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Markets, speculation, and risk.
This is the Chat with Traders podcast.
We're on episode 245.
If you're new to the show, very warm welcome to you and everyone else.
Thank you for coming back to join us today.
I'm Tessa, co -host of Chat with Traders.
I'm excited about our guest today.
He was interviewed in Jack Schwager's Unknown Market Wizards.
From early on, as a rebel who avoided group think, he sought out contrarian trading opportunities in overhyped or deeply oversold stocks and commodities.
Blessed by early trading successes, he retired to a beach in Thailand in the late 90s and traded his account full time only to experience tragedy less than a year later.
Our guest today is Jason Shapiro.
Ladies and gentlemen, before we tune into this fascinating interview with Jason, I'd first like to quickly take this opportunity to introduce the new host who's joining me today.
His name is Ian Cox.
Ian will add another dynamic to the show due to his unique background, experience, and perspectives in his own way and own style that I hope you will all come to appreciate.
If you haven't yet listened to episode 244, where I share an interview I did with Ian, please listen to it to learn more about him.
Ian, welcome aboard to Chat with Traders.
Thank you Tessa for the nice introduction.
Yeah, I'm looking forward to starting here with Chat with Traders and getting a chance to interview top traders from around the world.
And I'm excited to learn from them.
As this is your debut interview, how do you feel about it?
You know, I've read about many of these great traders through the Market Wizards books, but having a chance to finally talk to someone live and ask them questions and get a chance to connect with them and learn the lessons that they've learned is exciting for me.
So Ian, without giving up too much detail now, because listeners will want to tune in to this fascinating interview shortly, what were some of the things that really stood out to you during the interview?
Many of the painful lessons that Jason learned, which drove him eventually to give up his opinions on the market and instead focus in on what the market is telling him.
And thus he became a great market tape reader.
Okay, well, without further ado, let us roll straight into it.
Ladies and gentlemen, we are so pleased to present Jason Shapiro.
According to the book, Unknown Market Wizards that you interviewed with Jack Schwager, he mentions that you went to a London business school.
Yeah, that was for a master's degree.
Undergraduate, I was a finance major.
And then I worked for, I don't remember exactly how long, five years, maybe five or six years I went to work.
And then I went to London business school for a year to their master's in finance program.
Did you find what you learned in that school helped you in any way with trading?
I'm not really gonna say that it necessarily helped me with trading.
It definitely helped me understand more about the fundamental side of markets and financial theory.
So I don't really use, I would say financial theory per se in my trading, but I think it definitely helps to understand it just because the more you know, I think the better off you are and you can choose to use or not use the knowledge that you pick up, but there was nothing really interesting.
I mean, you know, I'll take, I took options courses that helped me understand how to value an option.
But truthfully, does that help in trading?
I don't trade options, but even if I did, I mean, options are pretty well priced, you know?
So the understanding how to price an option wasn't necessarily helpful in trading, but it's still good to know.
It's still good to understand these things.
Right, in the book you mentioned that you went on vacation to Africa and you held a position during that time Tell us about that.
That's probably the most valuable lesson I learned while I was in business school, which had nothing to do with business school.
Oh, please tell us.
Yeah, I mean, I just had a position in Hanks and Futures where for, you know, whatever reason, I was bullish.
And you know, at the time, this was right, I would say as the internet was starting.
I remember when I was in school, we could download internet pages, but it took about five to 10 minutes to download a page.
So really, I was going to a Bloomberg screen that we had in the library and looking at markets and charts.
And my broker was faxing me intraday charts once a day.
And that's kind of how I was trading the Hang Seng Index at the time.
And I was still pretty much a shorter term trader holding things for two or three days, usually that type of thing, and over -trading still.
But at the time that I went away for whatever reason it was, I was bullish to Hang Seng Index and I had a big position on.
And I was going to Africa for a month and I knew that I wasn't really going to be able to have contact, you know, so it's pre -cell phone.
So, you know, I just kind of left an order with my broker to kind of stop me out if it goes down to here and otherwise just let it go.
And after a month, when I got to a place where I could speak to him, the market was up quite a bit.
And of course I told him to sell.
And I think if I went away for another month, I probably would have made twice as much money, right?
But it just helped with the lesson of, you know, it's an old Jesse Livermore saying that the money is made in the sitting.
I made more money in that month than I had made, you know, all year trying to trade in and out of the market.
So did this experience influence your later trading?
Did you become more patient and let the trade unfold over time?
Did this tempt you to be 100 % okay?
Yes, I mean, my trades now usually last, you know, at least my good ones last two to six months.
So in the book, Unknown Market Wizards, you shared that you got a chance to live in Thailand.
I did, I did live in Thailand, yes.
When I finished business school, I moved to Thailand and got married.
I had made mostly because of that trade when I was in Africa, but I had made a good amount of money.
I'd say 60 to 70 % off that one trade, but I had made a good amount of money while I was in business school.
And I just decided I didn't want to really go to work.
So I moved to Thailand and I started trading from there.
Wow, that sounds like a dream come true.
How did that go for you?
Yeah, it's funny that you use those words because so often what sounds like a dream come true is not what you think it is, right?
Uh -huh. So again, it was based on the same type of psychology.
I went back to the idea of, you know, look at me.
You know what I mean?
All my friends are working every day and putting on a suit and tie.
And I'm sitting here with my toes in the sand in Thailand and aren't I a genius.
And I'm just having fun trading and living in Thailand.
And I think it took me nine months before I blew out again.
When you look back, what were some of the lessons you learned from that?
And did you change your strategy from earlier?
Yeah, I think the main lesson that was instilled on me in that situation was, you know, don't fight the tape.
I was bearish to US stock market for, I don't remember why, trying to be contrarian, you know.
And it was going up all the time and I was fighting the tape the whole way and that's how I lost my money.
And yes, it definitely affected how I trade.
I mean, after that, now I'm back to broke.
I really sat down and had to decide, you know, what I was going to do about this.
If I really wanted to continue trading and I had to stop, you know, with this up and down thing, you know, and blowing out, making and blowing out.
And so I had done a good job of journaling my trades back in those days.
So I really took a few months and went through this and really tried to develop a process based on that, you know, what was working, what was not working and let's try to eliminate the things that were not working and let's try to focus on the things that were working over time.
And that was really the beginning of me starting to develop a repeatable process in trading.
I see, so for a while there, you were, were you trading based on your opinions instead of the tape, right?
For the most part, yeah, yeah.
I think the market's going up for whatever reason and I think the market's going down for whatever reason.
And I was getting stuck into a lot of, you know, psychological traps that, you know, we all get stuck in with trading and I needed to eliminate those.
You know, you're bearish, you're shorting, the market's going up, okay, maybe you're stopping loss, but then you're shorting again and it's this whole idea of, well, now you can't miss it when it does go down because you've been shorting so much and the market's gone up so much and you've lost, you
know, now you can't miss it so you have to, you know, those kind of thought processes are very debilitating to your P and L over time.
So I was kind of still stuck in that because I was young, you know, and I lacked sort of the experience.
So, you know, so eliminating those type of thought processes were a big part of it.
How long have you considered yourself to be a contrarian trader?
How early did you adopt that viewpoint?
Pretty much, I would say within a couple of years of trading, that was sort of my take on things.
I've always been, I would say a contrarian person.
And so therefore it was a natural gravitation to being a contrarian trader.
I think that my definition of what a contrarian trader is has changed over time.
But even when I wasn't doing what I'm doing now, I considered myself contrarian.
I just had a different definition of what that was.
So when we talk about being a contrarian, I think it's helpful to understand who are we being contrarian to, for example.
And so I'd like to take a look at some of the players involved in the market.
And one extreme type is often referred to as the dumb money and an investment legend that the father, President Kennedy was hearing stock investing advice from the shoeshine boys.
And to him, this was a contrarian sell signal because these types of people typically get into stocks near the end of the move.
Based on this legend has it that he sold all his stocks months before the 1929 stock market crash.
So do you consider any other types of investors, groups or institutions, which might be in the dumb money category?
I consider just about all money over time to be dumb money.
And I think that the most important part of it is when they're all agreeing, right?
When everybody is in agreement that that's when it becomes dumb money.
And it makes sort of, and you go back to business school and financial theory, it makes sense on a financial theory basis to me at least, because the first thing we learn is the market is a discounting mechanism, right?
So when everybody suddenly is saying something, then isn't that discounted in the market already, right?
And that's where efficient marketing comes in.
And it's more than a question of if they're just saying it, it's a question of if they've actually put their money in.
So if everybody's already put their money into a certain idea and they're all piling their money into that idea, then isn't that gonna already be discounted?
And I think that that's really the key is for me at least, I believe the discounting mechanism.
People use price as a discounting mechanism.
I like to use participation, which is measuring if the money's actually gone in there as a discounting mechanism.
So it's not a question of, hey, this asset's gone from 50 to a hundred.
Therefore it's discounted in the good news.
It's more like every single person that I know of has their money in this.
Therefore it's already discounted in the good news.
Yeah, so do you think that one way to measure participation is to say, look at the media?
Like for example, it is said when magazines which don't specialize in stocks, like say Time Magazine, Newsweek, and others have a front cover article about stocks or commodities, it frequently signals the end of the move in that market and a great time to take the opposite side of the trade.
Do you consider these type of non -financial magazines to be a good contrarian indicator when they have their front cover articles?
I don't think that there's any doubt about it.
Just as an example, there was a, and I've talked about this a lot, but there was a front page of The Economist article that came out that had the cover, on the cover had wheat on the cover, and that was a few months ago right at the exact top of wheat.
I think wheat's down 40 % since then.
So that's a good example of that.
And you get into the kind of why that is thing.
And I think it's a question of, magazines are looking to sell magazines, right?
So they're gonna put what is going to grab people's attention on the cover and what is popular on the cover, right?
When wheat hasn't gone anywhere in five years, nobody's putting wheat on the cover of a magazine because nobody cares, right?
So they want to put the exciting thing on, and by definition, the exciting thing on is when everybody's participating in, and therefore that's when the market's going to turn.
Right, right. I remember while trading the oil drillers back in 1999, I saw a bearish front cover article on The Economist talking about drowning in oil.
And this came out when oil hit $10 a barrel, and it turned out to be a fantastic contrary indicator as that was the bottom of the market.
Yeah, I think that there's dozens and dozens, if not hundreds of examples like that, right?
Not only the bottom of the market when oil was at 10, I think oil was sitting at $10 a barrel for years at that point.
And then finally they put an article on the cover, like you said, and there you go.
Man, oil took off from there, right?
Yeah, well, but how about the publications and TV who specialize in stocks like Investors Business Daily, Wall Street Journal, CNBC, and others?
I mean, shouldn't these financial media sources be part of the smart money crowd?
I mean, do you notice much of a difference between these as a contrary indicator, are some more noticeably more reliable as a contrary indicator?
So I don't read Investors Business Daily, although I think if I were a stock trader, I would probably read it religiously.
I have a lot of respect for what those guys have done.
As far as The Wall Street Journal, and I don't really read The Wall Street Journal either, but I do spend a lot of time, because I have the TV all day on Bloomberg TV and CNBC.
And I do think that they are, can be great contrarian indicators, yes.
When you have people come on there all day, and the same people are saying the same thing, looks like I say, they're all discounting this stuff in.
I think they're even a better contrarian indicator, because this is where people are coming on and talking consistently, and again, when they all are agreeing, when they all are agreeing, then that's the time to be contrarian for that, or at least start thinking about being contrarian for that.
I mean, people think like there's a difference between, you know, some professional so -called money manager, and some retail guy and a person, and to me, the only difference is this person, you know, got their MBA and got a job, you know?
The market doesn't, you know, being highly educated in this stuff doesn't give you a better chance of beating the market as time has proven.
Professional money managers don't beat the market either, right?
So when all professional money managers are saying the same exact thing, yes, I think it's a great time to be contrarian.
Interesting, so despite, you know, many in the public might think, well, these people on CNBC and these money managers, they have a lot of education, they have a lot of experience, and they're much sharper than, you know, those magazines say they don't focus in on that, and so you'd think that, oh,
they would know, I mean, that they would make smart choices generally, and know when to get in, you know, near the bottom or sell somewhere near the top, but not based on your experience and what the evidence shows, right?
The evidence shows the complete opposite.
I feed the people on CNBC on a consistent basis.
It's not a personal thing, you know what I mean?
It's just like if everybody is coming on CNBC and saying the same thing, then I am definitely looking to go the other way.
So in your experience, typically how long do you find that they maintain those attitudes toward being bullish or bearish, a particular stock, because the old saying, the trend is your friend, are you looking for players that were formerly bearish to flip bullish, say on the TV, or have you identified,
say certain people on the show to be consistently like perma bulls or perma bears?
There's definitely some of that.
There are definitely some people who have certain personalities, and you can sort of get a feeling for when, yeah, they are capitulating and therefore you want to go the other way, my preference is really when there's more consensus and when all the people are coming on TV and agreeing on the same exact
thing, you know, that's really where, what I'm interested in more than anything else.
So though, like I say, there are some people that are wrong on a very consistent level.
I see. And so what publication do you most frequently use to help you locate contrarian opportunities?
You know, I don't really read any of the newspapers or anything like that.
It's really the TV, you know, CNBC has a lot of people coming on there talking every day.
And then at the end of the day, they have the wrap -up shows, Fast Money, which I like to call fade money.
I listened to that, I watched that religiously every day.
And if I'd be missing it, then they do have it on a webcast.
And I listened to that because that has guests and it has commentators.
And when they all come into agreement and there's no doubt about their agreement, then that's interesting to me.
Do you use the commitment of traders report put out by the CFTC?
I do, I use it extensively.
It's really my main data source, so.
Okay. I noticed on the COT report that there are three primary players, the commercials, the large speculators and the small traders.
Is there one that you would consider to be more in the smart money crowd or how would you view those three different groups?
So yeah, I mean, the commercials will have on the exact opposite position as these speculators, right?
For every buyer, there's a seller, for every long, there's a short, right?
So to me, it's two groups.
Commercial speculators, right?
And I look for that to line up when I'm taking a contrarian trade.
Now, again, going back to financial theory, you could argue that commercials are hedging, right?
There should be a cost to hedging.
And therefore, the speculators are capturing that cost as a profit, right?
Over time. And to me, that's what trend following is, right?
This is why trend following over time has made money because they're basically capturing the cost of hedging that the commercials are giving out.
And that's one side of it.
The other side of it, which is what I do, is that extremes when commercials are extremely short and speculators are extremely long.
That's when a good turn can happen.
And that's when I go the opposite to speculators and with the commercials.
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So, and that's how I trade.
I'm not a trend follower, I'm sort of a turn picker.
You know, a contrarian turn picker.
So I'm trying to be contrarian in mass positioning by speculators, which will in turn have the opposite mass positioning by commercials.
And it's not really a question of if it works all the time because it doesn't work all the time, as nothing works all the time.
But for me, what it gives is good risk reward, right?
If you have speculators massively long here, then clearly they're discounting in a lot of good news.
And should the market in fact start to turn the other way, then they all start getting stopped out, right?
And so the move can be large.
So it's just a question of risk reward.
You know, it only, like my trades only work over time.
It's been somewhere around 37 % of the time.
But my payout is, you know, over four to one.
So if I can make four, lose one, make four, you know, make four 37 % of the time and lose one, the other 63 % of the time.
Over time, that adds up to profitable piano.
I see, yeah. Would the commercials and the stock indices have more flexibility in switching from bearish to bullish stances?
Because unlike a commodity producer who depends on receiving enough revenues to cover their costs of production, a commercial player in stocks doesn't have the same limitation?
I think that could be true, which is why you see quite a quicker movement, I think, in the stock index, CLT data a lot, than you do in commodities.
And I had never thought of it in the way that you just said that, but that could be a good explanation for why that is.
I see. Does this affect the power of going opposite of them?
So say a commercial in the commodity sector, since they are almost always short, if they switch to being neutral or net long, is that more something that you take notice of than say, if a commercial in the stocks switches from bearish to bullish?
I wouldn't say it's something, I definitely take notice in the commodities when, yeah, commercials get long, and it's a pretty loud message, right?
But the stock indices, I just, you know, I take all this data with the CLT, and I, you have to index it to itself, right?
Because if you're waiting for speculator, or commercials that say it gets super long gold before you buy it, you're never gonna buy gold, because they're never getting super long gold, right?
It has to be relative to where they've been in history kind of thing, right?
How often do you see the commercials and the commodities get neutral or even net long?
Well, it depends what commodities, but like things like the metals, it's very rare to see that.
It's a once in a few year thing.
I mean, right now we have a situation where the commercials are actually getting that long silver for the first time in quite a while.
But it happens, we had a situation in palladium where commercials almost never get long, and they got long a few months ago, I think it was about five, six months ago, and it was right before a pretty massive move in palladium.
So - Oh, wow. Definitely worth paying attention to, yes.
Generally, do the commercials and large speculators use similar levels of leverage?
Is either group less likely of getting liquidated?
I mean, I don't know the answer to that.
I would guess that the commercials, given that they have physical behind it, are less likely to be liquidated than speculators are.
Speculators are, you know, if things start going against them, you know what I mean?
They have stopped loss levels, they have, whatever they do, moving averages start getting hit and they start liquidating, right?
Right. Because commercials don't really have to do that.
Right. Last week I was looking at the COT report for the S &P 500, and I noticed an unusually large difference between the large speculators and the commercials.
And this difference was greater now than it was at the March 2020 lows.
Now that the commercials are heavily long and the large speculators are heavily short, I mean, what's going on with that?
Why do you think they would be at such extreme opposite ends?
Because we could consider both of them as a very knowledgeable group.
So what are they looking at to cause them to be totally opposite of each other?
I mean, I think why speculators are largely short, the S &P 500 here is, you know, they're bearish.
I mean, the world is semi falling apart, right?
There's everything in the world to be bearish about, theoretically in the stock market.
You're not gonna find a lot of people that are making fundamental bullish arguments here, right?
Right. So therefore they're short and if they're short, well, then the commercials are long because that's the opposite side.
But important to note that that is not the case for things like the Dow positioning.
It's also not the case for things like the NASDAQ positioning.
In fact, two weeks ago, the speculators had one of their largest long positioning in NASDAQ that they've had in quite a while, right?
Uh -huh. Right before this market started to go down, of course.
So, you know, looking at the S &P in and of itself can be a little bit dangerous.
You know, you need to look at sort of all the indices across to really see if there's a bias there.
If you had to guess, why do you think the speculators would be short S &P and long NASDAQ?
It's a trade that's worked for, you know, it's probably been the trade of the century.
Uh -huh. Long tech, you know, long US tech and, you know, versus anything has worked, right?
And if you're gonna be long, I guess, then that's what people think they wanna be long, you know?
I mean, the market started to squeeze up from the June lows.
And in the June lows, you had speculators short all of these indices, right?
Uh -huh. And then as we started to squeeze and they had to buy things, what they were buying was a NASDAQ.
You know, that's where the beta is.
Right. It's theoretically where the growth is.
And that's been the trade of the century.
So that's where they go, I guess.
Right, right. What's your viewpoint on looking at or following stock analysts?
Are they a good contrarian indicator?
Like say, if they upgrade stocks from, you know, buy to strong buy and raise a price target, what do you think about following them or do you?
I think it's garbage.
I wouldn't follow stock analysts.
You know what I mean?
I wouldn't follow anybody.
Certainly the stock analysts, I've had friends that have worked as stock analysts and you know, there's so many reasons why a stock analyst upgrades a stock or downgrades.
I still don't know about downgrade because they never downgrade.
But there's so many reasons why they upgrade a stock, some of it which might quite frankly have to do with their investment banking relationships with that company and all that kind of stuff.
You know, I think it's, I think it's just the whole thing is a scam.
Do you look at short interest levels, put call ratios, the VIX index?
I do look at put call ratios, yes.
Look at short interest because I don't trade individual stocks, right?
And also I think short interest has them.
I'm not exactly sure how often they report that, but I think it's got like a one month lag time or something like that.
If I'm not mistaken, which I could be, but I don't really look at it because I don't trade individual stocks, but put call ratios I definitely look at in particular on the indices.
Have you lived the AAII investor sentiment survey?
I have, yep, I look at that every week when it comes out.
I look at all these kinds of survey type of things.
Surveys can be good, but the truth is it's not money at stake.
You know, it's just a survey.
Hey, are you bullish or bearish?
Well, it doesn't mean very much, right?
I'm bearish. Well, are you short?
Was the real question, right?
Or I'm bullish. Okay, you might be bullish, but are you long, right?
That's the real question.
And that's what's so good about the COT is it's real money, right?
It shows what money is actually doing rather than what money is talking about doing.
Well, what about a lot of investors look at price earnings ratios and prices sales ratios, price to book and things like that as an indicator that stocks may be getting frothy or maybe undervalued?
What are your thoughts about using such indicators?
I think that when the market hits the top, those indicators are gonna say that the market was overvalued.
But it will probably say that they were overvalued for two years before that too, right?
I mean, they say that they're looking at price to book and price to sales and price to earnings as an indicator.
Well, where the hell were they a year and a half ago when all these stocks were trading at 200 times sales, right?
Were they all shorter?
Because they certainly should have been.
And the point is you should have been short at 50 times sales and then it went to 200 times sales.
So if you're short at 50 times sales and once you go to 200 times sales, you got run over, right?
But do they work over long?
You talk to like Jeremy Grantham, guys like that, they'll work but Jeremy Grantham doesn't care.
He'll get out at 50 times sales, he'll watch you go to 200 times sales and then he'll watch you go from 200 times sales back down to five times sales, right?
And he'll have gotten out at 50 as he should have, right?
Right. That's not trading, that's investing, right?
So I think from an investor point of view, over time that will work.
But it's just like anything else, you have to have the discipline to be able to get out at 50 times sales and watch you go to 200 times sales and say, I'm not going to chase this here.
It's dumb, right? So I think those are great tools for investing.
And I use them sometimes when I make analysis and I write a newsletter.
So like sometimes in my newsletter, I will mention stuff like that.
Like, I'll get re bullish the stock market when Apple's back at three times sales, which is where it spent 20 years.
And then suddenly it went from three times sales to whatever, 10 or 20 times sales.
And now I think it's on its way back to three.
I think they're good sort of measurements for things like that, but I personally don't use them to trade necessarily.
I see. So I like to jump into the timing of when you put on the trade.
What's kind of a trigger for you or what are some triggers too?
I mean, you've identified certain stocks or commodities as being extremely overbought, very high levels of participation, long or short.
What do you look for of when to put on a trade?
So it's a good question cause it's more as important, if not more important than the whole crowdedness of the trade, but I'm looking for a market confirmation before I'll put on a trade.
To me, it's not like, okay, let's say I'm trading off of CO2.
Okay, this market is showing that the speculators are massively short and the commercials are massively long.
I want to get long.
I'm not gonna just get long because of that, right?
I'm gonna wait for the market to confirm this.
And I think that no matter how anybody trades and no matter what their process is, they should always look for market confirmation before they do something.
And this goes back to my experience in Thailand where I was shorting the U .S stock market.
I was just shorting it.
Market was up, I'd short it.
Okay, it would close on highs, I'd get stopped out.
Next day, I'd short it again, right?
I think it's so important to be patient for the market to confirm your viewpoint before you do anything.
So for me to confirm my viewpoint based on how I trade and based on what my method is, I am looking for what I like to call a news failure event.
And what that means is let's say whatever market I'm looking at is showing some kind of huge bias that speculators are hugely short.
So I'm looking to get long.
Well, at that point I'm kind of monitoring the market very closely as to what people are thinking, why the market's going down, what they are thinking about, right?
That's driving it down.
What kind of news flow is bullish and what kind of news flow is bearish?
So if I'm looking to get long, I'm looking for some kind of bearish news to come out and then the market cannot go down on that news.
And so the market's rejecting that news and that's where I'll get long, because at that point it's telling me that all that is discounted in.
The market just got the exact bearish news or even more bearish news than they were looking for and the market didn't go down on it.
And why is that? Well, to me it's because everybody's already short, which is how the whole idea started to begin with, right?
But now the market action and the market tone is confirming that thought process.
So that's how I enter a trade.
Given how much news is flooding into the markets every week, how do you differentiate between low and high importance news releases?
And does the relative importance change much over time?
It definitely changes over time.
How do I gauge it? It's kind of, again, listening to the commentators and what they're all focusing on and what they're all talking about.
And when they're all agreeing like, this whole inflation thing right now is an example, right?
Is like the big thing, right?
So let's say for whatever reason, which I'm not, but let's say I was looking to get long stocks here, right?
My data is showing me everybody's too short.
I'm looking to get long.
Well, the CPI data is gonna come out next week.
And if we had some kind of usually strong CPI number that was much higher than expectations, therefore being very inflationary, and then the stock market didn't go down on that, that's when I would be looking to buy.
So like, it's just a question of listening.
And with commodities, it's usually pretty the same thing.
It's all the supply and demand numbers that come out.
You know what I mean?
Although not necessarily because with the Ukraine war, all of a sudden that started to affect a lot of the grain markets.
And obviously a lot of the energy markets are being affected by that.
So it's just a question of paying attention to, you know, what's really theoretically moving these markets and therefore how is it reacting to as these new events come out?
So what you consider to be very important news items.
Do they get released frequently like every week or are they once a quarter, once a month, that kind of thing?
Yeah, it depends on the market.
I mean, it seems like in the financial markets, you know, there's stuff released obviously all day, right?
So that all affects stocks, bonds, currencies, you know.
For the commodities, it tends to be more sort of monthly.
You know, I know for the grains, I like to watch the WASDE report very much and that's a monthly report, you know.
The energies have a weekly report, right?
The weekly supply and demand report.
So that's more weekly and for the soft commodities, the grains tend to be more like once a month type of things.
Although like I say, that changes over time too because you start having things like, you know, wars and shipping lines, you know, being blocked and all that.
So that can be obviously, to me, when I'm looking at these news things, it has to be super obvious, right?
I don't want to be my interpretation because that leads you to make trades just because you want to make them, right?
And that's what I'm trying to avoid, right?
So I'm looking for the news event to be headline news obvious so that my interpretation really doesn't have to be very much.
I've heard you mentioned in other interviews of having the importance of having uncorrelated plays.
Can you give us an example of an uncorrelated play that you put on?
So for me, you know, my portfolio gets built as I get individual trades, right?
So whatever, I got long stocks, I got short, British pound, I got whatever.
And each trade gets, this is all about, you know, risk control, you know, risk and risk management.
So each individual trade has its own risk management, right?
But then as I have a portfolio of trades on, if the trades are highly correlated, then it's really not one trade, right?
So you have to watch your risk management on that.
So I'm measuring the correlation between my trades.
And if these two trades have a correlation of one, well then to me, it's the same trade.
So I'm going to cut the risk on each one of them because what's the point of having the same trade on twice if you're measuring your risk, right?
So that's really the importance of correlation to me.
So when you put on a trade, typically how often do you find, or how many times do you typically get stopped out before catching a significant move in your favor?
It varies. Sometimes I get it right on the spot first time.
And sometimes, I mean, truthfully sometimes I never get it.
But the good thing about waiting for the news failure thing and the confirmation is that like, it's not like I'm going to be buying it today, I get stopped.
Okay, the next day I'm going to be buying it again, I get stopped next.
You know, for this news failure event to happen, that's not going to happen every day, right?
But there's plenty of times where I'll trade the thing three times or four times, get stopped four times and then either my data goes away and it's no longer crowded or I'm not getting any more news failure or whatever.
And therefore it's kind of gone.
So I guess it varies truthfully.
So for example, say if you are looking to get long, the commodity say oil, for example, do you ever take a look at the oil stocks as maybe another way or oil indices to go long, say the oil sector when it's extremely undervalued relative to the commodity on a historical basis or the flip side if you're
looking to go short oil and you notice that the oil companies are extremely out of whack historically compared to the underlying crude oil prices.
Do you ever trade the stocks at all or the ETFs?
If I did, I would hate that particular idea.
Oh, okay. Tell us why.
It's so easily observable, right?
That how can there possibly be an edge in there?
You know, I mean, who can't pull up the oil versus oil stock chart at any time, right?
And say, I mean, we've been hearing this forever.
The OIX has under reformed oil, right?
It's been underperforming oil for 15 years or something.
You know, and they've written up a number, but I mean, that's never helped you, right?
It's so obvious and it's so easily observable by everybody that to me, and it almost goes against all good sort of trading ideas, which is things are lagging.
Buy the laggards, sell the leaders.
Really, you're supposed to be buying the leaders and selling the laggards.
So you're going to sit there and buy the OIX or whatever it is, because it's lagging oil.
I don't think that's a very good idea at all, personally.
It goes against every trading rule that I know.
It doesn't say it can't work sometimes.
Everything can work sometimes, right?
But it goes against every trading rule that I know.
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So what indicators do you use to exit your positions?
So because I'm entering when things are showing speculators super crowded, I am therefore exiting when speculators are no longer crowded.
My whole process, and this is what developing a process is, and developing an edge is, okay, once you have that process or that edge, it all has to align and make sense with each other.
So I'm getting in because everyone's short.
I'm getting out because everyone is no longer short.
I see. So are you looking for a more mean reversion to a typical average, or do you ever hold onto your positions for the long term where the exact opposite would occur, where they go from excessively bullish to excessively bearish, for example?
Yeah, that's a good question.
No, it's mean reversion.
It's not mean reversion of price.
It's mean reversion of participation, right?
But what I have found is I would probably make more money over time if I buy it, let's say, when they're excessively short and I hold it all the way until they're excessively long, right?
But once it kind of gets past the midpoint there, where they're neutral now, the volatility of the portfolio goes up a lot more than the excess return.
So I get out at the neutral point.
It's also a question of I have a business and I have a job, and that business and job, I offer a product to my investors, which is to catch those market turns and therefore have this negative correlation to other people, right?
Once the thing gets past the neutral point, that's the trend followers getting on board the trade, essentially, right?
And that's their job.
My job was to catch that turn, right?
The first X percent move of that turn, right?
Once they're getting on board, that's their job and I'm out, right?
So I've kind of done my job as far as my product goes.
And plus the fact that the volatility ends up going up a lot more from that point, I also don't like personally.
I see. Is there, what typical timeframe do you typically see from a reversion back to the mean and sentiment and participation?
You know, it's typically two to four months.
I'm just trying to look, but yeah, like we were getting along the S &Ps back in June and we were getting out, you know, in August.
So that was a two month one.
So it's typically two to four months.
Although I have had trades last three weeks and I've had trades, you know, this is winning trades, losing trades happen very quickly.
I get stopped out, but, and I actually had a winning trade last almost two years, a few years back.
So, but typically two to four months.
Okay. In the book, Unknown Market Wizards, you shared that you managed to fund in New York and that you did really well, making money every year where you used a counter trend approach.
Can you describe what a counter trend approach is?
Well, this is exactly what we've been talking about, you know, and I don't really think that it's counter trend, although it can sometimes be that because trend is more of a price thing, by definition, a trend is price, right?
I'm counter participation, right?
So I'm counter when they're all short, I'm long, when they're all long, I'm short.
Now, it's no coincidence that a lot of times when everybody's short is when it's trending down and when everybody's long is when it's trending up, right?
That's not always the case, but it very often is.
So you can call that counter trend, but yeah, that's what I do.
That's what I still do and that's what I've been doing for 20 years.
Also, you mentioned in that interview with Jack Schwager that you were running a CTA fund and that you weren't particularly enjoying what you were doing and that you were 100 % systematized.
And you mentioned that you were bothered by return degradation.
Can you describe what return degradation is and the reasons for it?
Is this common when using program trading?
So yeah, I mean, it was just that I started, I left the hedge fund, I started my own CTA and I had big dreams and big stars in my eyes and I had a lot of employees and a lot of costs and therefore had to raise a lot of money.
And part of the marketing game was a large portion of the allocators were allocating to systematic strategies.
So we ran our strategy as a systematic strategy using all of these ideas that I use, using the data that I already use, using all these things, right?
So therefore we could raise more money and create more revenue to cover what I had as big costs.
And what it turned out to do was our returns were worse than the returns that I had produced before and since.
So that's what return degradation is.
I use the same system that I used for that, I still use, but I use discretion on top of it, right?
So sometimes my system will say buy something and I won't buy it or same thing on the sale, I won't make any trades now that my system doesn't say make, but there are trades that I won't make that my system does say make.
And that's because I have learned partially through that process of when we were fully systemized, I've learned where the weaknesses are in the system, over time, and I can recognize them that this is the weakness in the system.
So therefore I can sort of ignore those trades.
And what percentage of the time do you override the recommendation of your system and not take the trade?
It varies across time, but I would say 20 to 25%.
I see, so are you currently managing other people's money or just your own?
No, I currently manage a CTA.
Yeah, I have four, one, two, three, four, five institutional accounts.
I work as a one man operation, and I offer this non -correlated return stream to my clients and that's really it.
I'm not really, I'm not raising any money, I'm not accepting new clients or anything like that.
I'm in a place where I'm happy to do what I'm doing now and we're doing it.
I did start after Market Wizards came out, I was getting a lot of requests from people on LinkedIn and on Facebook, if I could help them learn how to trade and all that, somehow some people like the contrarian approach, like some of the things I was saying, were asking me if I could help them learn,
and I think that that's an important thing to do, especially when you reach my age, you kind of want to help people, but I was getting so many of these requests that I can't sit here and teach 250 people at the same time because I have a job and I have a business and I have a family and I have a lot
of things that I'm doing.
So, we did start this webpage, it was one of the people who came to me and I said to him, I don't really have the time, and he started the webpage where we then go and I distribute this newsletter that I write and we have a Discord chat where everybody kind of gets on there and talks about markets all
day and talks about, it turned into something I didn't know it was going to turn into originally, I just thought it was going to be a way to distribute this newsletter and maybe answer some questions for people, but it's turned into this whole community of people and it's interesting, I've learned just
as much from them as I think that they've learned from me, there's a whole bunch of different traders from all over the world talking on there about their ideas.
I focus on what I do, they focus on what they do and they all kind of talk and learn from each other and it's become an interesting thing.
So, in closing, is there any one or two pieces of advice you could give to traders when they're experiencing losses?
Kind of what would you say to them?
Be honest about it, right?
Realize and try and realize why they're happening so that you can learn from them.
I think that when you're losing money is the greatest time to educate yourself and the greatest time to get better because when you're making money, you're not going to try to get better because you figure you're already a genius, right?
And losing money is the wake -up call that can help you to really get to work and get better.
And I think if you're losing money, and I lose money all the time, unfortunately, but if you're losing money in a process that works over time, then the thing to do is just accept that as part of the process, you know?
If your account, I mean, I've been trading pretty much the same process for 20 years and my account was on new all -time highs very recently.
So, if I have a two -week period where I'm losing money, it's like, well, I don't think that that was the end of what I've been doing for 20 years.
I think it's still valid and this is just part of what goes on.
You're not going to make money every day, every week, every month, every quarter, you know?
It's just not realistic.
So, I would say those are the two things.
So, it sounds like having a process can help protect us from our own psychological demons.
I think that that is 100 % the entire thing, yes, of what this is all about.
You have to have a process to protect you from your own psychological demons.
All right. Well, Jason, it's great having you on the show.
Thank you very much for sharing about your history and your viewpoints and strategies.
How can our listeners get in contact with you?
So, yeah, we've got this crowdedmarketreport .com, which is, you know, like I was talking about, this newsletter and Discord chat service that we do.
There's also, I do some videos on YouTube, which I think it's also under crowdedmarketreport on YouTube, and talk to some people there as well.
So, those are the two places where people can get in touch with me.
Fantastic. Thank you very much, Jason.
All right, I appreciate your time.
Yeah. I appreciate you having me.
Great, great having you.
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