The Pitfalls Of Big Trade Macro
Big Trade Macro
As you may have noticed our name is Process Driven Macro. This was not an accident. One thing in the macro space that everyone is always trying to do is what we call Big Trade Macro.
Big Trade Macro is the phenomenon of traders obsessing over the next big generational move. The type of move that if called can make a career.
Things like “I called the 87 crash” or “we shorted tech in March of 2000 and rode half of those dot coms to $0” or now “you think the 2008 crash was a big deal? look at this debt number, the next move down will be worse than the great depression.”
This is a disease, but to an extent I get it. I mean who doesn’t wish they had a Soros trade and people say “He broke the Bank of England” or the Tudor/Zweig calls of the 1987 crash. I mean if your analysis leads you to those moves then by all means nail them. But, the risk is that you actually just fall into the trap of being a full time macro tourist, the one who is always just hunting the next big move.
Macro Trading Reality
You see the reality of this game, the trading game, the macro game, the entire money game, is that the big moves are great, but the day to day is where the returns are.
What do I mean? Well look at the track record of the greats, and then look at the track record of the people who nailed ONE move.
Tudor did 5 years straight of double digit-ish returns (one year was 99.2%), and one of those years was 1987. So was he going all in on crashes? Not sure how you put up the other four years of double digit returns doing that.
From 1969 to 1985 Soros had 14 years with double digit returns, and only one year with a negative return (1981). Druckenmiller had 30 years without a down year and only a few down quarters. From 1992 to 2000 Nick Roditi did 39%/yr.
Do you know what all of those track records have in common? Most of the time markets were relatively normal.
Look at the 90’s when Druckenmiller and Roditi were crushing it. Stocks basically went one direction. The world didn’t almost end….once (and no the Tequila Crisis, Asian Contagion, and Russian Defaults were not close to being world enders). And yet these guys put up numbers consistently.
They might make their highest returns when there is a lot of market turmoil, but they are looking for good risk vs reward trades, not just the next big trade.
Perma-Bear=Perma-Underperformance
Do you remember after the global financial crisis how everyone was convinced that we were only a year or two away from the next huge leg down and that this one would “the big one” and they proceeded to miss the next 10+ years of bull markets? A few well known hedge funds even started to offer potential investors shares denominated in gold due to their bearish view.
How about all the books in the early 90’s written by people who called the 1987 crash? Well if you go back and look at trading books from the 90’s you will see that almost none of them ever turned bullish. The only one I can think of is Marty Zweig. He called the 87 crash and then started to get massively net long, and he ended the century putting up something like 18%/yr with very low drawdowns. The other guys? A few are still around selling their wares, but a few crashes later none of them are relevant anymore…and none of them have Gulfstreams or Bombardiers as the case may be.
Triumph Of The Optimists
While I am kind of going on a perma-bear rant, because almost all Big Trade Macro Hunters become perma-bears, look at the Forbes list. Only one dude is on there that made the bulk of his money shorting. And if the reports of his net worth are remotely accurate he has given up about half of that since the 2008 crash. Turns out that the “inflection points” just don’t happen most of the time.
Whether you look at Warren Buffett who basically only adjusts his long exposure, the Waltons where the technical term for their position might be “balls long the US”, or even someone like Druckenmiller who has crushed it being long AI stocks the past few years, the reality is that the biggest move out there is being long humans, and being long mid-level stability.
So Just Be Long?
No, I didn’t say that. I mean it is not the worst strategy, but I think you can do better. But what I am saying is that whale hunting might make you think it will get you all the girls, but casting out a fishing line will get you fed most of the time while you wait for signs that a whale is close by.
We are a macro shop and we believe in what we do. It is just that while we could sell a lot more subscriptions to people by selling doom and gloom and telling you all to load the boat up on gold, go all in shorting the USD, and get ready for the end of the world, what we have seen over our investing career (August of 2000 to now), is that being perma-anything is rarely the right move, and that waiting for the next big one will not get you fed. Or in investment terms, waiting for the next big one won’t give you solid long term returns, won’t do a good job of controlling your risk, or make you fun to be around. No one wants to hear your take on the debt/GDP ratio for the 15th Thanksgiving dinner in a row.
There Is A Better Way
So what should you do instead? Well as mentioned earlier we called the shop “Process Driven Macro” for a reason. You see we love the classic legendary macro trades. But recognizing that they do not come around everyday, we have found it useful to develop frameworks that help us find ideas on a more regular basis. Frameworks that help us navigate both bull and bear markets across asset classes.
It is not perfect and it is ever evolving, but by focusing on things we have some control over we can manage risk, consistently improve our idea generation, and adapt to what is vs what might happen eventually.
In our framework we use a set of tools that help us determine the current economic regime, the markets that should over and under perform, and when we should buy and short them. The process is always evolving but the idea is that we try hard to look for good opportunities. We believe, and history shows, that a good investment track record is built with singles, doubles, triples, home runs, AND grand slams. It is not built by solely looking for the grand slam, because it turns out those don’t happen that often.
The Never Ending Pursuit
Like markets, our process changes all the time, typically in a very incremental way, with the occasional breakthrough. We try and weave in things that we have learned from different disciplines both in and out of the investing world.
One recent melding of different disciplines that has helped us crystalize a current project is the idea of idea velocity and pipeline velocity. The basic concept of idea velocity is something we all kind of know. You need good trade ideas, and the more you can find the better the overall risk reward you can get, lower correlations, smaller drawdowns, higher returns, etc. But back in 2013 an Ex-FinTweep who went by Dasan wrote a piece on Idea Velocity. It struck a cord and our own version has been evolving ever since.
Recently we read about a term called Pipeline Velocity….and it is a formula from the sales world that shows the same thing. The basic calculation is (leads*average deal size*win rate)/(length of sales cycle/measured period). This gives you an idea of what revenue you can expect in that period. Usually a quarterly number in sales, but you can use it with any time period.
We like this because we have long said that in trading there are two levers you can pull to improve results. You can try and make more from your winners/lose less on your losers, and you can try and increase your hit rate. A million way to try and do either, but from a basic level those are the two levers.
Taking this and adding it to pipeline velocity and it gives a more detailed look at what we can work on. We already knew it, but now it is a formula. You can work on the number of potential trades (leads) by adding markets, adding strategies, etc. You can try and make more/lose less per trade (average deal size). And then you try and increase your hit rate (win rate).
The better you can do those the higher returns/lower risk you will get over the measured period, at least over time. You see in trading, just as in sales, no matter how quantified you get, sometimes things happen. But overtime if you have a good process you will come out on top.
We will write a lot more about this in the future. But for now, just hours before a Fed rate cut, we want to encourage you to stop with the never ending whale hunting. Focus instead on just looking for good ideas. Sometimes they will be a whale, but a salmon tastes really good as well, and are a lot easier to catch. Your returns will thank you.
Happy Trading,
P.S. If you liked this then take a free two week trial of our service. If you have any questions send me an email or find me over at Twitter @DavidTaggart