Having passed the CPA exam last year, I subscribed to the Wall Street Journal and found your podcast recently. As instructed on your podcast, I am emailing you because I would love any material for new investors that could help me grow and develop past the buy and hold phase I am currently in and learn to become a capable, active investor.
Love the podcast and appreciate your passion and content.
During one of your recent podcasts, you and Wesley Gray were discussing how the academic community considers the volatility of an asset’s price to be its risk while you and Gray consider the permanent loss of the capital invested in an asset to be its risk. Many years ago, I read an interview of Harry Markowitz where he stated that he used volatility to measure the risk of an asset because “it made the math easy.” I was completely shocked. The father of Modern Portfolio Theory chose his measure of risk based on its mathematical convenience.
I searched for the interview again because I wanted to send a link of it to you so that you could read it for yourself. Unfortunately, I could not find the interview but I still remember the feeling of complete shock that I felt when I read that Markowitz chose volatility as the measure of risk because “it made the math easy.”
What is your understanding of how volatility became the primary measure of risk in finance?
I don’t believe Markowitz believed that as you state, but rather was designing for theory. As you might recall he was surprised that modern finance was built off his work. He wrote the PhD paper, and others extrapolated his work into something else. Markowitz, himself, stated that “semi-variance is the more plausible measure of risk.”
But I have also see this:
“I would’ve created CAPM around semi-variance, but no one would have understood the math and I wouldn’t have won Nobel Prize…” –Harry Markowitz
We can never stand in the way of market moves – nobody is big enough aside from those with the deepest of all pockets and even then their luck may just run out?
However the sheer stupidity of market reactions continues to the point that I believe most market participants simply are not accepting we are living in a different World following Trumps win and Brexit.
Take today’s move lower in the Pound [ To be fair a small move lower in the Far East on headlines that May will be outlining her case for a hard Brexit shortly] – The weekend news is quite possibly the most bullish news I’ve seen for Sterling in my 30 year career trading fx markets. Here’s – for dummies – what has really been said over the weekend.
Trump – I will immediately put a sizeable trade deal in place with the UK – front of the que as I am a huge believer in Brexit and as the World’s largest market the U.S will offer Britain free access on favourable terms which will boost jobs, investment and prosperity in the UK massively. As far as Europe is concerned they can go screw themselves – I am not on the same page as Merkel on anything – Europe is heading for a disaster and I am already thinking about tariffs on German products in the U.S. – BMW for example.
Meanwhile the UK government announces that it may slash UK taxes to play hardball with Europe – meaning vast increases in UK competitiveness versus Europe which means anyone else clinging on to the pipe dream that business will leave the UK and relocate to Europe – a socialist / anti-entrepreneurial cesspit of high taxes and bureaucracy then for God’s sake wake up and smell the coffee. That leaves the UK as in its strongest position for decades with the prospect of not only globally driven growth and exports surges but as a safe haven for when Europe falls to pieces and likely to see massive currency inflows into the UK.
It doesn’t get any better than this for the UK which is why my targets for Sterling over the next 3 years are very simply 0.2 for Euro / Stg and 2 for cable – easy peasey – and that’s extremely conservative.
Am I long? No I’m short Sterling right here because the price action is giving no reason to back these views at all – but when it does we will flip that is for sure. Never trade my view or opinion as many of you know but if I’m right then the price action should confirm and the Pound against the Dollar needs to break at least 1.35 to show signs of life.
Meanwhile – for me – quite possibly the second best trade out there is selling the DAX. Global imports on German goods, Germany picking up the bill for a disintegrating Europe and the demolition of German values in future years only point to one direction for the German stock market. I look for a long slow move to 6000 in the Dax with the first signals this move is underway coming when it breaks 10,500 without making a new high in this particular cycle.
And as for the market clinging on t0 2010-2015 “type” solutions with bad news is good news for stocks – just remember when the shit hits the fan – what QE? Trump is a free marketer and if markets need to head a long way lower – then that’s where they should be!
Episode 515 is another “Mega episode.” It is a culmination of interviews comprised of four of the most successful trend following traders alive today: Ewan Kirk, Jean-Philippe Bouchaud, Martin Lueck and Christopher Cruden.
Ewan Kirk is the head of Cantab Capital and has brought his firm from $30M AUM in 2006 to over $5B today. Kirk employs several strategies but clearly uses a trend following foundation.
Jean-Philippe Bouchaud is founder and Chairman of Capital Fund Management (CFM) and professor of physics at École polytechnique.
Martin Lueck holds an M.A. in Physics from Oxford University and currently is the Research Director and President of Aspect Capital. Lueck was originally with Adam, Harding and Lueck Limited (AHL), which he co-founded with Michael Adam and David Harding.
Christopher Cruden has been in the trend following space for over 25 years. In 1988 he became a Director of Adam, Harding and Lueck Asset Management Ltd (AHL). He is currently the head of Insch Capital Management.
Phil Donahue and Ayn Rand are on the podcast today, but one of them is of course dead. Rand is best known for her two best selling novels, “The Fountainhead” and “Atlas Shrugged.” Michael plays two clips of Donahue interviewing Rand. Rand is controversial, but her thinking is accurate and clear. She breaks down altruism, government regulation, free market, monopoly, God, feminism, terrorism, and many more topics. You may not agree with her on all points, but there is inspiration to be taken away from her passion and to-the-point thinking.
In this episode of Trend Following Radio:
Acting on faith
Living by emotion, not reason
Spending money on the un-gifted minds rather than the gifted
Tim Price has worked in capital markets for over 25 years across three management firms. His book is “Investing Through the Looking Glass.”
Tim thought Brexit would be the biggest thing in politics during his lifetime, until Trump. People love a narrative and those behind Brexit and Trump produced a great one. People were so fed up with the establishment that even though they may not have agreed with the idea of Brexit or the agenda of Trump, they wanted a vote against the establishment.
“What was the driving force behind wanting to write your first book?” The seminal event for him was the collapse of Lehman Brothers, which led him to think: “How on earth did we end up in this mess?” Interest rates are still at zero eight years post crisis and central banks are still printing money out of nowhere. He has spent the years since 2008 researching what the causes were and essentially the “Who done it” in the bailouts. Michael and Tim talk about the economy and the avalanche that is building on the horizon. Michael asks, “How did we get to the point where so many of us have just accepted that there are these show figures making decisions for us that we have no choice in?”
In Tim’s work he takes people on a detailed journey through the banking system, bailouts, bond market, stock market and the solutions. “What other options in trading exist after you have value, momentum and gold?” Michael and Tim discuss why there aren’t really any other options beyond those.
In this episode of Trend Following Radio:
Trusting central planners
Going against the establishment
Lehman Brothers collapse
The Brexit and Trump narrative
“Mankind has survived because of our ability to believe in things that do not actually exist.” – Tim Price
Oh, how I show my age missing discourse like this. Besides Donahue, we had William Buckley, Dick Cavett, and, often, even Johnny Carson. Hearing liberal vs. conservative in an informative way was so, so nice. NOT screaming, NOT engaging in relentless raw ad hominem attacks, NOT being proud of ignorance, nor being illogical–and so smug about doing all this. Even the audiences back then were different. Civility is always welcome. I like to hear from the dead, because what they say is locked down, therefore, allowing a true evaluation of them.
Learn to be a trend following trader.
Sign up free today.