Research: How the Pros Do It - Peter Boockvar and Brent Donnelly

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0:56Hi, everyone. Welcome to the second installment of our series, Research Like the Pros. With me today, Brent Donnelly, President of Spectra Markets, and Peter Bookvar, CIO of Bleakly Financial Group. Hello, gentlemen. Hi, Maggie. Hi, Brent. Hey, Peter. How are you doing? Thanks for being with us. So, you know, we've been talking when you've both been on, you know, over the course of really a good part of last year and into the new year, that this is a really tough and at times confusing investing environment we're in, right? There's a lot of noise, a lot of conflicting signals, just people are really unsure or hard to see into the future.

1:38So we wanted to take the opportunity this week to take a step back and talk about the process and thinking that goes into the great analysis that you both do and hopefully help our viewers feel a little bit more confident about how they can use research to be smarter investors and maybe to deal with some of this sort of anxiety and uncertainty we all feel. So we're so pumped that you could be with us. It's a little different, right? We're used to meeting on the daily briefing, but I think this is going to be really fun. So why don't we start out with each of you talking a little bit about your origin story, I guess.

2:11When did you go from just being a market participant to actually kind of building your own framework and kind of an operating system, an operating research system, if you will? Brent, why don't you kick us off? Do you remember when you kind of made that switch? Well, I do because when I started in the business, I was a market maker and it was very flow oriented. So there wasn't really much of a process required. You were more of like a robot responding to clients flows and executing for them. And then as flow became automated, there was kind of this survival of the fittest thing that happened where the market makers that had a little bit more macro or risk taking appetite survived and those that were flow oriented struggled.

2:56And I found a lot more interesting anyways to do the more macro oriented and risk taking stuff. So it was really like a long process that took many years because initially I was more focused on technicals and some simple things like that. Then I added correlation, but then eventually correlation stopped working. So the whole process of me developing my process was really kind of an ongoing evolution that continues to this day because whatever worked two years ago doesn't necessarily mean that that's going to work two years from now. so for me that was a huge lesson as well was the things that you're making money doing right now are almost by definition going to get discovered by the market and not be profitable later on I'm talking about trading of course not investing so for me it's it's been an evolution and then yeah the one other thing I would say is that going from a bank to a hedge fund because I worked at a hedge fund for a few years the risk management approach is just so different and it's so much more rigorous and also more adaptable at a hedge fund because your capital changes.

4:04Whereas at a bank, it tends to be more simplistic, like don't lose this much money today or don't lose this much money in a month. Whereas at a hedge fund, you have to scale in terms of your capital, scaling up as you get more capital. So it's a lot more rigorous. And I learned a lot from that as well. Yeah, it's so interesting. A couple of things I want to ask you about that. But Peter, what about you? I think in the beginning, it was really trying to figure out of what type of investor trader that I wanted to be. There's no one rule of thumb path to success in making money in the markets. And I think it's important for each individual to curate a style that fits their personality and risk tolerance.

4:52Like I discovered pretty early on that after reading like market wizards, like, wow, it'd be really cool to be a trader and then tried it and realized that I wasn't any good at it. And that what I was better at was more longer term type thinking when it came to an investment. In other words, not how something is going to play out on a data point or in the next couple of weeks based on some events, but what's going to play out over multiple years. And that was just my own personal sort of style that I became comfortable with. And rather than being a market wizard, I sort of tended towards like Warren Buffett's type style of thinking with extended timeframes, focusing on big picture themes.

5:51And that also allowed me to sort of block out a lot of the daily noise. And then if I had a vision of how something was going to play out, now I could have obviously been wrong with that. But if I had a thesis that I was focused on and researched and felt that I had a higher probability than 50 % of playing out, then that allowed me to block out a lot of short-term influences. And if I own a company I like, whether they meet or beat earnings expectations is not necessarily going to shift my thesis. But if the fundamental backdrop of the business model changes, well, then that causes me a rethink.

6:32But it took me time and a lot of lost money to figure out, like, sort of what did I want to be when I grew up in this business? business and uh you know i finally came around to a style that fit me and fit what i felt that i was better at and trying to avoid what i was not good at now was more short-term trading uh and and that's what i've come around to and also in terms of my analysis you know i sort of started out as a plain vanilla like stock picker uh mostly like smaller and mid-cap stocks where i liked delving under the hood of a company's fundamentals and their situation, what their outlook is.

7:16But then sort of being in the markets, I felt like adding macro to that, and I sort of have become a macro person, but I at heart like to do the bottoms up as well. I felt that it was important to marry both. Like rather than just being a micro person, you hear some stock pickers, oh, I don't pay attention to the macro. Meanwhile, they may be buying a cyclical business. You know, Warren Buffett says, I don't pay attention to the macro, but he owns an oil company. So he does have to pay attention to the macro because that drives the fundamentals of his micro thoughts. And I felt that marrying the two together would be, you know, an effective way of analyzing not just the economic situation, broadly speaking, but the situation of a company that you may like the stock of.

8:04So and that's today where I'm listening to a lot of company conference calls, whether it's stocks we own, stocks we don't own, but to get under, you know, on the ground information, but also following the day to day macro and what a data point is here and whether it's rates and monetary policy and FX and commodity prices and all that how that ties into all ties in together. Hey, everyone. We're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. Join over 5 ,000 attendees for the largest AI event in Asia at Super AI Singapore, June 5th and 6th, 2024.

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10:26Yeah, no, absolutely. And I know that focus on the sort of underneath the hood, because we always lean on you to pull out a line from a conference call that no one heard or paid attention to because you kind of get down and dirty in the details, which we love. So I'm interesting. I'm hearing both of you talk about the you can't live in a silo, right? It sounds like I mean, all of your both of your approaches have evolved, have changed, but you can't just look at one tiny slice anymore. And I think we feel that because it's such a complicated global financial system and so much is influencing markets.

11:08It's not it's not that simple anymore. I think that people kind of think that you know stuff and you don't, which is, you know, it's very intimidating, right? They listen to you guys and they just think that you have some access to knowledge that they don't have and can't possibly. But what you're telling us is that this is a sort of constant learning journey, which is super interesting. And both of you kind of adding on that macro later, I think I didn't actually know that. And I think that's so fascinating. It gives us all hope that we can do that. And that's why we spend a lot of time talking about what's going on from a macro point of view, because you have to layer it on the individual investments.

11:48Brent, you look at FX as well, which is interesting because or a lot, I should say. Talk to us about why that's important, because I think we went from a period where there wasn't a lot going on and that's changed a lot. Talk to us about how foreign exchange kind of fits in the picture. Sure. I just want to touch on one quick thing that Peter said, because I think it's really important, is having a little bit of self-awareness as to your own personality and your style and what's going to work is really important for people that are newer. where what I find or what I found was a lot of young people that came to the trading floor would kind of look at someone who's successful and try to copy that.

12:29And it just never, ever works. What you have to do is look at multiple people who are successful, take a couple little things from one couple things from the other one, and then slowly create your own style. Because I don't have the patience to do what Peter does. And so there's no point in me trying. My personality is much more geared towards excitement and gambling and that kind of thing. And so I know that and I just acknowledge that and my style reflects that. In terms of the importance of FX. Wait, Brent, I just want to jump in because I think that's so important. I'm glad you pointed that out because one of the things that we talk about in the academy and any of the educational things we do, one of the first modules is know what kind of investor you are.

13:10Why are you doing this. I'm just curious, do you hear that from clients though, where they think they're one thing, but actually there's something else? Or what they're doing, they want to take that risk, but they're actually risk averse. I'm sure both of you come across that with the clients you deal with. Yeah, I'm laughing because I even do it myself sometimes. Sometimes you'll see someone saying, well, Chinese demographics look really bad over the next 20, and this and that. They're going on about balance sheet recession in China. And so I'm going to buy dollar China with a stop loss and their stop loss is like 2 % away or something like that.

13:45So it's like a 20 year view with a one, one day's range stop loss away. I think matching your, your style and your view to your parameters and the structure of your trades really important. So like, if I'm doing something that's beyond about a week in duration, which is unusual, because usually my trades are more like a week or less, then I'll usually do it in options because I feel like that structure will override my lack of patience because there's a little bit more of a switching cost or there's more friction to get in and out of options. So yes, I definitely see that. People very often have a mismatch between time horizon or trade structure and time horizon.

14:29And the other place you'll see that sometimes is where people, like Peter was saying, will analyze everything about copper and they'll say, OK, there's a shortage and there's nothing in London and this and that. But they won't look at the other side of the equation, which is usually more macro, which is the demand side. So you always have to have kind of like a top down and bottom up approach, I think, to anything you're looking at. Or you just it's just too often you'll just get run over by by some other factor that you didn't even consider. So I think having a macro look and then to your question on FX, I mean, FX kind of is two things.

15:10One, it obviously has a direct impact on, say, multinational earnings. It has an impact on oil imports in Japan. And like, there's a lot of macro and micro impacts. But then it's also, it also can be a barometer of capital flows. So like, when the US is the center of innovation, it's the only strong place for growth, then, you know, that's reflected in a lot of places, not just mag seven, but also in the dollar. So I think a lot of times you can, even if you're not in an FX person, you can use FX as kind of a barometer of where the money's flowing, because a lot of FX flows are real money. So people are buying an asset or buying stocks in Europe, or they're buying a company in Europe, and then they're buying euros in order to facilitate that transaction.

15:58So a lot of times, I think FX is a good barometer for capital flows overall, including emerging markets and G10. Yeah, that's a great point. Peter Brandt, who's a lot of our viewers will know, we have him on, a very experienced veteran technician and trader. One of the first interviews I did with him, He said, if I don't get the dollar right, I don't get anything right. And that was such an interesting. And boy, did he get the dollar right that year and a lot of other things as well. Peter, do you find that as well? I mean, you talked about your self-awareness and journey about figuring out what you were good at.

16:33Do you feel like there's a mismatch when you're talking to clients about what they think they want and what they're really talking about underneath? Does that come up with you? Yeah, well, my struggle always is, you know, the way and just to add on to, you know, what Brent and I both discussed is not only does each person have to sort of develop their own style of investing or trading, it's also what they're comfortable buying. Some people are comfortable sort of hopping on momentum and saying everything's great with this company and it's going to stay great. So I'm okay buying high in hopes of selling higher, which is fine.

17:13That may work for a period of time. I'm more comfortable looking at things through a more of a value lens and looking for more things that are bombed out. Like I'm looking at the 52-week low list when I'm looking for something to buy rather than the 52-week high list. but that's very difficult because sometimes I can be right on an investment, but it could take two years to come to fruition. I'm not a good market timer either where I can say, okay, this is the moment that things are going to inflect higher and I'm buying it at the exact bottom right before it ticks up. Unfortunately, it hasn't worked out that way for me.

17:56And whereas I think that certain stories can play out sooner rather than later. Sometimes it doesn't. Like I, I was long uranium for years and Cameco in particular at$10 and it sat at$10 for years before it finally moved higher. So we're in a situation where a lot, you know, a lot of our clients happen to be retail and they, they see what happens with AI chip stocks and, and they see that going up. And you always get the question of, why do you not own that instead of something else? And where sometimes the time horizons of you relative to an investor are different. And sometimes the investor focuses on things that are hot, while you're focused on things that are not, in hopes of it will eventually get hot.

18:48I think it was Bernard Baruch saying, I'm trying to buy something that I find attractive that others will find attractive at some point in the future. Yeah, you get there early. And a lot of times I get there too early, but that's trying to manage the time horizon and matching that up with how you make an investment. And it doesn't always line up. And I always am testing my thesis and like, is this story still on track? And yes, it's taking longer than I thought, but will it eventually come around? Like my new trade is to be long fertilizer stocks because corn and soybean prices to me are bombed out and the positioning is very, very short.

19:37But I can't tell you when this will actually work. It could be a year before these stocks go higher and maybe they go lower before they go higher. I just feel like we've reached an extreme point where they are finally attractive and I'm not smart enough to get my timing exactly right. Whereas Brent and other short term traders, I think they're much better at sort of timing that inflection point at which a trade would work. But I think understanding the difference is important, right, Brent? There's a place for all of it. Yeah, what's interesting about what Peter said is that on the shorter fractal, I find the same challenge, which is you put on a trade and then it's not working, but it's not going against you because I always use stop losses.

20:25And then you have to question like, okay, am I just bored and I'm being impatient? Or is there information here? And generally, if you look at the moves in the market in any market, it's very concentrated into very specific periods. So like, you know, two hours out of the day is going to represent the majority of the move in a currency most days. And so a lot of it is there's an expression that's related to war. It's something like it's hours of boredom punctuated by moments of terror. And trading is basically the same thing. And so having even even on my shorter time horizon, there still is a patience element.

21:02Obviously, time is dilated in a different way. but there still is that element of there's a lot of noise. And that's why I like trades where I know I have a specific catalyst because again, as an impatient person, my favorite trade is to say, I've done all this analysis and I think core PCE is going to be hotter than expected. And then I put the trade on at 824 and by nine o 'clock I'm out and I'm either right or wrong and happy days. And again, that's tailoring your trading style to your personality. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

21:44Yeah, no, absolutely. By the way, in addition to being an inpatient person, Brent is also a fantastic writer. And his notes are so entertaining, and they always have more information than just markets. I learn a lot from them, and they're great. One day we'll get into your former past as a, what was it? A sketch writer, a cartoon developer. There's this whole life Brent had in Canada. Fantastic. Yeah, I got a couple lives going on. Yes. And they filter through, which I really appreciate. But you both mentioned something really important, I think. And this is something that comes up. I'm curious if you hear it from your clients.

22:23It's something comes up in the questions we get all the time. because, of course, you're always able to ask live questions. And, you know, we do this on the show is people have an idea and then they're not sure if they're right. And then they're they're wondering if they should pull the ripcord. So you both have these sort of, you know, process and framework that you've built. And it sounds like I think, Peter, you said you're always testing them. Like there are going to be times when you think you're wrong. Does it help you developing this operating system or this framework? Does it help you keep you on the path so that you're not being whipped around by every piece of data that comes in?

23:00Because that's what happens right now to people. They hear, and we were just talking really quickly about NVIDIA before we came on air. Oh, it's oversold. It's going to sell off. And then the next person comes on. Oh, this is the next greatest thing. Or Elon Musk, Tesla, another great example. I believe in Elon. He's the next coming. Or the stock is, you know, and their head's on a swivel. They don't know who to listen to or what's right. It seems so conflicting. Peter, how do you deal with that? And what do you mean when you're always testing against your framework? Well, one of the first questions I ask myself before I buy a stock is, are you willing to buy more if the price goes down?

23:45Now, a short-term trader, after they buy something and the price goes down, they likely stop themselves out. So me being a longer term investor, I say to myself, am I willing to buy more? And if the answer is yes, well, then I buy the stock and then I use weakness as an opportunity to buy it cheaper. And if it gets even cheaper, I use that as an opportunity to buy even more. Now, at some point, I get things wrong and it just keeps on going down and the fundamentals don't turn out the way you think. and business is more challenged, or this is going to take much more time to play out where a lot of investors in the stock don't have the patience that you do, and then it's time to possibly reevaluate.

24:34But that's really the question I ask myself, because I always think, try to look at things the opposite of which the market does. And I always use the analogy that Walmart is the biggest private sector employer in the country because of everyday low prices that attracted people to come to their store, where the New York Stock Exchange, when it says everyday low prices, everyone's running for the hills. And I tried to turn that around with looking, and that's how I look for cheap stocks. And if a cheap stock gets cheaper, that's great. But again, that comes with its own risk that you could be wrong.

25:12And the person selling it to you is smarter than you are in this particular situation. So getting to your question about testing the thesis, something goes down after you buy it, you always need to test the thesis because you always wonder, does somebody know something that I don't? Is someone making a smarter move than I am? And I always wanted to test that and see whether that's the case or not. Now, obviously, mostly in hindsight, do you determine that? But that's always part of the retesting of a thesis. Yeah. And why you pay such close attention to so many of those details that are overlooked.

25:49And listen, we're in an environment where there's a lot of information, it's moving fast. And we talked about this yesterday with Tony and Jared, Warren Buffett just recently saying the market feels more casino-like than it ever has because everyone's kind of addicted to these immediate gratification 10x. Everyone's think they've got the next lock on something. So it's hard. The idea of discipline has kind of gone out the window. So it's a tough environment to operate in. Brent, how do you separate out? Because you're all seasoned. You've developed this framework. You've developed your research process.

26:25How do you filter out what's real and what's noise, especially when you're looking more short-term in momentum and trading? How can you tell the difference? Right. So first of all, just to address the thing of it's harder than ever, everyone says it's harder than ever every year, I feel like. I feel like trading's never been easy. But anyways, that's so true. When the algorithms came in in 2006, everyone was like, this market has ruined the algorithm. And I mean, the market just is whatever it is to me, but it's always hard. The thing I think that you were talking about in the different views that people have and then trying to keep up with all the different stories and all that.

27:06I think chasing stories is probably like the biggest leak in finance. Maybe negativity bias is bigger, but chasing stories and doing what other people are saying you should do is the worst possible way to trade. And so it really comes down to having your own process. So like, my process is kind of around narratives, what regime we're in positioning, correlation, and some other things. And I mean, I think, actually, I think Jared said this first, or maybe he's quoting someone, but listen to many and respect few, I think is a good motto, like, you should have your own process. And And you're listening to other people in order to see how they look at the world or to get information that they're looking at, but certainly not to trade their views.

27:51Because even if they're right, you don't know when they're getting in and out. You don't know when they're doubling down or flipping. Druckenmiller can say something on TV one day, but he might flip his position the next day. You obviously would not know that. Following other people, I think, is the worst possible process. what you have to do is develop your own process and then so for me I kind of have like the seven things that I look at and the more of those that are in line like text and positioning and correlation and all that then as they come into line you know if I get five or six out of seven then then I can say okay this is a really interesting trade and if it's three out of seven or two out of seven then I'm I know this is probably there's a lot of crosswinds so for me I'm looking for all the wind kind of blowing in the same direction.