The Double-Edged Sword of Trend Following

[00:00:00] Welcome to Two Quants and a Financial Planner, where we bridge the worlds of investing in financial planning to help investors achieve their long-term goals.

[00:00:05] Join Matt Zeigler, Jack Forehand and me, Justin Carbonneau, as we cover a wide range of investing and planning topics that impact all of us and discuss how we can apply them in the real world to achieve the best outcomes in our financial lives.

[00:00:15] Justin Carbonneau and Jack Forehand are principals at Validia Capital Management.

[00:00:18] Matt Zeigler is managing director at Sunpoint Investments.

[00:00:21] The opinions expressed in this podcast do not necessarily reflect the opinions of Validia Capital or Sunpoint Investments.

[00:00:25] No information on this podcast should be construed as investment advice.

[00:00:28] Securities discussed in the podcast may be holdings of clients of Validia Capital or Sunpoint Investments.

[00:00:33] All right, gentlemen, how are you?

[00:00:36] Good, how are you?

[00:00:37] Good, good, good.

[00:00:39] What's up, Justin?

[00:00:40] Today we are going to tackle the topic of trend following and sort of work through what trend following is, the pluses and minuses of it, how it might be able to be deployed in various investment strategies and a whole bunch of things related to that.

[00:00:58] But before we get into that, we do have a exciting announcement to make.

[00:01:04] And that is on April 30th.

[00:01:10] The three of us along with a few other folks are going to be involved in a full day of knowledge sharing and podcasting and discussions around the markets and investing in strategies with, I think, almost two dozen guests.

[00:01:28] It will be live streamed.

[00:01:30] The event is called P&L for a purpose.

[00:01:33] Jack is pretty much spearheading this single-handedly.

[00:01:37] I actually shouldn't say that.

[00:01:38] There's a pretty big team of people that Jack's been working with to get this thing organized and off the ground.

[00:01:44] So, Jack, I know you put in a ton of work and effort into organizing this.

[00:01:48] So yeah, are you excited or what?

[00:01:50] Yeah, yeah.

[00:01:51] So we're working with our friends at Spot Gamma.

[00:01:53] People, Fricene Brent Kachubon are on the podcast I do together with him.

[00:01:57] April 30th, 8 a.m. to 8 p.m.

[00:02:00] 24 interviews each half an hour throughout the day.

[00:02:03] We're going to all share the hosting duties.

[00:02:06] We've got great names.

[00:02:07] Like all the biggest guests we've ever had in access returns, Jim O'Shaughnessy, Jim Cresson, Mike Green, Andy Conston, Katie Stockton, Wes Gray, Tobias Karlam, and I won't read them all.

[00:02:15] But we've got a lot of great guests.

[00:02:17] We're doing it all to raise money for cancer.

[00:02:20] It's right now if you go to our YouTube channel and you click on Live, it's there.

[00:02:25] And you can click a little notify me button, which helps us get exposure for it.

[00:02:28] But also we'll get you notified when we actually do go live.

[00:02:30] So yeah, we're excited to do it.

[00:02:33] This is the first live TV thing you guys have done, right?

[00:02:36] Correct.

[00:02:37] Yeah, I just did one the other day with why I've been a guest on live episodes, but we've never done our own.

[00:02:42] And then I just did one with Brent the other day just to test all the stuff to see if it would work live.

[00:02:47] But yeah, I mean, people have seen us with these recorded interviews.

[00:02:49] Now they have to find out if we can actually do it live.

[00:02:52] And the answer may very well be no, man.

[00:02:54] And then we're going to have to deal with the consequences of that.

[00:02:57] But I think we probably can.

[00:02:59] So is launching an ETF scarier or launching a multi hour live episode scarier?

[00:03:05] Yeah, I think that the scary thing for me is not that we can't do the interviews.

[00:03:08] The scary thing for me is that the tech is going to fail at some point.

[00:03:11] Like that's the thing that I'm spending like all my time trying to make sure

[00:03:14] we have backups of backups of backups.

[00:03:16] Like, you know, there's obviously the thunderstorm in my house is going to occur

[00:03:19] right in the middle of this thing because that's just what happens.

[00:03:22] Or like the guy's going to be out front cutting the power line for some reason

[00:03:25] because he's working in the street or something like that is going to happen.

[00:03:27] So like the plan is like we got to have a plan for how we continue to go on,

[00:03:31] which is we just throw Matt out there by himself basically with some random

[00:03:34] guess these never heard of and he just don't.

[00:03:37] I mean, that's that's basically the plan.

[00:03:39] God is out there right now finger hovering over that red button saying,

[00:03:42] what can I make go wrong?

[00:03:44] That's a great feeling, isn't it?

[00:03:47] It is kind of cool, though.

[00:03:47] Like, I feel like, you know, back in the day with like the telethons

[00:03:50] they would have, like, you know, they've got the guy like, give give all that you can.

[00:03:54] And then they've got like the bank of people with the phones behind him.

[00:03:56] And like, I'm going to need you guys to find a bank of phones to be behind me

[00:04:00] in this because that would be kind of cool with a bunch of people there,

[00:04:02] even though no one's going to actually call the phones.

[00:04:04] But it is kind of cool and it's fun to it's fun to be able to raise

[00:04:07] money for a really good cause.

[00:04:09] And, you know, every every when we asked to do it, agreed to do it.

[00:04:12] So we've got a lot of people that will help us get some great exposure.

[00:04:14] And also we're going to do a lot to learn about what's going on.

[00:04:17] It's right. It's the day before the Fed meeting.

[00:04:18] We've got a lot of macro guys on.

[00:04:20] We've got value investors.

[00:04:21] We've got the people in the option space.

[00:04:22] So it'll be a great opportunity to learn and to hopefully raise some money along the way.

[00:04:27] That's going to be really cool.

[00:04:28] Really excited to be a part of it.

[00:04:29] And Jack, you are the Jerry Lewis of Thignive Charity Podcasts.

[00:04:35] Probably not as charismatic, but I'll take it.

[00:04:38] Yeah. So that's going to be a great, a great event.

[00:04:40] Hopefully people can join us.

[00:04:42] And the cool thing is people can kind of pop in and out.

[00:04:43] You know, you can look at the guest schedule, see what time people are lined up.

[00:04:47] And if you're interested in macro, come into the macro stuff.

[00:04:49] You're interested in value investing, come in for that.

[00:04:51] If you're interested in other types of things that we're talking about,

[00:04:55] you know, you come in for that.

[00:04:56] So we don't expect people to hang out all day with us.

[00:04:58] So if you do, that's great.

[00:04:59] But I think people, and we're going to try to stick pretty close

[00:05:03] to that schedule on the half hour, you know, with new guests rolling in.

[00:05:07] And that'll all be kind of outlined up front.

[00:05:09] So anyways, good stuff, lots of effort and work going into that.

[00:05:13] But it's going to be a really fun and great day.

[00:05:16] But also by the time this comes out, I will have like in the YouTube

[00:05:19] description of that live event, I will have the schedule in there.

[00:05:22] So you'll you can go in the you can click on the video

[00:05:24] and you can see exactly who's coming on when.

[00:05:26] All right, cool.

[00:05:28] OK, so let's get into the idea of trend following trend following.

[00:05:35] You know, it's interesting.

[00:05:35] It's like I feel like depending on.

[00:05:40] You know, after the financial crisis, I feel like trend

[00:05:42] following was more front and center just because of what had happened.

[00:05:47] And I feel like a lot of people were trend followers coming off of that

[00:05:52] or like working trend following into certain types of strategies.

[00:05:55] And I mean, we've had like Jerry Parker on who's

[00:06:00] who does trend following as a strategy.

[00:06:02] We talked a lot about trends following on past episodes.

[00:06:05] We know other guys that use trend, but I don't hear it as much

[00:06:08] talked about, I guess, just in the last few years,

[00:06:12] just probably given what is kind of transpired in the markets.

[00:06:14] If you think about the last bear market, it was like the COVID thing.

[00:06:17] It was 30 days of waterfall declines and then bounced right back.

[00:06:21] And so I don't think trend had a good, you know, a lot of people

[00:06:25] that deployed trends following strategies didn't actually execute

[00:06:28] on any decisions during that period, just because it was so quick.

[00:06:31] But anyways, so let's just how would you take a stab at defining?

[00:06:38] I guess trend.

[00:06:39] I guess there's a couple of different ways you can think about it.

[00:06:42] Right? Yeah, what you said is really important because there really are

[00:06:45] two major ways to define trend.

[00:06:46] And one is what you just said, which is the trend following like a Jerry Parker

[00:06:50] does is basically being long and short all kinds of different things.

[00:06:53] I mean, obviously we're trying to find things that are trending

[00:06:55] both up and down, and we'll talk about that later.

[00:06:57] But you can do it in different ways.

[00:06:59] So like Jerry could be long oil and short soybeans and,

[00:07:02] you know, long bonds and short stocks and like all these different things

[00:07:05] at once. So it's like this massive long short portfolio.

[00:07:08] You're long, the stuff that's going up, you're short, the stuff that's going down.

[00:07:11] But for your average investor, that's not really the type of trend following you do.

[00:07:15] The average investor would use something along the lines of when the S&P

[00:07:19] five hundreds above its moving average, I'm long it when it's below

[00:07:22] its moving average, I'm in cash.

[00:07:24] Like that type of thing is a simpler version of trend following

[00:07:26] that you'll see used a lot by equity investors.

[00:07:28] But it's important to break those down because those are two different

[00:07:30] very different return profiles.

[00:07:32] I mean, obviously if I'm in the S&P when it's above its average

[00:07:34] and I'm below it when it's below it versus being long and short

[00:07:37] soybeans and a bunch of stuff, like that's going to end up with a very

[00:07:40] different return profile that one is going to end up with a very

[00:07:42] different return profile than the other.

[00:07:45] I think back to let's take this to Newton for a second as in like Isaac Newton.

[00:07:51] First two laws of motion, a body at rest stays at rest,

[00:07:55] the body in motion stays in motion until something happens.

[00:07:59] Like simple as that.

[00:08:01] And whether we're talking about financial crisis, we go,

[00:08:04] why does trend work?

[00:08:05] Because all of a sudden that slow rolling 200 day or 10 month moving average

[00:08:09] stock price dips below.

[00:08:10] If you got out, you avoided the slow motion car wreck that was

[00:08:14] the next however many months of those bad returns.

[00:08:17] And so the body at motion, the equity market turning up and then

[00:08:21] toppling over slowly and then crashing for an extended period of time.

[00:08:25] That event, that crossover was a really useful signal to take you

[00:08:28] out of the path of damage.

[00:08:29] The flip side of that is that in COVID when it all happens over

[00:08:33] the course of 30 days, you get this whiplash effect.

[00:08:36] And the beautiful part about trend following is it gives you stuff

[00:08:39] to get you potentially on the right side of some arbitrary line.

[00:08:43] Can be systematically arbitrary, but it's just it's you're picking your point.

[00:08:47] But the slower you make it, the more prone to certain types of whiplash

[00:08:51] you are in the longer term you make it, the more or the faster

[00:08:53] you make it, the same thing you're prone to these whiplashes.

[00:08:56] So whether you're all in or all out, dependent on something or

[00:09:00] partially in or partially out at what speed.

[00:09:03] This is a big nuanced topic.

[00:09:05] And maybe that's why you hear less about it now.

[00:09:07] There are some convenient examples post financial crisis of like trend

[00:09:11] works, but trend means a lot of things.

[00:09:14] Yeah, that's right.

[00:09:15] And just to get to the basic definition though, it's what we

[00:09:18] would call time series momentum.

[00:09:19] So in our momentum episode, we talked about cross sectional

[00:09:21] momentum and time series momentum cross sectional momentum is when

[00:09:24] I'm comparing the momentum of one asset to another time

[00:09:27] series momentum is when I'm comparing something to itself.

[00:09:29] So for trend following, for time series momentum, all I need is

[00:09:32] effectively the price history of the asset I'm looking at.

[00:09:35] I don't need to compare it to anything else.

[00:09:38] And we will kind of have a little bit of a deviation from that.

[00:09:40] And we talk about Gary Antonacci's work and but that's

[00:09:43] the general ideas is I'm trying to compare the return of an asset to itself.

[00:09:47] One of the things that, you know, we hear sometimes as you

[00:09:52] hear these macro folks come on and they're talking different ideas in macro investing.

[00:10:00] But a lot of times I'm thinking of like somebody Katie Stockton where momentum

[00:10:03] sort of China is the basis for where she's seeing opportunity or places

[00:10:09] in the market that she's avoiding.

[00:10:12] But how would you respond to the question of, you know, isn't

[00:10:16] trend following just like kind of a form of market time?

[00:10:20] Yeah, that's a really good question because we kind of talk out of both sides

[00:10:24] of our mouths to some degree because we always say like as quants,

[00:10:27] you don't want to time the market.

[00:10:29] But then we're like, and here's our market timing strategy, you know,

[00:10:32] with our trend following.

[00:10:33] And so there's a big difference between the two.

[00:10:36] So me trying to, you know, read Matt's newsletter and time the market

[00:10:40] based on Matt, you know, seeing what he's seeing in the macro

[00:10:42] environment is very different than a systematic strategy that's using

[00:10:45] purely numbers and historical testing to determine what's going on.

[00:10:49] And then I think that's the biggest thing to determine when I should get in

[00:10:52] and when I should get out.

[00:10:53] So let me be clear, Jack, though.

[00:10:55] That's my TikTok account, not my newsletter.

[00:10:57] I get confused.

[00:10:58] You put so much stuff out there these days.

[00:11:01] You know, I'm getting confused with various sources.

[00:11:03] Because I obviously take every piece of content you're involved with.

[00:11:05] I make sure to ingest that.

[00:11:08] But anyway, so yeah, the general idea is like timing the market

[00:11:11] is generally a bad idea.

[00:11:13] But if you there are benefits, if you can be more right than

[00:11:17] in terms of getting out at the market, there can be benefits in terms

[00:11:20] of limiting losses.

[00:11:21] And so if you can find a systematic way to do that or a way that works

[00:11:24] over time, there can be advantages to that type of thing.

[00:11:27] So is trend following market timing?

[00:11:29] Yeah, I mean, by definition it technically is, but it's a better

[00:11:32] form of market timing and that it's actually backed up by data

[00:11:36] in terms of what works over time.

[00:11:38] I think in terms of I'll make a musical reference to this.

[00:11:42] It's you have to know something is in style and then do the

[00:11:46] thing that's in style.

[00:11:48] And so maybe my ultimate trend following music is definitely the surf

[00:11:52] music of the late fifties and early sixties.

[00:11:55] And it works in time.

[00:11:58] There's a place for this thing.

[00:11:59] It's taking this Southern California surfing thing.

[00:12:02] And whether it's Dick Dale or the Beach Boys, it takes over

[00:12:06] America as this exciting trend that everybody gets on at the same time

[00:12:09] together. But then if you notice, there's not really any surf music

[00:12:14] in the seventies, for example.

[00:12:15] There's not really any surf music hardly at all in the eighties.

[00:12:18] And then Quentin Tarantino comes back in the nineties and

[00:12:20] Miserlew is in Pulp Fiction.

[00:12:22] So with all these things, there's the timing example of that's what trends are.

[00:12:27] There are things that become trendy at some point in time.

[00:12:31] Is it market timing?

[00:12:33] Yes. But if we call that market timing, then we call every decision

[00:12:36] to get in or out or add more takeaway from market timing.

[00:12:40] And again, it's the nuance of these terms.

[00:12:42] They're so important to understand their nuanced.

[00:12:45] Is there is there surf music now?

[00:12:47] Oh, yeah, there's is there's tons of surf music.

[00:12:50] Does that count or not really?

[00:12:53] That's probably like some like, I don't know, like California chiller

[00:12:56] that that deserves some other subgenre name that I'm sure exists.

[00:13:00] But there are lots of great, like surf and surf rock bands,

[00:13:03] instrumental surf rock bands.

[00:13:06] I'll see if I can figure it out before the end of the episode.

[00:13:08] I just saw one a few months ago, who's this amazing band of brothers

[00:13:12] and the guy plays like surf ukulele through an amp.

[00:13:15] It's it's fantastic.

[00:13:16] It's out there if you're willing to look, but it's not trendy.

[00:13:19] There's no like hit like there's no Ariana Grande surf song

[00:13:24] to my knowledge right now that's dominating the charts or something.

[00:13:27] Well, and I think the one big difference here is when you're

[00:13:31] market timing, you're making some type of decision

[00:13:36] or you're making a change to your portfolio or your investments

[00:13:40] based on what you think is going to happen in the future,

[00:13:43] whereas trend following is always based on what has happened in the past

[00:13:48] in terms of that signal.

[00:13:51] And so there's a very different and important distinction there

[00:13:55] because if someone says, I think the market's going down,

[00:13:59] sell and may and go go away.

[00:14:02] That is someone that's time and making a decision.

[00:14:05] That's their timing the market, whereas if the S&P closes,

[00:14:09] you know, below its 200 day moving average over the past two months

[00:14:12] and someone decides to sell 20 percent of their portfolio,

[00:14:15] that's more of like a trend following type of decision.

[00:14:17] So that's just, I think, you know, another good way to think about

[00:14:21] what those differences might be.

[00:14:23] Yeah, you know, as Quants, we want to find stuff that works.

[00:14:25] We want to find stuff that we can say historically has worked out.

[00:14:28] And the problem is me trying to figure out when I should go

[00:14:31] in or out of the market, there's no evidence to believe that

[00:14:35] to suggest that that would work.

[00:14:36] And so if there were macro strategists who had, you know,

[00:14:40] could use all the economic variables and could figure out when to go in

[00:14:42] and out of the market, like that would probably be a similar strategy

[00:14:45] to trend following if it worked.

[00:14:47] But the other big advantage trend following has over that kind of stuff is,

[00:14:51] you know, because trend following is using price action,

[00:14:54] you know, during like most of the major declines,

[00:14:57] you're going to be saving some of that decline for the most part.

[00:15:00] And we'll talk about COVID, which map brought out before later.

[00:15:02] But in general, with most major bear markets, because you're using price action,

[00:15:07] because you're using what actually is happening, like you said,

[00:15:10] you have a pretty good feeling that that's going to reduce losses.

[00:15:13] If I'm using macro variables or something and I get it completely wrong,

[00:15:16] I could completely miss a bear market.

[00:15:18] So that is one of the advantages of trend following

[00:15:20] by using what we're actually seeing is you can you have a higher chance

[00:15:24] that you are going to limit losses when you do get that downturn.

[00:15:27] So let's talk about the return profile that we might think

[00:15:34] trend following might give us versus something like a buy and hold.

[00:15:36] So let's just make it very simple.

[00:15:38] Let's say using the S&T 500, we're going to deploy

[00:15:44] we are going to buy it and hold it for, I don't know, 10 to 20 years,

[00:15:49] or we're going to use trend following.

[00:15:51] I think if you all take the buy and hold sort of return profile

[00:15:57] or expectation is, you know, you're probably going to get something

[00:16:00] over most 10 or let's say 20 year rolling periods in the S&P.

[00:16:05] You're probably looking at something like, let's say, an eight and a half

[00:16:09] to 10 percent return somewhere in there based on what the S&P has done historically.

[00:16:14] But if you expect that you're probably going to go through

[00:16:17] a bear market occurs once every five to six years, it might be a little bit.

[00:16:21] This is post World War Two, but it may be a little bit less now.

[00:16:27] But if you get a bear market that coincides with the recession,

[00:16:30] you're probably looking at something like down 35 to 50 percent

[00:16:35] in a worst case scenario.

[00:16:36] I think the S&P has lost 50 percent of its value

[00:16:40] either two or three percent or two or three times since the the mid 1920s.

[00:16:46] Anyways, that's what you get with the buy and hold.

[00:16:48] You can get really solid long term returns.

[00:16:51] But if you're going to stay invested in the S&P when those drawdowns happen,

[00:16:55] they can be very painful and they can be very scary.

[00:16:57] And a lot of times that's when investors tend to make sort of the worst bad decisions.

[00:17:02] And so I'll kick it over to you guys in terms of what the return profile

[00:17:06] might look like if you're up and it's going to depend on the trend

[00:17:09] following system, but sticking with the S&P, what you would get

[00:17:12] if you deploy a trend on it?

[00:17:13] Yeah, well, Meb Favors Papers is a good place to start here.

[00:17:15] So he used the 10 month moving average on the S&P 500.

[00:17:19] And effectively, and we have a trend following tool on Validia as well

[00:17:22] that we've tested back in the 70s.

[00:17:23] And our results are pretty similar to his.

[00:17:25] And the idea is I always like to say you should assume

[00:17:28] probably the same type of return with about half the drawdowns.

[00:17:32] You know, in Meb's paper, he got, you know, point nine or whatever,

[00:17:35] like one percent better return.

[00:17:36] And I think our thing shows something similar.

[00:17:38] But I always say like the idea is you probably end up

[00:17:41] in about the same place, but you're chopping off part of the drawdowns,

[00:17:45] you know, a significant part of the drawdowns along the way.

[00:17:47] Now, the problem is if we look at how that actually works in the real world

[00:17:51] is so I'm the S&P is moving for long periods of time.

[00:17:55] I'm going to be the S&P is going to be above its 200 day moving average.

[00:17:57] I'm just going to be invested.

[00:17:59] Then there's going to be things like 2008 where the S&P breaks below

[00:18:03] and everything works out perfectly.

[00:18:04] And I missed the entire drawdown.

[00:18:07] But then there's going to be.

[00:18:08] Yeah, it was almost I mean, most of these were down almost nothing in 2008.

[00:18:12] Yeah. But then there's going to be the horrendous amount of false signals

[00:18:16] along the way and obviously the longer term moving average you're using,

[00:18:20] the less you're going to get on the false signals.

[00:18:21] But the idea is it's going to say it's going to say, get out of the market,

[00:18:25] something's coming, it's going to be wrong.

[00:18:27] It's going to say it again.

[00:18:28] It's going to be wrong.

[00:18:29] It's going to say it again.

[00:18:30] It's going to be wrong.

[00:18:31] And so like these things are not these things are right,

[00:18:33] like 30 or 40 percent of the time, something like that.

[00:18:35] And they're wrong 60, 70 percent of the time.

[00:18:38] The reason they work is because when they are right,

[00:18:40] they're right to a much bigger magnitude.

[00:18:42] So if you think about like, if I missed most of 2008's drawdown,

[00:18:46] how many bad signals can I have after 2008 where I'm still ahead a lot?

[00:18:50] And what did I get by the way after 2008 a lot?

[00:18:53] You know, since 2008, it hasn't been pretty with the trend following.

[00:18:56] So that's the problem and we'll get into the behavioral stuff with this.

[00:19:00] But that's kind of what the return profile looks like.

[00:19:02] You get probably a similar return with less drawdowns.

[00:19:04] But the price you're going to pay for that is a lot of false signals

[00:19:07] along the way as you get there.

[00:19:10] This ties back into the sequence of returns risk episode we just recorded to

[00:19:15] because it's if you lop up, lop off the bigger drawdowns

[00:19:20] than the amount that you're compounding at the rest of the time

[00:19:23] is allowed to be lower.

[00:19:25] So if I if I lose 50 percent of my value like in the financial crisis,

[00:19:29] I have to double before I'm even back to that starting point.

[00:19:32] If I can reduce or minimize or totally avoid that 50 percent drawdown

[00:19:37] to your point, I can have much lower forward returns for a period of time

[00:19:41] until those averages converge back on each other.

[00:19:44] That's a super important point in this when we think about how do these things

[00:19:48] stack up? And by the way, if you didn't get the benefit in 2008, nine

[00:19:53] and then you've been eating it doing trend following in the period after

[00:19:57] this is why you got to stick with strategies a long time, right?

[00:20:00] You need these things to make them work.

[00:20:02] This is the problem with all these risk reducing strategies

[00:20:04] is everybody flocks to them right after they've had their best possible situation.

[00:20:08] Exactly. The same thing with the permanent portfolio,

[00:20:10] like everybody flocked to all this stuff after 2008.

[00:20:12] They're like, oh, trend following kept me out of 2008 or I would have.

[00:20:15] I wasn't actually in it.

[00:20:16] And then you get the harder part of the strategy, which is sticking

[00:20:19] with it when everybody else is making money and long only.

[00:20:21] So it's one of the challenges.

[00:20:23] Like with anything like this, if you're going to use it

[00:20:25] and we'll talk about sizing it and stuff later, but if you're going to

[00:20:28] use it, you have to hold it across very long periods of time

[00:20:31] because you don't know when it's going to work

[00:20:33] and when it's not going to work.

[00:20:35] And two clarifying points.

[00:20:38] So for this is a letter of kindness to myself, you know, whatever,

[00:20:42] 16 years ago when I start reading about this stuff is the 10 month moving

[00:20:47] average, the 40 week moving average and the 200 day moving average

[00:20:51] are all effectively the same thing.

[00:20:53] If that's not obvious to you yet, I was once that person.

[00:20:57] So let me confess that right now.

[00:20:59] And then beyond that, we're talking about the all in all out versions of this.

[00:21:04] So this is again, the long only I'm not sure anything.

[00:21:07] I'm all in on the S&P that I'm all out.

[00:21:10] The thing when you go all out, if you're putting it in the money market,

[00:21:13] influences the return.

[00:21:14] If I'm all out of that, but I'm all into long term treasuries

[00:21:17] that influences your return and just the nuance runs deep

[00:21:20] at the signal levels and on what you do when the trend is against you level.

[00:21:24] I think there's another really interesting

[00:21:27] and important point here with trend.

[00:21:30] And I'm kind of going to bring it back to market timing for a second.

[00:21:32] But remember, there's the decision to get out

[00:21:35] and the decision to get back in.

[00:21:37] So if you think about the financial crisis, the people that went through it

[00:21:41] that made a market timing call afterwards, in some cases,

[00:21:46] it may have been five years after that bear market was over

[00:21:50] that they finally got back into equities or maybe they never did.

[00:21:54] But a trend following system when the big benefits to it

[00:21:57] as one is it can save to the downside in those big declines.

[00:22:01] But there's a systematic buy point

[00:22:05] where you're coming back in and that's extremely important.

[00:22:09] It gets you back invested and it allows you to have a chance

[00:22:13] to then let equities on pound and grow for you.

[00:22:18] So it's not only the sell, it's also the systematic buy.

[00:22:21] And that's important because we'll sort of talk about the emotional aspect

[00:22:24] of it in a little bit here, but I'm kind of hitting on it.

[00:22:27] It's a lot of people when they go through those types of market environments,

[00:22:30] they get really scared and that can.

[00:22:34] Dramatically influence their decision making process.

[00:22:37] And this is where trend following, I think, can help there.

[00:22:40] Yeah, and that's such an important point

[00:22:41] because I think that buy back is the harder of the two decisions.

[00:22:44] You know, if you put yourself back in like 2009 or something

[00:22:48] and you sold out, you know, you thought the world was coming

[00:22:50] to an end and you sold out and the market starts going against you.

[00:22:52] It just keeps going up and up and up.

[00:22:54] Like you don't want to buy, you want to believe I was right.

[00:22:57] You know, this is this this is all going to fall apart.

[00:22:59] This is all going to crumble and then years go by, you're still wrong.

[00:23:02] And like, I'm sure you've seen people like this, Matt, you know,

[00:23:05] they do that and they don't ever get back in or they don't get back

[00:23:08] in for many, many years.

[00:23:09] So one of the advantages of trend following is there is a systematic rule

[00:23:13] that you're going to get back in when the trend is reestablished.

[00:23:16] You're not going to sit here and worry about all the catastrophe

[00:23:18] that could potentially be going on the economy or everything else is affecting

[00:23:21] you, you're just going to follow the trend.

[00:23:24] The Hey dummy, look, this is happening is such an important anchor.

[00:23:31] If we're going to take it just to at least one behavioral

[00:23:33] finance point about this whole thing.

[00:23:36] If nothing else, even if you don't systematically use the 200 day

[00:23:39] moving average to build and construct your portfolios with stuff.

[00:23:43] It's a really good Hey dummy test where you can say

[00:23:47] stocks are above this thing.

[00:23:48] They tend to do well when they're above this thing for extended periods of time.

[00:23:52] It can be a good litmus test, even if you don't live or die by it.

[00:23:55] But certainly for the people who sold out of stuff needed to be proven right

[00:23:59] and then stayed out of that stuff.

[00:24:02] Even if you don't systematically follow these things, just using it as some

[00:24:06] of your Hey dummy rules can be tremendously useful.

[00:24:10] Another thing just as a side point, too, is the S&P is significantly

[00:24:13] more volatile below its 200 day moving average.

[00:24:15] So if you look at like the standard deviation of returns of the S&P

[00:24:18] when it's below its 200 day moving average is much more.

[00:24:21] So you are kind of avoiding a lot of that volatility to some degree.

[00:24:26] What do you have a point on that?

[00:24:28] Yes, and this is the ultimate again, take us back.

[00:24:31] However, how many years are we since financial crisis?

[00:24:34] What what young we lad was I at that point?

[00:24:37] The at least in my career.

[00:24:40] The all the love to the American funds wholesalers and whoever else like

[00:24:45] forever would pass me in my old days.

[00:24:48] The chart of like time in the market is more than important

[00:24:51] than timing the market.

[00:24:52] And if you miss the worst days below the 200 day moving average,

[00:24:57] you get typically the best and the worst days often side by side in the market.

[00:25:02] So yeah, they're more volatile, but all those best and worst days things

[00:25:06] that usually happen below because that's when stuff gets the craziest.

[00:25:09] And to your point, that's another good thing to remember.

[00:25:12] It's, you know, the best and worst days both tend to happen

[00:25:15] side by side in those sub or anti trend periods.

[00:25:21] Let's get a little bit more granular on sort of the different ways

[00:25:26] that someone might go about measuring trend.

[00:25:28] Obviously, like we said, you have

[00:25:32] some of the more popular ones, the 50 day moving average,

[00:25:35] the 200 day moving average.

[00:25:37] So in that case, you're just taking the last 50 days of something

[00:25:40] like the S&P and you're looking at the average level.

[00:25:44] Let's say you could, you know, I don't know where the S&P is right.

[00:25:47] But where is the S&P right now?

[00:25:48] The D 200 or something like that?

[00:25:50] Um, it's almost five down.

[00:25:52] It's been, oh yeah, it's been a little.

[00:25:53] Yeah, so so that's that's one of the more common ways.

[00:25:58] But there's a few others that I'll let you guys, Jack,

[00:26:00] you can kind of lead that up.

[00:26:01] But I do I'm going to bring up the tool on Validia just to see

[00:26:05] where we're at here.

[00:26:08] What are some of the other ways that we might measure trend as well?

[00:26:11] Yeah, this gets back to what Matt was saying before.

[00:26:13] Like in our simple example, we have the 200 day moving average.

[00:26:17] When we go below the 200 day moving average, we go all out or we go all in when

[00:26:21] we're above it and practice, you don't almost ever see that.

[00:26:24] Um, because by betting on the 200 day moving average, you're betting on one thing.

[00:26:29] By going all in or all out, you're taking a big risk around that one thing.

[00:26:33] You know what you'll see in like our, our friend Corey Hauston,

[00:26:35] the guys that resolve did this is the best way to do this is use as many

[00:26:38] moving averages that work as you possibly can.

[00:26:41] Like they got to the point where they were using all of them, like the hundred

[00:26:44] ninety nine, one hundred ninety eight, one hundred ninety seven.

[00:26:46] Like take a small portion of your portfolio and tie it to each one of these things.

[00:26:51] And we'll talk about different ways you can do it outside of moving averages.

[00:26:53] But the idea is if you want to get the average of all this stuff,

[00:26:56] that's probably a better way to do it is move your cash allocation

[00:26:59] in or out slowly based on a lot of moving averages,

[00:27:03] but versus let's just sell tomorrow.

[00:27:05] Now, the sell tomorrow can work spectacularly well if you get it right.

[00:27:09] But it can also be spectacularly wrong.

[00:27:11] And maybe this is, you know, Matt, I think you have a point on this,

[00:27:14] but we can this is a good time to talk about covid too,

[00:27:16] because that's a good example of that type of thing.

[00:27:18] Any time we get in love with a strategy that helps us do this stuff

[00:27:22] or we're interested in it or we're trying to implement it,

[00:27:25] we have to be aware of when are the times we are going to be most painfully wrong.

[00:27:31] Whenever you buy or sell something, one of the realities is

[00:27:36] and somebody said this a long time ago, so attribute accordingly.

[00:27:40] Jack, I think you'll tell me it was Mark Twain and I will totally agree with that point.

[00:27:44] But whoever said it, Howard Barks or somebody probably made the point

[00:27:48] that when you're in and out of something,

[00:27:51] you don't just have to be right once.

[00:27:53] You have to be right when you sell it

[00:27:55] and you at least have to be right when you buy it back again.

[00:27:59] That's really frigging hard, especially the more compressed the timeline is.

[00:28:03] So in a case like the financial crisis,

[00:28:06] it might have been midway through that summer

[00:28:08] if memory serves correctly of Oh, eight.

[00:28:11] Finally, price and trend, the trend line, the moving average converge,

[00:28:14] you get out and it's not until the middle of oh, eight.

[00:28:18] You're not back until like the middle of oh, nine back into the market

[00:28:21] at a much lower level.

[00:28:22] So I sold high.

[00:28:24] I bought low or not at the low but low or that's really important

[00:28:30] because I'm right twice and that's what's helping my results.

[00:28:34] In any case, and COVID would be a prime example of this.

[00:28:37] If the market pukes and I sell low,

[00:28:41] but then the market shoots way back up.

[00:28:43] And now my trend signal says buy it back.

[00:28:48] What might have just happened is I might have just sold low and bought high.

[00:28:52] What I ended up doing is in tax terms, resetting my cost basis,

[00:28:55] re resetting my entry point in a way that is very unfavorable to me,

[00:29:00] at least my short term results because if I book a 20% loss

[00:29:03] and then go chasing back in, that's not helping anybody.

[00:29:07] And this is one of the things that makes it tremendously hard to do

[00:29:10] in the real world because these whiplash signals will they're just savage.

[00:29:16] Yeah, that's where the composites come in

[00:29:17] because like one of the things I've learned in investing is whenever a thing

[00:29:20] works and you can define that thing a bunch of different ways,

[00:29:23] like do the average of all the different ways,

[00:29:25] like a value composites is a good example of that.

[00:29:27] Why would I invest with the price to book

[00:29:29] when I can use a composite of value factors?

[00:29:31] And like there's nothing special about the 200 day moving average

[00:29:34] versus the hundred ninety seven day moving average.

[00:29:36] So why would I not use all these moving averages

[00:29:39] and get the average of it over time?

[00:29:40] I'm not going to get the best one.

[00:29:42] I'm not going to get the worst one,

[00:29:43] but I'm going to get a smoother ride.

[00:29:45] And also I'm going to avoid this this all in thing

[00:29:47] and all out can be very challenging behaviorally

[00:29:50] and also maybe for tax reasons and other reasons it's not great.

[00:29:52] So using an average, you're kind of slowly moving in and out of things.

[00:29:56] You're not going to get it perfectly right,

[00:29:58] but you're going to get the average of what works,

[00:29:59] which is this whole idea of trend following.

[00:30:01] And so I think that's a better way than trying to pick.

[00:30:03] You know, a lot of people want to pick the exact moving average

[00:30:05] and, you know, we could run a test right now, Matt.

[00:30:07] And we could be like, let's take every single moving average

[00:30:10] and test it back to 1932 or whatever.

[00:30:12] And you could say, well, the hundred eighty seven day moving average

[00:30:15] is the best moving average.

[00:30:16] But the reality is that doesn't mean anything going forward.

[00:30:18] Like the hundred eighty seven day moving average

[00:30:20] is not really the best moving average.

[00:30:22] You know, you're going to get you probably want to just get an average

[00:30:24] of these over time. You're not going to pick the best one.

[00:30:26] If you optimize around any single variable.

[00:30:29] And this is this is a rule.

[00:30:31] Single variable analysis is always extremely dangerous

[00:30:34] because as soon as you optimize around a single variable,

[00:30:37] inevitably you've made something that works exceptionally well

[00:30:41] in the rear view mirror.

[00:30:43] And unfortunately, you are hurling forward on the highway of investment returns

[00:30:48] and that one variable is not the thing you want to choose to live and die alone by.

[00:30:52] So it might be with layers.

[00:30:54] You might have three moving averages that you're using.

[00:30:57] You might be using Bollinger bands and like distance from an average

[00:31:00] and saying I'm going to size and shape positions off of these things.

[00:31:04] Single variable, high risk, high danger because of these whipsaws.

[00:31:10] One of the things that the data shows on our site is that at least

[00:31:14] with the simple trend following model we have on Bolidia is like things like commodities

[00:31:20] or these asset classes that have.

[00:31:22] And I mean, stocks when they go into really bad bear markets would be one of these

[00:31:26] because I mean, we know that stocks can be down, you know, 40 or 50 percent.

[00:31:29] But commodities tend to be, you know, they tend to have these like big boom and bust cycles.

[00:31:36] So, you know, using trend on something like that,

[00:31:40] at least in our historical data, you know, shows that it does outperform

[00:31:44] like a buy and hold. Of course, we'll talk about the challenges of deploying.

[00:31:48] We've already talked about some of the challenges, but it's those types of

[00:31:52] I think asset classes where trend might shine a little bit better

[00:31:56] versus some of the more standard ones like stocks.

[00:31:59] Yeah, commodities are a great example because they have those what they call super cycles.

[00:32:03] And so I think of everything we track,

[00:32:05] I think it probably has worked the best on commodities

[00:32:07] because they've had these really, really long cycles, you know, in both up and down.

[00:32:12] And it was down for a very long period of time.

[00:32:13] But the longer you have these trends and the longer you have these cycles,

[00:32:16] the better trend following is going to work.

[00:32:19] So yeah, I think I think commodities is a place where it tends to work very well.

[00:32:23] Super cycles and the boom and bust.

[00:32:25] Those are the things that tell you there tends to be more of like

[00:32:27] a range that these things might move in and they move sharply and extremely in

[00:32:31] directions. And with trend following, that's what you want.

[00:32:34] You want the extreme moves in either direction to hopefully capture them

[00:32:38] on the long side, avoid them on the downside, unless you're doing long

[00:32:41] short, in which case you want the big moves in either direction.

[00:32:46] That's what trend is supposed to be helping you solve.

[00:32:50] So let's just flush out what the biggest challenge is

[00:32:53] with something like this might be.

[00:32:54] And I think we've kind of hit on these a little bit,

[00:32:56] but let's go a little bit more sort of specific and make sure that it's clear.

[00:33:02] Jack, I think the point you made earlier that, you know, even

[00:33:09] the best trend following strategies.

[00:33:13] They still have, you know, very low batting averages.

[00:33:16] They don't get there's there's there's a lot of whipsawing that happens

[00:33:19] in between the periods that you get the benefit from it, right?

[00:33:22] Yeah, that's right.

[00:33:23] Like you're we know these things are going to be wrong more than they're right.

[00:33:26] I mean, that's basically built into them.

[00:33:28] So you know most of the time you're going to be looking at a signal

[00:33:31] that's wrong and you're going to have to buy back higher, which you don't like doing.

[00:33:34] It's it's behaviorally very challenging.

[00:33:36] So yeah, that's definitely a downside of this.

[00:33:38] Also thinking back, I want to make that point about the covid

[00:33:41] that Matt and I were talking about before.

[00:33:42] If you use like more single indicator systems, you know,

[00:33:45] the other problem is you get wrong.

[00:33:48] So if you think about what happened with covid,

[00:33:50] we had a very, very massive decline very quickly and then a huge bounce back.

[00:33:54] So if you look at the different types of trend systems,

[00:33:57] like the short term moving average guys did pretty well in that

[00:34:00] because they got out pretty quickly.

[00:34:02] The intermediate term guys, you know, did the worst

[00:34:05] because basically they got out right when it was about to go back up.

[00:34:08] The long term guys didn't base them very much

[00:34:10] because they never, you know, they didn't get out much in the first place.

[00:34:12] And so that's an example of why you want to have

[00:34:14] you don't want to use these single, you know, factor systems

[00:34:17] because you want to have some short, you want to have some medium,

[00:34:19] you want to have some long, you know, you can even use those

[00:34:22] what they call the death cross, which I hate the.

[00:34:24] I hate the name of that because it implies the world's about to come

[00:34:26] to an end or something.

[00:34:27] And it's definitely the data does not show

[00:34:28] if the world's about to come to an end.

[00:34:29] But, you know, even these moving average crossover systems can help too.

[00:34:33] The death cross, by the way, is when the 50 day moving

[00:34:35] averages goes below the 200 day moving average

[00:34:37] and no death and destruction does not happen at that point.

[00:34:40] But and also rivaled by isn't the golden cross

[00:34:43] when it goes the other way?

[00:34:44] Yes, I believe so.

[00:34:46] So yes, that's one of the things that investing is you give

[00:34:48] thing the bigger name you give it or like the more aggressive name.

[00:34:51] People love that kind of stuff.

[00:34:52] So like the if you can say the death cross on CNBC people are like,

[00:34:56] oh, no, this is a huge problem.

[00:34:57] But but if you test the death cross historically, it's not it's not

[00:35:00] the problem you think it might be.

[00:35:02] So I issue the challenge to you and the trend following community.

[00:35:05] I'm looking for a I want four variables to confirm the trend.

[00:35:10] And I want to refer to it as the Quad City DJ cross.

[00:35:14] I like that every time we do it.

[00:35:15] Yeah, we do a come on, ride the train that you to ride it reference.

[00:35:18] Oh, nice. Yeah. Just I think our clients would love that.

[00:35:21] We we implemented that roll out that strategy.

[00:35:23] I think they have a little bit of a Quad City DJ momentum strategy.

[00:35:28] Please, every time we go to cash, we like send them the audio

[00:35:30] file or whatever it is just start playing the music.

[00:35:34] It's a jam.

[00:35:35] We keep differentiating ourselves in the market.

[00:35:36] No doubt about that.

[00:35:39] Well, and I think, you know, the other point that you brought up

[00:35:41] is obviously taxes can be a big issue here.

[00:35:45] Like imagine if you were utilizing trend, it got you back in at the end

[00:35:49] of or somewhere in 2009, you know, you wrote it all the way off.

[00:35:54] Maybe it didn't because I know with our trend following system,

[00:35:59] like we had false signals and I think it was 11, 15 and 18, something like that.

[00:36:04] And of 19 maybe those were periods in the market where the S&T was down

[00:36:07] almost 20 percent and our system was kind of reducing risk.

[00:36:12] And then the market kind of turn because none of those bear markets

[00:36:15] was really coincided with economic weakness or recession.

[00:36:22] It was other things driving it for the most part.

[00:36:23] There was concerns about that, but didn't materialize in that way

[00:36:26] from the economy standpoint.

[00:36:28] But the point is that, you know, if you had taxable money

[00:36:33] invested in trend following system, you would have had four sales there,

[00:36:35] which would have generated probably pretty big tax consequences.

[00:36:39] So that's another important thing to sort of keep in mind here.

[00:36:44] Yeah, everybody individually has to think about, you know,

[00:36:46] am I what is my own tax situation?

[00:36:49] You know, obviously it doesn't apply to IRAs,

[00:36:50] like if you're managing non-taxable money.

[00:36:52] Also, these things can now be embedded in ETFs.

[00:36:54] So some people run the Mint.ATF.

[00:36:56] So in that case, you can avoid it that way.

[00:36:58] But it's just something to keep in mind.

[00:36:59] I mean, anything that's doing any buying and selling,

[00:37:01] you know, taxes always have to be something

[00:37:03] you have at the top of your mind when you think about it.

[00:37:05] We've talked about it in some of the episodes,

[00:37:07] especially with Libo Doris, too, where you're looking at churn,

[00:37:11] you're looking at turnover.

[00:37:13] There's ways to look at all these

[00:37:16] these types of things when you have more actively

[00:37:18] traded strategies and just understanding, OK,

[00:37:21] if this is going to turn itself over, you know,

[00:37:23] 300 percent over the course of the year,

[00:37:26] are these all short term trading gains and losses?

[00:37:29] How historically have they stacked up?

[00:37:30] What's the kind of risk I'm putting on?

[00:37:32] And in some of these more composite,

[00:37:34] like CTA type managers or arrangements,

[00:37:36] depending on the fund structure,

[00:37:39] or if it's in an ETF or whatever else, too,

[00:37:41] you can kind of look at these things and understand

[00:37:43] sometimes it's not so bad.

[00:37:44] Sometimes all of it's so like short term in nature

[00:37:48] that a lot of the losses can offset the gains.

[00:37:52] There's ways to structure this stuff well.

[00:37:53] And there's also ways to do this profoundly stupid

[00:37:56] where you can still a lot of money in taxes

[00:37:58] and congratulations if Uncle Sam is getting all of your return.

[00:38:02] That's probably not the alpha you're after.

[00:38:05] Yeah, that's a good point.

[00:38:06] What do you guys think of this?

[00:38:09] This word hasn't come up yet, but I'm just I think

[00:38:12] this is correct would be a correct statement.

[00:38:14] But isn't trend following like a form of momentum investing?

[00:38:19] Yes. Am I right about that? Yeah. OK.

[00:38:21] Yeah, I know it's basically time series momentum.

[00:38:24] So yeah, absolutely.

[00:38:25] You know, a lot of people like will get into the nuance of that,

[00:38:27] like in the factor investing world,

[00:38:28] and they don't like using the word momentum with trend following

[00:38:31] and they like having momentum be the cross sectional thing.

[00:38:33] And you know, trend following is the time series thing.

[00:38:36] But realistically, yeah, it is 100 percent a form of momentum.

[00:38:40] And it's a style back to the surf guitar thing.

[00:38:42] Like it's just a style that sometimes is vogue

[00:38:45] and sometimes is not extra Madonna reference in there.

[00:38:49] So it's one of those things.

[00:38:51] Different flavors of this thing are going to show up.

[00:38:53] And yes, it's momentum because it's focusing on in many cases

[00:38:57] the underreaction to good news as it comes out over time

[00:39:01] or the underreaction to bad news on the short side.

[00:39:04] And this is just a reality.

[00:39:05] This is a way that humans work.

[00:39:08] AI, what's that? Nvidia starts.

[00:39:11] Oh, this is a cool thing. We do this.

[00:39:13] It keeps going. Oh my God.

[00:39:15] Every company is going to put this in their name.

[00:39:16] It keeps going.

[00:39:18] These trends build.

[00:39:19] And this is just one way we try to make sense of how

[00:39:23] us crazy humans run around in our day to day lives.

[00:39:27] I know when we've had Jim O'Shaughnessy on the podcast

[00:39:30] in the past, he's talked about this idea of two points of failure.

[00:39:36] And I think you wanted to relate it to trend following.

[00:39:40] Yeah, well, the idea is like thinking about which investors

[00:39:43] trend following works well for.

[00:39:44] So the two points of failure are if the markets down a lot,

[00:39:47] people will typically panic and sell.

[00:39:49] And the second point of failure is if you underperform

[00:39:51] whatever you consider your benchmark, you know, the S&P 500

[00:39:54] or whatever people are talking about at the cocktail party,

[00:39:56] you're going to panic and sell.

[00:39:57] And so the question is really whether trend following

[00:40:00] addresses the first one very well.

[00:40:02] It's limiting drawdown significantly against buy and hold.

[00:40:04] It is horrific on the second one because you are you're sitting

[00:40:07] in cash a lot of time when your neighbor is making money

[00:40:10] in the S&P 500.

[00:40:11] And that's very hard to do.

[00:40:12] And so what I was getting at there is I think the type

[00:40:15] of investor this works with is really the person who is

[00:40:18] more focused on that first point of failure than the second.

[00:40:21] And it's hard to figure it to maybe Mac has some ideas

[00:40:23] on how to suss that out with clients,

[00:40:25] but the person who's more worried about losses than they are

[00:40:27] about keeping up with their neighbor.

[00:40:29] That's really where this works really well.

[00:40:31] The person who's really worried about keeping up

[00:40:32] with their neighbor and talking about their returns

[00:40:34] at the cocktail party when the market's up,

[00:40:35] this is a really bad thing to begin involved in

[00:40:38] because you're going to have these periods

[00:40:39] where you're out and they're in.

[00:40:41] For most people who just can't stick with a system

[00:40:46] systematic strategy to begin with,

[00:40:48] which is a lot of people like the default setting

[00:40:50] for most people unless they're willing to totally

[00:40:52] take their eyes off it.

[00:40:53] Stuff like this is not going to serve.

[00:40:56] You're not cool with the cocktail party when you're like,

[00:40:58] let me tell you about the merits of 10 month moving averages.

[00:41:02] That's not a sexy concept,

[00:41:04] but owning the thing that works right now

[00:41:07] and I would say the same is true for momentum can be

[00:41:10] if you're the type of person who goes to cocktail parties

[00:41:13] and want stuff like this to talk about,

[00:41:15] this is a tremendous tool.

[00:41:17] I can take the S&P 500 and I can sort it

[00:41:20] by giving me every stock in the S&P 500

[00:41:22] and that's trading above the 200 day moving average.

[00:41:24] And I can use that as ways to identify

[00:41:26] what's trending, why and how.

[00:41:29] As a rubric for figuring out what you're interested in,

[00:41:32] what keeps you invested, momentum or trend following

[00:41:36] can both be really interesting ways

[00:41:37] to always own something that's doing well.

[00:41:40] Doesn't mean it's going to do well for you.

[00:41:42] Doesn't mean your advisor is going to like you

[00:41:44] doing it or whatever else, but it's a handy tool.

[00:41:47] And it makes it one of those things

[00:41:48] that when we track stock portfolios

[00:41:50] we track things that are going on.

[00:41:52] I'm always going to pay attention to stuff like this

[00:41:54] just because it helps me understand

[00:41:56] where are the trends and what's happening now?

[00:41:59] Again, shout out back.

[00:42:01] The band I was talking about before the surf rock band

[00:42:04] they're called disposable.

[00:42:05] They're from New Jersey.

[00:42:07] They don't have a lot of stuff online.

[00:42:08] It looks like they're on band camp somewhere.

[00:42:11] Great band, ukulele, surf guitar.

[00:42:13] It's wonderful, but they're not top

[00:42:15] in the charts right now.

[00:42:16] So if billboard is my equivalent

[00:42:18] to under taking moving average,

[00:42:20] I can't pull up the billboard chart

[00:42:22] and see my favorite punky surf rock band

[00:42:25] at the top of the billboard charts.

[00:42:26] And that's my indication that I can't play the cool card

[00:42:30] when I drop that name with somebody

[00:42:31] who only cares about billboard stuff.

[00:42:34] These things are tools.

[00:42:36] And if we understand the nuance with them

[00:42:37] we can figure out how they serve us best

[00:42:40] in the places we want us to serve them.

[00:42:42] And last I checked too cocktail parties

[00:42:44] are not the determinant of net worth

[00:42:46] or is that the way we measure net worth?

[00:42:48] I think another problem you have here with trend following

[00:42:50] is in like December 2008,

[00:42:53] there probably weren't too many cocktail parties.

[00:42:55] That's the time as a trend follower

[00:42:56] you wanna be at the cocktail party

[00:42:58] telling all your friends about how great it's doing

[00:43:00] and they probably aren't having the cocktail parties.

[00:43:01] So I don't know if I can put that

[00:43:02] in the academic research

[00:43:04] but that is probably a problem with the strategy.

[00:43:07] Can you desire me a cocktail party oriented strategy

[00:43:12] that in times of pandemic

[00:43:13] like all I do is I don't know

[00:43:15] like in a pandemic I just go buy the cues

[00:43:17] or something like that.

[00:43:18] But in cocktail party times

[00:43:20] I get like the hottest meme stock

[00:43:22] and I don't know Bitcoin or something.

[00:43:24] Have you guys seen that video of like done

[00:43:26] that's going around Twitter

[00:43:26] of like the guy dancing on the stage

[00:43:28] as they put everybody's face on?

[00:43:30] Have you seen that?

[00:43:31] It's like a celebration video.

[00:43:32] I think it's like the guy that did,

[00:43:34] what's it called gangnam style or whatever

[00:43:36] but they like impose like

[00:43:38] like the guy that got the macro call right

[00:43:39] or something that'll impose his face on the video

[00:43:41] and like he'll be the one dancing out there.

[00:43:43] When he pops out through the stage like that.

[00:43:44] Yeah this is a different one

[00:43:45] all the same idea though

[00:43:46] the guy dancing all the way to the end

[00:43:48] it's like the same concept

[00:43:49] but that's basically you as the trend follower

[00:43:51] like in December 2008.

[00:43:53] You may have other problems in your life

[00:43:54] but that's you, you're like dancing out there

[00:43:55] and you can't do it because

[00:43:57] nobody wants to go to the cocktail parties.

[00:43:59] These are the things you gotta think about.

[00:44:01] Are you doing this for wealth creation?

[00:44:02] Are you doing this for status?

[00:44:04] It's okay to know if you're doing something

[00:44:06] like this for status

[00:44:07] just figure out the way you wanna talk about it

[00:44:09] the way you wanna track it

[00:44:10] the way you wanna do it.

[00:44:11] And by the way, lots of people

[00:44:13] when they're out there marketing their strategies

[00:44:15] are saying this is what we do for clients

[00:44:18] that's what they're doing.

[00:44:19] They're not selling you wealth

[00:44:20] they're selling you some idea of status

[00:44:22] around this idea that feels good

[00:44:24] that aligns with your behaviors

[00:44:25] then maybe you should pay attention to it

[00:44:27] but if it doesn't, it's okay to ignore this stuff too.

[00:44:30] So for us there's a couple of different ways

[00:44:32] that we use trend following in our clients portfolios

[00:44:36] we have specific equity strategies

[00:44:39] that can sort of flex in and out of the market

[00:44:43] based on our trend following system

[00:44:44] and then we have these risk management models

[00:44:46] that utilize trend to move in between different asset classes

[00:44:51] and or also can increase their cash position.

[00:44:56] Let's say, the majority of asset classes

[00:44:58] are on a negative downtrend

[00:45:01] then that might be a signal for those strategies

[00:45:03] to start moving or reducing risks

[00:45:07] moving out of the market or reducing risks

[00:45:09] but in terms of like position sizing these

[00:45:14] and actually like deploying these in client accounts

[00:45:20] mostly, for most of our clients

[00:45:25] it's not anywhere near 100% in either one of those

[00:45:28] it's like they're mixed with other long-only

[00:45:31] or diversified strategies

[00:45:33] we're just trying to give them some exposure to trend

[00:45:36] to allow them to benefit from those types of strategies

[00:45:40] when they get it right.

[00:45:42] But it's not anywhere near 100%

[00:45:46] Yeah, sizing this stuff is so important

[00:45:48] because to your point we don't have one client

[00:45:50] that's 100% trend following

[00:45:51] and I don't know that we have one client

[00:45:53] that could stick with 100% trend following

[00:45:55] it's just too hard

[00:45:56] like those periods where it's not working

[00:45:58] that can go on for years

[00:45:59] you're going to abandon it

[00:46:00] but if it's 20% of your portfolio

[00:46:02] and you're using other risk management methods

[00:46:04] and you're blending them all together

[00:46:06] then it makes sense

[00:46:07] if somebody using a 60-40 portfolio

[00:46:10] keeps a strong bond allocation

[00:46:12] but also uses trend following

[00:46:14] for part of their portfolio

[00:46:15] like they take some from the stocks

[00:46:16] and some from the bonds

[00:46:17] and use trend following or something

[00:46:18] that's where it makes a lot more sense

[00:46:20] because then it's not having such dramatic impacts

[00:46:23] on your portfolio that it's when you're wrong

[00:46:25] that you can't stick with it

[00:46:26] and that's just a generally good idea

[00:46:28] in investing in general

[00:46:29] it's like all this stuff that makes you look different

[00:46:31] if you can blend that stuff

[00:46:32] if you can size that stuff appropriately

[00:46:34] it works out a lot better

[00:46:35] than if you think you can put 100% of your money

[00:46:37] in it and stick with it.

[00:46:39] We think about so professionally at some point

[00:46:42] in the way we construct portfolios

[00:46:44] we think of stuff as either

[00:46:46] the big two buckets are

[00:46:47] is it either a risk seeking thing

[00:46:49] or is it a risk mitigating thing

[00:46:52] and then inside that we have subdivisions

[00:46:54] and something like trend following

[00:46:55] it's never going to be everything

[00:46:58] it's going to be a sleeve

[00:46:59] and mostly most trend following strategies

[00:47:02] are either going to be hybrid

[00:47:03] or risk mitigation in some way

[00:47:05] where we're going to say

[00:47:06] your real purpose is to help us

[00:47:08] hopefully avoid some amount of drawdown

[00:47:10] and here's why.

[00:47:12] We don't often use these strategies

[00:47:13] but if somebody has one

[00:47:14] or somebody has a CTA

[00:47:16] we just want to make sure we understand

[00:47:18] is this the kind of thing

[00:47:19] that's going to introduce more volatility

[00:47:21] to the portfolio in some way

[00:47:23] maybe it's a commodities only CTA

[00:47:25] or something that's got just wild

[00:47:27] wild standard deviation to it

[00:47:29] we don't usually advise on those things

[00:47:31] or suggest those

[00:47:31] but some people are going to have them

[00:47:33] and that's okay.

[00:47:34] And then in the other direction though

[00:47:36] it's okay if you're going to give me

[00:47:37] just a lower vol

[00:47:38] what's the contribution to the rest of the portfolio

[00:47:41] how do we fit that in

[00:47:42] and then how do we size it?

[00:47:44] The weird thing here too is

[00:47:46] that means if your volatility profile

[00:47:50] and your correlation

[00:47:51] to the other things in the portfolio

[00:47:52] is that of a Vanguard intermediate term bond ETF

[00:47:57] or something

[00:47:58] well now we have to look

[00:48:00] and say is it smarter to do this or that

[00:48:03] and that's the other thing

[00:48:04] that these strategies do

[00:48:05] when you start to take off the label

[00:48:09] and look at the factors as they're defined

[00:48:12] then you start getting into the conversation about

[00:48:14] what are the descriptions we use of how this thing acts

[00:48:17] and then what are my other alternatives

[00:48:19] that have the same of these descriptions

[00:48:21] and that could be a huge, huge influential detail

[00:48:24] on where these things fit into a portfolio

[00:48:26] how you size them

[00:48:27] what the tax considerations are

[00:48:29] and all that other good stuff

[00:48:33] but crap let's be honest all that

[00:48:34] it can also be blended

[00:48:36] within a certain strategy

[00:48:38] you can have trend following blended

[00:48:39] with other risk mitigation techniques

[00:48:41] so time series and cross-sectional momentum

[00:48:43] the portfolio you mentioned Justin that we run

[00:48:45] has both components

[00:48:46] it has a trend following component

[00:48:47] like get me out of the market

[00:48:48] if everything's going down

[00:48:50] but it also has a cross-sectional component

[00:48:52] buy the assets that are going up the most

[00:48:54] and so you can mix a lot of this stuff together

[00:48:56] or I know Alpha Architects

[00:48:57] like in there

[00:48:58] they have two different systems

[00:49:00] for the time series thing

[00:49:01] so they have one system

[00:49:03] where they use moving averages

[00:49:04] to determine whether to get out of assets

[00:49:06] but they have another system

[00:49:07] where if you look at basically the return of the asset

[00:49:10] versus the risk-free rate

[00:49:11] and this is something that comes out of Gary Antonacci's work

[00:49:14] like if the return of the asset

[00:49:15] is below the risk-free rate

[00:49:17] that's when you go out of the asset

[00:49:18] so there's a lot of blending

[00:49:19] and combining and things you can do

[00:49:21] and typically the more blending

[00:49:22] and combining you do the better

[00:49:24] because you're getting like the average of all these

[00:49:26] you're getting the average of the different trends

[00:49:28] but you're also getting the average

[00:49:29] of the different risk mitigation techniques

[00:49:31] and like all of it comes together

[00:49:32] into something you can stick with better

[00:49:34] than trying to use one approach.

[00:49:37] So here's one for you.

[00:49:39] Why did Jack the trend-following YouTuber

[00:49:41] across the road?

[00:49:43] This is what I'm here for.

[00:49:44] Did you take this one?

[00:49:46] Is this a TTT punch line?

[00:49:47] Yeah, this is.

[00:49:49] So yeah, why did Jack the trend-following YouTuber

[00:49:51] across the road

[00:49:52] to chase after excess returns?

[00:49:56] And hopefully catch some subscribers along the way.

[00:49:58] Are you in chat to EBT again?

[00:50:01] Yes, I'm chat EBT or this joke all day long.

[00:50:05] Podcasting and have like some sort of chat EBT

[00:50:07] like we should have Matt and I will talk

[00:50:09] and you can just continue to type chat EBT references

[00:50:12] throughout the podcast.

[00:50:13] Yeah, actually before we end though

[00:50:18] just share your that latest experience with Claude

[00:50:22] and on the back of the phone.

[00:50:23] Oh yeah, that was crazy.

[00:50:24] So I was having it like

[00:50:25] I was doing an article on free cash flow

[00:50:27] you know that I was having it edit the article

[00:50:29] so like first of all these things are really good

[00:50:30] so anybody who's not using these MLMs

[00:50:32] they're really good and Claude to me is the best right now.

[00:50:34] It's Claude Opus is like better than anything else is out there

[00:50:37] but anyway, so like you give it the article

[00:50:39] it edits the article

[00:50:40] and now what it's doing is it's actually like

[00:50:42] starting up its own agents.

[00:50:44] So when I send it to Justin like effectively

[00:50:47] I didn't do anything but say like edit this article

[00:50:48] it gives back the edited article

[00:50:50] and then two agents start talking to each other

[00:50:53] and one is like, oh I have some feedback

[00:50:55] on this article like you might want to do three

[00:50:57] or four or five things

[00:50:57] and the other was like wow

[00:50:59] that's amazing feedback

[00:51:00] and the other one was like it was my great pleasure

[00:51:02] to provide this feedback

[00:51:03] and it just keeps going

[00:51:04] like these two things keep like they both have initials

[00:51:07] like their people and they keep talking to each other

[00:51:09] and like it gets the point where all they're doing

[00:51:11] there's no more revisions to the article

[00:51:13] they're just complimenting each other back and forth.

[00:51:15] One is just telling the other how great they are

[00:51:17] and like I finally had to stop the thing

[00:51:19] because it got so out of control

[00:51:21] but it is it's amazing

[00:51:22] like these things are actually spawning off

[00:51:23] like agents that are talking to each other

[00:51:26] based on you just putting in a request.

[00:51:29] I'm blown away by this.

[00:51:31] I'll send you the extra transcript of it

[00:51:33] because I sent it to Justin.

[00:51:34] It's pretty crazy

[00:51:35] and it was, I think it was gonna in an endless loop

[00:51:37] so I don't think it was ever gonna

[00:51:39] like it just got less and less substantive

[00:51:40] and more like complimenting each other

[00:51:42] but I don't think it was ever gonna end

[00:51:43] if I didn't stop it.

[00:51:44] I mean they might be out there somewhere

[00:51:45] on the internet chatting with each other

[00:51:46] just don't stop it.

[00:51:47] No, it didn't.

[00:51:48] It devolved into the worst cocktail party ever.

[00:51:50] That's what I'm saying.

[00:51:51] It was just how's the weather back and forth.

[00:51:55] That's where this stuff is going though

[00:51:56] I mean Justin uses this stuff more than I do

[00:51:57] but like I mean that's where it's gonna go.

[00:51:58] It's gonna go to the point

[00:51:59] where you can like send all these different agents

[00:52:01] to do all kinds of things

[00:52:02] and not only is it writing,

[00:52:03] you know writing or editing the article

[00:52:05] but then it's bringing in other perspectives

[00:52:07] like to edit the article even more

[00:52:09] and it's pretty crazy.

[00:52:11] So the trend, the trend here is that

[00:52:14] this is gonna take over more agents

[00:52:18] is the thing that's trending.

[00:52:19] Bots.

[00:52:20] I guess.

[00:52:21] AI.

[00:52:22] This podcast is eventually just gonna be three agents

[00:52:24] and it'll probably be more entertaining than it is now

[00:52:25] so he's been accepted.

[00:52:27] Why don't we just do like this round compliment thing

[00:52:32] where all we do is just compliment each other

[00:52:34] for 55 minutes about like what we,

[00:52:38] since Jack and I have never even given each other

[00:52:40] one compliment over like 20 plus years working together.

[00:52:43] Should we start now?

[00:52:44] We got lots of stuff that's been catching up to do.

[00:52:46] Or maybe we'll start with substance

[00:52:48] and then we'll devolve into the complimenting

[00:52:49] as it gets on like just like the agent did.

[00:52:53] Justin those were some amazing insights

[00:52:54] on trend following in today's podcast.

[00:52:57] Oh, well thank you.

[00:52:58] That was great.

[00:52:59] You must have studied extensively

[00:53:00] to be able to provide that kind of commentary.

[00:53:01] Yeah.

[00:53:04] There you go.

[00:53:04] Nice.

[00:53:05] All right guys.

[00:53:06] So thank you guys for checking this out, listening to us

[00:53:10] and we hope to see you on April 30th.

[00:53:13] So we'll see you next time.

[00:53:14] Thank you.

[00:53:15] Thank you.

[00:53:17] Hi guys.

[00:53:17] This is Justin again.

[00:53:19] Thanks so much for tuning into this episode.

[00:53:21] You can follow Jack on Twitter at atpracticalquant.

[00:53:25] You can follow me on Twitter at at JJcarbonam

[00:53:27] and follow Matt on Twitter at atcultishcreative.

[00:53:30] If you found this discussion interesting and valuable

[00:53:33] please subscribe in either iTunes or on YouTube

[00:53:36] or leave a review or a comment.

[00:53:38] Also if you have any ideas for topics

[00:53:40] you'd like us to cover in the future

[00:53:41] please email us at accessreturnspod.com.

[00:53:45] We would like this to be a listener driven podcast

[00:53:48] and would appreciate any suggestions.

[00:53:49] Thank you.