The Important Lesson a Quant Manager Learned in 2020

Joe Weisenthal (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast, I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

So Tracy, it goes without saying, and we really don't need to belabor the point at all that from a market's perspective, the last year has been, I guess, unprecedented.

Tracy Alloway (0:31)

Yeah, I think that's right. When you say we don't need to belabor the point, should I describe what we're talking about, or should we just move on?

Joe Weisenthal (0:38)

Anyway, it's just this crisis, this huge crash, this incredible rally that never seems to end in the middle of a pandemic and so forth. It's just like, there's no obvious historical analogy to what we've just seen that I can think of.

Tracy Alloway (0:56)

Well, I think what was really interesting about last year was that we basically saw an entire economic and to some extent, financial crisis and a recovery. So a sort of complete economic cycle all squeezed into less than a year.

And if you think, I mean, the trajectory of everything was quite similar to the 2008 financial crisis. You had the sharp market sell-off in March and then you had the central banks come in and stabilize things. And then you had a slow recovery or a recovery in markets. But again, the big difference was that it all happened in the space of months versus years before.

Joe Weisenthal (1:35)

Yeah, no, I actually, I think that's right. You could characterize 2020 as essentially a full cycle that really got compressed into the span of a few months early.

Tracy Alloway (1:47)

Yeah, exactly.

Joe Weisenthal (1:48)

So anyway, it's still pretty unusual.

Even if you could sort of describe it using words that we're familiar with, it's pretty unusual. But what that means is, for investors, obviously we had this incredible rally. Stocks are at an all time high. But I think a lot of people missed it. A lot of people throughout the summer saying, oh, we're gonna get the second dip in the market. That's coming any time soon.

You talk to sort of wealthy investors and sort of high net worths. There was a lot of caution under exposure to the gains and so forth. So while the headlines were very impressive, I don't think there's any doubt that, there probably aren't actually a lot of people that saw their portfolios really match or really, you know, let's just say, I think there were probably a lot of people whose portfolios don't match the headline gains.

Tracy Alloway (2:40)

Yeah, I think that's right. And I think there's probably a sense in markets, or at least professional investors in markets, that what happened wasn't really what they expected or what they were necessarily prepared for. So we already mentioned that everything unfolded really, really quickly. So even if you were well positioned going into March, you'd taken a little bit of risk off the table, you might not have been expecting the markets to recover as quickly as they did. I think there's also the sense of dissatisfaction with what has rallied. I think a lot of people are not upset, but I think there's a sense that the stupid stuff has gone up a lot more than some other things.

Which again, that's the kind of thing that tends to upset professional investors.

Joe Weisenthal (3:34)

Right, in fact, that actually was one of the themes of 2020, which is that back in the spring, we had the virtual Buffett shareholder meeting. He was, many people remarked that he was very negative on the market in a way that he usually isn't. And then at the same time, you had like the Dave Portnoy's of the world absolutely killing it in part by picking Scrabble letters out of a Scrabble tiles, out of a box and picking stocks.

And all these people are like, yeah, you know, I'm not too busy these days. I'm going to sign up for a Robinhood account, making a fortune, you know, all kinds of confounding dynamics to make the market, you know, the market always is very efficient machine to driving people insane. But I think 2020 really took the cake at that.

Tracy Alloway (4:19)

Yeah, I think that's exactly right.

Joe Weisenthal (4:21)

I've always said that the market is a great technology for humbling people, making smart people feel less smart. But anyway.

Tracy Alloway (4:30)

Yeah, you can be wrong every day.

Joe Weisenthal (4:32)

Yeah, I'm very excited about our guests. We're going to talk about some of the lessons learned from 2020 We're going to be speaking with Corey Hoffstein. He is the CIO, the asset management firm, Newfound Research, really sort of active publisher of research, publisher on Twitter, talking about ideas in quantitative finance trend, following various ideas such as that portfolio construction. He had a really interesting thread at the end of last year, talking about essentially the costly lessons learned of 2020 and what happens when you experience a market that is basically unlike anything else before. So Corey, thank you very much for joining us.