Mark Kritzman is a Senior Lecturer in Finance at the MIT Sloan School of Management, founding Partner and Chief Executive Officer of Windham Capital Management and serves as a senior partner of State Street Associates. Mark has written six books, his latest titled “A Practitioners Guide to Asset Allocation”.
Mark began his career on Wall Street in 1974 and was immediately drawn toward systematic trading. At a time when there were not many quantitative traders, he was affectionately titled a “token quant” within his company.
Over the years Mark has been an advisor to many funds. While working with various companies it became clear fund managers were mixing how they invest with how they would choose asset classes. He decided to break down the most basic and logical ways of organizing the investment process. What are some components of an asset class: stable composition, be investable, internally homogeneous, externally heterogeneous, raise the utility of a portfolio, and you should be able to access it in a cost effective way. From there, depending on a persons risk, different combinations of asset classes would make up a portfolio.
Being in the game as long as Mark has, he has been able to witness the enduring and turbulent nature of markets. He saw one silver lining come out of the 2008 financial crisis – it provided a context where investors could go back to the basics of trading, and in particular, recalibrate how they manage risk. Mark finishes the podcast talking fixed weight portfolios, Peter Bernstein on scaling portfolio risk, dynamic asset allocation and explaining Samuelson’s Dictum.
Jason Calacanis is a venture capitalist, entrepreneur, angel investor, author, blogger and has years of perspective when it comes to investing in start ups. His new book is “Angel: How to Invest in Technology Startups–Timeless Advice from an Angel Investor Who Turned $100,000 into $100,000,000”. Even if you never plan on becoming an angel investor, his book is a great look at how the modern economy works.
Technology is accelerating at an ever-increasing rate and Jason argues that there are approximately 30 million jobs that will disappear in upcoming years due to advancements in technology. He wrote his book to try and help people step away from the usual way of thinking and look at where the world is moving. For example, the cheapest car you could buy today is far and above more sophisticated than the most expensive car you could have bought 20 years ago. When Jason evaluates a company, he looks at a couple things: What is in the best interest of society? And what is the best technology that we can use to get there?
What is Silicon Valley like through the eyes of someone living and breathing it? Jason talks about Silicon Valley as the center of the world. There is an infectious need to look for the next $100 billion dollar idea rather than the next million dollar idea. It’s also very liberal, political and quirky. It is where the largest amount of high power tech companies derive from.
What is the biggest factor in becoming a successful angel investor? Success in angel investing comes down to portfolio diversification. You need to cast a wide net, knowing you are going to have a lot of loser companies. There are massive implied odds. The upside to finding a winning company far exceeds any amount of losses you may incur. Michael relates this to the Babe Ruth effect and Jason puts his own spin on it, “Finding a winning company is more like the equivalent of a grand slam scoring 100 runs rather than just four.”
In this episode of Trend Following Radio:
Creating a global footprint
Who is able to export their ideas around the world
Mihir Desai is author of “The Wisdom of Finance: Discovering Humanity in the World of Risk and Return.” Mihir is currently the Mizuho Financial Group Professor of Finance at Harvard Business School and a Professor of Law at Harvard Law School.
He wrote his new book with two goals in mind: 1. Demystifying finance and 2. Have people look at finance in a more inspirational way. After each financial bubble bursts, the public repeatedly retreats to stereotypical ideas of finance. Mihir doesn’t want to wait for a generational shift to take place for finance to be looked at in a positive light. Financial literacy has gone by the way side in schools. How do you get children to think about basic risk taking? How do you think about protecting yourself? How do you buy insurance? How do you pool your money as a family? He hopes his book may help change some views and enlighten.
Mihir explains why diversification isn’t important just in the markets, it is important to diversify in all aspects of life. As an athlete you should workout all your muscles not just pinpoint one area. Or if you are looking at your health, you should look at all aspects of your health, not just what you are eating or how you are sleeping. Broaden your outlook and diversify your time and energy accordingly.
What is Agency theory? If you give someone money to invest, why do you get the money back? Arguably this is the biggest problem in modern finance. 150 years ago most people were self employed. Nowadays we appoint people as our “agents”. We have a system where we give money to people we don’t know and expect them to take care of it. Michael and Mihir end the conversation talking about people finding their path and true happiness in life rather than doing what their parents or society has told them to do.
In this episode of Trend Following Radio:
Reputation of finance
The magic of leverage
The asshole theory of finance
“Luck is a dominant force in your outcome. That is lost on a lot of people in finance.” – Mihir Desai
Jason Gerlach and Chris Stanton are the CEO and CIO of Sunrise Capital Partners. Sunrise Capital is a systematic firm located in San Diego. They were featured in The Little Book of Trading. Sunrise has been in business for four decades trading. Their goal is to invest in an intellectual way by taking human emotion out of their decision-making.
Michael opens the conversation up with Brexit and how Sunrise Capital reacted. There are foreseeable events and unforeseeable events. Brexit was a foreseeable event. Jason and Chris breakdown the weeks before Brexit, and how Sunrise has been positioning their portfolios in contrast to other firms. Jason and Chris say that in the systematic world there have been two different camps of thought in how to approach Brexit.
Michael moves the conversation from Brexit to Oil dropping in 2014. Jason and Chris say that these events are not just moneymaking events, they are also risk management events. People live in the middle of a bell curve and never think of the tail events in life. They trade and invest for the non-random times and are always shocked when events tend to go further than expected. Sunrise does the opposite and uses technology to curb our human irrationality.
Michael and Chris dive deeper into risk management and the importance of diversification. Sunrise has five systems that operate differently in all market situations. Chris explains risk adjusted return and how setting the “heat” is really the heart of leverage. “What kind of return is optimal for you?” The higher expected rate of return, the more drawdown you may have. When you look at someone’s rate of return, you have to look at what their drawdowns are like. Leverage is a reality in strategies; you just need to be responsible with that leverage and cater it to each individual investors needs.
Michael moves on to ask, “Has Brexit opened up Pandora’s box?” Chris and Jason say Sunrise believes that price distribution has changed since 2013. Intraday volatility has changed and prices now make huge jumps in smaller time-frames than they ever have before.
In this episode of Trend Following Radio:
Brexit and systematic trading
Directional betting on a coin flip event
Preparing for black swan events
Are computers good or bad?
“Systems control the trading ideas. What they do is they give you a statistical edge in creating your trading ideas.” – Chris Stanton
“It’s a bad idea to get the insurance after the catastrophe.” – Jason Gerlach
Hey Mike. Davie Tate here. I was thinking about your recent podcast where you talked about how the sharks were posting Bill Dunn’s worst years to demonstrate the failure of trading. It reminded me of the recent articles on John Paulson. You may have read that his gold fund is doing horribly this year. Down 65%. Just like with Bill Dunn, people who don’t understand trading are just salivating over this demonstration of the “failure of trading”. The fund only represents 2% of Paulson’s funds. If this fund operates totally independently of his others funds then I might be inclined to agree with some of the criticism Mike. I can’t understand how any professional trader of Paulson’s caliber could allow his fund to lose 65% of assets. Also, I can’t understand why any professional trader could have looked at a gold chart for the past few years and decide to go long which is the only way that I can imagine that he could be down 65%. If he does incorporate counter trending strategies and was long then I don’t understand why his stops didn’t prevent such a massive loss. On the other hand Mike, if this fund does not operate totally independent, but operates as part of all of his assets, then my view would be totally different. A 2% investment of total funds under management while a bit high, is not a totally unreasonable amount for a professional to risk on a trade. Furthermore if that is the case, just think about it Mike. A 65% unrealized loss on a particular trade means you’re still in the trade. We are actually willing to risk 100% of the 1% or so that we risk on each trade. I don’t think some people realize that. If you have $100,000 trading account and you risk $1000, 65% down in that trade means you are still in the trade. The trade doesn’t end until you either get stopped at a 100% loss of the $1,000 or you take profits of 2:1 or 3:1 on that trade. Some people don’t seem to realize that about trading.
65% loss in one market is not trend following. Where is the cutting of loss? Maybe his strategy will work, but it’s not loss cutting. Dunn’s DD was from taking many small losses across many markets. Those add up to a DD. No one drop on one market. Plus, there really can’t be a TF fund on one market alone. No diversification.
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