Simplicity in Trend Following | Andreas Clenow

I mean if I add complexity if you don't get paid for it we have to get paid a lot to add complexity otherwise the complexity is not worth having there if you put the complexity in you will have a much more difficult time executing it it's much less likely to work because it's probably just over optimized use between use of ten indicators that has to be working together and give you the signals while also that it's just happy to work because you autumn eyes that you fitted perfectly to to the recent past now with my first book I thought I made a very simple there trading model the whole point with a model I showing the first of all Paulo the trend is that it supposed to be is very simple model to describe generally what the twenty follow me mister does my biggest regret with that book is that I didn't make it even more simple much to my surprise no one raised that concern I didn't hear at once instead my book took off in a way that surprised both me and my publisher after two years my publisher tells me that I against all odds ended up in the top 5% of Finance book authors it was a fun ride and I learned a lot along the way this is a quote from the preface of the latest book written by today's guests imagine spending an hour with the world's greatest traders imagine learning from their experiences their successes and their failures imagine no more welcome to top traders unplugged the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level before we begin today's conversation remember to keep two things in mind all the discussion will have about investment performance is about the past and past performance does not guarantee or even infer anything about future Mormons also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions here's your host veteran hedge fund manager niels Kastrup Larson hey everyone and welcome to another episode of top traders on plot thank you so very very much for tuning in today for those of you who are regular listeners you know that my goal with the podcast is to share the stories of some of the great traders in the world and to ask those questions they don't usually get asked to help you get more clarity confidence and courage to take your own trading or investment career a step further today you're listening to episode 91 if this is your first episode you've heard you might want to go back and listen to all the earlier conversations before we find out who's on today's show I just want to mention that today's episode is brought to you by Eurex and given all the current market volatility relating to US rate hikes and the slowdown in China you'll find some very useful ways of hedging your portfolio risk if you visit the Eurex website this is a chief investment officer basis asset management concern and you listening to torture is unplugged and by the way if you want to read the full transcript of today's episode just visit the top traders on plot calm website and sign up to receive access to all of them now let's get started with part 1 of my conversation I hope you will enjoy and tres thank you so much for being with us today I really appreciate your time good now entrance today we are going to make full use of the many talents that you have on one hand you are running your own systematic investment strategies which requires a lot of the various disciplines that I often discuss with guests on the podcast but also you allocate to external managers which is a rare combination so perhaps we can touch on this skill set as well and of course many people knows you as the author of two books the first one following the trend which caters to an audience that is interested in the classical way of using trend following strategies on a basket of futures contracts and your latest book stocks on the move which goes into why and how you need to trade stocks when applying a rule based approach is that a fair summary you will say good now for full disclosure andreas I read your first book a few years ago so I may not remember all of the details and I have read most of your latest book leading up to our conversation today but I'm I'm sure you will guide me to the more juicy Bitzer of both books during our talk but before we jump in I just have this simple question that I try to ask all my guests in order to appreciate the different answers there is to the question and basically it's how you respond when a person you haven't met before ask what you do how do you explain what you do and dress well I was running joke back in Sweden anyway when someone asked me unless no insert in the business whatsoever I just shrug and say that I I make rich people richer that might be the most accurate description but it's a it's funny enough what do I do well I am chief investment officer of a a little bit different shop here in Zurich we are in a family office that means that much I'll be careful that we manage belongs to to us the partners me and my partner and that gives us a large degree of flexibility we can do well what we think makes sense with this pool of money we can we can create our own strategies we can take in investor money since we are also licensed asset manager here in Europe we can invest in other people's products we can do private equity deals we can do all kinds of give us an investment that makes sense obviously with you if you manage a reasonably large pool of money it doesn't make sense to put it all in one strategy not even if it's your own really great strategy therefore we do a lot of different things that usually surprises people that were in so many areas obviously I should say I'm mostly well most mostly known for the systemic sauce its Matic side primarily because of the two books a lot about the subject but that's one lot of many things that we do really sure no absolutely well I'm gonna stay with your story at least for a little bit longer because I'm uncurious to know how you got to where you are today and and I wanted to put some extra color in that so so tell me a little bit like you know what were you like a kid or young man growing off where and and and and where that all took place in rural Sweden pretty much the Midwest the cancers are sweeter if you like it's a kind of place where you look around you see a flat price in all directions it's it's a town that really I'm not making this out I couldn't make this up it's a town that uses the slogan most cow dentist City of Sweden town to be an affair there's more more cows per square meters and anywhere else in the country that is the tourist slogan of where I'm from so you see when we start on the story tour absolutely I never thought I never saw a cow in my life growing up but that doesn't let me escape there be a reputation of the town itself sure i I went to school in Gothenburg and while I was there I got increasingly interested in in in trading on two topics actually and trading and computers okay Peter interest I had for many years before but I guess I I cannot develop the skills a little bit better during those years I started financing in Gothenburg school of economics and these two things started nothing together more and more yeah I started a computer consulting company back in those days this was of course me to early 90s and well who didn't have a computer company back then right right it was almost too easy I mean if you if you knew computers back then the way that most people well pretty much everyone knows computers today if you haven't had a decent base key oh well you were in demand back then sure so me and actually a lot of my parties back then we're running a similar type of companies we're doing training programming servers networks computer security these kind of things during this time as well I got more mature into a whole training thing I read law trading books I got into all the deep deep rabbit hole sort of technical analysis all of these things that by the way I think we might return to that later if I know you're right that's that's probably something that makes me a little bit different than most people in my situation I find it unusual that that people hedge fund managers and the like come from the normal background so to speak the role of normal retail trading background to begin with a reading ta books and all of these things that's unusual fighter thinking that sucked if both could have bled for me but anyhow I have a company back then and I think it sometimes late night is that it was time to cannot grow up and do something real for a living and I I left the whole entrepreneurial thing and joined a company that was back then called Reuters not always merged and called Thomson Reuters I was head of the financial consultancy ignoring for a while this was interesting on to say it's interesting learning experience to be on the corporate side for a while yeah a lot about corporate world and most of all I learned about how I don't really belong I think a lot of people realize the same thing but see the better you get it something that kind of environment the less you get to do it right this one learning experience the other one was that well if you want to get something done in a corporate environment you have to break the rules and then you have to bail be lucky and get away with it I'm not talking about regulations running low so these kind of rules but rather they're the rules that tell you that here is your box and here is what you're allowed to do in the company and here is what you love to have opinions about yeah so what I figured out quite quickly and I guess that's that's where I'm heading with this story why I changed everything in the end what I figured out this to get something done to get ahead in a corporate environment I had to just go ahead and do what I was sure needed to get done whether or not I was authorized to do this or not instead of the usual committees approvals teleconference and project managers and discussions and so on yeah I just got it done mostly by myself in evenings a weekends and sentence sure and what usually happened lucky knees a lot of people want to get me fired a lot of other people to promote me and lucky me any day people wanted to promote me one I thought about that a few times and a few years later I was head of Reuters quanta development team in Geneva for equities in commodities and I slowly started to get increasingly cynical about that other point I was learning that the better you get at getting things done with the body or getting since dawn the less they let you do it so I found myself in the end at the a job well before 30 I guess I don't want to think back how old I am summer run that HR figured out that Here I am in teleconferences all day talking to you people who talk until the conference all day discussing head counts back and forth discussing projects and budgets for things we all know has no real meaning anyway right mmm things that doesn't really matter we're just fighting over should you neva do it should Paris do it should London do it then we spend half a year and I don't know how many millions on discussing this and I was increasingly feeling that you know it's it's nice I have a nice title they pay me nice money but I can't keep doing this for my own sanity I can't be here in 20 years it was a nice company to be with I think this is a problem you find in all large organizations sure this happens after a while well about you exactly that's because of a cold call corporate world and then at some point you I guess decide enough is enough yeah basically I did what I what I tend to do a few times when I I if you test in the past when I felt like I was either in trouble or on you get something change something you basically raise a flag and hopefully I hope they're friendly sees it make yourself visible surehand summer bouffant you I did that I got a bit lucky back then this was what ten years plus is awesome blogger sure I happened to buy absolute coincidence run into people who had large sums of money they needed to have managed they had some basic idea on how it should be done but not really the details and they don't want to do it themselves sure I understand completely how improbable this whole thing seems and that's what it seemed like to me at the moment as well at that time as well but that got me into the whole hedge fund space they start up a hedge fund back then over back in those days it was quite straightforward to start a hedge fund at least over here sure regulations well let's just say that wasn't too important for the regulator's at that time the regulator's allowed all kinds of things that today would be impossible you set up offshore hedge funds in the Caymans and well it was quick cheap but easy and compliance and all of these things was minimum now it's a whole different world today it wouldn't be possible to do what would we did back then not legally under how I'm sure people do it but back then we could within the current framework at a time do this kind of things which we couldn't I don't know so I kind of got lucky on what's the expression how I stepped in a banana peel and slipped into the business obviously I had some background to begin with I had hopefully these in preparation for what I jumped into but things developed quite well I had a couple of more times where things kind of happened in the right direction but in the end my my my general philosophy is if you have to for this seemingly improbable things to happen you have to create the circumstances for it true if I can just stop you there I'm just curious because so you say you meet people who have money to to be managed and then you you start a hedge fund but and at what stage had you already started managing your your own money did you have a strategy I mean where does that fit in because usually even rich people don't give money to people who don't have some some level of of you know experience in in what they want them to do so so where did that start long time but at the time I would say my money was in the context of things fairly significant sure what just paid me well but not that well I've been well I start off with like most people I guess in who wants to get into the business I started out building training systems back was already back to mid nineties simple meta stock TradeStation was a call back then sure yeah the usual suspects of optical analysis programs and of course now looking back I realize just how how amateurish those things were about you know we have to start somewhere I remember I was building a point and figure plotter in Excel that automatically reads real time from Reuters and and makes a point of figured shot in Excel I don't know what that's good for but I I did those kind of things in a way I guess my trading if you wanna step back to that at the beginning I I like to trade it back in the 90s and I thought I was really good at it right I made very good money but you know what I'm going with this don't sure long technology stocks my strategy I bought Nokia right strategy this is the nineties and most most people treating back then if it is alongside of the equity markets and it didn't matter what you throw the dart that is kind of hit something profitable yeah so I guess I got lucky if I started trading in our own 99 2000 something like that I would have taken some losses and I would have you know Dawson wheel for a living instead so what is so what do you think that the people that you met what did they want you to do specifically initially when you started off well they want to make you develop they had they had their some basic idea trading ideas that they were unable to develop the test and to implement okay and they needed someone to do this full-time as well hmm which they were not to prepare to do at that time I guess we spent a few months discussing the whole thing ie build some sorry some some prototypes for them and this is also something I always keep stress in my books and website and things that programming skills are absolutely vital in this business sure it doesn't matter if you plan to be the cool hedge fund manager with a staff of 20 programmers you have to learn at least basic programming single programming that is yeah I develop the things we launched with let me see what was it back then it was it wasn't big but it wasn't significant 3040 million something like that I guess sure this is enough stalling pace back down absolutely still is I think yeah it's it is enough to start with for sure and who did well for a for a few years on that and yeah it was fun for a while it's not it's not the the fund of the company I'm with now and I left that on Oh some years ago I can't remember the time for him at the moment about six seven years ago something like there and moved to my present position at Asus sure that Asus is not it's question I always get it's not some sort of abrogation based on my name the company has been around since 1995 and back then well I was trained not yes I'll sure how it's not enough to it I want to be part of Asus back then sure absolutely and obviously we're going to talk much more about what you do today inside aces of course but just just before we jump to that you know of course writing books and running your investment strategies is a big part of your life today but what you do when you're not working what you're like spending your time doing outside the office oh that's not usual question I never got that under there you know an interview before well should I say long walks on the beach a reading a good book I don't know what was it what do I do well I like photography actually okay there's one more little bit more normal thing I do true then of course between that and family and it's more son well how much time is really over true true excellent now you've written a couple of books about systematic trading strategies which usually involves a lot of math and equations but you've actually managed to write them with very little math being being used of shown and I think you're what you're trying to promote is the importance of trading broad concepts not complex super system so to speak explain to me why this is so important in your view if you trade what most of us see is a normal type of systematic models I mean now we're excluding I'm excluding here the high-frequency stuff your own things because that's a whole different ballgame but normal systematic strategies usually they're about trading broader concepts I see a nova focus on on details usually detest don't really matter so if you if you discuss with it if I discuss with the retail trader so contact me because of the book and this thing's a common theme I will see is this focus on the most tiny details things that I wouldn't even bother with so therefore I'll actual I try to focus on I could emphasize the larger things me for instance you can talk about gears we do a you measured trend will you use exponential moving average or a simple one or a way to moving average and well my only answer is I I don't really care what's going to be the difference in the end so high name Iran in error so people strive for perfection but essentially perfection is not needed in in in this particular instance I think it's misconception this focus on the details I believe this comes from it costs very much in the TA school I think the technical analysis school right where people read all those books about 100 different indicators and the five different settings on each and how you can treat the parameters and I can optimize things and it doesn't work like that you won't really find a hedge fund manager sitting there optimising he says ten indicators that is combining two to get to the perfect buying signals no one really works on that on their on the institutional side it says this is a bit of a retail illusion now you'll find what kind of phenomenon you want to exploit in a strategy and it's never about the best possible strategy there is the best possible strategy if you find a Spile and try to find a good way to trade that style sure sure just just as a quick follow-up and I know with it it's very related to what we've just talked about but I mean you also refer to the value of simplicity and how very simple rules can perform remarkably well tell me a little more about that the findings and also how you you know got to that conclusion I mean was it just through testing or or was there something else that that made that very clear to you that actually simplicity is really you know it does really work the right person the simpler systems are usually the better ones what do you mean by better by the way that's something I often get asked and and you know how do we define better in this world how do you think are you thinking sort of risk adjusted returns are you thinking when you add complexity if you don't get paid for it true you have to get paid a lot to add complexity otherwise the complexity is not worth having there mmm if you put the complexity in you will have a much more difficult time executing it it's much less likely to work because it's probably just over optimized use if you should ten indicators that has to be working together and give you the signals well odds are that it's just happy to work because you or optimize that you fitted perfectly to the recent past sure now well I want my first book I thought I made it her a simple the trading model the whole point with a model I show in the first book follow the trend is that what point is supposed to be is very simple model to describe generally what the trend following industry does right my biggest regret to that book is that didn't make it even more simple how could you have done that what is he actually and I have to say I have to give credit where credit's due the suggestion came to me after I wrote the book by I think you know I'm already a Nickelodeon ever in New York at a quest absolutely it's very good asset manager definitely so his suggestion was well did you try just looking at a mr. 12-month return nothing else at first when I suggested that I thought about like everyone else he's got to be kidding he wasn't and I did the math on it I came back and said yeah you're right I should have done this for two reasons I should have done that both because it's simpler and therefore nicer and it would also have prevented the unfortunate side-effect I see sometimes in my book where people mistake my demo system that I made for not to explain the phenomenon explain the it's like a teaching tool and once in a while people contact me and they seem to think I meant that this model is like a perfect trading model recommended that people should take this rules and start trading them and yield ten years they probably give you okay return but this model business rules not meant as an advice not a trade they were meant as the description of what what the business is on average so what technical mean by an annual system even if I heard you right before shot this system is often called this type of system is often called a 12-month momentum rule or muscle tone rule what you do is you look at two data points so what was the price yesterday what surprised a year ago is it high today or high yesterday or lower yesterday year ago yesterday's price is high there was a year ago that we go along not we go sure and that's pretty much it and you do that on a diversified basket of futures so this is you know something that would give similar performance as what you demonstrate in the book using a different set maybe a more classical way of doing trend following it would actually embarrass enough it would be better results than the model epicenter in my book this is the big disclaimer this is of course based on the couple of assumptions first you have to trade a broad universe as you say applying this on one single market well maybe it works maybe it doesn't you apply it on on 50 to 100 different futures markets so far it works fine of course you have to have some sort of a risk allocation and method or position sizing your sizing if you will run what I use there is a classic just a wall of parity model which is quite normal then of course the big downside with this type of model in reality is that you're in all markets at all times which means you're eating a very high level of a model of equity sure what about so the interesting thing is that you're not trading that mortal as far as I understand Nicole is not trading that mortal what makes that model interesting on one hand yet I've not come across anyone who trades that kind of strategy it's a learning tool it is amazing right and it's a benchmark tool as well obviously you develop your own rules the way it makes sense to your type of strategy what you want to accomplish but benchmark against this if you can't beat this model well then you might have a problem sure now just-just-just not that I intended to go down that model because obviously I didn't know you're gonna bring it up alright I'm now that I'm curious and that is does this model because we're going to talk about that later on does this model does it require the full diversification meaning that's what trend-following often benefits from ie the diversification between different markets all could you in theory not that I want to jump too much into what we talk about but could you also apply the same methodology to 50 different stocks or 100 different stocks well you could but the results would be different you have to do things a little bit different there but on the stocks and I assume that you want to wait for with me but wait they're not let me jump into that already okay but your question in a way you do need a broad set of things otherwise you apply this just to one or even two five markets well it could happen any anything could happen really trying to get some very weird results from that [Music] let's dig into the books a little bit and we'll probably discuss ideas from both books a bit randomly as we're already doing now so apologies for that but I wanted to start out with just some general observations that I have made looking at your work and some of the ongoing publications you produce and and that you're appearing and the first one is about trend following where you often refer to trend falling as being an easy simple strategy where and I'm quoting where anyone can find basic rules on the internet and the fact that it's you know it there's not that many ways it can be done so my question is why do you like describing trend following in this way that's the feeling I get when I read some of these things and I don't need to be taking the other side but there could be a reason why you're describing it this way but again I read a lot of things EC yes on one point and one side you could say EC the rules themselves are often easy right you look at the rules the trend following rules usually not complex from that's not what the complex this it's an easy tool to implement this is easy to run this in reality well not always and then this is a matter of course if if you run a fund or a larger mandates you you probably don't just run one cleaning model so how do you combined is how to do risk management there are a lot of there are a lot of variables that come in in reality but in theory if you want to assign the trend-following model in a simulation platform well that's not terribly difficult sure sure sure and if I can just sort of add my two cents I mean I agree with you that the concept of trend-following is is simple but I think as soon as you get beyond that it really isn't that easy to find the you know to find rules that one can stand the test of time and also can produce a relative return to the drawdowns that comes with it that most people can can stomach and what I find really interesting at the moment is that the return dispersion between managers that all have maybe 10 20 30 years of experience that dispersion seems to be on the rise and to me that means that a lot of people with a lot of actual experience is having to find slightly new ways of doing trend following you know in order to stay competitive so so I agree with you there are some simple things societies to to train for life but I think there's a it's becoming a little bit more complex age there's not a reason why why you see what you see the differences between men and managers ok but obviously some differences are due to their different different speed of the trend following some is due to their different focus on different asset classes and so on but this is all news we all know this before at least those of you who read my book and you all did I hope but the new the new thing but reasonably new in a way is that the number of pure trend followers is now quite small right most of this most shops in the CPA industry they're primarily trend father's not a lot of them but most of them are primarily trend followers that doesn't mean that the trend following is the only strategy or even always a dominant strategy hmm there has been a trend for well some years now to combine strategies to reduce volatility to find ways to to cover the the draw downs you introduced carry strategies calendar spread you introduce counter trend models there are all kinds of separates they said lie strategies like the caller that you introduce is overlays yeah now this has in sometimes some phones is worked out fine for others it backfired but this isn't my view the main focus cause in this city of increasing divergence and performance sure no I think that's a very valid point and I also just want to mention that I really like your analogy about twin falling where you you compare to to watching a scary movie where you say that the happy ending is never in doubt but it takes a lot of nerve to sit through the whole film and and just like we have you know the emotional roller coaster that trend-following gives us and indeed any other investment strategy you know once it's live and it's real money and you're having a real drawdown it's it's a different thing than just looking at them yeah and you there's not important thing as well mention about topic is that you can't just blindly follow the rules I mean even if you have great tools that worked great for you for 30 years there might be situation coming up to just a little car for 30 years true they take this year ago for instance what happened they are in the Swiss bank or the floor was sure what was now that cost some for some CGI furnaces cost extreme moves up or down yeah for most it didn't do that much but I would say it shouldn't be a big event for a trend follower hmm now the models made a thing so you run your simulation you might get some really extreme stuff there but if you actually took those rules if you actually follow them completely then you have to stalk a question I mean how why did no one do any critical thinking here I mean first there were three main positions that would be concerned right you are the euro future the Swiss a future and the euro Swiss a future sure so why would you trade both the Swiss the future at the euro future for instance yeah I completely understand trading the euro future but the Swiss the future would have given you the exact same position on a very high correlated basis yeah and of course if you had that position if you were short the Swiss see all the way down world and it took the message hit that day hmm if you were in the RF future the your Swiss see that you really have to wonder here because that's where things can get really dangerous sure so you're not official low-volatility yeah which means a standard standard models which would use some sort of a parity position sizing they would tell you to take it absolutely insane position size yeah it also followed that well also the master saw the 25-30 percent up or down that that months depending on what side they happened to be on sure now I mean that's a very good point and one thing I recall from having last year interviewed a few managers around that time of the move my good friend Jerry Parker actually in the interviewer did with him which is just a short review he said well you know you always have to put in a minimum level of volatility regardless of what the actual volatility is I think a lot of people if they didn't do it before they'd certainly do it now because it's not going to be the last time we see these artificial volatility and I guess even December was a good example when we had the ECB decision which obviously caused some of the short-term European bond markets to to move quite extensively and again you know if you don't have a minimum level of volatility for individual markets you can arise actually right now you have to quite some time in primarily European store markets that is the a short term interest rates markets right because there you have a very clear asymmetrical risk which the CREM loss would be completely unaware oh yeah so you're trading over 100 which means the settlement that would imply the banks are willing to lend to each other in our secured basis and pay for the privilege now we might stay there for a while you in this extreme situation we might even move up a little bit but even even if we we move a tiny bit up or we can make a huge move down so there's a very asymmetrical risk and these things you have to take into you can't just run a trend falling model and close your eyes absolutely that's true now I think a lot of people who look at the stock markets and as as we as human beings you know we have a tendency to only focus on this sort of the recent history and and since we've had a bull mark now for six seven years it would be natural to conclude that doing trend following on stocks would be very straightforward and very profitable but there's a problem with that logic when I read your book explain to me what the issues are in in in in doing that let me start with in the book I made a clear distinction between trend following and momentum right I understand a lot of people have asked me about this but obviously I've made that semantic distinction there to make a point because in my view is very different the alternative would be to say that the trend following in stock on stocks works differently than trend followed on futures that's also correct but it's easier to make the point if you use a different terminology and therefore I was very liberally using the momentum term instead of the trend-following term in the book to make sure people understand what I'm talking about now the difference is is yes you know we'll be running a trend for a model on futures it works because you're trading so many different things maybe for the next two years the commodity futures will fail completely maybe there's no transfer maybe you keep losing there but maybe you make all your money in the currency futures or in the in the bond futures that's in the end the entire rationale for the transferring type models that most markets fails fail most the time that's the time but there will always be something they will produce enough profits to make up for it so how will you trade stocks well because thing is you have a lot of different instruments of choose from you have thousands and thousands instead of just the hundred or so four or four futures on the other hand you're dealing with it with a lot of instruments with very high internal correlation mm-hm and you're gonna gain at the same time you're gonna lose at the same time most importantly you're going to lose at the same time things might look reasonably uncorrelated on the upside but then like this week the market goes down and guess what all the stocks even the great one we'll take a big beating at the same time know your risk models go out the window the other problem is of course which stocks you trading if you trade futures you have the luxury of trading all of them all the time what's the problem you have a hundred or so to choose from right and I see the trends you can take any signal you get just get it now in a bull market you will get a buy signal on every single stock out there mostly men away yeah you can take them all you need some sort of ranking method otherwise how do you determine which stock to buy hmm and to say you normal trend following that would mean you stay in it until it stops going up right but the problem with that is in a bull market everything goes up it doesn't mean that this is the best stock to have the stock might go sideways or slightly up when you're sitting on this for a long time wasting your your your capital on it while other stocks are skyrocketing so you have to trade differently that's why I presented the book I present a model to to rank the stocks peak stocks in a systematic way to decide which stocks to be in to decide when you close them out when another stock is performing better and I would say the single most important thing is don't buy stocks in the bear market you have to have some sort of filter for what is the overall stock market doing because you can't just expect stocks to move up in the same same extent in a bear market that is if the general index is falling you can't expect to find a lot of great buying opportunity south are true so your rules should be aware of what's going on in the overall markets so that's the major two main differences you would you would flag because there's another one I'm sure you you you're gonna come to that anyway and that is of course that in your momentum trading strategy for stocks you don't go short and in fact you go as far and saying that shorting stocks is a is the fool's errand tell me more about the the reason behind this most people lose money on shorting stocks sure it's thought is very very difficult can it be done other people doing this for a living and making great money yes of course it is but that doesn't mean is easy doesn't mean that most people should do it or should even try stocks that are in a bear market um very very difficult to trade they have a tendency to behave very violently and so you have small moves moves down it keeps ticking down day after day week after week and suddenly you get this one day moves and events coming out some some banks some government coming in whatever else happens and you get a messy move against you and you lose all your money in a day mmm this happens all the time for stocks a share goes down a lot because of horrible conditions you're short for four months and everything is great and then of course some other company realizes the great takeover candidate and they buy it and you lose all your money shorting in general for everything is much more difficult than buying hmm especially if you won't have a had a longer term time horizon stocks are even worse of course Joe I wonder I mean obviously people should go in and buy your book and read about how the details are in in terms of how to trade stocks the way you suggest but but I just have a I'm just curious about something okay if we take the there they you know your your suggestion about buying stocks that move up essentially that's what you're saying and you should buy the ones that have the most momentum and you shouldn't short them and you should have some kind of filter for the environment which are backed by the way I'd like to talk to maybe a little bit more about that bit but could you add if you don't want to show individual stocks would it make sense at all to two shorts a the index because obviously we know that there are some good moves on the downside in equities once in a while we haven't seen them for a while but they do occur so have you ever thought about sort of that there's a lot of things that make sense that I times would recommend against especially the books because frankly most people read in the books are retail retail traders and I try therefore to error on the responsible side if you understand my part do I sort stocks to our short indices yes sure of course I do not in a huge extent is never a main strategy but yes of course yeah you can look at different is he he won't look at bitter neutral strategies these kind of things we tried to short short out the index completely it's fine if you really know what you're doing and you really have the model store to monitor it and you understand the potential risk with it for most people it's not what most people it's not a good idea but if you know what you're doing you understand what's what we saw them what else sure sure sure sure sure now okay and I'm just sort of jumping around a little bit on on sort of different different topics and and feel free to to go down other ideas that you want to talk about but but a lot of people in the money management business you know they're usually very focused on explaining you know what they do and how good they are at doing it in order to convince investors to let them manage their money but but you do it slightly differently you spend a lot of time giving away specific rules as to how investors could do it themselves instead of giving you the money so to speak why why is that and I'm sure you have had this question before yes all variations of it very okay yeah first why write the book well I had fun doing it I wanted to write a book I wrote a book I had time most people don't have time most people aren't allowed to most people are employed in the capacity where they either all the time is gone or they are not allowed to do anything like that I have my freedom I do what I like I want to write a book why do I give away the secrets well frankly all the wrong people I think I wrote that hit one of them that all the wrong people know this anyway so Who am I really hiding it from what I write in the books is hopefully there are some ideas here and there even for lis professionals but no one's really going to read the book thinking that this is great I'm gonna go put a billion bucks in the market and explore this idea the people who manage large amount of money the people who have run hedge fund management shops they have quanis employed either they already know what I want to write in there or they can figure it out it's not that it's not something really revolutionary I try to explain it in a way that hopefully the way I explain it is new hopefully I can contribute a little bit with this but it's not secret in there and to be completely Frank I think the strategy of getting a little bit well-known by by the books versus paid off yeah there's been a lot of investments a lot of businesses coming in because of this people who people read the books contact me over the websites they cause a couple questions and maybe something comes or something doesn't but they're ours it never hurts now but I do have a follow-up question it's not specific to to to your books but but clearly there are a lot of choices today where investors can either read a book or buy a system and they might get this false idea or hope that you know by following you know whatever they they they buy they they will become a great trader and and something clearly as you described before certain things you you have to probably leave to to the professional so my question is really do you have any advice to people who either read your books or other books or buy some of these things that we all know is available out there in on the internet as to how they can determine if they are equipped to do it themselves or whether they're better off letting their investments be managed by other people how can you how can people figure that out of course look at your situation see what kind of knowledge do you have to begin with look at the material you've been reading see it doesn't make sense I think the most important thing to look at when you read different material is so see what does it promise or imply about your probable and imminent success if someone writes books material or coaching something else and they promise that they if they make crazy promises if someone says they they train millionaires for a living and they make people normal people into millionaires in a year or so they promise triple digit returns well no it doesn't work like that doesn't exist if you're even considering something like that well and you probably not at least yet equipped to entice your money because then you're believing in things that are very impossible but staying in the realm of sanity well the first thing is taking very no risk I would say the main mistake that retail traders do is that they take on risks that it would get people fired or or worse in the hedge fund world people say that we take a lot of risks in the business but when I see what what retail traders do well that's because on the crazy side you have to have realistic expectations and of course that's usually where it fails because with realistic expectations it's no longer interesting for for many retail traders when you start understanding that the compound return of say 15% or so maybe per year even 10% a year over time it's considered to be quite good then a lot of people lose interest or of course if you aim for 50% or 100% you will most likely well most likely you will lose most of your money before you learn the mistake you have a couple of good here's a couple of bad years and wild swings and hopefully you get out before you lose everything but no one in history has sustained such a hard return sure I guess and on this topic I noticed a blog post you wrote and I don't remember exactly when that was written but it was titled something along the lines why managing your own money is a bad trade you tell me tell me a little bit about about that one I like to say well if you're gonna clickbait people you have to at least deliver afterwards so I try to make sure that some extra content to back out my sometimes well it's a bad trade what I try to point out there is many people have this dream of trading for themselves mmm and I understand it but I will suggest modifying that room a little bit a lot of people say that the biggest dream is to be able to sit at home or have their office and just trade your own money all day and have a great return and be professional trader well my point being if you're gonna do that anyway why don't you throw in other people's money in the pocket too why well because you get a base fee on that and you get a components fee you can manage your own money the same time that's not the issue but just your own money well that's risky because maybe have a bad year if you make no money and how you're gonna pay for that office in the computer you have in front of you on the other hand if you have client one in there as well you can do the exact same thing you can still be professional traders do you still trade your own money for a living but other people's money as well now you can seek more long-term because now you don't have this constant stress that you have to make money before the end of the month otherwise you can pay the bill you can't pay your your-your-your food you can pay the car payments and your wife's gonna leave you right so what you do is that you have this base key coming in that means means you can you can relax you can do things more or more calmly you can see long-term you don't have to take big risks just to make make ends meet but in a month you probably manage your own money better you probably manage your clients money better that way and everyone's happy so I know that at the end of that blog post you do have some reasons why people shouldn't take outside money to manage and some of them you refer to as excuses some of them you've referred to as valid what what what do you think you know what what are the valid are there any valid reasons why not to do it though well reason would be that you see if they don't like people you don't want to deal with people you don't want to deal with clients you don't want to have the hassle of the getting investors reporting to investors possible compliance issues and so on that's fine if you don't want to deal with that it's fine but then you made an economic decision based on your preferences which economically might not be the best but it's a valid reason another thing is of course at least here in Europe these days and you know what I'm talking about there yeah regulations are getting borderline ridiculous and mr. regulator if you listening to this I have absolutely no problem with what you're doing in the business is getting very very strict and very very expensive to comply with increasing regulatory requirements the hurdles of entry are going up fast I mentioned before that I got lucky I got into the business at a time when it was easier and cheaper to start something in the business trunk these days let's say you someone comes to you with a million bucks and ask you to Manish if you based in Europe well that doesn't make any sense there's no way you can make any money from that someone comes to you ten million well you're not gonna make enough to have no proper salary but at least you can start something so that's very valid reason as well that my understanding is now I have really no knowledge mostly myself about this but my understanding is that this is still much easier in the US okay yeah well it may it may well be there's no doubt that regulation is on the up and it's probably not gonna end here so so that is definitely something to consider if you're thinking about doing it on your own yeah I just remember this one more valid reason of course it's probably more of them but I just remember one in a way that maybe you have a trades throughout year which you cannot scale right if you're doing a quick interview scalping back and forth you take a couple of lots here a couple loss desirable if someone puts another ten million in the bucket maybe you can't do it any more so that's of course absolute the Della's sure so just for people to realize this because I'm sure a lot of people will go and look up your your blog and and and and your website etc etc but but again just to stress the point that that we talked about before and that is that a lot of the things that you might write about or use a title to when people see it I think it's a good idea just to read the article before they make their conclusions because often you you actually end up arguing the opposite that much of the title might say so or something different at least so so just just be aware of that very quickly when you're on a website is that if you have a title about how to use momentum analytics to beat the the SMP benchmark in the long run no one's gonna read that no one even if you're right the best no one's gonna read that sure know that you now but staying on that theme and staying about blog post in general and the fact that you like to have these juicy articles from time to time you did take a step and you even did it earlier on in our conversation today you've taken a staff at technical analysis some time ago saying that you know the visual nature of technical analysis lends itself to get rich quick stories so how do people tell the difference between technical analysis and say momentum or trend-following trading how do they do that well I guess see the problem with technical analysis is there's no definition of it everything is technical analysis you're dealing with the price well as ta right I wouldn't say that all technical analysis is nonsense I spent a lot of time taking on masses especially when I was younger I read all all the books I've gone through all the phases like most people I'm sure you can come up with some sort of seven stages of technical analysis model that people go through before they finally accepted to move on there are a lot of weird things in there and as I pointed out before some of the technical analysis organizations are really guilty in promoting it they give it some sort of legitimate what is the word in English legitimize it oh great yeah by including it in their courses there are there are some things some particular pet peeve someone like Elliot wave theory for instance about you know how the universe moves in magical waves you can predict and so on you know these are fluffy things that can either be proven or disproven and if I say that I come up with a new idea that is if it's seven magical waves I'm sure I can write a book about it and I can make a lot of money from it but no one can prove me wrong right even though there are eight ways we rely on you have fun of things like Fibonacci numbers were now you have all these decimals it looks like there's something magic with this but is it zero or six one eight I don't know if someone tells me that this zero six whatever the ratio actually is there it's not better than saying approximately 2/3 well I would see some math on that but that was producing that it's not nonsense there but ignoring them or ignoring the New Age nonsense which not every reasonable adult should be able to ignore anyway then you're still left with a lot of things that just cloud the picture mmm this is always indicated for instance and many of the indicators might have a value but once you start using an indicator for everything this is normal expression like before you if all you have is a hammer you start seeing nails everywhere and that's the problem with technical analysis tool that you have all of this indicators you throw this throw a whole bunch of them at the wall and see what happens off the wall right and it doesn't mean that you have anything of value yeah let's move back to your books in some way and discuss some of the topics but in the context of perhaps more than usual questions that I asked my guest which relates maybe a little bit more to to your own trading but before we go there there's just a couple of topics I wanted to bring up that I thought was interesting as well especially I think again a lot of people know you for trend-following or momentum strategies but actually and you also highlighted to me that counter trend models paradoxically pair can you know be beneficial in a portfolio so let's explore that for a little bit a little bit more because that's not something I think a lot of people usually would maybe associate with you the models that just goes against a strong trend now those can be dangerous they're always trade-offs as well but they're not as interested in my view there will be for instance together in a very strong blue market or let's say the oil situation at the moment he comes crashing down crashing down crashing down and all of a sudden you decide well here's where it stops why do you buy sure that's one type of counter trend trade I don't like that so much not that it's impossible to work that way but I don't like it so much what I prefer instead is the type of character models that sail in the direction of a dominant trend what enters after a certain type of pullback in that trend right now that type of model came from this is certainly not a new idea I've seen a lot of other people doing something to do similar things in the past but the idea here came from the realization that many of you out there probably have good tread following models tend to stop off too early especially the medium term trend following right that that's interesting yeah so what if we measure where these stops are normally taken and we take the opposite side so when the long positions stop out mm-hmm ease the way to do this and I think I published the code of this on this while ago year or two ago ever published approaches as an indicator have half-jokingly as an indicator because I usually criticize indicators right I mean indicator which measures the number of ATR units you are from the recent extreme with the trend right now if you read my first book which you clipped her done you know that that model stops not after three ATR units from the recent trend extreme yeah so I just made a model that simply buys exactly though it measures how much how many first checks are we an uptrend downtrend hmm based on that it checks how many ATR units are we away from the most recent extreme and then when we eat see you buy or a shop of course depending on their on is not that bad it was quite okay of course mg entry logic UNICEF is not enough to have F complete trading although thought it's a stock sure I just want to mention to people who may not be familiar with the term ATR that Andreas is using but that is referring to Average True Range in this case I think it's interesting what you say having said that also I would say that you know since a lot of people and and I would certainly agree with that there are a lot of trend following strategies that probably in a broad spectrum have similar entries and similar exits and you know a three average to range from from the last extreme is probably not a bad estimation of that it wouldn't it be could it be argue that it's a little bit dangerous to to go against those forces when you're if you're trying to then actually turn and and buy when they sell and sell when they buy so to speak or or it does that really not really matter when you test something I don't find it to be any any higher risk and then of course you could if you like you could argue that my plan here on lawn what's the right to first a book to make everyone exit that red walls of the 38-yard universe and then I make it mobile to take the opposite side I'm sure there's some cynical people out there for thinking that that's exactly why you did it but let's let's not go there now before we go to talk a little bit about your your your own business that's how I call it but it's more about sort of your experiences as running your own business but but you actually also wrote something about starting a trading business what it takes what's realistic what people are missing how would you some of that kind of theme that because I think a lot of people who listen to us today you know I mean there are more emerging managers than our established managers for sure so so clearly that's something that people I think will would be interested in a little bit as to to watch you because you've been around for a while you've started a couple of businesses and you know what you think it takes and we talked about the regulation I accept that but if you ignore regulations I know a lot of people do that they can go on the radar for a while no harm done right everyone is in agreement the clients are happy with it they're happy with it let's just go with it right I would still recommend begins that the problem is even if everyone's happy you're managing your uncle's money and he doesn't care and so on well if something happens you have a loss someone gets unhappy someone hurt hears about this who doesn't like you whatever could happen here and regulators found out about this and you are done in the business you would not be able to go into the business again and take this very seriously this is not the same business as 10-15 years ago where things were easy on that front now it's very very strict follow these rules having said that for any business well the cost side is the first thing that people miss right it's very easy to think well I'm gonna make X amount of dollars per year right so you look at what can I'm trading you need for that but your side is not the only thing you need to look at in your business is it you may or may not need an office so you need to blue me or a Reuters well that's another two K a month if you can get away with something cheaper I don't know but you will have a lot of overhead costs to begin with you will have to make sure you can cover this with with base fees never never budget with performance fee it's almost we may or may not cover the end of the year but if you're depending on performance fee to to survive in the business then the business is not sustainable it's not going to work then it's dependent on lunch you have to be able to cover your base piece with with your base income that's of course your your management team difficult to start a business nor in regulations district on regulations is still depending on where you live how much money you need at the end of the month left over and the most money potentially staff will need well it varies dramatically from place to place incidentally you might not want to start a business in in the his wits land for that reason this is not it's not a little setter in place it's a it's tough to get people for for for decent money hero for decent money in many other places many other countries in comparison the need for a large base revenue is system the primary thing and for that you need a large acid base obviously if you can take between one and two percent hopefully and in base fee just doing the math on that just paying your own salary takes quite a lot of whole Astana Management paying all the systems all the other costs paying the brokers paying that the administrator the custodian there's a lot of people in need to get paid before you see anything so the initial a space that is a key trick so how do you get that sure no that's fine let's let's talk a little bit about sort of more the usual topics that I would discuss with with my with the managers on and it you know it's somewhat relates to how you then build a strong Wow organization and and let's assume that you overcome some of these financial challenges that you just mentioned but in your case I wanted to ask you sort of more focus on on on research because that's something they viewed on a lot of now investors they will put a lot of emphasis on the research capability of a manager when making their selections and clearly research is a large to large extent the heart of a systemic manager but you also you know you also have a an alligator or an investor hat to put on so if we put that on for a little bit now what kind of research and capability do you look for when you are looking to allocate money away ok let me take the systemic managers because we are sure well as you know we allocate to a lot of different things something like I shouldn't say on a public podcast because that means the amount of calls and emails I'm getting is going to increase from most definitely interest yes don't worry I have a system to forward them to anyway well first of all thanks for listening to top traders unplugged if you feel you learned something of value from today's episode the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released we have some amazing guests lined up for you and to insure our show continues to grow please leave us an honest rating and review in iTunes it only takes a minute and it's the best way to show us you love the podcast we'll see you next time on top traders unplugged [Music] you [Music]

Channel: Top Traders Unplugged

Views: 15,269

Rating: 4.8518519 out of 5

Keywords: investing, hedgefund, trading, trend following, managed futures, risk management, niels kaastrup larsen, top traders unplugged, popular traders, investing money, investing for beginners, best traders in the world, worlds best traders, Andreas Clenow, ACIES Asset Management, Stocks on the Move, Following The Trend, systematic trading, how to manage capital, trading strategies, problems with trend following, retail traders, technical analysis, How to begin trading, how to trade

Id: grIHdA5pMhE

Length: 69min 2sec (4142 seconds)

Published: Mon Dec 17 2018