The Compound and Friends
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.
00:12:19 · Alex Altmann
[00:12:19] S1: Yeah. And so in in our case, obviously, we'll work on kind of the opposite where we're we're generally looking for the 80 fives, 80 to 85, nineties in some cases, hit rates, where we'll look at kind of the forward return profiles, whether it's on the S and P, whether it's on a a particular style factor, whether it's even on a sector. And the the hit rates look really attractive based upon pretty robust, not just backtests, but just very long sort of out of sample and in sample periods. So good case in point. Right? So our main framework that helps guide whether we wanna be bullish or bearish, we... It's called BETTY. It's Barclays equity timing indicator. We were originally gonna call it betting, but then kinda compliance had a bit of an issue with that, unsurprisingly. And it's... All it is is that you say we have all the data. Everyone has access data. If I told you what all of these inputs were, you could build it yourself. It's... There's no secret source. It's just a case of aggregating a bunch of stuff that's already available in the market and knowing that when a significant or a sufficient number of them are flashing either positively or negatively, you know in your head and and on paper statistically what the forward returns of the S and P are more likely than not going to do. We have the whole the whole thing laid out, and that's really our guiding light with... From a quantitative framework. And then the qualitative framework is the positioning. It is talking to customers. It's all... It's knowing what the organized narrative is in the market. And, hopefully, this is where it becomes more of an art than a science. You've got the science bit. Right? The art bit is pulling it all together. This is a bit that AI hasn't figured out yet. It's like pulling it all together in a way that you can say, okay. All the ducks are in a row. I think we got... Know, now we... To use your parlance, we have to take a swing.
00:14:04 · Josh Brown, Alex Altmann
[00:14:04] S0: Can you go back to what you said about the order? How how you get to narrative? It start... Like, it starts with it starts with what... Because I agree with the the premise. I just... I sort of think, like, whatever Price is doing, that becomes the story that everybody accepts. It just takes a little while for that to be transmitted around the street. And then it's it's funny. Like, you hear you hear people saying something on Thursday. Like, five people will say the same thing, and they arrive there because of whatever price just told them. It almost never works the other way where somebody is going against price and and people accept that narrative. Does that make sense, like, I'm trying to ask you? [00:14:48] S1: It it it does. And and that's, I would mostly... For the most part, I would think... I think of that as noise. It is because people will use price to justify Yeah. Narrative, or they'll explain something x post because a price moved a certain way rather than necessarily providing real intelligence behind it and go actually... You know, challenging the view. Does does that make actual sense? [00:15:15] S0: Right?