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I have always had an interest in electronic music, and throughout my time at Lehman, I thought about becoming a DJ, but there is something about working on Wall Street where the stress just crowds out all the good things in life, and all you are capable of doing after work is going to a bar. 

That all changed at the bankruptcy, and I said screw it, bought all the equipment, and started teaching myself how to play. My poor wife. In those early days, I was practicing four hours a day at top volume in our tiny house.

In DJing, there are no rules. You do what works. When you’re playing in front of a crowd, it’s not simply what tracks you play that gets the room moving but the order in which you play them. A big mistake novice DJs make: They play huge tunes all night and wear the audience out. Really good DJs are patient above all, taking hours to warm up a dancefloor, gradually building the energy over time.

The best warmup act I ever saw was a guy named Zack Roth, who so skillfully warmed up for Matt Darey that the place was going off when Matt came on. To this day, one of the most incredible things I have ever seen. Roth had a few tunes of his own released, which were very good, but he has been out of the music scene for years now. Probably working as an accountant somewhere.

Black Magic

But it’s voodoo, it’s black magic, and there’s no science or formula to it. Some people have it and some don’t. Sometimes you go into a club and the DJ is worse than an iPod on shuffle. 

At my Daily Dirtnap conference a few years ago, I DJed a social event at a place called South End Bistro. One of my subscribers came up to me afterward and asked, “Was that one really long song?” I laughed and told him that is what it is supposed to sound like so that you don’t even notice the transitions between the tracks, and it just builds and builds over time. A job well done. 

My favorite compliment to get while DJing: Dude, I have no idea what you just played, but it was awesome! That’s the curation part of the job—finding great tracks that no one has ever heard of. When I was playing the Real Vision Crypto Gathering in Miami a few months ago, Yakov Vorobyev was standing behind me, Shazamming my tracks. Yakov is the founder of Mixed In Key, which is the purveyor of specialized DJ software—he’s worked with all the big names. He showed me his phone, and most of the tracks had less than 100 Shazams. Bombs that no one had ever heard of before. I allowed myself to feel smug.

Do What Works

I submit to you that markets and music have a lot in common. They’re both voodoo! Black magic! But the difference between markets and music is that the musicians know that it is voodoo, but the finance guys keep trying to make a science out of it and systematize it. 

When analyzing a stock, you follow this rule and that rule and this rule, and you buy the stock, and it goes down. Anyone who tells me that they have a “process” is completely full of crap. And oftentimes, if someone has a process, that process works in a typical market environment. Then the environment changes, and the process is voided, a property I call “nonstationarity”—the markets are a game where the rules are constantly changing. 

The value guys thought that buying cheap stocks worked—that hasn’t worked in 20 years. The growth guys think that buying tech stocks works—that will stop working, if it hasn’t already. Sometimes cheap stocks work, and sometimes expensive stocks work. How do you know when? Voodoo. Black magic. 

The only advice I have to offer is that you do what works. If it’s not working, stop doing that, and try something else. You have to be agnostic about process. But people put themselves in buckets and say, “I’m a value guy,” and they can’t fish in a different pond. I am a mean reversion guy, but I also have the ability to be a trend follower at times. I do what works because if I don’t, I won’t have a very long career.

Buy and hold? That works until it doesn’t. Buy gold? That will work until it doesn’t. Buy energy stocks? That’s not working. Bonds negatively correlated to stock? Nope. Buy small cap? Flushhhhhh. (For what it’s worth, I think small cap will work again soon.) 

I have been doing this long enough such that I have seen just about anything that passes for “conventional wisdom” stop working at some point. Oddly, I have been doing this for 26 years, and I am still around. Nassim Taleb wrote about this in one of his early books—if you see a gray-haired person on a trading floor, show some respect. That guy has seen some cycles. Most people survive only one-half of one cycle, the first half, which is less instructive. 

Someone actually emailed me recently, telling me about some study that a big brokerage did on their financial advisors, trying to determine which ones were the most successful. Not coincidentally, they were the ones that started their career in a bear market. I started my career in 1999, at the top of the dot-com bubble, but I was a heretic—never believed in it. Four months later, the bear market started. I survived round after round of layoffs at Lehman. I am a cockroach. I think a good name for a hedge fund would be Cockroach Capital, LLC.

Be Open to Changing Your Mind

But again—all voodoo! You don’t see that type of intellectual flexibility in any other profession in the world. 

I look at my Facebook friends, with their ossified political beliefs, and shake my head. My political beliefs are constantly changing, through a process of falsification. I’m libertarian-ish, but I’ve gotten more conservative about some things over the years and more liberal about others. You can’t put me in a box. Uncategorizable. 

Most people play for Team Red or Team Blue, and there isn’t a lot of thought that goes into it. You must have the ability to change your mind. Sometimes you have a window of about 30 seconds to change your mind. The longer you sit there and think about it, the more the market is going to move against you.  

You’ve probably heard of paralysis by analysis. There are times when I’m trading where I’m max bullish on a position, and something about the chart or the price action will make me change my mind, and I’ll go to max bearish—all within a minute. Most people don’t realize how insane that is. There is no other job in the world where you have to do that. Surgeon? Nope. Attorney? Nope. Bus driver? Nope. 99.9% of the population never has to change their mind about anything.

So, how about these markets? I will give you a brief rundown of what I am thinking… 

I am thinking that stocks will rally another 5–8%, consolidate, and then—kaboom. I don’t know what the kaboom is, whether it’s private equity or China or Trump or something else, but this reminds me a lot of the price action after 9/11. In both cases, you had an exogenous shock, a rally up close to the highs, and a consolidation. We are in the rally part right now. If we rally 5–8% from here, you should probably take this opportunity to cut risk significantly. Of course, that is my opinion right now, and it might change after emailing this newsletter to my editor. Because I can change my mind!

I also think that the “capital flight” theme where stocks, bonds, and the dollar are selling off at the same time is very stale and expired, and after the last two Economist covers, we are bound to see a rally in US assets.

You know I like to make fun of the CFA program all the time. Someone actually did a study and found that the performance of CFAs was slightly worse than people without CFAs. I can tell you that they don’t teach voodoo in the CFA program. Another attempt to science-ize and systematize the industry. It never works.

Anyway, after all this talk about music, I highly recommend you check out my latest mix, “Exquisite.” Let it be the soundtrack to your trading. I think your performance will go up.

Jared Dillian, MFA