From Value Investor To Vixologist | The Acquirer's Multiple®

During his recent interview with Tobias, Jim Carroll, the @vixologist on Twitter and Senior Vice President and Portfolio Manager at Toroso Advisors, discussed From Value Investor To Vixologist. Here’s an excerpt from the interview:

Tobias: You’re a volatility guy, and you are the Vixologist on Twitter, which is a great handle by the way. How do you come to be vol guy?

Jim: Well, that’s a great question, because I didn’t start out as a vol guy. Actually started on Wall Street in the investment banking business. Corporate finance guy back in the 80s and 90s, became the CFO of a little internet company that went public in March of 2000-

Tobias: Oh, congrats.

Jim: -through Morgan Stanley.

[laughter]

Jim: Squeaked that one out the window and it just went thud. The good news is we didn’t get sued by anybody, but the bad news is it meant that there was going to be another chapter in my life. I was actually a value investor back in those days with my own portfolio. You will recall that value works like a charm in the aughts. When the internet was melting down, there were actually sectors of the economy that were chugging along nicely, real estate some of the commodity areas. For my own portfolio, I had discovered a handful of managers that I was basically building a portfolio around. People like Bill Nygren at Oakmark, Mason Hawkins at Longleaf Partners.

Tobias: Some great names there.

Jim: Jean-Marie Eveillard at First Eagle, folks out at Dodge & Cox. Really, I was building my own portfolio and family around a group of value managers who successfully navigated the internet crash. During that time after my own little internet company was clearly not going to be the end game. I had some friends who were experiencing that meltdown, asked me, “Jim, what should I do with my money. I’m getting killed.”

There was enough critical mass there that I decided to start my own registered investment advisor, which originally was long-run capital in 2003. I’ll continue doing what I had been doing. The global financial crisis comes along and suddenly, I recognize that not only am I allocating assets to managers, I’m allocating risk management. As you know, Toby, value manager loves nothing more than for a stock to be cheaper tomorrow than it is today. [chuckles]

The portfolios were suffering along with everything else, in part because the other difference in the GFC was that everything was correlating. There were very few safe havens, in the back half of 2008, you could buy long term treasuries, and that worked. The dollar caught a bid, but other than that, it didn’t matter what sector or market cap strategy you were invested in, it was going down.

I had to think hard about how I was going to manage risk, and decided to undertake a research project to look at what was going on in the world that I just hadn’t experienced. I was a value guy, so there’s growth. What are all these quantitative people doing? We didn’t really have factors.

Nobody was really talking about factors in 2008-2009. If you did some digging into the body of research, there were some people talking about things like momentum. Tom Dorsey, Dorsey, Wright always called it Relative Strength. I manufactured my own momentum strategies in the fashion that now is best documented by Gary Antonacci with calling a Dual Momentum.

The idea that you are investing in the best performing whatever you want stocks, sectors, asset classes, with a hurdle, so that if they’re not jumping the hurdle, you’re going to move to cash. I look across asset classes, use different measures of momentum with a cash hurdle and create what I call an absolute return portfolio. Varied responsive to changes in markets, horribly tax-inefficient. I did actually come up with a methodology that moves a little more slowly, but is tax-efficient, and does tend to still ride the winners, and that is based on the Dorsey, Wright relative strength methodology.

This sounds so silly these days. All the way back in 2015, when the Shiller PE was already starting to look rich, bond yields had been plummeting for decades, Bogle and Arnott everybody were saying, “Gee, looking out 10 years, we’re not sure where the returns are going to come from.” I tripped over this stuff going on in volatility, with the VIX and betting on the VIX. Wall Street had invented these great new things like VXX, you could be long VIX. XIV, you could be short VIX. Okay, let’s do another deep dive. Who cares about weekends and nights?

Let’s start reading research on volatility and term structure and contango and backwardation. The internet’s a great resource. There were people out there saying, “Okay, here’s how these things are constructed, here’s how you might use them, here’s some systematic approaches.” Did a deep dive into that and came up with an approach to use these things to express either a short opinion or a long opinion. Most of the time, you want to be short volatility. That’s why I’d say to people, “What do you have in your portfolio?” I got S&P 500. I got these stocks,” da, da, da. “How would you say that expresses a view on volatility?” “Well, it doesn’t.

I just own a bunch of stuff.” “Yeah, you’re short volatility.” “What do you mean?” “If the stuff hits the fan, and your stuff goes down, it gets pretty exciting, doesn’t it? Yeah, that’s because you’re short volatility. What do you do about that?” Oh, by the way, we still haven’t really figured out what to do about that. The industry is still trying to figure out how to put the pieces together to offer a hedge product, a long volatility product, a long-short volatility product. I’m in the mix, as the vixologist trying to create that cocktail.