By Alex of the MacroOps substack
“My portfolio is very balanced… I have half my assets in cash and the other half is in pain…”
My brother-in-law told me that the other day and it made me chuckle. I’m guessing that pain allocation resonates with more than a few people right now.
We’re holding 68% cash in the MO port and have been carrying productive shorts (short ETHUSD, short RTY, short NVDA) so our net exposure has been low. But even with this defensive posturing, we’ve felt some pain over the past few weeks as our port has drawn down a bit from NAV highs.
It obviously could be much worse. But still, drawdowns aren’t fun.
We aren’t going to talk about markets in this note. We’ll save that for Sunday. This is going to be more of a stream of consciousness, including answers to some questions a few of you have put to me recently.
We’ll cover portfolio and trade management, thinking about macro outlooks, jungle medicine, and maybe psychedelics, we’ll see.
I did my first Kambo ceremony the other day. Kambo is known in Portuguese as the “vaccine of the forest”. It’s been used amongst the indigenous cultures of the Amazon for thousands of years and is believed to be a purgative, immunity-boosting medicine.
It’s frog poison.
They first burn your skin in a few spots and then apply the poison to the burns, so it goes straight into your bloodstream.
The poison hits quick. It first races down into your chest and sends your heart beating like a John Bonham drum solo… From there it blasts into your skull causing partial blind and deafness and then disperses throughout the rest of your body sending every single one of your cells buzzing like a bee.
It’s not something you do for fun.
But… they say it’s good for you
It’s too early for me to speak to its efficacy. I’ve been pretty wiped out since and have at times felt like I was getting gut-punched by Tyson over the last few days. The practitioners told me this is from the medicine clearing out parasites in my gut and that I need to complete the treatment with two more rounds this weekend. So looks like I’ve got my weekend planned :).
I realize most of you are sane and normal and you probably read about this stuff and think my elevator doesn’t travel all the way up to the top floor. I get that. Totally understandable. I don’t blame you.
Personally, I’m open to trying things like this because they pass the wisdom of time and geography filter that I discussed last year (link here). Also, I struggled with a serious chronic illness for a number of years after my last combat tour. And as a result, I was forced to get a little (read: very) experimental on the health front.
Anyways, this is definitely not medical advice. I’m not a doctor, I haven’t even watched Grey’s Anatomy. And if you ever feel compelled to try Kambo, do your research and only do it with a very experienced practitioner.
Rule #1: Don’t lose money…
@jr asked me a great question in the Slack yesterday in response to this SQ chart I posted.
The question was “How do you balance the desire to 1) buy a great value zone and 2) wait for price to prove itself (in this case, confirm a support level).”
I love trade management questions like this because there is no single right answer. It’s all nuance, context, process, goal dependent, etc…
But it’s really thinking through these nuances and developing a framework, where you make the money. Picking winners are a dime a dozen. The money-making comes in the risk and trade management.
So here’s my answer to the question that doesn’t have a simple answer.
My approach to trading and investing is to not lose money. Everything I do in markets stems from this single driving desire.
There are a number of ways to do this. You can, for example, be a really smart calculating business analyst/value investor type with a love for 10Ks and the patience to see your thesis born true.
In this approach, your risk management (how you don’t lose money), is in your analysis, your assessment of risk, and the embedded margin of safety. A critical behavioral edge for this approach is to be able to actually sit through the portfolio volatility (ie, large paper drawdowns) that inevitably come so you don’t end up puking the lows. Something that’s easier said than done…
This is a difficult path. It’s one that most punters claim to do, usually because they’re acting out a mimetic desire to be like daddy Buffett. But few are successful at this over multiple cycles (key being multiple cycles since this is an easy one in a bull market).
Here’s the main issue with this approach.
You don’t get a ton of at-bats. And, as a result, your feedback loops are very long. This makes it next to impossible to know if you actually have any skill or if you’re just the beneficiary of survivorship bias who’s on borrowed time… and eventually, your patient capital becomes purgatory positioning, which inevitably ends with you getting zeroed out of the game for good.
You can see more than a few examples of this playing out today.
You don’t need to look far to find a “value” fund managers that just 12-months ago was celebrated for his/her astonishing 5-year returns and sought after for interviews, raised Buku assets, were praised for their superhuman intellects, etc… and they’re now closing up shop after erasing all of their career gains in less than 6-months…
They suffered under the delusion they were in possession of God-like analytical abilities. But in reality, they were just cluelessly surfing a macro liquidity wave juiced by a growth-at-any-cost fad.
This happens every cycle. Few make it to the next.
We don’t play that game.
Three maxims were inscribed in the forecourt of the Temple of Apollo (the Delphic maxims). These were: “Know thyself”, “Nothing to excess”, and “Certainty brings insanity”.
My approach to not losing money is centered around these three truths.
Know thyself… this one is the most important.
We have met the enemy and he is us to quote Oliver Perry and Pogo. To make it in this game you need to be brutally honest about what your strengths are, and more importantly, where you are weak… Self-awareness is critical to long-term investing survival.
For instance, I know I’m not going to win any securities analysis contest. I’m a Generalist with a capital G. One who likes his investment ideas simple and obvious (at least to me). There’s no edge for me in trying to parse through the legalese fine print of a 10k better than the other 10 million MBA-trained super-geniuses out there doing the same.
I think the market is generally pretty good at that stuff. It is mostly efficient. Except sometimes it isn’t… sometimes it’s wildly hysterical. That’s when my back of the napkin fundamental math skills can be put to work. That’s where I do have an edge.
I’m good at staying level-headed. It takes a lot to get me excited. Market moves just don’t really do that for me.
So while my weakness is my inability to analyze the esoteric minutiae. My strength is in my wiring (due to either nature or nurture) which makes me decent at playing the metagame and identifying “the point of max pessimism” as Sir John Templeton would call it. My approach is similar to what Bill Miller lays out here:
The securities we typically analyze are those that reflect the behavioral anomalies arising from largely emotional reactions to events. In the broadest sense, those securities reflect low expectations of future value creation, usually arising from either macroeconomic or microeconomic events or fears. Our research efforts are oriented toward determining whether a large gap exists between those low embedded expectations and the likely intrinsic value of the security.
I’m good at calling BS on the market. Identifying when the Narrative Pendulum has swung wildly out to one side and no longer discounts any reasonable reality. That’s one of my strengths.
Here’s the catch, though. Even when I get real bulled or beared up on something. I’m talking high conviction, stepping to the plate for my fat pitch Babe Ruth’n it kind of excitement… I stay cognizant of the fact that I could still very much have something wrong, or that I’m missing a key piece of the puzzle and my thesis could at any moment, go Jenga.
My confidence never goes above 90%. Never.
So this is where the second maxim comes in hand, Nothing in excess…
No excess of confidence, in positioning, or overcommitment.
I’m all for going Totis Porcis and betting the ranch. The thing is, I always make sure I have another ranch. There’s a balance, an indefinable sweet spot, between conviction and fallibility, aggressiveness and risk control, striking when hot and quickly adjusting when wrong…
This leads us nicely to the third maxim of “Certainty brings insanity”.
If only the LUNAtics out there had read up on their Delphic philosophy… tuition is high at Market University, best not to make it more so with an addiction to the gamble and ignis fatuus…
You know why Druckenmiller is the GOAT?
He never lost money. Like really never lost money. The guy had five down quarters over his 30-year career of managing money. Let me repeat… Druckenmiller only had FIVE DOWN QUARTERS OVER A 30-YEAR CAREER… To quote the famous figure skater Will Ferrell, that’s mind-bottling.
I know traders who’ve worked with him. They say he embodies strong opinions, weakly held. He could pound the table with conviction one moment. And just as aggressively cut and run the next, if the market hit a predefined technical uncle point or a key piece of data changed. No ego. No attachment. Just ruthless money management and a focus on capping his downside…
His mental flexibility and devotion to managing risk are the skills that made him legendary.
It’s not his deep intellectual macro insights or his penetrating fundamental analysis of stocks. He’s skilled in those areas, sure. But that’s table stakes. That’s not where his genius is.
His genius is in executing a system, a holistic process, that allows him to be wrong time and time again but not lose money. This sets him up with the capital (both financial and mental) to whole hog it when the fat pitches arrive.
Man, this is becoming a long-winded roundabout way to answer the question. What was the question again?
Oh, right… “How do you balance the desire to 1) buy a great value zone and 2) wait for the price to prove itself (in this case, confirm a support level).”
Okay, so let’s use our above SQ example to illustrate.
I like Block, Inc. (SQ) the company. I like their products. I’m a frequent user of their cash app. I financed a food truck business. They use SQ’s products and love it. I see SQ products everywhere now. Young millennials I talk to all use Cash app. Not Venmo/Paypal. Not Zelle. The hard data supports this.
I think Jack Dorsey is one of the most underrated Founders/CEOs in tech. It seems to me that he’s built an incredibly impressive culture capable of fast innovation at scale. And he’s doing this in hardware, software, and financial services, all simultaneously. That is rare.
There remains a LOT of low-hanging margin to eat in the overregulated noninnovative financial services industry. To me, SQ is the clear leader and has the best shot at winning big in this space over the long term. They can potentially close the consumer-merchant loop and become an impenetrable fast-growing business with a massive TAM.
Because of the above and all the reasons Brandon has laid out in his excellent research pieces on the stock. I want to be a buyer of SQ when it goes on sale.
SQ is currently on sale.
Its multiples are at or near historic lows (see graph below). Meanwhile, the company’s fundamentals have never been stronger. Its path to success has never been as clear.
So we want to be looking for spots to buy.
Now, we already own SQ. We put on a small starter position last month. We added another small amount to that position the other day.
We want to build this position into a big one as it’s one of our higher long-term conviction plays (outside of the still ridiculously cheap commodity shitcos we own).
At the same time, our Bear Market Shock and Trend Fragility indicators peaked out at the start of this year, giving us a lead on the current action, which is why we’ve been able to sidestep the pummeling and make a little money YTD.
While our indicators suggest we’re probably at or near a short-term tradeable bottom. We still need to see major breadth thrusts confirmation and preferably a VIX spike to mark a total washout low. Until then we should expect a continuation of the sideways volatile regime at best or a bear market at worst.
Nothing in this game is a sure thing though…
We can enter an extended bear or we can soon bottom and run… Things can change, the Fed can flip, the dollar can rip, inflation can come down or shoot up… in macro environments full of noise, as this one very much is, we need to stay balanced and nimble.
We don’t want to be binary in our thinking.
You can’t be all bull or all bear in a market like this. You can have your opinions and tilt your positioning in that direction. But you want to own some stuff that would work in case you’re wrong. That way you don’t get caught flatfooted. Not to mention, staying balanced does something to the mind. It helps keep you more intellectually flexible and honest.
We very rarely go 100% cash. The last time we did was in late Feb 2020. But the writing was on the wall for that one and today is very different.
Okay, so we like SQ and want to own more. But the macro picture is uncertain. We can assign roughly equal odds to a further selloff or a near-term bottom here.
We also hold lots of cash on the books. To get a bit more balanced and in line with our equal macro odds, we want to take small swings at adding to SQ — and other names we like.
SQ is at long-term support. This gives us a technical inflection point. A logical uncle point in which to nest in our stops, in case we’re wrong or early.
So we’ll add a little bit here. We’ll keep the position small because the stock remains in a larger corrective phase and because the macro is messy.
If and when we get (1) broad market breadth thrusts triggering (as shown on the breadth tab of our HUD) and/or (2) SQ shows signs it has put in a base and buyers are back in control (ie, higher pivot points, consecutive bull bars, SQN in Bull regime, etc…). Then we’ll look to more aggressively build on the position.
If breadth thrusts fail to materialize and/or SQ punches through support and continues on its downtrend. We can cut our additions and go back to our small nominal starter position.
In doing so, we protect our downside (NOT LOSE MONEY) first and foremost. While also staying engaged in a stock that has incredible asymmetry over the long haul.
This creates balance. Balance keeps us honest. In markets, it helps keep us alive. It prevents us from going full Kambo and purging our pain allocation right at the lows…