YouSaid · the spoken record

Michael Gayed

lines on the record: 54
first: 2021-10-24
most recent: 2021-10-24
sittings or episodes: 1
sources: podcast

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“Appreciate that. So on Twitter, I'm almost as active as my funds through Atlee Lag report. You can check out the funds at ATAC, ATAC just stands for ATAT, ATAC funds.com. And then for the premium research, it's lead lag report.com. Everything is basically just variations of the same concept. Kelly done the stock market. You have to not get killed. You have to also be in the environments where you could be killed, which is those down periods. And look, at the end of the day, all I'm trying to do is give voice to math. And the stuff that I presented out there, it's not magical. You can test it. You can see it's valid. Go beyond the small sample, think longer term, and realize the future, again, is unknowable.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“I am sure that certain indicators are parts of Simon's and others when they do their hyperactive trading. I am certainly not smart enough to have as many variables, but I also think I'm probably fairly anti-fragile from that standpoint because I'm only focusing on one or two that define the bulk of why markets do what they do.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Benchmark, right? It's not something that you can really compare against a passive vehicle or passive index might any means.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“This is the challenge. Because to your point, the turnover on all three funds, the ATAC Rotation Mutual Fund, Risk on, Risk Off, Roro ETF, the JoJo, Junk On Junk Off Bond ETF. The turnover on all the funds is expected to be well north of 1,000%. We're active. So I always laugh when people debate active versus passive because the overweight Apple by 50 basis points. It's like, dude, that's not active, right? That's not active share. And they're very active because the anomaly only lives in the short term. It goes back to markets are efficient. In longer term, it's in the short term where you can see the weather up to the horizon and you have to keep on slowing down. So because of that, you're right. It's very hard to benchmark because, how can you benchmark something that's that active? Unfortunately, most people will benchmark it against the S&P, which I love in years like last year, in the midst of the COVID crash, but it's not the right benchmark. And that's an important point. I think the way to think about this stuff is you compare it against other taxable strategies, other active, non-correlated, or low-correlated approaches, and you blend those, the competition, basically, and that's your.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Used to. I'm not a meme trader, I guess is the way to say it. If you want to beat the market, you have to choose the right market, which is really an argument for asset allocation. So you always go back to the proven studies. Brinson B. Baron Hood in the late 80s basically showed that asset allocation is the key to everything. It's not about the individual positions. It's about the average of the positions. And I tend to not want to try to reinvent the wheel, because I believe there's much more I can do to uncover and make progress. So because the studies are pretty uniform on that point, why should I do individual stocks? Now, by the way, I will say on that note, I do write about individual stocks. One of Seeking Alpha's writers, in addition to Lead Lagroport, which is much more ETF and SA allocation-oriented, I do that because the reality is a lot of people still like to talk stocks. I try to add some color, some interesting points about narratives. But as far as my own personal investment style, I would much rather be choosing the right average than choosing the individuals in the average.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“A lot of this really came from my having to survive coming out of a weight, right? So I was one of TradeStation's clients, users, and I learned easy language and tested everything imaginable. I read every single white paper I could imagine because I had to live my life and I had to look for a job. I didn't want to sit there in front of a screen and trade based on opinion. I wanted something that would automatically do it for me. So I was trying to find a way to do that throughout 2009 as the world is still shivering from the great financial crisis just so I could try to find a job anywhere I could, right? So it's almost out of necessity that made me seek out something that could be automated, that could be rules-based so that I could do other things. And it's interesting because that was that period when I realized.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Opinions on markets and gut feel. So it creates a lot more noise in volume, in asset growth, and all this stuff. So that's why I go back to what I said before. Sometimes less information is more because it means less likelihood of taking the wrong action because of noise as opposed to signal.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Those that look through their statements quarterly. If you were to guess who had the better longer term performance, who had better performance longer term, those that looked at their statements quarterly or those that looked at statements monthly. They're not seeing as much data points. They're not seeing as much noise and volatility, which causes them to take less risk because they get scared out of a position. Now, that's a good example of too much transparency can actually be harmful because people feel like they need to act on what's probably noise. The issue from my standpoint is Ro-Ro and Jojo has closed their holdings. They're risk-on-risk off positions every day. You know from our site at Techfonts.com what the holdings are. And it's all rules-based. I'm already seeing it from some people that are looking at those funds. They're looking at the position at a moment in time saying, I don't want to be exposed to risk on equities this week. I don't want to be exposed to risk-off treasuries this week, even though it's not about their opinion. It's about what the rules-based approach is saying. My point is that people end up panicking out because they think they know something more than something you can quantitatively test versus their own subjective.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Certainly for Roan Jojo, the risk on risk off ETF and the Bonfund Jojo. It's funny, I actually think that JoJo will probably be the most interesting over time for most people, I think, because nobody knows what to do with bonds. And if you can, if the two biggest risks for bonds are credit risk and duration, well, I'm rotating around credit risk and duration, which kind of makes it intriguing. But yes, you're correct. And Torosso, which is the parent company, and we're the ones behind not just the ATAC funds, but the blockchain ETF, BLOK is our funds. the risk parity ETF RPAR we help bring to market. We're very much in the space. But the ETF structure is certainly more ideal. Now, there is something that there's a caveat to that. In many ways, too much transparency can be very damaging to investor returns. Now, that sounds very strange for me to say. There was a study done in the early 90s that looked at 401k participants. Those that looked at their statements monthly.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Risk off. It's a different dynamic. It's almost the exact opposite if saying no, the short term dynamics favor some kind of risk, risk off, some kind of risk condition. I very much believe that markets are largely efficient longer term, but in the short term they are not. That's why all the papers basically for the most part look at shorter term timeframes and look back periods to determine the offense and defense. So while risk parity says you can't predict, so have exposure to everything, risk on, risk off says you can identify the weather to slow down entering the storm. They're actually very much complements to each other, but it's really because they take different timeframes into account. One's much longer term risperity, one is more tactical, short-term based on very visible anomalies that historically have persisted over time.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Say it depends on the time frame. I'm actually a big fan of the thinking mind Risperry because the argument is that you have exposure to something that will always do well no matter what cycle you're in. One of those four or five, depending on how you're defining risperity, quadrants will work and outpace everything else. And yeah, you're not going to be, you're going to be lagging that investment because you're blending it, of course, against other things which are not participating in the cycle. But you'll always have exposure to something that would work. And I would agree that diversification means having as much exposure to as many future different paths as possible. That's really what diversification is. And from that standpoint, I would argue risk parity certainly fits the bill better than 60-40 because stocks and bonds are very correlated. Now, that's a longer-term cycle argument. And the thing about identifying cycles is you often don't know if you're in a new cycle until two to three years after it's already changed. So the idea is you want to have exposure because you don't know exactly when the switch happens. Now, in my world, the sort of all-in risk on.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Work. And you don't need to have a catalyst. And this is the thing that always gets to me. People always want to find a reason for why something should go up or down. The reason is only determined after the fact. Narrative always follows price, period. So seven years of famine become seven years of feast because there's mean aversion in cycles. Now, if you think about the role of gold in a portfolio, where does that mean aversion argument kick in from a cycle perspective in terms of equities? You want correlation when you were towards the tail end of a bear market. You want as little correlation towards the tail end of a bull market. You don't want to be concentrated in beta.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Answer the question by saying that. So look, there are a lot of studies on mean reversion in markets. There's something known as the Morning Star Curse as an example, where if you were to look at the five-star rated funds for the last three years, they tend to be the one or two star rated star funds for the next three years. So mean aversion is always a thing that you can kind of count on when it comes to markets. The closest thing to a guarantee is mean aversion. Problem, of course, is that you have to know where the mean is. And the mean's always changing. That's a whole different discussion, right? But okay, so let's go with that. And by the way, I always used to make this joke on the road that mean reversion is a concept that's as old as the Bible. He who is first shall be last and last first is mean version. Okay, so he had basically a lost decade for gold. It's like you had a lost decade for stocks from 2000 to 2008 or 10, whatever, the period when it ended that. So my point is that the fact that gold has lagged for so long arguably may be the reason why it starts to”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Suspect that there's an element of the mind likes numbers that end in zero. I'm sure you can find some kind of psychology test that shows that with that leverage for the long run paper that looks at moving averages, the finding goes from, I think it was 10 days to, I think, 260 days if you did like a simulation and said, okay, let me do 11 day moving average, 12 day moving average. There's nothing magic about 10, 50, or 200. The phenomenon about volatility rising or falling based on whether you're above or rather below and above, respectively, the moving average, that's there no matter what. It just will happen at different times, but overall the finding remains the same. But yeah, no, I don't think there's anything magical about it. But, you know, it's funny, right? Because to the extent that things like 280 day are in the lexicon, it will impact price movement short term because algorithms will trade off. So again, I go back to you got to be aware of it because others may be coding things based on something that probably has no real causation behind it. But suddenly there's causation because now there's money actually flowing acting on it.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“If oil is rising, that means cost push inflationary pressure is increasing. Yield should be rising to reflect that. But it happens with a lag, oil blues first, then bonds react. That's sort of different than the more reactionary patterns that I think you tend to see in technophanalysis. I'm a fan of being aware of most things, but be skeptical of everything.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Exactly right, that's exactly right, and that's and from that standpoint, I think you have to be aware of some of these things, right? Because if a lot of people are starting to buy something because technically it looks oversold, well, it's probably going to start rallying because everyone else is seeing that it's oversold and they start buying, right? So exactly to your point, what one believes to be true is either true or becomes true. That great quote, I forget who's said it, but I think from that steppoint, awareness is needed. My approach is much more intermarket analysis, which is a branch of technical analysis along the lines of John Murphy, Martin Pring, and of course my father under this idea that certain parts of the marketplace will move first and then there will be a lag. Good example actually is as we're chatting here late September in 2021, a good example of that is what's happening with oil, nat gas, and treasury yields. Yields have been spiking the last several days, which makes sense because oil's been spiking. Why does that make sense? Oil's spiking affects bonds because oil is a form of driver of cost pushing inflation.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Our wishy washy types of pattern, it's hard to actually do that. Now, having said that, I do believe that a lot of people use tick analysis in a way that actually makes sick analysis valid because everyone else is following.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“I'm very much quantitative in my thinking, even though I put a lot of qualitative narrative in the lead lag report. But I think there's two schools to technical analysis, right? One is pattern recognition and triangles, pendants, and things like that. There's oscillators, and then there's more sort of quantitative testing. I think the problem, and I share some of the cynicism, it sounds like you have with the field, I think the problem with technical analysis is that if somebody tells you it's more art than science, run away. Because unless you can test it scientifically, which would be a back test, rules-based, you can't really have faith that any single drawing or pattern that you see on a chart means anything. And I think people under a few understand this. It's one of those things that really very few people, I think, really understand when it comes to investing. You want to empirically test what somebody says is valid has any merit from historical data. And my point is that with some of these more”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“A similar idea, right? So instead of utilities against the market, it goes juggler and says, well, this is about interest rates. Let's play with treasuries. And instead of looking at the yield curve.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Volatility, the weak Lehman Brothers, you're wiped out, false signal. The gates of Roro, Roro, the ETF, risk on, risk off, equities, treasures, used as lumber to gold, the index that Ro Road attempts to track was risk on end of February last year as the COVID crash is just starting. Your short fall, you're done in the water. That was a severe hit the moment things really started kind of shutting down. Again, it righted itself because it's a weekly approach. And then when treasuries and then recovered the lowest the index ever got on RoRo's index is like 20% as far as the drawdown. But again, my point is that no signal is infallible. Your opportunity sets really critical. There's no such thing as a sure bet. Short volatility is like playing with fire because if you're wrong, that can wipe you out. And that's sort of where I would caution people in terms of thinking about taking that as your response opportunity.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“In the water. The strategies fail miserably. Now, let's say your risk on a shortfall. Yes, your up capture is going to be a lot more because you have a lot more potential to make gains selling that premium essentially by shorting volatility. But again, when you have a false signal, meaning you risk on at the wrong time, well, now you're in a lot of trouble. Good example of that is both lumber to gold and utilities. The JoJo ETF goes junk on, junk off, high yield, bonds or treasuries. It used the utilities tricker. The utilities outperform the market, risk off goes treasuries, utilities underperform the market, risk on, high yield chunk debt. The week of Lehman Brothers, the index that JoJo tries to track is risk on, meaning it's in high yield. So it loses money as the world's a false signal. Now it's a weekly approach. It writes itself and then goes fully into treasuries towards the tail end of 2008 when you had QE1 and Treasury yield collapsed and the index ended up closing the year very positive. If you're short.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Opportunity always exists when the crowd thinks it knows an unknowable future. There's nothing as a sure bet. The clearest example of that happening in what they called Valmageddon in 2018 when these short volatility short VIX ETFs blew up because you had a massive spike. I think it was, it basically took out an entire product. The problem with the VIX ETFs and strategies, as you noted, is that they're designed to go to zero in some ways because when you're going long VIX, you're not going along spot VIX. You're going along the rolling over of the futures VIX contract, which constantly bleeds because the natural state of markets is to be low volatility until that moment hits when volatility spikes. But the problem is, again, you're wrong in losing money. Whereas, again, I go back to treasuries allow you to be wrong, but still make money. That's why it's very hard to, like if you were to take any of the signals from the papers and say, okay, instead of risk off being treasuries, let me make it go long Vix or make it go short the S&P.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“The SP. Everybody wants correlation on the upside, but they don't want it on the downside, but they don't know how to identify those periods. So what ends up happening is people take too much concentration risk, and this even goes back to your earlier point about everyone being all in. They end up over-allocating to the winners. Payout ends up being less because too many people are betting on that pot. And then strategies like mine suddenly come into the forefront because I get some risk off. And the risk off happens because nobody's really paying attention to the anomaly, which I can prove going back to the 20s exists. It's a fascinating industry because when you know your strategy, you know your signal, you have the data, all that is basically meaningless if you're in the small sample and if end investors are simply too impatient to diversify into things which are not working because the environment doesn't favor it for a moment.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“It is down. Why is that? Because you're in a pure risk gone world that's just the SP. And this is also an important thing to keep in mind. Every strategy has an Achilles heel. Every asset class has an Achilles heel. I'm very upfront. In the case of the mutual fund and really anything that's risk on, risk off, the Achilles heel is very simple. If you don't have risk off, you lag because you keep playing defense. You keep slowing down entering the storm when the signals tell you to play defense and you're wrong. The one time again that you're right, you're really, really right. But you need to have some of those chunctures. So, and it's funny, right? Because I always use this point on Twitter. It's like in years like this year, 2021, where it's just about the S&P and the S&P is the only game in town. People naturally compare you against the S&P. Bisors have clients that compare their portfolios to the S&P. Home bias, it's what's being shown to them every single day in the financial media. But I'm pretty sure diversification means more than the S&P, 500, let alone the five stocks that are driving.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Treasuries are basically like an inverse SP. It's like a short position without the risks of shorting. March 31st, pretty much a week after the low, the signal flips to risk on. Treasuries start weakening. The fund, after having made gains in Treasuries in the midst of everything collapsing, then rotates risk on, all in large caps, then all in small caps, it has this additional relative momentum component. And it closed the year up 72% because of that. It's not because it was in Tesla or Bitcoin or anything like that. It's because it did what it was supposed to do. Now, this is, again, the key point of this. If you have a risk on risk-off approach, you need some risk off. You need some of those periods where the market does go down. It doesn't have to be as extreme as COVID, but you need some of those periods to thrive on by getting that Treasury trade right. You need markets to actually break. Contrast that to this year. This year, as we speak, the mutual fund is down something like 9-10%. Now, on one hand, it's kind of like Crimea River. I mean, it's up 72% last year. It's slightly down, not slightly. It's down 9-10%. I'm not going to say it's”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Kind of goes back to the opportunity set discussion again ideally, you want to have an opportunity set that allows you to be wrong and make money, but when you're right, allows you to have a degree of convexity, meaning you get some sort of extreme move relative to equities when everything's breaking down. Long duration treasuries typically give you some degree of convexity and again the potential to be wrong in any single signal, but still make money. So utilities were outperforming really mid-January last year. The risk-off signal was there way before anybody was that worried about COVID and the markets were still hitting new highs. So the mutual fund went all in treasuries, long duration, and stayed there because it's evaluating the relationship every rolling week on a rolling basis, utility stayed strong. So it stayed in treasuries in advance of the COVID crash. And that's sort of the key thing in my world. It's meant to be anticipatory, not reactionary. So it's in treasuries, the world's ending, at least for a moment in time. Treasury yields collapse, flight to safety.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Going to do that, obviously, but you can add the margin, you can de risk, meaning either take less leverage or maybe tactically play some options overlay to actually cut off some tail risk, or you could do something as simple as just overweight your bonds. To the extent that most investors have an allocation like a 60-40 stock bond mix and if utilities are outperforming the broader stock market, maybe you want to go from 60, 40 stock bonds to 50-50. Go to where your stock, you're weighed your bonds. And you'd be surprised because At the margin you can still generate some outperformance that way by just tactically taking on less risk at the right time. You don't have to go all in. In my case, I go all in because the approach is really designed to be ultra aggressive on the anomalies. But for most people's individual portfolios, it can be a guidepost for where to overweight and underweight.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“The VIX, as you know, tends to be much more reactionary to volatility. It is volatility. Utilities think of the VIX as like the mile mark you crash your car. Utilities are the rate to that extent. And a very simple way of tracking it is you can just use ETFs like the utilities ETF XLU relative to the S&P. If utilities are outperforming over a very short-term basis, up more, down less, it's relative, that would be your sort of warning sign to play defense or to be careful, at least de-risk a little bit, be mindful of that. Recognizing, again, it could be a false signal. Now, in my world, the way that I run my ATAC funds, whether it's the mutual fund or the RORO ETF or the JoJo bond ETF, my approach is to be all in. Meaning when I go offense or defense, when I go risk on or risk off based on these signals, it's a full-on switch between the offense, equities, or junk debt. Case of Roro or JoJo respectively, or all in treasuries as the expression of risk off.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Because it's sunny doesn't mean you won't. There's nothing that's foolproof. So you have to play these probabilities based on indicators like utilities, play defense, recognizing that you could be wrong both ways, risk on or risk off, but more often than not, the odds would favor you can get it right when you most need to be right. The interesting thing about utilities as a sector, going back to the 20s, is that's a fairly remarkable and consistent phenomenon, meaning independent legislative events that affected the utility sector, independent of decade. You tend to see that dynamic where if utilities are outperforming in the short term with a lag stock market volatility on average rises afterwards, which means to me at least there's a degree of conviction that that's an anomaly that will probably persist because it's already lasted for so many decades.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“So that's one the 2014 Dow award, and that was sort of the one that started it all. And it has the longest history. It goes back to the 1920s. So again, utilities outperformed the stock market. Generally, stock market volatility tends to rise. One of the stats in that paper shows that in the top 1% of VIC spikes, those real collapses in equities. Historically, utilities are already leading 75% of the time before that top 1% VIC spike takes place. It warns you in advance of the conditions. Now, by the way, that doesn't mean that every time utilities lead, you have an extreme VIC spike. It's that when you have an extreme VIC spike, utilities tend to already be leading. And we should revisit that because that's actually an important distinction. Now, 75% of the time is pretty good. But of course, that means 25% of the time it misses it. And I always use that line on Twitter at the Lag report. No signal is infallible in the small sample. Just because it's raining doesn't mean you'll crash.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“What's fascinating is that it pretty much is true across almost every single major asset class, meaning SP, DAO, individual stocks, high yield bonds, corporate credit, that you end up having these sort of underreaction, streakiness when you're above moving average, more consecutive updays, whereas when you're below, you have more volatility, more seesaw, more extremes. Doesn't matter whether it's equities or bonds or commodities as well, you see the same type of volatility change, irrespective of what asset class, what benchmark”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Risk on exposure. Gold outperforms lumber, you want risk off exposure. Treasuries allow you to be risk off and make money, even if you're wrong. The other dynamic is generally when lumber to gold is weak, small caps underperform large caps, which, by the way, has happened. Now, what's the thinking there? Well, lumber is a plan, again, domestic consumer strength, wealth effect, housing. Small caps are more sensitive to the domestic economy. Large caps are more multinational. It would stand to reason that if lumber is doing well, that you would want more sensitivity to the U.S. economy, which is what small caps afford you. Otherwise, you want more safety from the diversification of large cap multinational revenue streams. Another example of how it works, even though you can say with hindsight, the signal is wrong in terms of being risk-off. Small caps have done nothing since February, right? So again, I go back to there's a lot of nuances with any strategy. It's more than just on or off market going up or market going down or even volatility going up and volatility going down. It's also about the interaction of different.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“When lumber is outperforming gold, your risk gone, you're above moving average. Again, I go back to just kind of writing the same concept in different ways. Lumber surge this year, why disruptions, sawmills, all this stuff, and then collapse. Treasure yields kept dropping since mid-March. The signal was actually kind of right because it was signaling that there was sort of risk of risk off, of high volatility. It was a false signal, at least so far with hindsight, but you still made money in treasuries while being wrong in the signal. That's another thing which I think is important anybody that looks at the research I've put out there. People get obsessed with a single indicator and they get obsessed with saying your indicator was wrong. I don't care about the indicator being wrong. I care about being wrong and making money, which means that it's more than just evaluation of a signal. It's also about the opportunity set with which you're executing on your signal. So, for example, lumber outperforms gold.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Because housing is the biggest driver of wealth, and the average home has about 16,000 bored feet of lumber. So housing is the biggest driver and most important aspect of the wealth effect. Housing is what most people's, again, wealth is in. So lumber is a key component of that. And as lumber performs because of the long tail of construction, as lumber performs, it tells you a lot about risk. It tells you a lot about credit creation, inflation, growth expectation, so on and so forth. Now, why compare it against gold? Because historically, gold in many ways similar to treasuries tends to be a risk off play, meaning that when you have high volatility in the stock market, at least for a moment in time, gold tends to do fairly well during a flight to safety moment. So you compare the most cyclical commodity, lumber, to the most nonsical commodity gold, and it tells you a lot about volatility, same dynamic like moving averages. And it's interesting because usually when lumber is weak relative to gold, you're below a 50-day or 200-day moving average.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, it's always been the paper that got the most attention, certainly this year in 2021, because lumber spiked and then subsequently collapsed. It's funny because I get people that would poke holes at us saying, oh, it's some random relationship. And these people, meanwhile, are saying that from their home, which has about 16,000 boards.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“You're in low volatility when you're above a moving average, de lever when you're below moving average. And what you find is that that's really the only way to properly time leverage for the long run. In other words, that's the only way to really not suffer severe drawdowns because severe drawdowns happen with severe volatility. Severe volatility has to happen when you're below moving average. That's sort of the key finding. A lot of people are surprised by that paper because it's actually arguing more for risk management than taking on more risk. The magic comes from the deleveraging, not from the releveraging. That's the key part of that.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Leverage, well, then the question becomes well, how do you identify volatility? So, what that paper does is it goes to everybody's favorite indicator, the moving average. Now, a lot of people, I think, when you hear in the media, oh, stocks are above moving average, they're trending higher because they're above their 50-day, their 200 day moving average, they completely get it wrong as far as what a moving average really does. Moving averages don't tell you about trend. Moving averages tell you only about volatility. If they told you about trend, a simple 200-day moving average crossover would beat buy and hold. It doesn't. I can show that quantitatively. Any number of markets, any number of indicators because they're false signals. So the uniform finding in that paper is that when you're above a 20 moving average, whether it's stocks, bonds, commodities, or below, and even smaller time periods, 50-day, 10 day, volatility is lower when you're above a moving average. Volatility is higher when you're below a moving average. So, okay, then let's use that as your trigger. Lever up.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“A lot of behavioral biases towards leverage, certainly towards bottoms. And it is factually true that pretty much every single major extreme in the economy and markets has one thing and one thing only in common, which is leverage. I can even take it back further and say that every single revolution in society has been driven by leverage and the wealth gap that causes, that enables widening of the wealth gap. Now, the key finding in that paper is, okay, so you don't want to leverage obviously when things are falling apart because you have a massive drawdown. And the enemy of leverage is volatility. So the more volatile, the more swings are for the stock market, the more leverage hurts you because you're basically levering at the exact wrong time. You're going two or three X the market when it's down 2% and then you're actually levering up more after you've had a gain when it could then go back down. And that's where volatility kind of hits you. It's called the constant leverage track. So if you go with me that volatility is the enemy of”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Causes a false sense of confidence in, again, the The thing that I often see is a lot of people have these wildly complicated strategies that have 10, 15, 20 variables that they can show is a perfect predictor of the future. The problem with complex strategies, going back to the sort of anti-fragile way of thinking about things from Nazi Talib, the more complexity there is, the more fragility there is. Because every single variable in any equation that's meant to model out the future has an error attached to it. That means every single error from every single variable then has a correlation to another error and another variable. And that's how you get these butterflies effects. And that's why a lot of these hedge funds that were sort of legendary having these very complex models end up blowing up continued time and time again. I'm much more of the opinion that if you're going to invest and trade, focus on one or two things that might explain 60 to 70 percent of why markets do what they do and accept the truth. The truth that the rest is probably randomness and noise than try to overoptimize. And that's the sort of section.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Number one, turn off the TV. Turn off the financial media. Listen more to podcasts like this. And I'll tell you why I say that. Listen, I've done the rounds. There was a stage in my life I was on CNBC in Bloomberg every other day and doing the punitry nonsense because I'm trying to grow my book of business. I'm trying to build a name. But the reality is 99% of what people say on TV. And I'm not saying that as a slight to CNBC or Bloomberg, but the reality is a lot of these talking heads, they say things without actually having empirically tested if what they're saying has merit. And the problem, of course, is that as human beings, we have this natural desire to reach out to the soothsayer on the hill. The person who confidently says, this is what's going to happen. This is abide. This is a sell. But unless you can actually empirically show that it works and contest it and you can program it, it's all hot air. It's all nonsense. And it gets you more into trouble because it causes over trading and it”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“I have to keep on playing defense, and that is very hard mentally for most people to do because everybody wants to tell their neighbors, look at this hot cryptocurrency that I bought and made 10x on. Look at these Tesla calls that I bought. It might work for now, but that's not really a longer-term strategy.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“At the right time, they always want to be up more than the stock market and view that as the way to beat the market. But again, it's very hard to beat the stock market when it's going up and to the right. It's very easy to do so when you have a systematic approach that allows you to play defense, hopefully more correctly than not. The key part of that, of course, is that you cannot have a strategy or a signal that possibly allows you to be up substantially and down substantially, down less substantially by equal magnitude. In other words, If you're going to play for downside protection, you have to give up a probably decent chunk of the upside because you're going to be wrong in playing defense. And I think that's something that a lot of people in the Twitterverse seem to forget if your approach is to be risk on risk off and you need some risk off, you're going to keep slowing down entering a storm's never having an accident, always being late to your destination, your up capture less than 100%. But the one time it works, it really kind of saves your life, but you don't know when that time is, so you have to keep on slowing down.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“This stuff sounds good in terms of conversation, but in reality, I don't think you can really create a strategy around any of that. It's funny, right? Because there are these two stats, up capture, down capture. So what percentage of the upside is your strategies, your portfolio capturing when the S&P 500, for example, is positive versus when it's negative. And if you were to look at the S&P over the last 15, 20 years and say, okay, I'm only going to capture 50% of the upside and capture 50% of the downside, meaning half both ways. SME is up 10, you're up five, SP is down 10, you're down five. You destroy buy and hold performance, even though you're underperforming on positive periods. Why? Because of the math of the downside being so brutal. I mean, we all know the classic example, right? You're down 50%. You have to double to break even. But you don't need to be down 50%, even 10 and 15% if you can cut off some of those large declines. You have more capital to compound off of. And people underestimate the power of mitigating risk.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Automatically exposed to the area which everyone is most exposed to putting a portion of their paycheck every day. It's not because they themselves are doing the buys manually. You see what I'm saying? So I think there's a nuance in that sort of line of thinking. I would agree that the sensitivity towards decline and the way that the VIX spikes on very minor declines shows there is a degree of nervousness, which you can argue is the wall of worry that markets need to climb. But again, I go back to which markets. If it's the S&P, that's a different story in small caps emerging markets, Europe. There's a lot of nuances in that discussion. And the final thing I'll say to that is a lot of these maxims are very hard to actually test. It's very hard to actually quantifiably say this is the moment where everybody is all in on equities. You can point to sentiment, but the reality is even that's, and I've done tests on that, even that's a little suspect in terms of the reliability there.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“That relevant. Now, having said that, it's also nuanced in terms of thinking about people buying at the top as far as when the top actually occurs. Here, sitting in 2021, the reality is ever since February, most stocks have gone nowhere. So when the S&P goes down 5%, it feels much worse for everybody else because most people are not their individual stock positions may not necessarily have the S&P. They have smaller cap stocks, which have gone nowhere. emerging markets have gone nowhere. So the pain is a little bit more accentuated because they've gone sideways for a long time. The other part of this is that keep in mind, I think the dynamics are also very curious, right? Because I saw some stats something like 40% of fund flows automatically go to S&P links vehicles, 41K automatic investing, things like that. So people are taking, I would argue, undue bullish risk automatically, not even realizing how much concentration risk everybody else has in those areas. So they get nervous because”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“It's a very good discussion point. So I know I'm biased. Everyone is biased. By the way, there's a lot of studies on behavioral finance that show that just because you're aware of a bias doesn't mean you can prevent it. My bias is I always want to see risk off. I want to see some volatility. I say that selfishly because, and I've proven this in these different papers that will I'm sure talk about alpha comes not from being up more, comes from being down less. If you really want to outperform, it's not about taking on more risk. It's about taking on the right risk at the right time, which is after a risk off. And that's why it's so hard to beat the market on the upside unless you use leverage. You can outperform the market over long periods if you can cut off the tails, the extreme declines, or at least, and you can do that by identifying conditions that favor it. And that's how I stand out. The mutual fund I run, the ATAC rotation fund last year was up 72%. Not because I did anything magical, but because I had a risk off moment. And the signal is used in that fund did what they historically do. They get ahead.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“And again, given the sheer amount of debt there is in the system, the thing I'm most confident on, the thing that I'm most bullish on, is more downside surprises”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“Point in a trend. It's the path with which you get there, the sequence of returns. And that's kind of the joke about buy and hold, right? Because you can be optimistic about the future. I would argue that the reason buying hold works is largely because very few people actually hold because the sequence of returns prevents them from holding because their emotions get the better of them. So kind of like on a job interview, if somebody says to you, you know, what's your five-year plan? Deep down, you want to say, listen, I'm only trying to get past the next week. No one really knows very long term, but I do think from a contrarian perspective, it's not so much about the direction of stocks longer term. But again, that sequence of returns, greenspan was very prescient when he published his book, The Age of Turbulence, because every age of turbulence needs an age of moderation before it every period of high volatility needs a period of conviction of low volatility being extrapolated out into the future because of the most recent past.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“I'm a big fan of Nasim Talib's work, Black Swan, Antifragile. And I very much take his viewpoint on predicting the future, which is that the future is far less predictable than it ever was because of leverage, because of all these moving parts. We're in a chaotic system and butterflies can create massive hurricanes in such a complex arena. Now, the one thing that we know, or at least can have a high degree of some certainty, is that we're going to probably keep on seeing ongoing manipulation by central banks, by policymakers, because they have to keep this thing going up and up and up, given the sheer amount of debt that keeps going up and up and up. I can make an argument to you that next 10 years, markets will probably keep going higher, but you could have several 20, 30, 40 percent type declines in between. And that's more of the world that I tend to live in from the standpoint of this kind of risk-on, risk-off mentality. What matters to me is not so much the end.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT
“The future, well, then it's a question of expected value probability times payout. If everybody thinks one way, they're all betting on the same pot. Well, that means that you're splitting that pot up among many, many, many participants. Those participants could be right, but the payout's going to be small because everyone else is betting on that pot. If you bet the other way, you're not making a bet that you're going to be right. You're making a bet that the expected value is going to be a lot more than betting with the consensus. And that's a nuance, I think, in the way people tend to think about contrarianism. It's not a function of just being negative or be positive at extremes. It's trying to see what is it that the crowd is so certain of. Because if they're so certain of it, they've bet on that outcome, probably with 100% conviction. And again, the payout is going to be higher bending the other way.”
2021-10-24 · We Study Billionaires · TIP390: Quantitative Investing Tactics w/ Michael Gayed · IDENTIFIED FROM THE TRANSCRIPT