Episode #35: Jerry Parker, Chesapeake Capital, “To Me It Just Boiled Down To One Question… Will The Big Winners Pay For The Small Losses?”

Episode #35: Jerry Parker, Chesapeake Capital, “To Me It Just Boiled Down To One Question… Will The Big Winners Pay For The Small Losses?”

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Guest: Jerry Parker is the Chairman and Chief Executive Officer of Chesapeake and Chesapeake Holding Company. He received a Bachelor of Science degree in Commerce, with an emphasis in Accounting from the University of Virginia in January 1980. Jerry started his trading career in 1983 as an exempt commodity trading advisor for Mr. Richard J. Dennis, in his “Turtle” training program. Mr. Parker has overseen Chesapeake’s operations and its trading since its inception in February 1988.

Date Recorded: 12/29/16     |     Run-Time: 1:12:16

Summary: Episode 35 features one of the original Turtle Traders. “What’s a Turtle Trader” you ask?

The story involves Richard Dennis, a great trader from the 1970’s. As the story goes, he made his first million by about age 25. By the early 80’s, he was worth about $200 million. Around this time, the movie “Trading Places” came out (two millionaires make a bet on the outcome of training a bum to be a financial whiz, while taking a financial whiz and, effectively, turning him into a bum). Richard felt he could similarly train a financial no-nothing, turning him into a great trader. Richard’s partner felt it wouldn’t work. So they made a bet. (Though as you’ll hear on today’s podcast, Jerry doesn’t actually believe there was ever a bet.) Regardless, how’d it turn out? Three or four years later, the group Richard trained had made, on aggregate, around $100 million.

The episode starts as Meb asks Jerry how he became involved with Dennis, trend following, and the Turtle Traders. Jerry was hooked on the idea of trend following from the beginning. Meb suggests that many people either “get it” or they don’t – meaning they get hooked, buying into the strategy completely, or not. For many people, the philosophy just doesn’t take.

Eventually the program ended, after which Jerry moved back to Virginia and started Chesapeake, which basically consisted of a telephone, a quote machine, and his trading rules. Jerry tell us how the company grew and how its trading systems developed. They’ve gone from trading around 20 markets to well over 100 now. Meb asks in terms of conditions, what’s been the most challenging market for Jerry in his career at Chesapeake? His answer – the market since 2008.

The conversation eventually steers toward leverage and volatility. Meb says how most people don’t realize how they can tamp down a volatile market through trend following and managed futures. Jerry agrees, and adds that you want to “make the same (volatility) bet” despite different markets, to maintain consistency.

Meb then asks why so many investors, retail and institutional alike, have such small allocations to trend following. Jerry gives us his thoughts, pointing toward the inherent bias people have for equities. He also believes most investors truly don’t realize how powerful diversified trend following can be.

Meb agrees, noting how if you showed an adviser the returns of all sorts of portfolios yet didn’t name the strategies, in almost all circumstances, the portfolios the advisers would choose would have the largest allocation going to trend following. But when you attach the actual strategy names, people shy away from trend following. Meb thinks it really boils down to a branding problem.

Jerry thinks people have it backward—they see trend following as an add-on to some other strategy, when in fact, it’s the core. Start with the CTA strategy and maybe add some long-only equities.

Meb then steers the guys into a discussion about some of Jerry’s most popular tweets. One of which is Jerry’s recent quote: “Beating the market is hard. Even surviving the market is hard. Stamina may be the most underrated quality.” The quote really resonated with Meb, and he asks if Jerry ever wanted to throw in the towel. Jerry thinks discipline is at least 50% of it, and yes, it can be very hard.

The guys then discuss markets, with Jerry noting that there is nothing to be lost from trading more markets than stocks. For instance, he loves currencies. This prompts Meb to bring up a Bitcoin-crash example, where a trend following approach could possibly have saved some major losses.

The conversation then turns toward common investor mistakes, most notably the tendency to hold losses and sell winners short. Simply put, the behavioral side of investing is extremely challenging. This causes Meb to wonder what will happen to the roboadvisors when a bear market finally begins. Specifically, with it so easy to pull your cash out of a roboadvisor (and no live advisor to stop you), how many investors will allow fear to make them liquidate their positions?

There’s tons more in this episode, including how Jerry lost 60% in one day, the differences between technical analysis and trend following, the “turtle program” of the future, and the one market that won’t allow futures trading. Do you know which one it is? Find out in Episode 35.

Sponsor: Global Financial Data

Comments or suggestions? Email us Feedback@TheMebFaberShow.com

Links from the Episode:

Running Segment: “Things I find beautiful, useful or downright magical”:

Jerry:

Transcript of Episode 35:

Welcome Message: Welcome to the Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us, as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Sponsor: Today’s podcast is sponsored by Global Financial Data. We’ve been using Data Series from GFD for almost 10 years, ever since I wrote my first white paper. The data has been super useful in other areas, like creating CAPE ratio calculations. For over 20 years, Global Financial Data has been aggregating and transcribing data from original sources, which no other data provider has done before. Please have a look at their website, at globalfinancialdata.com, for more info and to set up a trial account. If you mention that I sent you, they’re offering a 20% discount on all new business subscriptions. Again, that’s globalfinancialdata.com.

Happy new year, podcast listeners. This podcast should be finding you in the very first days of 2017. For many of us, thank God 2016 is over, but we’re recording this at the end of 2016, and I am super excited to have an awesome guest today here. Jerry Parker, welcome to the show.

Jerry: Oh, thank you very much. I’ve been looking forward to this.

Meb: So we’ve done about 30 or so odd episodes, had almost half a million downloads, and we tell people to send in emails that say, “Feedback at the Meb Faber Show.” Send us your questions. By far, and it’s not even close, the vast majority of our questions center around the concept of trend following.

We talk about everything on this podcast, value investing and buy-and-hold and asset allocation, but trend following seems to get the most questions. I also have a pretty wide audience, but also a lot of younger guys. So I said, “You know what? I just had beers and a hamburger with Jerry in New York recently, at Minetta Tavern.” If you’ve never been, it’s an awesome spot. But I said, “Man, you gotta get you on the podcast soon, when we get back,” and he said, “Absolutely.”

So Jerry’s calling in from Tampa. The way we have to get started here… I’m gonna apologize to you because you have to be sick of it at this point, but I’m gonna start by… We gotta do… It’s like “Star Wars.” We got to do a little origin story at this point, for a lot of the younger audience. I dug this up off the Internet. So I’m gonna read an ad from October. No. So summer, probably, 1984. You know where I’m going with this, but the audience does not.

It says, “Richard J. Dennis, of CND Commodities, accepting applications for the position of commodity futures trader, to expand his established group of traders. Mr. Dennis and his associates will train a small group of applicants in his proprietary trading concepts. Successful candidates will then trade solely for Mr. Dennis. They’ll be not allowed to trade futures for themselves or others. Traders will be paid a percentage of their profits and will be allowed a small draw. Prior experience in trading will be considered but is not necessary. Applicants should send a brief resume with one sentence, giving their reason, with one sentence, giving their reasons for applying. List the address. They must be received by October 1, 1984. No telephone calls will be accepted.”

Jerry, do you remember seeing this ad? Did someone pass it along to you? How did you come across this?

Jerry: Yes, I remember seeing it. I read the Wall Street Journal every day, and that’s where I saw the ad, but it was seldom that I would read the ads or the… But I happened to stumble onto that ad, and I did see it, and I thought it was a great idea. I guess I had read an article about Richard Dennis in Business Week or something like that. So I knew it was legit. I knew this was an opportunity, a good idea.

But I applied in 1983. So that specific ad is for the second group of [inaudible 00:04:42] in 1984, but I saw the ad in, I guess, the summer or fall of ’83. So I was a member of that first group that started trading January 1984.

Meb: So let’s talk a little bit about that. Some of our readers may not know who Richard Dennis is. A question I always wanted to ask, and I assume you know the answer, you may not, is: was part of this inspired by the “Trading Places” movie? You know Mortimer and Randolph? The concept of… The discussion that Dennis and Eckhart [SP] was, “Is it possible to train traders? Or is there some innate ability? Is someone just born Stevie Cohen? Or can you actually train them with some methodology?” That was the genesis of this concept. Was it something that was inspired by “Trading Places?” Or have you ever thought about that? Or asked?

Jerry: I’ve heard about that people speculate, but I don’t know for sure. There’s no doubt that Rich probably thought traders could be trained, and Bill was probably more skeptical of that. I don’t think there was a bet. I think that equally plausible is Rich wanted to hire some people to trade a systematic, discipline, rules-based approach, so he wouldn’t have to, let’s say. Let’s have some of our money be traded this particular way. So since… Because he maybe wanted to do things more discretionary, but I don’t think it was a formal bet. I don’t even know if it had anything to do with “Trading Places,” but there was definitely… I believe that in the Turtle Trading Class, there was… They did talk about… They sort of disagreed to the extent that trading could be taught.

When we were taught rules, they weren’t hard rules to understand. They definitely believed in systematic, rule-based. So being taught to trade is not really the accurate description of what we’d done. Anybody can be taught the rules. It’s really can you be taught, or can you figure out for yourself whether you’re gonna be able to follow rules, much more so than… The rules weren’t complicated, and everybody had a college degree or whatever. But over time, it is… It does become very difficult to follow those rules. To sort of almost approaching 100%, that’s sort of necessary.

Meb: So you just graduated from UVA a few years prior. So wa-hoo-wa [SP]. You were a business student. Right? And I think started out as an accountant. Right? So were you trading at all on your own? Or was it more of a just happy coincidence that you saw this and started, brand-spanking-new? Or what was kind of the place you were in life when that happened?

Jerry: I was in public accounting and desperately looking to do something different. I would watch “Wall Street Week,” and I sort of liked Martin Zweig, and I read his book. He was sort of… His philosophy was a little bit of trend following. I started reading about trend following and subscribing to his newsletter. Then I was totally hooked. I believed everything about trend following, from the very beginning, longs and shorts. Yes, of course. Perfect. Markets other than stocks? Why not? Diversification.

So trend following and all of these elements of what we were eventually taught, I just believed them when I first heard about them, and I thought they were absolutely wonderful. The objectivity of this strategy… Then to me, it just boiled down to one question, and that is, “Will the big winners pay for the small losses? And if so, we’re gonna… We’re home free. We’re gonna… It’s gonna be easy. We’re gonna make lots of money.”

So it didn’t… Of course, it’s not easy, but it didn’t take a lot of convincing or like [inaudible 00:08:48]. Now we have to figure out ways to convince clients to invest. When you find somebody who understands it and really likes it and loves it, it’s much better. It shouldn’t take much time to choose the exact perfect words to convince people that this is a good strategy.

Meb: It’s funny. So I was reading a… I’m of the belief there’s a lot of investing strategies that can work. So there’s a quote from Seth Carmen, one of the world’s most famous value stock investment managers, but he does debt and other trading as well. But he has a great quote, that I think applies very similarly, and he says, “Warren Buffett once wrote that value investing is like an inoculation. It either takes, or it doesn’t. When you explain to somebody what it is and how it works and why it works and show them the returns, either they get it, or they don’t.”

It’s so funny, to me, to hear him talk about value investing because it’s the exact same phenomena when it comes to trend following. So some people, like you said, they hear it. They see it. They’re like, “Oh. That makes absolute, complete sense.” Just the same as some people say, “You know value investing makes complete sense,” and they get it. Then there’s other people. You know? There’s many investors like this, that they kind of want to fiddle with it. You know? They’ll email me in.

So we wrote a paper, almost 10 years ago now, on trend following and have seen, I’m sure, every question in the book that you’ve seen, but the basics are simply you’re buying markets that are going up, and you’re selling or shorting them as they go down. That’s it. In my mind, doesn’t matter that much if you’re using a moving average, a channel breakout, whatever it is. The basic premise is, in general, the same. But so many people will want to question and introduce subjectivity, such as, “Hey, Meb. Is it really when it crosses the 200-day moving average? Or should I wait a month? Or should I just wait until volatility tamps down?” It’s kind of like that’s the whole point of the system, is removing that subjectivity.

So it’s funny you say that because there’s a totally opposite… Many people would think value investing is totally different, but it’s really kind of… Does the philosophy immediately take? For a lot of people, it’s not intuitively obvious, for many reasons.

All right. So you did a few years at this training program, and you guys made a bunch of money. I’ve seen estimates as high as over $100 million, for the group as a whole. What eventually caused you to say, “You know what? I’m actually gonna go out on my own and start my own shop.” What was the thinking there?

Jerry: Well, you know we loved working for Richard Dennis and Bill. They were the greatest people ever, the smartest people we could have ever possibly learned from. Our training was the best. It couldn’t have not been better. The sort of Turtle story has become a story. What’s been sort of lost is what an amazing genius group of guys that trained us. So we were willing to stay there forever. There’s no way we could have ever foreseen managed futures and CTAs and managing billions of dollars. So just pleasing Rich and trying to do all we could to show him how much we were appreciative and that he did make a good decision to hire us and to start the program was all I ever had in mind.

So the program just ended, and it was supposed to be a five-year contract program, but it ended after four. So I just think that, over time, it was a lot of hassle, dealing with 20 guys. So it was… They just sort of maybe lost interest a little bit. Yeah, I think there were attempts to keep it going or to roll it into a big, multi-adviser fund, or I’m not sure. But yeah, it was sad, and it was… I’m sorry that it ever ended, because there’s a lot more to it than the two-week training course or knowing the systems. It’s kind of like trying to tell somebody what it’s like to be a Marine. You can’t really do that. They have to experience it on their own.

So I could tell you all the secrets and all the good ideas, but being there with those people for four years was beyond just learning the systems and stuff. So it’s not anything that I think any of us wanted to see ever come to an end, even if it meant making far less money.

Meb: So you picked up shop. I’m assuming. Was this in Chicago? Or in New York?

Jerry: It was in Chicago.

Meb: So you… Did you move back to Virginia at this point and say, “You know what? I’m gonna start a CTA.”? Or what was the kind of progression to get Chesapeake off the ground?

Jerry: That’s exactly right. Moved back to Virginia. Met some people in New York. At this point, we probably averaged 100% to 200% a year, with Rich, with taking on incredible leverage on risk. I lost 60% in one day, but I was still up 140% for the year.

Meb: Did you say 6-0?

Jerry: 6-0.

Meb: Oh, my God.

Jerry: But we were only trading a couple…a million to $2 million. So to get Chesapeake started, with all… All I had was a telephone and a quote machine. I think I started with $2 million. So that was more than enough. That’s about what I was trading with Richard Dennis. So it didn’t take a lot to get going. Our expectations were, looking back, very low. That’s the world we lived in: a telephone, a quote machine. Follow your rules. Nothing automated. You know $2 or $3 million was more than enough.

Meb: So Chesapeake started, I believe, in ’88 or the late ’80s. You have to have one of the longest, continual track records of any trend followers in existence today. Is that right? I’m trying to even think of any others that could date back to the ’80s.

Jerry: There’s some. You know? Maybe Campbell. John Henry used to be Milburn [SP], I think, probably before us. Yeah, you’re right. It’s a long track record, for sure.

Meb: It’s fun to look at because particularly… I mean you must have put up something like 7, 8, 9, 10 years in a row, out of the gate, without a losing year. If I remember correctly, it may not have been the first losing year until ’01. Is that right? Or was it… Were you like… The first few years in business, after trading, was it a scenario where you’re like, “Man, this is… I’ve kind of found the holy grail.”? Or was it a fairly trying process at times, in the early days? What was kind of your thinking? And how has it evolved over the years, in the almost, man, almost 30 years of trading? Thirty years of Chesapeake. You’ve already hit 30 years of trading.

Jerry: It was… The markets are tough, and it’s a struggle. We were fortunate to have a lot of years in a row, and then it was probably a lot of luck, calendar years. You know? I’m sure a trailing 12-month. We had negative periods. But just evolving over time to trading program that went from trying to make 200% to maybe 15%, and having to evolve the trading’s methodology, the trading systems, to something that’s more longer-term.

But I would say that, by far, the most challenging period has been 2008 and kind of the Fed’s interest rate policy, to throw out some excuses. But this whole recent period, whether it’s… CTA’s gonna continue to struggle every year or two. Or if we’re gonna get back to being more consistent, because we have so many different markets we can trade, you would think that, under that idea, that’s one of the main reasons that we had a track record that had very few losing years was because of all the different markets. We just didn’t have to just trade stocks or just trade anything. It was long, short, every market in the entire world, virtually, that would put us in a pretty good situation. If you have a positive expected system, to be profitable frequently.

Meb: Not to interrupt you, but you’ve touched on a couple ideas I actually want to expand on a little bit more. The first was… Roughly, when you first started Chesapeake, about how many markets were you trading? Then how has that expanded or contracted? How many markets are y’all trading today? And how has that kind of evolved as you’ve gotten bigger and more kind of institutionalized?

Jerry: The early years, it was probably 20-some markets, just US. Now, it’s grown, over time, to over 100 different futures markets, currencies, interest rates, commodities, and indices. We also trade a fair amount of single stocks as well. So the problem, though, is that there’s a minimum amount of diversification we probably get from trading all these markets, because another bond market or another short-term rate or another currency is not adding the type of diversification, probably, that you would get out of just the first 20-some that we used to trade. So it’s nice to say you trade 100 markets and 100 single stocks, but…

Meb: Couple questions there. First, is it singles, actual single, the stocks trading, the quoted listed securities? Or are you trading the single stock futures?

Jerry: We trade both. So if we want to get… Some clients we require to trade single stock futures, and some clients are okay with single stocks. There’s not a great deal of difference. So we trade both. I think trading indices with a systematic trend following is a bad idea. I think it’s something that is a huge mistake the CTAs have made over the years. Number one, not trading single stocks. Number two, not having more material risk allocation to equities, so that when the equities are the only market that’s really trending well, we at least make a little bit of money, versus sort of not doing as well and asking people to sort of hang on to this alternative investment when their stocks are doing really well.

So I think that trading the individual names is way more diversification. It improves the draw-down and the risk profile, and apply a trend following system to an index, a basket, where with inside of that basket, you would want to be long some, short some, and maybe flat some. It’s kind of unfortunate situation.

Meb: Well, it’s interesting because I think that kind of makes you an outlier, because most of the trend followers I talk to don’t do a whole lot with stocks or individual securities. It’s always been a curiosity to me, and you’ve written about this and talked about it, but it seems like so much opportunity, and we talk about this with even just the market cap indexes and owning stocks in general, is that the S&P, in and of itself, is a trend-following index. So you’re guaranteed to own more and more of the winners as they go up, and less and less of the losers. A lot of investors don’t know that. They think the S&P or market cap indices and stocks are just built based on earnings and revenues, and that’s not even the case. The only input is simply the price of the stock and shares outstanding.

So by definition, market cap is trend following, but to be able to do the risk management and apply it, I think, is a brilliant way. I almost see never any CTAs doing it, which I think is crazy. What do you think are some of the… Do you trade any particularly esoteric other markets that most CTAs don’t? Or do you consider most to be fairly middle-of-the-road, typical sort of markets?

Jerry: They’re all liquid, and they’re all exchange-traded. CTAs want to trade all the markets, and they set their portfolio up so that they can have maximum diversification in the currencies, commodities, and interest rates and the sort of risk [inaudible 00:20:58] per market, per sector strategy, basing your position size on the volatility, inverse to the volatility. So we just go a step further and create our stock portion of our diversified program. We try to get a couple stocks from each sector to have as much diversification as possible, not trying to find the best trending equities at the time or at any time. We treat it just like the currencies, commodities, and interest rates. We trade them. We trade them all, those, and then we try to create the… We wait the markets, based upon the correlation and giving us the least amount of…the most diversified portfolio.

Since there’s 5000 stocks or 1000 stocks, you have to make different choices and handle it slightly differently, but we try not to handle it too differently because…and stick with the same philosophy that we have on all the other markets.

Meb: This is an interesting point you brought up, talking about volatility and leverage. One of the things that it took me a while to get, as I kind of grew up in my career, is that there is no reason to accept any investment… Bridge Water writes a lot about this. I think they call it “the number one mistake in investing,” where there’s no reason to go out and accept stocks, for example. So stocks, historically… We’ll just use some easy numbers. It’s a little higher, but let’s say 10% returns, historically, in the US, 15% to 20% volatility, historically, earlier in the century, 20%, maybe as low as the S&P now. Let’s call it 15%, just for simplicity.

But there’s no reason to actually go and accept that, that you have to take that sort of leverage. You could go and apply leverage to that. I mean leverage is already embedded because most listed US stocks have debt. Or you could say, “You know what? I don’t want that much volatility or exposure,” and say, “I’m gonna add cash to this investment and bring the volatility down.”

So what Jerry’s talking a little bit about is that once you have all of these instruments around the world… So you could have the most volatile market ever. I don’t know. I have zero idea. Cocoa or something. Let’s say it’s super volatile commodity, but there’s no reason to accept it, that you have to trade it at that 30% volatility. So you can take it down to a lower.

So this is what a lot of risk parity funds do in asset allocation, and it’s a little bit of a different concept. It’s funny to see these guys raising billions of dollars on this concept that’s only been around… They’ve been talking about risk parity for 10 years. I always tell people. I’m like, “CTAs have been doing risk-based portfolios for 30 years now, going back to the ’80s and traders in the ’70s.” That’s just a good marketing spin on it, but I think it is an important concept. We actually wrote a post on this recently, talking about adding cash to a portfolio. So there’s a lot of ways to do it. You can do it on an individual market level or as a portfolio as a whole.

So Jerry was talking earlier in his career, where they were targeting much higher returns, 100%-plus per year, and now has dialed that back to say, “Look. Trend following and managed futures…” You could target 10% returns and 10% volatility. You could target 50% returns, but you’re gonna be going through much higher draw-downs. So the methodology is still robust. It’s just kind of what best suits you and what your goals are.

Jerry: That’s right. So from a systematic trend-following point of view, you’re probably best to have each one of your trades have the same expected return and the same expected sort of loss. So you can trade the euro dollars. You got to trade those a lot larger. You got to buy $500 euro dollars for every 10 S&Ps. So it’s the same trade. It’s the same bet. It’s the same expectation, the profit from that trade. It’s pretty straightforward and uncontroversial.

I like the risk parity, from a 60/40 point of view. I think that makes some sense, I suppose, to probably try to get an expected return equal from your stocks and bonds. I think the problem that people have had with risk parity, in that respect, is a lot of people decided to leverage up the bond part towards the end of the cycle. So that’s kind of a problem. You don’t… These things work, but they kind of… It’s troublesome if you try to implement doing the right thing in the middle or towards the end of a very long bull market.

Meb: What Jerry’s talking about, listeners, is that… Say you have a traditional 60/40 portfolio, 60% stocks, 40% bonds, dollar-weighted. The actual risk in that portfolio and the volatility is actually something like 90% stocks, 10% bonds, because the stocks are so much more volatile. It swamps the portfolio.

So what most risk parity people do is they’ll say, “No, let’s put like 80% in bonds and 20% in stocks, and then leverage that two times and still come to the same volatility level, so that stocks and bonds contribute equal volatility.” The problem, of course, is that it’s been marketed over the past few years, after this 30-year decline in interest rates. So if you don’t start to include a lot of other assets or strategies, the bond portion, you’re actually probably taking on a lot more risk than people think.

So a couple questions. So managed futures… I’m one of the biggest proponents of it, and trend following, in general, as a strategy. We use many funds that have trend-following strategies. We’ve been talking about it for years. Almost every investor that comes to me, both retail, institutional, all the way up to the real money, endowments, and pension funds, has, at most, a sliver allocated to trend-following strategies. I have a lot of thoughts on this. But what’s your takeaway on why that is so low?

Jerry: I think it’s important to separate the two out. I think it’s important to sort of look at the trend-following piece, which is just entries and exits and the sort of money management we’ve talked about, and then there’s the market piece, currencies, commodities, stocks, and bonds.

I think that people like stocks more than anything else, and bonds. The currencies and the commodities, I’m not so sure about that. That doesn’t sound… I may get fired for doing that, if I make that 25% of my portfolio, which is what we do. We’re 25% currencies, commodities, interest rates, and stocks, each. So that’s risky.

You could talk about the diversification level and how much better it is, and you’re doing shorts as well. I just think that’s a lot of alternative craziness for more conservative investors to take. No amount of explanation would probably allow them to hire you to manage their whole portfolio that way. CTAs, they don’t even try to sell themselves as the optimal portfolio. It’s absolutely the optimal portfolio. There’s nothing better. It’s systematic. It’s rule-based. It’s taking small losses. There’s lots of risk control, maximum diversification, with shorts. Man, sometimes there’s nothing to be long. There’s nothing out there that you can invest in. You’ve got to participate in these down trends as well.

But we sell our self as crisis alpha, which makes no sense because it’s not always going to be crisis alpha. You say to people, “You know, you grovel for 5% or 10%.” You know? Which doesn’t help your overall portfolio. Hey. I’ve got CTAs at 5% or 10% of my portfolio. That’s not much crisis alpha. When you ask for 5% or 10%, that’s what you get, is 5% or 10%. So one of these days, someone’s gonna wake up and say, “Hey. Why didn’t you guys ever tell us that this is not a 5% or 10%? This is the core.”

I mean, I don’t know of any CTA who doesn’t really believe that, for God’s sake. How could they not even believe that that’s…that what we do is the absolute core? If all of the…any of the CTAs really thought that the optimal portfolio was mostly stocks, a lot of bonds, and 5% or 10% of trend following, the way that…with diversified trend following, then most of them, including myself, have the complete power to create that portfolio, but we sort of pretend, because we don’t want to make people mad, or we don’t want to step out and be bold, that, “Oh, this is just perfect for crisis alpha.” But it really is the core.

I believe over time, maybe after the next bear market, people will see the benefits of diversified markets, real diversification, not just different stocks, but currencies and commodities and the short piece as well.

Meb: Here’s the example. We’d written an article a few years ago. It’s actually on dividend stocks. We’ve talked a lot about why I hate dividend stocks in particular right now. I think it’s one of the most nonsensical investment strategies. Listeners, you may have heard Larry Swedro’s [SP] podcast. We talked a lot about dividends. We said… The analogy we gave… We said it’s the… If you remember the old-school Pepsi challenge, where Pepsi was clearly preferred as a soft drink, to Coke, in blind taste tests. Both Coke verified that. Pepsi verified that. But the problem is once you told someone that they were drinking Coke, they vastly preferred Coke. That, of course, led to the abomination known as New Coke, but that’s a separate story.

So we talked a lot about how dividends just have a great brand. It’s kind of like Coke. People understand dividends. They think they’re getting a check. It’s the most nonsensical investing strategy. Obviously we like shareholder yield, which is done vastly better than dividends, but it’s the same thing with managed futures, or, sorry, trend following. I often use the two synonymously.

Listeners, by the way, managed futures can mean… It’s a broader umbrella. Though most managed futures funds are trend following, it’s actually a broader umbrella. So we’ll stick to trend following. But I said, at a recent conference that Jerry was at, this evidence-based investing conference in New York, I said, “Audience, all…” It’s a bunch of advisers, institutions. I said, “All right. If you put on a blindfold, so say the taste test, and you ran with historical results… I don’t care if you used B-Top 50, the [inaudible 00:31:20] any of the indices for the trend following funds, and you blinded them… So you said stocks, bonds, whatever, real estate, commodities, housing, and you put all these asset classes into the Monte Carlo optimizer and said, ‘What’s the ideal portfolio,’ the largest allocation in almost any circumstance is gonna be trend following.”

The problem is most people take that, and they look at it, and they say, “Oh, no. No, no, no. We’re gonna do stocks, 50, bonds, 40, trend following, 10, at the most.” So we wrote a paper about it, this past year, called “The Trinity Portfolio,” and just updated it recently, and said, “Look. A buy-and-hold allocation is just fine of traditional, long-only assets.” The biggest problem with that, historically, like you mentioned, is big draw-downs, because you’re long, and people call it “buying hope,” whatever they call it, where you close your eyes. You hold and no matter what. But historically that’s had very large draw-downs.

I’ve always said my desert-island strategy is a trend-following strategy. The problem with trend following is, you mentioned, twofold. One, historically, it’s had a little bit bad branding with the futures concept, you know, trading, sounds like trading currencies and commodities and things like long-term capital blowing up, which wasn’t a trend follower. It’s the opposite of a trend follower. Then two is that you look different, which is one of the biggest ones.

Humans have a very hard time, particularly, when everyone else is making a ton of money, which is the scenario you’re talking about, the S&P being straight up since 2009, in this environment. When you’re doing any other strategy, it looks sub-optimal. So sorry. I was going on a bit of a long rant there. So I think it’s a little bit of a, like you’ve talked about before, branding problem. But if you had to be intellectually honest, trend following should be a very large part of your portfolio.

So I recently launched Digital Adviser. Actually that’s the starting point. It’s half in trend-following strategies and actually can go up from there. All right. Sorry. That was a little rant.

Jerry: Well, I enjoyed being in the audience at that conference, man, listening to you speak. I believe you said that if you look at the numbers, your numbers, numbers that you had looked at, that trend following or diversified trend following, CTA programs, or…usually command about 50% of the allocation.

So we’re at an evidence-based investing conference. I have to say that if I had been running the conference, I would have had to stop the conference right there and go straight to the front and say, “Wait a second. You mean to tell me there’s evidence here, because this is what we’re here for. There’s PhD-approved factor, this momentum, applied to these different various asset classes, long and short. When you run numbers, it deserves 50% of your portfolio. Let’s cancel all of the other speakers. We’ve got to get into this. This is amazing.” I got to say that did not happen.

Meb: On the panel that I was on, we had Wes Gray, who… So Wes is a PhD from Chicago, now a professor, so grew up under [inaudible 00:34:44] markets, but Wes, to his credit, is very intellectually honest and has fully embraced trend following as a concept. So he started out efficient markets, and then kind of went the factor-based look, value, which is where most people kind of start off in that world, and then said, “No, actually look at this data. All the data shows that trend following is a totally reasonable strategy.” So Wes has been a big convert.

I actually read somewhere once that Ed Thorpe was a big trend-following convert. So I’m actually looking forward to his memoirs, which are coming out in the first quarter of this year, to see if he talks anything about that, but it’s funny because people will run the optimizer. They’ll look at it. People will sit down and say, “Meb, what is the best hedge to a traditional portfolio?” I’ll say, “Look. There’s only a couple choices, but historically government bonds have done a good job, but they’re not guaranteed, particularly at 1% interest rates. They may not be that in the future.” Managed futures been across the board, and trend following the best hedge to a traditional portfolio, largely because it can be short everything, when everything else is going…when it’s hitting the fan.

Then of course, buying a basket of puts, but buying a basket of puts has a negative expectancy. So really only one of those, in my mind, is the most viable choice out of the three of those. But again, I’m preaching to the choir.

Jerry: But I’ll just say that I would look at the problems differently. I don’t think that that’s the question to ask. The question is this diversified portfolio, currencies, commodities, stocks, and interest rates, long and short, with trend following. This is the core. We’re not gonna start with this inferior product that has about an 8% return and a maximum draw-down of at least 50%. We’re gonna start with this other strategy, that’s PhD-approved, [inaudible 00:36:37] approved, this momentum, with all these different markets. It makes no sense to sort of say, “What do I add to something that has such a horrible risk-adjusted return?” No, you start with the CTA strategy, and maybe you add 5% or 10% of long-only, passive equities, because sometimes that is the only thing that’s going to work.

Case and point was a year ago, August, where the markets crashed and rallied. So that’s just a situation where trend following is gonna really under-perform. Sometimes just never getting out, even though it sounds incredibly risky, and it has been risky, that is sort of the only strategy that’s sort of going to work. But I don’t think that it makes much sense to identify the superior idea based upon evidence, and then think about how we’re going to hedge something that may be our favorite investment, but has no intellectual basis for being a material part of our portfolio.

Meb: So there’s a feature we’ll do now with people that are particularly…spend a lot of time or publish a bit on Twitter, where you can actually go and sort people’s tweets by their most popular tweets. I printed out a list of a few of your most popular ones, and we can kind of use them as jumping-off points, because I think they’re actually really interesting. Your most popular tweet was actually a quote, a couple months ago, where you said, “Beating the market is hard. Even surviving the market is hard. Stamina may be the most underrated quality.”

I think that just resonates big time with me. We did an exercise the other month, where I went and looked at all of my old blog posts. We’ve written over almost 2000, going back 10 years, and it’s astonishing to see how many companies, investors, websites, bloggers, etc, just gave up, quit, or just no longer exist. In this 30 years of Chesapeake, has there been times when you’ve said, “You know what? I’m kind of done, or the markets have changed, or I want to get into something else, maybe go buy a baseball team, like Henry did.”? What’s… You know? Has it ever been to the point of maximum frustration? In particular, you mentioned this post-2009 environment of just soldiering on.

Jerry: Well, I mean I think you have good days and bad days. I think it is difficult, and the discipline part is at least 50% of it. I think that having sort of grown up around mentors, not just, like I said, getting the rules and the ideas, but seeing how they responded and how we were taught to respond, from an emotional point of view, I think that’s what that quote represents, is that it’s difficult to stand up in the face of losses and under-performance. You get afraid or…

But I can say one thing right now, that I don’t… At least when I first started trading, in the ’80s and ’90s, before we became a full-fledged trading firm with technology and computers, that there’s no doubt that the amount of money that I did not make, based upon a lack of discipline or not following the rules or being…wanting to get out of profits too quickly or not take the next trade, overwhelms the amount of money that I did make because my approach wasn’t as good as it could’ve been. I think that’s the way it is with most people.

Meb: Do you have sort of a most memorable market memory? Is it the 60% down in one day? Is there a particular trade that stands out in your mind, in the past 30 years?

Jerry: Oh, there’s been some fun trades. I remember… I think 1989, we made 30% in the year. We made 30% in January, I mean in December of that year. I think we… It was all in one trade, which was hitting oil. And going to a Christmas party and had clients there at this Christmas party. We’re all just looking at the weather channel, seeing how cold it was in New York. So that’s…

Meb: Funny.

Jerry: A lot of kind of fun trades like that.

Meb: And the longest trade you’ve had, in terms of years? Has there been any multiple, two, three, four-year trades?

Jerry: Yeah, there’s been a few. Obviously the metal trades, the base copper, aluminum, and that ended in 2006, was a big trade. But we frequently have trades that go a year or two. I think that was a crazy small trade we had. I think it was euro-yen, euro dollar, Japanese yen trade, that lasted three or four years maybe. It just wouldn’t nub. The trend just wouldn’t break. But a lot of that’s just a function of your time frame, your look-back period.

Meb: I know you scale in a little bit or scale out, or I may be speaking for you, but I think I heard that somewhere. So you’re not necessarily always just a binary decision where you’re in or out. We were talking the other day about the Dow. It’s now… I think it’s the second-longest bull market ever in the Dow, not by magnitude, so not by percent gain, but time. Then I think if we make it through the spring, it ends up being the longest bull market ever, if we make it through the spring, so getting pretty long in the tooth there. But like you said, had you asked anyone, two, three, four years ago, if this train would continue on US stocks, it would be pretty doubtful. But that’s the beauty, the beauty of trend following.

Your second-most popular tweet, almost two years ago now, was… It says… I’m gonna post all these to the show notes, listeners, so the links and everything else. It says, “David Harding’s portfolio growth versus Buffett, over the past 18 years, hashtag trend following,” and it shows Harding of Winton [SP] is just dominating Buffett. For fun, because I know you wouldn’t want to draw attention to yourself, but we ran the numbers for Chesapeake versus Buffett, and you all have certainly had a higher sharp ratio than Buffett has over this period. Buffett’s actually more volatile than Chesapeake has been. So kudos to you.

But it’s a good example of people who… Buffett probably has the best brand of anyone in investing, how he’s managed to cultivate it, but it also just goes to show a totally different investing approach, like trend following has had equal or better performance than one of the best managers of all time.

Jerry: Of course. I mean just think about it. He has one of our sectors. You know? So we step on the playing field with 75% of our markets are not stocks. So obviously we have a huge advantage in the sense that the currencies and commodities and interest rates can give you much more diversified portfolio. Once again, though, it comes back to one question. You know? That is: do stocks have superior trends versus the other markets? They don’t. So they have great trends, but the currencies and the bonds and the commodities, leverage-adjusted, risk-adjusted, are just as good. So there is nothing to be lost from trading more markets, trading these particular markets, trading shorts. It is obviously this free lunch, and we need to take advantage of it.

Meb: I was gonna type up an article the other day, because I love the esoteric markets. So we wrote an article, years ago, and white paper called “What if Sir Isaac Newton was a trend follower that looked at, kind of humorously, using a trend-following approach on a lot of historical bubbles?” So GMO has written a lot about bubbles, but we just overlaid a 200-day or 10-month moving average on all these historical bubbles. Not surprisingly, it saves your hide in these bubbles because you ride them up and then get out at some point. You may lose 30%, but you don’t lose 100. An example was Sir Isaac Newton and the South Sea bubble.

I was pinning the article at the time because Bitcoin was going straight through the roof at the time. I said, “Look. This has all the classic attributes of a bubble. Here’s an example. Just use the long-term moving average. It’ll get you out at some point when this crashes.” Sure enough, Bitcoin crashed. It got you out. Then I was gonna update it the other day because Bitcoin has now entered this long uptrend again and had a great year last year. So I was joking because it’s not exchange traded, but I said, “A lot of these Bitcoin traders could certainly learn a thing or two about trend following and saving their hides,” because you can apply trend following to almost any market in the world.

I know our friends at Long Board were on an earlier podcast. They were talking about trading. Man, what was it? Carbon credits or something? I think there’s only one futures market that’s banned. Do you know what I’m talking about? Is it onions? There’s one agriculture product that is… There’s some… Congress passed a rule, years ago, that says you’re not allowed to trade…ever have futures market… I think it’s onions. Anyway. So I love the esoteric markets, but obviously some of them don’t scale. All right.

Another one of your best tweets says, “Most people can pick winners. Most people just can’t manage winners, and most let a few losers wreck their portfolio.” Maybe you want to make a quick comment on that.

Jerry: I think that, over time and experience, I think most people kind of don’t…probably don’t have as much of a problem taking small losses. You know? That’s probably not that big of a deal. Maybe it is for some people, but I definitely think that what separates successful from unsuccessful is not getting out of your winning trades too quickly. From my point of view, of course, when you are pretty confident, and you feel good about your system of exiting the market, and you’re gonna follow this rule, so it basically just gets back to, “Don’t get out of the trade until your rule has been hit.” I think that’s where people have a very difficult time.

I know I used to… I said what I just said in front of the quote machine, by myself, and didn’t have the type of structure we have now, that you just sort of say, “Wow. I just can’t sit through this draw-down. I’m gonna get back all this profit.” But people are much more sophisticated now. CTAs and the majority of CTAs, they don’t do just… They don’t really do a discretionary trade, come into the trading room and say, “Exit my Swiss frank or sugar.” They built it into their systems, whether it’s [inaudible 00:47:25] targeting or different methodologies, which I sort of call just systematic discretion, which is, “I’m not going to accept this trade having a big draw-down, and I’ll just create a rule that may not be that great of a rule. It may not be robust or legit. I can at least say I have a rule.”

So the whole human nature of not giving back profits is destructive. Trying to manage any one particular trade is not what we do. We do every trade the same way, with the same entries and same exits, and it’s gonna look horrible in some trades. We are gonna give back almost all the profit, but it’s what you’re supposed to do and not worry about it, not try to manage your trade P&L or your quarterly or weekly or monthly P&L. So it is the plague of all humans to want to book that profit and figure out a way to do it, legitimately, but the only legitimate way is to just follow the robust system and follow those rules and hang in there and be bold.

Be bold with your profits. Be cowardly with your losses. But we have a tendency to do the opposite. If it’s a loss, we want to be bold because we want it to come back. If we have a profit, we want to be cowardly because we’re afraid of giving it back. Of course, that’s straight from 1983. I’m quoting Richard Dennis, basically. That hasn’t changed and probably won’t change.

Meb: I think you had a philosopher quote on your website, from like the 1800s, 1700s, 17th century or something.

Jerry: Yeah, yeah.

Meb: Along those same lines. I can’t… Do you remember it? I can’t remember it, off top of my head.

Jerry: It’s not exactly this, but it’s basically, “Take small losses, and let your profits run.”

Meb: Yeah. That’s great. You know? We talk about… When we talk about trend following too, we tell people. We say, “Look. Charles Dow was talking about this over 100 years ago, and it’s a very simple concept.” But for a lot of people, their behavioral quirks makes it really challenging for them. One of the biggest quirks is the numerous losing trades in a row or, like any strategy, and this actually goes along with one of your quotes, is… This is a couple years ago, but you said, “Great funds lose money more often than good funds do. You can’t have grand-slams without a lot of strikeouts.”

You’ve seen this behavior in the allocations where, every few years, people say, “Trend following is dead, and CTAs are dead,” and then they have another year like ’08, and then everyone rushes into them. We were actually talking about this on Buffett the other day because we said… He’s getting ready to print another year for his stock portfolio, under-performing the S&P, and it’s something like 8 out of the last 10. However, had you been following this back to 2000, you would’ve beaten the market by something like five percentage points per year. But most individuals and institutions have about a two to three-year time frame, looking at performance, which is exactly the wrong time frame.

Have you seen that, kind of as a money manager for both individuals and institutions? Do you try to spend a lot of time educating them on not being their own worst enemy? And have you seen that sort of consistently bad behavior and timing? Or have you cultivated to this point, where you say, “No, we’re kind of only taking clients that get it.”? What’s kind of been the experience there on people?

Jerry: Oh, no. You’re right. That’s one of the best ideas ever. You know? This whole, “Under-perform for years, and then over a long period of time, you over-perform.” I love that. That’s just perfect. That’s what you’d expect. But I just wonder sometimes. You know? I’ve just often wondered. Is it even possible to have optimal trading be a business? Because you are relying upon people who don’t know how to trade. They have bad ideas. They lead you astray. They want you to create a system that does bad things. It takes small profits.

So no. It’s just the worst part about managing money and trading is having to deal with people who, if they could trade, they obviously would. But since they can’t, they… And these are the people who allocate money to me and criticize me and put pressure on the manager to do the wrong thing and be short-term and worry about under-performing. I’ve actually had people call me up and say, “You’ll never make money again. I’ve been in this business 10 years, and I’ve seen this before,” and I’m like, “Okay.” It’s lonely, but it’s great business, but it certainly would be better business if we could just trade our own money and not have to listen to all this silliness.

Meb: Well, that’s interesting because you’ve seen some… So running a… We launched this Digital Adviser, and one of the biggest problems we’ve seen a lot of these robo-advisers have is… One, they’re all buy-and-hold. So they all do the same thing. That’s fine. If you want a passive, beta, global market portfolio, that’s fine, because they don’t cost anything at this point. But behaviorally, none of it existed during a bear market.

I’m really afraid to see what’s gonna happen in the next bear market because there’s no barrier. At least when you have a financial adviser, there’s at least some barrier between people and doing something stupid or… And so I think it’s gonna be really concerning to see what happens next time, but who knows. We may never have a bear market again.

But it just gave me an idea because I was like, “One way…” I’ve seen a couple ideas. So one way is that people obviously do lock-ups, but lock-ups is kind of tough because… Or give a fee discount if people either are long-term clients or if they lock up. So I know [inaudible 00:53:00] guys gave a fee discount if you’ve been an investor at the firm a long time. The problem with that, of course, is that if they have bad performance, they’re still gonna get fired. So they don’t care about the discount.

Maybe an idea would be to say, “Look.” You sit down with an institution and say, “You know what? I’ll take your money. However, if we hit a…Pick the number…10%, 20%, 30%, 40% draw-down or have a couple losing years in a row, you double your investment. If we have a big run, you need to redeem out.” Maybe that would be the right contract to have. I don’t know if you’d ever get any new investors that way, but it might be an idea.

Good. Look. I don’t want to take you for too long. We, I think, already hit the hour mark, but let’s… I have a few more questions to talk about before we wind down and let you get back to the Florida sun. You talked a little bit about Zweig, who’s one of the heavyweight champions of the kind of [inaudible 00:53:59] technical analyst space, but also a guy that wrote a ton about fundamentals. The younger crowd won’t know who this is, but he’s one of my favorite examples.

So many people… It just drives me nuts every time I hear it. …that’ll say, “Technical analysis doesn’t work, or trend following doesn’t work, or I’ve never met a rich technician,” which is always my favorite quote because I would always just say… Like a few years ago, when Marty passed, he had the, I think, most expensive apartment in New York City that had ever sold or something, and a true just brilliant mind. So you mentioned some of his books. So we’ll link to them in the show notes. What other sort of research and books have been sort of an inspiration to you over the years? Or do you have any favorites, in general, that listeners may like?

Jerry: I definitely think any time you can get your hands on an interview of a famous trader, it’s really a good idea, magazines, books, market wizards, of course. People have a tendency to tell you more of what they believe, what’s in their heart, something that you can research and think on. I think that reading interviews and biographies of famous people and traders and getting to the core of what drives them and thinking on it, putting it away, coming back to it months or a year later, and to see how you can have it jive with what you know to be true and how you want to do things in the future. I think that’s very key.

Zweig was just so humble and smart. But I do think that there is a difference, material difference, between technical analysis and trend following. In my mind, they’re not the same. Trend following is a systematic approach. There’s entries and exits that are based on moving averages and breakouts. Technical analysis is patterns and chart reading and cups and saucers and things like that, which I don’t really understand or agree with. So I do think that they get thrown into sort of the same group sometimes, but systematic trading with one entry, one exit, and a stop loss, that’s how I would do it, in order to create a robust large sample of trades, is the way to do it.

We never know what’s going to happen. We’re not good at predicting. We only make money on 40% of the trades. We do know the right positions to be in, but we don’t know what’s going to happen. We got famous for riding oil down from $90-some down to $20-some. Well, I’d done that trade a dozen times, a couple years before, and it had failed almost every time. I was the last person to know. It wasn’t important to know, on that particular trade, that it was gonna actually work and work to the degree that it did. All I had to do was just follow my system.

Meb: We actually wrote an article after that happened, called “The Agony and Ecstasy of Being a Trend Follower,” where it showed kind of the whipsaws of the oil trade, on a hypothetical, just simple moving average, and the massive, massive down draft. I get a lot of questions from readers that say, “Meb, I like this trend-following approach. But how do I get rid of the whipsaws?” I said, “Well, look, bud. That’s just a feature of the system. If you could magically get rid of those, then you’re gonna have a made-off S equity curve. Let me know how to do it.”

It’s funny you mention that about technical analysis. So technical analysis… There’s interesting stories that… I went through the CMT program, which is the Charter Market Technician. When I got to the third year, I said, “Oh, my God. I don’t believe 90% of this stuff,” like you mentioned, these chart patterns that didn’t seem to have any objective back tests or historical statistics and Elliot wave and all this just kind of arcane voodoo. I said, “There is no way I’m taking that third-level test.”

Then they also had, at the time, offered the ability to write a paper. So they then announced they were getting rid of the paper requirement. So I, on like December 29th… This is 10 years ago now. I turned in an abstract on just… It was basically, literally, just like trend following on markets, because I had no idea what I was gonna write about. So I ended up writing my first white paper. That’s actually gonna hit a 10-year anniversary this year. So I got to update it.

But the funny takeaway was, the first time I wrote it, the title was… Man. I think it was “A Simple Approach to Market Timing,” or “A [inaudible 00:58:31] Approach to Market Timing,” and no one would read it. I sent it to a bunch of famous traders, and like 99% of them were just basically like, “Market timing doesn’t work. I’m not gonna read this. You’re an idiot.” I even got some really nasty responses. I posted a few from people that wrote…famous traders that will remain nameless on the blog. Then I changed the title to “A [inaudible 00:58:53] Approach to Tactical Asset Allocation,” which is a much more palatable buzzword. Then it became the most-read paper, I think, on the entire database.

So it’s just kind of funny about the branding. You know? You talk about where people… They hear one… If you say the word “market timing,” their brain starts to melt down. So kind of in the same vain, we’ve got a lot of younger listeners and traders. So as we were talking about the books, I agree with you that there’s a lot of resources that would actually be… Michael Covel [SP] is certainly trend following. He’s got 500 podcasts with famous traders.

But if you look to a lot of the other CTAs, and you Google “CTA performance” or “managed future trend following performance,” you can find a lot of shops, and they have a lot of research that actually sits on their own website. So ISAM, AQR, Chesapeake, which is Jerry’s site. A lot of these sites have a ton of research that often goes down the rabbit hole and gets a little esoteric, but that’s a great place.

So what would you recommend to a young trader or an investor that wants to get involved in trend following? Maybe not just like… There’s the initial, “Hey. I’ll allocate to a fund.” But maybe that wants to actually start to practice it or learn kind of the craft themselves. What would be your suggestions there on either resources or just, in general, thoughts?

Jerry: I would say do what I did and win the lottery and get a great mentor. There’s nothing like a mentor. I don’t know. I just think people like Richard Dennis and Bill Eckhart are rare, people who have this sort of skepticism about everything. Life is hard. Trading is hard. You’re not gonna find anything that’s so great. That’s the way we were taught to look at things. I think it’s rare, but it’s worth trying to find somebody who will take you under their wing and show you and teach you what they know. You know?

I would say that’s the most important thing in any area of life, is work hard, and work for peanuts. Learn next to a master, over time. Read and start crafting and creating your own philosophy of how things work. Don’t kid yourself. It’s probably always worse than you think it could possibly be. I think having that sort of attitude, especially as it relates to managing and trading money, is a good attitude to have. Don’t want to be too optimistic.

Meb: You may regret this, because the next day after this podcast airs, you’re gonna have about 100 podcast listeners at your door, willing to work for free in Richmond, Virginia or wherever you may be at the time. So fair for warning what you ask for. I do think it’s great advice. We get a lot of career questions from people, and I always say to the people, I say, “Look. Do something of value.” So I can’t tell you how many articles I get where people will just be like, “Meb, email me,” and they’ll be just like, “Meb, can you tell me how you got started and built your business?” I’m like, “Really? You’re gonna ask me to take an hour of my time and type this in and just give you this playbook?” No. The best way you can do it is to show up and be of value.

So email someone and say, “Is there any research projects I can work on for free? Or anything that I could do?” Or actually do something and then show it to them. Anyway, those are some good ideas. I think the mentor-ship is an amazing way to get your foot in the door.

There’s a great Steve Jobs video making the rounds on the Internet right now, where he talks about calling up on the phone, the founder of Hewlett-Packard, when he was 12, and asking if he had this part that he could buy. The guy answered the phone at his house. He said back then, you could just look up in the white pages and call someone. So he says… The moral was that if you don’t ask, you’ll never get an answer. So he ended up working on the assembly line at HP, as a teenager.

So I think a lot of the same things applies, where if you really make the effort, there can be a lot to find. I think if you probably ran a version 2.0 of the Turtle Experiment today, you would probably get about 100,000 responses anyway. It would be a little bit different. There’s actually a website. We’ve spoken at their conference a few times, Quantopian. That’s a little more of a crowd-sourced quant site. They just got big funding from SAC. But a couple of their most popular algorithms are actually trend-following algorithms.

Jerry: Yeah, I think that the new Turtle 2.0 is definitely coding. So I got lucky. You know? I was brought to Chicago, given a cush job, told everything I needed to know, and just do the trades. So now, it’s… Since I totally believe in systematic trading, that in order to help add value to Chesapeake or anybody, you need to code and do some back-testing and come up with your own systematic approach. That’s the new… That’s the Turtle program of the future.

But I’m shocked that… I don’t want to rant too much, but I’m really shocked when I meet young traders or young people in the business. They are not interested in my ideas as much as… I was just a very quiet person in the corner, sucking it all in and listening. If I didn’t agree with it or didn’t understand it, I just stored it away, and I’d come back to it. I’ve had that happen many times, listening to famous traders, and I said, “I don’t think I agree with that, but I don’t understand it probably.” Then years later, I would say to myself, “Oh, now I get it. Yep, I didn’t really get it then.”

But the chances of me, when I meet young traders, or people ask…send me their resume… If I have an interaction with them, they’re mostly arguing with me, telling me why I’m wrong. So I mean it’s up to them, of course, but I think that this is the type of person that trading attracts. You know? That is a person with strong convictions, who thinks they’re smarter than everyone else. I’m not saying there’s not a place for that. I know that I have been a very rude, arrogant person before, I’m sure, but let me just say there’s a time and a place to shut up, listen, store it away, think about it.

People with 20, 30, 40 years’ worth of experience, they deserve a little bit more respect than whippersnappers who… The first… One of the questions that Richard Dennis asked me in the interview was, “As a percentage of what’s possible to be known about trading, how much do you think you already know?” Most of the guys said, “90%.”

Meb: Oh, my God.

Jerry: Yeah, and it’s ridiculous. I just got a chill when I just said that because it’s so stupid. Of course, Rich hired one woman, Liz Shoval [SP], and her response to the question was, “Very little.”

Meb: That’s great.

Jerry: So there you have it.

Meb: There’s no more humbling game than the financial markets. If you participate long enough… We’re actually thinking about writing a book on this because I think a lot of parents kind of incentivize as they’re trying to teach their children, or not even parent to child, but just learning about markets in general. A lot of people kind of go with the wrong approach and learn the wrong lessons, until they lose a bunch of money. Then they eventually figure it out by trial-and-error, but I think there’s probably a lot of better ways to learn.

But yeah, there’s no more humbling… I mean I ate bologna sandwiches and mustard sandwiches for a year after blowing up some option trades, when I was in my young 20s. I learned all my behavioral biases pretty early, when I didn’t have any money. So I’m happy to have been inoculated, as you say, to trend following at an early age.

Jerry, you’ve also… Real quick, before we finish, we often ask people… This was 2016. This might be the last one. Is there anything beautiful, useful, magical, that you can think of, that other people may not know about, that you might want to pass along?

Jerry: Oh, I was afraid of this question. So I looked on your website, and I saw what everyone else had mentioned, and a lot of those I really like. I just… I’m a recent convert to Dash Lane. I’m just totally in love with Dash Lane. If you have to… It just… My personality… Storing my passwords… Let’s say that there’s really nothing better. So I have a long list.

I’ll tell you one thing I think is kind of useful is barchart.com. It’s the best place to go for free quotes, when you’re traveling, or you have your iPhone, and you want to know what the bonds are doing. Most the time, when I see a bond… There is no such thing as a bond quote. It is the yield. CNN or Fox runs the yield at the bottom, which doesn’t tell me how the bonds did today. So barchart.com is a great free resource for commodities, currencies, stocks, interest rates. It’s just fantastic.

Meb: That’s a good one.

Jerry: You know? I’m into the free stuff, as most of us are these days.

Meb: It’s funny. So we’d use stock charts for a while on the blog, as a link, just some permalinks. Going back to young investors, one of the biggest challenges was always… I’ll just go ahead and use this as mine. I just thought about it just now. We posted, historically, free data sources on the blog. It’s a list of [inaudible 01:08:25] and places you can get historical stock returns, back to the 1800s, all this good stuff. The biggest challenge, as a coder or younger investor, is access to data, but there’s a lot of resources.

The biggest one I would suggest to people is go cozy up to your local business school. This is actually what I did for our first white paper, 10 years ago, is I found a friend at Stanford GSB, and I said, “Hey.” It was actually a girl. I said, “Hey, Lindsay. Can I borrow your Stanford login? Because you have access to about $150,000 worth of professional databases.” She said, “Yeah. Sure. Of course.” So I downloaded everything to my heart’s content. You know, Stanford, if you’re listening, I’ll give you a citation in the paper, in the next go-round.

But there’s a lot of ways to probably get student discounts. Again, going back to the original ideas, you just got to ask. So yeah, those are both great ones. Bar Chart. We’ll add links in the show notes. Jerry, where can people find more information on you? If they want to follow your writings, updates, funds, where’s the best spots?

Jerry: Well, everything that I’m thinking on a daily basis, that’s important to me, is on Twitter. It’s funny because you read some. What I think is important and what I like and what I really think is a great tweet doesn’t always resonate with others, but I really like using Twitter as sort of a diary and way to be able to go back over my life and see what I was thinking and what I thought was important at the time, politics, religion, business, sports, NBA, and, of course, trend following and trading. So Twitter, and chesapeakecapital.com is a good place as well.

Meb: Yeah, and Virginia basketball. So Jerry, by the way, we didn’t even get to this today. So we’re gonna have to have you back on in like 6 months of 12 months, but we didn’t even get to the topic of… You historically managed CTAs, but also have a handful of mutual funds now in the evolution of kind of trading in public vehicles. But we’re already at the, man, 80-minute mark. So we’ll save that discussion for another day. By the way, we did have a big win last night, over Louisville. So UVA is putting together pretty good basketball squad this year.

Jerry: Very trustworthy. I was very happy. The Lightning won, and UVA won. Yeah, we have a good situation. Now we got to worry about football. Hopefully that will improve, one of these days.

Meb: I can normally get by, by being a Denver Broncos fan, but we are sadly out of the post-season. So my year is over for the rest of the year. Jerry, it’s been so much fun. Thank you so much for joining us today. Again, you can always go find the show notes at mebfaber.com/podcast. We’ll add the transcript for this later. Please, go leave us a review on iTunes. We really appreciate it. Thanks for listening, friends. Good investing.

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