#45 - Cole Wilcox, CIO, Longboard Asset Management on Stock-Level Trend Following, Real Diversification, and When to Hit the T-Bill Brake (recorded 10/13/25)

I think there's a lot of stuff that's sold as an alternative that's BS, it's not really, it's the same, it's just the same kinds of at-risk packaged in a different way that aren't really going to be a true diversifier for you. I think that's the most important thing is how do you determine something is truly a source of diversification and it's doing something different? This podcast is for advisor use only and not to be distributed to the public. The Wealth Consulting Group is an SEC registered investment advisor and the opinions voiced and contents in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Welcome to the bowl of Wall Street. I am joined with my co-host, Paisley Nardini, Italy Le J, and we are super thrilled to have with us as our guest, whole Wilcox, with Longboard Asset Management. Cole, how you doing? Good, how are you guys? Doing good. Are you there in Arizona? I am in Arizona today. It's kind of seasonal weather back here in October, so I kind of go back and forth between Arizona and Florida. And I heard you guys got a whole bunch of rain on the day. We got pounded with rain last four days. I think it was some kind of hurricane or something that came up from Mexico. Very rare for us to get that amount. I think it was the most amount of rain that we had in the last like eight years or something like that. Wow. That's interesting. So tell us about yourself. Tell us about Longboard. Where did you start? I know Paisley and Talley have got a number of questions. You and I talked. When was it? That probably a couple months ago. And you're all about trends. So let's just jump in. Yeah, I mean, our background for 25 years has just been in all things alternative investments and specifically liquid strategies that are diversifying strategies and building portfolios of diversifying strategies that are non correlated and can be a great source of diversification for equity investors or bond investors to add that kind of third leg to the portfolio. We were kind of live in a philosophy where generally speaking, I think investors are overly reliant on bonds and the relationship between stocks and bonds for diversification amongst their their equities and their kind of source of returns and the area that we specialize in in this alternative space is types of asset classes or types of strategies that are both liquid and that have meaningful diversification, low correlation benefit to traditional portfolios. Our kind of micro niche that we have is all things trend following our specific strategies or trend and systematic trend in in nature. And that's what our background kind of has been. Whether it's multi asset trend following across every instrument in the world from currencies, commodities, fixed income and equities long and short to what our fund does and kind of its uniqueness on idiosyncratic trends on individual kind of securities. But I would say everything inside that trend following world for the last 25 years is what our specialized niche is. Hey, cool. That's really fascinating because there's I have not found maybe I'm not looking hard now, but I have not found that many that are individual stock trend diversified, non like what you're doing. And some people I think maybe in Paisley, you probably have some thoughts on this too because some people automatically think manage futures when they think of trend. And you guys do have manage futures and that's great. But like what you're doing with the individual stocks, totally different than the managed futures. Maybe you can kind of elaborate a little bit on that. I want to make a comment before coal does because I had a conversation with coal a week or so ago, and I would say completely flip the script from what I thought the strategy was. And so I think it's really important if you're listening to this and you currently invest in trend following or manage futures and you have an idea of how coal's team kind of brings this to life through their strategy. I think it is truly unique and differentiated. So whether it be differentiating versus your equity beta or differentiating even from some of your existing trend strategies, a lot to offer here. So I just wanted to set the stage with that. Yeah, for sure. I mean, it's definitely a different. I think the biggest misconception that we get is when we talk about stock or like investors in general or advisors, they hear the word stock and they automatically put a manager who might use those instruments in the traditional equity world. And then it just kind of gets confusing, like how is this an alternative? And is it low correlated and things like that? And so we've kind of learned that it's very important to make sure that people are clear that this is actually a very low correlated strategy. It may not be the lowest correlation of all potential strategies that you can get, but it's certainly absolutely in the alternative bucket and does something unique and different. And just because we focus on the individual subcomponent trends that are packed with inside of market indexes, that it's still very much a diversifying kind of asset and belongs in that diversification sleeve. If I could just jump in, and before we get too too much into the weeds, I know we're going to go there. But just a kind of general kind of conversational question, just to help our audience a little bit, I'm reminded of that famous quote by Marty's Wall Hague, of course, the trend is your friend until the end when it bends. And as you say, you're a trend follower, but I wanted to ask you about regimes, because I know that they matter to you too, cool. So we're in a bull market like this and everyone thinks they're genius. How can you help? How does your strategy kind of fit into that kind of overall trend, if you will? Well, the everybody feels like they're a genius because the market went up. I don't know that I have a solution to that. I think that's just, I've been investing since the mid-90s and I've had the experience to go through many different market cycles. I think how I came about trying following for me personally was I experienced the 1998 kind of crisis from long-term capital management and the internet bubble, then the blow up of the internet bubble, then the recovery, and then the '08 kind of financial crisis. So that early first five years really said I got, there's got to be a better way of managing risk. I had a healthy respect for risk because I lived it in the real world. Outside of maybe COVID in the last 15 years, we haven't really had a major kind of market crisis or kind of the cycles that I had early on in life. I think foreign investors in general a lot of it is just you got to learn the hard way and kind of go through and experience it unfortunately or you have to be a student of history where you're really taking the time to study and go through it. Or most importantly, you have a financial advisor like you guys where you are a student of history and you have gone through it and you're helping tamper down the kind of animal spirits that your clients have or the greed or just the not knowing or their emotions to kind of put them in a position to do the wrong thing or get overly excited about something that is kind of just like a temporary phenomenon. But that's where the role of I think a financial financial advisor plays like the biggest role. Helping clients not be their own worst enemy and kind of succumb to the worst kind of behavioral investing that happens in after periods of great success or things have seemed like they've gotten very, very easy and I'm very smart and I just haven't gotten to the point where the market has humbled me yet. Well, thank you, thank you for that and to be clear, you are amongst friends and Jim and Paisley did formally launch a new innovative liquid alternative strategy here for WCG. Yeah, cool. Yeah, so cool. I guess just following up on kind of what we're talking about with Tren. So I like you. I love the technicals. I look at the fundamentals by looking at the technicals too and and CMT and I often get people kind of confused or conflating, you know, momentum with Tren and sometimes especially when you have a market like this that some of these momentum names and we own some of them. We're going to be completely transparent with some of these have done very, very well, but sometimes people think that because there is some momentum, there's Tren that there's not risk management that there's not, you know, trying to diversify and have lower correlation and be what, what do you think? What do you tell people when people ask you? I'm sure you probably get some same questions about that, but Tren and momentum can be completely different. Yeah, I mean, I think to the average person, they think there's the same thing, you know, momentum, Tren, you know, I would they know the difference, you know, between those those words sound very similar. Yeah. I consider them to be cousins, right, of one another, but definitely not, you know, the same thing. The traditional momentum, you know, kind of studies, I would say the primary difference is they're much more short term, you know, in nature than what I consider to be Tren, at least in the equity kind of world, where you are kind of stack ranking the biggest winners and the biggest losers and kind of rebalancing your portfolio, maybe once a month, once a quarter and kind of high turnover type thing in your average whole time is not very, very long. And so if they are capturing Tren as part of a factor inside of a momentum strategy, I would say it would be a very like short term kind of to maybe intermediate term, but more on the short term kind of zone of the trend speed. Our world where we're doing trend and kind of a classic trend following way, our average whole times on positions are, you know, that we are successful with that we where we generate the bulk of the returns tend to be measured in years, where once we are into a position and it ends up becoming a huge winner in the future, those are kinds of we're just holding onto them and letting it kind of play itself out over a long cycle. So I consider us to be more investors than we are, you know, traders in the kind of a world. I think momentum is very much like a trading strategy and I think our approach is more of an investing strategy with very disciplined risk management, you know, kind of as as part of what it is, because even investors still have to go through major market draw downs, you know, maybe not all the time, but you know, once a decade you're going to get maybe a 50 percent, you know, decline in the market and you're going to have to kind of go through that and no amount of equity diversification and how many stocks you own are going to prevent you from having that kind of systematic down draft in the market crisis, 73 to 74, a 2008 type type thing. And I think that's a really important point in my discovery, coal in our conversation is that oftentimes in the world that I live in, when we're talking about this technical trend following, it's very short term in nature relative to the holding periods that you referenced, it is very tactical. There is a lot of turnover. And so I think again, going back to thinking about where many advisor portfolios sit today and the long only construct of stocks bonds, looking for diversifiers, but perhaps not being comfortable with this fully unconstrained long short application and high turnover tactical strategies, I think again, that's where your strategy really starts to shine and starts to become a little bit more approachable for a lot of advisors that are looking to take kind of an initial step out or diversify some of these tactical trend following that does have, you know, weekly by weekly type turnover. So maybe at that juncture, it would be helpful for you to kind of run through how you've constructed your strategy, the philosophy behind it. And then that'll start to bring some of this to the surfaces to how your strategy is quite unique. Yeah, I mean, look, when we first started kind of applying trend following, it was like we're standing on the shoulders of giants, you know, there's a long industry that has been doing systematic trend probably since the 70s as an industry. When I kind of discovered it as an approach maybe in the late 90s, we initially did all of our work and it was on multi asset trend commodities, currencies, fixed income equities, the typical managed futures kind of thing that you see. And, you know, my first position in it was just allocating out to these managers. I came at it as an allocator investor first approach. And one of the things that I, what we wanted, right, was we love the idea of low correlation or something that was completely, you know, different and acted different than equities. And it would be a great compliment to the equity investing side of it. And you could see these events where it historically, a multi asset managed future strategy did well during the market crisis. So there were a lot of like features of it where I go, that's really interesting compelling crisis alpha kind of thing that the managed futures industry is there. What we started to see, though, and experience is in theory, it's there, right? There is, there is great low correlation, probably the lowest correlation of all the strategies out there would be a typical long short managed futures type strategy. But at the same time, as great as this theoretical diversification is in the real world, it also is one of the most challenging and difficult frustrating asset classes to hold, you know, for people because the, it's a blessing in the curse where you have this super low correlation. But then the results of that is it moves very independent of other asset classes, especially when other asset classes are working. And it just creates a lot of investor frustration, you know, like where you can go nine out of 10 years can just be very annoying, emotionally challenging things to hold, you know, for people. And just kind of in the real world, what I saw was people got in trouble with their managed futures kind of allocations. Because the investor experience just wasn't palatable, you know, for, for them, it wasn't because you, you very and frequently suffered the cut or had the kind of environment where they pay off and you're like, oh, I'm really happy with this managed futures, you know, kind of thing. And then so our approach was more when we started doing the research, it was kind of two full one of them. There was already all the work that had been done. Every little rock to turn over a new research had already been done in the multi asset kind of world. So there wasn't a need for new more, more research to do these trend following strategies multi asset. But what we started asking questions was how come nobody was applying the systematic trend framework to the individual components of these indexes. You guys are trading all the indexes, you have this exposure, but you're you're just doing it at the diversified index level. And so there aren't there are a lot of cross current trends, trends fighting each other, things like that. Wouldn't there potentially be more signal to noise ratio if you were looking at the individual securities and and kind of unpacking at that way. And we just didn't find anybody in the industry that had actually asked those questions or published research on it. And we just found it to be a very intellectually curious exercise to start with. And we published this paper in 2005 called does trend following work on stocks that basically showed this big empirical study that it does in fact work and is quite effective. And it does something as a byproduct of it that the sequence of returns that you get out of doing trend on stocks is a has a much higher frequency of delivering outperformance or investor satisfaction. Right. So it's it's a byproduct of that approach is that it more frequently outperforms a diversified trend approach a multi asset kind of approach. And the benefit of that is investor satisfaction is higher more frequently. And there's huge benefits to investors kind of in that space where but you don't lose the diversification benefit. Because you can still go to a 100% portfolio of treasury bills and be completely non correlated or negative correlated during the market crisis. So the kinds of benefits of being a true diversifier and being something that's going to weather a market crisis is still embedded in the strategy. But and so you don't lose that compound another that you gain this more consistent emotional experience through multiple different market cycles that it's able to just make investors feel generally happier more frequently than the high degree of frustration that you get from your traditional like managed features. Thank you. I think anybody who's been an investor in managed features is going to have a universal pain point kind of around that. So a question I might have as you were talking about kind of cross asset and traditional trend falling versus the intra asset class trend that you've employed in your strategy. Thinking about the dispersion that we've seen at like the individual stock level. Does that have a direct bearing on your alpha opportunities within your trend strategy? It depends on so we published a paper an updated paper last year called does trend falling still work on stocks which was kind of a follow-on paper to the original one 20 years later. On your website? On the website yeah and it's also published on like SSRN and the other academic places out there. So there is in that new section as an empirical answer to that question about the alpha. So the answer is it depends. You have to measure the alpha based upon the right kind of peer group. So if you measure alpha against the S&P 500 it's going to say oh this strategy has negative alpha. But I would then I say but the S&P 500 is not our investment universe nor is it the right benchmark to calculate kind of alpha. But if you do it against what our universe is which is an equal weight Russell 3000 kind of universe then you do a strong positive alpha to that kind of subset. So in the last 15 years the S&P has obviously just been a cap weighted S&P has been a runaway kind of freight train against every other asset class either US domestic mid cap or small cap or international stocks or whatever it's there's a huge performance dispersion between the two that is no secret to anybody. And but when you look at trend or kind of what we do is say hey have you produced alpha against your kind of overall investment universe that you have you know yes it's just that that overall investment universe has dramatically lagged the performance of the S&P 500 because of this kind of cycle that we've been in where you've had a huge runaway performance gap between the between the two. I don't know if that answers your question paisley but that's my all right it's helpful thank you so cool I've got I've got a question just kind of to follow follow up on that yeah when when you're looking at trend and you're more long term trend right so that's different than the shorter term intermediate term but you're there will be times right where maybe the breadth is is not that great and maybe there's not a lot of stocks that are in a trend so you will systematically start raising cash during those periods correct yeah if you look at our kind of asset allocation time series or I kind of the history of it over the over the years you're going to see a portfolio it's fairly active and it's rebalancing between the equities that we own the sector differences right because what's in favor what's out of favor is kind of changing as the interest sector changes happen and the degree to which treasury bills dominate the you know the the portfolio so just like this year we came into the year with strong positive trends you know fully invested kind of at a full risk budget well is it actually coming into Q3 of last year after the administration got elected the markets kind of started to change in November December and then followed through in March in January for March culminating with the tariff tantrum kind of thing we through that five-month cycle we basically went from fully invested full risk to the largest de-risking in the portfolio that we had seen since COVID and that pushed the portfolio to be greater than 50% t-bills at the very very kind of low and if the markets had continued to decline you know maybe there was an additional acceleration versus like this b-bottom reversal that we had we would have eventually gone to like a hundred percent you know kind of t-bills so there is if this is not a you know a long only you know strategy and very much can be a hundred percent negatively correlated t-bill portfolio in a market crisis just really depends on what's lying out in the in the general market trends and I feel like that goes back to your risk management this is you know not like I know there's some other technical strategies that may look at trend but they're fully invested and sometimes they're very high beta so this is very much looking at risk and then you you know you cap your position sizes as well so it's very diversified probably best to compare this to a tactical strategy than more of a long short strategy would you agree uh yeah I mean the our mechanics for what we do the the way that we establish risk budget drawn down control volatility targeting the portfolio uh volatility waiting you know having a systematic trend entry exit you know criteria those mechanics are identical to what you see from the systematic trend category so any manager that's in the Morningstar system out of trend category like our architecture of what we do is is identical to those to the managers you know at at at large so I think that's actually a better fit is but that makes us different if I look at the differentiation between one trend manager and the other it really comes down to a market selection and trend speed you know what what what markets do you have in your portfolio and how is that kind of influencing you know if you do come out of these only and you don't do currencies fixed income and equities then that's going to give you a certain half sequence of trend following we happen to just do something that's unique in the industry that we only do individual securities to kind of take signal from which we see we have a higher signal and noise ratio in that then if we were doing it on say just stuck indexes um but the output is still the two primary asset classes that we own in the portfolios either they're going to be heavily dominated by T-bills in in bad market environments or heavily dominated by the best performing trends in in US US equities uh but we don't have a uh you know a preconceived notion around what sector that's going to be or yeah what's going to happen in the future or any kind of fundamental bias right that goes into our our portfolio selection so it's uh so it's fully unconstrained but but it's also predominantly US equities right you don't go outside yeah the I mean you'll have companies obviously have uh they're only US listed companies so oh god what is the Russell 3000 so every stock that is a member of the Russell 3000 is what is our investible universe that's your universe okay and then we'll filter out you know the the least liquid stocks you know kind of out of it because we don't want to be in the in the in the bottom wrong microcrackers yeah like probably not a lot of microcaps in there just because there's not a lot of liquidity right correct uh but it is biased or if you look at our you know portfolio most stocks in the Russell 3000 are mid and small cap companies oh yeah so yeah the opportunity set that we have is very different from what people's typical equity exposure you know kind of is or what even if they have an alternative strategy long short equity the kinds of equities that a long short equity strategy or category has is going to be heavily dominated by mega cap you know kind of stock so we were able to pick up on you know the future winners of these companies that after the fact people want to own uh but they don't really have any exposure kind of in their portfolio so we have unique and interesting names you know in the portfolio unique and interesting trends um we hold them for a long time to kind of on the winners like let them kind of play out which that comes back down to another big differentiating kind of thing is that the the trend on stocks part of it is it just a radically different tax efficiency kind of approach to to applying trend um you know futures well 56 straight man you're getting long-term short-term capital gains there's no such thing as a uh a deferral you know unrealized gains because you're getting marked a market every year so you basically get some form of tax distribution every year from your typical managed futures type strategy 10 years of running you know our fun we've never paid a cap game you know distribution because we're holding on to winners as long as we can to let these big trends kind of play out and deferring gains and unrealized gains and yet at the same time more than 55% of the investments that we make are put on end up getting stopped out at a at a small loss when once the risk management kicks in which is a natural tax loss harvesting kind of approach to the strategy and so we're constantly tax loss harvesting building up those tax assets which then are used to defer any future long-term capital gains kind of balancing the two against one another so that over time you know it you're able to do to get this benefit of trend to get the hedging you know benefits of it and to do it in a lot more tax-efficient way than what you would see from a typical like futures trend approach yeah i think that's really important too because so many advisors when they're evaluating alternatives they're the chances go my qualified versus my non-qualified accounts and so the ability of this to kind of be in all portfolios i think it's important let me just jump in here and i wanted to go back and ask a follow-up question to what paisley was asking you and what i what i heard was when there's kind of a wide dispersion between the best and worst performing stocks within your your universe that can be a challenge to performance but the flip side and maybe this is a two-parter but the flip side of that what i'm hearing and correct me if i'm wrong when correlations are rising and breath is improving as it is you know has been recently i think russell 2000 has been one of the performers off the the april lows is that the kind of a environment where you thrive coal and not not just like across assets but within markets and and i bring that up because i mean pretty much everything except the dollar and maybe government bonds are at all time highs whether it's gold bitcoins stocks really you know really even home prices are still near all time highs so that's that's part a part b would be what happens when the trend changes because i was i was sitting in the simplified conference and there was some managed future operators on the stage that were complaining about their peers getting website and kind of digging out of the the hole from march in march in april sorry that was long winded but there's a lot to unpack here yeah i think there's three different things so the cap the cap weighted cut or the the performance dispersion part um so what's what's happening is it's it's actually a combination of two things you have to performance dispersion that's happening but it's very concentrated in a handful of like mega cat names and which those indexes like the smp are cap weighted right so a huge you have dispersion happening but it's also in the areas that have the largest weight so it's it's it's like you know leverage on the dispersion is what's going on when you kind of create smp cap weighted versus others performance dispersion in and of itself isn't a problem or like an alpha negative to track performance dispersion is good for us because we're going to be in those big winners it what happens is it's just if the performance dispersion happens and it's in small and mid cap you know kind of names that's that's going to be fine for us or if it's kind of broadly distributed kind of thing it's just from a relative performance standpoint if it's in the mega caps or the largest of the large which are and and you're comparing us against cap weighted indexes it's like there's going to be a alpha drag you know that that happens there but we you know we're in the in the in the business of capturing statistical outliers right like over over time that being said the kinds of outliers you know they play out over multiple years right so they might not happen in like in in one year but that's my answer I guess to that you know kind of a question there the best the best kind of environment for this would have been like say 2013 that's the probably the best returning year that we've had recently and what did you have going on you had a solid relative performance happening for small and big cap stocks so that that sector was doing well so our portfolio which tends to own more stocks like that is benefiting you know from it being kind of in the right area for relative performance you had very low volatility or you know limited whipsaw right there wasn't a lot of back-and-fills kind of the market just went up a little bit every month pretty much for the whole year and the combination of that of like you're in the right stocks and you're and the trend was like the perfect you know like the endless summer wave kind of thing it was like the perfect wave that year you end up just doing very very well um this this year is it's it's not just the cap weight so that's a factor of like the the outperformance and the dispersion is coming from the largest stocks it don't have a lot of you know position sizing in our portfolio because we have small bets across a lot of positions but it's also more more the whipsaw of what happened this year you know by going to 50% you know kind of tip and putting on your risk management and doing what's necessary to respond to things I mean we didn't know or nor would we ever you know know that hey that was going to be the low and things turn around we have a process we follow risk and you just got a head fake right this is one of the false positives that frequently happens with trend and what happens is you know that hedging in that calendar year isn't free right so 2025 our hedging and our going to tea bills will cost us money by not um because there was just an immediate you know kind of reversal there's other years where it doesn't cost you 2008 didn't cost you you know your hedging worked and you you know went to the and so collectively over time if you take a 10 year window or 20 year window and you look at like what was the cost benefit of hedging like it actually isn't that positive where the collective decisions of all of those you know hedging and risk management was super beneficial but if you just look at one data point where it's like hey this was the one year and there was a false positive is going to be like well this thing got it wrong that's going to happen we don't get it wrong every single time it's not we don't need to get it right every single time we need to to when you do have a big blow up we knew do have been successful and managed risk um and it's a it's a process that plays out over time but this specific year 2025 would be like that that'd be like a you know one of our most challenging kind of environments when you're talking about relative performance of the strategy to to just plain vanilla long only equity risk so that's maybe a question to kind of pivot our our focus here from for me would be at the end of the day advisors investors when they want to adopt a new fund differentiated strategy they have to figure out where to fund it from and how much to fund it and so from your perspective this is obviously me very much a generalized statement how are you seeing investors allocate to the strategy and where are they sourcing it from so i'm just going to use the typical architect of what our general investor kind of is there will be exceptions you know to this so i'm just going to say generally speaking the only kinds of advisors or investors that are using our fund or people who have already bought into the use of alternatives right so they're they're not saying i don't i maybe i need some additional diversification they they really already understand that they need to build a portfolio of diversification there's nothing wrong with stocks and bonds and and that kind of part of it and they're doing everything if they can to optimize their equity exposure optimize their fixed income they just think that the the the portfolio of equity and fixed income is not enough there needs to be more diversification on the portfolio so they're looking at non-forilated strategies things that can be you know diversifiers what we do and this kind of like an our tagline on the website or whatever about optimizing liquid alternatives is we approach it from a funding mechanism and say let's look at the whole portfolio of what you're doing in this area and let's figure out which managers or which strategies are actually adding the most value which ones are worth paying fees for uh and do you have the right mixture kind of between the two so our funding or where an allocation typically comes from is from somebody's existing diversification you know bucket and then going through an optimization process to like let's make sure that we can can we enhance the returns can we uh you know lower the fees on the total cost of ownership everything you're doing can we reduce the tax efficiency like what can we do to help you kind of go about portfolio construction and and then how does our fund potentially play a role you know in that and um that's kind of what our you know approach you know has been typically what I see is that advisors tend to be overweight like one strategy or the other or they just don't have very strong like tests for should I be is this manager worth paying its fees and is it really like you know carrying its weight in the portfolio or not so we kind of just give them some basic you know guideposts around that and okay let's just put some simple tests to people and hold every manager you know fee to the fire and make sure that uh there isn't any inefficiency or drag coming from how you're going about your diversification sleeve uh and I and I found that's like the best place to look for opportunities you know that that that exist for where I guess funded from so would you say an average allocation to that I'm just thinking based on my own experience I mean probably five percent easily could make it a 10 percent allocation do you see allocators you know give more in a portfolio than 10 percent to the to their overall diversification sleeve or go one manager to your strategy in particular I'm just thinking because this is unique it is equity based but it is more of a low correlation strategy um old sleeve is going to you know anywhere from 10 to 20 percent for most advisors um so what part of the total portfolio can your strategy kind of take out so we're of the opinion that in your if you're running these kind of you know old strategy you're building it you really should be using a minimum of three different strategies that are the best managers and what they do that are also very uncorrelated to each other right so if you're using three managers that are all multi asset trend followers that's like we're using three large cap equity managers they're all doing the same thing you have the risks of the same you know it's they're just diversification and name only so we're very uncorrelated to any alt strategy out there so we add value by blending us into a portfolio regardless of what you're using um but I would argue that you should never be putting maybe say more than 30 percent of your portfolio into one strategy and you should not be using less than three um I think that just from an engineering and robustness so if you're going to put a 20 percent slug of your clients overall portfolio you know into an alternative diversifying you know kind of thing you know you should of that 20 percent you shouldn't have more than 30 going to one specific manager or or strategy and you really need to make sure that those strategies are truly unique they don't have the same strategy they don't carry the same risk they don't have the underlying holdings they're not going to have drawdowns at the same time and that that's honestly what I see like mostly as I see a lot of portfolios that are constructed that are just simply very redundant I've got five trend following managers okay but they're five trend following managers that are 90 percent correlated to each other so while you do have a low correlation compared to equities or whatever you do not have uh interest strategy diversification and you're going to kind of come up against these cycles of like hey this this particular strategy sucks for a long period of time and it's it's going to be frustrating you know to you we're trying to optimize not just the returns that you get from it but your your your your your investor experience your ability for your clients to see that what you put them in in this alt sleeper this diversification sleeve um you know it doesn't have to you know test their patients for nine years and then just have one you know one payoff it shouldn't have to be that difficult to have this kind of like ownership of these things in your in your portfolio but that's that comes down to portfolio construction so I can think what I'm it is what I'm what I'm hearing is uh you know we we understand we're trying to stabilize returns and and protect the downside minimize downside capture but it's also possible to have too much of this stuff and maybe as you say 30 percent or more is going to dampen your upside capture especially when we're in kind of dash to trash situations like we've been in since the the April lows yeah I mean it's yeah it's absolutely fair and I think it you know what I always point out is at the end of the day whether you like it or not you know a 60-40 portfolio is kind of the default benchmark for you know whether or not you're gonna get fired you know by accident or because every other advisor you know out there in the world's got some kind of 60-40 issue portfolio or you know whatever I'm using that as just a generalism across the board if you radically underperform that for an extended period of time then that's going to be problematic because the marketplace is not kind of you know doing that um and so it's really how do you engineer a truly diversified sleeve something it can actually really add diversification in there but minimize the tracking error risk or like the risk that you're gonna be put into a situation of conflict or you're gonna significantly underperform your peers or other people around you where your client you know perceives you as not being a good advisor or perceives you as you know delivering a dissatisfied investment performance kind of return so you it's it's there's part art and part science I would say in in the portfolio construction process in this way and you really just have to understand that it's not about building the portfolio to optimize on paper or architecturally for like the lowest correlation because if you if you get the lowest correlation but then the investor experience is not good you know nobody nobody wins it's it's really a balance between what are the returns that you're giving up versus gaining what kind of diversification benefit are you getting from it what kind of fees do you have to pay for kind of taxes come along with it it's there's a collective you know kind of input into it and the and the acknowledging that you can't build a portfolio and just as I'm just gonna put all this tail risk insurance you know in there and that's gonna work out never is gonna be happy with it they're not and less that next year right you get that tail event kind of thing like oh my goodness to why I did this if you don't get the tail event for nine years eventually whether it's year one or two or three your clients start saying what is the stuff why's it in my portfolio why are you charging me fees on it and why is it causing performance drag you know kind of performance drag you know in the in the portfolio which is all gonna be based upon probably some very short term you know look back when to of a year or two or kind of whatever and that's that's where I kind of you know look at it so you have to understand there's a real world constraint of investor behavior when it constructing these things and finding the right balance between the the alternative portfolio construction and that the the traditional and kind of what you have to give up or what you gain and finding that fine line between the two so important and I want to go back actually do a comment you made early on in our conversation here which was talking about investor experience and going back to that post GFC environment where so many diversifiers and liquid olds disappointed clients disappointed advisors and they've really kind of vacated the old space I think in the last 12 months we've started to see diversifiers come back and vogue and so I would love your kind of macro market thoughts on kind of this part of the portfolio broadly and moving from the 60 40 into you know 50 30 20 or whatever that asset allocation split is and the importance therefore of this type of strategy to help investors kind of whether the storm because ultimately that why do you add diversifiers they can be returned seeking of course but a lot of times it is to smooth the volatility and so that journey versus the destination is so important so like why today in this macro environment do you think this type of strategy is relevant well I think that the strategy is is relevant probably you know for a number of reasons I mean the biggest one is we're obviously going through a significant you know reckoning as it relates to debt and debt as it relates to you know US dollar you know kind of things so there's a you know an ever growing you know I'm not coming at it from like a doomsday or kind of thing oh you know like Ray Dalio like oh it's we're gonna it's all gonna blow up next year when this you know happens I'm not saying that I'm saying that we have nothing but ever increasing you know kind of debt we have an imbalance between the two we know that and that has implications in the economy and and and for asset prices and things like that so alternatives which you know those kinds of issues can create problems for companies we have inflation we have other kinds of stuff that can negatively impact certain business models or positively impact other business models I think that it's important to build a portfolio that recognizes that we can have growth cycles we can have inflationary cycles we can have deflationary cycles the environment that we're in right now is probably like a little bit you know weird and unpredictable and maybe some of those debt related stuff may have a bigger impact on you know fixed income and the the ability for fixed income to be a good store of value you know for you kind of like going going forward in time and you see other asset classes working right like gold as an example right great great performer great low correlated asset you know you don't have to have a hedge fund strategy or something to get a low correlated asset in the portfolio I think that because of all that like you know the risks of debasing you know currency the risks of you know debt and the implications of all those kinds of things that we're in right now make it more challenging for just a base case 6040 portfolio that you know it did well for a long period time but we were in a deflationary environment pro growth for 20 years of course like that's going to do very well and stocks and bonds were ever decreasing correlations between the two was the it was just easy I think we're in a much more challenging environment you know now and on a go forward basis the problems we have to get out of are not just going to magic to go away and that process of going through that I think diversified portfolios that acknowledge that you have these risks and that are well constructed to handle different things are probably going to perform you know better than just your you know your base case you know kind of basic diversification it would be my you know point on I obviously we could be wrong but I think that's the case for why more diversification I'm not saying you have to have trend following strategies in there I'm saying there's a lot of different ways to build more diversification I just think you should not be solely dependent upon bonds and fixed income to be your sole source of equity diversification I think there's bigger risks than ever with the fixed income side of it and its ability to both diversify you and preserve capital and you know that's that would be my argument for why you should have you know a 20% slog into or more into a truly diversified portfolio whatever you choose to put in there yeah I would agree with all those comments and we're fighting a different type of war today than we were 15 20 years ago and therefore we need different tools and um levers to pull in order to be successful and have a resilient portfolio so like we have a drifting macro regime yes and and you and then that comes down to but you also have to recognize there's a lot of stuff that's sold as an alternative that's BS it's not really it's the same it's just the same kinds of it risks packaged in a different way that aren't really going to be a true diversifier for you I think that's the most important thing is how do you determine something is truly a source of diversification and it's doing something different um is the biggest you know kind of you know factor of well have you back on to talk about private credit and private equity next week save save that for another another episode private credit private you know debt private other kinds of things I'm just saying like you can yeah private private beta I mean it's just a math I mean accounting kind of gimmick so um the private public it's all the same stuff except for the fact you just don't change the prices it doesn't make the risk go away uh what is uh what does um clip say volatility laundering something like that private equity volatility laundering yeah kind of stuff I mean yeah yeah just there's there's there's a lot of things you know that are there in the in the in the in the but you just when you break it down to what do you actually do what risks do you take and like a common sense approach to well are those risks different than the general risks of the of the of being an equity investor no they are not uh is that generally different than the risks is private debt generally different than the risks of being a uh a public debt investor no uh and I mean maybe in certain instances if you're doing asset back collateralized on whatever you know certain stuff were the uh but in general these kinds of you know equity and debt risks are you know are are the same now yeah I would I would not the risk of owning gold is not the same risk of being an equity investor it's not the sure risk of being a fixed income investor um so that's where I look at things you know of this thing is potentially a truly you know it's not risk-free there's tons of risk of owning gold and silver but it's a different kind of risk and that's what's important so cool I want to ask you about right now how your portfolio is positioned um what it what do you what is the your system your process what do you like right now um I know you had a podcast before where you I think mentioned that you own some shillies as well it talks like tell me tell us a little bit about what the portfolio looks like when we lift up the hood how much cash do you have right now what do you own you know and and and we're I'm always wanting to learn about these things and so it honestly doesn't matter like what sector it is I know you know tally and I sometimes go back and forth on the macro like what sectors are working what are not but I'm just curious like what are the trends speaking to you what we what you own currently yeah they're I mean they're not gonna be that surprising because they haven't really changed so the the biggest change and you know this year like I said we came in the markets started trends started to deteriorate yeah in the beginning of the year with tariffs and we went kind of risk off or very very hedged position that's reversed you know markets of trends went the other way we got whipsawed in that you know in q2 um and then reestablished you know trends as new breakouts kind of happened so today we're at 90% you know just just shy of 90% okay you know invested 10% T bills compared to say maybe 50% T bills 50% invested at the bottom of in marcher sure worst part of the of the tariff tantrum um so position you know for follow through and you know breakouts it's dominated by I don't know it's probably 80% 85% small mid cap names the two largest sectors are still which these have been ongoing trends for years uh industrials and financials are the two the two biggest you know uh weightings inside of industrials you know it's it's the typical like uh AI kind of thematic stuff but the non-obvious you know we don't own mega cap stocks in this in this portfolio so you don't see the the common AI names but you do see things like uh train technologies is you know one people like oh how's that an AI stock and was like well they manufacture air conditioning you know systems yeah every one of these you have two trains you know that probably you can't stop a train that's there can't stop a train like every like industrials and financials so tell us more yeah so every you know every AI data center kind of in the world you know these chips and GPUs produce a lot of heat yeah heat needs to be cool then the way that they're cooled is they throw a bunch of air conditioners from train on top of it so every AI data center hires train to you know or they're peer group like comfort systems things so we know those kinds of things right there's a lot of comfort system this done very well but like and and it's traded along with AI but it's yeah it's an HVAC company it's an HVAC company that you realize that their growth is all coming from AI GDP spent right yeah this cap X that's happening uh AI is translating into like non-semic inductor you know stuff right like there's other ways that businesses are employing people and making money interesting whatever as you know you building the data centers in Arizona then I think that they can bet yeah when they start doing in Alaska or wherever then we got to watch that yeah um and so but then you got to be able to put it somewhere where you know you can you heat it can you produce the power you know locally and cool it in the same area so that those people would have a geographic location benefit but those are the kinds of I don't know like uh names that you know we we own in the portfolio or in the financials it's not necessarily oh banks but you know like we've owned Arthur J Gallagher it's been a top hole yeah or follow for a long time many years it's it's a commercial property casualty um well to do I guess lots of lines of business but it's a commercial insurance broker right so they they just broker it's like one of the greatest business models in the world is commercial insurance brokerage you don't underwrite risk you just do brokering yeah renewal it's a renewal based business it has ultimate high margins and low low churn uh it's way better than software as a service as a as an industry in terms of the the economics of the you know of the business and it's something that you sell a product that everybody is regulatory mandatory to buy yeah you don't have to buy sales force or any one of these other software that's a voluntary market but you have to governments forces you to buy insurance across these so it's it's a great it's a great business model and that's great because I love how the trends sniff out these these companies these names right this is you're not having to go through uh a bunch of financials and and you know if you don't have to have like a whole bunch of sector analysts to find these things it's you find them through you know price and uh how they behave right so that's what we're very you know I'm very big on the markets are the best collective intelligence the best price discovery mechanism you know like in that way markets are very you know efficient that doesn't mean that the price is correct every day yeah I'm saying markets in general that are open and free are efficient at price discovery and getting to the truth um 100 percent and ultimately and this is where I deviate from all of my other peers and in trend um if you ask XYZ managed features person why did you make money in in that trend like why did corn go down or go up or whatever they would just kind of tell you it doesn't matter or they might give you some hedgerous speculator risk premium whatever yeah it's really never like a very clear black and white you know kind of answer yeah they just like well it's in the data and we do trends and statistically this works one thing about equities is you know these are operating businesses yeah and they either work or they don't work and in the end we're very much you know of the mindset like the whole mr. market right like in the long run the market is a weighing machine and the short term it's a voting machine so it you know it's going to be a popularity contest you can get speculative bubbles but over time companies that go on to be very very big winners and they're super successful is because they were very good at solving a problem and they created a lot of value in the world that that value translated into they made a lot of earnings and they made a lot of money and their shareholders did you know very well so the kinds of businesses that we end up making a lot of money with over time like their stock trends tend to follow the long-term earnings you know of the it's very rare that you ever get like a 10-year trend that works out or some company like never makes money it's it's possible but it's very you know statistically like an outlier versus generally it's a company that's you know made a lot of money yeah kind of over over over time so fundamentals and those kinds of things absolutely do matter to whether or not you have a sustainable trend or you have a sustainable investment we don't use the fundamentals to predict right what's going to happen but I know that in the end whatever we ended up making money on was the company tends to be very successful financially at the fundamental level makes a lot of sense there's there's an economic point to it right you may not see it until after the case but yeah that makes a lot of sense tally so I had a question I'll I'll put on my my gym warden cap here for and if I'm putting words in your mouth Jim just call me out I will so I wanted to ask you call about your risk management process this is about as kind of in the weeds as I'm I'm going to get but Jim Jim runs a quantitative stock selection model for us in which we have part of our risk management process is position limits and we can let the winners run but we also you know we trim them we trim but we also sell our losers pretty pretty quickly but I I wanted to ask you about position sizing how how do you handle that and and do you use you know stop losses the higher the price the higher the stock what what is your process there yeah so we you know it's it's it's a it's a systematic trend following the process so once we're in the trend like hey with us things broke out we we purchased it right and it's in the portfolio every position has a stop loss you know behind it we're or you know sell criteria says we're gonna we're gonna sell it we use a volatility derived stop losses so basically some unit of volatility or average true range that's behind something where let's say if a stock drops by 10 ATRs average true range we're gonna set in that every stock is there the average true range for each stock is going to be different in percentage terms because a high volatility stock will have a higher average true range and a low volatility stock will have a lower average true range our risk management or the money we're going to lose is the delta between the current market price and that stop loss point so every day that we come into the world we say I don't ever want to have a drawdown say greater than 20% right so the amount of risk budget is defined by us and I take that 20% and I'm going to then say what are all the positions that we have signals on what's the distance to stop on all of those things and then algebraically it's just gonna solve for how many shares should I own of each one of these positions if I want to have equal risk across each holder and it's going to tell me to get to solve for 20% total portfolio risk you should own xyz shares of each one of these you know companies the the highest volatility stocks are going to have the proportionally lower dollar amount exposure and the the lower volatility stocks about proportionally higher but if they both get stopped out we're going to lose the same amount in terms of portfolio risk and then we just do that every day you know the next day happens you get a new market data point you recalculate you know the whole portfolio and do whatever rebalanced trades that are necessary so if some stock just goes parabolic and it's way far away from its stop loss our our risk management system is going to say hey this thing is out of whack relative to the target risk and you need to trim some of this position in order to bring the open risk back in line that was what your target risk should be so we're constantly measuring the target risk of the portfolio the actual risk of the portfolio and then making adjustments to the position sizing when you know not every because it's not just if it gets out of whack by a penny we're going to do you know you want to minimize transaction costs and whatnot but that's that's the process kind of on a on a daily basis is we don't we can't control what the market's going to do or the volatility of the market but we can control our participation we can control our position sizing we can control our reaction to different you know market volatility dynamics etc and that's that's kind of just this daily process that we do throughout every market cycle is just making these adjustments that are necessary as the market evolves and never and keeping the whole portfolio and the individual position risks exactly where they're supposed to be because that's the one controllable variable that we do have is how do we respond and what how do we expose risk to the markets as a whole it's great stuff yeah this is this is awesome we could we could we could talk to you for a long long time I don't know paisley or tally if you guys have any other questions I got one more paisley did you have something no so tally do you have any questions any other ones I'm good I don't want to keep you good so I love the name long board and and and it makes me think of these big waves so my wife and I lived in Hawaii for a period our two oldest kids went to school there as well and so I think of the waves like by waky key that are longer they're more predictable you can literally ride the longer boards but the waves on the north for some of those are a little bit more violent unpredictable is that kind of how you came up with long board I'm curious with the name yeah I mean the the long board so I lived in Hawaii also so that's actually the background is that it's way too hot in Arizona to live here so we would travel and spend as much time as we could in the summers in in Hawaii on the island of kawaii in the north shore and you know that's a great you know kind of surfing spot and yeah that's where the name originally kind of came from was the time that we spend there but it is about writing market waves and having the right tool for the right you know kind of waves right so these longer duration kind of physics of the types of waves that we're looking for the right type of board for that is a is a long board it's a long board yeah and you can use one of these smaller boards that are like for going in but like it's more violent I feel like that the waves are a little bit more unpredictable I think those shortboard kind of surfing is more going back to the conversation for about the different trend in momentum I think yeah I mean those kinds of waves are more momentum based kind of stuff versus these longer duration you know waves of what long-term kind of trend is is doing especially long-term trend and you know in in inequities because there's there's a difference like the biggest thing about doing it in in stocks is like it makes logical sense that a some company could go on and be a huge super cycle winner for 20 years right and just you hold it as long as you can it goes on that makes all of your money you know I don't have the same nobody in the trend following world of currencies or whatever would say I'm in a 20-year trend right about any kind of stuff they're they're they're truly measured in in months right it is the kind of duration that you typically you know see so we're just in a very different time zone and coming from a completely different perspective that is also driven by the fact that what we're actually looking at is a totally different set of data from with you know individual company cycles yeah that data is also rooted in like economic like foundational you know principles that's how I go back and I think of us that we're more very uh we're we're investor you know first kind of mindset but at the same time very pragmatic about the risk component you know stuff that it can't just be I mean Charlie Munger or Wampoff would say like if you can't handle 50% drawdown you should never invest in stocks and I think I agree with that for the average person who's going to invest in the index funds or whatever because that's going to happen and so just don't even don't even put your money in the market if that's something you can't deal with sure I'm more of like I know people can't deal with that so could we engineer a way where there's a uh we still have this long term investing mindset we understand the equities are going to produce a lot of big winners and there's a lot of returns you can generate from it but not be so dogmatic that you know your only choice is to either take accept the risk or get out of the market like is there a way that we can manage risk in a in an effective way while still keeping you know the majority of your of what you would expect to get over the long term from being an equity investor and trend following specifically applied the way that we do it is actually highly effective at at uh making good on that goal makes 100% sense well this has been fantastic Cole thank you so much for joining us uh I really appreciate your time I appreciate all your insights this is this has been fantastic thank you you no problem glad you guys enjoyed it and if you have any follow up questions happy to to answer those for you sounds good and I look forward to your podcast also about paisley where we're doing something maybe different on this uh I snagged Cole for my podcast as well and we might have a little debate on like the short term trend following and crossed asset versus intra asset longer term just to spice it out so I think both serve a purpose but yeah we're big on we're we're very big on uh you know there's a whole ecosystem of these types of strategies out there there's no one correct way of doing you know kind of anything there's a lot of different ways to build something there's a lot of different ingredients to build it you just you know have have the recipe that you want everybody has a different flavor and there's a lot of great managers and a lot of great strategies out there in the world and long course one but there are many many others and um I think that's all we're really trying to do is just help help people think about it the right way and ultimately the marketplace will decide whether or not your your fund is right for them or or or not