going it’s becoming brand name marketing game you know it’s like bringing out your own brand of toothpaste nobody’s gonna take this seriously the big guys on the business the same thing happened with trend-following now it’s more or less a brand name thing now as a business model alright changed all their all the big influences are coming to the large thumbs there was not the case 10-15 years ago so you got to look at where can you add some value in the business I mean if you’re doing is business of course if you’re trading your own money a different story you know do whatever worked whatever makes money but if you look if you build a business you got to be different you can’t just run a ten following model like everybody else even if you say that you’re slightly better than this billion dollar or hedge fund silver bar well sure but why should I invest in you so that part has changed malt you know I think you hit on something we talked about a lot which is I think a lot of younger people see the I hesitate to you the word sexy but the maybe they watch the billions or you know one of these shows that really makes trading look like this fantastic and it is highly rewarding career whether it’s an equities return following anything else and and trend followings has this lure cuz you’re using words like futures or leverage and margin and harkens back to the trading Trading Places day of the Cowboys trading hogs or oil or wheat or whatever maybe but the very real flipside that you I think very accurately described is we often say the managing money and the business of managing money are two completely different things and skillsets and approaches and I think a lot of what we’ve learned over the years is so much of asset management business is about narratives and storytelling and relationships for better for worse but you certainly from a pure quant standpoint see a lot of strategies asset managers out there that most would say are kind of garbage but still manage a gazillion dollars so so it’s it’s something that I think is important to distinguish between the two as someone who’s been both a practitioner and allocator talked to us a little bit about how you see a managed futures or trend falling allocation fit into a sleeve of a portfolio so if you’re talking to an institution or a family office or even an individual says look you know I’m I want to put together this portfolio how do you kind of describe where it fits in I think 20 falling should be part of a larger portfolio I think it’s it should be one of the core building blocks of a larger portfolio we’ve seen over time that trend-following tends to perform very well in high volatility environments as it is the old classic tail hedge model no guarantees of course but during a severe bear bear bear markets during times when financial markets on distress trend-following tends to do quite well I’m not one of those would say put all your money in trend-following no way don’t put you all don’t put all the money in anything you should diversify your portfolio across a lot of strategies what we would do is we buy a lot of different hedge fund strategies as well as traditional assets and we we build a portfolio that should work under under any type of climate but tranforming I mean what we’ve seen here is first of all I mean obviously the elephant in the room trend following in return has come down over the past decade or so not terribly surprising I don’t expect to see any camera charge they saw 15 20 years ago that’s not realistic not on these kind of yield levels but we have not seen any sign that it stops working we’re not seeing a sign that would perform worse than equity markets when equity mark is still one of the worst as the classes if you do if you look at if you look at the volatility Justin returns over time on buy-and-hold equities it’s still one of the worst looking ones is you should still have equities of course I’m not saying you should that’s that’s a hot take I wanna I want to hear you dive a little more into that because you just probably exploded the brains of half the listenership right now equities sure return of the time you should have an equity portfolio everybody but you should also be aware that you know if you look over a 30 40 year or 30 40 year period and I’m talking total return of course with dividends included you’re looking at a expected return I’ll say between five to seven percent perhaps realized over time and for that you’re looking applicational drawdown so say well 50 60 percent Mountain I mean we had two of those in there in the past couple of decades during my career there were two of us fertility levels are quite high you have selling shots you know if you enter the wrong time take a long time to get compensated for that you know if you buy the top of the bubble at the moment you know I’m not going to time the markets here I don’t think that’s a useful use of your time but at the moment we had one of the longest-running bull markets in history and you know it would be reasonable to assume that sooner or later that’s gonna end with a larger correction if you start building an accurate exposure before a logic correction it might take a decade or so before you actually get your money back so equity is a difficult as a class both because of the the performance of the on the indices over time you can argue that the construction of the indices is part of the problem and I be inclined to agree on that but you have a big problem with equities is that stocks and stocks and the performer is similarly you know if you buy a basket or 50 stocks you’re still most along beaker right you’re still just long equities they’re all gonna tank at the same time difficult you know I think you a good example is we see portfolios so many times where they come to us and you know they say hey I’m diversified and their portfolio is us Large Cap Growth us large cap value us Mid Cap Growth us mid cap value has small cap growth you a small gap value and they say look I have thousands of stocks I go congratulations you just bought the S&P 500 you know which in and of itself like you mentioned is a portfolio of stocks and in the same thing I was actually at a conference recently and we were talking about how we thought a lot of the foreign markets are cheaper than the US and they said well mAb you know so you’re saying that if you buy emerging markets that’s gonna protect if the u.s. goes down and I said no I would fully expect if the u.s. goes down 50 or 80 that emerging markets would also go down 50 or 80 because in the gin in general they’re still stocks and there are different stocks but it’s not the same as having a managed futures account where you know you got stuff that has quite a bit less correlation so you mentioned there they’re not one of your favorites what are your other favorite asset classes or strategies that you would you would consider like favorites wrong word favorites wrong word you said you said you stocks are not one of the best what else would you consider to put in a portfolio and and if you say you’re putting it all in local Swiss - 1 % bonds you’re probably gonna turn everyone crazy actually I think it’s not -1 anymore it’s like minus 1/2 right what are they using topic of course yes we do have negative deals over here we had for quite some time now that’s that’s a weird one yes and fortunately you don’t get paid for taking your mortgage on your house there would be nice no I mean you need you need a diversification of your portfolio and obviously it depends on your goals here I mean some people are more focused towards capital growth wealth generation other people are more focused on capital protection there is you know protecting your wealth so it all depends on what situation you’re in you know how much money you have and if you’re aggressive in growth or if you are more concerned about not losing what you have if you have a large not portfolio my view is you should have a big mix yeah you should have you should have probably substantial allocation to equities in general hopefully something actively managed by somebody who knows what they’re doing you should probably have an allocation to various type of hedge funds like your private equity hedge funds at the moment I think there’s a lot of interest in things going on in the private equity space at the moment you should probably have a real estate portfolio I mean you know obviously I’m coming for institutional side and now we have people at home sitting there thinking that who-who is this guy should go buy real estate and hedge funds or like my salary that’s not possible what I’m saying it’s not possible for people who don’t already have a fair chunk of cash to allocate obviously but maybe you can invest in the manager who can do it for you then you know you can participate in the vehicle or it’s some type or the pool vehicle you can participate in this kind of things diversification gets easier the larger portfolios were handled basically and sometimes when we work in business we whose Trek or the fact that the rather substantial portfolios that we handled might not be the portfolio’s that the average personal Tarsus you know is this looking to Ellicott is there anything you think that fits into a portfolio and we’re going off-topic a bit which is fine we’ll come back in a minute anything in particular that you think is interesting that fits into a portfolio that most others would consider doesn’t so cuz you and I are trend followers and we appreciate that allocation I mean we probably have one of the largest trend following allocations to our default asset allocation portfolios here of anyone I know most the people that I ever talked to they say I’ll put 5% in trend-following managed futures you know that I I don’t know of an institution that has ever allocated more than 20 maybe maybe there are some if they are there they’re certainly outliers but and you can answer that question if you want but also are there any other strategies like trend falling that you think are interesting that most allocators don’t allocate to or if they do it’s you know a tiny thing or one that you love that’s maybe somewhat untraditional the particular space is something I like very various types of return or absolute return type of strategies even in the equity markets there are strategies there or there are either either even have a variable exposure level or a delta-neutral type of strategy is that is that they’re not depending on whether the stock market is going up and down usually with these type of strategies you get a lower return but a most stable return and I care alike this type of managers because you get a stable basic corner store in the portfolio something that keeps performing at a fairly low level but it keeps performing up and down with the stock market I also well I I’ve also been I think you know but this Performa we are we have been corrected for the past 10 years or so in the and the in the alternative lending space business the business lending space in United States so we would be quite active over there so we’d had some pretty nice success with with strategies and ventures in that kind of space and that scenario I think is it’s growing at the moment talk to us a little bit about there because that’s something we haven’t spent a lot of time exploring on the podcast so what do you mean by alternative lending for the listeners and kind of how do you guys approach it credit what we do is we have securitized in Europe some American type American based ventures that offer credit to American businesses we’re talking medium-term credits for medium morris medium sized companies so less than a year credit for established but not there are large companies and this type of companies the problem for them is that they cannot find long from they just won’t get loans from American banks over 2008 often the credit crunch American banks left the scene left big vacuum behind them where basically the American businesses aren’t able to lend to loan money as we we and many others like us offer credit to those companies this was what we are doing started like you started with the top of PE PE there’s a private equity venture that will later securitized but we found for the past ten years it’s been going really well we have we’ve seen that they didn’t have the heels you can find in that space or for attractive totally uncorrelated it’s just something different you know what we always look for different type of solutions you know 10 15 years ago we we were in in saltwater disposal you know looking at we had a place over in Arizona to clean water after of the fracking operations which was quite a nice business when the oil price was higher it’s just an example of different things that we do on there or more of the private equity side of the firm where we look for interesting things here and there clearly this is not something that you know the average listener can go out and you know go ahead and start or go to business around but just to mention you know it’s always interesting business ideas around and sometimes they can grow into something of you know it’s it’s you touch on something that has always been fascinating to me which is a lot of these asset classes or strategies or approaches that like you said have no correlation to anything else and by definition many of them are hard to scale or they may be pretty Nishi you know even something like catastrophe bonds it may be complicated it may have low liquidity but things that really have no correlation to really anything else in the in the portfolio I want to hop back to trend for one more minute and then we’ll continue on to some other stuff one of the things that I think interest people is trend falling in a traditional managed futures world is set up as a long and short opportunity set and many people are very comfortable with a long or long flat sort of approach but shorting starts to get uncomfortable could you talk a little bit about one how you see shorting fitting into the allocation if it’s something that is also necessary because some people say no no if I had to do managed futures I’ll just do it long flat so maybe talk a little bit about that and see what I don’t hear your opinion sure just to be clear we’re talking about futures and not equities because I see them as totally different subjects on this legal instance but for futures and trend-following it’s a tough call because if you model it you’ll see that you can probably get high returns over time if you just do the long side so looks attractive on paper just skip the short side you can keep trading the long and short over over a decade and you look back at ten years and see that on the short side I net lost money and this isn’t easy here enjoy that draw the conclusion that we should just stop doing it but it’s not that easy the short side in conjunction with the long side if you trade them both at the same time it will have a negative correlation what you’re looking at in the end is the overall combined strategy will it will return a better risk adjusted return because you just you decrease your motility by adding this this is negatively correlated strategy what that means in plain English is that as stress times at times when the long-haul trend-following really takes a hit that’s when the short side really performs and it lessens they need a negative performance it’s smooth smooths out the performance and it gives you a more attractive return curve over the long run that’s an interesting point that a lot of people outside the business are missing as well that sometimes when you’re building a product usually in the product there are many different strategies or at least several strategies combined into one product each of the strategies need to contribute of course but they don’t necessarily need to have an attractive positive return they can even have a negative return if they have a sufficient negative correlation to the other part in the portfolio you know as I said in the end it’s about risk adjusted return not just return there are no prices for getting the highest possible return me yeah that’s not how the business works you win by having the best risk adjusted return I think it’s an important point you know we often say that long short is such a great diverse fire because often it’s when things are hitting the fan but long flat if I had to choose one personally for my entire portfolio if you said maybe had to do your entire portfolio with one I would actually choose long flat but a long short as a diverse fire I think makes a lot of sense you mentioned equities as a reference your second book talked about equities which I thought you haven’t seen a lot of research have you seen a lot of academic research which is borderline unreadable about momentum you haven’t seen as much as people talking about it in terms of trend maybe talk a little bit about how you think about are there any opportunities to implement equities with a trend or momentum approach and with a nod earlier you said that indices aren’t particularly well designed any insight there - it would be interesting how the second book came around or kill about when that one was off my first book I got a lot of questions about stocks people read the first book they said yeah this sounds great on futures but you know futures you need to have pretty substantial bit of cash to start or start trading so so many people emailed me a nest egg question can we do the same thing on stocks and my answer was no not really if you do it on stocks you got to do it differently and this became such a common question that I figured you know what let’s just write a book about it and I try to keep the terminology clean I I tried to use a different terminology to show the difference that I mean that I think is important here what I said in the book was that basically trend-following doesn’t work the stocks but momentum does and it’s a very similar concept stocks are different you’ve got to treat it differently the key thing in trend-following is I mentioned before is diversification if you can trade everything from from from Cairo to palladium due to bonds then you have diversification but the stocks no not so much if you try to do try to entrench following your stocks you just gonna pile up massive amounts of detail and if you don’t realize that you’re building a bita portfolio you know if you build a metre portfolio on purpose it’s fine but if you build the beetle portfolio by accident you will have a rude rude awakening when the market turns right so I wrote the second book with that in mind trying to explain the difference between trend following and momentum the big thing with momentum really is you gotta take into account the state of the entire stock market you cannot realistically expect to make money buying stocks in it in a bear market and shorting stocks well sure there are experts are very good at that more short-term oriented to run say immediate long-term strive you that that remains short stocks for weeks or months I wouldn’t recommend that and you asked about the construction of indices and yeah sure I mean if you look at if you look at this a be 500 as your your market gauge there but if you look at that to see what is the stock market doing either understand that the S&P 500 well it has five on the stocks in theory but only the top 20 or so matter its market cap weighted meaning that the larger companies so the higher the value of the company the higher the weight in the index and the top 20 companies I saw they dominate the index the rest are just a rounding error is it ridiculous to pretend to fire up this 500 stocks in the urban you have some stocks that have what is it now 5% plus for that for the top and the lowest what 0.001 percent the bottom a few hundred don’t matter so this not diversification in there and that’s a big problem with the index try an experiment here try tried buying the same 500 stocks build a simple back test by the state 500 stocks do it equal weighted I sorta don’t recommend equal weighting but it’s a lot better than the market cap weighted and what you’ll see is that over time it outperforms quite nicely we say market cap weighting while a interesting innovation in the 1970s the innovation was actually not market cap weighting but lower fees versus the higher fee stuff and almost any other weighting methodology tends to outperform over the market cap starting point let’s get to your new book you didn’t learn your lesson under ASU you wrote a book and then another one and then you said I like torture I can’t help myself I’m kind of right at third I think I’ve quit at this point I’m not sure it’s it’s too painful well you said I got to write another one and you put out a new book talk to us about it what’s uh what’s a new one out I figure I did two books that are reasonably similar in my first book about future second book about stocks they’re very similar in style and structure it’s like a clear sequel and generally I don’t like sequels who wants the next big movie franchise friends they had a number two something or the change of name slightly and it’s more less the same so I figured I’d do something different this time what do you mean we we getting ready to have I think the like the tenth or eleventh note like eleventh or twelfth Star Wars film come out unless you’re Disney until the fourth came out and I do mean the force that chronologically came up I guess it’s a target audience on my books I I sort of thinking about a wild back but I’ve got a question I can’t even remember who asked me the question what all right my target audience in my books and I thought about and I came up with the answer and that I say actually explains why I write the books I do my target audience is myself 10 to 20 years earlier so basically I tried to write books that would have helped me a lot if I had found a book but I was less experienced when I was younger but I didn’t door and all the stuff if I could have find if I could have found a book like that it would have helped me a lot that that’s my starting point I’m the target audience but I was younger so I figured what’s the best thing what what should I didn’t learned like I don’t know 20 years ago or something proper back-testing proper proper programming of backtest the tech side so I figured no I got a kind of a lock to audience right but people seem to have like the first two books I don’t know why but they seem to like them right so I got kind of a built-in audience so let’s see if I can trick these people into reading a textbook because these are people who probably wouldn’t buy a textbook normally but maybe I can get them to read one and I can you know put them in a false sense of security until they realize that they’re half way through a tech book and now they’ve got to continue so what I did with the third one is it’s a very practical book is to my knowledge is to type a book that at least I’m not aware of and it’s a similar type of book out there it’s focusing on how to use a programming language called Python to build back tests of trading strategies and the point is that anybody who reads it who spends enough time takes it seriously learned I don’t care what kind of tech background you’re at if you never programmed in your life before shouldn’t matter I hope the point is you should be able to after this book to test your own strategies to actually formulate your strategies test them build it run it run the run the math and see what comes out does your strategy work or not what and in it clocks in at well over 400 pages you know I think this is a perfect prelude to just becoming clean al the professor you know that’s a real money man you update this every year and this this becomes your textbook for uh-oh I think yeah I think you know as well that I think most listeners should be aware as well that you want to write books and make money there are only a few select topics and these are very little about wizards and vampires I make very tiny money on books but like like almost all authors out there well it’s good you know it is funny because I feel like so many in I’ve heard you speak to as well so many and it may be a generational thing but so many young investors they start with a lot of the technical analysis books they start with the coding to try to optimize some sort of intraday currency trading to where they again can make 20% per week and they throw 500 variables in so that they find a system that that works but I thought yours was particularly thoughtful are there any sort of examples or takeaways from the book that you think are interesting for people that are considering taking it for a spin well I tried to mix it there are some trading ideas in there so I had some both is both 20 models from my previous two books and I used new trading models with hopefully new concepts so this new stuff from the 8 your trading angle but I mainly use that to get people to understand it here at the core topic of the book which is learning do it yourself so I would say the big takeaway here is well trust but verify and this book helps you to verify you know somebody tells just read your works you know maybe it’s true maybe it’s not but your default view should be that it probably doesn’t so let’s sit down and test it does it work or not I want to give you the tools to do this yourself that’s that’s what the book is about to test test your own ideas test would people claim to test what people tell you if you read another book about trading they give you some some rules or something in there well you know this gives you a toolset to replicate it to test what happens if you trade it you know it’s funny because I am came to much of what my career has become on quant side of the business from frustration with reading a lot of the books out there that made a lot of claims about this happens and this is what happens in the future and this is a bullish setup or sign or system or whatever without really any systemic underpinnings and frustration with I mean just countless dozens if not hundreds of books you know with without any substance and then I certainly wish this was what was around a long time ago did you self publish this or was this with traditional publisher I did actually yeah I got a bit of a shock when I got into the whole publishing world first I read about how to get a book published I read about how incredibly difficult it is and that’s probably true if you’re publishing your novel probably I don’t know I haven’t tried one yet but first I had multiple publishers who pretty much accepted my book right away which was very surprising to me I was feeling very good about that until I realized that publishing your finance book is surprisingly you see then you start looking at the terms and conditions and you realize nobody gets rich writing books I think actually uh you know I hate name dropping but Jack Swagger once told me that as far as he knows there’s only one person in the world who can actually make a living from writing finance books and it’s not him I’ll leave it to you to figure out who it is and she’ll be obvious I think but if you look at the economics of publishing a book with a major publishing house you see that it is bordering all the radicals I mean yeah sure you don’t expect to get much paid but don’t expect to give away you know pretty much everything to some other company right then you realize what exactly do the publisher do for you maybe I had a bad experience maybe I had a major got unlucky but my view of my first book was I’m giving away pretty much all the money and I did all the work I even designed the cover I did all the marketing no marketing was done for the book I just couldn’t see the value out in the end so I didn’t experiment with a second book I self-published the second book and I figured you know I did all the work on the first one right I sold as many as I did on the first one and well not that it’s not expressed there it’s it’s actually not enormous money in a way of shape form but at least it felt like it’s fair compensation for writing the book so I did the same thing on the third one it’s uh published by Amazon buy a great space I checked with a couple of publishers I had a couple publishers who were interested but again the terms of conditions are as a businessman I it feels it feels wrong to do that to be honest and if you get the same distribution on your own then one do that technology the technology and the the platforms for this has increased incredibly over the past decade the world has changed so fast with how it operates and like you mentioned trend falling and power laws exist in so many areas where the big winners are often magnitude more than the long tail of everything else but talks a little bit better website you throw up some articles on there some resources you’ve been publishing for a long time I don’t know if you can call it a blog anymore in 2019 but where do people go and they find a little more about what you’re writing about there and what’s uh what’s on what’s up east in writing books and things and the website is really it’s a hobby project I started some years ago it was actually the fellow author who told me you know what I was almost done with the first book and establish the author in the field gave me some advice some of it was great some of it I backtracked on later he told me a one-story web page write articles write a blog basically that didn’t feel right but there at least you know that that worked out I had more of an interesting interaction there I wrote a lot of articles and people seem to enjoy it he also told me join Facebook Twitter and the long list of other things and I left most of those things off to her sorry I think I still have a Twitter account which you know if you send me a message a message on Twitter I probably never see it because I never log into the thing that part I’m not sure maybe you got a habit bottom that’s why I started my patient away and I write I write articles when I want to have moments when I have some time it’s more a hobby but it’s been sparse lately due to writing well we’ll link to some of the articles on there in the show notes listeners meb favor com4 slash podcasts are some good articles how to be a professional trader and some others that we probably don’t have time for today trading sardines is another nice one what uh what else you working on these days now that this book is put to bed out of your brain as you look to the horizon in 2020 and beyond I’m is there anything that’s scratching an itch in your head other than negative interest rates other than chatting up managers anything particular on your brain that either you’re working on or you’re curious about I mean some people are incredibly focused some people have a laser focus and deal one thing they do it incredibly well and all their energy goes to this one thing I have the highest respect in this type of people but one of them I like to do a lot of different things and all of these things and I most of the visible stuff really that you see from me are my hobby projects and yeah you gotta have your hobbies and I do confess that I’m actually looking on my screen at the moment about 300 page manuscript thrown at this summer is gonna turn out to be anything that actually got published or you get another manuscript I I end up deleting and I had fun writing it but I do have something in the pipeline in a way so all I can say about that one is that it’s gonna be an extremely different book not nothing remotely similar to us that you see before if it does finalized of course and and investing mystery romance novels are a very small niche under it as much as I joke about never writing again for me it comes a point where it’s almost like you can’t help anymore and I have to vomit it out there’s a topic that is it’s bugging me currently but it’s a matter of course of finding the time and and interest to do it talk to me a little bit about resources you know I’ve talked about a few already obviously your books and website is anything else out there you think is particularly been influential to you whether it’s books or websites concepts anything else and you’re in your head mentors anything that you think would be helpful to the listeners looking like I’m paid by the guy but I tend to when I guess a question tend to apply the same guy I think actually all and that anyway after he helped me out here other chapters my latest book as well I very much recommend a Rob Carver’s books probably a hedge fund guy in London he was I believe head of fixed income trading for AHL for a while here are some incredibly good books about a systematic training particularly for this first book which is actually called systematic trading I hear it’s got a new book coming out I believe next month yet yeah I think that’s is rare to see somebody with a background of the industry background writing this kind of insights and that’s why I pay attention it’s you know after a while you get to know a lot of the fellows in the field and and is there a rare to see somebody who had that high level background who still wrote books about it and then I can very much recommend cool that’s a great one I I know I’ve seen it I don’t recall ever reading it he’s got another one - that’s smart portfolios okay yeah I knew it something similar title but not quite quite the same have not yet read is Bauer leveraged trading so basically high-risk trading more retail oriented I believe oh well that’s interesting that’s a topic we get consistently I think nothing gets the Pavlovian glands going for for investors then leverage and the pig the big wins so that’ll be curious to see his take on it the hard part for most most people is you need to avoid it but we’ll see what he comes up with that’ll be fun and I and you’re supposedly I think I saw on Twitter or somewhere else that uh Jack Swagger Schwager I always pronouncing it correctly is working on a new new market Wizards book

• his name was confuses me as well because I he’s not my native language but I do speak German so I tend to cross in a German way and that’s probably it means brother-in-law by the way in German but other was confused because of the the German spelling of the name but as an American so I wouldn’t say for sure sorry Jackie hey we’ll look you jack Andreas meb I think we all we’ve all have the same struggles name’s I get a every time I go to get coffee in the morning I get a different variant of my first name I feel like I just need a pseudonym at this point I should just start saying Bob as you look back on your career what’s been your most memorable investment good bad in between anything come to mind as seared in your brain yeah I do have a good one for you I’ve got a good one for you remember the Missy how many years ago was that you know you start getting all you lose track of here so it wasn’t like four years ago when the Swissy Pig broke it was you know the swiss thing was was was kept to the to the euro they were holding the 1.2 line remember mm-hmm so this was story starts one day before I mean now we had how long was it here or something we had the rate between our currency over here I mean obviously I’m based in Switzerland the rate between our Swiss currency and the euro US was pretty much fixed at one point to the central bank Swiss central bank held the line there they spent a fortune holding that line now this was a date before it broke and this was well I guess he called the trade I had to make a larger personal transfer from Swiss II to the dollar and unfortunately for me I had this amount in their own badge not that not the bank that I had some leverage over where I can push push rates and push conditions but I had it the wrong bag a bank could really care less about me and I’m calling the man I’m checking because obviously he banking is not the way you do these things and they give me a rate that’s absolute disaster I mean we’re talking three keys and spread something ridiculous right I tried to explain my way off the chain talk to next guy next guy try to explain and I get more and more people telling me that no you don’t understand sir we don’t have any fees on cars at conversions like now of course you don’t you have spreads this conversation got on my nerves I think I got more and more upset I yelled my way up the ladder I probably was fairly polite but in the end I just lost my temper I think if these people don’t they don’t understand either they don’t understand how much money they’re stealing from me on this transaction or they pretend I understand I can’t with this I I totally lost my temper in the end I slammed the phone down I figured you know tomorrow I just I just transferred this amount to a bank where I can do business the bank where I had some more clouds I do the transfer there between the currencies and transferred out to the States now the next morning I show up in the office I think it’d not leave it overnight I just got too upset spending our two hours on the phone yelling at people over this I I just left it I went home I thought they can wait today next day I show up I look at the screens you know I was pissed for 3% spread next day I look at the screens and the spread changed in my favor 33 0 % are we talking a major FX conversion rate changed 30 0 % overnight yep I was pretty happy that day that’s so funny just thinking just think if you went back looking back on and the guy had caved in listen ok we’ll waive it let you make a let you make the transfer you transfer and then miss it ok that would have ruined my day I mean this is one of the best trades I did that year you know it’s I mean I guess if there’s any sort of logic in this any foreign lesson in this is it wrong sometimes your best trades are from dumb stupid luck I guess that’s that’s the same way we can see core a lot and probably have many of the stories with with good things happening to dumb luck and things happening from skill the other thing obviously if you’re looking at more more serious that’s privileged trading lessons here will be if you have a situation like that here we had a one-sided cap right the pressures all on one side you have a central bank artificially protecting the line on one side I mean everybody know knew before and it was clear the day they stopped protecting it is going to be a major major move right everybody knew that and still people took risk on the wrong side I mean you saw later on some trend-following shops for instance we lost a lot of money because it took on massive positions in a trend for a moral on a market that moved tiny cents up and down right with almost normal Authority at a time because central banks we’re keeping it down so I mean the lesson here from the more serious point of view is it if you apply standard models instead of models would tell you wrong take a position to take a messy position because there’s almost no more Attila T right what we do most of the business is we take Bo like parity type of positions so something is low volatility you take it a very big position size because otherwise that position has no possibility to impact the bottom line result right so later when you solve it some funds lost enormous amounts because they took massive positions on the wrong side of an artificially inflated asset and they didn’t take into account that the volatility the low volatility is also artificially created by central bank yeah I’m certainly not saying you predict it and take the opposite side here and embed on the bank failing but if you take on massive bets that basically say that the bank will never the central bank will never stop defending that line and you have a problem so bottom line is don’t always follow your rules use some sort of common sense in special situations it reminds me of the old Soros and sterling trade you know where you outlined a very clear example of why that stress and pressure builds up and even better example of knowing some sort of situation that is outside of the quantitative rules could really save your hide and that applies to everything you know people are always asking when would you you know alter your systems when do would you trade something and in my mind that’s something that whether or not you change your system at least is something to be very aware of and a lot of people not just in this example many many other examples get get carried out in body bags because of these situations where they either just completely ignore it or just assume that it would never change and yeah history did its exact same situation as the historian situation you know similar in my home countries well it was back before I left did you had a similar situation in the the the Swedish Krona as well but if you have a situation where a central bank is artificially doing something against the pressure of the market it’s a matter of time it’s a matter of time while we’re on that topic and then we’ll have to let you go what what is a on the boots European perspective for what’s going on how are most people or how are you thinking about currencies and interest rates in 2019 because I think if we went back in time 10 20 30 years and we’re having a chat over a pint or something and said you know the future is gonna be one where a lot of sovereigns have negative yields and even I think some corporates now that seems like a pretty odd future for for the fine ex-finance textbooks do you have any you have any just thoughts general comments to make on the way the world looks yeah I mean the horizon at the moment one obviously is negative yields I mean a lot of Americans would say that negative yields not possible over here and I’d say well the Swiss disagree we had them for a while it is possible you guys are a bit further and further away than then operate on this star in the pond of course but negative yields is a problem and the problem is how to get away from it how to move away from negative yield once you’re there you’re stuck you got the tablet you got the tiger by the tail and now what do you do you hold on how do we slowly let go on this that’s going to be a major issue that’s one issue the other issue obviously that we see it’s just bad for everybody in the long run is the the brexit disaster story and the together with the increasing risk of global trade wars I mean it’s not a matter of political opinion but rather economic opinion that these kind of things are just not good for the markets and not good for the economy they’re not good for the business so there’s a lot of problems in the end but curses as well you can say that the dollar has a lot of problems and I agree with that but which major currency out there has less problems than the dollar it should you guys have a lot of problems but point me to a major currency that has less problems than your currency and currencies are is a relative gain so sometimes it’s not the best currency but the least worst currency that performs we don’t have a lot of challenges ahead this for sure yeah yeah that I was just over in the UK earlier this year and hey this is say the mood was it was quite a bit dour I couldn’t even really get anyone to give me a coherent example of how this all even potentially works out it was so confusing to me but anyway we’re we’re owners of some shares there so I’m that all of the bad times tend to create opportunity on the value side for guys like us andreas where can people find more if they want to learn more about you follow what you’re up to get in touch with you where do they go hey my blog you can still call that on my website following the trend calm one word and there’s a contact form there as well you can contact me there I tried to be pretty accessible guy I try to you know try to interact with people read the books and these kind of things so yeah feel free to contact me and if you happen to be in in Singapore in November 26 or Melbourne the Saturday after whatever that is 31st something like that feel free to comment chest will be there I’m I’m doing Singapore Melville and in a few weeks very cool also check out his books listeners following the trend and his new one trading evolved Andreas thanks for joining us today listeners will post-show note links at meb favorite com4 slash podcasts of the books as some of the things we talked about today other books white papers etc just subscribe the show on iTunes leave us review we’d love to hear what you have to say and shoot us feedback at the Met Faber show calm thanks for listening friends and good investing [Music] [Applause]