94 Acknowledging Risk on a Daily Basis with Bill Dreiss of Dreiss Research Corporation - 2of2

Bill

…which is highly technical. That also provides a certain amount of credibility in terms of my track record. In other words, I have NAV doing that, so it’s not like people might suspect that I’m fudging my performance.

Niels

There’s one question, Bill, that I have to ask. I am obviously being a little bit frank about it but, as you’ve explained, people would have guessed now that you’re not in the youngest part of the CTA space. You’ve been around for a long time, so what are your thoughts about who’s going to take over the day you don’t want to do this anymore? Are you thinking that far out? I use it as an example, the firm that I work for, Dunn Capital, it has also been around since 1974, but we’ve gone through the succession planning. Marty Bergin is the owner and runs that firm. How do you think about these things? I’m sure investors will be thinking about it as well.

Bill

Well, I’ve been exploring various possibilities of passing my business on in various ways. Of course there’s the alternatives that I could sell it, or I could form a partnership with someone who I could pass it along to, and so on and so forth. So I have been actively exploring that. At this point I haven’t really made any decisions as to what the best way to go is, but that’s certainly on my mind.

Niels

Good. Let’s jump to the next section. I want to talk a little bit about track record now. I’m not here to, or we’re not here to talk about specific numbers or anything like that. Regulation makes sure that we’re not allowed to do that, but I do want to ask you about track records in general. Now again, your track record is very long and, although you said that your system hasn’t really changed over time, that obviously should give a lot of confidence when people look at track records and your track record in particular.

Is there anything that people should be aware of in terms of things that have improved and made significant improvement along these last 25 years you would say? Or is it really, “We started in ’91 and it’s pretty much what you’re looking at and what you would have gotten whether you made any changes or not?”

Bill

Things always look better in retrospect. Whatever modifications you make over time can really, even if you’re not doing this based on backtesting, tend to look better going back.

No, I would say that really not much has changed. In other words, this system has been pretty stable over the years. I would think that the main sort of changes that have been made have been involving adding or changing the portfolio – adding or subtracting various markets. Those judgements were made, generally on, once again, more economic grounds or qualitative grounds.

If a market becomes inactive, or because something like short-term interest rates in Japan, I used to trade the Euro/Yen… things go dead and you just say, “I’m not going to trade that anymore.” By and large, even the portfolio – the commodities that I have traded have stayed pretty much the same. Now that having been said it’s amazing how much, say dropping a particular market out, can change your profile, at least in the short term. So small changes can, very frequently, show up as a fairly large influence on your track record, at least in terms of the shorter term. Obviously, over the longer term they don’t make much difference.

Niels

Sure. Now, one of the things, of course, having been in business for a long time and having studied the market for an even longer time, is that you’ve seen a lot of data. You’ve seen a lot of different market environments. You mentioned earlier on that periodically people will say that trend following is dead and all those things.

One thing I don’t think we can ignore, and I wanted to get your take on it, and that is since 2009 there certainly been a bit of a concentration of below average returns in terms of annual returns for CTAs. At the same time, we’ve also seen at least one very solid year in the last couple of years. There’s, to me, a little bit more inconsistency in these overall CTA returns. Do you think that something has changed since 2009? We all know the reasons why that might be, or is this just something that when you look back at your data, that this is really business as usual?

Bill

Well, I would say the most obvious break point, if I look at my past performance, came around the turn of the century. I think prior to that, and this goes way back, one of the justifications for CTAs was the fact that in commodities you could presumably get diversification because you had all these markets that had different fundamentals. Why should cattle move with copper, or wheat?

So I think from… certainly from the ‘70s when I got started, into probably the end of the ‘90s you had a reasonable amount of diversification between markets – or non-correlation between markets. Of course it varies depending on market conditions. Since then the correlations have increased, not just between financial markets, but between commodity markets, and between financial markets and commodity markets. I think that really became even more pronounced during and after the crash, when things became almost in lockstep.

That’s one of the reasons why most CTAs did so well in the crash, is that everything… Diversification, it’s like Mark Cuban says, diversification is for idiots. In a sense the lack of diversification – that is the correlation can be your friend or your enemy.

If you’re in the right direction you make a lot of money because everything is moving. Obviously, if you’re in the wrong direction, then that’s when you take drawdowns. So I think that’s what we’ve seen since, as you say, 2009 or maybe since 2008. We’ve seen the potential for much larger moves either in the positive direction or in the negative direction – I’d say since 2009 certainly.

My returns, at least my average returns, are about the same as they were before. But I’ve had… 2008 and 2014 were by far my largest yearly profits. Whereas in 2013 was my largest drawdown. So, it’s a double-edged sword. So I do think the markets have changed in that regard. I don’t know what to do about it.

Niels

I agree with that. You’re right, correlations have certainly changed in some ways and markets are more inter-related than maybe we’ve seen for some years back. I think markets are becoming a little bit more divergent again, which is what we really want, I think, as CTAs. Volatility is good, but divergence and volatility is even better.

Bill

I think you can see that from the end of 2013 into the middle of 2015, for about a year and a half. The volatility went way down, certainly, and at the same time I think the correlations went down. That is, you started getting markets moving on their own. Since the summer, I guess, we’ve started to see those correlations and now it looks like everything is moving with oil.

So I think that this was observable as far back as the dot com boom. When the markets really start getting volatile it doesn’t matter which market segment it is, things tend to snap into place and your correlations pick up. So whether it’s the stock market driving things, or whether it’s the oil market, or whatever, once one segment of the markets gets volatile, then it tends to drag a lot of other segments along with it.

Niels

Yeah, definitely.

Bill

I don’t know whether that’s globalization or whether it’s the big banks. You could think of all sorts of reasons why these correlations are heightened, but that just seems to be the environment that we are in.

Niels

Sure. Luckily we’re in a strategy area where we don’t have to forecast, as you said. Reaction to whatever market conditions we get seems to still work quite well.

So let’s talk about the strategy and the program itself. If you were going to describe to a potential investor from a 30,000-foot point of view what you’re trying to achieve in terms of risk reward, or I don’t know what kind of way you would normally describe it. You mentioned that you’re in the higher level of perhaps risk perhaps compared to some of the really large firms, but how would you describe what you’re trying to achieve to a potential investor?

Bill

I think that one thing that’s always motivated me, and partly it is just the matter that I’ve never really gotten… Partly this is due to the fact that I ‘ve never really gotten that big, is I like to give investors a bang for their buck. So in other words, you can leverage down, but if you’re charging people two and twenty or something and you’re trading them at 10% margin on equity, it seems to me that you’re not really giving them their money’s worth.

Of course now I just charge incentive fees, so the management fee doesn’t come into play. I think what you’re looking at, in general, if you’re looking at fairly… I don’t know how to say this. There’s a standard in the industry, or in the financial industry of about 20% return. That’s what Warren Buffet makes, that’s what anybody who’s been a successful investor, meaning a knowledgeable investor for a long time, they make the 20%. Very few people go over that. The people that go under it are essentially going under it because they’re reducing their leverage.

So essentially the product that I’m offering or that people, say in my risk range, are offering is the ability to make, over a long term, maybe 20% or so a year – 15% or 20% a year but they’ve got to be willing to takes some drawdowns. Like Warren Buffet said, he said, “if you can’t take a 50% drawdown, you shouldn’t be investing.”

Of course people take those kinds of drawdowns all the time, well not all the time, but in real estate and other investments. The last real estate bust, how many properties went down by 50% or more? But people don’t care, they just hold on. So if you can convince people to hold on through the drawdowns in commodities, then you’ve got something that I think is just as attractive as other investments, maybe even more so. You can certainly get 50% drawdowns trading the stock market without much effort.

Niels

Sure. I want to talk about the environment as well, because a lot of investors may not appreciate that any strategy, you mentioned a few including your own, there is a certain environment where it works well, there’s a certain environment where it’s not meant to work. Of course we’re all trying to, in some ways, differentiate between the good times and the bad times to create a more robust output.

I came across something in the literature I read about you which referred to a choppiness index. I don’t know whether it’s designed to do what I just tried to explain in terms of protecting you in the difficult times and allowing you to maybe be more aggressive in the good times, but explain to me about the choppiness index.

Bill

I look at… I know what you’re alluding to. The temptation is to say, well, if I can find something that would tell me when I’m in a choppy market, then I’d reduce my trading. Then if it would tell me when I’m in a trendy market, then I could increase my trading. Well, I don’t know. I can’t do that.

About the time that you’ve identified that you’re in a choppy market, it’s time for… it’s about ready to take off again. The choppiness index is really a fairly short-term indicator. What it allows me to do is to move my stops up if I have a market that’s starting to run away. So if you have a market that’s blowing off, or that’s really accelerating…

Niels

Like oil at the moment to the down side, perhaps.

Bill

Yeah, that’s right. In fact, it’s kicked in on some of those petroleum markets. Essentially it’s just an indicator that allows me to move my stops much closer than they would normally be.

Niels

Did you have that from day one, or is that something that you’ve discovered?

Bill

That’s something from way back, yeah.

Niels

OK.

Bill

It’s just another aspect of the system so it’s an override as it were. When it’s systematic, there’s no judgement involved, it’s just part of the system. It essentially isn’t something… it’s indicating that the trend is accelerated and it is time to maybe tighten up my stops.

Niels

Sure. You mentioned also earlier on, obviously a lot of people refer to trending versus mean reverting. You were referring to persistent and the back side of that is anti-persistent of course. You said that this is something that you can kind of prove when you look at markets, etc. etc.

If that’s the case, and we believe over time that trend following, as a strategy, is more likely to succeed in the long run compared to mean reverting or any other sort of anti-persistent strategy. Why do you think it is so difficult for investors to see that evidence?

I think that there is a tendency for people to prefer the mean reverting strategies. They feel better about it, they have more winning months perhaps until, of course, we know from other firms that you get perhaps a blowup at the very end. Why can’t we visualize this better to investors?

Bill

Well, I think it all comes down to Kahneman and Frisky behavioral economics. There’s been a lot of research done on the actual psychological responses people in these kinds of situations. One thing I think about is what I do and what anybody who’s… what a professional investor does is he is essentially working against, in his own psychology, he’s working against those behaviors that are typical and pretty much pervasive human behaviors. To some extend that’s how we make money.

We make money by taking advantage of people who are subject to those kinds of, shall we say, irrationalities. That’s why I was saying before, that’s why it was so easy back in the ‘70s to make money as systems traders because almost everybody that you were trading against was very much subject to the vagaries of fear and greed. You were insulating yourself from that to some extent. That’s pretty much the same situation here. As we all know, the client is his own worst enemy. No matter, over the years, you watch people come and go and people are inclined to come in at the top and leave at the bottom.

Niels

Sure. What does the portfolio look like today in terms of markets? How many markets do you trade? I understand that it is fully diversified, but commodities are an interesting sector, so how much of that do you have in your portfolio today?

Bill

I tend to be, and this has always been the case, I tend to be probably over weighted in the commodities compared to most people. Right now I’m trading… I’m about 35% financials and 65% commodities. I’m trading about 42 markets at the time, but usually I’m right around 40 markets. As I say, I diversify, I try to diversify across sectors, not just markets, so that I’m not too heavily weighted in any particular sector.

It’s hard to avoid that to some extend just because you have more markets available in some sectors than in others. I think, if I were to say what differentiates Dreiss Research from other, say, trend following CTAs, I would say that I’m probably more heavily concentrated in commodities versus financials. Of course some of this has to do with size also. When you get into the large CTAs, the liquidity is in the financials, for the most part, so they have no choice but to move in that direction.

Niels

As well as timeframe. I think that’s probably the other differentiating part I would say, when I listen to your explanation. People have probably become more medium term, but you’ve stayed long term, as have a few others and that seems to have served them well.

Bill

Yeah, and that’s another good point because if you’re dealing with markets that have less liquidity, it’s less of a problem if you’re trading long term. If I have fewer trades, then I care less about how much slippage I get when I make a trade. If I’m making lots of trades, then I want to have a lot of liquidity just so I don’t get hammered by the slippage.

Niels

How do you enter a market? Does the system get one signal and then you’re fully into the market, or does the fractal methodology build up over a period of time in order to get fully invested in a market position?

Bill

No, I enter all at once. I’ve obviously… A lot of these strategies, there’s a lot of different options in this sort of thing. Different people do different things. I’ve researched it. My conclusion is simple is better, so I trade with stop orders and get in all at once. If you wait to get in you’re probably, if it’s a good trade, you’re too late. If it’s a bad trade, you wished you wouldn’t have got in.

Niels

Yeah. Speaking of entries and exits and sort of position management. My own experience is, that I think a lot of managers regardless of methodology, tend to identify the beginning of the trends around the same time, where personally, I think there could be more of a difference between managers when it comes to, how they manage the position along the trend and also where they get out, but it’s not scientific, it’s just sort of my gut feel. How do you view these entries versus exits and the position management and how do you manage your position along with a trend?

Bill

One thing I do that, as I say, from the point of view of my system – that is the signals, one, I’m not a reversal system. So my entry and exit signals are different, not always, but most of the time. I just take one signal. What I do is I try to maintain what I call risk balancing. That is, I try to balance my positions based on dollar risk. Of course that changes with the volatility.

So if the volatility of a position picks up then I’ll pare down that position to keep it in balance with my other positions. So that has two effects. Obviously, like any kind of form of portfolio balancing, it means that I don’t become overexposed in any particular market. On the other hand, what it means is that generally, if I’m into a long trend and the market is moving in my favor, generally it gets more volatile as time goes by. So I’ll be paring my position as time goes by.

Again, this is not explicitly built into the system, but the effect of this is that I tend to take profits on a position as time goes by. Not to say that my position gets pared down to a very small position, but generally I’ll pare the position down over time. So sometimes I’ll get to the end of a trade and then I’ll have a very sharp reversal coming back, but I’ve still taken some out of that market prior to that time, so that helps a bit.

Niels

But you wouldn’t be able to get out completely as long as the trend is going in your favor, right?

Bill

No, not at all. In fact, I would almost always maintain the bulk of my original position would be in tact until I get an exit signal.

Niels

One of the questions I get a lot of at the moment from potential investors and also people who are listening in, in terms of interest in system development and so on and so forth, because I hear a lot about that people will look at the volatility when sizing their positions, etc. etc. We’ve now had a period of time where certain markets have been a lot less volatile than others because they’ve been artificially managed by central banks. How do you handle that in order to avoid that your system recognizes that there’s a low risk opportunity, but it obviously may contain a lot of risk, it’s just that the volatility in say short term interest rates, maybe bonds, whatever it might be could be argued as artificially low at the moment? How do you approach that?

Bill

I just don’t acknowledge that. To me the volatility is what it is. That is, I have a measure of volatility, which again, I guess it would be parameterized in the sense that I mentioned before. So I have a certain lookback window that relates to the dynamics of my system, and then I calculate the volatility. If the volatility is low, then I’ll get into a larger position. If the volatility is high, I’ll get into a smaller position. Then as the volatility varies as the position develops, then I might scale down if it grows as time goes by. The effect of all of this is to pretty much maintain a dollar volatility in the various markets to be pretty much equivalent over time.

Niels

You also mentioned you use stop losses and I was just curious, is it the fractal nature of markets that tells you where the stops should be, or is it the stop algorithm or methodology completely separate that you just developed over the years?

Bill

As I said, the main function of the Fractal Wave Algorithm is to essentially define turning points in an objective way, or in a non-subjective way. Then what do you do with those? What I do with those is pretty much the same thing that any technical analyst would do, I use them as trend lines, and then when I break trend lines that gives me signals. I also use them as support and resistance, generally in the shorter term.

So I use sort of a combination, in other words if I get a trend line break, I also want a short-term break of a support or resistance point. So that’s what I say, in some sense if you were to observe my system on a chart, this whole thing comes out on a chart. It looks like pretty standard technical analysis. The difference of course being is that I’m not making any judgements on that, the system’s making the judgements, but it has the look and feel of what you’d get from technical analysis.

Niels

Let’s shift gears to a very important topic namely risk management. How do you define risk? I know that you are not a big fan of standard deviation, so how do you define risk in your own methodology?

Bill

I think, again, from my philosophical position I’m very suspicious of any kind of… things like VAR or any kind of standard risk metrics. I just think that risk is out there and your worst drawdowns always in the future.

I find if you look back over time, you find again some pretty standard risk profiles. You look at anybody who has been around for say 20 years or so, or maybe even 10, almost every one of those managers has had a major drawdown, which I would characterize as 50% or more, and usually just one, right?

I was fortunate in that mine didn’t happen until 2013, so I went for a long time in living a charmed live, in a way. Anybody who has been around for a while has had one of those catastrophic drawdowns, and in some cases those are called blowups, and they go out of business. Somebody like Richard Denise did it three times I think. If you can live through those, which again, is much more a function of how well your business is run and how stable your client’s support is, and how dedicated your marketing team is. If you can ride through those, then you can come out the other side.

So I’m sort of getting off the subject, but as far as risk goes, I think the risk profiles, to some extent you can over manage risk. There’s just some things that you just have to accept and you can’t really control. I think the most important factor that has to do with risk is whether the manager’s going to lose his head or not.

The people who’ve survived in this business are people who have been able to weather drawdowns without losing their nerve. That’s exactly it. So that’s where the risk comes in. The risk comes in – is your manager going to lose it? That’s where the ultimate risk is. If you believe that your guy’s going to stay the course, then you should probably stay the course too.

Niels

So am I right in saying, from listening to what you’ve explained so far, that risk is really something that you look at market by market and that intra-market correlations, per se, are not going to change the way you size the position in one market when an opportunity arises? Is that a fair way of describing it?

Bill

I don’t think… You say risk in terms of I’m obviously sizing my position market by market based upon volatility, so you’re using risk in a different sense. If you’re talking about portfolio risk, then that’s a different topic shall we say. It has to do with how the markets interact, unless as you say, if they’re highly correlated then… There’s a larger risk in the standard deviation sense. There’s a larger variation, right? But once again, that’s not something you really have anything but sort of the grossest control over. You’re controlling that in some sense by the amount of leverage you’re taking. To think that you can manager that in some sense I think is illusory.

Niels

Yeah, that’s fine. You mentioned yourself that all mangers go through a drawdown and that you’ve been there as well. Obviously managers that have been around for a long time have gone through many drawdowns. Maybe not as big as a 40% or 50%, but there will be drawdowns along the way.

I’m going to quote someone that you may be familiar with and who wrote a few years ago. It’s David Drew, and he wrote a few years ago that, “here’s an amazing thing about robust systems, the more robust a system, the more volatile it tends to be. This is because robust systems are not optimized to particular markets or market conditions. The converse is also true. You can design systems with excellent returns and low volatility on historical testing but which work only for a given period or given market. These systems tend to be curve fit and market fit and not robust.”

This is completely probably against what most people will feel that robust systems are the ones that are more volatile. I sense from our conversation today that, that is the conclusion that you’ve come to as well.

Bill

Yeah, I know David and he’s right, and I think this is a conclusion that most people have been in the business for a while would come to. It’s what I call… This is in contrast to perhaps the dominant quant paradigm which is picking up nickels in front of a steamroller. In other words, you can design systems like Long Term Capital or whatever that can give you smooth returns for a while but what those systems are doing, in my opinion, are what I call warehousing risk.

So essentially it’s like… And I think it’s the same sort of thing that Dave is talking about, you can design a system that essentially accumulates risk in some sense, and that when it finally breaks out it happens in a big way. This is, of course, what happened in the lead up in the financial crisis. You had all these people developing these securitizations and all these sorts of things and they were just setting the system up for a major break.

In the short term, while that was going on, everybody was happy because everybody was making money and the apparent risk was very low. That’s what I think a trend follower tends to do. I’m essentially taking risk – on an ongoing basis I’m realizing risk. I’m not warehousing it, I’m recognizing it and realizing it and that’s just part of the game. I think any sort of viable, long-term investment has to do that because otherwise it’s a disaster waiting to happen.

Niels

Sure, A lot of people say, you hear entrepreneurs talk about it all the time that they learned a lot from the adverse time in their career and so on and so forth, what about drawdowns? What have you learned from your drawdowns? Have you learned anything from the big drawdown that you had more recently that was different from what you’ve seen before?

Bill

No. There’s two kinds of drawdowns. Certainly there’s the garden-variety drawdown, which for me might be 20% to 30%. That’s just part of doing business. They’re not pleasant, but on the other hand the problem is that even the ordinary drawdowns are likely to cause anguish to your clients. In terms of your system, these are pretty much just part of the game.

When you get what I call catastrophic drawdown, say something 50% or greater, one, I think those are pretty rare. As I say, a trader might experience something like that once in 20 years, or whatever. So once again, it’s just a matter of living through it when it happens. In terms of my experience with that, no I suffered but I didn’t change anything. As I say, the following year I was up 85% or something.

So to me the existence of drawdowns, large or small, in my experience have not had any particular bearing on… In other words, I don’t use those as evidence that my system is not working, or that something needs to be fixed. The reason for that, as I say, I have this underlying faith, and I think faith is the only word for it, that markets will continue to exhibit persistence. That is that trend following is a universal or at least a persistent behavior of the markets and, as I say, that’s supported by the fact that the markets are subject to the fundamental economics that don’t change.

Niels

You mentioned also, earlier on, that at times where performance has been flat or slightly down. That’s where you’ve seen investors leave. I think that can be said for every single manager in the business. Clearly investors don’t share the faith that you were talking about when they go through a drawdown. Is there anything that you think we can do as managers to help them become a little bit more faithful?

Bill

As I say, I think it comes under the heading of customer relations or marketing, or dedication. I don’t think it has so much to do with trading as it has to do with being able to convince, and this is true of any business. You can develop your business so that you have a faithful clientele and I think that applies to this business also.

So I think the really successful CTAs have managed to develop that kind of relationship with their clients so that their clients have the same level of belief in the viability of their systems as they do. That’s something I haven’t been particularly successful in developing. On the other hand, it’s something that I have. Like I say, you talk about drawdowns, obviously it’s easy when you get into a big drawdown to start doubting yourself a little bit. I can’t think of what else I’d do other than throw in the towel and go into another business.

Niels

Sure. But also the other thing that I think is important when people look at your firm and that is you’ve proven that you’re not going to change and that you have the faith. Frankly a lot of managers who’ve raised a lot of money are firms that have come out where it looks like this is the next great iteration of trend following we all needed, but based on a five-year track record you actually really don’t know what the strategy is capable of doing to the down side at that stage. As you say, the longer the track record the more of these drawdowns. People might look at that as a negative, but in reality it’s probably the best evidence that you can get that the manager knows what he’s doing and is capable of riding through the difficult times.

Now one fun question on risk: is there anything that keeps you awake at night, Bill, in terms of something where you know you just can’t model that, you can’t take that risk away, or are you really that comfortable with every aspect of the system today?

Bill

No, you can always fanaticize on the end of the world or whatever, but no, in terms of any sort of reasonable environment. For instance, I guess an example might be, that I’ve seen it a couple of times, is you have something like in the meltdown in 2008, or you might have a change in government policy.

OK, here’s a good example, the recent Swiss Franc, when they unpegged the Swiss Franc, well that was a big hit, right? For me I lost probably 5% on my Swiss Franc trade. But it’s one commodity out of 40, so in terms of my overall portfolio I took a bit of a hit, but not much. I’ve had situations in the past where something like the Euro/Dollar just goes crazy. Or you’ll even have occasionally…

I think I had an occasion several years ago on the Euro/Dollar where you had like a flash crash type of thing. I guess with these electronic markets you don’t know. You might wake up and the thing has gone to zero or whatever. I think that’s where trading a number of markets helps. It’s unlikely that one market is going to kill you no matter what happens.

Niels

I wanted to jump to a section which is maybe a little sort of on the personal side, as we round off our conversation, just for people to get a chance to get to know you maybe a little bit better. The first thing I want to ask you is, and this is more to talk about probably the business side of things, that’s just over the long career that you’ve had what’s been the biggest challenge when you think back of what you ‘ve done? What’s been the biggest challenge for you?

Bill

I suppose the biggest challenge is just to stay with it.

Niels

Right. The discipline.

Bill

Right, it’s the discipline. As I say, when I got into this business, one of the attractions of this business is one, I don’t have to work hard; two, I can live where I want to; and three I can go surfing when I want to. The down side is that you’ve got to do it every day. Somebody’s got to do it every day. I can’t take a month off without having somebody else cover it, so it’s that sort of day in and day out, year after year type of thing that requires the level of persistence. Sometimes you just get tired and you’d like to take a break.

Niels

Take a break.

Bill

As I say, I’m sort of aiming towards retiring shall we say at some point in the not too distant future. So hopefully I can work something out in that regard. On the other hand, it’s certainly entertaining. It’s kept me entertained for most of my life. It keeps me engaged in the world.

The thing about trading commodities is even if you’re not a fundamental trader in terms of your technique you have to keep track of what’s going on in the world economy and the various markets and that’s interesting in its own right. So, like everybody else, I have opinions on what the copper market’s going to do, or what the gold market’s going to do and whatever. It just doesn’t happen to affect my trading.

Niels

Maybe we should do a separate podcast for that. I should ask all people who are systematic traders what their gut feels are and what their own predictions are even though it’s nothing to do with how they trade in reality. That could be an interesting conversation.

Bill

Here’s my main take on that, and this is something I think that is contrary, or at least is not widely recognized. In commodities, people talk about commodity super cycles. These cycles last a long time. From the early ‘80s into about 2000 you had a bear market in commodities. That’s a 20-year bear market. Then you had a bull market from about 2000 to, whenever… maybe for 10 years and since then we’ve been in a bear market and people seem to be trying to pick the bottom in these various commodity markets, and they’re certainly low now but this could go on for a long time just based on history.

Niels

Sure, absolutely, I agree with that completely. You’ve been involved, I’m sure, in many due diligence questionnaires or meetings, telephone calls, whatever it might be, with investors researching your firm over the years. What do you find that investors or potential investors… what do you think that they should be asking you, but they never really do? What is missing when they’re looking at a strategy like yours?

Bill

That’s a good question. I don’t really have an answer for it.

Niels

That’s fine. There might not be an answer.

Let’s jump over the last section. You can always come back to it. The last section I have that I want to ask you about – I call it general and fun and it’s a little bit of everything sort of put together at the very end.

The first thing I want to ask you is what do you think it takes to become a good trader and what does it even mean to be a good trader?

Bill

I don’t know, and the reason I say that is I have friends, I have a friend who’s a high frequency trader. I have friends that… I read about people like Warren Buffet or George Soros, or whatever. No, I think there’s a wide variety of possibilities in terms of trading approaches and I think, of course it goes without saying, people would tend to pick a trading approach that fits their personality.

I guess the bottom line, for me, would be discipline. That is, I think that anyone who’s a successful trader long term has developed a discipline. In fact, I think that all successful traders are systems traders. They just don’t maybe characterize themselves that way. I think as a trader becomes more and more experienced, he becomes more and more disciplined in terms of whatever approach that he or she is using.

So the advantages to being a systems trader is that you enforce that discipline from the get go. Even though, I’m sure everyone has learned, it’s one thing to implement a system, it’s another thing to stick with it. To me, at least, that’s easier than having to, on a day-to-day basis, renew that discipline, which would be very difficult for me to do psychologically. If I had to trade, if somebody said you have to trade by the seat of your pants I’d do something else.

Niels

You’d do even more surfing perhaps.

Bill

That’s too much work and too stressful. So in one sense, the reason I trade the way I trade is, for me, it’s like the least stressful way to trade.

Niels

Sure. Now you clearly read a lot of books. That’s apparent from our conversation. In terms of trading and sort of ways of improving your trading, what books would you say have been most influential on you and that you maybe want to recommend that people should read? Are there a couple that stand out do you think?

Bill

Obviously, from my perspective, probably the best on would be Mandelbrot’s The Misbehavior of Markets, which is a really comprehensive description of his research and his views. Another book that always was one of my favorites was the Secrets of Professional Turf Betting (by Robert L. Bacon) which was written by a guy who played the horses. The whole description of how the basic ideas that the form moves away from the crowd. So I thought that was one of the more insightful books I’ve ever read on trading.

The books that I think are the most pertinent, in many ways, are books that have nothing to do with trading specifically. For instance, Dostoyevsky’s short novel called The Gambler is a good one for psychology. It’s very painful to read for anybody who trades. When I look at useful books, recently probably the most interesting book I read is Daniel Kahneman’s Thinking Fast and Slow.

Niels

Yeah, yeah, a lot of people refer to that one.

Bill

I think that really there’s a lot of… the books that I look to for inspiration, and this has been true in terms of going back and developing trading systems and all that, tend to be outside the field. Physics books, or books on psychology or other more general topics.

Niels

Sure, absolutely. Based on everything that you’ve learned in your career, if you were going to give any advice to someone starting out today or if you were given the chance to start from scratch today and turn the clock back, but knowing what you know today, what if anything would you do differently?

Bill

Looking back, the main thing I would have done differently is I was back involved with computers in the early days. If I would have focused on say setting up a software firm, or even setting up a firm to provide financial software, then that would probably have been a more lucrative and perhaps even interesting career choice. In other words, you take somebody like Bloomberg. He’s selling the shovels to the miners. Whereas the traders are the miners. So I think that everybody wants to be a trader. Trading is this sort of exciting and…

Niels

Glamorous career.

Bill

Glamorous, but I tell you, the way to make real money is to be a dot com entrepreneur. Those guys don’t make 20% a year. Of course it’s a crap shoot too. Most of them go bust in a hurry.

At the time, once again, I think the business is, in a sense, it’s a very seductive business. A lot of especially technical people – physicists, or mathematicians, or engineers, or whatever get attracted and other people also of course. They get attracted to the prospect of applying their tools to finance. In fact, that’s what I thought.

When I was back working for a think tank I was doing all this interesting mathematics but I couldn’t see, it was all a paper chase. All you’re doing is writing reports and I thought, how can I use mathematics to actually make a living? One of the few things that I could identify, or the only thing I could identify, was applying it to developing trading systems.

I think that’s changed. Now, somebody who has skills in mathematics, there are a lot more ways that that can be applied with expansion of modeling in all sorts of different fields. In those day about the only kind of modeling that you could do that had a practical application was modeling the financial markets.

Niels

Sure, that’s a good point. Bill, do you have children?

Bill

No.

Niels

So I have to phrase the question a little bit differently then. If you had someone that you cared for that you could only pass on one of your skills to that person, what skill would that be and why? You can’t mention surfing.

Bill

Well, I don’t know. That’s a hard one to answer. As you might have gathered before, and I’ve had the opportunity to, say, encourage younger people. I don’t encourage them to go into my business. One of the things that was discovered, or that came out during the financial crisis is that something like 40% of the graduates of MIT and Stanford and Harvard go to Wall Street. I think it’s a gross waste of talent.

Those people should be doing something productive other than just professional gambling. When I got into the business, the people in my generation, we were really unique. In other words, like I say, people who graduate from MIT or Harvard Business School or whatever did not go into finance. They went out and they ran businesses, or designed products or bridges or whatever. So, in a sense, we have met the enemy and he is us. In other words, I feel like I was one of the original quants. I think the world of finance and to some extent the world has been taken over by quants and I think it’s a waste of time and energy that propagates an illusion among the public that the common man can make easy money, which is just not true, right?

So I look at somebody like, say, Eugene Fama, who has always been, in some sense, an intellectual nemesis because he’s been standard bearer for the random walk and all that. I was reading something when he got the Nobel Prize recently, and essentially what he said is, “most people should put their money in index funds,” and I agree. I think that the financial services industry is just way larger than it should be.

Niels

Well, you know, I think that’s a fine answer, although it wasn’t quite what I meant because in terms of skill it could be any skill, but I’m going to try and lure it out of you in a different way by asking you whether you have a secret talent – something that even people who know you might not know about you. Again here, I guess everybody knows you’re a good surfer, so that might not be your secret. Is there a fun fact that you can share with us that people might not know about you?

Bill

No, not that I can think of. What you see is what you get, obviously. I’m a surfer and I’m a commodity trader and whatever comes out of that.

What I really am, I guess here’s something, I’ve developed an interest in the last fifteen years or so in physics, particularly in thermal dynamics. That’s very interesting but it’s certainly not a secret. I find that it’s also something that seems to be not uncommon among CTAs that they tend to be attracted, at least later in life if they didn’t start out as physicists, that they tend to be attracted.

Niels

Now I said earlier today, or I asked you what investors might miss when talking to you in terms of questions, so here at the end I’m going to turn it on myself and ask if I have failed to ask you anything that you want to bring up at the very end, just to make sure that we do justice to you, and to your firm?

Bill

No, I think you’ve covered it pretty thoroughly.

Niels

That’s good. Before we finish our conversation do you mind sharing with the listeners where they can best reach out and learn more about you and your business?

Bill

Well, I have a website: www.dreissresearch.com.

Niels

Great, so they will definitely be able to find you there. Of course I will also put up some information on the show notes page for this episode. I think that just leaves me to say thank you very much, Bill. It’s been very interesting and I appreciate your openness and transparent way of explaining everything that you’ve done and shared with us today. I hope we will have a chance to catch up at a later date and see how everything is developing on your side.

Bill

OK, thank you very much. I appreciate your time.

Niels

Good, thanks so much, Bill, and take care.

Ending

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