Michael excerpts a presentation from Cliff Asness. Asness is rigidly focused on the systematic side of the trading equation. Don’t let the idea of something being systematic scare you into thinking complication alone. Systematic means you follow rules. Asness has models, rules, and mechanisms he automates and executes. That’s smart. We can learn from that thinking.
In this episode of Trend Following Radio:
Black box investing
Quants vs High frequency trading
Value based trading
The dirty words of finance
“The hedge fund manager has to use what I call the dirty words of finance: Leverage, derivatives, and shorting.” – Cliff Asness
While most modelers pegged Clinton’s chances at greater than 90% (in some cases 99%), Silver had Trump as a 35.2% chance few days before the election. That was pretty darn good handicapping.
You are confusing prediction with handicapping, which is surprising given how much you have talked about poker and probabilities and black swans. If I were grading Nate Silver, I would give him an A+, because that is the grade he earned. I even heard him talk about the possibility of systemic failure in polling and got ridiculed.
What’s the point of his kind of political analysis? The usefulness? There is none. The vast majority of people (who know of him) think he has some predictive up or down power. That’s what he wants (likes), even if not accurate. Then people in the weeds can show up to say “oh no you missed his point, it’s his great handicapping skill.” Yeah, I see how clever this mathturbation is.
Mark Rzepczynski is the CEO of AMPHI Capital Management and has a deep knowledge of trading, especially trend following trading.
Simplicity beats complexity every time. Unfortunately, people crave more complex. With trend following, traders keep it simple. They just want to get the direction of the trade right. Trend followers don’t care about what the price will be or how far it will go, they just go back to the basics and see what way the trend is going, up or down.
The ability to simply follow the math has always been undervalued. Risk management is about the math of selling losers and hanging onto winners. It isn’t hard math to do, but this is what separates successful managers from losing ones. Successful managers build a portfolio, follow the trends and execute trades properly.
Harry Markowitz said, “If I would have created CAPM around semi variance no one would have understood the math and I would not have won the Nobel Prize.” Mark breaks this quote from Markowitz apart. He dives into good volatility vs bad volatility.
Fake news has been the premise of the 2017 presidential election. But is fake news new? Every time you see a government announcement come out saying they are revising their data, that is fake news. GDP numbers, unemployment, etc. are examples of fake our outdated news that cannot be depended on. We know that prices move and fluctuate from day to day, but trend followers can do things to smooth the uncertainty and prepare with a toolbox of rules such as staying diversified and having crisis alpha.
Many take risk without thinking. They do not quantify risk. One of Michael’s first steps into the risk indoctrination came in the 1990’s through a book, “Against the Gods: A Remarkable Story of Risk.” Michael plays an excerpt from the author Peter Bernstein.
There is no perfect algorithm for risk, only guesses. Everyone has a limited amount of capital. Risk is putting your money down and knowing that you can lose it. In the trend following world, risk is why traders keep it small. How much can you afford to lose? This is the only thing you can control in the markets. Predictions should be a blinking red light for anyone listening.
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