In this episode of The Derivative, Jeff Malec dusts off the dress shoes and steps out from behind the webcam for his first in-person interview since before COVID. He heads to Potomac’s studio to sit down with Dan Russo (@DanRusso_CMT), Portfolio Manager and CIO, for a conversation on why investing theory often breaks down when real life shows up. This chat covers why market timing isn’t about catching every move, it’s about avoiding the ones that cause lasting damage. Dan also explains how Potomac applies systematic, rules-based models built on trend, breadth, and intermarket signals, why cash is a position, and why many popular investing slogans oversimplify risk. SEND IT!
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Check out the complete Transcript from this week’s podcast below:
Timing, Triggers & Transparency: Inside Potomac Funds’ Tactical Investing Playbook with Dan Russo
Jeff Malec 00:20
All right, everyone, we’ve got a special edition here. I’m in this lovely studio in Bethesda, Maryland with Dan Russo of Potomac funds. Dan, how’d you guys come up with this cool studio? What’s the story here?
Dan Russo 00:36
So the office here is new. The office here in Bethesda, Maryland that we’re sitting in, we opened early July. We were traditionally or we were all fully remote, firm up until then, we have always believed in content. We were doing a lot of the work, you know, Zoom calls, team calls, just recording from our own home offices. So with that in mind, we kind of said, Look, we we want to lead with content. We call the content bazooka, and we think it adds a lot of value. So having a professional studio with the people to staff it and all the right equipment to do it right was really important to us. So it was part of the build out. It wasn’t like we had a spare room or converted an old closet into a studio. It was part of the plan all along. Because we do like to lead with content. We do believe in transparency. As a tactile manager, we oftentimes look different from traditional benchmarks. So because of that, we feel that we have to not feel we want to explain what we’re doing, how we’re doing it, why we’re doing it, because the way we invest lends itself to a lot of questions. Number one, yeah, listen, we’ve been doing content for a long time. We see it everywhere, it adds value. And there’s something to be said for production value, right?
Jeff Malec 01:45
You can see the value right here in the space. You offered that I could put stuff on the bookshelf back here, but I declined. I should have brought a bears helmet. Hopefully we win. This will probably be out after their next playoff game, but
Dan Russo 01:59
so a lot of people like to lament about their football teams or get excited about their football teams, and they’re just, I’m a Jets fan, so the entirety of my life, from a football standpoint, has been absurd, yeah, so I don’t even get involved in those conversations. But down here, we are big commanders fans who also didn’t have a great season. Not ravens, no, okay, but I’m not from here, like I said, right?
Jeff Malec 02:25
I’m a chat, sir. You had that one season with Rex Ryan, and who was the cornerback, that was the lockdown cornerback. So you had, there was a brief, brief little moment there the content bazooka. So you actually ended up here because of your own content, right? Or because of following content.
Dan Russo 02:43
I did, you know social media actually, Manish cotta, our CEO and CO, CIO, we followed each other on Twitter now. X and I would do these video hits from from my home, and was doing a lot of writing. It was active on social media, just trying to add value, put content out there. And they were doing the same. So I was following along, because we were following along with each other. And then one day, Manish posted on on Twitter that he was looking for somebody to come in and help out as a portfolio manager. So I just sent him a message like, Hey, I think it’s, Hey, man, I saw your post. Would love to chat. And so we got together that way. I don’t actually, don’t think there’s a copy of my resume here, but I think it was all just through connections and through like, you know, the content creation. Content creation as he was reading a lot of the work that I was doing, I was reading everything that they were doing, and watching along. So it ended up working out, you know, we had the conversation. And that was March of 21 I started
Jeff Malec 03:33
here, any Twitter Spats between you two arguing some finer points of some now program?
Dan Russo 03:38
Listen, it’s not worth getting into Twitter Spats. Like, it’s a horrible use of time, you know, I think, you know, like anything else, if you can have intelligent disagreements with people, you’ll learn something. If you want to be an ass, you’re going to come off looking like an ass.
Jeff Malec 03:52
What kind of content were you putting out? What were you doing that for? Just personal, just
Dan Russo 03:56
some of it personal, some of it professional. You know, I was working for a small quantitative research shop out of Philadelphia. So I was working from home. So just ideas about the market things I was looking at, you know, as a chartered market technician, I’m looking at, you know, 1000s of charts all the time, things that look interesting, different relationships, just, you know, having the dialog. It was still an interesting time, you know, coming out, you 2020 right, post covid And the whole 2021, meme stock craze, some, you could put a chart out on anything, and probably get, get some, you know, get some following, get some engagement out of it. But for me, it was always, you know, I don’t know. I guess my rub, if I want to rub people the wrong way, is, I came from an institutional background, so, like, I don’t understand the whole retail meme craze, GameStop and whatever, maybe to my detriment, maybe not. But I was like, you know, not to sound like the old man, you know, yelling at the cloud. But like, you know, this is not gonna end well, right? Like, you know, these are not good companies, right? I think it happened recently with somebody that was a hardware company, that was an AI. Play that everybody was bidding up. And I happen to know the company well from a previous role that I had, and I would go on Instagram, like, Y’all realize that this is a terrible company with terrible management, and I’d get attacked. And I was like, You know what? This is not worth it.
Jeff Malec 05:13
We have had a one of our most listened to podcasts was back during that Gamestop thing. We had a guy, but one of my college buddies high school teacher in Michigan, his student came in crying, like, I lost all this money. I don’t know what to do, right? Like, getting caught up in this game stop thing. So he’s calling me, like, how can he get out of this? I’m like, he can’t.
Dan Russo 05:33
Yeah, exactly. And that’s, you know, that’s another reason that we’re big on content, because we believe in education too. I think a lot. Like, I remember during that time, you know, people losing money and then wondering if they could essentially get a refund, yeah, like, Oh, hey, I bought this stock. It went down. Can I return it and get a refund? Like, what? So I think education is a big part of the content that we do as well. Again, as I said, we’re tactical managers. We’re not just buying and holding the s, p5, 100. We’re not buying and holding cheap index funds. We’re we’re we’re tactical, right? We’re in and we’re out. And that requires a level of education. It for people to understand our clients, the financial advisors have to explain like to their clients, right? Why do we own this? What are they doing? So education is a huge part of investing. I’m actually not a huge believer in the whole like, democratization of trading and like the gamification that you go on an app and you buy a stock and confetti is falling all over the place. I think you need to lead with education.
Jeff Malec 06:32
This podcast is not brought to you by Robin Hood. Apologies if they’re a sponsor, they are not. No, we, and I’ve actually talked about that before. Like, what, are you doing? Like, why and how’s the SEC or whoever’s allowing that of, like, confetti, you sold an option? Yeah.
Dan Russo 06:48
I even, you know, regulatory aside, right? I, you know, it’s not a game. You’re right, you know, I always, kind of tell people. People always ask, you know, I read this book and I want to open an account and trade stocks. I always ask people, you follow basketball, sure. Do you know who LeBron James is? Yes, if you got on the court with Lebron James, do you think you could win? No, you’re doing the same thing in the market, right, if not more. So you’re in there with everybody, right from the mom and pop investor to the greatest traders and hedge fund managers of all time, right? And everything in between, like, you’re getting in the ring or you’re getting on the field or the court, whatever your analogy with these people. Like, why do you think you should take that lightly and like, it’s a like, and that you have a chance. Maybe you do in the short run, but in the long run, you know, it’ll end up like you said, the teacher wondering how they can get out of this.
Jeff Malec 07:43
I’ll one up you on that. We did a post once. If Bill Gates was as tall as he is, that much more wealthy than the average person, he’d be 313 miles tall. That’s actually interesting, right? So it’s like you’re not just getting on the court LeBron, James, you’re getting on the court with a 60 foot, 1000 pound LeBron James that can just put it in the net.
Jeff Malec 08:15
So you keep mentioning tactical, I want to spend a lot of time on that. Is that a fancy word for timing? You know, a lot of managers say tactical because they don’t want to say timing. You guys actually lean.
Dan Russo 08:27
We embrace it, right? We openly. There’s two schools of thought, right? There’s the buy cheap passive index funds. Time in the market is better than timing the market, we flip that equation, right? We believe timing the market is better than time in the market, largely because, yes, the market goes up over time, right? We know this. And a lot of the people who advocate for time in the market will show you a chart you know, of the s, p5, 100 going back 100 years. Your investment horizon is not 100 years, okay? Your investment horizon is finite. Sequence of return. Risks matter right sequence of returns matter. If you were getting ready to retire in early 2000 and you’re like, look at this massive bull market, and you were overweight stocks, you might not have been retiring, right? And our whole we believe in the concept, or the idea of max drawdown right, as a key risk metric, right? And max drawdown is simply how far your account has fallen from its peak to its trough, and right, the greatest number of that sequence. And the reason we believe in that is because that is, that’s the ride you take as an investor, right? I can show you a chart and say, here’s what the s, p5 100 did over the over the past 50 years. And you can see, see here, these were pull backs. These were bigger bear markets. And in your head, you’re going to say to yourself, well, I can live with that, because look at the outcome, right? But in the moment, can you live with that? Right? In my. Career I started, actually. So I started working full time on the floor of the NYSE the week that AOL bought Time Warner, right? Could not have timed it worse. Yeah. And in my career, the market’s been the market. And by market, I mean s and p5, 100 has been cut in half, twice.
Jeff Malec 10:16
You mean, AOL couldn’t have timed it worse? You couldn’t I could
Dan Russo 10:18
not have timed it worse. IOL was pretty brutal, too, but I guess great sale by Time Warner, right, right? But the market’s been cut in half, twice, down 30% in in a second, right? In 2020, right. So these things can happen, right? And where you are in your life, of your investment life cycle matters, so just buying and holding anything doesn’t make sense to us, right? We don’t believe that you should have to live through the entirety of a catastrophic drawdown. Now, I think one of the misconceptions about timing is that you think we’re trying, we’re trading and trying to catch every twist and turn in the market. And that’s not the case either. Like maybe there are people out there trying to do that. That’s not what we’re doing. Ultimately, what we’re doing is we’re using quantitative technical analysis to create trading systems. We combine those trading systems in different ways to create a composite model. And the composite model answers the question, do you want to be invested? Yes or no. And then from there, we have four funds. Each fund has a different universe of investments that it can choose from, predominantly ETFs and futures. And if the composite model tells you to be invested, each fund then looks at its individual universe and decides where it wants to be invested again, through through technical trend and momentum analysis. That being said, there are times where we don’t want to be in the market, right? And it’s not because we’re trying to, again, catch every 2% move up and down. We’re trying to avoid the catastrophic drawdowns.
Jeff Malec 11:47
It reminds me of the old saying, right? You can drown in a river that’s averages two feet deep, exactly, right? There’s a 20 foot hole there somewhere.
Dan Russo 11:56
Well, there’s that like, I mean, the math of it, right? You can see, but I think more importantly is the psychological element of it, right? It’s kind of like Mike Tyson. Everybody has a plan so they get punched in the face right until you are sitting and staring at a 25 30% drawdown on your account. You don’t know how you’re going to react. No, right? Most people don’t, and most people, I think, knowing what the outcome is, say I could
Jeff Malec 12:21
live through that. Maybe worse than don’t have a plan. They think, they think they can actually.
Dan Russo 12:25
They think they’re going to be able to execute the plan exactly as as they laid it out. Number one, they think emotionally and psychologically, that they can stick with it. Number two, and number three, and this is the part that I think a lot of people leave out, even the ones who say, hey, you know, the market always bounces back. Just hold through it. And that’s true. The market does bounce back right the market has bounced back through every correction, every bear market, every recession, but the environment that produces a 50% drop in the s, p5, 180% drop in the NASDAQ, 100 plus right after the.com bubble is probably an environment where you might lose your job, right? So now walk me through how you’re sticking with it, because the market always bounces back when you’re faced with putting food in table, when you’re faced on making sure your kids can continue to go to Little League or hockey or ballet school, whatever it is they’re doing, right? You don’t always have full control over it, so we are maniacal about max drawdown, because, again, that’s the ride you take. And right? We can go through the simple math of it. If you lose 50% you need 100% to get back, and if you only lose 25% you need 33% to get back. We all know that math, but get past that, right? Why live through it? It’s behavioral.
Jeff Malec 13:40
And are you? I’ll get wonky here for a minute, but the MAR ratio, right? Are you even more so compound return over max drawdown?
Dan Russo 13:48
It’s something we pay attention to, of course, right? Yeah, because, look, you can avoid max drawdown, like, hey, returns, right? So, you know, we, we are obviously focused on, you know, upside capture, the MAR ratio within the context of max drawdown, also, right? Because we talk about this a lot, we talk about the things that people traditionally go to as diversifiers to the market, and a lot of them are great diversifiers, but if you look at them over time, they have no return, right? So there’s always trade offs. You know, our goal as a tactical manager is to try to get as much of the upside as possible while maintaining a healthy drawdown relative to historical norms in the market.
Jeff Malec 14:28
So why do why is there the timing is bad feeling in the market, right? Like, what’s the lived experience of most people are not good at it the industry of why they arrived at that? I think there’s two things.
Dan Russo 14:40
I think there’s two things. I think number one, like I said, most people are not good at trading. Is hard, right? Going back to our LeBron analogy
Jeff Malec 14:46
earlier, you know, a lot of people heard Jordan and fair
Dan Russo 14:49
actually, in fairness to you, in a lot of our marketing materials, when we talk about how we do what we do it, we use the 90s bulls. All right, I don’t even like a basketball, but I even Jordan PIP and Rodman and. That’s the extent of it for me, but you’re off the hook. Fair. You know, I think that number one, it’s hard. Number two is, there’s no real clear definition of what is tactical. What is market timing? Right for us? Tactical market timing is we can will and do take the portfolios 100% to cash if our composite models tell us to get out of the market, we go to cash. We view cash as a position. And over the past couple of years, it’s been a good position, right? You’re getting yield. But there was somebody else who might view tactical as when I’m bullish, I’m 100% long. If I’m a little less bullish, I’m 75% and if I’m bearish, I’m bearish, I’m 50% that’s tactical also right? And that the metrics around that investor are going to be drastically different from us. If you look at correlation, if you look at beta, right, upside, capture, downside, capture, all the key metrics, that investor, who is also tactical, in fairness, will look completely different to us. So I think it’s number one, it’s hard to define. And number two is, I think most people are not good at it, and the people who are not good at it tell you it’s just easier to buy and hold, because the market always comes back, right? If you just buy and hold and listen, in fairness to those people, the past 10 or 15 years, just keep buying has been a good strategy. We’ve gone, everybody’s been ingrained to know that the Fed is going to come in. In the case of covid, they had fiscal and monetary backstops. So there are a lot of people who don’t know that the market can get cut in half, right? They know it, but they’ve never lived through it, yeah, right, especially now like we’re getting, it’s 2026, when we’re recording this. You know the global financial crisis was what, yeah, 1618, years ago. That’s crazy, right? So I was sitting on a desk when Lehman was collapsing, right? I was on the floor of the NYSE as the.com bubble was bursting, as, you know, as Enron was being exposed as a fraud, right? And everything in between. And you know, people subsequent to that, have lived through bear markets. In fairness, I let people like, oh, young investors have never lived through a bear market. The S, P was down close to 20% in 2022 like, yes, they have, but the snap backs have been a lot faster. I remember graduating. I graduated like I said. I started full time the week a old, all Time Warner, all through college, especially the back half of college. I was cutting class to go day trade in the library, like, massive bull market. Buy Microsoft, buy Cisco, buy Juniper
Jeff Malec 17:28
on, like, the library computer. Because you don’t have, you can
Dan Russo 17:31
have a phone. I think I had a phone. It was like, this big, right? You couldn’t trade on it, you know, going to the library computer. I don’t even know what it was like, the National discount brokers account, or, yeah, the duck, yeah. So, and I’m like, wow, this is easy, yeah? And then you realize it’s not easy. And then you I graduate, it’s 2000 the new millennium, y, 2k right? Puppy dogs, ice cream. And then it was like, literally, a shit show for three years. And then come out of that global financial crisis, two years of just like grinding you down, so you’ve not had a grind down bear market in a while, like a go down, stay down. Every rally gets sold. So in fairness, just keep buying and time in has worked.
Jeff Malec 18:16
Could you argue? I could argue, or others could argue that’s a feature, not a bug, that we’ve like designed the system to keep those extended drawdowns out. Yeah, I think that there’s this. I mean, you know, I call it the financial industrial complex, right, right of the military, and just like, It’s all designed to prop this market up.
Dan Russo 18:35
I mean, I guess you could be, you know, if we want to go down like the that rabbit hole,
Jeff Malec 18:40
but people have, Let’s peek into it,
Dan Russo 18:42
been trained to know that if the market is under pressure, the Fed will step in, right? Somebody will step in. There’s like, you know, I’m not gonna use the word bailout, because it’s not a bailout, yeah, but I’m not gonna use moral hazard, because that was a word that got overused a lot after Oh, eight, no, nine. I think it’s just conditioning, right? And the rationale, you know, as kind of quant focused, technical analysis focused people, I always, often say, the why doesn’t matter, right? The why is not what gets you paid, like, who cares why it’s happening, it’s happening, right? Prices, price goes down, and it snaps back. You’re going to get paid, if you’re aware of that, right? You’re not going to get paid because you know why it happened.
Jeff Malec 19:26
Even worse, if your bias doesn’t agree with the why, you could get upside down in a hurry.
Dan Russo 19:30
And there’s a lot of people who have been bearish for a long time, and those people are great, because when they flip, that’s probably the real signal, right? So yeah, I think just focusing on data and what’s happening with price trends, the health of the market and other confirmation measures. Who cares? Why? And I realize that’s not to sound flip. Yeah, right. Obviously we care why things are happening, right? And you want to be able to speak to and have an understanding, but you. At the end of the day, it’s gonna impact your process.
Jeff Malec 20:04
It also sounds like you’re not the type of group or person that’s gonna say, I’m betting everything that there’s never gonna be another 50% drawdown in the No, 100% No, right? You know, we like sure, maybe it’s all designed to prevent that, but I’m not betting against it.
Dan Russo 20:18
Percent. Yeah, no. I mean, we are. We’re set up for the fact that it probably could happen, right? But we don’t think you should have to live through it. We don’t think you should have to wear the entirety of the drawdown right again, because when you’re when the market’s down 40, what do you do if you get laid off? Right? What do you do if that’s because of a deeper recession coming? Right? You can’t just sit there. You don’t have the luxury of sitting there and holding right. You have to, you have to live your life right now. I mean, listen, this is my problem with kind of a lot of economic theory in general, right? A lot of economic theory that you’re taught in school, and I do teach a college class on market analysis, but a lot of the economic theory that you’re taught in school assumes that you will always make the perfect decision, yeah, right in every situation and you can’t right, life gets in the way. Right? You get laid off. You get divorced. Something happens in your life. You have to move right? Who knows?
Jeff Malec 21:18
Divorce tax? My brother’s a realtor. He’s like, That’s most of my business. Yeah, death money
Dan Russo 21:23
in motion, right? Because, because life happens, right? So to sit there and say, you just hold through it, the market always bounces back. Look at this chart of the S, P, since 1929 is so disingenuous that it’s gotten to the point where it’s just a running joke. Now we just laugh, but it is disingenuous. It’s fair, it’s true. But the that’s not the average person doesn’t have 100 year investment cycle, as I said, and life gets in the way.
Jeff Malec 21:57
Coming back to what the last bit on timing, everyone shows those charts or data points of you missed these 10 best days, that’s why you don’t time, because if you miss those best days, you’ve lost most of the gains. Yeah.
Dan Russo 22:12
So that’s been completely debunked, I think, by us and others, also completely disingenuous. And what I like to say lazy research, right? Because the 10 best days often cluster around the 10 worst days, and if you miss both 10 Best and 10 Worst, you actually do just fine, right, compared to buy and hold, right? So it’s a disingenuous form of analysis or a disingenuous data point that doesn’t complete the analysis, so let’s call it disingenuous at worst, lazy at best, and it’s just patently false because they cluster, because volatility clusters, right? This is you see it, bear market rallies are some of the most vicious rallies, go back and look at 2000 to 2003 2008 2009 right? Massive bear markets with 30, 40% rallies while they’re you know, in the midst of the bear market. So it’s the vol the 10 worst days and the 10 best days tend to cluster around each other. So if you missed the 10 Best, you have a high likelihood of missing the 10 Worst also. And if that’s the case, you end up okay.
Jeff Malec 23:27
And so is that part of your model of looking at when that volatility is elevating, when it might be some of that clustering.
Dan Russo 23:33
So our model looks at the market through three lenses. What is the trend in the market? How healthy is that trend as measured by breath? And is the trend confirmed by intermarket themes? Right? Trend is pretty simple, up, down, sideways. What is price doing? Health is market breadth. It’s counting how many stocks went up, how many stocks are going down? How many stocks are making new highs? How many stocks are making new lows? What’s the volume trading the stocks are going up versus the stocks that are going down? In a healthy bull market, you would expect to see more stocks going up than going down, as we’re seeing now, you’d expect to see more volume trading in the stocks that are going up than going down, and you expect to see more stocks making new highs than new lows, right? And if the market is going up, the s, p, pick your market, but more and more stocks are going down. To us, that is a sign of deteriorating health, right? And then the third lens is intermarket confirmation, right? We look at what is the bond market telling us about the stock market? What are commodities telling us, what are different pockets of the stock market telling you we use a riff on Dow Theory. Dow Theory is this concept that was created over 120 years ago where you look at the Industrial Average and the transports. And essentially, when we were kind of an industrial East Coast industrial country, right, a lot of manufacturing, a lot of the industrial companies were located on the east coast, and the railroad companies would ship, right, the companies that make the stuff, the companies that ship the stuff, right. And you want to see confirmation there, right, if the companies that make the stuff are doing well, and the companies that ship. The stuff or not, right? There’s something off, right? So we still look, we actually still use a riff on Dow Theory. We pay attention to what the transports are doing. They actually just broke out of a four year consolidation. I was at a conference last week down in Tampa, bunch of technical analysts, and that’s all anyone wanted to talk about, right? So while the news media is focused on, you know, the mag seven and AI, we’re down there, like, you see this chart of the transports, like nobody’s talking about that, and it’s kind of fun. It’s kind of fun
Jeff Malec 25:23
that way. Not at all this, the whole concept breadth transports, Dow Theory is like right out of the 60s, right?
Dan Russo 25:30
A lot of it is, which is kind of fascinating, in my opinion, because number one, it speaks to the fact that a lot of these, you know, basic concepts of market analysis and quantitative and technical analysis still hold number one. And number two is you can get an edge by focusing on those concepts, because a lot of people aren’t anymore. Now, some stuff has gone away and will never come back. I remember reading a book and making sense. There used to be something called an odd lot indicator, and you’d go into Barron’s would post it, right? And if a lot of odd lots are, for those who don’t know, or orders of less than 100 shares, right, back in the day, a round lot was 100 shares, excepting, I think it Berkshire Hathaway, because it was so highly priced, it was one share. But a round lot was 100 shares, excuse me, odd lot was anything less than 100 shares, right? And the concept was, you retail, unsophisticated investors trade odd lots, right? The person who buys 10 shares, five shares. And, you know, institutional Smart Money investors traded in round lots. So if you’re starting to see high volume in odd lot trading, that was a sign that, like, the dumb money was piling into the market. Now we trade now we trade in fractions of shares, right? So that’s gone. But there are these older concepts from the 50s, 60s, 70s that still hold that people don’t pay attention to, and it’s fascinating.
Jeff Malec 26:54
And outside looking in, you’d think, Oh, this is this high tech. Not to say you’re not, but like they’re using heavy quantitative analysis,
Dan Russo 27:03
well, we are. You know, what we’ve done is we’ve we’ve gone from the lines on charts technical analysis like draw a trend line, right, draw a pattern. We’re not doing triangles and rectangles and head and shoulders. We’re taking these concepts, getting the data that we need, writing the code and then testing it rigorously, right? So it’s not like, Oh, more stocks went up today. That’s good. It’s like, No, how has that changed over time? What is the trend in that metrics, right? Where is it relative to where it was a year ago? Right? And we’re testing it over and over again, getting all the data we need, and then combining the different systems, right? You take a trend system, and you say, Okay, fine, the trend is up. Well, let’s combine that with a breath system and an intermarket system, and then what does that mean? All of three of these things are bullish. Great. Well, what if only one of them is, is that good? Let’s test that, right? And we’re doing it. Obviously, it’s more in depth than just three systems, right? There are multiple systems that we’re looking at, and what we’re doing is we’re looking at the combinations of systems that are currently on a buy signal or in an on off state. The systems are binary, right? That system can be either on or off when then we look at the systems, the combination of systems that are on, and we say, historically, when this combination of systems has been on, is that a good time to be invested if yes, great, 440 act mutual funds, each with an investment universe. Let me go through it, right? This fund is going to be the own this. This fund is going to own X, Y, right? We use trend and momentum on baskets of ETFs as well as futures to get the exposures we want.
Jeff Malec 28:39
Instead of like a voting machine. It’s a waiting so if you have 100 models or it’s
Dan Russo 28:44
not waiting, no, it’s purely the combinations. And that was one of my first questions when I got here. I was looking at all the different trading systems. I was like, Well, how is this one weighted? Not weighted? I was like, Well, what? Well, what do you mean? It took me a little while to then see it, the combinations are what matter. And that makes sense, because let’s say you have, let’s keep it simple. Let’s say you have three indicators. You have a trend indicator, a breath indicator, an intermarket indicator, and you say, I’m going to give 60% of the weight to the trend indicator, right, and 20% of the weight to the other two. That sounds great. But what happens when you’re in a market that’s not trending right now, you’re just out that could last a long time? Or, you know, what happens if you run a mean River? Let’s say you have a mean reversion system, right, where you’re looking to buy the dip every time, that’s great. What happens if there’s no dip, right, or meaningful enough dip for you to get in, and the market just grinds higher, right? And if you think that can’t happen, right, it can. If you look at some like a traditional mean reversion indicator, is something called the RSI, right? And the the default parameters for RSI are 14 days buy at 37 At 70. That’s what everybody learns. You read a book, that is what you learn. Covid market tanks, 34 35% right? And then rips out. And if you remember, at the time all the we’re going to test the lows. Everybody said we’re going to test those, including myself, in fairness, yeah, we’ll probably test the lows. Retest, retest after it ripped up after that. Yeah, you know, we’ll probably retest the lows. So if all you had, if you said to yourself, I’m a mean reversion trader, and I’m going to use this cool RSI thing that I just read about, and when the s p5 100, RSI, the 14 day RSI, and the S p5 100 goes back below 30, that’s when I’ll buy, right? Because think about the news at the time, yeah, the market bottomed. What? March 23 26 like Friday, that Friday, Monday, that was it, yeah, but things had just shut down, yeah, only like a week before, so the news was still horrible and the market was ripping. Obviously, the market is a discounting mechanism. We do believe that. But if you were using just one thing, the RSI, do you know the next time the market got oversold? To give you an entry
Jeff Malec 31:05
22 was it? Yeah, wow,
Dan Russo 31:07
right before going down close to 20% Yeah. And the NASDAQ 100 was down 40% at one point in 2022 so our point is number one. You need multiple you need multiple trading systems, hopefully all uncorrelated, right? But and they should be doing different things, a trend system, a mean reversion system, and then get confirmation from other parts of the market, right? Because if all you have is a hammer, everything looks like a nail, right? Said differently. Let’s say you had a trend system and a mean reversion system, but your mind works mean reversion. I want to buy low, sell high. If you give more weight to that mean reversion system you might not get in it. So you need multiple systems, uncorrelated with each other, in our opinion, but not weighted. The combination is, what if
Jeff Malec 31:50
I have two that are saying you should want to be invested, two are saying, Don’t be invested.
Dan Russo 31:54
Which two, which? That’s how we look at it. Yeah. Which two matters, because there are environments where, let’s say you have again. Let’s keep it simple for math purposes. Let’s say you have 10 individual systems, right? There could be a situation where three of them are on, but those three are high probability that the market is going to go higher. So you get it you so you’re in you could have another situation where five of them are on. But if it’s not the right five, you might not be in, right? And that’s, you know, that’s a concept, right? It’s the combination which ones, right? The other thing that’s important in our in our opinion, is you want to be regime aware, right? You want we have systems that are more likely to fire in a bullish environment, and we have other systems that are more likely to fire in a bearish environment. And by fire I mean, get us in on the long side, right? But the systems that are likely to fire in a bearish environment have really short holding periods, right?
Jeff Malec 32:58
Because, again, it’s it dipped your tone,
Dan Russo 33:01
quick hit, right. Like I said earlier, bear market rallies can be vicious, right? So we’re not saying like our model is telling us to get out. So we’re just going to stay out right. We recognize that there are opportunities within a bear market to pop in a couple days at a time, scalp, some opportunity, and then get back out right? Whereas the systems that fire in a more bullish environment are likely to keep you in longer to take advantage of the fact that the market does have a natural upside bias,
Jeff Malec 33:33
and each of the so the four funds when it when you’re signaled to go in, it’s all four going long, but in their own instruments
Dan Russo 33:43
at a very high level. Yes, okay, right. So what I’ve been talking about here today is this concept of trading systems. Put them together to make composite models. We have more than one composite models, right? For simplicity sake, if, let’s say, if the composite model fires, that’s answered, that asks the question, do you want to be invested? Yes. If yes, then each fund doesn’t as a basket of an investable universe that it could look at our largest fund when composite modifiers is long, the s, p5, 100, right through a combination of futures and ETFs, we have two other equity focused funds. They have baskets of ETFs. There’s an aggressive one that basket contains ETFs that generally have a beta and or standard deviation greater than the S P. Then there’s a conservative fund less than basket of funds, ETFs less than beta or standard d less than the S P. Talk to people about is the conservative fund might own health care broadly, where you get pharma in there and you get services in there, the traditionally conservative parts of health care, whereas the aggressive fund might own biotechs. And then the fourth Fund is a combination of high yield timing and what we call global macro, but really is anything else that’s not stocks. So high yield timing model we’ll look at, obviously the high yield market via ETFs, and then the global macro you. Or everything that’s not stocks. We’ll look at converts, preferreds, treasuries, corporates, emerging markets, the dollar, right, all in all in ETF or an exchange, exchange traded product format.
Jeff Malec 35:14
But the signal is still coming from like
Dan Russo 35:16
a signals are still, you know, quantitative and systematic in these different instruments Exactly. It’s not, you know, Dan wakes up one day and he’s bullish the dollar right? So let’s get dollar exposure right? It’s going through a quantitative process.
Jeff Malec 35:41
Talk me through a little bit. You guys have done a lot of work getting on all these tamps, turnkey asset management programs where you’re combining all this stuff into different ways for the advisors. So two questions there. One, the advisors must love you, like you’re doing all this work for them, right? Hey, thanks. Put this. I’m looking for this exact flavor. What’s the combo I need? So let’s start there. How does that work with the advisors?
Dan Russo 36:05
So look, we work closely with advisors. You know, obviously, you know, we help them, right? We want to make business simple for people, right?
Jeff Malec 36:15
We are novel ideas. It really is a
Dan Russo 36:19
novel it is. Look, you know, we have the expertise, and, you know, we have the willingness here at Potomac to make the investments, to make business simple for our clients, right? So one of the big initiatives that we’ve, we’ve had recently, is a concept called guardrails, right? That we’ve rolled out to our advisors, where they can look at different managers and create models and combinations and kind of see what that would look like historically. You know, if you
Jeff Malec 36:46
different managers, not just your funds, not just our funds, oh, cool, correct?
Dan Russo 36:49
You know, they can look at what happens if we combine Potomac with this other manager, and what does that look like, right? And you can see historically Well, if you built this portfolio this way, with these weights, here’s what your your return would have been, your drawdown, right? And all the statistics around that, well, you guys
Jeff Malec 37:03
are cheating that because you know You’ll look great paired with anything. Oh, yeah, so, but in a good way, cheating respectfully,
Dan Russo 37:10
respectfully, but yeah, no, that’s what we’re doing, right? And you look we we think we pair well with others, because we think that we are a true diversifier and a core holding. Because, like I said earlier, you know, we look at a lot of these traditional diversifiers. Look at things like treasuries, look at things like gold, look at things like managed futures, right? Pick your diversifier. There are these massive trade offs. This is a managed futures pod. Be careful.
Jeff Malec 37:38
I know that we like managed futures. It’s actually bring it. Well, do we
Dan Russo 37:41
bring it? No, no, listen, we manage future in that in that fund where the other 50% is everything but stocks. We have managed futures funds in there as well, because managed futures are a diversifier, right? And we do make sense. We do think it makes sense. But a lot of these traditional diversifiers, they work at different times, right? Treasuries were a great diversifier to equities from 2000 to 2021, right? And then something happened. And in 2022 the 6040, portfolio got decimated. Right? What happened? Most people probably don’t know, but what happened was inflation, when inflation spikes, correlations among assets change. In particular, the one most advisors care about is the correlation between stocks and bonds. Right? In a disinflationary environment, stocks and bonds tend to have a negative correlation. So a 6040, 7030, portfolio works with little effort, time in rebalance it periodically, right? And you would be fine when inflation spikes, CPI two, eight to three get above that level, the correlation between stocks and bonds flips to positive, just like shit. I got to do some real work now, but by the time they real and not do real work, but they got to do something even the Fed can’t do. They got to have a call on inflation. So it’s not about doing real work. The advisors are doing real work, right, but they’re doing it based on historical data, right? Fine, but to understand when you should switch from bonds as your diversifier to managed futures to gold, right? Requires you to have a view on inflation and be able to time inflation. The Fed can’t do it. So what makes you think you can? I can’t. I’m not sitting here saying like, Oh no, Dan, can do it, but I don’t have to do it right? Just by being by being more quantitative, by being aware of the trends and how they’re changing. I don’t have to call it. I don’t have to I don’t have to care why the correlation flipped. I just have to know that it flipped. Right? So for us, we’re not trying to get the call on inflation. For us, we are trying to manage that downside, capture as much of the upside as possible, and do all that with a beta and correlation much less low relative to the market. And to us, that’s a core holding, and that’s a core diversifier.
Jeff Malec 39:57
And then second part on the advisor, how. How have you felt their transition over the years from when you first started working with them? I debate with my wife, her father worked at Baird, Midwest. Her money’s all with a small group in Kenosha, Wisconsin, still. And I’m like, is this these three guys in Kenosha really the best people in the world? Are they the Lebron, James the Michael Jordan to manage your money. But anyway, I digress. But right, that concept of in the old days, they had to raise the money, they had to go do the golfing and manage the money, versus today, you know, I mean, listen, they’re finding shops like you have, like, Hey, I just need to go find golf with the guys. Build the relationship. I’ll find someone good to manage the money. Like, how has that transition been, and are you seeing more and more of that? I think
Dan Russo 40:43
we are right. Because, you know, I think people understand what they do well and what they can outsource, right, and we understand what we do well and what we can outsource. I mean, I’ll give you a prime example, 2019 2020, I was actually considering going the advisor route. I went to, you know, local Merrill Lynch office on Long Island for one of their open houses, Morgan Stanley, a few of the few of the bigger places, and to a person, I got rejected. And to a person, everybody told me the same thing, you would not be good at this. And I said, What are you talking about? I’ve been doing this for 20 years. Yeah. Look at my trader on the NYSE strategist, right? They’re like, that’s why, because you’re going to come in here and you’re going to be thinking the weeds terms, exactly, Dr and Mrs. Smith, Mr. And Mrs. Jones, whoever. They don’t care where the VIX is right, and they don’t care where the S P is relative to its Bollinger Bands, right? Or that there’s more stocks going up than going down. What they care about is, can we retire? Can we put our kids through school? Can we buy a boat? Can we buy a second house? Can we take care of our parents who are getting older, right? That’s what those people care about. And the advisors get that right, and they are good at managing those relationships, right? And any time spent deep diving on the market, wondering where the S P is relative to its lower Bollinger band is time they don’t spend doing what they’re good at, right? And what, what we have found is the advisor that clicks most with us understands that, but cares about the market, right? They don’t want to just buy and hold they they understand this concept of max drawdown, and that’s what that’s what you live through, right? So they take the time to understand what we’re doing, how we’re doing it, through a lot of the content that we produce through conversations with us, right? And that is where we have a lot of success, the folks who want to outsource it, because they want to service their clients as best as they can, but then still take the time to understand who we are, what we do, and how and why we do it.
Jeff Malec 42:56
It’s so funny to me, right? Like I’ve grown up max drawdown spin at the front of my mind for my entire career. Like, in the you’re looking at a hedge fund, you’re looking at a Managed futures program, that’s the main stat, that’s the main thing you look at. So it’s, yeah, of course, Max driving. Like, what are we talking about? Well, yeah, because, yeah, but it’s not, no, it’s never been a big thing in the stock world, right? No, in the normal investment,
Dan Russo 43:18
because, just keep buying, yeah, because, but, like, just think about, go back to the psychology, right?
Jeff Malec 43:22
Like, back in the day, it’s not on your Schwab statement, for sure, right? Well, I was actually just
Dan Russo 43:27
gonna go there with statements, because it’s not as much of an issue now. But, you know, years ago, used to get your statement in the mail, right? And, you know, I remember I was, I was young, but I was still investing. You know, when my statement came in the mail in, you know, 2002 I didn’t open it. So, you know, it’s just the same, so
Jeff Malec 43:48
it’s just $1 amount. Like, there’s no stats, there’s no you don’t know where you are in, no, but
Dan Russo 43:52
you know, it’s down, yeah, right. Like, when you’re living through that bear market, and that’s the point, you know, at some point you do open it, right? Because at some point it deteriorates to the point where you have to say, well, how much money am I down here? I’m like, What happens if I lose my job? And, like, what am I gonna do? Right? So you say, so you open it, and what do you do? You open it, you see you’re down 40 and what do you do? You sell, get me out. Yeah, I can’t take it. Can’t take it, right? So you want to
Jeff Malec 44:14
avoid that. But if you think they know they’re down 40% or they know they’re down 600 they don’t think in percent or whatever, right?
Dan Russo 44:20
You know, they know that. They know that I had a million dollars and now I have 600,000 Yeah, right. And that’s the other thing I think that the advisors do well, that again, I would not. I’m like, a percents person, right? I’m like, what? It’s not no big deal. It’s 10% they’re like, you know, somebody might look at me, like, Yeah, but that’s 100 grand. And then you have to say yourself, all right, well, it’s 100 grand, yeah.
Jeff Malec 44:42
But the the real world, that was my, that was my Naples house, yeah, it’s
Dan Russo 44:45
gone exactly. The real world lives in dollars, right? And the advisors, I think the best advisors, right, honestly, are really good at psychology and really good at relationship management and. Good at education and not golf. Golf. Maybe I’m not good at golf, so I wouldn’t know. That’s where you’re
Jeff Malec 45:04
gonna go with that story. I went to an open house. They saw me swing a golf chair. They said, you’re out.
Dan Russo 45:09
Yeah, no. Well, that could happen too. They care about their clients meeting their goals, and they know that we can help that, saying they take the time to understand what we do right and how we do it. And ends up being a great relationship.
Jeff Malec 45:32
It’s interesting to me, coming from the we talked about managed futures, also heavy in the long volatility world of that you’re going to cash and not trying to add some tail hedging or some kind of optionality there to be like, Hey, I’m my saying, Get out. Why not invest in something that’s going to go up when you when the market’s going down, instead of just going to cash? How do you guys look at that, honestly?
Dan Russo 45:57
So it’s a great question, because it’s the first project that I worked on when I got here. Was I was selling. What do you mean? You go to cash like, yeah, there’s some, there’s always something you could buy, right?
Jeff Malec 46:07
So initially, went in 2020, yeah. So he said, do
Dan Russo 46:12
the work, do the work, and see he knew the answer already. And I got there. I got there myself. It gets back to what I was telling you earlier about inflation, right? What do you buy and when? Right? So now you’re adding another timing decision to the equation, right? And it basically came out that sure if you could do it, but then there’s a lot of calls you have to get right, number one and number two, again, getting back, even though we’re focused as quantitative, systematic, right, technical analysis. And, you know, take the emotion out of it, there’s always emotion, right? There’s always second guessing. And to me, we have this composite model, right? Composite model again, do you want to be in? Do you want to be out to us, the psychological, the behavioral elements of the model being right? And then you buy something and still lose money, like, Why? Why deal with it, right? And that’s what. So I started in 21 let’s think about this. I started in 21 it was the first project I worked on. Let’s say I determined that, yep, no, no. Treasuries are the thing when, when our model says, Go to cash, let’s not go to cash. Let’s buy, let’s buy a treasury. ETF, had we done that too? Yeah, we’ve, we would have gotten destroyed, yeah, right, all while being right, right. The model told you, through most of 2022 that this was not a good environment to be invested in equities. Okay, cool. So we put on some treasuries and we lost money. Why have that conversation? Why have that in your head, right? So we just kind of view it again. It gets back to simple. Keep it simple. It gets back to, you know, why, what’s a diversifier and when, right? Gold was great this year. There are plenty of years where gold does nothing, or, you know, goes down, yeah. So, you know, sometimes commodities look great, then they have a massive max drawdown. Let’s buy real estate. The max drawdown is on a real estate ETF. It’s in the 70s, right? So this thing that you’re buying right as your diversifier, as your risk off asset, doesn’t always act the way you think it will. And right? I’ll honestly say, in fairness, getting back to treasuries, like in 2023 as stocks rebounded, so did treasuries. They moved together again. So that’s not a diversifier, right? The thing you buy to be the diversifier to your core asset. If they’re moving together, it’s not a diversifier, right? So cash is the only true diversifier.
Jeff Malec 48:58
And I’ll add on to that, the option piece, you need to be buying it before your model signals to get out. By the time your model signaling to get out, volatility is probably spiked. Now it’s expensive and it’s more likely to revert. So you need to be buying it before the model. Listen, I mean, yeah, on top of the timing is difficult,
Dan Russo 49:15
yeah, honestly, I think volatility, and I’m by no means of all experts, so the vol guys will come after me for this. But from, you know, the way we view the world, volatility spikes are more of a coincident indicator. Vols spiking with the market, right? It’s not, it’s not often that the VIX is ripping as the s, p is grinding higher, right? And you’re like, Whoa. What’s going on with the VIX? Let’s hedge right? To me in the way we think about, you in the VIX and vol and quite honestly, it’s one of the things that I’d like to do a lot more work on as we build out our team. Honestly, it’s a better for our work. It’s a better mean reversion signal, right?
Jeff Malec 49:53
Yeah, like, how much more panic can there be in the market, right?
Dan Russo 49:56
Right? There’s a certain level of as a matter of fact, it’s one of the systems that we use, right? We. Look at the VIX, and we look at where, you know, above a certain level and above a certain moving average, to us, there’s a high probability that the market has probably gone down too far, too fast, and is likely set for a rebound. Love it. And then I’ll finish with your main program has, what’s the bull the bull bear, what’s it? What’s the full name? The strategy is called bull bear Potomac, bull bear. I thought so. All of our strategies are combinations of our four funds. And so we have the four funds, 440 act mutual funds, where we do all of the trading and investing, and then we have our strategies, and the strategies hold the four funds in different weights. Do you prefer
Jeff Malec 50:37
or do you recommend people go into the strategies versus direct into the funds.
Dan Russo 50:41
I don’t make that recommendation, okay, right? I think ultimately, you have to do what’s best for you. You have to do what’s best for your for your client, right? So that’s, that’s not a call I make,
Jeff Malec 50:50
but saying the main one has a beta of, like, point
Dan Russo 50:53
five, correct? So the bull bear strategy, the Potomac bull bear strategy, that’s a historic beta. Yeah, right. That’s, if you go back through its entire life and look at what the beta has been. It’s about a point five. What’s important to understand is we are fully tactical, right again. So what that means we can, will and do take the portfolios to cash. So when we’re invested, our beta is not point five. It’s some number higher than that. When we’re in cash, our beta is zero, right? And this gets back to education. I’ll connect that.in a second over the life cycle. Time we’re invested, time we’re in cash, blends out to about a point five beta. But if we’re invested, let’s say we’re invested, and we run that strategy at about a 1.5 beta when fully invested, if we’re invested in the market, goes down 10% we’re going to take that ride at about a one five beta, right? And this where the education, the content, the people who take the time to understand what we do and how we do it, the people who follow us and understand what we do and how we do it, know that somebody who doesn’t take the time to fully understand what we do and understand what we do and how we
Jeff Malec 52:04
do it, we’ll see the market down five star fund I’m putting money in,
Dan Russo 52:07
yeah, yeah, they’ll see us down 10, and we’ll, you know, they’ll see the market down 10, rather, and us down more. We was doing a 30.5 beta. That’s a blended number, yeah, over time.
Jeff Malec 52:18
Well, I was gonna give you props, right? Because to me, that’s the power of the timing, right? It is like I can have more exposure to the market, but over a full cycle, be a point five beta. So that’s like, to me, you know, I’ll argue options or manage futures again. Like, if you add that, you can take on more equity risk, right? Like, once you have a proper diversifier, in your case, I’d say your diversifier is your timing right? So once I know I have a diversifier that works, I can take on more equity risk and at the right time, at the right time, and actually end up less risky over over time.
Dan Russo 52:50
Yeah. So our ability to go to cash and the amount of time that we spend in cash over cycles allows us to take advantage of the times where our model says, now’s a good time to be invested, right? And you can it’s intelligent risk taking, as opposed to, like, you see, we all know how the math works, right? Just look at, look at, you know, one, two, you know, two, three, beta, ETFs, right? The sequence of return risk matters, yeah.
Jeff Malec 53:17
So you have to, or were you before you before you started here, like, I’m going to take this, or, I guess it was you and Manish together, but right of like, I’m going to go put this into the hedge fund world and have 5x leverage and really knock it out of the park.
Dan Russo 53:33
We never know you never I came from the institutional sell side, where a lot of my clients were hedge funds, so I’m always intrigued by hedge funds, yeah, but you know, we’ll see where you, see where it takes you.
Jeff Malec 53:43
And then my last this is all us, equity focused now is there? Well, US
Dan Russo 53:48
listed, us, exchange listed is the focus. We can have exposure to global markets through us listed ETFs right there. There’s a Latin American ETF that’s listed here, right? There’s China ETFs that are listed here, right? EFA value. EFA growth. But not trading products that are trading in other countries at this point.
Jeff Malec 54:12
But that’s my brain goes to, why not time everything? Why not put this on Europe, put this on Asia. So when I arrived here, this on real estate. So when I arrived here in 2021
Dan Russo 54:23
I’m employee number six. The growth that we’ve seen, it’s been a great ride, is allowing us to add resources and, ie, bandwidth. It’s so tactical, anything right? Let’s test it. Let’s build it up. Until about a year and a half ago, the investment team was me and Manish, but we would also, we, you know, also wearing a lot of hats. Like I said, I’m employee number six, and the firm’s been around since 1987 but I’m employee number six. So as we’ve added people, those are projects that I would love to look at. Why not? So if we can get the data, code it properly, we can test anything Sure. And, you know, you know, you. Again, we believe in tactical. So, yeah, why not tactical? Why not look at it, at least explore it. And so I have a whiteboard in my office with a lot of ideas that would be interesting as tactical models.
Jeff Malec 55:22
Yeah, as the futures pod here. So you’ve added futures in the last year. Yes, and that’s been great.
Dan Russo 55:29
That’s been the paraphrase, yeah, it’s been, it’s been great, like a great relationship through, through you guys at RCM, listen, it’s just a more efficient way to get the exposures we want when we want it. Getting back to cash as a diversifier, cash is also now throwing off a yield. So if I can get the exposure that I want through a combination of futures and ETFs, but put up less money up front because of the futures, that’s money that sits earning a yield is additive right to the fund overall, that’s number one all by getting the exact same exposures as if we were using 100% ETFs. So nothing changes from the strategy perspective, nothing changes from the exposure that we’re getting perspective. We’re just doing it in a more cash efficient way, right which and earning the extra earning the extra yield on the money that stays in the money market. That’s number one, number two. And this is not a problem for SMP products. But down the line, you know, as we grow, you start to look at liquidity. And the futures are deep and liquid, especially the index futures that we’re looking at, but you do get to a point where, and it’s fun, right, where you go to place an order, and your trader comes back to you and says, Hey, you’re gonna move this 2% I’m not saying we move the s, p, n, oh, and like, but some of the more, some of their ETFs that we trade, so you have to be that. And again, that’s where, kind of, like my trading background, comes in, and the relationships that we have, you come back and say, All right, let’s, let’s be more thoughtful about how we execute this, but we want to think about liquidity right at the end of the day. It’s hard, it’s hard to get an edge right? So if you can get it an edge through extra yields by me more efficient about how you get your exposures, why wouldn’t you take that, right? So that’s, you know, that’s how we’re looking at it. And it’s, it’s been fun. It’s been a learning curve. I did the deep dive. And every day I was, you know, through talking to you guys and talking to some, some people who I trust, was like, this is
Jeff Malec 57:27
were you did you have any biases being a NYSE floor guy versus those Chicago Yahoos?
Dan Russo 57:33
Floor guys are floor guys? Yeah, my opinion, I feel like you can always spot each other. You always find each other, right? They’re the people who I resonate the most with. A lot of times I’ll hear it in their little gravelly voice. Yeah, right. You can the gravelly voice and then, like, I people laugh. My wife gets upset because she thinks I’m not paying attention. The gravelly voice and literally bionic hearing, yeah? Like, open. I can hear com. I can hear three conversations going on over there right now and still talk to you and like, I’ll hear something. And my wife is like, you never pay attention. I’m like, No, I’m paying attention. Yeah, I’m paying attention to all like, and I think that, like, that’s, that’s trained. I’m not, I’m not trying to be rude or anything like, I literally can hear it over, right?
Jeff Malec 58:13
You have to be placing this order and realizing that that desk without, yeah, taking that call and
Dan Russo 58:18
but, yeah, no. Floor people. Floor people are my people. So no no animosity to you Chicago guys. As a matter of fact, my favorite painting on Earth hangs in Bobby’s office.
Jeff Malec 58:27
I’ll steal it for you. Please. Do you ever lament that we’re like, where’s that next wave of all those guys? Right? The Chicago floors are basically gone. So to me, like, where’s that next wave of talent, of the people, the lived experience of trading on the floor, where’s that going to come from?
Dan Russo 58:44
Yeah, it’s gone. Yeah, probably right. And I go back to the NYSE a lot. I still have a few friends who were there. And, you know, it’s, it’s not what it was. And I get, I’m accepting of it, right? Because as much as it’s fun, like open outcry trading right in one of the largest economies, or, if not, the largest economy in the world, it’s kind of a tough sell. Like the prices of bonds are being set because guys are standing around a pit screaming at each other. Or, you know, the price of at the time, when I was on the NYSE, GE was the largest company in the in the US, like the price of GE is being set because a group of people are standing around screaming at each other, archaic, right? I get why it went the way it went. I think, you know, trading evolves like everyone else, right?
Jeff Malec 59:27
I’ve said this on the pub for I was a young clerk going to the Board of Trade at 545, in the morning, hung over to do these out trades that I know. I’m like, looking for a 10 lot in 30 year bonds. So it’s like, could be a couple million dollar, yeah, right. And I’m just some Yahoo straight out of college, like trying to match this up,
Dan Russo 59:46
yeah, I think, I think floor people definitely have a personality, yeah, that is developed. There definitely thick skin. The things that were said to me, Oh, my God, on a daily basis, would get somebody fired in a day, in most places.
Jeff Malec 1:00:00
I just get dip spit spilled on you. No, happen to me twice this guy would have it inside his coat? Yeah, that’s unbelievable. Actually, yeah, you’re like, Come on, man, I’m working here.
Dan Russo 1:00:11
No, I think that. But listen, there’s, there’s always, there’s always going to be, there’s always going to be talented for people, it talent, right? People who are interested in markets, people who are interested in learning it’s just coming from a different direction now,
Jeff Malec 1:00:24
you know, I mean to me, it like fuels, that old school stuff will do better, because the the new talent won’t have known that, and they’ll kind of just computerize Well, I think it speaks to, like, too quick, yeah,
Dan Russo 1:00:36
I think it speaks to what I was talking about earlier, right? Like some of the best indicators and some of the best systems, in my opinions, come out of concepts from the 50s, 60s, 70s that some of these other people might not even think about. But then let’s melt the two, right? Yeah, let’s take this concept that you know a lot of people would just rule of thumb, right, like Old Market lore. All right. Cool. Get the data, code, it, test it. Does it actually work? Did it ever work? Right? Selling, right? Sell in May and go away, is something that everybody knows, right? And if you just say, oh, Sell in May and go away, right? It’s this old market concept. It’s this best six months or six months of the year, the markets actually find in, you know that that May through October stretch, it doesn’t go down on average, just doesn’t go up as much, right? So you don’t know that if you test it right? Some, some guy comes up to you, and you know, when you’re a summer intern in 1994 it’s a Sell in May and go away. And you’re like, Wow, that guy, he’s on the NYC he must know what he’s talking right, right? Well, then market goes down in May.
Jeff Malec 1:01:37
How silly they’re like, timing doesn’t work. But also, Sell in May and go in. Yeah, sometimes that’s timing on a major Yeah, exactly right.
Dan Russo 1:01:44
Exactly right. And that gets to the point right timing is there’s so many definitions for timing and tactical that to lump them all in one bucket, I don’t think
Jeff Malec 1:01:51
is fair. It’s time for my terrible joke. Why can’t investment managers tell good jokes bad timing? It’s good. I like it, actually.
Jeff Malec 1:02:11
Let’s finish your wine. Guy, give me your you got a hot wine. Take my A buddy of mine lives in Napa, and his hot wine is Napa. Cabs are terrible.
Dan Russo 1:02:22
My I don’t know if
Jeff Malec 1:02:23
it’s a hot take. I’ll take, give me. I’ll take, all
Dan Russo 1:02:27
right, I’m gonna give you. All right. We’re gonna go down this rabbit hole. All right. The majority of wine makers in California are making their wine for one person. Robert Parker, most influential wine critic in the country who has a palette, excuse me, that goes towards big Napa cabs, yeah, but if you want to sell wine, you need Parker to give you a 95 score or higher. So now in particular Cali. So my outtake is the majority of California Pinot Noir, including the Russian River Valley, is garbage because they’re making it for Robert Parker, I’ve dropped off two or three lists over the past few years because I’m getting these wines and it’s a Pinot Noir and it looks like a cab has 15% alcohol and, like, I could have this with a steak, so, and it’s the parkerization of wine, and it’s killing it’s killing the US wine industry. In my opinion, that’s
Jeff Malec 1:03:32
what’s the school there, Cal Fullerton, maybe UC Davis. UC Davis, right, but they’re teaching all that too. So I think they’re going in. They’re changing all these vineyards just to produce those big monsters they’re but like carrying our old vine, like doing all this stuff, that
Dan Russo 1:03:48
Noir is not a cab, right? Pinot Noir should not be almost as black as this mug, right? And 15% alcohol, but Robert Parker doesn’t like a 12 and a half percent red
Jeff Malec 1:04:02
that you can see through. So where do you where do you go instead,
Dan Russo 1:04:06
Oregon for Pinots, obviously, France, burgundy. I’ve been on a massive Brunello kick lately, so
Jeff Malec 1:04:14
I love it. I’m not a wine guy, so I wish I could participate in this conversation. That’s all I’ve got, that the that Napa cat, but that’s interesting. That’s two.
Dan Russo 1:04:24
Now I have two. I don’t think you need to be a wine guy, though. I personally come from the more like European view of it as part of the meal, and just drink what you like. Look if you like big Inky, Jet Black wines, like get it. But if you’re a little more into it, like I am, and you see a 15% Pinot, but
Jeff Malec 1:04:43
do you get a little quantity with it? Like, hey, this is, this is great value. I’ve seen this and I’ve tracked this over the years.
Dan Russo 1:04:49
I mean, I guess to the extent that a lot of the big label wines, I think are overpriced, so I won’t buy them. My hot take, then I guess my second hot take is, I think K. Misses, crap,
Jeff Malec 1:05:02
nice, double hot take. Two Buck Chuck.
Dan Russo 1:05:06
That’s what you like. That guy was a pairs well with what you’re eating. Go for it.
Jeff Malec 1:05:09
He was a traitor at, like, at Schwab or something. He was, like, on a on a desk. That’s awesome.
Dan Russo 1:05:16
Drink we have what you like, right? Like, don’t listen to me. Coors Light. If It pairs well with what you’re eating and you like it, go for it. Done.
Jeff Malec 1:05:24
All right, Dan, it’s been fun. Thank you. We’ll put where everyone can find you guys in the show notes. Thanks for the studio. Thanks for coming in. Appreciate it.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
