71 Why You Don't Want Symmetry in Investing with Mike Shell of Shell Capital Management - 1of2

Mike

This is Mike Shell of Shell Capital Management, and you’re listening to Top Traders Unplugged.

Niels

Thanks for doing that, Mike. By the way, if you want to read a full transcript of today’s episode, just visit the TOPTRADERSUNPLUGGED.COM website where you will find lots of details about today’s guest. Now let’s get started with part one of my conversation. I hope you will enjoy it.

Mike, thank you so much for being with us today. I really appreciate your time.

Mike

Thanks for having me.

Niels

Great. Now Mike, you are a little bit different to the guests that I usually have on the podcast in a number of ways, and here are some of my early observations. Firstly, you typically manage a large part of your client’s assets while most hedge funds or CTAs only get a small part of the assets as a single manager, or from a single investor. You also use ETFs as your main investment universe. You’re not registered as a CTA, but rather you are a registered investment adviser. Then you charge, as far as I can tell, a wrap fee, which is different from the normal. So all of those things to me are very intriguing and interesting. But, of course, when it comes to the strategy you employ, there are so many commonalities to the CTA world which makes it a very interesting conversation I think. So this is another way for the listeners to learn about how to use alternative ways to implement a robust and rule-based investment strategy. Before we go into all those details, I wanted to ask you what may seem like a simple question. I think still it’s something that I find many people have different answers to. So I’d like to go ahead and ask you that initially, and that is something like this: if you meet someone for the first time, say at a social event, who does not know you or what you do, how do you explain what you do in a very sort of short way?

Mike

Well I’m an investment manager, and I apply tactical trend systems to global markets, and our objective is asymmetry. My ASYMMETRY program is designed to manage risk and compound capital positively over various market conditions and over full market cycles of bull and bear markets. In other words, where our focus is to manage risk, but also compound positive capital. So ASYMMETRY is really all about the risk and reward – how much downside risk can they handle versus how much total return. In order to achieve that we’re doing it across global markets using primarily exchange traded securities, and we do it in a managed account structure.

Niels

Sure, great stuff! Now that was just a very quick introduction to that. What I really want to do now Mike, is I want to go back, and I want you to tell us your story. Because my very strong belief is that you don’t really understand the numbers from a manager unless you understand the story. So please go back as far as you want and tell me from the time you almost grew up as a young man to where we are today, how did that all come about?

Mike

Well I grew up primarily in East Tennessee. My step dad was an engineer, so we moved around a little bit when I was younger. I ended up mostly living with my grandparents in East Tennessee on a large piece of land. So when I was in high school… Out of high school, I joined the Marine core. I wasn’t ready to go to college, and so I joined the Marine core. My tour was ended early from injury. I got out of the marine core, very quickly became a police officer at the sheriff’s department where I was. I began college working full time as an officer and went through college. I got a business administration bachelor degree with a focus in accounting and finance.

From there I thought I was going to be a federal agent because I was interested in law enforcement as I was working in law enforcement. But from there I actually became very interested in trading, because actually the trading part came a little sooner than that. I had picked up a… had read How To Make Money In Stocks – Bill O’Neil’s first book back in the early nineties. That got me interested in trading. So eventually a few years later I started being more focused on trading and that’s kind of how it all started. The first thing I did was I wanted to get into the industry, so I joined brokerage firms, and I worked for a couple of different brokerage firms. I realized that the brokerage firm route wasn’t the way for me because I wanted to manage money and be an actual portfolio manager. So later on in 2004 I started Shell Capital Management. Shell Capital Management is registered as an investment advisor. Due to the nature of my working directly with investors like business owners and physicians and engineers, I didn’t think that a fund structure was the way for me to go. It seemed to me that doing it as an investment manager running separately managed accounts on a brokerage platform was the better way to go, so that’s how I did it. So that’s kind of how I got started.

Niels

I mean obviously that covers a lot of years in a very short space of time. So I want to just go back a little bit because again from being in the Marines, getting injured, coming to the police force, and then suddenly starting to pick up trading, where did the initial… I don’t know whether the word is exposure or interest in financial markets, where did that come from?

Mike

Well it was… I think sometime in the early nineties I had gotten a hold of the book How To Make Money In Stocks by Bill O’Neil. And that is a very quantitative system methodology. It’s rule based, but it’s also discretionary. The charting part of it was what really intrigued me too. So you screen for stocks, and then you use charts to determine the trend, and you use relative strength to determine the strength of the trend. So that actually… I went, and I took that a lot further…dramatically further now. The charting part of it and the trend part and the relative strength part were the parts that I really started doing my own proprietary research on, and also on risk management and much more sophisticated ways of managing downside risk. So that was really the original thing, and that’s where it all started for me. And then from there, I’ll tell you, I’ve read over five hundred books, I think it’s well over that now based on Amazon (the last time I counted). I’ve read over five hundred books on trading and math and investor psychology. That’s where over time I developed my strategy. The Jack Schwager Market Wizard books were incredible influences for me. You know, Ed Seykota, Richard Dennis, the Turtle story, the… Michael Covel’s trend following books, obviously were huge and all the technical analysis stuff and all of those things over the last twenty years.

Because it really probably started around ninety-four, so it’s been right at now twenty years. Those things over the first ten years influenced my beliefs, and I developed my beliefs… I tested my beliefs after about ten years starting around 2001 to 2003. I started systems trading where I started testing my beliefs, testing the discretionary methods that I was previously using and started developing those things into algorithms and models and systems. Now I have a complete system that encompasses all of the parts that I think I need… All the questions I need to answer every day. So that’s kind of how it all got to where it is.

Niels

Sure. I mean you also mentioned of course that your first exposure to the financial industry was in the brokerage world, and I’m just a little bit curious about… You know, what was your experience within that, that really propelled you to realize that that wasn’t for you. You wanted to do something different? What was it inside the brokerage world that you saw that just didn’t make sense?

Mike

Well as I spent several years as a broker, as a stock broker and an options broker, I was a registered principle and a registered options principal for a firm, and so I was mainly trading stocks and high roller strength stocks and also options back then. You know there you’re having to… A broker is selling securities. So you’re recommending that they buy or sell a stock. So you’ve got the other person who’s the investor and the asset owner, who is ultimately making the decision. You’re telling them what you think they should do, but they ultimately have to be able to do it. So it doesn’t matter how good your edge is of entry, exit, and size, and how well you manage risk. If that other person is unable to do that then you can’t really take your strategy, even if you do have an edge, and actually implement it with people who then have to be able to… they have to have your edge too. They’re not going to allow you to make the decision.

So now you can have discretion as a broker, as I did for years back then, but the problem there still is that you’re… Ultimately a broker is a broker. If you’re at a Merrill Lynch or a Wells Fargo, or a Raymond James, or wherever, those are brokerage firms. They mean well, but they’re there to sell investments. And in order to be a true money manager, a person has to form an investment management company, and they have to have documentation that says what they do. So we have documentation like our form ADV that describes the strategy. Then you’re starting to really define the strategy, and your whole firm… our whole firm is managing one investment program. So Shell Capital Management manages the ASYMETRY Global Tactical Managed Account. It’s one program, and that’s all we do. We don’t do anything else. And so the brokerage experience, what the challenge was, was trying to get other people to make decisions with an edge. So that’s very, very difficult to do, and then also doing it with an environment that’s not designed for that.

You go to a brokerage meeting, and the brokerage firms are calling themselves the sales organization. I’m sitting here thinking, you know this is… It’s really not who I am and what I want to do. I’m not in a sales organization. I want to be a money manager, a portfolio manager. I want to make trading decisions for a living. And that’s all I do today, and that’s all I’ve been doing for ten years. So that just wasn’t a fit for me and I… but you know you have to start somewhere. I think… I mean even some of the greatest traders in the world started in that very same way. I know several that you know of that started at some of the big investment… you know the brokerage houses, investment banks.

But ultimately to really do what you want to do you have to get out there and create your own firm, become a business owner and make it all happen. You know an employee is a person who operates the systems that somebody else creates. A self-employed person is a person who believes they can create their own system so that they go out and do that, but then they also operate the system. So if a self-employed person… They may create their own systems, but they operate their own systems. And this could be a McDonald’s franchise, okay? It could be a manufacturing company. A business owner is a person who owns a business, and they hire people to run the business and don’t have quite so much to do with the actual operation.

And then the investor is actually the person, who like invests with me, and they allow me… They hire me to manage their money for them. I do the trading, and they go out and sail away on their yacht or play golf or whatever it is they enjoy doing. So it’s kind of… That’s the four different levels of freedom I think, when you’re an employee of an investment bank or a brokerage firm, that’s what you are. Ultimately you may have your own strategy. I did, I had my own strategy then. But I couldn’t really implement it in the way that I wanted to because you see even if they give you discretion and you are a part of the investment adviser division of that firm, you hand them a form ADV, filed with the SCC that documents and says who you are as a company. Well, it’s got everybody else’s name on it but yours. It’s got all the other people. It doesn’t have your name on it. You didn’t write it.

So if you’re going to have a strategy, you’ve got to have your own strategy, and that requires you to start your own firm. And let me mention one more thing, I do today something we started a little over two years ago is we do also run a fund. I don’t talk about it as much publically. But we did start a management company to manage a fund. We’re doing it on a limited basis at this point. The fund is just a more advanced version of what I’m doing, where I’m using options and a much more dialed up faster moving system. There again a fund structure is another way of doing it, but it’s a pooled account. To me the reason that you go from the investment… So I can do what I do in a managed account program as a registered investment advisor, and I can manage these accounts across… We’re available at several places. Our main custodians that we use are Folio Institutional, Trust Company of America, and then we have the programs available also through Place Mark Investments and places… You know brokers like Schwab, Fidelity, TD Ameritrade, Pershing and Interactive Brokers.

So I can manage this managed account program across all these different platforms. I can buy and sell. That’s all I do is we buy and sell. We don’t custody. All I do is buy and sell in these accounts across all these different platforms, and that is one hundred percent of my focus, and as a firm that’s all we focus on. And because of the way that I do the managed account program, which is the main thing that we do, you know, and have been doing for ten years… Because of the way I’m trading mainly ETF’s or securities rather than say options or derivatives or futures, is that I can very easily do that in a managed account. I can do that in a Schwab account or a Folio Institutional account, or I can do that in somebody’s individual account because it’s possible to do it. So when it’s possible to do it, you may as well do it that way. That way they get transparency, they get control, and they get liquidity.

Niels

Sure, absolutely. I had one question before we jump into that because I can sense where we’re already heading, which is exciting. But, just out of curiosity, being in the marine core and then being in the police force and then working for a large organization, in a sense you’re part of a group so to speak. I was just curious, what gave you the courage to go and become an entrepreneur? Because that is a very different environment, let alone the fact that you wanted to be able to implement your own strategy, that’s one thing, but you also have to have a certain amount of courage to say, “Okay I’m not going to take a monthly paycheck anymore, I’m not going to be part of this group, I’m going to do this on my own.” Was there anything, in particular?

Mike

That is an excellent question. And an interesting thing because I’ve always been an independent thinker, you know I think I was always that was as a kid. I think back to my friends when I was young and my cousins, you know I’ve always kind of been a very independent thinker. And so I am probably the epitome of an independent thinker. I kind of chart my own way, do my own thing within the rules that I’m given. Not that I break the rules, I just mean I come up with my own ideas and my own way of doing things. Now the irony is, is that I spent a few years as a marine and as a law enforcement officer, where there, you’re taught discipline and to follow orders and to do those things. So that did provide me with an unusual level of discipline that you learn, and precision.

You know the military and in law enforcement, they’re very precise, they very much follow rules, you see. But they’re also bureaucracies. I can assure you that my experience in a law enforcement agency for four or five years certainly taught me that that wasn’t what I was going to do in my career because of the politics involved and all of those things. I have a lot of respect for the organizations, but it’s not for me as far as the politics and how it all works. I guess for me what sprung me out of it was I… It just wasn’t my fit. As I became older and older I was becoming more and more of an independent thinker, and I am self-driven, I’m self-motivated. So I’ve got this internal desire to do more with myself, and I’ve got an internal desire to create things and to create and operate things. So I create systems. I create systems for everything – everything we do is some sort of a system, and that’s my passion and that’s what I do. So I think what gave me… Obviously I had some bravery I guess as a personality trade or else I wouldn’t have ever joined the marines and got into law enforcement, and wouldn’t have gone off and went to a zero paycheck environment where you don’t actually get paid just to be there.

I took a chance, and, in fact, my grandmother was one of the smartest people I ever knew in my life. She told me a lot of really, really good advice that it took me years to figure out. I can tell you there was only one thing that she was ever wrong about. She told me in 1994, “Mike you’re so… don’t overdo this, you know, don’t get burnt out.” And I tell you, I’ve been like this for twenty years, and I’ve not got burnt out, not a single day, this is how I am all the time. I love what I’m doing, and I’ve found my passion. I could have very easily just went and worked at a factory and made widgets for the rest of my life, but I chose to do what I’m doing. I’m going to keep doing it until the day I die. And I tell people now, I say I’m as retired today as I ever will be because this is what I want to do until the day… Until I’m gone. As long as I’m here, as long as I can see and do… As long as I can comprehend the world, this is what I’m going to do until the day I’m out of here. And so I’m as retired today as I’m ever going to be, I’m not ever going to retire.

So it’s that level of passion for it and drive, and you know just making it happen. And also I’ll tell you one thing I mentioned, something about a Market Wizard’s book earlier. You know the one thing that I… Ed Seykota said, that everybody always gets what they want in a market. And I’ll say this: I believe that everybody gets what they want. And I would go so far as to say that everybody always gets what they want. Now you could say well, I’ve got cancer, I don’t want cancer. Of course you don’t, I didn’t say you wanted cancer, I said everybody gets what they want. And what I believe that means for me is that I believe that we get what we want because we decide what we get. And I think that if you really want something, you’ll get it.

And in my life, in the last forty-four years, I have seen people, people who get what they want. And even if they claim that they don’t have what they want, it’s because of what they’re doing every day is why they’re not getting it. And I can assure you that I’m getting exactly what I want, good and bad. You know I make mistakes, and I do things that don’t have great outcomes, but I decided those things. I think that that level of personal responsibility, that level of commitment and drive is the key. And it’s not just me, I see it in all the other people… There’re a few other people I know that are really good at doing the kind of things that I do, and I see the same level of passion and commitment, and they’re fully committed… We’re fully committed to what we do. And my whole life revolves around it. My wife and I, we don’t have kids, so our whole life revolves around what we’re doing here. So that, and I started that when I was around twenty-four years old is when it all really got started, and it’s been that way ever since.

Niels

Now clearly the passion, it comes through loud and clear, and I think you’re absolutely right, that that is very important. But I just wanted to ask one thing before we get into the more sort of serious stuff, and that is: If you’re not working one day, or if you have time to spare, what do you like to do which is not related to the business?

Mike

Well that’s a good question. And let me mention before that, you know the things I was just saying was related to the human element. You know, so there is a human element to the whole process. There are personality traits I think that help in doing this because I just mentioned them, I said it’s drive and passion, and those are all things. Well, the other side of the human element I guess we could say is… See the thing is, my whole lifestyle revolves around the process of trading, but the funny thing is, is that the way that we do it, you know the truth is we don’t get up… I don’t get up and go to an office every day anymore, and I did for years. I wasted a lot of time getting up and getting ready and going to an office.

Now I primarily, in doing what I do from my home office here in Tampa, Florida, or my home in Knoxville, Tennessee. And you know what, I wake up at about six o’ clock in the morning, and I walk straight into my home office. I turn on my machine, get my machines running, and I start immediately. And I run that until… I’m in a zone, a very deep zone until about eleven o’ clock. So from six until eleven I’m drinking coffee, and I am doing what I do. Then after about eleven o’ clock I go and have lunch and do other things, and probably go out and sit by the pool when I’m in sunny Florida. And literally, sometimes by the way I take my laptop, and I’m sitting out there with my little Shih Tzu doing my trading activities out there.

You see the funny thing is, is that the process is not going and sitting in an office. For me, it’s built into our life, and I’m not afraid to say that because that’s just how we roll here. And it’s… And so I may go jump in the pool at noon you know, and go for a swim. And one big thing I do is I walk every day a lot. Christi and I will go for long walks with our dog. We’ll go walk for three miles and come back… And I may get in the pool, and I may turn around… And then around two o’ clock then I go revisit what’s going on in the world. I look at my positions and look at all the things that’re going on, and run systems again. And the things that we do for fun though is… the funny thing is the fun is built into the day.

That’s how we do it; we’ve been doing it that way for the last five or six years. We went from going to an office and sitting in an office environment to just… I need to be in a certain mental state to do what I do, and my best mental state is a lot of times sitting with shorts and a t-shirt outside by the pool, or maybe even on… You know we don’t go to the beach and do it that much, but in a very relaxed environment so I can really be in the zone and really focus on what I’m doing. And then for fun, well you know, Friday night, we’re doing a fire pit Friday. We’ve got a bunch of friends and neighbors coming over, we’re going to have a fire out in the front, you know in the driveway have twenty people, we’re going to grill filets.

I’ve got a boat, a motor yacht down in St. Pete Beach. On the weekends, to get away, we go down there and we hang out on the boat. We take the boat out onto the ocean and drop an anchor down off an island somewhere and swim around with stingrays and jellyfish. We do lots of things like that. We went to the… You know Tennessee played in a bowl game last weekend, and we were in Jacksonville for the whole weekend. So we play hard but we work hard. The funny thing is though, is that in the middle of all this, 24/7 when our investors e-mail us at eleven o’ clock last night, you know we probably replied back, it’s just incorporated. And so we’ve done things differently that way in that our whole lifestyle is revolved around… It’s all integrated, there is no separation, there is no work. I have not worked since I’ve been doing this. But there is no separation… There’s no nine to five job that you come home to, grab a six pack and go watch TV or play with the kids. For us, this is just how we do things all the time, and we build lots of fun and exciting lifestyle things into it.

Niels

Sure. I mean there’s absolutely nothing wrong with doing things differently, that’s part of what attracts certain people to certain managers.

I do want to turn the attention now to the more business oriented stuff. Now we as human beings… I think it’s fair to say that we all have a bias towards symmetry in our lives. I mean if we decorate our houses, we want the pictures on the wall to be place symmetrical to each other. But why is symmetry the last thing you want when it comes to investing?

Mike

Well that’s an outstanding question. So my program is called ASYMMETRY, which is a word that I’ve actually trademarked several years ago, and so our managed account is called… Our actual portfolio is called ASYMMETRY Global Tactical. Our managed account program, the wrap program is called ASYMMETRY Investment Program. Our website is asymmetrymanagedaccounts.com, and the fund that I manage privately is ASYMMETRY Fund Management and the ASYMMETRY Global Tactical Fund LP. So everything that revolves around asymmetry… we’ve even considered changing the name to ASYMMETRY.

So asymmetry is about imbalance, it’s about not equal, it’s about more of one, less of the other. So if you understand the core essence equation for portfolio management is to have a positive mathematical expectation. So I’m going to start with the end which is: a positive mathematical expectation means that you’re average wins versus your average… So the percentage of wins -how much you make when you win versus how much you lose when you lose. That’s the probability of winning (how often you win), times how much you win when you win. It’s the probability of losing times how much you lose when you lose. You minus those things out and you come up with a mathematical expectation. We want that to be positive. So it’s not about trying to make all the trades a winner. It’s about having the average win be much greater than the average loss. That is asymmetry.

So asymmetry is about imbalancing risk and reward on a trade basis, so it’s more profits, less losses on a trade basis. It’s also about more total return and less downside at the portfolio level. Investors want as much return as they can get within a given amount of risk. Now I’ll tell you we can’t control how much profit we make, but we can control how much risk we take. That is the key, and that is the essence of it. Everybody else is trying to focus on trying to be right on all their trades and trying to make the trades winners. I’m focused completely on the things that I know that I can control, and that is how much I’m risking and how much I’ve got at risk at any given time. Because I do control and manage my risk, and then I’m able to find potentially profitable price trends in world markets, and then some markets that some people think are risky. What I’m doing is I’m mainly controlling my risks in order to create asymmetry.

So the funny thing is, while if you notice the investment industry tends to say like you said… They tend to say you want to balance your risk and reward. Well, that’s completely wrong. If you balance your risk and reward or if you balance your profit and loss, now just visualize what that looks like. That’s an oscillator, you have a period of winning, and then you have a period followed by losing. So you win for a while, and then you lose for a while, and then you win for a while, and then you lose for a while when you balance your risk and reward and when you balance your profit and loss. That is called symmetry okay; symmetry is balance. We don’t want to balance a risk and reward, we don’t want to balance our P&L, we don’t want to balance our total return versus our drawdown. We want to imbalance it, we want less of one, more of the other. And that is an objective, and that objective is built into everything I do. That is ironically the positive mathematical expectation that most CTA’s understand, that is what it is. So I call it asymmetry, they can call it expectation, but for me it’s asymmetry, and it is the essence of everything that I do.

Niels

Sure. No, I like the fact that you’ve been able to sort of coin a phrase that really defines you and what you do, because I think that that’s often very, very difficult to do. So my question is when did you realize that that’s actually in one word what you wanted to do?

Mike

That came about probably… I guess when I discovered expectation, would have been in the late nineties at some point. And it’s probably a combination of learning about the Turtle trading system – expectation obviously is a core of that. A little further, Van Tharp wrote a lot about it in the late nineties. I understand math in a unique way, and I don’t have a Ph.D. in math. I have fourteen Ph.D.’s I say because I’ve read five, six, seven hundred books.

So the funny thing is my Ph.D. comes from Covel, Schwager, Tharp, you know so on and so forth, Seykota, going down the line. I mean I’ve got a Ph.D. from just… The name of the school has got so many last names in it that I can’t even write them all out you see. A Ph.D. is a doctorate of philosophy; I’ve definitely got a few of those. But the thing is… That concept for me in my mind came about I guess in the late nineties… I guess the word just kind of came into my head because it’s all about imbalance. The whole imbalance theme came in and then I started using it. I realized I guess back a few years ago, four or five years ago I guess, I realized that I started using it more and more to define the asymmetry in a trade. So you can talk about a portfolio at the trade level, which we don’t do with the investors that much because that would be way too complicated. But the investors are more concerned about how much does my account go down when it goes down, and how much does it go up when it goes up over a full market cycle? Not just a bull market say in the stock market, but the entire… Look at the last ten years, you’ve seen my performance and what it looks like… I mean it’s… you need that asymmetry over a bull and bear markets, you need it over recessions and expansions. I think about asymmetry at the P&L level of: I risk a dollar, and I make two dollars on average. I can only be right fifty percent of the time, and I’m still going to make fifty cents, you know that’s expectation. But if I flip a coin which has a fifty percent probability of winning and fifty percent probability of losing, if I can skew that payoff… You know it’s all about the payoff, the asymmetrical payoff… If I could skew that to where I lose a dollar when I lose, and maybe I make two dollars when I win, then that’s where asymmetry comes from, and that’s expectation.

So that word has just come into my mind years ago. I used it a lot in conversation, and then I decided this is what we need to name what I do because it is my objective. So asymmetry is my objective, and asymmetrical returns are my objective. I’m trying to compound capital positively, but do so within a certain amount of drawdown, a certain amount of risk tolerance that we’re willing to… I’m not willing to accept a drawdown of more than about twenty percent, so I’m controlling my risk… I don’t want to have my decline, my peak to trough drawdown, to be more than about twenty percent within this managed account program. So that’s my… and I’d like the total return, but I can’t control that you see. When I get into a trend, I can’t make it go up. By the way, I also countertrend things, so I don’t just do trend following.

I buy mostly things that are going up… When I go outside, and I throw a ball into the air, if I want it to go really far and go really high, I’m going to throw it as fast as I can. If I could throw that ball at ninety miles an hour, the ninety miles an hour is going to be clocked coming out of my hand and it’s going to be faster early, and then it’s going to slow down and eventually it’s going to be the rate of change, the velocity, the momentum, the relative strenght, it’s going to slow down, and it’s going to start to arch. When that velocity starts to slow down, it starts to arch, and that’s when it starts to come back down again. That’s what a trend kind of looks like even in prices. The difference is I normally can’t go out and throw the ball, have it arch down and make a low, and then turn around and go up again. I’m not able to do that. I’m not that good at throwing a ball. But you see, that is the essence of a trend, is that trends tend to start off really fast, really strong out of the gate. That’s what we want to buy, is that we want to buy strong trends out of the gate. They tend to slow down toward the end.

Now the other thing that happens though is counter trends, which sometimes… The trend is probably created by underreaction to information. People, we may all get the same information, but we don’t catch it, we don’t see it at the same time. So as people build on to a trend and they start to learn that information, that trend starts to continue, and it lasts longer. There’s another thing that occurs too though that’s explained by behavioral finance, and that is that trends can also go too far. They can over react. We never really… The overreaction part is a tricky subject because if you bet against the trend, you can lose a lot more money betting against the trend than you can betting with the trend. So the overreaction part is a little more tricky to figure out when something may have moved too far too fast. But that’s a part of it too. Asymmetry is really ultimately about having more profits and less losses. That is to me the essence of portfolio management and it is the essence of all that I do and everything. I think about it every day. My house is even asymmetrical. It’s larger on one side than it is the other (laugh).

Niels

I’m not even going to guess what your boat is named, but I have a feeling it might be close to Asymmetry.

Mike

Well actually that would be a good idea, but it’s actually Adventure Capital, because it actually uses my Shell Capital logo. It actually puts the word adventure in there because it’s all about adventure. I think… I did a study years ago on happiness and what causes happiness and what allows us to stay happy and the irony is a change and uncertainty, the very thing a lot of people fear is actually what leads to happiness. Happiness is all about… If you want to stay happy, you need new experiences in your life. You need adventures. You need some change because there’s a term that I say a lot and my wife gets tired of hearing, I think, because I say it almost every day, “Hedonic adaptation”. So hedonic adaptation means that we get used to things, no matter what it is. You can go buy the best Ferrari in the world and get out and drive around or the best yacht in the world. You will get used to it, and you will get to where it’s not quite as valuable to you anymore.

So what you want to do is you want to try and avoid getting too used to those things by not doing it too much. So the irony is… The nice thing about a boat is that you can go out and have an adventure on the boat and go to new places and explore new areas, and that’s what’s really neat about boating. Of course you can do the same with motorcycles or a convertible car, you can fly around the world, but that’s… I actually named it Adventure Capital and haven’t yet put the word asymmetry into it, but most everything else we have… The boat is certainly asymmetrical. The boat is larger in the back than it is in the front.

Niels

Sure, sure. Now you mentioned one other word that I think we just want to touch upon as well. That is the fact that most people, most human beings they want as much certainty in life that they can get. Not many people thrive in an uncertain environment. But you obviously have a strong belief that we need to embrace the uncertainty. Talk to me about this concept and how do we learn to become better at accepting uncertainty?

Mike

That’s an excellent question. So uncertainty… The fact of the matter is we’re not certain about anything. We don’t know the future. We don’t know what’s going to happen next. We don’t know what’s going to happen next in a trade, nobody does. We don’t know what’s going to happen next about anything. In fact, I’ll go so far as to say that we don’t even know for sure yet if we’re going to die. Now think about it. We’re not dead yet. They may cure death before we die. We don’t know for sure that we’re going to. You’re not even certain about that. You couldn’t bet your life on it. We don’t know for sure that we’re going to die. You don’t even know for sure… You don’t have to pay taxes. They say death and taxes are the only certainty. That’s why I’m using these as an example. You don’t have to pay taxes. The alternative is to go to prison. So we’re really not certain about anything, or not very many things. If I take an ax and I hit my hand with it, I’m probably pretty certain it’s going to hurt, and it’s probably going to do some damage to my hand. But I don’t know, maybe it doesn’t, but I’m not going to try it. We just don’t know the future. So here’s the funny thing.

The way you deal with uncertainty… people worry about things and especially traders in the markets. This is one of the most common things, I believe, is that people worry about things. Worry is when you sit around and ruminate and are all concerned and fearing things that haven’t even happened. So you sit around, and you worry about these things. You worry about what the market’s going to do next, and it hasn’t even happened. Well, if you do that enough, guess what happens? If you do that enough then you’re going to experience that internally even if it doesn’t happen. OK? So people who worry a lot, they tend to experience those feelings. They experience bad things even if they don’t even happen.

The way you deal with uncertainty is you… I wrote an article on asymmetry observations just two weeks ago, before the holidays. We were getting ready to go to lots of holiday parties and events. We were hearing about all this flu going around and these were very unpleasant stories that we were hearing about – all these viruses that people were getting and people were sick, and I’m thinking, “Oh man, we’re going to go to these parties, and we’re going to catch it.” By the way, I didn’t but Christi actually did catch a little bit of one. But I write this article about it and what I said in there, I think it’s a pretty compelling piece because, we know that we’re going to these parties and going to be around people who may have these viruses and they may be around in the air. We know what the risk is. We’ve defined the risk, and we understand it. OK? It kind of almost makes you want to say, “Hey, does anybody there have the flu lately?” But you know, at the end of the day you’ve got to live life. Like I said earlier hedonic adaptation – you need new experiences. At the end of the day, you predefine your risk. You understand what the risk is. You predefine that risk and then you live with it. You let it go.

So when I buy something at 50, and I say, “OK, my system says I’m going to get out at 45. So I buy it at 50, and if it goes down to 45 that means that it’s no longer working. It’s no longer going in the trend I want it to go in. I’m going to get out. When I do that, I completely and utterly have let that five dollar risk go. Now most people buy at 50, and a lot of people will let it go to zero. When I do define that risk, I let it go, and I assume as though, in my mind, I’ve already lost the money. I am at that level of accepting the risk that I just took. Once I do that, I let it go, and I let it rip and I let it all unfold as it does. Once that trade gets under way, and it goes from say 50, 55, 60, 65, I’ve got an exit system that also follows that trade as it goes through there.

Well, that same concept we have to apply in life too. We have to understand what our risk is in a situation, no matter what it may be. A friend of mine was just talking about their son, who just turned 16 and he’s driving for the first time. Should he have passengers in the car or not, and all of this. You understand, you think deeply about your situation. You think about the risk of it, and the uncertainties, because it’s always going to be uncertain. We just don’t know the future. We don’t know what’s going to happen next. We don’t know the outcome in advance. So you understand what the risk is and then you have to accept it and you let it go. You determine how much risk you’re going to take in that situation. We’re going to go to our parties. We’re going to enjoy friends. We’re going to enjoy family. We’re not going to avoid that and miss out on life just because we’re afraid we may have to take Tamiflu for five days. We’re going to go ahead and do what we do and sure enough, she got a little bit sick and had to take medication, but she got past it and now we’re all good.

So I think we deal with that every single day in life. If you’re too afraid to take risk, then you need to focus on how can you manage and control that risk and determine how much you’re willing to take – define that and put it down and control it and then let it rip and just let it all unfold. Because I can tell you this, whether it’s a trade or whether it’s in life, if you allow that position to just let it all unfold. It’s like watching a movie. We have a home theater and we love watching movies. We watch a movie almost every night before we go to bed. That’s how I get my mind off of everything so I can go to sleep. I’ll sit here with a glass of red wine and watch my movie for two hours. I hate it when somebody tells me the outcome of the movie. I don’t want to know the outcome of the movie in advance. I want to sit and just watch that movie all unfold, and that’s the fun of it. So you see the funny thing is, is that trying to predict what’s going to happen next it kind of takes away from the whole fun part. What we can control, as I mentioned with the whole asymmetry concept is, we can control our risk in advance. That’s the part we can control, and that’s what we need to focus on and let everything else just flow out as it does.

Niels

I want to jump to the next topic, and I want to talk a little bit about you know what is required from an organizational point of view in order to do what you do. But I want to focus on it from a slightly different angle. We know from (I call it for lack of a better word) the pure alternative investment space, that they’re obviously competing with each other, but they’re not competing against the major banks around the world. When I think about your universe and the fact that you predominantly invest in securities; and the fact that you manage a large portion of the wealth of these individuals, I’m thinking that you actually are competing with these big banks and so on and so forth. So how do you structure an organization… you know, and I know it’s a small team, but how do you structure that in order to be able to compete?

Mike

Well first of all, our company… So Shell Capital Management is registered as investment advisor, so that is a fiduciary whereas the banks that you’re talking about are not. The brokerage firms are not fiduciaries first of all. They don’t have a fiduciary standard of care, whereas an investment management firm does have a fiduciary standard of care. That means that we need to make every decision that we make be in the best interest of our clients. And that’s talking about all the way down to something we spent several months on recently which is negotiating the trading cost. Now we do a wrap fee program where I actually pay the trading cost. So we charge one management fee, and it actually includes the trading cost. So Shell Capital Management manages people’s individual accounts that are titled in their own names at a third party custodian or a third party bank.

So they control the account, and they just give us through a power of attorney, through an investment management agreement, the ability to buy and sell in their account. And then we’re able to use high-end custodians with high technology that allows us to allocate the same exact trade across all these accounts, through all these different places. So all I’m actually doing for a living is I buy and sell things in those accounts. So I buy and sell in size, so I enter and exit in size, and that’s all I’m doing in the accounts. So everybody gets the exact same trade at the exact same time and pretty much at the same price.

Now the way we compete with them is because, first of all, we’re fiduciary, and we’re doing it… They’re hiring me to be a portfolio manager whereas if you go down to a brokerage house, you’re your own portfolio manager. Ultimately your broker is not your portfolio manager. Your broker is really a broker that sells you things and maybe gives you advice and tells you about maybe mutual funds or something like that, but they’re not actually a portfolio manager, where I am. And so it’s actually very easy to compete with that because we’re structured in a much better way. I mean there’s no question about it you can just Google “registered investment advisory” fiduciary standard of care and be one of the most basic concepts.

The second thing is we only make buy and sell decisions and portfolio management decisions. We don’t have access to the money in any way. We don’t cut checks. Nobody mails us checks. The checks go directly to these other custodians and these other brokerage houses. We can manage accounts as I said earlier, at Folio Institutional, Interactive Brokers, and Trust Company of America. Through Place Mark Investments we access Schwab, Fidelity TD Ameritrade, and Pershing, so there’s all these different places we can do it. So it’s really just a much higher level of getting it done if you want a managed account. People who I think are at the banks or at the brokerage houses are people who are really… You know, they’re wanting to kind of make their own decisions and maybe get a little bit of advice from a sales person, but at the end of the day… And I know those banks, they may offer their own programs too. You can compare them to mine and others, and you see that it’s about… you’re talking about the business structure itself.

You see at the end of the day like I said, it all comes back to we are completely and utterly focused on this one thing that we do, and it’s all that we do. We don’t talk to our investors a whole lot because there’s not a whole lot to talk about unless they need money or want to add money to it, or let’s just say want to kind of catch up and see how you’re doing. I’m not a broker, so I don’t discuss the trades with them, I’m making trading decisions, and they’re getting the trades, and we’re all getting them. My money’s in there, our family’s money is in there, the client’s money is in there, so it’s really not a… I guess if we are competing, probably the majority of people that have come to us over the years to be honest with you, have been high-end business owners who are very sophisticated people themselves, who are probably doing it on their own or… And maybe they had some help with their broker, or maybe they’re a physician. We have a lot of physicians and surgeons and radiologists and things like that too, and anesthesiologists, where they’ve had bad experiences with trust companies, or banks, or brokers. They lost a lot of money in 2008, 2009 maybe, and they came to us because of that. My maximum drawdown was fourteen percent in the managed account program, and it lasted about six months before we were covered. So I don’t think that as far as competing wise, I don’t really feel like we really compete with them because I don’t think that they can really compete with what I’m doing.

Niels

No, and I didn’t mean strategy and such. In terms of just sort of general, I mean… Do you have to rely a lot on outsourcing in order to cover all the areas that you need to cover? And do you have plans as you grow to also build a bigger team on your side?

Mike

Yes, that’s good. Actually you’re right, we do, very good point. We outsource a lot of things, okay? So like when it comes to the managed account program you have to realize that we have a whole team. All these different custodians and banks, and brokers that we mentioned, there’s a team in all those places that do all the back office stuff for us. All I do is I go in and enter a buy and sell. So there’s other teams that do all that. Kind of like in the fund, for example, in a pooled fund, you have a third party administrator that does all the administration and handles the cash money in and out. You have a bank account that accepts the wires in and out. You have a brokerage account where we do all the trades inside the brokerage account. There’re all kinds of controls that keep anybody from being able to get to the money. In the same way in a managed account program, it’s probably even easier because we’re just buying and selling in these people’s own accounts.

So yes we do have people. There are two other people that are involved in the organization. One of them is somebody who was the first employee I ever had ten years ago. He worked for me for about three years while he was getting a degree in finance at the University of Tennessee. Then he was kind of helping me do lots of things. One of them was to find investors. We had just enough investors that I wanted to focus on that for a number of years. Then more recently we’re launching some new things where in the last couple of years, we actually now made it available to other advisory firms. So registered investment advisors that are financial planner type of advisors, and wealth managers, they will now use my investment program with their clients. And so we have… I’ve got two people that actually work with them directly, and then occasionally I’ll talk to them too if necessary.

But I have two people that are working on that on a national level. And one of them, the guy that I just re-hired that worked for me years ago. He by the way spent six years flying helicopters in the army and then five years as a senior auditor. He’s a CPA, and so he has the level of precision that I need to work with me because we do things very precise. I have my way of doing things, and it’s not a normal way of doing things. So we demand a certain level of precision and this person has it. He is going to head up… He’s working with the advisors around the country, and that’s the element that we’re going to really grow, because that’s where I think our real growth is. Yeah, we’re still open to maybe working with some business owners and things like that, maybe directly that Christi works with, but Gary will be working with the Advisors.

So yeah, it’s all outsourced. We’re not a bank or a financial institution so we don’t have custody of the money. So there’s a lot of things we don’t have to do. We’re just ultimately buying and selling and then all these other entities are actually doing everything else.

Niels

Sure. I wanted to talk a little bit about your track record. And what I mean by that is when investors look at a track record, and usually if it’s been around as long as you have for sure, and longer, there is a lot of things that have gone on during that time, and the way the trading systems were structured initially may not be the way it is today. So when people look at your track record, you mentioned it’s ten years long, how should they interpret it? How has it evolved from a structural point of view, in terms of the structure of the program over that ten year period?

Mike

Well, it’s always been a flexible strategy. So ASYMMETRY is global, it’s tactical, and it’s all asset. So it’s global in scope that… so for example, using ETFs as an example, you know I’m running a CTA type system, but I’m actually applying it to ETFs. That’s just how I started doing it. Now, the globalness means that we will access international markets, so I may have a position in Thailand or Brazil or Russia through an ETF or China. There’re over fifteen hundred ETFs… There’s about two to three hundred of those ETFs right now in my universe that’s global, that I consider to be tradable and efficient enough for me to apply my systems and methods to. And within that there’s like twenty-five countries, and there’re US sectors, and there’re bonds, and there’s high yield, and there’re some commodities,.. There’re currencies, and so it’s a very, very broad opportunity set. So it’s always been a flexible strategy. Now my strategy while systematic in many ways, and definitely… you know it’s part of a system, I have multiple systems, I have lots of different systems that I developed.

Ultimately though, the human element is, is that I’m applying the systems, and I ultimately decide which system to apply, and I ultimately decide how to operate it, and I do the execution. So for me it is not a mechanical, completely automated, mechanical system. For me, I actually have lots of different systems, and I am actually playing the shell game, no pun intended, in determining how I’m going to do it. So the reason I do it that way is because I guess I’m unique in that in the nineties, I was a technician. I was using charts, and I was defining direction of a trend using a chart.

Then later on I started using algorithms and developing an equation. And algorithm is a big, scary sounding word to people, but an algorithm is just a series of steps and processes. So it’s a decision tree. And I remember when I first got this gigantic dry erase board in my office in Knoxville. I started drawing out with a black market this big decision tree: “If this happens, then here’s what I’m going to do, if that happens, then I’m going to do this. But if this happens I’ll do that.” And that’s how it all started, it became… It’s a decision tree. We programmed it into a program, and we developed all kinds of systems to deal with it. And for me, where the programs that I’ve developed come into play, is that they do the routine daily tasks that we can’t quite get people to do accurately at my level. You see, when I’d get up at six o’ clock in the morning and walk into my office and I hit that button, that computer system is always going to perfectly tell me exactly what I wanted to know, and they don’t make mistakes. A calculator doesn’t add one plus one and give you three, it’s going to always give you two. Because it’s a very, very simple question that you’re asking the computer to give you. And so computer programs don’t actually make mistakes unless you just develop it wrong. So you get the precision of a computer program that will rank the world, tell you what’s going up and going down based on my definition. You know, tell me how much risk I have in each position based on if I’m in it at fifty and I’m going get out at forty-five, then I’ve got five dollars at risk. How much is that five dollars as a percentage of my equity? You see that’s monitored all the time, and so it’s man plus machine.

For me it’s man plus machine, it’s a combination of those things, and I use… I have developed some skills, and I know some other people like to talk about being mechanical and systematic, and I am, but I have developed skills of understanding. A big one for me, for example, like right now there’s a lot of inner market issues going on. I understand how markets interact with each other. And I’ll give you an example right now: I mean who’d of thought that we’re in a global deflation environment. Okay? Prices of things are going down, prices of stuff are going down. I’m talking about commodities and stuff, gold, the commodities indexes and all that.

We’re in a global deflationary environment, and TLT, the long term treasury, ETF is going to the moon… It’s recently hitting maybe a peak here, I don’t know, but it’s been a very strong trend up. So it’s interest rate is down you know, like two percent. So interest rates are going down, bond prices are going up on treasuries, and that’s all interconnected to global deflation. See, I understand that. I think that there’s not a whole lot of people that I know… And I communicate fairly regularly with about one hundred people who do this stuff, and there’s not a whole lot of people that truly understand what’s going on… And why gold is down, why the dollar is going up, and why… And it’s global deflation. The price of things are going down, and interest rates are… And that’s driving… And the second thing I think that’s driving long-term treasury up would be the fact that there’s a lot of world markets that are actually fallen recently. That money tends to rotate into bonds, and that drives the price of the bond up.

Those kinds of things to me are important. Now do I have to know that to do well? No, I don’t. But I can tell you that overall a part of the consistency of my return stream, and the uniqueness in my return stream, has been because I’m following trends primarily. I also identify at times when those trends get to an extreme, and I do some things there. Now I’ll give you a good example… I normally don’t talk about my fund a lot, but I’ll tell you something I do in my fund that’s different that I do in managed account. So in the fund, if I’ve got a trend that’s going to the moon, like say TLT the Treasury. I may go sell call options against that. I may start to slightly hedge that position.

So I’m going to let it keep going up. I’m going to allow it to keep running. But I may say, “You know what, this trend has reached an extreme point based on my definition, and I’m going to go and I’m going to use options to maybe hedge that position.” Rather than sell it, I’m going to let it go, but I’m going to hedge it in some way. And I may use a vertical spread or some real complicated option strategy to do that. By the way, options are very, very asymmetrical, you know the payoffs are very asymmetrical if done correctly. They’re not risky unless you don’t know how to use them, which most people don’t. So I guess at the end of the day, there’s a lot to it. For me, it’s been man versus machine. Over the last ten years, I can tell you that when you look at my return history, which will be on our website: asymmetrymanagedaccounts.com.

When you look at my return history, in the first several years we had… Like if I compared it to the stock market, for example, which is a bad comparison because we’re not just trading the stock market… The performance was really, really strong, and there’s a reason for that. It’s because I had a lot of international exposure, and I had a lot of commodity exposure to commodity indexes, and particularly energy. Energy was rocking out from 2005 through 2007. Energy was going to the moon… and most of the… Again understanding what drives trends, the return drivers, the driver of the returns at that time was the fact that you had commodities and certain…

In those countries like Latin America, that are commodity driven, they were really rocking and rolling. So we had a lot of exposure to that in energy. And actually if you look real close, if we compare it to the stock market, ASYMMETRY Global Tactical kept actually going up into 2008, because then all of a sudden I started actually getting short a little bit using ETF, just inverse ETFs. We don’t use margin, and we don’t short anything in managed accounts. It’s always just long exposure, but we’ll gain some short positions through inverse ETFs. So it’s just a nice, clean, easy strategy to do. We do this in profit sharing accounts and all kinds of different accounts, because we can you see because we’re not shorting, we’re not using margin, or anything like that, no leverage. Although we may use a leveraged ETF occasionally if we want to, to gain more exposure with less capital.

Going into 2008 if you look real close, the portfolio kept going up. In fact I think from that peak in the stock market of October 2007 up until October 2008, I think it gained around almost twenty percent when S&P 500 dropped twenty percent. And there’s a reason for that, and that’s because there were certain countries that were still going up. Energy was still going up. We probably got into maybe some bonds that were going up in price, and two really unique things at that time that we don’t do too often was that I was short financials and REITs (real estate) through inverse ETFs. I’ll never forget… I normally don’t get very many questions from our investors, because they see what we do, they understand what we do, so they don’t ask very many questions.

I do remember one investor back then saying, “Mike, who shorts REITs?” He said, “That’s a dividend paying, and all this.” And I said, “Well I do.” He said, “Well why?” And I said, “Because REITs are going down more than anything else in the world is going up.” Real estate investment trusts in early 2008 in financials, you know banks and things, they were going down at a higher… You know a better trend. Their velocity was… They were going down more than anything else in the world was going up, so we ended up actually going inverse using those. Because the managed account is mostly a long strategy, it’s primarily long things, but it will go short things. And we do use like SH the short ETF… S&P 500 ETF that get’s the short side… We will do that at times too, but it’s just not a huge exposure to it because I just don’t need it. And that strategy I want a consistent return stream, and so overall it’s a very flexible strategy, it’s not really changed a lot it’s just you know… I’ve kind of been doing the same thing over the entire period of time, but the conditions have changed, so that is probably… There’re periods of time where we’ve had more bonds. There’re periods where we’ve had more international stocks. There’re periods where we’ve had more United States stocks. There’re periods where we’ve had currencies… You know you don’t hear much about currencies anymore, but you forget that the Euro and all those currencies were doing really well in early last eighteen years…

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