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- [00:00]
A
Trading is hard. It should be hard. You should try to make it psychologically hard. You should seek out ways that make you uncomfortable. And that's not a popular way of designing a strategy. This whole pursuit of smoothness is totally wrongheaded. You don't want to make anything smooth. It's going to continue to work if it's choppy and bumpy and something other people really don't like to do. The first big turtle trade was Feb heating oil, 1984. And there are numerous people besides me. Numerous of us didn't take the trade at all. And it was the first big outlier trend. Missing trades is a big no, no for a trend follower because inevitably that's going to be the one that's going to have a material impact on your performance. So you just got to go through the experience. The computer is going to tell you let it run, and you're not going to want to let it run as much as the computer tells you you should let it run. That's that human nature, you know, we. We just don't want to let it run.
- [01:00]
B
Hi, Jerry. Welcome back to Excess Returns.
- [01:03]
A
Justin and Jack, thanks for having me. It's a pleasure to see you guys.
- [01:07]
B
It's great to have you on again. We wanted to bring you back to talk about one of your favorite topics, and that is the investing approach that you've spent most of your, or maybe your entire career following. And that is trend following for those who aren't familiar. Wolfs, I think what we want to do with you is sort of start with your origins, the formative days when you were part of the Turtle trading program and what you learned from that experience. And then we can kind of work our way through what trend following is, how it's evolved, how you approach it today, and I think importantly what lessons you've picked up and learned both about the markets and human behavior and how to be successful or at least put the odds of success in your favor when using trend following. So really appreciate you coming on. And we've talked about some of this before with you, but, you know, our audience has grown a lot. Many of the people may not have seen you before. So this is kind of like, you know, hopefully be a nice little, like masterclass in trend following for people that want to just learn more about what Jerry's doing. You can go to a couple of places. You can go to Chesapeake Capital.com and then he also there's a number of each. There's two ETFs out there. I know the one site is. The other site is blueprint IP.com. so I know, Jerry, you've, you know, you've told this story before to us, but I think it'd be good to start with the very beginning. And, you know, I just think it would be great if you could share the early days in the Turtle Trading program and sort of how that materialized for you. And maybe importantly, like, what was the formative lesson that you learned during that experience?
- [02:45]
A
Big question, lot to say about that. So I'd make it brief, but tilt me in a direction if I leave something out that I've said before because there's just so much to talk about, I think. So. 1983, I see an ad in the Wall Street Journal and I'm Richard Dennis, wanting to train people how to trade commodities futures. And I was in accounting, public accounting in Richmond, Virginia. And I wanted to get out of public accounting. So I had other irons in the fire that all revolved around stocks and trading and investments and things like that. So I applied for this job and I. Everyone who applied, a thousand people, applied in 1983, and they sent out a true false desk to everyone who applied. So I took the true false test and I carried it around with me for a while. We finally sent it back in and I got an interview and went to Chicago and got the job. And then we got there. It was about two weeks of training from Richard Dennis, Phil Eckhart, Dale Delutri, from everything about statistics and math, psychology and technical training. And I was just hoping it would be trend following. I wasn't sure I had heard of that same following. I'd read a lot about it. I thought. I really liked it, the objectivity of it. I heard about futures, and I'm thinking, yes, futures, long and short, that's good. And then currencies, commodities. Yes. Even then I was like, yeah, of course. I mean, it's diversification. It's probably a good thing. And so it turned out that I was correct, that it was about trend following. And they taught us everything we needed to know at the time. And then I think one of the things they wanted to get across to us was some of these principles we're teaching you are principles that are going to last for a lifetime, for a long time, basically, a long time. The principles, at least the specifics of the parameters and exactly how to identify trends or get out of trends that can change over time. But certainly the parameters, they have absolutely changed. That's our biggest change we've made over the years. It's Just becoming longer term. And at the time, the turtles were pretty short term trend followers. Very high leverage volatility. I lost 50% in one day once and. But we had made a lot of money. So we were up over 100% or 200% and so we just had kind of a typical bad day, having not seen a bad day in quite a while and then compounding with this massive leverage. So the turtles were trying to shoot for 200% a year and usually achieving that 84 through 87. So that rich talked a lot about trade small, be conservative, preserve capital. But then when you got into it and understood what they really meant was, you know, we're going to reward people for trading large and making lots of money and just keeping it together and trying to stay in the game. And money management, especially in a systematic approach like that, where the leverage is really high, the risk control is very important. Unfortunately we were having to utilize a lot of risk control, which, you know, not, not always an optimal thing to do, but risk. Yeah. So that's, that's pretty much what we did for four years. And then up to four years it was time. They were tired of us. I think they were tired. And Rich had said that he wanted to hire the turtles to see if trading could be taught. Probably. I think there wasn't a big debate that we knew about, about that that's since come out. I think Bill Eckhart was a little skeptical and Rich was not skeptical about teaching people to trade, Especially when the whole idea was we're going to give you the rules, you have to follow the rules. I mean, so anybody can kind of follow the rules. I think what Rich wanted was to have the turtles give their feedback and come up with some new ideas and help make things, make these systems better. Things they had maybe thought about. But I think in that particular environment where there was a lot of competition and people were just really charged with following the rules and doing what each one of us to do and not disappointing him. There wasn't a lot of creativity. So I don't think we really met that goal of his to help out with new ideas. And since then, once we all left, we were forced to come up with our own ideas and stuff. But the politics of that room and that environment, you know, you need to, you needed to kind of hear what they said and what they taught and then figure out what the reality was to some degree. And then. Yeah, so that was a little bit of a challenge for people, I think. Yeah.
- [07:41]
B
Well, I would imagine part of. If you had come up with a new rule or a new methodology and it went the other way on you, meaning it went the wrong way. That probably wouldn't have been looked at as a positive because it was like a new thing you were introducing to what was a system that I think, you know, generally worked. Maybe it didn't work all the time, but it put the odds in your favor. So I could see how that would be a, maybe a tough environment to be super creative in. But to that point, and you kind of hit on this just a minute ago, like what has been it, it sounds like one of the things is that trend following or the way that it's deployed, what's changed, how it's evolved is, you know, maybe these longer term trend indicators versus when you guys first started, maybe it was, it was shorter. And I'm just curious if that's the case. And you can talk about anything else that has sort of evolved over the years too. But like why would that, what would, in your mind, like why would, why would some of that be like, what would be driving, what would be the driving force of that kind of thing?
- [08:39]
A
That's a good question. We definitely started seeing some deterioration and shorter term signals in the late 90s and we started doing some research into longer term holding periods. Holding things for six months to a year on average, you know, so and the good thing about that was that as the shorter term things were getting worse and worse. We found that the longer term stuff had always worked and it probably always worked better actually. So it wasn't like we were scrambling and trying to keep above water. We, we sort of stumbled onto other ideas that were equally as good, if not better. I think just the choppiness of the markets, the proliferation of computers, a lot of trend followers, short term trading from people who know a lot about short term trading, which would not be trend following. Some of the really famous groups or smart people who seem to spend a lot of time trying to make money every day. That type of strategy probably played with our, the short term systems. So you just put a trade on and maybe the market has a trend, but you just keep getting chopped up and you get in and out, in and out. So you have to stop doing that and figure out, you know, the longer term approach. And I think there's evidence that it's still mandatory to keep testing, checking the systems, checking the parameters and make sure you're long term enough. And of course the problem is, is that the drawdowns are bigger. The drawdowns in the open trade profits you know, they're bigger, you have a big profit in coffee or gold and the trading stop is far away. And it took that, let's say to get the big profit in gold. That's kind of the problem. In order to get the big movement to 4,000, you don't want to have your trailing exit too close to the market. I think gold's been fairly easy trends but some of them are not. Like Bitcoin maybe or some of the others, coffee, cocoa. But look, we just pay attention to what the data says. We had good training on backtesting. What was important about backtesting, how to do the backtest, what to be afraid of in the back test. Obviously overfitting and optimization and things like that. And making sure you had a large sample size of trades to look at that was really important. So that's kind of suffers a bit when you do more long term trading. Now your sample size is starting to deteriorate. So you know, it's, it's a tough game, tough business. But it was never a situation where we felt like we're told that we're giving you this holy grail, you're done learning, go off and do your make money for the rest of your life. It was always these are the good basics and the basics of the entries and the exits and how they work and how you should look at the markets and do your back test and money management. We really haven't changed that very much at all. And so I think those things are pretty good shape for a long period of time. But yeah, everything else is up for review frequently.
- [11:44]
B
One of the, one of the things that you've talked about or said is this idea that where we are at war with ourselves and the psychological aspects, you know, are oftentimes harder than the rules, especially when something's going against you. And the war we're at war with ourselves goes far beyond investing. But in investing it really comes to the surface because it's like we have all these biases and we have all these emotions and we have all these feelings and you know, we're thinking in, you know, emotions can take control of our decision making a systematic approach, you try to remove that. But we're still human and we still have these sort of emotions. So what are the things you think you've learned in your career to help with managing the psychological aspects of, of maybe trying to override a system or second guess a system or just make it through sort of tough periods when the system isn't working.
- [12:41]
A
Right. So I was a Slow starter, you know, leaving the turtle class. You know they're just saying like just do the trades, do the trades. You've got to do the trades number one and follow the rules. Don't get out before your exit. And they were short term exit so. So I was having a hard time doing that. I was having a hard time putting the trade on, didn't want to take a loss and then having a hard time staying in the trade. And just the first big turtle trade was Feb heating oil 1984 and there are numerous people besides me, numerous of us didn't take the trade at all. And it was the first big outlier trend February. So what are we doing? We just so you know, for some people the hard headed and they're fearful a bit and they just need to suffer and suffering and experience and making the mistakes. And I have seen the consequences of not following the rules. Missing trades. Missing trades is a big no no for a trend follower because inevitably that's going to be the one that's going to have a material impact on your performance. So you just got to go through the experience. And thankfully I never really made a bunch of errors that actually worked in my favor. So I never was saying oh well maybe I have some discretionary talent. And every time I didn't follow the rules it was kind of a really cost me money. So it just takes time for people to learn it that way through experience I believe. But nowadays I think it's harder because you know, everything's computerized and automated and now if I was sitting in front of a quote machine, I used to sit in front of a quote machine and I had the rules in my head and I would do the trades. And so we had a big trade in coffee and I ended up getting out of the coffee trade at the very high, you know, which is a not something you're supposed to do with trend following. And everyone would say, you know, that was a mistake. Now smart people write that into the code. I don't want to see these trades sell off, I don't want to have this drawdown. So I'm going to put something in my code that gets out of the trade because of volatility or correlation but basically it's at the highs, you know, and so maybe it's a little pig traffic, maybe it's a way to smooth things out but nonetheless. And so they're following the rules so there's nothing wrong with that. And so that's something I try to rebel against as well. Like uh, let's Be real true trend followers. Let the profits run. We can't really. We can leave a lot of money on the table if we take profits on the way up and not wait for the market to turn around. And I think we should treat the volatility of, of a monster trade that's making us lots of money a little bit different than the small losses we're taking. The small losses we take, they can add up. We need to be concerned about those little small losses. They're eating into our capital. We have a 40% win rate if we're lucky, so that we really need to concentrate on that, on preserving our capital and getting that win rate up to the 40s and having trailing stop the stop loss not too close. So we're not getting whipsawed. But if it's a profitable trade making all kinds of money, I think that we were sort of taught, you know, the computer is going to tell you let it run and you're not going to want to let it run as much as the computer tells you you should let it run. That's that human nature, you know, we, we just don't want to let it run. And so I think that's what's happened to CTAs a lot. They're not letting profits run the way that we do and other. Few other people. But it's. I think it's become more of a shark ratio game now on the psychology.
- [16:30]
C
Point, that's what the true false test was about, right. For Turtle traders, it was not about anything about investing knowledge. It was about you as a person and whether you're built, you know, you have the right mentality to be a trader. Is that right?
- [16:40]
A
A lot of it was that, yeah, you definitely. It takes money to make money, true or false, things like that.
- [16:49]
C
I can guarantee you I would have gotten that wrong.
- [16:51]
A
Yeah, some of them were difficult. You know, I think you just had to have a mentality of what are they shooting for here? And I think they wanted to hire people who did really well on the test and some people who did poorly on the test but had a, you know, a resume. Interesting resume, let's say. But there were some questions on there about trend and technical and yeah, psychological. I can't really think remember too many of the tests. I haven't seen a complete copy of the test in a long time. I'm afraid it might be lost. I know there's something.
- [17:25]
C
Hopefully it's out there somewhere. I assume a lot of it might still apply today in terms of what's created by the way, just for the record, before we move on the it takes money to make money is probably false. I would have said true, but I assume it's probably the correct answer was false. Correct.
- [17:38]
A
I think it's false. I think Rich thought it was false. You know, you don't want to have a mentality of what did you accomplish in life? Well, I didn't accomplish anything or I didn't accomplish very much because you know it takes money to make money. I never had money. I never had a lot of money. So I think that contrarian point of view, you can't go broke taking profits, things like that. I think Rich at one point said really what he tried to do, he was really would have fun by just anytime he heard a trading maxim that everyone knew was true, he would try to prove it incorrect. And I think he had a pretty good track record of being able to do that. So definitely a contrarian mindset. Not wanting people to like your trades, not wanting positive feedback from other people, being nervous if people agreed with your positions. Don't pay attention to the fundamentals. Fade the fundamentals. The original turtle trading was a combination of trend following rules and money management and this kind of contrary opinion where you know, if you don't. And it wasn't necessarily the news or the head of the news, not, not necessarily the fundamentals but kind of the news. If you saw something you're long soybeans and you see an article about soybeans in New York Times that's so, so the Chicago paper that's getting a little bit better. You get into a taxi and this and the driver says something about his soybean position. Yeah, you should get right out and sell your soybeans. So Rich wanted us to really utilize that as well that contrary opinion. But once again just environment of the room did not support that. It's hard to, it's hard for me to explain why we were I think afraid or. Yeah, just I don't know. I don't know why we didn't go for that. But we were all really, really happy to only pay attention to the objective rules.
- [19:37]
B
So, so just real quick I just chat GPT I'm gonna after this interviews over I'm going to send you a list of questions that chat GPT just spit out. Jerry, take a look at those and if those look like they're along the lines we'll throw them in the description and people can have fun and like do their own. Yeah, okay. Yeah.
- [19:57]
A
Oh cool.
- [19:58]
C
Good idea. So do you think that could Be. Do you think that could be done again today? I mean, it's, it's a very unique. I mean, trend following was more at its early, earlier stages. I mean, you guys produced. They basically trained you guys to produce incredible returns with that system. Like if you were starting that today, like Jerry Parker's Turtle trading system, do you, do you think it could be done again? Or do you think that was a very unique time and a very unique place that allowed that to happen?
- [20:23]
A
Well, I think it can be done, probably. Sure, why not? But Rich and Bill were very unique people. They were genius people. And that's part of the story that I think gets lost is they were really genius. I mean, we were just blown away how smart they were. We thought we were smart. But when you left meetings with them, they were nice people too. The nicest, kindest, gentlest people. They would put up with any crap. Some people would try to give them crap about why they lost money. You know, have sympathy on me. They were having that. They were really smart people and it was all embedded way. So computer research and back testing. There's some traders out there, for some reason, they know who they are. They travel bad mouth Rich to a degree by just sort of saying, well, you know, turtles, that was some pit trader, pit trader. So, you know. But when we got into trading, we did computer research. Well, it's true. Rich was a pit trader at one point. Then they moved upstairs. And Bill was a math geniuses. Bill was a math genius. And they had for the time in the early 80s, mid-80s, they had really good computer research. And so I think nowadays you probably just hire some people, some fonts and maybe give them some basics and force them to give you back more than the turtles gave Rich. And that's sort of what, as I said, Rich kind of wanted. But, you know, I'll give you guys the basics on trend or whatever, money management. And I'm probably, and this is probably what pod shops do or big hedge funds do with their new hires and say, look, get busy on your computer because, you know, obviously you can code or we wouldn't have hired you and come up with some new ideas and trend or whatever arbitrage or whatever you want to work on. But. But probably I don't see a real reason to sort of give people a complete package of how to trade, give them the money to trade and tell them to start trading when you could just automate it today and be perfectly reasonable to demand that whoever you hired gave you as much or more in return so that's the way I would look at it. I have had people call me up or email me a lot and sort of try to shame me, you know, like, well, you had this great experience and you owe it to the rest of us to have another total program. And I meet with people and I tell them how to train these young people. You know, I'll tell them how to trade and this is how you do it. And one entry, one exit and a stop loss and enjoy your drawdowns. And they'll be like, no, no, I'm not going to do that. We know that we could do much better than that. We don't abide by any of your ideas and any of the fears that you have of over optimization. No. So that's what I hear from most young people these days. Whereas when we were with Rich man, we had, we were blessed. We had no clue and we knew we didn't have a clue. And so that put us right where we needed to be understanding to listen up and try to do exactly what they were telling us.
- [23:34]
C
So I want to dig into the trend following strategy and I want to start at the top level because there's so many assets out there and you know, you're going to, obviously with trend following you're going to go long and short those assets. But I'm wondering, how do you think about the decision of what goes into the universe that I'm trading? I mean, is it really just keep it as broad as possible so you have as many things to choose from or is it more complicated than that?
- [23:53]
A
I think that's a good way to start. I'm a fan of that. I know it sounds, I should have something smarter to say, but I like that idea. I push that to the limit with stocks, single stocks in Bitcoin, Ethereum, Solana. I'm hoping to push it more with some of these other ETFs and futures that are coming out with the coins and stuff. So hopefully we'll get a fifth sector here pretty soon, meaningful sector with the coins and the crypto stuff. But we've, you know, obviously made good money in, in those markets since they started a few years ago. Another thing to throw in there though would be liquidity. Of course, you have to have sufficient liquidity and then build that portfolio without, without looking at historical performance. So build your portfolio strictly based upon a minimum requirement for liquidity and then diversification. So I used to just put together markets and just pretend that they're all long, all the time and see what kind of diversification I would get in there and then I'd build my portfolio. Then I'd say, oh yeah, let's run the back test to see how it looks. Yeah, it looks good. But I would never try to optimize the portfolio because the past is going to look different than the future. And I was really interested in the average win, the average loss, win, loss ratio, the winning percentage and these trade stats. That was my main concern. And this is, you know, and how, it's how the systems are behaving over all those markets on average. But. And then we trade, one of our funds trades, 400 markets, it's 200 stocks. The, the rest is in currencies, commodities and interest rates, futures and ETFs. And you know, we, we trade all those markets and we haven't really made sure that they're, you know, the optimal asset class in the past or. But we just believe that going forward, you know, all the trades are going to probably look very similar. The average trade or the average win, the average loss look pretty similar to what we've seen historically. And try not to get too caught up on what the past has looked like. But I definitely am a big fan of, you know, trading a lot of stocks and trying to get some commodity exposure in the stocks as well. A lot of the stocks we trade are highly correlated to commodities that. Some of them where you won't have any way of getting exposure to that unless it's through a stock or something similar like uranium, lithium, marijuana and different things like that. So I think that in my opinion, we should just trade as many markets as possible. It's really the most robust way to spread out the risk. Spread out, make it less bumpy. If you're not going to have, if you're not going to do anything to. If you're going to follow the system that could allow some of these big trends to have violent reversals, then it's probably best to trade all the markets as small as possible and minimize that, you know, the headache of having those drawdowns.
- [27:18]
C
So you will look at a certain asset class and say, well, oh, this asset class is better for trend following. So like, for instance, commodity, it works better with commodities. So I'm going to weight that more heavily in my portfolio than bonds. You kind of work off the assumption that it should work because the principles are true. It should work everywhere. Right. Is that, is that kind of the way you think about it?
- [27:33]
A
Oh, yeah. I would never optimize a sector or market, you know, and you can kind of prove that that doesn't work by, you know, doing a looking at, looking at corn over the past, you know, the first 10 years of the data and then see if that same system that was best for corn then is, is best over the next 10 years. And so it probably won't be. So yeah, one of the early ideas was you need to get a sufficient sample size. The only way to do that is print all the markets the same, the longs and the shorts the same. And whatever the average win and average loss, average trade, whatever these trade stats are, you're going to get the most knowledge from looking at whatever the average is of all the different markets. So yeah, that's. Sample size was a big thing. Big, huge thing. As far as making sure. You could be. You could rely upon your results and.
- [28:31]
C
Do the underlying signals look different? So do you have a certain system for commodities and a certain system for stocks, or is it basically very similar across everything?
- [28:39]
A
It's exactly the same across everything.
- [28:42]
C
And how do you think about risk management? Because it would be interesting. I was thinking back and I don't know, was this a couple years ago? When did the COCO thing happen? Was that a couple years ago?
- [28:51]
A
Yeah, a couple years ago.
- [28:53]
C
So that was a situation where something was running up extraordinarily. So I assume as that's happening, it's becoming a bigger and bigger weight in your portfolio. This sort of gets back to what we talked about earlier. But how do you think about when is too much? Or do you just wait until the trend reverses and you don't make any changes until the trend reverses?
- [29:09]
A
The latter. But once again, in the fund that trades 400 markets or 150, whatever, each position is kind of irrelevant. Right. And so you need to have 5 to 10% of those trades really per year. Have a big move, a big outlier move in order to, you know, make your 15% that you're trying to make. So another thing that we do, I think you can file this under risk management. Well, you know, stop losses, keeping losses small. Diversification is a big deal. I have lots of markets. Shorts, you know, is really important to take the shorts even though they don't. They're not nearly as profitable as the longs. Another thing we do I think is sort of unique is we don't include the open trade profits when we calculate our assets under management in order to size a trade. So COCO is doing its thing. It's really volatile, it's dominating the returns. But this cocoa profit is up and down and it was pretty huge. One day now it's not as huge. And so we're not letting that affect the future trades. The trades we're doing now, the trades we're just putting on, we're sort of saying, look, we're not going to, we're going to discount that quite a bit and not allow these, because these profits in trend following the profits can turn into losses pretty quickly. And now you've built up, you know, you're up 30% because of cocoa. And now all your trades, the recent trades, they're 30% higher. And now the cocoa profit starts going away and you're like, what do I do? And I got to start getting rid of lots of things now. So we try not to do that. So I think if you're doing things like that and looking at your total AUM every day and resizing and rebalancing or using that AUM to size the new positions, I think that that's not something that I would do. And if you're doing that, yeah, hell yeah, you better be start getting out of some of these trades. When volume kicks up or losses kick up or something kicks up, you know, you better start doing something because I think you kind of made a mistake doing that. Who am I to say these people make mistakes? Right. But then, so that mistake means you got to do something else that's kind of suboptimal. So it's, you know, this way we trade. Some of these little minor details get left out of the description sometimes and does sound like we're kind of crazy by letting Coco have such a big run and not take some of the position off. But we're kind of very focused. And, you know, even though Rich allowed us to trade with extreme leverage and shooting for 200% a year, he did talk a lot about how important it was to stay in the game and to preserve your capital. And they did have some rules that were the best rules ever for doing that. And so, yeah, that's very important.
- [32:17]
C
Can you talk about, I pressure investors earlier. Can you talk about the benefits of this for an investor? Because a lot of our investors will be sitting in something like a 6040 portfolio. They'll have their stocks and their bonds. And you know, I looked at this and I've used this full disclosure, I've used these type of strategies for clients. And when you look at this in the context of a 6040 portfolio, it's very hard to argue against adding it in because of what it does. So can you talk a little bit about the return profile of this and how it can enhance the 6040 portfolio?
- [32:44]
A
Well I think it does have a tendency to do really well on its own And I think 2021 and 2022 or three of my best years ever. So it does still have the ability, it can go through some rough periods where there's a lack of trends and when people write the papers of what happened during these periods. I know AQR wrote a paper years ago about what happened to trend following and basically it's the same old story, just not enough long term trends. I don't think we were doing anything wrong. It was just, you know we're, we're, we're, we have a lot of diversification and but a lot of the trades are really small and don't go anywhere and then we need to have 5 to 10% of the trades each year need to really be home runs. So if we don't get those that's kind of a trouble. But look, we're coming into the portfolio with currencies, commodities, stocks and bonds, crypto, liquid safe crypto longs and shorts. So yeah, we're different from the get go and everything is kind of, you know, sized. We're not overtrading the stocks necessarily. So it's going to offer some diversification. It can make and lose money at different times. It has had some good luck and I think it's kind of luck, you know, you can't really bank on this crisis alpha that this, the CTA trend following will make money when your stocks sell off. It, it has a tendency to do that sometimes but I think the last time it really did that was 2008 but recently it was abject failure with these. One thing that's not good with trend following is the dramatic violent sell offs and then V bottom it hits the bottom and rallies like crazy like Covid or when we ended up doing pretty well in Covid due to commodity trends. But you know this, the more recent stock sell offs have been short term and the CTA's lost money for you if they were in your portfolio. So I think overall though it should, in my opinion people should realize, I think they do, some of them do that it's really important to have a trailing stop and a stop loss on all of your markets, all the markets that you trade and for me it's just non negotiable. I'm not going to put a trade on or make an investment where I can't get out the small loss and have a systematic approach to enter and exit with a profit. And if you're just going to buy and hold something, you know, you will see that minus 50, 60%. I suppose we've seen it. And so you deserve people who buy and hold stocks, they deserve to have these outsized gains sometimes because of what's possible. Where the CTAs are, may not have as good a returns as stocks sometimes, but they're really approaching the markets in a much more risk, risk conscious way to preserve capital. And yeah, sometimes the trend is a failure when the best asset class goes straight up. And even with our stocks, you know, we are buying stocks, some days we're getting out of stocks because a certain stock went down and the S and P just keeps going straight up. So there's no way trend following can really do well in any market that's going straight up. It's going to kind of underperform until you have this sort of big drawdown.
- [36:13]
C
And I think you've argued, correct me if I'm wrong about this, but I think you've argued if we didn't live in a world where everybody was fixated on benchmarks like the 6040 portfolio, like this type of strategy, maybe better investment strategies as a standalone strategy than something like a 6040 portfolio. If you actually looked at the risk and return metrics, I think, I think you said that in the past, isn't that right?
- [36:30]
A
Yeah, yeah. Oh yeah. I mean if you look at all the data, not just recent data, you know, using a trend approach with all the markets in the sectors, currencies, commodities, stocks, bonds, there's no way for a CTA to have a 10% return like stocks and a 50 plus percent drawdown. It's just not possible because we, we may not always have the 10% return, but we won't have a drawdown that, you know, at that level where the average return is that low. So you got your shorts and you got your systematic approach and yeah, the, the risk is way less and but I think it is, you know, it is time for CTAs to. We're all struggling if we don't make money more frequently. So we're always thinking about that. How can we not improve the Sharp? I don't really focus on Sharp so much. I don't think our strategy is appropriately, it's appropriate to use Sharp to measure it. But I do think one thing that clients would really love would be more consistency. Make money almost every year. And I think that would go a long ways to get people to stop fixating on their line items, issues they have with trend and underperformance with trend. I think that, I think trading more markets, trading stocks, trend following stocks is, is probably the way to go in that regard.
- [38:01]
C
This is a selfish question because I was just curious about it because this is something I, that I dealt with a lot when we started using trend following like for our own clients is if you do have clients who are going to stay in the 6040 portfolio but just like because they're benchmark to that and they're going to add something like this. Is it better to have a managed futures type strategy that looks at all assets or is it better to have one where you exclude stocks and bonds? With the idea being if stocks and bonds are going down, I don't want them also going down inside of my managed futures strategy. Do you have any thoughts on that?
- [38:33]
A
Yes, thoughts on that. I think Quantico wrote a paper on that recently and I think their paper sort of said it's in everybody's best interest if the CTAs trade stocks, trade stock indices, probably what they meant by it. I don't think there's many CTA trend following CTAs who have single stocks in their portfolio, but the indices I think it's important because the CTAs in order for them to not get kicked out of the portfolio. You know this clients will look at the portfolio and if you're not trading stocks which has sort of been one of the best trending sectors over the past few years, then the performance is going to be even worse. So I don't think it helps to take the stocks out in order to encourage people to leave them in the portfolio. And the sprint following of stocks looks different than buy and hold. Until we get a big sell off. It's underperformed the buy and hold. But one of these days people will be very happy. Know we were short stocks. The S and p made a 200 day low. That's kind of a long term trend, you know, signal 200 day low, not a 200 day moving average. 200 day low which kind of corresponds to a 400 day moving average. The S&P hit a 200 day low around January 2008. January. So all of that carnage fully could be avoided. All of 2008, all of that big sell off. And so I think it really helps to have all those markets in there and people should be telling their CPAs go out and trade more of these stocks and trade more of these alternative commodities, South Africa and Brazil commodities and things like that. Go find some more diversification because it really is an asset class and a strategy that doesn't look like any other.
- [40:33]
C
Do you think these things are becoming much more available to your average person now through ETFs? And we're going to talk about your ETFs in a little while. But do you ever think it's an interesting thing for me because I think on one hand, like the math says this should be parting most people's portfolio, but obviously at this point it's not. Do you think like as more ETFs come out, as this becomes more available to average investors, do you think we're going to see many more people like will we get to a world where most people have something like this in your portfolio or do you think it's just too tough behaviorally, maybe against the 60, 40, so it'll be hard to do that?
- [41:04]
A
No, I think people will do it. I think it depends upon performance and relative performance and absolute performance relative to the S and P. Yeah, I think it will. I think obviously having Fidelity and blackrock, I don't know Vanguard, I know those first two, they've come out with trend following programs. I will have to wait and see how they perform and see how true to the trend following they really are. But I think they'll probably breathe some life into legitimacy of the space. BlackRock. I haven't checked to see how well they're doing. Their fun is performing, but I ignore fidelity. But I think that that's probably a good sign for the trend following CTAs. You know, some of the trend, you know, some of the typical CTA names are getting into the ETF trend following as well. Maybe with a kind of a stripped down version of you know, maybe 20, 30, 40 markets. Trend following only. So we're the only one out there with 400 markets trying to do this in an ETF. It's kind of a struggle. Yeah.
- [42:18]
C
And it's interesting because as these things and I would think it's the wrong thing for people to do, but people always look at short term performance. So I would think as a bigger track record develops, as these things are out there and people see them and people see how they perform, I would assume over time you'll get adoption because people don't want to hear about the history of it. They want to see what is the thing actually done in the real world. So I assume as these get more in the real world, you'll probably see more adoption in it.
- [42:43]
A
Right? I mean every day I read about these 2x and 3x ETFs so there seem to be a lot of appetite for crazy behavior. Maybe that's the problem is no one has a really high Vol managed futures trend following program and we're kind of stuck in an area where it's just too low volume so they get bored with it. But yeah, maybe that's, that's should be. Maybe that's our next fund. Something that's back in the Turtle days, not 200% but something that really people can put on their radar and say hey, when this thing, maybe when it looks like these guys are turning around they can pop pretty quickly on 40, 50% return. I don't know.
- [43:23]
C
You touched on it a little bit. But can you explain your two ETFs and sort of the different strategies that your two ETFs run?
- [43:29]
A
Well the one is like I said, 400 markets, 200 stocks. So it's really a 250% equities long and short individual equities that don't look like the S and P. Once again we went out there and we created this portfolio with a lot of commodity exposure but really diversified as well. And it has a fair amount of shorts on just all. You know every position in every market is based upon the trend. And just so happens that we're about 60% long stocks of. Of them, of our whole portfolio. About 60% of them are long and about 25% are short. So we, you know even in this bull market there are some stocks in downtrends and then the other fund is 25% stocks. So it's more of a typical managed futures. A lot of commodities currencies, interest rates and single stocks. We don't trade indices. The indices don't give you enough of a outlier potential and we just would miss all of the diversification benefits of entering and exiting and sizing the positions individually by each individual stock versus an index. CTAs would never trade the dollar index only or commodity index. I don't know why they trade these indices, these stock indices, but we're big fans of not trading them and expressing our stock views on the individual markets.
- [45:08]
B
What about you had mentioned before Bitcoin and Ethereum and some of these crypto assets, but it doesn't sound like or maybe maybe they are because some of these now at least Bitcoin now trades in an etf. But how are you sort of getting exposure to those asset classes and or could you see yourself working some of those ETFs in to the into these other ETF strategies that you run because you can buy ETFs within an ETF.
- [45:36]
A
Initially we started out with Bitcoin and Ethereum in the futures markets.
- [45:39]
B
Okay.
- [45:40]
A
And then we, then we switch to BlackRock ETFs and maybe in Solana you're trading as a future as well. So a lot of it just depends upon liquidity and the cost and the size of the, of the contracts. The futures contracts are super big and or the micros are really too small. And so it's really, I think we're not, we're having a difficult time getting back to the futures. We may do that one of these days. But it's kind of funny because I think when the bitcoin futures came out, all of these guys in the hedge fund world kind of my age are in their 50s and 60s, had no clue what bitcoin was. It's dangerous. You can get something stolen your wallet or something. But when futures comes out they're like oh hell yeah. Because I know all about futures. And so I think it was a really appealing to be able to trade bitcoin with the futures. And that was wonderful. But we'll probably end up going back to the futures one of these days and I'm really looking forward to. But you know, some of these, I just saw that there was another ETF coming out soon and the fees were going to be 2020 bips, so that's pretty good. I feel, I feel okay putting an ETF in our, in our ETF at that price. Some of them are too expensive. Yeah.
- [47:11]
B
When the futures, when the CTAs were like okay, 60% annualized returns. How do I get my hands on this thing? Regardless if the wallet can be stolen over here I got my futures contracts, they're safe over here. So I'm not going to worry about it.
- [47:23]
A
It's the first time ever, probably anybody, a whole group of people preferred futures over cash. I thought that was really funny. So big fans of those things. Hey look, they're liquid and they're diversifying. So that meets the R2 test. And I don't care about anything else. I mean volatile. We CTA size their positions inverse to the volatility. So our bitcoin positions are relatively tiny because it's so volatile. So it's perfect for what we do and should be embraced by everyone.
- [48:02]
B
What are you seeing like right now in terms of where some of the strongest trends are? Like when I and you had mentioned gold earlier, that seems I guess to be an easy one. I mean gold is like something at its best performance in 40 years or something like that. And then international markets are obviously doing very well. You have a lot of commodities like gold miners and stuff are ripping. But overall, like since the April low, like a lot of thing risk assets are up. So what, what areas of the market look strongest? And then I'm just curious, you know, if this is an unfair question, you don't have to answer it, so don't worry, it's okay. But like, does that, does that give you any. I mean you've seen a lot of different markets. So when you have a market like this, like you're seeing with this type of strength across a lot of different asset classes. If I'm categorizing this market correctly, like what do you, what, what does that make you sort of think about the overall market? Some people are like, this market's very fragile. Valuations are extended. We're on the verge of, you know, turning over. Other people are like, you know, the strength is gonna. So I'm just wondering if you have any sort of sixth sense on that.
- [49:15]
A
I have some sixth sense on some things, but probably not the stock market I wouldn't discount. I mean, you know, we obviously don't. Our positions are not impacted by valuations. I don't think too many people think that valuations are a good technique. You can leave a lot of money on the table if you don't participate in these trends that should not have existed. So we just want to go ahead and participate in them. I think. Yeah, easy, you're right. Gold, Gold and coffee and cocoa. They're in silver. I think the, I think they're, they're old news, but I think. Let's look at. There's only a couple things happening now. I think the copper, aluminum, zinc, palladium, it looks pretty new. Trends emerging maybe. What I like about those markets is the volatilities were pretty low. And so I think when the volatilities get low and you haven't had trends in a while, the way Rich would told it taught us, he would say like, you know, people just get tired of the market, they're not interested in it. And so we need to get ready and be ready. And the expectation in that trade is increasing because of the choppiness and the lack of movement and the low volume. Not only plus the whole idea that we're going to size inversely to the volume, so we're going to have a bigger position on if the trends, you know, if we do get a signal as long with that volume being pretty low. So I, I Check the volatilities in the markets a lot and you're just seeing some like the energy markets. Crude's not strong, but I think those base metals and palladium, they look pretty good. I have some sixth sense about the currencies. I have no faith in short dollar. We're all long the currencies in short the dollar. I don't have any faith in that trade. The market doesn't want to go up, wants the dollar to go up and not have the currencies go up. But so I think that could be something there as a dollar reversal. We keep hearing this over and over. You know, the dollar's gone down more this year than any the first X amount of months than any other year or something like that. And so I just don't see the market's heart is not in it. I have no idea what's happening in interest rates, but the volatility is there a low as well. I'm ready on either side. I think I'm long sum and short some and flat sum. So ready and waiting for the interest rates to do something as well. Those two sectors have just been the reason, you know, we just have it. We just keep getting false breakouts and flips on the currencies and the interest rates for so long now. And CTAs traditionally don't have a way to say ignore those trend signals in some of these markets and concentrate on some other markets. They just continue to take the signals. That's what we do and I think that's why the performance has been down. Every time we see something strong or weak happening in interest rates, we go for it and nothing happens.
- [52:19]
B
I wanted to ask you about, have you thought about or are you incorporating any type of AI into any of these strategies at all or. No.
- [52:32]
A
Well, no AI into the strategies. It's just trend. And we use AI in the office for different projects looking up stocks and companies, what's going on with certain companies that we may want to add. Then also to do research. And we have used it to do research. Like people were telling me, yeah, I'm using AI to write Python code and things like that. And I was like, okay. And so then one day I said, well, I'm just going to tell AI to do the back test, I don't want the code, just do it for me. And I was having some fun with that. It was doing a pretty good job of I just give it the prices and tell it what to do. And it knows me too. It knows me and it knows what I want and it's a pretty good guesser and it's very intuitive. So I think that is really just hopefully just the beginning because it can disappoint as well.
- [53:38]
B
One of the things that you said Richard Dennis taught you was the internal truths about trend following in the markets. And so what would you say if you were to try to capture those succinctly, what would you say those would be?
- [53:55]
A
Well, I think, you know, trading is hard. It's should be hard. You should try to make it psychologically hard. You should seek out ways that make you uncomfortable. I mean, that's not a popular way of designing a strategy. You want to kind of make it to where you feel good about it and you like it so you maybe then you'll do it. I still stick by what Rich said is like, do the hard thing, do the right thing. It's probably better to find strategies that are counterintuitive and not things that make you feel good, like giving back profits. Profits turn into losses, like big profits turn into small profits. Yeah. So I think that sort of, that whole idea of creating is not, it's taking years off your life. It's not adding, you know, the money is nice if you're making money, but you really should seek out psychologically difficult and hard things to do and let that guide your research and put yourself in a situation where your systems may not deteriorate as much over time. If you're really, you know, having wider, wider exit stops, you know, that's no fun. And I think we try to maximize the pain involved, but it usually just revolves around, we had a really nice profit, really large profit. It's a little bit smaller now. I think we should be able to live with that. I mean, come on. I think we don't want to try to make it smooth. I think this whole pursuit of smoothness is totally wrong headed. You don't want to make anything smooth. It's going to continue to work if it's choppy and bumpy and something that other people really don't like to do.
- [55:42]
B
I was hoping the bird were going to make it through the full episode with us, but they probably got sick of our questions here and jetted.
- [55:50]
A
So.
- [55:52]
B
But. Well, thank you very much, Jerry. We really appreciate it. We, we like to ask all of our guests sort of a standard closing question. You've already answered one of those for us, so. But we do have another one and you can go anywhere you want with it. And, and that is, what is the one thing you believe about investing that the major the majority of your peers.
- [56:08]
A
Would disagree with you with I'm really anti Sharpe ratio. I think it's only right to be anti Sharpe ratio when you're the distribution of your tradings is non normal and you're going to make money from 5 to 10% of your trades and they're going to be huge outlier trades. We're really big into diversification but you should not take us that seriously about diversification. We pretend that we're really big into diversification. When I trade crude West Texas and Brit and I trade London copper and New York copper and sometimes the differences between those are zero. However, the philosophy is yes, we want to spread it out, we want to have lots of different markets but we're really trying to find is those outlier trades and sometimes New York copper will trend and make a lot of money and LME copper won't. And so you need to not have the optimal diversified portfolio and trade markets that have them in your portfolio that are not materially different 90% of the time. And I think that's another thing too, that heating oil trade I was telling you about in Fab 84 heating oil. January didn't do anything. March didn't do anything. It was only February heating oil. So there in the lesson in the markets is that diversification is great. But look, the market that you're underweighting or you're assuming that you don't need to trade or underweight because it's correlated with other markets that can have a huge trend and you do not want to miss that it has a different name. So it's not the same thing. And I think yeah, the whole diversification thing, that's a better answer than Sharp. I like that one a little bit better. Trade markets even though they're all the markets, as many as you can and ones that are sort of correlated because you never know, something could happen to one of those if you're trying to find the outlier and let those profits run.
- [58:12]
B
That's the great thing about these podcasts is we can let the trend run as well to whatever answer you think is best. Thank you very much, Jerry. We always appreciate your thoughts and insights. What I value and appreciate is sort of the consistency and discipline with what you believe in and the way that you've invested for a very long period of time. So thank you for joining us today. We appreciate it.
- [58:34]
A
Thank you. Thanks for having me.
- [58:35]
B
Thank you for tuning into this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess Returns Network at excessreturnspod. Com. If you have any feedback or questions, you can contact us at excessreturnspod. @gmail.com.
- [58:54]
C
No information on this podcast should be construed as investment advice.
- [58:58]
A
Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.