Most investors lose because they run a predictive model in a system that punishes prediction. Richard Brennan has spent decades on the alternative: align with price and make no forecast.
Rich is a trend follower, which means he lets price movements decide when to enter and exit a position. He is also a researcher of complex adaptive systems, and the author of The Fractals of Finance and Complex Adaptive Markets. He is a strategy ambassador at East Coast Capital Management in Sydney. Jerry Parker, who wrote the forewords to Rich’s books, introduced him to the show.
Rich trained as a geologist and then went into business. He started investing with the predictive value-investing model that economics taught him. It produced wins and then significant setbacks. When he studied the track records of trend followers as a whole class, he found they aligned with the market and made no forecasts.
Fragile calm
Rich describes price as the collective experience of every participant, a consensus no single person can see from inside. The market is a reflexive complex adaptive system that responds to the forces participants put into it. Rich says calm markets are dangerous. A loss of diversity and a concentration of leveraged strategies build hidden fragility, and change arrives as a sudden phase transition. A few events in the fat tails dominate everything. For Rich, volatility and risk are different things, and risk is the permanent loss of capital.
Boyd and Friston
Mark McGrath and I brought Boyd’s work alongside Rich’s. What Rich calls aligning with price, Boyd called orientation, and orientation sits at the center of the real OODA loop. Rich describes his work as minimizing the error between his path and the path of price. Karl Friston formalized that idea as the free energy principle, and Rich cites Friston in his own work.
You can find Rich at the Traders Outpost, atstradingsolutions.com.
Which of your positions depends on a forecast you cannot check?
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Written by Ponch Rivera with AI assistance in production. The full conversation is in the player below.