Whipsawed

Mike Melissinos is back from a long podcasting break to review the markets - stocks, bonds, commodities and currencies. There's a lot happening right now with a possible looming recession, government bond yields going back to all-time lows and the recent Coronavirus outbreak in China. Mike gives a 30,000ft view of each of the major asset classes, his favorite markets and stocks. In the episode, he discloses a number of his current positions so as to not "talk his book" without being transparent.

We see pickiness permeating across society today. We don't like being wrong or feeling dumb. We think we can prepare for every little thing that comes our way. MLB teams are experiencing the pitfalls of over-optimization. Instead of giving batters as many at-bats as possible, they optimize for how each batter does versus the opposing pitcher while also considering the game is home or away, day or night, recent performance, and so on. When you consider all of these factors, the sample size decreases. This makes the decision less robust and you more likely to experience something "unexpected". Well, yea you didn't expect it because your sample size is five! How can you possibly gain any reasonable expectation from such a small sample size?

Ask questions to learn how your manager and his or her strategy makes decisions each day. It's important to learn about how the strategy is going to behave before you invest in it. You cannot expect to know how it will perform since that is largely up to the markets, and we cannot control them. But we can learn about how the strategy makes decisions in its initial design and in a variety of different situations.

Bearishness across the board in a number of sentiment surveys and indicators.

Communicate well, especially the value proposition and generate performance. Done.

...concentrated risk in one asset class and poor loss-control tactics.

Some get the result they want, and stop working. Those in for the love, never stop regardless of the results they get - but they tend to get the best results.

“Improving” the strategy typically serves as a self-correcting mechanism to remind the manager to stick to his/her philosophy and strategy, not to change it or “adapt” it every time s/he runs into some losses.

A blind taste test between two investments.

There’s a tremendous amount of inconsistency and streakiness that occurs in the markets. Great investors do their best to survive and focus between big kills and have the ability to take the shot when they come along.

All it takes is missing one big winner and/or holding a loser just a little too long to derail our investing results.

One seed = one opportunity. Many seeds = many opportunities.

Having skin in the game makes for a better fund manager.

Two things investors are always going to want: to make more money and suffer less drawdowns.

Romanticizing about a stock clouds judgement. General Electric, once a darling of the Dow and pillar of innovation, has become a shell of itself. It has lost over two-thirds of it’s value over the last few years and ~85% since 2000.

Article: http://www.melissinostrading.com/investment-strategy/comparing-the-worst-periods-of-trend-following-to-buy-and-hold-index-funds/

Part 1) Derek Notman of Intrepid Wealth Partners and I co-write article on Trend Following. Link: http://www.intrepidwealthpartners.com/blog/trend-following Part 2) An inspirational story of a kid trying to buy a computer goes out into the snow to make some money. Story from the young fella's dad: https://twitter.com/jackmurphylive/status/1084456663074131969

Yesterday's stock market sell-off presents a nice entry point for us to review our investments. Are we diversified? Are we too concentrated in tech stocks or large cap names? Might we reconsider re-balancing into some other non-US stocks, or different industries or different strategies in general? Do we have too much invested into the passive buy and hold strategy? Might it be a good idea to look at other strategies to invest in so we can improve our long-term performance ride? These questions and more give us good starting points to audit our portfolio and see if there are any simple and practical ways to strengthen it for the long-run.

This one dovetails off of the "How We Work With Investors" episode. I believe in taking a thorough approach to learning about the investor, their risk tolerance and philosophy when it comes to not just investing, but life in general.

On my recent trip to northern Italy, my wife and I went on a two-day wine tour. I asked a lot of questions. I wanted to learn about the winemaking process and draw parallels back to investing. Needless to say, they share a lot of similarities. The big question I asked: What percentage of making good wine are you, the winemaker, responsible for?  I wanted to learn if the weather, soil and other elements out of their control was mostly responsible for the taste in good wine.

In this episode, I outline my method for how I like to work with investors. It doesn't always work. There's the occasional bump in the road (investors want to add in when recent performance is hot and sell out when I've been losing; they forget the benefits of adding a strategy like mine in their portfolio in the first place; they forget the general performance behavior of trend following - namely, when it does and doesn't do well) but it has served me well in my short career so far. My goal: shift the focus away from short-term returns to long-term discipline. Honest pro-active communication is key. Scrambling later when emotions are high doesn't work. Sooner or later, the manager and/or investors breaks their discipline and then all hell can break loose. **To read this outline in blog and PDF form, please click on the link below. http://www.melissinostrading.com/culture/how-we-work-with-investors/

Our behavior transcends our current setting. How we invest is how we eat, how we are in relationships, how we work, etc. Trend Followers don't limit their philosophy to one area. In all likelihood, they go with the flow, ride winners, cut losses and care a lot about survival in every facet of their lives. http://www.melissinostrading.com/markets/episode-38-what-i-learn-from-fortnite/

On this episode I talk about my recent experience in the NYC Trading Tribe. For those unfamiliar, I lay out the premise of Tribe before I get into it. Specifically, I talk about my behavioral pattern of shyness - missed opportunity - frustration. For much of my life, this pattern has occured over and over again. In Tribe, with the help of the guys, I go to work on my feelings, find the positive intention then replace my medicinal behaviors with proactive ones. Since the Tribe meeting, things have been happening that I can attribute to changing my behavior and attitude. For more information on Tribe - http://seykota.com/TT/FAQ_Index/default.html

Markets go through long periods of choppiness – often long enough for us to think that it’s the new normal. Markets can trend for a long period of time and we feel the same way. There have been many other instances in many other markets where they chop – trend – chop – trend. Markets today are no different than they were back in the day. http://www.melissinostrading.com/markets/markets-dont-get-choppier-over-time/

You care for your garden in a similar manner you do your trend following portfolio.

Jerry Parker needs no introduction. He's been running a successful trend following firm, Chesapeake Capital, since the 1980's.   Today, we talk about a number of different things including: 1) Winton Capital "stepping away" from trend following 2) Morningstar's study on fund manager performance 3) The Dr. Copper myth 4) Earnings growth vs. stock market returns   We plan on having these discussions every so often when we come across articles we like and when important market events occur.

Today, I talk to Gary Antonacci, author of Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk. Gary has over 40 years of investing experience, holds an MBA from Harvard. He also found, invested and worked with a few investing legends when they were relatively unknown – Paul Tudor Jones (billionaire fund manager), John W. Henry (billionaire fund manager, owner of Boston Red Sox) and Richard Dennis (incubated the famous Turtle traders). Gary has been a guest on many other well-known podcasts, including Michael Covel’s and Meb Faber’s shows. On their shows, they get into the weeds on Gary’s Dual Momentum system – why it works better than simple buy-and-hold, why combining absolute and relative strength momentum create great synergy and a few other related topics. I didn’t want to recreate their episodes, so I decided to ask Gary a few additional questions and talk about some non-technical things. Some of our topics include: 1) Why Gary prefers momentum to other investing styles 2) How momentum investing helps you avoid that one debilatating, 2008-esque, loss 3) Gary’s experience investing with Paul Tudor Jones, John W. Henry and Richard Dennis 4) What Gary learned from these legendary managers 5) What Gary looks for when he invests with a manager Check out the links below to learn more about Gary, his investing system and it’s performance and on momentum investing, in general. Gary’s Book: Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk To Learn More About Gary’s Momentum System: https://www.optimalmomentum.com/index.html Gary’s Blog: http://www.dualmomentum.net/

Derek Notman, CFP, is a financial advisor from Madison, Wisconsin. His firm is Intrepid Wealth Partners. Derek recently discovered trend following and is starting to educate his clients on the benefits of adding it to their portfolios. Today, we talk about: - how he discovered trend following (Michael Covel's books, a personal mentor and The Way of the Turtle book) - how he educates and works with his clients - how trend following and entrepreneurship are closely related and - the "right" allocation amount to trend following Derek can be reached through his website http://www.intrepidwealthpartners.com/.

The only thing Wooden cared about was focusing on things within his control and doing them to the best of his ability. He didn’t care or worry about things outside of his control, including winning. He actually believed winning was outside of his control. Remember, this is a guy who’s won more national titles than anyone. https://medium.com/@mmelissinos/john-wooden-and-focusing-only-on-results-9eb3c2971bec

Every investment strategy experiences winning and losing streaks. They all take turns at the front and back of the line. Trend following has been sitting near the back of the line for the past 5-10 years, while stocks sit near the front. Trend following performance derives from the aggregate trends of all the markets within the portfolio, not just one or two markets or sectors. Over the past few years, performance struggles as choppiness from other major asset classes weigh down positive performance from stocks.This, while annoying, can happen from time to time. The next 5-10 years may not look like the past 5-10 years. Maybe stocks chop around for a while and commodities trend well. Maybe stocks and bonds both decline while commodities and currencies rise. Who knows.  https://medium.com/@mmelissinos/trends-have-trends-663ce5e8379f

For the past 5–10 years, trend followers have had to deal with a double-whammy — poor markets and no interest on excess cash. However, it appears at least one of those is changing for the better. Interest rates are rising. Today, the 3-month T-Bill yields ~1.75%. Even though this is pretty low on a historic basis, this is a welcoming sign given it sat near zero percent from 2009–2016. https://medium.com/@mmelissinos/a-trend-followers-secret-weapon-makes-a-comeback-fc3e064c3c29

The following factors make me bullish on commodities: 1) Multi-year congestion 2) Low volatility 3) A rolling Sharpe Ratio near historic lows and most importantly... 4) New price breakouts.   https://medium.com/@mmelissinos/opportunity-in-commodities-d0281fca3ece

I believe the bond market presents the most intriguing opportunity for trend followers right now. We’ve gone through an unprecedented time of low interest rates since 2008 and now that trend appears to be reversing. This trend may have more fuel than others given the extremely low volatility and overall feeling of complacency. Long-only bond funds, especially ones that use volatility to size their risk, have built up massive positions so any uptick in volatility or reversal of trend might trigger a mass exodus — kind of like what we saw in stocks and volatility-related instruments a couple of weeks ago. https://medium.com/@mmelissinos/a-storms-a-brewin-in-u-s-government-bonds-93dd50f338fd

The Fed appears committed to rising rates as long as the economy and inflation cooperate. Some people in the investing community have raised concerns that trend followers will not be able to perform as well when interest rates rise due to the negative carry when holding short positions in bond futures. They believe the main reason trend followers have performed so well since the early 1980’s is because they rode the long side of the massive bond price trend. And if that gets taken away then trend followers lose their golden goose and won’t perform well. Their point on trading the short side of bonds might be true, but they seem to forget that trend followers diversify like lunatics and have the ability to profit from trends in other areas like commodities, stocks and currencies when rates rise. Trend followers don’t rely solely on one market or asset class to provide all of the profits. If they don’t make as much money from shorting bonds, fine; there are many other markets to profit from. In this episode, I take a look at trend following performance during rising rate environments over the past 50+ years and if significant trends occur during these periods. https://medium.com/@mmelissinos/rising-interest-rates-an-opportunity-for-trend-followers-c3cc6f76e4f1

I’ve been receiving lots of texts and calls from friends, and people I haven’t heard from in a while, regarding Bitcoin — what my general thoughts are; whether to buy it or stay away; is it in a bubble or not? So I thought it’d be a good idea to take a look at some of the biggest bubbles over the past 40 years. We’ve seen bubbles in may different asset classes — stocks, agriculture, metals and energy. I’m sure there are few I’m missing, but this is just to put Bitcoin’s current price action in perspective versus past bubbles. https://medium.com/@mmelissinos/bitcoin-bubble-in-perspective-a55282d8df22

In psychology, superordinate goals refer to goals that require the cooperation of two or more people or groups to achieve, which usually results in rewards to the groups.Good investing requires a good system, good markets and discipline. Often enough, it's the discipline part that ruins us. In my experience, there's many different systems that make money and, sure, markets can suck for a while but they eventually come around. Maintaining discipline is very tough to maintain over time. When you throw investors, employees and family into the mix it becomes that much tougher.  To achieve long-term success in the markets, managers and clients (and family, employees, etc) need to work together. Managers need to communicate with everyone about how they invest and why they do it that particular way; also, give frequent updates on why they're winning or losing money and show examples of investments they've made so their support group can understand what's going on. When investors are left in the dark and judge their managers nothing but on monthly or quarterly performance, then it's only a matter of time before they quit because a losing streak will come eventually.  

"How much money have you made?""Where did you get in?"People think these questions are important because they stimulate hopeful feelings of celebration (we've made a lot) and intelligence (we got in before others were talking about it). But these questions don't have anything to do with doing the right thing today.

Risk is like gravity — it always there, but you don’t always feel or see it. Today, we’re in between market storms. People have become more and more comfortable and complacent during the 8-year bull market. The relatively painless uptrend has lulled people into a false sense of security. Even Janet Yellen says she doesn’t believe there will be another financial crisis in our lifetimes. Collectively, we’re getting used to the way things have been recently — rising stock prices, low and declining volatility and little to no need for protection investments like hedge funds and macro CTAs. I’m scared we’re getting used to things just in time for everything to change again. https://medium.com/@mmelissinos/its-not-if-but-when-a634fda39879

All fund managers have a system. Some have it in their gut and head while others code it into a computer. After coming to terms with a system, the manager must follow it religiously in order to maximize results and perform within investor expectations. I believe the main reason why benchmarks outperform managers is due to their lack of discipline. Medium post: https://medium.com/@mmelissinos/the-occasional-mistake-b1d02926fb95

Buffett suffered a 49% loss from Jun 1998 to Mar 2000. At the same time, the NASDAQ rose 140% and SP500 rose 28%. Despite heavy losses and public ridicule, Buffett stuck to his guns and wouldn’t touch internet stocks. Buffett’s ability to stay disciplined might be more admirable than his analytical skill. At the time, I’m sure people were wondering if Buffett had lost his golden touch or if he would ever outperform the market again. A near 50% loss for a stocks investor during the biggest bull market in history doesn’t inspire confidence. But he had the last laugh after the bubble burst, gaining 80% over the next two years while the NASDAQ lost 72% and SP500 lost 28%. https://medium.com/@mmelissinos/warren-buffetts-worst-loss-came-during-the-dot-com-bubble-546fb56a8f2e

As a copier, you cement your position of always following the crowd and competitors. You forgo understanding how the product you’re copying actually works; the reasons behind it’s design; the problems it addresses; why it performs the way it does. You blindly put your faith in the person or product you’re copying and, thus, give up your ability to develop and monitor expectations. http://www.michaelmelissinos.com/blog/copying-skips-understanding/

Reduce the rules in your investing strategy to make it more robust and easier to execute. We all hear that simple is better; that complex doesn’t work as well and is harder to execute over the long run. Complex rules tend to promote confusion and second-guessing – things that can wreak havoc on any investing strategy. Investors insist on making things too complicated. Many even believe that simple rules cannot make money over the long run; that the only way to win is be some kind of genius math whiz or have super-human intuition. No. No. And no. Simple and effective works. http://www.michaelmelissinos.com/blog/a-half-vs-half-assed-product/

When you take the road less traveled, you hear a lot of negative chatter from others and from yourself when you don’t perform well. But winners don’t give in or tell people what they want to hear; they stick to the process instead. If you watched the Super Bowl, you saw two games — one where the Patriots sucked and one where they could do no wrong. The Patriots, unlike the Falcons, didn’t panic when the game wasn’t going their way. They stuck to their game plan and the rest is history. Bill Belichick (head coach of the Patriots) always says, “Do your job” and “Next play”. He focuses on process 24/7. Only the super committed can hear these soundbites, put their frustration aside and execute.  http://www.michaelmelissinos.com/blog/the-search-for-trends-gets-lonely/

Apex predators don’t succeed all that often. Tigers succeed only 5% of the time; Polar bears 10% and Leopards 14%. All they need is one big kill every once in a while to stay atop the food chain. Tigers, lions and other predators know their game. They balance persistence and knowing when to quit; hunting only for the home-run and conserving energy. Investing is no different.  Trend traders lay low most of the time; expending little energy while waiting for a big trend to emerge. Most of the time, like lions and other predators, we come up empty. Frustration occurs, but it doesn’t distract us from the process. You keep at it and eventually you make a big kill. https://medium.com/@mmelissinos/make-a-big-kill-every-once-in-a-while-d28757b3c0c1

Embrace cycles and use them to your advantage. Pretending they don’t exist and attempts to eliminate the part of the cycle you don’t like, the losing streak, doesn’t work. The investing world doesn’t like cycles. It prefers investment strategies that produce consistent profits with little variation. I believe the collapse in interest rates intensifies this desire for consistent profits. One problem with investing in such strategies is that they’re likely curve-fit to the current market environment. In the short-term, they can do no wrong; nailing the timing on every trade – buying bottoms and selling tops. The risk, though, hides somewhere in the future when market conditions inevitably change. As a result, the strategy no longer syncs up with the markets and performance comes off the tracks, often resulting in blowups. http://www.michaelmelissinos.com/blog/cycles/