Fill The Gap Episode Thirty-One, with Clint Sorenson, CMT, CFA

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Summary

How do the tenets of trend following apply to private equity and venture capital? What does Eminem’s final rap battle in 8Mile have to do with client communications strategies? How could macro volatility be a helpful landscape for active investors over the coming 18 months? Find answers to these and so much more in the latest episode #31 of Fill the Gap!

This month’s featured guest is past CMT board member, author, OCIO, asset allocator and voracious lifelong learner, Clint Sorenson, CMT, CFA. Clint is a Co-Founder of WealthShield LLC and has long been dedicated to innovating and accelerating the investment landscape. His unique system leverages proprietary quantitative strategies, by fusing together behavioral finance, fundamental and technical analysis.

This month’s fast-paced conversation covers a ton of ground, so buckle up and sharpen your pencils for an interview that will impact your way of thinking about every aspect of your investment strategy!

Enjoy episode #31 of Fill the Gap with special guest Clint Sorenson, CMT, CFA.

Fill the Gap, hosted by David Lundgren, CMT, CFA and Tyler Wood, CMT brings veteran market analysts and money managers onto a monthly podcast.

For complete show notes of every episode, visit: https://cmtassociation.org/development/podcasts/

Transcript

Tyler Wood, CMT 00:13
Welcome to Fill the gap, the official podcast series of the CMT Association hosted by David Lundgren and Tyler wood. This monthly podcast will bring veteran market analysts and money managers into conversations that will explore the interviewees investment philosophy, their process, and decision making tools. By learning more about their key mentors early influences and their long careers in financial services Fill the gap will highlight lessons our guests have learned over many decades and multiple market cycles. Join us in conversation with the men and women of Wall Street, who discovered, engineered, and refined the discipline of technical market analysis. Fill the gap is brought to you with support from Optima, a professional charting and data analytics platform. Whether you’re a professional analyst, Portfolio Manager or trader, Optima provides advanced technical and quantitative software to help you discover financial opportunities. Candidates in the CMT program gain free access to these powerful tools during the course of their study. Learn more at optima.com. David Lundgren, welcome to Episode 31 of fill the gap, the official podcast of the CMT Association. It is great to see you my friend. How you doing?

David Lundgren, CMT, CFA 01:51
Fantastic Tyler.

Tyler Wood, CMT 01:52
That was perhaps the fastest most action packed hour we have had in an interview of fill the gap. What are your thoughts on Clint Sorenson CFA, CMT?

David Lundgren, CMT, CFA 02:03
I mean, I don’t know. I think that was, in many ways, I felt like I was talking to Jerry Parker, again, in with his, the phrase I use in our discussion was devote dedication to trend following all things trend following and I think for our listeners, if there’s if there’s any doubt about what the value is of trend following and how it is used and implemented across a vast array of portfolios, both in terms of dollar assets, as well as individual client solutions, this is the interview because we touched on everything in a whole lot more than I was expecting to be quite honest with you. I mean, it was fantastic.

Tyler Wood, CMT 02:35
Yeah, I think to me, the the ability for Clint to articulate the values and virtues, but also, as he said, the eight mile talk that he has with financial advisors or super important investors, right, start with all of the problems, start with all the negative start with all the things that are counterintuitive to our behavioral structure, everything that’s hardwired about how we think about investing. And,e once you’ve laid out all the negatives, then the people who are as you said, still on the bus can start to appreciate how long term diversified systematic trend following is going to give them what what they state is their objective. And as the whole time Clint was talking, all I could think about was, you know, everybody states a goal, you know, I want to be able to run a marathon or I want to be able to, you know, lose 50 pounds, or whatever it is, and they can commit to the idea on paper that, you know, every day, I’ll go to the gym, and I’ll just put 45 minutes in, but some days, there’s gonna be you know, thunderstorm or it’s gonna be really cold outside, or you’re gonna wake up not feeling great, or, you know, you’re, you’re just not going to want to go and it’s in those times when sticking with the model or sticking with the plan is so important, but really hard to do behaviorally.

David Lundgren, CMT, CFA 03:47
Yeah, that’s what I’ve found in my 30 years of doing this is that not not just for my clients, but, you know, it took me a long term as a trend follower to, to stay resolute in my belief in the process, in what we’re trying to do it, you know, trying to find these right tail events, or these outliers as Clinton and Jerry talk about, about them, finding these outliers, there’s only really one way to do it, it’s trend following, but that because it’s the ultimate, you know, the pinnacle of what we’re trying to accomplish in investing because it’s so it’s so sought after, by definition, it’s going to be hard to do. And so we sometimes when it’s when it is actually in that moment hard to do, we lose sight of oh, yeah, this is supposed to be hard. It’s not supposed to be easy.

Tyler Wood, CMT 04:28
You know, while we were together in Boston, Dave, you shared a little little bit of the personal feelings of going through this which you’ve done for 30 years as a trend following investor and I think the analogy you used was you know, you can you can have somebody tell you okay, I’m gonna punch you in the face now and you might be totally prepared for it know that what has come even know what it feels like still kind of hurts when it happens. And and I think what what Clint identified as that compounding nature of, you know, the end clients emotions, passing up to the advisor or the client-facing role where where those that get compounded because all they’re trying to do is please the client and take care of the relationship. And then you transfer that backup to the asset manager and suddenly the the throat to choke is getting a lot of attention at certain times in the cycle. And that’s, I think, I think, in this episode, maybe it serves as a little bit of that, that eight mile rap battle at the end where you know, trend following is a beautiful thing. But, just because it’s elegant doesn’t mean it’s simple to execute. Exactly. Yeah. Well, without any further delay, let’s bring our audience into Episode 31 of fill the gap, the official podcast of the CMT association with past board member Clint Sorenson CMT CFA

David Lundgren, CMT, CFA 05:50
Welcome to fill the gap, the official podcast of the CMT Association. In this episode, we are joined in discussion with Clint Sorenson. Clint is a CFA charter holder as well of course as a CMT charter holder and he’s the co founder of Wealth Shield. In the spirit of fusion analysis, Clint has developed several proprietary quantitative strategies that combine behavioral investing, fundamental investing, and technical analysis. Additionally, Clint has authored actually several index methodologies that attract by exchange traded funds and accessible for direct indexing. He’s co authored a book in 2015, titled Invest to Prosper, which I can’t wait to talk about. He’s also the past president of the CFA Society of North Carolina as well as a former board member of the CMT association. So for all of his success and accomplishments, it’s no surprise that Clint was recognized in 2018 as one of the 40 financial professionals selected for the investment news 2018 40 under 40 list. Clint Sorenson, Welcome to fill the gap.

Clint Sorenson CMT, CFA 06:53
Thank you. And I had a lot more hair back then. And when I was under 40, no longer under 40 anymore.

David Lundgren, CMT, CFA 07:00
Yeah, I once know a guy who shaved his head and somebody made fun of him for it, he said, “well I could grow all back if I wanted to. I do this on purpose.”

Tyler Wood, CMT 07:10
This podcast is all about misleading investors to understand that it’s totally stress free, right? I don’t want to I don’t want to give the wrong impression that there’s any kind of uncertainty or risk in markets, right?

Clint Sorenson CMT, CFA 07:20
Nothing at all, right? It’s perfectly predictable. Everything happens exactly as we expect.

David Lundgren, CMT, CFA 07:26
Yeah, super easy. Yeah. So before we get started in the depths of the conversation, why don’t you tell our our listeners a little bit about yourself your track through your career in terms of what got you to investing? In particular? What got you to lean on technical strategies and trend following? Yeah, absolutely.

Clint Sorenson CMT, CFA 07:45
Thank you love to and actually, this isn’t something I typically discuss, so it’d be fun. Yeah, so I was back, I went to UNC Chapel Hill. So the tar hills was my my college when I was there, I was actually a science major. So I was a biology studying chemistry and biology and psychology. And I was there and, you know, something happened in my family. And actually, I have a new book coming out and it’s a feature in kind of the introduction page that is there, but so that when my family family went through some financial hardships, and that really opened up a world to me that I had never had, I’d lived in a bubble, right? I didn’t under you know, they’ll teach in high school, or even college for that matter, how to manage just basic financial affairs, right, just basic financial literacy, I had, you know, zero. And I’m somewhat that way where I get like myopically focused on one thing, and I’m an idiot about everything, everything else. That’s the way I was in school. And, you know, it was such a shock to my sister and on her family, that I just started diving into the world of finance in general. And my grandmother gave me a book who she was very influential on raising me, she gave me a book, The Millionaire Next Door. And although not one of one that I recommend, now, it was a game changer for me in terms of sparking an interest. And then I just started reading everything I could get my hands on from, you know, all the rich dad poor dad series, which were popular during that time, too. You name it, right the and then I remember reading books from Benjamin Graham than I read the McGee Bible on technical analysis. And that was it. I was just hooked on investing clicked on finance. And so then I had to come up with a quick, quick way to break into that area with a science background, which wasn’t too hard. I ended up working for Wachovia bank started working with them and then they quickly got bought by Citi Group and got un-bought by Citi Group during the, if you remember this, during the financial crisis, so I got started in perfect timing. So I’m working there and I was working with a wealth team as an analyst and that was stressful. And I blame that for the haircut now because we you know, preferred stocks, everything was like, going to zero all these banks were going to zero and I was like having to analyze preferred stocks and subordinated debt and it was just a rude awakening to reality and that was the only guy that could do it with me. So we it was fun. It was an education trial by fire. I was taking the CFA program and and I’d read all the books, ’cause I remember back then it was, I think, I think it was Meb Faber that introduced me to the CMT originally. And then I started in you had to have a paper back then to get through the last level. And I had read and you didn’t have textbooks back then CMT, didn’t have textbooks, we had, like books that you bought, so I had read all the books that were already in the curriculum. So I was like, I’m gonna do this in between my CFA exams. And so that’s what I did. I took the I took the CFA. And during this period, I was at Wachovia took the CFA and I took one in December of I think it was 2000. I think I got awarded it in 2009. No, ’11 is when I got awarded that. So I started 2009, December two global one. Then I took level two in June, then I took the CMT. I think I took one and two of the CMT. And then I did the level three of the CFA, and then did the CMT. And starting back to this is no knock on CFA, but in terms of how fast we had to analyze data and when I was doing working with advisors who are working with retail clients and endowments and family offices, technical analysis was my go to, and really trend following. I’d written a bunch of letters to a bunch of trend followers and traders, Jerry Parker being one who we all know, and which he still has that letter, which is funny. But I began writing all these trend followers letters, just like, hey, let me I want to learn, I want to learn all about this strategy. Because it to me made the most sense. Technical analysis made the most sense in general, the trend following me because it was simple and elegant. But trick but technical analysis meant the world to me, because it was the study of price. And always remember, hey, that is ultimately that’s, that’s what we have. That’s the present fact, ultimately, everything else is conjecture and narrative. And so I got really centered on that. And yeah, just got thrown in and spent my time at, at Wachovia then Citi then Wells Fargo kind of perfecting my craft and working with teams and having a blast and then left to join a multifamily office, got an equity stake to kind of help run their portfolios. And that was the rest, that was history. And then after I did that, that was 2014. And since then, have just been, you know, building businesses in the asset management space, wealth management space, and having a blast doing it.

David Lundgren, CMT, CFA 08:11
Fantastic. That’s good.

Tyler Wood, CMT 09:26
So now I feel like totally unaccomplished, Clint. So through the great financial crisis. You’re working for a Wachovia you did the CFA and the CMT simultaneously and came out the other side. You said you still had hair in 2015?

Clint Sorenson CMT, CFA 12:58
Well, it was on its way out.

Tyler Wood, CMT 13:01
It was on fire.

Clint Sorenson CMT, CFA 13:04
Yeah, it was just crazy. It was crazy to me. And back then I was just, you know, like I said, I get myopically obssessed with just one thing and one thing only typically, even though it appears ADHD, when I have, I have a lot of things going on. But yeah, that was just it. And I was obsessed, I wish going back and I tell this to people all the time, like, really think about what you want to do and what your role is. And again, it’s not a knock on the CFA, CFA is very valuable. But CMT was has always been more applicable to me. And it was it, I tell that to people all the time, really think about what you want to do in this field, and what’s going to be the most applicable to helping you accomplish, you know, the outcomes that you desire, and I believe technical analysis was it for me,

David Lundgren, CMT, CFA 13:47
you know, obviously, the the financial situation you had early on in your, with your family was was instrumental and how you think about the world today. And you went on this deep journey, reading all these different books about financial literacy and whatnot. Can you can you summarize some of like the top two or three or five or whatever it is things that you took away from that, that really were like Aha moments, just like, this is what most people are doing wrong?

Clint Sorenson CMT, CFA 14:12
Yeah, it was, you know, again, for me, personal journey was really wanting freedom, flexibility. So the first path I kind of went down was really about buying or owning or partnering in businesses, right, that kind of creative outlet I think is super important. Being an entrepreneur, we live in the greatest number one the greatest time to be alive in my opinion. Number two, the greatest country to be alive in terms of fostering entrepreneurship, and to have that a and with the trend of decentralization is getting even better now, right? I mean, you’re able to like start a one person company or need any staff and you can literally have freedom and longevity and wealth for families for forever. I mean, it’s really incredible just thinking about how, how far we’ve come but that was the first path I went down was hey, entrepreneurship is super important. And I kind of learned that I’m not a I can never manage a business. I’m not good at managing people. I’m more of like the technician but like the E-Myth Revisited was was a book that really touched me in that regards figuring out how do you partner with people and unify people together on a common purpose, row in the same direction to accomplish something that benefits society. That ultimately was like, number one for me. And that was, once I discovered that I would, I was trying to convince my team at Wachovia at the time to go independent, because they were very, very good wealth management team and family offices and endowments, it was fantastic, enjoyed working with them. But, I tried for about three years to get him to go down the entrepreneurship journey, because I knew that was the that’s the key, right? That’s a great way out of what people call the rat race, right? So that’s something else you get from the book. But, this working as an employee, now you can make money as an employee and eventually build wealth, but it’s a lot longer trajectory. And so entrepreneurship spoke to me, so that was the first lesson. So build, buy, or partner in the business, become an entrepreneur, with whatever skill set you have that matches others, unite people on that common common mission. Number two, was the importance of making that business cashflow. Right, so cash flow is the lifeblood of an organization. I know we get hung up on fundamental analysis, especially on values and what’s the value of something. At the end of the day, that is a changing dynamic, just like correlations, just like any other thing, we measure standard deviations, we we think binary linearly, in this fixed mindset that goes to that does the same thing for value. And so I learned to focus really on cash flow, and try to make sure that we’re focusing on business, you build cash flow, then you take that cash flow, and you invest it in assets, and preferably, if you can get leveraged, but I’ll stick that to a different conversation. But leverage is key to in terms of building wealth. So, I kind of that was kind of the wealth formula, in my mind was, number one, get out, get into a business partner, unify with people do something new, you can learn to love in and you know, hopefully benefit society in some, you’re benefiting your customers, you’re providing a service, that was key. Number two, was make sure that that cash flows, right produces cash flow, and then reinvest that cash flow into assets, hopefully, where you could get leverage, because that just helps you compound and just wash, rinse, repeat. Just keep doing that. So, most of my investment experience personally has been in start helping start companies, founding companies or investing in companies, privately. That has a lot to do with just expert, you know, subject matter expertise and kind of focusing on one little niche and that’s opened up opportunities to invest in these other areas. I wouldn’t necessarily recommend that for everybody because diversification is a really critical thing. But, I feel like I still got some time to work on the diversification piece. I would say that’s the the other area that stuck in my mind is really diversify to minimize risk. And when you’re in your early years, I feel like starting from nothing, right? And building businesses, I feel like you have to, you have to concentrate. You have to you have to bet it all, right? And there’s I mean, this Another bad thing about school, not only the financial literacy, but they teach you that failure, some now bad. And I talked to my 10 year old daughter about this all the time, like there’s no such thing as failure system measurement where you are at the time, and it tells you that you need to improve. And like you need to continue to learn that I feel like we’d get so obsessed about failure being an event. It’s not an event. And I think that was another key element, it’s that mindset and learning that so those are probably the big thing.

David Lundgren, CMT, CFA 18:29
Can you speak to the difference between the philosophy of concentrate and the philosophy of diversify?

Clint Sorenson CMT, CFA 18:35
Yeah, so concentrate is I’m putting all my eggs in one basket, but I’m, I’m living in the illusion that I can control or watch that basket that that’s concentration, right? And whether I tell myself that to satisfy whatever, keep myself alive, maybe that’s all well and good. But that’s concentration, right? There’s significant risk in that. You’re betting it all right to hand a poker, right? I’m saying, Hey, I’m all in before I see any of the other cards, right? I’m going all in on the flop. That’s concentration, right. diversification, again, is spreading those eggs out, right? It’s in the way I look at it is taking a similar sized risk position a bunch of different assets, preferably in different sectors. I haven’t done that, yet – diversified in the same sector for everyone, which is asset management, wealth management, but I think that’s what you want to do as well as really diversify in spread your risk per se. Now, correlation analysis will tell you I don’t know how much I’ve spread my risk, maybe idiosyncratic risk of spread out a little bit. But, there’s elements or dimensions to diversification that I haven’t quite conquered yet. But that’s really what I mean by that.

Tyler Wood, CMT 19:39
Yeah. And obviously your your public market exposure can be highly diversified, but you have a core expertise in a very specific vertical. Do you keep all financials out of your public markets portfolio, so that diversification, Wealth

Clint Sorenson CMT, CFA 19:53
Management, everything? Yeah, so you know, I’m a trend follower through and through on anything in markets, so I allocate trend following managers and typically through fund structure, so like hedge fund structures, and I just let systems run that I can’t interfere because that’s another thing I learned is the importance of mindset behavior. Another reason why I think technical analysis is it’s underrated. I think people love technical analysis. Now, maybe when we all were, you know, getting started in it, it was underrated. But now it’s just becoming more mainstream, and rightfully so. But I think one of the most underappreciated areas of that is behavioral finance applications, because we are our own worst enemy. And, and professionals are worse, because you’d have, like, for me, if you think I’m dealing with financial advisors, and asset managers, and then they deal with clients, and whoever, whether it’s institutions or, or individuals, ultimately, we’re all serving the public somehow, right? So individual investors, and think about that compounding of behavioral issues, right, so you have the client who’s, you know, mad for whatever reason or upset or emotional about money for for, you know, rightful reasons, we know the reasons why it’s or it operates or rewards in her brain. And, you know, we have all these biases that kind of negatively affect us from a money perspective, or make money very difficult to master from a mind perspective. And then you’ve got to advisor all they want to do, or an institution that’s taking care of this person, all they want to do is please them, right. But there’s business risk, they don’t want to get yelled at and say you’re, this person is even worse than the end client. So their behavior is all shifting, and they want to change something and tinker. And, you know, most of the time, the best action to take once you’ve implemented a system is to remain disciplined to that system and stay with the system don’t deviate. And that makes it very, very difficult. And I know I’m, I’m the same way as every other human, I’m not going to say that I’ve got some sort of superpower, so I allocate out to managers to, to do the hard work, which is to stay execute, to execute. And, I give them that freedom so that I can go to them and say, Okay, your whole job is to execute, did you execute according to the process that I understand. And that discipline is what I hold them accountable for. And that helps me remain disciplined to hopefully get results I need to get from my client. So that’s, that’s ultimately, what I’m after from a behavioral perspective. So yeah, public markets portfolio, I give it all away, just give give it give it to a manager and then handle it. I don’t want to deal with it.

Tyler Wood, CMT 22:25
Dave has asked this question to a number of our guests. That control for behavior starts with education about the process and making sure you’ve got the right clients in your, in your book. Talk to us a little bit about how much education or how do you deliver the message to retail clients or through the advisors to the retail clients for something like trend following which is totally counterintuitive to the way every American shops, right? You don’t go into the store and look for everything that’s marked up 30% Higher, you were looking for a deal you’re looking for value, you’re looking for something that’s on sale? How do you communicate that that idiosyncrasy?

Clint Sorenson CMT, CFA 23:00
Yeah, it’s called the eight mile approach. So you seen the movie eight mile right when he goes out and his left final battle rap. And he just says all the bad things that that other person is gonna say about them. I go through all the bad things about trend falling right out of the gate. That’s how I start all the education then I go back into the behavioral aspects why works historically, cuts off the left tail allows you to hunt for outliers gives you maximum diversification. It’s robust, all the different reasons why someone would buy it. But once I get through all the bad reasons, they can usually come to grips with the strap, the ones who are going to be a fit for we’ll come to grips with the strategy. And then you got to monitor right, because again, like everything is dynamic behavior changes, risk tolerance changes. So we do a lot of modeling with the end client with advisors and their end clients on their behavioral tendencies, right. So we monitor risk tolerance, we monitor their willingness to take risks, just through feedback from the advisor and it always shifts and it’s based on the dare trend following too, I promise you this trends are going down in in pretty much the markets they watch like stocks, their risk tolerance has gone way down. And it’s the opposite. So we have to we do a lot of modeling on that to make sure that the client can stay in it because again, the worst thing we can have happen is we implement a strategy and then they abandon it at the wrong time. Because that behavioral component is I’m not gonna say more important, but it can it can really hurt or help a portfolio so someone’s saying, I’m going to abandon this portfolio because the strategy is underperforming in their mind because they’re watching stocks and trend following is not going to always look like stocks, one of the key elements we go over the eight mile approach, right? That can sometimes cause bad behavior and they’ll say I don’t know why this is down I wanted that right my the videos up 200% My trend followings up three, I want that out of the portfolio. And so that can be detrimental to their overall structure based on how you have their portfolio allocated. So we try to spend a lot of time making sure we have them in the right stuff. The end client that And that’s really an advisor, us, our team as well as the client kind of interaction and ongoing collaboration. It’s it just takes it takes a long time, there’s no kind of perfect cut and dry right thing to do. But that’s how we how we do it currently is, is focus on that and model out behavior.

David Lundgren, CMT, CFA 25:19
As a trend follower for my entire career, I can’t wait to hear what you would say are the bad things that you kind of put out there first, before you talk about the good things, what are the bad things that you highlight?

Clint Sorenson CMT, CFA 25:30
Yeah, so I always ask first question, who thinks the best way to make money is to buy low and sell high? Everyone raises their hand? Right? So that’s usually how I started off. And I say, Well, I’m gonna tell you, trend following, what I’m going to talk about today, I literally just did a presentation on this about three months ago in Dallas, it was to a bunch of like family offices. And I said, trend following by definition is going to be long at the tops and short at the bottoms, you’re not, you’re not going to time them or you’re not going to get out of the top, you’re not going to get you know, get in at the bottom, you’re going to be inherently based on the strategy long at the top. If you’re a true pure trend follower and short at the bottoms, how’s that feel, and you’re gonna be buying high and selling low. And when you start to have that conversation, those are usually where I start. And then I start to get into the behavioral aspects, doesn’t look like stocks. And I can show up to I’ll show one chart, which is trend following this comes from AQR actually just did a recent paper. So I’ve been using that a lot, where they showed the global 6040 but versus trend following. And they talked about the different macro regimes. That’s a great paper, by the way. But I went, but I’ll show a very similar chart, I’ll take like the SG 10 Index, or I’ll use done or somebody has got to publish track record out there. And I’ll compare it to the stock market or 6040. And they’ll see, okay, they’re generally going for a long term chart from the bottom left to the upper right, great. But then I start to dig into monthly deviations and how they differ in an annual. And so there’ll be they’ll go from the zoomed out approach to how they really look at their account, which is day by day, quarter, by quarter, whatever. And they’ll realize that okay, to it, this is a lot different. And I think that is the most critical piece of education and manage money is that piece because you got to put them in how they’ll feel something, not where they’ll have really the you know, hindsight bias and the illusion that they would have made a certain decision in the past that they probably wouldn’t have made behaviorally. So for instance, what I mean by that is they’ll look at a long term chart and say, Oh, man trend following to great No, wait, I want that in my portfolio or trend following did great from 2000 2003. i That was that was crisis alpha, I want that in my portfolio. I think that’s a super dangerous, because the moment it doesn’t perform to that exact expectation of the client on a down month, year, you got, you’re gonna have problems most likely, right. And we’ve seen a lot of that since the global financial crisis, we have these V recoveries, these quick moves down. And over the shorter term timeframes, you can have significant deviation between a trend following portfolio and just the stock market that they’re looking at. So going into those details, I think has been the best thing from an education perspective, and that’s gonna get people off the bus. And you’re gonna be able to at least build relationships and educational foundation for the people who are still on the bus once you discussed this.

David Lundgren, CMT, CFA 28:11
It’s really, I think, the way you just described it actually was really refreshing. And it’s, I’ll have to look, look for this paper myself, because I’m not familiar with it. But I do something very similar, where I try to educate people on what trend following looks like before they actually experienced it. So before you have these big momentum surges off the bottom and trend following lags, tell them that it’s going to happen exactly that way before it happens. So that when it does happen, they’re like, Oh, you told me about this, I gotta so this was normal, right? Yeah, this was no more. But still, it’s like, oftentimes you find that people, I don’t know what any other way to say this, other than to say this, I don’t want to sound like I’m being crass or anything. But sometimes people hear what they want to hear. So they, in the moment, it seems like you’re watching them, you know, engage with the conversation, if it looks to you like they get it. But when that actually happens, they still want out. So have you had that experience? What’s your strategy around that?

Clint Sorenson CMT, CFA 29:05
All the time. So in, you know, one of the things that so we, I operate from an investment framework, this is where the fusion analysis comes in, in a lot of that fusion analysis and I joke with Jerry Parker on this too. And this, again, is not a knock on macro or anything like this. But a lot of that fusion analysis is to is to sprinkle in information that they readily identify with so they’ll stick to the framework. But the framework’s bottom line trend following, in terms of how you execute is trend following. So what we do is we start with a macro framework, we’ll talk about the trend and expected returns, that’s valuations, right? Just Hey, what are expected returns supposed to be that gets especially advisors to institutional clients that gets them a certain amount of comfort, because we’re at least observing the data that I think is relevant, important. How are you using it? I mean, we’re just saying, hey, markets are high. returns are low, here’s where expected returns, but the trends not favorable. That’s kind of the way we talk through it. It’s more or less Got observation point. But that’s helped tremendously in education has been our investment for our cycle framework that we use. We also

David Lundgren, CMT, CFA 30:06
So when you say expected return, obviously you’re talking about like the next 10 years not

Clint Sorenson CMT, CFA 30:11
Yeah, 10, 20 years, like capital market assumptions on term expected returns, where there’s a little accuracy on subsequent returns and where valuation point is because it’s a long term time period and you’re talking about averages right at the end of the day, but it does help guide conversation. So we’ll start with that talk about the trend and expected returns valuations, we then talk about the trend and the economic cycle, both US and globally, but mostly US focus, because most of the clients we deal with are US focused. So, the advisors and their clients. So we’ll talk about what’s the trend and leading indicators, what’s the trend and inflation. So we get them so accustomed to looking at trends and everything, that it’s also very helpful, but we’re talking about the data points, and the economy will say, Oh, coincident indicators are trending lower, you know, leading indicators have been trending lower and now they’re starting to trend a little upward, right, where it’s just more observation, giving them comfort that there’s a nap, this type of analysis being done, which is being done. And then we talk about the Fed, how’s the Fed respond to these trends in the economy and inflation, and that’s, that helps, you know, that helps the client get more comfortable with the overall structure and it’s not just one thing. And then the last thing we talked about is pricing trends. And, guess what, we execute everything on price trends. So that’s the you know, we’re not going to go into something that has a high expected return, like emerging markets, for instance, unless it’s trending positive on a relative and absolute basis, and we find a manager that can get it, can handle that, or has it in a portfolio. So we, we do everything based on the trend in terms of how we execute. And I think that gets people comfortable, too. So it’s not only about Yeah, they’re in. But sometimes people just want more, they don’t think it can be that simple, elegant, and profitable, until they’ve been given time in the strategy. And so I think that’s the most important piece is can we get them enough time and a trend following strategy to see the merits of it, long term? And that is a that’s a gamble. You know, we’ve seen so many reports, people trying to time trend followers, I’ve tried it, I can’t figure it out. I don’t know if anyone has someone told me they did one time, reds used to run a big hedge fund. But I think that’s a very difficult thing to do. And so just trying to get people time and that strategy by talking about things they’re more comfortable with to give them more confidence in the overall approach has been has worked wonders for for us, you know, keeping people in those types of strategies. So beyond asset class diversification, sector diversification, and global diversification, you also have strategy diversification, you talked about the fund to funds models. So with all of the emerging managers in the complex, how, how many variations do you have on on trend following or, or how many different strategies are you guys running? Yeah, so we run, we run one commingle strategy, and then we allow, obviously, depending on count size, and everything to invest in other so we invest typically, in long term, diversified trend followers, that trade a lot of markets, keep their risk size low, and are hunting outliers and probably give you some hints there. And then we’ll we’ll also bet on some that are a little more volatile, right? So they may take on a little more leverage, we’ll position size them a little smaller in a bucket. But they’re typically long term trend followers as well, we have one short term trend follower in the mix, been they’ve been around for forever. And we’re also one of the one of the the founders of the turtles, it’d be good. But yeah, so that’s a short term, we use a short term program there. But for the most part, we’re systematic, diversified long term trend following we overweight, kind of lower volatility managers because of who we’re dealing with at the end of the day. And then we’ll sprinkling kind of these tactical exposures, where they’re a little higher volatility, right, but you have a lot higher probability of a big profit turning into a loss. So it’s a big swings there. Those weak managers like done, for instance, wouldn’t be in that bucket. So we do commingle vehicles, we will decide on the allocation to that strategy. And then we’ll do single manager opportunities where we’ll actually build a portfolio for the advisor in their in client, there’s typically bigger account sizes, and we’ll just build kind of their entire allocation with single manager mandates. So sometimes we’ll just go all in on one manager in the trend following space. But what I want there is again, trading a ton of markets, great risk control, systematic a hundred percent, no history of changing the strategy. I don’t want any mean reversion or any other strategy in that because I’ll keep with the strategy diversification on the other side. I want pure systematic, long term diversified trend following in as many markets as possible. So that’s typically what we’ll allocate. And then the other strategy diversification, we’ll we’ll go into other asset classes, right, like commercial real estate, we’ll go into venture capital, which I love venture capital too. It’s a lot like trend following just different you know how your risk control position size, right? Yeah. Right. So, but I love it because of the asymmetry. And again, small win rate, everything about it screams trend following to me. So we do it, we love venture as well. But we’ll we’ll allocate to those because a lock ups and capital timing, super important, we always allocate to those areas, any kind of private market, whether it be prime real estate, private equity, venture capital, etc, will allocate to those areas with the economic trend. So if the broad economic trends declining, we’re going to have a liquidity preference for those buckets. And when the broader economic environment is, is trending positive, which you can just look at leading indicators and mixture of leading and coincident indicators, whatever right, they all kind of help with measure that measuring that trend. And then we’ll allocate capital. Alongside that, because that’s super important in our history is last thing we want to be doing is placing a bunch of money when the economy’s in a downward trend, even if market trends are up in venture capital, and then the funding mechanism breaks down and you’re you’ve got major losses on the books. So we found that allocating alongside the business cycle, and you have a little more time to wait in those asset classes, at least from in our history. So we’ll we’ll do that as well. So that’s some of the strategy diversification, again, trend’s in mind, always the execution points, but we’ll allocate to other areas too,

David Lundgren, CMT, CFA 36:25
One of the benefits of being able to hand over a portion of your assets to trend followers, knowing that they’re going to manage risk in the downside, so that they want to have this large drawdown and when I think about trying to translate that and although conceptually and mathematically, private equity, venture capital, options, they all have this straight tail skew that make them I guess, options, you know, being long options trend following they’re very similar, because the downside risk is limited either via stops, or your premium is your total investment. But when you try to translate in again, private equity, venture capital has a similar skew. But when you try to translate that same concept as a portfolio manager, especially as an allocator, where you have three and five year lockups, there is no such thing is managing, like downside risk with stops, how do you gain comfort knowing that because you’re obviously just listening to you talk, you’re a devout, well thought out? trend follower, and manager and things like that. So how do you gain comfort to say that I’m going to put something in put some assets into this fund that I, I know, they can’t manage the risk? Like I’m traditionally accustomed to it? And I know, I can’t get my money back for five years. How do you take that leap of faith?

Clint Sorenson CMT, CFA 37:30
Yeah, so it’s all based on position sizing, and overall asset allocation. And so, you know, we, no one ever does it. But our recommendation is typically 50% into systematic, diversified trend find, most of the time people get to 20 to 30%, right, 20 to well, really 20 to 40%. And that would be like the most devout person to our framework. So I always start with what I know, I would do and what my recommendation is. And by doing that now allocation, and then your divert, you’re so diversified in venture capital, in terms of how you’re position sizing, because you’ll know exactly how much you’re betting on each and every company, and you know, your risk, you know, your risk role. And, you know, the 7020 10 rule, you know, at the end of the day, one of those, one of the 10 companies is probably going to be your big winner, and the rest are going to be mediocre, complete and utter failures, you don’t get your money back. And so that education component and knowing that position, sizing, discipline is critical, just helps me back into what does that allocation need to be based on their total total liquidity pool. So I handle all that through the allocation, which is a way of risk control. Problem is, in my experience, seeing a lot of firms do this, they manage allocations, according to a blended standard deviation, which I completely disagree with, I don’t think standard deviation is risk at all, I want all the upside deviation I can possibly handle and I might not want any of the down but at the end of the day, I don’t think that’s a very adequate measure of risk. And it also changes and in the other thing of an clusters and the other thing about it is correlations do the same thing. Correlations cluster change and are dynamic, and so that the a lot of firms, which gives us an edge independently, a lot of firms allocate to kind of create this smoothness in the portfolio right and maximize the risk adjusted return when you can’t eat risk adjusted return. So my goal is to is to make sure that we allocate the assets, they will stay in the portfolio, and we can maximize asymmetric opportunities. So that could be a small allocation to venture that could be an allocation of commercial real estate, which is when we did recently when the trend started turning positive we were this is this is why I love trend following trends turn positive. And I think it was 2017 or 18 in industrial real estate, and we spotted it just fall on the index and we found a manager and start allocating to industrial real estate and then COVID just fast forwarded ecommerce growth, like free ACC these things just blew up. And I started to think about that. I’m like, Man, that’s probably one of the best trend falling trades ever. And it had no stop loss, right? I mean, but we had different liquidity terms and positions. But I think that’s really that’s been fun for me is to apply trend to these other areas. But you do have to be back to your original question how you control risk without stop losses. It’s all position sizing and allocation. I think that’s the critical and taking time, right? In these private asset classes you don’t, it’s not like something that prices adjust like that, like in the futures market or in the public market, really. I mean, it takes a while for prices to adjust. I’ve seen those trends move a lot slower allocation decisions, there have been a little easier for me, then, you know, allocating, if I was running a trend following portfolio, which I used to when I ran individual positions, ETFs whatever, that’s very difficult to do in clients, because they see every single move, they started to question every single thing, advisors, question every single move, and that was it for me, I was like, No, we need to, we need to help them help them and get them managers and strategies that can keep them in bed.

Tyler Wood, CMT 41:07
So I’ve heard lots of technical analysts say you know, just get the get the company name, remove the ticker from the chart, and I’ll I’ll be much better because I won’t know anything about the name. So 2023 You know, the narrative around regional banks and financials generally, you know, people were panicked. It was gonna be 08′ all over again. And here we’re seeing financials outperform the S&P 500. So what a, what a joke, the market plays on all of us.

Clint Sorenson CMT, CFA 41:32
It, it tries to hurt the most people at the most, the most often, right,?

Tyler Wood, CMT 41:37
Exactly. So my question to you is, at what point is there some benefit to specialization, like having a manager that’s focused on emerging markets and not diversifying across, you know, all all equities? Or, you know, somebody who’s doing Commodities Futures Trading, maybe not having any, any diversification to other asset classes? Where do you draw those lines? Or where do you find that specialization actually improves their performance?

Clint Sorenson CMT, CFA 42:04
I don’t think it improves it. I think I think you have to make big blanket asset allocation decisions. So I like trend following for everything liquid. And then I make private investment decisions around the periphery to complement not really complement a portfolio but to maybe capitalize on some themes, or the illiquidity premium, or some return enhancement strategy. Give me a little more volatility without well laundering the volatility according to Cliff Asness, you now do because private markets, the market, obviously, so yeah, I mean, some of that’s just gamesmanship, to build a portfolio to allow for long term compounding. And I like lockups. There’s a considerable body of evidence to suggest, actually CFA published this long time ago. It was in their text, I think in like 2009, maybe 2010. But it talked about a direct correlation between lockup period and return. And I was like, yeah, because it’s time and you know, time is the most important piece of compounding. The reason I love trend following is because it helps it essentially is a system I can stick with. It’s, it’s simple, it’s elegant, it’s beautiful, it’s robust. You it’s complete, anti ego investing, right? It’s not about your win rate, it’s the opposite, you’re gonna be right 40% of the time, if you’re great, right? It’s all about just maximizing your wins, cutting your losses short. And it’s just so simple and counterintuitive, and goes against our Myopic Loss aversion and everything that we are like behaviorally programmed to do, it does the opposite. So that’s why I fully embrace that. But I don’t really think that investing in specialist actually enhances returns a lot at all, from a mathematical perspective, I think it enhances returns from a behavioral perspective. So there’s, there’s a key always we say this at our firm a lot. Mathematically optimal, is not behaviorally optimal all the time. Sometimes it is. But I find a lot of times that what’s behaviorally optimal for an advisor in their client, whether it’s an institution or individual is typically not mathematically optimal, right? You have to give them enough optimization, but also enough bedazzlement that to keep them in the seat, right. So we do a lot of like pre IPO stock raises, just to keep them engaged depends on the client, but we have them, we have them grouped by aggressive so they’re emotional, and they have a high risk tolerance. We have a moderate client would be someone that’s, well, we have a moderate aggressive and moderate conservative, moderate conservative, is more emotional about money, more risk averse, moderate, aggressive, more, is more like logical about money. But their risk aversion is typically moderate. Right? So they just don’t want to lose a lot but they have good expectations. And you’re conservative are typically all the way emotional and risk averse as as they could be right? And that doesn’t change a whole lot. And so when you think about that, I feel like doing aggressive clients, sometimes giving them, “hey, we got a Space X raise,” or “we got access to open AI,” these little things that are positioned sized enough for him in the venture bucket to make him excited and keep them in the strategy. I think that there is a lot to say about that type of behavior when you’re talking about private wealth, right? When you’re talking about individual clients and family offices you’re serving, there has to be enough of that, to keep them engaged. Because trend following is boring. And I like boring, but it’s, it’s boring, and they’re gonna they’re you got to keep them sometimes keep them occupied, or occupied, especially if they’re emotional about money. I think it’s super important to have other elements. So that’s where we incorporate specialization. So we’re gonna bring in this pre IPO manager, we’re gonna bring in emerging markets, here’s why. Or if they have a mandate, right family office, sometimes they have internal investment resources, they’ll say, hey, we want to get big into life sciences, or we want to allocate heavily into emerging markets. Do you have any recommendations, and then we’re just filling a mandate there and giving them recommendations. So that’s, that’s where specialization comes in. But I I am not so sure it adds any value from a return perspective, mathematically speaking. I think it’s more if it does add value on the return size, it’s because you keep clients in the seat and keep them keep them in the strategy. Yeah, sorry for the long winded answer. But that’s that was a lot to unpack in that one question. So Yeah, just look at restaurants in New York City. They’re still serving a steak, but they do it with like foam, and like all sorts of crazy performance art at the table just to get diners to come back to the restaurant, I tell you, Here’s money management rule number one, you either baffle them with brilliance, or bedazzle them with Bs. So you got one of the two.

Tyler Wood, CMT 46:41
Yeah. So as we’re coming into our last 10 minutes, let’s talk a little bit about where we’re at current market cycle, what you’re seeing in leading indicators, how you’re thinking about, you know, broad allocations. What’s your perspective right here?

Clint Sorenson CMT, CFA 46:54
Oh, my goodness, I think now is the best time I’ve ever seen to be an investor hands down. And here’s why. And I’ll talk about it from kind of the macro reasons why. Number one, you have this huge Deglobalization trend that we kind of, I guess it kind of really ignited prior to COVID. But the COVID was just an accelerator, right? So COVID just acted on it, supply chains were all broken down. We started this massive offshoring. In the US, you start to get geopolitical tensions rising, you got a lot of macro volatility, the Fed printed an amazing amount of money, right? 4.4 trillion in like two months. And then if you look at what we added to the deficit by 2030, COVID alone is like seven to $8 trillion. I just saw on the CBO CBO report. So let me just massive amounts of money. And that created just an incredible opportunity in a lot of asset classes, because of the Feds response to that. So first, it ignited trends and everything commodities. I mean, it was it’s probably the macro volatility is probably one of the best environments to be a trend follower. So you saw trends and everything from copper to eggs to orange juice to cocoa to coffee, whatever. Short trends in energy earlier this year. I mean, think about this, we’re in the middle of a there’s a lot more. We’re we’ve got a, we’ve managed this transition to, to EV, right and green energy and all of that we really mismanaged that from an infrastructure perspective, so we’re like desperately short on these metals. And you have you have things breaking out everywhere. Everyone’s thinking oil is going to 300. And it’s going down. So I just I love markets like that where the unexpected happens. Then stocks this year, right? It’s no stock. No, everyone’s trying to figure out why stock shouldn’t go up. And like I get this question all the time, because I’m like, yeah, the economic indicators are down, period. I mean, actually, a lot of our internal data suggests that we’re coming out of a recession, not going into one. And and this is such a paradox, because you’re like, wait, we’re coming out. And then I’m like, Yeah, we’re coming looks like we’re coming out. And like we’re reaccelerating on a lot of leading indicators. And that looks vastly different from what we looked like last year. And the playbook has supported some of that financials outperforming utilities underperforming a lot of the defensive names really lagging. It was just such a This isn’t supposed to happen moment. And I love that in markets, I think that is where trend following and really just discipline, technical based asset allocation thrives. And we’ve had a big liquidity preference in private markets, and that’s where we see a lot of the pain. So leading indicators rotating down coincident are starting to improve rather Cohen’s indicators are still slowing so if you look at charts go on from top left bottom right what the NBR looks at know the recession, so it wouldn’t shock me right when you have real retail sales negative for six months you have industrial production negative. You have ISM below 50, you have new orders crumble, you’ve had housing volumes really tanked, got the existing home sales, average price trending downward. A lot of these things tell me all right, yeah, profits are negative, right. In fact, a third consecutive quarter of negative EPS you’ve got corporate profits negative year over year. All those things are downward trend, right at the end of the day. So it wouldn’t shock me. But I don’t think a recession even matters because by the time they announced that you’re out of it anyway. And so I’m mainly focused on these leading indicators and what’s not supposed to happen. And it to me, it just tells us that we’re gonna we could be in this environment for a while, because what happens in these types of environments is when you get what’s not supposed to happen, the Fed wants demand destruction, period, they want demand destruction so that they can get inflation down which it’s been trending down, but now starting to tick up again. So been trending down, they’re gonna stay tighter for longer until that happens that causes bank credit lockups, those credit lockups eventually spill into businesses. That’s why we’ve seen a spike in bankruptcies with companies over 50 million, you have the senior loan officer survey trending higher in terms of percentage of banks tightening all the things you see that continue to work against those private markets, we have a liquidity preference, because that’s going to create opportunity, we’ve got 2 trillion and almost negative net present value commercial real estate, and that’s probably a conservative estimate needs to be rolled by 2025, you got 15 trillion in debt that needs to be rolled federally, we’ve got all this long dated issuance, I mean, this is incredible, the opportunities I think, are going to be vast, because think about what the Fed has to do. They either have to prioritize inflation and remain tighter for longer, which just exacerbates this negative credit trend, which eventually spills into asset mispricings. Potentially or, or, or trends that could be longer term than what we’ve experienced, because they can’t just turn around and meet it with $9 trillion in QE. That’s going to be a very difficult thing to do politically, when we still have the precursors to inflation i.e wage growth and full employment. So, that is a recipe for macro volatility. And that tells me that there are going to be outliers, or at least I’m hoping they’ll be outliers, and I just want to be in the position to capture them. So long term, I think there’s some pain in commercial real estate, that’s going to happen. But it’s going to create some unique opportunities. You just got to wait and see where they’re going to be not sure it’s going to be office, but but I like industrial grocery anchored retail and suburban marketplaces, you know, the Great Migration areas. And then also like, some hospitality and lodging, which getting care from there. And then I like venture capital, eventually, because those trends have been down, we’ve got names down 60 to 90% because they can’t get funding to go IPO. So I think the big pre IPO names when we get liquidity trend change and we start to see them trend up, which we follow a lot of data from companies like eight view on that, when we start to watch that trend up, I think that’s going to be a nice little interesting area, because these companies would be in the S&P 500. If they were public, they’re huge. They’re waiting a lot longer to go public. And I think it’s such a robust market and stocks that I really like better than public markets. And public lives, we think rotation back to value as we tick up in in inflation we’re seeing that already happened on a relative basis. I think energy makes a lot of sense. I think cyclical value, I’m really anxious to get into small cap value, if the Fed does knock this recovery down with the further tightening or at least more credit contraction. We’ll see if that if that plays out. But I think that could be interesting. And the recovery would be, you know, small cap value. So I watch that very closely. Because I think that’s a that’s a great area. But yeah, that’s my that’s my current thoughts. Trend following is the core.

David Lundgren, CMT, CFA 53:17
What about AI? I get asked a lot about, you know, is it a bubble? Is it real? Things like that? What do you what do you think about it? What do you typically tell clients?

Clint Sorenson CMT, CFA 53:26
It’s definitely real. And I always quote George Soros when they asked me about bubbles, which is I like bubbles, you make money in bubbles. So, look, bubbles are great. This is I mean, we’ve got more retail participation, we’ve got incredible options activity, this is all going to create opportunity. Now for a long only manager, it might make you underperform. But again, think long term, this is going to be robust on the upside or bust. On the downside, I want to be able to just wherever the water flows, ride the wave, and that’s if that’s long, great, but short, great. I get so tired of the bull bear narrative on anything, just because I think why does it have to be either why can I just say I like to, I like to compound well for my clients and myself. So I’m gonna do I’m gonna go whatever direction that means to be in. And I think AI is the same thing. I think it’s awesome. I think AI is absolutely a real thing. I think there are some significant opportunities across all businesses. I think as an entrepreneur, the ability to create a one person company to do great things because you have AI as your engine, I think that has never been more possible than now and I think you’re gonna see people create billion dollar businesses, service based businesses with AI. I mean, think about an our instance, guys, if we’re gonna say hey, we’re gonna go offer Investment Consulting. We’re gonna be able to AI and have pre programmed language AI with this AI avatar of us are somebody you know, better looking than me out there. Just telling clients exactly how to be positioned – videos, content, you know, who knows what it’ll look like? So I’m super optimistic on AI and I love bubbles. I love this type of celebration of tech innovation. Not saying we’ll pop, I mean bubbles pop. But I think there’s opportunity in that too.

Tyler Wood, CMT 55:12
Not for the passive investor,

Clint Sorenson CMT, CFA 55:15
Not for which never makes sense to me. I mean, can we please address this, there is no such thing as passive investing. I’ve, every time I hear that, it’s usually by an index company who just wants you to stay in their index, because they get paid for you to stay in their index, whether through their through lending out shares, or through the actual asset management fee. I just can’t I can’t get with it. Just it doesn’t make any sense to just buy something. Don’t care about their trend. Don’t care about anything about the company, just buy it just because I’ve been told that that’s what stocks do, they go up. But if you look at history, we’re the only market for the long term trajectory with a positive rate of return over inflation. So I’d say we’re probably the anomaly. And so when you look at that, that’s just not a great way to approach markets. You’re just you’re saying you know something about the future, when you don’t really know anything can happen. And there is no guarantee that stocks are going to continue to go up. So I feel like you have to have risk controls passive investing without that makes absolutely no sense to me at all. We’re dealing with uncertainty, you have to have risk management.

Tyler Wood, CMT 56:22
Extremely well said, Clint. Absolutely. I hope for all of our listeners, they can reach out and contact you where’s the best place to send them?

Clint Sorenson CMT, CFA 56:32
Yeah, Twitter, wealthshield.co. And then you can obviously look me up on LinkedIn. And I’m, I’m pretty accessible. So any of those places,

Tyler Wood, CMT 56:42
Clint, as always, anytime I talk to you is a great way to end my day and really appreciate everything you’ve done for the CMT association for investors writ large. And thanks for being with us here on the podcast today.

Clint Sorenson CMT, CFA 56:56
Hey guys, so it’s my pleasure. Thank you guys. Good to see you guys again.

Tyler Wood, CMT 57:03
Fill the gap is brought to you with support from Optima. In addition to candidate study of the official CMT curriculum, Optima provides a full video course on all of the material that candidates need to know for each level of the CMT exams. Each course is broken up into modules ranging from 15 to 45 minutes depending on the complexity and length of the topics being covered. Learn more at optima.com

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Originally Posted August 21, 2023 – Fill The Gap Episode Thirty-One, with Clint Sorenson, CMT, CFA