Technically Speaking, December 2007

I had the pleasure of speaking to Ralph Vince by phone on October 1, 2007 – he was in his office in Ohio and I was in my home in Connecticut.

MMS: So what’d you think of this market today?

RV: I haven’t looked at it.

MMS: Really?

RV: I haven’t even looked at it. I generally look at that on a weekly basis. I mean I know that there’s been a rate cut. I know oil is moving. But I couldn’t tell you what the indexes are doing.

MMS: Really? You only look on a weekly basis. When do you look? What’s the routine?

RV: I usually look on Saturday morning – I read Barron’s. I’ve made a conscious effort to make things be long-term, and to take a more long-term perspective on things because in the last 20 years – as everything has become more compressed through computerization – things have become considerably more short-term than they used to be. And I’m not a short term trader.

MMS: When you look at charts, are you looking at monthlies… weeklies?

RV: Usually weeklies. That’s the time frame that I’m operating on.

MMS: Tell me a little more about yourself – how you got involved in the market? What was your inspiration?

RV: I was a kid and I was looking for a job. I walked into a brokerage firm, and the girl asked me if I was here about the job in the paper, and I said “Yes,” without a clue what the job was, and she handed me a book that said Federal Reserve Regulation T. I remember this was a Friday, and she said “Be familiar with what’s in the book and be ready to work on Monday, and I remember getting on the bus and wondering what in the hell this book was. As it turned out, I became a margin clerk for short option accounts only. And to make matters worse, at the time, you calculated everything by hand. There were no computers.

MMS: What year was this? 

RV: This would have been in 1980.

MMS: Computation with no computers.

RV: Well, there were computers, but there was no software in place for the kind of calculations I was doing. It was a great introduction to the business, that’s for sure. 

MMS: Was there any important mentor type out there, even a book writer?

RV: There were a couple of option aficionados right where I worked. I remember being so impressed by one guy yelling in a phone to someone “You want to be buying new highs.” And I remember – in my youthful mind, it burned right into me – a truer word was never spoken. A couple of other guys were using point and figure charts, and I was curious, and I really got interested.

MMS: And move us forward to your career today.

RV: Well back then, they were just computerizing the back office operations. And a guy from ADP, I think it was called Computer Information Service, came and talked to us, and a couple days after that called me up and said, “How would you like to come and work with me in New York?” So the next thing I know I’m working in New York with access to price databases, so I started writing programs. And they began to ask me to test this and test that out, and it exploded into this little business. And it was something I really, really enjoyed. In retrospect, it was interesting to be there, right when everything was getting started.

MMS: And that was the early phase of Apple, before they went south for a while, right?

RV: Yeah, they had a few good years initially, they were about the only game in town for about 20 minutes there, and then the PC came in and just displaced it all in short order.

MMS: And now they have certainly had their come back. Go on.

RV: So, one thing led to another, and I eventually ended up working for Larry Williams on the West Coast. Working for him was the greatest thing that ever happened to me. I met him in a hotel in Chicago around 1985 and we just hit it off. He would call me at the most insane hours. I don’t think he ever slept, I’ve never seen a man so passionate about the markets and I would try to write down every word and trading idea that this guy spoke. I couldn’t keep up with him at anything though – not in terms of his thought process, not physically, nothing! And I started keeping all kinds of notes. I’d been keeping notes all along, that’s just part of my routine. And one day, I sent my notes off to a publisher, and they said “We’d like to put this out as a book.” There are some interesting things in the notes that were not so obvious pre- the programming age. And it got me some notoriety.

MMS: You’ve done three books now?

RV: Oh, you embarrass me. I honestly don’t know, I think it’s four. This last one’s like a compilation of the previous three (plus the stuff I’ve been working on the past 10 years in that vein).

MMS: Have you always been a writer? 

RV: Well I just like to document my footprints, where I’ve been, and my plans, where I’m going, because I find I always have to go back and ask myself how did I get here? What did it take to get here? I really just put things down on a legal pad. And then the years go by, and one legal pad stacks up on top of another and pretty soon I’ve got a beanstalk growing.

MMS: So writing is a discipline for you? 

RV: It definitely is. I’m involved in many projects, not just the market stuff. I have other pots boiling. I do industrial programming. I’ve got this talking robot project I’ve been working on. So I can’t keep track of it unless I write it down.

MMS: Are you electronically inclined? 

RV: No, not at all. I’m all thumbs. When it gets beyond the known to the abstract, it just costs a lot of money to fix what I damage.

MMS: So how do you create a talking robot? Is it theoretical?

RV: Well there are a lot of speech recognition engines out there, where what you’re saying types out in Microsoft Word and so forth. But there’s no muscle on the back end. And that is what I create, its deeper programming data. I strengthen the linguistic muscle behind speech recognition for speech-based systems that will eventually be ubiquitous – in your car, your thermostat, and eventually everywhere.

I also do industrial type programming for Snap-On business solutions, the automotive center. And I do a lot of programming that way. It sounds kind of perverse, but it’s really what I like to do when I get up in the morning.

MMS: So your market sensibilities come from your programming skills?

RV: Yes, my programming skills really complement my portfolio management ideas. It’s a real hand in glove fit.

MMS: So just draw that out for me a little bit.

RV: Okay. In the past, people would take parameters and input them into a portfolio model, and from those input parameters, they would derive what an optimal portfolio would be. I’ve created a different sort of a model, and in fact, the computational demand for doing it my way now would have been prohibitive a generation ago because the computer power wasn’t there. More specifically, it just wasn’t accessible to people.

MMS: Okay, so what is it that you bring to portfolio technique?

RV: First, my model is based solely on leverage versus drawdown. The old models don’t even take leverage into account. But leverage is an indispensable facet of it.

Secondly, to say that variance in returns is what risk is, is pretty fallacious. Risk is drawdown. That really is what risk is. That’s where you lose or keep your clients. Secondly, this model pertains to any distributional form of returns, whereas the old one is really for normally distributed returns. We know nothing is normally distributed except people’s height and IQ scores for the most part.

It seems data that has a naturally-limiting bound to it tends to be normally distributed. Say a man is, typically, 6 feet tall and weighs 200 pounds. If we could double his height, to 12 feet tall, and keeping proportions the same, we have to square his weight.

So a similarly proportioned man would, at 12 feet tall, weigh 40,000 pounds and if you double the girth of his bones and connective tissues, he still wouldn’t be able to stand up! So there is a naturally limiting bound that gives us finite variance, and a normal distribution there. Not so with prices. And lastly this one doesn’t use correlation, which is really a clumsy parameter. And the days when you need that the most, say October 19th, 1987, and some days we saw this summer, the days when you’re counting on it the most are the days when it will fail people the greatest. The new model uses conditional probabilities in lieu of correlation, and it’s far more realistic.

I might say that this model has the benefit of being derived post October 19th, 1987 and other dates like that, days that the previous models were not modeled after. Now these type of big drop days seem to pop up every 18 months or so…

MMS: Okay. So let’s talk a bit about your routine and what your average day is like. If you only check the market on Saturdays, what do you do during the week?

RV: I usually write code from the moment I get up. That’s my day. And I try to avoid looking at the markets. It’s almost impossible to do that, because the Internet and media are everywhere. You can’t walk through an airport concourse without finding out what the markets are doing, whether you want to know it or not.

MMS: And do you have to close it out because you get tempted?

RV: Oh absolutely. I have to say to myself “I’m going to follow this plan,” and you’ll follow that plan much more easily if you’re not watching it all the time.

MMS: So you have to be very disciplined about it.

RV: Right, and I have the benefit of not working in the business. If you’re in the business, you can’t help but feel the market pulse on a minute by minute basis, and that’s grown with the Internet. I really try to block that out.

MMS: So, you have a plan, you have your investments and an exit strategy. And you’re just going to live it out until that exit strategy completes itself?

RV: Yes, exactly.

MMS: How frequently do you change or adjust your portfolio?

RV: I wouldn’t do anything until first thing Monday morning, regardless of what happened this week. Until I see Saturday what to do, I’m not doing a damn thing.

MMS: Okay. But do you do something once every Monday morning or?

RV: Well, once every Monday morning for a two to six month plan.

MMS: And you’re a runner?

RV: I run a lot. Guys who are coordinated or have athletic ability don’t have to do that kind of stuff. They can go play tennis and squash and all that. But when you’re uncoordinated like me, its one of the only things you can do athletically.

MMS: You’re an “ultra-marathon” runner. What’s that?

RV: 50 to 100 mile type thing.

MMS: So you must run every day.

RV: No, I don’t. I’ve got a little program I follow and it keeps me in shape. I run a couple times a week, just for a few miles. And then on weekends I’ll go do a double digit, and once a month I’ll go do anywhere from 20 to 50 miles in one go. But I go slowly. I mean I’m back there at the end of the crowd.

MMS: Still, that’s very ambitious. And you practice Ju-jitsu?

RV: Oh, I’ve been doing that for many, many years. Two nights a week we get together. I’ve been doing it so long, and when you get to a certain age and you don’t want to stop because you’ll loose your form. Like the running thing, the whole idea isn’t so much for sport or staying in shape, as it is the psychology of not succumbing to the suffocating culture of comfort, and that’s my primary motivation. It’s a little nutty and a little monastic, but that’s –

MMS: That’s your philosophy…

RV: Yes it is.

MMS: What do you like to read?

RV: I love 1950s literature. I love the renaissance of that. I love reading Nabokov. I love reading Kerouac and Truman Capote. And I love the literary explosion that happened in that decade. And I think Lolita is the pinnacle of English literature. That’s a book I’ve got to back and read every two years or so.

MMS: What kind of business reading do you do?

RV: I like to read Barron’s cover to cover. I like to read US News and World Report. I like to read Journal of Finance. And I tried to read Futures magazine. Well, The Economist, but that’s a little, that’s kind of inapplicable to anything that I’m really involved with. I like to read anything I can get my hands on by Nelson Freeburg.

MMS: What does Nelson Freeburg write?

RV: He has a newsletter. He has different systems and studies. He’s kind of a one man “Davis-Zweig” type, a one man research department that just pumps out tons of great stuff. Nelson Freeburg’s work is one of those rare jewels that rivals the research and output of Davis-Zweig in my humble opinion. Nelson Freeburg puts out a newsletter, Formula Research.

MMS: So music, do you like music at all? 

RV: Oh yeah.

MMS: What kind?

RV: Now you’re really trying to date me. I’m not even going to go there.

MMS: Oh, okay. Elvis Presley?

RV: Well, let’s put it this way, it’s after the 1950s, okay?

MMS: Okay, to conclude, what would you like your readers to know and remember?

RV: Well I just hope they work with some of the ideas that are in this last book. I’d like to see somebody pick up the ball and start working with these ideas because I think there’s a lot of stuff that can be worked with, and that can do a lot of good.

MMS: Can you expand on that a little bit?

RV: Sure, in the last chapter we go into maximizing returns on the given probability of a given drawdown. And I think that there’s a lot there that people can work with and really use, and I hope that somebody can pick up the ball and do some good with it – add to it, you know, kick it around a bit. That’s really what my motivation is in putting it out there.

MMS: You’ve told me a lot about yourself. Is there anything else you’d like to say about your life?

RV: I think the “not succumbing to suffocating culture of comforts” is kind of the heart of the whole thing with me. And actually, right now I have to go and get a fl at tire changed.

MMS: We appreciate your wisdom, and thanks so much for taking the time to talk to me today and for letting us get to know you a bit.

RV: Thanks so much, Molly.