253: Patrick Boyle - Lessons from Financial History and False Expectations in the Markets

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Trading in the financial markets involves a risk of loss. Podcast episodes and other content produced by Chatwith Traders are for informational or educational purposes only and do not constitute trading or investment recommendations or advice. You know, there's a funny thing where people say to me, oh, you're you're a quant. You're not creative. You know, other people are creative, but people like you, you just like numbers. And it's like, well, no, because the numbers just answer the quest.

But your creativity comes up with the question, right? You have to sit there and look at markets and look at things happening and say, I feel there's a thing that's happening here. I wonder if there's an advantage, but all of the money comes from. 253. I'm Tessa, co-host of Chat with Traders. You just heard a little snippet of our guest today, who I will introduce shortly.

I hope everyone's doing well, staying healthy, or at least trying to stay healthy, and it's amazing that we're already in February. If you're a new listener, welcome to Chat With Traders. And for all of you who've been longtime listeners, we appreciate you so much. We have listeners from all over the world and we'd love to hear from you. We literally want to hear your voices. Simply hop on the chatwithraders.com website and click on the speak to chat with traders in the menu.

State your first name, where you're calling from, and answer the question What keeps you in the game of trading? Keep it short and brief, and if we get enough voices, we may compile it and share it with everyone. Well I'm excited about today's show. Ian speaks with another very special guest of ours. His name is Patrick Boyle. Patrick is a finance professor, author, quant hedge fund manager, and a connoisseur of financial history.

As a young investor in utility stocks, Patrick's hunger to learn and apply the lessons of financial history helped him to maintain composure during the frenzied bubble market in the late nineties. His studiousness and And growing aptitude for finding opportunities resulted in him making valuable connections with mentors and business partners. His desire to understand history by analyzing data led to building quantitative trading models.

And eventually he launched a quant hedge fund called Palomar Capital. Guys and gals. This episode is jam-packed with so much rich information, wisdom, humor. Patrick is a natural and engaging storyteller and he makes finance that much more fun. Ladies and gentlemen, we have the great honor of presenting Mr. Patrick Boyle.

Well, Patrick, uh welcome to Chat with Traders. Thanks for having me. It's exciting to be on. Yeah. Yeah. Uh so a little bit about your background. Uh w where did you grow up? Um, I was born in the United States but grew up in Ireland. Both of my parents were Irish and so um, you know, I went to school in Ireland. I guess we moved there when I was about Four years old, and I stayed there through university and then uh then came to the United States to work afterwards. So

Oh great. What what did you uh major in in university? I I studied business uh for my undergrad and then later I went back and studied finance uh as a master's degree. So Um, it it's kind of interesting because initially I didn't really know very much about markets and so

Um, you know, when I started working in the world of finance, I I kind of knew more the kinds of stuff you learn in in a business degree than than a finance degree. So I kind of knew all of this sort of accounting type stuff, but nothing about kind of how markets work or, you know, stocks and bonds or why people buy them or anything like that. So

Hmm. So was it your experience in the university that helped uh trigger your interest in um in the stock market or commodities market or whatever? Or was it friends or family? Well, it it was possibly I I guess my dad, when when I was a teenager, I've sort of worked summer jobs since I was uh 14, which was when I was allowed to work.

And so I worked uh for one summer and earned uh, you know, kind of saved all my money at the end of the summer at the age of 14. And my dad then encouraged me to invest it in the in the stock market. So I bought a stock. And um, you know, at the time I was terrified, you know, that I would lose all of my hard, hard earned uh money. And um You know, basically kind of summer by summer I would work and uh and uh you know my dad would encourage me to invest.

uh some of the money. But in truth, like I really just sort of listened to what uh, you know, like I picked these, uh, you know, I think the first stock I bought was. I forget even it was some sort of utility company that was, you know, some special uh, you know, tax treatment to utilities at the time. I don't I I don't even remember the reasoning at all because I was 14 years old. But um you know, it it kind of got uh, you know, it sort of interested me.

But, you know, even at that point, I kind of, I, I worried quite a lot about it because I felt I worked very hard. to save money, you know, these kind of minimum wage jobs you get as the teenager. And the last thing, you know, you see the the stock fall a couple of percent and you're like, well, that's hours of work gone down the train. So um yeah. Yeah. So you started off as a like a buy and hold investor in the was that the early nineties?

Exactly. Yeah. And uh, you know, yeah, r really just kind of uh, you know, essentially it depended on how much I would earn over a summer, but I would buy kind of one or two stocks. uh with my my earn my savings. And, you know, back then commissions were very high. So you really did just buy and hold. And and in truth I kind of

you know, overall I st ev even though I'm a reasonably fast paced trader, I kind of still recommend to most people that that buy and hold probably works for them. You know, it's sort of uh you know, you you get exposure to uh to to business, to owning a business and the the sort of returns that come from that.

Mm. And over this time period, uh you got started when you're a teenager. What sort of things did you kind of look at when picking a stock? Or did you just pick a stock'cause your maybe your parents recommended it or you It was very much like my my dad w and my dad was a doctor so my dad I think had a broker and he would go in and

you know, have these long discussions with his broker. And then it was, you know, I I might it it was really very directed by my dad. Like he'd it's one of those things where he'd sort of give me a choice, but it was, you know, it it it was pretty much um You know, I think the idea was just to sort of diversify and to buy kind of safe companies and that kind of thing. But

I can't really, you know, be a total lie to claim that there was any real wisdom that occurred at that point. It was very much, I think my dad just sort of wanted to encourage me to save rather than to spend my money.

And um and my dad had invested for years and uh, you know, i it it just sort of seemed like a reasonable thing to do. So in truth it was probably Uh, you know, the overall goal was probably just diversification to you know, there were no I I don't really believe there would have been mutual funds, but uh I I had single stocks at the time and there were no index funds or anything like that at the time, at least not commonly available.

And so just sort of every summer I would work and buy sort of a stock or two. And over by by the time I guess I was in my twenties, I had a a little portfolio and there'd been a bit of a bull market. So it had done reasonably well. And how did the advent of the internet and the dot-com boom uh you know come into your investing uh experience? Well, the dot com boom kind of had a huge effect on me because I started working in the market.

in nineteen ninety-eight. So kind of right as things took off. And back then I I worked in the private wealth management area of of a bank. And um, you know, it went from like the stock market being sort of a a a thing that sort of uh a a few people invested in.

to being uh, you know, sort of a a constant discussion, like every time you went out to a party or to a dinner or whatever, people would be talking about stocks. And in particular, they'd be talking about the kind of high flying internet stocks at the time. And so that was a very is a very interesting point to start in the market where there's sort of a boom and a bust, you know. And it it It's interesting because I worked in the long-only private wealth management area 98, 99, 2000.

And then 2001, kind of right as, well, 2000, the markets started to fall. And 2001, when people were uh, you know, starting to really lose faith in markets, was when I started working at a hedge fund. And so that was when there were sort of more opportunities to go long and go short and kind of short term trading and all of that sort of thing. And so it was, it was kind of quite an interesting, I guess just the timing of all of those moves and everything was.

quite inter I think I even started work around the time of the meltdown of long term capital management, you know, so I sort of turned up uh uh at work and like things were as vol you know, nineteen ninety-eight was actually a hugely volatile year. Like a the you know, there were kind of uh daily swings uh well, gosh, there were big, big swings. Um And then 1999, it was like the tech stuff that all just went straight up.

And of course, being a young guy and kind of understanding the internet, like I I would have kind of had my own computer and been an early adopter of the internet and kind of, you know, had things like internet banking and uh, you know, been on you know, buying stuff on eBay and things like that. Like I was quite excited by the dot com. uh by the internet on its own and by computers. And then also um all of these stocks that that uh sort of seemed uh what can I say it it was a time

when older investors were sort of viewed as possibly a bit out of touch. It didn't turn out that they were. But there was a good year and a half there where if you were young and you kind of felt that you knew all of the cool startups and whatever and you had no uh no concept of valuation, but sort of a knowledge of what was happening, like what was cool and what was not. Uh you you seemed very smart for about 12 months, you know, and and then then people started avoiding you.

So did you uh uh did you buy into the idea that this bull market in the dot-com era was different from other bull markets because of this revolutionary technology called the internet was going to usher in a new golden age. And so it would be justified having high expectations of what stocks could do. I kinda did in that it it's interesting because I sort of I remember at the time feeling

That it was very reasonable to expect, well, say 20% returns, right? So I would put when I would invest, I would put my money in the market and sort of calculate sort of how much money I would have in ten years' time, compounding it twenty percent a year. And it and it that like it sounds idiotic today, but back then It's sort of like that's sort of all of the friends I had and everything thought like that. Now I was lucky because I worked in the business and I worked

with sort of smarter older people who had seen things a little bit more. So they would kind of give more sensible advice. I think I got more excited by the idea of it, but because I I already had kind of a

diversified portfolio of stocks. And I was really at that point I was investing sort of new earnings and kind of dividends that would accumulate would get reinvested. But I was lucky not to really get too caught up in in the real nonsense, largely because I had sort of smart people around me who would sort of say, you know, let's watch and see how this works out.

But I was kind of a believer. Um, it's a funny thing because in the last few years, you know, like young people, sort of the same people as me, but uh, you know, today have been quite caught up in a lot of the crypto stuff and things like that.

And uh, you know, I have a lot of sympathy for that way of thinking because that's how I taught at that age as well. But the the thing I would say was that it was very obvious as a young person with the computer back then. that the world was changing. There was a way that that I could do stuff. Like I could buy stuff on the internet. I could email my CV when I was applying for jobs. All these kinds of things existed.

that people my parents' age didn't understand, but they were definitely better ways of doing things. And so The business case behind the internet, you know, the idea that things like almost the knowing what wouldn't work was useful because it was at the time I remember there were a number of IPOs for like yellow pages and things like that.

And I remember as a, you know, sort of twenty, twenty two year old kind of looking at this and thinking, like, who on earth is going to use a phone book? You know, like it's sort of uh i i it arrives at your home and you recycle it, you know? But but

You know, those things were going public. And I kind of wonder if the the management of those companies knew that that it was on the way out. Well, d n I think if they had known, they probably would have found a way of banging it up on the internet. But I think

You know, the it there were certain things like there were obviously businesses at threat from the internet. And I think that part of the equation was correct. But the other side of the coin, where you looked around and you saw all of these kind of hot new startups and you'd read in the newspaper that some guy launched a website uh

And a week later was a billionaire. And I think I wasn't I I was too young to be grounded enough to realize that that was nonsense, like that it didn't make sense and that the multiples, you know, back then. um a lot of those stocks because they were sort of um so ridiculously expensive, the brokers came up with different ways of pri you know, they'd say, oh well, you can't look at the price to earnings ratio because the earnings are negative.

Um, but we've come up with the plight price to clicks ratio, you know, because the amount of people who click on this website means that it's a hot website. And you kinda go, well, Uh yeah, I can see how that's a good way of separating the different websites, but it it's a bit unnerving that none of

for making money, you know? And so I was kind of intellectually caught up in it, but I was possibly a little bit lucky that I didn't throw too much money at it. Like I was Maybe I I kind of stood on it long enough to to kind of not make I I I did buy I did buy one mutual fund at the absolute top, but luckily with not much money, there was one called like the Janus Technology Fund.

And I I I really believe I bought it in like, you know, towards the end of December in nineteen ninety nine. And luckily I think I only put a couple of thousand dollars into it, but I think that was the high tick of that thing. Like it just went straight down. And I remember reading all the news articles about the guy who ran the fund and they kind of go, he's a genius. He and they'd have pictures of him like

climbing down a manhole, inspecting the fiber optic cables that were being put under the ground. And like, he really understands this stuff. And you're like, well, good, good. He'll he'll know if this is all falling apart. And it's like, he didn't. It's nothing wrapped up about a year later. Wow. Did the overvaluations in any of these dot-com stocks tempt you to sh sell short? I didn't know much about short selling.

At the top. And then by the time I started kind of really actively trading, I was trading futures and trading kind of index type futures. So I kind of And and really what happened actually to move me because cause the truth was I was inter like I one of the things that interested me about markets was just companies. Like I was interested in companies, what they do.

Um, you know, how what's the difference between a good and a bad company? That sort of thing, like kind of the kind of thing someone interested in fundamentals would be interested in. But I worked in this sort of wealth management area where we were, you know, very much long term investors. And it was also, you know, the people I worked with were all uh kind of quite a bit older than me. You know, they were in the youngest people like managing money were in their forties and I was sort of a

rather fresh faced 20 year old with a a big mop of hair. It's quite quite a different look back then. And um, you know, of course they wouldn't put me in front of a customer because I was way too young to be put in front of a customer. But I was young enough to also think that they should put me in front of customers. So I figured that what I needed to do was to have experience, right? Because all of these the real thing these guys had is they were able to say, well.

In the seventies, when this happened, this was a good investment approach. And so that's what we're doing. And I thought, well, how can I understand all of that stuff? Like, how can I understand stock market history? And so there were two approaches. One was just to read books, you know, and luckily in the late 90s. um, you know, Barnes and Noble was packed full of investment books, like it was half of the half of the bookstore at the time.

So there were lots of books to read. And then I just thought, well, in order to understand like kind of how the prices move and the the history of like what worked and what didn't and when did it work. uh you know at the time there was all this data on the internet. And amusingly, it was easier back then to get stock market data than it is today because all of those dot com companies just threw a load of data up on the internet, you know, so you could download.

all of this stuff for free and and start uh you know kind of screening or uh analyzing it. And so I started um just downloading data and trying to understand like In a rising interest rate environment, how do stocks perform? Which stocks perform? In a falling interest rate environment, how do stocks perform and which ones perform? You know, should you buy higher low PE companies? Should you buy value stocks or growth stocks?

And you know, and when when do these various things work? And so I just started building. I I had moved to Boston and I didn't really know anyone. I I had one friend in Boston and a computer and a small apartment. And so I just Spent a lot of my spare time. It was a way of learning how to use the computer, and it just interested me. And so I would just analyze all of the data.

But I was looking for long-term, long-only investment strategies, like something that would say to me, you know, in this economic environment, you can buy this type of stock and hold it indefinitely and you should outperform. And the funny thing was that I I found things that were sort of reasonably interesting like that, but I kept finding kind of more short-term stuff.

And that was entirely unsuited to what I was doing at work. So I was sort of able to look smart in the office because I'd go into the office and sort of discuss the backwardation in the oil contracts. And people kind of go, Oh, how do you know about that? But um You know, I'm I'm not sure that it added a lot of value for my employer, but that sort of pulled me towards the the trading thing simply because I worked out that even though I wasn't trying to find short-term signals.

analyzing data tends to tends to dig out shorter term rather than long-term data signals. So that that was kind of what happened with me. Have you ever watched a stock explode and thought, if only I had the capital, or sat on the sidelines because your account balance felt too small to matter? Good news. With Trade the Pool's limited risk platform, you don't need millions or even thousands to start trading the U.S. stock market. Bypass the PDT and tap into over 12,000 U.S. listed equities.

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So it sounds like on your own accord, you had a natural interest in getting into some kind of quantitative trading on your own. Is that is that accurate or were you introduced to it by someone else? And I I I sort of I came across like this idea that you could understand history by analyzing data, but I wasn't very good at analyzing data early on. Like I didn't really know uh enough of the sort of statistical techniques. So I I built all of these models and tried to understand things.

But it was really when I read Vic Niederhofer's book, Education of the Speculator. And I read this book and I was like, oh, this guy is he's got similar ideas to me, but he's way, way, way, way better than me. You know, he's way smarter than me. And so I kind of dug through his book. Like t I still have I have about five copies of that book kicking around the house. But I have my original copy that's all worn out from reading it and rereading it.

But that book, and then there were also things like the Jack Schwager Mark Wizards books that I read. And you know, at the time, like I was reading the Jack Schweiger book and I didn't really know what futures were, you know, so I had to like learn all of that stuff as well because I I was used to just single stocks and bonds. And um basically I kind of worked out that there was a world of people who sort of thought like I did.

And then I met with Vic Niederhofer and he would just critique the sort of analysis I did, like I would do these. these awful studies and send them to him and he kind of called like, you know, you're you're going in an interesting direction, but you you don't understand how to differentiate sort of um, you know, uh randomness from a real market effect. And so he would email back and forth with me and sort of tell me what I was doing wrong. And and I slowly got better. And so

It was, I guess, a combination of curiosity. I think also like a, I think one of the good things. about me at that point in time was I was quite aware that I knew nothing. And I and I and I think that that's a good way to be. There's a lot of people who know nothing and they think they know everything. While I very much real like it was it was the realization that I knew nothing that made me try and learn this stuff.

And then as I learned stuff, you know, you'd find these little things and you'd be like, gosh, you know, I found something really interesting and other people don't seem to know this. And that of course just encouraged further research. But My my research, to be honest, was was not that good. You know, there were things I I got interested in, like um uh closed-end mutual funds. You know, when I worked out that they traded, some of them traded at discounts and some at premiums.

I then wanted to see, well, what happens if you buy all the ones that are trading at a discount or what What happens if you buy those and sell the other one short? And of course I wasn't even able to trade this, but I just wanted to know what happens. And basically, yeah, I just uh, you know. Uh kind of just uh uh possibly out out of not knowing very many people and having a computer, I I kept myself busy learning uh learning all of this stuff for a few years. So

Oh wow. And so what did you find with that uh uh closed end mutual fund uh strategy of buying the discounted ones and sh shorting the uh ones with premium? You know, it was an all right trade that earned very little money. And actually that was one of the real benefits of meeting Vic Niederhofer, because he would point out to me, he'd say to me, Patrick, you keep Finding a bunch of things.

that work as long as you don't include transaction costs in them, you know. And the minute you throw transaction costs in, you you know, these things are all money losers. Like you said, you know, you're thinking in the right direction. But you've got to find fatter profits that compensate you for risk and that compensate you yeah and that will overcome the cost of trading, you know. So um

So things like that and then just actual uh, you know, statistical methods uh that the Victor would like, uh, you know, he'd recommend all of these books to me and I would get the books and I'd dig through them and I'd say, well, what does this mean? How should I use this? And He was very generous because Victor was uh, you know, he was kind of quite a serious guy and he would answer my emails, you know, and that was uh that was kind of quite exciting and and it was really good for me.

Wow. I understand. Uh did you later uh go on to work with uh Victor? Yeah, about a year after reading his book, uh Vic Victor, uh, you know, I was working at Bank of America at the time and I just bought uh bought my first apartment. And Victor sent me an email and said, Do you want to come out to Connecticut and work here? And I kind of almost didn't, I I wasn't entirely sure if he was serious or or uh, you know, kind of teasing me.

And I said I would. And I think I drove out to meet with him. He made me a job offer. And I moved. You know, two weeks later, you know, I gave two weeks notice to Bank of America. Rented out my apartment and moved to Connecticut. Uh, because like I couldn't believe my luck. Like I, you know, a year ago I had read his book. It was, in my opinion, the b to this day I think it's one of the best books on. sort of the what can I say, like how a trader thinks. And um

And and to to kind of, you know, a year later be sitting in that office. It just it seemed amaz to this day it seems amazing to me, like it really was uh quite a stroke of luck, you know.

Wow. Uh was he a catalyst for you to start your own uh quant hedge fund? Um, I don't really know. I actually I I loved working for Victor and I l I actually loved working. You know, I liked uh I I I don't know that I'm like necessarily the world's most entrepreneurial. Person. I enjoyed working basically everywhere I worked. I had this great luck that I met a ton of really smart people.

Um, at at almost every firm I've worked at, I've really enjoyed it. But what happened, the real reason I I launched Palomar was just it was, when was it? It was in 2011. Basically the credit crunch had ended. There was kind of a a I guess just to cut back a little bit, I would say that I spent many years as a trader and I was never because once you take this sort of statistical approach, you're always trying to separate.

um randomness from reality, you know. So just because you've had a good run doesn't mean you're good at what you're doing, right? You could be lucky flipping coins or whatever it might be. And so I spent many years kind of agonizing over You know, just because I've made a profit doesn't mean that what I'm doing is any good. It could just be luckier. I could be making money, but I'm exposed to a risk that I don't understand. You know, I had kind of um, you know, as a big fan.

Of the Lowenstein book about long-term capital management, you know, and there's there's a huge warning in there to any trader. that basically says, you know, don't uh don't start thinking you're too smart, you know, like because just because something's worked for a few years. And it's kind of new, it doesn't actually mean that it's a good idea. And so some of the the the tests I had run, you know, you would find these trading strategies that would win like 90% of the time.

And you'd be like, well, that's amazing. But as you as you run it on more and more data, you see that it does win 90% of the time, but that 10%, it will lose you way more than it made you when you were right. And so any good trade that you have, you're always wondering, you know, is the is the sword of Damocles above my head? You know, like am I uh you know, am I right?

And so I I always had and kind of still have a certain amount of doubt about like when things go well, I never get overly excited. And um it was really the the credit crunch had had ended. And during the credit crunch, I had seen A lot of very smart people really fall on their faces, like good people who have been good traders for a long time. And when the market collapsed the way it did collapse.

uh you know that they're they they had you know a a year that had lost more money than they had made in the prior decade kind of thing there are a lot of people like that And I had managed to kind of grind out a sort of a reasonably low volatility, decent return during that period. And then what had happened was just.

uh you know I'd worked uh at at a couple of banks in London where um you know the there they there were prop desks where it was basically an internal hedge fund within these banks and they would pay you as if it was a hedge fund and it was great. and you you'd get to use all the infrastructure of the bank and it it was a wonderful job. But because of the credit crunch,

the banks had basically all become uh semi-nationalized or under government control in one way or another. And they were told they had to de-risk. And none of the bank ev even though it's kind of it entertains me because the real losses in the credit crunch came from basically the traditional business of banks, which is lending people money to buy houses. But anyhow, they decided they had to de-risk and there there was no bank CEO that was gonna

sort of behold in front of uh Congress to explain why uh a bunch of uh fast paced traders in i in a quiet room in i in London had had blown a load of money. And so The banks were really losing the will to hire people like me. Um, a lot of the big hedge funds. Um, They were kind of doing okay, but there there were it it seemed to me that there was a real risk. Like I had seen a few people who had, you know, done all right, but they'd kind of hopped around a few jobs. And I didn't want to do that.

And I kinda thought, well, if I launch a fund and I even if I just have five customers, that's like five jobs. It's diversification, right? And if one of them uh, you know, doesn't like what I'm doing, well, the other four might stick around. And so Uh, really kind of the the reason I I started a business was just that it seemed like the only way to keep doing what I was doing at that point. Uh, you know, the the idea of working at a big firm and not

You know, not having to to spend your time on many of the other issues. Cause you know, running a business is very different to running a trading strategy. And um and that is the downside of running, well, at least if you really love trading, the downside of running a business. is that you suddenly find yourself involved in all sorts of IT issues and capital raising and marketing and, you know, all of these other things that that weren't necessarily how you wanted to spend your time. Mm-hmm.

Um, if you wouldn't mind sharing with us, uh, what was your biggest loss and how how did it all happen? You know, my biggest loss was a bit of an interesting one or like uh it I I don't know if it was big as percentage was, but but uh the the worst day of trading I ever had. was the day of Jerome Curviel's uh, you know, when when the rogue trader, it was actually around this time in 2000 and

seven. It was kind of right before the credit crunch. It was the markets were closed because it was Martin Luther King Day. And at Socgen they discovered that a rogue trader had, I think, bought like 30 yards of Eurostox futures. And they decided to bang that all out on a day when the US markets were closed.

And so it was expected to be like I I worked in London at the time. And on those days when the US market is closed, you know, the European markets are open and nothing much happens in them. It's a bit of a sleepy day. So I turned up in the office kind of in in jeans, you know, which was not my not not the usual thing, but I was basically kind of, you know, high fiving uh the boss and then heading out again kind of thing.

And the market was collapsing, you know, and and I had a lot of signals that said to me that the market should go up. And so I I took a decent size position and the market just would collapse, stabilize, collapse, stabilize, collapse, you know. And eventually the the SPs seemed to calm down. And that was when I realized they were limit down. And that's why that's why it stopped falling. Um

It was the first limit down day I had seen in markets. And um it it was sort of an interesting thing because that was a brutal day like where um, you know, I I just couldn't have been more wrong. and uh, you know, was trying to get out and and trying to cut size. But no matter how much you cut size, the fact that the market was f like it it was crashing. All you can do is look less awful. You know, if you came into this long, you know, it's just sort of risk management trying to get out.

But Fortunately there was um W when I I'd about flattened out with just a brutal loss, like just uh I felt humiliated. I you know, I stand there in a pair of jeans with the worst losing day I'd ever had, you know, explaining that to to senior management. And the market started rallying like hell because Bernanke had, you know, it had been so awful that they did that emergency rate cut. So the market started taking off.

And my signal said, you've got to get long. And I thought, good Lord, am I going to do this again? You know, like because there's sort of a point at which you you think like, I need to just go home and go to bed. Like I need to stop with this. And so anyhow, I I managed to steal myself and buy into the rally. It also like PL, amusingly, the PL didn't get struck on my loss.

because the market was closed. You know, it kind of it got averaged over two days. And I managed to make enough money on on the bounce back. that in truth, like if you look at my PL uh as calculated by the systems, it looks like an all right day. That that is a day that that uh you know I I will remember as as the worst day I've seen in markets. But it

It turned out to be kind of a good thing for me because that was right before the credit crunch. And we had been in an awfully low vol market. You know, the SPs used to back then, like, I mean, they'd have a daily range of four points. And fortunately that that big volatility explosion, uh, you know.

led me to to adjusting size, adjusting risk management, like uh because my s my my systematic approach to trading is quite dynamic and pulls in what's happened recently. And so When the whole credit crunch kind of kicked off, I was sort of I felt very lucky to have sort of been uh almost immunized from the the fear of the volatility because of that. that brutal day that it happened maybe, you know, a month or so before the the the real horrors of uh of the credit crunch uh appeared.

How has your experience with the limitations of quant trading varied over the years? The limitations. Well, you know, the the interesting thing, you know, I I guess everything you do limits you in one way or another. And it it's even it's a funny thing because As a quant trader, as I said to you earlier, I kind of always love the story of the market. And I still love the story of the market. And I love reading all of the news that I don't then trade on because that's not what I do. And so

In certain ways you're kind of limited by that. But one of the thing that I really enjoy about quant trading. is is the fast paced nature of it. Now, the fast-paced nature equally means that you kind of grind out a whole bunch of small profits that hopefully turn into a large profit over time.

But you you never have like a heroic story of like sort of buying a stock to 10X's or whatever, you know, because you're just in and out constantly. Um, one of the things that I like about it and one of the the the fact that you trade a lot. means that you really examine yourself, like you really examine your own decision making ability. And I I think that that's actually

the thing that has kept me really interested in markets, because in a funny way you would say, like after, I don't know, 20, 25 years in this business, like, aren't you sick of it? And and there's a good argument that there's many things you would get sick of. But the thing that's most interesting about it to me is just that you you examine yourself, you know how often you're right and wrong.

and you have a good gauge for it and you know how bad it is when you're wrong and things like that. And so it it almost has a, you know, a therapeutic like uh effect to it. where it forces you to to study your mistakes and to really to to kind of have a pretty accurate gauge as to how good and bad you are and when you've been lucky and when you've been smart and things like that. And and

I I I do like that. And I guess so the limitations I I often feel that, you know, there there's a type of person who is a long-term uh sort of single stock type trader. And I'm often jealous of them because they get to feel really smart because they bought like whatever the hot stock of right now is when it was way, way lower and they're they're they're a smart guy and everyone knows they're a smart guy.

Well, I unfortunately know how much of an idiot I am, because I have repeated mistakes to deal with. Uh, you mentioned in an interview a few years ago that 90% of your time is spent on research. Is this because the effectiveness of previous strategies you employed decline over time, forcing you to have to constantly come up with new strategies? Yeah, I mean, I that that also is like whether people recognize it or not, that is just the way that markets work. You know, like you can't.

Uh you can't come up with a good idea at the age of twenty and expect to to sort of feed off of it every day for the rest of your life. And I and I think That's almost one thing I try to push to people is, you know, cause cause often people sort of they uh we'll say if they decide that you know something that would be useful to them. And they sort of want to say to you, well, Patrick, tell tell me the thing that I need to know in order to make a lot of money in markets.

The problem is that anything I told someone today would likely be wrong in a year or two years' time because it changes. And it it it is required. This was one of the great lessons from working with Vic Niederhofer because he had this idea and he actually took it from do I have the book here? I used to have it around here. Had this book.

uh by a guy named Bacon uh called um oh it's something something turf bedding I forget what it's called. It's it's a gambling book though. And Victor encouraged me to read all of these gambling books. Because the the gamblers actually know that they are exposed to chance, to fortune, to good and bad luck, and to good and bad decision making. And the nature of markets, you know, Bacon points out in the book that.

We'll say if someone worked out that the that the biggest horse always won the race or something like that. So all you had to do as a as a as a turf better would be to turn up at the race. bet on the biggest horse and it would win. Well, what of course happens is that over time people work that out. And it it does it almost doesn't matter what the signal is, but people work out the signal that

that um uh that shows the likelihood of winning and people start to bet on it. And the more people that bet on it, the odds change. And so even though you might be right about picking which horse wins, the problem is that you'll because the odds have changed, your wins will be smaller, and then when you're wrong, your losses will be bigger, and you'll you'll eventually have turned a winning thing into a losing thing.

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And markets are exactly the same as that. in that any big idea, anything that works today will be discovered. It has to be discovered. And and you know, that pace might change a little bit over time, but it it it throughout history, this has to be the way it works. And that once your trait becomes well known and once anyone can do it, it can't work anymore. And so you have to always find new things. And so there really is no sort of secret sauce or secret idea. The the real

secret is just to keep grinding away, to keep working. And really, that's even why, you know, there's a funny thing where people say to me, Oh, you're you're a quant. You're not creative. You know, other people are creative, but people like you, you just like numbers. And it's like, well, no, because

The numbers just answer the question, you know, but your creativity comes up with the question, right? You have to think through, you have to sit there and look at markets and look at things happening and say, I feel there's a thing that's happening here. I wonder if there's an advantage. And then because you're you're capable with with uh you know coding or numbers or whatever, you're able to test it.

But all of the money comes from creativity. It comes with coming up with good ideas or even coming up with smart ways of testing an idea that other people maybe can't come up with.

Mm-hmm. So do you find that um your is it easier or more difficult um now to have your tr your trade ideas last a certain period of time? um now versus before. So in the past, uh, you know, computers were, you know, more expensive, uh, there was less competition, and now there's Computers are much more powerful, easier to research, trade ideas and what have you, but you have a lot more competition. Um is it better or worse today? And how long

It's harder in a funny way because I've got experience. I've sort of made lots of mistakes. So I maybe I think I'm quicker at knowing what's a good uh like what's worth pursuing and what's not worth pursuing. Like that was the problem when I was young. was that I didn't know when I was wasting my time and when I wasn't. Now I may be

you know, because I've tested a lot of things, I maybe have a bit of an instinct. Like a a funny thing is years ago, like in in my first few years of trading and analyzing. I would find like what looked like the world's greatest trade. Like you'd be like, I found the holy grail. You know, I remember once finding some amazing trade with like the best statistics you've ever seen.

And I brought it to Victor. This would have been like a month or two into my job. And I brought it off to him and said, this is an amazing trading strategy. And he said, yeah, it's too good to be true. Check your code. There's an error in there. And I I, you know, he was kind of outraged. I was like, it's no, there's not an error in my code. Like, why doesn't he believe I've got this great idea?

And I went away and dealt with it. And sure enough, there was a mistake where I was using the the you know, I'd swapped my variable. So I was predicting the the past with the present, which isn't very useful. But, you know, he had at that point 40 years of trading experience and he just knew that there was no opportunity that good. Like if it looks too good to be true, there there's a problem. And sure enough, there was.

And so there is a benefit to experience. It is harder, like there's a ton, a ton of smart people and also even trading costs have come down and things like that. Cause even one of the early advantages was just that if you're trading at a fund or at a bank or somewhere big, because you trade a lot, you get

uh cheaper it cheaper trading costs and so on. You know, I think that's maybe become a little bit more widespread. You know, you can still as an institutional trader, you still get better better cost than other people, but you know, there there is more competition, but there's also in a funny way,

There's also just there's more people making mistakes as well out there, you know, because there's always there there's lots of really smart people doing really smart things in the market. And then you have a bunch of people who kind of don't know very much and have way too much confidence in the markets. And so there there's maybe a mix, but I I in truth I've always like my whole career, I've always thought that I'll turn up one day and find that it all no longer works.'Cause that's

That kind of is the expectation, you know, that that eventually it'll all be washed out and you'll just be uh, you know, looking at entropy. But uh, you know. Yeah. Uh the two thousand ten flash crash. um has been blamed by some traders on machine trading. How did this event happen? And has the lesson been incorporated into most models today, making such an event unlikely to occur again?

Um, it it's a bit of an interesting thing'cause'cause I I feel that overall, like the way they blame the the flash crash, I I think that they don't truly know what caused the flash crash. The flash crash was a mad sort of a thing that happened that lasted a couple of hours. And they sort of blamed a guy at Triton out of his his bedroom in London um for uh sort of spoofing.

Which I don't really believe because I I had when when was I? I was 2010 and I I had probably been trading for like nine years. fast paced trading at that point. I I had seen people spoofing in markets for the that entire period. Like I remember I used to see these massive trades come into the book in the bund only to disappear as the market got close to them and so on. It was very obvious. to me, uh, you know, for a very long time. And I think anyone who was a reasonably active trader.

saw spoofing and knew it was spoofing in the markets. I think there were a few things that that caused the flash crash. There was this idea th that uh that it was caused by one guy or by a group of traders who were sort of manipulating or bullying the market around. I would argue that a big part of what happened was that market making had become much more algorithmic at that point in time. And what i if you're a fast-paced trader, actually a good example would be even During

the market would move very rapidly and you'd get a fill and you you'd then exit that trade. And only, you know, we'll say like a an an hour or so later, you'd get a call from your broker that would say, we we've undone that trade. That was an erroneous trade, right? So anyone intelligent.

at that point knew, like we'd just been through a period of great volatility and we had seen people's trades just been unpicked because they were considered unfair for a variety of reasons. So any quant trader at that point knew. The once the market moved a certain amount.

There's a very good chance that any buys or sells that you put in, the winning trades will be unpicked because they're deemed to have uh occurred in an unreasonable market. So what do you do? You shut off your your system is set up. that once the market has moved more than a certain amount, you just stop trading. You know, you back out and you come back when uh, you know, the, the, the rule makers have decided which trades are fairer and which are not.

And so I think the real a big part of the flash crash was simply that a lot of automated market makers and a lot of uh, you know, fast paced traders like me just backed right out of the market when that started happening. Because You know, if you bought at the low on the day of the flash crash, you could have made a fortune, right? You could have been in and out.

and made a fortune. But there's a really good chance that they would say, well, your buy is invalid and now you're short the market and it's gone up another percent. And it's like, I I'm not playing that game. And and No one sensible wanted to do that. And so the I I think the real reason that liquidity just disappeared was that people had learned that lesson. And, you know, but but always, whenever there are these.

big events in markets. It's very easy for people to come in and say this happened because of this, but but we don't really know. Like we can say that, you know, that there's probably like 10 different things that work together. to cause that that uh sort of crazy event. Uh could it happen again? Definitely. Like I mean, anything that has happened can happen again. And many things that haven't happened will happen, you know. So

Yeah. Actually that I I studied it at El at uh London Business School with a guy called Elroy Dimson and his great line on risk is that uh his definition of risk is that more things can happen. than will happen, you know, like essentially that there's just more out there than you realize.

Mm-hmm. Uh, according to the SIG Tech hedge fund report, only about twenty two percent of hedge funds use a purely quantitative strategy. Um, why do you think that uh there aren't a lot more that are using a quantitative approach if it uh if the quantitative approach can show uh that it has uh positive alpha? For one thing, just different people are good at different things like

Quant trading appealed to me because I didn't like just buying something because I felt good about it. I wanted to have a good reason for doing it. And that that just sort of appealed to my way of thinking, doesn't appeal to other people. But also kind of back to that idea of ever-changing cycles. Whenever something works well, it draws people in. And then there's sort of too much money chasing too few trades. And so it disappears.

A a great example of that would be convertible bonds, right? Because back um when I started working for Victor, um the all of the hedge fund launches in the early 2000s were convertible bond arbitrage. And this was because Ken Griffin had made a fortune in convertible bond arbitrage and everyone decided this was, you know, the it was an easy way to raise capital if you launched the converts hedge fund. And so all of the capital came in and the the whole reason convertible bond arbitrage worked.

was people were mispricing convertible bonds and there weren't enough people who knew that. So they'd buy the cheap bonds, hedge it all out and make money. Once once you can raise tens of billions, there aren't enough convertible bonds to do that with. And so The nature of markets, it requires that people be doing different things. Like if everyone is doing the same thing, that thing can't work.

And you you can almost look around like even um, you know, recently all of that sort of growth stuff worked basically from I don't know, two thousand and nine till twenty twenty one. growth, growth, growth. The FAM stocks were what people had to own. It it couldn't keep going like this, this small basket of American technology stocks can't lift the entire market forever.

And so once once everyone is doing that, something else ha that has to end and something else has to start. So a market would never work. if there weren't a bunch of people doing a bunch of different things. And and even just that idea of efficient markets hypothesis, the the market can only approach efficiency if

the if if enough analysis in uh and different types of analysis are being done. And so You actually do often see that where, you know, whenever in fact it's a terrible thing almost, whenever Quant does awfully well. A ton of money comes in, but it doesn't just come to me, it comes to every quant fund. And and then they they pilot into the exact same strategies. We'll say last year they made a billion dollars in a strategy. Well, now they're throwing three at it.

as are all of their competitors, the trade isn't big enough for that. And so then you see two years of sort of sideways or losing trades and everyone loses interest. And they move on to, you know, whatever the hot new trade is. They they pile into Kathy Wood's arc or whatever and and that blows up on them. And so you know, you you can't chase last year's or last decade's winning strategy and expect uh, you know, this year to be a photocopy of last.

So how has 2022 been for you? Uh have you had to switch strategies and do you still dislike shorting? Um 20 uh well uh last year was was actually a very good year for me. It's one of my better years. It uh interestingly, I do specifically dislike shorting, like I uh you know.

Actually, almost every trader I know, there's very few people, there's some people who are really good at shorting and almost everyone else, there's so many people I've met and they kind of go, I wish I had never heard of that approach, you know? Because You know, shorting is always swimming against the tide. You know, if you look at it, eight out of ten years are up years in the market, eight out of ten days are up days in the market. Like the market tends

to grind up. Like I I say that like if you can look at a hundred years of data or whatever it might be. You know, you can swim with the the the you know, you can swim up or down the river. It might be easier to swim down the river. So you you always require, in my opinion, um, you need to qualify your trade better. Your analysis needs to be better to be good at shorting, because if most of the time the market goes up.

You can be long stocks and wrong about your idea and possibly still make money. While when you're short, you have to be really right. You have to catch it. Um Many years ago, I did a lot of analysis. Like kind of I moved towards certain ideas that are a bit longer term in nature. And one of them is just that if you look at the returns of markets. during different uh Fed cycles.

Most of the returns in markets occur during periods of falling interest rates. In fact, if you look at things like the FTSE, if you if you move away from American stocks and look internationally, you'll find that almost all of the return. in the stock market occurs during periods of falling interest rates. So during periods of falling interest rates, I have short trades. uh really, really reduced to a very low level. I'm more confident shorting.

uh during the period of hiking interest rates, because there's just more of a chance. No, it's not even that that I believe that markets will fall in that period, but there's less of a chance that they will ramp in your face, you know, that you'll you'll get brutalized by them. But I've even found during periods like when I look at my returns during the the worst days of the credit crunch and things like that.

Surprisingly, I often find that most of my profits in a down market occur on the long side. Because of course, if you're trading long and short. You know, you shouldn't have a beta to the market anyhow. And I found during the credit crunch, like often I did quite well catching the bounce after the fall, much more than I did catching the fall.

Um, so last year was quite a good year. It was sort of interesting because there was a lot of irrationality leading into last year. And there's a bunch of things you can look at. But but there were a lot of bubble stocks and sort of having been through the dot-com bubble.

Um, you know, when you saw like uh I I forget, like did Tesla go up like 70% when it was announced that Hertz had bought a couple of cars from them? Like the the, you know, uh a a a company that was almost bankrupt was gonna buy some of their cars. They were already sold out and somehow that like added, you know, half a trillion dollars of value to the company. And you had all the AMC and the GameStop stuff, you had all of the, you know, and and many other meme stuff. And it felt very

like the dot-com bubble. I think the big thing that made it feel to to sort of traditional investors, it it felt less like the dot-com bubble because of crypto. And because in in the 1990s, All of the money went into publicly traded stocks. So everyone like saw the NASDAQ, a thing that they could own going up.

While now people were kind of reading on the internet that there was some coin with a picture of Elon Musk's dog on it that had uh, you know, gone up ten thousand percent in a day. And they thought, well, I'm not getting involved in that. So I think a lot of regular people almost didn't see what was happening, but the real fraught was in stuff that most people couldn't or didn't want to get involved in. And so in a way, This recent bubble, many

regular people were kind of saved from it. They kind of got to watch from the sidelines and have a bit of a laugh. But um Last year was a rationalization. And there's still many of these things that are trading at prices that make absolutely no sense. Um, and you know, and the bubble boys are still big believers in it. But um I felt I felt last year was sort of uh

a a good year for anyone who took a long view of markets. And by that I just mean who had been around for a while and didn't didn't trade with sort of FOMO as their main uh main trading signal. And off you know, there were even things like, you know, uh like you come into last year, there was all this stuff about, you know, how

uh no one was going to buy oil anymore. You know, no one's cars were gonna be you know, we were all gonna be driving EVs in a year and there'd be no oil. And you look around, you're like, well,

There sure seem to be a lot of uses for this oil that everyone says that no one wants. And no one's allowed to drill any new holes in the ground, you know, so So it it it's not really that surprising, we'll say like you could have invested in the oil industry very cheaply during the the lows of covet and just a a simply

Like this is a totally non-quantitative thing, but just a simple look at it, like where you could kind of say, well, like, is this an industry that will be shut down or will it will it trickle along for another 10 years? If it's gonna still be around in 10 years. you can sure get on board cheaply now. Equally, you know, you saw things um like in uh in January, I feel of last year, there was, you know, China fired that uh, you know, they were testing these hypersonic weapons, you know.

And everyone was saying, well, what are these things? They're they're they're better than what America has. And it ever so slightly seems like a no-brainer to look at defense stocks and kind of say, like, so is the United States gonna watch China test fire weapons that they don't have, or are they going to start developing those weapons? And if they're going to develop them, is Lockheed Martin a goodbye, you know?

And so, and and then even you look at things like the, you know, value versus growth and things like that, like kind of, you know, value which had underperformed, like I said, since. What, uh, since since really since the credit crunch, right? Like there's a lot of stuff that's you know, people think that we finished a big bull market.

But we really didn't. If you look, most stocks never rallied really after the credit crunch. If you look at international stocks, they've been sideways for, you know, 10, 15 years. There was this small handful of tech stocks that achieved massive valuations, you know, that that were all just sort of selling advertising on the internet, right? Like, you know, Facebook, Google, advertising companies, right?

How can advertising do that well if the core comp if the people who are buying advertising are not doing well? You know, so in a in a funny way. Apart from like quantitative strategies working reasonably well, there was also even just a lot of sort of common sense investors did reasonably well over the last year. So

Um, I'd like to transition to um managing risk and false expectations. Isn't it common? I mean, can't we expect as a natural uh phenomenon that as markets rise sharply? that people buy into this idea, well, you know, maybe this time it really is different for all these various reasons. And so, you know, the expectations of maybe 10% a year, well, why not 15 or 20%? Because the narrative is so powerful.

And so the question is, is that um how do people get swept up in false expectations? Are is it a lack of historical knowledge? Is it a lack of statistical knowledge? And how do we protect ourselves? From false expectations. So I think A big part of it is a lack of historical knowledge. But also the truth is optimistic people are drawn to markets. You know, like kind of real pessimists would never own a stock. You know, they buy bonds, they're careful, they

buy gold or, you know, do do sort of really safe things. So the most optimistic, the dreamers kind of buy stocks, you know? And so then when when that goes well, though those those are the people who get carried away. And I and I think almost anyone I know who works in markets, other than maybe like the People in markets tend to be actually, even if you're a big bear, you're still optimistic about your ability to make good decisions or to to ascertain value. And so I think.

People in markets tend to be optimistic. If they don't think too much about history and think too much about risk management, they they can believe all sorts of kind of crazy things. And and I think That's even the that's sort of where a lot of kind of con men and charlatans step in. Like even uh, you know, I won't ma name the fund manager who promised fifty percent returns a year over the next uh decade there about a year ago. And

Uh, she just didn't mention that there might be a minus in front of. But um I guess once again I was very lucky. I mentioned him earlier. I was very lucky to work with with Elroy Dimson at London Business, who he was my thesis advisor. And he is sort of, I would almost say, like the number one market historian, because he's a guy who found, who, who put together a collection of uh stock market data from almost every country in the world.

since nineteen hundred. He has this huge trove of data and then he does this really interesting analysis on it and sort of tries to pull truths from that data. And when you look at that data, there are There are certain truths as to how you can do. And even one constraining principle is that if you feel that your likely return is significantly higher than anyone has ever achieved in the past.

You might be right. You know, if you're Jim Simons, you might be right. But there's i if you're some guy at home who's like working nine to five and sort of uh, you know, reads a few chatrooms and buys stocks, uh Chances are, you know, that that you you're not going to outdo uh every investor in history, you know? And so in a way, um you know, we're almost able to work out the likely best and worst case scenarios based on how well and how horribly people have done in the past. And so it's worse

studying kind of how markets work, like what returns are generated for markets. It's also really worthwhile studying. people who've lost fortunes, you know, and how they've lost fortunes, because we can all make those mistakes as well. And maybe You know, one one of the great things about just reading in general is that you get to uh

sort of experience uh experience things that you haven't really experienced. You know, you you you get to to sort of see other people's lives and walk in their footsteps and maybe learn things from that. Um in fact It's sort of one of the things that I in one of my videos I made a while ago about Sam Bankman Freed, one of the things that really surprised me was that he he was put forth as this awfully smart guy.

who never read books like and he thought it was an absolute waste of time ever reading anything and sort of said the most you should read is like a tweet or a blog post. And I thought, gosh, Sam, if you had read a few books You know, this wouldn't have happened to you because this is this is uh you know what his the rise and fall of Sam Bankman-Free, there's an equivalent of that almost every decade throughout history, you know, like this.

It the one person who shouldn't have been surprised was Sam, you know, but

Yeah. Uh so then when it comes to scams, uh You know, Tips to help us avoid scams. I mean, you know, some of us are smart enough to understand, well, you know, if they offer you 2% per day uh in this trading technique, obviously that is unrealistic. But what about the more subtle scams like My understanding is that Bernie Madoff had uh Seemingly reasonable and somewhat plausible returns, and yet he was a big scammer. Um, is there a way that investors can protect ourselves from these scammers?

Well that that's a bit of a pet question for me because it's something that that kind of fascinates me because I I teach uh financial derivatives at at uh two universities in London. And uh when when the Madoff meltdown occurred, I was fascinated by it. And as you say, you know, his his promised return. was I think 12% or it the return was 12% a year over a very long period with pretty much no volatility. But

There were still things I kind of I go through an example with my students to say, what could someone who understands derivatives know? Um uh that that would highlight that this was a scam. Well to to start with, it was at least on a a sharp ratio uh basis, like on a risk to return basis, it was very surprising. Like it was a a a type of return, the likes of which uh was very rare. So straight away if something's very rare, maybe it warrants a little bit more research. Now

Uh the uh Bernie Madoff, it would appear over time over time told investors that he did different things with the money. But at his peak, like when he was at his biggest, I I believe he was telling people that uh that he traded a split strike conversion, you know, which is just a fairly simple

option strategy. He only took money from sort of fund the funds kind of professional investors. And if you were a professional investor, it might and I think he also told them that he only invested in in big stocks that were in the SP 100.

So a simple if if you were given the job, like rather than sit and talk with him and be charmed with him, you might sit down and just look at the stocks in the S P one hundred and say How many of these stocks could you trade a split strike conversion on and actually attain the kind of returns that he got?

And uh there's a lot of people who did this analysis. I think um, gosh, I can't think of his name right now. Uh kind of the famous uh hedge fund uh guy slash poker player. What's his name? Um, can't think of his name, but anyhow, he he looked Rather quickly at uh I I think Jim Simons as well looked at Made Os Returns and quickly worked out it was a fraud because if nothing else, he wasn't doing the thing he said he was doing. Um, because you you couldn't get

that return from that strategy. Cause even if you picked every month the 10 best out of the 100 stocks to trade that strategy on, you wouldn't be getting a 12% return per month. So so it was extremely unlikely. That's kind of one giveaway. And so as a professional investor, you need to do the work, like you need to build the spreadsheets. You don't just go and talk to a guy and go, wow, Bernie, that's amazing, you know. Um

But then even there there's a few other interesting things. I know a few people who met him and they tell me that he was an awfully charming guy. Like they say that, you know. uh any doubts you had, you sit sat down with Bernie and and you would just think, gosh, he's the best guy in the world and he's honest and decent and so on. And um, you know, and I I think that's really how he did trick people. And similarly, I kind of I

Studied Charles Ponzi and a lot of other con artists as well. And one of the big take takeaways from almost all of them is that they're unusually charming people. So you almost don't want to talk to them. You actually want to just

look at the numbers because if you're susceptible to being charmed, these are the guys who will charm you. Um what else might warn you about them though? I guess um the the the real thing that I think, and maybe I'm wrong about this, But actually, when I was at university, we did a case study that looked at Bernie Madoff, but this was before he blew up.

And it was because Bernie Madoff was actually the guy who invented payment for order flow, you know, that that's been in the news a lot over the last few years. And we did a s uh a class on ethics.

where we looked at we we had to just look at a case study of Bernie madoff and whether it's ethical or not to do what it is he's doing to pay for order flow uh rather than to have the trades executed on exchange. And I think that a lot of the people who invested with Bernie Madoff possibly felt that he was doing something crooked because there was always this.

question mark overhanging even his market making business. And then that he's running an unusually profitable hedge fund on the side, it's possible that some of the investors thought that Bernie was ripping off his brokerage customers and putting the profits in this uh this

strategy and that that you were sort of in with Bernie, you know. And and I even think, you know, when you look at Sam Bankman Freed, there were a lot of question marks over this guy, like as to whether what he was doing was right, was he a crook?

And and I think a lot of things in the crypto space, you know, like no one is ever that surprised when sort of these crypto heroes fall and you learn that they were crooks, because everyone kind of goes like, yeah, they sure looked like crooks all along. Um, and I I think that many times like you know those Nigerian scams and they sort of say like

My father stole all this money and he buried it and I need you to help me get it out of the country. And so they kind of get you to conspire with them and to do a criminal act in order to be profitable. And I wonder if a lot of made off investors. thought that he was a crook, but he was their crook. And they thought Sam Bankman Fried was a crook, but he was their crook. And so on. Um

Do older strategies, say first employed decades ago, uh, quant strategies, like say, for example, a simple mean reversion strategy, ever become effective again as other quants give up these older strategies? For newer one. I do study all of my trades that I used to do, that I no longer do. Like I I I

There's a point at which if they're not doing well, they get pulled from the live system, but I still analyze them. And an interesting thing, I uh you know, there's a few ways of looking at it, but I I I worked out a little bit of an idea back actually during the credit crunch because

What happened in the credit crunch was we had gone from, you know, a very volatile market in the early 2000s to an absolutely dead market for a couple of years, as I said, you know, sort of four percent range in the S P. to suddenly explosive market. And suddenly a lot of the old strategies that used to work started working again during the credit crunch. And I think that it's just my theory, because I always have like an idea behind why a trade works as well as just the numbers of it working.

And I think the real reason that trades work, like that, that certain trading strategies work, is that they trigger our emotions. You know, there's sort of that. Mike Tyson line that uh that everyone has a plan till they get a punch in the mouth, you know? And in suddenly during the credit crunch, people were delivered punches in the mouth.

And they woke up, you know, if you were sort of dozing through the day, like eating a sandwich at lunchtime and whatever, and the market's moving 4%, when it's suddenly gapping 10%, like you're, you know, white knuckled glued to your keyboard, right? and you think differently and you behave differently. And when the market frightens you, it really frightens you. And when you're really frightened, you don't do what you plan to do. You do what you feel you have to do to survive.

And so suddenly, so people are different in different market periods. And thus I kind of built a bit of a model with a number of factors, volatility being a big one. Certain trades work better in certain market environments simply because people's mentalities change. Because you're always

Although you look at it like from my perspective, I might say, well, I'm always trading the numbers, but what's moving the numbers is how people feel. It's whether they're frightened, whether they're excited, whether they're lazy, whether they're energetic. And this moves the market around. And so if you can find sort of things you can measure in the market that might describe, you know, how emotional or how calm the market is.

Those factors might help you find trades that will work in in the current environment. If you can find similar environments and see what worked then, will that work now? Mm-hmm. So in uh closing, um, what are your biggest struggles in trading that you've been battling recently and how do you how are you overcoming it? I I think my biggest struggles are sort of the struggles that that I've always had because the there's kind of a funny thing.

Where I I I don't know, maybe other people are different to me, but uh but I almost like quantitative trading because it takes the emotion out of trading. Like you you don't uh you know it it it it's you're doing the correct thing, you know, you're sort of gambling optimally, uh, like a card counter does or whatever, but There still is always a thing where throughout my career I've found

that the best trades are the ones that I least want to do. You know, it's it's when it's when you're buying and and you think you would be ashamed to tell anyone this. Like you you kind of think like, I'll put the trade in, the trade's going in. But if I lose money on this, I cannot tell anyone like that I was foolish enough to buy on a day like this or to sell on a day like this.

And th those always seem to be the trades that work. And and that's even I think why quantitative trading appeals to me. is because it sort of forces you to do the things that you don't necessarily want to do. Because I think if you always do things to feel comfortable, you're always with the herd.

and uh and you can never really stand out. And I I think that it that actually even the reason, as I said earlier, the reason that that markets and the trading are interesting is simply that it's a battle. of of uh managing your emotions around uh, you know, sort of uh sometimes frightening or overly exciting things. And then you also always have to tell yourself, like when things have gone well, you have to tell yourself, calm down. It's not, you know.

you've had a bit of luck here. You know, the long-term expectation is what it is. And if it's gone really well over the last two weeks, you're not a genius. It won't necessarily go well over the next two weeks. And then equally if it's been horrible, you know, if your system is good, if it's wise, if it's well thought out, if it's well tested and not riddled with flaws.

uh it's reasonable to keep to keep trying it uh until you can find a reason that there's there's something maybe deeply flawed in what you're doing. So

Well, uh it's great having you on the show, Patrick. Thanks for coming on, chat with traders. Thank you. It's been a pleasure meeting you. Yeah, and how can listeners get in touch with you or uh, you know, to learn more about you? Well, the biggest thing I do is is YouTube. I have a YouTube channel and I put up uh a video a week and it's often just sort of things I find interesting in markets.

Um, that's kind of the biggest thing. I'm also on Twitter. I'm kind of reasonably active on Twitter, mostly just causing trouble, annoying people. Um that's that's kind of the big two places to find me online. Great. Yeah, I've certainly learned a lot from you uh on your many um YouTube videos, which are very, very interesting. Oh thank you. Yeah. Fantastic. We've reached the end of this episode of Chat with Traders, but rest assured there are more episodes.