Speaker 1: This is Master's in Business with Barry Ridholds on Bloomberg Radio.
Speaker 2: This week on the podcast, Oh, I have an extra
Speaker 2: special guest, Peter Borsch, founding partner number two at Tutor Investments,
Speaker 2: where he worked directly with Pull Tutor Jones, most famously
Speaker 2: helping him put on a very aggressive short position heading
Speaker 2: into the eighty seven crash and then covering not in
Speaker 2: the mayhem of that Monday, but pretty close to the
Speaker 2: bottom tick on Tuesday. Really just a fascinating career, a
Speaker 2: unique perspective on markets. Not only did he serve on
Speaker 2: the Brady Commission looking at the eighty seven crash, but
Speaker 2: his history of investing, in trading and public service both
Speaker 2: at the FED and the Chicago Board of Trade and
Speaker 2: Treasury Department really unparallel, as well as just a pretty
Speaker 2: amazing track record as an investor and trader and as
Speaker 2: a philanthropist, one of the co founding trustees at Robin Hood.
Speaker 2: Really a fascinating character. I found this to be a
Speaker 2: master class in a humble approach to markets and being
Speaker 2: aware of your own limitations in order to obtain the
Speaker 2: best possible results as a trader and investor. Borish is
Speaker 2: a legend on Wall Street, and I'm thrilled to have
Speaker 2: the opportunity to sit down with him and discuss his
Speaker 2: career and his just approach to investing and trading and philanthropy. So,
Speaker 2: with no further ado, my conversation with former director of
Speaker 2: research at Tutor Investments.
Speaker 3: Peter Borish, thank you so much. It just goes to
Speaker 3: show I can't hold a job.
Speaker 2: That's right. That's right. You are constantly onto the next gig.
Speaker 2: So I'm familiar with your work, but I bet a
Speaker 2: lot of younger listeners may not know of your infamy
Speaker 2: and what took place at the eighty seven crash. We'll
Speaker 2: get to that. Let's start out with just your background.
Speaker 2: What got you interested in markets and trade?
Speaker 1: Well, I guess it's sort of fortuitous.
Speaker 3: So when I finished graduate school, I always begin at Michigan,
Speaker 3: because I'm a Michigan man. I went there for undergraduate
Speaker 3: and graduate school, and I finished graduate school in eighty
Speaker 3: two in what was really the real recession under President Reagan,
Speaker 3: and I was very fortunate to get a job at
Speaker 3: the Federal Reserve Bank of New York doing what so
Speaker 3: I was doing at that point. If you recall, it
Speaker 3: was the LDC right the Mexican crisis, and they were
Speaker 3: talking about, well, if Mexico increases a supply of oil,
Speaker 3: will get a lot more revenue. I, being stupid, raised
Speaker 3: my hand and said, yeah, but if they increased the supply,
Speaker 3: isn't that got to put down with pressure on prices?
Speaker 3: And they're kind of like, you know, you should be
Speaker 3: sort of thinking about research macroeconomic models. And that's really
Speaker 3: where it went. And at that point, foreign exchange and
Speaker 3: futures and derivatives were just starting. Nineteen eighty two was
Speaker 3: a year that SMP futures started. So I went down
Speaker 3: into that group and did some research, and being a
Speaker 3: little gearheady, I worked on the sort of internal Black
Speaker 3: Scholes model for the FED. And that's how I got
Speaker 3: fortunate and started my career. As I say, Wall Street
Speaker 3: is littered with former FED people, that's a good.
Speaker 2: Way of describing it. Littered with former FED people because
Speaker 2: the FED is a giant employer of economists and other
Speaker 2: technical researchers, and very often they leave the FED and
Speaker 2: go to big shops. You didn't go that way after
Speaker 2: you left the FED. Tell us about your next career move.
Speaker 3: So it's nineteen eighty five. I've been there three years.
Speaker 3: It's about the time you start looking for a job.
Speaker 3: And I had some job offers from, you know, sort
Speaker 3: of white shoe Wall Street firms, and then through a acquaintance,
Speaker 3: I met this guy that was coming off the Cotton
Speaker 3: Exchange by the name of Paul Tudor Jones, and he
Speaker 3: asked me to help him out because he was chairman
Speaker 3: of the Financial Exchange, of the subsidiary of the New
Speaker 3: York Cotton Exchange, and they wanted to start trading some
Speaker 3: futures contracts. And I'm like, look, I'm young, I'm single,
Speaker 3: what a dynamic personality, great person. I'm going to give
Speaker 3: it a shot. And that's how I started out at Tutor.
Speaker 2: So Tutor Investments launches eighty five.
Speaker 3: Eighty all started in September of eighty four. I came
Speaker 3: on in the beginning of eighty.
Speaker 2: So literally number two at the firm is is that what?
Speaker 3: Well, there were people and support staff, but sort of
Speaker 3: I was the first real sort of research professional.
Speaker 2: So tell us a little bit about what you guys
Speaker 2: were doing in eighty six eighty seven, what were you
Speaker 2: trading and what was he looking at?
Speaker 3: So one of the geniuses of Paul, and really understanding
Speaker 3: futures markets in general is that most of the innovative
Speaker 3: risk management approaches came out of the futures markets because
Speaker 3: of the embedded leverage using margin.
Speaker 2: There's no room for error. You can't just let's see
Speaker 2: if it comes back. It's not how you can trade futures.
Speaker 1: No, not at all.
Speaker 3: And so with the advent and the development and the
Speaker 3: starting of new financial futures markets, he was taking his technique,
Speaker 3: his approach, his discipline and applying that to the new
Speaker 3: futures markets and his commitment. And this I think people
Speaker 3: have to realize because what one can do today, right,
Speaker 3: I have the FRED app on my phone. I can
Speaker 3: download massive amounts of data in hundreds of a second. Right,
Speaker 3: You couldn't do that there. And he had a huge
Speaker 3: commitment through me for data. We would hire summer interns
Speaker 3: to put data into spreadsheets, build models, work he was
Speaker 3: willing to and literally on the weekends we would be
Speaker 3: on our hands and knees taking out floppy drives, putting
Speaker 3: in hard drives, updating computers, and we were applying all
Speaker 3: that to the new markets with the discipline and approach
Speaker 3: that he had towards trading.
Speaker 2: So that's an interesting difference about pul Tudor Jones regarding
Speaker 2: his process. Very quantitative driven, very mathematical, But there's another
Speaker 2: side to his approach, which was way ahead of its time,
Speaker 2: very behavioral. Tell us a little bit about the psychological
Speaker 2: approaches that he brought to both looking at markets but
Speaker 2: also managing himself.
Speaker 3: So the strength of Paul at that time and even
Speaker 3: today still is that because he had always traded on
Speaker 3: the floor and understood that most market moves come in
Speaker 3: extremes fairly quickly. Market spent a lot of time doing
Speaker 3: nothing and then they reprice. So you have to have
Speaker 3: that discipline, you have to have that patience, and if
Speaker 3: you think it's going to be an acceleration point, then
Speaker 3: you try to get larger, but you have to have
Speaker 3: a really tight stop. It's such a contradictory approach because
Speaker 3: people want to be right all the time, and the
Speaker 3: way that you probe and trade is understanding that that's
Speaker 3: not the case. And he would always say, Okay, they
Speaker 3: got me today, but I'm going to get him back
Speaker 3: with one hundred percent interest.
Speaker 2: So people also should realize, for those of you who've
Speaker 2: never traded futures, It's not like options where essentially you
Speaker 2: could put up your losses in advance and all they
Speaker 2: could do is go to zero options. You're on the
Speaker 2: hook no matter where it goes. It's not like it's
Speaker 2: not like, well, we'll just see how this trades. If
Speaker 2: it keeps going against you, you're fully responsible, and hence
Speaker 2: the commitment to tightstop losses and a discipline approach to
Speaker 2: managing the downside.
Speaker 3: Yes, and the thing about futures is you must maintain
Speaker 3: your discipline. One of the problems I think with rookie
Speaker 3: options traders is that because if you're buying them, all
Speaker 3: you can do is lose your premium. So if you
Speaker 3: have a belief in the market and you buy your
Speaker 3: premium and then it starts to go against you, you go, well,
Speaker 3: I still believe in it, and I still have premium left.
Speaker 3: So a lot of times when you're doing that, you
Speaker 3: put the trade on and you're meant to accepting the
Speaker 3: fact that you're going to lose all your premium, put
Speaker 3: up your losses in it, and in the future's world
Speaker 3: that you don't do you don't. You can't lose your
Speaker 3: discipline because the market will discipline you regardless.
Speaker 2: Yeah, no, it makes it makes a lot of sense.
Speaker 2: So you've said, and as long as we're talking about
Speaker 2: discipline and management of trades, one of your quotes that
Speaker 2: I really like is trading and risk management are inherently
Speaker 2: unnatural characteristics. Explain what that means with pleasure.
Speaker 3: So, first of all, we always said discipline before vision,
Speaker 3: and by that it means we can talk and I
Speaker 3: can think, and we can gossip and the market's going here.
Speaker 3: You know, it's kind of like gossiping about sports. That's
Speaker 3: not really trading. It's a discipline, rigorous approach. And so
Speaker 3: when I say it's an unnatural feeling, is because we all,
Speaker 3: most of us I'm used to it by now, want
Speaker 3: to be liked, and so you want to be there going,
Speaker 3: oh you're long apple, I'm long apple. Oh we're all
Speaker 3: so smart. But you have to have that discipline to say,
Speaker 3: wait a second, it's over the move, is there? So
Speaker 3: think about it this way. You've got one hundred people
Speaker 3: in a subway car who are all along something. If
Speaker 3: I get out and go into the other car where
Speaker 3: I'm on the short side, I'm the one person in there.
Speaker 3: If I'm disciplined and.
Speaker 1: I get stopped out.
Speaker 3: You can always squeeze one more back in the subway car.
Speaker 3: But when it turns if I'm the only one there
Speaker 3: and they all come running out, that's why markets go
Speaker 3: down faster than they go up. So it has to
Speaker 3: be in a logical sense, the ability to take the
Speaker 3: other side of the trade. Now, that doesn't mean you
Speaker 3: should be contrarian for contrarian's sake. And that's the difference
Speaker 3: in all these different approaches. So there's the trend following,
Speaker 3: which is go with the trend. There's the wave strategy,
Speaker 3: WHI says we're going to try to find inflection point here.
Speaker 3: They're all good strategies, but if you don't have a
Speaker 3: disciplined risk management on top of it, you're not going
Speaker 3: to make money.
Speaker 2: The challenge is the crowd is right most of the time.
Speaker 2: If you want to be a contrayon, you have to
Speaker 2: capture that two three four percent where the whole crowd
Speaker 2: is wrong and get out before everybody heads for the doors.
Speaker 3: Yes, you have to be very mindful of inflection points.
Speaker 3: And I go through this all the time. People are like, oh,
Speaker 3: you know, the market goes up over time and it's
Speaker 3: a straight line.
Speaker 2: And that's the trading that's investing.
Speaker 3: Yes, But even then, and I asked people, I said, well,
Speaker 3: you know, you think I look any older today than
Speaker 3: I did yesterday?
Speaker 1: And they go no.
Speaker 3: I go, well, you think I'm going to look any
Speaker 3: older tomorrow than I did today?
Speaker 1: And they go no. I go great, two points a line.
Speaker 3: I'm never going to get old, which is fantastic.
Speaker 2: So let's talk a little bit about eighty seven. Market
Speaker 2: had a huge run from eighty two through the beginning
Speaker 2: of eighty seven. Tell us a little bit of how
Speaker 2: you guys were positions heading into that year.
Speaker 3: Let's step back for a second, because nothing markets don't
Speaker 3: go up in a straight line, right they think about Yes,
Speaker 3: the low was in August of eighty two, but there
Speaker 3: was a serious correction in eighty four and then even
Speaker 3: in nineteen eighty six, there were some really harrowing corrections,
Speaker 3: particularly after July fourth, eighty six and the September expiration
Speaker 3: of eighty six. So it was really January of eighty
Speaker 3: seven when it started to take off. In that first
Speaker 3: part of the year.
Speaker 2: Now upwards like a strong rally.
Speaker 3: An incredibly strong rally. I think by the time we
Speaker 3: got to the high in August, right, it was up
Speaker 3: over thirty percent on the year. And again going back
Speaker 3: to what I just said earlier, Paul gave me the
Speaker 3: opportunity to take my sort of creative research imagination and
Speaker 3: spend it on some data. And we started being very
Speaker 3: early on collecting real time data and also modeling. And
Speaker 3: I mentioned that we hired people, so we took people.
Speaker 3: And back then there was a book right the Now
Speaker 3: from eighteen ninety seven to present, and we had to
Speaker 3: type that data in the spreadsheet.
Speaker 2: It was very complicating it but well there.
Speaker 3: Was You couldn't download it, and you had to check it,
Speaker 3: and of course when people are putting in a lot
Speaker 3: of numbers, there's typo, so you had to have charts
Speaker 3: just to see all those different things. And we started
Speaker 3: modeling and thinking given where we were with the new
Speaker 3: financial futures markets, and if you think about financial futures
Speaker 3: in general or new markets, we always sort of think
Speaker 3: about it as if you have a kid and they're
Speaker 3: five years six years old. You think you could talk
Speaker 3: to them. You can think they're rational, but they're not,
Speaker 3: and they do throw tantrums. And that's happened a lot
Speaker 3: in derivatives by the time you got to eighty seven,
Speaker 3: right the futures were five years old. People thought there
Speaker 3: was going to be portfolio insurance, that there's going to
Speaker 3: be this massive always liquidity, that you could stay longer
Speaker 3: stocks and that you could sell futures against it, and
Speaker 3: there was this assumption of continuity of liquidity. So at
Speaker 3: the same time, we understand that there's potential technical flaws
Speaker 3: underneath the model, underneath the markets, and we're building this
Speaker 3: model which is really tracking what happened from the low
Speaker 3: of twenty one, which we corresponded sort of to the
Speaker 3: low of eighty two, and what was going to happen.
Speaker 3: And when I first built this model, I really thought
Speaker 3: that the top was going to occur in early eighty
Speaker 3: eight rather than August, and the secondary top in October
Speaker 3: of eighty seven. But then the technicals came together with
Speaker 3: the fundamentals, and Paul, being the great tradery was really
Speaker 3: had the opportunity to take advantage of that.
Speaker 2: So before we get to Black Monday, around what time
Speaker 2: of the year did you start seeing cracks in the
Speaker 2: underlying market? At what point were you looking at this
Speaker 2: and saying, hey, we have you know, some time to go,
Speaker 2: but you could see the beginning of the end was coming.
Speaker 3: Up when the market started to pull back in August
Speaker 3: and into September expiration. Remember back then there was only
Speaker 3: quarterly expirations, so there was a lot more activity around
Speaker 3: that and when we saw and part of research is
Speaker 3: being able to replicate things. So you had always you
Speaker 3: had holidays, and you see that, so you had labor day,
Speaker 3: you had three day a weekend, so you could line
Speaker 3: these things up in terms of price activity, volume, and
Speaker 3: the likely And if you go back to the twenty
Speaker 3: nine scenario, you also saw what happened post labor Day.
Speaker 3: Right the top was September third, twenty nine. Then you
Speaker 3: had the correction, then you had the rally. So would
Speaker 3: you sort of had the technical lining up with the
Speaker 3: fundamentals because of the issues that were taking place globally
Speaker 3: at that time. And at the same time, believe it
Speaker 3: or not, we had a new chairperson in Greenspan at
Speaker 3: the FED that had just come in. So here's a rookie.
Speaker 3: Now you had Volker prior and as I like to say,
Speaker 3: you know, young guys have all the moves, but old
Speaker 3: guys win championships. And so he was in the sense
Speaker 3: challenged what to do with regard to that, and that
Speaker 3: was something that we thought post crash, that he was
Speaker 3: going to be very aggressive in reducing interest rates, which
Speaker 3: he did.
Speaker 2: Well, let's roll back pre crap. So Friday before Black Monday,
Speaker 2: how were you positioned? How was Tutor Investment's position heading
Speaker 2: into that weekend?
Speaker 3: So the analog really like, was you know, ringing a
Speaker 3: red red bell sort of on that Wednesday, right, there
Speaker 3: was a decline, you got to technical levels, you had
Speaker 3: a bounce and then and then you failed a.
Speaker 2: Week bounce that just had no nothing behind it, right.
Speaker 3: And then on that Friday, we felt that it was
Speaker 3: there and and we were short.
Speaker 2: A little short, a lot short.
Speaker 1: Well, I think.
Speaker 3: People have to give perspective. Remember we at that time
Speaker 3: were not a particularly large firm, so for us.
Speaker 1: We were large short. Uh.
Speaker 3: And then over the weekend, with the news that was
Speaker 3: taking place and also the fact of the sentiment, there
Speaker 3: were still people that were very sort of bullish and
Speaker 3: people that felt that they could be protected. And this
Speaker 3: is where most of these models, right, assume consistency twenty
Speaker 3: four hour trading, you're gonna be okay, and you can
Speaker 3: even go to ninety eight right with long term capital
Speaker 3: where that was also part of their problem. But on
Speaker 3: weekends that's not the case. So you had a gap situation.
Speaker 2: Monday morning market gaps down pretty substantially. There's no bids
Speaker 2: to be found. There, can't get people on the phone
Speaker 2: tell us what that day was like as an actual
Speaker 2: trader short a collapsing market.
Speaker 3: So, you know, it's a very very interesting perspective because
Speaker 3: when you think about it, and it's also one of
Speaker 3: the advantages of why I say that it's so important
Speaker 3: to have all these different markets. When you're short something
Speaker 3: and it goes down, you're a natural buyer, right, So
Speaker 3: people think shorts are bad.
Speaker 2: No, they're good throws buyers in any crisis.
Speaker 1: Yes, yes.
Speaker 3: And so then the question is, and as I like
Speaker 3: to say, here's my definition of a quandary. Do you
Speaker 3: stay out of a market and watch everyone else make
Speaker 3: money or get in and thereby cause it to immediately crash.
Speaker 2: So but you were on the right side.
Speaker 1: We were on the right side.
Speaker 3: So there are a lot of people there that are
Speaker 3: in that quandary position because the market had been so
Speaker 3: strong and without discipline. The irony of markets as buyers
Speaker 3: are higher, sellers are lower, right, everybody loved bitcoin at
Speaker 3: sixty thousand, they all hate it at twenty.
Speaker 2: You know, that's just that's human nature.
Speaker 3: Yes, so in this case, they didn't know what to do,
Speaker 3: but then panic sets in and they were selling. So
Speaker 3: we learned from our experience.
Speaker 2: Tell us about that, because I recall you saying that
Speaker 2: historically when you've looked at other crashes and the best
Speaker 2: opportunity to is not the day of the crash, but
Speaker 2: the next day, tell us that game.
Speaker 3: That's correct, because when I mentioned earlier about nineteen eighty
Speaker 3: six and July, in September, we were short actually, and
Speaker 3: then we covered on that Monday, and the market continued
Speaker 3: to go down until midday Tuesday. It also did that
Speaker 3: in September. I think it was September thirteenth. It's a
Speaker 3: long time.
Speaker 2: So, but generally speaking, the bad day and people the
Speaker 2: next day in the morning like just let me yes.
Speaker 3: And that's changed a little bit now because of twenty
Speaker 3: four hour trading, and so sometimes the extreme you do
Speaker 3: close on the low and extreme and there isn't that
Speaker 3: much follow through the next day, but then there was
Speaker 3: definitely follow through.
Speaker 1: So we waited and we were.
Speaker 3: Patient, and we were one of the buyers on that
Speaker 3: Tuesday the twentieth, and so we performed a function. I
Speaker 3: think that exactly what you want in the marketplace, right
Speaker 3: shorts were covering, were being buyers. I'd like to think
Speaker 3: that knock on would that maybe you know, some of
Speaker 3: our buying helped.
Speaker 1: Put in the low. But what we really did that it.
Speaker 3: Wasn't just stock index futures. We felt and that the
Speaker 3: FED and undergreen Span was going to be massively cutting
Speaker 3: interest rates. Remember the tenure today is what three seventy
Speaker 3: three seventy just un before yep, and back then it
Speaker 3: was well over six. I think it was closer to seven,
Speaker 3: and that historically you know, by the way has thrown
Speaker 3: in the market today, I think the risk rewards we're
Speaker 3: going more likely to there then back down to where
Speaker 3: we are.
Speaker 2: You're not buying it. We'll talk later about yes, everybody
Speaker 2: predicting lower rates, We'll circle back to that. But not
Speaker 2: only were you short equities, what was your income position.
Speaker 3: We started buying a lot of fixed income futures all
Speaker 3: across the curve, and particularly at that point one of
Speaker 3: the most liquid markets was the year dollar futures, and
Speaker 3: we felt that the FED was going to provide liquidity,
Speaker 3: which they needed to do, and they did do. And
Speaker 3: the irony of that whole situation is it was after
Speaker 3: that crash that we started the Robin Hood Foundation, thinking
Speaker 3: that the you know, those who were less fortunate in
Speaker 3: New York were really going to be affected by the
Speaker 3: downturn in the markets. But the Fed, Yes, the Fed
Speaker 3: stepped in. They provided liquidity the market. The economy wasn't
Speaker 3: as dependent on the equity markets as necessarily as it
Speaker 3: is today as we saw a post or eight, and
Speaker 3: who knows what's going to happen now.
Speaker 2: So for those people who may not have seen it,
Speaker 2: there is a famous documentary I believe it's called The
Speaker 2: Trader that follows pull Tudor Jones around. If you haven't
Speaker 2: seen it, it's on YouTube and vimeo and elsewhere. How
Speaker 2: did he manage the chaos of eighty seven? What was
Speaker 2: his day like?
Speaker 3: Well, it was a life changing day really for both
Speaker 3: of us. And you know, there are good people and
Speaker 3: there are great people, and Paul is one of the
Speaker 3: great people in my mind, not just as a trader
Speaker 3: but as an individual. And why you're so committed to
Speaker 3: New York City and philanthropy so there's always a little
Speaker 3: bit of sadness in the sense that when you are
Speaker 3: short something and it goes down and there are a
Speaker 3: lot of other people that may be getting hurt. So
Speaker 3: that's one reason as well. Do you go in and
Speaker 3: you intellectually think, okay, yeah, maybe we're going to crash
Speaker 3: and we're going to do something, but emotionally you're like, wow,
Speaker 3: at some point, that's it. We don't want we're not
Speaker 3: going to benefit, we don't want to participate. We are
Speaker 3: not going to be short anything more. After that next day,
Speaker 3: we're going to wait, we're gonna see and we want
Speaker 3: to the supportive of the markets and the economic system.
Speaker 3: And to me, again, we're relatively young, and Paul's five
Speaker 3: years older than I am. But you know, that's a
Speaker 3: lot of wisdom and that's something I learned from that for.
Speaker 2: A thirty year old and for those people who weren't
Speaker 2: actively trading in eighty seven, the irony is so not
Speaker 2: only is Black Monday down twenty two percent and change
Speaker 2: on the Dow, markets finished the year, you know, flat
Speaker 2: to up one percent. It wasn't a horrible year considering
Speaker 2: and eighty eight things just kind of took off again.
Speaker 2: Turns out we were early days of a long bull market.
Speaker 2: And you've talked that very often. You get that test
Speaker 2: early in a long secular bull phase. Tell us a
Speaker 2: little bit about what the thinking was going to be
Speaker 2: post eighty seven crash, what it looked like a decade out.
Speaker 3: Well, there was one of the best divergences technical buys
Speaker 3: in nineteen eighty eight. I think maybe the S and
Speaker 3: P made new lows or the Dow or the Dow
Speaker 3: transports and it was unconfirmed, and sentiment was so negative.
Speaker 3: And this is where you have to be flexible as
Speaker 3: a trader, because you're like, Okay, the world is coming
Speaker 3: to an end. And then I think we realized early
Speaker 3: on that it's probably not coming to an end, or
Speaker 3: at least not today. And so now you have to
Speaker 3: look for your opportunities because remember you're managing other people's money.
Speaker 1: You got to get rid of your own opinion.
Speaker 3: Get you shake your head out of that you sort
Speaker 3: of intellectual fog that you're in, and say, here's what
Speaker 3: the markets are telling me. I need to listen to
Speaker 3: the markets. And that was nineteen eighty eight and when
Speaker 3: it really took off. And if you if you think
Speaker 3: about you know, cycles and period and going into ninety
Speaker 3: one with what happened in Iraq under Bush one and
Speaker 3: again the same thing, Oh my god. And and that
Speaker 3: was also a very interesting lesson because that was the
Speaker 3: first time in history we had a pre announced date
Speaker 3: to start a war. So now what do you do
Speaker 3: with risk management? Right, you've got models, do you trade
Speaker 3: through it? Do you not think it's going to happen?
Speaker 3: Do you not have risk on going into that?
Speaker 2: You're talking about Bush two and the Iraq war in
Speaker 2: three one, So there was a deadline.
Speaker 3: And right, and then they he went in and the
Speaker 3: markets took off after that.
Speaker 1: You know, there's a lot of.
Speaker 3: Good supportive you know, material fundamentally technically around that time,
Speaker 3: because you were still recovering from the eighty seven and
Speaker 3: people tend to remember the last thing that happened to them.
Speaker 3: So they're always afraid because they think that the market's
Speaker 3: going to go down, just as now they're afraid they're
Speaker 3: going to miss out because the market was up. And
Speaker 3: I'm not so sure that they should be afraid of
Speaker 3: missing out.
Speaker 2: Let's stick with eighty seven. We'll circle back to today's market later,
Speaker 2: So post more TOM eighty seven you get tapped by
Speaker 2: the Treasury Department to serve on the US Presidential Task
Speaker 2: Force on Market Mechanisms head by Brady. It became them
Speaker 2: as a Brady Commission. What did you find? What was
Speaker 2: the process like of looking at what caused the eighty
Speaker 2: seven crash?
Speaker 3: So, first of all, it was an honor, and of
Speaker 3: course I was the youngest person there, and I'm still
Speaker 3: friends with the number of the people that were staffers.
Speaker 3: But I can just tell you in summary that we
Speaker 3: Tutor were so far ahead of every other firm on
Speaker 3: Wall Street we didn't even know. But all the data
Speaker 3: in the report right there's a chapter on the market break.
Speaker 3: All that data came from us. None of the other
Speaker 3: firms had it, whether it was JP, Goldman, m Mess,
Speaker 3: bear Stearns, you name it. And that's a credit to Paul,
Speaker 3: as I said, the ability to not only want to
Speaker 3: do it, but also to spend the capital to invest
Speaker 3: in data in computing at that time.
Speaker 1: And the real conclusion.
Speaker 3: Of that is where we are today, that all these
Speaker 3: markets are linked. You know, New York wanted to blame Chicago.
Speaker 3: There was the options markets and they all were sort
Speaker 3: of disconnected. And that's where the joint task force with
Speaker 3: the Treasury, the CFTC.
Speaker 1: And the SEC.
Speaker 3: And that was also where we put in the circuit breakers,
Speaker 3: you know, sort of price limits. There was no price
Speaker 3: limits in eighty seven, so that.
Speaker 2: When stuff falls, hey, down twenty two percent, that's just
Speaker 2: the market. Now, what is it seven percent?
Speaker 3: Yes, there's a three and a half. I think a
Speaker 3: seven and a fifteen. And the point is there's a
Speaker 3: timeout because we just mentioned a moment ago about emotion
Speaker 3: in markets, and you need to step back, and futures
Speaker 3: markets have always had price limits from.
Speaker 2: The lost limit down, that's what.
Speaker 1: We can do.
Speaker 3: And by the way, sometimes in the short run, right
Speaker 3: that limit becomes a little bit of a magnet because
Speaker 3: if the limit and storybeans is thirty five cents and
Speaker 3: you're down thirty three, do you really want to take
Speaker 3: a long position home overnight?
Speaker 2: So you might do it.
Speaker 3: But now you sit back and you have in the
Speaker 3: case of the equities, it's just a timeout.
Speaker 1: Let's get it together.
Speaker 3: Let's see what's happening there, market makers. And it's been
Speaker 3: knock on wood effective right even in eight where you
Speaker 3: reach that.
Speaker 2: Well, the flash crash in twenty ten and twenty eleven,
Speaker 2: we had those.
Speaker 3: Yes, so we time out, we bounced, and now, of
Speaker 3: course I look at some of those things, and I
Speaker 3: look at the data as potential interesting technical indicators.
Speaker 1: But that's for another day.
Speaker 2: So let's stay with the concept of interrelated markets. I
Speaker 2: recall reading Tim Metz's book Black Monday, and he talked
Speaker 2: about how I think it was the New York Stock
Speaker 2: Exchange put the Chicago Futures Index up on the wall
Speaker 2: so traders could actually see what was going on in
Speaker 2: index futures, and it took a while before people realized
Speaker 2: all the specialists were lowering their bids because they were
Speaker 2: looking at the index futures. How interrelated are all of
Speaker 2: these markets.
Speaker 3: They're completely interrelated because the key for liquidity is the
Speaker 3: ability to arbitrage. And you had risk managers, so this
Speaker 3: S and P five hundred stocks, or at that time
Speaker 3: you had a smaller index, which was about twenty eight
Speaker 3: of the Dow contract, and so you could buy all
Speaker 3: the underlying you could sell the futures or vice versa,
Speaker 3: or you could spin it any way you wanted. If
Speaker 3: you liked twenty seven of them, you could do that
Speaker 3: and sell the futures and be implicitly short the one instrument.
Speaker 1: That's not there.
Speaker 3: So this stuff is all linked and that is important
Speaker 3: because to have a successful market you need investors, You
Speaker 3: need speculators. Of course, you need natural buyers and hedgers,
Speaker 3: but you need market makers and arbitragers to tighten the
Speaker 3: market up so that there's plenty of liquidity on both
Speaker 3: sides of it.
Speaker 2: So you mentioned a lot of the changes that were
Speaker 2: put in place post eighty seven. We're still enjoying that.
Speaker 2: What was the fallout from eight oh nine. Are we
Speaker 2: still dealing with the aftershocks of that event? I mean,
Speaker 2: obviously twenty twenty and twenty one and twenty two we're
Speaker 2: still in the midst of But is there still an
Speaker 2: echo of eight o nine today?
Speaker 3: I don't know if I would say it's an echo.
Speaker 3: There's always a learning process when it comes to markets
Speaker 3: and liquidity events, and it's always in the short run.
Speaker 3: All markets moved because of supply and demand for money,
Speaker 3: and in eight there was issues, needless to say, but
Speaker 3: there was also some things which have been recently sprung up,
Speaker 3: for example, regulators saying, oh no, we shouldn't be allowed
Speaker 3: to short financial institutions. Now, if you remember part of
Speaker 3: the chaos in eight was associated with that because they
Speaker 3: banned short selling.
Speaker 1: Right.
Speaker 3: It was incredibly smart, I guess on the part of
Speaker 3: the regulators doing it right before an expiration. So you
Speaker 3: had this massive covering of eliminating short positions, but then
Speaker 3: you got rid of the market maker. Some of these
Speaker 3: financial stocks had you know, ten year ranges in twenty
Speaker 3: four hours. That's going to eliminate a lot of liquidity, right,
Speaker 3: and then the market's going to find its own natural level,
Speaker 3: which at that point was a lot lower.
Speaker 2: Right. You want people stepping in as buyers to cover
Speaker 2: those short positions. You don't want whisper campaigns mentioning companies
Speaker 2: are going out of business when they're not. So that
Speaker 2: not shorting financial institutions kind of brings us forward to
Speaker 2: what's been going on in the regional banks in twenty
Speaker 2: twenty three. How do you look at the first republics
Speaker 2: in Silicon Valley banks? Are these one offs or is
Speaker 2: this part of something that's more systemic or is this
Speaker 2: just the FED raising rates so quickly that they're breaking things?
Speaker 3: Wow, So that's such an interesting question. So is it systemic?
Speaker 3: I don't think it's systemic. I think that it has
Speaker 3: a lot to do with the way that at the
Speaker 3: management of these companies we're running them. SVB was a
Speaker 3: particular case because you had this massive inflow of VC
Speaker 3: capital and the problem is those are always naturally getting
Speaker 3: taken out because you're investing. At the same time, they
Speaker 3: decided to go as a FED is embarking on a
Speaker 3: rate high campaign, not to have a risk manager, so
Speaker 3: you can.
Speaker 2: But they did have hedges on in twenty twenty two.
Speaker 2: They just decided, hey, these are so profitable, we should
Speaker 2: ring the bell.
Speaker 3: Well, yeah, that's always if you're hedging, you're hedging for
Speaker 3: a reason, and are you hedging to trade.
Speaker 1: There's a difference, right.
Speaker 2: Well, they're a bank, so one would assume they're hedging
Speaker 2: interest rate duration risk. They just saw the win and said, hey,
Speaker 2: let's everybody, right, but everybody's going to get a good bonus.
Speaker 3: Right, But then they move from hedgeres to speculators, right,
Speaker 3: and if that's not your professional job, that becomes extraordinarily challenging.
Speaker 2: As as we we learned.
Speaker 3: And you know First Republic, which was a different type
Speaker 3: of institution, and you know they they were basically in
Speaker 3: think of that in the old days, right, they were
Speaker 3: giving away the toaster to try to get accounts, and
Speaker 3: then when rates started to go up. So think about this, right,
Speaker 3: the tenuere at its low and twenty was, you know,
Speaker 3: twenty basis points. Now we're at three seven, but historically
Speaker 3: three seven isn't very high. And it goes back to
Speaker 3: my earlier statement that people anchor to sort of the
Speaker 3: high or the low, so they assume it's going back there.
Speaker 3: That's a big risk management mistake to make that assumption.
Speaker 2: Let's talk a little bit about computerized trading, helping traders
Speaker 2: become better at their jobs and hiring traders. Let's start
Speaker 2: with that. What sort of traits should hedge funds be
Speaker 2: looking for if they want to hire a successful trader?
Speaker 3: If you're referring to a discretionary trader, right, so that's
Speaker 3: one bucket versus sort of a model based quantitative trader
Speaker 3: where you're looking at at their track records.
Speaker 2: Tell us about both.
Speaker 3: Well, So I'm going to start first with the quantitative.
Speaker 3: It's a little easier. I've never had a quantitrative trader
Speaker 3: come to me with a bad simulated track.
Speaker 2: Record, right, Models are always fens.
Speaker 3: Right, I'm waiting for the guy to come in with
Speaker 3: a minus two sharp going height.
Speaker 1: It can only get better.
Speaker 2: But by the way, what back test ever is best?
Speaker 1: Yes?
Speaker 3: Yeah, well I'm super I can predict yesterday perfectly. I'm
Speaker 3: very good at that. I try to, you know, come
Speaker 3: on here, I'll tell you what happened, No problem.
Speaker 2: Who has a better track record than heinz PS Capital, Yeah,
Speaker 2: they're the best.
Speaker 3: Yeah, and it's the hedge fund is there. But it's
Speaker 3: why in seriousness that you know the first line of
Speaker 3: every disclosure document his past performance is non indicative of
Speaker 3: future results. But everybody looks at past performance. So on
Speaker 3: the quant side, you have to look at real time
Speaker 3: data and you also have to segment it to sort
Speaker 3: of the it's strategy relative to market. So if you
Speaker 3: look at last year, a lot of CTAs and trend
Speaker 3: followers did really well, and you'd have a great real
Speaker 3: time track record.
Speaker 2: Because you had a defined move in a specific direction
Speaker 2: that was sustained.
Speaker 3: Yes, So there's two things about that. One they'll come
Speaker 3: to me and to go, oh man, man, we just
Speaker 3: had the best year since Wait another year where there's
Speaker 3: a lot of dislocations, and I'm like, man, that's fantastic.
Speaker 3: Once every fifteen years, do me a favor come back
Speaker 3: in thirteen. I don't want to be late. But the
Speaker 3: reality is, if you want to dig deeper in that,
Speaker 3: then you start looking at, well, what markets did you trade,
Speaker 3: Why did you do that? Why did you exclude Coco? Well,
Speaker 3: Coco's not a good trend following market. How do you
Speaker 3: know that? Well, then you've overoptimized. So you really have
Speaker 3: to start digging deep, asking very very tough questions. When
Speaker 3: it comes to these quantitative strategies, frequency of trading, volatility,
Speaker 3: draw downs's and all. This is more of an art
Speaker 3: than it is a science. And that also applies on
Speaker 3: the discretionary trading side. But on the discretionary trading side,
Speaker 3: you have that other element that you have to put
Speaker 3: on top of that, which is the emotional.
Speaker 1: And the psychological.
Speaker 3: And one of the things I always say is that
Speaker 3: every successful trader has a near death experience. I just
Speaker 3: hope they have it before we've allocated to them. And
Speaker 3: so it's not that they've had it, it's how you
Speaker 3: recover from it. And so it's one of these things
Speaker 3: that math works. And so sometimes there's a trader and
Speaker 3: he'll come into my office and I'll go Pete. I
Speaker 3: can't believe it. I just had my worst day ever.
Speaker 3: And I'm like, well, I've got good news and bad
Speaker 3: news for you, and he.
Speaker 1: Goes, well, what's the good news?
Speaker 3: I go, well, you're still within your risk parameters. You
Speaker 3: didn't violate any of our trading rules, so you still
Speaker 3: have a job. And they go, well, then what's the
Speaker 3: bad news? I go, If you're in business long enough,
Speaker 3: you're going to have a worse trade, because that's just
Speaker 3: the law of large numbers. Records are made to be broken.
Speaker 1: If I told you.
Speaker 3: Twenty years ago that someone was going to break Kareem
Speaker 3: scoring record in basketball, unbelievable. Are Lebron James did it
Speaker 3: this year? All the credit in the world for him.
Speaker 3: But it's a little bit like trading options. So if
Speaker 3: you continually buy premium thinking a record's going to be broken,
Speaker 3: you probably run out of money before it does. And
Speaker 3: if you continually sell premium thinking the records are never
Speaker 3: going to be broken, you go broke when it is broken.
Speaker 3: So you have to have that discipline, and it's an
Speaker 3: extraordinarily tough business.
Speaker 2: To say the very least. Let's talk about a quote
Speaker 2: of yours that I havepen to really like fundamentals aren't wrong,
Speaker 2: you are. Explain what that means.
Speaker 3: It means that the market is the scoreboard, and if
Speaker 3: you think you're right and you think the fundamentals are wrong,
Speaker 3: you're going to take a small loss and turn it
Speaker 3: into a large loss. Trading works best when the fundamentals
Speaker 3: and the technicals intersect. Too often, one just looks at
Speaker 3: either one or the other. So we could say today, well,
Speaker 3: we think the fundamentals are deteriorating. There's no way the
Speaker 3: S and P should be at forty two hundred. I'm
Speaker 3: going to get short, but there's no technical indication in
Speaker 3: the markets today that you should be short.
Speaker 2: Right, the number of fifty two glows is falling. The
Speaker 2: breath is pretty good, and when you look, especially outside
Speaker 2: of the US, a lot of positive up trends. People
Speaker 2: have a tendency to ignore that and they're just focused
Speaker 2: at what's going on. Look at the Russell small cap
Speaker 2: in the US. It's doing terrible. We're due to crash.
Speaker 1: That's correct.
Speaker 3: So what you do for me in that case, I'm
Speaker 3: looking for if you want to look to sell it
Speaker 3: and pick a level, then you look for the Russell
Speaker 3: to start doing better. And reaching key technical levels and
Speaker 3: then you can probe and you look for divergences all
Speaker 3: the time. So you look at the transports which have
Speaker 3: been lagging for today. But these are all signs. They're
Speaker 3: not things in which you should be taking action. You
Speaker 3: have to be patient. And a lot of times you
Speaker 3: talk about traders and discretionary traders in particular, and I'll
Speaker 3: speak to them not trading is a trade right, and
Speaker 3: just because you're sitting in front of them screen doesn't
Speaker 3: mean you have to do something. And that takes tremendous discipline,
Speaker 3: because particularly if you get paid to share of the
Speaker 3: profits and you're like, there's nothing going on now. Some
Speaker 3: of the best traders I know, they'll be like, Okay,
Speaker 3: I did something. It's ten thirty, I've made some money.
Speaker 3: I'm out of here for the day. And that's fine.
Speaker 3: However you do it, however you force your own self discipline.
Speaker 3: But just trading to trade is a terrible strategy.
Speaker 2: That's the great Warren Buffett quote. Unlike baseball, there are
Speaker 2: no Colt strikes and markets. You could sit there with
Speaker 2: a bat on your shoulder and just wait for your pitch.
Speaker 1: That's correct.
Speaker 2: So let's talk a lot.
Speaker 3: A lot of people are into business because they love
Speaker 3: the action and sitting.
Speaker 2: Oh well, we're all junkies. We're all looking for you
Speaker 2: that dopamine.
Speaker 3: So sitting with your bat on your shoulder is really
Speaker 3: tough for somebody.
Speaker 2: Yeah, yeah, absolutely. If I'm always surprised at traders who
Speaker 2: are also gamblers, like to go to Vegas, like to
Speaker 2: play play blackjack. It's like, don't you get enough excitement traders.
Speaker 3: I don't gamble at all. I don't bet on I'm
Speaker 3: a fan, right, So I'm a Michigan fan. I'm a
Speaker 3: nick fan. God, I'm a Jets fan. I'm a Mets fan.
Speaker 2: So we can you you are a glutton for punishment.
Speaker 3: Yes, we can have a whole psychological well.
Speaker 2: At least at least Michigan has been doing. Football has
Speaker 2: been doing better.
Speaker 3: Yes, and they had a good run in basketball. But
Speaker 3: I'm a fan. I enjoy I never bet on sports.
Speaker 2: Let's talk about betting on natural gas. We have had
Speaker 2: a kind of wild market and energy over the past
Speaker 2: couple of years, not just the Russian invasion of Ukraine,
Speaker 2: but all the things that have been happening in both
Speaker 2: oil and gasoline and natural gas. You're a natural gas trader,
Speaker 2: how do you look at what's going on in that
Speaker 2: market and tell us where the price of energy is
Speaker 2: going to be in a couple of weeks or months.
Speaker 3: So for everybody that's listening, whatever I do, do the
Speaker 3: opposite and you may have a chance of success. So
Speaker 3: natural gas, in terms of how it's behaved, it's had
Speaker 3: a round trip. So where the prices today is close
Speaker 3: to where oil was when it was zero in April
Speaker 3: of twenty just to give you a sense.
Speaker 1: So natural gas.
Speaker 2: Also round trip, and gasoline is almost a round trip, right.
Speaker 3: But not nearly to the extent. So this again becomes
Speaker 3: listen to the markets, don't listen to the gossip. And
Speaker 3: so where we are right now, in my mind in
Speaker 3: natural gas, which is different than crude, is a little
Speaker 3: bit counter cyclical. Because we've had warmer than normal weather,
Speaker 3: we had extra storage and that put downward pressure in winter.
Speaker 3: Now it looks like that's going to reverse and we're
Speaker 3: going to have a sort of really hot summer. And
Speaker 3: you can ascribe that to climate change.
Speaker 2: Or al Nino and stuff.
Speaker 3: You know, you can decide whatever you want to call it,
Speaker 3: but the facts are the facts. Right, If it's hot,
Speaker 3: and we're going to be burning and you're going to
Speaker 3: need to be cooling at the same time. A lot
Speaker 3: of this thought that, you know, natural gas and the
Speaker 3: economy was going to weaken, and in general, we were
Speaker 3: taught to try to buy low and sell high. We
Speaker 3: just talked earlier how most times in the markets, buyers
Speaker 3: are higher and sellers are lower. So we're sitting there
Speaker 3: trying to put a position on sort of spreading summer
Speaker 3: natural gas and hedging it a little bit by being
Speaker 3: short winter next year.
Speaker 2: So we're recording this at the end of May twenty
Speaker 2: twenty three. How do you look at macro events? The
Speaker 2: Russian invasion of Ukraine just being one example, Does that
Speaker 2: affect the way you look at what the market is
Speaker 2: telling you? Or is that just gossip? By the time
Speaker 2: it's in the newspaper, it's already in the price.
Speaker 1: No, you have to.
Speaker 3: Look at all these things, and I think there's an
Speaker 3: important lesson here. When there's tremendous amount of market uncertainty,
Speaker 3: you need to trade smaller, right, because that's what kills you.
Speaker 3: You know, periods of low volatility, which we're in now,
Speaker 3: then tend to be followed by higher volatility. A lot
Speaker 3: of models are predicated on looking backwards over recent volatility,
Speaker 3: and then you're trading too large. And I really want
Speaker 3: to distinguish because there's people talk all the time about
Speaker 3: black swans and they go, oh, this black swan could happen,
Speaker 3: or that black swan could happen, and I'm like, if
Speaker 3: you're talking about it, it's not a black swan. That's
Speaker 3: risk management, that's smart. A black swan is when you
Speaker 3: wake up in the morning and a condo in Florida
Speaker 3: has collapsed, or you wake up in the morning in
Speaker 3: Abe's assassinated. These aren't things that you put into your
Speaker 3: risk management models.
Speaker 1: But if you.
Speaker 3: Survive, you win, so you should really probably at these
Speaker 3: periods of uncertainty, So is there going to be a
Speaker 3: Ukrainian offensive? What is that going to do? And how
Speaker 3: is that going to affect the situation with Russia?
Speaker 1: Are they going to be threatening?
Speaker 3: They are a nuclear power? Is that just a threat
Speaker 3: to try to keep them or God forbid, something worse happens.
Speaker 3: I have no idea. I don't think anybody can have
Speaker 3: that idea because you can't get into the head of
Speaker 3: the leaders of Russia decide how they're going to act,
Speaker 3: But from a trading perspective, I think that you need
Speaker 3: to trade smaller.
Speaker 1: Now.
Speaker 3: One of the things that I find really interesting right
Speaker 3: now this time of year is that because if there
Speaker 3: is climate change and you have grain prices that are
Speaker 3: pre pandemic levels, it could be really fascinating and exciting
Speaker 3: to have sort of a summer rally in soybeans and corn,
Speaker 3: and the risk reward of buying them right here is
Speaker 3: fantastic because you've had a wet period of time. If
Speaker 3: you get dry and you don't have good growing conditions
Speaker 3: in the Midwest here. At the same time, you have
Speaker 3: uncertainty in the Ukraine, which is a large producer of
Speaker 3: grains basket. So yeah, so this could be And there's
Speaker 3: nothing more fun than a summer bull market in greens.
Speaker 2: So I've never quite heard that sentence before, nothing more
Speaker 2: fun than a bull market in the summer in grains.
Speaker 2: You've pointed out the psychology and self discipline. How can
Speaker 2: you teach traders to manage their emotions and to not
Speaker 2: allow their either their enthusiasm or despair to affect their
Speaker 2: trading behavior.
Speaker 3: The best teacher, unfortunately, is failure and how you deal
Speaker 3: with that failure. So many times people would come into
Speaker 3: my office after a really bad day. They sit down,
Speaker 3: they put their hands on their head, and they go, oh,
Speaker 3: why the hell am I in this business? Now what
Speaker 3: you can do and we've all done this. If you
Speaker 3: get out of all your positions, you emotionally cleanse yourself.
Speaker 3: But are you able to get back in the game.
Speaker 3: Because you can emotionally cleanse yourself and leave the game
Speaker 3: and you'll never be able to make your money back.
Speaker 3: So how do you handle that adversity?
Speaker 1: Success? Okay, most people enjoy success, but it doesn't teach
Speaker 1: you anything correct.
Speaker 3: In the trading business. It's how you deal. What did
Speaker 3: you do? And you have to really be self aware.
Speaker 3: Did I hold on to the position too long? Was
Speaker 3: I too big? Was I gossiping with other people? And
Speaker 3: I lost my discipline? You really have to break it down.
Speaker 3: And it all comes back to the fact that you
Speaker 3: have to admit that it's my fault as the trader.
Speaker 3: I'm the one that's grewed up.
Speaker 2: Well, you mean it's not the fed's faults. Because I've
Speaker 2: spent the past decade listening to managers and economists and
Speaker 2: traders tell me, well, my P and L would be
Speaker 2: much better. But this QE and the FED doing this,
Speaker 2: how can anybody trade in that environment?
Speaker 3: Yeah, I've as the years have gone on, I've gotten
Speaker 3: a lot better at taking credit for success and blaming
Speaker 3: others for my failure. And yeah, it's a good way
Speaker 3: to go. But you're living in Lola Land if that's
Speaker 3: how you think you are, what your track record is.
Speaker 3: And it's the sports scenario. If you're playing baseball and
Speaker 3: the team gives you a shot and you're batting one
Speaker 3: fifty and they take you out of the lineup, it's
Speaker 3: not the manager's fault, it's.
Speaker 2: The umpire, the umpires calling those outside pitches strikes. How
Speaker 2: can anybody get a fair shot at the plate with that?
Speaker 3: That's true, But if he is, just like in the markets,
Speaker 3: you got to you have to adjust, Yes, you have
Speaker 3: to adjust.
Speaker 2: To That's exactly right. So let's talk a little bit
Speaker 2: about robin Hood. It could be one of the more
Speaker 2: famous Wall Street based philanthropies in New York, especially giving
Speaker 2: its longevity. How did the idea come about? How big
Speaker 2: a factor was the eighty seven crash in the creation
Speaker 2: of Robinhood.
Speaker 3: So it's probably of all the things something I'm most
Speaker 3: proud about being associated with that since the beginning, and
Speaker 3: again really kudos to Paul for his leadership in doing that.
Speaker 1: So, as I said.
Speaker 3: Earlier, we really thought that there could be some economic
Speaker 3: struggles following eighty seven. And one of the things about
Speaker 3: trickle down, and I need to fully disclose, yeah, I'm
Speaker 3: a Democrat that believes in markets, is that when things
Speaker 3: go bad, it's those at the bottom that get hurt first.
Speaker 3: And we've seen that repeatedly. And so when we thought
Speaker 3: about helping New York. Now you have to realize nineteen
Speaker 3: eighty eight we gave away sixty five thousand.
Speaker 2: Dollars, not exactly a huge amount of money.
Speaker 3: No, last year we gave away one hundred and thirty million.
Speaker 2: That's a chunk of change. Yes, and you guys have
Speaker 2: been doing this every year for thirty five years.
Speaker 3: Yes, And the model was different. And why did we
Speaker 3: start it because Paul's an entrepreneur and the one thing
Speaker 3: and we're market people, and we said, you know what,
Speaker 3: if we do a good job, we'll be able to
Speaker 3: raise the money. And I don't want people to give
Speaker 3: us money in us not spend it.
Speaker 1: So we have two rules.
Speaker 3: One is if you give us a dollar, we're going
Speaker 3: to put it out the door in the next twelve months.
Speaker 1: And two we're paying.
Speaker 3: For the overhead the board. So if you give us
Speaker 3: a dollar, it's getting paid.
Speaker 1: It's not being one.
Speaker 2: Hundred cents on the dollar goes out from donated cash.
Speaker 1: That's correct.
Speaker 2: And who are the donors to the robin Hood Foundation.
Speaker 2: Besides you and Pull Tutor Jones and that original.
Speaker 3: Crew, there's literally thousands and after nine to eleven and
Speaker 3: Sandy and during the pandemic, tens of thousands of donors
Speaker 3: from all different sizes. Now we're sitting here in Bloomberg
Speaker 3: and Mayor Mike through the Bloomberg Philanthropies is one of
Speaker 3: the largest donor and supporters of New York. Now Robinhood
Speaker 3: focuses on sort of the overriding goal is mobility from.
Speaker 2: Poverty, meaning economic motibility, the ability to pull yourself up
Speaker 2: from a bad condition.
Speaker 1: That's correct.
Speaker 3: And within that, you know, we're we were the first
Speaker 3: funders of charter schools in New York City. We're the
Speaker 3: largest funders of food pantries. You have to have a
Speaker 3: holistic approach, and if you walk around New York and
Speaker 3: if you love New York City. What are the four
Speaker 3: issues right you see them. There's homelessness, there's mental health,
Speaker 3: there's food insecurity, and there's immigration and that together. If
Speaker 3: you could do that through job training, through education, through
Speaker 3: support systems, and we do that also we have try
Speaker 3: to use technology to help that, to put people on
Speaker 3: a path of a better life. Is it a challenge, absolutely,
Speaker 3: But we go back about the trading business and talking
Speaker 3: about how bad a day can be. But the thing
Speaker 3: that keeps it always in perspective. No matter how bad
Speaker 3: a day I have, the people that we're helping, their
Speaker 3: days are far worse. And if you keep that in perspective,
Speaker 3: you're going to help others who are less fortunate.
Speaker 2: How do you measure success for a charity? As a trader,
Speaker 2: you get a P and L. You know exactly whether
Speaker 2: you're right or wrong. How can you tell the impact
Speaker 2: of your dollars whether or not they're successful or not.
Speaker 3: So that's a really outstanding question, and that's something that
Speaker 3: Robinhood has been particularly innovative in in trying to measure metrics.
Speaker 3: So if it's a job training program, it's not just
Speaker 3: a number of people that are in there. For example,
Speaker 3: how once they graduate, where's their starting salary relative.
Speaker 1: To where they were beforehand?
Speaker 3: Do they still have that job a year later? Are
Speaker 3: they making more money? Are they at some percentage above
Speaker 3: the poverty level? If you're funding charter schools, where are
Speaker 3: they are the kids graduating? Are they going to college?
Speaker 3: Are you tracking them? Are they getting employment? So it's
Speaker 3: all very data intensive and metric intensive. Now, there are
Speaker 3: some things right you're if unfortunately, if you're a woman
Speaker 3: and you've been battered and you have kids, before they
Speaker 3: can go to job training or education, they need to
Speaker 3: have a safe place to say. So, we fund shelters
Speaker 3: and where we are, and we do food support because
Speaker 3: it has to be a holistic approach, this movement from poverty,
Speaker 3: and as a parent, just as you're dealing with your
Speaker 3: own children, that's what you're doing. It's a holistic approach.
Speaker 3: It's not okay, here's one magic bullet. I wish that
Speaker 3: were the case, but it isn't. And like any organization,
Speaker 3: the key is not me, not Paul, not the other
Speaker 3: board members.
Speaker 1: It's the quality of the staff.
Speaker 3: And we have committed, innovative staff that has really pushed
Speaker 3: robin Hood along the way, and that started you know,
Speaker 3: with our leaders and president, from David Saltzman to Wes
Speaker 3: Moore who's now the governor of Maryland, to our newest
Speaker 3: one rich Bury, and so we're really fortunate to have
Speaker 3: excellent team.
Speaker 2: You mentioned charter schools. Tell us a little bit about
Speaker 2: the Kip charter school in the Bronx and why Robinhood
Speaker 2: has been so active in promoting and developing charter schools
Speaker 2: in some of the poorer neighborhoods in New York City.
Speaker 3: Well, we're markets people, so we think that competition is
Speaker 3: a good thing. We know that charter schools aren't going
Speaker 3: to be a replacement for all public schools. But if
Speaker 3: you think about technology in general, right, it's innovation and change.
Speaker 3: And if you think about the KITP model, it's really
Speaker 3: like a parent. So if you have a child and
Speaker 3: they're not doing well, what do you do? You give
Speaker 3: them extra resources, You give them extra homework, and so
Speaker 3: they may come home from school and you're working with them. Now,
Speaker 3: if you have parents who are working the overnight shift
Speaker 3: in a hospital, they don't have that ability to give
Speaker 3: their children that extra time because they're working.
Speaker 2: So these schools do that and meaning extended hours tutors exactly.
Speaker 3: They're providing the resources and the opportunities for those students
Speaker 3: who they wouldn't normally have in a traditional public school model.
Speaker 2: Let's talk about what you guys do at Robinhood for
Speaker 2: Public Schools. Tell us about Math for America that seeks
Speaker 2: to improve math education in US public schools.
Speaker 3: So Robinhood Foundation of Math for America. Those are the
Speaker 3: two non for profit boards that I sit on. And
Speaker 3: I've been blessed really because Math for America was started
Speaker 3: by Jim Simons, and we all know what a legend
Speaker 3: Jim science is in the hedgephone world. In the education space,
Speaker 3: that model was predicated in how do we keep better
Speaker 3: math and science teachers in public schools? The assumption being
Speaker 3: which isn't rocket scientists even though he had more, well, yes.
Speaker 2: Given for the students resources.
Speaker 3: If you have really good teachers, you're likely to have
Speaker 3: better outcomes. So how do you keep really good teachers
Speaker 3: in schools when there's a lot of competition for them?
Speaker 3: So we've done two things at Math for America. We've
Speaker 3: established a community of master math science teachers where they
Speaker 3: can come together and learn and teach. And also we
Speaker 3: provide them a stipend, so there's an incentive for them
Speaker 3: to stay in their schools. And it's really fascinating because
Speaker 3: even though all the teachers in the schools aren't there,
Speaker 3: a good captain, a good player makes the players around
Speaker 3: them better. And so what they're doing and what they've
Speaker 3: taken back from you know, coming down to math for
Speaker 3: America for these sessions and bringing it back to school,
Speaker 3: I think helps all the teachers, which helps all the students.
Speaker 2: Before we get to our favorite questions, let me throw
Speaker 2: a curveball at you, which I find intriguing. You like
Speaker 2: to quote Captain E. J. Smith who famously said quote
Speaker 2: when anyone asked me how I can best describe my
Speaker 2: experience in nearly forty years at sea, I merely say uneventful.
Speaker 2: Why is that quote so intriguing to you?
Speaker 3: Well, not only did he say that, but he said
Speaker 3: it sort of just before the launching of the Titanic.
Speaker 3: And I think if you've listened at all time, and
Speaker 3: he was the captain of yes, he was the captain
Speaker 3: of the titan If you listen to anything or taking
Speaker 3: anything out of this podcast, is that complacency in anything,
Speaker 3: but particularly in the markets, is extraordinarily dangerous, and one
Speaker 3: should take away from that that bad things can and
Speaker 3: will happen in the markets. So that means trade smaller,
Speaker 3: have really good risk management, and don't believe your success
Speaker 3: when you're trading successfully.
Speaker 2: Let's jump to our favorite questions that we ask all
Speaker 2: of our guests, starting with tell us what you've been
Speaker 2: entertaining yourself with. What are you listening to or watching,
Speaker 2: be it Netflix or podcasts or whatever.
Speaker 3: Ah well, so we have a sort of group consideration
Speaker 3: at home. Of course, we're finishing succession right, there's two
Speaker 3: upright and at the same time, Barry and Ted Lasso.
Speaker 3: So those post Memorial Day, I think we're gonna have
Speaker 3: to find some new things.
Speaker 2: I'll make a recommendation to you. It's only eight episodes
Speaker 2: and I'm only halfway through it. But the Diplomat, Yes,
Speaker 2: that's next, that's next. On our really well done, really
Speaker 2: fascinating characters. I'm really I'm really enjoying it.
Speaker 3: And when I'm sitting around and trying to clear the
Speaker 3: head and reading, I try. I like historical novels.
Speaker 2: Well, we're gonna come up to books in a moment,
Speaker 2: so put a pin in that. Tell us about your
Speaker 2: early mentors who helped shape your career.
Speaker 3: Well, I was very very fortunate, as I said, being
Speaker 3: at at the FED and UH and the research people there,
Speaker 3: and of course there's Paul, who was a mentor, and
Speaker 3: because we're together on the border of the Robin Hood Foundation,
Speaker 3: is still a mentor because I think you can always
Speaker 3: learn different things and and believe it or not, a
Speaker 3: lot of the mentors now are are people I read
Speaker 3: and listen to. And for example, I had the opportunity
Speaker 3: to be here at Bloomberg Philanthropies a few weeks ago
Speaker 3: and listen to Mayor Mike, and I try to take
Speaker 3: away things that I find insightful. And sometimes I run
Speaker 3: into people and I'll say to them, you know, you
Speaker 3: may not remember this because to you it was a
Speaker 3: throwaway line, right, But it had a lot of meaning
Speaker 3: to me. And I probably stole it and didn't give
Speaker 3: attribution to it.
Speaker 1: But I try.
Speaker 3: It doesn't matter who it is across the board, and
Speaker 3: it can be from uh, you know, a ted Lasso,
Speaker 3: It could be from a book, It could be from
Speaker 3: a politician, It could be from anybody.
Speaker 2: Let's talk about books. What are some of your favorites
Speaker 2: and what are you reading right now.
Speaker 3: So, as I mentioned, I read a lot of history
Speaker 3: oracle novels, and there's an author by the name of
Speaker 3: David Liss who writes about England and coffee trading and
Speaker 3: those type of markets in the eighteen hundreds, and that's
Speaker 3: kind of what I'm reading right and now, because the
Speaker 3: psychological aspect even then applies to today.
Speaker 2: What else have you read recently that you enjoyed.
Speaker 1: I'm going to read Michael Lewis's new book of course.
Speaker 2: I'm excited Sam coming out in September October something like that. Yes, yeah,
Speaker 2: that's gonna be that's gonna be great. So our final
Speaker 2: two questions, what sort of advice would you give to
Speaker 2: a recent college grad who was interested in a career
Speaker 2: in either trading or running a fund.
Speaker 3: So I think all college grads, all all young people.
Speaker 3: You have to be willing to pay your dues. But
Speaker 3: the trading aspect the hedge fund asked, It's a lot
Speaker 3: like sports. The chances of being.
Speaker 1: A pro.
Speaker 3: Is a low probability, So you should try and then
Speaker 3: if you have a chance of success, continue, but if not,
Speaker 3: then you need to pivot because what you don't want
Speaker 3: to be doing is, you know, saying, Okay, I'm going
Speaker 3: to be a lifetime player in the Triple Ace and
Speaker 3: so you know, as in the minor leagues. But if
Speaker 3: you want to pursue it, you have to pursue it.
Speaker 3: But do your own work right coming in And I
Speaker 3: do a lot of global macro and risk assulting, and
Speaker 3: I always tell them, I go, you're not paying me
Speaker 3: to read you the Wall Street Journal or from Bloomberg.
Speaker 3: I go, if you want to have story time, it's great.
Speaker 3: I'll pull up all the Bloomberg articles you want and
Speaker 3: I'll read them to you. So don't rehash other things
Speaker 3: that people can easily get and think you're being innovative.
Speaker 3: Do your own work, and you really need to be analytical.
Speaker 2: And our final question, what do you know about the
Speaker 2: world of trading and investing today? You wish you knew
Speaker 2: fifty years or so ago when you were first getting
Speaker 2: started fifty or forty forty year.
Speaker 1: Yeah, let's let's say forty.
Speaker 2: Yeah, I just put a decade on you. So forty
Speaker 2: years ago when you graduated in the eighties, What do
Speaker 2: you wish you knew then that you know now?
Speaker 3: I think it's always the same. I wish we didn't
Speaker 3: go through our own near death experiences. We had that,
Speaker 3: As I said, every successful traders, we had big volatility
Speaker 3: and eighty six a Tutor that I mentioned earlier, I
Speaker 3: wish I knew how difficult it would be running my
Speaker 3: own CTA. So when I left Tutor, they seated me.
Speaker 3: I bought the team of research. It was sort of
Speaker 3: the first quant trading on the street and the whole
Speaker 3: business aspect of raising money compliance. I wish I had
Speaker 3: a better understanding of that because it's just not your
Speaker 3: track record. And that's another big problem for graduate today.
Speaker 3: I think, oh I have a great track record. This
Speaker 3: isn't field the dreams. If you build it, they don't come.
Speaker 3: You need to have a really really important process, and
Speaker 3: I wish I was better at that at that time.
Speaker 2: My colleague Ben Carlson calls that organizational alpha, and I
Speaker 2: love that phrase.
Speaker 1: It is a great phrase.
Speaker 2: Right. Thank you, Peter for being so generous with your time.
Speaker 2: We have been speaking with Peter Borsch, founding trustee at
Speaker 2: robin Hood and formally director of research at Tutor Investments.
Speaker 2: If you enjoy this conversation, well check out any of
Speaker 2: the previous five hundred or so we've done over the
Speaker 2: past eight and a half years. You can find those
Speaker 2: at iTunes, Spotify, YouTube, wherever you find your favorite podcasts.
Speaker 2: Sign up from my daily reading list at Rid Halts
Speaker 2: dot com, Follow me on Twitter at Ridholt's follow all
Speaker 2: of the Bloomberg Fine Family of podcasts at Podcasts, I
Speaker 2: would be remiss if I did not thank the crack
Speaker 2: team who helps put these conversations together each week. Robert
Speaker 2: Bragg is my audio engineer. Attika Vlbroun is our project manager.
Speaker 2: Paris Wald is my producer. Sean Russo is my researcher.
Speaker 2: I'm Barry Ritolts. You've been listening to Masters in Business
Speaker 2: on Bloomberg Radio.