The Compound and Friends
00:16:22 · Alex Altmann
[00:16:22] S1: No. No. No. The the quantitative aspect is really important. That... That's what I was referring to before and where there's art rather than just just science. There are plenty of strategies in the marketplace that are just literally, you know, inputs and outputs. And if it's good quality inputs, you get good quality outputs and vice versa. But I... I'm a big believer that the discretionary overlay is really powerful. It's really important. And, you know, I kind of experienced that firsthand when I was running money as well in insofar that if you just rely on a quantitative process and you inside your own bubble, I think it can work. Clearly, there's guys who have had phenomenally successful careers running those kind of strategies. But for me, personally, I believe there's real power in in talking to the community and getting a really good qualitative assessment of what that... The zeitgeist is, and then building the quantitative framework alongside that to see if they match up or if there's a discord. Right? And if there's some kind of dissonance between the two, then that's to me is usually where there's a real opportunity. Because I'm a big believer personally that... And today, in this environment, is a perfect example of that, where you've got this so called prevailing narrative that suddenly everyone is bearish on AI, right, because of what happened in the financing space or or whatever it may be. And, I conduct surveys. We just sent out a survey just today, which we conducted yesterday. Had 200 investors that came, which is a pretty good sample size from from the Wall Street community. And it's a high quality survey, and the and the feedback was overwhelmingly not bearish on on AI. Right? Only 60% of people that responded thought that we had a financing problem. I'm like, how can that be? We have a financing problem because we've just gone through one over the past two weeks, so that number should have been a 100%.
00:18:03 · Michael Batnick
[00:18:03] S2: So what does that tell you?
00:18:04 · Alex Altmann
[00:18:04] S1: Well, it tells me... So that... That's the start of a of a story. Right? Because you've got dissonance now. You've already got... Okay. Customer feedback is everyone's bearish AI. Survey says you're wrong. Okay. Let's check the positioning data. So traditional hedge fund PB positioning data from some of my competitors will say hedge fund nets are super low, therefore, everyone's bearish, and they've all sold tech. What they may not necessarily tell you, and this is in no way we... No way me sort of, like, poo pooing the the quality of work from competitors, but what that data probably doesn't show necessarily or people overlook is that the range of net exposure changes by hedge funds is minimal. It'll go to... From 48% to 55% back to 48%. Right? Why? Of course. Because a lot of these guys are RV pod shops, and so they're just running market neutral neutral strategies. So in reality, they they have no or little market sensitivity beyond their beaters within the portfolio. So I don't care what they're up to. And we get... We... We've run stats around this. So the point being is is that we'll use the positioning data where we think it's valid. So what are retail positioned in? Huge vertical. I mean, the largest owner of stocks is the retail community. Next largest owner, re... Mutual funds. Right, and levered ETFs. What are they up to? Right? So these are the verticals. What are vol control funds are up to? Those guys have significant equity length. QIS strategies, Ditto, CTA, Ditto. So you build up, like, a a quantitative picture across your framework, and you say, okay. What does the positioning metrics actually look like? Now let's compare that to what the prevailing narrative is, and now let's compare it to what our customers are saying.
00:19:41 · Michael Batnick, Alex Altmann, Josh Brown
[00:19:41] S2: What do you see in retail? Is it... Was it... Is it dumb money as people say, or have they been... I feel like they've been pretty damn right the past this this cycle with buying dips. [00:19:48] S1: Vast majority of retail would... Our portfolios would have outperformed institutional portfolios. [00:19:52] S2: What does that tell you? [00:19:54] S1: It tells us a few things. First and foremost is they have more holding power. Right? So a lot of the hedge fund community are operating on much tighter drawdown limits because their mandate on... You know, they're [00:20:06] S0: They're being observed. Correct. The retail account is not being observed by anyone other than the holder and the holder's wife. [00:20:12] S1: Yes. And and and and and it's something they wanna brag about to their their friends at at dinner parties. [00:20:19] S2: I bought the dip. [00:20:19] S1: I bought [00:20:20] S0: the answering to a committee about why they're overweight semiconductors. They're just overweight semiconductors because they wanna be [00:20:27] S2: And why they draw down 400 basis points? [00:20:29] S1: Right. Right. And the only thing that will basically cause them to stop out is either their brokerage account basically margin calls them or they lose their job. That's it. Yeah. Right? That... It really is all about... People always ask me, oh, what gets retail to sell? I'm like, lose your job or when your neighbor loses their job.
00:20:29 · Alex Altmann, Michael Batnick, Josh Brown
[00:20:29] S1: Right. Right. And the only thing that will basically cause them to stop out is either their brokerage account basically margin calls them or they lose their job. That's it. Yeah. Right? That... It really is all about... People always ask me, oh, what gets retail to sell? I'm like, lose your job or when your neighbor loses their job. [00:20:46] S2: So there's been there's been times where retail has dumped stocks, like, obviously. Is that is that a buying opportunity or not necessarily? [00:20:53] S1: It depends on the starting point and how long it's been going on for. So what if I told you... We've got data on retail back to around about 1995, like, good quality data data. And what we do [00:21:02] S2: Is that relevant still in [00:21:03] S1: today's world? Absolutely. It's more relevant today than I think it's ever been. [00:21:07] S2: Wow. That's surprising. Why do [00:21:08] S1: you say that? Well, because, you know, the devices... Okay. I guess we have to kind of go back into history a little bit. 2019 was a real demarcation for retail trading. Not 2020, 2019. People don't really talk about it, and that's because in October of that year, it's when zero commission trading was introduced. Right? And it just so happened to coincide with the launch of Robinhood and some of the, you know, the more gamified [00:21:34] S0: This is when Schwab said zero, Fidelity said zero, and zero became the standard. Zero. Exactly. Yeah. [00:21:40] S2: Right? I
00:21:40 · Michael Batnick, Alex Altmann, Josh Brown
[00:21:40] S2: Right? I [00:21:40] S1: remember. So there was very, very low frictions trading. Then what happened? COVID. Right? And then what happened? [00:21:46] S2: Everyone trades. [00:21:47] S1: Bunch of stimulus checks, people sitting at home. [00:21:49] S0: 40,000,000 new brokerage accounts open in eighteen months. Exactly. Yeah. [00:21:52] S1: So... But, really, I mean, would non zero zero commission trading have changed it? Probably not. But I do think it's important because, you know, it effectively lowered your transaction friction to to to nothing. And then you got a bunch of people with checks and nothing to do, and they're basically, you know, let's face it, we're all degenerate gamblers. So a lot of people basically got involved in that, and and that obviously coincided with a significant short term correction in in equities. [00:22:20] S2: They didn't leave. They never left after the bear market. They're still here. [00:22:25] S1: They're still... Oh, no. No. They they... That's not true. They did... So there was a degree of selling by the retail community in 2022, and that was a deliberate financial tightening exercise by the Fed. [00:22:35] S2: Right? It was but it was short lived. Like, if you look at the percentage of overall volume, it's still pretty... It's still high. Is it 25%? [00:22:41] S0: The retail share of trading is still where it was. [00:22:43] S1: Oh, in terms of the share. Yeah. But what we tend to track is the evolution of both cash balances and margin balances as as a percentage versus the natural drift of Yeah.