Episode 40: 2022 – Year of Unusual Volatility? – Wayne Himelsein

In this episode I talk with Wayne Himelsein, CIO of Logica Capital Advisers. 

Wayne is responsible for leading portfolio management and the overall implementation of the firm’s investment strategies. Beginning his career as a Proprietary Trader in 1995, and launching his first Hedge Fund in 2000, Wayne has over 25 years of industry experience.

We talk about the following:

• Is time real?
• What is signal vs noise?
• Where to find great quotes?
• 2022- Year of unusual volatility?
• Existential risks to hedge funds.

I hope you enjoyed this conversation with Wayne as much as I did!

 

 

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

 

Transcript Episode 40:

 

Taylor Pearson:

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

Disclaimer:

This podcast is provided for informational purposes only, and should not be relied upon as legal, business, investment or tax advice. All opinions expressed by podcast participants or solely their own opinions, and do not necessarily reflect the opinions of Mutiny Fund, their affiliates or companies featured.

Due to industry regulations participants on this podcast are instructed to not make specific trade recommendations, nor reference best or potential profits. Listeners are reminded that managed features, commodity trading, Forex trading and other alternative investments are complex and carry a risk of substantial losses. As such, they’re not suitable for all investors and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making a decision on the appropriateness of such investments. Visit mutinyfund.com/disclaimer, for more information.

Jason Buck:

The first thing that jumped out at me when I was thinking we were getting on a call today, is I think a few days ago, I got your one year monthly commentaries as well, is how do you come up with all these quotes? Where do you have these on deck? You always have all kinds of quotes that go perfectly with what you want to talk about, but I’m like, “Where is the compendium of these quotes? Do you have some sort of program we don’t know about for searching out quotes?” What’s the deal with the quotes?

Wayne Himelsein:

Yeah, it’s funny. So for starters, I love quotations. And tiny side note, I was once told by a teacher, because I kept on calling them quotes and they’re like, “No, they’re quotations.” So I don’t know if anybody knows that, but apparently they’re not called quotes, they’re called quotations. Either way, I love them. And so my brain always wants to… whenever there’s something to say, I always want to see or find, “Who said this in a cool way?” Or I’m thinking some thought. And I have had quote collections in my, I call it Google docs, for years and whenever I see a cool quote or quotation, sorry, I put them in there. And I’ve collected, now in different sections, about finance or about life or about… et cetera.

Wayne Himelsein:

So a lot of them I just had. I remember when I’m talking about or writing about some topic, I’m like, “Oh yeah, that triggers that quotation. Let me go grab it.” It’s in my Google doc or one of my docs that I’ve kept things in. And then if there’s something that’s not triggered, but I really want to put something there, then I’ll go online and I go to some of the great quotation sites, like Brainy Quote, is one of my favorites.

Jason Buck:

Yeah.

Wayne Himelsein:

And I type in my search word and then I just scroll through them. And honestly, part of the pleasure is sitting there reading the different quotations of what different famous people have said and seeing, “Hey, does this fit, does that fit or feeling it or not?” And what’s really cool with that is that as I go through them, I’ll read one, “Aah, that’s silly. That’s off point.” Or it’s a silly person that I don’t want to put as a representative of my thought.

Wayne Himelsein:

But then when I get to one that shines, there’s this inner moment, I’m like, “Yes, that’s it.” And I love it, and then I obviously just put it in the letter and it works perfectly. And when I find those, it’s such a cool moment. Sometimes it’s funny because of who said it I’m, “I don’t know. I love what they said, but can I quote that person for whatever silly reason?” And it’s nothing substantive, it’s just some movie star and I’m trying to say something deep about finance and I’m, “Well, does that really work?”

Wayne Himelsein:

But in the end I just go with the power of what they said, and hopefully it’s a person that substantiates what I’ve said in some way, a lot of the time. But I’m so quotation loving that I have to find the exact right words for saying what I want to say. That’s funny that you noticed that.

Jason Buck:

Well, so it’s half the monthly letter time writing it and then the other half of the time is finding the perfect quote. Quotation.

Wayne Himelsein:

You know what? It’s probably. Yeah, exactly. You got it. I’d say it’s 70/30. Probably 80/20, if I really think about it.

Jason Buck:

Yeah.

Wayne Himelsein:

With 20… But the finding the quotation becomes a joy. I’ll sit there for hours reading through stuff until I find that perfect one and the joy is obviously searching them. And then of course, each time I’ve done that, over years, then I have that, call it encyclopedia of quotations in my head, because I’ve read them for each letter. So then the next point comes out, I’ll go, “Oh yeah, I remember where I saw something that fit.” And so it just becomes cumulative, which is nice.

Jason Buck:

Well then the part that sucks is when you find the perfect quote after the letter’s gone out and you’re like, “Ah, come on. I wish I could have used that one.”

Wayne Himelsein:

Yeah. You know what? That’s a good thought, but I don’t let that happen because I don’t look after it’s gone out until the next letter comes up. I guess I do once in a while when I’m trying to think about something else, but not generally for the letters. I make it, right after the letters are written, I’m like, “Okay, I need something here, here, here.” And that’s how it goes. Yeah.

Jason Buck:

We’re just saying quotation verses quote and the pragmatism or how we use language these days reminds me of… my girlfriend has musical theater training and everything. And so she would always tell me the difference between accent and dialect is we actually use that wrong. It’s actually, should we should be saying dialect instead of accent, and then accents when somebody is a foreign language-

Wayne Himelsein:

With a tone.

Jason Buck:

… speaker that’s speaking English. Yes.

Wayne Himelsein:

Oh, okay.

Jason Buck:

That’s actually accent and dialect is the regional differences within a country.

Wayne Himelsein:

Oh yeah. There you go’s the nuance. Yeah.

Jason Buck:

But pragmatically, we all say accent. So even though she used to always talk about it I was, “Come on, everybody’s going to say accent, so we use accent.” As language evolves, which may be part of our conversation today, is things change. The word literally has now become to mean its opposite. And the people that get upset about it, don’t realize that language is an evolving, emergent, biological or evolutionary phenomenon, that’s constantly changing. And it’s how do we use it colloquially can change the actual definition of the word.

Wayne Himelsein:

Totally. Yeah. And if you’re a word person, then you notice and think about that stuff. I’ll tell you one of the funny ones of those for me is, and I hear it every time because a lot of people say it, I used to say it, is saying something is very unique. I had this one teacher who I’m, “That’s very unique.” And they’re like, “You can’t qualify unique. If it’s unique, it can’t be very unique. Unique is one of a kind.” So there’s no very one of a kind, it’s one of a kind or it’s not. And so you can’t ever say anything before unique and I find it funny because everyone always says that, “Oh that’s so unique,” or “Very unique,” rather.

Jason Buck:

Right.

Wayne Himelsein:

I’m, “No, it’s just unique.” But I don’t actually say that, but I think it and laugh because it’s one of those things like you talk about, it’s a very unique thing.

Jason Buck:

I was just looking through some more of your recent tweets and even on your recent tweets, you started even including the quotations as well. And one of them was, “Trading recent markets I found benefit in being more nimble, that is being more ready and willing to holy flip an assessment. A good long can be a good short or vice versa. The question is at what moment and for how long?” And then the quotation is from Emily Dickinson is, “Forever is composed of nows.” And that’s what I want to kind of dive into as this “Forever is composed of nows”. I think I sent you, last week, I sent you an article from your neighbor Annika Harris about time.

Jason Buck:

And as more as she’s delving into working with physicists and whether it’s thinking about time and space and consciousness, is a lot of the physicists are starting to believe that space and time are just made up by our consciousness. And so with your Emily Dickinson quote I’ll give you that to riff off of, it’s “Forever is composed of nows.” What does that mean to you?

Wayne Himelsein:

I just love that one. That’s one of my favorite quotations of all time. It means so many things. Do we have four hours for this session? Because-

Jason Buck:

Yeah, of course.

Wayne Himelsein:

… I can go on a lot. Let’s start with some of it. So philosophically all we have is now. Not philosophically, literally. We don’t know the future, we certainly can’t go back and change anything in the past or reach into our past. And of course, that’s the teachings of some of these great wisdoms or philosophies is, all we have is here and now, and that’s the essence of appreciating our life and the moment and getting joy in the moment, now is it. And so take that to the next step is there’s now, and then by the way there’s now, and then there’s now.

Wayne Himelsein:

And so literally forever and i.e, the future is just composed of every immediate, next moment or current moment, hence forever’s composed of nows. And then to me, of course, I’m a quantum, a math guy, I’m mathematician, whatever you want to call that. Love numbers, is the way simple way I think about it. And love looking at things in a quantitative way. When I… Emily Dickinson of course is a great poet and writes beautiful things. But when I read that, I think of it mathematically in the sense of limits. Calculus is the idea of there’s the nows that are spliced into times.

Wayne Himelsein:

I’ll go back to, not go back to, but I’ll refer to a Zeno’s paradox is one of the great concepts and philosophy where if you shoot an arrow and before it gets from beginning to end, it has to go halfway, and then before it gets from there to the end it has to go half of that, before the end and then half of that. And so you keep on having to go half, such that you never get there. And so the limit of all those eventual movements where you’re at 1/1000000th of that next move is, of course, getting to the finish line. And so I think of that in the sense of forever’s composed of now as is these separated instances where collectively is your experience. But each one is just a now, as a splice in time. I don’t know if that analogy makes sense, but in my mind… It’s like in calculus, you have to use limits to go from the infinite to the moment, to the finite.

Wayne Himelsein:

Whereas, in life, we live time as an experience like the article you sent me was that really there’s now and now and now, but it’s fluid in our mind as this thing we’re like living through. And so we accumulate the separated moments into a living stream and hence it all comes together in, “Forever is composed of nows.” Does that all make sense? Or how do you feel when I say that. It’s a little bit all over the place, but that’s how I think about it.

Jason Buck:

No, it is great. And that’s why it’s one thing… and maybe I’ll get it both on Zeno’s side and the idea of we have this just collection of nows, but I think that’s one of the things that Annika was writing about, is the idea if you have a collection of nows and then our consciousness creates time out of that. It creates a series of events and causality. And then we tell ourself a narrative story in hindsight. And that’s what the collection of now starts to make sense to us on what we would consider at conscious level. Now, we can debate whether we have consciousness or free will, but what’s interesting about that to me is if the thing that we use to collect these nows and to create a sense of self, and then the physicists are telling us, “It’s possible that space and time don’t exist and it’s just a collection of nows.”

Jason Buck:

I’m not sure the thing we use to think about that can conceptually even come up with that concept. It just literally breaks our brains if you try to take time and space out of the equation, because everything we know and understand about life, via our consciousness, has to use these equivalents of space and time. And so to me, it’s almost like the mysterians or new mysterian philosophers, like Colin McGinn, the question then becomes, can consciousness be used to study consciousness? And they say, “No, it’s always going to be a mystery.” Hence, mysterianism, that we will never be able to understand it because the very tool we’re using to understanding is a false tool that actually doesn’t exist.

Wayne Himelsein:

Right, yeah. So, once again, I’ll go back to math. I’ll go back to calculus.

Jason Buck:

Okay.

Wayne Himelsein:

Right. In calculus a derivative is a change of something’s position. X goes from here to here, with respect to some change in time. What’s happening to us, we experience time, but what’s actually happening is the molecules and atoms that make us and everything around us, are just changing some incrementally, small position over some instance of time. And as each one of those increments change, the calculus of our minds folds that into some smooth stream.

Wayne Himelsein:

But all that happened is this one atom went from here to some incremental distance in front of it within one split second, and now like this one hair got slightly grayer, in some tiny incremental way. And so all of that happening, changing in… Is there a time? No, there’s just change in repositions with respect to some space time dimension or dimensionality. And when that happens, our brain must interpret that in some way. And therefore we create this fluidity. So it’s obviously our brains that’s creating it, but all that’s happening really is that things are changing around us.

Wayne Himelsein:

If atoms stopped changing then time would stop. But it’s not that time stops, it’s that things stop moving, really, it’s at the essence of it. That’s how I think about it. I don’t know if that’s what you’re addressing, but to me, I guess that summarizes the answer that, all of it is happening in our heads. Nature is doing what it’s doing around us and our heads is creating this flow of time. Therefore, it seems silly to think about it as like, “Oh, is our consciousness looking at our consciousness?” No, it’s that our brains are interpreting these incremental changes all around us.

Jason Buck:

But that’s what I’m saying. If our brains are creating this flow of time, can we use that brain to therefore think about what would it be like without time? Or is that a self delusion mechanism is like, we can’t even use the thing that experiences time is the thing we’re trying to say, “Time doesn’t exist, and so are we fooling ourselves?”

Wayne Himelsein:

Well, it doesn’t exist, and it does. So to me, the answer to that is a matter of scale.

Jason Buck:

Okay.

Wayne Himelsein:

It doesn’t exist at those ultra minute increments. If we go down to the quantum or some really small increment of time, there is no time or so to speak. But since our brain creates it, then to us, there is time but at a larger scale. I have the analogy that I just thought of is a movie. So a movie, if you take the old school tape off the reel, it’s a photograph and a photograph and a photograph, and then the dude’s waving and it’s like, “Dit, dit, dit.” And then you play that it at a higher speed, he’s like, “Hey…” And so you see the arm flow across the room. But really it’s just a hundred pictures at 60 pictures a second or frames per second, that ends up creating a movie. So at the scale of each photograph, there is no time, but at the movie level, there is time because you’re running it at 60 frames per second. Therefore, to me, there is and there isn’t and it’s not contradictory, it’s a matter of scale.

Jason Buck:

Everything good in life’s a paradox. It’s not necessarily contradictory, but it makes you think about it. My family actually owns a movie theater and I worked there pre digital projectors. And so I actually had to splice those reels together. So it always does make me think about a lot of looking at those frame by frame and then the interrupted action between frames and how our brain can actually blend that together without us even noticing it.

Wayne Himelsein:

Totally. And what’s interesting. If you ran it, I think they’ve tested this, of course, they have to have, at different rates. If you ran a movie at, let’s say, 10 frames per second, we’d say, “Oh, that feels slow.” Or ran it at 200 frames per second and be like, “Hold on, something’s moving too fast.” And so there’s this almost ideal frames per second that the human mind interprets as the natural flow of time and that’s of course subjective to humanity.

Wayne Himelsein:

And, of course, if you’re a bee or fly buzzing around, then it’s much slower and that’s why we can’t hit flies with a fly squatter because they see it coming really slowly. They run at a different frame per second and so they watch different movies. That’s the idea.

Wayne Himelsein:

And what’s funny is going to the movie analogy is you think about stopping time is hitting pause. So we’re watching a movie and it’s all flowing and you hit pause and boom, there’s this moment. And you’re looking up at the screen and the person’s face is mid laughing and so their mouth is giant and you’re just frozen time and… No, you’ve hit pause and it’s on that frame. To me, once again, it goes back to all that we’re talking about, it’s the calculus, it’s the convergence of that, we’ve just stopped it at that moment and found the derivative.

Jason Buck:

Yeah. And we’ll definitely bring it back around to trading. But I was thinking about when you’re saying that that way too at the speed is of when there’s frame per second, I think Annika also uses that thing when she’s talking about was somebody hitting a tennis ball. You have all of these different inputs biologically coming in and then the brain blends them together to seem like it’s one instantaneous moment. Or I think about our ability to reaction times I think is 250 to 300 milliseconds. And so people will tell kids playing sports, if it’s somebody in soccer taking a penalty kick, or it’s a pitcher in baseball, they’re like, “Well, watch the ball and react.” And we actually can’t react that quickly. We don’t even have the reaction time, so you almost have to pre guess.

Jason Buck:

And that’s what it’s interesting is allegedly with baseball pitchers, I always think about that steroid use will actually improve our eyesight, so maybe at the release point of the pitcher, you can actually see the seams on the ball, and then you’re already swinging based on the seams on that ball, based on our reaction time. So actually steroids maybe improve your eyesight, which is actually the benefit versus the musculature. But that’s just a random thought on my own, or same with soccer with penalty kicks is the goalie actually has to choose the direction before the kick is taken. But we tell kids to watch the ball and react accordingly and it just doesn’t work like that.

Wayne Himelsein:

Yeah. I think what works is our experience over time playing a sport. And so you see someone kick it, before you’ve even watched the ball you’ve seen people kick thousands of times. And so when they kick that ever so slight angle of that person’s leg and the tilt of their shoulder, as their foot contacts the ball, you almost know the direction because you’ve seen 10,000 kicks. And so that’s really what is experience? It’s the repetition of events that allows our brain too much more rapidly crystallize what will happen next, or forecast rather what will happen next.

Wayne Himelsein:

And what’s interesting to me is when we talk about what the brain can and can’t do, and almost slow down time, like a professional athlete might, is I think of times in my life where my brain has slowed down time and I’ll give the perfect examples is during accidents, I’m sure each one of us have had this. I’ve been in a car accident where, one of the worst in my life, I was a teenager and wasn’t me driving, but the car flipped and I went through a full multiple, 360 flip in the air. I remember that, time slowed. I was lurching through the air upside down and I’m, “Man, do I remember every one of those moments?” It’s almost so… I talk about the fly or the bee, I felt like that. And it’s just click, click, click, and we were running at 10 frames per second and then slam and you hit whatever the car hit. And I ended up upside down, hanging for my seatbelt and got out unscathed, luckily.

Wayne Himelsein:

But that experience, first of all, I’ll never forget that. But what’s amazing is that the brain does that and the shock of what you’re going through does slow time, which means that our brain has the capacity to. And whatever would’ve happened, there’s that and there’s other similar events in my life. I also got into a bicycle accident some years ago, I got hit by a car while cycling. And again, I still remember the slow motion of flipping over that car. And I was airborne for… it could have been minutes, although it was probably half a second. It’s fascinating to me.

Wayne Himelsein:

And I feel like that obviously disrupts this concept, that there is some fixed… our brain has the ability to therefore we can’t all think we can turn it on or off, maybe we could learn to, I don’t know. But that, to me ties into the athlete or the sport’s analogy you were using. Which is our brain can process at much more interesting than we typically do, because it’s shown to have done so on different occasions.

Jason Buck:

You’re saying that when the athletes are, through experience or chunking information, and then they’re able to quickly intuitively assess that information and their body can react even based on that chunking process before it happens. I had a very similar experience with a car accident when I was 16 and it was my fault. It was in the snow, when I was going too fast and I was late for an event and flipped a car. And luckily everything unscathed and myself was just the only one involved and it was fine. But I felt the same experience that it felt like time was incredibly slowing down. I had all these thoughts and felt like minutes passed in a split second.

Jason Buck:

But I wonder also, I can’t help myself to push back and wonder, if it’s true or else I’m just misremembering it? And maybe during that vivacium impression, it had such a strong impact, I felt like I was feeling all those things, but maybe that’s a hindsight narrative fallacy. But I’m just curious, do you have any thoughts on that?

Wayne Himelsein:

I haven’t had thoughts on that. But I feel like I remember after those events happened to me, it was so clear in my mind that it had felt so slow. I kept on thinking about it and thinking about it as we do. I’m sure you did after your accident. That there’s no way somebody could have convinced me that was all in my mind, but obviously it was because time still moved at the rate time moved. Nothing’s changing in this world because Wayne got into a car accident, how much ego is that, that’s ridiculous. The world does what it does and we just live in it.

Wayne Himelsein:

But to me, I think there’s obviously some form of change, chemical change, if you will, associated with the adrenaline or something that happens when you’re in that highly anxious moment, maybe adrenaline heightens our senses and so we’re so alert to every piece of information that’s flowing in that it feels like slowed time. That’s possible. That’s where that might overlap.

Wayne Himelsein:

But I’m not sure. Obviously afterwards, we always create these narratives. That’s what we do, once again, as humans. Everything is self-reflective or, in a way, topological, we’re humans so we see things from a human side and whatever that means. We can’t look outside of ourselves. We can sit here and talk about it and have fun with it. But at the end of the day, we’re subject to our nature.

Jason Buck:

Well, I think we were headed there because one of my favorite books is The Rise of Superman, by Kotler. And that’s the idea that he views that extreme sports athletes are at the forefront of where our brain functioning is, and it’s almost the same question throughout the book. The underwriting question is, how do we get into flow states? And usually if your life’s on the line a little bit, that adrenaline’s pumping, so you’re getting all of those explosion of chemicals throughout your body. And that’s what helps us get into that flow state more.

Jason Buck:

So you got the… he’s always talking about, you got the stretch your abilities, there’s got to be a bit of risk involved. And all of those sorts of things tend to maybe increase our hormone levels, which puts us into that flow like state, where maybe we’re more assessing our surroundings than being caught up in our own thinking processes. But that one’s always… Sorry. Go ahead.

Wayne Himelsein:

Yeah, no. That strikes a huge chord with me and I’m going to-

Wayne Himelsein:

That strikes a huge chord with me and I’m going to take, bring it right back to the world we’re actually in. Which is trading and finance. So talk about heightened senses when markets are going crazy. And I know myself as a trader, there was a time where, when I was a younger trader, I used to sit there and analyze. And so like, look at the stock and its behavior and the pattern and deliberate over it for days. And this move and what do I expect? And now after 25, 27 years, however long it’s been of doing this, I see something and in an instant, my brain, I’m like, “I like it or I don’t.” And I could analyze 10 times longer. And I still go back to, “I liked it an hour ago.”

Wayne Himelsein:

You can ask me, “Well, what did you like?” I’m like, well, this stuff that I’ve been doing for 27 years, I saw it instantly. So that’s that analog of the professional athlete is that you’ve been doing something long enough. You recognize all those patterns. And then something crazy happens in that world. So in a sports game, of course, that’s a, let’s say a major competition. It’s the nationals or whatever. Some major game. In trading, it’s, something nuts is going on in the market. S and P gap’s down 8%. Instead of panic, I go into this hyper-alert mode, which is taking all the information I’ve learned over the years and my experience and saying, “Okay, what’s the right thing to do here?”

Wayne Himelsein:

And I find that fascinating. It works really well. And I could go back and question myself after I’ve made a decision, and however much analysis I do, I find my body or my mind collectively knew it. And the higher the stress event, to the point you were saying, the more it feels like it knows it quickly. Or quicker. So that ties in really well to what you were saying. What did you call it? The superman? I don’t know that book, but it feels like the same concept.

Jason Buck:

That’s why I was actually going to bring up with you and you led perfectly there. I was taking notes on what you were saying. Intuition was kind of my next question. And I think you and I personally talked in the past about Chronos versus Kairos. The ancient Greek philosophers used about talk about, Chronos is clock time. And then Kairos is the opportune moment. And like you said, especially when we’re trading and especially in volatility and derivatives, is time can speed up or slow down, and it contracts and expands.

Jason Buck:

And that really affects especially derivative options. But the interesting thing… You’ve always referenced you’re a quant too. But if with decades of quant experience and chunking information and chunking different forms of market experience, you said, when something happens, you have that gut intuition that this is the right move here. But then as a quant, you maybe couldn’t formalize or codify that into a trade. So I’m just wondering, the competing parts of your brain, how do you deal with that in that moment of, I know this is the right move, but if I had to come with a rational reason, it may be way too late and I might be fooling myself.

Wayne Himelsein:

So that gets into this whole other subject of what it means to be a quant. A quant to me, is seeing and approaching the world in a quantum way, quantitative or analytical way. And so, let’s go with the example or the question you ask. So I see a trade and instinctively… I’ve been around this for decades, and so I’m like, “Oh, this seems perfect.” And then right away, the quant side of my brain says, “Hold on, Wayne, this is one data point. Don’t leap off the cliff. You don’t know if there’s soft ground below.”

Wayne Himelsein:

So those are the competing minds. Then the other, the more quantum me says, “Well, everything in markets, we use empiricism. But empirically we don’t have a million years of markets. We have at best 30 years of options.” Testable, maybe 20 something, maybe 1987 plus.

Wayne Himelsein:

But the point is that no matter what, we’re using limited data. We don’t know the full shape of these distributions. We don’t know the true behaviors of what might be just chaotic environments, non-linear environments that can’t be modeled to forecast. So I have all this quantitative information in my mind, “Hey, there’s limited data points. Hey, we only have as much data as we have. It’s only just a representation of what might be.”

Wayne Himelsein:

And then I have, “Hey, this feels like a pattern I’ve seen before.” Knowing that it’s a small sample pattern. So I have to take all of that information and say, “Let me make a decision.” And that’s, I think what happens faster or slower, given the event. In slower moving markets, I’m going to be more leaning to the quantitative side, which is, let’s trust that this typical behavior will persist in these faster. Weirder markets.

Wayne Himelsein:

I have to say, “Hey, let me go with my gut because I don’t trust empiricism as much because this is anomalous behavior.” And I believe my brain is doing a little bit more because it’s including the fact that it’s anomalous behavior with what it knows is the traditional behavior. I’ll conclude all that by saying that every quantitative model is still the representation of our subjective findings. And so now I know that. I know that the best model I make, and I’ve systematized this process. Well, the process I systematized was the patterns I was seeing for years. That’s all that’s been systemized. So is it a model?

Wayne Himelsein:

Sure it is. It’s a model of a bunch of patterns that I thought… Seen to be persistent by my judgment. And so I know that model might break. I.e., that seeming persistent pattern might change. So that’s how I see it. Well, what do you think about that?

Jason Buck:

No, I’m appreciate you admitting that. Because I know, I think we’ve talked about this a bit before, too, is the idea of a quantitative system is really just an amalgamation of subjective experience over a certain amount of data sets. And so everybody’s like, “Well, I’m fully quantitative.” And I’m like, “Well, what about the person that created that model?” That’s a subjective experience, humanoid. They’re like, “Yeah, but that’s what you have to deal with.” So we always talk about, there’s the idea of combination of cyborg. Man, plus machine. You can use quantitative models, you can use large data sets. You can start to codify the way you think about everything. But then as you said, when Chronos turns to Kairos, do you think that’s the point where you start, where you have to get in touch with those gut intuitions? Because you, in the back of your mind, are subconsciously know that, “My quantitative models were designed off a certain data set, and we may be outside of this dataset’s experience.”

Jason Buck:

And that’s the human overlay. Knowing I only had a bookend-ed data set. And now we’re in a phase shift environment where that data set may not be no longer applicable to today’s markets. In that sense is like, when Jim Simon’s at different points, he’s actually pulled the plug on Rentech and his quants get very upset with him. But what you think again? That’s just his gut intuition that goes, “Hey, we think we know 99% of it, but this is that 1% environment. And therefore let’s just pull the plug.” Or like you’re saying, or go with your gut intuitions and try to navigate that in a more second by second basis.

Wayne Himelsein:

Yeah. And then the humor of that is that you later codify that event. And you say-

Jason Buck:

Of course.

Wayne Himelsein:

… Part of our model is that 1% of the time we turn the off knob, and so we have this 99% this, and then 1% that, and that’s our model. And that’s now the model is that we gut turn it off. People call that discretionary overlay and people call that a bunch of different stuff. And then people who codify their discretionary overlay, some years later call that part of their model. But it’s all the same. It’s just different ways of talking about the same thing. And that’s it. We have to realize that at the very core we’re dealing with unknowns.

Wayne Himelsein:

You and I have talked about this before. The known knowns and that unknown unknowns and… All, that great quotation going back to that. So we know what we know, and most of the time that seems to pan out and then all, every once in a while, things get really wacky. And when it does, time slows down. That’s what we experience. And then our senses get heightened with the adrenaline or chemicals that are going on in our body. And then we make a judgment that part of our model is, we have to over overlay this discretion based on our experience, which is its own model of our life’s experiences.

Jason Buck:

Part of that… You begged an interesting question. I think that you said, “Black swans are inherently unpredictable. So I can’t stand when people talk about black swans.” We can talk about gray swans that are semi predictable.

Wayne Himelsein:

Sure.

Jason Buck:

Like, history doesn’t repeat, it rhymes. But then when something does happen, and then we put it into the quantitative models, like you’re saying. Take an example like COVID, or the ’87 crash or anything. Should you put that in your quantitative model when you know it’s maybe a one off effect and event and maybe affecting the data set and the trading styles you’re looking at. I think about a lot of times when even trend followers. That COVID event happens, but that by the time, so they’re training their models based on that event and the data set. And then depending on their look back period, eventually gets out of the data set and then the distribution completely changes.

Wayne Himelsein:

Sure.

Jason Buck:

So it’s like, how much does… Should that affect your distribution and how much should you include that event? You’re saying, like, it happens 1% of the time. Is the future going to have an event like this or it’ll be completely different and should I include that in my models or not?

Wayne Himelsein:

Yeah. Now we’re talking about the big questions.

Jason Buck:

Exactly.

Wayne Himelsein:

Go refer to the quotation in my last monthly letter about big questions. That was the Leonard Suskin who’s, we can ask the big questions, but it doesn’t help unless we can actually test them. Experiment. Unfortunately in finance, we can’t. We can’t test the next pandemic. So go with what my theory is on the question you’re asking. Obviously I’ve thought about this a lot. I’ve thought about it for, well, over a decade. It’s the big problem in finance. In lots of arenas, but particularly in finance with the market dynamics and versus let’s say more pure science, you can study in physics things that will tend to be a little bit more repeatable. Not in markets. So I find my general consensus is that the behavior of humans tends to be the same.

Wayne Himelsein:

And so human behavior, you can, if you will, trust to be repeatable. Because people just always are the same and you can go to any century. And I always laugh when people say, “Well, back in the 1960s or back in the 1800s, people were.” No, they weren’t. They were just like us. They just wore different clothes and had different technology, but they still had the same feelings when they went home at night. Happy or sad. And those emotions, obviously fear and greed led to the, obviously the tulip mania of the old olden days and all the different manias before that were not even recorded. Sometime back in Rome, there was a some mania of something. And it wasn’t Bitcoin, it was Rome coin.

Wayne Himelsein:

In that way, I find that what we can model of human behavior, we can rely on. And so we do our best to try to extract what’s behavioral and what can we trust? And versus what is just noise. And I know that seems like an impossible thing to extract or to bifurcate, but that’s what we try to do as quants. So now you come back to the question of distributions and what do you trust? Is we have the whole distribution of all of time. That’s how we do it. And then we have different period distributions, and rolling. And we actually have a tool that squeezes and expands the duration or the time used of that distribution. So we say, “Hey, let’s look at S and P behavior from 1980 to 1990 or 1980 to 2010, or just 2009 to 2010.”

Wayne Himelsein:

And so it’s the same data, we’re just starting and stopping the beginning and end points at different places. And you see how that distribution evolves over time and the, if you will, the distribution of those changes can help peter out what’s consistent and what’s not. And so for me, it’s some combination of looking at the total distribution, i.e., all history that’s ever happened, looking at different frames of the distribution, local and some wider term and different sizes. And then seeing the similarities are ones that are the most reliable. And hen I say that, I think of this other concept of fractals, which is self similar behavior. Self-similar at different sizes. Scale is… What’s called scale and variance. So it doesn’t matter. It’s always the same at every scale.

Wayne Himelsein:

I feel like that is the same with price behavior in markets. And you can almost say, if you look at a minute chart or a five minute chart, or a 30 minute an hour, or a daily, or a weekly chart, if you see similar or similar trend, and it’s all up trending, then it’s more reliable than if the short term is down trend and the long term is up trending. Then there’s a conflict between two timeframes. So the meeting of timeframes and similarly meeting of relationships of different size distributions, to me, is the human behavior part that doesn’t get extracted. And where they don’t meet is the anomalous part that I will call noise. It’s a broad answer, or it’s a long answer, but I hope that congealed in your mind or makes sense.

Jason Buck:

Yeah. I want to maybe talk about specific, because it’ll help us flesh out a little more. I’m thinking about scale and variance or the opposite of scale and variant. Like, just changes that scale. I think Teleb’s been talking a lot about lately is like, communism at the family level works, but not at the national level. Because it has scale variance to it.

Wayne Himelsein:

Totally.

Jason Buck:

What you’re thinking about is like… And this is why I think you’re right. This is probably the hardest question for us. Is the idea is human nature doesn’t change. We’re very emotional creatures and you can see that kind of patterns throughout the long arc of history and trading and investing. But then as you know, we both operate in vol space. And so vol surfaces are one, constantly undulating, but then more important you have different players on the field.

Jason Buck:

You can’t back test the long history because you have… Till 2010, you have the rise of the VIX ETPs, which changed that market dramatically because you have different players entering the market. And then I think even at a smaller scale, let’s just take 2020. For example, you have March, 2020 happened. You have this huge sell off, this huge pop in volatility. But then for the rest of the year, you kind of have the echo of volatility from that.

Jason Buck:

And then now we’re going into a contentious presidential election where last time most people were surprised by Trump’s election. So now we have kinks in the volatility surface that are dependent on the previous election, but then tied in with the echo of volatility coming from March, 2020. So these are, on that small scale, like you’re saying, that are deviating from maybe the large scale. And so how do you deal with that, though? With that scale invariance?

Wayne Himelsein:

That’s a good question. Once again. You’re talking about, the deviations are, from what you’ve described, I want to re-summarize as overlapping independent events. So COVID happens and then there’s an election. Those are obviously unrelated. And they happened concurrently in time. And I remember actually, when COVID first happened, Feb., March of ’20, I remember a few weeks or within that month or two, there was some big event in the oil world that something happened. And it wasn’t yet Russia, Ukraine. It was something else. And it was that weekend, right during the COVID meltdown and something went wrong and around. I’m like, wow, this is an event in an event. I felt like I was in the movie Inception or something. And so that’s what’s happening. And it’s like, what is this event versus the first event? Everyone’s already nervous.

Wayne Himelsein:

They’re not going to get double nervous. The world’s already ending from a pandemic and it’s killing us all. That’s the mindset at that moment in March of ’20. So what does it matter that now some oil field was shut down or something? And yet it did. The market still reacted. And so to your point, there’s these overlapping events, there’s sometimes within the other, there’s sometimes a little bit of time after the other. We studied vol behavior over years and found that vol events that occur or crisis or stress events that occur within some timeframe after a prior are not as reactive to, as that timeframe fades. It’s the memory of humans. And very simply if something awful just happened, let’s say Feb, March of ’20. And there was COVID, if in July or August of ’20 something else terrible had happened, it’s like, okay, we are already in terrible.

Wayne Himelsein:

How much worse can it get? And so the vol doesn’t pop as much or doesn’t react as much because the fear is already there. Had it been seven years and nothing had happened then suddenly a global pandemic. Oh my gosh. It is, nobody ever remembers when anything was bad. And so this fear just goes through the roof. So the overlapping of events definitely has an expression in the output of vol behavior and the vol surface because it… There, once again, the traders of vol, as the traders of the markets, are humans and humans tend to have this experience of more panic. But when they’re in a panic, they don’t get as panicked the second time as quickly. So we go back to human nature being the defining, not behavior, but the defining characteristics of all markets, including volatility.

Wayne Himelsein:

And so once again, if you understand human behavior and you have some reasoning around why people or how people should behave, then you see it reflected in the markets. And if that lines up, then you can begin to extract and say, “Okay, we shouldn’t expect as much as a pop because there’s… We’re in the middle of pain already and people are therefore not as sensitive.” Then I’m not going to expect at that time. And so when vol runs, we’re going to be more likely to want to revert that pop, then trade it for an expansionary payoff. So there’s where knowing the behavior and having that thesis beforehand and understanding that’s where everything comes from and is repeatable will drive investment or trade decisions.

Jason Buck:

Got it. And that was even more pressing on the idea of… You were talking about signal to noise ratio is like, if we look at thousands of years of human history, we get one understanding of emotions and then maybe a hundred years of history of kind of broader financial markets in general. And then maybe a 10 to 20 year history of actually vol instruments being traded. But then this is tying into, the hardest question is how do you then decipher signal to noise ratio? And that’s what I was saying. Especially when you had overlapping events or events of then shorter timeframes, what you would consider noise initially in a different environment might be signal in this environment. So how do you differentiate between what is actually signal and what is actually noise?

Wayne Himelsein:

Yeah. So to your comment on instruments. That was in your last question. I didn’t address it. And you re-pointed that out. So the different instruments to me, or if you will, the evolution of the volatility markets with different ways of exploiting volatility, I actually don’t pay much attention to it. And I know that sounds nuts because I’m a vol trader. But what I mean by that more specifically is that at the end of the day, it’s all vol. You can create a structure and step it on top. And we saw what happened in vol again in February of ’18 when, when that ETN or was it a ETP? I forget what category of product it was. XIV blew up. And so XIV had a particular structure to it that wasn’t stable based on the way they were trading it inside and the leverage they were using, et cetera.

Wayne Himelsein:

So it blew up, but underneath it all was an exposure to vol and let’s say VIX futures, which have so much volume and therefore so many traders per day reacting, So we can study XIV as this overlaid structure around the thing, or we just study the thing underneath it. So I guess what I’m trying to say is what happened to XIV is a function of what was wrong with XIV as a product. Was a structural inefficiency. That to me is a different side of arbitrage or it’s finding, it’s studying the documentation of these products and seeing where is their error and the way they’ve created this thing? Is it the way they roll? Is it how much leverage they’re using? Those are structural inefficiencies to potentially take advantage of, but as far as the vol that’s happening underneath it, that’s the world of volatility.

Wayne Himelsein:

It doesn’t change, that product doesn’t change how many people are buying and selling protection on the S and P per day. It’s just, it’s expressed in the surface of vol, or at least the front of the surface. The first, the near term is expressed in the VIX and going along the, of course, from at the money to the tails. In and out, you see the shape of that smile by the pricing of the VIX. Or you can just go look at each S and P option up and down the chain and say, that’s what’s happening. And the VIX is some byproduct of all those options. That’s taking a certain slice and called itself the VIX. I don’t care to look at that slice and call it the VIX. I care to look at the underlying options and see the shape of the entire surface and how it’s undulating over time. And that to me is the most information because that’s what everything else is relying on to be who it wants to be, whether it’s VIX or XIV. Does that better answer where you were going?

Jason Buck:

No, it’s great. And along those lines, when we had the rise of retail traders that were buying calls or YOLO-ing calls on meme stocks, do you think in that sense, you don’t need to pay attention to that either because it’s going to be expressed in the S and P options and that’s what you’re trading anyway?

Wayne Himelsein:

For me, yes. I mean, you could pay attention to it and say, “Okay, Game Stop calls are behaving like this.” And their IV is priced at X and it’s three times what it should be priced at. And we can make those assessments based on the history of implied vol of GME, the stock. So we can look at the realized vol of that stock and say, okay, it’s now trading here. So there’s this excess buying of calls that’s overpricing what calls should be paid for. So it’s not a good trade. We can make that assessment. To me, I don’t really care. I don’t trade that. So I didn’t trade that. I don’t want to trade that there, but certainly there are people in the world that can say, “Well, that vol is overpriced relative to it’s realized.” And say that’s a good trade.

Wayne Himelsein:

And I agree with that. And then go do that. And the world’s so big in finance there’s space for all of us. So sure that has some logic to it. And I’m a fan of that logic. But to me personally, that’s just Game Stop. I don’t want to pay attention to that individual stock. All I know is, all 500 constituents, the S and P will collectively create S and P vol, which is the best representation of mass consensus because it’s got the noise cancellation of all 500 constituents. It’s got the high volatility tech stocks and the low volatility, industrials. And they’re all coming together to show us the behavior of this index, which therefore must be the best version of mass consensus because it’s… Everyone’s at every sector’s input. And on that surface, who’s buying what options and how’s that shape of the option surface behaving, that to me, is more of a fair representation of what the world is thinking.

Wayne Himelsein:

Let me say also in this way, is that you talk about signal to noise. The more granularly you look at anything, whether volatility or just in regular trading, trading stocks or the indices or whatever you’re trading, whatever you’re trading, any asset class, the more granularly you look at it, let’s say, “Hey, how’s the ball behaving on game stock relative to its past?” That’s digging into, to me, more noise, because it’s so singular.

Wayne Himelsein:

So related to what’s happening on some Reddit, or some external thing in the world with some retail people who might shift tomorrow. And I have no idea how they behave, so that granularity is primed for more noise. Whereas when you look at the S and P it’s more signal because all the Game Stops are going to noise cancel the non-Game Stops, and you’re going to have really the behavior of the broad institutional market. And therefore I say, if you want to not risk decreasing signal and increasing noise, you want to look more broadly rather than more granularly. And that’s true in any statistic, the more you try to fine tune and think of-

Wayne Himelsein:

In any statistic, the more you try to fine tune and think of curve fitting, the more you try to fine tune your model with more variables or parameters, the more it’s subject to be over fit. Because, you create noise with more precision. So it’s the same thing when you study the one strike of Vol on one particular name in the market. That could be literally one institution moving it. It doesn’t tell us “what’s going on at large”.

Jason Buck:

Yeah, I was thinking about also though, more in the aggregate, is if you have a higher demand among single names on call options, that can start to change the skew on SPX that we move from more of a skew to a smile. But would you argue that if you’re trading near term at the money straddles, then that skew or smile, whether it’s the smirk or smile, is not really going to be affecting near the money at the money gamma scalping. Is that fair?

Wayne Himelsein:

Yeah, it shouldn’t be. That’s part of the point of ATM scalping is you don’t want to be, and you’re not affected by skew. You’re affected by that smile, moving up and down, vol, the entire surface lifting and lowering, but you’re wanting to not be affected by skew. That’s one of the reasons you want to scalp. There’s more gamma at the money. There’s the most. So that’s why there’s a mathematical rationale to scalping at the money, but the other, the collateral benefit, is that you don’t have to be as worried about skew behavior, because it shouldn’t affect you.

Jason Buck:

And then part of that, when we’re talking about at the money and gamma scalpin, is we’re talking about signal versus noise. And what I find very interesting is if your daily gamma scalping, or daily re-striking, you’re going to get a lot more at bats. You’re going to get a lot more data on those trades. And if you think about it in context of tail risk catching, people buying deep out of the money options, and maybe that they only get a payout once every ten years, they have to perfectly model, and perfectly monetize those positions. And you’re only getting that opportunity maybe once every ten years and it’s anomalous event.

Jason Buck:

And we’ve talked about vol will cluster, but vol will mean [inaudible 00:50:02] just quickly, and you can lose those those profits. So is that part of, when you think about that philosophy of being a quant and reducing signal to noise ratio, is that if you’re trading on a daily basis, you actually can collect real data. Whereas, if you’re just buying teenies and hoping for the one in ten year event, I can think about this often, that drives very different distribution of returns and very different distributions of what you can count on how to monetize over time.

Wayne Himelsein:

Absolutely. Of course. It’s a very different dis distribution. Everything you’re saying is right. With an ultra rare event, you have a incredibly low hit rate, and incredibly high potential positive skew. So you have the both things going for you. And with lower hit rate comes higher positive skew, potentially.

Wayne Himelsein:

But then unless to your point, given that you monetize. If you don’t monetize, then your positive skew immediately is gone. And it’s gone in a day, when there’s that massive meaner version of overpriced vol. And VIX goes to 80 or IV goes to 80/90 in some event. And the next day it’s 40. It’s that 50% reversion in a single day on that massive recovery rally on whatever day that comes. And inevitably, it always comes.

Wayne Himelsein:

I think that was March 21st or something of 2020, somewhere around there, that 10% rally day. So if you didn’t monetize within a few days before, you’ve given back half your profits in an instant. And so to your point, not only are you living on the rarity of the event, is you’re living on the super high reliance on monetization skill.

Wayne Himelsein:

And so to that risk, there’s so much need to monetize correctly, there’s probably a greater likelihood you monetized too early, because you can’t risk not monetizing. Unless you have a mandate that says, “My strike is 50% off the S & P. I’m going to monetize.” Then, if it makes it to 48%, you have no realized P & L. You didn’t make anything. So you have no positive skew.

Wayne Himelsein:

And if it got to 51 and you monetized right at 50, and then it went down further, then you didn’t participate in “the rest” and wherever your strike is, that’s the same decision. So, the problem is as it’s getting there, you’re so in need of that positively skewed payoff for that ten years of waiting that to me, you’re inclined to monetize sooner if you don’t have a rule.

Wayne Himelsein:

Now go back to what you’re talking about ATM, and higher frequency gamma scalping is you have a high hit rate, and positive skew. And that those two things usually don’t go together. And that’s what’s beautiful about it is, you can establish a reliable hit rate. You do this daily, or multiple times a day, so you’re clocking your trades, and you have empirical evidence for how you do scalping.

Wayne Himelsein:

And you say, “Oh, look, I’ve got a 54% hit rate. I’ve got a positive edge. Great.” And you do that over years. You know you have an edge, but this whole time you’re holding a positive skew payoff. So when it really pays off, and there’s that COVID event, then you do excessively well, because you’re in an option. It’s that simple.

Wayne Himelsein:

And so to me, there’s no better way. That’s why I do what I do. There’s no better way to have a reliable, positive expectancy, and embedded positive skew. What else is there in trading? And I know there’s millions of things to do trading, and I’m not criticizing anybody’s trading style, or skill, or strategy. I love it all. I love the financial markets, but I mostly love positive expectancy, high hit rate, with positive skew. It’s so hard to do, but conceptually that’s the gold, and that’s why we live to try to do that better.

Jason Buck:

And nothing’s perfect. So there’s always trade offs. And like we were talking about whether you’re buying those [inaudible 00:53:52] teenies, you might miss out on a lot of that convexity if you’re buying at the money straddles. And then the other thing you may be slightly more concerned about, especially if you’re doing it long vol only, so we should maybe talk about why long vol only is the key, because if you are incorporating short vol to pay for long vol, a lot of wonky shit that can happen, that you’ve never seen in your data set before, so that’s why I know you try to stay away from it. But the other part of that is, if you’re re-striking on a daily basis, or on a time weighted basis, you might miss out on a persistent trend in vol, or capturing that move if it’s not quite as explosive.

Jason Buck:

So maybe talk to me about both the positives and downsides of using only long vol, but then also by constantly trying to monetize and re-strike, you don’t maybe sometimes capture the full breadth of that move.

Wayne Himelsein:

Yeah, sure. The devil of monetization is missing out. Ask any trader and they’re like, “This thing ran and I got out and I made 20%, and then it ran another 20%.” And, are you wrong? And, half the people say, “Well, I still made 20%.” And the other half, “I could have made 40.” And so, the glass is half empty, or half full. You made 20, but you could have made 40. You monetized too early. It’s not just vol. That is the number one “issue” of trading is when you get out. And it’s easy to get in and hold forever, and sure, you can be a long term holder, and buy the S & B and see what it does in 50 years, and you’ll be fine.

Wayne Himelsein:

But, for those of us that are daily trading, or in the markets in real time, and try to make P & L on a regular basis, and manage a portfolio, well, yes, there’s the skill of monetization versus the devil of missing out, is always what we’re trying to hone. And so if you ask me, I think there’s a good equilibrium there. And we like to do it probabilistically, because, “There is no right answer.” So you have these two forces that are pushing against each other, good and evil. And in this good and evil world, good being this convex payoff, and the more you let it go, the more it’s going to go to the sky, and evil is missing out on that upside, if you want to play those two sides.

Wayne Himelsein:

Now, so we say, “Okay, we don’t know the right answer. We could get out of it today and tomorrow could be the reversion, or we could hold some more and then we could lose some of it tomorrow. So let’s get out at some.” It’s always like split the baby. And so, does the baby split in the middle? Should we get out of 50/50, half our position? No, I say let’s do it in the best way I know how, which is probabilistically, i.e., the more confident I am that we’re close to the end, the more I want to take off.

Wayne Himelsein:

So that gets back to what is the shape of this distribution? Where are we in this distribution? If the S & P, if we look back over a hundred years, as a easy, broad theory, if every time it’s ever sold off the most, it’s been around 50%. And we go back to the great depression. We go back to the 2002-3 correction, we go back to ’08, the credit crisis, COVID, all of them are between 30 and 50%. 50% is around the max.

Wayne Himelsein:

So to me, at 50%, I’m comfortable, fully finally liquidating everything. I’m left with nothing. And you’re right, if it goes down 55%, and I’m just sitting, I’m staring at it. And I’m like, “Ah, didn’t get that last 5%.” But probabilistically, I’ve made the right decision. And if I sold everything out at 10% down, well that’s silly, because so many times it’s gone 20, 30, 40 all the way down to 50.

Wayne Himelsein:

So, if we use that broad theory, we could say, “Okay, let’s divide that up somewhat equally 10, 20, 30, 40, 50,” and say, “Okay, at 10% down, well that’s on average, let’s say seven out of ten corrections are 10% down.” Okay, so let’s sell 30% of our position. And then it’s down 20%. Well, a lot of them… Now let’s sell not 30% of what’s left, but 40% of what’s left. Because, now it’s down 20. And so, by the time it gets to 50, you’re selling the last bigger percentage of what’s left because you’re at the end of what mostly has ever happened.

Wayne Himelsein:

So we go back to, “Yes, we can always be wrong.” But if you use your best judgment, which to me is the probabilistic assessment of what’s ever happened, which relies on human behavior and people buying up markets when they’re cheap, then there’s some rationale to scaling out more and more as it dives deeper and deeper. And living with that decision and saying, “Yeah, I miss some of the upside, but you know what? I use my best mathematical/quantitative judgment to get out of as much as I can along the way at the right time.” So that’s how we approach it. And we don’t believe it’s “right”, we believe it’s thoughtful, and we understand the downside of the upside, and we accept that. Therefore, that’s how we move forward with it. And we try to get better at those probabilities over time.

Jason Buck:

Yeah. And I think whether it’s when you’re out at negative 50% down, it goes down negative 60 negative 70, that’s one thing. But the other thing I think about is, just at a high level theoretically, take this year with a grinding down market, by re-striking daily, let’s just say somebody’s buying a straddle, and they’re buying just theoretically, just systematically puts in calls. You may be monetizing those deltas on the puts, but when you’re re-striking with the calls, as it continues to trend down, you’re giving a bit of a drag by always buying those calls. If it consistently trends in that direction persistently. And my argument is always been, is, yeah, it’s inherently mean reversion to be re-striking that, but at the same time, you’re also daily monetizing the trend.

Jason Buck:

So you may not be getting a full monetization because of the drag on, let’s say, the call side, but you’re still monetizing. And you’re still re-striking for, if we see an environment again, like you were referencing, whether it’s the 1930s or 2000-2003, I believe from that period, we had seven rips of 20% higher, or 20% or more, as a dead cat bounces.

Jason Buck:

So that’s the reason you put on both sides, is rarely do we see environments like this, that we’ve seen this year, where it’s just persistently grinding down. And so there is a, I don’t want to call it downside, there’s a trade off, to putting on that straddle when you have persistently grinding down markets, versus ones that are volatile mean reverting, as they grind down.

Wayne Himelsein:

Right. So I think what all that I think about as you’re saying that, or giving that example, is right skew, right skew, right skew. And what I mean by that is, you could be wrong 99 times, and then the day you do that same scalp, and the next day, there’s that 11% rip, you’ve made back 101 days that day. And that’s why to me, when you live with a right skew instrument, i.e., optionality, if you can manage tightly that “way down” and you can keep on… You can be wrong 99 times, and the hundredth time pays for those 99. Obviously, people say that’s part of the problem, is you could bleed and bleed and bleed until… But, if you can manage that bleed tightly, and not lose too much, it doesn’t take much of “just being right” that nth time, to make it all back, and then some.

Wayne Himelsein:

And so for us, it’s not only do you say we want to monetize, because over time, even in bear markets, there are bear market rallies, there are recovery rallies, and violent recovery rallies at that. We’ve seen the most outrageous.

Wayne Himelsein:

So to me, when I’m re-striking, I’m one, monetizing and getting as close to a positive hit rate, i.e., greater than 50% on that trading. So we’re making money along the way, curtailing the downside way better than the market, but still repositioning ourselves almost daily for a right skew payoff, for as soon as that event happens.

Wayne Himelsein:

And so to me, I guess I like that. And you could say, “Well, Wayne, you could keep on doing that until you lose and lose,” but it would take a hundred years to bleed away everything, because we’re containing the downside so tightly. And yeah, now it’s been six months in ’22 and the market’s done this, this is going to be another six months. What’s the S & P going to go down another 20%? Sure, anything’s possible, but at some point it ends. And at some point along the way, there’s a violent recovery rally.

Wayne Himelsein:

And people say, “Well, that’s a bear trap.” And yes it is. But that’s what we need to make a few months in three days of P & L, because we’ve repositioned those strikes or that gamma, if you will. We’ve repositioned to be convex to the next move at the best level, and contain the downside, trying to achieve that payoff. And of course, if you believe in what you do, that’s what you do. And I’m not saying that we’re not wrong doing it. I’m saying we have seen this, not quite like this year. There’s been a crazy environment where there hasn’t been one of these real rallies for six months now. But even then, we continue repositioning. It feels like the…

Wayne Himelsein:

I know this sounds silly because it’s the buy the dip mentality or behavior, but it’s the more it drags down, the closer you are to that end. And I understand markets can going to go down for two more years. I get it. I’m not saying that at six months, is it, but certainly it’s a better trade now being right skew position, than it was three months ago. And it will be better in three months from now. And so to me, it’s all just a matter once again, of sizing, of managing your downside, of following your process, of keeping right skew positioned, and of generating positive P & L along the way, the best you can. And all of that summarizes, sometimes it doesn’t look so great for a few months, well, so be it. If you believe in that final outcome, and when I say believe, I mean that in a scientific and thoughtful way, if you’ve been doing it for decades, you’ve done the work, you understand what you’re doing, then I think it’s a very worthwhile risk to take, versus what others are doing out there.

Jason Buck:

Two things on that. One is, what we’re really saying is volatility expands. What people are really saying is, the expected distribution of returns expands, and that people a lot of times think that’s only to the downside, but it’s the upside too. So you get those face ripping rallies. So that’s what you want to take advantage of.

Jason Buck:

And then the second one is, we started talking about paradoxes with Zeno’s paradox, is I’m just curious, how you hold it in your mind, the paradox of having positively skewed option trades, but then with re-striking, is essentially people would argue as a mean reversion strategy. So, how do you think about positive skew and mean reversion at the same time? Because a lot of people, they would consider that a paradox.

Wayne Himelsein:

Sure. Well let me go to the wide world of vol, is most long-vol positioning out there, is some form of vol arb. So, most long vol has another opposing short leg to it. So somebody, for example, there’s short the belly, there’s short at the money, for long out of the money. And so they’re like, “Oh we hold long tail on the S & B, and we’re paying for it with short, at the money.” And so you’re using this rich premium to pay for the teeny premiums. And you’re getting this positive spread, i.e., your short vol, to pay for long vol. That is by far the most widely utilized methodology out there in the vol world. And I’d survey that, and I’d say, “Well, okay, so you’re short vol to be long vol.” Well, I don’t get it. That’s counter thesis. You’re doing literally the opposite of what you’re trying to achieve.

Wayne Himelsein:

I love this analogy I always give, which is, you want to do the high jump, you don’t put on a weight belt. If your goal is to jump high, you take off the weight belt, and in fact, you take everything out of your pockets, in fact, get naked, because you want to jump as high as you can. I guess assuming you shave your legs or whatever. You want the minimum resistance when you’re trying to leap as high as you can. That’s the key point. But the problem with long vol, is it’s so expensive to carry. So, do we understand why everybody gets short, some strike, or some a calendar spread, or a strike spread? Why are they taking those opposite legs, these counter thesis trades? Because long vol has to be paid for. At the end of the day, you can’t just own long vol, you’ll bleed away to nothing.

Wayne Himelsein:

So, what we establish is that, in order to own long vol, people need to put on some form of short vol. And so I say, “Well, I don’t want to put on a counter thesis form of short vol.” So, I’m going to do an analogous short vol, which is mean reversion trading, against my long vol.

Wayne Himelsein:

So instead of saying, “Okay, I’m going to buy a long out of the money put, and short some other strike to pay for it,” no, I’m going to hold the long vol out of the money, and I’m going to mean revert its payoff as a form of short vol to pay for that longness that I own. At the end of the day, it is similar to being short a position, but I’m actually never short.

Wayne Himelsein:

So if there ever is a major long vol event, I have nothing resisting me. I’m jumping high without a weight belt. And so, when that panic happens, it’s 9/11, it’s COVID, I’m free! I’m free to leap to the sky. And so, I love that. I’m not constrained by a short, but if it’s with a monetization, that’s my way of infusing the mean reversion, infusing a “short side” against my long, to be able to pay for that long, because you cannot just hold a long. That’s the simple answer. So hopefully, that all makes sense, but that’s how I think about it in my mind.

Jason Buck:

I think to put maybe a finer point on it, if you’re using the classical way of people are short vol to pay for long vol trades, is when you put on short vol optionality, you still have convexity to those losses. And then you’re hoping that your long volatility convexity will outweigh those. But if you’re using a mean reversion strategy, then you’re saying then that’s really linear losses versus the convexity of just buying the options. But more importantly than that-

Wayne Himelsein:

That’s a beautiful summary, Jason. Say that again. That’s music to my ears. Exactly. Exactly.

Jason Buck:

But it’s even better that that.

Wayne Himelsein:

You’re concave to gain and linear to loss. In fact, even better than that, because you have stop losses on your trade. Sorry. Go ahead. Yeah, I love that-

Jason Buck:

Even better than that, if you’re buying options, you have convexity to your P & L, but then the mean reversion side is actually concavity to the losses because of the way options pricing works. So it’s not only do you not have convexity to your losses, you have a bit of concavity to that linear mean reversion. So you’re essentially taking linear losses with convex wins, where a lot of times, if you overlay short vol and long vol together, you can have convexity to both sides of that book. That’s that weight belt you’re referring to. It’s almost like a progressive weight belt in a way. It’s not just one weight, it’ll change dramatically by the force of the movement, in a way.

Wayne Himelsein:

Exactly. Exactly. Yeah. Yeah. Being convex to gain, and concave to loss, is the beauty of optionality. Like that’s it. And if you talk to most traders who trade delta one assets, who don’t trade options, who trade stocks, or indices or whatever it be, futures, all they want to do is let winners run, and cut losses quickly. That’s the general trading theory out in the world. I think most traders would agree with that. Can’t imagine anyone who wouldn’t.

Wayne Himelsein:

So, they’re creating a concavity to loss, and a convexity of the gain, synthetically. That’s what trend following is, the winners ride the trend for longer, you’re convex to the gain, and then cut your loss with a stop loss. That’s concavity to loss.

Wayne Himelsein:

So by being in an option, you’re just letting the instrument you buy, do that all for you automatically, and instantly, and not being subject to gap risk. So you have a “better instrument” and you have to pay for that instrument, which gives you all that you want as a trader. And so the way to pay for that instrument is some way to short vol to pay for that. And you either do that directly short vol, which creates the opposite with convexity to loss, or you mean revert long vol, which is linearity to loss. And so that’s where it all balances out.

Jason Buck:

Yeah. And like you were saying before, when we were going back to emotions and being a quan instead of maybe an emotional trader, that’s the beauty of options, is almost that four stop law. So it’s behaviorally forcing you to have that concavity to losses, or that predetermined price level that you paid for that premium is your actual stop, without having to worry about emotionally being able to put on the stop or avoiding that gap risk. And so, we’re recording this on July 19th, 2022, and you started to hint at it and everything, because I read your newsletter so I know, but I want to hear your thoughts on what’s happened in the vol or long vol space year to date, or what’s your take on it?

Wayne Himelsein:

I’ll say read my letter.

Jason Buck:

Well highly recommend to everybody, is it logicoffunds.com? Or I should know exactly… What’s your website?

Wayne Himelsein:

Yeah. It is. I don’t know that we post our monthly letters up there.

Jason Buck:

You not post that?

Wayne Himelsein:

Yeah. I don’t think so. I got to double check. I should know that of course, but I think for compliance, we might not be able to-

Jason Buck:

Oh yeah. Good point.

Wayne Himelsein:

… post our monthly letters.

Jason Buck:

I wonder if you-

Wayne Himelsein:

And I believe we don’t.

Jason Buck:

… if you blacked out returns, and just had the commentary, you might be able to post it. I’m just thinking out loud, but in general-

Wayne Himelsein:

Yeah. Certainly the commentary.

Jason Buck:

Yeah. In general, I think people have been disappointed by certain long volatility strategies, or some have done well, some have done poorly this year, but I think on your latest letter, you were talking a little bit more about Volavol. So maybe we can get into that a little bit of how you view the market year to date, and how Volavol affects the market, and Volavol closed the close, or maybe [inaudible 01:11:27] even.

Wayne Himelsein:

Yeah. What we were talking about in the letter is having seen a range of anomalous behaviors. And I was talking about earlier, how that we could look at all the different instruments, and then you could just look at the core, like, “What’s vol doing? How’s S & P moving?” And then you have the realized vol, which is of course the history of what it’s done. And you have an implied vol, which is how it’s priced right now, based on what we believe is people’s assessments of where they think it’s going. Oftentimes, thought to be predictive, but really it’s not, it’s just the price of where it is-

Wayne Himelsein:

… thought to be predictive, but really it’s not. It’s just the price of where it is right now, based on people’s assessments. If you look at the behavior of realized versus implied, we’ve seen these crazy divergences this year. Basically, the market, at times, looking more volatile, but the fear or the assessment of where it will be, going the opposite way, it’s almost ridiculous. Things keep on getting worse and you look back in your rear view mirror and, “Look! They’re getting worse and worse and worse. The wave’s getting bigger. It’s about to crash on you.” Then look forward and it’s getting less priced, as if the worst is now all behind us. They keep on saying that, as the wave’s approaching behind you and you’re like, “When are you going to drown?”

Wayne Himelsein:

It’s almost like, what the hell is going on? What we try to convey in the letter is that these are massive divergences between realized vol all and implied vol in terms of not just directly, but their vol to vol. Which implies that they, themselves, are choppy if you will and it just shouldn’t be that way. I’m trying to think of how to give an analogy for this. It’s just that the things that we typically have seen in all years that we’ve studied vol’s behavior, which we’ve studied since … most of our data goes back to right after 1987. That’s when options really became mainstream and usable and studiable. We have data sets all the way back then, and we’ve just never seen so many divergences since then.

Wayne Himelsein:

That’s been, let’s say, ’90 to now is 30 years plus. When we look at vol, itself, we see one thing. Then we look at vol to vol and we see even more diversions. It’s not that means something powerfully in and of itself. It’s simply the fact that the more places we look … you open the car hood and you look at the carburetor and then you look at the oil and then even the window washing fluid is the wrong color. You’re like, why is everything wrong? That’s really what we are trying to convey is, nothing looks normal. We study all this because to us, vol itself has a behavior and vol to vol has a behavior. When vol tends to be in a state of reacting, it has a certain volatility itself.

Wayne Himelsein:

It moves up and down to some degree. Then when there’s a breakout, those up and down moves of vol, itself, are larger. Those two things should move together. When they don’t, there’s all this bad happening, but people aren’t really scared. That’s the way to interpret it. I don’t know, there’re many ways to talk about it. I don’t know what exactly you want to get out of this or what part of my answer you like or don’t. I guess I’ll go back to you with that next, but there’s so many directions I can go. I summarize it as things are wrong from every perspective or angle and I turn it back to you for where you want to go next with that.

Jason Buck:

Sure. In a minute, I’ll probably get to floating versus fixed vol. We can talk about that a little bit about actual the price in your P and L and your returns matter more on fixed rate. The idea I was thinking about was years ago, you and I used to talk about a lot of long ball strategies. This slow, grinding down market would be worst case scenario, pain trade. One of the things we talked about was mathematically, if that happened, if you kept grinding lower on a realized basis versus implied, eventually applied comes down so far that any sort of movement and realize would spike implied, but then maybe because of this vol to vol movement or this choppiness that we’re seeing on an intra-month basis. Then even on the flip side of that on an intra-day basis, that’s keeping vol at this medium sustained level where you’re able to have that grind down. Like you said, we haven’t had any face ripping rallies. We’ve had some inter days, but then we did actually see the top vol. Then they get quickly-

Wayne Himelsein:

The vol is very short lived. Yeah. I remember that there’s been a few days where vol suddenly woke up and we’re like, there’s vol. That was a big vol move that we expect. Vol is up and vol to vol is up. I’m like, that’s lining up. Then the next day, three days later, it’s all gone, like nothing had happened. The market keeps on grinding lower, so not only are the signals failing, but they’re failing in connection with what’s happening in the market, which is the wackier part. I think what I wrote about … not, I think. I know what I wrote about in that letter is this, that the information that’s coming out is there’s not much shock value.

Wayne Himelsein:

I think what I said in the letter is, breaking news inflation. It’s nothing. It’s not a pandemic that’s going to shake up the world tomorrow. It’s something that’s going to pan out over the next many years. Now there’s going to be supply chain issues. I think I’ve heard that for two years now, so it’s not an event. It’s not a shock. It’s not something that is creating panic. It’s a slow changing economy that, in and of itself, will only reveal how slow and changing it is with numbers that come out every three months. It’s like, let’s wait for the Fed. Okay, I’ll see you in three months to see what they do and let’s wait for the next housing starts or whatever it’s going to be.

Wayne Himelsein:

We have these month wide, two month wide, three month wide number outputs that are slowly and incrementally putting these boundaries on what the next few years will look like. The slowness of this outcome is nobody’s having to dramatically reposition their portfolio. They’re all expecting what’s happening. All the numbers are coming out well in line or somewhat around the boundaries of what people are expecting. It’s like, okay, let’s just keep on grinding down until we see where things are. Therefore, vol is not doing anything, because fear is not heightening.

Jason Buck:

Along those lines, in a way, you were referencing earlier, the VIX doesn’t matter, especially spot VIX. It’s untradeable. The best way to look at it is floating strike volatility is what it’s representing, which means not necessarily a thing we can actually trade, because we have to actually buy options at fixed strikes. What I love in your newsletter is you always show almost like a naive straddle versus your own P and L. Maybe talk to me a little bit about fixed strike, naive straddle, showing that you’re trading, how well it’s doing relative to a naive straddle, and maybe how naive straddles have done this year.

Wayne Himelsein:

Yeah. It’s the same answer to everything I’ve been saying is like a name straddle, because vol hasn’t taken off and the market’s been declining. You haven’t had that payoff. This actually goes back to what you were saying. What we were discussing earlier is repositioning your delta, you’re saying, if you know, if every time you’re gamma scalping and repositioning, you’re potentially putting on a little bit more risk to lose again. You’re monetizing some gain perhaps, but you’re repositioning. In doing that … where was I going with this? I was going to relay it back to your question. I lost my train of thought. Hold on a second.

Jason Buck:

Naive travels.

Wayne Himelsein:

Yeah. Going back to a naive, the repositioning is so different to a naive because a naive quote, just lets it go. I’ll call that delta accumulation. You let it go. By repositioning, you’re back to straddling every time and so you’re going to lower the volatility dramatically from a naive and not be subject to the pain. Now, if you’re in a vol lifting environment, the naive will serve you well. You’re in an environment like this where vol is actually not doing so well, relative to what’s happening in the world of course, then you’re actually going to lose in a naive versus that re-striking is saving you from what would otherwise be happening in a naive. There are certain months with a naive will outperform, because the market had enough vol and enough directional move for the naive to pay off.

Wayne Himelsein:

What we’ve noticed is every time that happens, it’s so violently and quickly retracts that, even though that one month we are off it, that very quickly afterwards, we’re outperforming again. Over time, that divergence of us versus the naive just keeps on going. Yes, there are certain months you could say, you should have been in naive that month. I’m like, that’s nice that month, but over the next three months, you’re far better than it, again. You’re already so diverged from the last two years that it’s almost never going to catch up to you. That’s where you’re remonetizing and having a positive hit rate on scalping, is generating profitability. Looking at it the other way, where you realize that just holding a naive straddle is not a strategy that works. Long vol is too expensive to hold, especially when vol itself is not paying off, is not contributing to the gain in your portfolio. It’s just a bleeding trade. Unless you have some mechanism around it, you don’t want to just hold straddles. That’s the summary I would take from all of it.

Jason Buck:

Yeah. For personal reasons, I wish you would publish a naive straddle index that I could point to versus the [inaudible 01:21:18] index, but there’s so many business things you could do at one time. Going full circle, we were talking about cyborg, man plus machine. When Kairos happens, you want to be actively trading using your gut and your intuition. A lot has come out recently about all these AI bots where there’s Lambda or GPT-3. I’m just curious, because you and I tend to talk about these things. What’s your take on if that’s actual AI or is this monkey’s on a typewriter syndrome and you have nothing to worry about?

Wayne Himelsein:

Full disclosure, I don’t know either of those acronyms that you mentioned. I don’t heavily at all follow the AI innovations and developments in the AI world. You have me on those terms, but if I look to the general question, what do I think about AI? I think it’s the same thing we’ve been talking about. It’s empiricism versus the nonlinearity of the world. We can look at the past and say, based on all these things that have happened. The perfect model says that this is the forecast and a lot of the time that works and Google or Amazon can recommend the next song for us that we’d like to listen to. It works in those environments.

Wayne Himelsein:

Then in dynamic, nonlinear environments, it breaks down, because things change in ways that have never been seen before. I know there’re these examples also that have happened in the AI world. I don’t remember the specifics but years ago when it was Google, I think, who was cataloging the photos and they’re doing all the photos and there’s all these stories of a thousand cats and they think they’ve identified a cat and then one day it’s a wolf or something. I’m terrible at telling the stories, but I remember some of these that at the time, I’m like, that’s funny, where got it totally wrong. It was one story, I think it was the military that a friend of mine told me that it was assessing the friendly tanks versus enemy tanks.

Wayne Himelsein:

They’d show the computer pictures of US tanks and pictures of foreign tanks. It’s like, this is the friendly tank, this is an enemy tank. Then it went out into the field and it didn’t shoot potential bombs at any of the enemy tanks. The question was, why not? They studied this afterwards and I guess the engineers discovered that in the pictures, the US tanks were always totally high resolution and the enemy tanks were always granular pictures … or grainy pictures rather, sorry. On the field, everything was high resolution so that none of them were enemies. What variable is it assessing to make its judgment? That’s the AI thing. I always think of all these stories and I’m glad I thought of one that worked for what I was trying to say, but there’s so many of them and I know the technology’s gotten better.

Wayne Himelsein:

I know, probably, the acronyms you described are some more innovations in the intelligent modeling of things. I know it works for chess and I get all that, but for me, once again, when it comes to chaos environments like the financial markets, when things like COVID and inflationary economies happen out of nowhere and Russia/Ukraine wars, I don’t believe that there’s enough information to ever model things perfectly. Humans have to be the ones, and I certainly want to use machines, but I don’t know that I could ever rely on a machine, given what I’ve seen in the last 30 years. I know I sound like one of these older folks like, things won’t change.

Wayne Himelsein:

Now there’ll never be an electric car and here, we’re all driving them. I don’t mean to sound like that, but it’s mind blowing to me that one can assume that such chaos and diversity of information can be calibrated in a way to be reliably forecasted with other than a human mind. I know what you’re going to argue. Well, a human mind is just a computer. Yeah, it is, but what is it that’s different? I know this is going to sound wonky, but it’s the emotional side. The brain is the reasoning side of us and there’s the emotion that comes in the adrenaline.

Wayne Himelsein:

We were talking about earlier, when we see a market crashing and I’m watching it, and I know what my brain has experienced, and I have the adrenaline of what’s going on and the portfolio and the size of capital that I have potentially at risk and all of those things coming into play. I feel like when AI’s get emotion, then maybe they’ll start to get closer to where we are, but I feel like emotion does positively contribute to our decision making, if we have properly learned to manage those emotions, i.e. not act wildly, but say, I’m feeling scared, let me, de-risk. When those emotions associate to rational outcomes and trades, then that’s something that if the robot doesn’t have the emotion, how does it know to feel that, to make it do that? That’s my final word on that.

Jason Buck:

No, it’s great. Then, as you know, if strong AI ever does get emotions, then it’ll be just as fallible as we are, as well.

Wayne Himelsein:

Yeah, exactly. I love that. Thank you. What a great counter to that … or response. Thank you. Yeah, exactly. Exactly.

Jason Buck:

Yeah. Then let me timestamp this real quick, because we most likely will cut this, but it was on my mind today. I wanted to bring it up with you is our mutual friend, Cory [Hoffstein 01:26:51]. Him and I were talking about cyber security today, because a lot of times at our firm, that’s one of our primary focuses on cyber security. It’s interesting how much our industry’s changed a lot. There’s the business of trading, which is semi-manageable. Then there’s the business of running an investment managing business. Corey tweeted out today and then we talked about it later is whether somebody used social engineering or whatever, they were able to hack his phone, disable or change is QFA. That way they were able to get into his emails and his phone, et cetera.

Jason Buck:

Luckily, he was able to catch it fairly quickly. I know you and I have talked about before that you had an attempt as a man in the middle attack about a wire transfer. One of the people that reach out to Corey was a co-founder of a hedge fund we all know very well, that now is able to run a family office. He was saying, similarly to Corey, he reached out because he’s like, this is actually what concerns me more than about any of the trading or investing, is actually the protection mechanisms for our wires. What things they do are anything from whether you’re using internal signal chats to using zoom, when you’re talking to somebody about a wire transfer, or also trying to make sure it’s the same person you have relationship with. How is it the first time with that relationship? I’m just curious, because I know what you’ve been through is like, how do you think about, these are the true existential crisis to running an investment management company. If you got hit for a $10 million or $20 million wire that went to the wrong place, that can destroy your entire firm, no matter how well you’ve traded for decades on end.

Wayne Himelsein:

Yeah. That’s such a good point you make is that we’re all talking about trading risk and at the end of the day, the absolute height of it is operational risk. Yeah, we know that very well. We’re so focused on operational risk. In fact, my firm has had more hires on operational side than we’ve had on the trading and quant side. Our quant team has been the same team and once we started growing and it was all about operational risk and operation and that’s really what’s grown the most in the last few years is that side of us. Exactly to that point, it’s QFA and it’s BitLocker and ransomware protection and virus shields. Go down the list and we have this whole cyber security plan and different providers we use.

Wayne Himelsein:

At the end of the day, it’s funny, as I was discussing this exact issue with someone recently. I’m like, so much of it comes down to common sense. We got an attempted attack and we have all this cyber security and yet somebody did this. I’m not going to explain the trick live, because I don’t want it repeated, but it was something that came to us. It’s noticing something. It’s being hyper aware knowing that there are so many people out there in the world trying to intercept. Something looked weird and when it looks weird or you feel anything, just holding back and saying, you know what, I’m not even going to trust my QFA right now; I’m just going to pause and figure out if this is real.

Wayne Himelsein:

We just got an email two days ago from something that looked like the SEC and there would’ve been no reason for this to come. Right away, I’m like, I don’t trust it; don’t click that link. It made it through our spam and our phishing filters and all the stuff that we have, which is really well set up. Then we contacted a consulting firm and say, have you ever seen the SEC come from this address? They’re like, yeah. SEC sends that all the time. They’re looking for an answer to a question and it was minor. They needed one of our people’s XXXX. It was … not silly. It was just pure information.

Wayne Himelsein:

They were just asking us and they do it very securely, but it was benign. That’s the word I was looking for. The point I’m making is as soon as I saw it and the SEC I realized to myself, that’s the word that bad people in the bad side of our industry would use to try to get to us, because they know how much we’re going to be attentive to an SEC email. That’s the first thing we’re going to click, because during the daytime, that’s what your adrenaline is going to … oh my gosh, I better click that. Being hyper aware of it, to me, it got through enough filters.

Wayne Himelsein:

Therefore, once again, going back to AI versus the human, it’s the human who has to protect themselves. That’s what I say. You can’t trust the AI of the phishing and spam filters. You have to trust yourself and anything I ever see now that I don’t fully know the person or trust or be on that direct call, getting the wire instructions in person, I’m not going to send money or move money or allow it to go anywhere. That’s on top of having two people who signed for money to move from our account and all the stuff that we have. That’s all just what everybody has. At the end of the day, it’s not trusting the AI, but trusting your own vigilance, I guess, is what I’ll say.

Jason Buck:

Yeah. It’s shocking how advanced these phishing attacks have been. When you look at the email and everything, it looks completely legit and everything. My default at this point is I don’t click on or reply to anything, so hopefully if it’s our overlords, so to speak, they’re at least empathetic there. Maybe we might miss a few of them, because we’re afraid of clicking on any link that could potentially be nefarious.

Jason Buck:

With that said, Wayne, I always enjoy our conversations and I appreciate you being able to come on the podcast. I look forward to our future conversations, as well.

Wayne Himelsein:

Yeah. Thank you very much for having me. I enjoyed it very much. These conversations go in a long and windy path and I love it. Good talking to you, Jason, as always.

Taylor Pearson:

Thanks for listening. If you enjoyed today’s show, we’d appreciate it if you would share this show with friends and leave us a review on iTunes, as it helps more listeners find the show and join our amazing community. To those of you who already shared or left a review, thank you very sincerely. It does mean a lot to us. If you’d like more information about Media Fund, you can go to mediafund.com. For any thoughts on how we can improve this show or questions about anything we’ve talked about here on the podcast today, drop us a message via email. I’m Taylor@mediafund.com. Jason is Jason@mediafund.com or you can reach us on Twitter. I’m at Taylor Pearson and Jason is at Jason Mutiny. To hear about new episodes or get our monthly newsletter with reading recommendations, sign up mediafund.com/newsletter.