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You're listening to Teip on today's show, we have a veteran of the finance industry, Mr. Neal's Kastrup Larsen. Neales has been part of the hedge fund industry for more than 25 years. And throughout that period of time, he's implemented a trend following approach to investing. Through this episode, we discussed the specifics of this style of investing and how it's so different than all the other styles we've ever covered in the past. So without further ado, here's our interview with Neales.


You are listening to the investor's podcast where we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors podcast, I'm your host. And as always, I'm here with my co-host, Preston Peche. Today we also have Neales Kostov Larsen with us now. Thank you so much for joining us today. Thanks for having me. It's great to be here. So, Nils, I wanted to start the episode off with a story that I think is very telling whenever it comes to today's topic of trading and trend following, you're one of the few people who has interviewed the famous commodities trader, Richard Dennis.


And to set the scene for the interview, could you please tell the audience more about who Richard Dennis is and specifically the legendary story of his turtle's?


So Richard Dennis is a legendary futures trader who worked in the pits of Chicago back in the 1970s and 1980s and who reportedly turned a few thousand dollars into two hundred million dollars over a decade or so. But what's really fascinating about Dennis is that despite his own trading success, he actually believed that what he did could be taught now.


So as you mentioned, Dennis is a trend follower in his approach to investing, which really means that he's looking for big break or momentum in the price of the market. And in his case, he was trading futures to identify a potential big move up, a big move down.


And not only that, he was a systematic trend follower, meaning that he had rules for what would essentially constitute an entry point as well as an exit point of any of the trades now.


So he was also a firm believer that emotions are investor's worst enemy. And I think many of us will know that to be true. And because he had overcome this fact by using a rules based approach, he believed that you could teach it to other people and that you did not need to have any special background or skill in order to be successful as long as you could do one thing, and that was follow the rules.


So in 1984, he established the first of two classes of students. I think there were like 15 or 20 in each of these classes. And they are the ones that became known as the turtles. And essentially he taught them for two or three weeks, I think some simple rules before he would let them trade his capital initially using those rules. And then later on, they adapted and improved upon these rules. But to make a long story short, I mean, the turtle project was a big success.


And over the four years or so that it ran, my understanding is that the turtles did really well for Richard Dennis. And actually, early on in my own career, I worked for perhaps the most successful turtle, namely Gerry Parker. And for those who listen today who are familiar with my own podcast, they will know that I've done many episodes with Jerry, but also, as you say, in one, a few people who have had Richard Dennis on the podcast.


But I think what made it really special was that he was joined by two of his original turtles.


I'll finish this little turtle story by saying that there has been a lot of speculation surrounding the story because Richard Dennis had a business partner back then called Bill Eckhart, and allegedly they had different opinions about whether you were born a good trader or whether it could be taught kind of this nature versus nurture experiment. So for decades, a lot of people talked about how they had made a bet and actually that this whole bet was inspired by the movie that came out, I think, around the same time called Trading Places with Eddie Murphy.


But at least Rich told me when I spoke with him that there never was a bit and certainly it had nothing to do with any movie.


And in fact, he shared that.


He thought of the experiment on a Sunday afternoon while drinking some Johnnie Walker black.


So, Niles, you are talking about rules based in that this could be taught. Could you talk about whether the most successful trend followers change the rules? If yes, how often? Talk to us about this idea of kind of changing the rules set, because I would think that that's probably something you don't want to tinker with if you get something that's working.


I mean, I think the best way of talking about this is maybe using a concrete example from the firm that I work for because I've done capital. We actually one of the oldest trend falling firms in the world, having been around since nineteen seventy four. So you could say for sure that we've been through a number of different market cycles.


The challenge you have as a rules-based manager is, as you allude to, I mean every time you make a change, there is the risk that you are going to get it wrong.


So first and foremost, I would say in our own case, we very rarely make meaningful changes to the system. And in fact, I would go on to say that from nineteen seventy four to about 2006, we didn't really make any major changes at all. Returns were strong and let's call it that.


They came with a healthy dose of volatility, but our clients were OK with that. So there's very little reason to change something, as you say, that was already working.


If it ain't broke, don't fix it. But what has led us to start evolving the strategy in the past 20 years or so was really the recognition, that trend following.


It's a really hard strategy for most investors to hold on to because returns are lumpy, which means that we tend to make money in very few months of the year and we tend to have more losing months than winning months. But of course, the reason why it works is that when we do have strong performance, it's typically much more than the typical sort of losing month that we have now.


Most investors, frankly, they prefer the steady return stream like beta produced until it was clear that it wasn't real returns.


So I think there is a saying something along the lines that the seduction of safety is often more dangerous than the perception of uncertainty. And I think that's really true when when it comes to investing.


But to answer your question, we've made about three or four major changes when we come across some really important discoveries. And a lot of it has been to do with how we manage risk and how we get out of trades, because actually identifying a trend and I'm sure many of your listeners will know this, identifying a trend is not that hard.


Frankly, you could almost do it with the naked eye looking at a chart. It's much harder to figure out how much to risk on a trade and also during the lifetime of a trade, should you change your exposure? And also, when is the trend coming to an end? To those two things, in my opinion at least, has always been the weakness of following. Our losses tend to happen when there are either no trends and when there are big reversals in the markets.


So we work very hard to find ways to improve that because if we can improve on this, what you'll end up with is better risk adjusted returns.


And you could say that the journey we've been on at least, is really to try and deliver a trend following in a better package.


I think a lot of people forget, actually, that investing in stocks, for example, is a kind of an eight percent return strategy, but with 50 percent plus draw downs from time to time.


And we really want to do better than that. But let me also stress that we're very humble about the markets and we're still students of a trend following.


There's always ways to improve what we do.


And I think it was a Leonardo da Vinci that at least is quoted for saying that simplicity is the ultimate sophistication. And that's really what we're trying to do, create something that is simple but not too simple, but that can handle the complexity of global markets. It sounds to me like you somehow figured out a way to apply the Kelly criterion to the way that you're looking at the trends and saying, hey, this is one that we need to put more money on our more position size on because the trend is so strong relative to these other investments.


Is that an accurate characterization? I think that's a pretty good characterization. Absolutely, and I think the challenge is that, as you say, you want to build confidence in your position to those things. That turns out to be, you know, a really strong and long lasting trend.


At the same time, you want to be able to get out of those positions that obviously one don't work from the beginning. But actually, also, when you have been in a trend for a while and suddenly things change, you want to get out quickly. And I think the the challenge we've had this trend follows is that the old style of trend following or the original style of trend falling was to get in slowly and get out slowly. That's kind of how it worked.


And so going back to my initial point about why we didn't change a lot from nineteen seventy four to the early 2000s was the trends were pretty long.


And so that kind of timeframe worked really well. In fact, we've done a study on our side where we go back to 1990 and we look at what would have been the absolute perfect time frame in terms of what we call the look back period for our trend model.


And we look at each year to see whether that would be 20 days or 200 days or 300 days, really a wide range of possibilities.


And what you see is that it changes dramatically from year to year.


So just from recollection, in 1990, I think the best look back here, it was only 20 days, like three weeks to very short term.


Then the next year it was 40 days, which is twice. And then in nineteen ninety two it was two hundred and sixty days. Right. So you get this massive wide range of possibilities. And one of the things we've done now firm, which is really hard to do, I think was something we cracked in around two thousand six, is to completely systematise how we select these time frames inside the model. So that, I would say, is one of the game changes for us because we don't want to have any kind of discretion in the system.


As soon as you do that, you can forget about all your research and back test. You have to trade what you test and test what you trade. There's no in between, but it is definitely a challenge. And as you both of you know well and your audience markets keep evolving.


I think this year we've seen that we've had the quickest sell off in history. So, yeah, it's a continued process to evolve.


One of the things that we wanted to talk to you about is that one of the billionaires that we follow here on the show, that is Rich Dalu and we call it his thoughts here multiple times on the podcast about the holy grail of investing, which is having 15 uncorrelated assets, because the idea is that you will provide the best risk to return ratio. So having you on this show now, I think is very interesting because we haven't really been covering trend falling like that before.


So how does trend fall and play into this thesis? So first, let me say that I actually really like the way Ray Dalio explains the benefit of diversification and how this can really be a game changer for our portfolio. If, as you said, Steeg, you can find truly uncorrelated assets and this is where the trouble starts, right? Because many of the so-called alternative investment strategies that people have been told can be a hedge, quote unquote, when equities go down, have shown to be much more correlated and especially during their time of crisis.


So to answer your question, the reason why trend following on a diversified portfolio of markets, meaning both financials and commodities, is so powerful to include in a portfolio of stocks and bonds is because generally it's not correlated at all with stocks and bonds in the long run.


So, again, if I think of our own experience since nineteen seventy four, our correlation to the S&P is minus zero point zero five, which is essentially zero, and that's ideally what you want. But what is important to understand is that it doesn't mean that we have zero correlation all the time.


We can be positively correlated when stocks go up, we can be negatively correlated when they go down.


So it's not a fixed correlation.


And the other thing that I have come to appreciate over the years is that the key thing to understand is that non correlation is probably more important than excess return, meaning that if you can find an asset that gives you a slightly better return than your stock portfolio but is highly correlated, it won't do as well as picking a non correlated asset, even if it gives you a slightly lower return. I think this is quite counterintuitive to people. Speaking of this, I came across a study a few years ago where the author had essentially created like a million random portfolios with different weights to traditional assets, but also including trend falling.


And one of the things they had tried was to across these one million iterations was to see if an allocation to trend falling off 30 percent would increase the overall portfolio risk adjusted return. And can you guess in how many cases a 30 percent allocation to trend following improve the risk adjusted return in all one million portfolios?


So this is obviously really interesting to me.


And also, at least from my experience, I've never come across a white paper that suggests that adding trend falling to a portfolio of stocks and bonds won't be beneficial in the long run. So then to answer your other part of your question, that is so you have diversification in your portfolio, which is really important. But what about the diversification inside the portfolio? How does that play into it? And I would say that that is equally important.


In fact, I would say it's vital because a lot of people think that the secret sauce to trend following is the rule to where to buy, where to sell.


But frankly, a lot of people, unfortunately end up saying, OK, I'll just do trend falling on my stock portfolio.


But falling on a single sector or single market may not work for a long period of time. The secret is that you traded on many truly different markets.


So in our case, we have commodities like grains and energies and metals and meats and softs in order to deliver these attractive returns.


Now, here's the downside to this, and that is the challenge many managers come across, and that is if you want to grow your business really big, then at some point the smaller markets, these commodity markets, which are the least correlated in your portfolio, become too small for you to have a meaningful allocation to them.


And if you're tempted to kind of overstate your capacity to build your assets, then actually your returns most likely will be lower over time. And that, I think, has hurt our industry to some extent.


The other thing which is super interesting, which is something that I also came across recently because of what's happened this year, when you go back and you look at crisis periods and you look at your portfolios and you look at various different sectors that you have in your portfolio, and we all think about crises as equity market crises.


And I think it's very tempting for people to believe that because trend flows can go long and short, that we can make a lot of money from the short side in equities when they have like a thirty five percent drawdown.


But actually what you find is that the most consistent performing sector going through all of the crises we've had in the last 40 or 50 years is commodities.


And this is, of course, because there are a lot of things happening when you go into a crisis. Right. So that kind of diversification is is really interesting.


And just to maybe take one step aside from this and something that I noticed just in the news this week, and I know this is obviously near and dear to your hearts and and that someone like Warren Buffett I'm not an expert in Warren Buffett, but to me, he's always stood of someone who kind of argued for diversification.


He invest in many different businesses, et cetera, et cetera. But I noticed because of the success of Apple recently, that right now he has like a 43 percent exposure in his portfolio to Apple.


So I think it's just an interesting point, because you do need to find the sweet spot between diversification and conviction.


So I'm not saying that you can't end up with from time to time, you know, a large exposure in a certain sector for sure.


But it also is so, for example, when I meet investors who come up to me and say, oh, great, you know, I have an allocation to trend following my portfolio. And of course, I say that's fantastic.


But then you learn later on that it's like two or three percent. And that kind of you know, it kind of sinks your heart because you know that it's not enough to make a meaningful impact on the portfolio as a whole.


So it's a lot of different things to take into account.


So now, as you had mentioned earlier, that Done Capital was founded back in nineteen seventy four. So what I find interesting is many younger generations are pulling data from the past and trying to develop whatever their model is. You've been doing it with real data. So what does your data show about trend following since nineteen seventy four?


And I'm very curious what your thoughts are on about the last three or four years compared to the nineteen seventy four to now time period. Because I think what we're seeing in the last couple of years, just from a performance standpoint, seems like it's kind of a standout. You're absolutely right, I mean, there's definitely benefits of having a forty five year track record that's on drawbacks as well, because we tend to have had draw downs along the way, which people who just look at back tested performance never show.


But the most important thing I find from having been around that long is that you have this real experience and experience from really some hard learned lessons that you can use in your research. One of the things you learn when you go through difficult times is, of course, back to one of your earlier points.


You know, the temptation of changing your model when you're losing money is very high, but it could be devastating if you did so. I think real experience is important now. So to answer your question, the type of trend following that, we do have stood our clients very well, I would say.


And actually I just want to add one thing and which I think is important from a context point of view, and that is when we talk about our clients, we really look at them as partners in this journey. And we demonstrate that by never having charged a management fee for all services. So we actually only make money when we make money for our clients. And we think that's the fairest way to treat investors now. But this is important because it informs us in terms of how our research should be done.


But let me be a little bit vague here.


Because of regulation, I'm not really allowed to say how well we've done, unfortunately. But of course, if your listeners would go to our website and accredit themselves, they can see all the data.


But what I can say, and I think this is relevant to answer your question, we have made three really big improvements or two major improvements, I would say, over this period.


So in two thousand six, we made a big improvement and in 2013 we made a big improvement.


And so what I often like to do when we think about have returned change because everybody remember the 70s and the 80s and the 90s and think about certainly in our world, those being much, much better than in the last 10 years or so. So when I look at those three different periods, so you have thirty five year, you have a 14 year period and you have a seven year period, if I look at our annualized returns, they're almost identical.


And so this is important for two reasons. One is that, as mentioned, a lot of people have complained about performance in the last decade or so because of the central banks and how they have manipulated the markets, trying to control the markets. Now, I would say that it has not been easy and I will say the last five years has not been great. But again, if we go back seven years, actually our returns are pretty much the same as we've seen in the last thirty five years.


So that's one thing that's important.


But the other thing that's from our point of view that we focus on is, OK, so if we have delivered the same level of return since 2013, have we done that through research with better draw downs, with less volatility? And the fact is, yes.


So the journey we started in trying to deliver this in a more appetizing way by making these improvements is really turning out to being deliver to the investors, but not in terms of more performance, but actually in terms of same performance but less volatility, which is something that people generally tend to like.


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All right, back to the show. One thing that's also interesting about the track record that you have, Nel's, is that very few people in country have been doing trend following when interest rates have been going up. And we in this interesting point in the interest Ixil today. But let's not forget that they were going up until nineteen eighty one and then actually have been going down since. That's a long term trend. So how is trend following different and different types of interest rate cycles.


When you look at trend following returns, as you say, most firms haven't been around that long, so they have generally all of them been trading through a period of falling interest rates. And there's no doubt if you look at the attribution of return from the case in general, a lot of it in recent years have come from the fixed income sector, short term interest rates and bonds. But as you rightly said, I mean, we have actually traded through a period of rising interest rate.


I think it was like nineteen seventy six to nineteen eighty one in particular, where we saw quite a long period of significant rise in interest rates. And when we look at our track record, we did really well during that period. Of course, that's not a guarantee about any future returns and what they will look like. But what I will say is that since we can be short as easily as we can be long in a market, my belief is that trend following is one of those strategies that can do well when we do see a return to higher interest rates.


This is actually also interesting in another way, because in the last 20 years or so, we've had this perfect correlation between stocks and bonds.


Right. The 60-40 portfolio type approach has looked safe, but if you go back more than 50 years, you'll actually find that more often than not.


So I think it's around 66 percent of the time, thereabouts.


Stocks and bonds are positively correlated, which means they go up and down together.


And so when that starts to happen again and we get into sort of more normalcy in terms of correlations, that's going to be very little or no protection to be had inside the 60 40 portfolio.


And then you also asked about the various sectors and how they perform.


Interestingly enough, for example, equity sectors, of course, when you have a slow upward moves in equity markets, as we have seen from time to time in the last 10 years, for sure, equities is a great place to be from a trend following point of view. The challenge, what we've seen in recent periods with the equity sector is that on several occasions now it has gone into deep bear market territory straight from an all time high and trend following.


Of course, you have to be long as long as the market goes up. That means that typically we, as trend flows, will have the largest long exposure right before the market terms.


So we saw that in February of twenty eighteen. We've seen that in February of twenty twenty.


You know, when you go through a crisis, equities, actually as I said earlier, not the place where we make a lot of money.


We tend to make it in other places and yeah.


So, but this is why you have to be diversified frankly, not just in your own overall portfolio, but certainly also from a trend following point of view. So, Niles, here at the investors podcast, I would say our roots of our audience and I know Stig and myself included, is it's all about Warren Buffett style value investing. So for many of us not familiar with trend following, what are the first few important steps to take us as we learn about this and to help us understand just the methodology and the approach?


First of all, I mean, if you look at just any market, really, a value investor would be looking to buy a market that is moving down to cheaper gets the more value you can get from it.


So that's kind of the first main difference we as trend followers would never be buying in a falling market. So when it's cheap enough value, investors would get into the market. And as the market moves back up to, say, fair value, you get a lot of the benefit of the trade will come in the initial phase. And of course, if the market moves up and becomes expensive, then this is probably a time where value investors would start thinking about getting out.


So, again, from my experience, you kind of live this buying low and selling high mentality. And now I started out as a bond trader, so I'm fully familiar with the benefits of buying low and selling high. But then I came across a trend following which is really the opposite, where you buy high because we're waiting for this breakout to show up the momentum to come in and then hoping you can sell even higher. So from a just comparing trend falling to value and why I think they're a good match, is that OK?


Trend followers won't be buying at the low for sure.


We'll be wait and we're going to be patient until the market starts to show some sign of upwards move. On the other hand, we don't have this concept of something being too expensive, so we'll be, quote unquote, stupid enough to stay in the trend for as long as possible where maybe value investors have already left.


And I think maybe just speaking at this moment in time, Tesla is a great example of that. Right. Because a lot of people didn't expect Tesla to be able to go this high now will say we don't trade stocks with Tesla. But the concept is very important.


And what I found really interesting is that I found this and I think this ties into a lot of points in terms of our conversation today, also as to why you may want to consider using rules rather than discretion in your approach, because I think it was Barron's this week came out with an article showing the quote unquote, the analysts price target for Tesla.


And the highest was something like two thousand three hundred dollars and the lowest was three hundred dollars. It shows you how difficult it is to assess the price of anything. And of course, both of them are quite far away from where the actual price is. And I think consensus is like half of what the actual price is. So.


So, yeah, I think marrying discretionary type trading with systematic trading, that gives you diversification on investment approach, value and trend also in my view, seems to be going well hand in hand because it's just another form of diversification. Whenever we are looking at the market right now and all the volatility we had this year, a lot of stock investors would say that it's been quite painful to live through. And a lot of the strategies we have the unfortunate to tend to change during a crisis.


Perhaps that's whenever we really need to stick with your strategy because we just can handle that volatility. But I'm curious to hear if you could talk a bit more about how trend following strategies have performed in previous crises, because you have actual data on that, but also how the covid-19 crisis is different if it is different. So in our case, we've been through, I would say, for crisis that most people remember, right? So we had Black Monday back in 1987, then we had the tech bubble in year 2000, then the great financial crisis in 2008.


And right now 20, 20, we have covid-19. And that probably is still unfolding. Right. So these crises are very different. Black Monday was a relatively short crisis. Only a few months. The tech bubble was the longest in time. The great financial crisis was the deepest in terms of stock market losses. And then covid-19 so far at least, has been the quickest, both going down and going back up again. So all of these things presents a lot of challenge for any investors and of course, for trend followers as well.


What I can say from our actual data, as you said, we've done well in all of these four crises, and perhaps that's because we kind of blend a couple of different types of trend following techniques together.


But what I will say, which I think is maybe less talked about, is that in order to be successful through periods like this, you really have to overlay your strategy with a very strict set of risk management rules and framework.


So what decides whether you do poorly is not just based on the signals where to go long and short.


It's very much dependent on how well you manage the risk, because keep in mind that no investor can control the return.


You just don't know what kind of return we're going to get from our trades.


But what we can control is the risk we take and how we manage the risk. So I would say we spend a lot of time trying to become the best risk manager that we can, and I'm sure the next crisis is going to be different from the previous one.


So, I mean, of course, I'm incredibly biased, having done this for more than 30 years. But what I truly love about trend following is that it's adaptive, right?


So we only look at price and we don't have any preconceived notion as to how those prices should evolve and how they should change.


And so this is probably why we've been able to handle many types of environments. But let's be fair, we don't do well in all environments. If you have short term sell offs that jump back straight away, I mean, I can think of February of twenty eighteen as one of them.


That was not a great time for a trend follower, but it's only one month and that's what people have to recognize the importance within the investment. And I know you guys believe in that as well. It's really having the patience to stay with the investment for a long period of time. Now, as you were talking about risk management, and whenever I think about trend following, I think it's so important to get something that when the trend changes that you have this sense of it continuing in the direction that you think it's going to go.


And so when I'm thinking about how I would manage the risk of something being super volatile and reversing that trend, that I'm expecting to continue to go in a certain way, I would think that the market capitalization, the size of the particular pick that you're buying, would have a huge part of managing that risk. Would you agree with that? Yes, so the way I would think about the question a little bit differently is maybe to say so if you were to follow and you only had one entry point and one exit point.


Yeah, I mean, this becomes incredibly important, but that's not how we do it in real life. Essentially, we want to build up confidence in a market. Right. So we do it across different time frames. We do it across different levels of momentum indicators in order to have this gradual move in to a position.


And as I said, sometimes it's a gradual move out. Sometimes it's a quick move out if markets really change. So I do think this is what makes it challenging, certainly for individual investors to try and do it themselves.


I'm not actually a big proponent of kind of DIY trend following simply for the reason that you need a fair amount of capital to get enough diversification across markets, across time frames, because otherwise you end up becoming incredibly reliant on, as you say, on one specific price, one specific correction, and therefore the returns may look very different to what you expected. So that's another challenge for sure.


I'm really trying to wrap my head around this combination of value investing and trend following and is sort of like connection to Prestons question before about like where you go from here, because I guess what I'm assuming other investors are looking for is whenever my normal value investing portfolio is not performing, then what will it perform? And so you are talking about Phibro twenty eighteen before, for instance, and you said, well, trend Copeland didn't do too well, value investing.


It wasn't like investing did do well compared to the rest of the market, but like everything just fell at the same time. So how does trend following play into this. I think the answer is that investors are deep down looking for something that can make the money when equities go down, or you can come with all sorts of reasons why people would consider it trend following.


But I think it all comes down to that one point. You want to find something that can make you money when the rest of your portfolio is going down. And this is what became known about 10 years ago as Crisis Alpha.


Right. So when there's a crisis, then can we produce some alpha? And when I heard that concept initially, I was really excited because I thought, wow, this is something that a lot of investors can hold on to because it makes sense and it's easy to understand. The challenge is that over the years, the definition of a crisis have changed. Right. So before 2011, we thought about these crises as as I mentioned, the dotcom bubble and the debt crisis or the great financial crisis.


And they were like year and a half, two year crisis periods. Then come something like February of 18 and it's like one month. It's fact. I think it was 12 days. The markets went down and then they went straight up again. For us, that's not a crisis.


So you have to look at these things in a much longer time horizon in order to see the benefit of combining these things like you have to really with all types of investments. Now, what I can say is that leading into February of 18, from a trend following point of view, most trend followers had made significant amount of money, especially in equities. So if, frankly, what happened in February of 18 was we gave back about half the profits from the previous four months, which is OK over a five month period to inflows, we're still doing well.


But it's just not to say that it's a hedge. And I think this is the danger. And this is also why I think hedge funds have become a little bit of a sore point with many investors because they used the word hedge in the name.


We are not a hedge, we're an uncorrelated return streams.


And there's a huge difference between being a negatively correlated, i.e. a hedge or a non correlated, as we talked about earlier.


Sometimes we will be highly correlated to equities because if equities go up, we'll be long for sure and so on and so forth. So but you're right. And I do think that the next five or 10 years, given what's happening in the world right now, I know from listening to many of your podcast episodes that there is a lot of concern out there in terms of what the world could look like. And we are in a slightly different place from where we've been before.


And so I truly believe that the next five or 10 years, what will make or break your portfolio is whether you get the strategic asset allocation right. And so back to Ray Dalu and his Holy Grail.


I think that is the only thing we as investors can do, and that is to try and find things that are truly uncorrelated, not on a daily basis, not on a monthly basis, maybe not even on a yearly basis, but in the long run, and then build something whereby you don't have to sit and worry about your portfolio every single day, every single month.


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That's blankest. ICOM spelled Belin KNST Blankest Dotcom's billion US to get twenty five percent of a premium membership and a seven day free trial. Blankest dotcom sless billion us. All right, back to the show. We had a call here not too long ago and we were talking back and forth about this interview here today and what we want to talk about and the one comment you had was to be successful in transforming. You just have to fight against all your basic human instincts and sort of like that statement.


Could you please elaborate on that, especially for those who have been doing that trend following and have trying to go through the pain of finding against everything that you think is true and right? From an overall point of view, you could argue that nature could not have designed a worse investor than you and I, right.


So in every single way we've evolved, right. So we've evolved for immediacy and instant gratification. We've evolved for certainty. We've evolved for taking action. But success in investing really takes dealing with uncertainty. It takes restraint, it takes patience, and it takes not listening to your own God. Right.


So when you combine our kind of human design with CNBC and Bloomberg, where you constantly have this breaking news and trade recommendations, which, of course, deep down only qualified guesses about an unknown future, it really sets a lot of investors up for disappointment when it comes to making the right decision.


And I think in fact, I think there was a study or something that was published by Fidelity where they have done a review across all their client accounts and found that those who had done the best over the long run were typically people who had either forgotten that they had an account in the first place or they had passed away, i.e. people who did not do a lot of trading.


And so this is actually quite topical for our discussion right now because we have this huge resurgence in day trading with the Robinhood, as unfortunately I think that when the next bear market comes, I think a lot of these investors will be completely wiped out.


So, one, there's a clear correlation between activity and investment performance. Those who do the worst tend to be the ones who, ironically, keep the closest eye on the markets. And I think it was Jim O'Shaughnessy who wrote in the book What Works on Wall Street. Something like the first thing you have to do as a behavioral investor is to recognize that you are just as susceptible to the same dumb mistakes and crippling behavior as the next person. So we need to be aware of that.


But of course, there are certain biases that I think I was referring to when we spoke initially, and that is things like ego, right? We have this tendency to be very overconfident, essentially, and we see this in many different ways in life.


Right. If you ask someone if they're consider themselves a good driver, I think you will find that a huge percentage will say, yes, we're you know, I'm a great driver.


Right. I even heard about a study where they asked, I think something like seven hundred men if they thought of themselves as good looking. And again, you have this huge percentage saying, oh, yes, almost to the point where you feel that life only five sit ups away from dating a supermodel. Right. And so overconfidence is a big problem for us as investors. The other thing is that we are very conservative as people. Right.


We like the status quo.


We don't really like change, which is very hard to deal with when it comes to investing because it changes all the time. And of course, the other thing which I think Kahneman came out with is that we have this different perception of gains versus losses. Losses feels much harder on us as investors, which leads us to take the wrong decision at the wrong time. Then another bias I can think of is we have this I think it's called attention bias, where we think of the possibility of really a dramatically bad outcome, much more than the probability of it actually happening.


And so, again, we, with the fear we have, can often play with our decisions when it comes to investments. And then, of course, we have emotions. We have generally speaking, it really does cause investors to overrule underreact to information, I would say.


So this is really why following, in a sense is different, right? Because we want to take out all of these emotions and biases from the investment strategy and just follow rules and not trying to predict anything.


And and interestingly enough, at the end of the day, comes back to human behavior.


And so if you take an example from the equity world, just just take a step away from trend following one person that has really worked out human behavior very well is Amazon's Jeff Bezos, because what he's basically built his business on is specific behaviors that he felt would never change, namely that we would always want things as cheaply as possible and as quickly as possible. These are very basic behaviors. And look what he's done. I mean, the richest man in the world.


So, Niles, where can the audience learn more about you, your two podcasts and done capital? Thanks for asking, I think the best place to learn about Don and the journey we've been on is really on our website, where there is also a lot of educational resources are there for that.


You can go to Don Capital dot com and you have to register to get access to all of the information. But that's purely for regulatory purposes. And of course, if people want to follow kind of the ongoing journey, then the podcast is Top Traders on dot com.


Before we let you go, I have one question that I think that I'm probably not the only person here in the audience who are thinking about is do you have a go to resource? Is there any kind of best selling book in value investing? You would have the intelligent investor. Now, that's the Bible.


Do you have something similar about trend following that? It's a must resource. We are very big on book recommendations here on the podcast. There are a few different resources on trend following, of course, and all boils down to usually books or white papers, right? So the CME Group saw the largest futures exchange on their website.


There is in particular one short white paper, I would call it, called Dr. Lintner Revisited. I think that's a great introduction because it actually looks at some research that was done back in nineteen eighty three, I think, and then revisit whether it's still whole. So that's a good way of getting into that. But if you don't mind me being a little bit selfish here, because I actually created this guide where I put in like a hundred different books that I think all investors should be at least contemplating diving into.


And in that guide, there is actually quite a few books mentioned specifically on trend following. And I think from what we've done, I think the link is top traders on Plock dot com forward slash tipi.


And when you go there, you actually also get a book that I co-wrote specifically on trend. I would say that's the best place to go. Fantastic.


The website Neales mentioned is tough traders unplug dot coms, less tippee, that's top traders unplug dot com, less type for Nilus book God. And his free book will make sure to link to that. And the other thing that we were linking to is your new episode with Preston Ellis. We're talking about the failure of the US dollar, so we'll make sure to link to that in the show, not together with the two other resources that you just mentioned, Nail's.


Thank you so much for being so generous with your time and teaching us about investing and trend following.


Thanks so much, guys. It was fun and thanks for having me. All right, guys, there was all the press on.


I had this week's episode of the Masters podcast. We'll be back again with another episode next week.


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