ReSolve Riffs with Marcos Bueno of Ascent Systematic on a Multi-Disciplinary Approach to Quant Equity

This week we had the pleasure of speaking with Marcos Bueno, CIO at Ascent Systematic Advisors. Marcos has a diverse and well-rounded backgrounded in finance, and our conversation covered topics that included:

  • His background at proprietary trading desks and macro funds
  • Starting his career in fundamental, research-oriented investing
  • Early successes during a bull market while recognizing the role of luck
  • The GFC, the Volker Rule and leaving Wall Street to join Graham Capital in London
  • Combining global macro with trend-following
  • The different perspectives between value investors and macro traders
  • Opinion vs Gospel, Humility vs Hubris
  • Bitten by the ‘systematic bug’ and becoming enamored with its elegance and efficiency
  • Systematic thinking as a superior approach by keeping biases in check and limiting your downside
  • Why the market is always ‘right’, even when it’s ‘wrong’
  • The emotional investment that comes with deep fundamental equity analysis and how it can skew investors’ perception
  • How trend following takes advantage of some of the permanent features in markets
  • Reflection on cognitive biases and trading intuition from a systematic perspective
  • Signaling, information diffusion and self-fulfilling prophecies
  • And much more…

This is “ReSolve’s Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

Listen on

Apple Podcasts

Subscribe on

Overcast

Listen on

Spotify

Subscribe on

TuneIn

Subscribe on

Android

Subscribe on

Google Podcasts

Subscribe on

Libsyn

Marcos Bueno
Founder and Chief Investment Officer
Ascent Systematic 

Formerly at Goldman Sachs, JPMorgan, UBS and Graham Capital.

MBA from Wharton, Master in Mathematics & Economics from Ecole Polytechnique (France), and Industrial Engineer from UPM (Spain)

After more than fifteen years managing institutional equity and macro portfolios on a discretionary basis, I designed Ascent’s systematic investment process. My goal was use fundamental principles of money management to profit from market inefficiencies originating from discretionary managers’ cognitive biases – from which I also suffered – and to exploit persistent asymmetric opportunities in stocks.

TRANSCRIPT

Adam:00:01:49Okay, good afternoon.

Mike:00:01:50Good Friday afternoon. All right. So

Rodrigo:00:01:51Let’s do it. Ready to go.

Mike:00:01:55I love it. Well, before we get started, we might as well start with the, hey, by the way, this isn’t investment advice. These are four people talking about markets and trading strategies and all kinds of fun stuff. And you’ll need to do your research on your own beyond that. And this is not investment advice. It’s educational and hopefully informative. And with that said, turn over to you Adam.

Adam:00:02:21Great. Yeah. Well, welcome to Marcos Bueno. Marcos, where are you coming to us today from?

Marcos:00:02:29Hi, guys. I am in New York today. And I’m very excited to be here with you.

Adam:00:02:35Good. Yeah. Us too.

Mike:00:02:37We’re excited to have you.

Adam:00:02:38Yeah, absolutely. And I was noticing as I was sort of going through your bio, in preparation for this conversation, that you actually have this really varied work experience, right? You’ve worked at prop desks and Macro Hedge Funds and are now running your own fund. So, I thought it would be interesting to us and to the people watching and listening to maybe learn a little bit about how you picked up some experiences and lessons along the way, and then how you apply those experiences and lessons to run your current strategy. So, maybe a good place to start is for you to give us a little bit about your background, and then maybe we’ll pull in some threads.

Backgrounder

Marcos:00:03:24Yeah. Okay. So, that’s right. I have done a bunch of different things. Some of it has been by design, some of it has been random. So, I’m an engineer and mathematician and so I did undergrad and master. I did some consulting, management consulting. I also got an MBA in finance and I grew up in Spain, but I have lived in five different countries. I went to school in France. I worked all over Europe. I lived in the Czech Republic for some time. I went to the States, did my MBA, then I spent 10 years in London. Then I moved to New York for another seven years. Now I’m in between. Yeah, my kids have four passports, so we are all over the place.

Career wise, pre MBA, I didn’t really know much about finance. I was a management consulting, in the telecom area. And when I went to Wharton, I discovered finance and that was interesting. And I learned about this place called Goldman. And I said, well, I want to work there. And I was lucky to have an offer there. And I actually went to do M&A on oil and gas. I quickly learned that that wasn’t for me. And I met some people at the trading floor and that was kind of cooler because they were working less. The job was more interesting, at least for me. And they were making more money, so it was kind of overall better. So, I was at Goldman for a couple of years doing derivatives, exotic derivatives of the multi asset. So, I was doing equities, I was in commodities, currencies, a little bit of fixed income.

And I also then kind of realized that what I wanted to be was on the buy side, and that opportunity came at UBS and the prop desk, the equity/commodity prop desk. And even though it was a prop desk, the group I was in was a value-oriented group. So, there, we didn’t do a lot of investments. It was very research oriented. We made may put a trade once a month. I traveled all over the world meeting companies and in the commodity space, because I was an engineer, that sort of like spoke to me. So, that was interesting. Visiting mines, oil fields, refineries, utilities, nuclear plants, blah, blah, blah, you name it, and doing the real fundamental work as a value investor does. And one of the things I realized, I mean, I made a lot of money very quickly. And I thought I was very good. And the reality…

Mike:00:06:14I’m familiar, what’s that situation.

Marcos:00:06:16…I wasn’t.

Rodrigo:00:06:17What year was that?

Marcos:00:06:18That was 2005, 2006, 2007. Looking back, I mean, already that at the time when 2007 started to occur and 2008, I basically looking back realized that he was not so much my stock picking that was successful, it was that I was long a bull market. And that told me that basically, it was more important to determine whether we were in a bull market or a bear market than anything else. So, if it’s a bull market, you don’t want shorts, and if it’s a bear market, you don’t want longs. You can do everything you want. Most of the time, your longs are going to go down, if it’s a bear market and they’re going to go up, if it’s a bull market. So, it’s kind of a — that is a macro perspective. And it turned out that JP Morgan, the macro team, was looking for somebody with experience in equities. And they hired me out of UBS, I joined JP Morgan, it was like a global macro, and I was the equity guy in the global macro team.

And that was interesting is that it was a complete change in perspective, in terms of what the value guy does versus a macro guy. The value guy’s perspective, the underlying premise is that I am right and the market’s wrong. The macro guy has a lot more respect for the market, and they will have views and they will have their opinions, but they will respect the market. And they are a lot more disciplined when it comes to risk management. And they have an opinion, if the market does not respond in the way they expect, they will cut it out. That was a big learning for me. The risk management, the management of the positions that you can have your opinion, but that’s not gospel. Right? That was a big problem of the fundamental guy that I was.

Anyway, long story short, on my commodity experience, I learned about currencies, I learned about other things. I didn’t do any more singles, not so much stock picking anymore, and it was more really macro. And without me realizing it was basically trend following. Like you have a view, you put it on, it goes with you, you keep it if it doesn’t go, you cut it. Years later, I realized that was what the trend followers does. But that’s what trend followers do, but we can wrap it in a view, right? This is my view and my view was wrong. Actually, you could actually get rid of the view and say the things going up, you go long, things going down, you get shot. And the reasons why are a lot less important than we think. It’s just what it is. So, I had a great run at JPMorgan. I was very happy there. But 2008-2009 happened and the politicians were not very happy with that. And they created the Volcker Rule, and all the prop desks and all the banks were cut. So, basically, I was fired. We were all fired, laid off.

And I did other things. Actually I built a house during the time but I was just serendipity. This hedge fund, Graham Capital, was opening in London and they hired me as the third person in London to run a macro commodity book for them. Started really small and then it went up to almost a billion dollars. And Graham has this unique feature thing is that they combined the macro thing with an old school trend following CTA. And that’s where I got first exposed to systematic strategies. I hadn’t been exposed to them until then. And it resonated with me because of all the things that I have said is like, basically, at the end of the day, if you manage your positions well, it doesn’t really matter what you do, it doesn’t really matter what your opinions are, the key to making money is managing your positions well. And ultimately, it’s just don’t let your losses get too big. And just ride your winners, let it go, and that’s what they were doing systematically. So, that was appealing. But I didn’t do that.

It just planted a seed in my head that has sprouted maybe five or six years later, because one of the things that I also did, I launched — when I tried to launch a multi-manager fund, Graham was a multi-manager, that is a beautiful business model. I think it’s good for the portfolio managers, it’s good for the investors, it’s good for the owner of the business. Long story short, that didn’t pan out, we had a seeder for a couple 100 million dollars that didn’t follow through in their promise, so that project died. And now it’s just kind of started managing my money. And that idea that I had, okay, this trend following idea that was so beautiful, and with my equities experience, I said, I thought this should really work in equities, right, in single stocks. Single stocks, we have a lot of them, there is always something that is trending. And the trends in equities as opposed to futures are very powerful, like a stock can go from 10 to 100. Oil can go from 50 to 150 if you’re lucky. But equities can really have a lot of runway when they trend because things happen. I mean, look, you have Jeff Bezos, you have Apple, you have new technologies, changes, it’s like it can really go really far.

So, one of the things I did when I was managing my money, was develop this thing that I had thought in the past that I never really pursued until I had the time, which is what is now Ascent, which is a trend following program for single stocks. And I started, I put 10% of my money on it at the beginning. And over time, it was really kicking my butt every single time. Like everything I did from a discretionary side, it was never as good as the models. And so I put all my money in the models, like you know what, it’s better than me. And some other people learned about it and say will you do that for me? And I said yes. And that’s how Ascent was born. It started with managed accounts. Now there a hedge fund. Yeah, and that’s basically, I’ve done engineering, consulting, value, macro, derivatives, trend following models, multi-manager, you name it.

Adam:00:13:02Wow, yeah.

Marcos:00:13:03I hope that wasn’t too boring.

Adam:00:13:05No, that’s great.

Systematic Rules Based Philosophies

Mike:00:13:05No, no. I wonder if, continuing on that, you fallen into sort of a systematic rules based mindset. And philosophically, can you share why you think that’s superior? And also share some of the shortfalls where maybe you’re looking at the rules that you have in place, and you would like to go outside those rules, right? And where are those points where the rules brush up against you as a practitioner with experience where you’re maybe at a crossroads and what do you do in those scenarios? So, two questions, which is a terrible thing to do to somebody. But the first one is systematic thinking, why is that superior? And the counter to that is just sort of steel mining, where you find that that runs into some abrasion with you as a practitioner.

Marcos:00:14:08Yeah. Okay. So, why I think it’s superior, in my particular case, it’s because the systematics or like rule-based approach gets me out of my own way. It gets rid of my idiocy, and that is driven by cognitive biases, opinions, the idea of conviction, the belief that I am right and the market is wrong. It is a process that introduces a discipline, a discipline in which you never lose a lot. The only outcomes of any trades that I do is either I lose a little, I make a little or I make a lot. I no longer have the I lose a lot that can happen to a discretionary trader, because we fall in love with trades, because we have opinions, because we have biases, because we have a hard time taking a loss. Those are the things that create a loss, a big loss.

Mike:00:15:14Let me push back on that a little, because one of the things that happens with trend following is yeah, the losses are small, but sometimes it’s small loss, small loss, small loss, small loss, small loss, small loss, small loss. I mean, at times when markets are in transitions or trends are in transitions, you get that death by a thousand cuts. So, I want to push back on that a little bit in that how do you think about that?

Marcos:00:15:41I think about it, as that’s life. Now the good thing is … yeah, the good thing about trend following is that it’s not a new thing. It’s been around for decades. So, there is a real track record of decades of it working, right? I haven’t really seen anybody, I’m sure that there’s some people out there that do it, I haven’t really come across anybody that does it on single stocks. So, single stocks are different than the traditional futures. But the methodology is really, really solid for two reasons. One, again, you never get into a big loss. And it takes advantage of something that is a permanent feature of the market, of the stock market in particular, and there is always some trend somewhere. There is always some stocks that are doing well.

Now that said, it’s not a constant, right? Sometimes I mean, not — it’s permanent, but it’s not constant, right? Sometimes you have these periods of small loss, small loss, small loss, small loss. But those are periods. Over time, there’s always some stocks that are doing well. And sometimes we have a lot, sometimes we don’t have a lot. But it’s permanent. It’s timeless feature of stock markets. So, that is always there and as long as you control your risk, you will be fine. I cannot tell you how much money we’re going to make. But it kind of mathematically we …

Rodrigo:00:17:10And Marcos, when you talk about trend and equities, or you just — you’re just getting out, you’re not shorting the equity, right, when you talk about trend following?

Marcos:00:17:18In this particular program it’s either long or flat. And the reason being that the real asymmetry of returns, the real long right tail is on the long side of equities. And the investment program is not really meant– the philosophy is not to invest in equities. The philosophy is to use the stock market as a tool to make money, to extract returns from features of the stock market. And that comes from the long side, much more than the short side. The short side, the risk/reward is not as good.

Mike:00:17:52Yeah, I want to get to that next question. Right. So, we have these periods of whipsaw, that’s part of trend following. And then systematic gets you out of your own way, disciplines your thoughts ,disciplines your behavior, keeps your losses small. But where do you find that you bump into your rules from time to time as a practitioner, and where they create maybe friction? Or where you’re like, oh, maybe I want to modify this rule, or this would be a great rule to ignore at the moment. And so where are the limitations of the systematic thinking and how do you bring your experience as a practitioner to bear in those situations, or do you?

Marcos:00:18:34I can tell you that every single trade that I make on this program feels wrong.

Mike:00:18:44That’s how you know it’s right.

Marcos:00:18:45Exactly. That’s why it works, right? Because every single trade is a painful trade, when I’m buying, when I’m selling. That is one of the reasons why it works, right? Because from a discretionary perspective, it’s really, really hard. When something is trending up, we have a tendency to say okay, next time it dips, I’ll buy it. You know what, probably when it’s dipping is no longer — it is telling you something. And when you’re losing and it’s going down, you always want to sell on a day up right? Or say, I’ll want to wait for tomorrow. What happens when it go up? Then hope comes back and say you know what, maybe now it’s working so I’m not going to sell it. So, these are the typical cognitive biases. So, I can tell you that every trade feels wrong. That is always a conflict I have.

Now I have been around for long enough to know that a good trade is no longer a trade that makes money. A good trade for me is the one where I follow the rules. Now, I would be lying if I tell you that I don’t have opinions, that I don’t want to trade, that this is perfect, because it’s not. Now I keep a small account for me to trade discretionary, to scratch that itch of having opinions, and that keeps my sanity, if you will. The other thing I would say is that what I do is, in my opinion, a very good way of trading the market, but it’s not the only one. There are other ways of making money. I just think that this one is my opinion is the one that gives me the most chances of success. Like, as a discretionary trader, I can see trades sometimes, I can have opinions, and I can tell you over a period of time, I will be better. But I don’t think I can be consistent for years and years doing that. Some people may be able to do that. I have learned that I do not. And some other people make money in a different way, right.

The other way I think one should invest in equities that makes a lot of sense is value investing, actually. But that is also really, really hard. And value investing is founded on the same principles. Basically, you limit your downside. You only have small losses compared to what you can make. I mean, it’s been polluted. It’s been confused. Value investing has been confused with low multiple investing, right? That’s different. Value investing is really, really hard. Because you really have to have real good insights on business and futures, and the future and what a business can earn and management teams and things like that, that’s very hard to begin with. And then the other thing that is very hard is to have capital locked in for long enough time for these things to work out. Because you need a perspective of years in which you have positions that are small enough. And you keep long enough that the day to day or month to month, volatility of the market does not matter to you.

Now, that is really, really hard to do in a professional perspective, where you have monthly reporting or quarterly reporting or even yearly reporting, and the money can come in and out at any moment, right? So, value investing really is really, really hard, because it’s difficult to implement and it’s difficult to get the capital that goes with it.

Mike:00:22:25The curse of OPM, the curse of other people’s money.

Marcos:00:22:29Yeah. So, it really needs to be permanent capital and it needs to be really long term. And it has to fit, whatever, I mean, it has to fit your personality as a manager. Mine is not that. I learned that. I just cannot — I don’t want to go through big drawdowns. So, my program is a lot more short term, the average holding period is three months, we’re looking sort of like these medium term trends. And I’m happy with it, it works, but it’s not the only way you can make money in the market.

Adam:00:23:00Yeah. What’s so interesting about trend in every market that you might apply trend to is that you’re, to some extent, piggybacking off of the fundamental expertise of all of the other participants in the market. Right? There’s a…

Marcos:00:23:16Sometimes, not every time.

Adam:00:23:19Well, I mean, to some extent there is a group of investors who believe that they know something, they’ve done some fundamental work, and they’re allocating capital. Certainly, there’s lots of others that are just trading on patterns, right, like trend followers do. But at the bottom of the stack, there’s somebody there that is presumably digging into the fundamentals of the supply/demand dynamics of a commodity market, or the competitive moat of a business that you buy, the ability for profits to expand, contract, margins, and the competitive position of the company to improve or be vulnerable, that sort of stuff. And so you’re able to piggyback on sort of the average of everybody who’s trying to bring their expertise to bear, which is one of the things I like. I really like what you said earlier and this sort of dovetails from that about the fact that value investing requires you to have a variant perception that says the market is wrong and I’m right. And I think over time, certainly we have come to the conclusion that most of the time the market is right. And so that’s why trend tends to work a little bit more effectively.

Markets, Right When They’re Wrong

Marcos:00:24:52Yeah, the market is right. Let’s put it this way, the market is always right because no matter what we think, or no matter what we think the market should do, our P&L is only determined by whatever the market does. It doesn’t matter if the market is wrong. The market is wrong, if that’s the truth kind of thing, like. That is something that is very hard to accept. The market is right, even when it’s wrong, because our P&L is determined by what the market does. Our job as a money manager is not to find truth, is not to figure something out. It is not to figure out events or to predict events or to predict earnings or to predict fundamentals, that’s not the job. The job is to predict prices. And when we do all the fundamental work, what we’re try to do is to predict future prices. But the problem is that there is a lot of market participants for whom fundamentals are not a factor.

Mike:00:26:05True, yeah.

Marcos:00:26:07So, the market will behave according to the blend of all these market participants. Some of them will be fundamental players, some of them will not. And some of them will be fundamental players, but they cannot act on it, for example, so that will be the blend. So, our job is to understand all these things that get reflected on the priced. And even if our fundamental analysis is correct, if everybody else is getting something else, that’s the truth. So, the market will be right even if he’s wrong.

Adam:00:26:34The other major complication that I always struggled with, with discretionary macro or discretionary value investing, traditional analysis of company fundamentals, that sort of stuff, is that it takes a lot of effort to dig into the fundamentals of a company, to get to know the company, to meet the management, to call the suppliers and call the clients. You have to sort of build a file and get to know this company. And getting to know it and spending time with it makes you emotionally invested in it. And if you’re going to devote a huge amount of time to something, it’s really hard to … yeah, when it doesn’t really go your way. Right. And I think of all of them, the potential challenges to any kind of discretionary thinking in markets, I think, that may be the hardest one, because no matter how smart you are, and how big your team is, your edge — most people believe they have an edge and actually don’t. If those who do have an edge, the edge is something on the order of maybe 51 or 52%. So, 52% edge is actually a really substantial edge so long as you’re trading sufficiently high turnover.

Marcos:00:28:12Yeah, I can tell you from experience, personal experience, and what I have seen others. When I was a value guy, when I was a fundamental investor, I was very arrogant.

Mike:00:28:28It’s almost required. I mean, you need to have essentially, overconfidence, in order — because a foray into the market is an expression of your overconfidence, that the market is, in fact, has not realized some set of facts that you have realized, ahead of the market.

Marcos:00:28:47I was a smart person.

Mike:00:28:50Was, not so smart. I was smart until I realized how dumb I was.

Marcos:00:28:58It is an arrogant approach when I thought about it. And it’s difficult for the two reasons that you said, Adam. One imagine, it’s very, very hard to get all the information. But the thing is that when you get all the information, you may still be wrong. And I sometimes give this example like if in 2000 you knew what Amazon’s earnings and cash flows and everything, all the fundamental metrics, all of them for the next 20 years. If you had perfect foresight, which you didn’t have, but imagine you had and you said this is a company that is going to do really, really well over the next 20 years and you bought it, you were still down 90% in the meantime.

Mike:00:29:45A couple times.

Marcos:00:29:47Yeah. So, that was kind of useless knowledge.

Mike:00:29:53Yeah, the journey matters.

Marcos:00:29:54Yeah. Even if you had perfect information, and you were down 90%, you will think like, okay, this doesn’t work. Now, imagine if you didn’t have perfect information and you didn’t, and we were down 90%, it’s like, it’s just not possible. So, even when you have all the information, you may still be losing 90% of your money. I mean, that’s not a great method if you think about it.

Mike:00:30:22It’s not successful when you have other people’s money and transient capital.

Marcos:00:30:26Yeah. Exactly, doesn’t work. So, that’s one difficulty. And the other one, exactly what you said, when you have invested so much time and effort into an idea, first of all, it’s very hard to not — let’s say, you’re interested in something, you spent three months working on it, it’s very difficult to say you know what, all these three months I did, let’s not buy it. I mean, some people do that, but it’s pretty hard to do that. And then when you’re in it, and it’s just not working, and imagine you’re in Amazon and you’re down 10, 20, 30% it’s like, it’s really hard to let go as you say. So, this is a cognitive bias that it’s present in all of us, we are wired to do that, to hold on to the sunk cost and that’s very dangerous. It’s very, very difficult because of that.

Now, the systematic approach gets rid of that, and focuses on what is really important, which is the management of the trade once you have it on. And if you have a systematic, disciplined risk management process, you can even take random trades, in equities, in particular, because they trend. You can take random trades, and keep the ones that are working and get rid of the ones that are not working, and ultimately, you will make money. Now, taking random trades is not really ideal, but if it works on random trades, if you improve your trade selection, then you’ll make even more money. The way I did that is basically the best indication that a business is doing well is that it’s doing well.

Same thing with a stock. Stock can go up for many reasons. But the best indication that a stock may continue to go up, is that it’s already going up. Because that gives us good odds that something good is happening. It can be a good operator, good technology, a fad, whatever. But a stock that is trending up, stock or a commodity or anything that is trending, trending is a reflection of a change that is happening. Change tends to be gradual, it takes time, it’s just diffusion of information. When we see a trend, chances

Adam:00:32:52Are you incorporating any fundamental trend, like earnings momentum or anything like that into your process?

Marcos:00:32:59There’s things like that. I don’t want to say too much. But it’s not anything related to multiples or earnings and things like that. It’s like, I’m looking for, to put it simply, good stuff.

The “Good Stuff” Bucket

Mike:00:33:14Maybe we can, because we’ve — I want to make sure we get right into some of what you actually do. And maybe you can just start from the beginning. We’ve got a great question from Matt Hollerbach too on how do you size positions and I want to get there. But I kind of want, I think Marcos if you could just walk us through, to the extent that you can share, so, we understand there’s some of the stuff that you’re going to want to keep behind the veil of secrecy. But how do you, initial positions, like where do you get your initial ideas? How is it a screening system that you’re running? Are you looking for price momentum, earnings momentum? What are the things that you’re generally looking for in the good stuff bucket?

And then once you’ve got an idea, as Matt says, well, how do you size it in the portfolio? And then the next question that follows on to that is, once the trade is on, what’s the trade management situation when you have a big winner? How do you adjust for that? Do you let it run? Do you trim it? How do you trade manage in that risk management? So, maybe just walk us through your general sort of set of criteria from the beginning to the end, and then we can kind of poke and prod as we go through.

Marcos:00:34:27Sure. I think the — I will give you a little bit of context of how this was born. And this, I introduced a little bit, but basically one of the biggest weaknesses that I realized I had, I mean when you’re a junior trader, you have weaknesses, you don’t know what they are. As you mature as a trader, you start to learn about your weaknesses and you tend to avoid your weaknesses. And then as you get even more senior, you say, okay, how do I fix my weaknesses? My biggest weakness is that I am kind of a grumpy guy and I am a bit of a skeptic, when it comes to these. I’m not a big believer in things like, I will always see the downside, I always see the risk. And that was a real hindrance for me to be long things that always look too expensive. And also, because I started as a value that sort of like colored, my vision of life of investing. So, I missed out on a lot of opportunities of things that were going, that did great, but I always thought I have missed the boat, or were too expensive, we’re going to come down and I missed —

In 2003, I looked at Apple and it had gone up 100% in the year before. And I said you know, I missed that. Amazon always looked expensive to me, I never bought it. So, this was a real cost. So, one of the things that — one of the reasons I did this is to just get out of my own way and I knew that I needed to get on these trends. And as long as I could manage the risk, I will do fine. But I couldn’t do that from a discretionary perspective, I had to get out of my own way. Anyway, because I’m always kind of grumpy, my number one concern is I did not want to be long anything that was going down. I only want to be long things that are going up. If they’re not going up, I’m not interested. So, that’s the genesis of the model, the model is that everything that is not going up is just not part of the universe. So, the model is looking at all the US stocks about a certain market cap and liquidity. And if it’s not going up, it’s just not even considered.

Adam:00:36:55So, I can I just sort of press pause there and maybe pull on that thread a little bit? So, going up is I think very hand wavy, right? So, can you say a little bit more about how you quantify when stocks are going up? And maybe just to frame this a little bit. And given that you came at the development of this strategy from a background in observing futures trend following, maybe — I’d be curious about how you’ve adapted your trend process from traditional kind of futures trend to be more effective with equities. So, maybe…

Marcos:00:37:36Yeah. I think one of the hardest things for trend is defining what the trend is. This is one of the things that you can show a five year old, we can always see, okay, this stock is trending. But how do you really tell that to a computer, right? It’s like we can see a pretty person and we all recognize a handsome or pretty man or woman, but to tell a computer what that is, it’s kind of hard. So, that was one of the things that I first struggled with. And in the end, I went with a very, very strict definition of trend that captures — that it makes sure that everything I capture is in an uptrend, it will not capture all the trends, but it will make sure that what I capture is a trend.

So, it kind of when like at the beginning I was look, how do I define a trend, I want to make sure — my initial thoughts were okay, let’s define a trend. So, if I give stock to the computer, it will tell me if it’s a trend, not trend or not. And that’s kind of hard. I completely changed my mindset and say, okay, I don’t care about capturing all the trends, I want to make sure that what I capture is a trend. That simplified the problem quite a lot. So, it’s a very, very strict definition of trend. Only a few stocks will meet that definition. But the good thing is that when it does, it is a trend. It’s kind of — I wish I could say more about them I’ll sort of like spill the beans.

Adam:00:39:27Well, maybe just isn’t …

Marcos:00:39:31Let’s look at it this way. What I’m looking for is when a stock is entering, what I call a new regime. When a stock is going through a process that is new, that when we enter a new regime there is information in the fact that we’re getting into a new regime. So, it will translate in things like breakouts for example. It will translate, it’s not always breakouts but it will capture breakouts. Basically, something happened in a stock that has information, we’re getting into a new area, a new regime, something is different. And that has the advantage versus momentum, that it can actually potentially get us at the beginning of a trend versus momentum. Momentum will get us already in a trend, it may be late. The trend following approach, some of the classic ones will get you at the beginning of a trend. So, I think that’s the most important number one criteria is that it’s going up. I’m not interested in anything else.

Now, one of the difficulties as well that it took me some time to crack is that as opposed to futures, in equities, you have a lot of equities. In futures, you may have 50, 60 markets, 100 if you push it, but let’s say 50 markets, so you only have 50 to choose from. In equities, just in the States, you have like 5,000. Now, you don’t want to have a portfolio of 200 stocks, you want to have a portfolio between 20-30 stocks, concentrated but not too much. But you don’t want to have 1,000 stocks. In futures, you don’t have that problem because you only have 50. So, a maximum, you only have 50. The only other big difference between single stocks and futures is that stocks are correlated and futures are not, for the most part. So, you can do your 50 futures and apply the same independently to each of them and you will now have a lot and you will be uncorrelated. In stock it’s not the case, in stocks, you have a lot and they’re correlated. So, how do you pick only a handful of stocks? And how do you make sure that they are uncorrelated to one another as much as you can, right? Because let’s say utilities are trending and you end up with 30 utilities in your portfolio. You don’t really have 30 trades, you have one.

Adam:00:42:06So, are you enforcing some sort of sector constraints? Or are you doing this using some kind of quantitative clustering or some kind of…

Marcos:00:42:13I don’t do sectors, but I try to — there is a method in it that with the goal of diminishing the correlation among the positions, and I’m looking to have sort of like a distinct idiosyncratic driver for each position.

Adam:00:42:32So, you use the word idiosyncratic. I mean, one of my absolute all-time favorite equity, systematic equity strategies is idiosyncratic momentum or residual momentum, right.

Marcos:00:42:47Right, idiosyncratic trend, because I don’t have momentum. I’m looking for trends, idiosyncratic trend. But idiosyncratic reduces the correlation across positions. And that’s really important.

Adam:00:42:57So, maybe just — would you mind explaining that if you don’t want to go into your exact process, just sort of the general idea of residualizing….

Marcos:00:43:06The idea is to the extent possible, and again, it is a numbers game, we don’t have precision, precision on an individual trade, but over time, the numbers work. To the extent possible, what I’m looking for is that every trend is driven by something different. And I’m looking to have something that is driven by an idiosyncratic driver for that stock. That’s where the quote-unquote fundamental consideration comes in. Like it has to be something related to the stock and it cannot be a macro, it cannot be a sector driver, it has to be something that is unique to the stock that is idiosyncratic.

Adam:00:44:01So, the idea is or an approach to sort of get to that would be to residualize each of the individual equity returns against the market, the sector, maybe the sub sector, maybe a handful of macro variables, right? So, maybe rates, crude, that kind of stuff. And now you’ve got a return series that reflects the very specific idiosyncratic features of that company.

Marcos:00:44:39That’s a way of doing it.

Mike:00:44:43But you do have a systematic way to do it. You can’t disclose it, it’s behind the veil, but there’s a process that you’re going though that…

Marcos:00:44:53And what he translates into, is kind of like some people say is like hire slow and fire fast. Because I’m a grumpy scaredy cat kind of guy, I’m always playing from the perspective of being conservative. Look, I am very reluctant to put cash to work. It has to be a very special opportunity. And that means that it needs to meet a long list of criteria before the money comes in. On the other hand, when it comes to exiting positions, I’m also very shy and I will get rid of positions very quickly. And the only criteria for exit is price. If it’s not performing, it’s out. I don’t care about anything else. I don’t care about the story, I don’t care about the fundamentals, I don’t care about the earnings beating expectations. I don’t care about relative performance, I don’t care about anything, except it’s not performing.

So, I am very shy to come in and I’m very shy to keep it in. So, I’m very quick to take it out. So, it’s always trying to be conservative among other things, because I have all my money in it, I don’t want to lose it. So, it’s always playing conservative, it’s always playing on the defensive. And that means that it doesn’t really get into big drawdowns. And because it will stay with trades, as long as they work, you have this symmetry in returns, where you can really get long, long, good returns, but you never get a really bad return.

Adam:00:46:30Well, show that chart, if you don’t mind.

Marcos:00:46:32I don’t chart that, I — let me show you guys. So, this one. So, I have this chart here. So, this is the result of all the trades we have done since we started about three years ago. And sometimes we lose here. These are all our losing trades. A couple of them got big, because of gap risk, but the majority were very small. And then we made money in about 55% of the trades. So, about 50%. We make a little bit of money here. And this is where the money is really being made, which is here, in this right tail of returns. And this basically guarantees that over time because you never lose a lot.

Mike:00:47:25Yeah, let’s dig into that a little bit because there’s a couple of things there that relate to Matt’s question. So, we’ve got a very high bar to get into a trade into the portfolio. We’ve got a second bar, which is an idiosyncratic bar for trade 2, 3, 4, 5, 6. And now we’re putting the trade on. How do you think about the position size for those trades that you’ve got on? Right. And then the other thing is when that trade is in your favor, so it’s great. I bought at 10, my stop was nine. But now it’s 15. And even though my trade is profitable, when I’m putting that P&L and sending that statement to those clients, they now have internalized $15 as their money. So, now we have the initial position size that we’ve got to determine, and the trade management as it goes along. Because that $10 price fades into the rearview mirror quickly as we’re at $20. And now we’re 50% away from the initial trade position. So, how does this cascade through those decisions?

Marcos:00:48:37Yeah. One thing that is important to say is that in the majority of conversations that we have with investors and the investing public has, most of the time is spent on how do you pick your trades, which we just discussed. To be honest, that’s the least important part of it.

Mike:00:48:59Well, you said, you’ve said you have a 55% success rate, right. So, 55% of your trades are winning. So, that’s not where the juice is coming from. The juice is coming from the right tail of those trades that paid you an asymmetric payoff. And you kept them and you, yeah, you beat those good trades to death and truncated the losing ones.

Marcos:00:49:22So, I went from, let’s say, 50% hit ratio on a random sample to 55, 55/45. It’s a significant improvement, but it’s nothing to write home about because in this case, and in any case, what really matters is what happens after you put the trade on. And that’s one thing and the other thing is something you Mike said, is how do you size the trades? Like the sizing really, really matters. And truncating basically not getting the losses too big.

Now, on the sizing, when I was a discretionary trader, and when I do some of the discretionary trades on the side, we have this concept of conviction. Right? And that’s wrong. That’s wrong because we do not know the future. And anybody that has been in the market for some time will tell you that they’re surprised about what are the trades that work and the trades that don’t work. And there is not that much correlation between what we think is going to work, when we put the trade and what actually happens later. And even the best investors get it wrong. Like, Bill Ackman’s best ideas were Valiant and Herbalife. He really believed in them, I’m sure, but didn’t work. And that happens to him, and that happens to everybody. So, conviction is a very dangerous game. Sizing by conviction, as I used to do, I think it’s a bad method. What I do is I size all the trades the same. I don’t try to optimize. I think optimization is a very dangerous game. I’d rather be robust. And because I don’t know what’s going to happen, and because all of the trades that are getting to the portfolio have cleared the high bar, they’re all equally good to me. So, they’re all …

Adam:00:51:22Just to be clear, are you always fully invested? It sounds like you’re not?

Marcos:00:51:27No, I’m not. That’s another thing that is wrong. But we can talk about that.

Adam:00:51:31So, you’re equal weighting them, but it’s really when you’re in a trade that trade gets a certain fixed amount of capital?

Marcos:00:51:37Let me elaborate. It gets …

Mike:00:51:40Is it a risk weighted?

Marcos:00:51:41It gets a fixed amount of risk

Mike: 00:51:43Yes. Okay.

Marcos:00:51:46Stocks and any market really have their personalities, right. So, there is a — What is in effect is vol weighting, right? Volatile stocks get less dollars, and less volatile stock gets more dollars. But in terms of risk, I’m always risking the same amount of capital on every trade.

Rodrigo:00:52:10Energy companies get a lower allocation, utilities get a higher allocation, basically.

Mike:00:52:13Well, it would depend on their, I’m assuming, it would depend on their volatility at the moment that you’re putting the trade on.

Marcos:00:52:20Yeah, it depends on a number of factors, It’s not a naive volatility weighting. But ultimately, what it means is that every trade gets the same risk allocation. And at this time, we were running at 75 basis points per trade. So, every time we put on, we’re going to risk 75 basis points. And that is basically what we would lose if our initial stop gets hit.

Rodrigo:         00:52:44Yeah, 75 basis points of standard deviation.

Marcos:00:52:4975 basis points of the capital.

Adam:00:52:50So, in the event that all of your — you own 20 stocks, in the event that all those stocks get stopped out tomorrow, you’re in a 15% loss position. That’s kind of the way that…

Marcos:00:53:06If we enter all of them today, and we get all stopped out of all of them today. That will be the answer. The reality is as the trades move up and down, the risk in the trade will change. And sometimes the trade, the risk will get smaller and sometimes it’ll get bigger. And that goes to the question of Mike was saying, is that what do you do with trades that do really well. The orthodox trend following will tell you nothing. It will tell you do nothing. It’s a good thing that that’s happening. And that’s how I started. But stocks are not futures. Stocks have nasty behavior sometimes. And as you said, there is the reality of other people’s money and the reality of drawdowns and that when you get it, let’s say you start with 100, and you go to 200 and then you go back to 130, you still make 30, but some people will think that you lost 70. So, now I changed some things and I do — when a trade gets too big because it’s doing too well, that means that I have an oversize risk in one stock. I’ll bring it back in line with the rest of the portfolio.

Adam:00:54:40So, there’s a threshold.

Marcos: 00:54:41There’s a threshold at which point basically you have too much concentration risk. And because they are stocks and any stocks in my heuristic, any stock can fall 50% in a day. That’s my kind of rule of thumb. And if one of my stocks falls 50% in a day, obviously, I would have a very bad day. But that shouldn’t kill me, obviously it hurts, it shouldn’t kill me.

Now, when that number gets too big, it needs to be brought down, because any stock tomorrow can fall 50%. So, if I have, let’s say, for argument’s sake, I start with a 5% weight. And it’s gone to 10 or 12, that’s too big. Because if you fall 50%, I have a down 6% day on one name, that’s not really acceptable. So, basically, what effectively happens is that I sell some of it, take money off the table, and I bring it in line with the rest of the portfolio. So, I don’t have an oversized risk in any one name.

Rodrigo:00:55:41So, Marcus, can I just take it back for a second from a practitioner in the markets? I’m always curious, as we start exploring, and you’re an engineer, you get curious, you start tweaking what you want to do, and you come to whatever you’re managing. I went down a similar path to you. But I didn’t stop there. I was too curious about the low correlation of asset allocation of futures contracts. Like I just went a little further, and added more diversification and created more things. What about the other more traditional long/short trend following? It was not attractive to you when contrasting where you decided to make your career?

Marcos:00:56:34There are two reasons why I did it in stocks. One is that I had experience in stocks. I had developed some insights as to how, what are those — What does it mean when a stock gets into an origin, as I said before? So, that was kind of unique. Hadn’t never seen anybody doing that. Trend following in futures, I didn’t really have a lot to add, really. I had something to add here and I thought it was unique. There were less players involved. I thought, I mean, to use a bit cliché, there was more edge, even though I don’t really believe in kind of that thing. But basically, it’s like, there’s less people doing that. And I also think that the trends in stocks are more powerful than anything else. Now we can have stocks really doubling in a month, whereas it’s hard to find that in futures.

Rodrigo:00:57:45So, this means, this is one of the things we talked earlier about how when you were a value manager during 2005, 6, 7, you realized you were in a bull market, and that’s why you did well, right. So, the autocorrelation is strong. There’s trends, positive trends everywhere. What happens in a market like 2000 to 2003? What happens in a Japan-like scenario, where that idea that equities trend may go away, for more than a little bit?

Adam:00:58:20That’s a good question.

Marcos:00:58:22Indices do trend. Single stocks do trend but single stocks, we have a lot of them. And there is always some stock that is trending up, because there is always some entrepreneur that is doing things differently. There is always somebody that is eating more, getting market share. There’s always something new that is happening. There is always some winner somewhere.

Mike:00:58:52Schumpeter’s creative destruction.

Marcos:00:58:55Creative destruction.

Adam:00:58:56That is true, but like … Okay, go ahead.

Marcos:00:59:00So, now in a bull market, we will have a lot of these stocks, and I will be very heavily invested. And that’s good. In a bear market, when most things are going down, I will not be heavily invested and that’s even better. So, what happens in a bear market? What happens in a 2000 to 2003 scenario? Most likely, I will be under invested. And that’s okay because it’s better to be under invested than losing money. That’s my philosophy. And that’s why going, Adam, to your point before is that I’m not always fully invested, because I have no interest in having less money today than yesterday. If it means that there’s no opportunities that I think are good, it is better to not take them. From 2000 to 2003, you were not invested, you did better.

Mike:00:59:56Well, that’s interesting, but there’s a regime shift there too. 2000 into 2003, there were absolutely trends developing in oil and international real estate. And that was probably one of the … The problem is that regime shift portion.

Adam:01:00:13It’s the Japan scenario, it’s 30 years of declining markets, right, where that upward drift over time turns into a downward drift over time.

Marcos:01:00:23Yeah. I mean, it has happened that the US stock market has been in an uptrend, broadly speaking for decades, but it doesn’t have to be like that. Nothing tells you that trends have to go up. I think there’s a belief out there that equities trend up over time, there is no reason why actually. And in fact, I would say that most people that say that, speak from a perspective of a US centric market, which is actually the exception. Like, if you look at most other markets, they don’t trend up. And there is no reason why any — I mean, the reason why it has trended up is because the US economy has been successful, because it’s been the most successful capitalist system out there. Where we have these creative destructions and earnings are going up over time. But things can change. It could be a Japan kind of economy, it could be a European kind of economy, or it could be Southern American type of economy. And we may be going in that direction because there’s a lot of monopoly power and wealth disparities and stuff that’s not conducive to wealth creation.

And anyway, I digress here. What I mean is that even in Japan, even in Europe, even in markets that have been sideways for 20 years, you will find stocks that are doing really well. Like you could see like LVMH in Europe, or even Softbank in some periods. There is always some stocks that are doing well. And ultimately, for me, in any case, it’s just better to not be invested than investing in something that is going down. I don’t need to be invested. I’m not doing this to invest in equities. I am doing this to harvest returns using the stock market features as a tool to make money. And sometimes it will be fertile environment and sometimes will not. But if everything is going down, everything’s going down. I think I will not have a lot of returns, but I will not have, let’s say negative returns.

Adam:01:02:36Yeah, I think that’s clear. Absolutely.

Mike:01:02:39There’s actually a good question here too, from Helloagain, which is with systematic systems, how does one handle large tail events? Right? Even if your system tries to minimize correlation and whatnot, you have a large tail event, let’s October 87. How do you probably mentally prepare for that? I’m sure some of that comes from the 75 basis points per trade. Right? That’s a risk management philosophy before you even start, but how would you address that question from?

Marcos:01:03:10Yeah. The biggest risk of any equity investment, active, passive, you name it, is that kind of scenario, like an overnight 25% crash, right, or a 50% crash. I do worry about that. There is a hedge for it, which is basically the daily ES where you buy a daily put 10% out of the money, 15% out of the money. It can be hedged. Now this hedge is not free. It’s actually quite expensive. That’s the only way of getting rid of it. So, it’s kind of something we have to live with.

Adam:01:04:07Well, I guess you could also kind of just short whatever approximate beta you have on the long side, you could short ES futures against it and then you’re only generating alpha.

Marcos:01:04:24Yeah. We actually, for some time I had a program like that. I had a program that was market neutral. Neither me nor the investors that were running it ended up liking it.

 

Adam:01:04:38Of course not. We’ve had a 10 year massive bull market. Nobody loves hedges during a bull market.

Marcos:01:04:45That’s one reason but the main reason was that I was introducing a risk that I could not control.

Adam:01:04:52The basis risk of the ES beta versus the portfolio. Sure.

Marcos:01:04:55Now because I mean, so far I have been outperforming the indices, but that’s not really the goal. The goal is really to make good risk adjusted returns. The risk is — this is not a program to outperform, this is a program to make money. Like, it has the possibility of outperforming and it will definitely outperform on the downside, because it will be out of the market. So, it has kind of this call option profile, when the market is going up, you’re long, when the market is going down, you’re like flat. And it has outperformed, but that’s not the goal. But when you introduce a short leg, let’s say the market or beta or whatever, you introduce market risk, and then you are trying to capture the outperformance, which is really not the goal. And then we no longer really know where we are betting on.

And that was kind of the learning of it is like we get rid of one risk, but we introduce another one that we don’t like either. So, it was kind of like, okay, we stopped it. At the end of the day, it’s like I had some of my money in it to try it and I have other investors in it. And in the end, we didn’t like it. We didn’t like it, bottom line. Now that risk, the overnight kind of crash is there. You are long the S&P, you are long portfolio, you don’t have shorts, is there. If you don’t have these daily tickets, it’s there. One of the things I’ve noticed though, is that these kind of things happen when we are already in a downtrend. Even the crash of 87 happened after a period of deterioration. In 29, it also happened, it didn’t happen in a day but there was a moment of weakness in the market that lasts for some time. And then boom, it happens.

It happened in 2012. I remember in gold, we had the crash in gold. Gold had been weakening for months and months. And it’s basically these kinds of things happen when the market gets really fragile. And it typically happens after a period of weakness. And then something cracks. This program is pretty good at getting out of things. So, for example, when the market fell 35% in 2020, it got out of everything in about two weeks. In the last three months, it basically got out of everything in a few weeks. So, if we are no longer in an uptrend, I will be much lighter in terms of investment than if we’re in an uptrend now. Can it really happen on a day in an uptrend? It can happen, but it’s less likely.

Rodrigo:01:08:07Gentlemen, I’ve been called away. So, I’m going to leave you guys to it. Thank you, Marcos. That’s awesome. I’ll continue to listen live as I go do this thing. Okay, thanks, guys.

Marcos:01:08:16Okay, bye.

Tradeoffs

Mike:01:08:18I guess this is a feature of the market, right? You’re entering the market in this style of call it, trading. And there’s always tradeoffs. And it’s interesting sort of March 2020 would have been a pretty good litmus test of that, going from a fairly stable market to quite a downturn as quickly as we’ve ever seen. And so you do have some experience, but the bottom line is, as you say, it hasn’t happened in the past. It could. And that’s life. I think it’s good to internalize and explicitly address that and say, Well, this is a vulnerability, it may not have happened. So what do you do? Do you stay in the bomb shelter all day long and just sit on, hoard your cash at negative rates or what do you do? And I suppose …

Marcos:01:09:11What one should do is not have all the money in one program.

Mike:01:09:15Correct. I was just going to say that you’re going to diversify across some other programs, you’re going to have some other things that are doing totally different things to what you’re doing and this is a risk that you’re willing to take in this particular strategy.

 

Marcos:01:09:28Yes, because I mean, this is a conversation that I have with people, investors and non-investors is like, there is this dilemma between, okay, should be my investment program be quote-unquote, a complete program or not. Like my decision has been to be a specialist like, and it’s kind of restaurants, like restaurants right? You want to go to an Italian restaurant that is good, you want to go to a Chinese restaurant that is good, or Japanese, whatever. If you go to a restaurant, I can do everything, probably everything is bad. I do have a particular preference from what I do. But when I talk to people, I said this should not be the only thing that you do. This should be a part of your portfolio and you should have passive because it’s really an efficient way of deploying capital, but you should have this and you have all the things.

And you should create a portfolio with different pieces, each of them is doing one thing kind of — you cannot have — you need to have specialists in your team kind of thing. You need a quarterback, you need a defensive line, offensive line, whatever and you cannot have 11 players that do all the same thing, because probably you are having mediocre players. So, you can have specialists in each of them. And each of them will do one thing and all of them will have a vulnerability. And the key is to make sure that they’re not all the same.

Mike:01:10:58Yeah, very good advice. And on another topic, that you we were talking about position sizing earlier, and some folks may think 75 basis points is kind of small. And it’s actually, it’s not small, right. And a position size of over 2% in any strategy generally leads to the higher risk of ruin. And so if you’re not familiar with the process of how you work the trade back through the portfolio side, actually, Tom Basso has a great piece called Successful Traders Size Their Positions, Why and How, and that’s a PDF that’s available from Basso’s, I think website for free, but it walks you through the mathematics in a very simple format of why position sizing in that area is somewhat optimal, and how to think about working that position sizing back, thinking about the volatility of the underlying position. So, if those, there’s folks out there that want to dig into that a little bit more. That’s a great start …

Marcos:01:12:02I think 2% sometimes people talk about 2%, and I think it’s really dangerous. And that comes back to your comment that you made like, you have a loss, loss, loss, loss, loss, loss. If you have 10 losses in a row or at 2%. That’s down 20. That’s a lot.

Adam:01:12:23Amit was asking, and I think this is a good one and I know Jerry and the guys on their podcasts, I forget what it was called, Systematic Investor podcast or something. I mean, Jerry talks about how once you put the position on, you don’t adjust the trade as the risk goes up, right. So, Amit’s asking if you’re holding equal vol weight oftentimes, as a stock enters a new regime, you’ve got this vol expansion, right? So, you’ve got kind of the vol before it’s in the regime. And now it goes to a different vol regime. Maybe it’s — presumably, you’re mostly going to get upside vol, right? But are you reducing or managing the size of your position in the context of changing vol? Or are you, once you put the trade on, then, you’re sizing it based on that 75 basis points of risk, based on the initial vol estimate?

Marcos:01:13:30I don’t, except for what we said when the risk gets overweighting one position, because there are two things that can happen. Vol decreases, not a dangerous thing. I don’t need to increase the size. The other one is vol increases. If it increases to the upside, that’s good for me, because I’m making money. If it increases to the downside, I hit my stop. So, my stop does not move because the vol has expanded. So, once I put on the trade, the vol regime is either favorable or neutral. I mean, a change in vol regime is either favorable to me or neutral. It’s favorable if vol increases to the upside, it’s favorable if vol goes down, and it’s the same if vol increases and it goes down because my stop is based on a lower vol regime. So, I don’t change it because there’s only — I only have positive optionality.

Mike:01:14:43And that’s how you’ve created that sort of asymmetric return profile in the outcomes of your trades, really.

Marcos:01:14:49Yeah. That is basically a construct of the stock market. Like if you buy stock at 10, you can only lose 10, but you could make 50, 100, 1,000, there is no limit to the upside, really. And we have seen some of these things, right? They don’t happen overnight, but they do happen. Now, if instead of risking 10, you’re risking, let’s call it two, then it’s even more asymmetric. But the asymmetries are really embedded in the stock price. Let’s say the currencies don’t have this feature, bonds don’t have this feature, but stocks do.

Adam:01:15:34Gotcha. Okay, I think we’ve covered most of the things that I wanted to chat about.

Mike:01:15:47Is there anything that we’ve missed, Marcos? Is there anything that you’d like to add as part of the…?

Marcos:01:15:52No, I think there is one message I wanted to tell people, kind of the insight that I have had in all these many years, is that the really important thing is not the investments that you make, is how you manage the investments that you make. And that applies to trading, investments, life, anything. All of the glory, all of the focus is on the stock picking, your entry, whether the investment is a good investment, bad investment, the reality is, when especially when there is liquid markets, like stocks, that doesn’t really matter that much. What really matters is your size, how you manage the trades. And that’s the sizing and that’s how you exit. It’s making sure that you don’t lose a lot. You don’t lose too much in any single investment. And then when things are working, let them work. And some that I do these analogies like stock picking for show and risk management for dough. Like in golf, right. Everybody admires the guy that can do the 400 yard drive. Yeah, but that’s not the shot that wins the tournament?

Mike:01:17:08Yeah, that’s great. Yeah, it’s stock picking for show, risk management for dough. What was it, risk management?

Marcos:01:17:15Yeah, risk management for dough. Trade management.

Mike:01:17:19Trade management for dough. That was it.

Current Markets and Discretionary Views

Marcos:01:17:23Yeah. So, that’s the one message I would say. Now, if you want to talk about current markets or whatever, my  discretionary views, I’m happy to do that too because I have my opinions. I do not act on them. But I do have them.

Adam:01:17:35Well, let’s hear it. Sure. You brought it up.

Mike:01:17:38We have those same opinions as well. And we don’t follow them, so it’s a bit of fun. It’s always a little bit of brain candy.

Marcos:01:17:47One of the things I like is making fun of myself because I’m I kind of gold bug and I saw that in some of the older podcasts, you’re talking about gold and why is gold not working? What happened to gold? We have all these inflation and stuff. And some commodity macro — precious metals have been always one of my favorites. That’s where I make the most money. Because it’s a very psychological asset, gold in particular. And I was listening to some of your podcasts on this, and it’s like, why isn’t it working I noticed and like it is very simple why it’s not working. Because people are not interested. I mean, it’s really dumb, it’s really dumb, but it’s kind of, can any market be stocks, commodities, gold, currencies, is determined by how many buyers — I mean the balance of buyers and sellers right and how enthusiastic buyers and sellers are in relation to each other.

And in particular in an asset like gold that doesn’t have any, at first approximation, does not have economic benefit, right? It doesn’t yield anything, it has negative carry but this let’s say at its simplest no carry, no dividend, nothing, no utility, it has some utility but let’s get that at a much lower price. The only reason why it moves is because people like it or do not like it. There’s no reason for it. There is no rhyme or reason to gold, it’s very psychological. The only thing that moves gold is what people think. And if people think that gold is going to go up, they will buy it.  This is not a price at which gold is attractive or not attractive. It’s not a stock that is sustainable, I cannot of buy that it doesn’t exist in gold. It’s like gold at $2,000, gold at 1,000 is the same thing.

Adam:01:20:14I’ll tell you speaking of gold that there’s, I get maybe one trade a year like discretionarily that I get a real itch on. And I think it was, what was it Wednesday morning or something was it like that I dropped the Bill O’Neil multi year cup and handle breakout chart of gold just in advance of Putin invading or the forces invading Ukraine, and said, I think the time is now. And we’re going to, and I want to go by some LEAPs. And I literally went and started setting up an account to go to do that.

Marcos:01:20:57I am personally bullish gold. I have been bullish for the last 10 years. So, take that with a pinch of salt.

Adam:01:21:05I’ve been ambivalent gold the last 10 years, but I’ve been bearish stocks for the last 10 years. So, you know, take that with a grain of salt.

Marcos:01:21:14I just think gold has turned a corner though. Because the reason why gold was not, people were not interested in gold is because they found something else; crypto in this case, that would fill that need to hedge about whatever gold is supposed to be hedging. And basically people got less interested. That’ll happen, I think. That’s what happened. Now, I think crypto will ultimately disappear for the most part, and we can talk about that too. And so like gold will come back, people will realize that gold is the daddy of the protection against the devaluation of the currencies. So, they will come back. And I think that’s why gold isn’t working, hasn’t been working because people were not believers in it anymore. And there is no reason, there is no fundamental reason for it to go up other than people want to buy it. And they decided they don’t want to buy it anymore so that’s why it didn’t go up. And I think that psychology is changing a little bit because crypto is not living up to the expectation that people had for it, because…

Adam:01:22:32I yeah, it’s not acting as a risk off asset or as an inflation hedge asset. It’s acting like a high beta NASDAQ stock at the moment.

Marcos:01:22:40Yeah, I mean, the crypto is … stories, but it doesn’t have the good things that gold has, which is real, limited supply; crypto for all the things that they say has unlimited supply. And we have seen it.

Mike:01:22:57Well, now this is going to be very controversial. This just went from a really nice podcast to a super-controversial podcast.

Adam:01:23:04Yeah, right. Exactly, yeah.

Mike:01:23:06Because the crypto crowd has some fervor on all of this.

Marcos:01:23:09Yeah, no, they do.

Mike:01:23:10So, it’ll be interesting to get some feedback.

Adam:01:23:12Yeah, we’ll market it as Marco’s Bueno on crypto. What are your — any equity views?

Marcos:01:23:21I don’t have strong equity views right now. I can tell you that the model is heavily cash because I sense that we have entered a new regime in the market. I think for the last 10 years there was kind of governmental support for the market. Or at least …

Adam:01:23:47Just a tad, 120 billion a month.

Marcos:01:23:49Whatever it takes, 120 billion a month. I think that was a very important part of people’s increased willingness to take risks, because they thought they had an insurance policy. Whether they had or not does not really matter. They believed they did. So, they acted accordingly. And I think that that has somewhat changed. I think politically, the number one concern is inflation. That’s not a new idea, I think it’s there. I think the fear that politicians have is always not getting elected. And I think that they believe that the thing that will get them out of office is elevated inflation. Before it was a fear of market going down, now it’s a fear of inflation.

So, I think the focus has changed to that. And I find it very interesting that Joe Biden reappointed Powell, back in November. There were doubts about it. I think it was … that was considered more. So, November 22, Powell was reappointed ,kind of it was, to me was a bit of a surprise, because Powell had always been dovish. I mean, when Powell was appointed, the first time was with a very hawkish central bank. Then he …

Adam:01:25:23Until the pivot like a couple of months later.

Marcos:01:25:27Yeah, then he changed to please the powers that be. And I think he’s kind of flexible in his approach. He’s not very dogmatic. It’s like he will do whatever he needs to do. And when he was reappointed, we had an initial burst of enthusiasm in the market, NASDAQ went to an all-time high. It reversed, and we haven’t seen those prices since. And my interpretation of that is that Joe Biden and Powell got together and Joe said are you going to help me fight this inflation problem? If you say, yes, you get to be appointed, and he got reappointed. So, I think the focus has changed completely. And that has introduced turbulence in the market. We are in a new regime. The reality is, I don’t know how this new regime will resolve itself. I don’t know if we’re going to go — I can see this scenario where we correct the excesses of the last few years. There are reasons to believe that.

Last year, we had more influence than the last 20 years combined. This dynamic has continued in 2022 and yet prices are lower. That is a very bad sign. A year ago, we had the same dynamic with ARK, where they had massive inflows and prices started to move lower. That was kind of the beginning of the end. And that is something that I kind of pay attention to, because when you have a lot of inflows, and the prices don’t move accordingly, that means that there is a lot of seller supplies on that side. Now, that kind of negative. Like all these people, all the late comers that came, that bought at high prices, many of them are underwater, that doesn’t make for a very good market. That means that people are in pain, they’re going to be shyer when it comes to putting money to work again. And that is not a positive development. That is not good.

Now, the other side of the argument is that maybe what we have seen in the last 12 months, all these massive inflows was kind of like the beginning of a stampede away from cash, as people realize that cash is not a very good asset in the long run. So, this could be the beginning of a process in which money flows into any asset that is yielding. And we have seen that in other places, mostly emerging markets, South Africa, Venezuela, Argentina, where the money gets devalued. And people look for protection in assets in stocks and real estate. So, that could happen.

But in the meantime, we have this process of re-adjustments to the new regime when we went for, let’s call it the Fed put to the inflation focused. And things get rejiggled and during that process, we have all this noise. And I think we’re going through that. That’s why I’m quite happy to be away. This is a very treacherous market, you can lose a lot of money. It’s very hard to make money. There is no rhyme or reason. Is the market looking for pain, looking for weak hands and as I said, not the time to be a hero. It’s just much better to take a step back and let it settle. And then we will know and it can take a few months. And if you step aside for a few months, you probably will be happy until — there’s no reason to — I mean, let’s say the risk-reward right here is not good. There is no real good direction.

Mike:01:29:25Or there’s no reason to push the trade. And I’m assuming that your systems are also in your strict definition of trend, that hard screen is not showing a lot of opportunities as well.

Marcos:01:29:38There’s not a lot of things. I mean, there are a few things, but it’s not – we’re not seeing a lot of things.

Adam:01:29:47And the last few days hasn’t changed that situation in any way?

Marcos:01:29:52In February, I mean to give you an idea, we ended January 95% in cash. We had one position and we took three or four new ones in February, we exited a couple of them so we have a bit more invested. There are some things that are doing well. Actually, I’m going to put the letter out there next week, but we have commodity inflation … materials, mortgages, things that are doing well. But in general, we’re not seeing a lot. Now, this could have been a bottom, or at least local bottom, but this program is not designed to pick bottoms, because you get smelly fingers when you do that.

Mike:01:30:35Yeah, and that’s the point. You’re not there to pick a bottom. And if I’m assuming under the strict definition of trend that you’re using, things will bubble up and those things are probably not correlated particularly to what we’re seeing in the market cap market space, right? The market cap in the S&P is dominated by a narrow group of stocks. It’s got lots of technology in it. So, whilst the market sort of like in 2000, is doing one thing underlying the market in certain sectors, there’s very different things going on. But as you say, if you’re in this regime shift, this is where you can get the chop suey on the whipsaws of getting in and getting stopped out. So, having a very strenuous screen to qualify as a trend, that is something you’d invest in, helps keep you out of.

Marcos:01:31:32It keeps me out of trouble.

Mike:01:31:33Yeah, it keeps you out of the chop.

Marcos:01:31:34Yeah. Now one thing that would be exciting, and I mean, it’s possible, is that we haven’t — we enter something that is the opposite to what happened in the last 24 months, is that we have 5,000 stocks, the top 100 stocks don’t do very much. So, the indices don’t do very much. But the other 4,900 stocks have dispersion. And maybe of those, there’s a number of them that do very well, these will not be reflected in indices. But there will be opportunity for stock pickers, either systematic or discretionary. But there may be actually more opportunity for active managers than what we have seen in the last couple of years. Because the top 100 stocks that dominate the indices don’t do very well, and then the other ones do.

Mike:01:32:28Yeah, that’s a very good point, as well. Yeah, very good point, right. If you have a universe of 10 stocks, and all those 10 stocks have the same performance of 10%. There’s no dispersion, there’s no opportunity to outperform. And so what you want is 10, a universe of 10 stocks where you have dispersion. So, a lot of — some of them up, some of them are down, that at least gives the opportunity for outperformance or differentiation of performance.

Marcos:01:32:54Yeah. So, so we see — I mean, the market is …

Mike:01:32:58Hey, us active managers can dream, right?

Marcos:01:33:05We’ll see, we’ll see.

Mike:01:33:05Yeah, agreed, we can dream.

Adam:01:33:08All right, well, look we’re at or at 93 minutes, Marcos, you’ve been very generous with your time. So, thank you very much.

Marcos:01:33:14Thanks to you guys.

Adam:02:33:15Where can people find you?

Marcos:01:33:18I think the most visible is Twitter, MyGoodman9. There’s a website, www.snsystematic.com. All my letters are on there, my contact details are on there. If anybody wants to talk about this, I’m always happy to.

Adam:01:33:35Great. For those of you still around, please don’t forget to Like and Share so you can get other great guests like Marcos on the pod. Also reminder, we’ve got Alex Gurevich on the podcast next Friday, who obviously is an amazing guest at any time, but I think may have some special perspective to bring given where we are on the geopolitical front. So, be sure to tune in next week at four o’clock, Marcos, Mike, and everyone who tuned in–

Marcos:01:34:08Thank you guys.

Adam:01:34:08            — tuned in, thank you so much. We’ll see you next week.

Mike:01:34:09Thank you. Cue the music.

Show more

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.