The transcript from this week’s, MiB: Peter Borish, Tudor Investments & Robin Hood, is below.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, oh, I have an extra special guest. Peter Borish, founding partner number two at Tudor Investments where he worked directly with Paul Tudor Jones, most famously helping him put on a very aggressive short position heading into the ’87 crash. And then covering, not in the mayhem of that Monday, but pretty close to the bottom tick on Tuesday, really just a fascinating career, a unique perspective on markets. Not only did he serve on the Brady Commission looking at the ’87 crash, but his history of investing and trading and public service, both at the Fed and the Chicago Board of Trade and Treasury Department, really unparalleled, as well as just a pretty amazing track record as an investor and trader. And as a philanthropist, one of the co-founding trustees at Robinhood, really a fascinating character.
I found this to be a master class in a humble approach to markets and being aware of your own limitations in order to obtain the best possible results as a trader and investor.
Borish is a legend on Wall Street and I’m thrilled to have the opportunity to sit down with him and discuss his career and his approach to investing and trading and philanthropy.
So with no further ado, my conversation with former director of research at Tudor Investments, Peter Borish.
PETER BORISH, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, COMPUTER TRADING CORPORATION: Thank you so much. It just goes to show I can’t hold a job.
RITHOLTZ: That’s right, that’s right. You are constantly on to the next gig.
So I’m familiar with your work, but I bet a lot of younger listeners may not know of your infamy and what took place at the ’87 crash. We’ll get to that.
Let’s start out with just your background. What got you interested in markets and trading?
Well, I guess it’s sort of fortuitous. So when I finished graduate school, I always begin at Michigan because I’m a Michigan man.
RITHOLTZ: Go Blue.
BORISH: I went there for undergraduate and graduate school, and I finished graduate school in ’82, in what was really the real recession under President Reagan. And I was very fortunate to get a job at the Federal Reserve Bank of New York.
RITHOLTZ: Doing what?
BORISH: So I was doing, at that point, if you recall, it was the LDC, right, the Mexican crisis.
RITHOLTZ: Sure.
BORISH: And they were talking about, well, if Mexico increases a supply of oil, they’ll get a lot more revenue. I, being stupid, raised my hand and said, “Yeah, but if they increase the supply, isn’t that going to put downward pressure on prices?” And they’re kind of like, you know, you should be sort of thinking about research macroeconomic models. And that’s really where it went. And at that point, foreign exchange and futures and derivatives were just starting. 1982 was the year that S&P futures started. So I went down into that group and did some research. And being a little gearheady, I worked on the sort of internal Black-Scholes model for the Fed. And that’s how I got fortunate and started my career.
As I say, Wall Street is littered with former Fed people.
RITHOLTZ: That’s a good way of describing it. Littered with former Fed people. Because the Fed is a giant employer of economists and other technical researchers, and very often, they leave the Fed and go to big shops. You didn’t go that way. After you left the Fed, tell us about your next career move.
BORISH: So it’s 1985, I’ve been there three years, it’s about the time you start looking for a job and I had some job offers from sort of white shoe Wall Street firms and then through an acquaintance, I met this guy that was coming off the cotton exchange by the name of Paul Tudor Jones. He asked me to help him out because he was chairman of the financial exchange of the subsidiary of the New York Cotton Exchange. And they wanted to start trading some futures contracts. I’m like, “Look, I’m young. I’m single. What a dynamic personality. Great person. I’m going to give it a shot.” and that’s how I started out at Tudor.
RITHOLTZ: So Tudor Investments launches ‘85? ‘84?
BORISH: Paul started in September of ‘84. I came on in the beginning of ‘85.
RITHOLTZ: So literally number two at the firm? Is that where…
BORISH: Well there were people and support staff but sort of I was the first real sort of research professional.
RITHOLTZ: So tell us a little bit about what you guys were doing in ’86, ’87. What were you trading and what was he looking at?
BORISH: So one of the geniuses of Paul in really understanding futures markets in general is that most of the innovative risk management approaches came out of the futures markets because of the using margin.
RITHOLTZ: There’s no room for error. You can’t just, “Ah, let’s see if it comes back.” That’s not — and how you can trade futures.
BORISH: No, not at all. And so with the advent and the development and the starting of new financial futures markets, he was taking his technique, his approach, his discipline, and applying that to the new futures markets and his commitment, and this I think people have to realize because what one can do today, right, I have the FRED app on my phone, I can download massive amounts of data in hundredths of a second.
RITHOLTZ: Right.
BORISH: You couldn’t do that there. And he had a huge commitment through me for data.
We would hire summer interns to put data into spreadsheets, build models, work. He was willing to, and literally on the weekends, we would be on our hands and knees, taking out floppy drives, putting in hard drives, updating computers. And we were applying all that to the new markets with the discipline and approach that he had towards trading.
RITHOLTZ: So that’s an interesting difference about Paul Tudor Jones regarding his process. Very quantitative driven, very mathematical. But there’s another side to his approach which was way ahead of its time, very behavioral.
Tell us a little bit about the psychological approaches that he brought to both looking at markets but also managing himself.
BORISH: So the strength of Paul at that time and even today still is that because he had always traded on the floor and understood that most market moves come in extremes fairly quickly. Markets spend a lot of time doing nothing and then they reprice. So you have to have that discipline, you have to have that patience. And if you think it’s going to be an acceleration point, then you try to get larger, but you have to have a really tight stop. It’s such a contradictory approach because people want to be right all the time. And the way that you probe and trade is understanding that that’s not the case.
And he would always say, “Okay, they got me today, but I’m going to get them back with 100% interest.”
RITHOLTZ: So people also should realize, for those of you who’ve never traded futures, it’s not like options where essentially you could put up your losses in advance and all they could do is go to zero. Options, you’re on the hook no matter where it goes. It’s not like, well, we’ll just see how this trades. If it keeps going against you, you’re fully responsible and hence the commitment to tight stop losses and a disciplined approach to managing the downside.
BORISH: Yes, and the thing about futures is you must maintain your discipline. One of the problems I think with rookie options traders is that because if you’re buying them, all you can do is lose your premium. So if you have a belief in the market and you buy your premium and then it starts to go against you, you go, “Well, I still believe in it and I still have premium left.” So a lot of times when you’re doing that, you put the trade on and you’re mentally accepting the fact that you’re going to lose all your premium.
RITHOLTZ: Put up your losses in advance.
BORISH: And in the futures world, that you don’t do. You can’t lose your discipline because the market will discipline you regardless.
RITHOLTZ: Yeah, no, it makes a lot of sense. So you’ve said, and as long as we’re talking about discipline and management of trades, one of your quotes that I really like is, “Trading and risk management are inherently unnatural characteristics.” Explain what that means.
BORISH: With pleasure.
So first of all, we always said, “Discipline before vision.” And by that, it means we can talk and I can think and we can gossip and the market’s going here. You know, it’s kind of like gossiping about sports. That’s not really trading.
It’s a disciplined, rigorous approach. And so when I say it’s an unnatural feeling, is because we all, most of us, I’m used to it by now, want to be liked. And so you want to be there going, oh, you’re Long Apple, I’m Long Apple, oh, we’re all so smart. But you have to have that discipline to say, wait a second, it’s over, the move is there. So think about it this way, you got 100 people in a subway car who are all on something. If I get out and go into the other car, where I’m on the short side, I’m the one person in there. If I’m disciplined and I get stopped out, you can always squeeze one more back in the subway car. But when it turns, if I’m the only one there and they all come running out, that’s why markets go down faster than they go up.
So it has to be, in a logical sense, the ability to take the other side of the trade. Now that doesn’t mean you should be contrarian for contrarian’s sake. And that’s the difference in all these different approaches. So there’s the trend following, which is go with the trend. There’s the wave strategy, which says we’re going to try to find an inflection point here. They’re all good strategies, but if you don’t have a disciplined risk management on top of it, you’re not going to make money.
RITHOLTZ: Right, the challenge is the crowd is right. Most of the time, if you want to be a contrarian, you have to capture that two, three, four percent where the whole crowd is wrong, and get out before everybody heads for the doors.
BORISH: Yes, you have to be very mindful of inflection points. And I go through this all the time. People are like, oh, you know, the market goes up over time and it’s a straight line.
RITHOLTZ: That’s not trading, that’s investing.
BORISH: Yes, but even then, and I ask people, I say, well, you know, you think I look any older today than I did yesterday? And they go, no. I go, well, you think I’m going to look any older tomorrow than I did today? And they go, no, I go, great, two points, a line, never going to get old, which is fantastic.
RITHOLTZ: So let’s talk a little bit about ’87. The market had a huge run from ’82 through the beginning of ’87. Tell us a little bit about how you guys were positioned heading into that year.
BORISH: Let’s step back for a second, because markets don’t go up in a straight line.
RITHOLTZ: Right.
BORISH: They think about, yes, the low was in August of ’82, but there was a serious correction in ’84. And then even in 1986, there were some really harrowing corrections, particularly after July 4th, ’86 and the September expiration of ’86.
So it was really January of ’87 when it started to take off in that first part of the year.
RITHOLTZ: Upwards, like a strong rally.
BORISH: An incredibly strong rally. I think by the time we got to the high in August, right, it was up over 30% on the year. And again, going back to what I just said earlier, Paul gave me the opportunity to take sort of creative research imagination and spend it on some data. And we started being very early on collecting real-time data and also modeling. And I mentioned that we hired people.
So we took people and back then there was a book, right, the Dow from 1897 to present. And we had to type that data in the spreadsheet. It was very complicated.
RITHOLTZ: You have to keep updating it, right.
BORISH: But, well, you couldn’t download it and you had to check it. And of course, when people are putting in a lot of numbers, there’s typos, so you had to have charts just to see all those different things. And we started modeling and thinking, given where we were with the new financial futures markets. And if you think about financial futures in general or new markets, we always sort of about it as if you have a kid and they’re five years, six years old, you think you could talk to them, you can think they’re rational, but they’re not. And they do throw tantrums. And that’s happened a lot in derivatives. By the time you got to ’87, right, the futures were five years old, people thought there was going to be portfolio insurance, that there was going to be this massive, always liquidity that you could stay longer stocks and that you could sell futures against it. And there’s this assumption of continuity of liquidity.
So at the same time, we understand that there’s potential technical flaws underneath the model, underneath the markets, and we’re building this model, which is really tracking what happened from the low of 21, which we corresponded sort of to the low of 82, and what was going to happen. And when I first built this model I really thought that the top was going to occur in early 88 rather than August and the secondary top in October of 87 but then the technicals came together with the fundamentals and Paul being the great trader he was really had the opportunity to take advantage of that.
RITHOLTZ: So before we get to Black Monday, around what time of the year did you start seeing cracks in the underlying market? At what point were you looking at this and saying, “Hey, we have some time to go,” but you could see the beginning of the end was coming up?
BORISH: When the market started to pull back in August and into September expiration, remember back then there was only quarterly expirations.
RITHOLTZ: Right.
BORISH: So there was a lot more activity around that. And when we saw, and part of research is being able to replicate things, so you had always you had holidays and you see that. So you had Labor Day, you had three day weekends. So you could line these things up in terms of price activity, volume, and the likelihood. And if you go back to the ’29 scenario, you also saw what happened post-Labor Day, right? The top was September 3rd, ’29. Then you had the correction, then you had the rally. So when you sort of had the technical lining up with the fundamentals because of the issues that were taking place globally at that time, and at the same time, believe it or not, we a new chairperson in Greenspan at the Fed that had just come in.
So here’s a rookie. Now you had Volker Prior and as I like to say, you know, young guys have all the moves, but old guys win championships. And so he was in a sense challenged what to do with regard to that. And that was something that we thought post-crash that he was going to be very aggressive in and reducing interest rates, which he did.
RITHOLTZ: Well, let’s roll back pre-crash. So Friday before Black Monday, how were you positioned? How was Tudor Investments positioned heading into that weekend?
BORISH: So the analog really was ringing a red, red bell sort of on that Wednesday, right? There was a decline, you got to technical levels, you had a bounce, and then you failed.
RITHOLTZ: Right, a weak bounce that just had nothing behind it.
BORISH: Right, and then on that Friday, we felt that it was there and we were short.
RITHOLTZ: A little short, a lot short, what were you short?
BORISH: I think people have to give perspective. Remember, we at that time were not a particularly large firm. So for us, we were large short.
And then over the weekend with the news that was taking place and also the fact of the sentiment. There were still people that were very sort of bullish and people that felt that they could be protected and this is where most of these models, right, assume consistency, 24 hour trading, you’re going to be okay. And you could even go to 98, right, with long term capital where that was also part of their problem but on weekends, that’s not the case.
RITHOLTZ: Right.
BORISH: So you had a gap situation Monday morning.
RITHOLTZ: Market gaps down pretty substantially. There’s no bids to be found. You can’t get people on the phone. Tell us what that day was like as an actual trader, short a collapsing market.
BORISH: So, you know, it’s a very, very interesting perspective because when you think about it, and it’s also one of the advantages of why I say that it’s so important to have all these different markets. When you’re short something and it goes down, you’re a natural buyer.
RITHOLTZ: Right.
BORISH: So people think shorts are bad, no, they’re good.
RITHOLTZ: They’re the first buyers in any crisis.
BORISH: Yes, yes. And so then the question is, and as I like to say, here’s my definition of a quandary. Do you stay out of a market and watch everyone else make money, or get in and thereby cause it to immediately crash.
RITHOLTZ: So, but you were on the right side of the crash.
BORISH: Yes, we were on the right side. So there are a lot of people there that are in that quandary position because the market had been so strong and without discipline, the irony of markets is buyers are higher, sellers are lower. Right, everybody loved Bitcoin at 60,000, they all hated at 20. You know, that’s just–
RITHOLTZ: That’s human nature.
BORISH: Yes, so in this case, they didn’t know what to do. But then panic sets in and they were selling. So we learned from our experience.
RITHOLTZ: Tell us about that because I recall you saying that historically when you’ve looked at other crashes and the best opportunity to cover is not the day of the crash but the next day. Tell us how you came down.
BORISH: That’s correct. Because when I mentioned earlier about 1986 and July, in September we were short actually And then we covered on that Monday, and the market continued to go down until midday Tuesday. It also did that in September, I think it was September 13th, it’s a long time, so if I don’t have any exactly–
RITHOLTZ: Right. But generally speaking, a bad day, and people the next day in the morning, like just let me get rid of this stuff.
BORISH: And it’s changed a little bit now because of 24 hour trading, and so sometimes the extreme, you do close on the low and extreme, and there isn’t that much follow through the next day, but then there was definitely follow through.
So we waited and we were patient and we were one of the buyers on that Tuesday, the 20th. And so we performed a function, I think, that exactly what you want in the marketplace, right? Shorts, we’re covering, we’re being buyers. I’d like to think that, knock on wood, that maybe some of our buying help put in the low. But what we really did, that it wasn’t just stock index futures. we felt that the Fed and under Greenspan was going to be massively cutting interest rates.
Remember, the 10 year today is what, 370, 375?
RITHOLTZ: Just under four, yep.
BORISH: And back then it was well over six, I think it was closer to seven. And that historically, by the way, is thrown in the market today, I think the risk reward is we’re going more likely to there than back down to where we were.
RITHOLTZ: You’re not buying it, we’ll talk later about everybody predicting lower rates, we’ll circle back to that. But not only were you short equities, what was your fixed income positions?
BORISH: We started buying a lot of fixed income futures all across the curve, and particularly at that point one of the most liquid markets was the Eurodollar futures, and we felt that the Fed was going to provide liquidity, which they needed to do, and they did do.
And the irony of that whole situation is it was after that crash that we started the Robinhood Foundation thinking that those who were less fortunate in New York were really going to be affected by the downturn in the markets. But the Fed stepped in.
RITHOLTZ: Little did we know. Right.
BORISH: Yes, the Fed stepped in. They provided liquidity. The economy wasn’t as dependent on the equity markets as necessarily as it is today, as we saw post ’08. And who knows what’s going to happen now.
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RITHOLTZ: So for those people who may not have seen it, there is a famous documentary, I believe it’s called “The Trader” that follows Paul Tudor Jones around. If you haven’t seen it, it’s on YouTube and Vimeo and elsewhere. How did he manage the chaos of ’87? What was his day like?
BORISH: Well, it was a life changing day, really, for both of us. And there are good people and there are great people. And Paul is one of the great people, in my mind, not just as a trader, but as an individual, and why he’s so committed to New York City and philanthropy.
So there’s always a little bit of sadness in the sense that when you are short something and it goes down and there are a lot of other people that may be getting hurt. So that’s one reason as well. Do you go in and you intellectually think, “Okay, yeah, maybe we’re going to crash and we’re going to do something.” But emotionally, you’re like, “Wow, at some point that’s it. We’re not going to benefit. We don’t want to participate. We are not going to be short anything more after that next day. We’re going to wait, we’re going to see, and we want to be supportive of the markets and the economic system. To me, again, we’re relatively young. Paul’s five years older than I am. But that’s a lot of wisdom, and that’s something I learned from that.
RITHOLTZ: For a 30-year-old. And for those people who weren’t actively trading in ’87, the irony is, so not only is Black Monday down 22% and change on the Dow, markets finished the year flat to up 1%. It wasn’t a horrible year considering. And ’88, things just kind of took off again. Turns out we were early days of a long bull market and you’ve talked that very often you get that test early in a long secular bull phase.
Tell us a little bit about what the thinking was going to be post-87 crash, what it looked like a decade out.
BORISH: Well, there was one of the best divergences, technical buys in 1988. I think maybe the S&P made new lows for the Dow or the Dow Transports and it was unconfirmed and sentiment was so negative and this is where you have to be flexible as a trader because you’re like okay, the world is coming to an end and then I think we realized early on that it’s probably not coming to an end or at least not today.
And so now you have to look for your opportunities because remember you’re managing other people’s money. You got to get rid of your own opinion, shake your head out of that intellectual fog that you’re in and say here’s what the markets are telling me. I need to listen to the markets. And that was 1988 and when it really took off. And if you think about cycles and period and going into ’91 with what happened in Iraq under Bush 1, and again the same thing, oh my God. And that was also a very interesting lesson because that was the first time in history we had a pre-announced date to start a war.
So now what do you do with risk management? Right, you’ve got models, do you trade through it, do you not think it’s going to happen, do you not have risk on going into that?
RITHOLTZ: You’re talking about Bush II and the Iraq war in ’03?
BORISH: No, Bush I in ’91.
RITHOLTZ: So there was a deadline and…
BORISH: Right, and then he went in and the markets took off after that. You know, there’s a lot of good supportive, you know, material fundamentally, technically, around that time, because you were still recovering from the ’87, and people tend to remember the last thing that happened to them. So they’re always afraid because they think that the market’s going to go down, just as now, they’re afraid they’re going to miss out because the market was up. And I’m not so sure that they should be afraid of missing out.
RITHOLTZ: Let’s stick with ’87, we’ll circle back to today’s market later. So post-mortem ’87, you get tapped by the Treasury Department to serve on the U.S. Presidential Task Force on market mechanisms, head by Brady, it became known as the Brady Commission. What did you find? What was the process like of looking at what caused the ’87 crash?
BORISH: So first of all, it was an honor and of course I was the youngest person there and I’m still friends with a number of the people that were staffers. But I can just tell you in summary that we, Tudor, were so far ahead of every other firm on Wall Street, we didn’t even know. But all the data in the report, right, there’s a chapter on the market break, all that data came from us. None of the other firms had it, whether it was JP, Goldman, MS, Bear Stearns, you name it. And that’s a credit to Paul, as I said, the ability to not only want to do it but also to spend the capital to invest in data and computing at that time.
And the real conclusion of that is where we are today that all these markets are linked you know New York wanted to blame Chicago, there was the options markets and they all were sort of disconnected and that’s where the Joint Task Force with the Treasury, the CFTC, and the SEC. And that was also where we put in the circuit breakers, you know, sort of price limits. There was no price limits in ’87.
So that also–
RITHOLTZ: Meaning when stuff falls, hey, down 22%, that’s just the market. Now what is it, 7%?
BORISH: Yes. There’s a 3.5%, I think, a 7%, and a 15%. And the point is there’s a timeout, because we just mentioned a moment ago about emotion in markets, and you need to step back. futures markets have always had price limits.
RITHOLTZ: Right.
BORISH: From the…
RITHOLTZ: Lock limit down. That’s all you could do in any given day.
BORISH: And by the way, sometimes in the short run, right, that limit becomes a little bit of a magnet, because if the limit in soybeans is 35 cents and you’re down 33, do you really want to take a long position home overnight?
RITHOLTZ: Right. So two cents.
BORISH: But now you sit back and you have, in the case of the equities, it’s just a timeout. Let’s get it together. Let’s see what’s happening there. Market makers and it’s been, knock on wood, effective, right? Even in ’08 where you reached that.
RITHOLTZ: Or the flash crash in 2010 and 2011. We had those sort of…
BORISH: Yes, but we time out, we bounced, and now of course I look at some of those things and I look at the data as potential interesting technical indicators, but that’s for another day.
RITHOLTZ: So let’s stay with the concept of interrelated markets. I recall reading Tim Metz’s book, “Black Monday”, and he talked about how, I think it was the New York Stock Exchange put the Chicago futures index up on the wall so traders could actually see what was going on in index futures.
And it took a while before people realized all the specialists were lowering their bids because they were looking at the index futures. How interrelated are all of these markets?
BORISH: They’re completely interrelated because the key for liquidity is the ability to arbitrage, and you had risk managers. So the S&P 500 stocks, or at that time you had a smaller index which was about 28 of the Dow contracts and so you could buy all the underlying, you could sell the futures or vice versa or you could spin it any way you wanted.
If you liked 27 of them you could do that and sell the futures and be implicitly short the one instrument that’s not there.
So this stuff is all linked and that is important because to have a successful market you need investors, you need speculators, of course, you need natural buyers and hedgers, but you need market makers and arbitragers to tighten the market up so that there’s plenty of liquidity on both sides of it.
RITHOLTZ: So you mentioned a lot of the changes that were put in place post-1987. We’re still enjoying that. What was the fallout from ’08-’09? Are we still dealing with the aftershocks of that event? I mean, obviously, 2020 and 2021 and 2022, we’re still in the midst of, but is there still an echo of ’08-’09 today?
BORISH: I don’t know if I would say it’s an echo. There’s always a learning process when it comes to markets and liquidity events. And it’s always, in the short run, all markets move because of supply and demand for money. And in ’08, there was issues, needless to say, but there was also some things which have been recently sprung up.
For example, regulators saying, “Oh no, we shouldn’t be allowed to short financial institutions.” Now if you remember, part of the chaos in ’08 was associated with that because they banned short selling. It was incredibly smart, I guess, on the part of the regulators doing it right before an expiration. So you had this massive covering of eliminating short positions, but then you got rid of the market makers. Some of these financial stocks had 10-year ranges in 24 hours. That’s going to eliminate a lot of liquidity, and then the market’s going to find its own natural level, which at that point was a lot lower.
RITHOLTZ: Right. You want people stepping in as buyers to cover those short positions. You don’t want whisper campaigns mentioning companies are going out of business when they’re not. So that not shorting financial institutions kind of brings us forward to what’s been going on in the regional banks in 2023.
How do you look at the First Republics and Silicon Valley banks? Are these one-offs or is this part of something that’s more systemic? Or is this just the Fed raising rates so quickly that they’re breaking things?
BORISH: Wow. So that’s such an interesting question. So is it systemic? I don’t think it’s systemic. I think that it has a lot to do with the way that the management of these companies were running them. SVB was a particular case because you had this massive inflow of VC capital.
RITHOLTZ: Right.
BORISH: And the problem is those are always naturally getting taken out because you’re investing. At the same time, they decided to go, as the Fed is embarking on a rate hike campaign, not to have a risk manager.
RITHOLTZ: But they did have hedges on in 2022. They just decided, hey, these are so profitable, we should ring the bell.
BORISH: Well, yeah, that’s always, if you’re hedging, you’re hedging for a reason. And are you hedging to trade? There’s a difference, right?
RITHOLTZ: Well, they’re a bank, so one would assume their hedging interest rate duration risk, they just saw the win and said, hey, everybody’s going to get a good bonus this year.
BORISH: Right, but then they move from hedgers to speculators.
RITHOLTZ: Right.
BORISH: And if that’s not your professional job, that becomes extraordinarily challenging.
RITHOLTZ: As we learned.
BORISH: And, you know, First Republic, which was a different type of institution, and they were basically, think about it in the old days, they were giving away the toaster to try to get accounts and then when rates started to go up. So think about this, right? The 10 year at its low in 20 was 20 basis points. Now we’re at three seven. But historically, three seven isn’t very high. And it goes back to my earlier statement that people anchor to sort of the high or the low, so they assume it’s going back there. That’s a big risk management mistake to make that assumption.
RITHOLTZ: Let’s talk a little bit about computerized trading, helping traders become better at their jobs, and hiring traders. Let’s start with that. What sort of traits should hedge funds be looking for if they want to hire a successful trader.
BORISH: If you’re referring to a discretionary trader, right, so that’s one bucket versus sort of a model-based quantitative trader where you’re looking at their track record.
RITHOLTZ: Tell us about both.
BORISH: Well, so I’m going to start first with the quantitative, it’s a little easier. I’ve never had a quantitative trader come to me with a bad simulated track record.
RITHOLTZ: Right, well models are always fantastic.
BORISH: I’m waiting for the guy to come in with a minus two sharp going “Wait, it can only get better.” Then I —
RITHOLTZ: But by the way, what backtest ever is bad?
BORISH: Yes, yeah, well, I’m super. I can predict yesterday perfectly. I’m very good at that. I try to, you know, come on here, I’ll tell you what happened, no problem.
RITHOLTZ: Who has a better track record than Hindsight Capital? They’re the best.
BORISH: Yeah, and it’s the hedge fund is there, but it’s why, in seriousness, that, you know, the first line of every disclosure document is past performance is not indicative of future results, but everybody looks at past performance.
RITHOLTZ: Right.
BORISH: So on the quant side, you have to look at real-time data, and you also have to segment it to sort of its strategy relative to market. So if you look at last year, a lot of CTAs and trend followers did really well, and you’d have a great real-time track record associated.
RITHOLTZ: So you had a defined move in a specific direction that was sustained?
BORISH: Yes. So there’s two things about that. One they’ll come to me and go, “Oh man, man, we just had the best year since ’08. Another year where there’s a lot of dislocations.” And I’m like, “Man, that’s fantastic. Once every 15 years, do me a favor. Come back in ’13, I don’t want to be late.”
RITHOLTZ: Right. (LAUGHTER)
BORISH: But the reality is if you want to dig deeper in that, then you start looking at, “Well, what markets did you trade? Why did you do that? Why did you exclude COCO? Well COCO is not a good trend following market. How do you know that? Well then you’ve over optimized. So you really have to start digging deep, asking very, very tough questions when it comes to these quantitative strategies. Frequency of trading, volatility, draw downs, it’s, and all this is more of an art than it is a science.
And that also applies on the discretionary trading side. But on the discretionary trading side, you have that other element that you have to put on top of that, which is the emotional and the psychological. And one of the things I always say is that every successful trader has a near-death experience. I just hope they have it before we’ve allocated to them.
RITHOLTZ: Right. (LAUGHTER)
BORISH: And so it’s not that they’ve had it, it’s how you recover from it. And so it’s one of these things that math works. And so sometimes there’s a trader and he’ll come into my office and I’ll go, “Pete, I can’t believe it. I just had my worst day ever.” And I’m like, “Well, I’ve got good news and bad news for you.” And he goes, “Well, what’s the good news?” I go, “Well, you’re still within your risk parameters. You didn’t violate any of our trading rules. So you still have a job.” And they go, “Well, then what’s the bad news?” I go, if you’re in business long enough, you’re going to have a worse trade. Because that’s just the law of large numbers. Records are made to be broken. If I told you 20 years ago that someone was going to break Kareem’s scoring record in basketball, unbelievable.
RITHOLTZ: You would have left him, right.
BORISH: And here we are, LeBron James did it this year. All the credit in the world for him. But it’s a little bit like trading options. So if you continually buy premium, thinking a record’s going to be broken, you probably run out of money before it does. And if you continually sell premium, thinking the record’s never going to be broken, you go broke when it is broken. So you have to have that discipline and it’s an extraordinarily tough business.
RITHOLTZ: To say the very least. Let’s talk about a quote of yours that I happen to really like. “Fundamentals aren’t wrong, you are.” Explain what that means.
BORISH: It means that the market is the scoreboard. And if you think you’re right and you think the fundamentals are wrong, you’re going to take a small loss and turn it into a large loss. Trading works best when the fundamentals and the technicals intersect. Too often, one just looks at either one or the other. So we could say today, “Well, we think the fundamentals are deteriorating. There’s no way the S&P should be at 4,200. I’m going to get short.”
But there’s no technical indication in the markets today that you should be short.
RITHOLTZ: Right. The number of 52-week lows is falling, the breadth is pretty good, and when you look, especially outside of the U.S., a lot of positive uptrends. People have a tendency to ignore that, and they’re just focused at what’s going on. Look at the Russell small cap in the U.S. It’s doing terrible. We’re due to crash.
BORISH: That’s correct. So what you do for me in that case, I’m looking for, if you want to look to sell it and pick level then you look for the Russell to start doing better and reaching key technical levels and then you can probe and you look for divergences all the time. So you look at the transports which have been lagging for today but these are all signs they’re not things in which you should be taking action, you have to be patient and a lot of times you talk about traders and discretionary traders in particular and I’ll speak to them, not trading is a trade.
RITHOLTZ: Right.
BORISH: And just because you’re sitting in front of the screen doesn’t mean you have to do something and that takes tremendous discipline because particularly if you get paid a share of the profits and you’re like there’s nothing going on. Now some of the best traders I know they’ll be like okay I did something it’s 10:30 I’ve made some money I’m out of here for the day.
And that’s fine. However you do it, however you force your own self-discipline, but just trading to trade is a terrible strategy.
RITHOLTZ: That’s the great Warren Buffett quote, “Unlike baseball there are no cold strikes in markets.” You could sit there with a bat on your shoulder and just wait for your pitch.
BORISH: That’s correct.
RITHOLTZ: So let’s talk a little bit…
BORISH: But a lot of people are in the business because they love the action and sitting…
RITHOLTZ: Oh well we’re all junkies we’re all looking for that dopamine.
BORISH: So sitting with your bat on your shoulder is really tough for some people.
RITHOLTZ: Yes, yes, absolutely. I’m always surprised at traders who are also gamblers like to go to Vegas like to play blackjack it’s like don’t you get enough excitement from traders?
BORISH: I don’t gamble at all I don’t bet on — I’m a fan right so I’m a Michigan fan I’m a Nick fan, God I’m a Jets fan I’m a Mets fan so we can…
RITHOLTZ: So you are a glutton for punishment.
BORISH: Yes, we could have a whole psychological segment.
RITHOLTZ: Although at least Michigan has been doing, football’s been doing better.
BORISH: Yes, and they had a good run in basketball. But I’m a fan, I enjoy, I never bet on sports.
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RITHOLTZ: Let’s talk about betting on natural gas.
We have had a kind of wild market in energy over the past couple of years. Not just the Russian invasion of Ukraine, but all the things that have been happening in both oil and gasoline and natural gas. You’re a natural gas trader. How do you look at what’s going on in that market, and tell us where the price of energy is going to be in a couple of weeks or months?
BORISH: So, for everybody that’s listening, whatever I do, do the opposite, and you may have a chance of success. So natural gas, in terms of how it’s behaved, it’s had a round trip. So where the price is today is close to where oil was when it was zero in April of ’20, just to give you a sense.
So natural gas– –
RITHOLTZ: Crude oil is also round trip, and gasoline is almost a round trip.
BORISH: Yeah, but not nearly to the extent. So this again becomes listen to the markets, don’t listen to the gossip. And so where we are right now, in my mind, in natural gas, which is different than crude, is a little bit counter cyclical because we’ve had warmer than normal weather, we had extra storage, and that put downward pressure in winter.
Now it looks like that’s going to reverse and we’re going to have a sort of really hot summer, and you can ascribe that to climate change, or —
RITHOLTZ: El Nino and that stuff.
BORISH: Right, yeah, you can decide whatever you want to call it, but the facts are the facts, right? If it’s hot and we’re going to be burning and you’re going to need to be cooling, at the same time, a lot of this thought that natural gas and the economy was going to weaken, And in general, we were taught to try to buy low and sell high. We just talked earlier how most times in the markets, buyers are higher and sellers are lower.
So we’re sitting there trying to put a position on sort of spreading summer natural gas and hedging it a little bit by being short winter next year.
RITHOLTZ: So we’re recording this at the end of May 2023. How do you look at macro events, the Russian invasion of Ukraine just being one example, does that affect the way you look at what the market is telling you, or is that just gossip by the time it’s in the newspaper it’s already in the price?
BORISH: No, you have to look at all these things. I think there’s an important lesson here. When there’s tremendous amount of market uncertainty, you need to trade smaller. Because that’s what kills you.
Periods of low volatility, which we’re in now, then tend to be followed by higher volatility. A lot of models are predicated on looking backwards over recent volatility, and then you’re trading too large.
And I really want to distinguish, because people talk all the time about black swans. And they go, “Oh, this black swan could happen,” or, “That black swan could happen.” And I’m like, “If you’re talking about it, it’s not a black swan.” That’s risk management. That’s smart.
A black swan is when you wake up in the morning and a condo in Florida has collapsed or you wake up in the morning and Abe’s been assassinated. These aren’t things that you put into your risk management models. But if you survive, you win. So you should really probably at these periods of uncertainty. So is there going to be a Ukrainian offensive? What is that going to do? And how is that going to affect the situation with Russia? Are they going to be threatening? They are a nuclear power. Is that just a threat to try to keep them? Or God forbid, something worse happens. I have no idea. I don’t think anybody can have that idea because you can’t get into the head of the leaders of Russia to decide how they’re going to act.
But from a trading perspective, I think that you need to trade smaller. Now, one of the things that I find really interesting right now, this time of year, is that because if there is climate change and you have grain prices that are pre-pandemic levels, it could be really fascinating and exciting to have sort of a summer rally in soybeans and corn. And the risk reward of buying them right here is fantastic. Because you’ve had a wet period of time, if you get dry and you don’t have good growing conditions in the Midwest here, at the same time you have uncertainty in the Ukraine, which is a large producer of grains.
RITHOLTZ: Big breadbasket, yes.
BORISH: So, yes. So this could be, and there’s nothing more fun than a summer bull market in grains.
RITHOLTZ: So I’ve never quite heard that sentence before. Nothing more fun than a bull market in the summer and grains.
You’ve pointed out the psychology and self-discipline. How can you teach traders to manage their emotions and to not allow either their enthusiasm or despair to affect their trading behavior?
BORISH: The best teacher, unfortunately, is failure. And how you deal with that failure. So many times, people would come into my office after a really bad day, they sit down, they put their hands on their head, and they go, “Oh, why the hell am I in this business?” Now, what you can do, and we’ve all done this, if you get out of all your positions, you emotionally cleanse yourself. But are you able to get back in the game? Because you can emotionally cleanse yourself and leave the game, and you’ll never be able to make your money back. So how do you handle that adversity?
Success, okay, most people enjoy success.
RITHOLTZ: But it doesn’t teach you anything.
BORISH: Correct, in the trading business, it’s how you deal, what did you do? And you have to really be self-aware. Did I hold on to the position too long? Was I too big? Was I gossiping with other people and I lost my discipline? You really have to break it down and it all comes back to the fact that you have to admit that it’s my fault as a trader. I’m the one that screwed up.
RITHOLTZ: Wait, you mean it’s not the Fed’s fault? Because I’ve spent the past decade listening to managers and economists and traders tell me, “Well, my P&L would be much better, but this QE and the Fed doing this, how can anybody trade in that environment?”
BORISH: Yeah, as the years have gone on, I’ve gotten a lot better at taking credit for success and blaming others for my failure.
And, yeah, it’s a good way to go, but you’re living in Lalaland if that’s how you think. You are what your track record is and it’s the sports scenario. If you’re playing baseball and the team gives you a shot and you’re batting 150 and they take you out of the lineup, it’s not the manager’s fault.
RITHOLTZ: It’s the umpire. The umpire is calling those outside pitches strikes. How can anybody get a fair shot at the plate with that?
BORISH: That’s true but if he is just like in the markets, you have to adjust to it.
RITHOLTZ: That’s exactly right. So let’s talk a little bit about Robinhood. It could be one of the more famous Wall Street-based philanthropies in New York, especially given its longevity. How did the idea come about? How big a factor was the ’87 crash in the creation of Robinhood?
BORISH: So it’s probably, of all the things, something I’m most proud about, being associated with that since the beginning. And again, really kudos to Paul for his leadership in doing that. So as I said earlier, we really thought that there could be some economic struggles following ’87. And one of the things about trickle down, and I need to fully disclose, yeah, I’m a Democrat that believes in markets, is that when things go bad, it’s those at the bottom that get hurt first.
And we’ve seen that repeatedly. And so when we thought about helping New York, now you have to realize, 1988, we gave away $65,000.
RITHOLTZ: Right.
Not exactly a huge amount of money.
BORISH: No, last year we gave away 130 million.
RITHOLTZ: That’s a chunk of change.
BORISH: Yes, and —
RITHOLTZ: And you guys have been doing this every year for 35 years.
BORISH: Yes, and the model was different, and why did we start it? Because Paul’s an entrepreneur, and the one thing, and we’re market people, and we said, you know what, if we do a good job, we’ll be able to raise the money, and I don’t want people to give us money and us not spend it.
So we have two rules. One is if you give us a dollar, we’re going to put it out the door in the next 12 months. And two, we’re paying for the overhead, the board. So if you give us a dollar, it’s getting paid. It’s not being paid —
RITHOLTZ: 100 cents on the dollar goes out from donated cash.
BORISH: That’s correct.
RITHOLTZ: And who are the donors to the Robinhood Foundation besides you and Paul Tudor Jones and that original crew?
BORISH: There’s literally thousands and after 9/11 and Sandy and during the pandemic, tens of thousands of donors from all different sizes. Now we’re sitting here in Bloomberg and Mayor Mike through the Bloomberg Philanthropies is one of the largest donors and supporters of New York.
Now Robinhood focuses on sort of the overriding goal is mobility from poverty.
RITHOLTZ: Meaning economic mobility, the ability to pull yourself out from a bad condition.
BORISH: That’s correct and within that you know we’re we were the first funders of charter schools in New York City. We’re the largest funders of food pantries. You have to have a holistic approach and if you walk around New York and if you love New York City, what are the four issues? Right, you see them. There’s homelessness, there’s mental health, there’s food insecurity, and there’s immigration.
And that together, if you could do that through job training, through education, through support systems, and we do that also, we have, try to use technology to help that to put people on a path of a better life. Is it a challenge? Absolutely. But we go back about the trading business and talking about how bad a day can be. But the thing that keeps it always in perspective, no matter how bad a day I have, the people that we’re helping, their days are far worse.
And if you keep that in perspective, you’re going to help others who are less fortunate.
RITHOLTZ: How do you measure success for a charity? as a trader you get a P&L, you know exactly whether you’re right or wrong, how can you tell the impact of your dollars whether or not they’re successful or not?
BORISH: So that’s a really outstanding question and that’s something that Robinhood has been particularly innovative in, in trying to measure metrics.
So if it’s a job training program, it’s not just a number of people that are in there for example. how once they graduate, where’s their starting salary relative to where they were beforehand? Do they still have that job a year later? How are they making more money? Are they at some percentage above the poverty level?
If you’re funding charter schools, where are they? Are the kids graduating? Are they going to college? Are you tracking them? Are they getting employment? So it’s all very data intensive and metric intensive.
Now there are some things, right, if you’re, if unfortunately, if you’re a woman and you’ve been battered, and you have kids, before they can go to job training or education, they need to have a safe place to stay. So we fund shelters and where we are, and we do food support, because it has to be a holistic approach, this movement from poverty.
And as a parent, just as you’re dealing with your own children, that’s what you’re doing. It’s a holistic approach. It’s not, okay, here’s one magic bullet. I wish that were the case, but it isn’t. And like any organization, the key is not me, not Paul, not the other board members. It’s the quality of the staff. And we have committed, innovative staff that has really pushed Robinhood along the way. And that started with our leaders and president from David Saltzman to Wes Moore, who’s now the governor of Maryland, to our newest one, Rich Buery. And so we’re really fortunate to have excellent team.
RITHOLTZ: You mentioned charter schools. Tell us a little bit about the KIPP Charter School in the Bronx and why Robinhood has been so active in promoting and developing charter schools in some of the poorer neighborhoods in New York City?
BORISH: Well, we’re markets people. So we think that competition is a good thing. We know that charter schools aren’t going to be a replacement for all public schools, but if you think about technology in general, right, it’s innovation and change. And if you think about the KIPP model, it’s really like a parent. So if you have a child and they’re not doing well, what do you do? You give them extra resources, you give them extra homework.
And so they may come home from school and you’re working with them. Now if you have parents who are working the overnight shift in a hospital, they don’t have that ability to give their children that extra time because they’re working. So these schools do that.
RITHOLTZ: Meaning extended hours, tutors, et cetera.
BORISH: Exactly, they’re providing the resources and the opportunities for those students who they wouldn’t normally have in a traditional public school model.
RITHOLTZ: Let’s talk about what you guys do for, at Robinhood, for public schools. Tell us about Math for America that seeks to improve math education in US public schools.
BORISH: So Robinhood Foundation, Math for America, those are the two not-for-profit boards that I sit on. And I’ve been blessed, really, because Math for America was started by Jim Simons. And we all know what a legend Jim Simons is in the hedge fund world. In the education space, that model was predicated in how do we keep better math and science teachers in public schools? The assumption being, which isn’t rocket science even though he is a rocket —
RITHOLTZ: Pay them more.
BORISH: Well, yes, but for the students —
RITHOLTZ: Give them the tools, give them the resources, yeah.
BORISH: If you have really good teachers, you’re likely to have better outcomes. So how do you keep really good teachers in schools when there’s a lot of competition for them? So we’ve done two things at Math for America. We’ve established a community of master math science teachers where they can come together and learn and teach and also we provide them a stipend so there’s an incentive for them to stay in their schools and it’s really fascinating because even though all the teachers in the schools aren’t there, a good captain, good player makes the players around them better.
And so what they’re doing and what they’ve taken back from, you know, coming down to Math for America for the sessions and bringing it back to school, I think helps all the teachers, which helps all the students.
RITHOLTZ: Before we get to our favorite questions, let me throw a curveball at you, which I find intriguing. You like to quote Captain E.J. Smith, who famously said, quote, “When anyone asks me how I can best describe my experience in nearly 40 years at sea, I merely say, ‘uneventful.’” Why is that quote so intriguing to you?
BORISH: Well, not only did he say that, but he said it sort of just before the launching of the Titanic. And I think if you’ve listened at all to–
RITHOLTZ: And he was the captain of the Titanic. Yes, he was the captain of the Titanic. If you listen to anything or taken anything out of this podcast, is that complacency in anything but particularly in the markets is extraordinarily dangerous.
And one should take away from that that bad things can and will happen in the markets. That means trade smaller, have really good risk management, and don’t believe your success when you’re trading successfully.
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RITHOLTZ: Let’s jump to our favorite questions that we ask all of our guests, starting with, tell us what you’ve been entertaining yourself with. What are you listening to or watching, be it Netflix or podcasts or whatever?
BORISH: Well, so we have a sort of group consideration at home. course we’re finishing “Succession” right there’s two left and at the same time, Barry, and “Ted Lasso” so those post Memorial Day, I think we’re going to have to find some new things.
RITHOLTZ: I’ll make a recommendation to you it’s only eight episodes and I’m only halfway through it but “The Diplomat” yes that’s next on our list.
BORISH: Yes, that’s next – that’s next on our list.
RITHOLTZ: Really well done really fascinating characters I’m really I’m really enjoying it.
BORISH: And when I’m sitting around and trying to clear the ahead and reading. I try, I like historical novels.
RITHOLTZ: Well we’re going to come up to books in a moment so put a pin in that. Tell us about your early mentors who helped shape your career.
BORISH: Well I was very, very fortunate as I said being at the Fed and in the research people there and of course there’s Paul who was a mentor and because we’re together on the board of the Robinhood Foundation is still a mentor because I think you can always learn different things. And believe it or not, a lot of the mentors now are people I read and listen to. And for example, I had the opportunity to be here at Bloomberg Philanthropies a few weeks ago and listen to Mayor Mike. And I try to take away things that I find insightful.
And sometimes I run into people and I’ll say to them, you know, you may not remember this, because to you it was a throwaway line, but it had a lot of meaning to me. And I probably stole it and didn’t give attribution to it. But I try, it doesn’t matter who it is across the board. And it can be from a “Ted Lasso”, it could be from a book, it could be from a politician, it could be from anybody.
RITHOLTZ: Let’s talk about books. What are some of your favorites and what are you reading right now?
BORISH: So as I mentioned, I read a lot of historical novels and there’s an author by the name of David Liss who writes about England and coffee trading and those type of markets in the 1800s and that’s kind of what I’m reading right now because the psychological aspect, even then, applies to today.
RITHOLTZ: What else have you read recently that you enjoyed?
BORISH: I’m going to read Michael Lewis’s new book, of course.
RITHOLTZ: Yeah, I’m excited.
Coming out in September, October, something like that.
BORISH: Yes.
RITHOLTZ: Yes, that’s going to be great. So, our final two questions. What sort of advice would you give to a recent college grad who is interested in a career in either trading or running a fund?
BORISH: So I think all college grads, all young people, you have to be willing to pay your dues. But the trading aspect, the hedge fund aspect, it’s a lot like sports. The chances of being a pro is a low probability. So you should try and then if you have a chance of success, continue, but if not, then you need to pivot because what you don’t want to be doing is saying, okay, I’m going to be a lifetime player in the triple A’s. And so, as in the minor leagues. But if you want to pursue it, you have to pursue it. But do your own work, right? Coming in, and I do a lot of global macro and risk-consulting and I always tell them, I go, “You’re not paying me to read you “the Wall Street Journal or from Bloomberg.” I go, “If you want to have story time, it’s great. “I’ll pull up all the Bloomberg articles you want “and I’ll read them to you.”
So don’t rehash other things that people can easily get and think you’re being innovative. Do your own work and you really need to be analytical.
RITHOLTZ: And our final question, what do you know about the world of trading and investing today? You wish you knew 50 years or so ago when you were first getting started?
50 or 40? Let’s call it 40 years.
BORISH: Yeah, let’s say 40.
RITHOLTZ: I just put a decade on yourself. (LAUGHTER)
So 40 years ago, when you graduated in the 80s, what do you wish you knew then that you know now?
BORISH: I think it’s always the same. I wish we didn’t go through our own near-death experiences. We had that, as I said, every successful traders, We had big volatility in ’86, at Tudor that I mentioned earlier. I wish I knew how difficult it would be running my own CTA. So when I left Tudor, they seeded me. I bought the team of research. It was sort of the first quant trading on the street. And the whole business aspect of raising money, compliance, I wish I had a better understanding of that because it’s just not your track record. And that’s another big problem for graduates today. They think, “Oh, I have a great track record.” This isn’t Field of Dreams. If you build it, they don’t come. You need to have a really, really important process and I wish I was better at that at that time.
RITHOLTZ: My colleague Ben Carlson calls that “organizational alpha” and I love that phrase.
BORISH: It is a great phrase.
RITHOLTZ: Right. Thank you, Peter, for being so generous with your time.
We have been speaking with Peter Borish, founding trustee at Robinhood and formerly director of research at Tudor Investments. If you enjoy this conversation, well, check out any of the previous 500 or so we’ve done over the past eight and a half years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcasts.
Sign up for my daily reading list at ritholtz.com. Follow me on Twitter @ritholtz. Follow all of the Bloomberg fine family of podcasts @podcasts. I would be remiss if I did not thank the crack team who helps put these conversations together each week. Robert Bragg is my audio engineer. Atika Valbrun is our project manager. Paris Wald is my producer. Sean Russo is my researcher. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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