Episode 5: Jason Buck and Taylor Pearson – Interview by Jeff Malec

In this episode, we flip the script and have our good friend Jeff Malec interview Jason Buck and myself, Taylor Pearson.

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We start by talking about our backgrounds, mine in marketing cat furniture and Jason’s in selling Turkish rugs among other things and walk through how those led us to look for solutions to protect our own portfolios.

We dive into the portfolio construction philosophy underlying the Mutiny investment strategy.

We then talk through the major tail risk and long volatility strategies and explain what each is really doing under the hood.

We then go into all the considerations around how to protect against a black swan: focsuing on the value of ensembles and diversification across long volatility and tail risk managers, strategies and market microstructures.

I hope you enjoyed this conversation 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.

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Transcript for Episode 5:

Taylor Pearson:

Hello and welcome. I’m Taylor Pearson. And this is the Mutiny podcast. This podcast is an open-ended exploration of topics relating to growing and preserving your wealth, including investing markets, decision making under opacity, risk, volatility, and complexity.

Taylor Pearson:

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 do not necessarily reflect the opinions of RCM Alternatives, 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 past or potential profits and 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 and making such a decision on the appropriateness of such investments. Visit www.rcmam.com/disclaimer for more information.

Taylor Pearson:

For more information about today’s episode, visit our website at mutinyfund.com and subscribe to our free email list. If you listen to the show on your Apple podcast app. Remember you can give us a review. Each review helps more people find the show and join our amazing community. In this episode, we flip the script a little bit and have our good friend Jeff Malec interview Jason and myself. We start by talking about our backgrounds, mine in marketing, cat furniture, and Jason’s in selling Turkish rugs, among other things, and then we walk through how those led us to look for solutions to protect our own portfolios. We dive into the portfolio construction philosophy underlying the new investment strategy, and how it can help investors decrease their risk and increase their returns. We then talk through the major tail risk and long volatility strategies and explain what each is really doing under the hood. And finally, look at the different considerations investors should have in mind in terms of protecting against a black swan event or market crash. These include focusing on the value of ensembles and diversification across not just strategies, but also managers and market microstructures. I hope you enjoy this conversation as much as I did.

Jeff Malec:

I’m your host, Jeff Malec, and today we’re joined by two guys I feel like I’ve known for 30 years, but I’ve actually only known for a little more than one. We’re here with Black Pearl Management’s Jason Buck and Taylor Pearson. Or as I sometimes conflate into one stage name, Buck Taylor, welcome, guys.

Taylor Pearson:

Glad to be here. Like on your stage name.

Jason Buck:

Love it. I like to call it a stage name and not the others.

Jeff Malec:

So but Taylor we started working together about a year ago, you guys come into RCM with a crazy idea to build a portfolio of vol managers to help protect against market down moves in real time. And since then, we bounce about 1000 ideas off each other and different concepts, which I have to admit it’s been a lot of fun and intellectually challenging for me. So thanks for that. You’re both self labeled entrepreneurs from different backgrounds. So let’s get into how in the world you ended up at a hedge fund conference in Miami. Taylor, start off with you. You started out in digital marketing, that’s an interesting in into this space. How did that work out?

Taylor Pearson:

Yeah. So I guess my sort of like entry into the hedge fund space or you know, what we’re doing now. I graduated from college at the bottom of the 2008 financial collapse with a very useful degree in history from a very, no name, small university in Alabama.

Jeff Malec:

That’s better than I thought you’re gonna say the bottom of your class.

Taylor Pearson:

No, I was the top of the class.

Jeff Malec:

The top of the class, the bottom of the market.

Taylor Pearson:

Correct. Worst of the best and the worst of the best. And so I got really interested sort of in the whole like Nassim Taleb and just trying to understand I didn’t have any exposure to financial markets or really know anything about it. I didn’t study finance. And sort of watching you know, what was happening there. I got really interested in Taleb’s work, you know, complexity theory, or goodness, the economics, all the things that kind of grew out of that but didn’t really know where to go with that and so started. Some guys told me on the internet that if you could sell things on the internet, that was a useful skill. And so I got a job, works in a marketing agency. I worked for an e-commerce company based in California, manufacturer in Asia. I went to Asia for a while and was helping them set things up there.

Jeff Malec:

And so what? They’re selling widgets? What were they selling?

Taylor Pearson:

We were selling, so, our most interesting product line was high-end cat furniture like stylish litter boxes. But we also, it’s mostly hospitality equipment. So we sold like portable bars like caterers would use at weddings. We sold valet parking equipment like most of the hotels event rental agency.

Jeff Malec:

The high-end cat furniture must have been gold for, like digital marketing, though, for AdWords and whatnot. Like, it seems like a pretty specific search.

Taylor Pearson:

Yeah, it was specific. It was one of those. I mean, you know, as you’d expect the market’s like not that big, like it wasn’t, you don’t get the product line. There’s always times people will pay $300 for a litter box. But we found all those people, we own that market sales.

Jeff Malec:

$300. Can it take away the smell as well?

Taylor Pearson:

No, I think it just looked nice, pretty, pretty litter box.

Jeff Malec:
So then somewhere around there, you wrote a book.

Taylor Pearson:

And so yeah, that company got sold in, trying to think 2014, 2015 and I was kind of trying to figure out what to do. And I’d had a kind of a blog and some stuff I’ve been doing on the side, writing good, my own sort of marketing stuff and I’d always wanted to write a book I was actually at a conference in Bangkok with Mike Cavell. Written a number of books on trend following and Mike kind of started talking trash to me and telling me he didn’t think I could do it and trying to set me up to write a book. And so I said, you know, fine, I’ll do it. And so,

Jeff Malec:

So you didn’t want to write a book about markets and you weren’t there to hear him talk about markets, right? It was just incidence that it was a trend following guy, which is the RCM world, was there at a conference telling you to write a book?

Taylor Pearson:

Yeah, some weird turn. It wasn’t. Yeah, it wasn’t a finance conference. It was like a start-up kind of internet business conference and then Mike, he’s got his online stuff that he does and courses and all that. So he was there, like kind of from that, from that angle, but that was how we sort of connected.

Jeff Malec:

So what was the book?

Taylor Pearson:

So the book was called The End of Jobs. It’s kind of a future of work careers books are kind of talking about, you know, what I had learned from, you know, my impression of how the world works in college versus afterwards and sort of like how career paths were changing. How the way my parents thought about careers was different from you know, what I had seen in terms of what was actually working. And now, obviously the big story, it was just like the internet, like there’s this thing called the internet and it has some unique possibilities, you know, you can, you know, at that point, I had a, I had a blog that like a few thousand people read, which is like a weird phenomenon, right? It’s like Who am I? Like, why thousands of people like read stuff I write on the internet like it’s

Jeff Malec:

Was total democratizing, right of like if you’re smart and have good stuff to say people are gonna find you and read you. So is this concept of did it tie into like millennials don’t want to stay at one job for very long and things of that nature? It was

Taylor Pearson:

More just like how to leverage the Internet to improve your career right? You know, you can all the things you can do to sort of like, if you think you get some of the big ideas like one this idea of kind of the long tail which is a book by Chris Anderson is a WIRED editor. And basically if you look at if you look at say like sales on In the Amazon platform, something like 52% of sales are done through third party sellers. So it’s not Amazon that’s actually fulfilling these orders.

Jeff Malec:

There’s a great pod on Reset, I think about these those fulfillment centers and there’s a bunch of them in South Dakota, it’s like, totally transformed a few small little towns that just repackage things all day long.

Taylor Pearson

Yeah. There’s just all these small businesses that are like selling stuff like high-end cat furniture, you know, Walmart’s not going to manufacture that, you know, Amazon’s not going to go and manufacture that but in aggregate, that’s, there’s a really long tail of those sort of opportunities that people can latch on to so kind of how those businesses work, you know, small software, businesses, e-commerce businesses, online productized service businesses. What those sort of things are, how you get into that.

Jeff Malec:

And so now you’re we’re in New York City, but you moved down to Austin?

Taylor Pearson:

Yes, I moved to New York. Maybe a year after that company got sold, was there for three years and now I recently moved down to Austin.

Jeff Malec:

I think that’s probably the average. New York. Residency is probably around three years before you like, what am I doing?

Taylor Pearson:

Yeah, I said, I was gonna stay two to four years. In three years. I was like, Yeah, good.

Jeff Malec:

There you go. And now you have a new book coming out.

Taylor Pearson:

Yeah, I’m working on a new book called Markets are Eating the World. That is, the title’s a riff off of Jimmy Wilson.

Taylor Pearson:

Basically, Marc Andreessen, the Netscape founder, now venture capitalists, his, like, refugia op ed, I think in the Wall Street Journal, maybe eight or 10 years ago called software z in the world. You know, you’re just seeing software companies sort of dominate all these industries, you know, Fang, and yeah, stuff. And so, kind of a riff off of how, you know, part of what we say when we say software’s in the world is like, really what we’re saying is software enabled markets are in the world, right? Like what is you know, Facebook and Google are content markets, right? They’re selling ads on one side and having you know, user journeys, kind of the other side. You know, Amazon is like, very obviously marketplace. You know, Apple not so much but you know becoming more like service oriented, moving more towards the app stores like a bigger are their thing and then trying to think about, you know, what does that look like further down the road? So I’ve gotten interested in sort of the Bitcoin cryptocurrency space and you know what, in what ways does that enable new markets? And then how does just kind of the way in which markets exist today and where they trend.

Jeff Malec:

I like it. Can I get a pre-version?

Taylor Pearson:
Yeah, you’re on the early list.

Jeff Malec:

I’m gonna take probably 25% chance bet that the book comes out of The End of Markets. Your editor is going to convince you to change the name correct? Start a series.

Taylor Pearson:

The end of guy. Yeah, I could do that.

Jeff Malec:

I like it. Jason, let’s get over to you. So you were in commercial real estate?

Jason Buck:

Yes. I got in commercial. I went to college, Charleston played soccer there for a while and then post college. Kind of commercial with my family’s always kind of been in real estate business. Whether it’s you know, flipping houses or real, you know, on the realtor side on my mom’s side, but kind of fell in love with commercial real estate and the complexities of it. So I started commercial real estate development company in Charleston, where we take, you know, two 300 year old buildings on that King Street corridor, and try to renovate them for highest and best use, whether it’s putting in offices, restaurants, apartments, kind of that sort of thing. I kind of liked because it was a free option on restaurants, which I eventually got into the restaurant businesses, like, if you’re renovating the building, you put the restaurant in the ground floor, the restaurant fields, you can lease that now, that space, that updated space, for three times more than you could before. So it’s a great fiduciary responsibility for your investors, because they have the real estate that’s going to gain in value and you get basically a free option on the restaurant. So yeah, did commercial real estate offices like I said, own some restaurants, tried setting up a Wi Fi mesh network for the city for internet service provider, you know, maybe a little too early on that one, but always been a serial entrepreneur since I was a little kid. You know, that stereotypical story. I wish I was unique but you know selling bracelets in school, like nine years old to making mixtapes and so on when I was 12 to, you know, play into various businesses I’m sure
was whatever that some of the songs on the mixtapes
so what I would do is at the time Yo! TV Raps just came out so I’m dating myself and but it would come on at one o’clock in the morning in our region because I grew up in Michigan and I would set an alarm to get up and I had a dual tape deck system and I figured out how to attach it to the TV so when Yo! TV Raps come on I’d sit there and I hit record when the video would come on and they’d record on one tape and then you know once the song was over stop and wait for the commercials and just do that from like one to two o’clock in the morning and then because I had dual cassette then I’d burn those onto new cassettes and then I take those to school and so on for five bucks

Jeff Malec:

MTV, his address is, if you want to sue him. Like you were the original Napster.

Jason Buck:

Yeah, exactly. The original Napster Yeah, I was like analog Napster.

Jeff Malec:

The Italian Job movie with the guy who’s, I am the original Napster.

Jason Buck:

Yeah. And then how it relates to markets is, you know, they’re also a stereotypical story, convinced my dad to set up a stock account for me when I was like 13, 14 years old. And like a typical noob, I read an article about, and I don’t even know where I read it, about American Standard, the toilet company, was gonna move into China and provide toilets for a billion people. So I was like I, you know, gotta try hard, convincing my dad like this is it like I’m buying American standards. So that was my first stock. I don’t even know what happened. Like, I’m sure who knows, probably down like everybody’s first. And then in ’99 and ’98, ’99, day traded a lot of the tech companies using you know, those first like e-trade accounts and everything and ran up like 2000 into I think it was $98,000 thought I was a genius. And then basically lost it all overnight. Like everybody did.

Jeff Malec:

Well, I was trading a stock at that time. They were doing the SAT phones, the satellite phones, um, it’ll come to me in a minute, but the whole trade was you would, they launched the new satellites. And if the launch was successful, the stock would pop. So people are literally, we would call in and you’d listen to the launch. There was like a conference asssigned to be like three, two, launch. And there were a couple. I don’t know why, like we’d already put someone on the moon, but these things would fail. They wouldn’t deploy properly. Like, yeah, 20% of the time. So curious on your thoughts on, we work from your commercial leasing background, commercial real estate background

Jason Buck:

I think I think all this stuff, all the issues of work have been written, right. And I, I don’t know if I have anything nuanced or new to add to it, other than like we were trying to build out, I remember I was, you know, there was one nice thing about Charleston, was like, it was a little bit behind the time. So I could go to like New York, London, Paris, San Francisco, and see what’s on the cutting edge of ideas. And I could bring them to Charleston, I’d be like five years ahead or what worked in other cities. And so I was like one of the first people trying to build out communal office space in Charleston, but it’s more on a long term lease basis. So I will, and, you know, trying to do the work model, but worked on a lot of those more cutting edge concepts like that of like, you know, kind of, you know, almost piggybacking what would Taylor was working on. It’s like the new workspace is going to be communal workspace or grand office and you know, beanbag chairs, beer and you know, coffee on top kind of thing

Jeff Malec:

And foosball tables. So, with a phone assist, I just remembered the company was Iridium satellite phones, Iridium. So, let’s talk. How did you guys hook up? How did the partnership form?

Jeff Buck:

Sure. So I go back a little bit. So as I stated I, was, primary business was commercial real estate development, and obviously 2007, 2008, 2009 happened, and that obviously decimated the business. And it was fairly like a really traumatic experience for me to go through that. One, just probably for ego sake, because I thought, you know, smarter than everybody else. And I figured this out and I was worth millions of dollars on paper. And it was a really devastating blow to not only lose that net worth statement, but more importantly, to lose my money, my family’s money, friends money, it was absolutely devastating. And if I’m to be quite frank about it, it took me years to really get over it. Like it was a probably a deep dark depression if, if we were to call it that, and part of that process over the last decade, was to figure out I never wanted to experience that again. Like, there’s got to be something wrong with my business model, my own hubris, all these things, I’ve got to figure out how to solve it. And part of that was, you know, if you take an entrepreneur’s willpower and creativity, and you line that up with a risk-on environment, you can think you’re a genius and you’re making, you’re just raking in all the monopoly money. But what happens when we go to risk-off and all that leverage dries up? They take all that Monopoly money away from you. So I was trying to think about how do we hedge that downside risk? And so part of that was learning how to trade options, learning how to trade VIX learning how to trade all these long volatility and tail risk events because actually what we didn’t gonna do, what happened was, speaking of my stupidity in general is like, as I saw the market turn in real estate in 2007 because I’m selling apartments and everything and I see the, we’re moving from these like, you know, no doc loans to now I can’t sell apartments because nobody can get loans. So you see it ahead of the curve. And I went to the some of the oldest developers in Charleston, all these guys were probably over the age of 50, 60 years old, and I went to a group of like half a dozen women, I was like, you know, are you guys nervous? And to a man, they said, “Nah, this time is different”. What I didn’t know then was how optimistic real estate developers are.

Jeff Malec:

And how many times, this time is different has been proven?

Jason Buck:

Exactly. So but I saw the writing on the wall. And so just, you know, having to learn my own mistakes. I started shorting the market, I started teaching myself how to trade options, which I shouldn’t have taught myself, but this is like kind of pre-internet days, so it’s hard to find good information. So I actually shorted the banks and the housing stocks, but the timing and the out of the money puts were too far out and you know, I’ve expanded so I actually lost money shorting the housing and banking stocks. So I was right. Like I was nervous and I was right. But I didn’t know how to trade options

Jeff Malec:

Right, which is the classic. If you’re in a stock, you just have to get the direction right. You’re in options, you got to get the direction, the timing and the volatility right. So which I’ve said before, 3D chess on the ocean with sharks with lasers on their heads

Jason Buck:

Exactly. So I’m just burning through money just trying to hedge my risk and doing the exact opposite. So I had to, then I realized after the crash, I had to teach myself options. Eventually thinking about negatively correlated assets got me into trading VIX, those sorts of things. So over that decade of figuring out I didn’t want to go through this again, so how do I hedge entrepreneurial risk? Through the decade I had to teach myself about how to trade options how to trade VIX how to trade long volatility, so I learned all those things and then actually through working with you guys for the better part of, God, It’s been over five, six years since I even found the RCM platform, is learning about the managers out there, I had to eventually realize that I’m a much better entrepreneur. So it’s better for me to find the managers that can stare at the screens all day and trade better than I can. And then working with you guys and lawyers and everything I started to figure out. Okay, how do you put a package together, an ensemble of these managers that can handle multiple path dependencies? And with the lawyers, how do you figure this out? So, you know, you can take smaller check sizes? How do you? What’s the loophole to get my family and friends in there? How do I hedge entrepreneurial risk instead of somebody that’s worth 100 million dollars? How does somebody that’s worth a few hundred thousand dollars? How do they hedge themselves? And so that’s what we all work together on is to figure that out. And then eventually, I realized that, you know, I’m going to need a platform to sell this to retail clients, I’m gonna have to build up an audience. And because I spent the 10 years, you know, figuring out how to build a business the right way and how to trade all these products and deep diving into this complex space. I didn’t have an audience, I wasn’t writing, I wasn’t blogging, wasn’t anything. So I was like, I need to find the perfect partner that’s already built a platform. Well, it’s gonna take me another decade.

Jeff Malec:

Is he in this room?

Jason Buck:

And he happens to be in this room. And I just got serendipitously, lucky enough that Taylor and I found each other online and developed a relationship over time online and really got to know each other well, and then we decided that we wanted to partner up and try to do this, and I am immensely grateful and couldn’t have found a better partner. He’s amazing.

Jeff Malec:

Taylor, was it? Did you guys find each other on a dating app?

Taylor Pearson:

I had co-written an article with now a mutual friend of ours, named Gary, that runs an Algo fund in Chicago, about crypto stable coins, who was like interested in the space and how you do stablecoins. And somehow Jason found that article and emailed us and we started talking about, yes, sort of crypto and then trading and sort of through those conversations that came out. I was at the time trying to find and similar to Jason earlier, I was like I want some sort of tail risk exposure. I want some sort of one volatility exposure. I’m trying to figure out the best way to sort of get that exposure personally. Friends, family, how are you interested in that? I think in part, you know, I mentioned sort of like 2008. And coming out of that was a big influence on me. And then I had a lot of my writing, my consulting, I was doing consulting work after the e-commerce company got sold. Like this idea of like antifragility and robustness. And then how do we make companies more robust or antifragile and, you know, better trickled over into investment portfolios. And so I was, again, I think I mentioned to Jason, I had a couple of funds and I was talking to them and he was like, no, no, you know, you don’t need to do it this way. And so we got ended up in a six month back and forth of you know, him talking me through. Well, you know, this is where volatility arbitrage does bad. And you haven’t thought about this, and you haven’t thought about that?

Jeff Malec:

He’s black hatting it?

Jason Buck:

Yeah. And it was also our mutual love of Taleb books and Chris Cole white papers from Artemis. That’s really like, that’s where the meeting of the minds was. And that’s what we both knew we’re searching very similar things.

Jeff Malec:

So not to burst your guys’ bubble, but you weren’t unique in the search for tail risks, right? And the banks and there were tail risk funds coming out and all this stuff. What were you seeing in those that wasn’t meeting the need?

Taylor Pearson:

I think I guess, you know, partially from my I mean, part of the problem from my perspective is just like distribution, like I wasn’t, I didn’t know how to find that stuff, right. It’s like, you can’t go Google like tail risk fund, and it pops up like 50 options, like here’s the different things with

Jeff Malec:

So maybe the banks were selling with their biggest clients with 10s of millions of dollars

Taylor Pearson:

I get a strategy, and then I mean, I think the, you know, obviously, like, as you should know, for myself, my friends, my family, like people that could write 100 k check, but maybe, you know, half a million-dollar check, but not someone that could write a $10 million check. And so you know, now that obviously like narrows down the sort of like investable universe, there are a lot. And then I think, I mean the thing that we spend a bunch of time talking about is sort of this no tradition tail riks you have this, this trade-off between sort of like the bleed or the carry and good years, you know, when the markets up, you know, how much is the strategy down versus the you know how much protection you get in the risk on environment? How much sort of convexity you have in the

Jeff Malec:

Bubble. Why weren’t you guys saying like, Okay, I need to put 40% in bonds, or I need to do manage futures like what was, you know that there’s classic ways to diversify and hedge What was your, what were you seeing at like, no, that’s not for me.

Jason Buck:

I think,

I think, as we talked about, like, if our spirit animals are like Nassim Taleb or Chris Cole is like, you read that stuff in you’re acutely aware that bonds have worked for 30 years. But you know, that if you look at the hundred year history of the correlations, it’s dramatically different. And I think that we’re both like, and correct me if I’m wrong, we’re like, we’re very historically minded, like both of us, I think about like, hundreds of years in cycles, like, and so it’s really hard to have some sort of intellectual integrity and just believe what’s worked for the last 20, 30 years, will work moving forward. Both of us have a really hard time with that, I think.

Jeff Malec:

And so Taylor don’t discount that history major too much.

Taylor Pearson:

There you go.

Jeff Malec:

And I forgot to mention, or you forgot to mention. Where in there did you work in the Turkish rug facade?

Jason Buck:

When I was 19 years old, and when I was 21 years old, I went to Istanbul, Turkey for summer. In Charleston, I’d worked in a restaurant that was run by a Turkish man from Istanbul. And so he said, if you ever want to, you can go to Istanbul and you can make a fortune and commissions off selling Turkish rugs to American tourists. And this is like pre-internet and I might

Jeff Malec:

They needed an English speaker?

Jason Buck:

Yeah, basically, but I just flew to Istanbul not knowing anybody or anything. I had an address and a name. And so I went to this guy and he’s the guy that owned the rug shop that made the rugs and everything. He’s really smart because he knew that if he had at the time, you know, a white, blond kid from the Midwest, the American tourists coming off the cruise ships are much more likely to trust him than a native Turk. Yeah. And so I was a street peddler.

Jeff Malec:

What’s that song? Constantinople? Load that up in the Walkman. And headed over.

Jason Buck:

Yeah, this is how crazy it was at the time. It’s my first or second time there. I signed up for a Hotmail account. That’s how new it was. And that was cutting edge. And I would maybe call my parents like, once every two weeks because it was really expensive for like, a few minutes.

Jeff Malec:

And was he right? You could make a small fortune?

Jason Buck:

Yeah, except for, and maybe just as much as I’m talking now you maybe don’t realize I’m an extreme introvert. So it’s really difficult for me to approach people in the street. So it’s probably good for me to get me out of my shell. But I wasn’t very good at it, to be honest with you, because it’s just it’s kind of anathema to my personality.

Jeff Malec:

And the cliff notes version of your bio Taylor, you were a Brazilian Super Bowl champion? What in the world does that mean?

Taylor Pearson:

Before I started doing marketing stuff, I got a job. I worked for a year as an English as a foreign language instructor in Brazil and I’m at this like classic rock bar in Sao Paolo. And I learned that this guy played at Dartmouth play college and he’s like, “Oh, yeah, like we, know Brazil’s starting like a National Football League.”

Jeff Malec:

And you were a bit bigger at the time?

Taylor Pearson:

Yeah, I played it off in July in college at a D3 school. And he was like, you know, you should come play for us. And so I came in, I joined this team and it was like Semi-Pro. We got like some comps and gym memberships and stuff, but it wasn’t like we were getting paid. But yeah, we were in the championship. It was on ESPN, Brazil. We had like 10, 15,000 people in the stadium. No one knew the rules what was going on, but they were yelling.

Jeff Malec:

We gotta dig up the footage. Put it in the show notes.

Taylor Pearson:

Yeah, we crushed them. I think it was like 54 to seven or something.

Jeff Malec:

I love it. And Jason, D1 soccer. What position were you?

Jason Buck:

Center midfield primarily. So yeah, played at College of Charleston. Before that I lived at the IMG Academy in Florida with like all the professional tennis players and I played in all over South America, Europe as a kid and travel the country.

Jeff Malec:

Why do you hate sports now then?

Jason Buck:

I grew up in a household where we weren’t very sport orientated, etc. Like alternative sports. My dad was a little weird. So he was really into America’s Cup sailing, triathlons. So we have that in common, Iron Man.

Jeff Malec:

Hold on. I was a professional sailor for a little bit so I take offense at that’s an alternative sport.

Jason Buck:

You know, it’s alternative, come on. So like in my house we didn’t watch NBA or NFL. We watch like, America’s Cup. We watch Iron Man. So we didn’t watch any of those sports and then growing up playing soccer. And my brother played ice hockey. My sister was a gymnast all like elite level. Soccer was like the only sport and nowadays I just really don’t follow. I watch English soccer because it’s nice to get up in the mornings and watch it on the weekends but I don’t have like a team I follow or anything. So boring, right?

Jeff Malec:

So we just learned, finished up learning, about these two athletes, turn businessmen, turn portfolio managers. Let’s get into the portfolio approach you guys have created. And you know, what is the mutiny strategy all about?

Jason Buck:

So the mutiny strategy is an idea of taking an ensemble approach to different managers in side the long volatility and tail risk space. And so what we think is when you have a risk-off environment, you’re going to have multiple path dependencies on how that comes to fruition. So we tried to put together as many different path dependencies as we could across an ensemble of seven managers. So that way, whatever that risk off environment is, we try to capture it. And so we created a structure of basically three buckets. We have volatility arbitrage bucket that does relative value trades on devolves surfaces, whether that’s, you know, calendar spreads or VIX versus SMP. The second bucket we use as a dynamic options so we have managers that do, straddles on the SMP and if they can’t find cheap convexity there. Then they’ll look for proxies and they also do strangles on the s&p 500. The third bucket we use is just called short term down capture, which is just using the Delta one futures and they trade intraday, you know, short, the s&p 500. And then we have another manager that that follows that relay race around the world. They’ll trade intraday short futures and Asia, Europe and the United States. And then we felt that that ensemble approach gave us a nice balance of return streams while waiting for that risk-off event. But just in case our managers weren’t in the market at the time, we thought we could add the piece of just continuous rolling puts and we could absorb that bleed through the returns of our other managers. So we kind of added this pseudo fourth bucket of permanent rolling puts, just in case you had some sort of exoticness event on a Sunday that nobody was expecting.

Jeff Malec:

Pretty good little fourth-floor elevator. Taylor, how would you put that in layman’s terms?

Taylor Pearson:

Yeah, I was gonna say Jason’s the smart one. My dumb down for myself explanation is, I mean, you start from the premise that diversification is good, right? You know, you can increase your returns per risk. In order to do that you need a negatively correlated asset. So, you know, most people have most of their portfolios and equity exposure, you want something that’s negatively correlated to equities. You know, the challenge with a lot of the things that do that the challenge the lie those strategies, and they’ll say, like the VIX exchange-traded products, is that they tend to have, you know, very high negative bleed and Goodyear such that, you know, when the risk-off tail event comes up, you’ve already sort of you know, you’ve bled 90% of what you put into the strategy from the start. And it’s, it’s not enough to sort of make up for that so

Jeff Malec:

And we get into that on the Principalium Alex Orus podcast of the Vic, you weren’t long VIX exposure, the ETF has lost 99.99% of its value. So it’s quite possibly the worst possible thing to get that long term exposure. If you want negative correlation VIX exposure tomorrow, it’s a great product. If you want to even the end of the week, not so great. If you want to hold it for a year, it’s literally the worst product you could do. So coming back ensemble, we’re just talking about many different strategies or many different managers. What do you mean by ensemble?

Taylor Pearson:

Yeah, both those different strategies. It’s the way I know like in my dumbed-down version to myself is like you know, if we, if you want to buy you know, fire insurance on every forest in the world all the time, that’s very expensive, right? You’re gonna bleed to death on that. And so you know what, what we want to do with using active managers and active strategies want to take people that are buying, you know, they’re using their own proprietary algos to say, like, you know, this show has no high winds and it’s really dry and so you know, the chance of a forest fire spiking off yours is elevated and you know, you’re just buying sort of insurance on that portion of the forest at that time. But the challenge with that is, you know, what, if you missed the fire, right. You think it’s in Northern California, it’s in Southern California. And so the idea behind having an ensemble of both strategies and managers is okay. Each of these, as Jason says has different paths, dependencies who do well in different paths and is sure to do badly. But if we can take them and match them up, so the way we’ve tried to construct the portfolio is such that the managers are uncorrelated to each other in risk on time, right? They have different sort of patterns in response times, but then it should, you know, the strategy should all flip to be correlated with each other but negatively correlated to the equities markets in a risk-off event.

Jeff Malec:

So two things. At one, who’s buying forest fire insurance? Squirrels and deer? Yeah, Bandy. The Bambi got screwed gets injured in a forest, right. I mean, I guess people in California but thanks. For the most part, there’s no one who really needs fire, forest fire insurance, but I get the metaphor. Secondly, you’re saying you want a negative correlation. The whole rest of the world is pitching Noncorrelation? What are your thoughts on that? And why negative correlation would mean when the market goes up, you’re going to lose money. So, how do you square that of like, I need negative correlation? To diversify.

Taylor Pearson:

The ideal you know, if you could wave a magic wand, or whatever it is you want, non-correlation in this current times and you want negative correlation and risk-off time? So that’s the hypothetical ideal of what you’re trying to construct and then obviously, there is no perfect thing that does that. But that philosophically, I guess that’s where we kind of came at it. Trying to think of something that would do it, fit that return profile.

Jeff Malec:

And I sae it from a different way and investors that we talked to at RSM. They’re kind of getting fed up with non-correlation because they can’t rely on it all the time. So they’re saying okay, December of 18, managed futures lost 5%, stocks were down 8% like, why did that happen? This is supposed to be my diversifier. And you explain to, blue in the face, that non-correlation means a lot of the time, they’re going to do the exact same thing as stocks, a lot of time, they’re going to do the exact opposite of stocks. Average that all together over many years, and you get 0.06 correlation, non-correlation. In real-time, any day or week or month, you could have very high positive correlation.

Jason Buck:

To your point about when your clients come to you about that is that I think fundamentally, people don’t understand non-correlation. When you talk about non-correlation, what they envision in their head is actually negative correlation. So that’s actually what we’re just trying to surface. And so not to use, like, you know, numbers per se, but like, let’s say in 2018, if you have negatively correlated assets, in 2018, you know, stock markets down, let’s say roughly 5%, a portfolio that was long volatility tail risk was up, let’s say 20%. So your blended rate, you’re gonna be, you know, positive on that year, coming into 2019, the stock market rips higher and it’s up 30%. But then your negatively correlated long-tail risk funds would be, let’s say, down 5% so you compound those blends over time, your log wealth is going to increase over time. That’s why you want negatively correlated assets.

Jeff Malec:

But to be labor, the point of that is if you have the purely negative correlated the VIX ETF interrogate each other, right? You’re totally negating each other. So that can’t have perfect negative correlation.

Jason Buck:

You can’t have perfect negative correlation. But what you can do through an ensemble of managers is the whole point of active management is they can try to risk, reduce or truncate that left tail or bleed during the risk on times. So as the s&p is ripping higher, and these guys are negatively correlated to the SNP, they’re also trying to reduce that bleed. So they’re actively trying to reduce that bleed. So that’s why the correlations are never going to be negative one. It’s because that’s what that’s where you achieve the outperformance is when you’re actively managing that negative correlation with the long volatility and tail risk. That’s where the power of the combination of short volatility and long volatility helps you achieve compounded growth rates are much higher with less drawdowns over time.

Jeff Malec:

Which is the classic modern portfolio theory. You know, portfolio mixture of non-correlated assets has a higher return, less volatility. I know, we don’t necessarily like to measure risk by volatility, but that’s the classic approach, right, of a portfolio approach can accomplish that.

Taylor Pearson:

I guess, like the logic is not that different from like risk parity, but just the, in terms of like having things that are either uncorrelated or anti-correlated, but instead like deriving it from statistical correlations, we’re trying to think about, how can we derive it more fundamentally?

Jeff Malec:

And I would say, you’re very different in the approach versus a classic manufutures trend following approach that, I say it in layman’s terms of, if the market does this, if you didn’t come into the sell-off long stocks already, if bonds are not already on an uptrend, if it lasts weeks to months-long, the down move, then manage features should perform. By definition it’ll perform because it’s going to get into all those moves. And that’s what upsets investors of like, well, there’s way too many ifs, what Jason would call path dependency. You guys set out to take away a lot of those ifs. Is that true?

Jason Buck:

Yeah, there’re a couple ways to look at it like, you’re going to see those path dependencies show up in either the volatility markets in the VIX futures markets, you’re going to show up in options pricing, which is you know, a form of volatility trading as well. Or you’re going to see it show up and you know, draw downs in against SMP in the futures markets. But going back to your point is like, are you guys a, you know, it’s a combo of both. So we tried to use an ensemble of buckets for path dependencies. And then inside each bucket, we use an ensemble of managers inside each bucket, because what I really want to do is create a stronger signal that way. So this is kind of a debatable point. But I don’t necessarily believe in alpha. I only care about balancing out betas and then rebalancing those betas between them. So I want the different buckets of path dependencies. And then by having an ensemble of managers inside it, I can get the beta return of all ARB, the beta return of dynamic options trading, the beta return of short term down capture data, because I want to make sure I capture that data returned. Because idiosyncratically those managers might be all over the place. But the more of them I put inside that bucket, I might not get the highest return, but I’ll get I’ll get a an ensemble return, that’s a stronger signal. And that allows me to balance out those betas between those buckets. So that way, where we have the positions on for the different path dependencies.

Jeff Malec:

A classically trained market analysts head would explode to say there’s a volare beta, right, because there’s not an ETF for easy way to trade it. So what you’re just saying is you want the, as close as possible to that theoretical return stream that’s provided by that type of strategy.

Jason Buck:

So if I have five different volare managers and their returns are anywhere from six to 10%. You know, I want to hit that 8% sweet spot every time and then next year, the manager that returned 10, he might return six and when they turn six might return 10 and vice versa throughout the whole ensemble, but it makes sure I get a theoretical beta signal for that volare bucket. So I get a much stronger signal than taking those idiosyncratic signals of just one manager.

Jeff Malec:

And let’s dive into each of those buckets a little bit. So, the first, we were just talking about volare. What is volare?

Jason Buck:

I’m a stickler for definition. So always like the arbitrage definition bothers me because to me, arbitrage should be a riskless profit, right? You’re buying and selling two things at the same time and you’re taking the spread. That’s what we all know is arbitrage but everybody’s now expanded arbitrage into statistical arbitrage etc. So we use colloquially volatility arbitrage, but what they are really, is relative value trades. So basically, we have different managers that look at different things within the structure. So One will trade the VIX futures index versus the SMP futures index. And they will look and they’ll ratio that spread out based on their proprietary algorithms. But it’s basically a relative value trade between VIX and SMP.

Jeff Malec:

So there’ll be like short VIX, short s&p. And then the market goes down they’re making money on the short s&p part and they’re losing money on the short VIX part.

Jason Buck:

And then your ratio is where the alpha allegedly is, just use rough numbers. For every VIX contract, you’re going to need three SMP contracts to kind of ratio that out because VIX is like three times more volatile than the s&p. So that’s how they’re gonna try to relative value. So it’s just like any long-short portfolio for lack of a better term. It’s long for Microsoft short IBM, long Ford, short GM, whatever, you’re doing that in VIX and SMP because technically, VIX is a derivative of an SMP the options on SPM we get to multiple layers of derivatives, but

Jeff Malec:

I call it quad riveter.

Jason Buck:

I think I go five out. You go four out?

Jeff Malec:

I go four out. It’s a futures, which is a derivative on an index, which is a derivative of options prices which is a derivative of a stock index.

Jason Buck:

I just go back for the s&p index is a derivative of the actual company and then the company’s stock certificate is a derivative of the actual company underneath. So anyway we have managed the trade the relative value spread between vixen SMP and then we have managers that will trade the calendar spread on just fixed alone. So you can go let’s say short front month, VIX and long back month fix like three, four months out and try to ratio that spread out as well. And that allows you a much cleaner relative value trade, because it’s least all on the VIX products. So you’re not counting on the correlations between VIX and SMP. You’re just working on the VIX term structure and how that relates from front month to back month.

Jeff Malec:

And the VIX term structure means the curve of the futures prices if you futures obviously have many months, so if I plot the VIX futures, the March future is going to be at whatever, 16. The April future, May or March, April. The April future might be at 16 and a half. The June future at 18. So I plot that on a graph and it naturally kind of slopes upwards. Because people don’t know what’s going to happen in six months. They think they know better what’s going to happen next month. So that uncertainty out into the future is reflected in higher VIX prices and that curve and they’ll typically buy the front month sell the back month because if there’s a an event, the front month, you know the event just have now the front month is going to spike a lot higher.

Jason Buck:

Exactly. And just to give us everything we like to use words like contango for the slope of that curve.

Jeff Malec:

Yes. And when it flips, when there is a spike, it quickly flips into backwardation. So, we’ve had on our podcast a few of these managers you’ve had on the Mutiny podcast. Want to share a few of the managers in that volar bucket that you’ve been looking at?

Jason Buck:

Sure. So when we’re talking about the VIX vs SMP trade. For that part of the bucket, we use Pro Capital out of San Francisco. And then for the actual VIX calendar spreads, we’re using Principalium out of Switzerland. And also, we use deep yield out of Switzerland as well for that bucket.

Jeff Malec:

Great. And then there’s some others, Certeza, and some others that are on the list down the line?

Jason Buck:

Yeah, we have. We’re constantly via you know, our work with you guys. We’re constantly on the lookout for new managers or following managers assessing their track record, seeing how they would fit into our ensemble. Are they additive? Or are they just kind of similar to another manager? So we always have ones in the wings that I think we can add in the future. It’s always an issue of regulations and AUM.

Jeff Malec:

And what are your thoughts on like the law of diminishing returns?

Jason Buck:
That’s why we try to follow, track, assess, talk to the managers, look at them over time, stress test them. Because if they are just gonna add that signal, it’s still actually not necessarily a terrible thing for law of diminishing returns if they are very similar to another manager. I mean, you really don’t want to go beyond eight. I mean, that’s really the sweet spot. But a lot of them surprisingly, even though they trade very similar products and similar styles, their proprietary algos are gonna be different enough. Well, they’ll have different return streams over the month. They might equalize over a year or business cycle. But if they’re slightly uncorrelated, you know, month to month, quarter to quarter, that gives us a better way to rebounds between them and get a stronger signal and a better theoretical beta return I’m talking about.

Jeff Malec:
And a little, you believe, a little rebalancing premiums. And we’re talking they could still be like point seven five correlated or something, there’s still going to be slight differences that go hand out. So that’s the volare bucket. The next is the options bugging?

Jason Buck:

Dynamic options. So for for our straddles bucket. So the other thing I forgot to mention is when we talk about our dynamic options, we wanted that to be the bulk of our portfolio because to steal or phrase, we view as debit card investing. If we’re only buying options, we know exactly what we can lose that it’s a death by 1000 cuts, we know exactly where the losses are. And the gains are asymmetric and unknown. And that’s how we view life as both Taylor and I alluded to at the beginning, is we have a mutual love of antifragility of asymmetric payouts, and you know, trying to go after unknown upsides and downsides.

Jeff Malec:

Before you go there, I got to expand. So you stole that from somebody? Debit card investment?

Jason Buck:
Yeah. from Nancy Davis.

Jeff Malec:

Ah, all right. Because, but the other side of that doesn’t get talked about enough like that. The flip side of that is credit card investing. Which dive into that. So credit card investing, you’re basically borrowing risk from tomorrow. Instead of credit card borrowing against yourself out into the future. You’re borrowing risk for tomorrow for something today? So you’re saying debit card investing? No, I’m taking away that risk. I’m only buying what I can afford, I’m not borrowing.

Jason Buck:

And then I have an asymmetric unknown asymmetric payoff. I just don’t know if the credit card’s the perfect technology. I’m trying to find one for the flip side of the debit card investing.

Taylor Pearson:

Why was that? I mean, that’s what kicked off the Great Depression, right? It was the portfolio that people had like highly margin stock portfolios, you could take out these huge margin loans and, and load up on stocks and then that whole collapse.

Jeff Malec:

At the quite clear opposite of a debit card is the creditor

Jason Buck:

I’m just thinking about where we take small known losses for an asymmetric payout, you know, is a credit card, small known gains for an asymmetric loss. I guess you could say with default that it’s the credit card companies that are taking, they’re taking that 22% big and small known gain, it’s the cost of the credit card company versus the investor side.

Jeff Malec:

Well, you I think that the consumer is taking small gains in terms of like, I just got my Starbucks and I have a new TV and I got this thing. They’re taking these small things in order for some big potential loss in the future of like, “Hey, crap, I can’t pay for all this stuff. I gotta go bankrupt.”

Jason Buck:

Or I look at it from the credit card issuer side. Yeah, they’re getting that 22% Vig, which just looks like every month they’re making their 2% roughly and then when somebody defaults, you lose 100%.

Jeff Malec:

But they only need five people at 22 to make it.

Jason Buck:
Exactly, so anyway, so the dynamic options, for so like I said, only buying options, primarily on SMP. And for the straddle portion, we use Wayne Hamilton Ontological Capital in LA. And Wayne is buying straddles on the s&p 500. If he can’t find cheap convexity there, he’ll toggle his exposure into proxies, whether it’s gold fixing etc. And what’s really interesting about what Wayne does, not give away too much, what he does, is he’s able to constantly have the straddles on which for most people, if you constantly had to strangle straddles on as you would assume you’d bleed to death, but what Wayne is constantly doing is he’s toggling the position sizing and Gamma Scalping the position. So that helps negate a lot of his bleed. And he still always has that position on, so in case you had some sort of exogenous event, he’s in the market. On the strangle side.

Jeff Malec:

Before you go there. Let’s Explain what Gamma Scalping is.

Jason Buck:

So as a position moves away from the underlying, your options are going to reprice. So then you can toggle your position sizing to gamma. So gamma is a function of Vega. So as Vega, the volatility of the underlying moves, the gamma on the front month contracts are going to convexialy or nonlinearly expand. So that gives Wayne a way to retoggle his position and scalp some of those profits from those moves, and reestablishes a straddle. So it’s a way of kind of scalping the market. The best way I think, to look at Gamma Scalping is you’re actually, if you do it, right, you’re negating your theta. So you’re gonna have your time lead data being time decay, so part of your option pricing when we’re talking all these Greeks, is you know, you’re gonna have your theta your time decay bleed. So the way you can make up there that is through Gamma Scalping, so a good gamma scalper is only going to negate there theta, you’re never going to really make profit necessarily with Gamma Scalping. But you can negate that theta, which then, that is the sword of Damocles over any sort of straddle or strangle position or buying options.

Jeff Malec:
You need to be short the option in order to gamma scalp? But these are your long option.

Jason Buck:
No, you can do long option and maybe, toggle some futures or if you toggle your option position and maybe you’re at the money and moving a little bit out of the money and it depends on your ratio of puts and calls you have. So he’s adjusting his ratio puts in calls. And based on what the market’s giving them for pricing. So he’s searching for cheaper convexity still all the time.

Jeff Malec:
And we should have defined beforehand, that a strangle you’re basically buying puts and calls at the money either side of the market. So we thinking that the market is going to break out one way or the other.

Jason Buck:
So if, let’s just say for rough terms, if SMP is at 100, you’re buying a call that says the market is gonna go up from there at $100. And at the same time you’re buying a put that says the markets gonna go down from there at $100. Let’s say you pay $1 for each of those options. So you have $2 in, which means the market needs to move more than $2 in any direction before you’re in the money on your p&l.

Jeff Malec:

Like 102 or 98. And so you’re betting your, which is a long ball process, you’re betting against, you’re hoping volatility expands and it goes down. If the market stays the same, volatility is going to come down and those lose their value.

Jason Buck:

And they lose the value because of time decay, because the theta. And so Wayne is doing his best to negate that theta decay through Gamma Scalping the position on a daily basis. And then so that’s the straddle position. And so using the same analogy, if s&p is at 100, a strangle would be when you go out of the money. So if the s&p is at 100, you buy a call starting at 110. And you buy a put starting at 90. So you need the market to move below 90 or above 110 for you to make money but the cost is a lot less than being, you know, at the money. So let’s say at the money, you’re paying just rough numbers, you’re paying a premium, like we said for either side $1 each. Once you’re out of the money that might be 10 cents each, but you need the market to move much more, but it’s costing you a lot less. And for that strangle position, we use Chris Cole and Artemis out of Austin, Texas.

Jeff Malec:
And I classic, I think of the strangle more from the short side of selling the strangle, and you’re kind of strangling the volatility like you want it to stay in that same range, right? But for if someone’s selling a strangle, there’s someone who has to be buying it.

Jason Buck:

And the both parts of, both the straddle and strangle, especially the strangle, especially when you’re buying a strangle is, you know, 80 to 90% of the time you’re gonna look like an idiot. That guy’s telling you that strangles is just cashing checks, right? He’s got that like, we talked about that income, he’s making return after return after return. And then you know, one in 10 year event comes along and he loses everything. It’s the turkey problem as Nassim Taleb references. And so it goes, it boils back to the philosophically, this is exactly where Taylor and I want to be. We want to be buying as much options as possible. That’s why the dynamic options make up the bulk of our portfolio. We use the other buckets around the periphery to just help manage the bleed. But at the end of the day, we want those convex asymmetric bets to pay out any risk off scenario. And we only want to be buying options as much as possible.

Jeff Malec:
So talk to that a little bit, because it would seem if you’re building this in your garage, you would not need the upside, you wouldn’t need the calls. You only need the putts.

Jason Buck:
Correct, except for a melt-up can be just as disastrous for a lot of people as well.

Jeff Malec:

How so?

Jason Buck:

Well, because as the market melts up, you’re increasing your risk. Because you’re building as Hyman Minsky was saying an air pocket underneath those profits. And just as much as you know, as we’re talking about option pricing, you know, in the different Greeks, the primary input option prices is implied volatility. And as markets become more volatile, and IV expands, both the price of puts in calls will expand and you can make money even on both sides of the trade.

Jeff Malec:
Right and so they’re using them, a bit as a financing tool for the other side as well.

Jason Buck:
In a way. And so what it also allows them to do is in these risk on times that we’ve been on, if you have a pop up in the markets, they’re actually able to make a little bit of money there by having those calls on the books.

Jeff Malec:
Which will help finance and reduce the bleed over time.

Jason Buck:
Right. And then there’s market dynamics to then which creates put skew is most people want to buy insurance. So that creates those puts are a little more expensive. And right now calls are very cheap. So you’re getting really cheap convexity. And I know you like to argue this. There’s no such thing as cheap convexity. And I agree, but like, for lack of a better term, those calls are very cheap.

Jeff Malec:
And from my standpoint it’s reflecting the probability that it’ll happen no matter what, what the price is. That’s what the market is setting the probability of the event happening at, so it’s neither cheap nor expensive. It is. But that’s my philosophy background coming through. So that’s the dynamic options bucket and the third bucket?

Jason Buck:
The third bucket, we called short term bond capture is just trading short the s&p market and for just short SMP intraday we use 3D Capital Eric Dougan out of Chicago and his bones are made on just using his proprietary algos to research the world markets and different commodities currencies indices and he uses that information to then short the s&p 500 futures when he thinks that the markets about to go down and and that’s what he does incredibly well. Along those lines. We use Deerfield once again from Switzerland, and they do something very similar intraday on trying to follow those markets down. But they made use of the Asian, European and US markets. So like in 1987. During the flash crash, you saw the cascade across world markets over 24 hour period.

Jeff Malec:
Not the flash crash, the Black Monday.

Jason Buck:
Yeah, Black Monday, sorry there you go. Yeah, well, technically, it would have been enough.

Jeff Malec:
It was before we were all humanly smart enough to come up with Flash Crash.

Jason Buck:
So on Black Monday, that relay race happened around the world so they would trade intraday and follow those markets around the world. The reason we really like, are the short term down capture with the futures is because the Delta one nature of the futures, meaning it’s just a directional call. So what happens is in that like first leg down, when, you know, markets start to crash, and we have all those options on the books, they start to pay out handsomely. The problem is when we go to reset those options, the implied volatility is expanded. So now those options are very expensive, for lack of a better term. So we’re paying up for the fear in the markets. But the Delta one nature of the futures is we can just bet short, the s&p 500. And we don’t have to pay up for that fear. That’s part of the dynamics in the option markets, which obviously leads me to another idea that we have around the philosophy of our ensemble portfolio, is by having these different buckets. We have very different micro structures to the markets that we invest in. So the VIX is an entirely different market than like the SMP or the options market or you know, so the VIX is going to have different structures around those traders. When you’re just buying options, just the Greeks have options lead to, you know, combat payouts and theta bleeds and etc. So that’s a different microstructure. When you just go short intraday the futures, it’s, as we said, it’s Delta one, you’re not paying up for that fear after the first or second leg down when fear is rampant in the markets. So I like the bucket structure because it like, it allows us to almost trade different micro structures, different styles, different managers. So it’s almost a three forms of ensembles, in a way. To me, it’s like you have managers ensembles, you have a bucket ensemble, and you have different microstructure of market ensembles.

Jeff Malec:

I like that and I want to come back to the short term down capture, it seems like that’s the most non-structural, to use a vague term, of the trades, you have there like, Volars, kind of structurally that’s going to work, the option structurally when it goes to the downside capture they just pure have to be right there call that the market is directionally right. So it seems a little counter-thesis to the rest of it of it’s a structural play. You’re saying you need it because sometimes those other pieces aren’t going to catch them.

Jason Buck:
As Taylor alluded to, part of creating this ensemble came out of the idea of, you know, when we were both initially looking for managers to invest in, we were maybe looking at like one manager, right, and every manager has their own idiosyncratic risk. And so what we found through you guys, and through going to conferences, and meeting with all these managers. We say, look, we all go for upside, we know you have upside, tell us where you get hurt. And so then we find out where they can get hurt. And then we go out and seek managers or other buckets that can cover the positions where they get hurt. Now, that leads to a lot of overlap and a lot of redundancy, which probably reduces a return. But we care more about the downside risk than the upside risk. The upside will take care of itself, we’re concerned about managing the downside. And so that’s why you have these overlapping natures and that’s why you need those. So for example, like I was alluding to the short term down capture in the futures, those are great after that first or second, like down move, if the s&p just rips off 10, 20, 30% down, like we said, we go to roll those option positions, they’re going to be prohibitively expensive. But those short futures are directional play, we don’t have to pay up for them.

Jeff Malec:
And, Taylor, I love what you guys are doing from that standpoint of a lot of strategies are just focused on this one narrow thing you’re saying. And a lot of time and effort went into that of like, how do I identify each of these different paths that a down move could take? And how do I get exposure to those? So what drove that kind of thinking of, I need to be more than just this one-trick pony.

Taylor Pearson:
So I think coming back to the original, Jason and I started talking about this. And then I think this has kind of been his hobbyhorse that he’s been building on for a long time, right. Is how do you find something you know, the ideal again, the theoretical ideal is we want something that’s negatively correlated to equity markets in a risk-off environment right. When the equity markets are crashing, you want something that’s going up, but you want something that either uncorrelated or slightly correlated with equity markets and sort of the risk on time. And so the idea of these different buckets as well, you know, historically, and obviously, you know, we don’t have correlations all into the future, but historically, these different buckets have not been correlated with each other. And so if you can have these different buckets and rebalance between them, and risk on times, you’re able to use that to effectively, you know, offset your bleed, you know, offset the cost of carrying the long volatility positions in good years. And so you’re trying to construct that return profile where you’re flattened most of the time, but you still have that convexity position on for when you need it.

Jeff Malec:

And it seems like you’re almost assuming one or more of the buckets is going to break, or not hold water and, so right I need more buckets.

Jason Buck:
To put it yet simply for you is, it’s this simple. If we’re out here pitching this like Black Swan idea and we’re saying we can cover you in a market crisis. And allegedly the, you know, they’re few and far between, like, let’s say a black swan event allegedly happens once every 10 years. And we’ve been harboring your investments and your savings for like seven years, and then that event happens. And we miss it. We’re a bunch of assholes, right, like, so it’s like, we have to have all these path dependencies.

Jeff Malec:
That’s what I wanted to get to. It’s more about self-preservation and looking yourself in the mirror. And as you’re putting the bulk of your own money in nice to have, like, I want to be protected, no matter the way it unfolds.

Jason Buck:
Right. And I hope that came across as like, this is entirely structured on Taylor and I scratching our own itch is exactly we’re doing this with our own portfolios, our own family’s money, like,

Jeff Malec:
You should have a doctor look at that.

Jason Buck:
Yeah, exactly. They are at the edge. It’s unfortunate for me, I scratch way too much. It’s, uh, but that’s all we’re trying to do is how do we preserve our wealth over you know, hopefully, we live a long time. And we want to be able to be there throughout the market cycles, and we want our savings outpace inflation.

Jeff Malec:
And that comes back to what I was saying earlier, the investors I’m telling, you and they’re getting fed up with the kind of we were saying, I’ve been helding this thing for this whole time and now it’s a little shallow because they’re like and then this one month lost 5% in the stocks, while you were up 86% before that, so relax. But the point being they’re getting they’re feeling this of like, I’m doing this thing for this reason, then it doesn’t do what I think it’s going to do. And you can tell them all you want that, well, you’re thinking wrong about it, but but at the end of the day, it’s it’s their money, it’s your money. And you’re like, no, this is how I’m thinking about it. And this is what I want it to do when that happens.

Jason Buck:
Yeah. And like you said, we’re laying all our own personal fears. That’s the whole bucket ensemble, the manager ensemble, the microstructure ensemble, it’s all because Taylor and I don’t want to lose money, we don’t lose our own money. So that’s the whole point. And we don’t, we are not smart enough to predict the future. So we’re just trying to dumbly cover as many pet dependencies as possible.

Jeff Malec:
I would say you’re not dumb enough to predict the future. Exactly. And I kind of think of it. Jason, you and I both grew up in Florida. It’s like buying hurricane insurance. But instead of, you know, not to protect anything, but just to make money, but you’re gonna buy it in Florida, Georgia. Georgia and South Carolina. So instead of just owning one state, and then inside Florida, you’re gonna have Miami, Palm Beach, Coco, whatever, you’re gonna have many cities inside of going to many cities. So you’re, you know, buying that insurance and you’re buying it in many cities in each bucket in each state.

Jason Buck:

You will actually cover your analogy, as you know, so many times, how many times have you been watching the hurricane forecast watching it? Watch it, watch it, it’s like, it’s gonna direct hit like Charleston. So you’re like in Charleston, you’re like, directly, it’s three days out. And then it takes a turn, and goes up the coast and hits North Carolina. So to your point yet, you’d want to buy everything in South Carolina and everything North Carolina.

Jeff Malec:
And to take that analogy further. Yeah. So your guys look is like, hey, there’s the cone of uncertainty of how this actually this down move is going to happen. I want to be at all points on that cone of uncertainty. And then the fourth bucket, which is if something if it goes totally outside of the cone on uncertainty and none of our brilliant manager picks and strategies and everything if they all with you know Charlie Brown, the long ball football, right? What’s the fourth bucket? How does that fit in?

Jason Buck:
So as you pointed out to limit some of the bleed, the managers might be in and out of the markets trying to limit their position sizing. And so we added back that that ruling puts. And so what we mean by that is what we did is, you know, when you constantly have those puts on, you’re obviously just paying up for insurance, so it’s always going to be just a pure bleed. But the way we try to manage some of that is we created an ensemble approach even to our rolling puts. So we have from anywhere from a negative 15% attachment point to a negative 25% attachment point and the attachment point we just means from from the market structure, unit now say from us 100. Again, if it goes down, you know, $15 all the way to $25. We use a blended approach to try to create an attachment point of negative $20. So a negative 20% attachment point. And we use a Hari Krishna out of Doherty advisors to manage that portfolio. So we actually have even though it’s almost like passively having the puts on we even have an active manager managing an ensemble of different attachment points to try to limit That bleed as well. But we want that, that those rolling puts permanently on and a permanent attachment point and negative 20%. Because like, as Jeff alluded to, let’s say on, on a Sunday, some sort of terrorist event or something like that happens, and somehow our other managers aren’t in there, we always have those rolling puts on, and they’ll always pay off as soon as markets reopen.

Jeff Malec:

And the downside of that is that it’s costing you two to 4% a
year.

Jason Buck:

Depending on where the market’s at. And then in options, risings are like, we’re at like two to 3% a year right now. And so that’s a bleed. But we felt we wanted to once again because it’s Taylor, nice money. One, we want that protection there. And two, we feel with the ensemble approach in our other three buckets, we’re able to generate enough returns where we’re happy to eat that bleed on those puts. And other people just can’t eat that bleed. They’re unwilling to eat the bleed. So it’s all about

Jeff Malec:
There’s tons of institutional money that eats that bleed all day long, which is the whole premise. The whole reason there’s short volatility managers is they’re just gonna sell that insurance all day long. And that’s why the put skew exists and everything. Let’s switch gears a little. Taylor, what’s your
ideal investor look like? You’ve talked a little bit about this kind of entrepreneurial call option or stuff like that. What’s the ideal investor look like for you guys?

Taylor Pearson:

Yes, I think, you know, the people we’ve talked to so far that are kind of interested. I think one is sort of like retirees strictly like recent retirees, they’re like, you know, people would classically do like a bond tent or something like that, where, you know, you’re 70, and you just retire, and you want to be very conservative for the next, you know, five or 10 years or whatever. So I think I think that’s one segment, I think probably the biggest segment is small business owners, startup people, that sort of world where they have a lot of, you know, short vol exposure through their careers. And I think often those, as Jason was saying, I think we, we both had sort of entrepreneurial backgrounds and to think about risk, you know, in a different way as a result of that. And so, you know, people that have, you know, that sort of mindset seem to sort of understand seems to be more intuitive than they think, you know, they don’t think about risk in terms of volatility, but risk in terms of, you know, drawdown and whatnot. And I don’t care if my revenues up, plus or minus 20%, you know, this month first next month necessarily, like what I care is like, is the business gonna go bankrupt? And so I think that’s, that’s the other big segment. And I think, you know, sort of as a part of that, you mentioned, you know, the kind of person that you know, be great in 2009, 2010, 2011. If you were flush with a lot of cash, right, there was a lot of, there’s a lot of options to go out and buy you know, buy real estate, buy stocks buy a lot of assets that were for sale. If you know, you could get up and pay cash and Jason was telling a story about someone in a position like that, that just went out to the Hamptons and offered 50 cents on the dollar for every house they could find in the Hamptons, and you know, they ended up buying like four of them right? Because at that time, there were some people that just had to have that liquidity.

Jeff Malec:

Quick side story. My fraternity brother in college, he was a Polish, which led into a good Polish joke, and he would self tell it so I don’t feel bad, but he’s, like his grandparents had emigrated. They came over there in New York. They couldn’t grow potatoes on their land. They’re like, whatever, a miles worth of land in the sand. Might have been great grandparents, but they couldn’t grow it in the sand. So they laughed and moved to like Western New York from what is now the Hamptons. He’s like yeah, my great grandparents own two miles of real estate on what is now the Hamptons. But yeah, I appreciate it. I feel like nobody else is looking at it that way which is great because you want to buy when there’s blood in the streets and what are the options hold cash for during 180% SMP run, like waiting for the downturn, so you can buy all this real estate.

Taylor Pearson:

And I think I know a lot of small business owners to do that, you know, people that have sold, you know, sold their business in the last three, four years. And yeah, they’re just doing they get a bank account, a savings account, and they’re just sitting on the cast because they want to be in that sort of positions or anything, you know, the idea here is,

Jeff Malec:
Which is the client like Warren Buffett, we’re sitting here, right? He’d be like, no, I always want to have 30% cash or whatever he has, for that reason, for when there’s a value that I see so I can buy it.

Jason Buck:
As Taylor’s like, coin does, like this entrepreneurial put option. Like we’re like a convex cash position in a way. And I think that’s, it’s fascinating from our backgrounds that I’d probably think about all the time is like an entrepreneur, you can’t help yourself, you have an idea, and you drive it to fruition. And the overall macro environment has nothing to do with that idea. So it can be really unfortunate when you’re in the middle of your entrepreneurial journey in this business that you can’t get out of your head, that then the macro forces of the markets in the world, all sudden, liquidity dries up and it tanks. Well, if we have this entrepreneurial put option where you’re driving your idiosyncratic risk with your business. And then you’re investing your savings in Mutiny Fund. And also in that crash happens, your businesses is okay, not only that, you’re sitting on this huge cash position, you can go out there and buy up all your competitors, or buy up their assets for pennies on the dollar. It doesn’t have to just be real estate, you know, it can be anything, you know, that’s it. You can buy up everybody in your industry.

Jeff Malec:
Right Or buy a factory, buy whatever, buy new equipment.

Jason Buck:
Or that cash allows your business to survive until the market, you know, takes a turn, but you know, the recession clears and you’re able to, you know, it provides longevity in your business. So that’s why we view it as like this was created for entrepreneur, you know, by entrepreneurs for entrepreneurs. Primarily. You know, hopefully, we’re a broad swath of audience but we really like to help out entrepreneurs because that’s the world we come from.

Jeff Malec:
And a lot of the people you’ve run across Taylor, are, it seems kind of hesitant market participants we talked before about the most hated rally ever and there’s a lot of people who made a lot of money in crypto and other entrepreneurial things who are just in cash unsure how to access the stock market. Or if they even want to access the subway.

Taylor Pearson:
I think some of you know, they look at the stock market and they don’t understand this doesn’t make sense. It’s like I don’t know what’s going on. Like, what I do know is you know, I just sold my you know, software business for five or $10 million overnight. Understand how that business works. And so like, I’m gonna sit around and wait until I can get back into that business.

Jeff Malec:

Right. But I don’t understand how Tesla is worth more than GM and Ford combined.

Taylor Pearson:

Right. So I think that’s, you know, Mark Cuban has his, you know, I have mixed feelings on Mark Cuban but has several coverages like Worchester. Right, which I think he tends to see on a lot of cash as well, right? He’s looking for, you know, when is there some opportunity that I have that I have some sort of credible edge on enough whatever you sold a software company telling there’s whatever that space was, you’re in the cybersecurity software space, like there’s, there’s a credible edge there, right, you understand that space works better than someone else. And if you’re in a position to go acquire a company to go buy a stake in the company or something and it’s sort of that scenario where liquidity dries up like yeah, that’s a really strong position to be in.

Jeff Malec:

And is it. Your theory is that all of these entrepreneurs are short volatility, they’re basically long the stock market, whether they actually are long the stock market at all like that. The stock market crash will crash the economy, there’ll be a recession there’ll be tightening of credit like all these things that’ll affect the entrepreneur, even if he doesn’t own a share of Apple or Amazon or whatever.

Taylor Pearson:
Yeah, I think our general thinking is that most people are more short vol than they realize right you’ve got you know, do what you say you run a small business like mega small business don’t tend to be as cyclical as the stock market, but they’re still cyclical, you own a house and you know that that’s going to be tied to the overall economy. You know, your clients can dry up whatever that looks like. And so having as Jason was saying, you know, you’re, you’re good at building software companies, cybersecurity space or something, like a way to hedge out for that macro risk, like you don’t know what the Fed is going to do and you know, are waiting on whatever is gonna happen in the stock market next month, so some way to hedge that risk and just focus on what it is that you’re really good at.

Jason Buck:
Jeff, do you think it’s too much of a stretch like we’re talking about like the overall market risk and like you said, you might not be in stocks, but you’re correlated with the market more than you realize. And that’s because we can maybe simplify to look at as more as liquidity during risk on liquidity as a wash, and everybody can buy your products, you can get loans for your business, you can do all those things. As soon as the market tanks liquidity dries up, and all those loans called in, and that’s where you’re tied to the markets because the markets are more a function of liquidity during risk on, there’s plenty of liquidity and everybody’s happy during risk on liquidity dries up. And that’s when we have problems.

Jeff Malec:
That’s 100%. And then you can compound that if you’re in a lot of these quote-unquote, air quote, alternative investments that are hedge funds that use leveraged that borrow money. So not only is the small investor and everyone at risk from a capital, tightening, the alternative investments that you may be diversifying in to protect yourself from that liquidity crisis needs liquidity in order to protect you from the liquidity crisis. So it’s kind of, can be a double-edged sword for a lot of these alternative investments out there.

Jason Buck:
And that’s why. Because it’s our money too, we only want to be in the futures and options market because of the cash settlement. So we have that so we know the cash can be there but even better is by buying those options. When somebody yells fire in a crowded theater and everybody’s rushing through that door, and they’re desperate for like, put options against you sitting on the inventory. That’s us and we’re there to rip your face off on that spread.

Jeff Malec:
No offense. And, yeah, and the real estate, to bring it back full, so like real estate, especially you. Okay, even if you were sitting on that cash, like and you wanted to buy 10 extra K, like you’re gonna have trouble getting those loans and doing right doing what you need to do at the depths of a crisis. Cash is incredibly king in that scenario.

Jason Buck:
And I’d like not to go off intangible would be incredibly brilliant as you use that cash to buy up everything you can cash for pennies on the dollar. You wait for the market to turn back around in however many years it takes, and then you repackage the loans and draw your money back out. That’s all. It’s that simple.

Jeff Malec:
Just quickly, which we hope to get him on the pod one day, but Don Wilson, a prop trader in Chicago who’s done very well was famous and away from butting just this. He was prop trading, made a ton of money as the markets took down, and he was buying hotels in Aspen, whole blocks in Chicago and then as the opportunities in the prop trading kind of slowed down he was right there and had all these real estate assets.

Jason Buck:
And cash is not cash, right? Cash right now is very different than cash in ’08. All of a sudden the value of cash is completely different in the crisis.

Jeff Malec:

And what if you have cash in Germany right now? It’s not only different, you’re paying somebody else to hold it. What we’re you going to say Taylor?

Taylor Pearson:

I guess one way I think about to turn back to the entrepreneurial put option, usually the best investment you can make is in yourself, right? You know, I’m going to go take a weekend seminar on you know, how to do AdWords or whatever, and that could pay off 100 X to one, you know, I pay $1,000 and I could learn to do AdWords for my business and make 100 times that money. And so being in a position to be able to do that investment in yourself, whatever your particular skill set is, your background. And to have that liquidity when no one else does. It’s a nice combination.

Jeff Malec:
Let’s pivot for a second. Jason, hope you don’t take this the wrong way. But you love to use some good $10 words from time to time in our portfolio construction debates. Now I even got you a nice Christmas present with highly or good or Gothic on it. Take me through some of these fancy words you like and what they mean for you in terms of the portfolio construction.

Jason Buck:

I’m gonna pass the actual definitions of words that Taylor, but I’m gonna defend myself for a second. The words actually what I found is they come from a function of being reading too much. And so your vocabulary accidentally increases from reading too much. And maybe because I’m a college dropout, I have an insecurity. So I always read too much like we’re talking about the other night before podcasts and YouTube, I used to average like 100 books a year. And I think it’s just a natural function of reading too much. I’ve noticed if I slow down my reading or like, or if I haven’t been reading for a while, my vocabulary falls off a cliff. And then as soon as I’m reading these words, just come into your head, and it’s just from reading.

Jeff Malec:

And you’re reading like, thick, heavy stuff?

Jason Buck:
Yeah, I read ridiculous stuff. I have no problem. But there was a quote once I loved, that was something like, he mispronounced the $10 words, like somebody who is a reader that grew up in a family that didn’t read. So I’m able to read the words and I know how they’re spelled. But I wouldn’t be surprised if I mispronounce them all the time because I haven’t heard them in real life. But as far as like Ergodicity and everything. Taylor’s going to feel the definition but, and for the people out there that’s, it’s a concept they’re trying to wrap their heads around. I’ll be honest, it took me really almost probably a year to really grok in my bones, what those concepts really meant and how to really apply them to your life.

Taylor Pearson:
So, ergodicity, as I understand it, is the difference between a time average and an ensemble average. So the example is if you take 100 people, and you give them each $100, and they go into a casino and let’s say they’re counting cards, they’re playing blackjack, and they have an edge. On average, let’s say, you know, wherever their edges, they’re gonna win $50, of course, that day, so on average, the average person is going to walk out of there with 150 bucks. And so that’s great, right? Like this is I should keep doing this I can, I can play this game forever. However, if you have one person, they start with $100 and they go in 100 days in a row unless you say they’re, you know, they’re taking all their winnings back or not gonna take anything off the table. If in the ensemble, the hundred people, let’s say one of those people went bust right, one of them got unlucky, even though they had an edge, right? You can still have a bad run of luck. If you have one person that’s doing that over 100 days, and they go bust on day 27 there is no day 28 right? You blew it up. And so that’s, that’s a nonergodic scenario. The time average and the ensemble average are not the same. And so that’s the reality of most of life, right? Like I don’t care that on average an investor makes XYZ in this strategy. What I care about is like how I do, I care about what my portfolio

Jeff Malec:
Kind of back to the like, you can drown in a river that’s on average three feet deep.

Taylor Pearson:
Because if the middle channel’s 20 degrees or 20 feet deep and superfast, you know, it’ll suck you in.

Jeff Malec:
I always explained it as we’re all in our office in Chicago near the Sears Tower. No, we’re not going to call the Wilson tower, Sears Tower. And we say, “All right, we’re all 10 of us walking over to the beam, which is our sculpture there by the lake. I’ll take different paths. If we all do get there at the same time. It’s got it right. If one guy gets there an hour ahead of the last guy, it’s non-ergodic, and the paths mattered very greatly.

Jason Buck:
The other way, like the vivid one is the Russian Roulette example. Do you want to be one of six people pulling the trigger? You’ve been the one guy that pulls the trigger six times. In historically, I think people call the sequencing risk. So throughout your lifetime, as you near retirement, you have sequencing risk, you can’t handle a drawdown when you’re 70 and a half and starting to have forced withdrawals out of your retirement funds. If you hit a drawdown at that period. You’re as you’re doing withdrawals, you’re now exponentially compounding your drawdown.

Jeff Malec:
Those people had to pay for college starting in a way, who just lost 50% of the college savings.

Jason Buck:
Once again, that sequencing risk means that time, your time and your lifespan is not lining up with the ensemble average returns over decades.

Jeff Malec:

And so the whole kinds of you’re trying to solve with Mutiny is to make sure those, no matter the path, no matter the timing, that it’s gonna work out for the investor.

Taylor Pearson:
I think it’s part of like the way a lot of finance work is it’s this, you know, based on this idea of like expected value, right? Like, that’s how I’m gonna make those when I’m gonna do my discounted cash flow of all these things and say this one has the, you know, the highest expected value. But even that ignores like what again, what the drawdown is. This might have a very high expected value, but it could have a 90% drawdown and like when that happens, you may also like I need that money to pay for your spouse’s surgery or your parents whatever, or your kids’ college or whatever. And so that sequencing risk and you know, volatility tends to cluster and happen at the same time is part of what we’re trying to solve for.

Jeff Malec:
So give me a couple of the other ones you like to use. I can pull them off our text string.

Jason Buck:
I’m trying to think because it’s not something I think about. They just come out. Yeah, yeah, they come out when they do. Yeah, we love obviously, ergodics because, one you make fun of us a lot for. From our fund that you made fun of is ataraxia which is you know in stoic philosophy is unperturbed by external events. You’re glad we went with Mutiny Fund instead of ataraxia. Luckily the ladies in both of our lives nixed that one but

Jeff Malec:

It didn’t quite fit, you’d be rewarded for, not unperturbed reward.

Justin Buck:

It’s like we think of it as like sleep at night portfolio. That’s what we are like, we want to know when we go to bed at night, and our savings are sitting there. If we wake up to any sort of traumatic or unexpected news on you know, in the morning news channel that we know we’re good.

Jeff Malec:

So let’s talk a little bit. It doesn’t quite matter for how you put the portfolio together. But what are your thoughts on where the markets are at and what are some of the dangers are out there? And if you want to say that it’s all bs narrative, who cares?

Taylor Pearson:

Oh, it’s the J.P. Morgan quote, I predict the market will fluctuate. That’s my prediction.

Jason Buck:
This actually goes back to why you and you’re asking me why I don’t watch sports. And one of the reasons is I can’t stand pundants I can’t stand people, you know what this guy needs to do? I can’t believe he missed that shot. Like that’s a no Brit. Like, that was a gimme.

Jeff Malec:

It’s like, so you’ve got a Stephen A Smith poster.

Jason Buck:
Yeah, if you were that good like you’d be on the field, like, you know what I’m saying like.

Jeff Malec:

Well, some of them were on the field.

Jason Buck:
Even if they were, the newer guys are 10 times better athletes. And so I don’t even care like it’s still irrelevant, your relic. And so part of that is like putting the gold punditry is is in predicting the future is impossible, so why bother? And that’s the whole point of our portfolio. If you combine short volatility and long volatility assets, you never need to look at your portfolio again. Full stop. Full stop, and I want to go back to a time, like pre what is pre 1980? Maybe when you had your savings that you never thought about. Now people are looking at their smartphone 20 times a day check the Robin Hood account, how is that helping you? I want people to go back to running their business doing what they’re great at spending time with their family, enjoying their hobbies, and forget about your savings and retirement. If you have long volatility and short volatility, you can sleep at night and forget about that and go about living your life. And trying to predict the future and have a narrative fallacy about the future is entirely pointless. And like, yeah, I could predict all sorts of stupid ideas for the future. But who cares if they come true or not?

Jeff Malec:
Do you think the US will go negative interest rates?

Jason Buck:

I have no idea. I couldn’t care less.

Jeff Malec:

But I do appreciate about that what you guys are doing. It’s not just a money making, we want to build this business and make money for ourselves. It’s kind of maybe it’s because you are from California. Now you kind of have this philosophical need to live a good life. What did you call, you had one of your $10 words for that at some point. But you have this desire to, like be true to yourself intellectually true and live this good life and say, “Hey, I don’t want to worry about this stuff. So that’s why I’m creating this thing.”

Jason Buck:
I’m waiting for Taylor to chime in right now because I know he’s like, cuz like, that’s, that’s usually the huckster that’s trying to sell you false goods, right? It’s like I’m doing this for like. We’re not doing this for the money. We’re doing this because we’re good people.

Taylor Pearson:

No, that’s where the skin in the game comes in. If I had to sell you the medicine, you better be drinking that medicine.

Jeff Malec:
But you have like this mattress will change your life and this right. There’s a lot. There’s way too much of that these days.

Jason Buck:

Yeah. But to your point, I think and that’s what I was alluding to is I think that people spend, you know, as you know, I hate the idea of investments. I hate that word. Because it’s savings, let’s call it what it is. You know, you have production and then you have consumption and whatever’s leftover savings. And that savings going back to sequencing risk and are good at that savings needs to Be there when you need it. That’s all it is. And as soon as somebody says investments, they’re going to sell you some fucking scam that can make 10% 20% a year, but loses all your money. You don’t want your money to make money, you want your savings to outpace inflation, and be there when you need it. You make money in your career and in your business, you set aside that savings for later when you need it. You need it to outpace inflation. That’s it. go about your business, go about your family and go about your hobbies. Enjoy your life, live authentic to yourself. And when you need the savings, it should be there. If you balance out short volatility and long volatility, it’s the best you can do.

Jeff Malec:

My argument to that would be I only have a little bit of money, I want it to grow and become more money. That’s how you lose money. But right if you have no money so t how do you get the investor to say

Jason Buck:

Invest in yourself, invest in your career, invest in your business, make more money, have more savings and keep setting it aside in an ergodic portfolio.

Jeff Malec:
I would argue the grand scheme of Americans can invest in themselves properly enough to make that happen?

Taylor Pearson:

I guess the trade-off that every individual can decide to make is if you have short volatility and long volatility, you can, you know, you can apply more leverage to that to try you want to generate, you know, if you’re if you want to take more risk for greater return like that, that’s your prerogative, but the most organic option, you know, that would be to, you know, if you’re not using a modest amount of leverage, you had shortfall in long haul, then yeah, you know, your, your savings, right? That’s, you know, if you’re maximizing for goodness city, you’re maximizing for that, that time averaging ensemble between the same, that’s, that’s what savings should do, right, you’re maximizing that over, you know, 400 year, whatever, long into the future, that that’s still going to be there.

Jason Buck:

And then, to your point, though, and, for lack of a better term, if you want to still make money and compound, combining short volatility long well until he’s actually the only way to do it, that’s going to maximize your log wealth. So if you want your money to actually grow, that’s how you do it. So for like to not say like holy grail portfolio, whatever, let’s just take an example. Let’s take 2018 let’s say you’re hundred percent in SMP and 100% like a long volatility tail risk portfolio, the s&p is down 5% the tail risk long Well, it’s a portfolios at 20%. So combined, you’re up 15%, if you’re 100 hundred, right? You rebalance that portfolio, you go into 2019 now, the market rips up 30% but now your long volatility stays down. 10% so you’re up 20% on average, on combining the two. So in 2018, you’re at 15% 2019 you’re up 20%. Now, you compounded at 15 and 20%. If you were an SMP only, you were down 5% and then up 30%. What maximizes your log wealth. It’s compounding positive numbers maximizes your log wealth, right? So actually, even though you’re protecting yourself, and you’re you’re you’re truncating, those left tails and reducing your drawdown risk. You actually end up wealthier over time by being a more boring portfolio.

Jeff Malec:

And what do you mean by log wealth?

Jason Buck:

It compound growth rate over time.

Jeff Malec:
Which is Einstein? The most powerful force in the universe is

Jason Buck:

Isn’t that what you do for, just assign it to Einstein or

Taylor Pearson:
I think that’s fair. But it’s a good line.

Jeff Malec:

Let’s look that up.

Jason Buck:
It’s a weird thing that I get, a boring portfolio is actually your best portfolio.

Jeff Malec:

And I would feel right most of the people are going to talk to her like I’m doing volatility arbitrage and all this stuff. That doesn’t sound very boring.

Jason Buck:
Right. And now, unfortunately, that this is the hard part of our businesses. You know, all too well is what we do sounds incredibly complex. And it kinda is because to just buy implicit shortfall assets like stocks and bonds, you just hit the buy button is the simplest thing in the world. But due to the way the markets work to have long volatility terrorists stuff is very complex. And you need very active management to run that portfolio, which creates an educational hurdle for us. But that’s kind of the way it works out.

Jeff Malec:

And it’s like, well, if you want the goods, you got to.

Jason Buck:
Right. And so it’s great on the on the short vol side, you’re not really paying for that. And it’s really simplified. So you end up paying for just half you pay if you pay for the long side.

Jeff Malec:

Right. But it seems most of the investing public would prefer simplicity over effect. Right? Like, yeah, almost like people I’d rather have this good looking fashionable jacket than the one that actually keeps me warm.

Taylor Pearson:

Well, I think, you know, that’s marketing. Like, you know, okay, you’re gonna buy the s&p 500 index, like the complexity of all the companies that make that up, what business they’re in how their business, right? I mean, it’s an incredibly deep complex thing, but it’s just become the eye catching on that sign that ETFs have already figured this out. Like right there. Just doing it on one side of the ledger.

Jason Buck:
That just made me think about it in a great way for the first time. It’s the vehicle that reduced the complexity. So the ETF made the actual individual companies in the sp 500. less complex and the vehicle made it simple. So we’re actually trying to make the long voluntaries simpler through the vehicle Mutiny fund.

Taylor Pearson:
Thanks for listening. If you’d like more information about Mutiny Fund, you can go to Mutinyfund.com or better yet, drop us a message. I am Taylor@mutinyfund.com and Jason is Jason@mutinyfund.com and we’ll get back to you. You can find us on Twitter @Mutinyfund and I am @TaylorPearson.me