The Compound and Friends
00:05:30 · Alex Altmann
[00:05:30] S1: Yeah. Exactly. Just unnecessary pockets. No. I mean, like, tactical in the in the traditional sense of of of Wall Street will mean that rather than thinking about your typical research outfit that we'll look at six, twelve, even longer time horizon, six, twelve months, we'll we'll... We're kinda trafficking in the shorter time horizon more suited, but not exclusively, to the fast money community. So we're thinking one week, two week, four week, maybe, you know, eight weeks ahead, not really much beyond that. We have thematic views. We've... You know, we have views that have sort of been prevailing for for months, if not years in some cases, on some structural opinions. But we're generally trying to think four to eight weeks out and say, alright. How are we gonna make money? And what are what are markets are gonna wanna do? Where's the best asymmetry? And then the other aspect about the tactical consideration is we we traffic a lot in verticals of the market that your traditional research outfits tend to not cover. So we'll think about positioning, derivatives, quant, what a hedge funds are up to, you know, and and these are really important verticals or pillars of the investment process that, quite frankly, all of the buy side are doing, but a lot of the sell side still kind of don't cover from a traditional research perspective. So we try to basically match the desk investment process to what the buy sides or the guys that we typically talk to, what they're doing. And that way, we can have a pretty sort of, like, pari passu head to head conversation.
00:07:01 · Josh Brown, Alex Altmann, Michael Batnick
[00:07:01] S0: Wanna know what other hedge funds are up to. Yeah. Okay. They do. And not purely, like, from a gossipy sense. Like, too. They wanna... Probably, but they wanna know... So positioning has become something really important in the market. Michael and I joke about it. Anytime there's something going on in the market and we can't explain it, we go Positioning. It's positioning. [00:07:22] S1: And it... It is. [00:07:23] S0: But it's... But people wanna know... People that are managing money professionally wanna know what their peers are doing. And they... I think they recognize the limitations of, like, a traditional portfolio manager survey, which sort of just comes out like groupthink. So you... So I guess you guys become a repository for, well, here's what your peers are. Here are the trades that people are putting on and why. That that... That's one aspect of it. [00:07:49] S1: Yeah. And then there's other aspects about positioning. Okay. So positioning can be instructive because, obviously, flow tends to dictate price. Right? And price dictates narrative. So in theory, you can carve up... And quite frankly, I do follow this mantra, which is if you know if there's a positioning asymmetry that has been built in the market, Does it have the propensity to change price in a very asymmetric way? And in doing so, can shift the market's perception of a narrative. [00:08:19] S2: Situational awareness was a perfect example of that. Perfect example of it.
00:08:19 · Michael Batnick, Alex Altmann, Josh Brown
[00:08:19] S2: Situational awareness was a perfect example of that. Perfect example of it. [00:08:23] S1: Right? And you get that periodically throughout any given year. You just need to have a framework in place that allows you to kind of monitor a lot of things simultaneously. So are we monitoring single stock positioning? I mean, we can is the short answer, but we don't because, generally, if you aggregate up to, like, theme, sector, quant style [00:08:45] S2: Good enough. [00:08:46] S1: Good enough. And and, of of course, like, aggregate market. So you wanna know how are hedge funds positioned, how are mutual funds positioned, how are CTAs positioned, how are vol control and QIS strategies positioned, How is risk parity positioned? If you kind of get that right, oh, how's retail positioned? That would be probably the biggest [00:09:04] S0: idea that's... So that's an opportunity to go the other way or not necessarily betting betting against an over an asymmetric positioning, but maybe just as, like, intelligence. Like, where is the money right now?
00:09:04 · Josh Brown, Alex Altmann, Michael Batnick
[00:09:04] S0: idea that's... So that's an opportunity to go the other way or not necessarily betting betting against an over an asymmetric positioning, but maybe just as, like, intelligence. Like, where is the money right now? [00:09:17] S1: Correct. And so sometimes it will actually provide an informed conclusion about taking a a contrarian bet. Other times, that's not necessarily the case, and that applies pretty much universally. So what we tend to do is backtest a lot of these positioning reports that we run against what the forward returns of whatever asset we're interested in. And then in some cases, it can actually validate the view and reinforce it. So I... This position's crowded, but actually based upon all of our back testing, the crowding means nothing, and actually the forward returns are really good. And And other times, it will say the opposite where you wanna take a contrarian bet and and sort of say something controversial. [00:09:55] S2: I feel like there is a school of thought that short term predictions are a total fool's errand. And I would say for most... For the casual investor, of course, it is. Trying to predict the market in the short term for most people is a total waste of their time to do something else. But the idea that you have clarity a year out in today's investing world sounds so insane given how fast things are moving [00:10:20] S0: Mhmm. [00:10:20] S2: That if you are going to make some sort of market call, tactical call, yes, zero to thirty days probably is reasonable.
00:10:20 · Michael Batnick, Alex Altmann, Josh Brown
[00:10:20] S2: That if you are going to make some sort of market call, tactical call, yes, zero to thirty days probably is reasonable. [00:10:28] S1: Yes. And so I'll give you a couple of stats that can sort of help clarify that a bit. Right? So if I told you that if you were to buy the s... Let's just use the S and P. It's easy. Right? So if you were to buy the S and P on any given random day and you were to hold that position for forty two trading days, it's equate equate to about two months, the odds of you making money, right, is about 73%, and your average return will be around about just shy of 200 basis points, 190 basis points. That's pretty good. Right? Now that's better than... Better... Way better odds than going to a casino and playing any game. So if you consider that your baseline, you're you're effectively trying to either outperform that or underperform that. And I think that's where the randomness comes in. Because if you're gonna just sort of buy the S and P and hold it and just sort of take a kind of a passive view on it, then you've... You're... The odds are you're gonna be right more time than not. So, really, what you're ever trying to do if you're gonna consider the tactical considerations is you're trying to basically say, okay. Are the odds materially deviating from that 73%? We have a framework which is actually pretty good. Is it perfect? No. Because if it was, I wouldn't be sitting here telling you about it or talking to our customers about it. [00:11:46] S0: You just run run it internally and keep your mouth shut. I'll keep my mouth
00:11:46 · Josh Brown, Alex Altmann, Michael Batnick
[00:11:46] S0: You just run run it internally and keep your mouth shut. I'll keep my mouth [00:11:49] S1: shut from a from a beach. [00:11:50] S2: But you have the data. So the way that a lot of gamblers lose, just a casual gambler, there's, whatever, 20 games over the weekend, and they'll bet on 11 of them, and there's obviously no edge. You don't have to sway at every pitch. You don't have to bet every game. But when there is reason, when the data says, hey, whatever, 80% of the time, do nothing. Right? Mostly noise. But 20% of the time, we have a 54% chance of of making contact, and we'll swing when it makes sense to do so.