ICYMI | McCullough: Full Cycle Investing → My Investing Philosophy To Fade Your Feelings

02/19/21 02:03PM EST

ICYMI | McCullough: Full Cycle Investing → My Investing Philosophy To Fade Your Feelings - 02.15.2018 investing styles cartoon

Despite Wall Street celebrating or chiding the latest hedge fund industry's winners and losers, investing is largely a never-ending game you play against yourself. Letting your feelings of greed and fear dictate your decision-making is a path to perdition that will always end in tears.

The key to success is to have a repeatable process that keeps you grounded and your ego in check. Hedgeye CEO Keith McCullough provided a practitioner's guide to "fading your feelings" in today's edition of "The Macro Show." Here's a key quote from Keith:

"Two of the hardest things to do as a hedge fund manager or risk manager of your hard-earned capital.

  1. Having it in your mental constitution – fading your feelings – to buy at the low end of the range. That’s very hard.
  2. Letting your winners run. That’s very hard as well.

Historically the latter has been a bigger problem for me. Every year I get better at that. This year in particular. God willing I’ll continue to improve because that’s all we can do as humans."

Investing is hard. To compete in financial markets at the highest level investors need coaching to correct mistakes and improve their decision making. 

Below we've transcribed core financial market philosophy from Hedgeye CEO Keith McCullough during the Q&A section of today's edition of "The Macro Show."

Enjoy!

*  *  *  *

Daryl Jones: This is Jerry from Cologne. Good morning Gents. If we want to raise capital to buy something that’s at the low end of its range, what do we sell first? Something that’s up a lot or something that’s not worked? I’m trying to wrap my head around letting winners run and giving things time to work.’

This is an interesting question. Something I’ve been thinking about and I don’t know if you agree with this Keith, but there’s so much that’s working right now I don’t have the patience to stick with losers. Maybe that’s me being impatient. There are so many great opportunities that sticking around and waiting on the stocks, sectors or factors that aren’t doing well maybe doesn’t make a lot of sense.

What are your thoughts about that? Where do you take capital from assuming you’re fully invested?

Keith McCullough: Two things on that. Two of the hardest things to do as a hedge fund manager or risk manager of your hard-earned capital.

  1. Having it in your mental constitution – fading your feelings – to buy at the low end of the range. That’s very hard.
  2. Letting your winners run. That’s very hard as well.

Historically the latter has been a bigger problem for me. Every year I get better at that. This year in particular. God willing I’ll continue to improve because that’s all we can do as humans.

Letting winners run in a raging bull market is important, especially one that continues to signal higher all-time highs. Higher all-time highs shows that the bloody asset can go anywhere, as anyone who watched the GameStop gong show yesterday can imagine. An asset like that can go up higher than anyone with a narrative can comprehend.

I agree with you Jonesy. If it’s a loser and it’s breaking my immediate-term trade line, for example. If it breaks my trade duration I’ll stop out of it. I stay with things that are bullish on both trade and trend and let them ride.

If I can let them ride, the better I get at this. And it’s not an easy thing to do.

Jones: This is Martin from Stockholm, Sweden. ‘Good morning, thank you and your team for all your picks. What would you ask yourself today?’

McCullough: One today is Tesla (TSLA). Why is Tesla signaling lower highs for the first time today? We’re starting to see that in some widely owned names. Maybe this crew of Reddit people really are about to get tagged for the first time.

They got tagged yesterday in GameStop. We didn’t. I traded around GameStop perfectly in Real-Time Alerts yesterday. You have to trust that I’m paying attention for you. The Tesla thing is really interesting because of the sentiment of it all and how people are positioned within the index.

On the fundamental side, I’m really interested in the housing data. The rate of change slowdown in MBA Purchase Applications, for example, we got down to the lowest level since May of last year. That’s higher frequency data.

That’s a function of a few things. Interest rates have gone up faster than a lot of non-Hedgeye subscribers would believe. Two, you’ve got this major supply shock in Texas and the questions surrounding it are manifest.

Those are the questions I keep asking myself over and over again. I try to let the markets answer these questions. I generally try to fade my own answers because the market has a better answer more of the time.

Jones: I notice Gold Volatility (GVZ) is in a bearish trend and Gold (GLD) is in a bearish trend as well. That’s counterintuitive to my understanding of trending volatility. Just curious if there’s anything to be learned about the process from this observation. Thank you for a great year.

McCullough: I thought the question was going to be, ‘It’s counterintuitive for Gold to go down when inflation is going up.’ That’s absolutely not true. That’s something you were taught like Scientology because you can empirically prove certain things.

When you look at the volatility of Gold it’s actually be unchanged. Unchanged volatility within a falling bearish trend for price – i.e. a Risk Range signaling lower highs and lower lows – that’s plenty bearish enough.

You don’t have to check another box that says, ‘Gold volatility is at 40 or 50.’ That’s not to say that it can’t happen. The other day Gold Volatility had quite a spike.

For those of you who have studied volatility, a great book is by Jim Gatheral is “The Volatility Surface.” He calls it instantaneous vol. I call it immediate-term vol. Others call it local vol. All of those things are one and the same thing. That’s where you should be paying attention, to the front end of volatility.

That’s what differentiates me more than anyone. I’m willing to be super short-term to understand the intermediate to long-term. I’m the longest-term Full Cycle Investor in the game, because I made it up. I’m also the shortest term because that’s where the signs are of the intermediate to long-term changing.

If you don’t believe that, think of it like a Sherpa in the mountains. Their whole life is about guiding unaware Americans up the mountain. Imagine, every day you’re in the same fractal, non-linear ecosystem. One day the system changes. That Sherpa knows the signs – whether it’s falling rocks from a certain place – that immediate-term signal is so indicative of a major avalanche or rock fall than anything other you can think of.

That’s why I do it that way. Any other part of your life – like white water rafting – any place where there’s physical danger, it is critical to pay attention to the instantaneous volatility of nature. The instantaneous volatility of markets is no different than that.

© 2021 Hedgeye Risk Management, LLC. The information contained herein is the property of Hedgeye, which reserves all rights thereto. Redistribution of any part of this information is prohibited without the express written consent of Hedgeye. Hedgeye is not responsible for any errors in or omissions to this information, or for any consequences that may result from the use of this information.