Podcast Summary

Episode Overview

Podcast: Animal Spirits
Episode: Talk Your Book: A Tactical Strategy That Actually Works
Date: December 22, 2025
Hosts: Michael Batnick & Ben Carlson
Guest: Dan Russo (Co-CIO, Potomac Funds)

This episode explores the challenge and rarity of tactical investment strategies that consistently deliver both downside protection and participation in upside markets. The guest, Dan Russo from Potomac Funds, delves into the mechanics of Potomac’s quantitative, technical-analysis-driven strategies—which have notably managed to keep pace with or beat the S&P 500, earned robust returns, and mitigated drawdowns. The discussion covers how these strategies are built, how advisors use them, risk management, the challenges of explaining tactical strategies, and the realities of where such tactics can fail.

Key Discussion Points & Insights

1. The Challenges and Evolution of Tactical Investing

• The Tactical Trap:
  Michael opens by reflecting on the post-2008 “tactical” fad: “Doing tactical well… is really hard. If you look at the Morningstar category of tactical, it really sucks. What is unique about you guys is that your numbers don’t.” (03:38)

• Why Most Tactical Funds Fail:

  • Tactical means different things to different people, making the category fuzzy and inconsistent.
  • Many so-called tactical strategies fail by not being able to survive or keep up during rising markets.

• Potomac’s Unique Approach:
  Potomac’s willingness and ability to move 100% to cash, allowing for “let the market play out and let probability dictate for us when it makes sense to get back in.” (04:22)

2. Defining and Delivering Tactical Strategy

• Quantitative Systems, Not Gut Feelings:
  The Potomac approach is entirely quantitative, eschewing intuition for tested inputs:
  “We are big believers in data over feelings. Probability over prediction.” (17:06)

• Composite Model Structure:

  • Multiple uncorrelated trading systems ("players") form a composite (“the team”).
  • The composite answers: Should you be invested now?
  • If yes, deploy into one of four 40-act mutual funds with different risk/drawdown profiles.

• Flexibility in Execution:
  While the model can in theory be “all or nothing,” in practice funds may act on different composite signals and be partially invested.

3. Portfolio Construction & Advisor Use

• Flagship Fund Performance:
  The Potomac Defensive Bull Fund’s standout:

  • Outperformed the S&P 500 over 3 and 5 years—even with long periods out of the market.
  • Achieves this through “concentrated exposure to a broad index… at about a 1.6 beta to the S&P 500… but only in the market about 60% of the time.” (11:51–13:38)
  • Uses futures and ETFs for leveraged, capital-efficient exposure without borrowing.

• Zero Discretion in Execution:
  Manager overlay only during the research and construction phase. Once signals and systems are in place, “there is zero discretion.”
  Dan Russo: “The second we override a signal with our own discretion, we’ve stopped delivering what we promised our clients we would deliver.” (16:48)

• Advisors’ Implementation:
  Advisors use Potomac’s strategies as a sleeve in portfolios—often blending funds for desired risk parameters. Potomac provides support but lets advisors choose what fits their client needs.

4. Communication, Risk, and Transparency

• Education & “Handheld Sale”:
  Potomac’s strong growth (from $500M to over $3B AUM since 2021) is attributed to intense advisor handholding, transparency, and content production.
  "Anytime you willingly choose to look different from the benchmark, you are going to spend a lot of time explaining yourself." (19:39)

• Risk Management:

  • Max drawdown is the primary risk metric.
  • No hard stop-loss numbers; drawdowns are assessed relative to model/system expectations and historical volatilities.
  • Key risk scenarios:
    1. Quick market crashes when fully invested: “A hard and fast move to the downside while we’re invested is going to have an impact.” (28:35)
    2. Slow grind higher led by few stocks (weak breadth): “Breadth is going to show up negatively within our signals and could keep us out of the market.” (28:35–31:13)

• Worst Case Scenarios for the Model:

  • Sudden, deep drawdowns while holding a 1.5–1.6 beta will hit performance before signals can get them out.
  • Market rallies driven narrowly by a handful of stocks may leave the model sidelined.

5. Diversification & Market Environment

• Why Traditional Diversifiers Don’t Measure Up:

  • Treasuries, commodities, 60/40 portfolios, and managed futures all suffer from trade-offs between returns, correlations, and drawdowns.
  • “A 60/40 portfolio runs at about a 0.97 correlation to the S&P.” (21:50)
  • Long-dated bonds: “TLT has a drawdown… of about 45%—an equity-like drawdown for your kind of risk-off diversifying asset.” (23:01)

• Potomac’s Solution:

  • By spending much time in cash, keeping beta flexible, and running lower correlation, they aim to deliver “equity-like returns with drawdown mitigation.” (25:07)

• No Stock Level Bets:

  • Main fund invests at the index level; other funds may use sector/industry ETFs (selected via quantitative trend and momentum scoring), but not individual stocks.
    “If the composite model says you want to be invested, the next question is where do you want to be invested. We use that trend in momentum scoring system, apply it to the sector and industry ETFs.” (31:27)

6. Memorable Quotes & Moments

• “We are big believers in data over feelings. Probability over prediction. These are all taglines you’ll see on our website.”
  — Dan Russo (17:06)

• "The second we override a signal with our own discretion, we've stopped delivering what we promised our clients we would deliver."
  — Dan Russo (16:48)

• "We have this concept of a base system and then trigger systems. And if we think of the base system, think of the base system as Jordan."
  — Dan Russo, using a Chicago Bulls analogy to describe model structure (09:17)

• On advisors explaining tactical approaches to clients:
  "Anytime you willingly choose to look different from the benchmark, you are going to spend a lot of time explaining yourself."
  — Dan Russo (19:39)

• Michael Batnick playfully on market timing expectations:
  "Investors want to have their cake and eat it too. They want a tactical strategy that gets a lot of the upside and doesn't have to deal with a lot of the downside." (06:09)

• When does it not work?
  “A hard and fast move to the downside while we’re invested is going to have an impact.”
  — Dan Russo (28:35)

Important Timestamps

| Timestamp | Segment | |-----------|---------------------------------------------------------| | 03:38 | Why Tactical is Hard: Morningstar Category “Sucks” | | 04:22 | Potomac’s Willingness to Go 100% Cash | | 06:25 | How Quantitative Technical Analysis Drives the Model | | 09:17 | Chicago Bulls Model Analogy | | 11:51 | The Defensive Bull Fund – Outperforming S&P 500 | | 13:44 | Achieving Leverage (1.6 Beta) with Futures/ETFs | | 16:48 | No Discretion Once Signals Are Set | | 17:06 | “Data Over Feelings. Probability Over Prediction.” | | 19:39 | Spurring $3B AUM Growth and Advisor Education | | 21:50 | Weaknesses of Traditional Diversifiers | | 23:01 | Example of TLT Bond Drawdown and Correlations | | 25:07 | Model Delivers 0.5 Beta, Equity-like Returns | | 28:35 | Worst Case: Fast Downturn or Narrow Market Rally | | 31:27 | Use of Sector/Industry ETFs but Not Individual Stocks |

Final Thoughts & Where to Learn More

Dan emphasizes Potomac’s transparency, commitment to systematic process, and their role as a complementary sleeve to advisors’ core portfolios rather than a full replacement. Advisor education and content are ongoing priorities.

For more information:

• Website: potomac.com
• Content: Conquer Risk podcast and YouTube channel

Summary prepared for listeners seeking a deep yet accessible overview of the episode’s content, insights, and actionable ideas.