031: Luke Cummings – Low-Correlation Equities Trading; How to Avoid Being Tied to the Market

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The biggest secret of the best traders in the world is that they're just like everyone else. However, they've worked hard to learn the markets and discover what works and what doesn't. How can you hear about these? Here's your host, Aaron Feich. Hey there, what's up, team? Welcome back to another episode of the Chat with Traders podcast, and you're listening to episode number 31.

Now, this week I spoke with Luke Cummings. He's an Australian equities trader with 14 plus years of experience on his side. After making a last minute decision that journalism wasn't going to be a good fit for him, Luke went into a finance degree which led him to becoming a stockbroker, which then led him to becoming a trader.

Nowadays Luke remains an active trader of course and also operates a hedge fund based in Sydney. As well as this, he also runs a model portfolio service and trading blog, which goes by the name of the long and short of it. And we keep things fresh in this interview by discussing trading methods and strategies that haven't really been spoken about in previous episodes.

Additionally, Luke shares some of the common traps that often catch entry-level traders and how you may be able to avoid the avoidable with some insight. For all the links and resources mentioned in this interview, all you need to do is go to chatwithraders.com forward slash thirty one and you'll be able to see all the show notes there. Alright guys, well I hope you enjoy this interview. I'm Aaron Firefield, your host of Chat With Traders, and here is this week's guest, Luke Cummings.

Hey Luke, what's going on man? How's your day been? Hi, Aaron, very well. Thank you. Uh days days are going well. Looking forward to um to chatting. No doubt. That's good to hear, man. Um thanks a lot for making the time to come on the show. It's really good to have you here and there's I mean there's a number of things I'm keen to speak with you about today. Um of course we all want to know about your development as a trader, uh sort of from day one to where you are right now.

And I'm also interested to get into some details about a strategy which you regularly trade, uh which is a takeover strategy. It's something we haven't really discussed on the podcast in the past and it'll be it'll be good to hear more about this. But

Let's kick it off with um your introduction to the markets. So where did this journey as a trader begin for you? Sure. Um look, to be honest, I I guess I kind of stumbled into trading um somewhat. I um I I'd had no real exposure to um the share market um in my younger years. Um grew up in country New South Wales, uh which is um the state of Australia for um your American listeners, and um moved to Sydney when I finished school, started studying at night, working in the daytime.

Um and one of the first jobs I had just happened to be working for um an international fund manager. Um, obviously, you know, buying and selling shares and and currencies and whatnot as part of um their portfolio management. Um it was very much an administrative based role. So um, you know, my job was to help settle trades and move cash and and reconcile positions and and so on and so forth. So um no direct exposure to the market as such, but

you know, was certainly aware of some of the things that were happening in the office at the time. Um my next step after that was I I took a job actually uh at an online broker. Um e trade here in Australia. Uh I don't think I was quite eighteen or maybe I just turned eighteen at that stage. Um so finished school reasonably young. Um and I was just working in a customer service division um

at E Trade, which uh was very interesting. It was um April two thousand. Uh actually started there about a week before um the the Nasdaq tech crash happened. Um which was, you know, quite eye opening at the time. Um, but really was there with no preconceived ideas about the market. Um, had read some books and and had some I guess exposure uh at university

to the market. Um, anyone who's kind of got a finance degree, I guess, one of the first things you get taught is that, you know, the market is is efficient, at least, um, relatively efficient. Um and at that stage I I really had no reason to to think otherwise or to believe otherwise. Um of course having exposure to um you know people who are trading online and they're calling in and they're asking questions about the website and their positions and and different things.

um, to I guess sense their emotions through that period of the tech crash uh was was very interesting because um you know they s sort of say you uh you know can tell a lot about a person when they're under pressure, when money's involved and um that was certainly an opening experience. Um, but uh a colleague who I worked with there um took a job at a broking firm um probably about three years after we'd been working there.

I got on pretty well with him socially. I wouldn't have said he was a a great friend of mine, but um, you know, we'd always gotten along well and a an opportunity came up.

to uh to go and work at the firm that he was working at. Um part of the the pretense under which uh we were lured there was, you know, all of these client accounts that they had that were dormant and and needed servicing um that weren't being serviced at the time, um seemed like a really good opportunity. And I I guess the reality was when we got there that um the uh you know the number of clients or prospects that existed were uh were less than we'd been led to believe.

Um and we sort of figured out that you know, uh if we're going to rely only on broking commissions for um uh for our livelihood that uh we probably wouldn't be doing doing too well. So we also had a bit of time on our hands because um, you know, we we weren't as busy as we had been led to believe. So we just sort of started looking at the market and um Doing a little bit of trading ourselves. Uh obviously, you know, we have exposure to clients who are doing something similar.

Um and you know, to be quite honest, um one of my business partners who's still my business or sorry, the the colleague that I was talking about who's now one of my business partners, um, just stumbled across this thing one day and sort of said, Look, I I think there's an angle here

Um, and I was like, you know, sounds great in theory, but you know, I've been to university and and I've studied finance. I know that the market's efficient and, you know, something that simple surely isn't going to work or or at least not consistently. There must be something we're missing.

Um and you know, I wouldn't say we paper traded in the way that people, you know, I I guess think about paper trading now, but we we watched a couple of these situations evolve and You know, we're like, Well, it looks like there's an angle here and I guess we just sort of started to, you know, systemically exploit that and to look for those types of situations.

Um, and it was actually a really profitable little niche that that we'd found and I guess, you know, really that was the start of the process for me. Um you know, I I took that job without having any intention of being a trader. Um it just sort of evolved that way and um that was I think two thousand and three or two thousand and four and uh in one form or another we've been at it ever since.

Okay, that's excellent. So I'm keen to sort of break that journey down a little bit a little bit more and and touch on some of the points you mentioned. So

Just before I do that though, what was it about trading that actually appealed to you or maybe not even trading but just the markets in general?'Cause I mean, when you're young you have the opportunity to go pretty much any direction you like in terms of your career. What was it about the markets and trading that really got your attention?

Yeah, it's a it's a good question. Um I I actually intended to be a journalist initially and and that was very much my plan. Um right up until the time I finished school I was going to study journalism. Um and at the last moment for whatever reason I just decided that, you know, I didn't think I wanted to be a journalist. Um And I really was just looking for a job, to be perfectly honest. I knew that I wouldn't have the luxury of going to university full time without working.

Um, and it just so happened that, you know, one of the first roles that I stumbled across was uh was the job, um, administrative job with the fund manager that I mentioned earlier. Um, I think, you know, once I got a little bit more exposure to the markets though, um uh I I mean I just think it's a fascinating thing and and I'm not sure necessarily that I thought about it in those terms at the time, but um y you know, you have this thing that every single day

there's something different as in there's no, you know, set pattern to how things evolve throughout the course of the day. Um, you know, you can be having a quiet day right now, it's um, you know, quarter past two in the afternoon here in

in Sydney. Um you know, something might be about to happen in five minutes time that I couldn't foresee or wasn't expecting that, you know, could be one of the best opportunities that we have of the um of the year. I think I was really drawn to the fact also that Um you know, you can make money that isn't directly correlated to your effort in the sense that

Um in my school holidays when I was still at school I was doing some, you know, manual work like landscape gardening. Um, my job was really to do, you know, the hard yakka, I guess, of the the digging and the moving and the lifting and and whatnot.

Um and you come home at the end of every day and you're exhausted and you've earned, you know, whatever, fifteen, twenty dollars an hour. But you can only earn more money by working more and it's hard work and then you have uh you know, trading which Um of course you need to put effort into that and and as times evolve, um, you know, with developed systems and and whatever else.

But the idea that um a little bit of effort can make you a little bit of money or can make you a lot of money and that you don't necessarily know in advance which it's going to be, um, you know, was certainly appealing to me. I I think all traders probably at some level, um, you know, are driven by a desire to have a better life or a better lifestyle, to have money. Um, I I think somewhere along the way

the money becomes less important, um actually probably once you start to, you know, consistently make it. But I think

definitely for me, um, you know, I didn't grow up in a wealthy household. No one in my house talked about stocks. Um, you know, I'm not even sure that I knew anyone who was trading or investing in stocks, at least not directly. So Um, I think the idea that uh, you know, you could build a better life for yourself and that it wasn't through manual labour as such was was probably, you know, at least at the time what appealed to me.

Yeah, I really like that answer and I think a lot of people listening, um, including myself, can, you know, really relate to that. So you mentioned there that you were at university, um and You was it a economics degree?

Um, it wa it was a finance degree which um I guess had, you know, an economics component, a finance component, accounting component, so on and so forth. Okay. So you mentioned that they sort of taught that the markets were efficient. But when you sort of started trading with your partner, like you mentioned there. Uh you were sort of saying that the markets weren't efficient. What do you mean by efficient and inefficient sort of markets?

Sure. So I guess um you know, if you sort of think about university and and finance or economics, I I mean we have this concept of the efficient market hypothesis. Um I and really in a nutshell what that tells you is that

um in its most purest form, everything um that should impact the price of a security, so whether it be a stock or otherwise, um, at any point in time is priced into that security. So the the idea is that you know, by knowing information about, you know, the PA multiple or the company's earnings or, you know, by looking at a chart or or whatever, but there shouldn't be any discernible ongoing advantage by knowing that information because

it's already in the price. Now, in its purest form, they teach you at university that you know it includes all known information and all unknown information. Um and that's I think called pure form efficient. And then they have this concept of, you know, semi-form efficient, which is a all public information is in the price but um you know

uh information, inside information I guess, is not in the price at th at that point in time. Um and I think, you know, sort of logically that makes sense. Certainly if you've had no reason up until that point to think otherwise. Um you know, at a fundamental level to me at least it sort of made sense. It's like, well, okay, if everyone knows that, you know

the current earnings are this or that this company's released a new product or um you know that the economy is doing this or or whatever else. Um you know it makes sense that that these things are priced efficiently. Now I think uh as things evolve and as you learn you realise that um you know that's an efficiency at a point in time uh is is probably the argument that um you know, that he's making or that concept he's making. And of course, you know, prices can move, um

uh as new things develop. So you know maybe an existing product's more successful than the company and the market had anticipated, maybe it's less successful, maybe um you know there's a currency impact for one of its earnings, uh earnings of one of its divisions. Um But I actually realized you know, very early on and or my partner and I realised that um e even that couldn't account for what we were seeing because um every day stocks are moving really with no discernible reason.

for them to move. So Um, you know, you can make an argument that maybe information is evolving or that someone who, you know, ha has an incentive to buy or sell a security has learnt something new that maybe they were previously not aware of. But I I think that you know, in a lot of stocks if they're liquid enough that that's probably not en uh enough to account for the reason that you see some of these securities move in the range that they move.

on a daily basis. Um and I think you know that combined with the fact that we'd sort of found this you know little niche that we were exploiting quite profitably

um you know, it was really telling us that, well, you know, the market's not efficient at a at all, um, at least certainly in some respects. So I think that Um you know, there are some instruments probably where you can make an argument that the market is reasonably efficient because there are so many people looking at them um

and you know, information about what drives prices is very readily available. But there's a bunch of stocks and and I'm sure other instruments as well and and stocks I guess is um you know our area area of expertise.

that y you know, people just aren't looking at or paying attention to or there are angles that they haven't thought of. Um and, you know, one thing for us I I guess is that um I've listened to to some of your previous podcasts, um on the side and I'm I'm slowly working through uh the the rest of them but Um Tim Sykes was saying that uh you were talking to him about his edge and and why he chooses, you know, small caps or penny stocks.

Um and he sort of used the example of, you know, if you're going to play basketball, do you want to play against Michael Jordan or you know, I'm not sure it's politic politically correct, but um, you know, do you want to play against a midget?

Um and you know, it it's a f funny analogy because I kind of agree with him in that I think there are areas of the market that are harder to compete in. I mean You know, if someone like Goldman Sachs is throwing all of their resources at an area that I'm trying to compete with them in, I think that's very difficult.

Um, I I think, you know, where we try to play a lot of the time is in areas that, you know, Goldman Sachs probably isn't paying attention to because it's too small, um, in terms of, you know, what it can add to their bottom line or It's an area that you know, these guys go to the same s um universities and colleges that that I went to that teach you that certain things are efficient or can't exist or or aren't possible.

Um and I think that that leads to them ignoring a lot of areas of the market that can actually be exploited and and I suspect that, you know, o of all the people you're interviewing who are trading for a living I mean they all at some level believe that the market

and and probably have proof that the market's not efficient because if the market was efficient, you can't make your living trading, you know, like they do and and like I do. So um that was a real eye opener for me, I I guess, is that uh you know, one of your other um interviews someone mentioned um you know stages of development and and one is you know you're making money but you can't figure out why and then you're not making money you can't figure out why which is

maybe worse. Um, and then, you know, you're not making money and y you know why, and then you're making money and you know why. And and I think that's a thing. Like if you're making money and you really want to make a career out of trading

I think you really need to be able to put your finger on, you know, pretty quickly, um, at least at the point where you're going to scale up in terms of the the time and, you know, financial resources that you commit to it. You've got to understand why it is that you're making money and and where that advantage is coming from because um you know randomness can account for a lot in the markets and in life, right? You you do a trade that makes money.

doesn't necessarily mean it was a good trade. You do a trade that loses money, it doesn't necessarily mean it was a bad trade. Um I think people confuse the end result of what they did

with um, you know, the intent that they had or the reason, um, you know, for them taking the trade in the first place. And um I I think that, you know, was important to us early on was to try and figure out, hey, are we just lucky here or, you know, have we actually found an inefficiency in the market and um you know, sitting where I sit now and and for some time I definitely believe that the market isn't efficient, at least in some areas.

Okay. Yeah, that's a really great answer. Um and and thanks for really expanding on that too. Um so all in all, would you say your um degree from university and your experience as a stockbroker Did you find that this had any benefit to you when it actually came to trading your own money? Definitely. Um, maybe not for the reason that I would expect though or that that listeners would expect. Um I mean, the university component I think was really great.

one for exposing me to um you know th things in terms of terminology and concepts and and whatnot that I just wouldn't have had exposure to otherwise. Um but once you get past that, you know, initial um fundamental knowledge base. I think it's really great.

um, you know, looking at it in hindsight to know or understand what everybody else in the market, at least who are finance professionals who are working as, you know, portfolio managers or prop traders or or whatever they're doing at all these firms. I think it's great to understand what they're taught and why their belief systems are, you know, what they are.

Um so from a university perspective I I think that was really great. Um from a broking perspective, I I mean, you know, I I think outside looking in, you think about a customer service role at an online broker, it actually sounds like a pretty terrible job. Um but

I I have to be honest, that the two business partners that I have, um, uh we all came through uh you know, e trade at similar times. Um, we didn't necessarily work together, but um we all had that that grounding or that base um coming through e trade.

And the cool thing about that was that you're not getting paid very much but you're going to work every single day and you're learning about the market. So you're learning about how the market actually physically operates and some of the rules and regulations that govern it and um you know some of the idiosyncrasies of the market.

in terms of you know, the market itself, but then you also have the benefit of seeing human emotion, um, you know, i in operation, more or less in real time because you're talking to these people over the phone who are having problems, you know, or have questions about whatever.

But you can't help but figure out, you know, um I guess what their emotional headspace is and you get some exposure to the types of trades and things that they're doing. So, um, you know, I I actually can't imagine being in the position that we're in right now. had we not had that um education, you know, in online broking because it's basically like getting paid for three or four years um to do an apprenticeship or an internship where you get to learn everything about the market. And I think

um you know, the alternative to that would have been trying to learn all of that stuff at night or on weekends or before work or, you know, in addition to having other jobs. Um I think would have been really difficult. Um moving on to when I became an actual broker and and was giving advice to people and looking after accounts.

Um also very interesting, I think, you know, the um the way people react to making profits, the way people react to making losses, um, the amount of opportunities you would call people with and say, Hey, look, here's a really great trade. Um here's the downside, here's why I think you should do it and you know, their reasons for not doing it or um whatever I think is is very interesting. Um so yeah, if I had my time again I I think the path that

all three of us took um to get to to where we are now was was really perfect. Um and the other cool thing was that, you know, in the year two thousand online trading hadn't existed in this country for very long. Um I mean it hadn't existed in any country for very long. Um a lot of the customers at at ETrade were still using dial up internet and couldn't talk on the phone at the same time they're using their internet and it was sort of just, you know, crazy time and it was kind of nice because

It's not like coming into an industry where there are people with thirty or forty years worth of experience that you don't have. Um, you know, at most there's probably people with couple of extra years experience trading online than than what, you know, I had um at that time. So uh I think timing was beneficial in that regard. Yeah, right. That's really interesting.

You kind of mentioned a little bit earlier, you talked about once you did start trading you and the partner who you were trading with came across sort of a niche or a little um area a type of trade or strategy that you could exploit and you were making um you know decent money from from this strategy you discovered Can you talk to us a little bit about maybe how you discovered that strategy and are you still running with that strategy today?

Yeah, sure. Um look this this uh credit for finding the strategy um definitely goes to uh to my partner at the time. Um He I you know, I I I've actually never really discussed it with him in detail. I I presume he just sort of stumbled across it by accident. Um we uh sort of found a way to to exploit a loophole. Um

around uh, you know, capital raising in typically smaller cap stocks. Um, so, you know, to to get access to discounted securities, um yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n Sometimes, you know, no discount frankly is big enough to want to give them money. Um other times uh you know, the the opportunities are attractive. So um sadly the loophole we were exploiting no longer exists. The the rules were changed such that um

uh the way we were obtaining access to them at the time um no longer exists, which is is a shame. But um we basically went through the process of of doing this ourselves and because we were somewhat capital constrained at the time um you know, there w there were really two forms of leverage for us. One was to share those opportunities with our clients, um, which we, you know, certainly endeavoured to do as as much as we possibly could and

had a lot of clients who who made a lot of money from that at the time. Um and the second way was, you know, for us to get our hands on more capital ourselves. Um and I I mentioned to you when we were out we're chatting earlier that Um, the way that we did that at the time, which I definitely do not advocate to anyone under any circumstances, is we actually use credit cards because we're young guys, like I was only, you know, probably twenty or twenty one at at that stage.

Um and you know, I I didn't have any money. I probably still had a little bit of, you know, consumer debt from university and buying a car and and all these things that you s you sort of do. So um we sometimes are making, you know, five, ten, fifteen percent a month from some of these trades pretty consistently. So even if you're having to pay a bank, you know, fifteen, sixteen percent a year in interest, um

Which sort of sounds crazy saying it uh now, but um you know, it was a smart thing for us to do. Um and, you know, we'll probably get to this uh the later on in terms of how our trading strategy has evolved through time. But Um, you know, one thing that uh or a couple of things about that was one, we needed to be pretty damn sure that we could make money consistently, um, given that we're using someone else's money.

Um, but but it also made us I think very um mindful of risk and um you know, sometimes that it's just better to take the fat, easy part of profit out of a trade without a lot of risk rather than um you know, really going for uh

the entire amount of profit that might be in the trade. So I I think you if you use a baseball analogy, you know, sometimes a base hit or a double is is better than a home run if you could get that base hit or the the double um you know, more frequently than you would get the home run. So, um

That was what we did. But uh I actually think and I don't have proof of this, but um I think the strategy we were running and the extent to which we scaled it amongst our clients and it sort of became a reasonably well known strategy, um uh certainly at least within a niche in the Australian market. um probably was what at least partially contributed to the um subsequent rule change about that. So um

Uh, it was a cool little thing and you know, one thing we don't really know now is whether or not maybe we should have kept it a little quieter and we'd still be trading it now because it just wouldn't have become such a prominent thing. But um

uh you know, onwards and upwards, no regrets, but it it was a cool thing. If we hadn't found that I I don't think, you know, that we'd be doing what we're doing today and and we wouldn't be talking about this. So um uh that was pretty cool and I guess the interesting thing is that um sort of a long way to answer your question but you know, you sort of

um think about how people become traders and the preparation they do and, you know, maybe they go to a course. Uh I've listened to your own interview about um, you know, starting out with uh Gann and and going to a seminar and and learning about that. And some people, you know, read books and and learn about fundamentals and um, you know, you've you've spoken to people on this podcast who you know, uh crazy into like, you know, programming and back testing and um, you know, different things.

Um, it sort of seemed a bit surreal that we kinda just stumbled across this thing that, you know, no one was really talking about and it wasn't particularly sophisticated and it was just really easy to exploit it for profit at the time.

Um you know, that that was sort of weird because e even things like having a trading plan and things, I mean, all those things come after, but all of the things that you think that, you know, you should do and that you need to know in advance to start making money in the market.

Um you know, we weren't doing any of those things and and some of our, you know, friends and and colleagues who were working at other firms and things like, you know, big name financial firms sort of knew what we're doing. They're like, You guys are crazy, like what are you wasting your time on like all these small, ridiculous trades for? Like, you know, what what's the point? Um and you know, I I felt and I think you know, probably my business partner at the time you

probably felt a little bit of an inferiority complex where it's like, Yeah, when yeah, we're not really serious as in, you know, no one's taking us serious. This is kind of a small strategy that, um you know, is a a bit of a niche and it was almost embarrassing to talk to people about it, but it just became such a big thing and we made so much money from it. Um and it's funny now, you know, looking back on that and some of the people who at the time were like

Yeah, you guys don't know what you're doing, you're just lucky and you know, loophole's gonna close and that'll be it. You guys will have to get, you know, other jobs and things. Um you know, some of those people now are like, Okay, what else have you guys got? Like, you know Tell me some other strategies. What should I be buying? W whatever. And um uh, you know, I think that's been an an interesting process to go through. Um

you know, I wish I could say that we set out with intent to become professional traders and did all these cool things and that, you know, we're super smart and great at math and all these things, but it just for us at least hasn't really worked out that way. And I think if I look back, uh you know, the fact that we weren't doing what everyone else was doing and that you couldn't just turn up somewhere and learn what we were trading in a course or read it in a book.

It's actually probably what made it work in some ways because we just kind of found something that no one else was looking at at the time.

Right, okay. So uh right at the start of that you mentioned um you were sort of purchasing discount securities. What do you mean by discount? So we understand before we move on. Sure. So look in in a purest example, um, w which is, you know, not the strategy we were using at the time, but um you know, uh in Australia, um, Westpac Bank owns um uh owns a fund manager called BT or partially owns a a fund manager called BT. Um

American listeners can uh can look it up uh online briefly if they want to. But um we uh oh you know did an offer recently where they sold down part of their holding. Westpac sold down part of their holding um in B T. And the reason they did that was because um in Australia they're talking about changing some rules around the level of capital that banks have to to hold and um you know, the penalty from a capital perspective of them continuing to hold B T.

um I guess in the bank's view, um, you know, was greater than the benefit of continuing to have the sharehold um shareholding in BT that they did. So um very basic level, Westpac says Anyone who's an existing um BT shareholder or who is an existing Westpac shareholder will have the ability to buy um BT shares at a fixed price of eight dollars twenty.

Now, this is for existing shareholders only. So if you, you know, don't hold shares in BT or you don't hold shares in Westpac and you um you know that announcement is made, then there's no way for you to participate. Um many years ago If you didn't already own those shares sometimes, they would say anyone who's a shareholder in a week or two's time, um, or three weeks' time, whatever it's going to be, will be entitled to participate in that offer.

So um in the case of of B T, um, you know, which is is sort of uh underway at the moment. Um, you know, B T announced or Westpac announced they were doing that sale uh that sale um when the share price was eight dollars twenty about, you know, two, two and a half weeks ago.

Um of course we've had a lot of market volatility in that time, but you know, the last week or so that the markets rallied pretty hard. Um, you know, BT shares as of yesterday were almost at ten dollars. Today they're you know, I think about nine fifty or something. Um It's quite a big price gap there, right? So, uh, you know, if you have the ability to buy B T shares at eight dollars twenty and they're currently trading at nine dollars fifty.

It doesn't really matter, you know, what you think the outlook is for B T. You don't need to want to own B T for any great period of time. Um you know, you're basically being offered something that's worth nine fifty today, um, for eight dollars twenty. As long as you think that between now when you buy BT and uh you know when you're able to sell them when your new shares are allocated.

That's sort of a no brainer transaction, right? Like it's like me saying you, you know, give me eight dollars and I'll give you ten. It's like, well, what's the catch? That seems a bit too good to be true. Um but it it exists. And the thing is now there's there's no exploitable angle because um

you know, that the window is closed by the time that's announced, but previously that window wasn't closed. And that was something that, you know, we took advantage of as much as we could um when the rules existed in that format. So what we're basically trying to do is figure out, you know How do we buy ten dollars for eight or how do we buy five dollars for four or or whatever the case may be? Okay, sure, yeah, that that makes perfect sense.

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Let's fast forward to current times now and talk about how you're trading these days. So give us an overview of your approach to the markets that you apply, you know, in current times today. Sure. So I I think at a fundamental level, um, the premise hasn't changed for us in that we're not trading the same strategy that we were back then. But one great thing about that strategy was that um the reward on offer was outsized relative to the risk that we were taking. So

I I think you're always taught and you know, we talked about that um a university degree earlier, the idea is that to get more reward, in theory, you have to take on more risk. Um and I think, you know, fundamentally that's that's pretty well accepted. What we're really looking for are situations where we think that the reward on offer um exceeds the level of risk involved in us taking that transaction.

Um, and that maybe sounds a little strange or a little crazy, but you know, the the idea is the same the same as, you know, that loophole we found before. Um there are other things in the market that, you know, where that exists, I think. And um we really have a couple of different components to our business now. So um the original business partner or colleague at the time that I mentioned, uh

you know, that I started working with, you know, more than ten years ago, um, is still one of my business partners today. Um, we actually I have a second business partner as well who, uh who joined um You know along the way And uh the two of them primarily are focused on really short term stuff. So um non client facing stuff, typically day trading, we to try and be, you know, pretty flat at the end of every day. Um

And it's time intensive. You know, they're every day, at least while the market's open, sitting glued to their screens, um, you know, looking for opportunities and and trading. So, um uh there's that element of our business and and I'm not, you know, really actively involved in that these days just because it's so time intensive and in order to do you know some other things um you know within the business it it's difficult.

to do that if you're glued to a screen all day. So that's one part of what we're doing. The second part is um, you know, we we have a managed fund or a hedge fund. um which trades, uh, you know, longer term type strategies. So, you know, day trading isn't really appropriate um for that vehicle.

Um so you know, our takeover strategy, which you you mentioned earlier, um, you know, fits within the fund, um, plus some other, you know, kind of longer term scalable um type strategies. Um and I guess the more recent, you know development there is um the the blog that uh we've started to share some of you know our ideas um you know some of our more simple ideas uh in the takeover space that

you know, retail investors are are capable of implementing themselves without it having to be through our fund or, you know, needing any special help to do. Um but the one thing that drives all of those uh those areas um or all of those business divisions is is this idea of risk reward. So Um you know what we're really trying to do in the first instance is make sure that we really strongly understand the downside in each situation. Um

And you know, I I guess upside is secondary to that. I think one mistake that a lot of people make when it comes to trading is they're really thinking about, you know, what's my potential reward here, how much money can I make? and their position sizes are really dictated by, you know, what they're imagining their profits are going to be if things go in their favour.

Um we're the complete opposite of that. We're we're really trying to figure out, okay, we're happy to risk X amount per trade um, you know, for a stock standard what I'll call opportunity. Um and that, you know, really dictates our position size. and I guess we'll cover the the takeover thing in a little bit more detail shortly. But um some of the opportunities in that space are you know much more int uh sorry, are much

um yeah, more interesting from a a risk reward perspective than your standard opportunity. So we have some discretion to um uh you know, vary our position size accordingly in that situation. Um I think if you're pigeonholing what we're doing it's uh I call it rules based discretionary trading. So we have um fairly fixed framework around what we're looking for in in all situations.

um and you know, lots of alerts and triggers and things that that um alert us to opportunities, but all of it has human intervention. So it's always someone looking at that saying, is that opportunity as good as it appears to be? Yes it is, let's take it. Or alternatively no it's not for X, Y, and Z reason and and therefore we're not taking it.

Um and look, you know, probably uh the best example I can give of a trade where I think that the, you know, reward is outsized relative to the risk. Um it's one we did recently for um for our fund and and through our newsletter or through our blog. Um and that was in a stock called Panost um Australia. P and A was the ASX code. Um and the history of Panos very briefly was that um they had uh a copper mine or several copper mines. Um major shareholder was a Chinese company.

um had made a couple of approaches to Panos previously about um taking them over um at higher prices than uh than where the takeover subsequently happened. Um at the time Panos board said no we're not interested you know the price isn't high enough. Um, yeah, we really went through that period of six months or so of um commodity price corrections. and the uh major shareholder, ch Chinese shareholder comes back and says, you know, we're making another takeover offer.

Um takeover offers can vary quite um considerably in terms of how they're structured. But the the cool thing about this most recent offer for Panoth was that um the price at which a takeover was being made was guaranteed. So it's basically called an unconditional takeover. Um and I think a dollar seventy one from memory was the the takeover price. We trade so many of these I can't remember exactly, but let's call it a dollar seventy one for arguably safe.

Um as soon as that takeover is announced, Pandos is trading at a dollar seventy two. So you can basically buy Pandos as much as you like, more or less, for a number of days at a dollar seventy two or thereabouts. Knowing fine well. that no matter what happens, so you know, if there's no improved bid, um, even if the market, you know, tanks during that time.

you're going to be able to sell that stock at a dollar seventy one. So that's really your hard stop loss that you know you've got in place, at least for the period that the bid exists. Um but it wasn't a crazy thought to think that, you know, Panos might get an improved bid, maybe not a competing bid from a different um shareholder a different company.

um given, you know, the reasonable shareholding that the Chinese company already had. But um you know, the the bid that they'd pitched um most recently was about twenty or thirty percent below um where the bid had been pitched previously. So it wasn't ridiculous to think that, you know, the bid could be improved by ten or fifteen percent um above its current level. Um

You know, in in order to get board acceptance and get shareholder acceptance. So uh you know, the way that looks is that if the takeover price is a dollar seventy one and it gets a ten percent bump. And as a new price becomes a dollar eighty eight. Um, if you look at that what you were risking in that situation, um, you're really only risking that one cent per share because you know you can get that dollar seventy one.

yet you have the potential to, you know, get a dollar eighty five or eighty eight or, you know, more, potentially two dollars. Um So for us, I love that trade because I know exactly at the outset what my downside is. I've got that locked in. Um I can position size accordingly.

And if the trade works out, then you know the multiple of reward relative to risk that you get is very, very great. Um you know, the headline percentage it might only be a ten percent return on the capital invested, but if you look at your return on risk. Um, you know, if you get a bump in the the share price or in the offer price, uh it it's you know, almost unheard of. So um that's not to say that Panas was definitely going to get that better offer.

It's very possible that the Chinese company just says, Look, that's our best in final offer, too bad and you know, we lose a cent a share but

at the outset that's a nice trade for us to take. And as it turned out, um they got a bump of almost ten percent. I think a dollar eighty five ended up being the price that it was taken out on. So, you know, we made eight or nine percent headline uh return on the trade. But had a very big position size because we had that you know downside um built in and you know we really got about fourteen or fifteen times

um you know, what we'd risked as a return on the trade. So um that in a nutshell is probably the best example I can give you of, you know, what our holy grail trade looks like. Okay. Yeah, that's that's really interesting. So

I mean you obviously sort of talked a lot about um an example there of sort of the takeover strategy, but if we could just sort of take it back to step one. What's what's the general objective of this type of strategy? So so let's focus in on your actual takeover strategy. What what's the general objective of this? Look, so um I mean the general objective really is

which applies across our whole business is to try and take lowish risk trades with good payoffs. Um the great thing about the takeover strategy specifically um from our perspective but also, you know, from our investors' perspective is that takeovers have generally pretty low correlation to the market. So once a stock is under takeover, depending on, you know, the level of conditions attached to whether the offer's likely to proceed,

more often than not, it's no longer trading in line with the broader market. So You don't need to worry about having a position that Um, you know, you wake up tomorrow morning and the Dow is down five percent, um, your your takeover positions just aren't going to get sold off or if they do, they shouldn't be and and it corrects itself pretty quickly. Um So it's a really low volatility um strategy for us in terms of it has low market beta.

Um and that's part of the reason that we actually decided to put it in a fund and that you know we've rolled it out through the blog because Um, you know, I think there are a lot of people out there, certainly in Australia this is evident. Um, you know, maybe less so in the US, but I I presume it's, you know, similar issue. Um, lots of investors who

you know, have had share market risk previously or have it now and they really don't want the volatility that goes with that. The share market's great in terms of, you know, being a trader or being an investor, holding managed funds, whatever, when it's going up.

But people don't want those massive drawdowns that you know you get in the GFC in an extreme example, even the hit that our market took and it you know um I guess a lot of global markets took last week when we had the the dual issues of China's uh market falling over and, you know, also these these issues in Greece. Um I I think, you know, people

don't like that. Um, as much as in advance they may think that, you know, their risk profile is that they're happy to, you know, take some risk in in order to get the upside. I don't really think that, you know, fundamentally that's the case.

Um but, you know, at the moment these people don't really have the choice to not be in the share market because the returns on int uh you know, deposits in bank accounts are so low at the moment that Especially if you're a retiree or, you know, you're getting towards retirement and um you know, you need that income to live. Det är inte en offer. uh you know, what we do or or aim to do with the takeover strategy is show people how to get share market like returns.

um with much lower volatility or downside risk than what that would usually entail. So Um, you know, we definitely have strategies that we can make more money with, but the returns are more volatile. You're gonna you know um experience larger drawdowns and probably more frequent drawdowns.

The cool thing about the takeover strategy is you don't really tend to get those drawdowns or big drawdowns because you're not linked to the market as such. That there are other factors at play. And if you're pretty good at figuring out what those factors are and only taking those trades where you're comfortable that the risks are minimal, um, you should have pretty low market beta using this strategy.

Okay, right. So how do you find out if a company is about to be taken over and how do you sort of know if whether how true that is? Like is it possible that it could be a false rumour? Yeah, well the the the great thing about the strategy, at least as we run it, is that um it it doesn't require knowing in advance. So our strategy actually is that we wait until the takeover has been announced and it's formal.

And then we buy the shares. Um, and that might seem counterintuitive because you know what you think about is you want to buy a s a share today that gets a takeover bid tomorrow at 40% above its current price and and you make money. Um the thing about that is

it's very hard to predict. So of course there are rumors. Um I mean i if it's a genuine rumor and you really know the information, then you know, you have it illegally at that point. Um and so that, you know, kinda rules out that option. Um if it's a rumor Um, you know, you're undoubtedly not the only person who knows that rhubarber and who knows how true it is. And um you know, if you're just buying stocks

purely because they're um perhaps going to be subject to to takeovers. Um you don't get that smoothness of return or that lack of volatility that that I was talking about earlier. And and there are definitely funds out there who buy stocks that they think could become subject to takeover. What we're really interested in is uh buying stocks that are already under takeover.

that may get an improved bid um and or a counter bid from another party. So um if you think about it uh like an option, I guess, um you know, anyone who kind of has basic knowledge of options knows that Um there are various factors that go into to pricing an option. Um, you know, one is uh volatility of of the underlying um security, um obviously the time that uh you know until expiry of that option, um interest rates play a factor.

And so on. Um, but you know, we're taught that time value has or that time has value in an option. And the great thing about these takeovers is that You're buying this option, it's a synthetic option, over future upside um in the share price because of an improved or competing offer. But you're not really paying for that in the way that you would normally pay for an option. So if you find like a a listed option, um, you know, over a a a security

you they're pretty efficiently priced, right? There are market makers in that market and everyone knows the Black Shoals formula and there's not too much variation in terms of it it's hard to buy cheap options. But that's one way that we can buy options, synthetic call options, very cheaply, um, over a takeover situation. And I think if you know, we're really boiling down why the strategy works.

that's it because we're getting um the ability to participate in an upside quite cheaply, which isn't to say that you always get a better offer or that you get a competing offer. You definitely don't. Um, but you get enough of them and you know, i in some instances the offers um or the subsequent offers are so good that

You only need two or three great trades like that a year, a bunch of um you know, okay trades and um you know, you make more than enough money uh every year from that strategy. So uh you know, at at a fundamental level that's uh that's what we're doing. So we're we're not trying to anticipate who's going to be taken over. We just wait for the announcements that someone is being taken over.

make sure that we think it's a credible target, a credible bidder, that the downside, you know, is known and limited and then, you know, position accordingly in the hope that something else is going to happen. Right. Okay. And with this particular strategy

What's sort of the time frame we're looking at from when we get into a position and when we exit uh completely? What's sort of What's the sort of holding time of the of one of these trades, generally speaking? Sure. Um look I'd say probably, you know, minimum a month and you know, six

six months, um, you know, si get six to nine months would sort of be the maximum time period typically, and I'd say about three to four months uh on average. So if a bid is made today for a company and there are no further developments meaning that Um, you know, there's no improved beard, there's no competing beard. Usually they take about three months to come to a natural conclusion. Um If uh the share price improves in the interim, um

You know, we may look to exit the position early if we think that the risk reward is no longer uh in our favor or that you know the additional benefit by waiting those extra months is is now not sufficient. Um if you start to get competing bids or improved bids coming in um you know, as part of the uh the trade, you know, usually would get bumped out to

you know, six months maybe, maybe nine. But the good news is typically that the longer the trade's going for, the more money you're making along the way, as in the you know, a trade that you have open six months from today. doesn't have the same bid level that it had when you took the trade. There's chances are being one, two, three, four improvements in the bid along the way. Right, okay. No, that's really good. So what I might do is um

But obviously before the interview you sent me through a a PDF document which um had sort of bit of an overview of the strategy we've just sort of discussed here, the takeover strategy. And it had a few um case study examples in there as well. So I might put a link to that in the show notes. So if anyone wants to find out more about this, just go to chatwithraders.com and um you'll find it in the show notes below the interview. But let's keep this moving. So

I'm keen to ask you just kind of some general advice. So from your experience, what are some of the common mistakes you see new traders making when they come to the market? Uh look, I think there's a few things. Um you know, I I think a lot of people maybe think that it's easier than it is depending on what experience they've had up until that point in time. So

You know, you're at a barbecue and um you know your buddy tells you about some stock that he bought you know three weeks ago and it's up twenty five or thirty percent. Um you know, or uh three grand a day and they've quit their job or or whatever. Um and I think you're looking at those people going, Wow, this is, you know, pretty easy. Maybe you've, you know, bought a stock or two yourself, same thing. You're making money. Um

And then all of a sudden you're not. And and usually that's because, you know, people are making money without necessarily knowing why they're making money. Uh I mean, luck is definitely a factor, right place, right time. Um obviously if the market's going up, you know, generally and and going up strongly then rising tide lifts all boats and it it's sort of easy to uh to make money.

Um, somewhere along the way, inevitably that reverses. Um I I think, you know, s some people if they're trading a specific stock, you know, maybe they paid fifty cents for it and, you know, saw it get as high as seventy and, you know, now it's back to thirty five, so Well it must be great buying now because it's been to seventy before. Um, you know, I I should buy more, I should hang on to my existing position, you know, whatever.

Um, and then they lose money. Um, I I so I think, you know, that's sort of one thing is that uh and I think in life generally it's easy to look around at other people and assume they're having more success than you are or that, you know, they've got something that you don't and Um, y you know, I I think it's uh as they say this about gamblers, right? You you always hear about gamblers winnings but you never hear about their uh the you know, the times that they lose. Um I sort of feel like

Not necessarily intentionally, but family and friends, um, you know, maybe and and even brokers who don't have your best interest at heart are are telling you about all the times that, you know, you missed out. Um on making money because you're you're not trading shares. Um so I think that's an element of it. Um, you know, not necessarily having a plan around, you know, downside, like how

much money am I willing to lose on this position or on you know a series of trades before I revisit what I'm doing? Um, you know, where's my stop loss on this trade? Like where am I wrong and where am I getting out of it? Um, you know, what flows on from that is, you know, getting stopped out of a position because you know you're supposed to and and you've had the discipline to be stopped out.

And then you watch the share rebound strongly to, you know, higher than where it was trading before. So then you think, Oh well, if I didn't have that stop loss I'd be making so much money now. So, you know, maybe I shouldn't have stop losses in future or maybe I should not pay attention to my stop losses and and then

it all becomes a bit wishy washy because it's like, well, okay, I've got this stop but, you know, how do I decide whether I'm executing it or not? Is that just something I decide at the time based on how I feel and my, you know, intuition or Um s so look, you know, there's that. I think um so on one hand I I think that's people underestimating how difficult it is to consistently make money. But I think the flip side of that is that

um you know, you look at the market and you think about the people who are participants in that market. So I'll I'll use Goldman Sachs as the gold star example in terms of, you know, at least their profitability and and their resources and whatnot, um, you know, all the way down to to smaller, um, I guess day traders or

swing traders who are individuals who who do that for a living. Um I think you can assume that that can be really difficult and you can go to um y you know, a lot of these courses you go to

um, that I've had exposure to in the early years by, you know, going along and and and watching them. I've had exposure in my later years by being one of the pr presenters or speakers of these, um at these events and uh y you know, some of the things that these people talk about um when you, you know, pay for these seminars, it it just sounds so complex and so difficult and

Um, you know, you can walk away thinking that if you can remember those, you know, three hundred different chart patterns that, you know, you're definitely going to make money or if you can, you know, master the fifty fundamental analysis ratios that you know you read in the book that you're gonna be able to make money or um and you know that if you can't do those things But then that means you can't be successful.

Um I think that's a big mistake for beginners as well. I think, you know, either assuming you can do what everyone else is doing um and it just works out is I think a mistake and but also assuming that it's impossible to do what the very best are doing um is a mistake. Um and I think you know, probably fear, um, and greed, you know, drive both of those things as they do, you know, in the markets generally.

Um I I think, you know, if if I was giving a new person advice, I mean obviously you have to learn somehow, right? So you learn by reading, you learn by going to seminars. um sometimes you learn by doing and and maybe losing a little bit of money.

But I I think it's all part of the journey to try and understand. Uh I I listened to, you know, the interview that you did where um you talk about Gann and how much time you spent kind of studying that in the the early days and, you know, reading the books and you've been to the seminars or whatever. And then somewhere along the way you just kind of figured out that

you know, maybe it wasn't all that you thought it was or maybe it wasn't for you. Um and the good news is by the sounds of things it it didn't really cost you much in terms of dollars, maybe a bit of time to to get to that point. Um and I think that y you need to learn and have some exposure to all of those things. But I think you just need to understand that

nothing is as great as it seems from the outside looking in as in there is no perfect thing in the markets that is always going to make you money, um that you know, you you can master and and then that's it. It it just doesn't work like that. And Unfortunately I think that, you know, in our industry there are some people who are holding themselves out as experts.

who are anything but they're experts at presenting courses and, you know, providing education and um, you know, really know the ins and outs of the three hundred chart patterns and systems that um you know that I referred to earlier, who either haven't really traded a share, you know,

a day in their life or they have but not particularly successful successfully and and they figured out that, you know, it's better for them to be educators. And I have no problem with that if it's on a disclosed basis that you know, you're not holding yourself out to be something that you're not. Um, but I think that's a big trap for new people is that, you know, you you want to grab someone and hold on to them as the person you need to be like.

Um and it's definitely important to have you know role models and mentors and and whatever else. I would just say that You know, attaching yourself to probably to the right people is important, but you know, kind of just being a little bit skeptical

about everything. I I I'd like to think I'm an optimist in life generally, but I feel in the market you have to just be a little bit skeptical and a little bit neurotic because sometimes things that look too good to be true, you know, actually are too good to be true and sometimes Um, you know, things that look too good to be true. actually are real and can be exploited, but at the start it's hard to figure that out and you sort of don't want it to cost you too much money.

you know, real money, um, to kinda get to that point and figure it out. So, um I I think, you know, thinking that you can just turn up and do a course or two and become a great trader is a pipe dream. But, you know, alternatively you don't have to be a mathematical genius or

you know, the smartest person um in the room to be able to make money from the markets because there's lots of different ways. You just have to, you know, get to the point where you understand how you're going to make money and what's going to stop you from making money. Yeah, absolutely. I mean that's such a good answer, Luke. Um really, really good points you hit on there.

Um let's just do one more question and then um we should probably we should probably wrap this up. So I I'm interested to know, this is this is a little bit different. Um besides your blog of course, um the long and the short of it.

Are there any blogs or resources that you yourself frequently visit or use to stay in tune with the market? Um, yeah, look, there there definitely um are lots of I guess different resources. Um It's probably one thing about, you know, my job that I think people from the outside wouldn't appreciate is

how much time you just have to spend reading things and learning about things, um, most of which ends up just to be perfectly honest, being completely, you know, useless or non usable at least at the time. But you can only uncover things by going looking for them.

And sometimes you'll, you know, maybe pick something up today that you can't use but in six months or twelve months you'll be able to use them. So, uh I mean look in Australia, definitely the Australian Financial Review, I read every day. Um the business section of all of our major newspapers, so the Australian, Sydney Morning Herald, um I read the um New York Times, Wall Street Journal. Financial Times, um, Bloomberg, C N B C um, I get a bunch of uh kind of emails daily that summarise um

financial y news and and whatnot. Um and then just ad hoc things that, you know, maybe I'll come across depending on what sort of trades we're working on at the time. But um I think being, you know, well read in terms of um Regular content, but you know, also some of those great classic trading books. I mean, I I know you interviewed um Jack Schwager a couple of weeks ago. Um, you know, I think.

if I think about my favourite trading books, um, Market Wizards and New Market Wizards would be, you know, amongst the top five, undoubtedly. Um, just for the insight you get to other people who are doing things that

I mean for me really helps solidify that there are a million different ways you can do things, different personality types, different strategies, and they all work. Um so, you know, I think understanding other people's journeys, where they went wrong, what strategies they've, you know, used successfully, which I guess is part of what you're aiming to achieve with this podcast, right? You're giving people exposure to different traders who have different strategies and systems.

who can talk about what works and what doesn't and and maybe you learn that way rather than having to learn for yourself, which um takes more time and can be more costly. All right. That's that's a really great um another great r answer there, Luke. So

Thanks a lot for doing this and um I mean I've certainly picked up a few things from this discussion and I'm sure anyone listening has also. Um but before you go, do you want to share with listeners um where they can go to find out more about you and your trading methods? Yeah, sure. So um uh look uh definitely um you know people can visit our blog uh which we we just recently established. Um so it's just w dot longandshortofit dot com dot AU.

Um I'll get you to put that in the show notes perhaps uh so people can easily find it. Um also we have a uh a managed or hedge fund that I mentioned earlier, so that's just www.seven eight nine asset management dot com dot au. Um just getting back to the blog actually. Um we'll set up a promo code so that anyone who's um who's listening today who uh thinks that you know maybe they'd like to trade the takeover strategy Um have a bit more information uh sent to them.

Um, you know, we'll we'll do a discount there, twenty percent off our usual subscription so that uh anyone who's interested can can take advantage of that. Um it's actually a fourteen day free trial anyway for people to have a look around before they commit uh any money. Um and then anyone who uses the promo code can uh get an ongoing discount on their subscription. Good one. So what would the what's the promo code?

Uh it's a good question actually. Uh we uh it's um uh we'll put that in the show notes if that's okay. We've we've got one set up, I just uh don't have the details of it uh at hand. Okay, sure. Yeah, well of course um the promo code will be in the show notes. Uh all the links will be also in the show notes. And are you on Twitter or anything like that? Yeah, I am so um uh on Twitter personally I'm just at Luke Cummings eighty one.

Um and uh our blog we're uh we're set up at long short of it um as well. So anyone can uh can reach out to me that way. Um obviously again contact uh via either of those websites. Um Uh, if they'd like to do so. That's really good. All right, well thanks a lot for doing this, Luke, and um until next time, take care and uh we'll talk soon. Thanks, Aaron, appreciate it. Really good to chat to you.

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