WEBVTT - Peter Borish on Lessons From the 1987 Market Crash 0:00:02.040 --> 0:00:08.240 This is Master's in Business with Barry Ridholds on Bloomberg Radio. 0:00:09.680 --> 0:00:12.360 This week on the podcast, Oh, I have an extra 0:00:12.400 --> 0:00:17.959 special guest, Peter Borsch, founding partner number two at Tutor Investments, 0:00:18.000 --> 0:00:22.760 where he worked directly with Pull Tutor Jones, most famously 0:00:23.360 --> 0:00:27.920 helping him put on a very aggressive short position heading 0:00:27.960 --> 0:00:31.720 into the eighty seven crash and then covering not in 0:00:31.800 --> 0:00:34.680 the mayhem of that Monday, but pretty close to the 0:00:34.720 --> 0:00:39.440 bottom tick on Tuesday. Really just a fascinating career, a 0:00:39.560 --> 0:00:43.239 unique perspective on markets. Not only did he serve on 0:00:43.320 --> 0:00:46.839 the Brady Commission looking at the eighty seven crash, but 0:00:47.600 --> 0:00:52.920 his history of investing, in trading and public service both 0:00:52.960 --> 0:00:56.800 at the FED and the Chicago Board of Trade and 0:00:57.320 --> 0:01:02.040 Treasury Department really unparallel, as well as just a pretty 0:01:02.040 --> 0:01:05.560 amazing track record as an investor and trader and as 0:01:05.600 --> 0:01:09.480 a philanthropist, one of the co founding trustees at Robin Hood. 0:01:10.000 --> 0:01:13.520 Really a fascinating character. I found this to be a 0:01:13.720 --> 0:01:19.160 master class in a humble approach to markets and being 0:01:19.200 --> 0:01:23.360 aware of your own limitations in order to obtain the 0:01:23.400 --> 0:01:26.920 best possible results as a trader and investor. Borish is 0:01:26.959 --> 0:01:29.440 a legend on Wall Street, and I'm thrilled to have 0:01:29.520 --> 0:01:32.200 the opportunity to sit down with him and discuss his 0:01:32.360 --> 0:01:37.360 career and his just approach to investing and trading and philanthropy. So, 0:01:37.760 --> 0:01:42.679 with no further ado, my conversation with former director of 0:01:42.760 --> 0:01:45.320 research at Tutor Investments. 0:01:45.360 --> 0:01:48.720 Peter Borish, thank you so much. It just goes to 0:01:48.760 --> 0:01:49.840 show I can't hold a job. 0:01:49.960 --> 0:01:52.920 That's right. That's right. You are constantly onto the next gig. 0:01:53.280 --> 0:01:56.320 So I'm familiar with your work, but I bet a 0:01:56.360 --> 0:02:00.880 lot of younger listeners may not know of your infamy 0:02:01.120 --> 0:02:03.840 and what took place at the eighty seven crash. We'll 0:02:03.920 --> 0:02:07.680 get to that. Let's start out with just your background. 0:02:07.720 --> 0:02:09.880 What got you interested in markets and trade? 0:02:11.160 --> 0:02:14.919 Well, I guess it's sort of fortuitous. 0:02:15.160 --> 0:02:18.000 So when I finished graduate school, I always begin at Michigan, 0:02:18.000 --> 0:02:21.280 because I'm a Michigan man. I went there for undergraduate 0:02:21.320 --> 0:02:25.880 and graduate school, and I finished graduate school in eighty 0:02:25.919 --> 0:02:32.040 two in what was really the real recession under President Reagan, 0:02:32.520 --> 0:02:36.160 and I was very fortunate to get a job at 0:02:36.240 --> 0:02:40.160 the Federal Reserve Bank of New York doing what so 0:02:40.400 --> 0:02:44.160 I was doing at that point. If you recall, it 0:02:44.360 --> 0:02:51.200 was the LDC right the Mexican crisis, and they were 0:02:51.240 --> 0:02:55.959 talking about, well, if Mexico increases a supply of oil, 0:02:56.080 --> 0:02:59.240 will get a lot more revenue. I, being stupid, raised 0:02:59.280 --> 0:03:02.400 my hand and said, yeah, but if they increased the supply, 0:03:02.520 --> 0:03:05.320 isn't that got to put down with pressure on prices? 0:03:05.760 --> 0:03:07.440 And they're kind of like, you know, you should be 0:03:07.600 --> 0:03:12.040 sort of thinking about research macroeconomic models. And that's really 0:03:12.400 --> 0:03:16.240 where it went. And at that point, foreign exchange and 0:03:16.320 --> 0:03:20.239 futures and derivatives were just starting. Nineteen eighty two was 0:03:20.280 --> 0:03:23.800 a year that SMP futures started. So I went down 0:03:23.880 --> 0:03:27.120 into that group and did some research, and being a 0:03:27.120 --> 0:03:31.000 little gearheady, I worked on the sort of internal Black 0:03:31.040 --> 0:03:34.280 Scholes model for the FED. And that's how I got 0:03:34.320 --> 0:03:37.000 fortunate and started my career. As I say, Wall Street 0:03:37.600 --> 0:03:40.920 is littered with former FED people, that's a good. 0:03:40.720 --> 0:03:43.960 Way of describing it. Littered with former FED people because 0:03:45.240 --> 0:03:49.480 the FED is a giant employer of economists and other 0:03:49.880 --> 0:03:54.160 technical researchers, and very often they leave the FED and 0:03:54.240 --> 0:03:57.400 go to big shops. You didn't go that way after 0:03:57.440 --> 0:04:00.600 you left the FED. Tell us about your next career move. 0:04:01.640 --> 0:04:05.320 So it's nineteen eighty five. I've been there three years. 0:04:05.440 --> 0:04:08.120 It's about the time you start looking for a job. 0:04:09.080 --> 0:04:12.200 And I had some job offers from, you know, sort 0:04:12.200 --> 0:04:19.880 of white shoe Wall Street firms, and then through a acquaintance, 0:04:20.200 --> 0:04:23.520 I met this guy that was coming off the Cotton 0:04:23.600 --> 0:04:28.440 Exchange by the name of Paul Tudor Jones, and he 0:04:28.560 --> 0:04:32.320 asked me to help him out because he was chairman 0:04:32.360 --> 0:04:35.120 of the Financial Exchange, of the subsidiary of the New 0:04:35.160 --> 0:04:38.839 York Cotton Exchange, and they wanted to start trading some 0:04:38.880 --> 0:04:43.080 futures contracts. And I'm like, look, I'm young, I'm single, 0:04:43.520 --> 0:04:47.760 what a dynamic personality, great person. I'm going to give 0:04:47.760 --> 0:04:51.320 it a shot. And that's how I started out at Tutor. 0:04:51.800 --> 0:04:54.680 So Tutor Investments launches eighty five. 0:04:54.720 --> 0:04:58.760 Eighty all started in September of eighty four. I came 0:04:58.839 --> 0:05:00.200 on in the beginning of eighty. 0:05:00.800 --> 0:05:05.440 So literally number two at the firm is is that what? 0:05:05.440 --> 0:05:07.880 Well, there were people and support staff, but sort of 0:05:07.920 --> 0:05:10.760 I was the first real sort of research professional. 0:05:11.400 --> 0:05:14.360 So tell us a little bit about what you guys 0:05:14.400 --> 0:05:18.840 were doing in eighty six eighty seven, what were you 0:05:19.000 --> 0:05:20.920 trading and what was he looking at? 0:05:21.760 --> 0:05:26.240 So one of the geniuses of Paul, and really understanding 0:05:26.640 --> 0:05:31.080 futures markets in general is that most of the innovative 0:05:31.160 --> 0:05:34.360 risk management approaches came out of the futures markets because 0:05:34.360 --> 0:05:37.279 of the embedded leverage using margin. 0:05:37.480 --> 0:05:40.520 There's no room for error. You can't just let's see 0:05:40.520 --> 0:05:43.159 if it comes back. It's not how you can trade futures. 0:05:43.279 --> 0:05:44.160 No, not at all. 0:05:44.760 --> 0:05:48.040 And so with the advent and the development and the 0:05:48.080 --> 0:05:53.200 starting of new financial futures markets, he was taking his technique, 0:05:53.560 --> 0:05:57.920 his approach, his discipline and applying that to the new 0:05:58.120 --> 0:06:02.120 futures markets and his commitment. And this I think people 0:06:02.160 --> 0:06:05.920 have to realize because what one can do today, right, 0:06:05.960 --> 0:06:07.720 I have the FRED app on my phone. I can 0:06:07.800 --> 0:06:11.640 download massive amounts of data in hundreds of a second. Right, 0:06:12.320 --> 0:06:14.680 You couldn't do that there. And he had a huge 0:06:14.680 --> 0:06:19.160 commitment through me for data. We would hire summer interns 0:06:19.200 --> 0:06:23.960 to put data into spreadsheets, build models, work he was 0:06:24.040 --> 0:06:26.960 willing to and literally on the weekends we would be 0:06:27.040 --> 0:06:30.440 on our hands and knees taking out floppy drives, putting 0:06:30.480 --> 0:06:34.080 in hard drives, updating computers, and we were applying all 0:06:34.120 --> 0:06:37.160 that to the new markets with the discipline and approach 0:06:37.680 --> 0:06:39.040 that he had towards trading. 0:06:39.240 --> 0:06:44.760 So that's an interesting difference about pul Tudor Jones regarding 0:06:45.200 --> 0:06:49.839 his process. Very quantitative driven, very mathematical, But there's another 0:06:50.000 --> 0:06:54.159 side to his approach, which was way ahead of its time, 0:06:54.360 --> 0:06:57.920 very behavioral. Tell us a little bit about the psychological 0:06:57.960 --> 0:07:02.320 approaches that he brought to both looking at markets but 0:07:02.440 --> 0:07:03.920 also managing himself. 0:07:04.960 --> 0:07:10.640 So the strength of Paul at that time and even 0:07:10.880 --> 0:07:14.480 today still is that because he had always traded on 0:07:14.520 --> 0:07:21.480 the floor and understood that most market moves come in 0:07:21.600 --> 0:07:25.200 extremes fairly quickly. Market spent a lot of time doing 0:07:25.240 --> 0:07:28.680 nothing and then they reprice. So you have to have 0:07:28.720 --> 0:07:32.080 that discipline, you have to have that patience, and if 0:07:32.120 --> 0:07:35.040 you think it's going to be an acceleration point, then 0:07:35.080 --> 0:07:36.800 you try to get larger, but you have to have 0:07:36.840 --> 0:07:41.440 a really tight stop. It's such a contradictory approach because 0:07:41.480 --> 0:07:45.520 people want to be right all the time, and the 0:07:45.560 --> 0:07:49.480 way that you probe and trade is understanding that that's 0:07:49.520 --> 0:07:52.040 not the case. And he would always say, Okay, they 0:07:52.040 --> 0:07:54.200 got me today, but I'm going to get him back 0:07:54.200 --> 0:07:55.320 with one hundred percent interest. 0:07:56.040 --> 0:07:58.840 So people also should realize, for those of you who've 0:07:58.840 --> 0:08:02.920 never traded futures, It's not like options where essentially you 0:08:02.920 --> 0:08:05.560 could put up your losses in advance and all they 0:08:05.600 --> 0:08:08.240 could do is go to zero options. You're on the 0:08:08.240 --> 0:08:11.800 hook no matter where it goes. It's not like it's 0:08:11.840 --> 0:08:15.640 not like, well, we'll just see how this trades. If 0:08:15.640 --> 0:08:19.520 it keeps going against you, you're fully responsible, and hence 0:08:20.040 --> 0:08:24.800 the commitment to tightstop losses and a discipline approach to 0:08:24.880 --> 0:08:26.720 managing the downside. 0:08:27.760 --> 0:08:32.000 Yes, and the thing about futures is you must maintain 0:08:32.080 --> 0:08:36.280 your discipline. One of the problems I think with rookie 0:08:36.679 --> 0:08:43.360 options traders is that because if you're buying them, all 0:08:43.400 --> 0:08:47.160 you can do is lose your premium. So if you 0:08:47.200 --> 0:08:49.920 have a belief in the market and you buy your 0:08:49.920 --> 0:08:53.800 premium and then it starts to go against you, you go, well, 0:08:53.840 --> 0:08:56.040 I still believe in it, and I still have premium left. 0:08:56.120 --> 0:08:58.520 So a lot of times when you're doing that, you 0:08:58.559 --> 0:09:01.480 put the trade on and you're meant to accepting the 0:09:01.480 --> 0:09:03.400 fact that you're going to lose all your premium, put 0:09:03.480 --> 0:09:05.640 up your losses in it, and in the future's world 0:09:06.320 --> 0:09:08.880 that you don't do you don't. You can't lose your 0:09:08.880 --> 0:09:15.160 discipline because the market will discipline you regardless. 0:09:14.840 --> 0:09:16.559 Yeah, no, it makes it makes a lot of sense. 0:09:17.040 --> 0:09:20.200 So you've said, and as long as we're talking about 0:09:20.559 --> 0:09:24.760 discipline and management of trades, one of your quotes that 0:09:25.080 --> 0:09:29.440 I really like is trading and risk management are inherently 0:09:29.840 --> 0:09:34.960 unnatural characteristics. Explain what that means with pleasure. 0:09:35.080 --> 0:09:39.200 So, first of all, we always said discipline before vision, 0:09:40.200 --> 0:09:42.520 and by that it means we can talk and I 0:09:42.559 --> 0:09:45.679 can think, and we can gossip and the market's going here. 0:09:45.880 --> 0:09:48.440 You know, it's kind of like gossiping about sports. That's 0:09:48.559 --> 0:09:53.440 not really trading. It's a discipline, rigorous approach. And so 0:09:53.520 --> 0:09:57.520 when I say it's an unnatural feeling, is because we all, 0:09:58.080 --> 0:10:00.320 most of us I'm used to it by now, want 0:10:00.320 --> 0:10:03.320 to be liked, and so you want to be there going, 0:10:03.320 --> 0:10:05.679 oh you're long apple, I'm long apple. Oh we're all 0:10:05.720 --> 0:10:09.560 so smart. But you have to have that discipline to say, 0:10:09.559 --> 0:10:14.080 wait a second, it's over the move, is there? So 0:10:14.160 --> 0:10:16.000 think about it this way. You've got one hundred people 0:10:16.040 --> 0:10:18.880 in a subway car who are all along something. If 0:10:18.880 --> 0:10:21.080 I get out and go into the other car where 0:10:21.120 --> 0:10:23.360 I'm on the short side, I'm the one person in there. 0:10:23.960 --> 0:10:25.600 If I'm disciplined and. 0:10:25.600 --> 0:10:26.439 I get stopped out. 0:10:26.440 --> 0:10:29.000 You can always squeeze one more back in the subway car. 0:10:29.440 --> 0:10:31.600 But when it turns if I'm the only one there 0:10:31.600 --> 0:10:34.520 and they all come running out, that's why markets go 0:10:34.600 --> 0:10:38.440 down faster than they go up. So it has to 0:10:38.520 --> 0:10:43.320 be in a logical sense, the ability to take the 0:10:43.400 --> 0:10:46.640 other side of the trade. Now, that doesn't mean you 0:10:46.679 --> 0:10:51.520 should be contrarian for contrarian's sake. And that's the difference 0:10:51.559 --> 0:10:54.640 in all these different approaches. So there's the trend following, 0:10:54.640 --> 0:10:58.400 which is go with the trend. There's the wave strategy, 0:10:58.400 --> 0:11:01.040 WHI says we're going to try to find inflection point here. 0:11:01.480 --> 0:11:04.720 They're all good strategies, but if you don't have a 0:11:04.800 --> 0:11:07.800 disciplined risk management on top of it, you're not going 0:11:07.840 --> 0:11:08.320 to make money. 0:11:08.679 --> 0:11:11.760 The challenge is the crowd is right most of the time. 0:11:12.160 --> 0:11:13.880 If you want to be a contrayon, you have to 0:11:14.000 --> 0:11:17.160 capture that two three four percent where the whole crowd 0:11:17.240 --> 0:11:20.920 is wrong and get out before everybody heads for the doors. 0:11:21.440 --> 0:11:26.400 Yes, you have to be very mindful of inflection points. 0:11:26.679 --> 0:11:28.959 And I go through this all the time. People are like, oh, 0:11:29.000 --> 0:11:31.080 you know, the market goes up over time and it's 0:11:31.080 --> 0:11:32.199 a straight line. 0:11:31.920 --> 0:11:33.840 And that's the trading that's investing. 0:11:34.040 --> 0:11:36.880 Yes, But even then, and I asked people, I said, well, 0:11:36.880 --> 0:11:38.640 you know, you think I look any older today than 0:11:38.679 --> 0:11:39.559 I did yesterday? 0:11:39.920 --> 0:11:41.320 And they go no. 0:11:41.520 --> 0:11:43.680 I go, well, you think I'm going to look any 0:11:43.679 --> 0:11:45.200 older tomorrow than I did today? 0:11:45.320 --> 0:11:47.360 And they go no. I go great, two points a line. 0:11:47.400 --> 0:11:49.920 I'm never going to get old, which is fantastic. 0:11:50.280 --> 0:11:54.880 So let's talk a little bit about eighty seven. Market 0:11:54.920 --> 0:11:57.800 had a huge run from eighty two through the beginning 0:11:57.800 --> 0:12:00.480 of eighty seven. Tell us a little bit of how 0:12:00.520 --> 0:12:03.480 you guys were positions heading into that year. 0:12:04.960 --> 0:12:07.600 Let's step back for a second, because nothing markets don't 0:12:07.600 --> 0:12:12.200 go up in a straight line, right they think about Yes, 0:12:12.280 --> 0:12:15.640 the low was in August of eighty two, but there 0:12:15.679 --> 0:12:20.080 was a serious correction in eighty four and then even 0:12:20.480 --> 0:12:27.720 in nineteen eighty six, there were some really harrowing corrections, 0:12:27.760 --> 0:12:32.400 particularly after July fourth, eighty six and the September expiration 0:12:33.200 --> 0:12:38.800 of eighty six. So it was really January of eighty 0:12:38.880 --> 0:12:42.480 seven when it started to take off. In that first 0:12:42.520 --> 0:12:43.520 part of the year. 0:12:43.800 --> 0:12:46.640 Now upwards like a strong rally. 0:12:46.679 --> 0:12:49.600 An incredibly strong rally. I think by the time we 0:12:49.640 --> 0:12:51.720 got to the high in August, right, it was up 0:12:51.760 --> 0:12:56.360 over thirty percent on the year. And again going back 0:12:56.400 --> 0:13:00.360 to what I just said earlier, Paul gave me the 0:13:00.400 --> 0:13:05.599 opportunity to take my sort of creative research imagination and 0:13:06.160 --> 0:13:11.200 spend it on some data. And we started being very 0:13:11.240 --> 0:13:16.640 early on collecting real time data and also modeling. And 0:13:16.880 --> 0:13:19.520 I mentioned that we hired people, so we took people. 0:13:20.040 --> 0:13:22.559 And back then there was a book right the Now 0:13:22.679 --> 0:13:26.200 from eighteen ninety seven to present, and we had to 0:13:26.240 --> 0:13:27.839 type that data in the spreadsheet. 0:13:27.880 --> 0:13:31.120 It was very complicating it but well there. 0:13:31.040 --> 0:13:33.760 Was You couldn't download it, and you had to check it, 0:13:33.960 --> 0:13:35.600 and of course when people are putting in a lot 0:13:35.600 --> 0:13:38.360 of numbers, there's typo, so you had to have charts 0:13:38.480 --> 0:13:42.000 just to see all those different things. And we started 0:13:42.080 --> 0:13:46.680 modeling and thinking given where we were with the new 0:13:46.840 --> 0:13:52.280 financial futures markets, and if you think about financial futures 0:13:52.280 --> 0:13:55.640 in general or new markets, we always sort of think 0:13:55.679 --> 0:13:57.680 about it as if you have a kid and they're 0:13:57.720 --> 0:14:00.400 five years six years old. You think you could talk 0:14:00.400 --> 0:14:02.800 to them. You can think they're rational, but they're not, 0:14:03.440 --> 0:14:05.800 and they do throw tantrums. And that's happened a lot 0:14:05.880 --> 0:14:08.920 in derivatives by the time you got to eighty seven, 0:14:09.000 --> 0:14:12.079 right the futures were five years old. People thought there 0:14:12.120 --> 0:14:14.520 was going to be portfolio insurance, that there's going to 0:14:14.559 --> 0:14:18.400 be this massive always liquidity, that you could stay longer 0:14:18.440 --> 0:14:22.160 stocks and that you could sell futures against it, and 0:14:22.200 --> 0:14:27.160 there was this assumption of continuity of liquidity. So at 0:14:27.160 --> 0:14:31.000 the same time, we understand that there's potential technical flaws 0:14:31.080 --> 0:14:34.440 underneath the model, underneath the markets, and we're building this 0:14:34.560 --> 0:14:40.480 model which is really tracking what happened from the low 0:14:40.680 --> 0:14:43.200 of twenty one, which we corresponded sort of to the 0:14:43.240 --> 0:14:47.400 low of eighty two, and what was going to happen. 0:14:47.480 --> 0:14:50.080 And when I first built this model, I really thought 0:14:50.120 --> 0:14:54.600 that the top was going to occur in early eighty 0:14:54.640 --> 0:14:59.960 eight rather than August, and the secondary top in October 0:15:00.680 --> 0:15:04.120 of eighty seven. But then the technicals came together with 0:15:04.200 --> 0:15:08.520 the fundamentals, and Paul, being the great tradery was really 0:15:08.720 --> 0:15:11.480 had the opportunity to take advantage of that. 0:15:11.720 --> 0:15:16.240 So before we get to Black Monday, around what time 0:15:16.280 --> 0:15:19.320 of the year did you start seeing cracks in the 0:15:19.400 --> 0:15:21.600 underlying market? At what point were you looking at this 0:15:21.680 --> 0:15:25.160 and saying, hey, we have you know, some time to go, 0:15:25.640 --> 0:15:28.800 but you could see the beginning of the end was coming. 0:15:28.600 --> 0:15:32.520 Up when the market started to pull back in August 0:15:32.680 --> 0:15:37.240 and into September expiration. Remember back then there was only 0:15:37.320 --> 0:15:41.800 quarterly expirations, so there was a lot more activity around 0:15:41.800 --> 0:15:45.440 that and when we saw and part of research is 0:15:45.480 --> 0:15:49.400 being able to replicate things. So you had always you 0:15:49.440 --> 0:15:51.960 had holidays, and you see that, so you had labor day, 0:15:51.960 --> 0:15:53.760 you had three day a weekend, so you could line 0:15:54.160 --> 0:15:59.080 these things up in terms of price activity, volume, and 0:15:59.320 --> 0:16:03.000 the likely And if you go back to the twenty 0:16:03.240 --> 0:16:08.160 nine scenario, you also saw what happened post labor Day. 0:16:08.200 --> 0:16:11.280 Right the top was September third, twenty nine. Then you 0:16:11.280 --> 0:16:13.840 had the correction, then you had the rally. So would 0:16:13.840 --> 0:16:17.080 you sort of had the technical lining up with the 0:16:17.160 --> 0:16:22.600 fundamentals because of the issues that were taking place globally 0:16:22.640 --> 0:16:25.520 at that time. And at the same time, believe it 0:16:25.600 --> 0:16:30.360 or not, we had a new chairperson in Greenspan at 0:16:30.360 --> 0:16:34.680 the FED that had just come in. So here's a rookie. 0:16:35.400 --> 0:16:38.920 Now you had Volker prior and as I like to say, 0:16:39.000 --> 0:16:41.200 you know, young guys have all the moves, but old 0:16:41.200 --> 0:16:45.240 guys win championships. And so he was in the sense 0:16:45.480 --> 0:16:50.760 challenged what to do with regard to that, and that 0:16:51.080 --> 0:16:54.960 was something that we thought post crash, that he was 0:16:55.000 --> 0:16:58.080 going to be very aggressive in reducing interest rates, which 0:16:58.120 --> 0:16:58.440 he did. 0:16:58.560 --> 0:17:03.560 Well, let's roll back pre crap. So Friday before Black Monday, 0:17:03.680 --> 0:17:07.520 how were you positioned? How was Tutor Investment's position heading 0:17:07.600 --> 0:17:08.560 into that weekend? 0:17:09.600 --> 0:17:15.600 So the analog really like, was you know, ringing a 0:17:15.640 --> 0:17:19.360 red red bell sort of on that Wednesday, right, there 0:17:19.400 --> 0:17:21.560 was a decline, you got to technical levels, you had 0:17:21.560 --> 0:17:24.880 a bounce and then and then you failed a. 0:17:24.840 --> 0:17:27.800 Week bounce that just had no nothing behind it, right. 0:17:27.640 --> 0:17:31.280 And then on that Friday, we felt that it was 0:17:31.359 --> 0:17:34.160 there and and we were short. 0:17:35.320 --> 0:17:36.800 A little short, a lot short. 0:17:37.320 --> 0:17:38.240 Well, I think. 0:17:38.080 --> 0:17:41.200 People have to give perspective. Remember we at that time 0:17:41.240 --> 0:17:44.879 were not a particularly large firm, so for us. 0:17:45.280 --> 0:17:49.480 We were large short. Uh. 0:17:49.520 --> 0:17:53.080 And then over the weekend, with the news that was 0:17:53.119 --> 0:17:55.919 taking place and also the fact of the sentiment, there 0:17:55.960 --> 0:17:58.399 were still people that were very sort of bullish and 0:17:58.520 --> 0:18:01.879 people that felt that they could be protected. And this 0:18:02.080 --> 0:18:07.639 is where most of these models, right, assume consistency twenty 0:18:07.680 --> 0:18:10.400 four hour trading, you're gonna be okay, and you can 0:18:10.440 --> 0:18:13.080 even go to ninety eight right with long term capital 0:18:13.320 --> 0:18:17.080 where that was also part of their problem. But on 0:18:17.160 --> 0:18:22.000 weekends that's not the case. So you had a gap situation. 0:18:23.000 --> 0:18:27.800 Monday morning market gaps down pretty substantially. There's no bids 0:18:27.840 --> 0:18:30.639 to be found. There, can't get people on the phone 0:18:30.760 --> 0:18:34.000 tell us what that day was like as an actual 0:18:34.080 --> 0:18:36.680 trader short a collapsing market. 0:18:37.960 --> 0:18:44.040 So, you know, it's a very very interesting perspective because 0:18:44.720 --> 0:18:47.240 when you think about it, and it's also one of 0:18:47.280 --> 0:18:51.280 the advantages of why I say that it's so important 0:18:51.320 --> 0:18:54.679 to have all these different markets. When you're short something 0:18:54.760 --> 0:18:58.960 and it goes down, you're a natural buyer, right, So 0:18:59.040 --> 0:19:00.400 people think shorts are bad. 0:19:00.480 --> 0:19:03.639 No, they're good throws buyers in any crisis. 0:19:03.760 --> 0:19:05.080 Yes, yes. 0:19:05.119 --> 0:19:08.560 And so then the question is, and as I like 0:19:08.640 --> 0:19:12.720 to say, here's my definition of a quandary. Do you 0:19:12.800 --> 0:19:15.959 stay out of a market and watch everyone else make 0:19:16.080 --> 0:19:21.520 money or get in and thereby cause it to immediately crash. 0:19:21.680 --> 0:19:23.200 So but you were on the right side. 0:19:23.359 --> 0:19:24.400 We were on the right side. 0:19:24.440 --> 0:19:26.440 So there are a lot of people there that are 0:19:26.480 --> 0:19:29.720 in that quandary position because the market had been so 0:19:29.880 --> 0:19:34.040 strong and without discipline. The irony of markets as buyers 0:19:34.040 --> 0:19:37.240 are higher, sellers are lower, right, everybody loved bitcoin at 0:19:37.320 --> 0:19:39.760 sixty thousand, they all hate it at twenty. 0:19:39.840 --> 0:19:41.840 You know, that's just that's human nature. 0:19:42.000 --> 0:19:45.120 Yes, so in this case, they didn't know what to do, 0:19:45.720 --> 0:19:49.560 but then panic sets in and they were selling. So 0:19:49.640 --> 0:19:51.360 we learned from our experience. 0:19:51.520 --> 0:19:54.720 Tell us about that, because I recall you saying that 0:19:55.000 --> 0:19:59.080 historically when you've looked at other crashes and the best 0:19:59.119 --> 0:20:02.399 opportunity to is not the day of the crash, but 0:20:02.560 --> 0:20:04.040 the next day, tell us that game. 0:20:04.200 --> 0:20:08.760 That's correct, because when I mentioned earlier about nineteen eighty 0:20:08.800 --> 0:20:13.480 six and July, in September, we were short actually, and 0:20:13.520 --> 0:20:16.600 then we covered on that Monday, and the market continued 0:20:16.640 --> 0:20:20.719 to go down until midday Tuesday. It also did that 0:20:20.800 --> 0:20:22.960 in September. I think it was September thirteenth. It's a 0:20:22.960 --> 0:20:23.440 long time. 0:20:23.480 --> 0:20:27.639 So, but generally speaking, the bad day and people the 0:20:27.680 --> 0:20:29.960 next day in the morning like just let me yes. 0:20:30.119 --> 0:20:32.440 And that's changed a little bit now because of twenty 0:20:32.440 --> 0:20:35.919 four hour trading, and so sometimes the extreme you do 0:20:36.000 --> 0:20:38.320 close on the low and extreme and there isn't that 0:20:38.400 --> 0:20:40.080 much follow through the next day, but then there was 0:20:40.119 --> 0:20:41.080 definitely follow through. 0:20:41.400 --> 0:20:43.240 So we waited and we were. 0:20:43.119 --> 0:20:48.360 Patient, and we were one of the buyers on that 0:20:48.440 --> 0:20:53.960 Tuesday the twentieth, and so we performed a function. I 0:20:54.000 --> 0:20:57.320 think that exactly what you want in the marketplace, right 0:20:57.880 --> 0:21:02.560 shorts were covering, were being buyers. I'd like to think 0:21:02.600 --> 0:21:04.800 that knock on would that maybe you know, some of 0:21:04.840 --> 0:21:05.720 our buying helped. 0:21:05.480 --> 0:21:08.440 Put in the low. But what we really did that it. 0:21:08.400 --> 0:21:12.960 Wasn't just stock index futures. We felt and that the 0:21:13.000 --> 0:21:16.639 FED and undergreen Span was going to be massively cutting 0:21:16.760 --> 0:21:20.120 interest rates. Remember the tenure today is what three seventy 0:21:20.200 --> 0:21:23.239 three seventy just un before yep, and back then it 0:21:23.280 --> 0:21:25.600 was well over six. I think it was closer to seven, 0:21:26.119 --> 0:21:29.359 and that historically you know, by the way has thrown 0:21:29.400 --> 0:21:31.719 in the market today, I think the risk rewards we're 0:21:31.760 --> 0:21:34.640 going more likely to there then back down to where 0:21:34.640 --> 0:21:34.840 we are. 0:21:34.840 --> 0:21:37.560 You're not buying it. We'll talk later about yes, everybody 0:21:37.560 --> 0:21:41.240 predicting lower rates, We'll circle back to that. But not 0:21:41.320 --> 0:21:44.919 only were you short equities, what was your income position. 0:21:45.119 --> 0:21:50.080 We started buying a lot of fixed income futures all 0:21:50.119 --> 0:21:52.960 across the curve, and particularly at that point one of 0:21:53.000 --> 0:21:55.959 the most liquid markets was the year dollar futures, and 0:21:56.000 --> 0:21:58.840 we felt that the FED was going to provide liquidity, 0:21:59.400 --> 0:22:03.560 which they needed to do, and they did do. And 0:22:03.720 --> 0:22:06.840 the irony of that whole situation is it was after 0:22:06.880 --> 0:22:10.040 that crash that we started the Robin Hood Foundation, thinking 0:22:10.160 --> 0:22:13.000 that the you know, those who were less fortunate in 0:22:13.000 --> 0:22:17.200 New York were really going to be affected by the 0:22:17.760 --> 0:22:21.640 downturn in the markets. But the Fed, Yes, the Fed 0:22:21.680 --> 0:22:26.160 stepped in. They provided liquidity the market. The economy wasn't 0:22:26.200 --> 0:22:30.080 as dependent on the equity markets as necessarily as it 0:22:30.160 --> 0:22:33.119 is today as we saw a post or eight, and 0:22:33.359 --> 0:22:34.960 who knows what's going to happen now. 0:22:35.440 --> 0:22:38.920 So for those people who may not have seen it, 0:22:39.480 --> 0:22:43.159 there is a famous documentary I believe it's called The 0:22:43.200 --> 0:22:48.159 Trader that follows pull Tudor Jones around. If you haven't 0:22:48.160 --> 0:22:52.639 seen it, it's on YouTube and vimeo and elsewhere. How 0:22:52.680 --> 0:22:56.919 did he manage the chaos of eighty seven? What was 0:22:56.960 --> 0:22:57.800 his day like? 0:22:59.320 --> 0:23:03.840 Well, it was a life changing day really for both 0:23:03.920 --> 0:23:09.399 of us. And you know, there are good people and 0:23:09.440 --> 0:23:12.639 there are great people, and Paul is one of the 0:23:12.680 --> 0:23:16.040 great people in my mind, not just as a trader 0:23:16.400 --> 0:23:18.760 but as an individual. And why you're so committed to 0:23:18.880 --> 0:23:24.320 New York City and philanthropy so there's always a little 0:23:24.359 --> 0:23:29.680 bit of sadness in the sense that when you are 0:23:29.760 --> 0:23:31.680 short something and it goes down and there are a 0:23:31.720 --> 0:23:35.520 lot of other people that may be getting hurt. So 0:23:35.600 --> 0:23:39.840 that's one reason as well. Do you go in and 0:23:39.880 --> 0:23:42.639 you intellectually think, okay, yeah, maybe we're going to crash 0:23:42.680 --> 0:23:46.960 and we're going to do something, but emotionally you're like, wow, 0:23:47.280 --> 0:23:50.240 at some point, that's it. We don't want we're not 0:23:50.280 --> 0:23:52.320 going to benefit, we don't want to participate. We are 0:23:52.359 --> 0:23:57.120 not going to be short anything more. After that next day, 0:23:57.160 --> 0:23:59.840 we're going to wait, we're gonna see and we want 0:23:59.880 --> 0:24:05.520 to the supportive of the markets and the economic system. 0:24:05.600 --> 0:24:09.800 And to me, again, we're relatively young, and Paul's five 0:24:09.880 --> 0:24:13.560 years older than I am. But you know, that's a 0:24:13.560 --> 0:24:15.879 lot of wisdom and that's something I learned from that for. 0:24:16.200 --> 0:24:19.959 A thirty year old and for those people who weren't 0:24:20.200 --> 0:24:23.840 actively trading in eighty seven, the irony is so not 0:24:23.920 --> 0:24:26.760 only is Black Monday down twenty two percent and change 0:24:27.240 --> 0:24:30.800 on the Dow, markets finished the year, you know, flat 0:24:30.840 --> 0:24:34.280 to up one percent. It wasn't a horrible year considering 0:24:34.880 --> 0:24:38.359 and eighty eight things just kind of took off again. 0:24:39.520 --> 0:24:44.240 Turns out we were early days of a long bull market. 0:24:44.320 --> 0:24:48.800 And you've talked that very often. You get that test 0:24:48.920 --> 0:24:52.359 early in a long secular bull phase. Tell us a 0:24:52.359 --> 0:24:55.159 little bit about what the thinking was going to be 0:24:56.119 --> 0:24:59.360 post eighty seven crash, what it looked like a decade out. 0:25:00.240 --> 0:25:06.360 Well, there was one of the best divergences technical buys 0:25:06.400 --> 0:25:12.040 in nineteen eighty eight. I think maybe the S and 0:25:12.119 --> 0:25:13.960 P made new lows or the Dow or the Dow 0:25:14.040 --> 0:25:20.440 transports and it was unconfirmed, and sentiment was so negative. 0:25:21.240 --> 0:25:24.240 And this is where you have to be flexible as 0:25:24.280 --> 0:25:28.240 a trader, because you're like, Okay, the world is coming 0:25:28.240 --> 0:25:30.560 to an end. And then I think we realized early 0:25:30.600 --> 0:25:35.520 on that it's probably not coming to an end, or 0:25:35.520 --> 0:25:39.720 at least not today. And so now you have to 0:25:39.760 --> 0:25:43.439 look for your opportunities because remember you're managing other people's money. 0:25:43.720 --> 0:25:45.760 You got to get rid of your own opinion. 0:25:45.520 --> 0:25:47.800 Get you shake your head out of that you sort 0:25:47.800 --> 0:25:50.600 of intellectual fog that you're in, and say, here's what 0:25:50.640 --> 0:25:53.399 the markets are telling me. I need to listen to 0:25:54.200 --> 0:25:59.600 the markets. And that was nineteen eighty eight and when 0:25:59.600 --> 0:26:03.640 it really took off. And if you if you think 0:26:03.640 --> 0:26:08.040 about you know, cycles and period and going into ninety 0:26:08.119 --> 0:26:15.880 one with what happened in Iraq under Bush one and 0:26:15.920 --> 0:26:19.000 again the same thing, Oh my god. And and that 0:26:19.200 --> 0:26:23.600 was also a very interesting lesson because that was the 0:26:23.640 --> 0:26:25.920 first time in history we had a pre announced date 0:26:26.000 --> 0:26:28.199 to start a war. So now what do you do 0:26:28.280 --> 0:26:32.119 with risk management? Right, you've got models, do you trade 0:26:32.119 --> 0:26:33.919 through it? Do you not think it's going to happen? 0:26:34.000 --> 0:26:36.080 Do you not have risk on going into that? 0:26:36.280 --> 0:26:39.080 You're talking about Bush two and the Iraq war in 0:26:39.920 --> 0:26:43.879 three one, So there was a deadline. 0:26:43.359 --> 0:26:46.560 And right, and then they he went in and the 0:26:46.600 --> 0:26:48.639 markets took off after that. 0:26:50.240 --> 0:26:51.359 You know, there's a lot of. 0:26:53.200 --> 0:26:59.919 Good supportive you know, material fundamentally technically around that time, 0:27:01.040 --> 0:27:06.240 because you were still recovering from the eighty seven and 0:27:06.680 --> 0:27:09.880 people tend to remember the last thing that happened to them. 0:27:10.320 --> 0:27:13.600 So they're always afraid because they think that the market's 0:27:13.640 --> 0:27:15.960 going to go down, just as now they're afraid they're 0:27:15.960 --> 0:27:19.000 going to miss out because the market was up. And 0:27:19.040 --> 0:27:22.359 I'm not so sure that they should be afraid of 0:27:22.359 --> 0:27:22.880 missing out. 0:27:23.040 --> 0:27:26.200 Let's stick with eighty seven. We'll circle back to today's market later, 0:27:26.720 --> 0:27:29.920 So post more TOM eighty seven you get tapped by 0:27:29.920 --> 0:27:33.639 the Treasury Department to serve on the US Presidential Task 0:27:33.680 --> 0:27:38.360 Force on Market Mechanisms head by Brady. It became them 0:27:38.359 --> 0:27:41.240 as a Brady Commission. What did you find? What was 0:27:41.280 --> 0:27:44.120 the process like of looking at what caused the eighty 0:27:44.160 --> 0:27:45.920 seven crash? 0:27:46.000 --> 0:27:48.000 So, first of all, it was an honor, and of 0:27:48.040 --> 0:27:50.320 course I was the youngest person there, and I'm still 0:27:50.320 --> 0:27:53.639 friends with the number of the people that were staffers. 0:27:53.640 --> 0:27:56.320 But I can just tell you in summary that we 0:27:57.280 --> 0:28:00.919 Tutor were so far ahead of every other firm on 0:28:00.960 --> 0:28:03.440 Wall Street we didn't even know. But all the data 0:28:03.480 --> 0:28:05.919 in the report right there's a chapter on the market break. 0:28:06.280 --> 0:28:08.760 All that data came from us. None of the other 0:28:08.840 --> 0:28:12.040 firms had it, whether it was JP, Goldman, m Mess, 0:28:12.200 --> 0:28:15.760 bear Stearns, you name it. And that's a credit to Paul, 0:28:15.840 --> 0:28:19.760 as I said, the ability to not only want to 0:28:19.800 --> 0:28:22.680 do it, but also to spend the capital to invest 0:28:23.160 --> 0:28:26.040 in data in computing at that time. 0:28:26.680 --> 0:28:28.840 And the real conclusion. 0:28:28.280 --> 0:28:30.720 Of that is where we are today, that all these 0:28:30.760 --> 0:28:34.280 markets are linked. You know, New York wanted to blame Chicago. 0:28:34.840 --> 0:28:37.520 There was the options markets and they all were sort 0:28:37.560 --> 0:28:40.160 of disconnected. And that's where the joint task force with 0:28:40.240 --> 0:28:42.760 the Treasury, the CFTC. 0:28:42.120 --> 0:28:42.880 And the SEC. 0:28:43.600 --> 0:28:46.600 And that was also where we put in the circuit breakers, 0:28:47.120 --> 0:28:48.920 you know, sort of price limits. There was no price 0:28:49.000 --> 0:28:50.960 limits in eighty seven, so that. 0:28:51.280 --> 0:28:54.360 When stuff falls, hey, down twenty two percent, that's just 0:28:54.400 --> 0:28:56.800 the market. Now, what is it seven percent? 0:28:56.960 --> 0:28:58.840 Yes, there's a three and a half. I think a 0:28:58.920 --> 0:29:02.120 seven and a fifteen. And the point is there's a 0:29:02.200 --> 0:29:05.280 timeout because we just mentioned a moment ago about emotion 0:29:05.640 --> 0:29:09.520 in markets, and you need to step back, and futures 0:29:09.560 --> 0:29:12.200 markets have always had price limits from. 0:29:12.000 --> 0:29:13.640 The lost limit down, that's what. 0:29:13.680 --> 0:29:14.080 We can do. 0:29:14.400 --> 0:29:19.400 And by the way, sometimes in the short run, right 0:29:19.480 --> 0:29:22.600 that limit becomes a little bit of a magnet because 0:29:22.600 --> 0:29:24.560 if the limit and storybeans is thirty five cents and 0:29:24.600 --> 0:29:27.280 you're down thirty three, do you really want to take 0:29:27.320 --> 0:29:29.040 a long position home overnight? 0:29:29.120 --> 0:29:29.959 So you might do it. 0:29:30.000 --> 0:29:32.719 But now you sit back and you have in the 0:29:32.720 --> 0:29:35.440 case of the equities, it's just a timeout. 0:29:35.840 --> 0:29:36.760 Let's get it together. 0:29:37.240 --> 0:29:41.320 Let's see what's happening there, market makers. And it's been 0:29:41.880 --> 0:29:46.960 knock on wood effective right even in eight where you 0:29:47.600 --> 0:29:48.200 reach that. 0:29:49.120 --> 0:29:51.800 Well, the flash crash in twenty ten and twenty eleven, 0:29:51.840 --> 0:29:52.760 we had those. 0:29:52.720 --> 0:29:56.760 Yes, so we time out, we bounced, and now, of 0:29:56.760 --> 0:29:58.880 course I look at some of those things, and I 0:29:58.880 --> 0:30:02.640 look at the data as potential interesting technical indicators. 0:30:02.640 --> 0:30:04.560 But that's for another day. 0:30:04.760 --> 0:30:09.200 So let's stay with the concept of interrelated markets. I 0:30:09.280 --> 0:30:14.240 recall reading Tim Metz's book Black Monday, and he talked 0:30:14.280 --> 0:30:17.680 about how I think it was the New York Stock 0:30:17.760 --> 0:30:23.400 Exchange put the Chicago Futures Index up on the wall 0:30:23.560 --> 0:30:27.960 so traders could actually see what was going on in 0:30:28.040 --> 0:30:31.920 index futures, and it took a while before people realized 0:30:32.400 --> 0:30:36.960 all the specialists were lowering their bids because they were 0:30:36.960 --> 0:30:41.520 looking at the index futures. How interrelated are all of 0:30:41.560 --> 0:30:42.320 these markets. 0:30:43.280 --> 0:30:47.560 They're completely interrelated because the key for liquidity is the 0:30:47.600 --> 0:30:51.080 ability to arbitrage. And you had risk managers, so this 0:30:51.680 --> 0:30:54.000 S and P five hundred stocks, or at that time 0:30:54.080 --> 0:30:58.280 you had a smaller index, which was about twenty eight 0:30:58.320 --> 0:31:02.560 of the Dow contract, and so you could buy all 0:31:02.600 --> 0:31:05.640 the underlying you could sell the futures or vice versa, 0:31:06.280 --> 0:31:08.960 or you could spin it any way you wanted. If 0:31:09.000 --> 0:31:12.120 you liked twenty seven of them, you could do that 0:31:12.240 --> 0:31:16.280 and sell the futures and be implicitly short the one instrument. 0:31:15.880 --> 0:31:16.720 That's not there. 0:31:17.080 --> 0:31:21.360 So this stuff is all linked and that is important 0:31:21.840 --> 0:31:25.000 because to have a successful market you need investors, You 0:31:25.080 --> 0:31:28.920 need speculators. Of course, you need natural buyers and hedgers, 0:31:29.400 --> 0:31:33.440 but you need market makers and arbitragers to tighten the 0:31:33.480 --> 0:31:36.880 market up so that there's plenty of liquidity on both 0:31:36.920 --> 0:31:37.400 sides of it. 0:31:37.800 --> 0:31:40.280 So you mentioned a lot of the changes that were 0:31:40.320 --> 0:31:45.600 put in place post eighty seven. We're still enjoying that. 0:31:46.480 --> 0:31:49.000 What was the fallout from eight oh nine. Are we 0:31:49.240 --> 0:31:53.360 still dealing with the aftershocks of that event? I mean, 0:31:53.680 --> 0:31:57.840 obviously twenty twenty and twenty one and twenty two we're 0:31:57.880 --> 0:32:01.360 still in the midst of But is there still an 0:32:01.400 --> 0:32:04.880 echo of eight o nine today? 0:32:05.800 --> 0:32:08.120 I don't know if I would say it's an echo. 0:32:08.240 --> 0:32:13.880 There's always a learning process when it comes to markets 0:32:13.920 --> 0:32:18.760 and liquidity events, and it's always in the short run. 0:32:19.480 --> 0:32:23.200 All markets moved because of supply and demand for money, 0:32:24.080 --> 0:32:28.680 and in eight there was issues, needless to say, but 0:32:28.720 --> 0:32:32.560 there was also some things which have been recently sprung up, 0:32:32.560 --> 0:32:36.360 for example, regulators saying, oh no, we shouldn't be allowed 0:32:36.360 --> 0:32:40.080 to short financial institutions. Now, if you remember part of 0:32:40.120 --> 0:32:44.320 the chaos in eight was associated with that because they 0:32:44.360 --> 0:32:45.360 banned short selling. 0:32:46.160 --> 0:32:46.360 Right. 0:32:46.600 --> 0:32:49.360 It was incredibly smart, I guess on the part of 0:32:49.400 --> 0:32:52.680 the regulators doing it right before an expiration. So you 0:32:52.880 --> 0:32:58.719 had this massive covering of eliminating short positions, but then 0:32:58.760 --> 0:33:00.800 you got rid of the market maker. Some of these 0:33:01.360 --> 0:33:05.160 financial stocks had you know, ten year ranges in twenty 0:33:05.200 --> 0:33:09.479 four hours. That's going to eliminate a lot of liquidity, right, 0:33:09.600 --> 0:33:11.920 and then the market's going to find its own natural level, 0:33:12.640 --> 0:33:14.960 which at that point was a lot lower. 0:33:15.280 --> 0:33:18.920 Right. You want people stepping in as buyers to cover 0:33:18.960 --> 0:33:23.040 those short positions. You don't want whisper campaigns mentioning companies 0:33:23.040 --> 0:33:25.760 are going out of business when they're not. So that 0:33:26.360 --> 0:33:30.080 not shorting financial institutions kind of brings us forward to 0:33:30.160 --> 0:33:32.400 what's been going on in the regional banks in twenty 0:33:32.520 --> 0:33:35.960 twenty three. How do you look at the first republics 0:33:35.960 --> 0:33:39.240 in Silicon Valley banks? Are these one offs or is 0:33:39.280 --> 0:33:43.320 this part of something that's more systemic or is this 0:33:43.600 --> 0:33:46.840 just the FED raising rates so quickly that they're breaking things? 0:33:48.200 --> 0:33:54.520 Wow, So that's such an interesting question. So is it systemic? 0:33:55.280 --> 0:33:57.880 I don't think it's systemic. I think that it has 0:33:57.920 --> 0:34:00.320 a lot to do with the way that at the 0:34:00.440 --> 0:34:05.800 management of these companies we're running them. SVB was a 0:34:05.920 --> 0:34:10.080 particular case because you had this massive inflow of VC 0:34:10.320 --> 0:34:14.520 capital and the problem is those are always naturally getting 0:34:14.520 --> 0:34:18.200 taken out because you're investing. At the same time, they 0:34:18.239 --> 0:34:21.759 decided to go as a FED is embarking on a 0:34:21.840 --> 0:34:25.839 rate high campaign, not to have a risk manager, so 0:34:26.000 --> 0:34:26.520 you can. 0:34:26.440 --> 0:34:28.959 But they did have hedges on in twenty twenty two. 0:34:29.600 --> 0:34:32.440 They just decided, hey, these are so profitable, we should 0:34:32.520 --> 0:34:33.000 ring the bell. 0:34:33.840 --> 0:34:38.880 Well, yeah, that's always if you're hedging, you're hedging for 0:34:38.960 --> 0:34:41.240 a reason, and are you hedging to trade. 0:34:41.920 --> 0:34:43.200 There's a difference, right. 0:34:43.080 --> 0:34:46.240 Well, they're a bank, so one would assume they're hedging 0:34:46.440 --> 0:34:50.960 interest rate duration risk. They just saw the win and said, hey, 0:34:51.040 --> 0:34:53.680 let's everybody, right, but everybody's going to get a good bonus. 0:34:53.719 --> 0:34:56.279 Right, But then they move from hedgeres to speculators, right, 0:34:56.360 --> 0:35:03.400 and if that's not your professional job, that becomes extraordinarily challenging. 0:35:03.600 --> 0:35:05.120 As as we we learned. 0:35:05.360 --> 0:35:10.720 And you know First Republic, which was a different type 0:35:10.719 --> 0:35:16.480 of institution, and you know they they were basically in 0:35:16.920 --> 0:35:18.520 think of that in the old days, right, they were 0:35:18.560 --> 0:35:22.799 giving away the toaster to try to get accounts, and 0:35:22.840 --> 0:35:28.000 then when rates started to go up. So think about this, right, 0:35:28.960 --> 0:35:33.080 the tenuere at its low and twenty was, you know, 0:35:33.160 --> 0:35:38.120 twenty basis points. Now we're at three seven, but historically 0:35:38.160 --> 0:35:41.719 three seven isn't very high. And it goes back to 0:35:41.760 --> 0:35:45.920 my earlier statement that people anchor to sort of the 0:35:46.200 --> 0:35:49.200 high or the low, so they assume it's going back there. 0:35:49.600 --> 0:35:53.440 That's a big risk management mistake to make that assumption. 0:35:53.800 --> 0:35:59.680 Let's talk a little bit about computerized trading, helping traders 0:35:59.680 --> 0:36:03.520 become better at their jobs and hiring traders. Let's start 0:36:03.560 --> 0:36:07.120 with that. What sort of traits should hedge funds be 0:36:07.360 --> 0:36:11.160 looking for if they want to hire a successful trader? 0:36:13.280 --> 0:36:17.799 If you're referring to a discretionary trader, right, so that's 0:36:17.840 --> 0:36:21.920 one bucket versus sort of a model based quantitative trader 0:36:22.400 --> 0:36:25.560 where you're looking at at their track records. 0:36:25.600 --> 0:36:26.480 Tell us about both. 0:36:26.680 --> 0:36:29.040 Well, So I'm going to start first with the quantitative. 0:36:29.320 --> 0:36:33.600 It's a little easier. I've never had a quantitrative trader 0:36:33.680 --> 0:36:37.320 come to me with a bad simulated track. 0:36:37.120 --> 0:36:39.759 Record, right, Models are always fens. 0:36:39.600 --> 0:36:41.440 Right, I'm waiting for the guy to come in with 0:36:41.480 --> 0:36:43.200 a minus two sharp going height. 0:36:43.640 --> 0:36:44.680 It can only get better. 0:36:45.760 --> 0:36:48.200 But by the way, what back test ever is best? 0:36:48.280 --> 0:36:48.480 Yes? 0:36:48.640 --> 0:36:52.759 Yeah, well I'm super I can predict yesterday perfectly. I'm 0:36:52.840 --> 0:36:54.799 very good at that. I try to, you know, come 0:36:54.840 --> 0:36:57.880 on here, I'll tell you what happened, No problem. 0:36:58.200 --> 0:37:00.839 Who has a better track record than heinz PS Capital, Yeah, 0:37:00.840 --> 0:37:01.359 they're the best. 0:37:01.600 --> 0:37:04.759 Yeah, and it's the hedge fund is there. But it's 0:37:04.800 --> 0:37:08.640 why in seriousness that you know the first line of 0:37:08.680 --> 0:37:12.640 every disclosure document his past performance is non indicative of 0:37:12.719 --> 0:37:16.040 future results. But everybody looks at past performance. So on 0:37:16.080 --> 0:37:20.120 the quant side, you have to look at real time 0:37:20.200 --> 0:37:24.760 data and you also have to segment it to sort 0:37:24.800 --> 0:37:29.120 of the it's strategy relative to market. So if you 0:37:29.160 --> 0:37:32.399 look at last year, a lot of CTAs and trend 0:37:32.480 --> 0:37:35.919 followers did really well, and you'd have a great real 0:37:36.000 --> 0:37:37.319 time track record. 0:37:37.200 --> 0:37:39.920 Because you had a defined move in a specific direction 0:37:40.000 --> 0:37:40.880 that was sustained. 0:37:41.160 --> 0:37:43.920 Yes, So there's two things about that. One they'll come 0:37:43.920 --> 0:37:45.440 to me and to go, oh man, man, we just 0:37:45.480 --> 0:37:48.839 had the best year since Wait another year where there's 0:37:48.880 --> 0:37:52.239 a lot of dislocations, and I'm like, man, that's fantastic. 0:37:52.280 --> 0:37:55.080 Once every fifteen years, do me a favor come back 0:37:55.120 --> 0:37:58.080 in thirteen. I don't want to be late. But the 0:37:58.160 --> 0:38:00.759 reality is, if you want to dig deeper in that, 0:38:01.120 --> 0:38:03.960 then you start looking at, well, what markets did you trade, 0:38:04.400 --> 0:38:08.000 Why did you do that? Why did you exclude Coco? Well, 0:38:08.040 --> 0:38:10.480 Coco's not a good trend following market. How do you 0:38:10.560 --> 0:38:14.520 know that? Well, then you've overoptimized. So you really have 0:38:14.560 --> 0:38:19.879 to start digging deep, asking very very tough questions. When 0:38:19.960 --> 0:38:25.120 it comes to these quantitative strategies, frequency of trading, volatility, 0:38:25.719 --> 0:38:29.200 draw downs's and all. This is more of an art 0:38:29.360 --> 0:38:32.360 than it is a science. And that also applies on 0:38:32.440 --> 0:38:36.160 the discretionary trading side. But on the discretionary trading side, 0:38:36.520 --> 0:38:39.279 you have that other element that you have to put 0:38:39.320 --> 0:38:43.360 on top of that, which is the emotional. 0:38:43.360 --> 0:38:45.120 And the psychological. 0:38:45.840 --> 0:38:48.120 And one of the things I always say is that 0:38:48.200 --> 0:38:52.560 every successful trader has a near death experience. I just 0:38:52.600 --> 0:38:56.080 hope they have it before we've allocated to them. And 0:38:56.160 --> 0:38:59.560 so it's not that they've had it, it's how you 0:38:59.600 --> 0:39:03.320 recover from it. And so it's one of these things 0:39:03.320 --> 0:39:07.160 that math works. And so sometimes there's a trader and 0:39:07.400 --> 0:39:09.839 he'll come into my office and I'll go Pete. I 0:39:09.840 --> 0:39:12.520 can't believe it. I just had my worst day ever. 0:39:13.640 --> 0:39:16.200 And I'm like, well, I've got good news and bad 0:39:16.239 --> 0:39:18.040 news for you, and he. 0:39:18.040 --> 0:39:19.919 Goes, well, what's the good news? 0:39:20.000 --> 0:39:23.120 I go, well, you're still within your risk parameters. You 0:39:23.160 --> 0:39:26.480 didn't violate any of our trading rules, so you still 0:39:26.480 --> 0:39:28.960 have a job. And they go, well, then what's the 0:39:29.000 --> 0:39:31.200 bad news? I go, If you're in business long enough, 0:39:31.280 --> 0:39:34.520 you're going to have a worse trade, because that's just 0:39:34.600 --> 0:39:39.000 the law of large numbers. Records are made to be broken. 0:39:39.320 --> 0:39:40.399 If I told you. 0:39:40.320 --> 0:39:43.000 Twenty years ago that someone was going to break Kareem 0:39:43.160 --> 0:39:50.080 scoring record in basketball, unbelievable. Are Lebron James did it 0:39:50.120 --> 0:39:52.080 this year? All the credit in the world for him. 0:39:52.080 --> 0:39:54.839 But it's a little bit like trading options. So if 0:39:54.880 --> 0:39:58.760 you continually buy premium thinking a record's going to be broken, 0:39:59.120 --> 0:40:01.640 you probably run out of money before it does. And 0:40:01.719 --> 0:40:04.520 if you continually sell premium thinking the records are never 0:40:04.600 --> 0:40:07.200 going to be broken, you go broke when it is broken. 0:40:07.640 --> 0:40:10.600 So you have to have that discipline, and it's an 0:40:10.680 --> 0:40:12.760 extraordinarily tough business. 0:40:12.440 --> 0:40:15.120 To say the very least. Let's talk about a quote 0:40:15.120 --> 0:40:19.200 of yours that I havepen to really like fundamentals aren't wrong, 0:40:19.800 --> 0:40:22.040 you are. Explain what that means. 0:40:23.040 --> 0:40:28.120 It means that the market is the scoreboard, and if 0:40:28.160 --> 0:40:32.040 you think you're right and you think the fundamentals are wrong, 0:40:32.080 --> 0:40:34.080 you're going to take a small loss and turn it 0:40:34.120 --> 0:40:39.160 into a large loss. Trading works best when the fundamentals 0:40:39.239 --> 0:40:44.839 and the technicals intersect. Too often, one just looks at 0:40:44.960 --> 0:40:49.040 either one or the other. So we could say today, well, 0:40:49.080 --> 0:40:51.960 we think the fundamentals are deteriorating. There's no way the 0:40:52.040 --> 0:40:54.920 S and P should be at forty two hundred. I'm 0:40:54.960 --> 0:40:58.360 going to get short, but there's no technical indication in 0:40:58.400 --> 0:41:00.919 the markets today that you should be short. 0:41:01.320 --> 0:41:03.680 Right, the number of fifty two glows is falling. The 0:41:03.719 --> 0:41:06.320 breath is pretty good, and when you look, especially outside 0:41:06.320 --> 0:41:10.400 of the US, a lot of positive up trends. People 0:41:10.480 --> 0:41:12.760 have a tendency to ignore that and they're just focused 0:41:12.800 --> 0:41:15.120 at what's going on. Look at the Russell small cap 0:41:15.120 --> 0:41:17.640 in the US. It's doing terrible. We're due to crash. 0:41:18.680 --> 0:41:19.400 That's correct. 0:41:19.640 --> 0:41:22.520 So what you do for me in that case, I'm 0:41:22.560 --> 0:41:25.040 looking for if you want to look to sell it 0:41:25.080 --> 0:41:26.880 and pick a level, then you look for the Russell 0:41:26.960 --> 0:41:31.279 to start doing better. And reaching key technical levels and 0:41:31.400 --> 0:41:35.839 then you can probe and you look for divergences all 0:41:35.880 --> 0:41:38.319 the time. So you look at the transports which have 0:41:38.440 --> 0:41:43.000 been lagging for today. But these are all signs. They're 0:41:43.040 --> 0:41:46.880 not things in which you should be taking action. You 0:41:47.080 --> 0:41:49.520 have to be patient. And a lot of times you 0:41:49.600 --> 0:41:52.399 talk about traders and discretionary traders in particular, and I'll 0:41:52.400 --> 0:41:57.880 speak to them not trading is a trade right, and 0:41:58.480 --> 0:42:01.880 just because you're sitting in front of them screen doesn't 0:42:01.920 --> 0:42:07.640 mean you have to do something. And that takes tremendous discipline, 0:42:07.840 --> 0:42:10.880 because particularly if you get paid to share of the 0:42:10.880 --> 0:42:14.640 profits and you're like, there's nothing going on now. Some 0:42:14.680 --> 0:42:17.960 of the best traders I know, they'll be like, Okay, 0:42:18.440 --> 0:42:21.720 I did something. It's ten thirty, I've made some money. 0:42:22.280 --> 0:42:26.399 I'm out of here for the day. And that's fine. 0:42:26.920 --> 0:42:30.719 However you do it, however you force your own self discipline. 0:42:31.080 --> 0:42:34.560 But just trading to trade is a terrible strategy. 0:42:34.760 --> 0:42:38.279 That's the great Warren Buffett quote. Unlike baseball, there are 0:42:38.280 --> 0:42:41.120 no Colt strikes and markets. You could sit there with 0:42:41.200 --> 0:42:43.680 a bat on your shoulder and just wait for your pitch. 0:42:44.360 --> 0:42:45.040 That's correct. 0:42:45.440 --> 0:42:46.440 So let's talk a lot. 0:42:46.480 --> 0:42:48.359 A lot of people are into business because they love 0:42:48.400 --> 0:42:49.960 the action and sitting. 0:42:50.160 --> 0:42:52.719 Oh well, we're all junkies. We're all looking for you 0:42:52.840 --> 0:42:53.560 that dopamine. 0:42:53.600 --> 0:42:55.359 So sitting with your bat on your shoulder is really 0:42:55.360 --> 0:42:55.920 tough for somebody. 0:42:56.000 --> 0:43:00.160 Yeah, yeah, absolutely. If I'm always surprised at traders who 0:43:00.160 --> 0:43:02.400 are also gamblers, like to go to Vegas, like to 0:43:02.440 --> 0:43:06.440 play play blackjack. It's like, don't you get enough excitement traders. 0:43:06.719 --> 0:43:10.520 I don't gamble at all. I don't bet on I'm 0:43:10.520 --> 0:43:12.640 a fan, right, So I'm a Michigan fan. I'm a 0:43:12.719 --> 0:43:15.600 nick fan. God, I'm a Jets fan. I'm a Mets fan. 0:43:15.680 --> 0:43:18.720 So we can you you are a glutton for punishment. 0:43:18.320 --> 0:43:20.000 Yes, we can have a whole psychological well. 0:43:19.880 --> 0:43:23.319 At least at least Michigan has been doing. Football has 0:43:23.320 --> 0:43:23.960 been doing better. 0:43:24.040 --> 0:43:27.480 Yes, and they had a good run in basketball. But 0:43:28.440 --> 0:43:30.640 I'm a fan. I enjoy I never bet on sports. 0:43:30.880 --> 0:43:34.800 Let's talk about betting on natural gas. We have had 0:43:35.040 --> 0:43:38.160 a kind of wild market and energy over the past 0:43:38.239 --> 0:43:43.400 couple of years, not just the Russian invasion of Ukraine, 0:43:43.960 --> 0:43:47.480 but all the things that have been happening in both 0:43:47.560 --> 0:43:52.240 oil and gasoline and natural gas. You're a natural gas trader, 0:43:52.280 --> 0:43:54.719 how do you look at what's going on in that 0:43:54.840 --> 0:43:57.840 market and tell us where the price of energy is 0:43:57.840 --> 0:43:59.880 going to be in a couple of weeks or months. 0:44:01.080 --> 0:44:04.520 So for everybody that's listening, whatever I do, do the 0:44:04.560 --> 0:44:09.840 opposite and you may have a chance of success. So 0:44:10.000 --> 0:44:14.879 natural gas, in terms of how it's behaved, it's had 0:44:14.920 --> 0:44:19.520 a round trip. So where the prices today is close 0:44:19.640 --> 0:44:22.960 to where oil was when it was zero in April 0:44:23.480 --> 0:44:25.560 of twenty just to give you a sense. 0:44:25.920 --> 0:44:26.880 So natural gas. 0:44:27.200 --> 0:44:30.920 Also round trip, and gasoline is almost a round trip, right. 0:44:31.040 --> 0:44:35.360 But not nearly to the extent. So this again becomes 0:44:35.840 --> 0:44:40.319 listen to the markets, don't listen to the gossip. And 0:44:40.719 --> 0:44:43.480 so where we are right now, in my mind in 0:44:44.160 --> 0:44:48.000 natural gas, which is different than crude, is a little 0:44:48.000 --> 0:44:53.360 bit counter cyclical. Because we've had warmer than normal weather, 0:44:53.440 --> 0:44:57.000 we had extra storage and that put downward pressure in winter. 0:44:57.520 --> 0:44:59.520 Now it looks like that's going to reverse and we're 0:44:59.520 --> 0:45:02.759 going to have a sort of really hot summer. And 0:45:02.840 --> 0:45:06.280 you can ascribe that to climate change. 0:45:06.400 --> 0:45:09.440 Or al Nino and stuff. 0:45:09.960 --> 0:45:13.560 You know, you can decide whatever you want to call it, 0:45:13.600 --> 0:45:16.120 but the facts are the facts. Right, If it's hot, 0:45:16.160 --> 0:45:17.800 and we're going to be burning and you're going to 0:45:17.880 --> 0:45:22.120 need to be cooling at the same time. A lot 0:45:22.160 --> 0:45:25.560 of this thought that, you know, natural gas and the 0:45:25.640 --> 0:45:29.279 economy was going to weaken, and in general, we were 0:45:29.719 --> 0:45:32.560 taught to try to buy low and sell high. We 0:45:32.719 --> 0:45:35.200 just talked earlier how most times in the markets, buyers 0:45:35.239 --> 0:45:38.040 are higher and sellers are lower. So we're sitting there 0:45:39.080 --> 0:45:43.760 trying to put a position on sort of spreading summer 0:45:44.080 --> 0:45:47.279 natural gas and hedging it a little bit by being 0:45:47.400 --> 0:45:49.080 short winter next year. 0:45:49.400 --> 0:45:51.720 So we're recording this at the end of May twenty 0:45:51.760 --> 0:45:56.239 twenty three. How do you look at macro events? The 0:45:56.320 --> 0:46:00.319 Russian invasion of Ukraine just being one example, Does that 0:46:00.440 --> 0:46:03.279 affect the way you look at what the market is 0:46:03.280 --> 0:46:06.960 telling you? Or is that just gossip? By the time 0:46:07.520 --> 0:46:09.560 it's in the newspaper, it's already in the price. 0:46:09.760 --> 0:46:10.680 No, you have to. 0:46:11.040 --> 0:46:12.640 Look at all these things, and I think there's an 0:46:12.680 --> 0:46:18.239 important lesson here. When there's tremendous amount of market uncertainty, 0:46:18.680 --> 0:46:23.600 you need to trade smaller, right, because that's what kills you. 0:46:23.520 --> 0:46:25.719 You know, periods of low volatility, which we're in now, 0:46:25.800 --> 0:46:29.319 then tend to be followed by higher volatility. A lot 0:46:29.360 --> 0:46:32.960 of models are predicated on looking backwards over recent volatility, 0:46:33.400 --> 0:46:37.239 and then you're trading too large. And I really want 0:46:37.280 --> 0:46:40.760 to distinguish because there's people talk all the time about 0:46:41.040 --> 0:46:44.400 black swans and they go, oh, this black swan could happen, 0:46:44.480 --> 0:46:46.920 or that black swan could happen, and I'm like, if 0:46:46.960 --> 0:46:49.960 you're talking about it, it's not a black swan. That's 0:46:50.080 --> 0:46:54.040 risk management, that's smart. A black swan is when you 0:46:54.120 --> 0:46:57.320 wake up in the morning and a condo in Florida 0:46:57.360 --> 0:46:59.400 has collapsed, or you wake up in the morning in 0:46:59.480 --> 0:47:03.759 Abe's assassinated. These aren't things that you put into your 0:47:03.800 --> 0:47:05.000 risk management models. 0:47:05.040 --> 0:47:06.799 But if you. 0:47:06.760 --> 0:47:09.879 Survive, you win, so you should really probably at these 0:47:09.880 --> 0:47:12.560 periods of uncertainty, So is there going to be a 0:47:12.640 --> 0:47:16.160 Ukrainian offensive? What is that going to do? And how 0:47:16.239 --> 0:47:19.880 is that going to affect the situation with Russia? 0:47:20.000 --> 0:47:21.520 Are they going to be threatening? 0:47:21.960 --> 0:47:25.320 They are a nuclear power? Is that just a threat 0:47:25.320 --> 0:47:29.560 to try to keep them or God forbid, something worse happens. 0:47:30.239 --> 0:47:33.920 I have no idea. I don't think anybody can have 0:47:34.000 --> 0:47:36.520 that idea because you can't get into the head of 0:47:36.560 --> 0:47:40.880 the leaders of Russia decide how they're going to act, 0:47:41.280 --> 0:47:46.120 But from a trading perspective, I think that you need 0:47:46.160 --> 0:47:47.080 to trade smaller. 0:47:47.200 --> 0:47:47.480 Now. 0:47:47.880 --> 0:47:50.200 One of the things that I find really interesting right 0:47:50.239 --> 0:47:53.799 now this time of year is that because if there 0:47:53.840 --> 0:47:57.319 is climate change and you have grain prices that are 0:47:57.560 --> 0:48:02.880 pre pandemic levels, it could be really fascinating and exciting 0:48:03.200 --> 0:48:07.400 to have sort of a summer rally in soybeans and corn, 0:48:07.760 --> 0:48:10.600 and the risk reward of buying them right here is 0:48:11.120 --> 0:48:14.640 fantastic because you've had a wet period of time. If 0:48:14.680 --> 0:48:19.640 you get dry and you don't have good growing conditions 0:48:19.680 --> 0:48:21.719 in the Midwest here. At the same time, you have 0:48:21.840 --> 0:48:26.000 uncertainty in the Ukraine, which is a large producer of 0:48:26.080 --> 0:48:29.799 grains basket. So yeah, so this could be And there's 0:48:29.880 --> 0:48:34.160 nothing more fun than a summer bull market in greens. 0:48:34.680 --> 0:48:38.680 So I've never quite heard that sentence before, nothing more 0:48:38.760 --> 0:48:40.880 fun than a bull market in the summer in grains. 0:48:41.520 --> 0:48:47.120 You've pointed out the psychology and self discipline. How can 0:48:47.160 --> 0:48:51.000 you teach traders to manage their emotions and to not 0:48:51.719 --> 0:48:56.279 allow their either their enthusiasm or despair to affect their 0:48:56.320 --> 0:48:57.160 trading behavior. 0:48:59.800 --> 0:49:07.000 The best teacher, unfortunately, is failure and how you deal 0:49:07.080 --> 0:49:11.680 with that failure. So many times people would come into 0:49:11.680 --> 0:49:14.120 my office after a really bad day. They sit down, 0:49:14.200 --> 0:49:17.480 they put their hands on their head, and they go, oh, 0:49:17.680 --> 0:49:21.480 why the hell am I in this business? Now what 0:49:21.560 --> 0:49:23.920 you can do and we've all done this. If you 0:49:24.000 --> 0:49:28.120 get out of all your positions, you emotionally cleanse yourself. 0:49:30.040 --> 0:49:32.760 But are you able to get back in the game. 0:49:33.239 --> 0:49:36.960 Because you can emotionally cleanse yourself and leave the game 0:49:37.360 --> 0:49:39.080 and you'll never be able to make your money back. 0:49:39.120 --> 0:49:42.040 So how do you handle that adversity? 0:49:42.800 --> 0:49:47.160 Success? Okay, most people enjoy success, but it doesn't teach 0:49:47.200 --> 0:49:49.160 you anything correct. 0:49:48.840 --> 0:49:52.279 In the trading business. It's how you deal. What did 0:49:52.320 --> 0:49:55.440 you do? And you have to really be self aware. 0:49:55.520 --> 0:49:58.560 Did I hold on to the position too long? Was 0:49:58.600 --> 0:50:03.040 I too big? Was I gossiping with other people? And 0:50:03.120 --> 0:50:07.800 I lost my discipline? You really have to break it down. 0:50:08.120 --> 0:50:11.520 And it all comes back to the fact that you 0:50:11.719 --> 0:50:16.920 have to admit that it's my fault as the trader. 0:50:17.600 --> 0:50:19.480 I'm the one that's grewed up. 0:50:19.600 --> 0:50:22.120 Well, you mean it's not the fed's faults. Because I've 0:50:22.440 --> 0:50:27.799 spent the past decade listening to managers and economists and 0:50:28.200 --> 0:50:30.719 traders tell me, well, my P and L would be 0:50:30.800 --> 0:50:34.400 much better. But this QE and the FED doing this, 0:50:34.960 --> 0:50:36.719 how can anybody trade in that environment? 0:50:36.840 --> 0:50:41.040 Yeah, I've as the years have gone on, I've gotten 0:50:41.400 --> 0:50:44.760 a lot better at taking credit for success and blaming 0:50:44.800 --> 0:50:49.560 others for my failure. And yeah, it's a good way 0:50:49.560 --> 0:50:53.319 to go. But you're living in Lola Land if that's 0:50:53.320 --> 0:50:57.840 how you think you are, what your track record is. 0:50:58.280 --> 0:51:03.080 And it's the sports scenario. If you're playing baseball and 0:51:03.160 --> 0:51:05.560 the team gives you a shot and you're batting one 0:51:05.719 --> 0:51:10.000 fifty and they take you out of the lineup, it's 0:51:10.040 --> 0:51:11.480 not the manager's fault, it's. 0:51:11.360 --> 0:51:15.839 The umpire, the umpires calling those outside pitches strikes. How 0:51:15.880 --> 0:51:18.040 can anybody get a fair shot at the plate with that? 0:51:18.040 --> 0:51:20.840 That's true, But if he is, just like in the markets, 0:51:20.880 --> 0:51:23.200 you got to you have to adjust, Yes, you have 0:51:23.280 --> 0:51:24.040 to adjust. 0:51:23.760 --> 0:51:26.480 To That's exactly right. So let's talk a little bit 0:51:26.600 --> 0:51:29.880 about robin Hood. It could be one of the more 0:51:30.680 --> 0:51:36.319 famous Wall Street based philanthropies in New York, especially giving 0:51:36.360 --> 0:51:40.799 its longevity. How did the idea come about? How big 0:51:40.840 --> 0:51:43.600 a factor was the eighty seven crash in the creation 0:51:43.680 --> 0:51:44.360 of Robinhood. 0:51:46.320 --> 0:51:51.040 So it's probably of all the things something I'm most 0:51:51.080 --> 0:51:56.080 proud about being associated with that since the beginning, and 0:51:56.719 --> 0:52:03.640 again really kudos to Paul for his leadership in doing that. 0:52:03.960 --> 0:52:04.880 So, as I said. 0:52:04.680 --> 0:52:07.360 Earlier, we really thought that there could be some economic 0:52:07.440 --> 0:52:15.200 struggles following eighty seven. And one of the things about 0:52:15.480 --> 0:52:19.719 trickle down, and I need to fully disclose, yeah, I'm 0:52:19.760 --> 0:52:23.640 a Democrat that believes in markets, is that when things 0:52:23.760 --> 0:52:28.200 go bad, it's those at the bottom that get hurt first. 0:52:29.520 --> 0:52:34.000 And we've seen that repeatedly. And so when we thought 0:52:34.040 --> 0:52:37.760 about helping New York. Now you have to realize nineteen 0:52:37.840 --> 0:52:42.000 eighty eight we gave away sixty five thousand. 0:52:41.640 --> 0:52:45.120 Dollars, not exactly a huge amount of money. 0:52:45.120 --> 0:52:49.160 No, last year we gave away one hundred and thirty million. 0:52:49.480 --> 0:52:53.000 That's a chunk of change. Yes, and you guys have 0:52:53.040 --> 0:52:55.160 been doing this every year for thirty five years. 0:52:55.239 --> 0:52:57.560 Yes, And the model was different. And why did we 0:52:57.600 --> 0:53:01.359 start it because Paul's an entrepreneur and the one thing 0:53:01.440 --> 0:53:04.680 and we're market people, and we said, you know what, 0:53:04.800 --> 0:53:06.560 if we do a good job, we'll be able to 0:53:06.600 --> 0:53:09.239 raise the money. And I don't want people to give 0:53:09.320 --> 0:53:11.160 us money in us not spend it. 0:53:11.719 --> 0:53:13.719 So we have two rules. 0:53:14.280 --> 0:53:17.160 One is if you give us a dollar, we're going 0:53:17.200 --> 0:53:19.360 to put it out the door in the next twelve months. 0:53:20.000 --> 0:53:22.400 And two we're paying. 0:53:22.160 --> 0:53:25.319 For the overhead the board. So if you give us 0:53:25.320 --> 0:53:26.359 a dollar, it's getting paid. 0:53:26.400 --> 0:53:27.120 It's not being one. 0:53:27.080 --> 0:53:30.600 Hundred cents on the dollar goes out from donated cash. 0:53:30.680 --> 0:53:31.440 That's correct. 0:53:32.280 --> 0:53:35.440 And who are the donors to the robin Hood Foundation. 0:53:35.600 --> 0:53:39.760 Besides you and Pull Tutor Jones and that original. 0:53:39.360 --> 0:53:44.160 Crew, there's literally thousands and after nine to eleven and 0:53:44.239 --> 0:53:50.080 Sandy and during the pandemic, tens of thousands of donors 0:53:50.080 --> 0:53:54.440 from all different sizes. Now we're sitting here in Bloomberg 0:53:55.000 --> 0:53:58.360 and Mayor Mike through the Bloomberg Philanthropies is one of 0:53:58.360 --> 0:54:02.719 the largest donor and supporters of New York. Now Robinhood 0:54:03.080 --> 0:54:09.080 focuses on sort of the overriding goal is mobility from. 0:54:08.920 --> 0:54:12.920 Poverty, meaning economic motibility, the ability to pull yourself up 0:54:12.960 --> 0:54:14.000 from a bad condition. 0:54:14.320 --> 0:54:15.320 That's correct. 0:54:15.400 --> 0:54:19.120 And within that, you know, we're we were the first 0:54:19.120 --> 0:54:21.440 funders of charter schools in New York City. We're the 0:54:21.520 --> 0:54:25.759 largest funders of food pantries. You have to have a 0:54:25.800 --> 0:54:28.320 holistic approach, and if you walk around New York and 0:54:28.360 --> 0:54:30.600 if you love New York City. What are the four 0:54:30.640 --> 0:54:36.240 issues right you see them. There's homelessness, there's mental health, 0:54:37.440 --> 0:54:43.920 there's food insecurity, and there's immigration and that together. If 0:54:43.960 --> 0:54:48.360 you could do that through job training, through education, through 0:54:48.520 --> 0:54:52.839 support systems, and we do that also we have try 0:54:52.880 --> 0:54:56.640 to use technology to help that, to put people on 0:54:56.760 --> 0:55:01.240 a path of a better life. Is it a challenge, absolutely, 0:55:01.600 --> 0:55:03.880 But we go back about the trading business and talking 0:55:03.960 --> 0:55:07.399 about how bad a day can be. But the thing 0:55:07.480 --> 0:55:10.200 that keeps it always in perspective. No matter how bad 0:55:10.239 --> 0:55:15.040 a day I have, the people that we're helping, their 0:55:15.120 --> 0:55:18.280 days are far worse. And if you keep that in perspective, 0:55:18.320 --> 0:55:21.960 you're going to help others who are less fortunate. 0:55:22.520 --> 0:55:26.040 How do you measure success for a charity? As a trader, 0:55:26.080 --> 0:55:28.439 you get a P and L. You know exactly whether 0:55:28.440 --> 0:55:31.600 you're right or wrong. How can you tell the impact 0:55:31.719 --> 0:55:35.160 of your dollars whether or not they're successful or not. 0:55:36.120 --> 0:55:39.480 So that's a really outstanding question, and that's something that 0:55:39.760 --> 0:55:46.320 Robinhood has been particularly innovative in in trying to measure metrics. 0:55:46.600 --> 0:55:49.920 So if it's a job training program, it's not just 0:55:50.000 --> 0:55:52.160 a number of people that are in there. For example, 0:55:53.280 --> 0:55:57.800 how once they graduate, where's their starting salary relative. 0:55:57.400 --> 0:55:58.600 To where they were beforehand? 0:55:59.000 --> 0:56:02.399 Do they still have that job a year later? Are 0:56:02.400 --> 0:56:05.560 they making more money? Are they at some percentage above 0:56:05.600 --> 0:56:11.960 the poverty level? If you're funding charter schools, where are 0:56:12.000 --> 0:56:14.840 they are the kids graduating? Are they going to college? 0:56:14.920 --> 0:56:19.560 Are you tracking them? Are they getting employment? So it's 0:56:19.719 --> 0:56:24.080 all very data intensive and metric intensive. Now, there are 0:56:24.080 --> 0:56:30.200 some things right you're if unfortunately, if you're a woman 0:56:30.239 --> 0:56:33.759 and you've been battered and you have kids, before they 0:56:33.800 --> 0:56:38.360 can go to job training or education, they need to 0:56:38.400 --> 0:56:41.520 have a safe place to say. So, we fund shelters 0:56:42.080 --> 0:56:44.560 and where we are, and we do food support because 0:56:44.560 --> 0:56:49.680 it has to be a holistic approach, this movement from poverty, 0:56:50.200 --> 0:56:54.520 and as a parent, just as you're dealing with your 0:56:54.560 --> 0:56:58.240 own children, that's what you're doing. It's a holistic approach. 0:56:58.400 --> 0:57:01.640 It's not okay, here's one magic bullet. I wish that 0:57:01.680 --> 0:57:05.359 were the case, but it isn't. And like any organization, 0:57:06.280 --> 0:57:10.080 the key is not me, not Paul, not the other 0:57:10.360 --> 0:57:11.080 board members. 0:57:11.480 --> 0:57:12.960 It's the quality of the staff. 0:57:13.000 --> 0:57:18.760 And we have committed, innovative staff that has really pushed 0:57:18.960 --> 0:57:22.120 robin Hood along the way, and that started you know, 0:57:22.200 --> 0:57:26.600 with our leaders and president, from David Saltzman to Wes 0:57:26.600 --> 0:57:29.560 Moore who's now the governor of Maryland, to our newest 0:57:29.560 --> 0:57:32.840 one rich Bury, and so we're really fortunate to have 0:57:33.040 --> 0:57:34.080 excellent team. 0:57:34.280 --> 0:57:36.640 You mentioned charter schools. Tell us a little bit about 0:57:36.640 --> 0:57:40.840 the Kip charter school in the Bronx and why Robinhood 0:57:40.880 --> 0:57:46.080 has been so active in promoting and developing charter schools 0:57:46.560 --> 0:57:49.520 in some of the poorer neighborhoods in New York City. 0:57:51.080 --> 0:57:54.960 Well, we're markets people, so we think that competition is 0:57:55.000 --> 0:57:58.480 a good thing. We know that charter schools aren't going 0:57:58.520 --> 0:58:01.840 to be a replacement for all public schools. But if 0:58:01.880 --> 0:58:07.240 you think about technology in general, right, it's innovation and change. 0:58:07.840 --> 0:58:12.400 And if you think about the KITP model, it's really 0:58:12.520 --> 0:58:15.760 like a parent. So if you have a child and 0:58:15.800 --> 0:58:18.640 they're not doing well, what do you do? You give 0:58:18.680 --> 0:58:22.920 them extra resources, You give them extra homework, and so 0:58:23.000 --> 0:58:26.880 they may come home from school and you're working with them. Now, 0:58:26.920 --> 0:58:30.840 if you have parents who are working the overnight shift 0:58:30.920 --> 0:58:33.919 in a hospital, they don't have that ability to give 0:58:34.040 --> 0:58:38.160 their children that extra time because they're working. 0:58:38.560 --> 0:58:43.920 So these schools do that and meaning extended hours tutors exactly. 0:58:44.320 --> 0:58:48.200 They're providing the resources and the opportunities for those students 0:58:48.640 --> 0:58:52.720 who they wouldn't normally have in a traditional public school model. 0:58:53.160 --> 0:58:56.440 Let's talk about what you guys do at Robinhood for 0:58:56.600 --> 0:59:01.360 Public Schools. Tell us about Math for America that seeks 0:59:01.360 --> 0:59:04.280 to improve math education in US public schools. 0:59:04.360 --> 0:59:06.680 So Robinhood Foundation of Math for America. Those are the 0:59:06.680 --> 0:59:09.120 two non for profit boards that I sit on. And 0:59:09.160 --> 0:59:14.320 I've been blessed really because Math for America was started 0:59:14.320 --> 0:59:17.080 by Jim Simons, and we all know what a legend 0:59:17.200 --> 0:59:20.440 Jim science is in the hedgephone world. In the education space, 0:59:20.600 --> 0:59:24.520 that model was predicated in how do we keep better 0:59:24.600 --> 0:59:29.439 math and science teachers in public schools? The assumption being 0:59:29.480 --> 0:59:34.320 which isn't rocket scientists even though he had more, well, yes. 0:59:34.080 --> 0:59:35.920 Given for the students resources. 0:59:35.960 --> 0:59:38.400 If you have really good teachers, you're likely to have 0:59:38.480 --> 0:59:41.680 better outcomes. So how do you keep really good teachers 0:59:41.720 --> 0:59:44.520 in schools when there's a lot of competition for them? 0:59:44.920 --> 0:59:46.960 So we've done two things at Math for America. We've 0:59:47.080 --> 0:59:52.480 established a community of master math science teachers where they 0:59:52.520 --> 0:59:56.960 can come together and learn and teach. And also we 0:59:57.040 --> 1:00:00.479 provide them a stipend, so there's an incentive for them 1:00:00.520 --> 1:00:04.760 to stay in their schools. And it's really fascinating because 1:00:05.120 --> 1:00:07.280 even though all the teachers in the schools aren't there, 1:00:08.040 --> 1:00:10.920 a good captain, a good player makes the players around 1:00:10.960 --> 1:00:13.560 them better. And so what they're doing and what they've 1:00:13.600 --> 1:00:16.120 taken back from you know, coming down to math for 1:00:16.160 --> 1:00:19.360 America for these sessions and bringing it back to school, 1:00:19.360 --> 1:00:22.280 I think helps all the teachers, which helps all the students. 1:00:23.160 --> 1:00:26.800 Before we get to our favorite questions, let me throw 1:00:26.840 --> 1:00:31.280 a curveball at you, which I find intriguing. You like 1:00:31.400 --> 1:00:36.560 to quote Captain E. J. Smith who famously said quote 1:00:36.600 --> 1:00:39.400 when anyone asked me how I can best describe my 1:00:39.560 --> 1:00:45.520 experience in nearly forty years at sea, I merely say uneventful. 1:00:45.880 --> 1:00:47.840 Why is that quote so intriguing to you? 1:00:49.520 --> 1:00:51.400 Well, not only did he say that, but he said 1:00:51.400 --> 1:00:54.800 it sort of just before the launching of the Titanic. 1:00:55.280 --> 1:00:57.240 And I think if you've listened at all time, and 1:00:57.320 --> 1:00:59.400 he was the captain of yes, he was the captain 1:00:59.440 --> 1:01:03.800 of the titan If you listen to anything or taking 1:01:03.880 --> 1:01:08.880 anything out of this podcast, is that complacency in anything, 1:01:08.920 --> 1:01:16.320 but particularly in the markets, is extraordinarily dangerous, and one 1:01:16.400 --> 1:01:20.040 should take away from that that bad things can and 1:01:20.120 --> 1:01:25.360 will happen in the markets. So that means trade smaller, 1:01:25.960 --> 1:01:30.840 have really good risk management, and don't believe your success 1:01:31.320 --> 1:01:32.680 when you're trading successfully. 1:01:33.040 --> 1:01:36.080 Let's jump to our favorite questions that we ask all 1:01:36.120 --> 1:01:40.440 of our guests, starting with tell us what you've been 1:01:41.240 --> 1:01:44.040 entertaining yourself with. What are you listening to or watching, 1:01:44.560 --> 1:01:46.760 be it Netflix or podcasts or whatever. 1:01:47.560 --> 1:01:51.680 Ah well, so we have a sort of group consideration 1:01:51.720 --> 1:01:55.040 at home. Of course, we're finishing succession right, there's two 1:01:55.440 --> 1:01:59.480 upright and at the same time, Barry and Ted Lasso. 1:01:59.560 --> 1:02:02.120 So those post Memorial Day, I think we're gonna have 1:02:02.160 --> 1:02:04.520 to find some new things. 1:02:04.600 --> 1:02:07.640 I'll make a recommendation to you. It's only eight episodes 1:02:08.160 --> 1:02:12.000 and I'm only halfway through it. But the Diplomat, Yes, 1:02:12.040 --> 1:02:15.640 that's next, that's next. On our really well done, really 1:02:15.960 --> 1:02:18.040 fascinating characters. I'm really I'm really enjoying it. 1:02:18.120 --> 1:02:20.560 And when I'm sitting around and trying to clear the 1:02:20.640 --> 1:02:26.000 head and reading, I try. I like historical novels. 1:02:26.240 --> 1:02:28.000 Well, we're gonna come up to books in a moment, 1:02:28.360 --> 1:02:30.920 so put a pin in that. Tell us about your 1:02:30.920 --> 1:02:33.160 early mentors who helped shape your career. 1:02:34.440 --> 1:02:37.440 Well, I was very very fortunate, as I said, being 1:02:37.720 --> 1:02:41.800 at at the FED and UH and the research people there, 1:02:43.400 --> 1:02:48.320 and of course there's Paul, who was a mentor, and 1:02:48.400 --> 1:02:52.480 because we're together on the border of the Robin Hood Foundation, 1:02:53.360 --> 1:02:58.640 is still a mentor because I think you can always 1:02:59.120 --> 1:03:04.040 learn different things and and believe it or not, a 1:03:04.080 --> 1:03:06.720 lot of the mentors now are are people I read 1:03:06.800 --> 1:03:10.600 and listen to. And for example, I had the opportunity 1:03:10.640 --> 1:03:13.720 to be here at Bloomberg Philanthropies a few weeks ago 1:03:14.040 --> 1:03:19.919 and listen to Mayor Mike, and I try to take 1:03:19.960 --> 1:03:24.840 away things that I find insightful. And sometimes I run 1:03:24.880 --> 1:03:27.400 into people and I'll say to them, you know, you 1:03:27.480 --> 1:03:29.760 may not remember this because to you it was a 1:03:29.800 --> 1:03:32.960 throwaway line, right, But it had a lot of meaning 1:03:33.040 --> 1:03:36.480 to me. And I probably stole it and didn't give 1:03:36.520 --> 1:03:37.480 attribution to it. 1:03:37.880 --> 1:03:39.080 But I try. 1:03:39.240 --> 1:03:42.080 It doesn't matter who it is across the board, and 1:03:42.120 --> 1:03:46.280 it can be from uh, you know, a ted Lasso, 1:03:46.480 --> 1:03:48.680 It could be from a book, It could be from 1:03:49.680 --> 1:03:52.080 a politician, It could be from anybody. 1:03:52.800 --> 1:03:55.040 Let's talk about books. What are some of your favorites 1:03:55.080 --> 1:03:56.280 and what are you reading right now. 1:03:57.280 --> 1:04:00.000 So, as I mentioned, I read a lot of history 1:04:00.040 --> 1:04:04.680 oracle novels, and there's an author by the name of 1:04:04.760 --> 1:04:11.400 David Liss who writes about England and coffee trading and 1:04:11.480 --> 1:04:14.840 those type of markets in the eighteen hundreds, and that's 1:04:14.920 --> 1:04:18.280 kind of what I'm reading right and now, because the 1:04:18.360 --> 1:04:23.280 psychological aspect even then applies to today. 1:04:23.840 --> 1:04:25.920 What else have you read recently that you enjoyed. 1:04:26.560 --> 1:04:28.760 I'm going to read Michael Lewis's new book of course. 1:04:29.120 --> 1:04:34.040 I'm excited Sam coming out in September October something like that. Yes, yeah, 1:04:34.080 --> 1:04:37.080 that's gonna be that's gonna be great. So our final 1:04:37.120 --> 1:04:39.920 two questions, what sort of advice would you give to 1:04:39.960 --> 1:04:43.600 a recent college grad who was interested in a career 1:04:44.240 --> 1:04:47.760 in either trading or running a fund. 1:04:48.680 --> 1:04:53.200 So I think all college grads, all all young people. 1:04:53.480 --> 1:04:57.280 You have to be willing to pay your dues. But 1:04:57.880 --> 1:05:01.000 the trading aspect the hedge fund asked, It's a lot 1:05:01.040 --> 1:05:04.280 like sports. The chances of being. 1:05:04.080 --> 1:05:05.640 A pro. 1:05:06.960 --> 1:05:11.720 Is a low probability, So you should try and then 1:05:11.880 --> 1:05:14.600 if you have a chance of success, continue, but if not, 1:05:15.280 --> 1:05:18.880 then you need to pivot because what you don't want 1:05:18.960 --> 1:05:22.720 to be doing is, you know, saying, Okay, I'm going 1:05:22.800 --> 1:05:27.200 to be a lifetime player in the Triple Ace and 1:05:28.000 --> 1:05:31.880 so you know, as in the minor leagues. But if 1:05:31.920 --> 1:05:33.680 you want to pursue it, you have to pursue it. 1:05:33.760 --> 1:05:37.240 But do your own work right coming in And I 1:05:37.280 --> 1:05:39.760 do a lot of global macro and risk assulting, and 1:05:39.760 --> 1:05:41.400 I always tell them, I go, you're not paying me 1:05:41.520 --> 1:05:45.320 to read you the Wall Street Journal or from Bloomberg. 1:05:45.600 --> 1:05:47.400 I go, if you want to have story time, it's great. 1:05:47.480 --> 1:05:49.760 I'll pull up all the Bloomberg articles you want and 1:05:49.840 --> 1:05:53.120 I'll read them to you. So don't rehash other things 1:05:53.120 --> 1:05:55.760 that people can easily get and think you're being innovative. 1:05:56.240 --> 1:05:59.520 Do your own work, and you really need to be analytical. 1:06:00.240 --> 1:06:02.640 And our final question, what do you know about the 1:06:02.680 --> 1:06:05.840 world of trading and investing today? You wish you knew 1:06:06.440 --> 1:06:08.880 fifty years or so ago when you were first getting 1:06:08.880 --> 1:06:13.080 started fifty or forty forty year. 1:06:13.040 --> 1:06:14.479 Yeah, let's let's say forty. 1:06:14.520 --> 1:06:17.600 Yeah, I just put a decade on you. So forty 1:06:17.680 --> 1:06:20.240 years ago when you graduated in the eighties, What do 1:06:20.280 --> 1:06:22.160 you wish you knew then that you know now? 1:06:23.920 --> 1:06:28.920 I think it's always the same. I wish we didn't 1:06:28.920 --> 1:06:33.400 go through our own near death experiences. We had that, 1:06:34.440 --> 1:06:37.320 As I said, every successful traders, we had big volatility 1:06:37.400 --> 1:06:41.520 and eighty six a Tutor that I mentioned earlier, I 1:06:41.600 --> 1:06:45.920 wish I knew how difficult it would be running my 1:06:46.040 --> 1:06:49.080 own CTA. So when I left Tutor, they seated me. 1:06:49.200 --> 1:06:50.880 I bought the team of research. It was sort of 1:06:50.880 --> 1:06:55.600 the first quant trading on the street and the whole 1:06:55.680 --> 1:06:59.680 business aspect of raising money compliance. I wish I had 1:06:59.720 --> 1:07:04.040 a better understanding of that because it's just not your 1:07:04.080 --> 1:07:07.400 track record. And that's another big problem for graduate today. 1:07:07.440 --> 1:07:09.640 I think, oh I have a great track record. This 1:07:09.760 --> 1:07:12.959 isn't field the dreams. If you build it, they don't come. 1:07:13.520 --> 1:07:16.240 You need to have a really really important process, and 1:07:16.280 --> 1:07:19.720 I wish I was better at that at that time. 1:07:19.880 --> 1:07:24.640 My colleague Ben Carlson calls that organizational alpha, and I 1:07:24.720 --> 1:07:25.480 love that phrase. 1:07:25.680 --> 1:07:26.600 It is a great phrase. 1:07:26.720 --> 1:07:30.400 Right. Thank you, Peter for being so generous with your time. 1:07:30.560 --> 1:07:34.640 We have been speaking with Peter Borsch, founding trustee at 1:07:34.720 --> 1:07:39.360 robin Hood and formally director of research at Tutor Investments. 1:07:39.960 --> 1:07:43.160 If you enjoy this conversation, well check out any of 1:07:43.200 --> 1:07:46.200 the previous five hundred or so we've done over the 1:07:46.240 --> 1:07:49.439 past eight and a half years. You can find those 1:07:49.560 --> 1:07:54.440 at iTunes, Spotify, YouTube, wherever you find your favorite podcasts. 1:07:55.040 --> 1:07:57.600 Sign up from my daily reading list at Rid Halts 1:07:57.640 --> 1:08:01.120 dot com, Follow me on Twitter at Ridholt's follow all 1:08:01.200 --> 1:08:05.680 of the Bloomberg Fine Family of podcasts at Podcasts, I 1:08:05.720 --> 1:08:07.840 would be remiss if I did not thank the crack 1:08:07.920 --> 1:08:12.040 team who helps put these conversations together each week. Robert 1:08:12.080 --> 1:08:16.320 Bragg is my audio engineer. Attika Vlbroun is our project manager. 1:08:16.920 --> 1:08:20.720 Paris Wald is my producer. Sean Russo is my researcher. 1:08:21.439 --> 1:08:25.240 I'm Barry Ritolts. You've been listening to Masters in Business 1:08:25.760 --> 1:08:26.880 on Bloomberg Radio.