Episode #282: Salem Abraham, Abraham Trading Company, “Managing Risk Starts With Imagining the Unimaginable”

Episode #282: Salem Abraham, Abraham Trading Company, “Managing Risk Starts With Imagining the Unimaginable”

 

 

 

 

 

 

Guest: Salem Abraham is the President & Head Researcher for the Abraham Trading Company. In 1999, Salem and the Abraham Trading team became the first company in the world to send computer-generated orders electronically to the Chicago Mercantile Exchange. Throughout his career, Salem has managed investments in stocks, bonds, options, derivatives, and private equity. The strategy for the Abraham Fortress Fund was originally used for Salem’s half of the Pickens-Abraham Foundation that he started with T. Boone Pickens in 2008.

Date Recorded: 12/16/2020

Run-Time: 1:03:26

To listen to Episode #282 on iTunes, click here

To listen to Episode #282 on Stitcher, click here

To listen to Episode #282 on Pocket Casts, click here

To listen to Episode #282 on Google, click here

To stream Episode #282, click here

Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159

Interested in sponsoring an episode? Email Justin at jb@cambriainvestments.com

Summary: In episode 282, we welcome our guest, Salem Abraham, President of Abraham Trading Company and a legend within the trend following and managed futures space.

In today’s episode we’re talking with Salem about a lifetime of trend-following. Salem explains how a chance meeting with Turtle Trader Jerry Parker was his first encounter with ideas he would build his career on. We talk about the importance of risk management and diversification by utilizing assets other than equities. Then he explains how his relationship with the late Boone Pickens led to a foundation that had such good returns that he opened it up to the public and runs to this day. We touch on asset classes ranging from the dollar, bitcoin, farmland, and even trailer parks.

As we wind down, we hear how hedge he put on in February turned $200,000 into $6 million in 37 days, returning 30x his money.

All this and more with Abraham Trading Company’s Salem Abraham.

Links from the Episode:

 

Transcript of Episode 282:  

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: What’s up, y’all. Great show for you today. One of my favorites. Our guest is the president of Abraham Trading Company and a legend within the trend following in managed futures space. In today’s episode, we’re talking with our guests about a lifetime of trend following. We hear how he got a chance meeting with turtle trader and former podcast guest, Jerry Parker, was his first encounter with ideas he would later build his career on. We talk about the importance of risk management and diversification by utilizing assets other than stocks. Our guest explains how his relationship with the late Boone Pickens led to a foundation that had such good returns that he opened it up to the public and runs it to this day. We touch on asset classes ranging from the dollar, Bitcoin, farmland, and even trailer parks. As we wind down, we hear about a hedge he put on, made 30X his money in just about as many days. All this and more with Abraham Trading Company’s Salem Abraham. Salem, welcome to the show.

Salem: Hey. Thanks, Meb. Great to be with you.

Meb: For the listeners, we’re winding down the yearend, recording this at the end of 2020. So I technically have to say 2020 is not over yet. There still could be a zombie apocalypse or asteroid or something, but we’re almost there. Salem, where in the world do we find you today?

Salem: I’m in Canadian, Texas, town of 2,500 people and two stoplights and long way out in the middle of nowhere. You know, the nearest Starbucks used to be 101 miles away. Then they put one in a grocery store 45 miles away. That’s a good metric for the people that think they live in the country. You go, “Okay, how far from a Starbucks?”

Meb: I want to talk a little bit about your origin story. It’s funny because I’ve heard you say you’ve come from a family of Irish and Lebanese immigrants to Texas. And if you just go straight north from Canadian, Texas, you arrive to where my dad’s side of the family immigrated, and it was kind of French, German, English mutts. But up originally, it was in a little tiny town called Holstein, Nebraska, which is outside of Hastings. There’s like 20 people. I’m sure they still don’t have a Starbucks within 100 miles, but they’ve now kind of settled in Western Kansas, near Colby. So that’s kind of on the same parallel up and down.

Salem: Highway 83, goes all the way up. We could all get on 83 and meet one another. Where’d you grow up?

Meb: Little Colorado, little North Carolina. I have a lot of very fond memories from the farm, which we still have in our family. So fingers crossed on wheat prices this year. We’ll see where they go. Most of the crew’s in Colorado. Give me a little of your background. I was tweeting the other day, whining and moaning like I do on Twitter, like everyone does on Twitter, about the accredited investor rules. And I said it’s kind of silly. It could be an online DMB test to allow you invest in things because I made a laundry list of things you could lose all your money in easier then, and at the very top of the list was Forex and futures. And you got your start with futures. Am I right? Take us back.

Salem: I grew up in Canadian. My family has been here for four generations and public high school, go off to Notre Dame. I’ve always been good in math. I’m kind of a one-trick low reader, poor speller, and I’m really good in math. And so I go to Notre Dame, get a finance degree, and met one of your UVA buddies, Jerry Parker, when I was, I think I would have been a junior in college and Jerry was very kind to help give me some advice on trading and what he was doing and this idea of a systematic quantitative way of trading was very appealing to me because it appealed to the math side of my brain, which is the really good part.

Meb: Listeners, if you haven’t heard Jerry’s episode, you can find it in the archives. He’s the best. But just thinking about serendipity in life, you’re in college, I imagine late teens, early 20s, but you met Jerry at a wedding, like this wasn’t like you were studying, reading like all these books on trend following and like looked him up. Like, did you just like bump into him at the buffet line? Were you guys on the dance floor? How did it happen?

Salem: Was reported once as a wedding, but it was not a wedding. What it was, it was a family gathering of 30, 40 people that were both sides of a family here in Canadian. So it was in Canadian and on one side of the family, the Abraham side and the Cooper side. And so I have first cousins here in Canadian that their first cousins on the other side of their family was then Jerry’s wife. So they were newlyweds. Jerry married a first cousin of my first cousin on different sides of the family. We’re at their house, his family’s house, and we see the other side of their family on occasion. And so here’s this girl that we know that we’ve known most of our life too, and she’s married Jerry Parker.

And so I’m in college and I’m talking to Jerry and he’s explaining what he does and, of course, it really resonates with me this idea of a systematic way of trading. So it was funny because I being a dumb college kid, he was meeting all these people the first time. So I knew everybody. He was the, you know, it’s when you show up and you meet everybody and everybody else knows everybody, so you’re the new person. So he was really on his best behavior, talking to everybody and being nice. I think, you know, looking back, I had to be just throw it out there. He said you know if you ever want to know more about trading, you can come to Richmond and I’d show you some stuff and maybe we could sit down and talk about it for a day or two and you’re welcome to come out anytime. So he extended this invitation and I know it was genuine, but I didn’t think he would ever guess I would take him up on it.

Well, so this was like a Friday and by, you know, Monday I’m calling him and saying, “Hey, when do you think I can come see you? I’d love to come see you, talk to you.” So I went to Richmond, my older brother went with me to tag along. And so we stayed there at Jerry’s house. I had a really nice time. And Jerry was nice to share some ideas and, you know, he didn’t reveal all his turtle secrets. There’s a lot I’ve learned since then that a lot of the pieces filled in later, but I think Curtis’ Facebook probably told more by far than Jerry did. But a lot of risk management things, a lot of good ideas, and then he encouraged me. And so that was it. But yeah, no, Jerry is the super trader and a really nice person and he was kind to me early on.

Meb: It’s such a good lesson, especially when I talk to younger people in the industry. Most people I think in our world are decent, really wonderful people, but young people, so many times, are scared and just won’t do that follow-up. That opportunity that’s sitting there looking you right in the face, like go sit down at a table with someone, most people would just be too scared or they’re nervous, whatever it may be. And so being able to take that opportunity, I think is such a good lesson because, hey, look, for better or worse, set you down a path or at least help guide it. So what happened at that point? You go back to college, got the trading bug. What was next?

Salem: So then I went to the library in the days before the Internet. Went to the library, read all I could about Richard Dennis and Bill Eckhardt and trading, and ideas. And so then started doing some simulations on paper and charts and things. And then it evolved into where then I got a Tandy 1000, a used Tandy. I couldn’t afford a new one. So I bought a used Tandy 1000 computer and was able to do some different simulations. I had System Writer at one point, System Writer TradeStation. Early on it was System Writer and I was able to do some things on it. And one funny story I told my grandfather who was a very successful businessman in oil and gas, and real estate, and commercial real estate, ranch real estate, and very much an entrepreneur, he was in politics for a while too. So I would bounce ideas off him and he would say to me, he said, “Wow, of all the ways to lose money, why in the heck do you have to pick the very fastest one, trading futures?”

Meb: And that’s coming from a Texas person who’s been involved in ranching and has been surrounded by people in the oil industry.

Salem: Like your family in Kansas, they would know people that go broke trading. They call it a Texas hedge, but it’s basically a lot of commodity hedges that go wrong where they hedge their wheat or they hedge their crop and then they don’t lift the hedge at the right time, they start speculating. We can fill up a hand real fast, people go broke trading futures. And so he was worried for me, but I started trading. I showed him the stack of the simulation. I said, “Look at this. If I had followed these rules, like I start with this and, you know, start with a million-dollar account…” was kind of the theoretical value. But at the end of the year is 1.6, 1.6 million. And he’s a 70-year-old guy and he smoked a bunch of gravelly was “What the heck do we do with this? Send it to Chicago and cut you a check, dummy.” There was a lot worse language than that.

And I said, “Oh, no.” I said, “It’s a simulation, but it’s your Notre Dame degree, you think you’re smart. Those boys in Chicago, they’re going to eat you for breakfast and spit you out for lunch, buddy.” So he was not encouraging is an understatement. But he was then ultimately willing to…he invested a little bit of money but the deal was if we lost half of it we’d stop trading. My two brothers invested, he invested, we had a $100,000 account. The deal was if we lost half the money, we’d stop the commodity trading nonsense and throw that stupid quote machine out the window. And now he says, “Okay.” And so that was January of ’88. That’s when I’d gotten out of school then by that point.

Now I’d gone through the crash of ’87 in October. So I’d done that in my own. That was my last semester in college. I was trading my own account and had a trend following strategy, went through the crash of ’87 short Eurodollars interest rates. So October 19th with the crash, October 20th was a 37 standard deviation move in Eurodollar futures and I was on the wrong side of it so my $50,000 account that had grown to $66,000 immediately went to $33,000 on October 20th. So there’s a lot that happened in that fall of ’87 and then the ’88, started trading and then in May it got down below $70,000. We thought we’re going to shut it down. And he’d come in one day. I remember he got the fax machine that roll up, that thermal paper, was how you got your statements. And he said, “Where are we today?” And I said, “68,707” and he’s just…grabbed the spring sheet. He said, “Just a matter of time.” And I’m like, “Ah.” So, but that within the draw out of ’88 saved me, by the latter half of May and into June, and by the end of the year, I had more than doubled the money and then was off to the races.

Meb: So what happened next? This is a pretty atypical origin story for a trader decades ago. I think trading remotely, particularly in 2020, it sounds totally normal to all the listeners. At what point did you sort of transition to full-time opening up to other people’s money outside of just friends and family?

Salem: At the time, January of ’88, I started working for my grandfather, making $2,000 a month. My wife, we got married in ’88. And so my wife of 32 years and yeah, 8 kids. And so we got married then and then ’88 was good and then ’89 and then I called late one night. It was about 4:30 or 5:00 Texas time. So I called Commodities Corporation. My grandfather had gotten a deal from Dean Witter, principal-guaranteed fund. And he had thrown it on this prospect from some Dean Witter broker and he’d sent it to me. He said, “Hey, you did better than these guys last year, so I’ll call these people.” Commodities Corporation was working with Dean Witter. And so I called and it was late. And my point is, it was late in the evening there. And Elaine Crocker picked up the phone at Commodities Corporation and a lot of her staff would have been gone and she picked it up and we had a nice conversation and she said, “Well, send your stuff.”

So that started about a 9-month conversation with Commodities Corporation that then ultimately they gave me a $200,000 account as a test account. And then a year after that, they went from…they liked what they saw and they started adding more money and ultimately they added about $100 million with me by the early to mid-90s. I had a lot of fun at Commodities Corporation, met a lot of really interesting traders there, and that was great. Well, I want to follow up on one thing you said about being out here, you’d have satellite dishes and phones. The internet was gone, but you had a crummy satellite, the little dish you’re out, you hook up yourself and then you have quotes on a monochrome monitor, like an orange or green numbers and then we had paper charts and the telephone. And that was what worked back then and notes. So as a guy who’s been out in the wilderness for three decades, the Coronavirus has accelerated all these nice luxuries for me where it’s like, “Oh, I’ve been out here waiting for everybody to show up with their Zoom calls.”

Meb: Exactly. You’ve been ahead of the curve by a couple of decades. It’s funny you mentioned Commodities Corp. I have an old tweet where I would love for somebody to write a book on this. There’s like four or five parent organizations that if you look at the amount of progeny they’ve produced, and I would put sort of Commodities Corp in the sort of Dennis turtles under one umbrella, maybe two umbrellas, but it’s kind of the same thinking. Soros has produced so many, the Tiger Cubs, Rubens, Treasury Desk. There’s like five groups, but that’s one of the big ones for listeners who haven’t heard of that.

Salem: In the late ’90s and then Elaine Crocker and Michael Garfinkel who were kind of in charge of the traders when we were there, their stable of traders, they then went to Moore Capital, working for Louis and Louis was a Commodities Corporation trader. They had some money with Paul Jones and Bruce Kovner at Caxton and Ed Seykota. There are a lot of great fun traders, Tom Basso. I know you interviewed Tom. Tom was there. The comraderie was something you normally don’t have as a trader. Certainly, I’ve never had out in the country trying trading on my own completely. So that was fun. It was a nice community.

Meb: A lot of those names, it’s like the Mount Rushmore of macro world, where really, and certainly like macro feels like heyday, a lot of those big names. You guys started doing the trend following across lot of different markets. Tell me a little bit about the philosophy and the methodology. I saw at one point you were one of the first companies, which is incredible considering where you are, to send computer orders to the Merc. Tell me a little bit how you thought about markets, how it evolved over the past three decades.

Salem: So originally it was trend following in 21 markets. At the end, we were doing not only trend following, but many different kind of versions of trend following and even some mean reversion. It was all quant though. The common thread was quant and we’re basically math geeks, computer geeks, and we trust math. So in that vein, we ended up having everything was quant-based. And then the goal was to try to create a diversified strategy. We ended up trading 90 different futures markets. We had a 24-hour trade desk. And so we had people there, you know, Sunday evening till Friday at 5:00 and round the clock trading and managed as much at one point a little over $600 million and then at the end we ended up 13.1% average generator return net to our clients over 31-1/2 years, but the last 10 was pretty lean.

It was, I would say flat for 10 years at the end. So that’s where we look at CTAs the last 10 years it’s been pretty lackluster. And there have been some winners and some good ones in there. Most folks didn’t do as well and solely we had redemptions and people left. At the end though, we had still a couple of $100 million dollars, $206 million to be exact. And we had certainly one big client that was really…didn’t want us to shut down, but we thought it was time to, you know, say, “Hey, there’s other things we could be doing and let’s go do those.”

So that was the CTA, that macro. Now, the thing we did in the middle that we brought up was the electronic trading. So what we call the electronic trading, it’s interesting, there are some parallels with now. In the late ’90s, you had the tech boom, the tech bubble ended up being in 2001, ’02, you had this, the bubble burst and stocks were not good in 2001 and ’02. But you had ’95, ’96, ’97, ’98, ’99, those 5 years. I think the worst in those five was like 22% or 23%. The best was like 38%. So I had someone say to me, “Why do I need the risk of futures when I can make over 20% a year in stocks?” I said, “Yeah, you got me. Yeah, I know. That’s the familiar part.” Like in ’95, we had $130 million under management, a little over $130.

So we were one of the biggest CTA, certainly the top 50 CTAs, in the top 50, but then by ’98, Commodities Corp, I got fired from Commodities Corp because I wasn’t making 30% a year. I had to make 30% in one year or average 15 over the last 3. And I had three years where it wasn’t very good. In ’97, they took half the money, fired me in ’98. We had a lot of money leaving. So we were down to $3 million in ’99 and it was basically my money and some family money. And then from there, then now in 2011, we were at $600 million. So you see the ebb and flow of traders and falling into popular and not popular and where is everyone chasing, but people were chasing stocks, but I left the CTA space.

Now, in 2001, ’02, ’03, ’04, we averaged like 27%. We did really well. So it’s back to a long-term lesson that everybody needs to know. Be careful when you’re driving, looking in the rearview mirror because the future is going to be different than the past. And I know some people on your show have talked about how sometimes our investors are the worst traders when they’re trading us as hedge funds. They come in and out at just the wrong times. And so you’ve got to manage your own emotions as an investor in traders too just like we as traders, the full time we do it for a profession, we’ve got to manage your emotions, my emotions, that’s part of it.

Meb: It’s so weird. People understand it, but then continue to behave poorly, is the weird thing. Like the institutions, you could sit down and have this conversation with them, they say, “I get it.” And then talk through the process about how they’re liquidated fund and they say exactly what essentially what Commodities Corp did, which is it’s a three-year time horizon, if you underperform you’re out. And the reality is it should probably be the exact opposite. Once you’re on board with the approach and the system or the allocation, like you should be allocating more if they underperform. But that’s what creates opportunity, of course. And I was laughing as you’re talking about the returns in the late ’90s, because a recent survey came out, polling investors all around the world and all the stock markets in the U.S. of course, was the highest, but the 15% expected returns. There’s going to be a lot of disappointed people at some point.

Salem: I wanted to touch on one interesting thing that happened to us, was the trading on the CMEs. Because what was interesting is when all these people leave, your clients leave, I told my team then. I said, “Well, here’s the bad news. The bad news is all of our clients have left. There’s one left.” We had a Dean Witter account that they said, “Well, we’re over half your money. We can’t be over half.” They said, “If you don’t fix it within six months, we’re leaving.” And I said, “Well, I won’t fix it in six months. No one’s coming. They love stocks.” They were counting on the clock for walking out the door. So I said, “Look, the bad news is the performance has dunked the last four or five years, everybody’s gone to stocks and no one’s calling. The good news is nobody’s calling. We can do whatever we want.”

So I said, “What we want to do” I said, “I’ve got the money to keep the team together.” And I said, “Let’s go do something that we can do on our own. And what do we want to do?” And it’s funny, someone ordered juggle balls. We all know how to juggle. So there are things we did that were just goofy things that we’re trying to think what to do. From that, building lakes on our pond. We did some funny things. But we were still trading our money, but we had extra time. Well, so then we said, “Hey, Globex is starting.” So it was the very beginning of Globex. We heard that they were opening it up, and so we ended up…what we did was arbitrage on stock index futures and ETFs and then the basket of NASDAQ stocks. The New York Stock Exchange, we couldn’t do because they’re specialist at the New York Stock Exchange, but NASDAQ, because it was computerized, we could do it.

And so we’d do the NASDAQ stocks, those 100 of stocks on the NASDAQ 100, we would do the ETFs, those spiders, the QQQ, the Russell. So we had about five different stock ETFs back then and then we would make markets on the electronic stock exchange, Island, Instinet, Archipelago, which then bought New York Stock Exchange. And then we would do it on CME, we would do arbitrage between when they were rolling like the futures, S&P futures from one month to the next quarters, they would roll during the roll.

So we were the first Terry Duffy at CME. I said, “I’d like something from you. We’re the first.” Computer program entering in order. The board of directors, they wouldn’t let me do it and I sent them a letter and then after two months they finally gave us permission and so we started doing basically now what’s called high-frequency trading. We called it electronic trading, but we were doing arbitrage, making markets between these connected markets. It’s a very basic arbitrage, but it’s like playing Slap Jack, but you brought your computer that you’ve programmed with an electronic eye and a hand, and you start getting 9 out of the 10 jacks in Slapjack. And these kids don’t know the game, Slapjack, but when you see a Jackie, you got to grab it. It’s a pretty simple game.

So it was a simple arbitrage, but once you computerize it, you would buy and sell. It’s fascinating in that there were days we were over 1% of the volume, Meb, of the Chicago Mercantile Exchange from a two-stoplight town in the middle of nowhere, and that’s when only a quarter of their volume was electronic. So we were 4% or 5% of electronic volume any given day at the Chicago Mercantile Exchange.

I ended up buying about 15 seats at the CME when they went… Well, the IPO happened was really the trade that came out of that, getting to know the CME and the CME was such a leader in going electronic. And the board of trade was king, but CME had the vision to go electronic and now they own the others. I think there’s something to be said for, you got to look ahead, and CME did that. They looked ahead far enough down the pipe to say, “Hey, this is coming whether we like it or not, we want to own it. We want to be king.” And they did that.

That’s where I bought all those seats in their exchange because I said this… And ended up, it was a great trade. But we had a lot of fun. We did that for six years. A lot of other people started doing it, got up the learning curve. You’d buy and sell, say half a million dollars worth of stock in two-tenths of a second and then you’d make a dollar or $2. And you’d say, “Well, that’s a waste of time.” And you say, “Yeah, but do that 10,000 times a day and you make $10,000 or $20,000 a day and you’re like, no, this is a lot of fun.” So I did it. And it was funny, that was in my retirement account, I did it. While I was trading stocks on my own account and they said, “Oh, yeah, you could do that.” So it was really nutty, but I had a team of about eight people that we brought on. We had over 70 computers and it was all automated. It was a lot of fun for programming, for computer data, and it was a really competitive environment to be so fast. And we learned a lot. Everything you and I have done anybody, you know, you have all these experiences and the cumulative effect of that affects where you are today and what you’re doing today. And so that was an interesting piece of the story.

Meb: So you’ve done a lot of different investing styles, trend following, I imagine, has been a core philosophy for a long time. Underlying a lot of that is a belief in how to think about risk. Here we are in 2020, it’s certainly an odd world we live in. I’d say often that they didn’t teach me about negative-yielding sovereign bonds or even just bonds in general or negative-yielding mortgages, which they have in someplace around the world, in university.

Salem: Now, Meb, we got to be fair here. That’s never happened in the history of the world back to caveman writings. It is dumb. It’s crazy. We can’t let people forget that’s crazy. You have to have a very manipulated market.

Meb: Tell me about how your views on risk have evolved, how you think about risk investing. I certainly see a lot of rhyming with the 90s and certain pockets of the world and what’s going on. Talk to me about how you guys approach risk, how you think about it.

Salem: I think we can all share ideas on risk because as traders, whether you’re a professional trader or someone that’s just trading your own portfolio, you see that common mistake of just a lack of diversification and trying to size risk, you know, whether it’s someone let’s say, I had a friend who worked at Enron and had all her stock in Enron and was about to retire and you’re like, “Now, wait a minute. That whole thing is bad. That’s wrong.” And people told her before Enron went under because it’s just unthinkable that Enron would go under, but the unthinkable happens. So the one thing I learned early on to October 20th of 1987, the day after the crash, 37 standard deviation. There’s a Nobel Prize-winning economist, “When Genius Failed,” if you read that book, they modeled that to six standard deviations. I did not have my college diploma and I knew that it could go 37.

So the unthinkable can happen. And I know, Meb, you’ve talked about it a lot, and I completely agree that when I’ve watched your show, I’ve heard you mention, “Hey, these things that can happen.” Like I think the stock market back in the Great Depression, stocks were down, if you look at the index, is down right at almost 90%, 89%. If you include dividends, I think maybe it’s 79%, but okay, 80%, 90%, whatever it is, it’s bad. And I think risk starts with looking at worst-case scenarios and admitting that they can happen. When we do that in our regular lives, we have fire insurance on our house. The odds of your house burning down, once every 400 years.

Meb: Despite that, I know two people whose houses have burned down. So it’s not like it just doesn’t happen to anyone.

Salem: It happens to people. In our little town, we’ve got 1,000 houses, so you have one or two burned down, a couple burned down a year or so. But the point is we do that there. I always tell people about the seatbelts. You leave your driveway, headed out on a drive. You don’t say, “Well, is today a seatbelt day or not?” you put seatbelt on and you’re planning for a worst-case event. I think managing risks starts with imagining the unimaginable because it can happen. And there’s a great test you can take that has you put ranges on things where it’s like, for instance, how much does the Statue of Liberty weigh, how many miles between LA and New York. You give numbers and you’re supposed to give, you’re 90% certain that the answer lies within this range. And what you find is people are bad at estimating things that are hard to figure out.

I think we underestimate the extremes. If I were on your show a year and I said, “Oh, a pandemic, you got to worry about a pandemic.” Everyone would I’m crazy. If I were before 9/11, we were talking about planes flying in the buildings, I’m crazy. If you talk about tsunamis, you would be crazy back in the ’90s before some of these tsunamis and what’s happened in Japan with nuclear meltdown and all that. Extreme events happen. You got to be ready for them. And then when you’re sizing your trades, you’ve got to make sure diversification comes in and you size them accordingly with those worst cases in mind. And certainly, futures are a great arena to learn risk. If you don’t learn risk, you go broke. It’s one of the other. And I think that certainly shapes us in the futures world because in stocks, it’s kind of hard. You could go put all your money in Apple stock and you may be okay, if you go put all your money in cattle futures, it’s just a matter of time.

And the one thing I’ll say is you see traders that are great traders, and let’s say you’re so good, you win 99 out of 100 times. Since you have farmland and I’m out here in the ranch, you bet the ranch or bet the farm, right? When you hear that phrase out in the country. If you bet the farm 100 times every time you bet. And even though you win 99 out of 100, you’re broke. That one comes along and you’re broke. So one of the risks things I do is I never bet more than 25%, even though where I feel like I’m absolutely certain, this is an absolute certainty. I would never bet more than 25%. So that’s one rule. And then I think managing the extremes and knowing that the really crazy stuff can happen.

Meb: You touch on a couple of areas that I think are so accurate, the first is you try to deal with as many risks as you can possibly consider and then still at your core realize there are probably some risks out there that you can’t even fathom. I was smiling, thinking about the farmland, where we consider all the risks of rain and the crops getting some sort of fungus or something and then sure enough, one year we had, while we’re cutting down the weed, a combine catch fire and burn down the entire field of wheat. Like it’s not even something I even consider, but thankfully we had insurance for it. But these sort of understandings of how the world can play out at least gives you a framework for, like you said, building a portfolio or building on some trades.

Because the opposite side of this is every five years there’s all these new funds that pop up that have sharp ratios of three or four that do a bunch of short volatility option selling. And people get sucked in over and over again because every month they’re up 1% or 2% and then they have the old club turkey where one month they’re down 50 or 100. But over and over people get sucked into them, including institutions and professionals. It’s not just a retail story. So having that understanding, I think is important. But people get lulled into it. They always want to bet the house. I think you’re seeing that a little bit with the crypto crowd again today, where the outsize bets. Outside of the high-frequency trading, how many trades do you think you’ve placed in your life?

Salem: Millions. We even did 20,000 a day with high-frequency trading. Twenty thousand a day, you run into millions really fast. But a normal day on our other trading, we would do a handful a day, 5 to 10, you know, trading 90 markets. You know, typically you don’t make money trading. Now, high-frequency trading, if you’re doing arbitrage, you make money trading. Usually, you make money sitting on trades. So sitting is always more profitable. And the more commissions we paid every month, you get about to decide was it a money-making month or not. And when you set during the month is when you made money in our hedge fund.

Meb, the other thing I’ve made as much money outside of trading as inside, I’ve done water deals, the CME seats were a big money-maker. Water deals were big, oil and gas, big. Real estate things, big. And occasionally I’ll put on a trade just on my own that it’s still trading. I’ve made as much in oil and gas as I have in hedge fund and in water and CME, it was a great trade too, buying the CME seats.

Meb: What’s the mood right now in Texas, the energy sector, like any other sector or industry, but even more so goes through its booms and busts periods. I was talking on the podcast the other day where energy used to be darn near 30% of the S&P and now it’s about 2. Is the mood pretty despondent, depressed, people giving up, or is there hope? How’s the vibe?

Salem: Very depressed in capitulation. You know, we talk about that in the market, sometimes you need capitulation and then that’s when the bargains show up. And I think that’s where we are. I think we’ve gotten to capitulation. I think the money has left, a lot of the endowment money has left. There was too much hype. At one point it was too crowded to trade and now it’s not crowded at all. So I really think now’s the time to be looking at it. You know, as a trend follower, it’s kind of counter. There’s trades I do that I see, “Hey, this is not a trend-following trade. I’m trying to find the bottom.” But I’ve made a lot of money on those trades too.

One of the favorite things that I think about is if I were in the boat, I would encourage your listeners, Meb, to imagine you’re in the back of a boat and you have 100 people, you’re watching them and sometimes they all go to one side of the boat or the other side of the boat and some point, if they all get on one side, the boat’s not going any further. It’s gone as far as it can go. And the oil and gas is that way now where it’s so negative, everything is so negative and everyone’s like, “Oh, we’re all going to go to green energy.” And then we’re going to get there, but it isn’t going to be right away. It’s going to take still, I think, several decades. And I think natural gas is going to be a longer-term fuel, maybe gasoline we don’t use, but with the natural gas, fits with renewables real well. So there are opportunities in the energy market.

And a funny story I’ve told before is talking about the boat analogy. I was listening to the radio. This has been 10 or 15 years ago. They were talking about it done at Lake Austin. They were doing a tour boat and the tour boat has a boat full of people and they’re coming down the lake and on the right side of the lake is this nude beach. I think it’s called hippie hollow in Austin. So here’s the nude beach on the right and there’s a lake on the left. So which side of the boat do you think people are going to be on? Well, they all get on the right side of the boat and they’re gawking at the new beach. The crazy thing… So, to me, that’s funny because that’s the picture I use in my head, is everyone on one side of the boat and if they are, then I’m going to bet the boat starts leaning the other way. But in this case, the boat actually capsized. So all the gawkers are now in the water and guess who comes to their rescue?

It’s the naked people on the beach. So they’re swimming out to help them get ashore and all this. Now, unlike what we might picture in our mind, is these supermodels on the beach. It’s usually very unattractive, naked people at the nude beach. And so now you have unattractive, naked people rescuing just recently gawkers of the unattractive naked people. It’s a mental picture to say, “What’s the problem if I’m in the crowd?” If you’re in the crowd, it’s usually not good, bad things happen, including maybe getting rescued by unattractive naked people. So keep that in mind.

Meb: Good lesson for the listeners. I was thinking about this because I kind of have both sides. I have the value investor, cheap bastard side of me, and then the trend following side of me as well. And I always say my favorite setup is looking for the things that are either really cheap or down a ton that are starting to exhibit some trend and momentum. And for the past handful of years, you’ve had any number of the Ag. and energy space. And we did an old study that looked at industries and the French pharma data. And not surprisingly, you buy stuff that’s down 80%, 90%, close your eyes, hold your nose, and usually they have some pretty good returns going forward and slapping on some basic trend falling ideas on top of that, I think gives you some guard rails for not writing something down 80 to down 100, but usually, sectors don’t go away overnight, or countries, or other bigger asset classes. But certainly seeing that in a lot of places in the energy and Ag. space, but some of those are starting to see some nice momentum this year, so we’ll see.

Salem: I’ve heard, you mentioned these longer-term. The look-backs you do are very long and I think that’s super smart, and I would encourage your listeners. I know you do already, but I would say me too, yeah. That’s a great idea. Because looking back over the broader arc of history, you see things that help give you a better understanding of the things that can happen. Just like this pandemic, if we just use our experience of our lifetimes, we can’t imagine things like pandemics, or great depressions, or even world war or things that could happen that could really hurt the economy And so there’s a lot of risks that you don’t put into the equation unless you go back in history far enough. In a normal distribution curve, everyone talks about three standard deviations and beyond they don’t talk about, but it’s really the tales that you need to worry about. That’s the stuff that kills you. That’s the stuff that makes you go broke. On statistics class they say, “Well, 99.7% of everything is inside these 3 standard deviations.” Well, the 99.7, it’s like, okay, the 0.3 is the lightning strike, the car crash, the house burning down, the great depression, the pandemic, all those things are the things you need to worry about and that is hard to put in a math equation.

Sometimes you have to… There’s a bit of an art to trying to figure out how ugly can it be and you have to be bolder than the folks at the Nobel Prize winners at Long-Term Capital who say, “Well, let’s assume six standard deviations” because they could have called me before I got my diploma and says 37. The Swiss Franc move, what, it’s been six or seven years ago. It was 35 standard deviation move. I was on the wrong side of that one too. The first time it happened at 37, I lost half my money. My clients had their money with me and we lost 1% on the 35 standard deviation move. So it was ugly, but they didn’t even notice. When you lose 1% of the day on that could be a stock market swing.

Meb: That’s a great example because you can say, I imagine there’s clients like panicky, like, “Hey, this massive move, I hope we weren’t on the wrong side.” And you’re like, “Ah, actually we were on the wrong side, but we only lost 1%.” It shows an understanding of risk and how these things work that I feel like most people just don’t appreciate. And that’s an oddity. Markets, this is what they do. We do these polls a lot on Twitter where we’ll ask people, kind of going back to your old tolerance bands on estimates and people consistently underestimate the possibilities of just even what’s happened to the past and the future is guaranteed to be worse. Like by definition, it’s got to be more outside of what we’ve seen, which is already post portfolios wins arrive.

Salem: You ended up being cookie paranoid in a way. The longer I trade, the more I’m that way where I worry about a lot of things that people shake their head and they say, “Coronavirus was a good one. I went…” So here are my N95 masks. I bought them on January 26th. I had heard about this virus, but that was a Sunday. And I sat down at this computer and sitting here for about three hours reading articles and they say, about every second or third article would talk about N95 masks. So I go, I have to drive 100 miles to the nearest Lowe’s or Home Depot. I told my wife, said, “Hey, I’m going to go get some N95s.” I said, “These articles say that’s the thing. And with eight kids scattered around the world, our youngest is still home, but everybody else is out. And I bought boxes at 10. There were literally thousands of N95 masks. The shelves were stocked. I thought 50-50, they’re probably all gone. Everyone else is worried. I clearly am the most paranoid person in the Northern part of Texas because no one had been there. I get these and I’ve boxed them up, mailed them to my kids. My kids are like, “He’s crazy.” And I give them to my employees, a box of 10 to all my employees. I said, “Hey, this thing could get really bad.” But you got to be willing to imagine it happening, the bad stuff. That’s the first step to risk management.

Meb: It’s useful. And this is one of the reasons trend falling and over long enough time horizons buy-and-hold investing works is that while you manage sort of the left tail of taking you out of the game, losing your bankroll, losing all your money, having exposure and systems that allow you to participate in the right tail too, because you do have all the trend followers and investors will tell you these massive wins are what determines all the returns for a portfolio, often in a given year. It might be one trade. If a position goes up 50% or maybe it doubles, they’re out. And that’s one of the things that a lot of the behavioral guide rails of, “Hey, can I have a system that lets me participate in these big upside wins?”

Salem: That’s where you want to sit. When you’re in a winner, just sit. Don’t take profits too soon.

Meb: Your philosophy has extended to another fund. You guys have… Goes back to a partnership with your old neighbor. We’d love to hear a little bit about Fortress, what’s that strategy and philosophy behind that?

Salem: Boone Pickens, his ranch. It was his favorite place in the world. And Canadian, Texas is on the Canadian River. His ranch is 30 miles up the river from Canadian on the Canadian river as well, 100 square mile ranch, over 60,000 acres. And so I was lucky to be his friend for over 30 years and we had…I would go over and have lunch with him when he was there almost every weekend. He’d call or I’d go over and sometimes he’d come to Canadian. So we were friends, but it got to be more in later years, but my grandfather knew him. About two brothers and I had a 12,000-acre ranch on the east edge, literally on his east fence line. It was on the Canadian river too, that we owned for 15 years, 12 years and he wanted to buy it.

He’d expressed interest. And so then we had a…there was a ranch closer here to town that was for sale and so approached Boone and I said, “Hey…” I did on behalf of my brothers and I said, “We’ve got this ranch for sale.” We would sell our ranch here east of you. And so we started talking about that and in the process of that, we said, “Hey, you’re giving all this money away.” Because that was the time when he was given hundreds of million. He would joke. He said, “I made 3 billion. I gave a billion away. I lost a billion and then I really don’t know what happened to the other billion.” Toward the end of his life. But he was a dear friend and he was a great mentor to me and he was very generous to so many people. And I pitched him. I said, “Well, why don’t we do something. You want to do something where we help these two counties here in Texas,” that his ranch is in, and Canadian and his. There’s Hemphill and Roberts County, Texas. Total they have 4,500 people total, at about 1,000 kids and I said, “Why don’t we do something, let’s do a foundation and help these kids.” So his deal was, he’s watching what I’ll do. I’ll give what you give and we’ll start a foundation together and we’ll help kids in education purposes in these two counties. And so that came about because of this ranch deal we were doing. And we ended up, we sold him that ranch and we bought some different ranch then over here. And then I said, “Well, let me put in $2 million.” And he put in $2 million. And, you know, by the way, my 2 million was appreciated CME stock. That’s what I put into it.

And then I got to manage my half of the $2 million. And so I’ve been on investment committees for 25 years from Amarillo Area Foundation, which is a community foundation with 200 million to the Hemphill County Library, which is 500,000 to St. Jude Children’s Research Hospital in Memphis, which is over 5 billion. So I’ve been on all these, where you get some either no financial advice to Cambridge Associates helps St. Jude and they’re terrific. And I think one of the best in the country, certainly Cambridge Associates. So I’ve been on all these different investment committees. I’ve learned a lot. I’ve had really interesting experiences in that from the fellow investment committee members and the advisors and everything. But then the hedge fund experience I’ve had and then the business experience investing in other things. So you take all that together and then I get to manage my half, which has only $2 million, but I get to do it just the way I want to. I get to be king of my investment committee, which I was really excited about. So I had an idea, basically, not as heavy on stocks and the right hedge funds and not hedge funds that bring more stock exposure.

So that was the approach. And after 10 years it worked really well. It ended up…the performance of it was making about, or slightly more than the top 10 college endowments, but with about half the risk. And so when my team saw it, I didn’t show them. We didn’t even compile the track record for 10 years. So I just was doing it on my own. They knew I had this foundation. We gave away a little over $2 million over the 11 years before Boone passed away, which was just a little over a year ago. The deal was set up where it’s split. If either one of us died, his $2 million went back to his foundation and the $2 million we had, it goes to my wife and I, our foundation.

And so the 10-year track record was really good. The team said…this is back in 2018, early 2018. They said, “We should open this up.” And I think a lot of smaller foundations could benefit from it or people with retirement accounts or things like that. Really, it’s people that are really focused on safety and diversification. So that was summer of 2018. Summer of 2019 we decided to quit our own hedge fund and really focus on the Fortress. And so then late 2019, about a year ago, we started really marketing the Fortress fund. And so the Fortress fund is our attempt to do the whole puzzle. So to say stocks, bonds, hedge funds were, you know, in the past we would be one hedge fund or one hedge fund would be one piece of a 20-piece puzzle and you’d figure out the other 19. It’s now our opportunity to say, “Let us put the whole puzzle together.” I’ve compared it to being like a baseball player deciding to be a manager of a baseball team.

So I shrunk down my team. Unfortunately, we went from 16 down to 8 people. We don’t have our trade desk anymore, but we have the round the clock trade desk and now we hire the hedge funds. So we have 10 different hedge funds in there and we have stocks and bonds. So instead of 70/30, is kind of the benchmark aqui, 70% All-Country World Index, 30% bonds. We cap our equity exposure at 50. So it’s 45% equities, is what we have today. We have 20% fixed income and then we have 35% hedge funds as well as gold too. So we’ve got a gold allocation, hedge funds, and our fixed income is treasuries, seven and a half year treasuries. Our stock exposure, we’ve indexed that. We’re not the best stock pickers in the world and we’re not some bond trading expert. What we think we know is hedge funds. We think we can pick the right hedge funds that don’t add more equity exposure and then what we’re really good at is risk management and diversification, having dealt in the future space. And so that’s what we’re really proud of with Fortress fund and how it’s done. The name Fortress fund is about safety. So we’re really talking to folks now, and I think it’s a good fit for people, certainly something to look at for people with retirement assets or assets of foundations, endowments, and things like that.

Meb: It’s smart and it’s thoughtful allocation that checks a few boxes in my mind. And we’ve philosophically sort of arrived at the same destination when thinking about holistic portfolios, at 60/40, 70/30, 80/20, whatever the institutions may do now because there’s no more bond yield trying to get that magical 8%. The problem with buy and hold on those two assets is completely illustrated by 2020 to where buy and hold is great over time, but it has the same correlation and exposure to what’s going on in the real world so all the bad stuff tends to happen at once. When it hits the fan, it happens to your portfolio too. Most hedge funds are just more of the same. If you buy a hedge fund, you end up with just more 70/30. Tell us a little bit about why it’s important when you say…because the hedge fund in our old book over a decade old, we describe the hedge fund industry is like saying dog. The Datsun looks nothing like a great dane, which is nothing like a lab. So it’s important to get the right category of hedge funds. Tell us a little bit what you mean and what you guys do in that space.

Salem: So hedge fund, first, the name comes from way back 50-plus years ago when someone hedged their stock exposure with it’s a long, short hedge fund, you have long stocks and you have short stocks and that’s your hedge. Well, then they expanded that to include everything. And I mean any investment partnership is now called a hedge fund. You could be drilling oil and gas wells and raising 100 million bucks in your hedge fund too. I remember I was a CTA, that’s the CFTC commodity futures trading commission. That’s my designated name as a commodity trading advisor. That’s a legal label. Well, so I was a CTA in ’88 and about ’98, 10 years, they started calling us a hedge fund. I remember the first guy I talked to, he was trying to convince me I was a hedge fund and I was arguing with him. I was like, “We don’t edge anything. I don’t know why you’re calling this hedge fund.”

He said, “Well, we’re investing with hedge funds and we think you fit real well.” And I said…I just kind of shut up then and I said, “Well, call me what you want. Just call me, you know, kind of thing.” And it’s like, “Okay, fine. I’ll be a hedge fund, I guess.” I think it’s important viewers know because hedge funds is something that I think most people kind of get confused over and I’ve been in the industry over 30 years, I get confused because basically everything’s a hedge fund. There’s nothing hedge. Just thinking about investment partnership, it’s what they ought to call it. So you’re right there and then so many of them are more equities. There’s lots of beta in most hedge funds, even the Barclay Hedge Fund Index.

We did an analysis back in 2000, it was correlated to equities at about 0.7. Now it’s correlated at 0.9. And so what you’re seeing is, two, there’s a reinforcement of the hedge funds the last 10 years of stock performance, as the winners in the hedge fund world are the ones that had beta. So now everyone investing, not looking out the front of the windshield, they’re looking in the rearview mirror investing and the rearview mirror investing says, “Well, let’s invest in what worked over the last 10 years. What’s the hedge funds that had exposure to equity, so we load up on more equities.” So you see this continual loading up and loading up and that’s what I see that even in the largest endowments and foundations, they’re loading up, that’s worrisome. They say it’s 70/30, but no one has 30% bonds. And they have usually around 5% to 10% bonds and then they have bond substitutes that oftentimes have beta in them and so they end up closer to 80% stocks, is what I think. It’s almost like 80/10 because they’ve watered it down some. The equities they have are watered down equities and like you’ll hear people say, “Well, this hedge fund is correlated to 0.9 but it’s only got 0.5 beta. If you do the math ever, you say, “Well, that really doesn’t matter. The correlation matters.”

So your other point you made, which is absolutely important, most people don’t think about it, particularly for foundations and endowments. And I think for your retirement account too. If the world goes off a cliff, like let’s say you’re a foundation. If your community goes to a great depression, great depression, we have 25% unemployment, everybody’s hurting, that’s the time your community needs you the most. If you’re a college endowment, that’s the time you’re going to have to support the college the most. And you can’t be the least able to help when you’re most needed. You’re the lifeboat. Don’t screw yourself and nail yourself all to the main ship so you go down with the ship, you’ve got to be the lifeboat and be ready to be the life boat, which means you cannot be that connected to the overall economy. That’s very important. Most people don’t even think of that.

Meb: It’s just this concept of human capital. In this case, it’s extended to what’s the purpose of an endowment. So many people get this wrong in so many ways, your example of your friend who invested in Enron stock, and it doesn’t even have to be Enron, a company that essentially goes to zero, it could be any company. In the analogy we gave a couple of years ago, which is probably people felt a lot this year was the average financial advisor is like four times leverage the stock market. They just don’t know it. Maybe five times leverage through their whole business. So a lot of people, I think it’s useful to sit down and reflect on, are you doubling and tripling up? And so are there particular categories of funds you’re attracted to, is it trend FARs, is it currency traders? Is it people that invest in small-cap stocks in Ghana? What are you guys looking at?

Salem: Small-cap Ghana though, would be interesting. It would certainly diversify. So stocks are indexed. We try to index pretty close to aqui and then treasuries are our bonds so that the hedge funds is where we bring the secret sauce for us. Number one, it’s big at 35%. So gold, we always like some gold exposure. It’s an interesting piece because it tends to do well when the stock market crashes. So treasuries, if you’re going to do bonds, you’ve got to do something really high quality. So treasuries will make you go broke slowly but to have them there as kind of a counterbalance to the stock exposure, that’s helpful. Gold is the same thing. And then the hedge funds, you’ve got things that don’t have more stock. We have no long-short equity. The biggest category in hedge fund is long-short, we have zero. We don’t want any… There are some great traders there. If we added them, we would reduce our stocks.

We don’t want things that our stock-like. So we do currency traders, we do CTAs. We do some global macro because there are always exceptions. There are some beta and go with macro, sometimes CTAs have beta. So you really have to drill down and look very closely at the trader. So we have 10 different hedge funds that we invest with. It’s gotten be something that can help you in the downturns. And you’ve got to watch past performance, is not indicative of future results. But for us, the Fortress was interesting because the proof of the pudding’s in the eating and Fortress, at its worst at the end of March, was down one and a half percent about. It never went down over 2% for the year and it’s currently up about 12% on the year now. And for the year it’s been around 11, 12 vols. So our vol is less and it’s just a function of having the right mix, but it is hard because I think everyone traces stocks because they know stocks, but I think where we can bring some added value is by understanding hedge funds. And there are hedge funds, I would encourage your viewers to say, “Look for the hedge funds that can help you diversify.” They do exist. I’d say three out of four won’t help you to diversify, maybe even four out of five. So it’s hard to find, but you can find them.

Meb: I was listening to an old podcast you did with our friends at the Systematic Trader. But it’s funny because it was a year or two ago and you guys talked about, I wouldn’t say predicted, but the possibility of oil futures trading negative. I don’t know if you even remember this. And then, sure enough, 2020 comes around and what happens? Oil futures go negative. I was just smiling so much as tying that back into our earlier conversation about thinking what’s possible. I guarantee you pulled everyone at the beginning of the year, they talked about oil trading at minus 30 bucks on the futures market. They said there’s zero chance. I hear you guys are talking about the possibility. As you look to the future, 2020, 2021 and on, what’s on your mind? What are you thinking about? You’re about to be an empty nester,

Salem. What are you going to do with all your time? What are you thinking about? I know you got a curious mind.

Salem: Five months in one week, but who’s counting? When you’ve had eight kids in 28 years of it, we love them all and we’re having a great time. This year we’re looking forward to checking the box and saying, “All right. George, we’ll slow down a little.” I mean, throw him out. Number one, I feel really blessed and fortunate to get to play in the investment space. It’s a fascinating puzzle for a math geek like me and a computer geek. It’s like getting paid to do math puzzles, and I love doing math puzzles. So I love doing what I do. It’s been fun to learn so much over the last three or four decades. My folks gave me money. My older brother, they were trying to encourage him to get good grades. I got good grades and they were going to give him money to buy a car and I couldn’t buy a car. I got good grades too. I said, “Well, can I get… I want a car.” They said, “Well, you’re not even 16. ” I said, “Well, how about you just give me the money and let me invest?” So I started trading in silver and stocks when I was 15.

So I’ve been trading now almost 40 years because I’m 54 now, almost 55. So looking ahead, it’s going to be interesting what the next 30 years, 40 years do. I hope I get to stick around a long time to watch it all. There’s always opportunities, but there’s always risks. It’s like sailing a ship on the ocean and every now and then a big hurricane comes and you got to be able to handle the hurricanes and the storms. And that’s where I’m a big believer in your portfolio has got to be storm-proof. And you’re not going to have a lot of time to prepare. Sometimes you have no time to prepare. So it’s always got to be storm-proof. It’s like always wearing your seatbelt, always being ready for the storm.

The storms I worry about, I think this printing of money, it usually ends badly and that’s become the go-to. And this is the longest in the history of the world that we have had fiat money. So in the early ’70s, so we’ve been almost 50 years with fiat money and money-back meant nothing. People like Bitcoin. I don’t like Bitcoin. I don’t like the U.S. dollar. I don’t like any of it because my test is this, we can’t see 100 years from now, but if we went back just 100 years with our paper money, and here we are in the United States with paper money, or Bitcoin, or an acre of wheatland in Kansas, or an acre of ranch land in Texas, or a cow, or a horse, or an ounce of gold, you do all those things, the Bitcoin and the $100 bill backed by nothing, they would shake their head and you couldn’t buy anything anywhere with it.

So the puzzle, I would say, if your store value does not work going back in time, whether it’s 100 years or 1,000 years, the acre of the land, the cow, the horse, the chicken, the gold, that works going back, the bushel wheat, 1,000 years ago, it’s all valuable. And so, man from the future, yes, that’s valuable. But the $100 bill, you can’t redeem for a bushel of wheat, or a chicken, or a pig. That’s not valuable. And Bitcoin would blow their mind. And Bitcoin, you’re playing another man’s game. That’s like going to Vegas. You don’t make money playing someone else’s game. If you go to Vegas, this is their game. They are going to win in their game. It’s their game. Don’t play their game. You need to play your game. As an investor, you’ve got to come up with your game. And Bitcoin, whoever the cool, smart guy, sitting on a beach, getting his fifth pina colada, he did Bitcoin and good for him, but Bitcoin to me, started out as a scam and a joke and it worked for this guy and now everybody loves it. I wouldn’t touch it with a 10-foot pole. I understand a lot of reasons to like it, I’ll take gold any day. Gold and land any day, all the time. I’d rather have those.

Meb: It’s funny you mention farmland. It’s one of my favorite asset classes and we’ve done a whole bunch of farmland podcasts, but one of the hardest to invest in from a public market standpoint, you can do some private funds, but even then it’s mostly still individual or the massive corporations held. And as far as the global market portfolio pie, it’s one of the most underrepresented assets that you can actually invest in. So I would love to be able to invest in a lot more farmland funds and ideas, public. If I wasn’t doing what I was doing now, I think I’d go down that route, but too much work. Got my hands full.

Salem: We’ve thought about doing a farmland fund too, and I agree with you. The problem is anytime you slap a fee on it, even a little bit, even a half a percent fee is probably you’d make four. It’s like a tip that pays you 4% to 5%, but it’s inflation-adjusted. And then if you put a 1% fee on it, then it starts getting pretty skinny. So I own orchards.

Meb: Let’s hear. Are you guys doing apple?

Salem: I’ve got a pecan orchard in central Texas and a peach orchard in Oklahoma City and then an apple orchard here in Canadian. They are work, though, and I’m selling those two because of that. I’m trying to make life simpler, so I’m selling my pecan orchard and peach orchard, but they are interesting investments and can make a decent rate of return. It’s for I don’t like the dollar. I normally don’t have a lot of bonds or CDs or anything. I’d rather have a rent house, which I have rent houses. I have a trailer park. I have a Barnes & Noble. It looks more, and you can put it in a suit in Barnes & Noble, but the trailer park, everybody laughs, “Oh, trailer park.” You’re like, “Look, when the economy tanks, everybody comes to the trailer park.” I like trailer park is a great one.

Meb: I was smiling as you were talking about the pecans and nuts because I grew up partially east coast and every time we’d go over to my aunt and uncle’s house. My uncle was a Dean Witter guy, classic stock picker, but they would have the tray of the mixed nuts you had to crack. And when I came out West in California and go to all my friends and families, none of them do that. And so I didn’t know if that was an East coast thing. If it was a Southern thing, if it’s a Christian thing, or it’s a what thing, but we just bought like a 20-pound pack of nuts. Now have it for Christmas. But the nut business has been a pretty good yield now. Have pecans done well?

Salem: Pecans are good now. I think like a lot of farm with the China trade dispute, prices of pecans and soybeans and a few different markets really dominated by the Chinese was the Chinese were buying a lot of pecans and then they quit. So of late the last couple of years, pecan prices are down probably 40%, which takes away the fun real fast. The profits go with the down 40. It’s a really interesting market. It’s a bond substitute in my mind. Any of that real estate is a bond substitute that isn’t based on fiat money. On my rent house, my trailer park, I can start charging chickens or pigs or ounces of gold for next month’s rent if the fiat money collapses. You got to worry when we print money like we’re doing, I mean, it usually ends badly. Again, you look at the big arc of history, the people that have printed money and gone to fiat money and start printing it, the history is a long list of countries that have ruined their currency.

Meb: Years ago when we used to give talks in public, when people could go out in public, we used to give away some copies of our books and we had put a hyper inflated currency, which you can buy on eBay for nothing, obviously. You’re right. It’d be Zimbabwe. You can buy these beautiful trillion dollar bills and we’d put some of those in the books and give them away as examples, but probably the long list of currencies that no longer exist is certainly much lengthier than the list of currencies that currently exist.

Salem: Greenspan wrote a great piece your readers ought to read, “1966,” talking about why we should not go off the gold standard. It’s a little three-page article. You look up “Greenspan 1966 gold standard” and you’ll find it. But he said, “It’s going to get too easy to fix everything just by printing money.” And that’s what we’re doing now. It’s worrisome, but we’ll get through it, whatever it is. It isn’t going to be the end of the world.

Meb: Own some things, I like it, that real estate, farmland, producing businesses. I like your trailer park idea. As someone who’s done millions of trades, what has been some of the most memorable, good, bad, in between? You talked about the one in college, any others that stick out as being particularly memorable?

Salem: The one in college was certainly memorable because you get run over by a freight train, that was memorable. Certainly in the commodity space over the years, there have been a lot of commodity moves that were good. You know, the grain market of 1988 was good. It solidified my business going forward. I’ve made a water deal. It’s interesting to see me deal, you know, outside of trading. Probably the best trade I’ve ever done, Meb, was with Coronavirus. On February 10th I bought foots. Once we had a death in a first world country, because I wanted to see that. So I bought my mask on January 26, February 10th, not in the Fortress fund because this is a crazy trade. I actually did it in my retirement account, which I do a few crazy trades in my retirement account. I bought puts on United Airlines because they had the biggest Asian footprint, I thought and then on Carnival Cruise Line because this was when that Princess Cruise Line was there stuck in Japan. And then I did Yum C, which is the Kentucky Fried Chicken Pizza Hut in China. So that was my COVID trade. I bought all these puts and I put a couple $100,000 into it. And Yum C hardly moved, by the way. The Chinese were supporting those stocks. I read that it made sense because it didn’t hardly budge. It was down like 5%. The others went down about 75%. In 37 days I made 30 times my money.

So 200,000 turned into 6 million. I’ve made 30 times my money before, but never in 37 days. I’ve made 100 times my money in trades. In 10 years I make 100X. But it was a crazy trade. It was a high-risk trade. I was willing to lose the 200. It was size-dried, but it was a huge payoff, but it was an interesting trade. And you know what my exit signal was, I knew when Canadian, Texas shut down its schools, imagine the people in the boat. In my mind, that’s the last person. The last place they’re going to shut down school is the middle of nowhere in a little country town. And so the day after they shut down school in Canadian, Texas is when I exited the trade. And that was right at the bottom, right at the right time to exit.

Meb: Salem, where do people go? They want to follow what you’re up to or they’re interested in Fortress. What’s the best place?

Salem: Our website’s really got a lot of information at abrahamtrading.com. It’s the best place to go. It’s got monthly performance. Everything’s there. And all the info about the Fortress fund is there and go check it out there. And, Meb, it’s really fun to be on your show. You’re a quant and I’m a quant. The one thing about numbers is numbers are, they’re either right or they’re wrong. Two plus two is always four. There’s no debate. And that’s the beauty of numbers and that’s where I would encourage your listeners. Numbers won’t lie to you and history doesn’t lie to you and be open to the extremes because they happen and your emotions are bad. Emotions hurt you. I don’t like emotions on trading. So we made money off emotional people. And you got to know yourself. Knowing the markets is only half of it. You’ve got to know yourself because oftentimes your own worst enemy. So we have to control ourselves too. “Know thyself and know thy enemy, you shall have a thousand victories.” Sun Tzu, “Art of War.”

Meb: It’s always easy to say and try to tell, especially our younger listeners and to come up with these risk parameters and until you’ve actually gone through the pain and the scars, you were lucky you got it early in college. So did I. I cut my teeth trading equivalent of futures in the 80s, which was stocks in the late 90s, full market. So I learned my lesson. Those were useful lessons. They hopefully pay certainly for not making that mistake again. Salem, it’s been a blast. Thanks so much for joining us today.

Salem: Thank you, man. It was fun to hang out and best wishes to you and your listeners.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us a message at feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.