Sifting For Asymmetry

The market moves off stories. These stories are based on both the underlying fundamentals and people’s perceptions of the underlying fundamentals.

Our job as traders isn’t to try and predict where the market is going (that’s a fool’s game). Rather, it’s to identify areas of potential asymmetry.

We like asymmetric opportunities as traders because they allow us to be wrong a lot, and still make a boatload of money. And that’s the key to this game. Finding asymmetric opportunities and also creating them through trade management.

The majority of the time, assets and markets, reflect a wide range of stories (ie, people’s perceptions of the underlying fundamentals). This means the market is pricing in a wide range of potential future outcomes. When that’s the case, there tends to be little asymmetry in the price.

Asymmetry is born when a story becomes popular (ie, consensus) and it prices an asset/market to only reflect a very narrow range of outcomes.

Humans are really bad at predicting the future. Probably why Mark Twain said, “Whenever you find yourself on the side of the majority, it is time to pause and reflect.”

This is why it pays to be a contrarian.

The following three things help with identifying asymmetry.

    1. Understand the popular models/beliefs: Know the popular economic models, theories, and beliefs that people use to assess the market and understand the world. This allows you to get a feel for how the market will react to and interpret certain data and events.
    2. Know the stories: This is more art than science and it’s helped by having a firm grasp on the above. But read constantly, study the headlines, and develop a feel for the stories that are driving prices. Bruce Kovner calls this “listening to the market.”  Dominant stories are actually pretty easy to spot, the problem is is that we’re likely to believe in them too. Stories only become consensus because they’re convincing.
    3. Understand how the economic machine works: Markets and economies are complex systems. It’s impossible to “know” how things will unfold, which is why prediction is pointless. But, even complex systems follow broad-based principles. Knowing these first principles and understanding how the economic machine works a little better than the average market participant allows you to identify dominant stories predicated on faulty models/beliefs. Market prices based on faulty think = mispricings and asymmetry.

It’s not about trying to predict the future. It’s about being aware of many probable outcomes and comparing those to what the market is over/underpricing. You want positive EV, high expected value opportunities, which is (Probability of Winning) x (Amount Won if Correct) – (Probability of Losing) x (Amount Lost If Wrong).

It’s a different approach to markets than the way most do it. It’s an inversion of conventional thinking. Most try to predict where the market is going… they play the “game of being right”. We compare where the market is, to a range of where it could be, and focus on how we can be wrong a lot but still get paid.

Ray Dalio, put it best when he said, “You can’t make money agreeing with the consensus view, which is already embedded in the price. Yet whenever you’re betting against the consensus, there’s a significant probability you’re going to be wrong, so you have to be humble.”

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.

AK

Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.