Episode 34: Darrin Johnson

Darrin Johnson

In this episode, I talk with Volatility trader, Darrin Johnson. 

Darrin and I talk about all the things that traders never discuss.  The dual role of being an independent trader and a family man and if balance is possible.  What it’s like to have your trader P&L also be your family’s balance sheet and what to do when you need a vacation.

I hope you enjoy this conversation with Darrin as much as I did…

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Have comments about the show, or ideas for things you’d like Taylor and Jason to discuss in future episodes? We’d love to hear from you at info@mutinyfund.com.

Transcript for Episode 34:

Taylor Pearson:

Hello and welcome. This is the Mutiny Investing podcast. This podcast features long form conversations on topics relating to investing, markets, risk, volatility, and complex systems.

Disclaimer:

This podcast is provided for informational purposes only, and should not be relied upon as legal, business, investment or tax advice. All opinions expressed by podcast participants are solely their own opinions, and do not necessarily reflect the opinions of Mutiny Fund, their affiliates or companies featured. Due to industry regulations, participants on this podcast are instructed to not make specific trade recommendations, nor reference biased or potential profits.

Disclaimer:

Listeners are reminded that managed futures, commodity trading, FOREX trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they’re not suitable for all investors, and you should not rely on any of the information as a substitute for the exercise of your own skill, and judgment in making a decision on the appropriateness of such investments. Visit mutinyfund.com/disclaimer for more information.

Jason Buck:

So we’re getting a delayed start today because you had some issues at your house with flooding due to one of your boys leaving a faucet running upstairs while you were sleeping. And so this is a good jumping out point because everybody thinks like traders have these pristine environments and they’re just staring at a Bloomberg for every second the market is open. But I mean, talk to me a little bit about trying to raise a family and being a solo trader at the same time. You basically never have a second off and anything in your personal life can obviously affect your trading life.

Darrin Johnson:

Yeah, that’s very true. The fact of the matter is it is just not possible to streamline anything. You have to just learn to roll with the punches and go with the flow. I mean, we had contractors in our house and I still had to trade. I still had to do everything I had to do. And just a lot of it honestly comes down to having a really helpful spouse.

Darrin Johnson:

The fact that my wife is able to assist me and help me and we’re able to work collaboratively. I mean, honestly, Jason man, we’ve been doing this for so long that it’s second nature. But I mean, this goes back to the very beginning. These are a lot of the things that aren’t discussed about running a trading business. Even as a solo person and not a firm or not a registered RIA or whatever, there’s a lot that goes into it.

Darrin Johnson:

I mean, what you see today is just one example of it, but it also comes into play with cash flow management, and the type of edge that you trade. So for example, when a miscellaneous $30,000 expense pops up, are you going to exit or liquidate part of a position in order to pay for it? It’s just all these different things really affect how you trade and how you run your business. And you learn to do things that may not be profit maximizing, but it’s how you survive and it’s how you pay bills. And it’s how you take care of kids and be part of a family.

Jason Buck:

I know with everything opening back up, you’ve been trying to take the family on some vacations. So when that happens, do you shut down, no positions on during vacation? Or what do you try to do to get some vacation back for yourself?

Darrin Johnson:

So when I first started, I tried to make a pact with Casey that whenever we go on a vacation, that I would shut everything down and shut it off. To be honest with you, I haven’t adhered to that at all. And that includes our last trip on Turks and Caicos. I have a brand new trading super computer at home, but I didn’t even bring my PC laptop or whatever. But I was still placing trades and doing stuff on IB’s mobile app. Because here’s the thing.

Darrin Johnson:

It’s like things come in bunches. And just to be quite frank with you, let’s say the first quarter, the past couple months have been an extremely profitable part of the year for me because of the volatility. I could not miss those trades. I couldn’t just go flat. I still try my best to be present and for us to enjoy the vacation, but I’m not going to lie. I had sizable positions on in IB in the mobile app. And that was just that.

Darrin Johnson:

Because again, this goes back to your first question. It is not a salaried paycheck. You make your money in bunches. There’s a rhythm to it. There’s a formula to it if you’re trading on your own and you’re doing this as a business. There are times, especially with how I trade, where implied volatility are elevated and realized vols are moving in single stocks and in the index, and the ETPs are moving on a daily basis or a weekly basis.

Darrin Johnson:

Those are times when you can structure some really profitable trades and you can get consecutive sets of profitable trades. Those streaks, another way we identify would be regimes, that’s how you make bunches of money. Then so when things die down and if the realized volatility dies down as well, then you may flat line for a couple months. But hopefully you’ve maximized when things are really good to where that’ll tie you over for a few months until things pick back up again.

Jason Buck:

Well, and unfortunately family life or the school schedules don’t line up with those lower volatility regimes where you can time your vacation last minute, just doesn’t work like that. What’s worse? IB’s desktop training platform or their mobile platform?

Darrin Johnson:

You know what, that’s a great question, dude. The desktop.

Jason Buck:

I didn’t want to lead you. I remember back in the day when I was using IB, I actually liked the mobile platform better.

Darrin Johnson:

Yeah, dude, that’s incredible. But you’re absolutely right. The mobile app, it’s weird. The mobile app is more intuitive and it’s easier to get to options chains and to look at stuff and then place the order even, is easier than it is on the desktop. On the desktop, there’s four different tabs that all do the same thing. They’re all redundant. So it’s like, why do I need to do this for Mosaic or for the old layout or the options chain? But on the mobile, it’s actually easier.

Darrin Johnson:

The only catch is like, let’s say your short of shadow on 10 different single stocks. It can be difficult to get an aggregate view of your net Greek exposure for hedging purposes. You really can’t really do that on the mobile app. You need the desktop app to do that, but that’s only because really of additional analytics software platform that I have, but in terms of just placing the trade, it’s much easier on the mobile app.

Jason Buck:

I’m trying to think of just for the audience sake, IB, we’re talking about Interactive Brokers and it’s kind of notorious for being a non-user friendly platform, but only in the sense of user friendly compared to maybe a Robinhood or Tastytrade. But if you’re talking about professional trading systems, you have to usually learn a lot to use professional trading systems. So it tends to sit somewhere in between there.

Jason Buck:

With this experience. I mean, I’m sure you’ve been thinking about it before, but like, have you thought about getting an office outside the home, and is this pushing you to do it more? Or what do you think?

Darrin Johnson:

I had a co-location, a common desk in Frisco. I it’s like right on the Frisco Plano border, in Dallas before we moved here, and I enjoyed it. I liked it a lot. I was being overcharged, but I loved it, man. We had craft beers and we had show and tell Tuesdays. It was cool, man. I really … I got to meet, me and you were both like people, people, especially with entrepreneurs. And so I got to talk to people, I enjoyed it, but I had to let it go right when Cameron started, our oldest started school, I stopped paying for it because I had him. And then I just invested more in like a home office space outside of the family room. We had a Foia area and that’s what I ended up doing.

Darrin Johnson:

But while I was using it, man, I loved it. I’ve thought about it here. But you know, the problem is Jason is Colorado’s a very different place. I don’t really … The cool thing about Dallas was there were a lot of traders there. There were funds there, there were banks there. It was kind of like an epicenter in the south or the Southwestern region. I had networks and I had people and there were plenty of traders that I could talk to and build relationships with.

Darrin Johnson:

Here in Denver, Metro it’s just not the same. I don’t really … Obviously there are cowork locations here, but I don’t really know anybody. I’ve just kind of thought about building out the home office even more to be honest with you.

Jason Buck:

And you know, I love telling you all these stories from institutional allocator’s perspective. And this one always blew my mind as like, I remember talking to an institutional allocator and they were looking at two of the funds that I know in the vault space. And one of them, at one point they were running out of like a WeWork in New Jersey, and that didn’t check the box for the institutional allocator. So they were like we can’t invest in them. And I was like, you mean, you’re penalizing them for being smart and being capital efficient and not using a crazy office space, but it’s just amazing. Just little things like that. You just don’t know all these checks boxes that make no sense to you and I as an entrepreneur, it’s just that’s one of the ones that I saw a fund get kicked out for using a WeWork space. That’s just like-

Darrin Johnson:

Man, I haven’t checked on the prices here in Denver, but I’m not sure if they’ve come down enough to where it wouldn’t be too cost prohibitive, but I haven’t looked into that, but that’s crazy and so what if you’re like a one man CTA? So you built a algo set for trend following or something. Maybe you use a cowork location. Then you outsource your compliance or whatever. Does that not check the box? Do you not get the allocation?

Jason Buck:

Yeah, basically it’s nonsense. It reminds me of back in the day when we were at a restaurant, I was in two decades ago, we were going for like three Michelin stars. And one of the requirements was at the time that you had to be required to wear a jacket in the restaurant and the waiters had to wear name tags. But our executive chef was like, “I don’t want to require jackets in my restaurant and I don’t want my waiters to wear name tags.” And so therefore we couldn’t check the boxes to get certain standards.

Jason Buck:

It’s always that regulatory capture leads to sclerotic things that don’t make any sense. I think that’s just part of it, but also in your defense, like what you’re dealing with now is like, I think that’s it’s pervasive across the board, right? I’ve been traveling for over a month now, straight. I’m actually in Las Vegas for the EQD Conference. And hopefully my mic’s not picking up the pool party behind me that’s outside my window, but that’s like you say, we all just make it work. And I remember at one of our first events years ago when Taylor and I were in Miami, the first question he had he’s like, wait, if our managers are here in Miami during work hours and trading hours, who’s trading the book?

Jason Buck:

Then obviously usually even smaller firms have a team of traders, but it’s always difficult as far as like running a business, you’re going to have to travel. You’re going to have to speaking engagements, you have to do all those things. Then for you with work from home and we had a lot of managers work from home and I think Ben Aifa’s probably done it the best showing how you can raise a family, your kids can be in and out of Zoom calls, but you could still work from home. I think it’s a new world we live in. And maybe those institutional box checkers for the WeWork workspace are going to hopefully change their tune, and be more open to the idea of people either work from home or in co-working spaces.

Darrin Johnson:

Again, it’s just another one of those obstacles that’s put in place for new startups or new upstarts in the investment management space. It’s one of the reasons why I’ve considered it, but it’s just … I won’t check all those boxes. The fact of the matter is it just doesn’t make sense for me to do it, but I can imagine for a young guy who’s basically a solo operation. And like I said outsources auditing and compliance. I don’t know how you … I mean, unless you have family networks or stuff like that, I don’t know how you break into the industry. It just seems like the Chesapeakes and the DANK Capitals and all the Whales. They get all the new allocations to the space.

Jason Buck:

Well, the biggest thing that there’s winner take all effects, but part of it too is actually what’s the regulatory burden you want to be under. So if people do like qualified purchasers only, and/or like family office, less than 15 investors. There’s all these little tricks they can use to not have to worry about a lot of the regulatory burden. I mean, they’re still probably going to have to deal with consultants if they’re going for the institutional allocations. But there’s always a lot more nuances to this game and it really depends on what is your minimum investor? What are the guidelines for that?

Jason Buck:

How many investors are you taking and are you going after institutional allocations? It’s all different and it’s all complicated. That’s the kind of the rub that we all deal with. I really wonder, like you’re saying. There’s just winner take all effects. And I think that when we started our hedge fund of funds, I think in 2019 going into 2020, that was the lowest startup rate ever for hedge funds.

Darrin Johnson:

Wow.

Jason Buck:

So like you’re saying, and that’s what people talk about. Especially on the SEC side. Due to compliance versions, it’s like people need to be able to launch with half a billion dollars minimum to be able to service the startup costs and people aren’t willing to seed them, but they will seed somebody with 150 billion. They’ll allocate to them. And so it’s almost like it reminds me of like the NIFTY 50 stocks.

Jason Buck:

It’s a form of CYA of cover your ass that, you can’t go wrong investing with the big firms. But if you do take a chance on a startup, you might lose your job.

Darrin Johnson:

Well, and the entrenched players, they argue that this is a good thing. That somehow, like you look in the investment industry, it’s always the weirdest thing to me ever, where guys are in their mid ’70s, in their ’80s and there’s really no talent in the bullpen. There’s no farm league. There’s no developmental league. There’s no, in fact, most of the more public gatekeepers or big time fun guys, they spend most of their time in public admonishing the younger generation, which it’s like in no other industry do we do that. It’s so weird to me. Jason, we’re still telling stories about boomer market wizards from the 1980s. The industry is so weird.

Jason Buck:

I love the term the European term Champaign socialists. You have all of these people that are boomers with large firms that they talk about. They’re all about helping the little guy, but then behind the scenes, they’re helping put in the regulations. So the little guy can’t do a startup. And then, like you said, though, I think it’s pervasive across the board too not outside of the financial industry. There’s so many businesses for sale right now from the boomers that are looking to retire because their kids don’t want to run the business.

Jason Buck:

It’s just like the amount of not only investment capital on that side, but just entrepreneurial and small business owner capital on that side is like, I just don’t know how we transfer that. It’s going to be interesting. We can obviously transfer the assets, but these businesses where the kids want nothing to do with it, it’s going to be really interesting and like you said, I think they’re seeing that on the hedge fund side. And I think that’s why we seeing people hold on so hard. Waiting to retire in their ’70s and ’80s, just because there’s no succession plan. And quite frankly, they don’t want to give it up anyway. It’s like out of my cold dead hands.

Darrin Johnson:

Exactly. Totally. Dude, you know what, like for a minute there, I used to look at the, let’s say 40 and under 45 and under crowd that are trying to like start a new CTA or start a new hedge fund, and the way that they would sort of bow at the altar of some of these guys that we know in the space and I’ll be like, why are you worshiping? It’s a new era. You’re young, you’re the new kid on the block. But then I realize you kind of have to play that game in order to get accepted and possibly get some crumbs off the table. I mean, it’s just-

Jason Buck:

Crumbs are right. Crumbs is that word.

Darrin Johnson:

I mean, that’s part of it. I understand why they do it because otherwise, like you will completely be locked out of capital. I get it. To me, it’s just unfortunate because here’s the thing. If you actually read the biographies and you read the history books on how a lot of these guys came into becoming wizards, they were backed with incredible amounts of capital, especially when you adjust for inflation in like 1980, it’s like, wow, dude, you got 20 million bucks in 1980. But no, that’s totally a bootstrap story.

Jason Buck:

My favorite sound. You always hear like, even like the smaller they’re like, we start with 5 million and you’re like in 1972 and I’m like. Not quite the same.

Darrin Johnson:

Exactly.

Jason Buck:

Not quite the same. And I wonder too, like a lot of that stuff, as I’ve seen in this industry, like you’re saying we’re resulting these boomers and it’s in these market wizard stories. I think Jack probably does a really good job of trying to search for managers, but I wonder how it just becomes this old boys network. It’s just the people he knows. That’s why just going back to that same well, and all of the … It looks like this homogenous one manager. That’s because of that.

Jason Buck:

I mean, I think Jack originally did a great job geographically, but that also just might been a seed and time for when you had two CTAs in a computer, trading above a garage in a Caribbean country or something like that. That may be gone as well. Like we’re saying just from the regulatory and compliance burden side. I mean, those stories are good, but also, I wonder those are swashbuckling stories too because a lot of the best parts of those stories are the floor traders. Now it’s hard to tell a story that this guy just sits in front of a screen all day.

Darrin Johnson:

He sits in front of a screen all day but another form of gate keeping or winner take all is when you switch up the performance metrics in order to get allocation. So that’s the other part of it. So there’s the compliance cost and then there’s the performance metrics. Those guys got backed with sizeable amounts, huge amounts of capital. And then they were allowed to have like 40, 50, 60% vol on their equity. And so it’s like but now it seems like to me, just outside observation, talking to people like you, talking to CTO, talking to other people, is like they want high sharps, they want low vol.

Darrin Johnson:

And maybe like 10, 11, 12, 15% returns, and that’s considered like a great strategy. And it’s like, wow, how do we get to this point where we go from it’s a code, I started with 20 grand and now I’m at 80 million to now we want you to have, because essentially when you make the … You’d require that the vol be that low on a equity curve, the assumption is that you’re well capitalized already. That’s what you, and so again, it’s just another form of like the have and the have nots. To me it’s just saddening to see it all transpire.

Jason Buck:

As you know, I love reading the stories of the CTAs from the ’60s to the ’80s. And like you’re saying a lot of them are running anywhere from like 40 to 60 vol. Nowadays, that is just insane vol. It’s outrageous for somebody to run a 20 vol these days, because once again, it’s kind of turtles all the way down because it’s also on the all allocator side too, is like, they wanted like a lot of it’s sub 10 vol now. And they love that sub 10 vol and that high sharp ratio.

Jason Buck:

If that’s what they want, that’s what they get. But it’s amazing to me how many times I’ve had conversations with other institutional allocators and be like if run that at 20 vol, you can just use less capital and it’s more fee for vol efficient. They just don’t even want to do the math on that because what it boils down to is like they’re competing its relative value versus somebody else in the other seat. So if it’s like an Ivy league pension they’re competing, I mean, endowment, they’re competing with other Ivy league endowments.

Jason Buck:

That’s what they care about. If everybody’s coalescing around low vol, then they’re going to coalesce around low vol even if it means they’re high paying a higher fee per vol and they’re not getting a capital efficient model. It’s like, no matter how many times you try to rationally show capital efficiency, you got to remember where the incentives and the incentives are for low vol, no matter what the fee structure is, because that’s not what matters to them.

Darrin Johnson:

Now that-

Jason Buck:

That’s a big part of it. I’m curious. You and I text all the time, but I don’t think we’ve touched since like in the last few weeks talking about, because the other part, not only do you do traditional asset classes and volatility, but you also do crypto a little bit here and there. I was at Permission List in west Palm beach last week. I was really interested in what the vibe was going to be like going into that with the whole Luna Terra crash.

Jason Buck:

It was surprisingly optimistic. I mean, granted, it’s probably like Gallo’s humor and maybe they didn’t see like a top and I don’t know if it’s a top, but the idea was like builders build in the bear market. So they’re all kind of pumping each other up that way. So who knows if they’re just still pumping their bags to be psychologically resilient. But I was wondering how many were going to be on like suicide watch, but it was pretty different then, but I know that you’ve looked at yields and all that stuff and participated in a lot of it. But I don’t think I’ve ever asked you. Did you have anything in Terra Luna?

Darrin Johnson:

No, but you know what’s interesting about it, after we did our speech on Stage, our presentation on Stage. There was a British guy, a British Pakistani guy. He came up to me and gave me a whole five minute pitch on the Terra Luna ecosystem and how great it was. I told him, I listened to him, but I was like, “Yeah, man, I’ll look into it.” But no, I didn’t. That was never on my radar. But that’s not to say that like a trail stop didn’t get hit in the Wonderland ecosystem.

Darrin Johnson:

I mean, but yeah dude, but again, going back to the mentality of being a trader and being an earner and being independent or a prop guy, I mean again, very sad for the people who were suicidal and lost everything, but the fact of the matter is there were sharp guys that made a lot of money, shorting, a lot of those DeFi protocols. If they could figure out a way to get the borrows, depending on where you were in the size of your account.

Darrin Johnson:

Because I was told by a couple of guys that FTX has some good borrows, if you were a VIP customer. It just depends, man but there’s still money to be made. I mean, anytime you have that kind of volatility, there’s money to be made there.

Jason Buck:

Well you just referenced too, because we’ve talked about it before. It’s like if on FDX, you’re a VIP customer more importantly like you and I’ve talked about, it’s like if you’re an offshore FTX trader and a VIP customer, you just have such tremendous advantage over any American trying to trade crypto markets.

Darrin Johnson:

A huge advantage. I mean like sizable. My buddy Andrew Mac, he is just an incredible, incredible, incredible trader. But because he is a Canadian, he gets all kind, dude like it’s funny when you go to the FTX site for a regular person through the US, it looks bland, the markets are wide as hell. There’s not much being bid and offered, especially on the options change and then the strikes are terrible.

Darrin Johnson:

You talk about adverse selection? That is just US. But dude, when I saw what Andrew saw from the foreign side, swaps, perps, all kinds of exotic options stuff that was possible. And I’m just like, “Dude, this is … Like, wow.” And the same thing is true for Deribit, and they’ve gotten Slick now. The first level thinking was like just use a VPN.

Darrin Johnson:

They figured that out. People who are legitimately outside of the US, like Andrew, when you see the interface that they see, and the suite of products that they can trade, it’s freaking incredible. It’s like, wow man. A lot of times when you hear people on Fintwit with like Robert James who has just amazing stuff, and he’s talking about where to find edge for people who are confused, the stuff that he’s talking about doing shortened perps and like basis trades and stuff like that. And not the sort of bland stuff and blanding crypto is 20% per annum.

Darrin Johnson:

But the real trashy stuff and the basis stuff like that, you have to be a non US citizen to get access to it or you have to be a fund, and then they’ll deal with you. But preferably if you’re a fund and you’re a non-US citizen, then man this is candy land.

Jason Buck:

Cory and I were talking about the other day. I can’t wait till these perps get more liquid on like on NFTs for Bored Apes or something is like, if you can get some liquid perps that you could shorten, hedge out that risk, it would be really interesting. But part of like, what you’re saying though is like, did you hear that SBF interview on Odd Lots and Matt Levine was on too when he was describing DeFi yields in the box of money?

Darrin Johnson:

The magic box? I’m listening to it. And I was … Tracy and Joe, or it was Joe and the other guy, Levine, I think his name. He was really-

Jason Buck:

Yeah. Levine.

Darrin Johnson:

I mean, I guess he’s like known on Fintwit amongst the higher up or whatever I was-

Jason Buck:

You don’t read Matt Levine stuff. You would love it. He writes a daily article and it is so in depth and so good. I have no idea how he produces it.

Darrin Johnson:

Wow.

Jason Buck:

But I think you’d really like just reading Matt Levine stuff.

Darrin Johnson:

Dude, I thought I wasn’t sure SPF was going to … I didn’t know if he was going to continue with the pod. It was like, dude, your questions are like, man, I mean, he was really pressing him and the more he pressed him, the more SBF was just like yeah, this is a Ponzi scheme.

Darrin Johnson:

I was kind of shocked and then Levine is just like, “No, you don’t mean, you mean X, Y, or Z.” He’s like, “No, no, no. It’s the money box.” And then I’m like what? I’m just thinking for a guy who’s trying to lobby to Congress to get stuff through, you did not help your case at all, man. I mean, he let the cat out of the bag. And then for anybody who’s reasonably astute, you connect the dots. Well, this is how this guy got billions and billions of dollars.

Darrin Johnson:

It’s like a Ponzi. And, but yeah it was quite the interview, to hear him describe it. And then the other thing was he could never really answer where the yields were coming from. They would ask him several different ways to try to get an answer well where … The people who invest in these DeFi projects or provide liquidity or whatever it is, where is the yield coming from? Then he would get into like all this jumbled jargon and stuff that’s specific to people who are really deep into crypto, but essentially it was new money. That’s where the yields are coming from.

Jason Buck:

No, you are the yield. That’s the point. It’s like it’s either the customers are the yield or the VCs are the yield until they reach critical mass with like, that’s what they’re doing with Luna and Terra, basically with the anchor. But so part of it, I wonder why I brought that up is not just like Ponzi, and some people think it’s more nefarious than that with SBF of how has he gotten so big?

Jason Buck:

But if you looked at the Bahamas conference for SALT crypto, he was on stage with Tony Blair and Bill Clinton. And he’s like, that’s the smart move. He’s getting these politicians in his pocket as he goes to get all of the regulatory filings done. I know they just got turned down by the CFTC on some other issues. But that’s what he’s building. I don’t think … Like you’re saying, why would he say that about DeFi is like, I don’t think he cares about DeFi because essentially what they’re trying to do is be like the first broker dealer that has traditional asset class and crypto on the same platform.

Jason Buck:

And for him, maybe he’s making that angle behind the scenes, but maybe behind the scenes, he thinks that like the politicians are never going to approve DeFi. So he didn’t mind on shitting on it.

Darrin Johnson:

What do you think his ultimate goal, that was unclear to me. What is he trying to accomplish with his lobbying efforts? I’ve been trying to research online, what does he want?

Jason Buck:

So they’re trying to get the multiple regulatory burdens, whether it’s FINRA, CFTC, SEC and then all of the FDIC is … Hopefully, it’s actually, honestly, the playbook reminds me of Elon Musk’s X.com. The idea is to be the one stop shop for banking, trading, investing, cash reserves, et cetera. If you can cross margin that across the entire platform, I think, and I don’t know, obviously that he’s just trying to be the modern version and the biggest baddest trading platform on the planet.

Darrin Johnson:

But implicit with that is that he’s kind of asking for regulation. It’s like, you’re trying to be preemptive in terms of so we want some regulation, but let us pick and choose what that will be.

Jason Buck:

Yes. They’re the ones driving. It is ironically what is it, like a 29 year old with close to 20 billion is the one that he was defining the regulations and trying to push for the regulations that they’re defining.

Darrin Johnson:

Yes. Exactly. Cool. Got it.

Jason Buck:

I think it’s come from their previous to use at Jane Street and stuff. So he gets it, like the whole idea I think is to. There’s all of these siloed worlds, whether you’re trading futures, sometimes trading options or trading traditional stocks, or even having your money market fund. I think that’s the dream for them and I’m just speculating is to be able to incorporate those all under one roof.

Jason Buck:

That just hasn’t been done before. If they’re the first ones that do it and they do it with the regulatory approval, then once again, like we were talking about at the beginning with the boomers, it was like, you’re creating a moat around there. Like you’re hoping to get across that moat and then pull up that drawbridge behind you. So then nobody else can come close to building a platform like you built.

Darrin Johnson:

No, that makes sense.

Jason Buck:

But I also, I brought up SBF because we’re talking about Luna Terra, and then you brought up Wonderland and the different OHM forks and Magic Internet Money. And what I’m more curious about is like, when you know something is a Ponzi, but it’s a trading sardine so you’re going to trade it anyway, is like, how do you think about time horizon and how much do you have to watch that trade like a hawk? Like we’re saying, even if it’s on your mobile phone while you’re dealing with issues at your house is like, when you’re trading Ponzi, it’s a very different trading style or how do you think about it that differently?

Darrin Johnson:

So that’s a really great question. This is something that I think a lot about because I am optimistic and I try to be generous because I know where I came from, and how I started. I think sometimes I don’t spell out the difficulty required, especially … What we try to do is we’ll say, “Okay, let’s point people to places where they actually can have a edge and get them away from what it was like 12, 13 years ago when I first came into the industry.”

Darrin Johnson:

It was literally boomers and like holiday inns and seminars, and they were pushing people to scalp E minis, like using market profile, which at that time was 30 years old. You know what I’m saying? They were pushing people in that, or it was like iron condos and invest tools. Which by the way as I know, huge settlement in like 2006, because they blew up millions of dollars of boomer money off iron condos, but anyways, that’s separate issue.

Darrin Johnson:

But the thing is so I always say, “Okay, well, look towards single stocks. Look toward lower market capitalization. Look for things that are more volatile.” And then naturally that would lead over to crypto as well. Or even to micro caps. The thing that I always overlook and I really have to check myself on it, is that I rigorously trained myself on the basics of particularly like portfolio construction, and Kelly Criterion. And then not to mention like all the theories and the theoretical stuff with option pricing and stuff like that.

Darrin Johnson:

The reason why I’m saying that is that really becomes essential when you get into inefficient markets. There’s that adage of knowing the end at the beginning, it’s like the more sophisticated you are, the easier it is to trade sardines, extract profits and stay alive. Because what happens is to answer your question, Jason, rebalancing becomes mission critical. You have to rebalance.

Darrin Johnson:

You can’t just say, “Oh, well, Wonderland. The yield is going from 120000% per year to 90, 95.” Well, if you’ve been in it and you’ve got this price appreciation from, it was like 5,000 to 9,000 plus, you’ve gotten all these yields. You have to rebalance. So that’s the first thing. The other thing is you probably should take a basket approach. So like you’re in Wonderland. Maybe you’re in OHM. Maybe you’re in some of these other OHM forks.

Darrin Johnson:

You take a basket … Because I had a long conversation with Sinclair about this, and he did like his merging, his math and the stuff. But he kind of came to the same conclusion that I had come to intuitively, which is you want to trade a basket and you want to rebalance as some sort of discrete intervals. So therefore by the time Danny decides to disappear with his Indian buddy in Canada, in the middle of the night with $50 million or whatever the number is, then you’ve already more than made your money and got a huge ROI.

Darrin Johnson:

One of the things you learn is that focusing on that ROI is kind of futile. Don’t worry about that. You’ll get what you get after everything settles out. Rebalance trade a basket and size each individual project or trade appropriately. Half Kelly, closer to full Kelly, maybe not full Kelly, but you want to do that. And you want to make sure that you rebalance at discreet intervals and listen, man, I take the same approach with single stocks.

Darrin Johnson:

Because one of the things you learn when you have to … It’s a different mindset from the start of like when you know you have to make money, you start to look for low hanging fruit, and then you learn to maximize it while the opportunities are there, and then know that you might give 15 to 20, even 25% of the feast that you made back when the edge runs dry, and then your job as the trader is just to constantly be looking once those things change, look for what the next thing is. And the thing is, Jason is contrary to what the multi-billion dollar managers and the super fancy, super fancy questions and all the stuff that we love to talk about involved with, the fact of the matter is that there’s always something to do.

Darrin Johnson:

You just have to know what to look for and be willing to trade it. Dude, I can’t stress that enough. But the problem is most people are looking for advice on how to kind of do what I have to do from like a billion dollar fund manager who trades exotic derivatives or who trades options on a desk or whatever. And it’s like, those people are brilliant. They survived, they’re amazing. But they’ve never had to do it from their apartment or even on a prop desk to be honest.

Darrin Johnson:

It’s just a completely different mindset. But the thing that they do get right. And this is the thing that as of late, I’ve really tried to reiterate, is you do need a strong theoretical foundation. You really do, the quant stuff will not give you an edge, but it will keep you in business. When the Luna Terra thing happens, you won’t be blown out. You won’t be insolvent, you won’t lose $10 million of your family’s money.

Darrin Johnson:

You may have made a decent profit, but maybe it wasn’t what it was purported to be when you first found out about the project. Dude, that’s something that I just cannot stress enough is to people, do not do all the integrals and do all the math and all the fancy algebra that comes with it. Have somebody teach it to you and learn it and know it cold because it does come in handy. But here’s the thing about quant. Quant is really in my eyes, it’s risk management school. It’s how to think about how to protect yourself. But it’s not how to think like you and I think which is opportunistically.

Jason Buck:

Well, you’re systematizing your risk controls. It’s everything you should be doing behaviorally if you systematize it. That’s more a quant at the end of the day in a way. There’s so many things you said I want to pull on. But one I thought about it for the first time is like the idea of also you’re rebalancing or cash sweeping these Ponzi schemes that you’re trading crypto is like, it’s actually no different. If you’re talking, start talking about exotic derivatives.

Jason Buck:

If you’re start talking about OTC contracts and you have counterparty wish with banks, once you’re trading billions of dollars in vol trades, you got some issues with some third party risk. So like for example, I know plenty of managers in 2008 that were up billions of dollars on long volatility trades, but they were suing the bank for 18 months to get paid out.

Jason Buck:

So what’s happened since then is instead of worrying about too much of that OTC where it’s improved, is now on like a 24 hour cycle, you can cash sweep those accounts. So that’s what a lot of managers are doing. They’re just like to either trunch out their selling or on the long vol side, or be constantly cash sweeping. Even if they locked up, as long as you’re sweeping out the profits and especially maybe if you can even cover your basis risk, at any one time, you have a limited exposure to the third party risk that you have with dealing with investment banks on the OTC side. But that’s what’s made me think about is like, even from the crypto side, all the way up to exotic derivatives, you’re still trying to cash sweep that count and rebalance.

Jason Buck:

But the other thing you said that I think is interesting that is a unique dichotomy that we’re always like fighting against and it’s a weird tight rope you have to walk, is the idea of like you were saying, like, do your research, have your quant models, use sophisticated trading techniques on crypto, but at the same time, it’s almost that midway thing. The bell curve on intelligence. And it’s like, you almost need to just jump into these markets before you have a clear understanding of them where if you research too much, you’re going to miss the trade entirely.

Jason Buck:

I remember, let me think how I can anonymize this the best, it’s like a friend of a friend was telling me about the new crypto protocol they’re getting into. I’m not even going to mention the protocol either. I started asking questions and I was like, is it a layer one or layer two? And he is like, “Oh dude, it’s like a layer five, man this thing’s incredible. Like it’s going to the moon.”

Jason Buck:

And I’m like, this guy clearly knows nothing and then I started laughing to myself as like, I’m actually the idiot here. This is the kind of like Chad Laxbro that makes like tons of money in crypto. Because they’re just jumping in and not thinking about it. So like you’re saying, if you were to been really ultra conservative, you’re obviously never going to trade a Ponzi. But at the same time, what’s interesting like you’re saying is like, I think this relates to two you’re saying like, people want to learn what you want to learn is like we’ve developed these frameworks over the last two decades for thinking about markets.

Jason Buck:

So like you’re saying is like, if you know something reminds you of something else, you can jump into that trade without maybe knowing as much. So what I’m saying is there’s this weird thing of sophistication versus jumping into a nacent market where one can keep you from getting in there. The other one has to get you in there. And it’s almost like they’re clashing with each other all the time. It’s like, how do I be sophisticated, but also participate. Do you see what trade off I’m trying to make?

Darrin Johnson:

That’s exactly what you’re saying. And then the other thing is like you said, quant is systemized risk controls. But the way when you look at the financial engineering grads or even people who are in the industry who maybe have a fund to work for a fund, for them quant is like the tool to find the edge. And it’s like, no, that’s not it. But people like me and you I can look … So for example, there are not that many, but there’s a small percentage of sharps that made a boat load of money in Wonderland.

Darrin Johnson:

They were early, they didn’t have any back tests. They recognized that Danny was a charismatic pumper and they got in early and they sized it not full Kelly, but fractional Kelly and dude, I mean, from that July or August into the fall, I mean, because the AP wise were, I hate to say that term, but because the yields were so high, they made a lot of money and got out and just rebalanced.

Darrin Johnson:

But again, that’s a trained eye. That’s okay. You’re bringing in a whole myriad of different skills. And a lot of it, Jason, let’s be real, it’s qualitative, yes. But it’s having been in the real world. Maybe you’ve run a business. Maybe you’ve been a salesperson. Maybe you’ve been whatever, a hustler, it doesn’t matter. You can recognize something that will catch on to other people as well.

Darrin Johnson:

So then there’s that and there’s researching it. Then the next step is being able to take that research and place a Kelly size bet or a fraction of Kellys size bet and let the chips fall. And like those two steps, most people get lost. Their brains are not wired to number one, trust their own research and their own instincts. But then furthermore put sizable money behind it. But the thing is, that’s the work of the business. It’s not who can solve Itô’s Lemma the fastest. Or who can talk to me about second and third order Greeks?

Darrin Johnson:

I mean, listen, man, I can get down a rabbit hole and I can go down that stuff, man. And it can be, oh man, it can just be like a mental orgasm, but that does not make you money. That does not make you money. Because what I figured out after reading Dynamic Hedging and then getting to Sinclair stuff, what I really figured out man was ultimately I don’t care how many second or third order Greeks you try to manage and stuff like that. You are never going to get around the forecast problem. You still have to predict.

Darrin Johnson:

I don’t care how granular you get with the risk in esoteric, you get with the risk, you’re trying to isolate. There’s still a prediction mechanism that you have to make, you have to make a forecast. Once you just accept that, then you have to build on, well, in theory, this is how a market should function and this is what should happen. And things should be at least quasi efficient.

Darrin Johnson:

But I know these people like the guy you were just talking about and he’s hella irrational. He’s a wild dude and this particular asset or marketplace is filled with guys like him. And so it’s like I’m going to ditch the theory. I’m going to use this theory in terms of portfolio construction. In protecting my bank role and growing it. But I’m not going to use it to try to find the edge because you’re not going to make any money that way.

Darrin Johnson:

I look at these young kids. There’s so many young kids that I see that are fresh grads and financial engineering or just STEM grads and they’re brilliant. And the way they’re going about trying to look for an edge or to get in the industry or to demonstrate that they have some sort of live trading to get a job on a desk, is back testing rule sets. Even if it’s in Python OR, like it’s back testing rule sets on like the S&P 400 or whatever it is.

Darrin Johnson:

It’s like, dude, that’s not how hustlers think, man. That’s not where to go. That’s not how earners make money, bro. I get it, maybe your back test out of sample, maybe it has a 0.6 sharp or something like that. I mean, that’s cool, man. But that’s not going to pay the bills. You have to learn to fine tune that antenna for opportunities. And then the next step is, and you may or may not have this in you. Is can you put 200, $300,000 behind it? Can you do that?

Jason Buck:

Well, or you got to raise and that’s a whole other skill set too with sales and everything. I don’t know, to me, I think you see this at large firms, you see people that do research and people that trade. Like a good friend of mine used to be at. He was the head oil expert at SAC that now is Point 72, but they never let him trade because he just couldn’t trade oil.

Jason Buck:

It’s two different things. And like you said, a lot of the people that can really geek out about third order derivatives and everything is like it doesn’t make money. And sometimes simplicity is ultimate sophistication. Some people that talk a big game on Fintwit, they’re actually trading pretty simple models because not only is you need simplicity sometimes, but also just liquidity wise and get trades off.

Jason Buck:

You need to use larger instruments and pretty simple ideas to be able to even trade because a really sophisticated idea can just get destroyed by bid ass spread. We both seen a million back tests that didn’t take into account the commissions and slippage and they were great until you started using them real time. I’ve also always wondered about, especially like I’m not saying, I don’t think this is necessarily how trend following CTAs make money, but some would argue they make money off behavior, off of like contagion and group think.

Jason Buck:

That’s why I wonder, like you’re saying like everybody kind of following crypto, it’s been amazing to just see how classic donkey and curves for 200 day moving average and going long ones above and short ones below. How much that’s worked in crypto and it may not be working anymore, but for the first five, 10 years, it worked tremendously just because of like you said, just behavioral dynamics of people just crowding it unsophisticated and I hate using that term, people just jumping in on trades and kind of fomoing in and out of it. That’s maybe part of it is like just, you need some sort of behavioral overlay to kind of keep yourself in check. I hate using all those terms, including behavioral.

Darrin Johnson:

Exactly. And that’s so true, man. Because this … So what comes from when you’re introduced to that quant route through a more formal setting, like a university program or through a fund, is like I said, it is great for risk management. But what happens is you tend to think that markets just in general are far more efficient than they are. And that the participants within said marketplace are much more informed than they are. What happens is like how … I guess I learned this-

Jason Buck:

Just, sorry, I don’t want to interrupt you, but don’t you think it’s like it’s even more nuanced than that’s like. You should assume most markets are efficient most of the time and then search for your edges, but that you’re likely fooling yourself because it’s likely efficient and there’s something you’re missing. So it’s like both, right?

Darrin Johnson:

It’s both. But then also when you bring up the CTAs and the trend followers, what I actually started figuring out was there’s noise. But within the noise, if there’s a craze or a trend or whatever it is, those things don’t revert quickly like you would think in like arbitrage free world. You would think that, okay, if there is this sort of euphoria over Musk just put out a tweet or like in 2020 or 2021 when Tesla was just raging on a weekly basis with the college, whatever. When you come through that world, you think that, that will work itself out, resolve itself very quickly.

Darrin Johnson:

But when you’re actually trading this stuff, you realize that these things can last for quarters at a time. These things can last, like there’s a whole … The regimes don’t shift quickly. Now you may get outlier years where it’s 2017 and it’s just, money’s falling from heaven. It’s just short vol. It’s just wake up, you short UVXY, and like then you go golf and it’s just like, oh my God, this is a blessing from God. This is crazy.

Darrin Johnson:

But what we did see though, for most of the 2010s was buying calls on growth type stocks, quality type stocks worked pretty well. What we found was upside skew was miss priced. Really, really cheap and suppressed. As somebody who’s at home. I didn’t know the reasons why. I didn’t find out the reasons why for a lot of the stuff, the anomalies that I was seeing until I got the opportunity to talk to people like Ben Aifa or different institutional people that could explain to me, well, this fund is doing this and this is why you see this. I didn’t know.

Darrin Johnson:

All I knew was like this straddle on the SPX on the week. This is like, why is this so cheap? Again, going back to the foundational stuff, if you think about, if you do your conversions on expecting move on various timeframes and you make the assumption about the square root time and all that, how vol increases by square root, time and all that, you start looking and it’s like, whoa, this straddle is way cheap. And then all of a sudden it’s like you buy it and it works and then you buy it again and it works. And it just, and dude, it’s like, but in your mind, you’re thinking this is the most liquid options market in the world.

Darrin Johnson:

Why does this keep working? It wasn’t until like maybe 2021 that I had conversations with really, really smart people, people way smarter than me and in the industry that could explain, no, these are just structural flaws that are causing these imbalances. And quite frankly, there may be a few people on the street that are taking advantage of the other side of it, but that’s there for retail to take if they want to take it. But I guess you need to have the trained to eye to be able to recognize that.

Jason Buck:

Well, part of it, I was thinking, and I want to point this one out, because of what you just said with like shorting vol and structural flaws, like you said, you got shorter vol in 2019 and you’re just raking it in. I’ve been having a conversation with someone yesterday when they were like shorting vol at this point at one where like a 30 handle on VIX, shorting implied and realize is not kicking in. I know you run your own realized models and everything that are great, and I forgive them for thinking that way. But as I like to point out is like in 2017, we had single digit VIX handles and it was the greatest time ever to be shorting vol primarily due to structural flaws.

Jason Buck:

It doesn’t necessarily matter the absolute value of VIX. It’s like the relative value plus structural flaws, plus what does the spread look like in the future? Well, we only own hindsight too. It looks like a goodbye at the time until it doesn’t.

Darrin Johnson:

The spread between, if you read Sinclair studies, if you read any of his white papers in his work, which you’ll find you can do this on your own too. The VIP is the largest when the VIX is in the middle to low percentiles. So now, but again, Jason, that ties in with what I’m telling you. Again, if the overall regime, let’s talk about the macro variables. If it’s easy money, if it’s economy’s GDPs doing fairly well in the United States, the fed is really open and transparent about their monetary policy.

Darrin Johnson:

You have a Trump administration or whatever, or even an Obama administration, but a Trump administration that’s especially like pro stocks. Like cut low pumping at five in the morning on CNBC or Fox business or whatever. Then the thing is that doesn’t change overnight. That allows you to short the vol and short the vol and short the vol, even though it’s at the absolute level of the spot VIX is at a low point.

Darrin Johnson:

But the key is, and again, this goes back to what we were talking about with the fundamentals of portfolio construction, sizing and correlation amongst what you have in that portfolio. When that changes like now I think it’s changing, then you stop that. So this is the difference between somebody who has to do this to pay the bills versus someone who’s at the fund level, who you may be evaluating. At the fund level, they’re going to just keep doing it.

Darrin Johnson:

So when you see a lot of these short vol, not the spectacular implosions, but the people who just really like the performances, like barely beaten T-bills. A lot of that is this. It wasn’t your rule set that made you money in the 2010s. It was that anybody, any short vol would … A Target manager who just woke up and shorted, T-VIX, he made $40 million. It wasn’t the rule set. It was that you were in sync with the regime, the macro regime.

Darrin Johnson:

That’s the thing man is … But the thing is though, and this is what you learn from the old timers. This is why it’s good to talk to older people. People who have been prop and former floor people, is because they can tell you, “Hey man, stop worrying about when this is going to end, maximize it and then just know that you’re going to give a percentage of it back and be okay with that, and sit on your treasure chest, and then go look for something else.”

Darrin Johnson:

But that’s kind of the mindset, but at the fun level, a lot of these guys, they just stick to their mandate. I’m always constantly going through Barclay hedge and the stuff that I have access to as a retail person. And I’m constantly looking for like short vol managers or even options managers. What you see is they’ll perform well at a certain period of time when anybody who would’ve shorted vol or shorted options in a way that’s short volatility, would’ve done well.

Darrin Johnson:

But then when that changes, they don’t change. They stay the same. So you’ll see like two or three really awesome years where it’s like you got 25% or 32% or whatever. Then from like 18 on, it’s like minus 10, minus five, plus two. And it’s like, what happened? But nobody within that firm was like the external variables have changed.

Jason Buck:

But as you and I have talked about it many times, I’ll show you many times like, and you’re referencing is they have a specific mandate. So it’s hard for them to do much about it. And so I think about like everybody’s always like short vol or long vol and I’m always like both. But also make me think about, you were talking about old timers. I think it was in Jesse Livermore’s book. He used to talk about an old timer would ask are we in a bull or a bear market? And then that’s how you’re going to figure out your trades. It’s like what’s the market regime we’re in? And then that tells you what we should be in, but also this-

Darrin Johnson:

But Jason this is where the dispute comes in. The super Verniax would argue that you can’t effectively do regime classification. I adamantly argue against that, but that will be their pushback.

Jason Buck:

All right. Maybe we’ll get into that. But also I want to finish this kind of thought too is like, I think it’s pervasive though, across a lot of hedge funds now, especially because the institutional allocators and mandates, is I was listening to some of the all podcasts on my flight last night for what they just did in Miami. And I think it was Bill Gurley was talking about as a VC, they don’t want to be investing or buying here, but as a VC mandate, they cannot stop buying.

Jason Buck:

They’re going to continue to invest in companies. Or when I was at a macro event a few months ago, I was talking to a commercial real estate investor that has institutional mandates that it’s invested by other institutions and he’s worried, but I’m like, you can’t stop buying. Maybe you need to hedge your interest rate risk, I don’t think you can hedge your price control risk, but it’s not like you’re going to stop buying real estate. That’s what you’re there for.

Jason Buck:

People get built in these like golden cages around themselves where they have to stick to their knitting. If somebody like, I think it was even Hugh Henry, at one point, he was primarily a long vol guy with his eclectica in a way is all global macros tend to be sometimes. But at one point he put out a newsletter like would you be … I can’t remember, I’m going to get it wrong. I was like, would you be shocked if I was bullish equities here?

Jason Buck:

All his clients were like, we’re not interested. That’s not what you do. And so it’s likes like so that’s kind of like the handcuffs people have a lot. By the way, I hate when people say this on podcast, but I’m going to do it anyways. I can’t wait to tell you off air about some of the personal vendettas that I got to get the come up ins for at this latest crypto event, from the crypto event we were at six months ago. I hate to tease the audience, but I’ll tell them later. But one of the things I want to touch on that you kept talking about is the idea of Kelly Criterion or even half Kelly.

Jason Buck:

I know UN Sinclair has debated this ad nauseum, but there’s a lot of people that would say that Kelly Criterion’s alertic fallacy and you can’t do it in real world trading. So I’m like what’s your take on that?

Darrin Johnson:

I think that’s not true first of all. I strongly disagree. And even within sort of the nuances in the application of Kelly, UN and I, we slightly disagree. For example, UN kind of scolds me about applying it to highly volatile markets and assets. Whether it’s smaller cap stocks in their options or it’s like DeFi projects. He’s like the input estimation error is just too high to actually apply Kelly. That’s what UN would say.

Darrin Johnson:

What I would say is that fractional Kelly is enough of a safeguard for me in terms of that input error. But I also know that you need some sort of progressive betting scheme. The idea that you flat bet a fixed amount on every single bet, that just never resonated with me. It just didn’t make comment because I mean, I understand. So again, it depends on your objectives.

Darrin Johnson:

If your objectives are to have stable performance, to be able to raise more assets, to have sticky money, then I get it. But if you are a trader or if you speculate for a living, when you identify the opportunity that you’ve researched and that you feel like has a potentially large edge, you need to be betting bigger and all Kelly does … And here’s the other thing, Jason, this is like, it’s not precise, especially with the continuous adaptation of it, with what we use, it’s not precise.

Darrin Johnson:

What do we know from all the simulations? And you can either run them yourself, or you can read other people’s research. You just need to be in that Kelly plateau. You need to be in that region before the curve turns concave. In other words, you don’t want to bet to the right of the plateau. You just want to stay in that region. It’s not about … Dude, this is not like physics or engineering or mechanical engineering. We’re not going to be that precise because the nature of the underlying phenomenon that we’re observing is not, it’s not a neat problem anyway. The important part is just to not be to the right of it, but to not have any sort of betting scheme at all is suboptimal.

Jason Buck:

So would UN’s pushback be with a high vol instrument? Is that it’s much easier to be on the right side of the plateau than you realize, especially because it’s the conceit of precision. You think you’re using half Kelly or to be on the left side and you’re using precision, but then you’re using … You’re modeling that discount error rate. And that it sounds precise, but it’s not. You’re just kind of checking the wind speed to figure out what you’re going to reduce that error rate by. Is that his contention is that high vol makes it almost impossible to know if you’re on the left or the right side of the plateau?

Darrin Johnson:

I think it’s high vol and then I think it’s more qualitative inputs like these people are criminals and frauds and derelicts, and there’s too much counterparty or just overall just model risk with these operations. But to answer your question, it is the high vol of the assets too, but it’s also just the shadiness of it all. But again, Jason, to your point earlier, the people that made fortunes out of these projects and they do exist, they did it because they didn’t agree with UN on that. Still applied it.

Jason Buck:

Well, but that’s like you’re saying a time window, anybody can do well in just certain regime or business cycle. I think it was interesting, UN and I think it was in an interview, or I can’t remember was personally an interview. We were talking about that. As he gets older, one over N makes a little bit more sense over one and like you’re saying you don’t see that, but I’m like I’ve always wondered it’s based on the time window that you’re pulling up, based on the vol or that time window and the edge you think you have in that time window, where over a longer time horizon, a lot of those are going to reduce down to relatively the same.

Jason Buck:

Maybe that flat betting has some intelligence to it as well. I’m not sure that’s the answer either. I just think it’s … The interesting, one thing that really worries me about Kelly is a personal issue, is I worry about that conceit of precision, leading me to think that I’m doing the right thing, knowing that I’m using a fudge factor, that’s irrational to overlay a rational or a precise thing that comes from lattic games where I know the distribution of returns.

Darrin Johnson:

And also there’s an additional part. And this is the part that I pointed to him. It’s the blind spot for most retail people who are going to attempt to read, because he has a forthcoming white paper. It’s going to be even more mathy and more intense than the chapter in his book on Kelly. The issue is the joint probability distributions. That is an intense problem. That’s where the blind spots are.

Darrin Johnson:

If you have a basket of these things, then what is your real true Kelly fraction on your total bankroll? I’m very fortunate to have access to someone like that. That can help me solve these problems because that’s a really challenging math problem. That’s hard stuff and-

Jason Buck:

Because that was my next question is like how do you think of the aggregate of those positions? What’s the correlation of the aggregates and that’s impossible to figure out, but that’s nice to know that UN’s writing another book about it.

Darrin Johnson:

He is. He’s obsessed with this problem. Is that and the problem of what do you do when you know nothing, but you think you have a niche, what’s the appropriate fraction. What’s the optimal F in that situation. He asked Aaron Brown that on the Real Vision series that he did. Aaron Brown really, like nobody it’s like … Again, the answer’s squishy. The answer is, well, not enough to send you down to the shelter, but enough to where it would make a substantial difference to your bottom line.

Jason Buck:

Well, I think you’re nailing it. That was the first thing that popped into my mind. It’s a utility function based on your own personal wealth. That’s what you’re saying before is like with any of these traders or whatever, it’s like once you have a certain amount of AUM, you can flat bet 25 bips on each trade and be just fine and make a living. But when you’re trying to come from out of nowhere or the dark shadows and jump on the scene and make your own personal wealth, you’re going to end up taking more risk and be somewhere between that half and full Kelly and know you’re taking on maybe a lot of risk and maybe an aggregate more risk than you’d want to be taking on.

Jason Buck:

But you’re trying to make a living in a finite timeline. And it’s amazing. I was actually having conversations at lunch with this last week is like, that’s the shitty rub of life. We take too much risk. We go to the right side of Kelly when we’re younger and we tend to blow up. So then we’re like, okay, I got to need to get more conservative. But by the time we figure that we’re probably in like 35 to 45 year old range. And now you don’t have that many decades left to compound nor do we maybe have the AUM we need to compound at like a single digit or low double digit rate that would be much more conservative. And so the rub is where’s your personal wealth at and how old are you? And when are you going to die? Those are all the confounding variables to how much half Kelly you could take on.

Darrin Johnson:

But here’s the thing Jason, is I guess I always come back to the notion of what alternative do people like me and you have, if we want to jump socioeconomic rungs on the ladder. What’s the alternative? The alternative is not 25, is not what someone recommended in the new Unknown Retail Market Wizards book of 50 basis points portrayed and you stop out. That ain’t going to cut it brother. You can run all the simulations you want and you tell me how that works out in real life. It does not work that way.

Darrin Johnson:

So my thing is, and then also when we look at the survivors or the winners in this game, I think they were close to half Kelly betters. I think Warren Buffet, for example, I don’t like using Buffet example, but I think he’s like a half to maybe even full Kelly, better. Just any of the top dogs and to me man, I think offense is the only way out. If you get dropped in the middle of the hunger games, are you going to sit there and be passive and timid and be the first kid that as soon as you hop off the train and you get on the battlefield, they just take you out. Or are you going to say, “Look, man, I’m in the hunger games, I have to play smart offense.” And there’s some patience.

Jason Buck:

I like it like default aggressive. Like it makes me think of like poker, people either come out the gates aggressive or conservative and people can usually peg them right away. But the actual optimal strategy is to be both and even randomize your conservative and your aggressive actions. But coming out the gates default aggressive tend to push people around. Like you’re saying, if you have one off events, like you’re saying hunger games, you’re getting off that train, you better be default aggressive. Or I can’t remember if I said this to you.

Jason Buck:

I remember reading books back in the day on violence and everything. There was a guy that was in prison in jails and worked with gangs. And he was like, if you are truly in a bar fight or whatever, he is like walk away or run away. But if you truly get in a situation like an alley, you can’t get out. He’s like you have to escalate the violence.

Darrin Johnson:

Yes. Most people who specialize in violence, that’s what they’ll tell you. Do not wait. So somebody knocks you out with a knife or tries to shake you or whatever. You need to be proactive and establish some sort of boundaries immediately. Otherwise, like you’re fish, like it’s a rap. And so that’s how I just feel about … When people contact me or DM me on Twitter or whatever, and they have let’s say like 70K or 100K.

Darrin Johnson:

Of course, you’re my homeboy and I love and respect what you and Corey and others do, but they want to try to replicate that, and try to do this professionally. It’s like, dude, I’m not trying to disrespect you. I’m not trying to diminish your investment savings, but that ain’t going to cut it. You’re not going to accomplish your goals and what you want to do, trying to do 25 basis point low vol asset allocation.

Jason Buck:

You need to be around in a high Sortino high sharp. You need to have some serious edge and if you know your lane, you can find that edge with capacity constraint strategies like you have done.

Darrin Johnson:

Right.

Jason Buck:

But that’s how you got to come out the gate.

Darrin Johnson:

And then it shifts. Then the mindset shifts of, okay, just how, like you essentially, what you want to do is you want to adopt a mindset of the old floor traders on the CBO or on the CME where it’s like, I know I have an edge here. I can come in every day. I can cash out at the cage or whatever it is. My job I just want to be able to come in tomorrow. That’s all your mindset is.

Darrin Johnson:

There’s a measurable, quantifiable edge here. I just got to stay in business. So that should be the shift. How do I stay in business? But once you make that mindset shift, and like you said, you get into the low capacity strategies. You can make it, the only caveat that I really invoke now is be sure to learn the basics of quant stuff. Read Liquidity Cascade, read all the stuff about … Accept the assumption that volatility is risk. I know it’s flawed and I know to assume that something that goes up X triple digit percents can come down to zero.

Darrin Johnson:

I know that you may not agree with that, but the fact of the matter is just accept it and use it because it’s a really good fail safe. It’s something good to fall back on, and it will keep you in business because Jason, this is the thing that bothers me. There is edge out there, bro. There are low capacity strategies that people can make money on. And the other thing is when you start breaking down like sort of the Kelly formula and you go through all the algebra, and you go through all that stuff, what you realize is another really important component that people overlook.

Darrin Johnson:

And again, this is not a hot take. I’m just telling you something that in practice works, is you need something that pops up frequently. But that runs counter to what people are hearing from managers, and from financial media types and stuff like that. It’s like, “Oh, day trading and super active and hyperactivity destroys your account.” Well, no, it’s actually the opposite if you have an edge. You need to be able to apply it in order to compound it more quickly.

Jason Buck:

You need a lot large numbers. You need to get to thousands of iterations before. Not to like to guess your head up, but like what you said though, is like, I think about it in art sense. If you want to paint like baskia or modern abstract interpretations or Jackson Pollock, you better learn how to paint like Goya or the classics first. And that’s what people a lot of the times want to skip over is like, you have to learn what all your predecessors came before you, so that it takes a tremendous amount of work to do what you did. It’s like until you want to have your own style, you need to be able to mimic the previous style.

Darrin Johnson:

That’s great.

Jason Buck:

That’s what people are like missing is like you’re saying with the quant, you need to learn all that stuff, but then to paint outside the lines, you need to have your foundation tight before you go and do that. One of the way places I was thinking about like ending this on is because it came up while we were talking about this, like, we text each other a lot about trading and investing and whether it’s stratify or crypto or whatever it is. But then probably more often we’re texting each other about interior design and different YouTube clips.

Jason Buck:

One of the ones you sent me lately that I loved was a documentary on Nipsey and marathon. And so once again, and I’m a jackass for not realizing before, the whole idea of what his concept of marathon, even calling it marathon OG was the idea is like, life’s a marathon. But then the irony of like he’s like he had all these quotes on his wall too. Just get up every day and just try every day, just get up the next day, try and eventually you’ll get somewhere. But it also relates back to where we were talking about compounding is like Nip may have been running a marathon, but also he got killed.

Jason Buck:

We just don’t know what timeframe we have. So it’s a weird thing as we age and mature is we know we have to have a marathon mindset, but it’s not a marathon with a fixed finish line. We don’t know when that finish line’s going to come for us. I’m just curious, like I just kind of throwing that out there just to see if you had any hot takes off of that?

Darrin Johnson:

Well, first of all rest in piece. I loved Nipsey. Watching that documentary was very moving for me and impactful for me. But I also think just to be clear though, Nipsey, so the estate now has essentially gotten up to, I think it was valued with all the holdings. Again, this is mostly private stuff. I take the mark to market for what it is, but it was like 150 million in total portfolio of businesses or whatever. But when he died, it was like 60 million.

Darrin Johnson:

So even though he died way before the marathon ended. In my opinion, he died a wealthy man and his kids are taken care of. But I do think that what you’re saying about being mindful of that and always keeping that on the top of your mind is really important. But at the same time, Jason, look how long it took Nipsey to get on. It took Nipsey really from start to finish like 15 years.

Jason Buck:

Right.

Darrin Johnson:

And then all the money just started … It was like a exponential jump. But the fact of the matter is like he stuck at it though. Toward the end of the doc, when he talked about, I don’t care, how many times you fail, just keep trying. I was just like you, I was on the same corner, but I just kept at it and I’m not going to lie like I had it all figured out. I just kept iterating. I fail but Jason, all the traits that we’re talking about now, they still apply.

Darrin Johnson:

The idea of pressing the line, probably over betting to the right of the Kelly plateau doing inefficient markets. But taking that money, enrolling it into equipment in order to hopefully hit a long call option a five Delta option in rap, in music. But the mindset of somebody like that is extraordinarily rare. That’s what I try to talk about when we’re talking about this business is you still have to have some of those same traits. You have to have that ability to not only research, observe, do environmental scanning, but then you have to make some money and then take that money and then bet again.

Darrin Johnson:

Then understand that I can’t touch this now. This is one of the things me and you always talk about this, cash flow management is a huge part of being an entrepreneur or even a solo entrepreneur. It’s a huge part. It can make or break you. And any for just a quick aside, your partner, Taylor wrote a great article blog post, everyone call it on [inaudible 01:15:40], in sequencing.

Darrin Johnson:

Anybody who wants to understand what that means, just run a solo-preneurship and you’ll understand how timing and when cash comes in and when it goes out, how that can either make or break you. Because that’s the best way to internalize it. I’ve tried some of the more, the physicist explanations. It didn’t really resonate. But when Taylor wrote that, that’s when it clicked for me. And I realized this does, the order in which this comes really matters, but that’s an aside.

Darrin Johnson:

But the point is like, then taking that and embedding on yourself, man, and then not touching it, allowing it to compound. That’s where the marathon vision comes in, where it’s like, I don’t know, I can’t do it right now, but I have faith that if I wake up tomorrow, I’ll be one step closer and one step but I just have to keep doing it. I mean, for Nipsey, I mean, he still was able to enjoy a lot of the fruits of all that grinding, man.

Darrin Johnson:

I mean, it’s just, Jason man, like when you’re in it, bro. I can describe to you so vividly. I remember the HVAC went out in our place. It was hot as hell and it’s like a summer day in Dallas. My kid is screaming and I’m trying to understand this stuff and I’m trying to figure it out but you just keep at it. I just kept doing it. And I knew that for the next six months, I can’t touch this money, but I’m not going to stop, I have to do this. And eventually man, it does work out, but you do have to keep at it and you have to have that resilience like you talked about with code.

Darrin Johnson:

Dude, you just, you have to and that’s why I listen to Nip almost every day. Like I said, that documentary was amazing, but I just always keep that in mind, man. It’s like, you have to keep going. And to your point, Jason, you always say this, most people don’t have that and it would drive most people crazy.

Jason Buck:

Most people can’t toil in obscurity for 10 years. But I also find it is actually probably the best point for us to end this too. But it’s also maybe next time we’ll talk about too is how do you maintain that grind? If you’re like a boxer waking up in silk cheats. That’s the hard part is like you strive to obscure for 10, 15, 20 years, you start to make some success. It’s like, how do you keep on that grind? And maybe you and I are mid grind. So we don’t have to worry about that just yet.

Jason Buck:

So we’ll maybe talk about that next time. But I also do want to thank you because with everything going on at home, with the floods and everything and trying to put your house back together, I appreciate you jumping on the podcast. And as always, I look forward to all our conversations and look forward to doing this again next time.

Darrin Johnson:

Anytime, man. Thank you. It’s been great to talk to you, bro.

Taylor Pearson:

Thanks for listening. If you enjoyed today’s show, we’d appreciate it if you would share this show with friends and leave us a review on iTunes, as it helps more listeners find the show and join our amazing community. To those of you who already shared or left a review, thank you very sincerely. It does mean a lot to us. If you’d like more information about Mutiny Fund, you can go to mutinyfund.com.

Taylor Pearson:

For any thoughts on how we can improve this show or questions about anything we’ve talked about here on the podcast today, drop us a message via email. I’m taylor@mutinyfund.com and Jason is jason@mutinyfund.com or you can reach us on Twitter. I’m @TaylorPearsonMe and Jason is @JasonMutiny. To hear about new episodes or get our monthly newsletter with Reading Recommendations, sign up at mutinyfund.com/newsletter.