The Meb Faber Show - Better Investing

Episode 42 is a remote podcast with Meb calling in from Hawaii. Fortunately, the roosters in the background aren’t loud enough to interfere...

Though this is a Q&A episode, it’s slightly different in nature. Rather than discuss listener questions, we’re experimenting with using some of Meb’s “tweets of the week” as our topics of conversation. It’s a way of getting inside Meb’s head a bit more. We’d love your feedback, so love it or hate it, let us know how we can make this format (or any, for that matter) better and more beneficial for you.

Some topics you’ll hear covered in this episode include:

-         How do you know when your market strategy has lost its efficacy, versus when it’s simply having a rough stretch, yet will rebound?

Details: One of Meb’s tweets suggested “After you read Buffett’s new letter to investors, read this,” which pointed toward his post about how Buffett’s long-term returns have crushed those of nearly everyone else, though he’s underperformed the market in 7 of the last 9 years. This brought to mind a question which Meb asked Ed Thorp: “When do you know when a strategy has failed, versus when it is time to remain faithful, as reversion to the mean is likely about to happen?” The Thorp answer was generally, “Do your homework so you know whether your drawdown is within the normal range of probabilities, or something unique” We push Meb on how a retail investor is supposed to do that.

-         With the VIX hovering around 11, is Meb considering buying LEAPS?

Details: If you’re not an options guy, don’t worry. Meb takes this question in a slightly different direction, discussing low volatility and options more in a “portfolio insurance” type of way. You buy insurance on your home and car, right? Buying puts at these low volatility levels has some similarities to buying portfolio insurance.

-         The last time stock market newsletters were this bullish was Jan. 1987. To what extent does this level of ubiquitous optimism get Meb nervous?

Details: Lots of indicators seems to be suggesting we’re far closer to the end of this bull market than the beginning. Of course, that doesn’t mean it’s going to happen tomorrow. You’ll hear Meb’s take on various indicators and what he’s taking away from them right now.

-         Newfound did a study, finding that the 60/40 model is predicting 0% through 2025. What are Meb’s thoughts in general?

Details: Meb is not surprised by this prediction. He’s discussed future returns based on starting valuations for a long time. But if you’re somewhat new to the podcast, this is a great primer on how Meb views potential returns of various asset classes going forward.

There’s plenty more, including something Cliff Asness referred to as “deeply irrelevant,” how advisers can excel as robos continue changing the investment landscape, Meb’s experience at a recent Charlie Munger speech, and Meb’s issue with Tony Robbins.

What is it? Find out in Episode 42.

In Episode 41, we welcome Doug Ramsey from Leuthold. Meb is especially excited about this, as Leuthold publishes his favorite, monthly research piece, the Green Book.

After getting a recap of Doug’s background, Meb dives in. Given that we’re in the Dow’s second longest bull run in history, Meb asks how Doug sees market valuation right now.

Doug’s response? “Well, that’s a good place to start cause we’ll get the worst news out of the way first...”

As will surprise no one, Doug sees high valuations – believing that trailing earnings-based metrics might actually be underestimating the valuation risk.

This prompts Meb to bring up Leuthold’s “downside risk” tables. In general, they’re showing that we’re about 30% overvalued. Across no measure does it show we’re fairly valued or cheap.

Doug agrees, but tells us about a little experiment he ran, based on the question “what if the S&P were to revert to its all-time high valuation, which was on 3/24/2000?” That would mean our further upside would stretch to about 3,400, and we’re a little under 2,400 today. Doug summarizes by telling us that if this market is destined to melt up, there’s room to run.

Meb agrees, and makes the point that all investors have to consider the alternate perspective. While most people believe that the markets are substantially overvalued, that doesn’t mean we’re standing on the edge of a drawdown. As we all know, markets can keep rising, defying expectations.

The conversation then drifts into the topic of how each bull market has different characteristics. Meb wants to know how Doug would describe the current one. Doug tells us the mania in this bull market has been in safety, low volatility, and dividends. Overall, this cycle has been characterized by fear – play it conservative.

The guys then bounce around across several topics: small cap versus large cap and where these values are now… sentiment, and what a difference a year makes (Doug says it’s the most optimistic sentiment he’s seen in the last 8 years)… even “stock market returns relative to the Presidential political party” (historically, democratic Presidents have started office at a valuation of 15.5, leading to average returns of 48%, while republicans have taken over at a valuation of 19, which has dragged returns down to 25%). The bad news? Trump is starting at very high valuations.

Next, the guys get into the biggest problem with indexing – market cap weighting. Leuthold looked at what happens to equities once they hit 4% of their index. The result? It becomes incredibly hard to perform going forward. It’s just near impossible to stay up in those rarified market cap tiers. So what’s the takeaway? Well, Doug tell us that he’d bet on the 96% of other stocks in the S&P outperforming Apple over next 10 years.

This episode is packed with additional content: foreign stock valuations… value, momentum, and trend… the Coppock Curve (with a takeaway that might surprise you – higher prices are predicted for the next 12-24 months!)… The best sectors and industries to be in now… Why 2016 was the 2nd worst year in the past 89 years for momentum…

Finally, for you listeners who have requested we pin our guests down on more “implementable” advice, Meb directly asks what allocation Doug would recommend for retail investors right now.

What’s his answer? Find out in Episode 41.

In Episode 41, we welcome Doug Ramsey from Leuthold. Meb is especially excited about this, as Leuthold publishes his favorite, monthly research piece, the Green Book.

After getting a recap of Doug’s background, Meb dives in. Given that we’re in the Dow’s second longest bull run in history, Meb asks how Doug sees market valuation right now.

Doug’s response? “Well, that’s a good place to start cause we’ll get the worst news out of the way first...”

As will surprise no one, Doug sees high valuations – believing that trailing earnings-based metrics might actually be underestimating the valuation risk.

This prompts Meb to bring up Leuthold’s “downside risk” tables. In general, they’re showing that we’re about 30% overvalued. Across no measure does it show we’re fairly valued or cheap.

Doug agrees, but tells us about a little experiment he ran, based on the question “what if the S&P were to revert to its all-time high valuation, which was on 3/24/2000?” That would mean our further upside would stretch to about 3,400, and we’re a little under 2,400 today. Doug summarizes by telling us that if this market is destined to melt up, there’s room to run.

Meb agrees, and makes the point that all investors have to consider the alternate perspective. While most people believe that the markets are substantially overvalued, that doesn’t mean we’re standing on the edge of a drawdown. As we all know, markets can keep rising, defying expectations.

The conversation then drifts into the topic of how each bull market has different characteristics. Meb wants to know how Doug would describe the current one. Doug tells us the mania in this bull market has been in safety, low volatility, and dividends. Overall, this cycle has been characterized by fear – play it conservative.

The guys then bounce around across several topics: small cap versus large cap and where these values are now… sentiment, and what a difference a year makes (Doug says it’s the most optimistic sentiment he’s seen in the last 8 years)… even “stock market returns relative to the Presidential political party” (historically, democratic Presidents have started office at a valuation of 15.5, leading to average returns of 48%, while republicans have taken over at a valuation of 19, which has dragged returns down to 25%). The bad news? Trump is starting at very high valuations.

Next, the guys get into the biggest problem with indexing – market cap weighting. Leuthold looked at what happens to equities once they hit 4% of their index. The result? It becomes incredibly hard to perform going forward. It’s just near impossible to stay up in those rarified market cap tiers. So what’s the takeaway? Well, Doug tell us that he’d bet on the 96% of other stocks in the S&P outperforming Apple over next 10 years.

This episode is packed with additional content: foreign stock valuations… value, momentum, and trend… the Coppock Curve (with a takeaway that might surprise you – higher prices are predicted for the next 12-24 months!)… The best sectors and industries to be in now… Why 2016 was the 2nd worst year in the past 89 years for momentum…

Finally, for you listeners who have requested we pin our guests down on more “implementable” advice, Meb directly asks what allocation Doug would recommend for retail investors right now.

What’s his answer? Find out in Episode 41.

We’ve had some great guests recently, and have many more coming up, so we decided to slip in a quick Q&A episode. No significant, recent travel for Meb, so we dive into questions quickly. A few you’ll hear tackled are:

-         Some folks talk about how the inflation numbers are manipulated by the government, and how the calculations have changed. Is there any merit to this?

-         What is your opinion on market neutral strategies? If you had to build a market neutral ETF, what strategy would you use?

-         Your buddy, Josh Brown, indicates that a significant portion of valuations, specifically CAPE, are the confidence in the stability of the stock market, which will justify high valuations here in the U.S. This makes intuitive sense, but I’d like your thoughts.

-         Have you given any thought to the application of a trend following approach over a lifetime? Specially, use buy-and-hold when younger, but move to trend as one approaches retirement?

-         Based on your whitepapers, you’ve indicated that trend following is not designed to increase returns, but rather, to limit/protect your portfolio from drawdowns. If this is the case, how does an increase in the allocation toward trend in your Trinity portfolios correlate to a more aggressive portfolio? It seems if “more trend” is supposed to reduce drawdowns, it should be found in Trinity 1 instead of Trinity 6.

-         Have you done any research on earnings growth rates compared with CAPE to get a more accurate indicator of expected returns? For example, while the CAPE for many countries in Europe is low, their growth rates are also considerably lower than the U.S., which could justify the lower CAPE as compared with the U.S. Your thoughts?

-         Does your “down 5 years in a row” rule apply to uranium, or is it too small?

As usual, there’s plenty more, including a listener wondering why Meb didn’t challenge Rob Arnott on a discussion topic during Rob’s episode, why Meb is in a cranky mood (involves auditing), and a request for more gifts of tequila from listeners. All this and more in Episode 40.

We’ve had some great guests recently, and have many more coming up, so we decided to slip in a quick Q&A episode. No significant, recent travel for Meb, so we dive into questions quickly. A few you’ll hear tackled are:

-          Some folks talk about how the inflation numbers are manipulated by the government, and how the calculations have changed. Is there any merit to this?

-          What is your opinion on market neutral strategies? If you had to build a market neutral ETF, what strategy would you use?

-          Your buddy, Josh Brown, indicates that a significant portion of valuations, specifically CAPE, are the confidence in the stability of the stock market, which will justify high valuations here in the U.S. This makes intuitive sense, but I’d like your thoughts.

-          Have you given any thought to the application of a trend following approach over a lifetime? Specially, use buy-and-hold when younger, but move to trend as one approaches retirement?

-          Based on your whitepapers, you’ve indicated that trend following is not designed to increase returns, but rather, to limit/protect your portfolio from drawdowns. If this is the case, how does an increase in the allocation toward trend in your Trinity portfolios correlate to a more aggressive portfolio? It seems if “more trend” is supposed to reduce drawdowns, it should be found in Trinity 1 instead of Trinity 6.

-          Have you done any research on earnings growth rates compared with CAPE to get a more accurate indicator of expected returns? For example, while the CAPE for many countries in Europe is low, their growth rates are also considerably lower than the U.S., which could justify the lower CAPE as compared with the U.S. Your thoughts?

-          Does your “down 5 years in a row” rule apply to uranium, or is it too small?

As usual, there’s plenty more, including a listener wondering why Meb didn’t challenge Rob Arnott on a discussion topic during Rob’s episode, why Meb is in a cranky mood (involves auditing), and a request for more gifts of tequila from listeners. All this and more in Episode 40.

In Episode 39, we welcome the legendary Ed Thorp. Ed is a self-made man after having been a child of The Depression. He’s a professor, a renowned mathematician, a fund manager who’s posted one of the lengthiest and best investment track records in all of finance, a best-selling author (his most recent book is A Man for All Markets), the creator of the first wearable computer, and finally, the individual responsible for “counting cards.”

Meb begins the episode in the same place as does Ed in his new book, the Depression. Meb asks how that experience shaped Ed’s world view. Ed tells us about being very poor, and how it forced him to think for himself, as well as teach himself. In fact, Ed even taught himself how to make his own gunpowder and nitroglycerine.

This dovetails into the various pranks that Ed played as a mischievous youth. Ed tells us the story of dying a public pool blood-red, resulting in a general panic.

It’s not long before we talk about Ed’s first Las Vegas gambling experience. He had heard of a blackjack system developed by some quants, that was supposed to give the player a slight mathematical advantage. So Ed hit the tables with a strategy-card based on that system. At first, his decisions caused other players at the table to ridicule him. But when Ed’s strategy ended up causing him to hit “21” after drawing 7 cards, the players’ opinions instantly changed from ridicule to respect.

This was the basis from which Ed would create his own counting cards system. Meb asks for a summary of how it works. Ed gives us the highlights, which involve a number count that helps a player identify when to bet big or small.

Meb then asks why Ed decided to publish his system in academic journals instead of keeping it hush-hush and making himself a fortune. Ed tells us that he was academically-oriented, and the spirit of science is to share.

The conversation turns toward the behavioral side of gambling (and investing). Once we move from theory to practice, the impact of emotions plays a huge role. There’s a psychic burden on morale when you’re losing. Meb asks how Ed handled this.

This dovetails into the topic of how to manage money using the Kelly Criterion, which is a system for deciding the amount to bet in a favorable situation. Ed explains that if you bet too small, won’t make much money, even if you win. However, “if you bet too much, you’ll almost certainly be ruined.” The Kelly Criterion helps you determine the appropriate middle ground for position sizing using probabilities.

It turns out that Ed was so successful with his methods, that Vegas changed the rules and eventually banned Ed from their casinos. To continue playing, Ed turned to disguises, and tells a fun story about growing a beard and using contact lenses to avoid identification.

Next, we move to Wall Street. Meb brings up Ed’s performance record, which boasts one of the highest risk-adjusted returns of all time – in 230 months of investing, Ed had just 3 down months, and all were 1% or less. Annualized, his performance was over 19%.

Ed achieved this remarkable record by hedging securities that were mispriced – using convertible bond and options from the same company. There was also some index arbitraging. Overall, Ed’s strategy was to hedge away as much risk as possible, then let a diversified portfolio of smaller bets play out.

There’s plenty more in this fantastic episode, including why Ed told his wife that Warren Buffett would be the richest man in America one day (said back in 1968)… What piece of investing advice Ed would give to the average investor today… Ed’s interest in being cryogenically frozen… And finally, Ed’s thoughts on the source of real life-happiness, and how money fits in.

All this and more in Episode 39.

In Episode 39, we welcome the legendary Ed Thorp. Ed is a self-made man after having been a child of The Depression. He’s a professor, a renowned mathematician, a fund manager who’s posted one of the lengthiest and best investment track records in all of finance, a best-selling author (his most recent book is A Man for All Markets), the creator of the first wearable computer, and finally, the individual responsible for “counting cards.”

Meb begins the episode in the same place as does Ed in his new book, the Depression. Meb asks how that experience shaped Ed’s world view. Ed tells us about being very poor, and how it forced him to think for himself, as well as teach himself. In fact, Ed even taught himself how to make his own gunpowder and nitroglycerine.

This dovetails into the various pranks that Ed played as a mischievous youth. Ed tells us the story of dying a public pool blood-red, resulting in a general panic.

It’s not long before we talk about Ed’s first Las Vegas gambling experience. He had heard of a blackjack system developed by some quants, that was supposed to give the player a slight mathematical advantage. So Ed hit the tables with a strategy-card based on that system. At first, his decisions caused other players at the table to ridicule him. But when Ed’s strategy ended up causing him to hit “21” after drawing 7 cards, the players’ opinions instantly changed from ridicule to respect.

This was the basis from which Ed would create his own counting cards system. Meb asks for a summary of how it works. Ed gives us the highlights, which involve a number count that helps a player identify when to bet big or small.

Meb then asks why Ed decided to publish his system in academic journals instead of keeping it hush-hush and making himself a fortune. Ed tells us that he was academically-oriented, and the spirit of science is to share.

The conversation turns toward the behavioral side of gambling (and investing). Once we move from theory to practice, the impact of emotions plays a huge role. There’s a psychic burden on morale when you’re losing. Meb asks how Ed handled this.

Ed tells us that his early days spent gambling in the casinos were a great training ground for later, when he would be “gambling” with tens of millions of dollars in the stock market. He said his strategy was to start small, so he could handle the emotions of losing. As he became more comfortable with his level of risk, he would scale his bets to the next level, grow comfortable, then move up again from there. In essence, don’t bet too much too fast.

This dovetails into the topic of how to manage money using the Kelly Criterion, which is a system for deciding the amount to bet in a favorable situation. Ed explains that if you bet too small, won’t make much money, even if you win. However, “if you bet too much, you’ll almost certainly be ruined.” The Kelly Criterion helps you determine the appropriate middle ground for position sizing using probabilities.

It turns out that Ed was so successful with his methods, that Vegas changed the rules and eventually banned Ed from their casinos. To continue playing, Ed turned to disguises, and tells a fun story about growing a beard and using contact lenses to avoid identification.

Meb tells us about one of his own card-counting experiences, which was foiled by his partner’s excessive Bloody Mary consumption.

Next, we move to Wall Street. Meb brings up Ed’s performance record, which boasts one of the highest risk-adjusted returns of all time – in 230 months of investing, Ed had just 3 down months, and all were 1% or less. Annualized, his performance was over 19%.

Ed achieved this remarkable record by hedging securities that were mispriced – using convertible bond and options from the same company. There was also some index arbitraging. Overall, Ed’s strategy was to hedge away as much risk as possible, then let a diversified portfolio of smaller bets play out.

Meb asks, when you have a system that has an edge, yet its returns begin to erode, how do you know when it’s time to give up the strategy, versus when to invest more (banking on mean reversion of the strategy). Ed tells us that he asks himself, “Did the system work in the past, is it working now, and do I believe it will it in the future?” Also “What is the mechanism that’s driving it?” You need to understand whether the less-than-desired current returns are outside the range of usual fluctuation. If you don’t know this, then you won’t know whether you’re experiencing bad luck (yet within statistical reason) or if something has truly changed and your “bad luck” is actually abnormal and concerning.

Next, Meb asks about Ed’s most memorable trade. You’ll want to hear this one for yourself, but it involves buying warrants for $0.27, and the stock price eventually rising to $180.

There’s plenty more in this fantastic episode, including why Ed told his wife that Warren Buffett would be the richest man in America one day (said back in 1968)… What piece of investing advice Ed would give to the average investor today… Ed’s interest in being cryogenically frozen… And finally, Ed’s thoughts on the source of real life-happiness, and how money fits in.

The show ends with Meb revealing that he has bought Ed and himself two lottery Powerball tickets, and provides Ed the numbers. Will Ed win this bet? The drawing is soon, so we’ll see.

All this and more in Episode 39.

In honor of this Sunday’s Super Bowl, Episode 38 is a special, bonus “gambling” podcast. We welcome mystery guest, E.V. Better, which is an alias for “Expected Value Better.”

Meb starts by asking E.V. how he got to this point in his career. E.V. had a traditional finance background, working at a long/short hedge fund for 5 years, but realized he could apply certain predictive analytics that work in the financial world to the sports betting world. He helped create a basketball model at Dr. Bob Sports and enjoyed it so much that he made the jump from traditional finance.

Next, Meb requests a quick primer for the non-gamblers out there; for instance, how the various types of bets works, the “lines,” the most popular bets, and so on. E.V. gives us the breakdown.

The conversation then drifts toward examples of “factors” when it comes to gambling (such as “value” or “momentum” is in the stock market). E.V. tells us there are really two schools of thought in traditional investing – fundamental and technical investing. When it comes to gambling, there are similarly two schools of thought; you have the strength of a team that’s measured by traditional stats (for example, net yards per pass) or technical factors (having been on the road for 14 days…having suffered 3 straight blow-out losses). When you combine these two factors, you better a better idea of which way to go with your wager.

These leads to two questions from Meb: One, how many inputs go into a multi-factor model? And, two, how do you replace older factors that don’t have as much influence or predictive power as they used to? E.V. gives us his thoughts.

Meb asks about “weird” or interesting factors that are effective. E.V. points toward “travel distance,” though the effect has diminished over time as travel has become easier. He also points toward “field type.” This leads into a discussion about betting against the consensus (contrarian investor, anyone?). And this leads into a common investing mistake – recency bias. For example, because the Broncos won the Super Bowl last year, people expected them to be great again this year…and they didn’t even make the playoffs (Meb is still bitter).

Meb steers the direction away from the NFL. Whether basketball, baseball, or whatever other sport, you’re simply trying to find an edge over the house. Meb brings up “variability” (the more games the better if you have a slight edge), and asks how this changes over different sports.

E.V. says duration of season is a huge factor. Also, the level of data available for analysis is key (for example, the amount of data in baseball is amazing). But overall, E.V. says the goal is reduce the variance to make thing as simple and predictive as possible to find your edge.

Finally, we get to the topic du jour – the Super Bowl. Meb asks E.V. directly, “Who do you like with New England at -3?” If you’re thinking about betting this Sunday, don’t miss it.

There’s far more in this bonus episode, including discussion of betting on the results of the Super Bowl’s coin toss… How long it will take for Luke Bryan to sing the National Anthem… How many times will “Gronkowski” will be said by the commentators during the Super Bowl broadcast… Want to put the odds in your favor? Then join us for Episode 38.

In honor of this Sunday’s Super Bowl, Episode 38 is a special, bonus “gambling” podcast. We welcome mystery guest, E.V. Better, which is an alias for “Expected Value Better.”

Meb starts by asking E.V. how he got to this point in his career. E.V. had a traditional finance background, working at a long/short hedge fund for 5 years, but realized he could apply certain predictive analytics that work in the financial world to the sports betting world. He helped create a basketball model at Dr. Bob Sports and enjoyed it so much that he made the jump from traditional finance.

Next, Meb requests a quick primer for the non-gamblers out there; for instance, how the various types of bets works, the “lines,” the most popular bets, and so on. E.V. gives us the breakdown.

The conversation then drifts toward examples of “factors” when it comes to gambling (such as “value” or “momentum” is in the stock market). E.V. tells us there are really two schools of thought in traditional investing – fundamental and technical investing. When it comes to gambling, there are similarly two schools of thought; you have the strength of a team that’s measured by traditional stats (for example, net yards per pass) or technical factors (having been on the road for 14 days…having suffered 3 straight blow-out losses). When you combine these two factors, you better a better idea of which way to go with your wager.

These leads to two questions from Meb: One, how many inputs go into a multi-factor model? And, two, how do you replace older factors that don’t have as much influence or predictive power as they used to? E.V. gives us his thoughts.

Meb asks about “weird” or interesting factors that are effective. E.V. points toward “travel distance,” though the effect has diminished over time as travel has become easier. He also points toward “field type.” This leads into a discussion about betting against the consensus (contrarian investor, anyone?). And this leads into a common investing mistake – recency bias. For example, because the Broncos won the Super Bowl last year, people expected them to be great again this year…and they didn’t even make the playoffs (Meb is still bitter).

Meb steers the direction away from the NFL. Whether basketball, baseball, or whatever other sport, you’re simply trying to find an edge over the house. Meb brings up “variability” (the more games the better if you have a slight edge), and asks how this changes over different sports.

E.V. says duration of season is a huge factor. Also, the level of data available for analysis is key (for example, the amount of data in baseball is amazing). But overall, E.V. says the goal is reduce the variance to make thing as simple and predictive as possible to find your edge.

Meb asks about underrepresented sports (curling, or NASCAR) offering more, or better opportunities (think “small caps” versus the “Apples” of the investing world). E.V. says the issue is finding a counter-party. You might be a great curling modeler, but have fewer market participants from which to profit. 

This leads into how to quantify an edge, and what a good edge value should be. E.V. says a 10%+ edge would be fantastic, but it’s important to be conservative in your estimate of just how big your edge is. After all, you won’t have a consistent edge every game. Meb makes an interesting correlation to investing you’ll want to hear.

Next, Meb asks about gambling as an asset class. Where would gambling fit into a portfolio and how would it work together? E.V. says sports is a unique alternative asset class that’s uncorrelated to other markets. This quality makes gambling an interesting addition to a portfolio.

Next, Meb moves to “quick hits” – shorter questions, many of which came from listeners via Twitter.

-          What’s the worst bad beat you’ve seen?

-          Have you looked at “intra-game” gambling, or do you only focus on full-game bets?

-          How does a sport with a small dispersion in scoring (like soccer) affect how you bet versus a high-scoring sport (like basketball)?

-          Have you thought about any lines that change over the course of a day based on the concept of betters losing in the morning and becoming increasingly aggressive in the afternoon (going on tilt, trying to win back money).

-          What do you think about “the hot hand”?

You’ll want to hear E.V.’s answers.

Finally, we get to the topic du jour – the Super Bowl. Meb asks E.V. directly, “Who do you like with New England at -3?” If you’re thinking about betting this Sunday, don’t miss it.

There’s far more in this bonus episode, including discussion of betting on the results of the Super Bowl’s coin toss… How long it will take for Luke Bryan to sing the National Anthem… How many times will “Gronkowski” will be said by the commentators during the Super Bowl broadcast… Want to put the odds in your favor? Then join us for Episode 38.

In Episode 37, we welcome John Bollinger, creator of Bollinger Bands, one of the most widely-used analytical tools in investing.

As John is also a market historian, Meb start by asking him about his historical influences – those individuals who helped shape John’s perspectives on the markets and trading. John gives us his thoughts, identifying who he believes is one of the most important figures in technical analysis. This leads to an often-forgotten takeaway – that many of the most effective market concepts have been around for a long time. Some very profitable strategies that still work today were being explored 100 years ago.

Meb redirects, asking John about his background. It turns out, John was in the film business as a cameraman. But by a few twists of fate, he ended up in front of the camera, providing technical commentary on markets for a fledgling financial broadcast network.

This leads into a discussion of John’s famous “Bollinger Bands.” He gives us an overview of the tool, and how he came to establish it. In essence, Bollinger Bands can help investors identify relative market bottoms and tops, helping find direction for profitable trades.

Meb then asks if John’s thinking on Bollinger Bands have changed since the early days. John tells us that the core concept stands the test of time, though he has added some extra indicators.

Next, Meb asks about combining two types of analysis – technical and fundamental – something John calls “rational analysis.” For many people, you fall into one camp or the other. But John was able to find overlap between them. He tells us how, and even ropes in two additional types of analysis to include – quantitative and behavioral. He thinks combing all four works better than using any single one. Meb asks how you actually use them all together, to which John gives us his thoughts.

Meb then asks which sector John is currently identifying as a good source of potential trading profits – but he immediately discounts the validity of his own question. You’ll want to hear why. This leads into a great takeaway – using the right charts for entry/exit in a trade. Specifically, a trader may use a short-term chart to initiate a position, but then not move to a medium-term chart to help him navigate how long to hold the position. Instead, he keeps looking at the short-term chart, which obviously will oscillate, and potentially scare the investor out of the trade. John says “People have this time frame confusion that I think does a huge amount of damage.”

Meb then asks about trade management. John says the most neglected issue is position sizing. People need to know how much capital to commit to their strategy, and there is a mathematical “optimal” answer. In essence, the problem is “betting too large.”

This leads John to reference the trading concept of “regret” – the percentage of time you’re in a drawdown. Turns out it’s about 80% or 90% of the time you’re invested. The only times you’re not in a drawdown are when you’re setting new highs, and that’s pretty rare. But most investors hate drawdowns and just don’t do well with this reality (part of the reason why investing is so hard for most of us).

There’s far more in the episode, including the most influential books John has read, Bitcoin, currencies, how to trade volatility, and John’s most memorable trades (good and bad). What were they? Find out in Episode 37.