Defying Wall Street: Betting Against Consensus—Bridgewater's Former Deputy CIO Reveals All

Welcome to another episode of Making Billions, Im you host Ryan Miller and today I have my dear friend Bob Elliott.

Bob is the former Deputy Chief Investment Officer at Bridgewater, one of the largest hedge funds in the world.  Currently, he is the CEO & Co-Founder at his new fund, Unlimited. He is highly sought after for his in-depth knowledge of the markets and frequently appears on world renowned publications such as CNBC, Bloomberg and more.

What this means is that Bob understands how to position your capital the right way so that you can massively improve your trading strategies while Making Billions.

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[THE GUEST]:  Bob is the former Deputy Chief Investment Officer at Bridgewater, one of the largest hedge funds in the world.  Currently, he is the CEO & Co-Founder at his new fund, Unlimited. He is highly sought after for his in-depth knowledge of the markets and frequently appears on world renowned publications such as CNBC, Bloomberg and more.

[THE HOST]: Ryan is a Venture Capital & Angel investor in technology and energy. He achieved market-beating placement growth in his first 5 years in the industry.

Transcript

Ryan Miller
Hi, my name is Ryan Miller and for the past 15 years have helped hundreds of people to raise millions of dollars for their funds, and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, in the show will give you the answers so that you too can enjoy your pursuit of making billions. Let's get into it.

With billions on the line, when was the last time do you bet against the market and won, my next guest is ready to do just that. He's the former Deputy Chief Investment Officer at Bridgewater and the current CEO at Unlimited. It's an investment firm that takes the best trading strategies and package them into ETFs for the everyday investor. So the question is, how are you building your investment systems so that you can enjoy your pursuit of making billions, Let's get into it.

Hey, welcome to another episode of making billions. I'm your host, Ryan Miller. And today I have my dear friend Bob Elliot. Bob is the former Deputy Chief Investment Officer at Bridgewater, one of the largest hedge funds in the world. Currently, he is the CEO and co founder at his new fund Unlimited, he is highly sought after for his in depth knowledge of markets and frequently appears on world renowned publications such as CNBC, Bloomberg, and more. So what this means is Bob understands how to position your capital the right way. So you can massively improve your trading strategies while making billions. So Bob, welcome to the show. Man.

Bob Elliott 
Thanks so much for having me. I really excited to be here have have enjoyed a couple of your previous programs following up on Kristof earlier this year. So hopefully I can hold up to his standards. I was definitely looking forward to it.

Ryan Miller 
Yeah, Kristof was phenomenal. And you know, we've been very fortunate to be in the top 2%, over 100 countries in the world, all because of amazing guests like you, and Kristof and many, many more. So we're very, very fortunate to have someone of your caliber to come on talk about economics trading strategies, we're gonna get into it, folks. So we got we got Bob on the line, and we're gonna pick a super brain, you know, just really quick, can you give me just a lead in on Unlimited and just 30 seconds? What is Unlimited? What do you what kind of trouble you guys getting yourselves into these days? Yeah,

Bob Elliott 
I mean, my career was, you know, it's been 20 years as a systematic investor. As you mentioned, I was at Bridgewater Associates the world's largest hedge fund for quite a while. And after 15 years there, I decided to leave and start to think about how could I make those sorts of hedge fund style strategies available to the everyday investor, you know, the investor that doesn't have 10s of millions of dollars to be able to put in a hedge fund strategy. And that's what we've been doing the add on limited, we're using technology to replicate what hedge funds, how they're positioned, and then packaging that in investor friendly structures like ETFs, so that every investor can get access to those strategies, whether you have $20 or $20 million.

Ryan Miller
That, is amazing. And we've we've talked a little bit about that, as we've gotten to know each other above, but not everybody is at your level or my level, some people are just starting out just like us when we were young and little less gray hair. I mean, you look. So let's hit on between the eyes, my man so so for beginners that are starting out in this industry? Like what are what are some ways that you can get some points on the board and just just win a little bit? But also, how do you cover your downside, as a beginner in this industry? I'm curious of your perspective here?

Bob Elliott 
Well, I think one of the things I emphasize to start out with is, I started in the investment management business with no formal training, I was actually a botanist by academic training, before I started at Bridgewater. And so in many ways I was in the shoes that, you know, many folks who are listening to this podcast are in today, which is, you know, no formal training on how markets and investing in economies work. And so I think one of the key things that I learned in terms of coming up the curve is really thinking hard using the markets as a lens to understand how the global macro economy and you know, the market linkages work. So every day, just think about it, the global macro economy is like a huge complex system, all sorts of things going on demand, supply, inflation, growth, all these different concepts that are around. But what you can start to do as the everyday investor is you can start to look at what's happening with macroeconomic information that's coming out, and what's happening in markets, because markets really are that lens into what's going on stock market, bond market, gold, commodities, all those different markets, currencies, they all sort of give you a lens into what's happening in the global macro economic system. And so by studying markets on a daily basis, are trying to rationalize and understand what's driving, what we're seeing what you're seeing, you can really start to build those intuitions from scratch about how how things work.

Ryan Miller 
Brilliant! and what are some of those areas. So learning markets, finding the linkages? I remember in my early days, just literally, I would leave CNBC in the background, and hopefully, something would make sense eventually. It did actually, I remember the first aha moment, you use the word linkages. Some people say correlations in the market saying when x happens, do y trade kind of thing. And so the first thing was what happens to the economy when there's a huge surge in oil prices. I never forgot this. I was like, Wait, oil is kind of an important thing. Like to us. It's very obvious, but when you're literally starting out as you start to learn the linkages and correlations on economic Next, you really start to understand, especially in trading, you really understand to say, Okay, if I think interest rates are going to go up, well, I understand linkages. If I think oil is going to go up, I understand linkages or down. And you understand that when x happens, Y happens, what are some of those areas, maybe a website or anything that you can recommend that you can give people who are starting out just to really get oriented to understanding these correlations?

Bob Elliott 
Yeah, I mean, I think most important, there's so many free resources that you can go out there, you don't need to buy a Bloomberg for $36,000 a year to get access to those sort of markets information that you need, in order to start to build that intuition. I'd say one of the easiest and most direct ways you can do this is first, I think, tradingeconomics.com is a free resource that gives you a really good lens into what macroeconomic stats are coming out. And in particular, it tells you what is the consensus expectation relative to what transpired to help you build that intuition about, you know, how are the stats surprising, relative to the market's expectations. And then frankly, resources like Yahoo Finance basically give you, you know, as much data and information as you need. And in particular, what I'd say is one of the good, one of the easy ways to track things is actually through the lens of ETFs. The ETF world covers basically every major financial asset that's out there that you might be interested in. So find a collection of ETFs, you know, one for the bond market, one for the stock market, one for gold, oil, etc. And you can start to track these ETFs. And these ETFs, and their returns on a daily basis, are the sorts of things that you can very easily see what's going on in the market as a result of those macroeconomic stats. So it's something really anyone can do. It's totally free, you can start to get on the field and really understand what's going on.

Ryan Miller 
Alright, spoke from a true master himself saying, Look, if you're just starting out, here's the place to begin, right? If if anybody tells you that, especially with Bob's background, you probably want to listen, I know I certainly am. And I love it. And I've checked out trading economics even while you're speaking. So yes, I'm paying attention doing two things at once, you know, but, you know, that being said, all seriousness, how do beginners not lose sight of the cover their downside? What are some simple things that you've seen that you can recommend to people just starting out, and then we can move on to the markets after that?

Bob Elliott 
Well, I think one of the one of the key things, part of the building of the intuition as a beginner is observing the markets and trying to understand those linkages. Another key thing to develop that understanding, frankly, is putting a little bit of money on the line, money that you're comfortable with possibly losing in order to start to develop those intuitions, because there's, there's nothing better than putting money on the line thinking for instance, maybe you think Biden's are going to sell off because oil prices just went up, right, and you put that bet on in the markets, and you might be right or you might be wrong. And one of the beautiful things about putting some money on the line is that it quickly enforces fast learning. I mean, I can even even to this day, 20 years in this business, remember painful market losses that I've had back in 2005, when I first started trading markets, right, in the in the natural gas market, you know, that still sticks with me today. And that's really how you accelerate your learning. And the important thing is just do it in a scale where it's not where it's used for learning, but not going to create an economic hardship, if you get things wrong, because there's an early trader, I promise you, you're gonna get lots of things wrong, that education is invaluable. But it shouldn't put you into uncertain economic circumstances, while you're doing.

Ryan Miller
Brilliant, And do you have a risk threshold that you would recommend for people, you know, you and I were bouncing that beanbag back and forth on bar and all these different things? Is there? Is there a total minimum loss that you think yeah, here's, here's your floor, Don't risk more than this. Any quick metrics that you can provide?

Bob Elliott 
Yeah, I mean, it's interesting as as a professional investor, you're constantly thinking about what's the max loss, I can take, and still be continued to be able to manage money. And the reality is, the same is true even for a small scale individual investor, say you're investing $1,000 or $500. On Robin Hood, it's the same exact circumstances. So you might think, Well, hey, if I want to do this over time to develop that intuition over the course of years, I need to be able to put myself in a position where I'm not losing so much money on any one trade, where I can't stick to it over the course of a couple of years. And so I think that's kind of the idea, like making sure that you know, even in a bad outcome in a meaningfully bad outcome, you're not losing more than 25% of your money over the course of a year. It's kind of how, you know, that's actually mostly what institutional investors target. At least once, I should say, I think it's actually a good rule of thumb for the everyday investors that are getting on the field. You know, investing and, and thinking about markets.

Ryan Miller 
Brilliant, I love it. So let's let's shift into the markets. Is anyone saying trading economics.com may have his finger on the pulse a little bit. Just to switch though, all seriousness, I'm excited about this part. So the market I'm just curious, from your perspective, what's going on out there? What are you seeing?

Bob Elliott 
Well, I think in many ways, what we've, what we've set up here is markets that are pricing in basically an all in bet on the soft landing. Now for those of you who are tracking the macro economy and markets, there's been this big debate, are we going to have a soft landing a hard landing, some people have talked about no landing, which The basic idea, the basic question is, can we have inflation come down closer to the Feds target without having a meaningful slowing of economic conditions. That's the soft landing camp, right? A hard landing would be that economic conditions growth would slow down a lot relative, you know, in order to bring inflation down. And so I think, when you look at market pricing, it really is a lens into how people are netting out in terms of their expectations of what's likely to transpire. And I think today, when you scan across markets, you I really see an all in bet on soft landing. So if you look at stocks, they're really not that much not that far off of highs, particularly when you consider the fact that bond yields have risen considerably, which should have a negative impact on the stock price. And you look at bonds, which, you know, continue to price in relatively low expect inflation, oil prices are very low, actually, they are about about as low on a real basis as they've been in a very long time. And the Fed is priced in to cut 100 basis points over the course of 2024, which really is Goldilocks not so much so many cuts that it would be indicative of a real growth slowdown, but cutting a little bit as inflation is expected to fall. So you listen to all that and you sort of say, who all in the markets are basically saying, we're definitely having a soft landing, where growth is super strong, and inflation comes down and the Fed eases a little bit and everything is perfect. And the odds that that happens are they're not zero, but they're certainly not 100% The way it's priced into markets today.

Ryan Miller
Okay, so what I'm hearing is, is that even though the market has priced in what it's priced in, it sounds like you may have an alternative opinion or perspective on that. I'm just curious, where do you see the markets going from what you're looking at now?

Bob Elliott 
Yeah, well, I think a lot of the things that I'm focused on is how it might be more challenging to achieve that soft landing scenario. And I think many people or the markets expect if you look back through time, beating inflation, once you've already had a high inflationary period, without a slowdown in growth is actually quite challenging. Very, very rarely does that occur. And so what that means from a markets perspective, is that in order to bring inflation down to the Feds mandate, odds are we're gonna have to have weaker economic conditions that are currently priced into the equity market, which would be bad for stocks. And then on the flip side, we probably need to have tighter monetary policy than is currently priced in to the short rate markets where the Fed holds higher for longer than those 100 basis points of cuts priced in 2024. So you put that together, it's actually probably not a great environment for both stocks and bonds. And I know a lot of folks have already felt the pain of 6040 underperforming over the course of the last 18 to 24 months. But until we bring inflation back durably to the Feds target, we're unlikely to see that 6040 portfolio perform anywhere near as well as it has, you know, over the course of the last couple of decades.

Ryan Miller
You know, I'm hearing that a lot that the 6040 split, may need to be reconsidered, or maybe at least our affinity for the 6040 split may need to lessen in order to adapt to the current market cycle. So brilliantly said brother, so as we round third base, and we were bringing it home, I'm just curious, from all of your wisdom, all of your experience, what are about say, three things that you could leave behind for our guests, from your perspective in this industry, just to give them some competitive advantages? Well, I

Bob Elliott 
think a couple of things come to mind. You know, the, the first one is that you have to have non consensus ideas that I think is a really important thing when you're thinking about financial markets, which is the basic idea that, you know, just like we talked about, in order to understand what's likely to transpire, right, in order to make money in markets, you have to have a view that's different from what's priced in. And so you'd have to be constantly doing is looking at what's priced into the markets, thinking carefully about what's likely to occur. And then comparing those two things in order to come to a view. All too often people basically just repeat what the consensus thinking is about what's happening in financial markets, rather than thinking about where the pricing is wrong, because it's really that gap between what's likely to happen and where pricing is. That's where what we call alpha, which is that's where you get outperformance relative to simply passive investing. And so that's a critical thing to constantly keep in mind as you're, as you're thinking about investing or trading market.

Ryan Miller
Awesome. I love it. When it comes down to you know, I can see you're very disciplined and you have a very disciplined approach and some of the best traders are. And one of those things comes into developing systems. I'm wondering if you could talk a little bit about developing a trading system?

Bob Elliott 
Yeah. Well, I mean, in terms of the other thing, another one to definitely highlight in terms of lessons learned is, is thinking systematically. You know, I think all too often, a lot of us have ideas, you know, intuitions about what's likely to transpire in markets, what how the world works, et cetera. And I think one of the challenges is there's really two challenges as an investor. One is assessing whether your ideas are actually good, and that's where systemization that idea of basically taking the idea and checking to see if that through time That was a good idea or not. And whether that would be a good way to trade markets or not through more sample size is really beneficial. And then the other thing that people often fail at when they're investing is that they're insufficiently disciplined. And this isn't like a moral judgment, trading markets is super hard. There's a lot of information coming out at you at any point in time. And it's frankly, hard to process all that information in a way that's rigorous. And so one of the things you can do is write down your rules, say, if I see this happen, and I know that it's a good idea, then I will go do this other thing. If I see, you know, the stock market go down below the 200, day moving average that I'll do you know, then I'll short the stock market, let's just say that's a, that's a plausible rule that you can you could do, well, there's always going to be information coming at you, that might knock you off your course. But if you have discipline through systematization, you can more rigorously adhere to the rules or the approaches that you know, will work over time. And that will help you outperform that will help you succeed in your investment strategies. Through top. Yeah, I

Ryan Miller
Yeah, I love it. And you know what this, this actually ties into your earlier comment when you're talking about trading economics, and really understanding linkages. And just like I talked about, in the early days, I think I'd been in school for like five seconds, university. And when you're just you need that exposure, there's a lot of information, that's what excited me about finance is, you're never going to learn it all. It's literally an endless stream of constant self improvement and learning. So you're never gonna get bored in high finance. But one of the things that you talked about is understanding those linkages. And then maybe you keep me honest here, Bob, but maybe, then you go from understanding linkages to understanding patterns. And arguably, those are pretty close and similar. But you have different patterns, like we talked about the Golden Cross and these different things. And learning those patterns also helped to implement systems patterns. So not only just is it information, its patterns, its technical analysis, we can go away into that, would you say all of those things go in in does that encapsulate a lot what you're talking about on building trading systems?

Bob Elliott 
Yeah, I mean, the corner good being a good trader is to have a game plan, a game plan that you think over time will deliver edge relative to relative to passive investing. And so the way that you can get the best out of your game plan the best out of your edge, is by being systematic and disciplined about your edge and trying your best as much as you possibly can, to not have, you know, the emotions of the day, or the information of the day necessarily knock you off of what your game plan is. Because when you have that you're likely to succeed over time. And I know, I know, it's hard. This is not this is not to say, Oh, wait, you know, every person, it's just so easy, right? You just create a system and you do it. I mean, I've been doing this for 20 years. And I still feel that tension, that tension, that emotional tension, of whether or not the incremental information I'm seeing is should change, my mind should take me off of my game plan. But I promise you over time, it will lead to better outcomes, the more disciplined you are,

Ryan Miller
Man, brilliant, so build trading systems, that's number one. And those go into understanding correlations, understanding patterns, technical analysis, a lot of these things, it's just saying you need to be discipline, and that discipline needs to apply to a system. That's not just trading folks, that's all investing. I know, whatever asset class you're in, you really need to be disciplined in your approach, challenge yourself, hire people that will disagree with you. But before I get too, ahead of myself, how important is it on, say, diversity as far as being a good investor, particularly in your world? Yeah, well,

Bob Elliott 
I think it connects to another critical point, which is part of the connection to discipline is also recognizing that you're gonna be wrong a lot. Like even the very best I'm saying the people who are the absolute very best in this business are only right 55/45 on any one trade on in any one month. So what that means is 45% of the time, you're going to be wrong, right? And so one of the ways to deal with it, and that's the practical route, like you can't get better than that. So it's not worth trying to be like, Well, I think I'm smarter than the, you know, most sophisticated asset managers in the world, right. Except that that's, you know, that's a good winning percentage. And so one of the things that you want to do, given that you want to improve your, your, your overall portfolio through diversification, and all diversification is, it's a really, it's a really simple idea. It can sound very complex, but it's basically saying, Look, if you have an edge, if you have a 5545 edge, well, then what you want to do is you want to put as many bets on the table as you can, because every time you take that bet, what happens as you probably will win. And if you just take one bet, you know, God's that you do, all right, or only, you know, are only so good. But if you do that over 10 bats, or if you're over 20, or 100 bats, if you do it through time, right, you get that diversification through time, that will really help you make the most of whatever edge you have in the market,

Ryan Miller
man. Brilliant. So we've talked about trading systems. We've talked about diversification, what would be a third leave behind that you can leave for fans around the world?

Bob Elliott 
Yeah, I mean, I think the last thing I'd say is that the best traders in the world that I talked to, are sort of relentlessly curious about how they could be wrong and that that is in the world. In the world. People are often benefited by having consistency in a way of thinking right they have In a position, so you're a politician, right? You're like, I'm, you know, I have the strong view on XY and Z, and I will be consistent in that view. And in markets that will kill you, right? What you want to do, because, as you said, you know, markets are constantly learning and evolving game, right, you're constantly have to learn and adapt and understand and evolve and recognize that you're wrong and and change when you recognize that you're wrong in a certain position or a certain dynamic. And so part of the way that the best traders operate is that they have this sort of relentless curiosity about how they could be wrongly seek alternate views, right, not in, I'm gonna have a debate with a person but you know, genuine, open minded, how could I be wrong? What can I learn from those alternative views? And so you see, you know, you see that process and and, in some ways, like one of the best ways to to, to enable that in your day to day operation of trading of whatever is for every trade that you do, where you have all the reasons why you're very long, you know, you're very confident, in your view, write down the reasons why you could be wrong, because what that'll allow you to do is, as you put that bet on through time, what you can see is, are things happening closer to what I would consider me, you know, making this trade wrong? Or are they closer to what I expected in order to make the trade? Right.

Ryan Miller
So I've heard you say before in the past that when you're challenging yourself, and you're trying to make sure whether you're right or wrong, and one of the questions of power question I thought was so important that you don't want to skip past that is, what are some things that could happen that would prove my current position wrong? And by asking I thought, brilliant question, that is a great way to frame up and just challenge your view of the world is to say, well, what would need to happen? So like you said, In the beginning, inflation is priced for a soft landing? Great, what would need to happen if that was wrong? How would we turn that into a hard landing? And how would you trade around it? So I thought that was a powerful question. So thank you for that. So as we wrap things up, is there anything at all that you'd like our fans to know

Bob Elliott 
You know, when I think about becoming a great investor, it really, it really starts with a single step, right? Just getting on the field, really getting into it, you know, taking that leap, right? Like, as I as I said, 20 years ago, I didn't literally didn't know anything about how to how to invest, how the macro economy worked, how markets worked. And so the key to developing that understanding is really getting out there tracking and understanding what's happening in the economy, what's happening in markets, and going through that iterative process. And that's the way you're going to learn. There's no textbook, there's no course there's no, you know, easy way to cheat your way into that understanding, it's really about going through that process day in and day out. And when you do that, what you see is that it's incredible how much you can grow and learn about investing in markets and, and macro. It's, it's, it's totally accessible out there for yet, and frankly, pretty much all for free.

Ryan Miller
I love it. Awesome. So you know, just to synthesize everything that Bob and I have talked about, focus on building your trading system, understand the market linkages, correlations, the patterns, really dive in and start your research there. If you're starting out, and if you're if you're still in the experience, well, it still applies to you, right? It's always changed. It's like trying to nail jello to the wall. The second thing that he mentioned is diversify your portfolio just to reduce your downside risk. So understand, also think about those areas of saying maybe there's overconcentration risk, right. So which is literally why you diversify. So am I overly exposed on interest rates? Am I overly exposed on tech? Am I overly exposed to supply chain interruptions because we've got this rare lithium mine that it takes it from whatever it is really examined and diversify, because as anything can happen, and finally, constantly challenge your perspectives, and seek out others who will do the same. You do these things, and you too will be well on your way in your pursuit of making billions.

Wow, what a show. I hope you enjoyed this episode as much as I did. Now, if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better. And make sure to come back for our next episode where we dive even deeper into the people the process and the perspectives of both investors and founders. Until then, my friends stay hungry. Focus on your goals and keep grinding towards your dream of making billions