Pod Insights Michael Covel's Trend Following Ep. 1392: Good People with Michael Covel on Trend Following Radio About this episode Please enjoy my monologue Good People with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.
---
I'm MICHAEL COVEL, the host of TREND FOLLOWING RADIO, and I'm proud to have delivered 10+ million podcast listens since 2012. Investments, economics, psychology, politics, decision-making, human behavior, entrepreneurship and trend following are all passionately explored and debated on my show.
To start? I'd like to give you a great piece of advice you can use in your life and trading journey… cut your losses! You will find much more about that philosophy here: https://www.trendfollowing.com/trend/
You can watch a free video here: https://www.trendfollowing.com/video/
Can't get enough of this episode? You can choose from my thousand plus episodes here: https://www.trendfollowing.com/podcast
My social media platforms:
Twitter: @covel https://twitter.com/covel
Facebook: @trendfollowing https://www.facebook.com/trendfollowing/
LinkedIn: @covel https://linkedin.com/in/covel/
Instagram: @mikecovel https://www.instagram.com/mikecovel/
Hope you enjoy my never-ending podcast conversation!
Transcript 12,805 words · 3 speakers
0:00 Speaker 00 Back when I was doing my first book, and I think I was reminded of this because I saw the Meven Faber interview with Salem Abraham and Jerry Parker, two great guys, of course. And I'm going to talk about Salem here for a moment. But back when I was doing my first book, I was piecing together Salem's involvement with Jerry. What an amazing story. And I chronicled that in detail in my book, The Complete Turtle Traitor. But my early mention of Salem in my trend following book led me to going to his hometown on several occasions. And I have to thank Sean Jordan for helping to make that happen also. But that was such a great experience to go to his hometown and see him executing trend
0:45 Speaker 00 following excellence in the middle of nowhere. What an amazing experience. You can be in Manhattan on one day, seeing all the glitz, the tall buildings, and then you go to Canadian, Texas, and you see something completely different. And you realize that what matters is what matters. And if you figure that out, you're off to the races. And I have to thank, among many people, Salem Abraham for teaching me that. Without any further delay, let me reach back into my archives and play an interview with Salem Abraham. Again, one of my most favorite people. I hope you enjoy this conversation.
1:43 Speaker 00 My guest today is Salem Abraham. Salem has been featured in my book, Trend Following. He's been featured in my book, The Complete Turtle Traitor. He has also appeared in my film, Broke, and he has appeared on this podcast before. One of my favorite conversations to have with anyone is with Salem Abraham. He's down to earth, he thinks big, he thinks detailed, he thinks about things that most people don't think about, and he's willing to talk about those things. Without any further delay from me, let's jump right into my guest today, Salem Abraham. I hope you enjoy.
2:26 Speaker 00 I did an interview with Jerry Parker recently.
2:28 Speaker 01 I saw that.
2:29 Speaker 00 I didn't say something about rolling and he just started shit talking.
2:36 Speaker 00 Anyways, how are you?
2:37 Speaker 01 I'm well. Yeah, life's good. Everybody's kids growing up, me growing up, everybody getting older, but everybody's healthy, the important stuff. And trading's always a mixed bag and that's fine, too. So yeah, no, things are well with me. How about with you?
2:51 Speaker 00 I'm well. I've been enjoying Southeast Asian living. It's an adventure. It's a long story. I'm writing the book, so to speak. Let's just say.
3:00 Speaker 01 Yeah.
3:01 Speaker 00 Are you still living in Canadian a lot?
3:03 Speaker 01 So I'm in Canadian and then we've got a place up in Colorado. Our kids are now grown out of the house. My wife and I, we've been married 35 years, have eight children. They're 20 to 31. The oldest, Kate, she works with me. No, I've still got a place in Canadian and our office, world headquarters is there. Then our place in Colorado is nice. So we split time between those two spots.
3:28 Speaker 00 You're the only person who has ever told me that you had eight children in eight calendar years.
3:34 Speaker 01 No, eight and 11.
3:36 Speaker 00 Okay, I thought it was eight and eight. That's what you told me back in the day.
3:40 Speaker 01 Eight and 10 years, 10 months.
3:42 Speaker 00 Okay, for sure, though, back in the day, you told me it was eight and eight.
3:46 Speaker 01 No, maybe that was just your head exploding with the eight. I don't know. If you'd have told me when we got married, we would have eight children, my head would have exploded. It's like a lot of trends, they keep going further than you think they're gonna go.
4:01 Speaker 01 What we're doing now is we're actually putting together trend followers and other people and we've got a mutual fund, the Abraham Fortress Fund, the symbols four to X, and it's got stocks. It's typically about 50% exposure to stocks. Today, it's 50% exposure to stock, 20% exposure to fixed income, 30% exposure to diversifying strategies, which is currently seven different hedge funds. Certainly trend followers are well represented in that, CTAs. What we're trying to do is have even broader diversification still. It's an interesting product and we're not up 24 hours a day, five days a week.
4:41 Speaker 00 You don't miss that?
4:43 Speaker 01 Yeah, it's not a retirement gig. It's just a let me try what a 40-hour work week looks like.
4:49 Speaker 01 Instead of a maybe 70 hour work week, you're really not working all the time, but you are because you're plugged in. You've got your phone, you've got your own call all the time and you're always looking at the markets. It could be Thanksgiving, you're looking at the markets. But I started trading when I was still in college. The last semester of college, I started trading and then in January of 88 is when I got out of college. And so right out of college, I started managing money. It was family money initially, and then I traded for 31 and a half years till the middle of 2019. And I, we started this mutual fund in 2018. Now we've been doing it for five years, but as we looked at it, we just said, this is a lot of fun.
5:30 Speaker 01 Analyzing other traders and seeing how we could put traders together too. But we still love trend following and trend following is certainly a very valid strategy. Trend following, something I saw, it was just me at the beginning back when Jerry Parker was nice enough to give me a few pointers and show me some risk management ideas. And then he was very kind to do that. But when I started that all the way to the end, you know, there's good times and bad times of trend following. But if you stick to it, it's a good program that really it exploits human psychology and our tendencies. It's a great strategy and so I still love trend following.
6:06 Speaker 00 Let me say this too, I was going to say at the beginning, I got to thank you because my first book came out in early April, 2004. I put some very brief information in there about you factually correct about trend following. I profiled a lot of different people, but I didn't have a lot of access to do that first book, really. It was a lot of moxie, frankly. But then after the first book came out, I was working on this turtle trader book. I talked to other people, but you were the first person to really give me some access to really say, sit down, long conversations, you know, got to see where you live and everything. And I'm really appreciative of that. A lot of people have given me access since then, but you were really the first person to really say, Mike,
6:51 Speaker 00 take a look behind this curtain a little bit. So I'm forever grateful for that, Salem.
6:56 Speaker 01 Your persistence, as you know, is probably the key factor in your success. It was fascinating what you were doing, looking from the outside of the sidelines. I think one time you had something about me, I sent something in. I talked to this guy's mother recently and he says he's a good guy. Just being a clown and then we started talking and I appreciate you. I think it's interesting to share these ideas with others and I think you've done a good job of doing that. Certainly the press you've given the space is helpful to all of us that work in that space. It's two way street of helping one another and understanding what's going on. And I think just all of us trying to study this puzzle that is the markets every day. It's this multifaceted puzzle.
7:38 Speaker 01 And then when you look at it from a trend following component and technical component, that's fascinating. You know, it was something at Notre Dame professor told me, oh, that won't work.
7:47 Speaker 00 That got your gander up, I'm sure.
7:49 Speaker 01 But then I said, I don't care what this guy thinks. From a math standpoint, as a math person, I trust in math. I don't trust in much else, but math is real. Two plus two is always 4.000 to infinity. I saw the math where I said, the statistics shouldn't look like this if there was nothing here. I saw that when I was 20 years old, 21 and looking at it in college. It's fascinating to think, why does this thing work? What is going on here? And over time, the psychology of it, really, we're just modeling human behaviors, what we're modeling. And you're taking advantage of human tendencies, really. It's fascinating, the whole thing. And it's interesting when other people come into the discussion. So you've done a great job of doing that.
8:32 Speaker 01 It's been fun to watch the success you've had and everyone that's come to the table to discuss and scratch their head and try to look at the good of this and then the puzzling parts too. So you've done a great job.
8:45 Speaker 00 Well, thank you, sir. I want to take you back in time though, a little bit before we even have any trading conversation. We've had a little bit already, but since I know you a little and since I've seen where you've grown up, seen where you've called home, I think I would be amiss if I didn't press you a little bit on the Salem ethos, the Salem life principles. You can pick whatever you'd like to pick, but trying to define what drives you, what keeps you grounded and perhaps even share where some of those lessons came from. All of us, we have to be a sponge. We have to be around other smart people and other mentors and pick things up and you're no different than I. But what are some of those key life
9:27 Speaker 00 principles that really ground you every day that you stick to no matter what?
9:33 Speaker 01 My grandfather, he was a very big influence with me when I was growing up, more when I got into high school. He was very much a wheeler dealer businessman. He was in politics in Texas, but mostly he was an entrepreneur. I remember when I'd gotten out of college in 88, he agreed to let me work with him, but I could trade on the side. And that was a big deal for my early trading success. He was paying me $2,000 a month with zero benefits. And I had an office space and he said, okay, you can do this trading. He wasn't a big fan of it, but then I was working with him. And the one thing that when I hadn't been there two weeks and he sat me down, he said, look, here's the one thing. One first rule is we're always going to treat people fair. We're
10:18 Speaker 01 going to be honest. We're going to be ethical. And if there's ever a time when the other side of a deal is thinking that we're doing something wrong, we're going to fix it, or we're going to eat something or whatever. Cause always think of the long term of just fairness and ethical dealing with others. And he gave some examples of where, look, it'll cost you in the short term, but in the long term, it pays big dividends. And because people trust you and in a community like ours, we have about in our county, four people per square mile. If you go out here and you screw people, you really have to move because the word gets around pretty fast. The world's built in a circle. You deal crap, you get crap. And in a small community, the circle is pretty
10:59 Speaker 01 tight. It helps you learn fast and quickly that you treat people fairly. So number one, there's that. And then number two, you work hard. I always liked working hard and staying busy. Those are good things. And then he was a terrific businessman. And I remember one of the things he taught me, we were buying and selling real estate. It was like fix and flip on ranch land. Imagine that. And so these ranches would be for sale and we would try to buy them at the right price. And we had one where we were going to buy. I was looking at and I said, hey, this is a good deal. And he said, well, yeah, no, it's a good deal, but that's the problem. It's a good deal. We don't do good deals. We do great deals. And Warren Buffett has it with margin of error. So my grandfather was big on saying, look,
11:41 Speaker 01 it's got to be better than good. It's got to be a great deal because he said, you got to keep your powder dry and your time. And Warren Buffett says the same things in different ways. This idea of just saying, look, you got to protect your time. You got to protect your investment capital and you got to go for those best deals. Some of it transfers over to trading. Some of it doesn't transfer over to trading. He was not as good with risk management. And that's interesting, but he understood the risk and he was able to maneuver a lot of risky situations and do fine. But sometimes I think he was a little bit reckless with risk from what I see with futures trading. The big thing is honesty and working hard. And that's unfortunate.
12:26 Speaker 01 Sometimes in the financial space, you get some sleazy characters that don't have good ethics. But I think in the end that bites them. I think people see them doing well for a while. And I think you just have to remember, hey, this is a long-term game. When you get to the end, you want to look back and be proud of what you've been doing and not have to be ashamed of it. You want to be able to tell your grandkids about it with pride, not with shame. I was ripping off the widows and the orphans to make a living. Sometimes some people in the finance industry I think don't have ethics and I think that's unfortunate, but luckily there's a whole lot of people that do. And I think those that do end up prospering and doing well and really having long-term success.
13:04 Speaker 00 Let me ask a little bit more about your grandfather. So he believes in you enough to stake you to give you a chance. If you went down a certain amount, it was out the window. It was all over. There's a lot of families and a lot of parents, they might not think this type of strategy of staking a young person is wise. It might go against the grain, or they might think, you know, everyone's just got to make it their way. But I think what's interesting about your grandfather in that situation is that he was looking beyond that. He must have been thinking, and you can tell me if he ever shared with you, why he staked you, because he's taken a chance, but this is not something that's necessarily
13:46 Speaker 00 common in families. I think it's a brilliant strategy because you and I probably would not be talking about this same conversation. Maybe you'd be doing something else, but we'd probably not be having this same conversation if your grandfather didn't believe in you, correct?
13:58 Speaker 01 I'm a product of Lebanese merchant. I had one great grandfather, then the Lebanese boys married Irish girls for a couple of generations. So I'm a quarter Lebanese, three quarters Irish, but the Lebanese, which my grandfather was 100% Lebanese, they're very entrepreneurial and generally they would do some merchant type business. And so they're always buying and selling and buying and selling. That entrepreneurial spirit where, you know, you try things. Okay, let's try things. And I think he saw it as a small risk. The downside's pretty small and the upside is big enough. You say, well, okay, it's a little crazy, but the risk reward is lopsided enough. Let's give it a try. I was very fortunate that he was willing to give it a try. And even though
14:41 Speaker 01 he didn't believe in it, he was very suspect of it even. He was willing to give me a chance and that was a key factor that played into the success I've enjoyed trading over the years.
14:54 Speaker 00 This is not meant to be a controversial question. I don't want to take it into a controversial area, but in this modern age, people have got all kinds of influences and they've got all kinds of beliefs, beliefs that are far away from, let's say, a traditional mindset or a small town mindset. One of the reasons that I love being where I'm at right now is that frankly, it's a traditional culture. By and large, I don't think America's terribly traditional anymore. I truly enjoy that. But if you were to give advice or to give insights to people that perhaps, maybe they think of themselves as being and having much different views on things than you, how would you reel them in? You make the story clear. If you're in a community and you screw
15:39 Speaker 00 over somebody, it's going to come around. Karma's going to bite you. But how would you try to share with young people today that are maybe being influenced by things in modern culture? And look, I get it. We all want to be rebels and all that stuff, but there are some basic life principles, basic ways to behave.
15:58 Speaker 00 That just are going to get you a lot farther over the course of a lifetime than, as you say, just trying to get over the widows and the orphans and stuff like that.
16:06 Speaker 01 You have to imagine a world full of people just like you. And if you're a real jerk and you're ripping people off, it's not going to be a very happy place. I think we get to control one person on the planet. I think if you're good enough, you don't have to cheat people. You can be honest and you can make a nice living. You can sleep well at night.
16:24 Speaker 00 That's the key right there. Sleeping well at night is terribly important.
16:27 Speaker 01 Yeah. And really, I tell my kids, the world is built in a circle. You crap everywhere you go. Eventually, you're walking around in your own crap. That idea, you deal crap, you get crap. Oftentimes, the world is a mirror and you find people mirroring what you're doing. If you're rude to the waitress, she may be rude back. Or you're rude to the Uber driver, they may be rude. You try to be pleasant, nice to people, I think. Just be nice. Don't be a butthole. Willie Nelson, his mama taught him, don't be a butthole, don't be a butthole, don't be an effing butthole. That was the three lessons. And I like Willie too. And the other thing, I think the sad part is we took our kids, the eight kids and my wife and I, there's 10 of us, we went to China for 20 days.
17:09 Speaker 01 It's been now 10 years, maybe 11 or 12 years now. So you show up to China with eight kids, ages were at that time 19 to eight. We were on our own tour group and going around. And I remember someone asked me, what are you doing? Why do you get your kids, why are you bringing them to China? And I said, well, and we live in a little town in Texas. I said, you can get in their minded. You gotta get out. And they said, oh, like a frog in a well. And I said, exactly, a frog in a well. And I said, lots of people are frogs in wells. You can be a frog in the well. You can talk about the country pick, we'll call him. Or you can talk about the city slicker is a frog in a well too. Mark Twain talked about how travel and getting out and seeing the rest of the world is the cure
17:54 Speaker 01 for really these biases we have against others or misperceptions of one another. And when you go understand people and travel, and you've clearly done it where you go over to Asia, people everywhere you go, they love their family, they have. Have hopes for themselves and their children and their grandchildren and everyone's nice. Now, we all do things a little differently, but different doesn't mean better or worse. And so you find yourself when you go and you see everything, you still have your opinions. You prefer one over the other, but it helps if we can all get to know each other. The country mouse needs to go to the city, the city mouse needs to go to the country. And we need to go all around the world and see people and it's hard to hate people that you've met. Will Rogers said that I never met a man I didn't like.
18:38 Speaker 01 Which the flip side of that is it's easy to not like people you've never met. And I think there's a lot of that going on in the world and that's unfortunate. So that's part of it too. I think it's nice if we get to know one another a little better and we understand one another better too.
18:51 Speaker 00 Just to share really quickly in a place like Vietnam, some of the things that keep me. Overall, very high IQ people, traditional, good business people, no violence and hustle, hustle, hustle, hustle. And everyone's curious. If you find yourself in that environment, which I think is hard for people, not for you. You've been to China, you have some experience. I think for people sometimes listening to me, they're thinking, how in the world could you find yourself into a place 8,000 miles away from your hometown? And work it so easy. I just told you why it's easy.
19:24 Speaker 01 Well, when we went to China, they were more capitalistic than I think a lot of Americans. They would talk about these community farms and says, no, we don't like that with a hundred families and a hundred acres. That's no good. We like one family, one acre. Some people don't work. They've seen this idea of the socialist and communist to an extreme and they've gone the other way. So they're very capitalistic and it's fascinating. You don't expect it. I know the government's kind of trying to keep everybody in check, but when you go meet the people, the people are very much about, hey, I want to do my thing.
19:59 Speaker 00 You said Lebanese background, merchant mindset, Chinese, Vietnamese merchant mindset. It's sell, sell, sell. Let me shift you into something that I know is near and dear to you, which is numbers. Do you have an example or something that's a start with you where you first knew this concept of numbers was going to be terribly important to you? Is there an age? Is there a recollection? Is there something that just galvanized you long before you even got into trading? Where then obviously numbers were terribly important, but there must've been moments early on where you were just a numbers kid, I'm guessing.
20:34 Speaker 01 There was a fair that came to Canadian and I would've been probably 12 years old, something around there. And there was a dice game where they would roll the dice and they would have payoffs for different amounts. It was gambling. It was straight up their own little Las Vegas game at the fair. You would bet a dollar and there was this payoff and it shouldn't have been legal at that time back when it happened. But I remember going to the, and it was like a three day fair. So I go there and I'm standing there looking at the numbers. I'm like, man, 10 pays way more than a seven.
21:07 Speaker 00 How old were you?
21:08 Speaker 01 12. So there was two six-sided dice. They were rolling. The 10 pays more than the seven. And I'm like, why would that be? I remember going home after the first day of the fair. It was 2,500 people. So you go down and two stoplights today. It's the same size as it was back when I was 12, the same town, Canadian, Texas. And so I went home and I figured the 36 possible combinations of two six-sided dice. And I'm like, oh, that's right. So there's six of them are seven, 10, there's three possible combinations there. It was just interesting to have done the odds. And then I'm like, well, man, they're ripping off every roll. There's no way to win this game. So then I went back and I looked and I'm like, I see how they're making money.
21:52 Speaker 01 So to figure out the odds from that, and I tell people, I'm like, there's a surefire way to win in Vegas. Everybody goes to Las Vegas or go gambling. And I'm like, look, go buy a casino. That's how you win. And everyone thinks, oh, that's silly. No, I'm serious. You can get a thousand of your best friends that love to gamble. Y'all could collectively buy the casino, buy a casino and it's way more fun. Yeah, no, I remember that. And that was one that just in my mind, just you saw where here's a game and here's the odds and I know why they win.
22:23 Speaker 00 So let me move it ahead a few years. And I think if memory holds here, my written questions for you today do not exist. But if memory holds, you met Jerry Parker at a wedding.
22:35 Speaker 01 Jerry Parker, I met him at a family gathering and he had recently gotten married to a first cousin of one of my first cousins. There's a family with I'm related on the mother's side. His wife's related on the father's side. So he had married this first cousin of my first cousins. We were at this house that the family that connects us. And so he was there and I met him and they'd recently got married. And he was the new guy in the room. All the rest of us are all family. We've known each other. So I start saying, what do you do? And he's an accountant, but he trades in the markets and
23:08 Speaker 00 Let me stop you for one second, though. Given your family background already, given your grandfather already, the new guy in the room, and he says he trades, what is instantly happening in your head?
23:20 Speaker 01 Oh, wow. Yeah, no excitement. And so I would have been probably a junior. It was Thanksgiving or Christmas, somewhere in there, at my junior year at Notre Dame. And so I had a year left to go because I got out of semester early. So I would have been two and a half years in and I was probably a year from graduating. I was a finance major at Notre Dame. I was trying to figure out how am I going to make a living? And my wife, she and I dated in high school. We were still dating. I was thinking, hey, well, I could move back to Canadian, but I don't know how I'm going to make a living in Canadian. And so part of my puzzle was, how do I make a living in Canadian, Texas? Can I? If I come back to this small town? And what would be my edge? I've got to have an
24:02 Speaker 01 edge. I've got to have something I can do that's unique and better than other people can do it. And the one thing I was always good at was math. I've always been awesome at math. I stink at a whole lot of things. Slow reader, poor speller, but math I can do. So he says, I trade and it's like, okay. And I'm like, well, how do you do that? Well, we have some models and these patterns happen. They have a predictive value. And I'm like, bull. Really? You show me that. Here's a math game that pays money. I'm in. I'm like, that's awesome. He had his chart book. I forget the ones. You'd get them every week and then he would mark the charts. And then the next Monday, you'd get the new chart. It's like a newspaper chart book.
24:45 Speaker 01 So I should remember the name because at one point I was getting that chart book. He said, well, if this happens, I'm looking for this price movement here. If this happens, I would buy. And if this happens, I would sell. I'm like, you don't care about the market? He's like, no, I don't care about the market.
24:59 Speaker 00 Were you at that moment though? So here as a finance major, you already knew something about the fundamentals. You had heard something about value investing. You're listening to this guy, this stranger, meeting for the first time. He's essentially telling you that the fundamentals do not matter. Your head must have been exploding.
25:16 Speaker 01 Yes, totally. I'm like, this can't be right. This is hocus pocus stuff. I mean, what, how would the price action be predictive? Like, what about this makes sense? Then he says, if you ever wanted to learn more, you can come to Richmond and I could show you more when we've got more time. And because we were at this event for, it was three hours, go have dinner, visit and sit around and talk. So he and I were ourselves in the kitchen and he had this book with him. I guess it was in the briefcase he had with him. And so he's showing me this chart book and we're looking at charts. And I'm like, this is fascinating. Well, so then this was a Friday night. Well, then the following Monday or Tuesday, when he got back to Richmond, I call him and said, hey, so when can I come to Richmond?
26:01 Speaker 01 And looking back, I'm like, he was just being nice. Hey, here's this family. I'm trying to fit in. And but he was like, oh, well, yeah, come on. He was very gracious.
26:11 Speaker 00 It must've been two things for you though, the math and the strategy, all that stuff. But the social proof, how quickly did you understand what Jerry was in the middle of? Because here you are, you're a young guy, you're just getting exposed. So you're taking it at face value. You're going to be a skeptic. You're going to dig in, scientific method 101. But you must've very quickly started to understand that Jerry was a part of a larger thing, which probably started to give you confidence, even if you didn't understand everything immediately.
26:41 Speaker 01 Exactly. What gives you confidence? Is when he starts telling a Richard Dennis story and saying, here's this guy that's wealthy, that's made all this money doing this. And this guy's entrusting Jerry at the time with a million bucks or so. He's made a lot of money. This has worked. The proof of the pudding is in the eating. So you just say, if you're a winner, a consistent winner, this doesn't make any sense to me. I don't understand how it works, but you're a winner.
27:15 Speaker 00 At that moment, you need to figure out why it is working.
27:18 Speaker 01 Actually, you don't have to figure out why it's working, but you have to know there's some truth here on a level that he's making money. Something's working. You can argue against it, but at the end of the day, again, the proof of the pudding's in the eating. I think the recipe doesn't make sense. When you get it all together, it's profitable. That's what to me was the part that I'm like, I've got to figure out how to connect these dots because clearly there's something going on here. And again, it was like your opportunity to own the casino to me where this is going to get the odds in my favor. It's, it's the carnival game. It's like, oh no, I get to be on the winning side. What is fascinating, and I think it's interesting to your listeners, so few
27:59 Speaker 01 people have the guts or the willingness to go do it. I would say out of 500 people, one person would say, I'm gonna go do it. That's what's rare. But if you've got listeners listening to us talk, clearly they're in that one in 500 where they're out there saying, I'm gonna go try this. And that's puzzling why that's so rare. But a lot of people just don't get that excited about it, or they somehow think someone's gonna bring this great idea to them. You gotta crack some eggs if you're gonna make a chocolate cake. You gotta go do the work. And most people, for whatever reason, don't think they want to do the work.
28:37 Speaker 00 When you bring up Richard Dennis, I think I'm accurate in what I'm about to say. I know I'm accurate for Jim Simons in the Greg Zuckerman book about Jim Simons. It talks about being influenced by Richard Dennis and his success. And I believe Paul Tudor Jones got into trading because of reading about Richard Dennis. He's an interesting guy in the sense that however he figured it out in the early 70s is just amazing.
29:01 Speaker 01 Yeah. And you think about, he didn't have the computing capability. It's like, how do you do a back test without a computer?
29:08 Speaker 00 It's a lot of paper.
29:10 Speaker 01 Lots of paper. Which I'd done back when I started, I did a lot of paper. But then had a Tandy 1000 computer and then started doing with a system writer. And it's much easier with a computer, but there's a lot of pitfalls in the computer, too, though.
29:27 Speaker 00 You can make the computer sing whatever song you want it to sing.
29:31 Speaker 01 Exactly. There's a whole different problem today with computers.
29:35 Speaker 00 Let me take it to something that you famously said on tape for me in a film years ago. You were talking about bike rides and kids and asteroids and meteors and things hitting. I don't ever have conversations where I'm trying to get anybody to make predictions or anything like that. It's not my cup of tea because I think it goes against the ethos of what this all is that we're talking about. You sit around and you're always analyzing the markets. You're always crunching numbers. Share with people about the present moment in the sense that, I mean, you've always got to have a strategy for the unexpected asteroid coming out of nowhere. But how do you look at the current environment? Do you think people are thinking about those asteroids as much as they should these days?
30:21 Speaker 01 No, I don't think we ever do. There's a lot of psychological research on, it talks about either we don't worry enough or we worry too much about the extreme events. You think of, say, I think 9/11 is one that people can relate to in that you think of the TSA before 9/11. What's the security at the airport before 9/11 versus after 9/11? There's a point where you're like, these terrorists have won. Think what we've done over the last 22 years, all this money we've spent on all this security. Your worry about it is absolutely zero to the worry is too much. Typically, I think like a pandemic, the worry about pandemics was probably next to right on zero.
31:02 Speaker 01 And now we're going to worry for the next 20 years too much about pandemics, probably. And maybe that's not a bad thing to worry too much.
31:10 Speaker 00 I think we both think it's worrying too much.
31:13 Speaker 01 I agree.
31:15 Speaker 01 As a risk manager, I would say in general, we don't worry enough. My biggest worry is really nuclear missiles with what we're seeing in Ukraine and Russia. And what happens when you corner Russia and they have nukes, but they don't have much else. Their army and that is worrisome to me. I tend to worry about extreme things.
31:37 Speaker 00 Can I keep it at that for a second? I have that conversation with people all the time. And it seems like somehow or another, America went from the Cold War where it was mutually assured destruction. Everybody knew that both sides had nukes. And then somehow or another, we have come to this thinking, okay, yeah, Russia's not the same economic power as America. But somehow or another, we've come to the thinking that they don't have nukes. They're not a threat. I don't know how that happened because you and I grew up with the idea that we might have to go to war. It was the Cold War. We grew up with the idea that there could be a nuclear exchange and there were bombers in the air for 24 and seven for 40 years.
32:20 Speaker 00 And now we've got young people that think, oh yeah, let's just get all our troops on the border of Russia. Nothing is going to happen. They're going to roll over and we're going to take Moscow. It's crazy.
32:29 Speaker 01 I totally agree. You go back to think about Hiroshima and Nagasaki. And so now you've got the end of World War Two. And then here we were growing up 40 years after that. And so we've got grandparents that are alive that, and now those people, the people that saw that, most of them are gone. They're all gone. I think unfortunately and sadly, there's a lack of appreciation for the destruction that can come from nuclear bombs. We've gotten to the point where it's just like the pandemic in that you go in 1918 and then you get along a hundred years, 101 years. And then all of a sudden you've got another one, you go, okay.
33:10 Speaker 01 And I think this heightened awareness, I think we forget about dangers that exist. You know, think of tsunamis. Remember when the tsunami hit, was it 2000 or so?
33:19 Speaker 00 2004, I think.
33:21 Speaker 01 Yeah, where 200,000 people killed and you go, holy moly, that's crazy. We don't even have that in written history, that size of an event. Truly like a meteorite hitting the earth, things like that, extreme volcanoes, which would kind of have, there's things that could happen and that happen occasionally that we give zero risk, but they're not zero.
33:45 Speaker 00 Let me throw this out to you as a trader, as a risk manager. And you bring up the idea of a nuke going off, something that clearly is not talked about much. I don't know how the military thinks about that. All sides, there's more than one nuclear power these days, there's a lot. And there's a lot that don't tell you that are nuclear powers and they are. But how would you go about as a trader, as a risk manager? If you think this is a threat, what would you start to do? What would you start to build? How would you start to hedge yourself if you truly believe that this is one of those unexpected ones? That you need to have some protection?
34:24 Speaker 01 There's a website, I actually have it bookmarked at the office. If you want to be disturbed, I guess, well, it's helpful to be knowledgeable about bad things. You want to learn about bad things and it's nuclear secrecy.com forward slash nuke map. You have to enter, how many kiloton bombs are we talking about? And Hiroshima and Nagasaki, I think one was 15 kilotons, one was 25 kilotons. And then you see the blast radius, you see the kill radius. And it shows the damage and what's going to happen to where, and you can put the map anywhere you want to have it. And then you can see this radius. It's terrifying, but at the same time, if you want to, if you're a risk manager, you focus on the terrifying.
35:08 Speaker 01 If you want to survive car crashes, you're going to study car crashes. You need to study all these bad things and you get to be a real downer to hang around. So your people go, oh, what have you been thinking about lately? Oh, it's bad stuff could happen. You've got to put the right odds on them. Once you put the right odds on them, you go, okay, well, look, it's a very tiny chance, but it is a tiny chance. And you need to acknowledge that. You can't just go about oblivious to these bad things that could happen. And it's funny, we selectively do it. We say, oh, let's get fire insurance on our house. That's about a one in 400 year event. But there's other things like say a currency collapse, that may be more like a one in 150 year event. We've got no plan at all for it. If you're going to really manage risk, you need to think
35:50 Speaker 01 about some scary things, but also you don't need to blow them out of proportion and give them greater odds than they deserve.
35:56 Speaker 00 We would not be talking about nuclear weapon blast areas without there being a situation in Ukraine, meaning whatever the odds are exactly are not the same as what they were a few years ago. They've gone up.
36:11 Speaker 01 Yes, and you think of what's going on in North Korea, what they're doing, and I think they seem to have a view of reality that's worrisome because they perceive us and the United States and other countries as to be maybe a bigger threat than we're trying to be. It's the highest risk we've had since the Cuban Missile Crisis. And people have talked about that off and on lately. They're not talking about it enough, but the end game is when this can get worrisome. And so that's the worst risk I worry about right now.
36:39 Speaker 00 You can always tell me, Mike, I can't tell you. But are you taking financial or hedging considerations around some of these more extreme risks today?
36:48 Speaker 01 I did for about 12 months, the first 12 months of the war. I haven't since March. I'd put options on, option trades that I thought was protecting our stock position in our mutual fund because I think stocks would go down something in the magnitude of maybe 50%. It depends on what happens. Tactical nukes in Ukraine is one thing, but then if it gets to broader Europe, it's something else. But what's made me feel better about it is these hypersonic missiles that Russia has don't seem to be that effective, as effective as what they thought they would be. And the Patriot missiles are able to shoot down some of these. And so that has given me some measure of comfort that if you were sending nukes
37:30 Speaker 01 to Ukraine and they were shooting them down, you could imagine some of them wouldn't detonate and therefore it's like a snowball fight, someone might be throwing them back at you. The hypersonic missiles gave Russia a
37:44 Speaker 01 Perceived advantage at this point in history, in their mind, an advantage. They had hypostasis, we don't. They can get these missiles to the, say, DC in less than 15 minutes, around 15 minutes. And so when you have 15 minutes to respond, that's worrisome. You don't want to overblow these things, but you don't act like that they don't exist. And if your job is to be the protector of people's wealth over time, you need to think about these things. There's a lot of uncomfortable things you think about that you worry about. As long as you have a plan, you don't have to worry. If you're living in a storm-proof house, you don't have to, if storms don't have to worry you, you can really sleep better at night. I like a plan. I don't like hope.
38:27 Speaker 01 Hope is a bad strategy and a lot of people just go to bed and hope, and I don't like that.
38:33 Speaker 00 What we're talking about, though, is also something that you are fond of saying, which is making money off things that we've never seen before.
38:41 Speaker 01 With COVID, on January 26th, was Sunday 2020. As a risk manager with our mutual fund, I wake up and it's about four times a week I'll read headlines. You want to read the headlines that are the bottom of the headlines, not the top. If they're in the top 10 headlines, they've been baked into the market. So you've got to say, what headlines are not baked in the market? And so I'd seen at the end of January, respiratory illness in China kills someone. Doctors are puzzled, something like that. And then you see this respiratory illness, then they start calling it a coronavirus. On the January 26th is when I read everything I could read about it, because it was starting to show up a little more. And when I graphed the exponential growth of the COVID cases in China,
39:26 Speaker 01 we started taking defensive action on our portfolio. That night, we took a third of our stock position off. And I said, I just want to take a third off just for the next 30 days and see what happens. And on that day too, I went to Amarillo and bought 500 N95 masks, sent boxes of 20 to my kids. I gave boxes to all of my relatives. I just said, look, I think it's 50/50 whether this is a big deal or not at that point. But then in February, the, well, I put options on United Airlines.
39:57 Speaker 01 But put options on, let's see Carnival Cruise and Yum Sea. I put $200,000 on put options. This is my personal account. I'd analyze 50% chance I lose the 200,000, 50% chance I make 4 million. That was my estimation of the odds at that point on February 12th. Then we got to February 24th or so, somewhere the vol picked up. And with higher vol, you want your position smaller, as your listeners know. And so we took another third of our stocks off. Then you get to the first of March and things start getting pretty spicy. March 7th or so, they shut down schools in Italy and Japan.
40:37 Speaker 01 And I remember telling people around March 7th, I said, look, we're three weeks behind Italy and Japan. I said, we'll be there. I said, I think schools are shut down at the end of March. And they all thought I was crazy, even then, at the end of March. Dilemma was, when do we get back in? And so this is not trend following. This, this is trying to figure out, there's an element.
40:57 Speaker 00 This is an odds guy, just trying to play with the odds, the uncertainty, you're just.
41:01 Speaker 01 Exactly. But there's trend elements and then there's, when is everyone on one side of a boat? You've got to decide, when is something baked in the market? It's almost a, when is the turning point going to come? And a lot of trends, you have no idea. You've got to wait for it. You don't know, you've got to wait for it. And so our indication of when is this baked in the market? Cause they started closing schools in Italy and Japan. And I said, when Canadian, Texas, when we close our schools, I'm covering, we need to get back in the market in our mutual. And I'm going to cover these option trades. And I had said, there were 67 day options. I was out to the middle of April. I said, this thing's going to come apart by the middle of April. March 17th, we were on spring break in Canadian and they said, don't come back from spring break.
41:44 Speaker 01 I covered March 17th, my 200,000 were the options, were the worst 6 million. The 37 day trade. I made 30 times my money, not in 37 days ever. That was a trade of just what were you doing and not really worrying because I don't worry. I sleep well at night. I'm on the lookout. I would say I'm on the lookout for problems because people think I worry. I do not worry. Then you try to build a stormproof house. That's it.
42:10 Speaker 00 Let me bring up another name. We brought two names today that I think you would consider mentors. Your grandfather and being mentored by Jerry Parker, but I'm positive the name I'm going to bring up. You would also consider a mentor. You were kind enough to introduce me to him and I got a chance to spend some time with him back in the day. He's no longer with us, but one of the guys that I'm sure would sit down and have the exact conversation you're having with me about odds and whatnot would be Boone Pickens. What would you like to share about your time with him? It was a really unique situation. You got a chance to live close to him and share. For people listening that are not familiar with Boone Pickens, well, go become familiar with him. One of the best speculators ever.
42:52 Speaker 01 He and I did some deals together over the years and became close. I was a pallbearer at his funeral. So we got to be really close there the last 20 years of his life. He was a great mentor and friend to me and we had a lot of fun together. He's a brilliant trader. The thing that he would always say to me, think bigger. He's so big. He really did. I think most of us, you don't even think that big is possible. It plays into the trend following component of you got to widen your perception of possibilities and make it so big. And you're like, oh, I made it big. And you're like, no, you hadn't even begun to get big. I'm talking crazy big. And you got to get out in crazy big. And you're like, well, that's crazy. And you're like, yeah, it's crazy only until you know it's possible, but we can get there.
43:37 Speaker 01 It's like going to the moon. Going to the moon. We don't even know what we're doing here. Can you imagine in the 60s saying, when Kennedy said, we're going to go to the moon by the end of the decade. And you're like, that's crazy, but you gotta think big. And then you think whatever you thought was big, multiply it by 10 and then go, wow, that's crazy. And you're like, okay, if you're saying it's crazy, then we're at the right level of big. And he was that. He was so good at thinking big and trying to imagine big things. He tries to take over Phillips Petroleum, you know, some of his takeover deals, it's like a minnow trying to swallow a whale. How are you expecting to do that? It's like, just stand back and watch, folks. And he would do things in the takeover days of the eighties. He did some amazing things.
44:18 Speaker 01 It was really fun to visit with him and particularly as he got older and could reflect on things that he did and see the good and the bad. And there was a lot of excitement and fun things that he taught me.
44:29 Speaker 00 I guess I'd be amiss since I've not read any biographies on him yet. I guess I probably should now, but did he ever share with you how he learned? How did he learn to have this attitude? Did he ever share with you?
44:41 Speaker 01 He did. His dad and his mother and grandmother, you know, his dad was an attorney for Phillips Petroleum. And then his grandmother and mother, they, he had a lot of mentors growing up that in his family, he was an only child. So he had a lot of kind of adults around him, helping him and then guiding him. He had a willingness to try and do big things. I mean, if you're going to do something big, you've got to set out on that journey to do something big. The thing that limits most of us is ourselves. It's almost like you have to be given permission to think huge. And the only one that's going to give you permission is yourself. You just have to say, it's okay to think big. When you think big, that doesn't mean risk big. There's so many times you could risk small. Your risk is low, but your payoff could be huge.
45:25 Speaker 01 Those lopsided risks, that's as a trader, you want to do more trades like that. And that's what you want to seek out.
45:33 Speaker 00 People love somebody talking authentically. Sometimes if you flip on YouTube and you watch what 20-somethings try to make videos, everything is soundbite, soundbite, soundbite. It's almost vapid. It's not even real. Whereas I think people love to just get behind the scenes and hear from somebody who's had some experience, had some great mentors and to share. It's the tone. The one comment that I wrote down here was to ask you, why are you always so calm? Are you always so calm behind the scenes? I've been around you a bunch of times. I'll share with you a story. So back in the day, I was visiting you there in Canadian and you were building a skate park.
46:15 Speaker 00 And you had a couple guys in town. They were the best skate bowl park, whatever they want. The builders you had shipped them in, whatever. But they had done something bad. And you took me with you on an errand to go chat with these guys. I was just watching how you did it. You never got mad and you're like, well, guys, you can't behave that way here. You can't do that. And these guys are covered in tattoos. A little bit on the wild side. It was a great experience for me to watch you handling that. So do you ever get mad or do you keep yourself pretty even keel?
46:47 Speaker 01 There's times I get intense and I get mad, but generally, if you're gonna get mad, there needs to be a reason why you're showing some anger. You try to be methodical about, okay, they need to see some anger here. And other times you're like, I'm just making things worse. If you get angry, you can just make the whole situation worse. And we've all done that before. There's a great saying that I try to remind myself of. Sometimes you're right, but you're talking about being dead right. And they talk about the epitaph on a tombstone of Jim Ley. It says, here lies Jim Ley, who died maintaining his right of way. He was right that day as he sped along, but he's just as dead as if he were wrong.
47:30 Speaker 01 So there's times where I'm right, but I make my opinions known in a way that's, I'm such a jerk. It didn't matter. I was right. It's, you're a jerk, man. I don't always do it right. You saw me on a good day, Michael. I'm glad. But it isn't always a good day. Like everybody, I have bad days. But you have eight kids. When you have eight kids, in 11 years, when our eighth was born, our oldest was not quite 12 yet. We had five under the age of five. So the younger five are each 15 months. It's all one wife, no surrogates, no twins, no tricks, no adoptions.
48:03 Speaker 00 What kind of tricks could there be?
48:05 Speaker 01 Well, I don't know. Sister wives. No, this is two people get married and we're still married 35 years later and not much to do out in the country and everyone blames me, but my wife, she wanted a lot of kids and I wasn't so sure, but she was persuasive. So we have a lot of kids and I'm glad we do. It's a blessing for sure.
48:25 Speaker 00 Let me shift you completely away from kids and family for a second to something unconnected, but you're going to have some insights here. There are quite a few public pension funds in America. There are university endowments. There's large pockets of money. And I think we'd like to imagine that the people that manage these large pockets of money, especially in the public space are the best and the brightest, so to speak. It's not always true, is it? There's a lot of money under management that I think if the average person that had their money in that pool of money would not be so happy if they understood the management. Can you give a lay of the landscape? I know it's a tough
49:09 Speaker 00 question because there's good and bad, but can you give a lay of the landscape in terms of from your perspective, when you look at some of the public pension managers and some of the endowments on the good, the bad and the ugly?
49:21 Speaker 01 What I worry about, and I've talked to some of the big ones, Notre Dame I've talked to and Stanford and my concern is since 08, when interest rates started getting lower and lower, what happened is then there was this move from 60, 40 was what it was initially. These endowments were all bonds in the seventies and then late in the eighties, 60, 40 came along. And then when interest rates in after 08 start going basically real rates of return of zero or negative, people naturally then say, well, I don't like the 40% in bonds. Well, they start going to 70, 30. It was funny. I went to an investment committee meeting. Cambridge Associates was our investment advisor. They say, oh, it's 70, 30. I said,
50:05 Speaker 01 when did we move the benchmark? Was there a vote? Did I miss the vote? It was 60, 40 and now 70, 30. Well, none of us are at 40. And I said, well, we're not at 70. I think there's beta in our fixed income. So then you get to this 70, 30 benchmark is where we are now. And really there's a lot of these endowments that I would say are 80 to 85% exposure to stocks. And so the idea of diversification has been set aside. Because really, everyone has in their universe their stocks and their bonds. And that's it. That's where I think your listeners, this idea of the alternative space and within the alternative space, 75% of that has beta, like long short hedge funds have beta. But the CTA space is often the space where you find no beta.
50:50 Speaker 01 And you find really the opportunity to make a respectable rate of return, say 6% to 10%. You can dial it up and down with vol too, but let's say with a lower type vol and make 6% to 10% in it. But it's non-correlated. What Harry Markowitz, who just died a couple of months ago, said, he won the Nobel Prize for Modern Portfolio Theory in 1990. And the math behind what the diversification, you know, everyone knows, oh, diversification. Yeah, yeah, yeah. We've been taught that. That's the first lesson of investing. And you go, yeah, but have you seen the math of diversification? Look at the math. He won the Nobel Prize for the math of diversification. And people know, never really do the math, out of 1,000 people, out of 10,000, maybe one will do the math.
51:31 Speaker 01 But the math of it's fascinating. And then you start saying, okay, well, how do we do this properly? And that's where these big endowments, they don't focus on that. And the whole reason for what we do today, why did we shift from a hedge fund to the mutual fund? Because our hedge fund, when we shut down our hedge fund in 2019, we gave back $206 million. And our performance had been flat for the last 10 years, but still the net return to clients was 13.1%. Well, that hedge fund for the 31 years. And then in 2019, we said, we want to do this mutual fund that has stocks. It has bonds, but it has the alternatives. And so we added a third pillar of diversification that people aren't good at.
52:12 Speaker 01 And we saw there's, I mean, even the smartest people out there, there are many of them are at college endowments. They go and load up on more hedge funds that have beta. But that's not the way to do it really. And we just felt like there's a math model that we want to put in place. And we want to try to do diversification better. That's the Abraham Fortress Fund. And if anybody wanted to read on that, you can go to our website at abrahamtrading.com. But it tells about that. That's the one thing. And that's where our pushback on these foundations and endowments is, look, you can't load up on stocks. All this is, is a big stock play. And then if you go and you ask them, you said, okay, have you looked at the storm there? The 150 year storm is the Great Depression. And in the Great Depression, stocks were down 79%.
52:55 Speaker 01 And that's with dividends. If you don't use dividends, it's 89% now. If you have 80% exposure to stocks and you lose 80%, you're down almost two thirds. And if you're down two thirds, you got to make 200% back. It would be a reset for all these colleges if that kind of money, two thirds of their endowment.
53:12 Speaker 00 Can I clarify? If you want to give that nice guy a face, that's okay. But you termed the managers at some of the endowments as some of the smartest people. But the smartest people keep making all the wrong decisions. Seems to be a little bit.
53:26 Speaker 01 Here's how I would say they're, they have the best resumes.
53:30 Speaker 00 That was so diplomatic. You will not get anybody mad at you.
53:34 Speaker 01 So they have great resumes. As a guy that's hired really smart people. I hired one guy that his resume was off the charts awesome. He never got it. That's the other thing I think that your listeners would take comfort from.
53:48 Speaker 00 What did he not get exactly, Salem? I don't want you to talk bad about him, just in general.
53:53 Speaker 01 Yeah, I understand. I don't know. I think there's almost like a gambler's instinct. What are we doing here? We're trying to get the odds in our favor. With eight kids, it's interesting. Some of the kids want a formula. I need a formula. And I'm not the formula guy. I'm a guy that can almost sense what the math is telling me, I guess. And I can figure it out. You almost need to be able to see the numbers and the results and sort through and say, okay, what's this telling me and what things are going on that are by chance? The real problem with all these really smart people at the endowments is they're just in a big race with one another.
54:32 Speaker 01 And as long as everyone else is being stupid and reckless, if they all get in a train wreck, they'll be in the train wreck together and it'll be okay.
54:39 Speaker 00 That's the most bizarre way of thinking. It's crazy. The relative thinking. I don't get it.
54:44 Speaker 01 Sheep go to the slaughter altogether, I guess.
54:46 Speaker 00 Yeah.
54:47 Speaker 01 They get off the truck and they head into the barn and come out pork chops.
54:51 Speaker 00 When you have these conversations, do you remind people? I'm sure you do. You say, hey, how were you feeling in the fall of 2002? How were you feeling in March of 2009? What do they say?
55:03 Speaker 01 They just blocked that out. That was a bad experience, Michael. I don't want to think about it. Don't bring up those things. But imagine if it's something that you say it's a really bad storm, down 79%. And look at that. I've asked him, I said, okay, what are you going to say if two thirds of the endowment at Stanford, at Notre Dame, at wherever, fill in the blank, if it's gone on your watch, two thirds of the endowment? And when you have to cut staff and cut programs, why wouldn't you try to construct it in a way that it could withstand the storm?
55:40 Speaker 00 Because if all the endowments are down two thirds, then it's relative.
55:44 Speaker 01 They'll say, we don't want to get behind. No, you don't have to get behind. You can still make as much money. You just are going to make it smoother if you do diversification properly. I mean, that's Markowitz and Modern Portfolio Theory in 1990 won the Nobel Prize for it. And that's what it is. How do you have diversification? That's the one huge benefit that I think is underappreciated about CTAs is the diversification they bring to an overall portfolio. Everyone likes to make money and you want to focus on, hey, here's a strategy that makes money. Okay, that's great. But it also makes money in a different way than most other things. And that added diversification, that was the thing that you say, we go from the hedge fund to the mutual fund. Why? Because there's a whole bigger picture out there and the diversification benefits that the CTAs bring
56:28 Speaker 01 and that space and our expertise in that space. And we say, we can go pick a group of people that we think can be what we call a third pillar of diversification beyond just stocks and bonds. And with that third pillar, the math gets really cool. It smooths it out and you could make the same amount of money with less risk is the Modern Portfolio Theory promise. Now, we're trying to deliver on that. Whether we can do that or not, there's no guarantees, but that's what we're trying to do.
56:56 Speaker 00 That makes money in a different way, though. That's really important. That's not just an opinion. That is solid math.
57:02 Speaker 01 Right. That is basic solid math. Even math people, I remember there was a math person at one of these groups. And I said, look, if the correlation is zero and you add it and it makes this money, we know it's going to improve the Sharpe ratio. You agree? And she's like, well, I don't know. I'm like, oh, no. You haven't played with the numbers enough. It'll improve the Sharpe ratio. Because you think, well, if I add something, let's say your 6040 has a vol of 12. And you say, well, here's this CTA. It has a vol of, say, 20. If I add it to the mix, what's going to happen? All the vol is going to go up. They average those vol's. You say, what if the correlation is zero? And it's vol at 20. And we're going to add it just 5%. So just not a big piece. Well, you go, well, this vol's going to go up. And then you add it and the vol goes down of the overall.
57:47 Speaker 01 It's like an ingredient.
57:49 Speaker 00 It's counterintuitive if you don't look at the math.
57:51 Speaker 01 Yes, it's counterintuitive. When I would make pancakes with my kids on Saturday morning, we would taste all the ingredients. Well, one of it is baking powder. Baking powder is nasty. Oh, yuck. We're not going to put this crap in our pancakes. And you're like, no, no, no, it'll make them fluffy and nice. Well, let's try it without them. And then they're flat and not as good. This is what it does. It makes it fluffy. It's like pepper in the stew. Pepper all by itself is pretty spicy. But if you add it to the stew or the right amounts, it makes a nice flavor. You need to think of the end result of putting those pieces together. And people don't do that.
58:25 Speaker 00 The moment in time where we are at right now, and I don't say this to try and make a prediction because I have no clue what will happen next. However, if I look at the last 23 years of my life since the dot com bubble, I look at what the Fed has done. I look at where we are now. I look at rates just tick up, tick up, tick up. I don't know. If people are not assessing the odds of what could happen as rates tick up, how could people not be assessed? But it seems like blur my eyes and listen to the voices out there. How this is all completely normal. This is all, everything's normal. It's very odd to me where if you can have that much of a rate increase over a little more than a year, risk is different now. The risk has changed.
59:10 Speaker 01 One of the things happening that no one talks about is how inflation, I think, affects stocks. Where if you look at Argentina, good example of just the money printing and the high interest rates over the last 12 years, they've had inflation of 40 to 50% annually. But their stock market goes up 40 to 50%. And so that element, that's the thing that I think how stocks going up, this whole inflation thing, if you think of, say, a Walmart store, let's say their prices are all up 50%, but costs are up 50%. Labor, cost of goods, the utilities up 50%. Okay, so everything rises 50%. Their profit is 50% higher still. If you go from 100 to 200 on 100% freezing math, if everything revenue goes from 100 to 200
59:56 Speaker 01 and their costs were 80 and their 80 goes to 160, well, their profit was 20, now it's 40. And so that growth in profits because of inflation, people overlook that. And that's where stocks can go up, up, up. But in the end, you're like, we're really not making any progress. Again, Argentina, they're up 40 to 50% inflation and stocks are 40 to 50%. You go, well, I don't know if I'm ahead or behind, but all the numbers keep getting bigger. That's going on. But the other thing going on is we're getting to a spot where we can't work our way out of globally, the debt we've got. And as rates go up, it's like, okay, are we going to go off the cliff to the left or the right? We debase our currency and just inflation run or do we raise rates and go broke?
1:00:41 Speaker 01 I think in the end, you debase your currency and I think we have a currency crisis globally. And that's where you want to have real assets in the end, but that's a risk too.
1:00:53 Speaker 00 Salem, I could keep picking your mind all day. Is there anything I've not brought up today that you might want to address? So we've talked about a lot of different subjects, but is there anything near and dear to you that I've not brought up?
1:01:04 Speaker 01 No, I think the interesting thing about trading and futures markets and trend following, all that are things that are near and dear to me and have been a key part of my trading success. But I think the idea of the diversification it brings, that's a piece that I would say the broader world doesn't pay attention to as much. It's more fun to kind of the make money than the trading. But the engineering of finance of putting things together and the value that trend following or the CTA world brings.
1:01:38 Speaker 01 To the overall investment space. That's fascinating to us. We're chasing that rabbit with our mutual fund where we could do stocks and bonds and then do this added piece that we understand uniquely well. And to bring those things together in a mutual fund is what we're trying to do. And that's fun. It's interesting for your listeners to think about, not only is trend following a way to make money, but it's also, I would say, more importantly, it helps diversify your overall portfolio of stocks and bonds when you add that with it. And that's really important, too.
1:02:11 Speaker 00 Just to add to that, too, is that a couple of searches out there, people can quickly find out. I'm not saying it's going to happen every time, but when we have had equity market meltdowns in the last 30, 40, 50 years, typically, the trend following CTAs have phenomenal performance at that same time.
1:02:30 Speaker 01 When we look at our own performance and you look at when do CTAs do well? They do well when things get volatile and things happen that are out of the normal realm of possibilities. That can happen in an isolated situation, like say, in sugar, the market, or it could be the overall stock market and be a bigger event that's more broadly felt. But those type of events are when you see the trend followers really shine because markets do things that are not expected. And help when you need it is a big deal. And that's what CTAs can bring, help when you need it.
1:03:06 Speaker 00 Salem, people can check you out at abrahamtrading.com, correct?
1:03:11 Speaker 01 Yes.
1:03:11 Speaker 00 Is there another URL for the mutual fund? Or is it all under Abraham Trading?
1:03:15 Speaker 01 It's all there. We just do one thing, that Abraham Fortress Fund and the symbol F O R T X, Fort X, and the Abraham Fortress Fund. We do one thing. I've got a big chunk of my money in it. I've got about $10 million of my money in it. People want to co-tell what we do and the Ford X is 75 basis points fees. We make half a percent, but yeah, everything's on the website and of course, no guarantees of profit. Everything's risky, but we love what we're doing now and it really has given us a chance to be the coach instead of the player and that gives us an opportunity to do some of the fun math puzzle and the engineering that we love to do and it's fun to work with other traders too. So it's a different thing, but I tell you, Michael, we applaud what you
1:03:57 Speaker 01 do and it's been fun to watch you over the years and the good job you do. I think spreading knowledge and sharing ideas with people and I loved back 20 years ago, 30 years ago, the Market Wizards and New Market Wizards, those type books, but you're reading words. And like you said, the inflection to hear people tell the story and I think to hear traders tell the story, that and I enjoy doing that myself. I'll go watch traders myself. To hear them say the words and to hear their inflection is even better than a book. And so what you're doing is great. Cause the more we all learn, the better it is. So great job of what you do out there and thanks for, cause I enjoy listening to your podcast too. So it's great.
1:04:41 Speaker 00 Salem, thank you. Anytime. We have to be more regular. I've got some folks that come on regularly. We'll have to make sure we catch up every couple of years at the latest.
1:04:50 Speaker 01 All right. Sounds great. Always love visiting. It's great to see you and all the best to you.
1:04:59 Speaker 02 I see a time when those awake will understand how to make money in up, down, and surprise markets. Whether a new trader or experienced, college student or financial advisor, protecting against a crash or just trying to make a lot of money, trend following offers everyone an answer in uncertain times. To get started immediately, send me an email, [email protected] . I will send you the right trend following steps to take along with my free video. But if you want to buy and hold, trust the government and trust Wall Street, this is absolutely not for you.
Previous Ep. 1391: The Biggest Balls of Them All with Michael Covel on Trend Following Radio Next Ep. 1393: Jack Schwager and George Coyle Interview with Michael Covel on Trend Following Radio Page updated November 6, 2026 · transcript and summary are machine-generated
