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Jan 20 • 5 tweets • 2 min read
Risk management 101: a short thread.

To be a successful investor, you have to skew the odds in your favor.

Yes, the odds.

I AM wrong plenty of times, everybody is.

Be humble, or the market will humble you anyway.

1/5
That’s why I talk about odds.

The magic formula is:

YE P&L = (P&L generated on winning trades) - (P&L hit on losing trades).

The golden trick is to find trades whose payoff limits the P&L hit if you are wrong, and delivers a large P&L gain if you are right.

2/5
I call those skewed risk/reward trades: if you win 50% (or sometimes even less) of those, you are ensured to make money at year-end.

Easier said than done though: if you only buy call options (limited downside, plenty of upside) you are not 100% guaranteed to make money.

3/5
Discipline in waiting for the right setup is key, too.

As a hedge fund PM and friend says “there is a time to be long or short, and a time to go fishing”.

The best investe are often fishing, and not often swinging their big ego around being long or short something.

4/5
I highlighted the 5 key rules not to suck at this game in one of my most-read pieces at The Macro Compass - hope you enjoy it!

themacrocompass.substack.com/p/5-rules-to-n…

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More from @MacroAlf

Alf Profile picture
Jan 22
A short thread on how to fast-track your career in Finance.

I became the Head of a $20 bn Investment Portfolio at 27y old - how the hell did I manage that?

Well, at least 50% was luck

The rest, a mix of hard and soft skills (latter: often overlooked, but super important).

1/5
Hard skills count, a lot.

In my experience, it's all about curiosity and dedication really.

If you don't love what you do and you don't work hard, then leave it.

Getting a bit of math & coding helps, but the drive to learn more every day is the key.

2/5
Soft skills count much more.
In order:

- Communication: you can be the smartest guy in the room, but if nobody understands you...forget it.

- Networking: really, speak to people!

- Diplomacy: there is so much politics in a large corporation. Learn how to handle that.

3/5
Read 5 tweets
Alf Profile picture
Jan 21
A revealing macro chart: total economy debt as % of GDP.

Many “rich” and “frugal” countries in here, too: surprised?

You shouldn’t be: instead of using public debt, they chose to lever up the private sector.

A short thread on credit (=money) creation and myths around it.

1/7 Image
Our system encourages credit creation.

As the long-term driver of economic growth stagnate & we have a keen interest in growing fast&now, we use credit.

Credit creation is the process of real money printing: the private sector gets more net worth out of thin air.

2/7
Credit creation can end up on the govt balance sheet (public debt) or on the private sector balance sheet (private debt)

Mainstream financial commentators focus 99.9% of their time discussing public debt and ignore private debt - Italy is indebted, Denmark is not

Bulls**t

3/7
Read 7 tweets
Alf Profile picture
Jan 15
Big flows move markets.

The biggest flows in fixed income come from the so-called “real money”: pension funds, bank treasuries etc.

Let me explain when they go big.
To get there, you have to understand their incentive scheme.

A hugely important thread.

1/7
You might think real money buys or sell big sizes of bonds when they have strong conviction on the next move in yields.

Absolutely not.

CIOs and PMs there are not paid more if they generate alpha, but they can be fired if they mess up: incentive schemes matter.

A lot.

2/7
Instead, they go big for two main reasons.

A) Regulation forces them to
B) They have some market risk to (un)hedge

Notice how in both cases they have their a*s covered.

Nobody can blame you for sticking to regulation or saying “it was a hedge” if you bleed P&L.

3/7
Read 7 tweets
Alf Profile picture
Jan 13
A global macro update.

Focusing on the daily swings might lead you to miss the forest for the trees, but we are still firmly in the secular Quadrant 1 here.

Vol has increased though, which means we are going to temporarily swing through Quadrant 4 and 3 at times.

1/7
The pace of growth of credit injection through the real economy has stalled to very low levels since mid-21.

This implies a weaker impulse to real growth and earnings until at least summer 2022...

2/7
...and a repricing down of inflation expectations too: basically, a still-okaysh nominal growth but on a clearly decelerating trend.

Lower inflation break-evens while the Fed embarks in a tightening exercise lead to higher front-end real interest rates, but...

3/7
Read 7 tweets
Alf Profile picture
Jan 9
QT is a big deal, yes.

But the main reason is not what you think it is.

1/10
To understand QT, you need to understand QE first.

QE happens when Central Banks create bank reserves out of thin air, and purchase bonds from the private sector with them.

The pvt sector asset composition is forcefully swapped from bonds to inert reserves/deposits.

2/10
The private sector does not have more net worth.
Its asset side's composition has just been swapped: less duration intensive & coupon bearing bonds, more zero duration & low-yielding reserves or deposits.

Now, QT is the exact opposite of this.

But before we go there...

3/10
Read 10 tweets
Alf Profile picture
Jan 8
We like simple narratives.

The Fed goes brrrr, stock market goes up: but the Fed doesn’t print money.

Now, the Fed is not going to hike or do quantitative tightening because they always want to ease: but they are going to tighten.

Oh yes, and even do QT.
Here is why.

1/4
What is their incentive scheme?

Preserve the status quo, kick the can down the road.

The risk/reward of not tightening when the labor market is very tight, inflation is at 7% and policy is ultra accommodative is just…horrible.

Nobody can blame Powell for tightening here.

2/4
& nobody can blame him for trying to reduce excess liquidity - getting away from 0% rates and a $9 trn balance sheet buys the Fed some optionality to fight future downturns

Also, mid-terms are coming and the political pressure to be seen “acting against inflation” is high

3/4
Read 4 tweets

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