In the second part of our conversation with the founder of Whitmore Capital Management, we learn the daily challenges, and lessons learned right from the founder and owner of a fledgling firm. We dive into discussions on risk management, drawdown, attracting outside capital, and much more.

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EXCEPTIONAL RESOURCE: Find Out How to Build a Safer & Better Performing Portfolio using this FREE NEW Portfolio Builder Tool

In This Episode, You’ll Learn:

• How many currencies Mark trades and if he thinks he will trade more in the future.
• About how he diversifies his system.
• A case study of the Russian Ruble.
• His use of charts when looking at currencies.
• A discussion of cognitive biases.
• How he compares his system to trend following and how the two models can work in harmony.
• How he enters and exists a trade using his system.
• Why he is an “every end of two weeks” trader.
• How much capital he would like his strategy to manage and how much it can feasibly manage.
• How he defines risk and manages risk.
• How he deals with drawdowns as a fund manager.
• What he learns from going through drawdowns.
• How he goes about doing research for his strategy without a research team.
• How he sees red flags in his strategy and when he has changed his model.
• How Mark goes about marketing and getting interest from investors in his strategy and fund.
• How he plans to avoid becoming more risk averse as the firm grows.
• What he thinks about the “key man” issue and what he is doing to plan for the eventuality of leaving his business to someone else.
• How he decided the location of his business.
• What the hardest thing will be for him as he tries to grow the business.
• What investors should be asking him that they are not.
• What it takes to become a great trader in Mark’s view.
• What he learned from the baseball card market in the US during his university years.
• What he has learned from past failures.
• His favorite books and why he recommends them.

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Resources & Links Mentioned in this Episode:

• Mark has authored many white papers on currencies, including:
• Currency Investing: An Alpha-Rich Environment
• How to Invest When Both Stocks and Bonds are Overpriced
• The Case for Currencies as an Asset Class Becomes Stronger
• Books that Mark mentions and recommends:
• Winning The Loser’s Game
• The Obstacle is The Way
• Economics in One Lesson
• The Structure of Scientific Revolutions

Follow Niels on Twitter, LinkedIn, YouTube or via the TTU website.

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And you can get a free copy of my latest book “The Many Flavors of Trend Following” here.

Learn more about the Trend Barometer here.

Send your questions to info@toptradersunplugged.com

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Follow Mark Whitmore on Linkedin.

Copyright © 2024 – CMC AG – All Rights Reserved

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Niels

Do you expect that number of currencies to change over time, or is this really a... I guess it goes also... obviously you're focusing on a particular sector of currencies, and there's always this debate between a fully diversified manager, or a focused manager, or whatever, but now that you've decided to be focused within your sector, how much further diversification do you think you would benefit from, or do you actually think that these number of currencies are actually enough to give me all the diversification that I need?

Mark

Yeah, that is an excellent issue to raise. I'm of the belief that if I had 200 currencies to invest in that were investable I would be thrilled with that, not necessarily from a diversification standpoint, although that's certainly part of it, but quite frankly it's an opportunity standpoint. With every extra currency that I have access to, that creates a situation where... to kind of give you a sense of where I visually imagine currencies to be, if you can imagine kind of a horizontal graph where you have 22 different points and there's a midpoint vertically, well, that would be the fair value. Then for each of those 22 currencies vertically there would be the actual market price. So I'm looking at these different ones, and I'm looking for a divergence that's a magnitude move from the midpoint that is the largest possible move, so the more currencies I have available, the more likely it is I'm going to find an extreme outlier that, in my opinion, has the greatest chance of mean reverting that creates a profit opportunity. I think at 22 currencies I feel very comfortable about our level of diversification. In fact, it is kind of funny, because perception wise you're right, people hear currencies and they think of a very focused... in essence kind of a non-diversified approach, but I think I'm very genuine in saying I'm very confident that given the fact that I'm in 22 different countries that have very different profiles in terms of... and correlations with one another in terms of their overall economic moves and hence currency correlations between them. I think I'm much more diversified that any other manager I can think of. But more currencies are always better, and I would like to be able to get exposure. For instance the Indian rupee, I think that's a currency that has some real interesting return profiles.

Niels

Do you look at charts at all, charts where prices often could indicate some level of change in trend or something like that, do you pay any attention to that at all?

Mark

I do, but generally as a counter and country indicator. So at the extremes I will look at charts. So the Russian ruble is an interesting chart. If you look at it, in currency terms the move down has been something that has been virtually unheard of, essentially, so for what it's worth, I think this is the most difficult currency to invest in at the moment because it's a very bimodal currency. There is a chance (I think it is extremely small), but this is kind of the only currency that I can invest in where I think there's a small chance of it basically going to zero. At the same time, it is so, on paper at least, out of line with its fundamental valuation that should things stabilize/improve, or should Putin's gamut... the operative question is, is Putin mad, is he a genius, or is he a mad genius?

I think that there's... probably the answer is mostly in the later in that his actions, I think very much have Russia's long-term strategic economic interests at heart, and I think that he's taking some very bold, calculated gambles in terms of accomplishing his ends, but he is exposing himself to potentially unexpected results. I don't think that the EU and the United States is going to get enough backbone to be able to truly push back, but it is conceivable that if there's enough of a route in the ruble, and obviously the direction of oil is not helping in the situation for Putin in the short term at least right now, you could potentially have a very unstable situation. At some point... his approval ratings are in excess of 80%, but should that change, he is definitely exposing himself to potential domestic political turmoil, a definite on-going economic turmoil, so it's a very fluid dynamic and difficult situation to be able to have any certainty about what the outcomes going to be.

Niels

From what you're saying, not that I have any sort of global macro view as such, but if you think about it, what he really needs is to devalue the ruble - to get as much of the oil revenue in and pay for all the internal costs that he is running. So as you say, and maybe that is how I understood your answer, that maybe he is a genius, and that's exactly what he is doing, but playing at a high risk.

Mark

Right, because the problem, and this is the fat tail risk problem, right, is that being able to... once the genie is out of the bottle trying to get the genie back in the bottle, it can be a lot more difficult than anticipated. So I think that there is definitely something to be gained in the short term by having the ruble move in the direction that it is moving, for sure, but in the long run, I think that he realizes that having... he's basically, right now, debasing purchasing power in Russia. So while public sentiment is all nationalistic, and they're whipped up into a fervor about everything in Eastern Ukraine, his ratings are great. If the ruble stays at these levels, then people on the streets of Moscow and all around Russia are going to literally be a lot poorer as a result of it, and I don't know how well that's going to play up for him if that doesn't stabilize and eventually rebound.

Niels

Sure, but just going to my question about the charts, and I just want to try...

Mark

Oh, I'm so sorry..

Niels

No, don't worry about it, this is actually kind of a question I thought of while you were talking because you're explaining the ruble being an issue and a difficult currency to trade now. If I'm understanding you correctly so far, this would be an instance where you would be probably buying more as it becomes cheaper, because you're a contrarian, but here's the thing, if you were looking at charts, you would see that the charts wouldn't support that view right now. But, on the other hand, when your views start paying off, the charts would support it, so why not use charts to confirm the timing of your thesis?

Mark

Yup, that's a super question to ask, and in fact one of the first things that happened when Evan came on board to the fund is that I told him, I said, "look, I'm skeptically agnostic with regards to being a chartist/technician. I want you to explore this and see if I'm missing something, and I very well could be." It's interesting, we actually looked at a real trade that I had done, which ended up being the most profitable trade that I had ever executed, but before it was the most profitable trade, as an individual, I had an 85% drawdown on that trade, so the question is, could there have been a better way of handling that?

What we looked at, at least, is that using the traditional technical analysis that we had used, there was actually a false reversal that had occurred, which was kind of a trap if you will that if we had been out of the market and then tried to get back in, we would have actually gotten in at a time where it dropped even further, and by dollar cost averaging gently in, we were able to... I'm sorry; I was able to... I should not say we, this was a trade on my own... and by the way, I should issue this extremely clear kind of disclaimer or proviso that trading my own account I was leveraged three to four times more than what the hedge fund is, hence the extremes of the moves, so in looking at it though, it ended up that, despite losing 85% like the trade ended up 100s, and 100s of percent returns given the leverage that was used. So we tried to backtest a technical kind of strategy and the confirmation would have been a false confirmation, and it would have actually led to further losses.

So it gets me further along with the belief, personally, and again, because I don't pretend to be a master chartist/ technician, it very well could be that if I was able to attract somebody in the top 5% of being a technician or a chartist they could have told me up front that this is a false break, don't go, it's a sucker move or whatever, but based on our general understanding of the strategy, it seemed to confirm my general view that in the short term, trying to predict markets is like a 60% probability kind of endeavor whereas, if I can be confident in a 90% long-term outcome, even if I have to dollar cost average in, in some ways that's good news. I remember very distinctly reading Charles Ellis's Winning the Loser's Game and in it he basically says that one of the things that most investors make a mistake with regards to is this idea of seeing capital losses as this big awful tragedy to be avoided at all costs. He says that just like you can walk into a department store and the socks are 50% off, you don't go home and say oh my gosh, I can't believe that the socks I own are like worth less than what they were the day before. You go in and you buy more socks because it's a good value, and so I have, at least, believed that... and that is interesting because I kind of told you that I sort of repudiated this efficient markets theory in terms of looking at asset markets.

One of the things that I did take away from that, at least that school of thought, is indeed this belief that trying to take the long view is going to be ultimately the most likely probability of long-term success. When you see losses, and from my perspective, when I have personal losses or now fund losses, I rigorously reexamine the assumptions, because if things are going down, I tell people that there are three kinds of losses and they all have very different implications. There's the kind of losses where you're taking losses because you're analysis is flawed, and those are the losses that you need to identify ASAP, remedy, and modify positions accordingly. That's what we're constantly trying to make sure that we're doing. The second kind of losses are sort of beta losses. You can just be holding a position, and volatility is inherent. The third kind of losses I actually say, again in this sort of Charles Ellis sort of mindset, is actually good news because it present some better buying opportunity for the fund.

We use what's dynamic rebalancing strategy such that as currencies that we think are attractively priced appreciate, we generally, at some point when there's enough gains, generally trim those positions and usually use those gains to then fund purchases in currencies that might have moved against us. So what we're doing naturally is... I always tell people that investing is some ways is unbelievably complex, and in other way it's literally as easy as buy low and sell high. The problem with most retail investors, and quite frankly a number of institutional investors, I think because of the pressure from retail investors is to chase performance and typically buy high and often times, using stop losses, or whatever, ditch things when they often times can be attractively priced.

Niels

It's fascinating what you say, and I'm also fascinated about your sock analogy because this goes back to cognitive biases. As you probably know, the brain tends to work completely opposite when it comes to financial decisions, so I agree with you, if you go into a Supermarket and they put washing powder at 50% discount you're likely to buy two of those because it's 50% discount, but if your stock price falls 50%, most people's brains would say, we better sell it because it could go to zero.

Mark

Yes, right.

Niels

So what you're saying is you're applying the supermarket theory to financial markets, which is the opposite of what most people do, but what fascinates me is what you're doing is opposite of trend following. My previous guest, actually last week, has just produced along with another gentleman, a 400 page book about why trend following has worked over an 800 year period, and so it's fascinating and at the end of the day trend following is about buying high and selling low and you're doing the opposite.

Mark

Yes.

Niels

It's so funny that it appears, at least, the way you do things that these completely opposite strategies can actually exist in harmony.

Mark

Yes! I agree with... and that's why I definitely say I'm skeptically agnostic in that cognitively I actually acknowledge this: markets are absolutely auto-reinforcing in the short term. So I think that it is absolutely possible then, and indeed happens in real life, that people can execute a strategy in a way that they are indeed taking advantage of that absolute... Mike is completely correct. I'm sure 800 years of market history does indicate that markets are auto-reinforcing in the short term. Theoretically, if you are nimble enough, I think you can make money doing that, and there are people who have proven that. I have taken the view, and it'll be up for debate, I guess we could maybe have this conversation in 20 years and see how things have worked out for me.

I perceive that actually the upside is better, by being this deep kind of contrarian. In some ways I try to employ, in the currency markets what Warren Buffet has done in equity markets in general. He has the discipline to say; I'm not going to buy something if the price doesn't look really attractive. He famously noted that he doesn't really care if equity markets would close for ten years. He's buying businesses that have extremely long lives. His internal rate of return, as far as I know over 50 years, is literally a world record. It's not just the length, it's not the cumulative returns, even the annualized return over that time period is just unbelievable. So I'm basically taking a similar view in that I can say, just like he's looking at a company that he wants to own into perpetuity, I'm looking at economies and their currencies, and is this a currency that in the next decade is going to be something that is likely going to gain value or lose value. My perception is that that initial determination, while it involves a lot of variables, and it's not an easy determination, that that determination is one that if valuation levels are extreme enough, you can do with a very high confidence band.

It is interesting, and this is the skeptical agnostic in me, that I feel like following the trend, or doing trend following, it really is like you have maybe, I don't know what the percentages could be theoretically, but I'm going to say 55% of the time you're right and then 45% of the time you're maybe not right, so you're making... that might be kind of like..

Niels

It's actually much worse. Traditional trend following systems will probably only make money 35% to 40% of the time.

Mark

Oh, but interestingly the gains you'll get on those will eclipse those losses because you've set tight stops, is that... ?

Niels

Well, the point of trend following is actually, you take your losses very quickly and you let your profits run, so that's the philosophy that has to go along with it otherwise it doesn't work. But the funny thing is also, because I think you're alluding to that part of the reason... and I think we talked about this earlier on, part of the reason why your approach worked is the patience and the long time horizon, but frankly, one of my previous guests, Scot Billington from Covenant Capital, they're trend followers and they only run their system once a week. That is super interesting that even within the same approach you have people doing very short term strategies and you have even people doing long term strategies, and these guys have been around for a long time and they're doing really well, so it's just fascinating.

I guess the point is there is no wrong or right, and there is part science and there is art involved and you have perfected your art, combined it with some science and some people say we're just going to rely on the science and let the computers do the work. Then spend time doing research, and it's just fascinating that all of these things, when done properly can make interesting profits and yeah... so just to round off this particular topic, I often talk to my guests about how do you enter a trade and how do you exit a trade, you kind of alluded to it, but what you're saying is that once the currency, a particular currency, comes up on the trade sheet or the radar screen saying it's now getting cheap, you just simply start easing into it, I imagine and if it goes in your direction and it starts looking a bit expensive or fully priced you ease out, is that kind of how it works?

Mark

That's exactly right. One of the things that is a little tricky and situational dependent, is if we have, I will use the British pound, I've been very negative on the British pound for a long, long time and the British pound had done reasonably well and had appreciated, especially against the dollar up through the middle part of the year, and then there's been some rather significant weakness since then. So that's a decision point where it's gotten less attractive, but at the same time the belief is that it's still got a ways to run. So generally speaking, if I don't feel like there's really compelling sorts of opportunities where I want to redeploy some of that money to take advantage of something that looks even more attractive, generally I'll let that continue to presumably weaken until it gets to, like you said, more of a fair value point.

One of the interesting things, and this is where I've been tempted to be a trend follower in the past and I'll kind of continually re-examine using my own model and backtesting and whatnot is that there's a tendency for currencies not just to get to fair value, but then go beyond that into an extreme, and historically I have not tried to ride that because I view that as a dangerous ride because those reversals from that point tend to be more violent I found at least historically, and as a result it's sort of a risky ride. Again, because we're more strategically driven as opposed to nimbly trading in and trading out, I kind of liken our portfolio sort of like a supertanker and you don't attempt to turn a supertanker, generally, on a dime basically. So I generally have been cautious about trying to ride winners to the opposite extreme very far at least.

Niels

Yeah, as we were talking about before, in this industry often you get put into boxes, either you're an end of day trader, or your an inter-day trader or you, as I mentioned, even an end of week trader how would you describe yourself? What are you?

Mark

We're interestingly an end of every two week trader (laugh). Yes, essentially we now run our proprietary calculus about every two weeks, and in the intervening time period we're... if there's been movements in the market value versus fair value in that time period, then we use that to modify positions accordingly, basically. So we're not doing a ton of trading. It's more like usually, unless there's a dramatic break. Similarly if there's a big event that occurs within the two week time period, of course we look and see, like wait, what has A done to our portfolio, B done to our risk - leverage or risk, and then C does this create an opportunity that didn't exist four days ago, or something like that. I remember one day when the Japanese yen moved 6.4% in a day; that in currency terms is just a staggering magnitude of movement, basically. Things like that don't happen very often, but when they do they again, create both short-term stress, at least if you're on the other side of the trade. I ended up when the Fukushima nuclear disaster occurred, I was exactly on the wrong end of that trade. I was already getting bearish on the yen and as that unfolded massive repatriation into the yen, and massive risk off profile, so that was a stressful time, but at the same time, that presented a better opportunity even to enter into some short positions which ultimately were quite, quite, quite, profitable.

Niels

Mark

Yeah, so I tell people that the dream scenario as a currency investor is to actually get market intervention in the same direction as where the fundamentals should lead. So when the yen was crating in the 72 to 75 handle, I just thought it was very, very apparent that A the bank of Japan and the political and fiscal authorities that be would be doing everything that they could to weaken the yen, because as fundamentally an economy that is still very dependent on exports, that price level with the yen made their exports so uncompetitive that it was going to be obviously squelching an already slow-moving Japanese economy.

Niels

If you allow yourself to look into the future, Mark, how much money can a strategy like yours manage, and I guess the answer is twofold, not just what it can manage, but also what you would like to manage in a strategy like this?

Mark

One of the reasons why I was very drawn to this particular area and this particular structure using a spot market is that with 5 trillion dollars of notional values of currencies traded every day, I mean, there have been currency funds that have been in excess of 10 billion. I think theoretically you could have a currency fund that's 50 billion and if you're having a strategic, as opposed to high frequency trading approach, you in and of yourself, would be unlikely to be able to move markets. Since we do use a strategic approach, I don't want to say unlimited, but I think you could conceivably have a nine-figure fund and you would still be able to operate it in a manner where you wouldn't be disadvantaging investors by having to deal with bid/ask spreads that are particularly onerous, or anything like that.

Niels

Now let's move on to one of my favorite topics, and that's... let's talk risk management. How do you define risk from your point of view?

Mark

So, yeah, that's a very interesting question. One of the things that we have found, at least, is that our sortino ratio looks better than our sharp ratio sometimes, because we do have upside volatility, which is always a good thing. I talk to people... volatility is volatility, but risk and volatility are intricately intertwined, but they don't exactly equate to the same precise thing. What I've told people too is that, like a lot of things in investing, I think that there's this internal sort of paradox where what is actually deemed to be extremely risky can be about the safest thing to do, and vice versa. What I mean by that is that... and this is one of those things where we look at sentiment indicators, and especially things like complacency and especially extreme levels of complacency, when investors are the most confident and money managers have the least amount of cash on the sidelines, that is almost without exception, when it gets to extreme levels, a time where the market peak has occurred and the downside can be rather dramatic.

So we've chosen a leverage ratio which I kind of alluded to previously which is significantly less than the leverage that I was using as an individual, and targeted a ratio specifically where our biggest drawdown, based on historical data and my returns would be 30%. So we figured that using a strategic approach like we did, where I'm always telling investors that this is not something where I'm guaranteeing you consistent returns on a monthly basis, but that hopefully in a worst case scenario that that is something that we could weather and recover from and still profit in the long term.

Niels

I wanted to ask you about another kind of risk which I'm not sure I've gotten it right, so it may be a question which is not applicable but, if I understand you right, you take your funds money and you buy different currencies and you use spot markets, so I imagine that they are sitting in a bank account somewhere in different currency accounts.

Mark

Yes, correct.

Niels

Have you thought about, and this is something that we obviously saw under the financial crisis that there are limits to what governments will guarantee when it comes to bank accounts, which obviously made the futures market incredibly attractive because you have a central clearing firm sitting in the middle which is not a bank, and that becomes your counterpart, and therefore the risk that one day you're going to wake up and either the bank has gone out of business, or something else happened to those cash balances. Given your approach how does that side of the risk table look do you think, and is that something that you've considered given the fact that the financial system is a bit stretched and probably the systemic risks are, you know in my opinion, most likely to be bigger today because financial institutions did not become smaller. They actually ended up becoming bigger despite the wishes of the authorities. How do you view that kind of risk?

Mark

That's obviously what happened with the derivatives market as well, so I was following the financial sector quite closely. To be honest, I actually thought that Lehman should be the model and not the exception. I'm a believer that asymmetric risk is inherently unstable for the overall system as a whole, and anytime you're telling bankers that they have a situation where, yeah, go ahead and leverage your assets like crazy, make all the profits you can while times are good and when things hit the fan, we'll bail you out and we'll make you essentially whole - maybe not entirely whole, but essentially whole. So that the profits you had in a years where you were able to execute your strategy recklessly if you will more than offset the times where you take a small haircut or whatever. I sadly believe that, and this is an interesting kind of paradox of sorts where, despite the fact I wish things were different, I am convinced that specifically the United States government, and I think that it would be able to have enough financial where-with-all even with the Fed exploding its balance sheet that it would make sure that no entity like the entity that we used basically to maintain our cash reserves or whatever would be allowed to go under.

So sadly, that implicit backing by the government, I'm saying sadly because I think from a structural level it's a broken system, and we're inviting... that's the problem with... the frustrating thing is that for an investor it creates great opportunity from somebody who's just a citizen who wants to see everybody have as good of a standard of living and as stable an economic backdrop as possible. It's miserable because the monetary political forces that be, are essentially exacerbating the magnitude of the various crisis' that they're building into the system by failing to let markets work. Markets work if you just let markets clear and you let vulture capitalists come in, soak everything up. What you do is, instead of something like TARP where you bail out the entities responsible for the carnage, you essentially would bail out any individual investor up to a certain wealth threshold or something, so that you're making sure that Jane and Joe Smith don't lose their retirement account, or their savings account or something like that. You let the relatively super affluent speculators go by the way of the Dodo bird, essentially.

That's the glory, or that's the beauty of market discipline. When those price signals are completely short-circuited, it creates systemic vulnerability and risk that just heightens over time. I just become so very concerned about that. Then again on the short term, it's very helpful for me because I have this implicit guarantee, essentially, that where I'm banking it's going to be around next week and next month and next year.

Niels

Yeah, let's jump to a very related topic namely the drawdowns, and you already mentioned that the kind of drawdown that you expect with your leverage that you employ is about 30%. I'm not so much interested in that because we've talked about that for a bit, but I'm very interested in the emotional roller coaster that drawdowns have on investors, but also on fund managers. In particular someone like yourself because often when I talk to my guests, they use systematic strategies so they always make the point that that's part of their strength is that they have these systems in place and they can kind of disassociate themselves from the drawdown and it helps them get through the difficult times. How do you cope with drawdowns and the periods of losing money? How do you emotionally deal with that side of things?

Mark

Yeah, I think that there is behavior that is learned and there is behavior that is innate and I think I am blessed as an investor and fund manager because I think the chief virtue that I have that I don't really have to work at is I'm just very stoic. I think stoicism... in fact there's a great book recently published. It's very, very short; it's called The Obstacle is the Way by Ryan Holiday, I think is his name. Essentially it's kind of a way of taking the views of Seneca and Marcus Aralias and applying them to everyday life and that book very much resonated with me because it's this idea that knowing what you can effect in life and what you cannot is such an important distinction.

For me I feel like if I can't effect something in life, if all I can do is essentially react and analyze, and that's as a fund manager what I'm doing, then as long as I'm doing my job the best I can, and as long as my analysis is sound, then those short term losses are going to be that: they're going to be short term. I will get through this as long as I manage the risk effectively going into it and I'm not overleveraged and that after 12 years is the valuable lessons I feel like I've learned and as a result I sort of have half of the consolation that some of your other guests have had in that because this strategy is at its heart a calculus driven strategy, where I can look and say based on all the academic work that I've done going back over 25 years now, I am confident enough in this system, this approach that if this is telling me that this particular currency is egregiously undervalued and it's still going down then I can sleep pretty well at night because I've not just got the 25 years of work, but I've also got the economic history that I studied before that, kind of like you just mentioned - Mike just wrote a book about the last 800 years of market history is that I'm a big believer in knowing history and I actually... one of my favorite topics to study is sort of economic bubbles in history and knowing how people behave and knowing that people generally do... and you alluded to this earlier, they do exactly the opposite of what is in their actual economic best interest because of the time they're sort of blinded, they do.

I remember hearing very recently that despite I think in the last ten years the S&P 500 being up approximately 11% annualized a year, the average retail equity investor has obtained about 4% returns. So the average person has basically captured about 35% of the gains largely because of this tendency to buy high and sell low. For me I take solace in the fact that I've learned, I've read these lessons in history, I've seen enough market history, I've employed the strategy I feel very comfortable with, and if the market is telling me I'm "wrong", then I am confident enough to basically be able to weather the storm and again sleep pretty well at night. Now I will tell you honestly, going from and individual investor to a hedge fund manager makes my sleep a little less sound than it once was. In other words, I know all of those things, but I have a lot of investors who have invested in me because they just have general confidence. They don't necessarily know the intricacies of my strategy or anything of the sort and I know for them, I vicariously sort of carry their burden. That's the hardest thing, in my opinion, about being a fund manager is dealing with losses on behalf of your investors.

Niels

Sure, absolutely. Now in those drawdowns that do occur from time to time, and even thought you say that you weather the storm, and it doesn't sound to me like you, and I guess that would be quite hard anyway to override your own self, which is what you would do, or would have to do if you were to realize to say, well, I'm wrong here. But I'm more interested in - do you learn anything from going through a drawdown? Is there anything that you take away from it and say, actually I could have done this a little bit different?

Mark

Yes, that is actually fair. I think that having endured several, probably several drawdowns in excess of 20% individually and so far our biggest drawdown as a fund has been about 18.5% that being able to have the courage of one's convictions, I think is the thing I continually learn. After every drawdown, I look and kind of do what we just alluded to. Is there a strategy that I could have employed which would have more optimized the results? Frankly, more often than not, I am able to dollar cost average in, but not quite as aggressively as what would have been optimal. Now obviously you need to balance that, and the reason why I don't always dollar cost average in aggressively is because now I know, wait a second, if I'm down 18.5% and I'm thinking things are looking very, very attractive, that doesn't necessarily mean that my investors next month, if it takes another three or four months for this thing to turn around, or however long it takes, are going to be able to feel as good about the fund. So I guess I've had to modify the aggressiveness with which I go in partly because I want to obviously create a fund where my investors need to sleep well at night too, overall.

Niels

Yeah, absolutely, shifting gears again, to research; let's talk a little bit about research in your world. What's interesting about research, I find, is that a lot of it is about asking the right questions. I can imagine in the big firms where you have teams of researchers that the conversation is going on when they meet is quite interesting and lots of good questions being asked, but if you, as in your case, are doing most of the work yourself, it becomes asking yourself questions which is, you know, a very interesting concept. What are you asking yourself when you think about... when you put on your research hat and think about the approach?

Mark

Right... right, so, it really does help to have a naturally dialectical mind because I think that the easy tendency, as you know as an investor or anything else in life, is confirmation bias. You tend to gravitate towards those ideas those people those articles, those books, that generally are going to reinforce and support your own opinion going in, but because I tend to be a devil's advocate by nature and, I don't know, this might be speaking to my mental health I suppose, I tend to carry on an internal conversation in my mind where half of me will be kind of articulating one side of a particular argument, but then it's like, well, wait a second, let's re-examine this and look at it from a different perspective. That's where I think being able to be as... I am kind of a big believer in sort of the art of war theory that you have to know thy enemy, so what I try to do is a try to constantly say, if I'm... as I said I'm defensive going forward in terms of the future of the general macroeconomic backdrop, but I try to make sure that I'm constantly exposing myself to those people who are saying, no wait, we have winds at our back, we have unlimited monetary bullets that we can spend, we have supportive governments in place, there's a lot of the shakedown that has already occurred, we're in a base building stage, we've gotten disruptive technologies that are going to make things better, we have emerging markets that are becoming increasingly affluent, and so there are obviously is a whole series of reasons to believe in the other side of the case. For me to kind of constantly carry on this internal dialog, which is usually spawned by reading something that isn't necessarily something that I particularly agree with or whatever, has been the most important thing. Now obviously with Evan coming on board it's nice because now I have a real person I can say, hey, does this make any sense or am I completely out in left field?

Niels

Yeah, absolutely. I often get asked, and I guess this goes towards more the systematized strategies where a lot of my listeners are actually interested in finding out how do you detect if something is wrong, a yellow flag, or red flag for a certain model or strategy? Is there anything at all in your way of doing things where you could be given a yellow or red flag that something structurally had changed that basically meant that you had to go back to the drawing board and say, actually this input or this part of the... maybe more to the scientific model is not valid anymore?

Mark

Yeah, yes, and we briefly alluded to it earlier which is the one instance where I've actually made a structural modification of consequence to the model related to the Swiss franc which was... I was shorting the Swiss franc for three years I think, and I was well, it keeps staying at this perpetually elevated state and I can't reconcile using the traditional macroeconomic tools I was utilizing. So then it came to this conclusion which I think has generally been supported in the last eight, nine years or so that the market is going to give a premium that I need to build into my model that is going to basically elevate the Swiss franc at a level beyond which I would think otherwise would or should be the case.

Niels

Can part of your approach be backtested Mark?

Mark

Niels

Yeah, interesting. I want to jump to another... I've got a couple of topics left, and I want to jump to the next one which is more the business side of things. How do you, and again I think it's such an interesting stage of your business development your in, and so I think a lot of people will benefit from hearing your view on that, but in today's world, given what's been happening in the last few years both from a performance point of view, both from investor sentiment point of view towards hedge fund CTA strategies etcetera, how do you go about trying to drum up interest in your strategy and in your fund?

Mark

Well, I guess if I had to be frank I might say, quite poorly, in that I actually loath the marketing and sales side of the business. In fact, one can argue that I made a classic entrepreneurial mistake of, as I many times have said, what a great addition Evan is to the firm, I in some ways hired a mini-me. Evans actually much taller than I am so I should say maybe more like a junior me, and it might have been more advantageous to hire like a chief marketing officer or something of that nature. My view has continued to be that if I do more thought leadership, because again, I do think there is something to this idea where I essentially feel like I am an evangelist for currencies as an asset class. The message is definitely one that is not well understood in the overall marketplace, and so I want to continue to kind of do that.

Just as I've been able to acquire some investors along the way from this kind of process, I feel good about that because it's not so much me marketing me, it's me marketing this message, if you will. I'm not the only guy looking at fundamental approaches to currencies and, as a result, I can feel good about delivering the message, basically. We have begun to use cap intro kind of service basically, and are beginning to talk to... at this point, now that we have about a two and half year track record, we can now begin to talk to the institutions that a year ago were, well we just don't have a long enough track record as a hedge fund to really even seriously consider you. So we're now beginning to enter into some conversations. Up to this point it's been strictly essentially the entire investor base is high net worth individuals, and obviously that's a wonderful group of people to have on board. It's harder to move the needle so to speak in assets under management in that approach versus moving into the institutional world.

Niels

Sure. Another thing I wanted to ask you about, it's not really about the business, it's also I guess about you and your thinking, your mindset, and that is you start out as an entrepreneur and you have a certain tolerance for risk, and clearly when you are managing your own money, you had an even higher tolerance for risk, now with clients on board, you've lowered that. What do you think when you are so close to the trading as you are compared to a fully systematic firm, how do you avoid changing your mindset when it comes to risk? How do you avoid becoming more risk averse as your firm grows and as you have more to lose so to speak, because I think that's a challenge, and it's a challenge for the investors, because they buy a firm expecting a certain risk and performance profile, and then suddenly this manager becomes successful and that profile changes, and often it becomes much lower, how do you think about that, or maybe you don't just yet?

Mark

Well, I think you've identified how I was initially going to answer which is that I am in the process of thinking about that perspectively, but since our assets under management are still modest at this point, I haven't practically had to wrestle with that. I will tell you that in planning for that, and I know that that did happen to me individually. When I had a year's savings in the bank, and thought OK my default plan is to basically go ahead and get just a different job. I acted very differently than when I had grown that substantially and I was planning on using this as a means of support for the rest of my life in terms of starting the hedge fund and still being able to take care of my family and all of that. It did change how I viewed risk. So what I am planning on doing is what I realize is a little challenging about the fund that I have is that, as far as the high net worth individuals we even have on board, is there are some of them that are doctors and lawyers, and for them a 5% movement is extremely uncomfortable. Then I have a handful of entrepreneurs and their like, wait, I expected this to be juiced, what's going on, we're not getting enough volatility, so my plan is actually to have hopefully three different hedge funds that essentially use the same strategy and just employ different leverage levels. So that way those people who are looking for real high beta, presumably high return strategy would have an option; those that are looking to basically to hit a lot of singles would also be able to find something as well.

Niels

Are you educating... I don't know whether that's the right word, are you trying to transfer your knowledge to Evan so that the key man risk which we all get asked about when we start out, if we're not fully systematic, so that the key man risk issue which a lot of institutional investors for sure would be concerned about?

Mark

Without a doubt. Yeah, in fact I was really insistent about bringing on Evan as a junior partner as opposed to just a senior analyst and actually providing equity in the firm, because A, as an entrepreneur I really, and I'm and Austrian in my economic beliefs generally, I'm a little Heterodox, but Austrian is probably the majority influence and I really believe in the power of the entrepreneur and the entrepreneurial spirit and so to have an ownership interest and to look at this as not just a job but as a business that I hope to do when I retire, which I hope won't be for another 20 or so years, can then pass along. In the meantime I am absolutely, in fact the only hiccup we had in our employment relationship was it took us a long time to sign a confidentiality agreement partly because of how sensitive everything was in terms of disclosing kind of the keys to the kingdom, and once we were able to do that, though, I as quickly as possible tried to get him in a position where, should something befall me that he would be able to execute upon this strategy very effectively. That, I expect, will be a three to five year process. He definitely is quickly grasping all of the key elements of the strategy.

Niels

You made another decision when you started your firm, and that's basically the location of your business. Obviously you're located away from the busy streets of the big financial centers. How do you think that impacts either your business positively or negatively?

Mark

Well, that's an interesting question as well. I would have to say, and maybe it's just because raising capital has been more challenging than I thought, that it is overall been sort of a disadvantage. I do have friends in the New York area, San Francisco area, Los Angeles area, Chicago area, and it definitely appears to be just easier that their general social relationships employ enough people who have meaningful connections that it's easier for them to basically get in front of the right people than it would for me, I perceive at least. I don't perceive it's a big enough disadvantage that it's going to in the medium to long run really hamstring. I'm confident that, again, with a strategy that is a sound strategy, even if it takes me a little longer to meet the right people that I need to meet, that eventually that this will work out well.

Niels

Absolutely, a couple of questions before we move to the final topic I wanted to talk to you about. One is that if you could ask a question of my next guest, meaning a peer, a hedge fund manager, maybe even taking into account where you are in your business. So let's say the next guest is someone who's been around for 20 years, has built a substantial business, is there anything that you would like to ask them?

Mark

I guess it would relate to the struggle between... I'm sorry, this is kind of an evolving thing in my mind, but to me the most difficult thing going forward is this notion that one might be constantly tempted and potentially even... it might be demanded of one to change one's fundamental investing philosophy and approach to satisfy investor demand. That's what I guess I am most concerned about, because up to this point I've had the luxury of accepting mostly friends and family money, and then connections of friends and family, so quite frankly during our drawdown I didn't get a single phone call saying, hey what the heck is going on, or I want to get out of my lockup, or whatever it might be. I know that especially as one goes through a career where they're answering to institutional money and often times very big checks, that the pressures to be able to modify strategy to accommodate those individuals... how does one handle that and is there strategies or approaches that person has used to be able to remain true to oneself while at the same time having a viable business?

Niels

Yeah, if I could just comment on that based on my 25 years of experience I would say that that is a very interesting point because when we start out as a small manager, we look at all the big boys and we aspire to them. We aspire to be like them, and often we believe that that is what the institutions want and therefore we should look like them. But at the same time we know that in order to attract the attentions of investors we need to be different. We need to differentiate ourselves, and actually my conclusion is that the only thing that really differentiates us from each other is ourselves. It's the manager itself. So in a sense, I think we need to preserve our uniqueness and we need to be true to our self and not try and emulate a Winton or an Aspect or an AHL or whatever they're called because they do what they do so well and so if an investor wants that profile they should buy it from them. They shouldn't buy it from you, they shouldn't buy it from me, and so staying true to yourself I think is the best thing for the investor, it's the best thing for you but as you rightly say, it's probably also one of the hardest things that we have to battle with. So I guess certainly in my past we used a tag line saying different but not too different. I think that's probably where the investor's sweet spot lies that they don't need another typical manager in their portfolio, they need something a little bit different, but if it's too different it becomes a problem.

Mark

Well that's very helpful, Niels. Absolutely, that actually, briefly, if I could add one thing which your thoughts dovetail really nicely with. One of my other friends who had been in the money management business for a long time said that the most valuable thing that I could probably do is to actually turn down money. There will be instances where there might be opportunities to have investable funds, but they're going to be on terms where you feel like either A, the client is going to be unbelievably difficult to deal with in terms of a relationship and to satisfy, or they might be looking for you to, as you alluded to, sort of change who you are and that the right answer should be, hey I'm not that person and you probably need to talk to somebody else, so I appreciate your thoughts there.

Niels

I wonder whether it's like having a girlfriend, or when you're a kid that you get someone into your life and the first thing that they start to do is they try to change you and it never works out, and it probably doesn't work out in our business either. One final question in this area, I just wanted to ask you: now clearly you have been dealing with potential investors and current investors asking you questions from a due diligence point of view and probably have due diligence conversations in general. What do you feel investors, when they look at a strategy like yours, should be asking you, but maybe they're not asking you?

Mark

Huh, I guess, and this is kind of the general question that I think is important that I don't generally hear in enough detail at least, and I would similarly want to be posing this to managers that I had is the view of what is your repeatable alpha? What is the basis for it? In other words I think because the currency world... and I was thinking a lot kind of subconsciously as our conversation has evolved about how you were talking about an approach like mine and trend following existing in harmony, and I think that's really insightful and correct and I was thinking specifically about why in my sector in particular. In terms of currencies, why then has there been this languishing in terms of aggregate performance, and it strikes me that part of it might be the source of the investable funds, meaning that it very well could be that trend following strategy may have more efficacy in certain markets where there's a lot of retail participants that fall into the same cognitive traps over, and over, and over and it's repeatable because human behavior becomes very predictable at a retail level. But in the currency market you don't really have any kind of retail people that are of any consequence what so ever. You're talking about major institutions, major money, and if they're all kind of deploying a similar strategy at what point... if you're not able to count of the other person basically making the same mistake because they're employing a strategy that's a smart strategy like yours, what becomes the source of alpha? I don't usually get a lot of people asking me that question outright, and that's a conversation I'm happy to have, but I think it's an important one in general.

Niels

Now let's go to the last section of our conversation and I call it general and fun, so it will probably be a little bit all over the place, but we'll see how we get on. In your mind, and in your experience, what does it take to become a great trader? You've done it. You've gone from being a lawyer, and today you're a successful hedge fund manager and you in-between have been a very successful private investor. What does it take?

Mark

Well, when I think about the most important trait, off the top of my head, I would have to say intelligence/insight, discipline, patience, passion, integrity, and humility. I think those are the ones that immediately spring to mind as far as, I think in concert with one another, those traits in particular I think would serve as a tremendous backbone to creating a great trader.

Niels

Has the entrepreneurial gene always been inside you Mark? Did you know from the very beginning that one day I'm going to have my own business whether it would be a law business or some other business?

Mark

Niels

Now of course, we've talked a little bit about why you do what you do today, but phrased in a slightly different way, what is it about the job that you really like or that you love, so to speak?

Mark

Recently I did this genius zone exercise with this entrepreneurial group that I'm part of and the idea is to figure out what it is that not just that you're good at, but what do you get energy and passion out of? This is part of it. I love talking ideas; I love the... one of the reasons that I immediately, the first thing that I did out of college was to get into teaching. That kind of forum where I might be presenting an idea, or a perspective that is completely new and unique that somebody hadn't quite thought of that way, is such an exciting kind of dynamic for me. That's what really gets me motivated and passionate. The second thing that I'm really passionate about is problem solving and putting together puzzles, so for me, the actual excitement of being able to look at a whole series of currencies and think to myself, OK trying to connect all the dots globally and whatnot, where are things going to be evolving in this future time period is a really fun endeavor in and of itself, so I'd say those are the two things that get me really jazzed and excited.

Niels

In the journey of setting up your own hedge fund and becoming a hedge fund manager, is there anyone out there that you've sort of looked at and said, "yeah, that looks like a great firm, I aspire to what they do", is there anyone out there as such?

Mark

I guess going way back as sort of inspiration in terms of the genesis of this idea, I'd say what George Soros and Jim Rogers did is sort of, to me, the epitome of what I would like to emulate in that they had the foresight, the courage, depth of analysis, specifically with the British pound, but they did this in a number of other investments as well, to basically call the Bank of England's bluff, and again, not a lot of people have the courage to stand... everybody in the United States you say, of course, don't fight the Fed, well, in the short term that's absolutely true, but in the long run it can be very, very profitable to fight the Fed actually, because they might be engaged in a game that is a confidence game, essentially. They're trying to keep all the balls in the air and ultimately at the end of the day, when you get a dislocation, that could be a tremendously profit generating opportunity. So I see what they did and that was the model of how both opportunistic, I guess for lack of a better word, sort of a vulture capitalist, if you will that I would kind of like to be.

Niels

So if you do decide to break the Fed one day, please do come and share that with my audience before you do it. We would appreciate that actually.

Mark

(laugh) Absolutely.

Niels

Now you've clearly read a lot of books I gather from our conversation, which books standout for you? Either it could be a book that has helped tremendously on the trading side, and maybe also a book that has really inspired you in a bigger way if I can put it like that.

Mark

Absolutely, yeah, I'd say regarding my... the two books in the industry, if you will, that I think were very influential for me, one is When Genius Failed by Roger Lowenstein, which chronicles the collapse of long-term capital management. I find that to be such a great read because it gets that piece I alluded to before about great investors. When I look to other investors that I want to follow or emulate or invest in myself, I look for humility because the bottom line is that with so many external variables and extrinsic shocks to the system... and that's why I never watch CNBC in the United States at least basically, but one of the things that I find kind of laughable is whenever I do, they always ask the guests, "where is the S&P 500 going to end at the end of this year?" and somebody will say, I think it's going to be 16,035 or something crazy specific like that. So to me this creates this artificial sense of precision and prognostication and prediction in a world which is very messy and hard to control for all the variables. So When Genius Fails is a great example of when hubris runs completely amuck and what kind of carnage can result.

Then last but not least, a book that actually I think is one of the most important books of non-fiction that has been written in the last hundred plus years is Thomas Kuhn's The Structure of Scientific Revolutions, which was done as a master's thesis, but the thing about it that I think applies to investing so well is that it basically identifies how there's this tendency of paradigms to become predominant in ways of thinking and there's a vested interest. It's very Hegelian in its approach, and there's this vested interest that seeks to push away anything challenging the prevailing paradigm. When I look at asset markets, and I look at when bubbles form I see that dynamic presenting itself over, and over, and over again and I think that to have the courage to be able to say, wait a second, the existing paradigm is fundamentally flawed in its approach. There is a better, different way of looking at things that results in this expected outcome has been a real important thing to literally frame the way I think.

Niels

Interesting, great stuff. Now you have taken us through a journey which, on the outside at least seems to have gone pretty much according to plan, but I would say that most entrepreneurs, they have struggles and they have failed along the way. That's how we learn. Has there been any failures, if I can use that word, in your journey?

Mark

Absolutely. I think that I prefer me, at least, when we've had capital losses, I never see... I shouldn't say never, in the sense of would never, but obviously capital losses in excess of what my risk parameters would be or something like that would be a failure because here I've set these parameters in place, these expectations and clearly something would have gone wrong. But having a drawdown or something like that for a period of time, I don't see as a failure. I have seen the lack of being able to grow AUM to be so far at least a failure. Part of it is something that is definitely on me. If I was a marketer or better about doing that, I think that I'd probably be in a different place, but then that's not really me either so, but I do think I've sort of failed to institutionalize an approach which would probably have gotten me further down the road of where I want to be. Perhaps having this long runway is both a blessing and a curse because I've talked to entrepreneurs in the past and when you have a month's worth of living expenses in the bank you do things in a very urgent way, that you might not do if you are in a different position. So I'd say that's been kind of the one thing where I look back, and I can say, I've really kind of failed in moving down the road more substantially on that front.

Niels

How do you measure success? What does it mean to you?

Mark

Success, in my book at least, is being able to live a life worth living and meaning that it's both enjoyable to live and that you're hopefully making life better for not just yourself, your family, other people around you. So for me at least that means plugging into what I think is my genius zone. Is to do those things where I feel like I am providing a value added service and hopefully the goal of having a fund is that if you feel like you have a strategy that has individually been profitable for however length of time is to be able to share that and have other people be impacted by that success as well. So for me a successful life is really making sure that my family, my friends, my investors, hopefully, that they're benefiting from the fact that I'm doing what I'm doing.

Niels

Fantastic, great stuff. Two more questions. So we're almost there. Could you tell me a fun fact about you, something that even people who know you may not know about you?

Mark

(laugh) Let me see. I guess that one thing is that through high school and college I was a fairly serious rock drummer of all things. What makes that fact a little more fun is the fact that one of my casual friends from high school ended up becoming the drummer for Pearl Jam, a rather small group here in the Northwest you may have heard of, so at some point in time I thought, boy I didn't know if going to college was the right thing. There's Martin Gladwell's thing where if you spend 10,000 hours doing something you can master it. Maybe I would have been better off spending five years banging on the drums. The good news is, is that I kid you not, that is occasionally if the stresses and strains of dealing with massive volatility in the currency market hits me I can always pull out my drum set and bang away for an hour or two and that actually relieves stress to some degree.

Niels

Great stuff, Mark. Now I asked you earlier about what investors may not be asking what do they fail to ask, so I want to turn it on myself at the very end, and that is what have I missed today? What have I not asked you that I should have, and I want to make sure that I do full justice to you and to Whitmore Capital Management, so is there anything that we need to bring up at the very end here?

Mark

Niels

Yeah, that certainly is an important point. I do want to just add to that, that is because there has been some press about this maybe a year ago, and I think actually a lot of the fees were not necessarily going to the managers, but were going to the houses, if we can call them that that goes in-between the investors and the managers, so just to add that little caveat and of course we know the same to be true for the mutual fund industry where I think the numbers are even worse. I think it is an important point and having fair fee structures. Also, for the investors to realize that it's not cheap to run a good hedge fund business and certainly not in an environment where regulations seem to go up every single day you open the papers.

It's a balance and at the end of the day the investors need to look at what is the net return we're getting, and if they're unhappy they need to find other ways to deploy their capital. I appreciate your bringing up that point. Now before we finish our conversation, could you share with us where the listeners can best reach out to you and learn more about Whitmore Capital?

Mark

Absolutely, so my email is Mark@whitmorecapitalmanagement.com, and our website is www.whitmorecapitalmanagement.com. The thought leadership pieces that I've done and some other materials there, and quarterly reports and things like that which I try to address, not just narrow currency issues, but some other broader investing issues as well are all contained on our letters and articles page.

Niels

Thank you very much, Mark, for that and do feel free to send them to me and I'll be happy to upload them to the show notes page on the TOPTRADERSUNPLUGGED.COM website, so that you can get as much information about Mark and his efforts on that side as well. I guess that just leaves me to really say thank you. Thank you for spending a two and a half hours with me on a Saturday, away from your family and sharing a very interesting perspective, a very interesting journey that I think a lot of people will resonate with, so thanks very much Mark, I appreciate that.

Mark

Well, thank you Niels, it was a real pleasure and I commend you for having started this endeavor and especially on behalf of small emerging managers like myself, it's great to have a forum and a resource like this that we can go to and utilize, so I commend you on the great work that you are doing.

Niels

Thank you very much, and I hope we can connect at a later date and see how things are panning out for you and maybe even one day meet up in person.

Mark

That would be great. Well, you have an open invite to Seattle any time that you'd like.

Niels

Fantastic. Thanks so much Mark and take care.

Mark

Great, you too. Bye bye.

Ending

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