Global Macro Trading Journal

[Ghost of Cutten]

Quote from darkhorse:

CAGR = compound annual growth rate.

At the end of the day, risk-adjusted CAGR is the only thing that matters, which goes back to my point, re, different strokes for different folks.

If an independent trader has access to an excellent strategy that can deliver 25% CAGR over 10 years, with low risk, and his capital base is small enough (or the strategy capacity large enough) to fully operate without capital constraints, then this trader would have zero need to look at long-term investment strategies of the WMT / AAPL type. Anything with a less desirable CAGR profile than his bread and butter approach -- again, assuming it is genuinely stable and low risk in aggregate -- has negative opportunity cost (or rather, opportunity cost as a significant negative).

This overlooks the total portfolio characteristics. For example, the WMT and similar investments is useful as a diversifier, even if the returns are lower - most speculative trading can be done on margin, so you can have a portfolio 100% long investments like WMT, and then do your normal trading 'on top' without any reduction in returns except for your cost of capital (currently tiny at today's interest rates).

Furthermore, things like global macro tend to do well when volatility is higher or rising, whereas investments like WMT perform better in quiet or falling vol markets. So having a trading portfolio collateralized by an investment portfolio reduces the volatility of returns as well as increasing absolute returns - a true free lunch.

Lastly, the true risk of an investment is not measured by its volatility but by the chance of long-term loss of capital. If a trading portfolio falls 10%, then you just suffered a loss of 10% of capital. If WMT falls 10%, the value in many cases has not changed much if at all, rather the share price has just gone down temporarily. So long as you don't have to sell any time soon, you can often just ignore the fluctuation and in most cases be confident that in future it will recover and steadily move higher. So a 10% 'loss' on an investment portfolio is not economically equivalent to a 10% loss on a trading portfolio, so long as the intrinsic value hasn't been impaired by 10% or more.

P.S. AAPL is up a lot more than 25% CAGR in the last decade, year, few months, however you mention it.

 

[Ghost of Cutten]

Quote from darkhorse:

Fair enough.

And again not so much directly disagreeing with you, as presenting an alternative perspective... as a general rule I am very wary of "unknown unknowns," which leads me to eschew "good" or even "very good" value opportunities apart from the bleedin' obvious macro dislocation, hard core Ben Graham type stuff.

You could be completely right about WMT -- but they could also have another ten years of sloppy sideways range due to some new unknown compressor -- like the rise of 3D printing technology fueling a low-cost manufacturing revolution that dulls their logistical edge, for example.

Not saying that will happen... just that my "unknown unknowns" hurdle is pretty high for long-term investments, and will remain so as long as my main opportunity set lies with risk-defined trades.

A trader has more unknown unknowns than a portfolio of value investments. What are the odds of 10 uncorrelated WMT stocks getting made obsolete, compared to the risk of a trader going on til, having an affair/divorce/death in the family, becoming an addict, blowing up on some black swan event while leveraged, or simply losing his edge? There is a reason the SPY index fund is the home of retirement savings, whereas Jon Q Trader's personal hedge fund isn't.

 

[darkhorse]

Quote from Ghost of Cutten:

This overlooks the total portfolio characteristics. For example, the WMT and similar investments is useful as a diversifier, even if the returns are lower - most speculative trading can be done on margin, so you can have a portfolio 100% long investments like WMT, and then do your normal trading 'on top' without any reduction in returns except for your cost of capital (currently tiny at today's interest rates).

There are clearly many ways to skin a cat.

It is not obvious that long investments should be levered on top of a trading portfolio, given 1) the potential time and energy cost of researching such investments, and 2) the alternative opportunity, which also requires time and energy, of finding and leveraging other low risk, high CAGR strategies, which are more accessible in general to capital bases of a certain size (vs large ones where 'moving the needle' becomes a challenge).

I am not saying what you propose is a bad way to go, only that it's different strokes for different folks again, with various nuances and inputs. Risk-adjusted CAGR is still the universal measure.

Quote from Ghost of Cutten:


Furthermore, things like global macro tend to do well when volatility is higher or rising, whereas investments like WMT perform better in quiet or falling vol markets. So having a trading portfolio collateralized by an investment portfolio reduces the volatility of returns as well as increasing absolute returns - a true free lunch.

That is one hell of a generalized statement. Too many caveats to even respond to it.

Quote from Ghost of Cutten:


Lastly, the true risk of an investment is not measured by its volatility but by the chance of long-term loss of capital. If a trading portfolio falls 10%, then you just suffered a loss of 10% of capital. If WMT falls 10%, the value in many cases has not changed much if at all, rather the share price has just gone down temporarily. So long as you don't have to sell any time soon, you can often just ignore the fluctuation and in most cases be confident that in future it will recover and steadily move higher. So a 10% 'loss' on an investment portfolio is not economically equivalent to a 10% loss on a trading portfolio, so long as the intrinsic value hasn't been impaired by 10% or more.

Flat-out disagree with your assumptions.

A strong trading strategy is akin to a strong business strategy -- if a business loses money in a rough quarter, but for reasons completely within expected norms and with no change to long-term expectations for the strategy, you wouldn't say there was a permanent loss of capital.

Or look at it this way: If Paul Tudor Jones has a 7% drawdown in his main trading account, knowing he has had hundreds of 7% drawdowns in the past and will have hundreds more in the future, he would not stop and say "that 7% is gone forever."

Conversely, to casually "just ignore the fluctuation" in your long stock investment, as you put it, requires a degree of confidence in value assessment that comes with a very high hurdle.

Last but not least, if you have the opportunity to deploy capital across high CAGR strategies, even a "temporary" loss of the Buffett style -- in, say, a value investment that acts like dead money for X years -- is still an opportunity loss in terms of capital deployed suboptimally.

It's the time that you can't get back. Buffett can wait 10 years for KO to reattain its nominal high, collecting dividends all the while, because his size demands extreme time horizons in the first place. Allocation challenges trump time concerns. But this isn't true for the smaller player.

Buffett himself has said he is confident he could still make 50% per annum were he dialed back to a modest amount of capital. Do you think he would get that going for single and (low) double-digit CAGR profiles? No... he would maximize opportunity relative to his capital base... which was my whole point...

Nuances, nuances.

Quote from Ghost of Cutten:


P.S. AAPL is up a lot more than 25% CAGR in the last decade, year, few months, however you mention it.

Sure, and AAPL is also one hell of an outlier. Not to mention a great trader can make a lot of money in the AAPLs, LULUs and CMGs of the world without taking a long-term investment approach to them.

 

[Daal]

Quote from darkhorse:

There are clearly many ways to skin a cat.

It is not obvious that long investments should be levered on top of a trading portfolio, given 1) the potential time and energy cost of researching such investments, and 2) the alternative opportunity, which also requires time and energy, of finding and leveraging other low risk, high CAGR strategies, which are more accessible in general to capital bases of a certain size (vs large ones where 'moving the needle' becomes a challenge).

You can just index everything and not have to spend time on research

 

[darkhorse]

Quote from Daal:

You can just index everything and not have to spend time on research

Or I could take out a line of credit, trade against that, and divvy up my free cash amongst Civil War era coins, my cousin's booming car wash franchise, and Mongolian real estate.

There's no question that prudent use of leverage makes sense as an overall return enhancement strategy. It's just that the opportunity set can vary dramatically from one trader / investor to another, with risk-adjusted CAGR (and personal tolerance for risk) the key metrics...

 

[Daal]

Quote from darkhorse:

Or I could take out a line of credit, trade against that, and divvy up my free cash amongst Civil War era coins, my cousin's booming car wash franchise, and Mongolian real estate.

There's no question that prudent use of leverage makes sense as an overall return enhancement strategy. It's just that the opportunity set can vary dramatically from one trader / investor to another, with risk-adjusted CAGR (and personal tolerance for risk) the key metrics...

Yes, there is some personal issues involved like risk tolerance. My personal situation I just find difficult to keep cash around instead of investing in well diversified basket of long-term investments that are likely to appreciate. I know that in 30 years I will thank myself for doing that even though I could feel like a idiot as they fluctuate like crazy

 

[Daal]

An interesting situation happened in the Soros 'real time' experiment in his Alchemy of Finance book. I remember reading that he would trade around A LOT his positions, yet the bulk of his large returns came from something very simple, he was long assets with positive risk premiums during a bull market, it was not his mega theories about political events or whatever

I can only imagine how he would have done using a 60/40(equity-bond) portfolio and using that as margin for his mega theories trades. He would probably be even richer now

Of course, there is selection bias there as there was a bond bull and stock bull at the time. But that is why I keep talking about and figuring out likely long-term returns of stocks, commodities, bonds in this journal even though ET is more short-term oriented. By having my base returns with a diversified and negatively correlated mix of many different assets I'm already ahead of by earning risk premia, I will then borrow against that to make the macro bets(That are biased towards being long assets with positive risk premia, I short but I rather be long). This keeps one ahead of the game by already having a base return

 

[Daal]

Also, cash is also a risky bet. There are issues like
-Inflation
-Taxes on interest income(When the interest is even paid, not the case in most US brokers)
-FX risk(For people who have a certain % of their spending in the form of imports and international purchases)

Whether one realizes or not, keeping the money in cash is a trade. I'd say is a risky trade for the next 20-30 years even if it isn't for the next 1 or 2

 

[darkhorse]

Quote from Daal:

By having my base returns with a diversified and negatively correlated mix of many different assets I'm already ahead of by earning risk premia, I will then borrow against that to make the macro bets(That are biased towards being long assets with positive risk premia

Yep, Jim Leitner talks extensively about this in his Drobny interviews

 

[Ghost of Cutten]

Quote from Daal:

You can just index everything and not have to spend time on research

Yes exactly. For a given risk tolerance, there's always a portfolio which will outperform cash over the long-term whilst staying within drawdown parameters.

And a 10% fall in an investment *may* be a true 10% loss in value, but is highly likely to be an exaggerated short-term fluctuation, whereas a 10% fall in trading capital is 100% certain to be a 10% loss in value.

Yes, an outperforming trader will 'make it back'. But he will be making it back from his remaining 90% of capital. Whereas unimpaired investment portfolio X will still be worth say 99, 97, 95...and priced at 90, so it will 'make it back' at a ratio of 95/90. And, unlike any trader, it is still just as likely, or in the real world of ever-changing cycles, far more likely, to continue at its long-term historical and economically expected return; whereas for ANY given single trader, each X% drawdown has a non-negligible % chance that he has lost his touch.

Total stock market, and especially total stock/bond/gold portfolio returns, are so much more persistent than any given trader's returns, that it is almost churlish to contest that fact. Really, PTJ's 10 or 20 year future return is expected to be what, exactly? The fact is we have literally no clue whatsoever - all we know with confidence is that we'll be charged 2 and 20 for the privilege. And that's one of the most consistent traders around. Meanwhile, good old SPY + IEF + GLD charges about 0.2% a year. That's 1.8% + 20% of profit advantage. Sorry but only a total idiot would think they are capable of picking the next generation of PTJs with certainty, and even if they picked them, their risk of fucking up is many times higher than just simple, cheap, naive index portfolio investing which takes a whole 2-3 hours per year to execute.

Whatever your trading strategy, you can either keep your capital in cash, or keep it in a diversified low-cost indexed portfolio within your drawdown parameters, and then trade on top of it. You can't trade on top of a hedge fund investment with a lock-up and an implicit gate risk any time they take a 20%+ drawdown. The question is, if you are a trader, do you make your limited risk bets on top of a portfolio of 100% cash (low volatility, shitty returns), or do you do it on top of a portfolio of bonds, or stocks/bonds mix, or solid blue chips, or the most rank speculative growth stocks and cigar butts you can imagine. How did the idea of investing in a hedge fund even get into this discussion? Ralph can invest in WMT, AAPL, and other blue chips, and then make punts on anything he likes. You can't margin an investment in Tudor or any other fund, and then trade based off that to the same degree. So let's compare like with like please, instead of dissimilar comparisons and trader hagiography through the rear view mirror.