Laurent Bernut on Japan's Economic Landscape, Sector Rotation Strategies, and the Psychology of Trading

Ever wondered how market psychology shapes investment strategies? In our latest episode, we have the pleasure of hosting Laurent Bernut, whose extensive career spans from the diplomatic halls of the French Embassy to the fast-paced realm of Japanese capital markets and hedge funds. Laurent takes us through Japan’s economic landscape, describing the current inflation, a weakening yen, and an ongoing real estate surge. He also sheds light on the investment opportunities within Japan's craftsmanship industries and the evolving openness towards foreign capital. Whether you’re an investor or merely a market enthusiast, Laurent's insights offer a treasure trove of valuable information.

Shifting gears, we explore the intricate dance between bull and bear markets with a focus on sector rotation and understanding beta. Laurent details how different sectors, such as consumer staples and technology, react to market changes and why adjusting long and short positions is crucial for risk management. We delve into the concept of net beta versus net exposure, offering strategies to optimize investment performance amidst fluctuating markets. If you’ve ever been curious about the mechanics of stock performance and the importance of market regimes, this segment is packed with actionable insights.

To wrap things up, we delve into the psychological dimensions of trading, particularly the concept of toxic shame and its profound impact on traders. Laurent shares compelling personal anecdotes, showing how self-worth can either fuel success or lead to self-sabotage. We also tackle the challenges of short selling in volatile markets and why position sizing is vital. As a special treat, Laurent gives us a preview of his upcoming book and the invaluable lessons it promises. This episode is a must-listen for anyone keen on understanding the deep connections between market dynamics and trading psychology. Don’t miss out!

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Transcript

Speaker 1: 0:08

My name is Michael O'Gaia, publisher of the Lead Lager Board. Joining me for the 40 minutes here is Mr Lant Bernou, who's kind of built a bit of reputation on the quant side and on the short selling side, as well as the market psychology side, as well as the market psychology side. So, laurent, introduce yourself to those who are watching and listening. Who are you, what's your background, what have you done throughout your career? And are you a night?

Speaker 2: 0:32

owl. I'm actually an early bird. I wake up at five, so this is good. I'm sorry if I won't be very coherent. I will try my very best. So my name is Laurent Bernu.

Speaker 2: 0:45

I was born in New Zealand. I grew up in New Colonia, which is a French territory. I've been living in Japan for about 28 years. I started with French Embassy, Then I worked as a Japanese accountant, so I used to do consolidation and all this in Japanese. Then I joined the capital markets in 2001, right around the time when because at that time there was Enron and WorldCom, so people wanted to know what a balance sheet. People finally discovered that it's not only earnings per share but it's also cash flow and balance sheet. And then I joined a hedge fund in 2003. I worked with Trudelity. At Trudelity, my mandate was to short-sell, so my mandate was to actually underperform the worst-performing market on record. And I published a book Algorithmic Short-Selling with Python. The second edition will come. At that time I was a very poor programmer. I'm still not great, but I'm trying. Also, I do real estate as well in Japan, and that's it.

Speaker 1: 1:58

So that's a lot. We're going to cover a bunch of things in that. Since you mentioned Japan at the start, I feel like I want to touch on Japan just a little bit, because you're actually living there. Is there really an economic boom going on or is this just nominal inflation? What is the mood in Japan? I mean the things I see anecdotally around inflation and in general that being a high saving economy does not seem to be all that positive in general that being a high-saving economy does not seem to be all that positive.

Speaker 2: 2:26

Oh yes, so that's a very good question. I mean I had friends from Thailand, somebody from Thailand coming over to Japan and said I'll buy the sushi, it's so cheap, thanks. So yeah, the Japanese yen has been as torpedoed, has really sunk compared to all other nations. There's a boom in, I mean there's certain assets. I mean, of course, the stock market is booming. Inflation is always good for the stock market, also real estate, so there's a lot of, I mean the stuff that I do.

Speaker 2: 3:01

When I started real estate, people, japanese bankers and if you want to solve the global warming, you send 100 Japanese bankers to Antarctica and the North Pole and it will freeze over. And when I started real estate, they told me like, what's wrong with you? Good question, how much time you got? Okay, let's go back to business. And anyhow, the point was when I started, people thought that I was wrong about that and now everybody wants to do real estate. Every other person wants to do real estate, so there's an ongoing boom. Does it have legs? I don't know, but when I started, when people thought I was crazy, they were right. Now people think I'm a genius, so I'm starting to unload or lighten up my portfolio. That's pretty much it. The mood Japan is an aging country so the mood doesn't change that much, but it's true that there's more dynamism Post-COVID. There's more dynamism and a weaker yen helps with exporting nation.

Speaker 1: 4:04

That's what I see on the ground. Do you get a sense that it's it's fleeting the cycle or is there something structurally that makes the argument for Japan to continue its economic strength and stock market threat? I've been highlighting the whole reverse carry trace since August. I've been wrong on that so far. But I want to talk more kind of longer term about the dynamism.

Speaker 2: 4:26

That's a good question. Well, since a lot of Japanese companies I mean a lot of global Japanese companies have currencies overseas, it naturally inflates that balance sheet and the income statement. So, yeah, there's a carry trade there. As far as the dynamism of the country itself, Japan is much more open to foreign investors. I've been contacted and I've talked to a bunch of people about there's a change in generation. Some obscure Japanese company that nobody has ever heard of. They're making micro-micro, micro screws that are used in the International Space Station. There's apparently no one else in the world who can do it. So Japan has a knowledge of self-welfare, a craftsmanship that is unparalleled, and there's a shit generation where those companies are for sale. I don't know if it's going to last. Honestly, I don't know. I don't know if it's going to last. Honestly, I don't know. I don't make predictions, I'm usually not really good at them.

Speaker 1: 5:31

Nobody is ever good at predictions Not me, not you, not anybody, definitely not the Federal Reserve and definitely not the BOJ. I think is the truism Okay you mentioned. Now there's one thing you can argue that there is you can somewhat predict, at least over the very long term. You can predict that markets tend to go up. And you talk about short selling right. And the issue, of course, of short selling is the odds are just against you. And you were in that profession, right, that was your mandates, right. So if your performance sucks, it's supposed to suck because markets go up rates, right. So if your performance sucks, it's supposed to suck because the market's going up. I'm curious in that experience did you kind of hate life a little bit, meaning you know markets just keep doing what they're doing and you're trying to bet against it and you're compensated based on your performance. But how much of it is the beta versus you?

Speaker 2: 6:19

I'm glad you mentioned this. I mean, my job was a short seller in the worst bear market in modern history, so I had to do worse than the worst market. I mean I used to go down to the Starbucks on the ground I mean the ground father Damn, I so envy your job. I don't envy your paycheck, but I do envy your job. So it's a tough job. With that said, I mean there's a way to play short selling, especially if you do relative series or cross-sectional momentum. Cross-sectional, which means relative to the index. If you look at the index S&P, for instance, there's roughly 50% of the stocks that would outperform, 50% of the stocks that would underperform. If you do it in absolute, it's going to be real tough. Actually, I can show a graph if you don't mind, mike.

Speaker 1: 7:08

May I? Yeah, yeah, please, let's try this out and those that are listening to this, I'll try and narrate with Laurent here. Let's experiment and see if we can get this working here.

Speaker 2: 7:16

Yes, this one, this one, this one, okay, sure, all know, this one, okay, share All right. So here we go Does it work. Looks like it's sort of mine, let's try it, there we go. Okay, so this is chapter four of the book.

Speaker 1: 7:40

And the book is about coding quantitative strategies using Python as a language correct.

Speaker 2: 7:45

Correct, correct, correct. So I was a very poor coder. So this is the S&P 500. What I've done here is I've downloaded just off Wikipedia this morning, the current constituents of the S&P 500, of the S&P 500, ran a series over however many years 2001, I think and counted the number of issues that had touched 200 days as just pure simple trend following, nothing fancy. So if we and just a lateral count over time, so this explains the lag here.

Speaker 2: 8:23

And basically, when it's a bull market, what you see is that pretty much everybody is in bull territory and very few of those stocks are underperforming. Of course, there's a built-in survivorship bias. Now, if you do it in absolute, on the other hand, if you do it in relative series, which is basically every price divided by the index, the S&P, what you tend to see is basically the number of outperformers is roughly 40% to 50% of outperformers and underperformers at all times. So what it means there is that it's more or less something that you can do. All you need to do is okay, let's look at what could outperform on the long side and what could underperform on the short side. So we're going further down a little bit, soft bank, blah, blah, blah. So the idea there.

Speaker 2: 9:11

The good news about doing in relative terms is this is we're going to okay, same story, but now it's further broken down into sectors. If we look at sectors, you can see the same dynamic in absolute. But if you look in relative, what you see here is a sector rotation. So instead of trying to time the top and time the bottom, looking at sector rotation really makes more sense. And the idea behind this is we all know about defensive sectors and we all know about cyclical sectors, which means defensive would be consumer staples no matter what you're going to eat food, there would be utilities, no matter what you need electricity or water. Cyclical would be consumer. Discretionary would be information technology and so on and so forth. So basically, this is what we have in absolute and relative.

Speaker 2: 10:01

And then the interesting part is now when we do the rotation. So there's just an equal weight across the board. Nothing we find is very, I should say, naive. It's very naive, but you can see the sector rotation. You can see the defensive in blue, the cyclical in yellow-ish and then the rotation would be in red and there's a very, very clear rotation. That happens all the time. So cyclical and defensive. So just timing those and building a very naive index like this works.

Speaker 1: 10:36

And right now the far right it's starting to turn. It's kind of a slow process of a turn Correct.

Speaker 2: 10:42

And here's another version of it. If we look at it here, for instance, this is ugly. So here I calculated the beta, and this one crushed my computer this morning. I was less than happy. So same story. This is chapter 11. We're talking about the same story, a download stuff.

Speaker 2: 11:03

I calculated the beta versus the S&P 500 over two years. So what is the beta? The beta is a covariance matrix. So let's say, for instance, the index moved by 1%, maybe Apple or Nvidia would move by 2% or 1.5%. This is high beta. But a utility stock would be moved by maybe 20 cents, 40 cents so, and it's roughly the same story.

Speaker 2: 11:30

So the sector that we mentioned before, the defensive and cyclical they will start to make sense here. Sorry for all the verbiage, my apologies for this. So what we have here? Information technology, and surprisingly again, this is equal weight across the world. Very naive way to look at it. It's not market cap weighted, it's, as of today, the constituents of survivorship bias built in Information technology is 1.4. Consumer discretionary 1.07. So these are the cyclicals that we talked about before, and at the bottom, low beta, is consumer-stable utilities 0.4, 0.5. All right, so then we built an aggregate by sector blah, blah blah. And what we see here. So I'll calculate the gain expectancy. What we see here is that if you buy high beta, the super stuff that races a lot, you would beat the index. This is the S&P, the blue line. You would absolutely trash the index. The problem is, if you do that, you would have zero customer. You would have zero client, because every now and then you take a 50% haircut.

Speaker 1: 12:38

And nobody will stick around for the comeback. That's exactly right.

Speaker 2: 12:41

Exactly so. It's a Bob Marley market. What is Bob Marley market? It's a redemption song, and everybody would bail on you as soon as this happens. So how to do it? So, basically, a long short can be the combination of depending on where we are in the regime, depending on what kind of market we're talking about, it's basically keep the same leaders, keep the information technology and the consumer discretionary, just switch sides when the market turns bearish. So how to do that? Here we have basically a high low, which is the net difference between the cumulative returns. And again, it's very naive. I do not take this. Please do not try that at home. I mean, I would feel bad, but what we see is very naive is the delta of the high beta minus the low beta, and what we can see is that when this the high beta and the low beta goes nowhere, it usually precedes the market.

Speaker 1: 13:43

Right, which is basically the idea that the low beta defensive sectors will move in advance of risk-off conditions.

Speaker 2: 13:51

Exactly when there's risk-off, you can see that the high beta stuff tends to disgorge a lot. This is kind of cool to give how to articulate the net beta. Because of cool to give, what should I say to give how to articulate the net beta? Because a long short is not necessarily a net exposure zero. Net exposure is basically the non-exposure all the arithmetic sum of all the positions on the long side minus the market value of all the short side. This is a net exposure. The net beta is beta adjusted.

Speaker 2: 14:34

A net exposure, like delta zero or market neutral, doesn't necessarily mean that you have actually net beta zero If you truly, truly, truly want to be here. This is why, for instance, in 2008, a lot of the long shots were tanking this oh, but look at us, look at us, we're net exposure zero. Yeah, but you still long the very high beta. If you long the high beta, you're going to tank. It's inevitable. If you long the high beta, small cap and so on, you're going to tank faster and farther than anybody. So the lesson here is keep the leaders of the way up, keep them in your portfolio, just switch sides. Make sense, yes.

Speaker 1: 15:16

From a sector perspective, are there certain sectors where you are less likely to be whipsawed? Yes, if you're trying to short them.

Speaker 2: 15:30

Yes, of course. Actually, what I think would be interesting, I heard of somebody who was doing a long short in utilities and I thought this is brilliant. So, yes, of course, there are sectors where you're less whipsawed. For instance, if you look at how should I say industrial, although industrial has its own cycle, some of them are early cycles, some of them are late cycle. So if we talk about shipbuilding, this is an early cycle. If we talk about machinery, this is late cycle. So there's also the O1 marks kind of cycle consideration to be taken care of. But if we look at stuff like healthcare, yeah, of course. And every time there's a bear market, don't worry, you can always go after the financials. No doubt about it.

Speaker 1: 16:14

Financials. They cannot get out of their own way, like ever, since they're just utility companies, basically, and they claim to have software potential, but they never really work that well. Yeah, the utilities I mean, I always talk about utilities because it's the most bond-like sector, right, so it has certain relative momentum, unique characteristics, worked very well in 2022, even though bonds sold off, but that's just because it's low beta anyway and there was a big boom in energy oil at that time. How are you thinking about that point, about this sort of relative strength changing that topping formation? Are you starting to say to yourself, at least when it comes to US markets, we're at a point now where risk is increasing, that it's just kind of a slow moving shift towards a risk off cycle? Or, and you just say to yourself, well, small caps are the next thing to run. So none of the sector analysis, or none of these, tells matter.

Speaker 2: 17:44

That's a very good question. I wish I could give you an answer. I mean, there are an increasing number of bearish signals for small cap and very racy stocks, so as to why, I don't know. I don't know and I'm not in. I mean, the market will tell us six months down the road, so I'm sorry.

Speaker 1: 18:16

No, no, no, I don't know the answer myself. It's legitimate, but that's predicting. Nobody knows right? That is the vulnerability now.

Speaker 2: 18:25

Exactly, but I see more cautiousness. I mean, I see more rotation. This is the beginning of rotation. Maybe I don't know.

Speaker 2: 18:35

The thing is, when I see a rotational weapon, I don't try to predict how structural it will be, I just measure it. You see, for instance, the difference in what I do is when I see, for instance, a cluster of signals within a sector. Oh, this is turning bearish, okay, fine. Then I understand that the sector is falling out of favor. But when I see one isolated stock falling out of favor maybe this is a stock that had a great run and it needs to take a break, needs to take a break. Get off the highway, have a can of Coke, refresh yourself and then go back oh, maybe there's something that. Oh, maybe this stock is actually. Maybe there's something that, oh, maybe this stock is actually. There's something fundamentally wrong with it.

Speaker 2: 19:23

So these are the only three type of questions. If everything's moving together second rotation If one stock is moving out of sync with everybody, okay, maybe there's something fundamental, or maybe it's taken a break. That's it. Speaking of which, I think it was a week or two ago you had somebody you interviewed who was talking about NVIDIA and, it's interesting, I have a signal called floor and ceiling and there was a signal that actually this one seems to lose momentum or seems to lose steam. I should say I don't know if it's going to be forever, and please do not go and sell your NVIDIA and send me the acquisition.

Speaker 1: 20:08

We are such a piece of and definitely don't short, as I say, nvidia, as much as I have all the stocks I had to pick on last year, that was the stock I had to be loudest and pick on the most. I always said very explicitly don't short it. Even if you're bearish on the narrative, as I still am, and I obviously have been dead wrong on that you had so many DMs saying one of the things you want to address is market psychology and the self-sabotage that happens especially with newer traders. But I'd argue there's plenty of pros that self-sabotage their careers, their portfolios. Let's talk about that because I think as much as you and I are quant-oriented. Quant means there should be no emotional bias. You just can't help yourself sometimes.

Speaker 2: 20:54

Okay, that's interesting, because did you know that actually, most of the I mean the best market psychology books written on the market? Then, you see, there was discretionary, fundamental people, and then there are quants people. Quants are supposedly this drawing machine, but the best market psychology books were always systematically written by quants people, by systematic people, all of them. I mean Ed Sekota, tom Basso, you name it. All the best ones were written by people who actually had a more quantitative approach. My take on this is because they are more emotional, they realize the impact of emotions, they try to build systems and then those systems they generate this matrix of false positive, true positive and false negative. So we all understand false positive, true positive and false negative. So we all understand false positive and true positive. But false negative is basically this is the bucket in which I fish all the time as a short seller. What is false negative is basically the concept of structural short, so the idea of self-sabotage. I mean, where does it come from? For that I always think of this anecdote back in 2008.

Speaker 2: 22:04

There was a bar in Tokyo just down from Lehman Brothers and there were all these bond traders. These guys were popping Don Perignon like it was Pepsi Cola, so of course all the girls would flock to them. And I remember there was this guy who was very flamboyant, very, very interesting fellow and I realized that actually three to four months after I received money, this guy filed for personal bankruptcy. I'm like, dude, I mean you're printing like $1, $2 million, maybe more, a year, how come you're already filing for bankruptcy? And I remember to this day he looked at me and said you know what, at the end of the day I was just a poor kid from Bombay. So within him there was this sense of toxic shame, and toxic shame is I'm not good enough and everybody who's been on the desk for a while is imposter, like it's rows of imposter syndrome. Right, I'm not inventing anything here.

Speaker 1: 23:09

You can't blame them, right? I mean, it's like if you go from not making very much, suddenly you know a million and a half, two million and yeah, it looks like it's going to continue. There's no transition for your personality to adjust.

Speaker 2: 23:23

Exactly and deep down, there's this feeling that do I deserve? Am I worthy of it? Am I enough? And there was a book in the 80s by John Bracho called the Shame that Binds Us, called the Shame that Binds Us.

Speaker 2: 23:44

So the reason why I mention it now is because I believe that actually and I'm the first one, I mean I have all the bad psychological traits. You name it. I have all of them in spades. I did all the mistakes twice, at least twice, maybe three times, and maybe over and over, and sometimes I even felt it in me. I made good money and then I gave it back, plus some, because deep down, I believed that I didn't deserve it and this is part of a core identity. So I'm not good enough. This is something that exists.

Speaker 2: 24:17

And how do you fix it? Because we have the other game of all the techniques. Okay, should I use a moving average? Should I do this, should I do that? This is just technique. Like, should I coach? Should I visit companies? Then we have the inner game. Okay, like meditate, you know, like really be organized, and so on and so forth.

Speaker 2: 24:36

But if, deep down inside, the image in the mirror says, hey, I'm good enough, and the mirror says no, you're not. How do you fix this? And this is something that probably I mean the market will test the darkest corner of your psyche, and I believe that making money in the market is not about having a good system. You see, I think it's Richard Dennis. I had this conversation with Michael Coburn and he said that Richard Dennis, the turtle trader he said he could publish his strategy on the cover of the New York Times for two weeks consecutively, or Wall Street Journal for two weeks consecutively, and 95% of the people would still not be able to trade it, because between the signal, between the system and the trader, there's all this dark psyche and all this toxic chain that binds us. And so the reason why I'm mentioning this and the reason I wanted to talk about it is because I've worked with an ethnotherapist and this guy she owes it. It turns out that actually, it's really, really interesting.

Speaker 2: 25:41

This is something that not only manifests in trading, but it manifests in all aspects of life Our relationship to our body. Dating, of course, is always a beautiful girl, but oh, we put her on a pedestal because deep inside of us we have the I'm not good enough. In the market, there's always this feeling. Oh, there might be a bad market. It might be. I don't feel safe. Toxic shame again.

Speaker 2: 26:04

So I've worked with this gentleman that we wanted to publish something about how to cure this toxic shame. For instance, we've seen it over and over, like the LTCM classic case. I was having a conversation with Victor Ragone fantastic gentleman was a trader with LTCM Immense respect for this gentleman. And Ubris Ubris is toxic shade. We've seen fortunes lost before. People put their ego aside. So my belief is that making money in the market is just a byproduct of the alignment of who we are as an identity, all the way down to the techniques. You see, if deep inside like, of course I deserve to be rich, of course I deserve to stay wealthy, then you will do things that are congruent with your identity, then they will become habit, they will become your beliefs, your beliefs will become your actions, they will become your beliefs, your beliefs will become your actions, your actions will become your virtues, your virtues become your habits, and so on and so forth. Does it make sense?

Speaker 1: 27:10

Yes, and it's a very underappreciated aspect of the long-term longevity of somebody trying to trade, at least on a discretionary basis. But even if you're in the industry, I mean there's the shame part. And then the shame part gets dangerous when you're at the moment of burnout, because that's when you just say to hell with everything and that's when mistakes tend to get amplified.

Speaker 2: 27:35

Absolutely, and there's a way to cure it. I mean, we cure it via super neuroplasticity. We've released something about it and it's actually Charlie. It's not a walk in the park in terms of hypnosis, but because you need to connect with all this deep shape in you. And when I did a session with him and since then we've become business partners when I did a session with him I really saw much. The next day the trading was effortless. I didn't have all these questions. The most volatile place in the market is the space between this yellow and that yellow. And the next day it was peaceful and trading became again what is supposed to be boring. Trading should make watching paint dry look like a thriller.

Speaker 1: 28:59

That is a quote I'm going to have to steal from you. Trading should be like dry weight, but I guess it's funny when there's volatility, right, and that's what I think short-sellers like to see, because there's a link between downtrends, obviously, and increased volatility. So maybe for the remaining few minutes here, let's talk about dealing with volatility, because there's a challenge here, right? The problem is volatility means it goes both ways, right? So big downs tend to be followed by big ups. So if you see things are starting to break down, you start to short and then the market just rips in front of you just before it's about to go down again, and that space in between the years suddenly starts to really question a lot about your skill sets. But that's just being whipped around by the markets of all the time. So let's talk about that, because I think this is what's underappreciated by those that want to get into the short side.

Speaker 2: 29:56

I mean, the short side is, by definition, volatile, so the short side is not. You see, on the long side, okay, the overwhelming majority of people are trying to follow one way or another. Whether you follow earnings momentum, whether you follow technicals, whatever that is, you buy low and you sell high. And it tends to be forgiving, because if you don't buy today, if it's something that lasts for a couple of years, you're going to be good. The short side doesn't work like that, the short side usually. For instance, michael was mentioning NVIDIA and personally I mean now I saw a signal I would short it, ent. And personally I mean now I saw a signal I would short it. Entry is I would short it. When I saw the signal, I wanted to send a message to my kind of that's probably, it probably doesn't need that. I would short it. But the question is not if I would short it, the question is how much and in the position, and this can be recaptured in the position sizing.

Speaker 2: 30:54

The most underappreciated formula in capital markets is gain expectancy, simply said, is how often you win. Times are how much you win on average minus how often you lose times, how much it goes on average, and for that what really matters is how much you are you size your position. The problem with very volatile stock is you can't take big positions because you're going to be whooped on. So, and the good news about volatility it's very difficult to predict where the price is going to be in months, two months, three months from now. On the other hand, volatility the good news about it is that it's highly predictable. If it's volatile today, it's very likely to be volatile tomorrow.

Speaker 1: 31:32

The term. There is volatility clustering, right Cluster.

Speaker 2: 31:35

Correct, correct, correct, correct, absolutely so. Sizing positions with volatility is very important.

Speaker 1: 31:44

Yeah, and that's the problem, right? Because if something you are bearish on starts to the whites of the eye start to show up of the decline, and you've, if, if something you are bearish on starts to the white to the eye start to show up the down of the climb, and you've been waiting for it for a while your first instinct is to go very heavy.

Speaker 2: 31:58

Yes, the problem with this is successful shorts. They shrink and it's very capital intensive to go heavy on the onset because the price is very high. So you can't have a big position size. So I've not been able to, I mean unless you have an intelligent use of margin. But by definition, the position size, the market value of your position or the capital, was at the I know how to say that in Japanese, but I don't know how to say that in English the cost times, the number of shares or base value, I think, is very high to begin with, and as the price starts to slim down then it becomes easier. But going big on the short side in the beginning is probably not the smartest idea In my experience. I mean people who are better than me, and they're lots of them, they do better work, but I've never been able to do that or at least sleep well, least sleep while doing it.

Speaker 1: 33:03

What about using inverse funds? Right, the track 1X, the inverse or 2X. That way it's doing it for you because the downside of it is a lot of zero. But let's talk about that.

Speaker 2: 33:14

Okay, that's a good idea. Actually, I did an inverse China in 2008, and I held it and the way those ETFs are structured the inverse or the double inverse I did a double inverse Asia in 2008, and I managed to lose money. I got the entry right, I got the exit right and I got taken to the cleaner on those ones. So the inverse is not a good idea. It's because of the mathematics, about the structure, so it has nothing to do with the trend. So, on the other hand, what I do is I take regular ETFs and I short them and then it's a question of borrow. So that is much easier to do because these ones the mathematics I mean how those funds are structured is very easy and predictable. The inverse funds is not a good idea.

Speaker 1: 34:08

I tend to share the same. I always say path matters more than prediction, and that is unequivocally beyond when it comes to inverse funds. For the last couple of minutes here, laurent, I am curious. So I have my Fenix as part of my brand. It's like my thing that I wear on all these videos. You've got something too. I can't quite tell what it is. What's yours?

Speaker 2: 34:31

Oh, this is a shark tooth from a Mako shark in New Caledonia, and this piece of gold is a Japanese friend of mine, who is a jewelry designer, who made it for me. So, yes, I like your phoenix, by the way.

Speaker 1: 34:48

So waiting for it to fully rise from the ashes. Hopefully it will soon, laurent. For those who want to track more of your thoughts and read your book and the second edition when it's available, where do you want it to?

Speaker 2: 34:59

So the second I'm actually the publisher. Like me today, but come on, you got to finish the outline, so the publisher is packed. You can find me on LinkedIn. You can find me, I guess. Yeah, LinkedIn is probably the easiest way. I don't have much social media footprint. I used to write a lot on Quora. I will probably start writing again on Substack. I took a little bit of a break on the markets. Oh, there's one thing I wanted to talk about. May I share something?

Speaker 1: 35:36

Let's do it.

Speaker 2: 35:37

All right, this is cool, this is cool. So this was a dream for me my entire life, when I joined the market, and I'll show you and I'll share it with you. All right, here we go. So I always dreamed of developing a market indicator that would be absolutely agnostic of timeframe. You see, like, for instance, oh, do you use a 100-day moving average? A 50-day moving average? Blah, blah, blah, you name it. And I always dreamed of something that would be completely agnostic and that would work across timeframes. So I developed something called the floor and ceiling. The floor and ceiling is very simple Mark it and make some advance. It goes up at some point, it would print a high and then every subsequent high will be lower. That's basically the right shoulder of the head and shoulder pattern. Okay, stops making new highs, stops making fresh highs and then all the other ones, so that, basically, that the market goes either sideways or bearish, vice versa, market reaches the bottom and then subsequent lows are higher. So I coded this how I call the floor and ceiling. So ceiling is because it stops, the ceiling and the floor because the market has just hit the floor. So that market saturated, and so I concatenated SPY.

Speaker 2: 37:06

There's a website called 1MinuteDatacom. So I concatenated SPY since 2009. That's much data on one minute and I processed it and to calculate the signal on the one-minute bar, overall it's about 4 million bars altogether one minute. Blah, blah, blah. From one minute to one week. I resampled everything and it took about less than four minutes to calculate all this, including at which minute did the signal change? So you see, it might print a bottom today, but we only know about this bar, but we only know a few bars on the road and if we use fractals like this, the minute at which we find that the market turned bearish on the daily bar is probably two, three months down the road. So the farther, the more remote it is, the higher the timeframe, the longer the distance or the longer the duration, and I think I've succeeded.

Speaker 2: 38:17

So here is the one-minute chart and what we see here is every floor, every ceiling and the higher levels is level eight it looks like a video game Level seven and so on and so forth. So every time it prints this, now it's the five minutes and, as we can see, I won't bore you with all the tables and so on and so forth, just a visual representation, but it's roughly the same. Now fast forward. We have the one hour. Still more or less the same story.

Speaker 2: 38:48

Now fast forward to the daily, the daily, even the lowest version, like the lower level. You see, it's like a Matryoshka. So level two, level three, level four, level five, even these ones are congruent with the one minute. So technically, I have succeeded in finding the minute at which a daily bear market or a daily bull market stops or starts, and I can find it in real time, and this is something that I've always dreamed of doing. Now, are there applications in real life? I believe there are, but it's a bit more complicated. It's not exactly my level of programming, but you see, for instance, what can happen is, on this minute, we have a bar that could trigger level two, that could trigger level three. So every time it's a level of extraction, it's fractals basically, and I've always wanted to do that and I found a way to do it. So it will be in the second edition.

Speaker 1: 39:48

Big deal. Anybody should be pre-ordering that once they're able to do so, for exactly that reason, and Lord's been very successful I know that he's been very successful and my DMM. He responds fairly quickly and I think his experience and knowledge of that is really quite unique. So, everybody, please make sure you follow Laurent, check out his book and, given that it's the top of the hour, I will see you all in the next episode. Bye, thank you, laurent, appreciate it.

Speaker 2: 40:13

Thank you very much, Michael. This is an honor. Thank you very much. Thank you.

Speaker 1: 40:17

Cheers everybody.

Speaker 2: 40:18

You too, thank you.