“They don’t know how to lose, how to learn from losing.”
- Erik Siedel
Lose money yesterday? I did. I lost 11 basis points. What do you do when you lose? Do you talk about losing by less than others? Or do you try to learn from every loss of absolute capital mistake?
The aforementioned quote comes from an excellent risk management chapter in The Biggest Bluff that Maria Konnikova appropriately titled The Art of Losing.
It turns out that professional poker legend, Erik Siedel, plays poker because he went to Wall Street just in time for the crash of 1987. “He lost his job… and he was, in essence, scared into playing well” (pg 61). Are the Hoodies scared yet?
Back to the Global Macro Grind…
If I lost 34% of a 10% position (TSLA) in less than a week, I wouldn’t be scared. I’d be professionally ashamed!
Not only is the sizing of that bet completely off the rail (my MAX equity bet is 6%, beta adjusted), having to have 10% of your capital be up +52% (from here) to get back to breakeven requires more luck than what got TSLA to that price to begin with.
Thanks for the update, Captain Hindsight.
Yep, no problem. I’m the one who took one of my Top #Quad3 Sector Style bets (Long Tech, XLK) down to 0.5% of my capital pre the NASDAQ’s 10% correction. I’m also the guy who had a 2% position in Brent Oil (BNO) yesterday!
“When things go wrong, other people see it as unfairness that’s always surrounding them. They take it personally. They look for something or someone to blame.” -Siedel
I have no one to blame for yesterday’s loss in Oil than myself. That position alone is 100% responsible for losing 11 basis points of my hard earned capital yesterday. I definitely didn’t know that the Saudis were going to cut price! But they did.
I also knew that what was happening with TSLA, AAPL, #VaccineStocks (MRNA), etc. was a bubble.
The most important thing about bubbles is that they get bigger and bigger until they eventually pop. Mathematically, they implode when the price of the bubble starts making all-time highs during a breakout in the volatility of the price.
Whoever doesn’t get that math, doesn’t get The Game. And they need to learn from losing like they just did.
Now imagine, alongside being long Oil, I was running net short US Equity yesterday (I was) but I was also long:
A) CNBC’s Moderna (MRNA) storytelling about a pending end to the pandemic
B) Drawdown Josh Brown’s Slack “idea” (WORK) and
C) Some LULU, just because the pants looked great, buying more at $398/share
Lol. That wouldn’t even be considered professionally embarrassing. That would just mean I was a monkey chasing charts without the slightest awareness of immediate-term TRADE #overbought signals or the volatility signals in those Risk Ranges.
Fortunately, unlike Hoodies and Drawdown, Hedgeye has these things (like WORK, SMAR, MDLA, etc.) in Tech called SELL ideas. It’s pretty hard to run with the dogs at the final table if you have no idea how to put together a flush or a straight.
The amount of Old Wall “upgrades” and “price target raises” at the literal NASDAQ top was #embarrassing too.
Will they learn from that? Probably not. That’s pretty hard to do when you don’t have any #timestamps or skin in the game. To his self-effacing credit, Brown is on the record mocking his “picks” as no way to run money.
He and his bud Barry build Old Wall consensus “asset allocation” pie charts, as an inflated-fee-service, instead.
Enough about playing at the Old Wall media tables… what we really need to do today is focus on playing the next hand. With our capital preservation plan intact, the most important risk management decisions today are:
A) Do I start to gross up my LONG exposure again?
B) Or do I stay in my crouch with a TIGHT net and LOW gross?
The best places to start grossing up longs in my go-anywhere long/short book are:
A) Places with NO change in their Volatility Regime that are
B) Trading at the low-end of their respective @Hedgeye Risk Ranges
Examples of those (currently my largest positions, but not at low-end of my ranges) at the Asset Allocation level are:
- Physical and paper (GLD) Gold
- Gold and Rare Earth Miners (GDX and REMX)
- Japanese Yen (FXY)
- Treasury Inflation Protection (TIP and IVOL)
- Short-term Treasuries (SHY)
Yes, I had all of those long positions on yesterday. And, most importantly, they were sized right. How else do you think I only lost 11 basis points of my capital? Oil is smaller than all 6 of those positions, but it still had bigly impact!
In terms of bottom-up long/short “stock picks”, I really don’t care what my analysts think about certain stocks right now until I know what I know about the volatility adjusted risk of the stock.
It’s not my research team’s first rodeo. They know that Captain Stock Splitter gets slayed on a VIX breakout > 30. They also know that I don’t know if/or when that new regime of volatility is just an episodic cluster or a new @Hedgeye TREND.
Keep playing the volatility-adjusted hand you have, not the one you’d like to have.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.61-0.74% (bearish)
UST 2yr Yield 0.11-0.16% (bearish)
SPX 3 (neutral)
RUT 1 (bearish)
Tech (XLK) 110.82-121.70 (neutral)
Financials (XLF) 24.26-25.53 (bearish)
VIX 25.79-35.43 (bullish)
USD 91.95-93.59 (bearish)
Oil (WTI) 36.56-39.56 (neutral)
Nat Gas 2.35-2.75 (bullish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
