Episode #188: Andreas Clenow, “Trend Following Is…About Taking A Lot Of Bets On A Very Large Number Of Markets”

Episode #188: Andreas Clenow, “Trend Following Is…About Taking A Lot Of Bets On A Very Large Number Of Markets”

 

 

 

 

 

Guest: Andreas Clenow is the Chief Investment Officer of ACIES Asset Management AG. He manages alternative investment funds for institutional and qualified investors. He has served as Nordic Manager for the Analytics Consulting division of Reuters Consulting, covering Sweden, Norway, Denmark, Finland, Iceland and the Baltics before serving as Global Head of Equity and Commodity Analytics Modeling, and later, Global Head of Institutional Charting and Technical Analysis. He is the author of Following the Trend: Diversified Managed Futures Trading, Stocks on the Move: Beating the Market with Hedge Fund Momentum Strategies, and Trading Evolved: Anyone can Build Killer Trading Strategies in Python.

Date Recorded: 10/28/19

Run-Time: 1:09:05

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Summary: In episode 188 we welcome our guest, Andreas Clenow. Meb and Andreas start the conversation with a  hat on what hooked Andreas on trend following, and his book, Following the Trend.

Andreas discusses running trend following as a portfolio strategy, not something that is optimal to run on a single market. He talks about some basic fundamentals of trend following, including the premise that it’s about taking a lot of bets on a large number of markets independently.

Meb then asks Andreas to get into some detail about risk management and position sizing. Andreas defines the way he thinks about risk, and goes back and forth with Meb about the reality of return expectations and compounding. Meb follows by asking what has changed with his approach over the years. Andreas responds with the idea of realizing it’s about strategy and business, and the business has changed a lot.

The conversation transitions into how trend following can fit into an investment portfolio. Andreas offers that the strategy can serve as a core building block of a larger portfolio. He talks about some of the environments where trend following has done particularly well, and the challenge of diversification in equities.

As the conversation winds down, Meb asks about Andreas’ new book, Trading Evolved: Anyone can Build Killer Trading Strategies in Python. Andreas describes the book as a guide for readers to build backtests and strategies in the programming language, Python.

All this and more in episode 188, including Andreas’s most memorable investment.

Links from the Episode:

 

Transcript of Episode 188:

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.

Meb: Hey, podcast listeners, the year is winding down. The decade is winding down but we got a great show for you today. Our guest is CIO of Acies Asset Management based out of Zürich, where he manages alternative investment funds for institutional and qualified investors. He’s also written a lot of books, including “Following the Trend: Diversified Managed Futures Trading,” “Stocks On the Move,” and his new one, “Trading Evolved: Anyone Can Build Killer Trading Strategies in Python.” Welcome to the show, Andreas Clenow.

Andreas: Thanks, Meb. Great to be here.

Meb: You know, last time I think we were hanging out would’ve been in New York City. I tried to take you to one of the finest Japanese restaurants and you said, “No, no, no, Meb, I’m ready for a burger.” So we both had our first Shake Shack adventure, and they just opened one next door to my office now. So when you come visit me in LA we don’t even have to venture out, we can just go next door.

Andreas: Sure, I’d love to. I’ve never been over to California yet, but yeah, give me an excuse, I’ll be there.

Meb: I’ll give you a lot of excuses, although the big thing here now is the veggie burgers, the Impossible Burger, the Beyond Burger, which are probably just as bad for you, but…

Andreas: That’s not helping me. You wanna give me a proper piece of meat if you want me to get out there.

Meb: Well, I’ve known you for a while. You’ve been one of my favourite authors and researchers, and I would love to dive into a bunch of your books today, including the newest one you have out. But I figured we’d start with the first book because this is one of my favourite books about a topic that is near and dear, I think, to both of our hearts, trend following. And you put this out…when did this come out? It’s not 10 years ago yet, is it, maybe 5?

Andreas: No, that was late 2013, so yeah, it’s been a while but not 10.

Meb: And so this book called “Following the Trend.” Maybe talk to us a little bit about it. How did you come to the appreciation or interest in trend following? A lot of people kinda stumble upon it in different ways, and many have also abandoned it over time. But how is it something that popped up in interest for you?

Andreas: Yeah, I mean, starting to write the book was, well, a bit of a hobby to begin with. I mean, not the trading per se, I was doing that for quite a while before. I was running some CTA funds back then, but the topic of writing a book about that came about when I was searching for good books on the topic. I found good books about people who did it before, about the industry, about famous people, and so on, but I didn’t find anything good about, you know, how does it actually work? Nobody who actually explained the details of, what is this saying, and how does it work? How do you build the strategies, how do they behave, and why do they behave the way they do?

And I just had a crazy idea one day to start writing something. I think part of the inspiration from that came from a short research paper, I think it was three pages or something, from one of the greats in the business, Nigol Koulajian, they were at Quest Partners in New York. He wrote a paper, like, three, four pages, something like that, just explaining trend following. And I thought, “This is spot on.” He was the first guy ever I thought, “He wrote something that’s brilliant. He just explains the whole business in a couple sentences. I think you can do something properly with this. I think you could do something longer. You know, [inaudible 00:03:50] it’s a couple of page research paper for some reason.” So what I did was I went ahead and I did, like, 300-page research paper instead, and surprisingly that became quite popular. I was surprised as anybody over that.

Meb: My God, you got some of the best gallery reviews including the one and only Market Wizards’ Jack Schwager talking about the book. But you start out with…kinda walk me through the book in general, because it’s really a…I wouldn’t say it’s a one-on-one level, how to build a trend following, managed futures sort of style strategy, but talk to us a little bit about how it all came together, and about just the very basic framework and thesis behind what you wrote about in the book.

Andreas: Yeah, I guess the entire business was very much misunderstood for a lot of reasons, especially after the stellar year of 2008. I say stellar year because the strategy, per se, performed really, really well that year. As anybody who remembered that year would say that even for those of us who actually had good performance that year with these kind of strategies, it was nightmare years. Nobody wants that year again, but it was a horrible year. But afterwards there was a lot of myths that came out, kind of, about what this is, and how it behaves, why does it perform, when does it perform or not?

So what I tried to do is I didn’t try to build and show a model that is the best possible trend model in the world. That’s not at all what the book is about. I tried to build a, what I call a middle-of-the-road model, something average. It’s not bad, it’s not good. It’s okay, it works. And then I spent the entire book just explaining, what is this thing, how does it work, why does it work? When does it work and not? And I believe the part that actually got attention, that’s the part I’m still kind of grateful for some of the bigger hedge funds for not suing me for. I did a reverse engineering chapter. And so basically I took this very simple trend model that I built in the book. It’s so simple that most people would look at that thinking, “This is useless stuff. Nothing this simple could be used in the hedge fund space.”

Then I used that model and I correlated it against the largest and most successful futures hedge funds in the world. And I showed that if you just toggle minor changes, just minor, minor changes back and forth, like you raise the risk, lower the risk, gear a bit more towards commodity or more towards financials, and you hit some 0.7 to 0.9 correlation to the major CTA hugest trend-following hedge funds in the world. And these are very successful shops run by brilliant people. And what I tried to show is it’s not that complicated really. You can explain the performance using a simple model.

Meb: You know, it’s funny because this is probably my favourite chapter in the book and I think you and I shared some laughs about it in person. Because so much of my belief, a lot of the big muscle movements of mini-strategies, not just trend following, but value investing, or many other ideas at their core don’t seem all that complicated. And we like to make them sound complicated and really complex because that’s easier to sell. But what was the response from a lot of the funds? Did they love you for writing this book, or hate you, or send you bottles of champagne, or what?

Andreas: Actually now in retrospect I can talk about it. It was a bit amusing at the time. After I finished writing the book I had a publishing contract. I had an offer on the table and not signed yet from an American publishing house. I gave it another thought. I looked through what I wrote, I named funds, I did all of this reverse engineering where I basically show that some of these billion-dollar hedge funds do very simple stuff and charge too much money for it. I realised, “Maybe some of these guys kinda lack the sense of humor about all of this.”

And of course, you guys know, America is somewhat litigation happy at times. I think I gotta take some steps to protect myself just in case. And I kind of hardened my structure. I made sure that I was very difficult to sue, and then I changed my legal structure on the book contract. I signed with a British publishing house to further protect myself. In retrospect, it turns out all of this was all in paranoia. And the one fund I was mostly worried about I’m not gonna say which one here, but the one fund I worried the most about being a bit sore about it, they called me up after the book came out, and the CEO called me up. He said he’s coming by Zürich, wanted to have a meeting, have a chat, and said, “Love the book.” He wanted to explain that I was right and he wanted to explain why, basically, their side of it. And we had a great call.

I mean, obviously, to be slightly cynical here, it kind of helps if you’re an allocator in the business, right? If you’re in a position to allocate money to hedge funds, then they have less of an incentive to sort of start a fight with you. But I think everybody took it great. I had no negative comments from any of the hedge funds, and I was paranoid at the time but it turned out well.

Meb: I loved it, and I’m looking forward to you eventually doing an update one day because I would love to see how these hold up out of sample, too. But let’s take a step back, because I think a lot of the listeners, trend following means a lot of different things to a lot of different people, and you and I probably have a pretty good understanding of what we say when we mean it. But maybe talk a little bit about a trend following portfolio in general, what that looks like to you as both practitioner and an allocator. Feel free to use some of the [inaudible 00:09:25] from the book and the jumping off point I’d like to start with is a quote you have in the book, and it’s something we talk a lot about, which is particularly after 2008 a lot of people saw benefits of a trend-following strategy that prior had not really thought about it, and then kind of got the opposite side of trend-following strategy afterwards.

So you said, “Trend following trades fail most of the time, but that’s okay. Trend following tends to have a fairly large amount of losing trades, often as high as 70%, and it’s not a strategy for those who like to be proven right all the time.” So maybe jump off from there and just talk to us a little bit about how you see trend following as portfolio in general.

Andreas: Yeah, I mean, the most important thing to understand is that trend following is very much a portfolio strategy. In my view, to run trend following model on a single market is [inaudible 00:10:17] is just begging to get hit badly. Trend following is basically about taking a lot of bets on very the large number of markets independently. So you see something starting to move in one direction, you jump on [inaudible 00:10:35] in that direction. You see gold going up, for instance. I mean, obviously you have to formulate mathematical rules about this, but the logic is more or less that you see something moving, gold, oil, something starts moving. If it moves up, you buy. If it moves down, you [inaudible 00:10:49] short.

And now you just wait. If it turns around, it goes against you, you close out. You have a small loss. That happens almost all the time. Over 70% of the time you take a small loss. It’s annoying, you keep losing, losing, losing, small losses, but once in a while it just continues. Once in a while you get the big move, and that big move is gonna pay for a lot of the losers. And the problem there is that if you do this on one or two markets you can have this period for a long time where you just keep losing, and you can keep losing until your portfolio is gone. But if you do this on a lot of different markets, and especially a diversified market that is you trade everything from gold, to soybeans, to bonds, to currencies, equity markets, trade everything in the same way, with the same rules, there will, or historically anyway, there will almost all the time be something that keeps moving and that pays for the losing trades.

So in my view it’s a game about large numbers. You have to repeat experiment over and over again. You have a slightly higher probability than average, and you just keep rolling the dice.

Meb: And the nice thing you do in the book, which I think is really interesting, useful for a practitioner is you do, sort of, a year-by-year walkthrough. Because a lot of people, you tell them on paper, “Yeah, you can have multiple losing trades in a row,” and then they have those losing trades in a row and they’re like, “Forget it. My system’s broken,” or they wanna mess with it, or they think trend following is dead. And you kinda walk through that year by year and show how these trades play out. I think that’s a really useful exercise.

Do you even recall, and I’m blanking on it because it’s been a while since I read the book, but I remember some of the strategies you published were so simple in their rules, one of them I feel like was literally like, is the market up or down in the last year or something? It was, like, the simplest rule on the planet. I can’t remember if that was the one in the book or something you wrote about on your blog. But do you remember the, kind of, strategy design from the book?

Andreas: Yeah, the one you mentioned, I published it much later, first on my website I believe, but I also wrote about it in my latest book. There is an example in there. But in the book I spent, I’d say 80% of the book…it’s been a while since I read it myself, but I guess 80% or so of the book is about one single strategy, which is quite simple. It’s a moving average breakout model, basically, a trend filter with a breakout, which is not terribly complex stuff. But the trick, as I explained in the book, is about diversification. The trick is not in the rules themselves. I mean, most people are focusing too much on the rules. They’re staring at the entry-exit rules as if that is the most important thing, and for some type of strategies, enter and exit rules are actually important.

For trend following, not so much. I mean, how many different ways can you follow trend really? The rules themselves are not too important in terms of enter and exit. The rules are important when it comes to diversification and the risk management, of course.

Meb: I think this is a really insightful comment you just made, because what do people spend 90% of their time thinking about, particularly when younger, but also even a lot of allocators, I think, is these concepts of, what do you use to get in? What do you use? What other very specific system when so much of the performance in many ways, because it’s gonna be dominated by these really, really big, massive trends in long-term, huge gains, power laws in many ways, almost like a venture capital portfolio? So much of it comes down to the position sizing and how you build a portfolio. Maybe talk a little bit about that, because I know having heard you give speeches in the past, risk management and position sizing is something you’ve had a lot to say about and have a lot of ideas about.

Andreas: Yeah, I mean, the risk part especially is something that I like speaking about in conferences, particularly when it comes to more retail-oriented conferences. Because the thing with a retail-oriented conference is if you say things that are dead obvious in the institutional space, something that everybody works in the business knows, if I say it in a more retail conference, people are shocked. I would say the biggest misunderstanding from people who don’t work in the business, or trading is a hobby is what risk is, and how to measure it, how much to take? Just a general understanding of risk, that’s the biggest thing they can improve on.

And I’d say risk, to summarise, risk is a matter of valuation change, or I’ll say value change per unit of time, or potential value chain per unit of time. If those components are not in, it’s not risk. A common question I got after writing the book was, “Yeah, but how many percent of a risk per trade?” My first reaction was, “Well, what do you mean? Percent per what, per day, per year, what are we talking about?” I wasn’t really exposed to some of these concepts before, but risk per trade I find to be a misunderstanding of what risk is.

The same thing goes with things like pyramiding and all of this retail oriented, this so-called money management things, most of those things are gambling methods that have no basis in mathematics, no basis in finance. Basic thing to keep in mind is it’s about value variation per unit of time, and if that’s not in your equation then it’s not risk. So that’s on the measuring side, and the other thing is, of course, how much of it to take. And that goes hand in hand with how much are you aiming for? What kind of return are you aiming for? Because you cannot get free return in this business, it’s not possible. If you wanna have high return you gotta take high risk.

Skill level only gets you so far. You can slightly tweak the equation, you can get slight and slightly more return for slightly less risk, but we’re talking small things. If you wanna aim for high returns you have to aim for high risk, and understanding of this is the key thing in my view to understanding finance.

Meb: Yeah, and I think along the same lines is also the understanding of expectations. I’ve heard you speak about this before, too, where certainly a lot of retail and individual investors, when you speak to them, and even in many cases some institutions, too, you talk about what’s possible or feasible about what they expect from their portfolio returns. And many people, the expectations are, dare we say it, like, a bit optimistic?

Andreas: Yeah, but there’s a difference in a way. I mean, yes, I agree that some institutions have too high risk targets. That’s true, but then you’re talking about different scale here, very different scale. We’re talking about, say, hobby traders who have a slightly skewed perception of risk. There’s an order of magnitude difference. I was speaking in a conference a couple of years ago where I realised later that many of them, they came from the same school of thought for various reasons. And I started asking around at the drink session at the conference about, what kind of return targets do you have?

And the first guy told me 20%, and that seemed to be something everybody normally agreed on. And while I was just starting to explain that 20% per year is not entirely realistic over time, then somebody pointed out that I misunderstood, they meant 20% per week. And yeah, you know, I said, “Have you tried taking 1.2 to the power of 52, and multiplying by your trading account?” And I was stuck in that conversation for quite a while explaining that if you can get 20% a week, then quit whatever you’re doing and do that, because no one in history has done even a fraction of that. You’re gonna make Bezos look like Bozo in a year. I mean, you can buy a Caribbean island in a year and a half. You can start your own little nation somewhere with that money.

But that is the difference. A retail trader is waiting for…I mean, in this case it was ridiculous. Of course 20% per week is beyond magic, but say even if you aim for 100% a year, over time in any given year anything can happen, right? I mean, 100% a year in 1 year is completely possible. But if you’re aiming to spend a decade doubling your money every year, well, you’re gonna be one of the richest people in the world if you’re able to do that.

Meb: I mean, we talked about that a lot where our buddy Wes Gray had written a piece called something like, you know, “Even God would get fired as an active manager.” Because, one, looking at just, I mean, if you compound at 20% a year, which is essentially what Buffet’s done, you eventually become one of the richest people in the world if you do it and continue to do it, and that’s the challenge. But the flip side for a lot of people is that that comes with fairly large draw downs. And you mention Bezos. I mean, this is a perfect example because there’s been multiple times where Amazon stock has gone down 90% and a lot of people can’t sit through that.

I mean, and Buffet and Berkshire talk about, “Look, if you can’t sit through 50% decline in quoted securities, you shouldn’t even be in the stock market,” and the same thing of course applies to our world as well. I know you’re not just a trend follower, but we’re still on the topic. Talk to me a little bit about trend following, and someone who’s been involved in this world for a long time, seen a few different cycles, how’s your perspective, or approach, or anything else changed over the years? Is there any sort of beliefs you may have had a decade ago that you no longer, or any sort of insights that you think have been additive? What’s any general takeaways?

Andreas: The biggest lesson I probably learnt over the past, I don’t know…I try to think back how many years I’ve been in the business but that just make me depressed. I’m older than I look, as you know. I think the biggest thing I’ve come to realise is it’s not about the strategy as much as it is about the business, and the business has certainly changed a lot. I have the greatest respect for these two guys. There are few guys in this business, only a handful, who actually continues to do the same exact thing since, well, ’80s, or at least early ’90s. That’s not entirely good for business, I believe, because you have to separate, right? There’s business side, and then there’s strategy side, and this isn’t really connected in any way.

Clearly the business side benefits from having good results, but you’ve gotta follow the business side. And the business for trend following has become commoditised. I don’t actually mean that as a pun. We do trade commodities here, but what I mean is when I started doing trend following it was still a fairly small strategy. Obviously I wasn’t part of the big Gold Rush of the early days when Eckhardt, and Dennis, and these guys got the whole ball rolling. But even when I got in it was still a fairly small strategy. Anybody could set something up, you show good results, you raise money, you build a business out of it. And I’m the first one to admit I’m incredibly lucky to get in when I did, but now it’s commoditised.

Can you imagine someone today saying, “I have a start-up idea. I’m gonna start a mutual fund. Now I can do slightly better than the big players. I’m gonna have a mutual fund and I’m gonna raise billions for my mutual fund.” Nobody’s gonna take you serious, though, right? Mutual fund is owned by, I mean, the whole business is owned by the large banks. It’s become a brand name marketing, you know? It’s like bringing out your own brand of toothpaste. Nobody’s gonna take you seriously, the big guys own the business.

The same thing happened with trend following. Now it’s more or less a brand name thing. As a business model, I don’t know, it changed. All the big inflows are coming to the large funds. That was not the case 10, 15 years ago. So you gotta look at, where can you add some value in the business? I mean, if you’re doing it as a business, of course. If you’re trading your own money, different story. Do whatever works, whatever makes money. But if you’re looking to build a business, you gotta be different. You can’t just run a [inaudible 00:23:07] model like everybody else. Even if you say that you’re slightly better than these billion-dollar hedge funds over there, well, sure, but why should I invest in you? So that part has changed a lot.

Meb: You know, I think you hit on something we talk about a lot, which is, I think, a lot of younger people see the…I hesitate to use the word “sexy,” but maybe they watch the “Billions,” or one of these shows that really makes trading look like this fantastic, and it is a highly rewarding career, whether it’s in equities, or trend following, or anything else. And trend following has this allure because you’re using words like “futures,” or “leverage,” and “margin,” and it hearkens back to the trading places day of the cowboys trading hogs, or oil, or wheat, or whatever it may be. But the very real flip side that you, I think, very accurately describe is we often say that, “Managing money and the business of managing money are two completely different things, and skill sets, and approaches.”

And I think a lot of what we’ve learnt over the years is so much of asset management business is about narratives, and storytelling, and relationships for better or for worse. But you certainly, from a Pure Quant standpoint, see a lot of strategies asset managers out there that most would say are kinda garbage but still manage a gazillion dollars. So it’s something that I think is important to distinguish between the two. As someone who’s been both a practitioner and allocator, talk to us a little bit about how you see a managed futures or trend following allocation fit into a sleeve of a portfolio. So if you’re talking to an institution, or family office, or even an individual who says, “Look, I wanna put together this portfolio,” how do you kinda describe where it fits in?

Andreas: I think trend following should be part of the larger portfolio. I think it should be one of the core building blocks on a larger portfolio. We’ve seen over time that trend following tends to perform very well in high-volatility environments. There is the old classic tail hedge model. No guarantees of course, but during severe bear markets, during times when financial market is under stress, trend following tends to do quite well. I’m not one of those who would say, “Put all your money in trend following.” No way, don’t put all your money in anything. You should diversify your portfolio across a lot of strategies. What we would do is we buy a lot of different hedge fund strategies as well as traditional assets, and we build a portfolio that you work under any type of climate.

But trend following, I mean, what we’ve seen here is, first of all, I mean, obviously the elephant in the room, trend following return has gone down over the past decade or so. Not terribly surprising. I don’t expect to see the kind of returns we saw 15, 20 years ago. That’s not realistic, not on these kind of yield levels. But we have not seen any sign that it stops working. We have not seen any sign that it would perform worse than equity markets. I mean, equity market is still one of the worst asset classes if you look at the volatility adjusted returns over time on buy and hold equities, it’s still one of the worst looking ones. You should still have equities, of course. I’m not saying you should avoid equities.

Meb: I was gonna say, that’s a hot take. I wanna hear you dive a little more into that because you just probably exploded the brains of half the listenership right now.

Andreas: Equities show return over time. You should have an equity portfolio. Everybody should have an equity portfolio, but you should also be aware that if you look over a, say, 30, 40-year period, and I’m talking total return, of course, with dividends included, you’re looking at an expected return of, say, between 5% to 7% perhaps annualised over time. And for that, you’re looking at occasional draw downs of, say, well, 50%, 60% now and then. I mean, we had two of those in the past couple of decades. During my career there were two of those. Volatility levels are quite high.

You have sudden shocks, you know, if you enter at the wrong time, it takes a long time for you to get compensated for that. If you buy the top of the bubble at the moment, you know, I’m not one to time the markets here. I don’t think that’s a useful use of your time, but at the moment we have one of the longest running bull markets in history. And it would be reasonable to assume that sooner or later that’s gonna end with a larger correction. If you start building an equity exposure before larger correction it might take a decade or so before you actually get your money back.

So equities is a difficult asset class, both because of the performance of the indices over time. I mean, you can argue that the construction of the indices is part of the problem, and I’d be inclined to agree on that. But the other big problem with equities is that stocks are stocks and they perform very similar. If you buy a [inaudible 00:28:23] of 50 stocks, you still [inaudible 00:28:25], right? They’re still just long equities. They’re all gonna tank at the same time. They’re difficult.

Meb: You know, I think a good example is we see portfolios so many times where they come to us and they say, “Hey, I’m diversified,” and their portfolio is U.S. large cap growth, U.S. large cap value, U.S. mid cap growth, U.S. mid cap value, U.S. small cap growth, U.S. small cap value. And they say, “Look, I have thousands of stocks.” I go, “Congratulations, you just bought the S&P 500,” which in and of itself, like you mentioned is a portfolio of stocks. And the same thing, I was actually at a conference recently and we were talking about how we thought a lot of the foreign markets are cheaper than the U.S.

And they said, “Well, Meb, you know, so you’re saying that if you buy emerging markets that’s gonna protect if the U.S. goes down?” I said, “No, I would fully expect if the U.S. goes down 50 or 80 that emerging markets would also go down 50 or 80. Because in general they’re still stocks, and they’re different stocks, but that’s not the same as having a managed futures account where you’ve got stuff that has quite a bit less correlation.” So you mentioned there they’re not one of your favourites. What are your other favourite asset classes or strategies that you would consider?

Andreas: I think it’s dangerous to have a favourite. I mean, you know, I like to diversify…

Meb: Favourite’s the wrong word. You said stocks are not one of the best. What else would you consider to put in a portfolio? And if you say you’re putting it all in local Swiss minus 1% bonds, you’re really gonna turn everyone crazy. Actually I think it’s not minus 1 anymore, it’s like minus 1/2, right? What are they yielding?

Andreas: Yeah, that’s a totally weird topic, of course. Yes, we do have negative yields every year. We have for quite some time now. That’s a weird one, yes. And unfortunately you don’t get paid for taking a mortgage on your house. That would be nice. No, I mean, you need diversification of your portfolio, and obviously it depends on your goals here. I mean, some people are more focused towards capital growth, wealth generation, other people are more focused on capital protection that is protecting your wealth. So it all depends on what situation you’re in, how much money you have, and if you’re aggressive in growth or if you’re more concerned about not losing what you have.

If you have a large enough portfolio, and my view is you should have a big mix, yeah, you should have probably substantial allocation to equities in general, hopefully something actively managed by somebody who knows what they’re doing. You should probably have an allocation to various type of hedge funds. I like private equity hedge funds at the moment. I think there’s a lot of interesting things going on in the private equity space at the moment. You should probably have a real estate portfolio.

I mean, you know, obviously I’m coming from the institutional side and now we have people sitting at home thinking that, “Who is this guy who says I should go buy real estate and hedge funds on my salary?” That’s not possible. What I’m saying here is not possible for people who don’t already have a fair chunk of cash to allocate obviously, but maybe you can invest in a manager who can do it for you, you know, if you participate in a vehicle, or it’s some sort of a pooled vehicle where you can participate in these kind of things. Diversification gets easier the larger portfolios you handle, basically. And sometimes when we work in the business we kind of lose track of the fact that the rather substantial portfolios that we handle might not be the portfolios that the average person out there is looking to allocate.

Meb: Is there anything you think that fits into a portfolio, and we’re going off topic a bit, which is fine. We’ll come back in a minute. Anything in particular that you think is interesting that fits into a portfolio that most others would consider doesn’t? Because you and I are trend followers, and we appreciate that allocation. I mean, we probably have one of the largest trend following allocations to our default asset allocation portfolios here of anyone I know. Most of the people that I ever talk to, they say, “Output 5% and trend following managed futures,” you know? I don’t know of an institution that has ever allocated more than 20. Maybe there are some. If there are, they’re certainly outliers.

And you can question that question if you want, but also, are there any other strategies like trend following that you think are interesting that most allocators don’t allocate to? Or if they do, it’s a tiny thing? Or one that you love that’s maybe somewhat untraditional?

Andreas: I mentioned the private equity space as something I like. There are various types of return, or absolute return type of strategies. Even in the equity markets there are strategies that are either have a very [inaudible 00:33:03] exposure level or a delta neutral type of strategy that they’re not depending on whether the stock markets are going up and down. Usually with these type of strategies you get a low return but a more stable return. And I kinda like these type of managers because you get a stable base, a cornerstone on the portfolio, something that keeps performing at a fairly low level, but it keeps performing up and down with the stock market.

Well, I’ve also been, I think you knew about this before, Meb, we have been quite active for the past 10 years or so in the alternative lending space, business-to-business lending space in the United States. We’ve been quite active over there, so we’ve had some pretty nice success with strategies and ventures in that kind of space. And that’s an area I think is growing at the moment.

Meb: Talk to us a little bit about that, because that’s something we haven’t spent a lot of time exploring on the podcast. So what do you mean by alternative lending for the listeners, and kind of how do you guys approach it?

Andreas: Basically it’s [inaudible 00:34:03] alternative credit. What we do is we have secure ties in Europe, some American-based ventures that offer credit to American businesses. We’re talking medium-term credit for more or less medium-sized companies, so less than a year credit for established but not very large companies. And these type of companies, the problem for them is that they cannot find loan. They just won’t get loans from American banks. After 2008, after the credit crunch, American banks left the scene. They left a big vacuum behind them where basically the American businesses are unable to loan money.

As we and many others like us offer credit to those companies, what we are doing started with [inaudible 00:34:55] that is a private equity venture that we later securitised. But we found for the past 10 years it’s been going really well. We have seen that in the type of [inaudible 00:35:05] you can find in that space are quite attractive, totally non-correlated. It’s just something different. You know, we always look for different type of solutions. Ten, 15 years ago we were in saltwater disposal.

We had a place over in Arizona to clean water after fracking operations, which was quite a nice business when the oil price was higher. It’s just an example of different things that we do on more of the private equity side of the firm where we look for interesting things here and there. Clearly this is not something that the average listener can go out and start, or build a business around. But just to mention, you know, there’s always interesting business ideas around, and sometimes they can grow into something that matters.

Meb: You know, you touch on something that has always been fascinating to me, which is a lot of these asset classes, or strategies, or approaches that, like you said, have no correlation to anything else. And by definition many of them are hard to scale, or they may be pretty niche-y. Even something like catastrophe bonds, it may be complicated, it may have low liquidity, but things that really have no correlation to really anything else in the portfolio. I wanna hop back to trend for one more minute and then we’ll continue onto some other stuff.

One of the things that I think interests people is trend following in a traditional managed futures world is set up as a long and short-opportunity set. And many people are very comfortable with a long or long flat sort of approach, but shorting starts to get uncomfortable. Could you talk a little bit about, one, how you see shorting fitting into the allocation if it’s something that is also necessary? Because some people say, “No, no, no, if I have to do managed futures I’ll just do it long flat.” So maybe talk a little bit about that, and I wanna hear your opinion.

Andreas: Sure. I mean, first I would like to say that, just to be clear, we’re talking about futures and not equities, because I see them as totally different subjects on this particular instance. But for futures and trend following, it’s a tough call. Because if you model it you’ll see that you can probably get higher returns over time if you just do the long side. This looks attractive on paper, just skip the short side. You can keep trading the long and short over and over a decade, and you look back in 10 years and see that on the short side I net lost money.

And this is easy to draw the conclusion, which is just stop doing it. But it’s not that easy. The short side in conjunction with the long side, if you trade them both at the same time, it will have a negative correlation. What you’re looking at in the end is the overall combined strategy will return a better risk-adjusted return, because you decrease your volatility by adding this negatively correlated strategy. What that means in plain English is that at stress times, at times when the long [inaudible 00:38:12] trend following really takes a hit, that’s when the short side really performs. And it lessens the negative performance, it smooths out the performance, and it gives you a more attractive return curve over the long run.

That’s an interesting point that a lot of people outside the business are missing as well, that sometimes when you’re building a product, usually in the product there are many different strategies, or at least several strategies combined into one product. Each of the strategies need to contribute of course, but they don’t necessarily need to have an attractive positive return. They can even have a negative return if they have a significant negative correlation to the other part of the portfolio. You know, as I said, it’s about risk-adjusted return, not just return. There are no prizes for getting the highest possible return in a year, that’s not how the business works. You win by having the best risk-adjusted return.

Meb: I think that’s an important point. We often say that long short is such a great diversifier because often it’s when things are hitting the fan. But the long flat, if I had to choose one personally for my entire portfolio, if you said, “Meb, you have to do your entire portfolio as one,” I would actually choose long flat. But long short as a diversifier I think makes a lot of sense. You mentioned equities as a reference. Your second book talked about equities, which I thought you haven’t seen a lot of research. I’ve seen a lot of academic research, which is borderline unreadable, about momentum.

You haven’t seen as much of people talking about it in terms of trend. Maybe talk a little bit about how you think about, are there any opportunities to implement equities with a trend or momentum approach? And with a nod earlier, you said that indices aren’t particularly well designed. Any insight there, too, would be interesting.

Andreas: This is actually how the second book came about. After my first book I got a lot of questions about stocks. People read the first book, they said, “Yeah, this sounds great on futures but futures you need to have pretty substantial bit of cash to start trading.” So many people emailed me and asked the same question, “Can we do the same thing on stocks?” And my answer was, “No, not really.” If you do it on stocks you gotta do it differently, and this became such a common question that I figured, “You know what? Let’s just write a book about it.”

And I tried to keep the terminology clean. I tried to use different terminology to show the difference that I think is important here. What I said in the book was that basically trend following doesn’t work for stocks, but momentum does, and it’s a very similar concept. Stocks are different, you’ve gotta treat it differently. The key thing in trend following, as I mentioned before, is diversification. If you can trade everything from cattle, to palladium, to bonds, then you have diversification, but with stocks, no, not so much.

If you try doing trend following of stocks you’re just gonna pile up massive amounts of [inaudible 00:41:12]. And if you don’t realise that you’re building a [inaudible 00:41:16] portfolio, you know, if you build a [inaudible 00:41:18] portfolio on purpose it’s fine, but if you build a [inaudible 00:41:20] portfolio by accident you will have a rude awakening when the market turns, right? So I wrote the second book with that in mind, and tried to explain the difference between trend following and momentum. The big thing with momentum really is that you got to take into account the entire state of the stock market. You cannot realistically expect to make money buying stocks in a bear market, and shorting stocks, well, sure, there are experts who are very good at that, more short-term oriented. But to run, say, a medium long-term strategy that remains short stocks for weeks or months, I wouldn’t recommend that.

You asked about the construction of the indices, and yeah, sure, I mean, if you look at the S&P 500 as your market gauge there, but if you look at that you’ll see, what is the stock market doing? You gotta understand that the S&P 500, well, it has 500 socks in theory but only the top 20 or so matter. It’s market cap weighted, meaning that the larger the company is, the higher the value of the company, the higher the weight in the index. And the top 20 companies or so, they dominate the index. The rest are just a rounding error. It’s a bit ridiculous to pretend there’s 500 stocks in there when you have some stocks that have, what is it now, 5% plus for the top? And the lowest, what, 0.001%?

The bottom few hundred don’t matter, so there’s no diversification in there, and that’s the big problem with the index. Try an experiment there. Try buying the same 500 stocks. Build a simple back test. Buy the same 500 stocks but do it equal weighted. I sort of don’t recommend equal weighted, but it’s a lot better than market cap weighted. What you’ll see is that over time it outperforms quite nicely.

Meb: We say market cap weighting. While a interesting innovation in the 1970s, innovation was not actually market cap weighting but lower fees versus the higher fee stuff. And almost any other weighting methodology tends to outperform over the market cap starting point. Let’s get to your new book. You didn’t learn your lesson, Andreas. You wrote a book, and then another one, and then you said, “I like torture. I can’t help myself. I’m gonna write a third.” I think I’ve quit at this point, I’m not sure. It’s too painful. But you said, “I’ve gotta write another one,” then you put out a new book. Talk to us about it, what’s the new one out?

Andreas: The latest book is very different. I figured I did two books that were reasonably similar. In my first book about future, second book about stocks, they’re very similar in style, in structure. It’s like a clear sequel, and generally I don’t like sequels. Who wants the next big movie franchise [inaudible 00:44:08] add a number to something, or they change the name slightly, and it’s more or less the same. So I figured I gotta do something different this time.

Meb: What do you mean? We’re getting ready to have, I think, the tenth or eleventh…no, like, 11th or 12th “Star Wars” film come out, unless you’re Disney.

Andreas: Oh, God, yeah. No, that’s for sure. I was a big fan of that until the fourth came out, and I do mean the fourth that chronologically came out. What it boils down to, I guess, is the target audience of my books. I started thinking about that a while back when I got a question. I can’t really remember who asked me the question about my target audience of my books. And I thought about it and I came up with the answer, and that actually explains why I write the books I do. My target audience is myself, 10 to 20 years earlier. So basically I try to write books that would’ve helped me a lot if I would’ve found a book when I was less experienced, when I was younger when I didn’t already know the stuff.

If I could’ve found a book like that it would’ve helped me a lot. That’s my starting point. I’m the target audience when I was younger. So I figured, what’s the best thing? What should I have learnt, like, I don’t know, 20 years ago or something? Proper back testing, proper programming of back test, the tech side. So I figured now I got, kind of, a locked audience, right? But people seem to have liked the first two books, I don’t know why, but they seemed to have liked them, right? So I’ve got, kind of, a built-in audience, so let’s see if I can trick these people into reading a tech book. Because these are people who probably wouldn’t buy a tech book normally, but maybe I can get them to read one and I can put them in a false sense of security until they realise that they’re halfway through a tech book and now they’ve gotta continue.

So what I did with the third one is, it’s a very practical book. To my knowledge it’s the type of book that, at least I’m not aware of any similar type of book out there. It’s focusing on how to use a programming language called Python to build back tests of trading strategies. And the point is that anybody who reads it who spends enough time, takes it seriously, learns it, I don’t care what kind of tech background you’re at, if you never programmed in your life before shouldn’t matter, I hope. The point is, you should be able to, after this book, to test your own strategies, to actually formulate your strategies, test them, build it, run it, run the math, and see what comes up. Does your strategy work or not?

Meb: And it clocks in at well over 400 pages. You know, I think this is a perfect prelude to just becoming Clenow the professor, you know? That’s the real money, man. You update this every year and this becomes your textbook for the rest of your career.

Andreas: Oh. Well, Meb, you’ve written a few books yourself so I’d say I think you know as well that I think most listeners should be aware as well that if you wanna write books and make money, there are only a few select topics. And since I know very little about wizards and vampires, I make very tiny money on books, but like almost all authors out there.

Meb: Well, it’s good, and it’s funny because I feel like so many, and I’ve heard you speak to this as well, and it may be a generational thing but so many young investors, they start with a lot of the technical analysis books. They start with the coding to try to optimise some sort of intraday currency trading to where they, again, can make 20% per week, and they throw 500 variables in so that they find a system that works. But I thought yours was particularly thoughtful. Are there any, sort of, examples, or takeaways from the book that you think are interesting for people considering taking it for a spin?

Andreas: Well, I tried to mix it. There are some trading ideas in there. So I have some both…I use both the trading models from my previous two books, and I use new trading models with hopefully new concepts. So this new stuff from the pure trading angle, but I mainly use that to get people to understand the core topic of the book, which is learn to do it yourself. So I would say the big takeaway here is, well, trust but verify, and this book helps you to verify. You know, somebody tells you a strategy works, maybe it’s true, maybe it’s not, but your default view should be that it probably doesn’t. So let’s sit down and test it, does it work or not?

I wanna give you the tools to do this yourself. That’s what the book is about, to test your own ideas, test what people claim, test what people tell you. If you read another book about trading, they give you some rules or something there, well, you know, this gives you a tool set to replicate it to test what happens if you trade it.

Meb: You know it’s funny because I came to much of what my career has become on quant side of the business from frustration with reading a lot of the books out there that made a lot of claims about, “This happens, and this is what happens in the future. And this is a bullish setup, or sign, or system, or whatever,” without really any systematic underpinnings. And frustration with, I mean, just countless dozens, if not hundreds of books without any substance. And then I certainly wish this was around a long time ago. Did you self-publish this, or was this with a traditional publisher?

Andreas: I did actually. I had [inaudible 00:49:39] on that as well if you’re interested.

Meb: Yeah.

Andreas: So I got a bit of a shock when I got into the whole publishing world. First I read about how to get a book published. I read about how incredibly difficult it is. And that’s probably true if you’re publishing a novel probably, I don’t know. I haven’t tried it once yet. But first, I had multiple publishers who pretty much accepted my book right away, which was very surprising to me. I was feeling very good about that until I realised that publishing a finance book is surprisingly easy. Then you start looking at the terms and conditions and you realise nobody gets rich writing books. I think actually, you know, I hate name dropping, but Jack Schwager once told me that, as far as he knows, there’s only one person in the world who can actually make a living from writing finance books, and it’s not him. I’ll leave it to you to figure out who it is. It should be obvious, I think.

But if you look at the economics of publishing a book with a major publishing house you’ll see that it is bordering on the ridiculous. I mean, yeah, sure, you don’t expect to get much paid but don’t expect to give away pretty much everything to some other company, right? Then you realise, what exactly does the publisher do for you? Maybe I had a bad experience. Maybe I was a bit unlucky but my view of my first book was, I’m giving away pretty much all the money and I did all the work. I even designed a cover, I did all the marketing. No marketing was done for the book. I just couldn’t see the value add in it.

So I did an experiment with the second book. I self-published the second book and I figured, you know, I did all the work on the first one, right? I sold as many as I did on the first one and, well, not that it’s…I don’t know how to express that it’s actually not enormous money any way, shape, or form, but at least it felt like it’s fair compensation for writing the book. So I did the same thing on the third one, self-published via Amazon, via CreateSpace. I checked with a couple of publishers. I had a couple of publishers who were interested, but again, terms and conditions are…as a businessman it feels wrong to do that, to be honest. If you can get the same distribution on your own, then why not do that? The technology and the platforms for this has increased incredibly over the past decade.

Meb: The world has changed so fast with how it operates. And like you mentioned, trend following and power laws exist in so many areas where the big winners are often a magnitude more than the long tail of everything else. But talk to us a little bit about your website. You threw up some articles on there, some resources. You’ve been publishing for a long time. I don’t know if you can call it a blog anymore in 2019, but where do people go to find a little more about what you’re writing about there, and what’s on it?

Andreas: I should probably write some more articles there. I’ve been too busy writing books and things, and the website is really…I’d say it’s a hobby project that started some years ago. It was actually a fellow author who told me, you know, when I was almost done with the first book an established author in the field gave me some advice. Some of it was great, some of it I backtracked on later. He told me, one, start a webpage. Write articles, write a blog basically. That didn’t feel right, but that worked out. I had a lot of interesting interaction there. I wrote a lot of articles and people seemed to enjoy it.

He also told me, “Join Facebook, Twitter,” and a long list of other things, and I left most of those things afterwards. I think I still have a Twitter account, which if you send me a message on Twitter I’ll probably never see because I never log into the thing. That part I’m not sure. Maybe you gotta have it, but that’s why I started the webpage in a way. And I write the articles when I have a moment, when I have some time. It’s more of a hobby but it’s been sparse lately due to writing.

Meb: Well, we’ll link to some of the articles on there in the show notes, listeners, mebfaber.com/podcast. There’s some good articles, “How to Be a Professional Trader,” and some others that we probably don’t have time for today. “Trading Sardines” is another nice one. What else you working on these days now that this book is put to bed, out of your brain? As you look into the horizon in 2020 and beyond, is there anything that’s scratching an itch in your head, other than negative interest rates? Other than chatting up managers is there anything in particular on your brain that either you’re working on or you’re curious about?

Andreas: All sorts of a lot of stuff going on. I mean, some people are incredibly focused. Some people are laser focused. They do one thing, they do it incredibly well, and all their energy goes to this one thing. I have the highest respect for these type of people but I’m not one of them. I like to do a lot of different things, and all of these things, and they’re mostly visible stuff really that you see probably are my hobby projects. And you know, you’ve gotta have your hobbies. And I do confess that I’m actually looking at my screen at the moment about 300-page manuscript started this summer. I have no idea yet if it’s gonna turn out to be anything that’s actually gonna published or yet another manuscript I end up deleting and I had fun writing it. But I do have something in the pipeline in a way. So all I can say about that one is that it’s gonna be an extremely different book, nothing remotely similar to anything you’ve seen before, if it does finalise, of course.

Meb: Investing mystery-romance novels are a very small niche, Andreas.

Andreas: That’s a good one. That sounds like a plan.

Meb: As much as I joke about never writing again, for me it comes a point where it’s almost like you can’t help anymore and I have to vomit it out. There’s a topic that is bugging me currently but it’s a matter, of course, of finding the time and interest to do it. Talk to me a little bit about resources, you know? We’ve talked about a few already, obviously your books and website. Is anything else out there you think is particularly been influential to you, whether it’s books, or websites, concepts, anything else in your head been towards anything that you think would be helpful to listeners?

Andreas: Let’s see, with the risk of looking like I’m paid by the guy, but I tend to, when I get asked that question, tend to plug the same guy. I think I actually owe him that. Anyway, after he helped me out, he wrote a chapter in my latest book as well. I very much recommend Rob Carver’s books. Rob is a former hedge fund guy in London. He was, I believe, head of [inaudible 00:56:16] AHL for a while. He wrote some incredibly good books about systematic trading, particularly his first book which is actually called “Systematic Trading.” I hear he’s got a new book coming out I believe next month.

Meb: Wow, that’s exciting.

Andreas: I don’t know what it’s about yet, but yeah, I’m waiting for that one. And I think that it’s rare to see somebody with the industry background writing these kind of insights, and that’s why I pay attention. After a while you get to know a lot of the fellow authors in the field, and it’s very rare to see somebody who had that high-level background who still wrote books about it. And that I can very much recommend.

Meb: Cool. That’s a great one. I know I’ve seen it, I don’t recall ever reading it. He’s got another one, too, that’s…

Andreas: “Smart Portfolios.”

Meb: Okay, yeah. I knew it was similar title but not quite the same.

Andreas: And I believe the third one coming out soon which I have not yet read is about leveraged trading, so basically higher-risk trading, more retail oriented, I believe.

Meb: Oh, well, that’s interesting. That’s a topic we get consistently. I think nothing gets the Pavlovian glands going for investors than leverage in the big win. So I’ll be curious to see his take on it. The hard part for most people is you need to avoid it but we’ll see what he comes up with. That’ll be fun. And you’re supposedly, I think I saw on Twitter or somewhere else, Jack Schwager…I always pronounce it incorrectly…is working on a new “Market Wizards” book, too.

Andreas: Yeah, exactly. I saw it as well, yeah. To be perfectly honest his name always confuses me as well because it’s not my native language but I do speak German, so I tend to pronounce it in a German way and that’s probably not…it means brother-in-law by the way in German, but I’m always confused because of the German spelling of the name but it’s American, so I wouldn’t say for sure. Sorry, Jack.

Meb: Hey, well, look. You, Jack, Andreas, Meb, I think we all have the same struggles with names. Every time I go to get coffee in the morning I get a different variant of my first name. I feel like I just need a pseudonym at this point. I should just start saying Bob. As you look back on your career, what’s been your most memorable investment? Good, bad, anything in between come to mind as seared in your brain?

Andreas: Yeah, actually I do have a good one for you. I’ve got a good one for you. Remember…let me see, how many years ago was that? You know you start getting old, you lose track of years. Do you remember, what was it, four years ago when the swissy peg broke? The Swiss, it was capped to the euro. They were holding the 1.2 line, remember? So this story starts one day before. I mean, now we had, how long was it, a year or something? We had the rate between our currency over here. I mean, obviously I’m based in Switzerland. The rate between our Swiss currency and the euro was pretty much fixed at 1.2. The Swiss Central Bank held the line there, they spent a fortune holding that line.

Now this was the day before it broke, and this was…well, I guess you can call it a trade. I had to make a larger personal transfer from swissy to dollar. And unfortunately for me, I had this amount in the wrong bank. It was not the bank that I had some leverage over where I can push rates and push conditions, but I had it in the wrong bank and the bank couldn’t really care less about me. And I’m calling them up, I’m checking, because obviously e-banking is not the way you do these things, and they give me a rate that’s absolute disaster. I mean, we’re talking [inaudible 01:00:06] and spreads, something ridiculous, right?

I tried to explain my way up the chain, talked to the next guy, next guy, tried to explain, and I get more and more people telling me that, “No, you don’t understand, sir. We don’t have any fees on currency conversions.” Like, no, of course you don’t, you have spreads. This conversation got on my nerves. I think I got more and more upset. I yelled my way up the ladder. I probably was fairly polite, but in the end I just lost my temper. I think that these people, they don’t understand. Either they don’t understand how much money they’re stealing from you on this transaction or they’re pretending to misunderstand. I can’t deal with this.

I totally lost my temper in the end. I slammed the phone down. I figured, “You know, tomorrow I just transfer this amount to a bank where I can do business, a bank where I had some more clout. I do the transfer there between the currencies and transfer it out of the States.” Now the next morning I show up in the office, I figured, “No. Leave it overnight.” I just got too upset spending, I don’t know, two hours on the phone yelling at people over this, so I just left it. I went home. I thought, “It can wait the day.”

Next day I show up, I look at the screens, I was pissed for 3% spread. Next day I look at the screens and the spread changed in my favor, 30%. And we’re talking a major [inaudible 01:01:23] conversion rate changed 30% overnight. Yeah, I was pretty happy that day.

Meb: That’s so funny. Just think if you went back, looking back, when the guy had caved in, let’s said, “Okay, we’ll waive it. We’ll let you make the transfer.” You transfer and then miss it.

Andreas: Well, yeah, that would’ve ruined my day. It would’ve ruined my year. I mean, this is one of the best trades I did that year. I guess, any sort of logic in this, any sort of lesson in this is that one well, sometimes your best trades are from dumb, stupid luck. I guess that’s the theme we can see quite a lot and probably have many stories with good things happening with dumb luck and bad things happening from skill. The other thing obviously, if you’re looking at more and more serious, that [inaudible 01:02:11] trading lessons here will be, if you have a situation like that. Here we had a one-sided cap, right? The pressure is all on one side.

You have a Central Bank artificially protecting the line on one side. I mean, everybody know the year before, it was clear. The day they stop protecting it is gonna be a major, major move, right? Everybody knew that, and still, people took risk on the wrong side. I mean, you saw later on some trend following shops, for instance, who lost a lot of money because they took on massive positions on a trend following model on a market that moved tiny cents up and down, right, with almost no volatility at the time because central banks were keeping it down. So I mean, the lesson here from a more serious point of view is, if you apply standard models, and standard models will tell you, one, take a position. Two, take a massive position because there’s almost no volatility, right?

What we do mostly in the business is we take [inaudible 01:03:07] parity type of positions. So if something is low volatility, you take it a very big position size, because otherwise that position has no possibility to impact the bottom line result, right? So later when you saw that some funds lost enormous amounts because they took massive positions on the wrong side of an artificially inflated asset, and they didn’t take into account that the low volatilities also artificially created by Central Bank, I’m certainly not saying you should predict it and take the opposite side here and bet on the bank failing. But if you take on massive bets that basically say the Central Bank will never stop defending this line, then you have a problem. So the bottom line is, don’t always follow your rules, use some sort of common sense in special situations.

Meb: You know, it reminds me of the old Soros and sterling trade, where you outlined a very clear example of why that stress and pressure builds up. And even better example of knowing some sort of situation that is outside of the quantitative rules could really save your hide, and that applies to everything. People are always asking, “When would you alter your systems? When would you trade something?” And in my mind that’s something that, whether or not you change your system, at least it’s something to be very aware of, and a lot of people, not just in this example, but many, many other examples get carried out in body bags because of these situations where they either just completely ignore it, or just assume that it would never change.

Andreas: Yeah, it’s exactly the same situation as the sterling situation. You had a similar in my home country as well. It was back before I left, but you had a similar situation in the Swedish krona as well. But if you have a situation where the Central Bank is artificially doing something against the pressure of the market, it’s a matter of time.

Meb: While we’re on that topic and then we’ll have to let you go, what is a on-the-boots, European perspective for what’s going on? How are most people, or how are you thinking about currencies and interest rates in 2019? Because I think if we went back in time 10, 20, 30 years and were having a chat over a point or something, and said, “The future is gonna be one where a lot of sovereigns have negative yields.” And even, I think, some corporates now that seems like a pretty odd future for the finance textbooks. Do you have any just thoughts, general comments to make on the way the world looks?

Andreas: Yeah, I mean, there are a lot of problems on the horizon at the moment. One obviously is negative yields. I mean, a lot of Americans would say that negative yield is not possible over here, and I’d say, “Well, the Swiss disagree.” We had them for a while, it is possible. You guys are a bit further away than over on this side of the pond, of course, but negative yields is a problem, and the problem is how to get away from it, how to move away from negative yield. Once you’re there, you’re stuck. You’ve got the tiger by the tail, and now what do you do? You hold on. How do we slowly let go of this? That’s gonna be a major issue. There’s one issue.

The other issue obviously that we see is it’s bad for everybody in the long run is the Brexit disaster story, and together with the increasing risk of global trade wars. I mean, it’s not a matter of political opinion but rather economic opinion that these kind of things are just not good for the markets. They’re not good for the economy. They’re not good for the business, so there’s a lot of problems. In the end, you asked about currencies as well, you could say that the dollar has a lot of problems, and I agree with that. But which major currency out there has less problems than the dollar? You guys have a lot of problems, but point me to a major currency that has less problems than your currency? And currency is a relative game so sometimes it’s not the best currency but the least worst currency that performs. We certainly have a lot of challenges in the year up ahead, that’s for sure.

Meb: Yeah. I was just over in the UK earlier this year and needless to say, the mood was quite a bit dour. I couldn’t even get anyone to give me a coherent example of how this all even potentially works out. It was so confusing to me, but anyway. We’re owners of some shares there, so all of the bad times tend to create opportunity on the value side for guys like us. Andreas, where can people find more? If they wanna learn more about you, follow what you’re up to, get in touch with you, where do they go?

Andreas: Well, go to my blog, if you still call it that, my website, followingthetrend.com, one word. And there’s a contact form there as well. You can contact me there. I try to be a pretty accessible guy. I try to interact with people who read the books and this kind of thing, so yeah, feel free to contact me. And if you happen to be in Singapore November 26th, or Melbourne the Saturday after, whatever that is, the 31st, something like that, feel free to come and chat with me there. I’m doing Singapore, Melbourne in a few weeks.

Meb: Very cool. Also check out his books, listeners, “Following the Trend,” and his new one, “Trading Evolved.” Andreas, thanks for joining us today.

Andreas: Thanks, Meb.

Meb: Listeners, we’ll post show note links at mebfaber.com/podcasts of the books, some of the things we talked about today, other books, whitepapers, etc. Subscribe to the show on iTunes. Leave us a review, we’d love to hear what you have to say, and shoot us feedback@themebfabershow.com. Thanks for listening, friends, and good investing.