In this episode of the Market Call show, I sit down with Jason Meshnick, a market maker turned fintech pioneer whose intriguing career journey has taken him from the bustling trading floors of the early 2000s to the cutting edge of AI in finance.
Jason recounts his winding path from a philosophy major in small-town Poughkeepsie, New York, to becoming a Wall Street trader and, later, a leader in tech for trading. We explore his transition to automated trading as floors shifted online trader jobs contracted and his move into roles in finance education and media.
Jason offers a captivating look into the evolution of markets and trading strategies, from the dynamics of floor versus electronic exchanges to analyzing sentiment shifts through media platforms and tools like CNN’s iconic Fear and Greed Index, which he helped develop.
Across various sectors of finance, Jason’s experiences highlight the human element alongside technical progress.
SHOW HIGHLIGHTS
- Jason Meshnick talks about his transition from being a market maker on Wall Street to becoming a fintech expert.
- We discuss the changes in trading desks from the early 2000s to the present, emphasizing the shift towards automation and a reduced number of traders.
- Jason describes his unconventional career path, moving from a philosophy major to a Wall Street trader, and his eventual move into fintech.
- Jason shares insights into the development of CNN's Fear and Greed Index, including the collaborative efforts and practical constraints faced during its creation.
- We explore the shift from floor trading to electronic markets and how enduring principles of market trading continue to influence career paths in finance.
- Jason recounts his personal and professional journey, including his move to Boulder, Colorado, and his involvement with the CFA Society.
- We dive into the intricacies of building decision trees for financial data analysis, comparing their transparency and reliability to large language models.
- Jason reflects on his editorial role at TheStreet.com and the importance of market sentiment analysis in shaping financial media platforms.
- We discuss the role of experience and a deep understanding of market nuances in successful investment strategies.
- Jason explains the seven indicators used in CNN's Fear and Greed Index and how this tool helps both sophisticated and retail investors make informed decisions.
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TRANSCRIPT
(AI transcript provided as supporting material and may contain errors)
Louis: Jason Meshnik how are you?
Jason: I'm doing great, Lewis. It's so great to see you.
Louis: I know I'm so glad to finally have you on the podcast. You know, just knowing you for so many years and you know, knowing that you have so much knowledge out there with regard to investing and just your overall creativity, I had to have you on and I'm so glad that you came on.
Jason: Well, and one thing as you know from from our relationship, I've always gotten so much out of talking to you and I always learn something just through our conversations, and I feel like by the time this podcast is over, I will have five new ideas to to go after and try to figure out what to do, how to make them all reality oh god, I hope so, I hope so.
Louis: it's all about the ideas you know exactly. It was funny. I asked you to send me a send me your bio and I've known you for a long time and we met years and years ago at a CFA meeting I think we were both on a board for the CFA Colorado or Denver chapter and and since then we've worked together in many capacities. But I didn't know a lot of things about you that I should have known just reading your bio. I knew that you spent 20 years in the fintech world and I didn't know that you were also working on some AI investment analysis, which I'd like to learn more about, and that you really have a lot of passion for educating. And I guess your coworkers asked you to write a newsletter. I had no idea about that and you know now what is this about. Vampires are rich. Why are vampires so rich?
Jason: That was one of my favorite things that I wrote. Yeah, if you want to cover that now, we can, or we can talk later.
Louis: I think we'll circle back to that, but I was a little what's that about.
But yeah, and now you're doing some teaching at CU Boulder, teaching finance. We've done a little bit of lecturing together at the university level DU and things like that and I've always enjoyed watching you teach because you seem to captivate the kids. Well, they're not kids, they're young adults with your style. So I'd like to learn a little bit more about what you're doing there. And you are a Wall Street trader and market maker and there's a lot of things that you know about microstructure and investor psychology that I want to kind of touch on too. So, but the big thing is understanding that you were involved with the CNN, that popular feed and fear and greed index back in 2012, I guess that was put together. So I don't know. Maybe what we could do is talk a little bit about your background. I mean, I kind of covered it a little bit, but just maybe you can tell me a little bit about you know, share with the audience, your you know how you got in this business and kind of what's been your progression in this business.
Jason: Yeah, so my guess is that everybody says this, but I came to it from a slightly different path, not that not that, you know, I didn't get out of college and immediately go to Wall Street, that's. That's a pretty normal path, right? But I was a philosophy major and I'm far from a philosopher. But I think what I took away from my undergrad as a philosophy major was just sort of a way of thinking, right, as opposed to being sort of a business person thinking only about money, it's more about thinking about other kinds of things and things that drive people and being able to draw from communication and trying to understand what people think and how they think and why they think, and I think it was one of the things that really fascinated me. Also, being a child of the 80s, you know Wall Street was so important. There's so many movies about it, right from from the Wall Street movie to I don't know. It seemed like every other movie that came out was about how to make millions of dollars on Wall Street, and so, of course, I wanted to be part of that.
Having grown up in sort of a backwater, poughkeepsie, new York, I always wanted to go live in the big city, yeah, so that was sort of my start, was coming at it from kind of a weird direction and I ended up immediately going to work for well, a firm that no longer exists for a couple of reasons, but it was the trading arm of a New York specialist firm. So the specialists were downstairs on the floor of the New York Stock Exchange and my boss was one of their customers and he just worked upstairs in their clearing division and he was trading his own money. He had been a floor broker for 20 years, owned two seats, sold his seats, did pretty well on them, and then decided that he was just going to live the rest of his life as a trader. He brought his son in and then eventually I was working as a runner so you know fourteen thousand dollars a year and just wanted exposure, just wanted to be part of the action. Right, I love the action. I was so excited about just being there, the history I love the history of things.
Um, I probably should have been a history major and so, just being in that environment, I ended up getting picked up because I was. I was pretty cheap, right, so they didn't have to pay me much and I ended up working and really falling in love with being a trader and learning about how the market worked and how floor brokers could help make these trades. We had a network of 20 floor brokers across the New York Stock Exchange and what was then called the Amex, and some of the regional exchanges too, so that we could trade and we'd strategize every morning and then make our buy and sell decisions and then, throughout the day, update them as needed. I'd like to say that we were the high frequency traders of the time, even though our frequency wasn't that fast, but we were sitting on both sides of the bid and the offer.
Louis: Boy.
Jason: times have changed, huh offer Boy times have changed huh yeah, I mean that's yeah, I like to say. When I, when I started in the business, there were people there who'd been on the floor in 1929. And so much of the floor of the New York Stock Exchange looked the same as it did in 19,. You know, if you, if you were to go, take Jesse Livermore and drop him, you know from 1929 and just drop him on the floor in 1992 when I started, he'd have been like I don't know what these TV things are that are all around. He wouldn't have even had that word, but otherwise he'd have been able to run into a crowd and know exactly what to do. And by the time I left in 2002, well, there wasn't even a crowd, right? I mean, everything was different about the floor of the exchange. I was a market maker on a fully electronic stock exchange, so the principles were all the same, but everything else had changed. It was so different.
Louis: Oh, that's a big part of what I wanted to talk to you about that the principles are all the same. So, because I was just listening back to some of our, or looking back at some of our conversations just to prepare for this, and we've had a lot of conversations in the past where you were really outlining like I want to capture what I saw, those principles that I saw on the floor, and I want to capture them today and that's kind of driven a lot of things that you've done. So maybe maybe you can tell me like just a handful of what those principles are that you've noticed are like still the same now that probably will never change.
Jason: Well, so I'll caveat this by saying I've been out of the markets for a number of years, right, so I left, I left trading in 2002. And then I was still, you know, still kind of a pretty active trader, investor for the next 10 years or so. But then life gets in the way and I'm just very busy, and so I've sort of shifted my focus in a number of ways and I'm honestly really interested in analysis now and thinking about market sentiment and what investors are doing and how investors think about the market. And I now, when I trade, it's opportunistically right, I'm not in there every day, I'm not trying to make eighths or even pennies.
Louis: I guess we should probably. Oh, I'm sorry to interrupt you there.
Jason: Go ahead.
Louis: I was just gonna say I guess we should probably back up a little bit and talk a little bit about, like more about your career progression, because you moved into from trading into fintech and, and from fintech now to working at the streetcom for and as an editor, so, and which to me makes a hundred percent sense. Um, just from what I know from your talent, your talent stack, so maybe you can kind of finish that progression a little bit. So, to where you are now, yeah, sorry, yeah, totally.
Jason: So my progression is really. I mean, there's there's a couple things that run through the entire thing and I think a big part of it is analysis and being excited about, about thinking about the markets right, about being being in some ways just part of the culture of it right. So that's been the big thing that's run through my entire career. But in 2002, my wife and I we weren't married at the time we were thinking about you know where will we end up, and we decided that we either end up in New Jersey or we could move somewhere that we wanted to live. So we did a search all around the country and decided we just sort of threw a dart at the at the wall and said Colorado seems pretty nice. So we ended up here in Colorado and it's been the best move.
Louis: Man, that was a lucky dart throw. If you ask me, it's a lucky dart throw, I think.
Jason: I think it was guided by my wife's hand. She may have said I'll take that dart and I'm going to place it right here just at the foot of the Rocky Mountains. So she'd been out here and visited and said Boulder is going to be the place where Jason will be happy and we'll make this happen. And so we moved out here without jobs. I quit my job as a market maker in June of 2002. And the market was changing so much at that time it was definitely becoming harder to make money, and so I was ready for a change. I was ready to do something different. You know, when I left, there were 10 traders on my desk and probably another 30, 20, 30 on our over-the-counter desk.
And when I went back, seven or eight years later and I'll get to this, but when, when I was working in FinTech and I went back, visited my old trading desk, there were three people and a really large computer and, rather than taking directional bets on the market, they were doing arbitrage. And they were. They were, they were working the order flow and they were figuring out, based on the order flow, how long or short they were going to be. You know, sort of using quantitative methods to understand. If they felt the market was going up and they were going to end up being more short and more short, they would have to think about the Delta to the market and try to get long ahead of those people so they could be selling to them.
So it became in some ways probably a much more intellectually engaging thing than just sitting saying, oh someone just sold me 1,000 shares, I have to get out of it now. You were thinking ahead of the market. In many ways it was really cool. I probably would have liked it a lot, but it just became a really different animal. It was much more arbitrage as opposed to directional trading, which is really what I knew. So we moved to Colorado without jobs and in doing that that's when I met you, lewis is. I was pretty engaged with the CFA Society despite not having a CFA I'll throw that out there. I'd also just finished my MBA at NYU. That counts.
So, I think they let me in, but that was about it, and they let me even onto the board.
Louis: Yeah, yeah, you're a very likable guy, so it was a pretty easy decision. They're like he doesn't have a CFA, but he's a pretty cool guy. We'll let him in anyway.
Jason: I think he also said this is a guy that we can make do all the all the programming. We can make him call all the all the people that we don't want to call and try to organize meetings. And they thought I was an event planner, which it turns out I'm not. I'm just not a good event planner. My wife can tell you that Actually, lois, you did kind of the same. We were organizing all the CMT meetings.
Louis: Oh yeah.
Jason: Like, yeah, yeah, yeah, let's, let's go call some people, um, yeah, but so so it took a while and I ended up finding this job here in boulder, uh, for a company called wall street on demand and for those who are not familiar with wall street on demand, it has a new name um, it became market, uh, no, became wall street on. It was wall street on demand. Then it became market on demand once I, once market bought us and then eventually it became market on demand once market bought us, and then eventually it became market digital, when they decided that it was really time to think more broadly than just web and think broadly across all digital formats video, et cetera, and advertising. And I stayed there for 19 years. Where, louis, you touched on the AI side of what I did and so this is one of my big jokes is that I like to say that I was the world's most widely read analyst, if not the best, and the reason why I say that is because over the 19 years that I was at that company, I built something like I don't know 200 different. I call them only because of today's terminology and the way that people talk about markets now, about technology now. I call these AI related, and they really are simple. They're very much rules-based AI, so sort of traditional AI, not these large language models that we have now that are in some ways more sophisticated but really not as good.
So what I was building were these big decision trees, and these decision trees were things where you would, using your financial knowledge, you would say, okay, I'm looking at some financial data around a company. What do we need to know? Well, let's start with the valuation. Is the stock what's the PE ratio? Is it a high PE ratio or a low PE ratio? How do you define a high PE ratio? Is a high PE compared to its average for the last five years, or is it the highest in its industry? Right, you can look at things cross-sectionally or historically, right, but both ways time-based or versus peers, and so we would do things like that and we would chop up the market and try to understand. You know which stocks were good or bad, but it wasn't necessarily for an investment perspective, right? This was because what we were doing was for the Schwab's and TD Ameritrade's and all those companies. We were building the news and research portions of their website, and so I and my team were providing that research, and so a lot of the texts that you would see on that site was completely dynamically generated.
So, very simple, rules-based AI. And I say it's better than large language models for AI, because large language models you never really know what you're going to get. It's a bit of a black box, right. So what we could do is I would create text that was locked down. I knew exactly what it was going to say. I didn't know what the data was that was going into it, right, I didn't know if Apple had a high PE ratio or a low PE ratio, but I had rules around defining what was high and low.
And so when I would go to the compliance departments at Schwab or TD Ameritrade or Fidelity, et cetera we worked with all the US brokers, many of the Canadian brokers, australia, others I would go to the compliance departments and they would say, well, how do I know that you're not going to say something silly or that's incorrect?
And I said, well, I'm going to give you the entire decision tree and you're going to be able to look at the decision tree and understand what it says.
So the only way that my model can be wrong is if I have a bug and there are bugs all over the internet, so I'm as fallible as anybody else, but we're going to do our best not to have those. And then, secondly, if the data is wrong and if the data is wrong, well it's wrong all over the website too, and we're going to fix that. But generally, 99.9% of the time, for 99.9% of the stocks, what we say is going to be accurate. It's going to be correct, it is going to be as unbiased as possible, because I'm not trying to tell you, as a value investor or growth investor or whatever, what you should do. I'm just trying to describe the various aspects of the stock. I wasn't there to give you a buy, sell hold recommendation. I was purely there to help you, as a self-directed investor, understand more about the stock, about the company. You know you brought up something that's really interesting about that.
Louis: I mean, I have to. You know you're talking about large language models and it's a little bit of a black box. We don't really quite know, and you're dealing with these big decision trees, or you were at that time and it was traceable, like you could trace the logic which made me think, okay, we have data and the data can be right or wrong, and then you have the logic, and the logic can be right or wrong. And I think that's one of the things that I always have a little.
I'm having a little bit of an issue with with some of the AI is the logic element of it, because you like how much of it is curve, fitting what is real behind it, so we could use it. I had a tech executive tell me one time that the big thing with AI is it can help us with speed and it can help us with accuracy if we use it correctly. But it's not necessarily like you still need human thought. You still need that ultimate human element to it. That's my personal opinion on that. But the fact that you were using decision trees early on, you know that and just to get information, that way you were speeding the process for the investor, basically.
Jason: Right.
Louis: Like they would spend a lot of time looking for all those things. But you systematically sped it up, which is a a big thing for and we and we all have that now that's and it's, there's just like different flavors of it, um, so, uh, it's, it's that whole. It's a whole. Nother topic we can get into a little bit later. But I, I, uh, I remember you talking about that when you were doing working on those projects, um, wondering where it would go next. Um, you know, as far as that goes, but getting back to your, getting back to your, your story, let's get back to your story. Yeah, sorry, keep getting off track.
Yeah, that's okay, yeah.
Jason: So while I was at that job I did, I did a number of things. I mean it was really, it was really an exciting job in so many ways. But the two big things that I did were really this you know, running the natural language generation product right. This thing we called it smart text, um, and so that's that ai thing. But then the other thing that I was so excited about was doing education right and and our. So this started back in 2006 or 7, um, I started doing brown bag lunches where I would just put together a presentation and teach our developers and designers and engineers all about everything they needed to know about investing, not so they could go out and make a million dollars, but rather so that when they were building the tools that we were all using, they understood their subject matter right, that they could be engaged with the topic and identify with the end user and really understand why a PE ratio mattered or why a chart mattered. Simple thing, like in design, you'll notice that there's a lot of white space on many pages and they talk about that as being good design. It's actually a really bad design for investors and the reason is well, depending on the type of investors, but for slightly more active investors, engaged investors, what they want is information dense things, and so I would help steer our design team to create things that were a little bit more information dense, an example being a chart, a price chart. You don't want to have to scroll up and down too much to be able to read your price chart on your Schwab account. You want to be able to type in NVIDIA and load up a couple of indicators that you want to see. Put your MACD on and then MACD is a lower indicator, maybe an RSI, maybe whatever Put those things on there and be able to, in one view, understand the trend, momentum, volume and volatility from that stock right. That was another thing that we did when we rebuilt Schwab's charts. I'm kind of proud to say that Yahoo actually stole this, but we broke the indicators out.
Previous big charts started this. They said indicators are either separated out as upper indicators or lower indicators, and that doesn't tell you anything, and I'll credit John Bollinger. I learned all this from him is really you know, people should understand what goes into the indicators. They should understand as much of the calculation as possible, right, what the inputs are and what it's giving, what information it's giving you, right, and then separate those out into different sort of you know I'm using the term factors very loosely but into the different factors of technical analysis. So, is it trend, is it momentum-based, is it volume, volatility you can come up with others as well but, right, where does it fit? And if you're looking, if you put a bunch of indicators on a chart and it turns out that they're all trend indicators, well, you really have one indicator and so you're not getting a full picture. So go put some momentum indicators on there to understand the speed and whether the trend is about to be exhausted or not.
So it's things like that that I really wanted to help both the end user of our products as well as the the, the person who was building the products, understand so. So I ended up writing for about three or four years. So we started that in 2007, but it was. They asked me to put it on hold after a while cause it was taking away from a lot of my work. And then, in 2018, our CEO came to me and she said you know, you used to do this, these brown bag lunches. I would really like it if you would just write. Just write a newsletter for the whole company.
The question of the week, so Fridays. I'd ask the question, and it might be how many? How many stocks are there in the S&P 500? And I haven't looked at the number recently, but I think the number is still 501, right, it might even be higher, but there's only 500 companies in the S&P 500. And so that's the distinction. There's 500 companies, but some companies have multiple classes of stock that may be in the S&P. It might be 505 now I can't remember. I have not looked in a long time, but that was effectively the answer, and so it became just a really fun thing to write the answer, and so it became just a really fun thing to write.
Yeah, so teaching people about vampires right, became a way of telling them. Why are vampires so rich? It's simple They've been investing for hundreds of years and so they've had time to let their money compound. Assuming that Vlad the Impaler, the first vampire, he was a prince. Let's just put a number on that $10,000 in today's money. What does $10,000 grow to over 500 years? It grows to trillions of dollars. And then, if you spend 1% of that every year, how much money are vampires spending? Today, vampires are spending billions of dollars. Vampires are probably supporting our economy.
Louis: They've got to be the richest people in the world. It's like puts vampires, yeah yeah, it puts elon musk to shame, I mean really so maybe elon's a vampire yeah, you never know, maybe a little similar, I don't know. That's that's wild. Well, um, so you have this creative side to you. That's that's driven that. And then how did you get um, like, was it just a natural progression for you to do what you're doing now?
Jason: or maybe you should tell us a little bit about what you're doing now yeah, so so let's get to what I'm doing now, because that's important and I know that, um, they'll be watching this and they'll they'll kill me if I don't talk about what I'm doing now, because they also really like it. Um, I'm having a lot of fun. So, you know, you go through ups and downs in your career and I definitely there were times when I absolutely loved trading and absolutely hated, and that might be the same day. I might love and hate trading.
Louis: In.
Jason: FinTech it was. I might love a year and hate the next year and, you know, love the next year for that. It was project to project and here you know right now what we're doing. So I work for I'm currently the managing editor of the street pro and so so you are probably familiar with the street. Jim Cramer founded it back in I don't know 1997 or 1998. It was really the first, the first and best of its type where you could come and get financial news and information. And then, not long after they started the street, they brought, they created something called real money where they brought in people like Helene Meisler and and Doug Cass and they would create something that was more of a subscription product but more of a newsletter, newsletter product where Helene would write top stocks is what it became and Helene would write her brand of you know market sentiment analysis and it was really great.
And Jim Cramer left about two years ago and I've never met Cramer. I've heard him speak before but I don't know Cramer, don't know a lot about him. But I'll say this is a business that was 25 years old or is 25 years old now, and it's going through a lot of change. So we're trying to figure out what will it look like in the future. And one of the big things I love this I quote it all the time but Barry Ritholtz was one of our. I believe he was a street contributor at one point. Barry Ritholtz has gone on to become a Bloomberg contributor and have his own money management firm, but earlier in his career, I'd say, he made his name at the street, as did a lot of people, and so he calls the street the Motown of Finance and he says that the Jim Cramer was sort of this I think the name is Barry Gordy character who you know sort of larger than life in many ways, and he brought people in, brought people in and he made them stars right, and so we did the same thing, or he did that at the street, and so we're in the process now of trying to do that again.
We have great contributors. They're all wonderful and they provide really great perspectives on the market, and sometimes they disagree and sometimes they agree. I asked a few of them to write about GameStop recently and it was really great to see the kinds of things that I got. But we want to get back and we want to make these people, we want to make our contributors, who are such great analysts, stars again, right. So we're trying to change a lot of things that we do in the business. In the past it was really Jim Cramer. The last five years, I'd say, jim Cramer became our number one star. I want Helene and Doug and Sarge and Rev Shark and I could go through the whole list Chris Versace I want them all to be stars too, and they want to be stars and they are because they're so good. So we're working at how we can do that, how we can elevate the content, not just to make the contributor stars, but really to showcase how good they are as we go and help more investors to be self-directed investors, be more successful in their trading and investing. And I say we have two different types of products, really Our value add.
If you are a trader, a self-directed trader, you might spend your time on Doug Cass's community, right? So Doug has his daily diary. Doug's a hedge fund manager. He's out there from three o'clock in the morning. He's sending us stuff. It's crazy. The editors have to be there editing and putting it up from. They start at 5.30. So the editors are in there at 5.30 in the morning putting Doug's ideas up all the way through the end of the trading day, and then in the lower half of that page is a community where we have many, many people from the community, some of which I won't say any of their names, but some of which are fairly big names in finance and investing. We know who they are.
On the site they really the community ends up feeding on itself and providing great ideas just among each other. There's one guy who talks a lot about cryptocurrencies. We don't have a lot of cryptocurrency content on the site. We're working, we're going to be adding some, but this one person alone actually provides some of the best crypto content I've ever written, and he's paying us right now, at least for now us right now, at least for now.
And so the other products that we have. We have where you can get trading ideas or investing ideas. We have some people who are a little bit more technical focused, some who are more fundamental focused. We have one person who does really well providing dividend ideas. Another person is really great at more fundamental, value-based ideas, but then we have a whole portfolio.
You can come to us and we have Chris Versace runs our pro portfolio, where we help investors understand not only how to put together a portfolio and they can just copy this entire portfolio but, the thing I love about it most, every week Chris writes a weekly update talking about what he sees in the market, what's coming up, economic things that are happening. But then he goes through all 30 holdings. He tells you the investment thesis you know I'm big on the investment thesis, lewis right, you should have a thesis, you should know why you're investing something and you should update it frequently. Right, chris updates the investment thesis every week. And then he tells you what his target price is and his panic point, his stop right, where he's going to realize that his thesis is incorrect and he's going to re-evaluate, probably sell the position. And then he just goes through and gives you sort of a weekly update and says, yeah, here's what happened in NVIDIA. Jensen Wan was out doing whatever he did. He spoke to these people.
So that's what we're doing and the product is great and we're, you know, really excited. Now we have a lot of energy around what we're doing and how we're, how we're rebuilding, um, building I keep saying rebuilding like really we're taking what we had, which was a solid product, and we're just building off of it. We have, uh, later this month this will be the first time I've kind of mentioned this Um month this will be the first time I've kind of mentioned this Our marketing team doesn't even know but later this month we're doing a roundup, or we're actually calling it the quarterly call. So this will be the end of every quarter. Now we're going to have four of our contributors come on and really just talk about what they see in the market and have kind of a little panel discussion, and so that'll be really exciting, but it's things like that that we want to do.
Louis: Yeah, it's good to hear the actual real time discussion, you know, because you get more color about it. But I love what you said about the Motown or the. Who is it? Who said a Barry Ritholtz?
Jason: Barry Ritholtz.
Louis: Yeah, I said that. I mean I thought I had so many like visions in my head because, you know, I'm a musician too and I I'm thinking about motown. I fell in love with motown as a young kid. My parents listened to it and the first thing that I thought about was that these, a lot of these people that were, uh, involved in motown, they were, they were completely isolated from the music industry. So so you know, you can find a lot of talent outside of, people that are like right in the mainstream of the music and of the Wall Street, kind of normative Wall Street. I mean you have to do something different really to be unique like that.
And sometimes I think groupthink hurts Wall Street. In fact, I was just telling my wife this morning. I got out of the shower and I said you know what, in a way, wall Street is kind of like not even a thing anymore. Like you know, it's like I don't even think of Wall Street anymore as Wall Street. I mean last time I was there it didn't even seem like Wall Street to me. I mean it's still, it's still a thing mentally, but it's not. It's like I really think it's time for Motown.
Jason: I think you guys are right in the thick of what we should be doing, because there's so many great thinkers that I run into who are not anywhere near the center of Wall Street, quote, unquote. So that's, yeah, one of the things I really want to steal comes from Chicago. So Morningstar in their quant reports. So if you have a Schwab account or any of these, they pretty much all have Morningstar's reports. These aren't the quant reports, I'm sorry, it's actually the ones that are handwritten by analysts, but on page I don't know two or three they have a module that says bulls say and bears say and they go through the bullish case of a stock and the bearish case of a stock, and that's something that I want to institute everywhere.
Everybody should be with everything right. You talk politics, you should have a. You know what are the positives, what are the negatives. Whoever your candidate is doesn't matter. They have positive, they have negatives, that's right. You know your friends have positive, negatives. Like everything has a positive and a negative, and you have to look at both sides of the story, especially they say you shouldn't marry your investments Right. Know what the downsides are, Know what the risks are with everything you do.
Louis: Wow, there's a lot there we could go into.
Jason: I know yeah, as far as the no, no, not politics. Believe me, I mean we're staying away from politics.
Louis: Yeah, we're staying away from that. You know, it's more like the I keep thinking of the narrative versus the numbers debate. I always say that I'm more interested in the numbers than the narrative. Like I start with the numbers and then go for the narrative and I think the older I get and the more I've seen, the more I realize that it's not the narrative necessarily, it's just understanding as much as you possibly can about what is true.
It's hard to do and so much of investing is qualitative. You know, I mean you know my background. I do a lot of quant factor stuff and all that and that's really helpful in kind of keeping you honest. But at the end of the day, when I look at the stocks that have done really, really well for me, or macro trades like futures type oriented trades, it's been because I had some piece of knowledge and understanding about something that I just knew with a high conviction that was true and I stayed with it and it made a lot of money. So that is really hard. I don't think the quant sometimes leads you there, but it may not necessarily. It's not usually the end, like the end all be all, and a lot of times if you look at the best quantitative stuff it tends to turn over a ton. Right, it's like like momentum. Well, you know, you could say like, okay, I'm going to run momentum screens on stocks and the best parameter set is going to be me like turning over quite a bit. But then after tax and reality in the real world, you're really not making that as much as you would think, whereas you might find something that's gaining momentum that no one's talking about, like I bought not to talk about.
I shouldn't talk about specific names right now, but there's a particular stock that I bought where I understood what was happening. It did come up in a momentum screen. It was a very small company at the time and then it just went ballistic. That now did I know it was going to ballistic? No, not to that degree. You know, I didn't think it was going to go up. You know 500% in, you know three months. But it's one of those things where you, if you know something, there's so much more to the narrative, so you go into the Motown aspect of things. There's value in that. We, we numbers are becoming a commodity, almost right. Everybody can get all these numbers and we can, we can move things around. Anybody can go on chat, gpt and, you know, pull, you know I get certain things. So I, you know, I don't know I'm becoming more of a qualitative guy the older I get. Is that that's weird?
Jason: I have a theory on that. Let me know what you think. But I think that you are able to become a qualitative guy now because you have been a quantitative guy for so long and so because everything that you do there's, you know, there's a famous saying, it comes from consulting. I think you can't manage what you can't measure, and so everything that you've done as a quantitative person has been to measure, even when you run that quant screen and you get a list of stocks and you know that this list of stocks is going to turn over at the same time. You probably know well, this is going to turn over. But let's pick on NVIDIA. Nvidia is on the list right now and, because of these other things that I know through my experience, nvidia may come off in two weeks, but it's probably going to come back on in a month. I should just hold it Right, yeah, and so I think that you've spent so much time in the markets and it comes down to the word is experience.
Right and that's why you hire a financial advisor. Or you hire, or you take a subscription to the Street Pro, or you want to get the experience of other people, especially as you're learning.
Louis: Yeah, yeah.
Jason: So now you can be. I was just going to say one thing. One thing is you can be sort of a core satellite where you can take your core investing, and maybe you want to be self-directed and buy a portfolio of ETFs, or you want to give that money to your financial advisor, give it to you, lewis, and then, with sort of the satellite funds, play money or whatever. You use your own experience Maybe it's in your own industry or whatever it is. You're trying to add that extra bit of alpha right and have fun maybe, but but keep yourself intellectually engaged. You have, you know, sort of the core of your portfolio over here and then kind of the rest of it where you can do things with as well.
Louis: Yeah, I totally, I totally agree with that. So you know, this is just kind of getting me into this the fear and greed concept. You know you got involved with the fear and greed. I'm not, I'd like to hear the story about how you got involved in and what you, what you did in that. But when I think about the fear and greed index, I always think about that fish that's in the bowl and doesn't realize that he's in water and but you know, but if he steps outside and looks at he's like wow, I'm in water, right. That's kind of what sentiment is to me. It's like we're part of the sentiment, like we are, we're the observer. It's like the Heisenberg principle, like what we look at, we change, right, and that's sentiment, and fear and greed is kind of like a great overall, you know, easy to understand way of looking at that. But I guess I want to let's start off with your story, like how did you get into the fear and?
Jason: greed project and what, what. What was your progression through that? So yeah, I mean, after coming from Wall Street, I'll tell a really quick story because I think this it's in it's in the article that I wrote too. But this story is a story from business school and I can't remember if the numbers are correct, but they're approximately correct and the timing is approximately correct.
I was in business school, part-time, at night. I was working as a market maker during the day and then at night I was at NYU taking a class and this class was a valuation class and they asked us we had to come up with, we had to do a discounted cashflow analysis of a stock, and each group got to select whatever stock they wanted and I proposed to my group let's pick JDS Uniphase, because it was one of. It was the NVIDIA of its day. Oh yeah, hopefully NVIDIA will have a better future than JDSU did. But my group was all they said absolutely, let's do that one. And the stock was trading at I don't remember exactly, but probably about $165. Okay, and so we sit down and we do our analysis and we're doing discounted cashflow analysis and one of the big inputs to DCF is understanding the growth metrics right and forecasting growth. And forecasting growth means looking back historically, figuring out how fast the company has been growing and just saying you know, is it going to speed up or is it going to slow down? Eventually they all slow down. It will slow down, but you have to figure out how long that's going to take. So we did the analysis and we figured out it would slow down, I don't know, over 10 years or something. Something pretty reasonable, probably pretty generous as well, and we came up with a value Again.
Remember the stock's trading at $165. We came up with a value of $2.25. And we looked at it and we said can't be, can't be. We learned in our last class the market's efficient, this is all wrong. I don't know. We did something wrong and so we went back and we now this time we went crazy. We're like this stock's going to speed up its growth. It's going to, instead of growing at 50% per year like it has been, it's going to grow at 100% forever. And we came up with a value of $225, right, and so the stock gets added to the S&P or maybe it was when they confirmed that it would be and the stock jumps to $225. It jumps to $235, I think was the high I sell my stock at like $225.
Louis: And so we were right, that was a good trade.
Jason: Good trade. And then we go and we present our research to our professor. And this is where it's really funny. The professor, who was so outrageously smart, could do any math problem in his head. But he's looking at us, he's laughing at us. He's like really, you think this thing is worth $2.20? We're like, yeah, here's the research, here's what we did. And he's just laughing at us. And then he says how could this company possibly be worth more than Apple? And Apple at the time was trading at $19, which, split adjusted, is probably something like negative 10 cents. And he said Apple has $16 in cash on its books and, whatever he's like, Apple is definitely worth more than JDS, Unipay. And, of course, this guy's probably retired on a private island somewhere.
But what I took away from this whole story oh, and the other thing is we were right on both sides. We were right with $225 call because the stock traded to $235. And within two years the stock was trading at something like $2. So we were right on both ends. And so what I took from that was I'm not a great analyst and I'm not a great forecaster. I'm especially not a good forecaster. Okay, but what I can do is I can look at data and I can back into things and I can understand well, if I look at, if I calculate, if I back into, how do I get to $165 or $200 for JDS Uniphase? I look and I say, well, the market has really high expectations of this company and those expectations are nothing but sentiment. Nobody knows.
Louis: I think that's all you need, though, jason, I actually don't think you need to be a great forecast Like that's really all you need. So, cause, if you know those extremes, you avoid mistakes, because the more I do this, the more I realize that's what it's about. You know, if you're going to put X number of units, and risk units if you will, in your portfolio, if you don't make a lot of mistakes and you compound reasonably, you're going to do great. It's just like reading. You know Warren Buffett always talks about read chapter eight and chapter 20 of the intelligent investor, which everyone should do, by the way. In fact, I'm set I send that book to clients and just say read this.
You know that's what all it is about. I mean, that's basically what it's about what you just talked about right there. You don't really need to be a great forecaster. You just need to avoid a lot of mistakes and have a reasonable amount of diversification, not too much. And yeah, I mean you hear about people that have made like great calls consistently, and then the more you learn about them, the more you realize that there was something else part of the story. You know what I'm saying. There was another part of the story that you didn't really hear about, and a lot of it boils down to not avoiding mistakes, having discipline, risk management, things like that, but anyway, I got you off your topic.
Jason: It's all risk.
Yeah no, yeah, no, no, yeah, and it's. It's important to cut me off too, because I can. I can talk about certain things for too long, but I'll just. I'll just cut right to your question, which was fear and greed, yeah, yeah. And so how did I get to that? Literally, I, from that point in about 2000,.
You know, I got much more interested in technical analysis and and, and I started thinking I'm not so much like a stock picker and I'm not so much into, you know, the MACD and the RSI. I'm much more quantitative. That's my interest in technicals. Technicals really helped me become more quantitative and more interested in looking at the big picture, understanding how to measure the big picture, and so I started looking at indicators and things that people like Ned Davis was doing. Right, I, I a big fan of Ned Davis, ned Davis's work. There's some other providers that were like that, sentiment traders Another one. I like all those, I like what they do and I started trying to replicate. You know, you don't know what their secret sauce is, although actually Ned Davis has a really good book. I'm looking at my bookshelf somewhere out there when Ned Davis's book is being right or making money. But then his chief strategist wrote another book where they actually go in and they tell you how to build a, build their, one of their sentiment indicators that has nine components to it. I was messing around with that, trying to figure out, trying to understand these indicators and understand the signals that they gave. And I hadn't around.
That same time, cnn was one of our clients at what was then Wall Street On Demand and our CEO was out talking to them and he was talking to Lex Harris, who was their editor in chief, and Lex said you know, I don't know what this is, but I want to build something called the Fear and Greed Index. Can you help me? And Jim, our CEO, came back and he came to my team and he said so CNN has this kind of crazy idea. They want to build something called the Fear and Greed Index. What do you think has this kind of crazy idea? They want to build something called the fear and greed index? What do you think? And everyone on the team pushed away from the table. They're like what a bad idea. And I was left sitting there going they thought it was a bad idea.
Yeah, they just you know they didn't get it. It wasn't what they do. I thought you were going to say mic drop.
Louis: I literally thought you were going to say mic drop. Everybody said that's a great idea, let's jump on it. That surprises me. They looked at it.
Jason: Yeah, they were like well, and they didn't know how to do it right. It wasn't what they were interested in. The team all had very different kinds of backgrounds, and I was the only one that had that more market-related background. The others were really more analysts Smart guys, great guys, but much more like. They could probably pick a stock better than I can, but they cannot tell you if we're in a bull market or a bear market. So I'm sitting there saying this is the greatest opportunity ever. And so they got me on the phone with CNN, with Lex, a day or two later, and we just started putting together ideas and Lex basically said look, I don't know what this thing is. You kind of know what I want to do. I just want something that really represents that quote that Warren Buffett says, which is you should be fearful when others are greedy and greedy when others are fearful. So what, what is that? What does that look like? And so I just went and built it. Luckily, they gave me Jim.
Our CEO's son was also a statistics major at Yale, and so for his summer internship that year, he sat with me and we went through and took all the indicators that I had put together and we did a principal component analysis, which is really important because you want to make sure, just like we said earlier, when you're looking at a stock chart, you want to make sure that your indicators aren't all trend indicators or all momentum indicators. The same thing, we want to make sure that each of the indicators, within fear and greed, didn't step on one another right, that they weren't saying the same thing, or really just that they worked well together, that they were each complementary, right? There were a couple indicators that I wanted to include that just didn't make it for budget reasons. Cnn is a media company. Media companies don't have huge budgets these days, so I couldn't do things like market valuation, s&p 500 valuation, or we wanted to use the, because by this point, market had bought us, and so I wanted to use the credit default swap index and I could only get end of day CVS data, not intraday, and so it just didn't fit with what we were doing. Um, so there were, there were some indicators that we left out that really would have been perfect and, um, you know, later on I got I got to use for other purposes, but not for the fear and greed index. But I got to use for other purposes, but not for the fear and greed index. But yeah, right now you know the fear and greed index, the seven indicators that are there, we selected one that is purely just the S&P 500, right, normalized. So we understand if it's sort of fear, you know, fearful or greedy.
But then we have two that are breadth indicators. So how broad is the advance or decline? And is that moving in concert with the market or against the market? Then we have two that are options related the put-call ratio and the VIX. And then we have two that are bond market related One that compares the spread and yields between low-quality junk bonds and high-quality investment-grade bonds, as that spread is tightening. You see that investors are, you know they're more, they're seeking out risk because they think that they can get better returns. And then the last one is where we compare the returns on stocks to the return on bonds over a 20-day rolling period, total return as well. So for all these underlying indicators we're using ETFs. So this is actually something that can be replicated by anybody, but there are a lot of mechanics and calculations that go into it on the back end which make it. You know, if you are going to calculate it yourself, you got to be pretty sophisticated and be and have a pretty decent data feed. Yeah.
Louis: Well, I love that. You know that was put in a scale that made sense and a categorization that made sense. It almost kind of makes sense the way that you did. It is like extreme fear, fear, neutral greed, extreme greed. These are things that we can understand and this is, I think, one of your biggest talents, actually. I think one of your biggest talents actually. You know, like you had said, we were looking for, we did principal component analysis, but we were looking for things that worked well together and complementary.
As a quant geek, I would have just said non-correlated, you know or not. I would have used like big, long names of there's some statistical names that are you know to describe, that are like really long and stupid, sounding like to make no sense. I love the fact that you like that, you, you that's the. That is a great skill and I think to be able to take something that is complicated and make it accessible was one of the biggest, I guess, wins from this and it also helps people understand themselves, in my opinion, like if somebody goes and they look at this and they say, okay, right now I'm looking at the website. It says I'm on cnncom markets, fear and greed. It says it's got a number 48 and it says we're neutral but kind of tilting towards fear. So tell me a little bit about, like, how you would interpret this.
I'm an investor right now. Let's say I have a reasonably good sized portfolio. I want to grow my wealth, but I also want to manage my risk. How would I? What would I use this for? How would I think about this? For like, really, like practically, how would I use this?
Jason: Okay. So what does neutral mean? And neutral is really that center zone of I don't know what it is right. So the first thing I'll ask you to do and I know users or people who are watching or listening can't see this, but in the upper right corner you can see where it says overview and timeline. So the first thing I want you to do is click on timeline, okay, and what you'll see is a chart of the fear and greed index for the last two years.
And especially when we are in this neutral area and we don't really know what the overarching sentiment is, it's important to look back over historically, just like we said with the PE ratio. Right, you can look back and compare to peers, or you can say how is it versus history, and so what we see is this 48 is an increase over where it has been. But, more importantly, we're sort of in this weird consolidation period. Fear and greed is just kind of ticking up and down, up and down. It's not really doing much of anything. So, however, we have dropped from a level of greed right Back before April and I'm going to pat myself on the back.
I don't write much about fear and greed. I'm going to start, but I don't write much about fear and greed on our site. I did post in one of our little communities. I said, look, hey, just so you guys know. You don't really know me, but I built the Fear and Greed Index and here's what I've been watching Fear and Greed. It has just broken down. I think the market's going to break down with it, and you know my timing was amazing and the next day the market broke down. So, yeah, good for me, blind squirrel. But so what I like to do is I like to look and see and look for patterns and try to understand what is it doing and how does it compare to the market.
So a few things, all right. What really matters is fear tends to be good. What happens when the indicator goes into fear or extreme fear? What we see is that standard deviation of returns. So the volatility of the market increases, and I think we're talking about forward volatility too, not like a month out, but days out if you want to measure it each day and sort of see what's happening.
Volatility is just high when we are in extreme fear and fear because investors are nervous. What happens when investors are nervous? Good time to buy, right. The other thing is greed happens a lot. Okay, and greed is not necessarily a bad thing. Extreme greed is oftentimes a good thing. Okay, extreme greed tends to have.
There's two times that extreme greed happens and one time is a great time and the other time is a high risk time. Okay, the great time is when we have been at extreme fear. The market has fallen maybe the market fell by 10% or something and we're starting to see a rebound and what you'll see oftentimes is the components of the fear and greed index spike and everything spikes, everything jumps up and we get to extreme greed because we've gone from a low level and all of a sudden, investors are committing new capital to the money. Investors are getting excited and we see extreme greed.
Extreme greed is almost always good, except when, if we were in some kind of an uptrend okay, we've been, we're in an established uptrend, something good happens, the market kind of spikes. We don't. It's rare that we really see extreme greed during an uptrend, but let's say it happens. Well, that tends to be a period where probably just don't want to commit new capital right now. I probably want to take a breather, wait, because risk is higher. You know it's extreme fear to extreme greed, but really it's low risk to high risk.
Louis: But sometimes, as you know, sometimes that greed can be really good too. The other thing yeah, go ahead, sorry, no, no, I was just going to say that reminds me of like the traditional technical interpretation of momentum is after you've had a bear market, you always get to an overbought situation. That doesn't mean the trend's over, it just means the trend's beginning, and it's almost the same concept. It seems like to me to some degree like you're looking for the extremes, but sometimes you have to interpret it the opposite way after a certain condition, after a bear market or after you've had really a lot of fear, and then it pops back up to greed, well, that doesn't mean the trend's over, that means we're just starting to go up again.
Exactly yeah, and you have a continuation of the trend.
Jason: Right, yeah, yeah, completely. And so with anything, with any indicator, you have to look at it in context right.
Everything from an economic indicator, cpi, et cetera. Everything has to be looked at within context. And with that, I think you have to look at the context within the fear and greed index, and that's why there are the seven components, and I actually feel that the seven components are more valuable than that headline number, than the speed dial, right. So we start with and CNN came up with these names and I love it that they did that, because they are so much better at explaining things than I am and they really they said well, you know, here's who our user base is. We want this to be something that is a sophisticated trader can use it. And, as you know, as we heard Katie Stockton tell us several years ago, lots of hedge funds use the fear and greed index, right, they use it as one of their marks to understand what investors are doing. But they want it to be understandable by retail investors, by my dad hundred versus 125 day moving average just to see how far like what is the momentum right. Use that word, it's completely accurate.
What is the momentum Is it? Is it so high that it's potentially exhaustive right now? It's so high that it's potentially exhaustive right when we and we normalize it both over the last six months. But then we also go back and we normalize it again over two years to say is that six month number that higher, low that we have? How does that compare where we've really been over a longer period of time? And then we look at, as I mentioned, two measures of stock price strength and stock price breadth. So market breadth we're looking at both 52 week highs and lows on the New York Stock Exchange and then the McClellan Volume Summation Index. So really is money flowing into stocks going up or money flowing into stocks going down?
Louis: And what we see is both of those numbers are sitting at extreme fear.
Because, those are great indicators. They're such great indicators. Yeah, I mean, I remember back in the day doing a ton of backtesting and those were some of the most robust indicators, all three of them, especially on the new highs it's actually new lows is actually more valuable, in my opinion, based on the research years ago, than the new highs, but just because it showed that extreme capitulation. But those are great and they are complimentary. One is like the number of stocks hitting highs or lows, and then the other one is more. The McClellan summation is also very valuable and it can be manipulated in so many different ways.
So and I love that you have three dimensions to that and while you were telling me about this, what struck me is I always try to put things in perspective for the individual investor and for the. You know how they can think about these things and make it useful for them. And I think one of the things that could be useful with this, or is useful for this, is understanding how you're feeling. Like you know, if you've just gone through a period of angst with your portfolio and then you notice that this thing is at fear, right, well, everybody's being fearful and like it's like what are you going to do in your portfolio during that period, right? Well, everybody's being fearful and like it's like what. What are you going to do in your portfolio during that period of time?
Jason: Exactly.
Louis: You know what how?
are just you know how you're feeling, like if you can step away like that fish in the fishbowl with in the water, you know and say, yeah, I'm in the water and you know, and, and this is what's happening, and what am I going to do? And stay level headed. I always talk about like staying level headed is the most important thing as an investor. It's like if I'm overly optimistic, I need to bring myself down and if I'm overly pessimistic, I need to bring myself up. Tom Basso mentioned that to me years ago, who was one of the market wizards.
Jason: Right.
Louis: Talking about doing that, and I've really that's been probably one of the market wizards, right, talking about doing that, and I've really that's been probably one of the most helpful things for me personally and for advising clients as well and managing money. Just it's. It's it sounds so simple. It's like oh yeah, I know that, but yeah, but do you do it?
Jason: Exactly, and that's where it's important to have something that's quantitative and unbiased, right, and I'll tell you a story about that that confirms what you just said. But when we first, a few years after we launched Fear and Greed, I was talking with a financial advisor and he said, oh, I use this thing all the time with my clients and I love it. He said how do you use it? And he said, well, I introduced them all to it. And then, when they call me, when the market is down, wanting to sell their positions, wanting to reduce risk the market's already fallen by 10% or 20% and now they want to reduce risk he says, ok, hang on a sec, go to CNN Markets, fear and Greed. What do you see? And they say extreme fear. And he says, ok, what does that mean? And the client always says, okay, what does that mean? And and the client always says, oh, yeah, everybody's afraid right now. Yes, and what does that mean? That means I shouldn't panic. And hey, let me write you a check because this is a good time to invest.
Louis: There you go. So one thing I noticed that's not on here is valuation, which is so hard to time valuation. So this is, you know, valuation. So if you put this in context with valuation, then I think you have a powerhouse, really, because absolutely yeah.
Yeah, because then you have that long-term valuation metric, like right now. I was just on a, I had just updated my factor. I have this correlation matrix of factors like quality, value, growth, technical, et cetera, et cetera, volatility, and I sent our CIO that correlation matrix to show. Hey look within the market, like finding a value right now in the market is very difficult, like you're not being rewarded for valuation metrics at all, or low volatility or strong dividends and you've got all the.
You know growth is kind of being helpful. Momentum is explaining everything and most of the performance is coming, you know, in a small amount of stocks. So that is a context that you can add on top of this that says, okay, well, within this current environment, like we know, small, smaller companies have much more value longer term. So do international stocks, you know. You know that can give you a mosaic, and I have to say a mosaic is really what works in my experience as an investor, meaning a mosaic, meaning that you've got these pieces of a puzzle and they're all kind of pointing towards something and like not everybody is talking about it. You know, and, and you know everybody's talking about nvidia and all that.
But I've also had conversations where people are saying, hey, all I need to do is buy costco and nvidia. I literally had a doctor tell me that, like a really smart person yeah, I'm just gonna buy, you know. I mean these are the things I remember hearing during the dot-com bubble and, frankly, it's a little bit scary for me hearing these things. Um, yeah, and that's one of the reasons why I wanted to bring you on is, first of all, I've wanted to have you on for a long time. Uh, we just life didn't allow that for for both of us. But and I'm glad that you're on now, because this topic, I think, is very, very timely the fear and greed thing.
You know even though right now it's giving us a neutral reading. You know, if you put this in the context of a mosaic, this is very powerful stuff and I'm glad that you know that you did this kind of work and you know, and I can see a lot of value in doing that when you, when you put.
Jason: I'll just say. I'll just say one thing really quickly about you know, as we're looking at the indicators and what it says, you know why. Why is it giving us neutral right now? Because I think that's the key. If we look at the indicators, that are at different ends of the spectrum and it used to be organized or ordered from most greedy to most fearful we see the S&P 500, right, so that's extremely greedy. Put in call options, so investors are still buying lots of call options, right, they're not really hedging their portfolio.
And when we look at the difference in stock and bond returns, right now stocks are just doing really well, right, so those are really telling you sort of what's happening. Yeah, I know the stock market's up. Okay, what else is happening? We see that the spread between junk bonds and investment grade is rising, right, so people are starting to de-risk that side of their portfolio, the bond side of their portfolio. And then, as we were talking about, why is the S&P going up? Nvidia, right, so of course those indicators are going to be strong, but meanwhile breadth is really weak. So we get a much clearer picture of what's happening in the marketplace. So that's the thing I wanted to add about how to read it and really understand it and dig into it.
Louis: Yeah, that's a great addition. That makes total sense. It reminds me earlier this morning I was talking to a quant analyst in Europe and we were looking at certain factors, fundamental factors, and almost all the fundamental factors that are very robust. Solid predictors of stock returns are underperforming because you always look at them on an equal weighted basis. So the equal weight factor relative to the market cap factor, that variance is at like this massive extreme. In other words, the average stock is underperforming.
That's another way of saying breadth right as a technician you would say a breadth, a quant would say something differently, but it's basically the same thing, which means that most stocks are not doing so well. And then you look at the smaller companies. A lot of the smaller companies are losing money, and so what is that telling you? There's some underlying things. It's not a fear thing. It's really what this does. Is it informs you that you need to be selective. In my opinion, right now, and not to you know, I want to make this an evergreen piece of content, but based on what we're reading here, just the tea leaves. It just says be careful, be selective, look for quality, you know, be diversified.
Jason: Exactly, yeah, yeah, exactly. It's really just a way of understanding the level of risk within the marketplace at a given time.
Louis: Yeah, so you've told me a lot about the components and risk management. We talked a little bit about risk management Historically. On the performance of this indicator, what would be like like what? Where's its strongest points? Would it be on the picking bottoms, or or or would it be forewarning a top?
Jason: Well, I think there's a couple of things. So I mentioned that I posted in one of our message boards back a couple of months ago that the indicator was giving us kind of a warning signal, right, and so one of the ways that I really like to look at it is I like to look for divergences. Okay, so what that means is that the S&P is going up and fear and greed is starting to decline and, in the spirit of making it as evergreen as possible, let's go back to 2015. The market in August I can't remember the exact numbers. Did it fall by? You may remember 20% or something? Over the course of a few days, the market really just fell out of bed.
Louis: Yeah, absolutely yeah. I don't know what the percentage is, but it was a lot.
Jason: Well, fear and greed had been declining while the S&P was rising and rising and rising and people were saying the syndicator is broken. And I'd even get into not Twitter wars with people, but just saying look, here's what it's saying and here's why it's saying what it's saying. And it really came down to a lot of market breath and the breath was weakening at the same time that the market was going up and becoming more and more narrow. And one day, right so the fear and greed index was setting lower highs and lower lows. It was just consistently declining right as the market was going up and it was just saying more and more and more risk and one day the market caught up with it. Right, and that's what I noticed again in January, december, january, february, march into early April. What I noticed is that fear and greed had stopped going up while the market was going up and it was just saying something has changed here. And I don't feel like. I don't love the word prediction, I love measuring, right, and so what it's saying here is, from a measuring perspective, something has changed in the market and risk is increasing was happening, but at tops, what I've noticed in general is that fear and greed starts to decline as breadth narrows, as people start to maybe buy the VIX or buy puts. Puts are what's going to influence the VIX as bonds start to perform a little bit better than stocks. These are all things that are saying investors are pulling back. Maybe the S&P is still going to highs, but investors are starting to pull back. Right? We're looking, we're measuring what investors are doing so that we can figure out what to do with our portfolios. So that's at tops. That tends to be what I see In uptrends.
Sure, sometimes you see the market the market, you know rip higher. The fear and greed index goes to extreme greed and you might get a short-term decline in that too, but probably not a long-term decline and then bottoms. It actually does a really good job. So this statistic is probably wrong because when I left my last job several years ago, all the data stayed there. As you'd imagine, it's not my data. So I left my last job several years ago, all the data stayed there. As you'd imagine, it's not my data, so I left the data there with them. But what I recall, at least through 20, probably 2018, 19, when fear and greed index had dropped below 10, there had not been a single one month forward period where you didn't make money right. So fear and greed drops below 10, one month out you're probably gonna make money. Okay, it doesn't mean going forward. We could be in a major bear market and that not happen.
But, even going back to like testing data that I use. We launched in 2012, but I use data back to like 2002 or three, something like that. So I had the financial crisis in there. I think even during the financial crisis, when fear and greed dropped enough, you still got enough of a spike back in the S&P that you made money in that little trade. So again, just like an RSI, it's like a momentum indicator. So the fear and greed may roll over again in a major bear market generally, if economic conditions and other things are are healthy enough that this is going to be sort of a short lived decline. It's probably, you know, it has been a strong time to consider increasing risk in your portfolio. I'll put it that way.
Louis: Yeah, Well, that's that's helpful. I think that was that makes sense to me, that the mark market bottoms could be really useful with this as well. Now, just to kind of switch gears a little bit a while back, I mean, you've had some, you know, real world experience with the microstructures in the market. No, you have not been trading on the floor for a long time or been a trader for a long time, but there were some things that you kind of evergreen things that you learned there, and in particular with volume and kind of you kind of listening to the crowd.
I mean, we kind of worked a little bit on some volume stuff a little bit, and I remember that you had some very useful insights into the microstructure of volume. And so if you were, what are some of the things you've gleaned from volume itself? That just kind of basic things that you've gleaned.
Jason: Yes, and basic things. So everyone talks about the NVIDIAs of the world or the stocks that are getting all the press right. I've looked at this two different ways. One was, as you mentioned, lewis. You and I did a lot of work on this together and you were, you know, a hundred percent a partner on this and you did all the all the really hard work of backtesting. I showed up with some ideas and some words, and, but this came from two different places. So one was one was that where we analyzed a volume algorithm that I had developed which really just says, you know, relative to, we just normalize volume just to understand for a particular stock.
I want to put all stocks on sort of the same footing. So a company that doesn't get a lot of volume if it sort of spikes in volume, how do I see that through? You know, the NVIDIAs of the world and the mega cap stocks that get all the attention, all the volume, when do I know that some smaller stock is getting attention, right? So how do I measure those spikes? And what I did is, I just said, let's just compare them both to their own history and to their history relative to the market. So it's sort of a complex calculation. I won't get into it too much here, but what I learned from that was that the stocks that were actually getting the most attention had you know, they still might be good bets, but they probably weren't as good a bet as the stocks that were being completely ignored. That is so counterintuitive. It's so counterintuitive.
Louis: When I mentioned that to a technician who works for a very large firm that's on CNBC all the time, he didn't believe it.
Jason: Yeah, so sometimes people don't get it.
Louis: Yeah, sometimes what you, what you think is true, is not true when you look at the data. So anyway, go ahead.
Jason: Yeah Well, and I'll tell you another anecdote. That's, that's kind of that proves it also. We did the same thing. So we were looking at working with the New York Times, and so I had quarters worth of data of the New York Times and what I did is I said, let's just figure out mentions, right, which stocks were mentioned, which stocks had articles written about them in the Times.
And we did this on a quarterly basis and we went back over I can't remember how many years, and the data wasn't super great, but it was good enough because it agrees with what I just told you with this other, this volume algorithm. So that's why I sort of like it is. We created an index and what we found was that the stocks that were having fewer mentions what was going to happen is they're going to have more mentions in the future, right, relatively more mentions, and they were going to get, you know, relatively better performance because of that. And maybe and I haven't done the research to figure it out, but you know at least with the volume data stocks announce earnings how often Every quarter, right?
Louis: Yeah.
Jason: So one month out of every three is going to be a high volume, relatively high volume month. Two months have the potential to be relatively low volume, and the market tends to have an upward drift over time because corporate earnings tend to grow over time. So therefore, we can kind of assume that maybe the reason why this algorithm works like this is just that companies are quiet. Now they're in a period where they're not announcing news, and maybe that month when. So they're in a period where they're not announcing news, and maybe that month when, you know?
Louis: so we're just picking stocks that are going to announce interesting news next month, but there could be lots of other things that are happening there that's a, really it does seem to be interesting at bottoms yeah, that's a really good point because we have the upward bias of equities, or at least we have in the united states historically, uh, for a long time and that that makes a whole lot of sense just that that would be the case.
But things tend to pause when you have a lot of activity afterwards. One way or the other whether it's a lot of activity, the downside, whatever that primary trend was or that trend beforehand you get this kind of this spike of emotion and then that might reverse or or at least pause. And then so and after we had done that work, I remember calling you up and saying you know, I really like buying things when it's quiet. It's just so much you have time to get in and you're not, you're not emotionally driven, and you've done your homework. And you know, and this, what not only applies to stocks, it also applies to other things, commodities, I mean.
Most recently, you know, when gold was really, really quiet, that was part of my, you know, it's like wow, it's time to start like adding to gold. No one's talking about it. People are kind of disillusioned with gold, you know. And right now I think emerging markets are kind of in that category. Small caps are kind of in that category. Some of the Europe is, you know, european stocks are in that category and they also have the valuations behind them too. They don't have the sexiness of the growth of AI and all of that. So it's a great forward-looking thing and I thought that work that you did, in that your concept was valuable and useful for people who are following the markets more closely. And also you could use it long-term too, like longer-term.
Hey, maybe buy gold because it is so quiet, maybe you know you have so you have a setup based on fundamentals and then the that that is a confirmation from the investor psychology standpoint. You know.
Jason: Well, and if you remember Lewis too, from from the paper that I wrote there were, I looked at it three different ways. Right, so there was, there was today's volume, and that's when people talk about volume they mostly look at today's volume. But then I said, all right, let's aggregate it over a week and figure out what happens over a week. And I created a sector portfolio using sector spiders. That at the time I think it still has. I have not been tracking it, but it tended to add some level of alpha. It'd even be equal weighted.
Right, we were waiting, simply waiting the portfolio towards the lower volume ETFs from the prior week and under emphasizing the higher, last week's higher volume ETFs. And then we did the same thing. This was where you were so helpful is we did the same thing with the S&P 500 constituents, but it wasn't daily data or weekly data. We actually did a rolling 2021 day, so a full month, and we just said, okay, how does the volume for this month compare to the last? I can't remember if it was six months or one year.
Louis: I'd have to go back and look at it.
Jason: Yeah. So we just said yeah, if it's quiet for the last month, that's really interesting, right? If it's really high for the last month, that's not as interesting. And it does turn out that those underperform. And then, in looking at it more recently and this is a little bit more qualitative but one thing I've noticed is that low normalized relative volume, so down to, like you know, 75 of normal um, we tend to get like an inflection point. Stock can go up or the stock can go down um.
However, below below that, the quietest stocks have tended to be the ones that have big rebounds, that tend to go up the most, and so that's sort of what I'm looking at right now to try to figure out if that could become an interesting option, strategy or something. But I think there's something there and again, I need to do a little bit more research. The problem with this one, unlike fear and greed, is, you know, you've got 1000s of stocks to analyze and so, as you know, I'm not a great programmer, so that's that's where I rely on the help of others.
Louis: Yeah and well, and then plus. You know, the volume data itself is has changed over time. So I think John Bollinger mentioned something to me about that, or you did too. Actually, there was quite a few changes in the volume, or how to look at volume. People that have been in the markets a long time said, hey, interpreting volume is harder now, which? I think, that's true, but the extremes, I think, are still in existence. You know that are still valid interpretations.
Jason: And when you normalize the data, then then a lot of those, a lot of those differences go away, right, because you're putting everybody on the same footing. So you can't just compare NVIDIA to NVIDIA. You have to compare NVIDIA to NVIDIA's relationship to the, to the entire market.
Louis: Yeah, so we've talked a lot about investor psychology and I want to change gears a little bit, if we can, and you know you've been. When you first told me that you were teaching at CU, I thought, okay, he's going to do it for one semester and he's going to bail. I don't know why I thought that that's I shouldn't say that. I guess I don't know why I thought that I shouldn't say that. I guess I don't know.
Jason: I'm not sure why, but you've actually been very consistent, and so you must really like Well, consistent until this year.
Louis: Oh, is that right? And I?
Jason: have not bailed, but I am taking a break. They actually asked me last year to come up with my own class, my own syllabus in trading and markets, which is really intimidating to do because it means coming up with 18 or 16 three hour lectures. And so I was in the process of doing that and luckily they called me last October and they said we're going to hold off on that for right now we're just we overextended too many classes, so we're going to hold off. And they've asked me if I want to come back next spring and just teach some regular classes and I actually I've said hang on, my job's really busy, so I'm just holding off now, but maybe in two years I'll go back and do it Okay.
Louis: Regardless, you've been doing a lot of teaching and I do go and I lecture there. And you lecture. So I guess I guess what I wanted to know from you was what are you seeing students like? I mean because I know when I the little bit of teaching that I've done, I saw some changes happening with students' interest in finance in general. So what are you seeing with younger people in terms of their interest in finance? What parts of finance are they interested in?
Jason: terms of their interest in finance. What parts of finance are they interested in? Well, one thing about I hear you know I'm hugely into cars and you hear people say kids these days they have no interest in cars. Kids love cars. Kids love everything that we loved when we were younger, and my students are all really engaged. They really are interested. Now I teach a lot of core classes, so that means that not every kid that comes through my finance class cares about finance at all, and they shouldn't, right? They're interested in marketing or you know whatever similar percentage of the kids in those classes to when I was in those classes, even versus my MBA, when I would take a core class, it was NYU, so I don't know. Half the class was finance majors, but the other half of the class were marketing and whatever else and they didn't care about finance, and so I would say that the percentages are probably really similar to what they were back in 2000,. Using that as a guide, I was a philosophy major in undergrad, so that doesn't count, but the students get it, they're interested.
A lot of them are trading. They're not trading NVIDIA, but they are trading GameStop and they are trading crypto and they are trading on Robinhood, and they get that Robinhood is not a good value because Robinhood, yeah, it's free, but so is Fidelity. Robinhood, you have to pay for research, fidelity, you don't. And they get all those things. But they are really excited about it because they're driven. They want to become, you know, they want to be financially independent, they want to be able to buy nice things and take trips. You know there are a lot of other different things. They may or may not want to have kids, right, but they feel stress around buying a house right, and they know that their career is not necessarily going to be the thing that allows them to buy a house right. Their salary may not keep up with inflation or it may not be enough to live in the place where they want to live. So they look for other ways and they think about other things that they can do. They're side hustles, right, and side hustle may be doing some trading in the market. So they're also some of them.
I think it's some of the older people who are a little bit disillusioned with the markets, some of the people who got in in the GameStop era. Some of them are leaving. You know, we see that.
I was on the phone with another provider recently, and they were talking about some of their active traders, people just saying, wow, this stuff is hard. But what I love about that, though, is when people say this is hard if they liked it. So if they didn't like it, they weren't really a client anyway. They weren't, or you know, for they weren't really a self-directed investor anyway. They were going to leave, no matter what. If they do like it and say this is hard, they're going to pivot. They're going to go away from being some kind of a short-term trader to being a self-directed investor who's really engaged in building a portfolio. Or they may even come to someone like you, lewis, and say I want to build a portfolio with you, but I'm going to be really engaged. We're going to talk a lot, we're going to talk every couple of weeks, and you and I are going to strategize about the market, and they'll be really good, good customers in that way.
Louis: If you see that as a good customer, right, but but like they're engaged yeah, yeah, I've noticed both, like you know, um, I've, there seems to be like a little bit of a cycle, like I'm just thinking of real, real clients that come in and it's like, okay, well, I have this robin hood account and I really want to dive in and I jumped in and I did a lot of stuff and I may have even done a you know pretty well, but now I'm married and now I have a child and now I'm, I've got all these other obligations and I don't really want to spend time with it, and then they roll that over to something else.
And I've also seen people where and I I encourage this to be engaged where it's like okay, like you said, here's your core stuff, here's, here's what we're going to speculate in or do some other types of strategies in.
we're going to allocate a certain amount and go, go for it, you know yeah and and I strongly encourage that you you know to be engaged, and so you know, I think it just depends on the person. I'm very much for. I love the fact that you can be self-directed and that there's so many resources that are available, and what you guys are doing allows people to do that, and I don't think it's an either, or, In fact, many people I would say most people have a bit of both. Now, High net worth investors do. They have some money where they're using advisors, wealth managers, and then they have this. It's like they know something, a lot about a certain industry or something like that. Certain percentage of their money is allocated a certain way, because there is a big difference between making money and keeping money, and how you manage your money is different. You know the strategies you use are different. You know you need concentration when you're making money.
You need you know you need and that would be typically in your business or your profession or whatever, and that concentration is what allows you to really make money when you get into the keeping money realm. It's about having reasonable diversification and having being able to be bulletproof right, not only from an investment standpoint, but you know asset protection and all these other things that you need to do keep your money. So and I'm kind of in both worlds, you know, in my, in my profession but I think the speculation and being involved, even not in speculation, but just being self directed, is a great thing, and the fact that we have individual investors that can do that now more easy than ever is a good thing absolutely yeah, yeah, so um I I mean sorry, this has been a great conversation.
I mean, so what are you working on now, that um that you'd like to share? You know, anything got you excited, or jazz these days?
Jason: well, I'm just so excited to be working with our 18 contributors. Um, you know, every one of them is such a professional. They work so hard, you know. Also shout out to continue everything that we're doing now, but then to add to it. Right, like I mentioned before, we're doing our markets. I keep wanting to call it a quarterly roundup. I think we're calling it a quarterly market call and working to put together a panel right, a panel that's really interesting and engaging to different types of investors. So we'll have Helene Meisler, who is a great technical analyst. We'll have.
Chris Versace, who is running a full portfolio, and then we have Peter Cher, who has a great geopolitical look at the markets and is a bond guy, and then Malia Bengali, who has a really wonderful global perspective, a global macro perspective. So just an all-star panel of people who can come and give us really great thoughts on the market and where it's going and what they see. So I'm just excited to be able to not have to write all my own content, not have to build these things dynamically and actually have humans who know what they're doing to go and work with and, just, you know, take ideas from them and have them take my ideas and all of us just work together to build something that's, you know, better than it is now and something that's going to be great for the next 25 years. The other thing that I'll throw out there is we are in the process of, like I said, we're really strategizing.
We just relaunched the street, so it used to be called Real Money is the division that I run, and so we used to call it. It used to be Real Money, real Money Pro. We collapsed all of the products into one, so now all of our subscription products are one and that is called the Street Pro. Okay, there's the street, which is the free side, and we are one of the top 10 business sites in the country, and then we are the Street Pro and that is the subscription side, where we give you actionable research and portfolio ideas, education, et cetera, research and portfolio ideas, education, et cetera. And so, as I said, we just we just relaunched about two months ago and so you know, I'm happy to offer people who are listening three months free right now. So our we charge I think it's $982 is an annual subscription or $99 a month. So this is a, you know, free three month subscription. I don't have a code or anything.
Louis: So maybe, louis, the best way is if people reach out to you and then you forward them to me or is there a way that you can get a link to us and then we could put it in the show notes? Or is there?
Jason: I'm working. I'll tell you what um. We just decided this last week. So I'm working on getting a code. It'll be something like you know, subscriptions, the street basin, so they'll know, they'll know who it is, um, uh, and and so I'll be able to get you that pretty soon. Okay, hopefully, hopefully in the next week or two. I hope that's um that'll work?
Louis: yeah, because we're we're about three weeks out right now. Yeah, so I've got three episodes before this one. So that'll great, that'll, that would be perfect, and that's thank you for doing that.
Jason: Excellent, excellent stuff, and I probably should have told you that before, but that's okay, that's the power of editing.
Louis: You know we can always edit stuff out, so we'll just make it. We'll get it to sound right, but this has been great and I'm glad you came on. You know, and is there any you know, if somebody wanted to reach out to you or anything like that, any way that you would, what's the best way for people to look you up?
Jason: So the best way. So LinkedIn is always great. I like LinkedIn because then I know exactly who everybody is, and otherwise I don't go to X or Twitter very often. I spend a lot of time on Instagram, though mostly car related. My other passion we didn't even touch on cars.
Louis: So, you know what we have to touch on cars. I'm sorry we're going to need to edit this and put it back somewhere, so so now I, I, I know you're a huge car fan and you joke about your racing capabilities and that you're like, maybe the slowest guy out there racing, but I have to, I have to know. Could you just give me your analogy on how racing cars is like investing and what you should glean from race the skills needed to be a good car racer versus a good investor?
Jason: Yeah, absolutely so. As you know, I wrote an article last year on the street so it's completely free titled what Car Racing Can Teach you About Investing, and it goes through the story of Sterling Moss in the 1955 Mille Miglia, which was this crazy, dangerous race through the streets of Italy, banned in 1957. The Ferrari movie that came out Christmas of last year was actually centered around the million million the 1957 million million. So people have seen the movie, know how dangerous that was. But in 1955, this guy, sterling Moss, went and set the all time record, averaged right around a hundred miles an hour for nine, almost a thousand miles of driving country roads across Italy. You know we live in Colorado. This would be like driving a thousand miles up in the mountains right behind me and averaging a hundred, hitting 175 miles an hour, and still able to win the award for being not only the fastest car but also for the most efficient driver in the race. And so that kind of is the cornerstone of what investors can learn about car, or what car racing has to teach investors about investing is. It all came down to a couple of things Risk management, being in the right frame of mind, right To understand what was going on having a plan right. That plan puts you in the right frame of mind so that when something bad happens as it always will, right?
Sterling Moss hit hay bales while he was driving. He drove off into a ditch. These things didn't fluster him, because he knew what he was doing, he understood, he used technology right. He basically had a plan and was able to set targets, goals, risk management for the entire race so that when he finished, not only did he set the record, not only was he the most efficient driver, but he also beat the number two finishing car in an identical car by 30 minutes, and that guy was a five-time world champion, right? So you're going to have mistakes. You're not always going to be the best or the fastest or whatever, but if you have a plan and stick to that plan, and if your plan isn't working, have other plans that you can go after that are well thought out, right. You're not just moving from plan to plan. Have a process right and you will be successful in the end. That's that's really the big thing. That's what it comes down to.
Louis: Yeah, that's great. That's good stuff. All right, Jason, thanks a lot. I appreciate you coming on.
Jason: Thanks, lewis, it's a lot of fun.
Louis: I'll look forward to see what you have coming next.
Jason: Yeah, we'll see. We'll see, At some point maybe I'll write this book. But it's slow going right now.