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 are examples of fake our outdated news that cannot be depended on.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.
Jared Dillian is editor of The Daily Dirtnap: A daily market newsletter for investment professionals. Jared is also author of “All the Evil of This World” and “Street Freak”. He gives a behind the scenes look at the good, the bad, and the ugly of Wall Street.
Jared’s interest with Wall Street didn’t start with the idea of making money. It was more academic. He wanted to learn why so many traders were trying to beat the market when all the Wall Street books he was reading said that beating the market was a huge waste of time. He started working at Lehman Brothers and quickly learned the culture within an investment bank was completely different. Everyone working at investment banks were in the business of making money, they are all traders. Jared speaks about the structure of Lehman Brothers and how they changed under the management of Dick Fuld. He then dovetails into detailing the dot-com bubble and the housing bubble, and explains why some firms were able to fail and others were able to survive.
Next, Michael and Jared talk about the “sex drugs and rock and roll” aspect of Wall Street. Jared looks back on what he saw when he worked in the pits of Wall Street and says that, “that culture” doesn’t really exist anymore since the 2008 crash. They finish up talking about the pros of being an entrepreneur rather than working for a big investment bank on Wall Street.
There are back-to-back monologues on today’s episode. The two episodes consist of the same material, just said a little different. The first take Michael was told was too aggressive with too many F bombs, so he re-recorded but still left it up on the tail end of the podcast. The double header podcast today was inspired by a film Michael recently re-watched called, “Boom Bust Boom”.
Michael talks about Hyman Minsky’s “financial instability hypothesis”. Minsky said that there is instability in capitalism and if capitalism was eliminated, that would help eliminate bubbles. Minsky believed that offsetting the economy is how you eliminate instability. This is where the government came up with zero interest rates, and in some places, negative interest rates. Due to the Minsky mentality, economists think they can control the markets and stop human nature from happening.
Michael ties his documentary film into the discussion and describes the insight he got during ’08 when he happened to be filming. Trend following strategies and behavioral economics have these characteristics in common: 1. People will never be rational. 2. Markets will always trend up, down and sideways. 3. You can’t predict trends. 4. There are ways to make money even though numbers 1-3 are set in stone and will not change.
In this episode of Trend Following Radio:
The tulip bubble
Fall of 2008
Financial instability hypothesis
Trend following philosophy
“The only way to eliminate market bubble’s and crashes is to eliminate people.” – Michael Covel
Today on Trend Following Radio Michael Covel speaks with Vineer Bhansali. It is Vineer’s second appearance on the show. He brings a world of experience to the subjects of behavioral finance and tail investing strategies. He believes strongly that sustained portfolio performance comes from expecting the unexpected and hedging both left and right sides of tail risks. Vineer’s firm, Long Tail Alpha, is based on exploiting values from the tails of the probability distribution and also exploiting how human behavior distorts the markets.
Michael starts the podcast off breaking apart Vineer’s white paper, “A Behavioral Perspective on Tail Risk Hedging.” Vineer says the way markets actually trade have very little to do with the idealized models that have been presented in the academic community. Those models are presented because they are easy to solve. All interesting things that go on in the markets are beyond the idealized scenarios. Vineer talks Michael through the idea of the “Three Investors.” His study is based on how people account for gains and losses. The study concluded that people are more adverse to losses than they are to gains, also people like security. Next, Vineer speaks to work done by Kahneman and Tversky that dovetails into his own studies. This work allows him to rationally explain the existence of tails in terms of very persistent behavioral biases.
Michael and Vineer comment on oil and how significant the price of oil has been in the last few years. Where does the behavioral aspects come into play? He says that both kinds of investors, rational and irrational, create market dynamics. He gives an example of a gambler that leaves the casino while he is up a lot, as opposed to the gambler that is down and keeps gambling trying to get it back. “You have people in this commodity market casino who are going in with a certain plan, but they can not execute on that plan.” He goes on to say that people who have a trend following plan are going to do very well. They can go short or long. Their portfolio’s tend to be more dynamic, and unless you know a whole portfolio you cannot make a rational decision. Michael says aggregation is the key word. You can’t look at a price for a hedge in isolation. That doesn’t do anything for anyone.
Michael then asks “What about the timing in Tail Risk?” Vineer says you have to be very open minded in how you construct a portfolio, and the timing relates back to the valuation. These concepts are well known in the finance world, they are just not widely practiced. Tail risk, hedging or insurance is what investing is all about. Michael ends with asking, “We all know everything we know about Oil, China and Rates could go in another direction. What will happen if your thesis doesn’t materialize? If things bounce back to the way they were?” Vineer says that at some point markets overshoot and his firm is set up for when that happens. He is always asking himself, “Where is the valuation? What signals are you getting? What objective framework and model can you build?”
In this episode of Trend Following Radio:
Is trend following mean reverting?
Human behavior and biases
Importance of a dynamic portfolio
“[Trading] really very much depends on people’s behavior and your extraction of what is driving that behavior.” – Vineer Bhansali