I remember I forgot to look back on some of the episodes to see if there were any of those air gaps. So a couple snuck through. Apologize for that. Anyway, I want to talk about the concept of your track record. Some of you might be up, some of you might be down coming into Q4, starting in October, and there’s a bit of a way that you can play chess with the track record. And this might not matter for the folks who are just at home trading their own accounts for themselves. And they know they’re just, just going to be proprietary traders, just handling their own money for the rest of their career.
They don’t have any intention of raising outside money. But if you do plan on raising money, one of the first things anyone is going to ask you is how well have you done? How did you handle draw downs? How did you handle your upside? And so obviously better returns are better for you from your marketing standpoint. So, plus don’t forget, you can’t really have relative performance right now, as we’re sitting here the various markets are down depending on whether you’re looking at equity or fixed income. So, and they’re down a decent amount. So let’s say that you markets are down 20%. I think they’re down more. I haven’t really looked.
I don’t follow that stuff to be frank, because you have to be concerned with absolute returns, not relative returns. So if your benchmark is down 20%, but you’re only down 10% in the investment advisor space, you would say that you outperformed the market because market was down greater than what you were down.
Having smaller realized than unrealized losses, but in the world of professional management, you need what are called absolute returns. So even if the market is down 20%, it’s expected that you’re up 5% or 10%. You need to make money. See two, if you’re getting an incentive fee, you don’t get paid on relative returns, you get your dead money asset management fee, which is what some of you are working for. No problem, but let’s not confuse the issue.
You’re not really money managing – your asset allocating. And that’s an important function to provide for people, but it’s not really portfolio management the way I would look at it. If you’re in at Merrill Lynch or Morgan Stanley, you’re not a portfolio manager, unless you’re running a ’40 Act product. If you’re working upstairs and you have high net worth clients you’re really a financial advisor who asset allocates and that’s it.
So for those of you who are looking to run outside money and build a track record, let’s say that you’re up 25% for the year. It doesn’t matter to me what the number is. Just pick a number that’s up that you need to show positive rates or return for the calendar year or for whatever timeframe you’re looking. You might have 1, 3, 5, and 10 year periods of time in your track record. There’s a lot of wisdom in booking those gains. Now some folks would grow their capital if they took $1 million to $2 million. So they’re up a 100% and they’d say, okay, well I want to finish the year at least up 80%. I’m only going to risk X amount more of my capital before I stop trading for the rest of the year because I have to manufacture my track record.
And is it misleading or unethical? I don’t think so because you’re actually doing real things with people’s money and trading and managing money for performance fees has to do with not just making money, but avoiding losses. And since the markets have been down and you are up, you might find it very, very advantageous for your career to be able to say that for 2022, you made money. So you can do that on a dollar basis. You can do that on a percent basis where you say, okay, if we hit this puke point I’m done for this certain period of time. Paul Tudor Jones used to do this throughout the early part of his career in not wanting to have double digit losses at any period of time for say like a month. So if he was down 8% finishing through the second week of the month, he would be super vigilant and trade much smaller because he didn’t have much more room to go before he hit that point where he would’ve cap puked out everything and gone to cash, say minus 9.8%, for example.
So you can kind of do the same thing as you’re coming into the end of the year. Now again, if it’s just your money, what do you care? You can just trade do what you do. But if you’re trying to manufacture a track record, it’s very valuable to you to be able to have a positive rate of return. So pick a number that makes sense for you and say, okay, here’s my puke point. And this is where I’m going to go to cash or trade and cut my position sizing by 75%. So if I was trading 15s, I’ll trade 5s. If I was trading 10s I’ll trade 2s.
And this way I’ll be able to better manage the whipsaw on my capital coming into Q4. And then I’ll be able to print a good number coming into the end of the year and for the entire calendar year 2022. If you have any questions about this, feel free to reach out. If you’re new to this show, thank you for being in here. Please consider subscribing we’re on all the major podcast platforms in YouTube. Please consider leaving a review.
This is a computer generated transcript.
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