Episodes

Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and the Ferris Report, both published by Stansberry Research.

Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Daily Digest. Today we talk with veteran trader, a true market wizard, Jason Shapiro.

Dan Ferris: And Corey and I will talk about the current bear market. Yes, you heard me right.

Corey McLaughlin: And remember, if you have a question or want to tell us what's on your mind, as always e-mail us at [email protected].

Dan Ferris: That and more right now on the Stansberry Investor Hour. You heard me right, folks. I said bear market. It's Dan doing that bear market thing again. What I'm specifically referring to, I'll tell you the way I see it and then I'll tell you some stuff I saw on Twitter by the Leuthold Group, which is a pretty well-known research firm. They do really good historical research. For me personally, what I see is the regular S&P 500 is up making new highs. Great. The Dow was making new highs as of, I think, October, November. Great. But the equal-weight S&P is not doing nearly as well.

I'm pretty sure you can do the same sort of exercise with the Nasdaq 100 in equal weight, though they're both making new highs. However, the thing that concerns me is the Nasdaq Composite not making new highs. The Russell 2000 not making new highs. And I told you the Leuthold Group has put out a tweet and they're talking about the fact that this doesn't – the market is not behaving like the early stages of any passable market that they've studied. The initial conditions proceeding the bull run of late last year and now into this year were different. The small-cap rally is not nearly as big as what you'd expect at the beginning of a typical bull run.

So they say we're still in a bear market and I have to agree with that. It looks like we're back to 2023. The Mag Seven is in charge, the Magnificent Seven: Apple and Microsoft, Amazon, Alphabet, Tesla, Nvidia, Meta Platforms. They're pulling up the big indexes where the equal-weight indexes are weaker because most stocks are weak. Most stocks aren't making these new highs. So that's where we are.

Corey McLaughlin: Yeah. It's interesting you bring this up because only recently has the S&P 500 started making new highs and it's up 20% from the lows last October. So even by the more conservative bull market definitions, that one qualifies, right? But I agree with you. Small caps, they lead the way. Every other – when it turns into from a bear market to a bull market, typically lead the way out. You're starting to see that on the up days, I would say, when I'm looking at each day. If there's an up day, small caps are up more. But they're still way below their highs and equal weight. Like you said, is just going – has been sideways for a long – going back to start of 2022 probably.

Dan Ferris: I know. We've got this equal-weight pop in December. I thought, "Oh, OK. It's over. This is a broad rally now. So maybe this is the start of something serious and it's going to be a new bull market." But it's fizzled here in January. So not there yet. Definitely not there yet.

Corey McLaughlin: Yeah. It's the Mag 6 now too without Tesla, which has taken a bath the last week or so with that earnings report where they said EVs, to follow-up on our EV discussion, that EV sales, they do not expect to – I forgot the exact words, but basically be way lower than last year. So Tesla is going in the opposite direction of the others. But yeah. You just wonder how much longer do those "Magnificent 6," now I will call them, how much longer do they have to run higher? I don't know. So far so good in 2024 for them, but not so much others.

Dan Ferris: But nothing goes up forever though, right? It's just where to – when does it end? They're great businesses, but that's the point. See, everybody knows that. That's the problem with this argument. It's exactly like the nifty-fifty argument. You can just buy these. They're no-brainers. They'll grow forever. They're the greatest businesses in the world. They gush free cash flow. They pay dividends. Their financial condition is superior, blah, blah, blah. They're the biggest companies in the world. Money pours into them constantly. There's a million arguments why they just have to keep being the best investments in the stock market. Well, at some point too many people think that and then it's not true anymore. You think we'd be past the point of everyone thinking that and it being too much. So far we're not there yet.

Corey McLaughlin: Right. And if you're looking for why this matters to a portfolio, the prices will matter and your timeline will matter. I'm thinking about we talked with Matt last week about this quant portfolio that we developed. There are – I don't think I'm giving too much away by saying there are none of the magnificent stocks in that recommendation right now. It's because they're too expensive relative to all the metrics that all our editors and analysts put together on how to value a business. So if you're doing this for the long term, now is not the time to be chasing those I would say that are already –

Dan Ferris: No. Definitely not.

Corey McLaughlin: What, Meta's up 150% or whatever and like –

Dan Ferris: Yeah. Or 200.

Corey McLaughlin: Two hundred maybe now. So that's not going to go up another 200%. I'm pretty confident in that in the next year and a half. So it's –

Dan Ferris: Yeah. Or if it does, how crazy is that? It's just – if it does, that's even worse. It's farther to fall. I got my trusty Bloomberg. So the Magnificent 6 – actually, Berkshire Hathaway is seventh and Eli Lilly is, I want to say, one, two, three, four, five, six, seventh is Berkshire Hathaway. Eighth is Eli Lilly. Tesla is ninth in market cap and the trillion-dollar market caps are just the top six. Berkshire Hathaway is 800. Eli Lilly is almost 600. Tesla is 580 billion. So yeah. Magnificent 6. Maybe that's the beginning of the end, huh? That's the beginning of –

Corey McLaughlin: Yeah. What I wanted to say with that point was like the risk-reward here is not skewed in the favor, I don't think, of the reward. I think it would be more risk at this point if you're trying to put these into a portfolio. Sure. If you want to own some of them, fine. But don't be betting on Meta to double from here any time soon.

Dan Ferris: Right. It's not – I'm not saying they're not great businesses. I'm not saying you should sell them all if you own them. I'm just saying that you should own other things probably. Don't have all your money in these seven, now six – let's just call it six – these six stocks because that's just not how life works. It's really not that easy. It's that easy if you'd done it 20 years ago. If you'd done it years ago and they were like – I remember we recommended Apple in Extreme Value, in a newsletter called Extreme Value and it did really well. That was like 2013 or so. We looked at it and thought, "Well, it's still Apple and iPhone, etc., etc." So it turned out great, but I don't think – we're not there. It's 2024.

Corey McLaughlin: Yeah. So you're saying we're still in a bear market though? That's another discussion.

Dan Ferris: Right. So that's the other thing. So what happens in bull markets near the top? Well, the leadership gets narrower and people start saying these are the no-brainers and everybody knows it. Everybody agrees. Our guest today has some interesting views what happens when everybody agrees in either direction. I'm curious to let folks hear about that. So you're right. That is the point. This Magnificent Seven thing is just kind of a classic symptom, really, of near the end of a bull run and in this case, what I believe may be the end of a massive, almost yearlong – really more than yearlong – rally after the 2022 bear market.

Part of the market is making new highs and then a lot of it is not. So this is interesting and I have to say, it doesn't surprise me. I've talked about the example of the 1966 to 1982 sideways market and we got a little blip up in the middle, a little new high in the middle. Years and years – it was like right in the middle. So it was years since the new high and then years until another one. So anything can happen basically is the real lesson there. Statistically, it's one data point. It doesn't mean anything. Statistically, we've only had a few sideways markets in the past century. Maybe it doesn't mean so much. I don't know. But I think that's where we are.

I think my same concern is still in play. The market is exhortingly overvalued. It's got these symptoms like Mag Seven leadership and history suggests maybe we're going to get steeper than 2022 bear decline and maybe a decade-plus sideways market. And I this may be the – some signs here that we're in that. Tough. I don't want it to be true. I don't want any of it to be true, but we don't get to fantasize about what we want the market to do, right? So we have to prepare and guide our readers and listeners the best we can.

Corey McLaughlin: Yeah. I – we can fantasize about it if we want, but won't do any good. I tell you what, I'm a bit more bullish right now overall just because of the trends that have been – for a valuation standpoint, totally agree with you. No argument the technical, momentum, all that stuff is bullish right now. I'm also concerned about still what's ahead, thinking about the risks ahead. I'm thinking more and more that interest rates are going to go higher next than lower, the way –

Dan Ferris: It makes sense, right?

Corey McLaughlin: – we just got this GDP number last week that beat the mainstream economists' expectations by about a%. It was like 3.3% for the fourth quarter in 2023 and they were expecting 2%, which by the way, about the economist, I need to mention this because I've read written a couple times in the Digest latey. Last month, the U.K. Economist totally missed on the U.K. inflation report, which was way higher than they thought because of alcohol and tobacco prices and taxes. They raised the taxes there on both of those things and the prices have gone higher too. So anyway, The Economist missed because of – I've been saying because they don't drink enough like regular old people.

Dan Ferris: That was a great line. I saw that.

Corey McLaughlin: It's probably not that great, but I keep saying it. So I wanted to say it here. Anyway, so they got the economy that might be heating back up, if anything, on just even the expectation of rate cuts and what that – housing prices are not cratering and we got oil going back up now. Those are – overall that's good things for the economy, but it may – that may be a surprise that's out there if the Fed is like, "Oh, wait a second. We're not going to cut. We might have to raise rates a little bit." That would hurt prices I would think, but that's just me in my mind considering a risk that could be out there right now.

Dan Ferris: Yeah. There was a headline on the Daily Shot, which is a bunch of global macro charts every day, which is a neat service if you're into that. A lot of people aren't. But it says the headline recently was "Easier financial conditions made to lay the Fed's rate cuts." So a stronger economy would tend to have the same effect, right? Yeah.

Corey McLaughlin: Just something to consider.

Dan Ferris: You don't need to make your –

Corey McLaughlin: That's not – not really in the prices, I don't think, at this point. It's definitely not in the narrative [inaudible] market right now.

Dan Ferris: Yeah. We're not a making a prediction. We're just saying it makes sense, stronger economy, easier financial conditions. You don't cut rates. You don't need to make anything easier for anybody. So yeah. It all – it actually – it's all of a piece with the economy being stronger, the market being strong. Things should make sense. We're just saying that if things made sense, we would not see cuts. We're not saying they're not going to cut. That's a whole different proposition. You never know what these guys are going to do or what it's based on really.

So we shall see. It's an interesting moment, I think. It's an interesting and appears to be like a pivotal similar to January 2022 kind of a moment with the major difference of actually having interest rates. We have rates. We didn't have them before. We had zero before. Now we have 5%-plus. So we'll see how 2024 works out. If history is any – has any meaning at all of course – actually, really if history has any meaning at all, two thirds of years and two thirds of the time the market goes up. So that would be normal, but under these circumstances I think it would also be normal for stocks and even bonds actually to take a breather and maybe for the hikes of the last, call it, two years here almost to start to have their effect, more of an effect to have some more credit problems.

I'm more curious to see how 2024 works out. In the past I've just been like, "Let it happen. I don't know. I don't care," but I'm really, really curious because I have these views about things and this moment appears to be one particular way. We shall see. Time will tell, will it not?

Corey McLaughlin: It will. Yeah. I think part of the reason the small caps are – have been lagging – small-cap stocks have been lagging is because of that credit risk concerned with a lot of these smaller companies, which hasn't – there's been a lot of bankruptcies, delinquencies, but there hasn't been that full-blown crisis at least outwardly in people's minds. So I think there's still some room for that to happen, unfortunately. So you're seeing that. I think that's part of the reason for the small caps. That's confounded a lot of people.

Dan Ferris: And it's cyclically normal. It's just cyclically normal. Some folks are saying that this is it. This is the year when the credit cycle kicks into gear. We'll see. It shouldn't, I don't think, surprise anyone. All right. Let's go ahead and take a completely different view. Instead of talking about a lot of macro stuff, we'll talk to an honest-to-goodness trader, who I believe is our fifth market wizard, not including Market Wizards author, Jack Schwager. His name is Jason Shapiro. He is a trader extraordinaire. So let's talk with him. Let's talk with Jason Shapiro. Let's do it right now.

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Jason Shapiro:  Thank you. Thanks for having me.

Dan Ferris: So Jason, you are – I looked through our archives. I've been doing this for years and you're not in there. So I'm really happy to have you on for the first time. Since you are a new guest, let's start this way. If you and I met in a bar and got into a discussion, I'm not saying either one of us hangs around bars, but if we got into a discussion and found out what each other does and I said, "Hey, what kind of investor are you," what would your answer be?

Jason Shapiro:  I'm a trader, a midterm kind of trader. I try to produce return streams that have obviously, hopefully positive returns and negative correlation to most other return streams so that when my investors are putting together a portfolio and trying to push out the returns relative to the risk, the idea is by adding zero and negative-correlated return streams with positive return expectations, they can do that. So that's what I offer to people.

Dan Ferris: That sounds like it would have been really, really super valuable in 2022 especially.

Jason Shapiro:  I think over time it adds value. If I can do what I'm trying to do, which to this point I have been able to do – yeah – over time it adds value hopefully. That's the idea anyway.

Dan Ferris: I should tell our listeners that Jason is a – how does one say – a market wizard. It's probably – most of the Market Wizards don't like to be called wizards. It's just a joke.

Jason Shapiro:  It's a little embarrassing, but you know.

Dan Ferris: Meaning that he was interviewed by Jack Schwager and included in one of Jack Schwager's books. We've had Jack on the program and a few other wizards.

Corey McLaughlin: Unknown market wizard though, right? Unknown. Yes.

Dan Ferris: That's right. Jason is an unknown – there's a different title to every Market Wizards book. So Jason is one of the unknown Market Wizards. Hopefully he's more known after this. How long ago did you do that?

Jason Shapiro:  It was a few years ago. I want to say it was maybe three years ago.

Dan Ferris: And let's go back a little bit here. How long have you been doing this? I can see through the video here that you have a couple of gray hairs.

Jason Shapiro:  Yeah. I'm 56. I think I placed my first trade and started doing this when I was 22.

Dan Ferris: What made you start doing this? Did you major in finance or anything in school?

Jason Shapiro:  I did, not that that had anything to do with it. But I don't know. My first real job, so to speak, was in Hong Kong and I worked for a commercial bank and I was in their little executive development program. I was not supposed to be there. It wasn't really for me. I think that they would agree with that just as much as I say it. I think like most people that get involved in this, there was a bull market going on around me. I was like, "Hey, let's see what this is all about."

So I got involved and went through, I would say, what most people went through and go through when they get into this, get involved when there's a bull market going on. Make money during the bull market, not realize when the bull market ends. Lose money when the bull market ends and then from there, try to figure out what you want to do. At that point I had gotten hooked on the whole thing. I had read in the first Market Wizards book, which had a big effect on me. That was actually when that book was in the bookstores, which had a big effect on me.

I liked the whole idea of what people were talking about in there. Struck a chord with me and so I wanted to dedicate myself to doing this. That's what I did. It just got to a point where – at a certain point I had no other choice because I had been doing it for so long and I had to try to figure out how to make it work.

Dan Ferris: I remember reading those first two Market Wizards books and thinking to me it was interesting because they all had different stories, but in the end there were just a few things that all sounded the same. We always wind up here when we talk with traders and you're nodding your head and I'm thinking yeah. It's like position sizing, cut your losses, let your winners run, all that kind of stuff. I think maybe in all the books there's one or two guys who that's not the main thing that you hear from them. I know –

Jason Shapiro:  They're probably not doing this anymore.

Dan Ferris: That's right. They're not doing it anymore. So when I look at those books I think they're great interviews. I could see how somebody would be inspired them, but I thought, "Gosh, that sounds really boring." What in sounded exciting about it to you? What was exciting about it?

Jason Shapiro:  The idea that if you could be successful at this, and this was false hopes as it turned out for the most part, but then you didn't have to really live the 9:00 to 5:00 grind. The idea that it didn't matter what people's opinions were and in fact, it was beneficial to be against what most people's opinions were. I always say if I go to a party and everybody is talking about some movie and how great it is and I'm the only one in there saying the movie stunk then I lose because I can't win that argument. Majority, they kick me out of the party. "You're an idiot. We all agree. You don't. You're an idiot. Get out of here." I can't prove otherwise.

Whereas in the market it doesn't make a difference. If everybody is bullish and I'm bearish we can sit here and argue about it, but at the end of the day we get the answer. There's no arguing about it. You can bullish, bullish, bullish. I can be bearish. Well, if the market goes down then hey, you can sit here and tell me why you were still right, but at the end of the day PNL speaks. So that whole thing being the type of person that I was, I wasn't really very good at getting along with groups of people and getting along with bosses and that type of thing. Given that that's how I was, it seemed appealing to me.

Dan Ferris: Yeah. I think a lot of people are like that. They just suck it up because they don't know what to do about it. You found something to do about it. So you would call yourself a natural contrarian then of course. It's just naturally part of your personality and that fits in with your trading style, which if you could describe that, it sounds like you like to go against the grain. I guess that's in contrast especially to a lot of market wizards who talk about wanting to ride the trend.

So while everyone else who does what you do, I know that's just a very – in a very general way is looking to ride the trend. You're looking to, what, fade it and figure out when it's going to end. That sounds very different to me. I know the position sizing and the cutting losses and all that are the same, but you must have a very different process than what other folks describe. The other folks describe breakouts and all the usual stuff that we associate with that type of trading. Well, that can't be what you're doing, can it?

Jason Shapiro:  No. It's not what I'm doing.

Dan Ferris: So without giving away your secret sauce you could –

Jason Shapiro:  No. I'm sorry. I am trying to pick turns in the market. I think I do it a little bit differently than most do, which is something I learned after doing it the wrong way for a long time. I don't disagree with don't fight the trend. I don't base picking turns on price. A lot of people think that they're being contrarian by thinking, "Hey, this thing has gone up a lot. Therefore, I'm going to short it." That's not how I do it. That will get you run over overtime pretty badly. I look at it more from a participation perspective.

So I'm trying to measure the participation. So it's not, "This has gone up a lot. Therefore, I'm going to short it." It's more like, "Everybody in the world has longed this thing. Therefore, I'm going to short it." I think that's what puts risk reward hopefully over time in my favor. So I think that the discounting mechanism in the market – this is where I disagree with most things. I think the discounting mechanism in the market is not price, it's participation.

Dan Ferris: Oh, that's very interesting. Can you talk more about that? That is very –

Corey McLaughlin: Yeah. What kind of reports are you looking at to determine that and how do you determine that?

Jason Shapiro:  So it's a combination. The main data source that I use is the Commitment of Traders report in the futures market, which shows where people are positioned. I'm looking for mass, one-way-sided based on history positioning and that type of stuff to start thinking about going the other way. Then the other things I do are more discretionary feels for it in terms of listening to people, reading a lot of things, and trying to determine where the positioning is. After doing that for 30-some-odd years, I like to at least believe that I'm decent at that sometimes.

I think one of the perfect examples this last 12 months has been this Nvidia thing. Everybody wants to say, "Nvidia is up too much. It's up too much. You got to short it. You got to short it. You got to short it." And to me when I hear everybody saying that, then that's telling me that it's not time to short it. So I have – I don't trade equities anyway, but I have been able to avoid even hinting at Nvidia being short.

Dan Ferris: OK. You mostly trade futures?

Jason Shapiro:  I trade all futures.

Dan Ferris: All futures. Just all markets or do you focus on particular markets?

Jason Shapiro:  All the U.S markets because that's where I can get the commencements of trader's data that have liquidity. So there's 37 markets. I look at it like I'm counting cards on 37 different tables and when the count is good at one of the tables, that's where I go and play. It's one process across as many markets as I can do it.

Dan Ferris: That doesn't sound like 9:00 to 5:00. That sounds like 9:00 AM to 9:00 AM. It sounds like –

Jason Shapiro:  I think that you are a hundred%. That's correct. There were many things in my original assessment that were off and that was one of them. It's certainly not nine-to-five. It never ends, including weekends. So yeah.

Dan Ferris: So – but you're still doing it. You found yourself. You love it, right?

Jason Shapiro:  I enjoy what I do. I think it's a fun puzzle to try and figure out. At least on the winning days it's a fun puzzle. I accept it for what it is. I've taken a lot of the so-called excitement out of it as I've become more of a professional trader. I try not to do this for excitement. It's – people – another thing that I missed, it was very exciting when I was young and also in the end not profitable. Now it's much less exciting because it's a job. I have a job to do. It's a very, very difficult job.

Dan Ferris: Very. Yes.

Jason Shapiro:  There it is. It is what it is. I'm here. There's nothing I can do now. The law schools won't accept me now.

Corey McLaughlin: So how do – I hear it a little bit in your voice. If you have a down day or a bad trade or whatever, how do you get back at it? Is it just the process that you've trusted over 30 years and they're going to happen? because I think a lot of individual investors, maybe they're just starting out can, "Oh, no. I got in at the completely wrong time on Bitcoin. Why am I not making any money on Bitcoin when it seems everybody is?" What's the lesson there? You got to have a –

Jason Shapiro:  I think the lesson is process, which people don't really get a lot. It's all about process to me for so many reasons, but just to this point. How do I deal with it? Well, because I just follow my process and my process, to this point, has done what I want it to do. I monitor that clearly all the time. I am comfortable with the fact that within my process there are losing trades. In fact, I have more losing trades over time than I have winning trades.

So I'm comfortable with that because I can go back 23 years now I've been running this same process. I can go back over 23 years and look at my returns and my win to losses and all that stuff and I can believe that it has worked this far. Now I'm always ready for it to stop working and if it does, hopefully I'll be monitoring that and realize it. To this point, it's been fine. So this is what I do. At this point in my life, quite frankly, if it should stop working, well, then I don't know. Retirement calls, I guess. So that's what I do. I do what I do.

It provides the return streams that I need it to provide. That's the return streams that my clients want from me and therefore, that's what I do. It's just a job and I'm just following a process. If I were a trend follower, I don't think that I would be managing any money, quite frankly. Here I am sitting in my house as a one-man operation. What institution would want to give me money? I have nobody working for me. I'm a one-man operation. I don't have the big back office stuff. I don't have a huge research team. So why would you give me money as a trend follower when you can pick a hundred trend-following firms that have billions of dollars under management?

People give me money because I do a very specific thing. It's very hard to find zero to negatively noncorrelated return streams to put in your portfolio that make money over time. So therefore, that's why clients give me money and that's why it's pretty easy for me to just stick to my process and do what it is I want to do and do what it is I do. I have people that want to copy-trade me and I tell them that they shouldn't do that because their goals are probably different than my goals. I want to make positive returns. I want to make very good risk-adjusted returns. Just like everybody, I don't get paid if I don't do that. I'm not on 2 and 20. I'm on 0 and 30.

So I don't get paid anything if I don't make money. So yes, I want to make money clearly. Having negative correlation and negative returns is worthless not only to me, but to my clients. So yes. I want to do that, but within that is the huge constraint that I want to do it in a negatively correlated way. So that is not necessarily in people's – what they're trying to do when they're trying to trade the market. They're just trying to hey, make as much money as they can. I get that, but –

Corey McLaughlin: You have a different set of goals. Yeah.

Jason Shapiro:  Copy trading me is – it's just a different set of goals. So you have to know what your goal is going in and therefore, take it from there. I think so anyway.

Dan Ferris: Jason, you sound all of apiece. Your natural contrarian instinct led you to trade a certain way and trading that certain way as pointed out is quite different from what any number of trend-following firms do. That's interesting to me. You've found yourself. I tell you something, we have a lot of listeners and a lot of readers who think they're going to do something like what the traders we speak with, yourself included, do and I gently – maybe I should be less gentle. I gently, maybe not discourage them, but try to point out that it is a 9:00 AM to 9:00 AM job if you're really good at it. It's not a lottery ticket. Jason doesn't – most of his trades – more don't work than do work. There's so much more to it than what our listeners believe. You sound like you're –

Jason Shapiro:  People ask me all the time – people tell me all the time, "I want to quit my job and be a full-time trader. I want to be a trader. What should I do?" I say, "Here's what you should do. Go to law school. That's what you should do. Get paid by the hour a good amount of money for the work that you do. Save it and then trade on the side. If you have five good years in a row of trading on the side, then think about maybe doing that." There's a reason why things are pretty efficient in economics. There's a reason why the best hedge fund managers get paid a billion dollars a year and that's because it's so extremely hard to do. So that's why they were able to earn that.

It's just like an NBA player. It's very hard to play basketball at an NBA level. So therefore, if you can do that you make $30 million, $40 million, right? It's the same thing. You have to understand it's very, very, very difficult. It really is. Talk to any of these people. Even if you look at the returns of various hedge fund groups over time, Tiger Management or whatever, they crushed it while the market was going up and they owned all the highest beta stuff. Then when the highest beta stuff came down they got crushed. They didn't have any magic formula going on here. They just bet on a bull market in a very levered way and it happened.

There's a lot of survivorship bias involved there that people don't want to understand. They want to think there's some genius behind this. I don't really think that there is. It's just a question of risk award. So many of the personality traits that it takes to really, I believe, be successful with this over time are the antithesis of what human nature is. You have to be able to put away everything that you have been taught to believe, your ego, your defense mechanisms, all your behavioral biases that you have not only come to develop over the course of your life, but were probably developed via human DNA way before you were ever born.

All of these things have to be overcome because they don't work. It's just an extremely difficult thing to do. It's also an extremely lonely place to be, I can tell you. It's not going to make you friends. It's not going to make you popular. You have to think about what you want in life. Most people in life want to be liked, want to be loved. These are basic human needs. This won't get you that. So you really have to think about if that's what you're after. Be careful what you wish for, as they say.

Dan Ferris: I like to say the successful trading is an unnatural act.

Jason Shapiro:  It is.

Dan Ferris: It's like jumping out of an airplane with or without a parachute. It's an unnatural act.

Jason Shapiro:  Which I could never do. I could never do that. My body doesn't let me do that. I tried to do that thing where you jump off the bridge one time with a bungee.

Dan Ferris: Oh, the bungee. Yeah.

Jason Shapiro:  I couldn't do it. My body was just like, "No. This does not make sense. So I'm not doing it."

Dan Ferris: Risk averse. I think I might be with you on that. I haven't tried it. I thought I could do it. My wife actually did ziplining and she said it gave her PTSD. I have video of her screaming the whole way. There were seven lines and seven screams. It's just horrible. You said something interesting. You were talking about other people imitating you, saying they wanted to imitate your trades and you told them that was a bad idea. It makes me wonder and I was wondering this before. You're a one-man operation. I wonder how much of what you're doing is or can be automated in your opinion. Well, is would not be an opinion, but could be.

Jason Shapiro:  Parts of it are quite automated. I once ran this thing a 100percent automated and found that it worked, but it didn't work as well. So I stopped doing that. They say – what somebody said to me once was computers can do a better job than humans, but a human and a computer can do a better job than a computer. So that's what mine is. It's a combination. I won't take any trades that my automated system doesn't say take. But I sometimes will not take a trade that my automated system says take. That comes from a few things.

It comes from having run it automated for a while, knowing where some of those weaknesses were because I was able to observe where the weaknesses and the automated thing were over time. So I like to believe at least that I can avoid that sometimes. Not all the time, but even if I can just avoid a few of the bad trades that the system would have taken that I don't take, and of course it comes with the risk of not taking a trade that the system takes that does work. So which one is it? Over time I have – I monitor this, the system versus me. If I weren't beating the system then I would just trade the system.

Now you can argue, "Hey, you're saying less than 50% of your trades are profitable." So that means if I don't take one of the system trades then I got more than a 50% chance of getting that right." You know what I mean? Maybe it's just as simple as that. I don't know. I have been beating the system since I went back to doing the combination of system. About six years ago, I've beaten the system pretty handily. So that's what I keep doing. This is all about, like I said, you got to take your ego out of this stuff. It's all about numbers. It's all about statistics and you've got to monitor these statistics so that you can know.

10

Corey McLaughlin: So if you can, can you share an example of what – maybe something that you're looking for. What's a consensus thought out in the market right now and how you trade against – just what things you consider against that if there's one? You mentioned in the video you don't trade equities, but something along those lines. What are you looking at right now?

Jason Shapiro:  So I have zero trends on right now. What I'm looking at, because what I find to be the most crowded thing right now is short grains. So I'm looking to get long grains at a certain point. I need the market to confirm my trade before I ever do it. I'm not going to say, "Oh, everyone is short grains here. So I'm going to buy them." It has to be something more like, "Everybody is short trains here and they're no longer going down on bad news. So I'm going to buy them." I would encourage anybody to do that no matter how they trade.

Market confirmation first. You might think Nvidia is overvalued and you might be a hundred% right, but wait for the market to confirm it first, however you want to find confirmation. I define it based on that news failure event, as we call it, but define it how you want. It goes through the 21-day moving average as a confirmation. Good. Then wait for it to go through its 21-day moving average before you short it or however you want to define it is fine. Let the market confirm what you're thinking first because you're not smarter than the market, I promise you. If you think you are, you're just going to get erased.

Corey McLaughlin: Market doesn't care what you think.

Dan Ferris: Yeah. I want to point out for our listeners that what Jason just said about the market confirming that's – he's not the first guest to do that. Lots of successful folks have pointed out – a typical thing – we'll get into a discussion about short-selling with a few people and they'll say, "I don't short the thing until it starts – until it curls over." "Until the chart curls over," is a phrase I've heard by some folks. Like you said, however you establish that confirmation, you got to wait for it. You can't walk in front of an oncoming train.

Jason Shapiro:  I've been telling people recently you think the stock market is going to crash. Fine. If you're right, then will missing the first 20 points in the S&P make a difference? If your thesis is going to crash, then why do you have to sell the new high every single day? It's going to crash. The S&P is what, close to 5,000 here, 49 and change? OK. Forty-nine twenty-five on the S&P 500. So if it's going to crash, it's going to 2,000. So if you sell it at 48.75 instead of 49.25, is that going to make a difference? If you had been waiting for that you would have not been shorting yet and it would have saved you hundreds and hundreds of points. So it's such an important concept to market confirmation how you want to define it, to me is such an important concept.

All of these concepts, I clearly – like you say, everyone that comes on here says this. I didn't make any of these concepts up. Ride your winners. Cut your losses. Wait for market confirmation. I didn't make any of this stuff up. Yet everybody – almost everybody who has had success over time trading says them all. Maybe that means something. Every rule that I go by comes right out of those first two Market Wizards books, I can tell you that. Why shouldn't it? Why shouldn't I learn from Paul Tudor Jones, Bruce Kovner, Michael Marcus? It doesn't make sense not to.

Wouldn't you rather learn how to play basketball from Michael Jordan, LeBron James or whatever than somebody not them? If Michael Jordan tells me that I should drive to the basket like this, maybe I should listen to that. Call me crazy, but you know. So why relearn those lessons? You're going to relearn them if that's what you choose to do. I did. I had to. Why not learn them – it's very hard for people to learn without learning the hard way by themselves. I get that and I was guilty of that as well. My best advice is go read those books and let those lessons really sink in because they're just fact. You're not being lied to. Bruce Kovner is not lying to you. Paul Tudor Jones is not lying to you. I'm not lying to you. These are the rules of the game.

So learn the rules of the game first. Even once you have the rules, it's still fricking hard as hell. At least get the rules of the game first. Cut your losses quickly. That should be rule one. Cut your losses quickly. Let your winners ride. Wait for the market to confirm. Don't think you're smarter than the market. There's the rule book. Now go out – it's like I say, Michael Jordan can teach me how to drive to the basket a million fricking times. I'm still never going to be able to drive to the basket like him because I don't have the physical attributes that he has. Still, those are the rules of the game. Believe them, is what I could say.

Dan Ferris: That's actually really well said. Thank you for that. Did you ever work for any of those guys you mentioned?

Jason Shapiro:  My big break in this business was when I met Helmut Weymar, who is the guy who started Commodities Corporation and he introduced me to Bruce Kovner and I interviewed there and I got shot down, not by Bruce, but by a few of the other people because my personality, I guess, was a bit too whatever. I did meet Bruce Kovner once. I met Paul Tudor Jones once at a conference. I'll tell you something.

The biggest effect Paul Tudor Jones had on me was I met him at a conference. I was in my 20's. I was just starting off and I was trying to raise money. I went to one of these conferences and he spoke and me being the cocky me at 26 that I was, I went over to him and shook his hand. I say, "Hey, nice to meet you." I said, "I'm coming after you." He looked at me and he said, "Just make sure you give back when you get there." It's all he said.

Dan Ferris: Oh, yes. Yep. So Paul's a well-known philanthropist.

Jason Shapiro:  Right. Which had a very big effect on me. He didn't say, "Oh, good luck, sucker. I'm the best." There was nothing like that. All he said, "Make sure you give back when you get there."

Dan Ferris: And did you?

Jason Shapiro:  Yes. Yes. I wouldn't say, did I? I am now getting to that point in my life where I am trying to do a lot of that. Yes.

Dan Ferris: You – OK. Well –

Jason Shapiro:  Not just in monetary. Not just in monetary terms. I do have some charities that I support, but also in this type of stuff. I'm trying to get the word out to people of what you're doing and what you're being presented on financial news is wrong. So stop and start to think about the right way to approach this. I think that's a big part of what I'm trying to do in terms of this part of my life giving back. That all started when I was in that Market Wizards book. A lot of people after that started to approach me and were asking me, "Hey, can you help me? Can you mentor me? Can you teach me?" Can you this, can you that, can you other thing? And so that's what I'm trying to do.

Dan Ferris: Excellent. Well, I'm glad you're doing it, man, because it sounds to me like you just said to the whole world the reason for this podcast. We don't want to be, whatever, take your pick CNBC or Fox Business or whatever, Bloomberg News. We want to be the people who interview Shapiro and have him say, "Eh, well."

Jason Shapiro:  Yeah. You don't want to be them.

Dan Ferris: That's right. We don't want to be them. All right. Listen, hey, I don't normally do this, but Corey, we don't normally have Jason Shapiro on the show. So I think we need to take advantage of it. Do you have anything before we let Jason go?

Corey McLaughlin: No. Just thank you. Thanks for what you're doing. You're spreading the rule book. Like you said, I think a lot of people would be thankful to listen to what you're saying because so many – there's a lot of younger generation people that want to get into trading or whatever. They're just not doing it – have any idea of what it takes, what you're saying. So just thanks for – yeah.

Jason Shapiro:  I'm telling you. I got into trading when I was a young person. It was a bull market. I got involved and made a bunch of money, more than I should have because I was young, I was stupid, I was leveraged. I made a bunch of money. The bull market ended... I gave it all back. By the time it was the bear market then I learned "Hey, you can actually make money short. So let's do that." So I started trying to go short. Made some money and lost it all because I didn't know when the market was going to bottom and start going up again. So I lost it all.

That's what you are doing. I know. Whoever you are out there, I know that's what happened to you. The reason I know is cause it's what happened to me and it's what happened to everybody that I know. So just know you know different. The quicker you get to that point, I think, the better. So you really need to start finding what edge means. You really need to figure out how to get process going that takes advantage of that edge and you really need to have the discipline to stick to that process to take advantage of that edge so that you can earn positive returns over time. I always say a process, discipline. That's what this game is about. Predicting future? No. Not going to work.

Corey McLaughlin: With you – with cutting losses, I'm sure you have specific rules that you've determined over time like, "This is when I'm losing money on this trade," predetermined and you're not wavering from that, right?

Jason Shapiro:  No, but for me, I'm picking a market turn. That's what I do. Well, if I'm buying something because I think it's a market turn and if it makes a new low, then by definition I didn't get the market turn. So I stop out. You can do that with anything. If you're buying a breakout, I bought a breakout. Well, if it breaks back down below that, then it's not a breakout anymore. Get out. You get out and then it goes back up. You're like, "Oh, shit. I should have held it." Whatever. That happens too. You have to have that definition in. Why am I buying this stuff? Where is it wrong? I'm buying it based on this. Where is that wrong? Because that's where I got to stop out.

It's not that hard of a concept. Like I say, these are the rules, but obviously following the rules then because no one forces you to do it. I won't stop out here. I'll give it a day to breathe and then give it a day to breathe and then whatever. The news comes out and the thing drops 20% in your face and now you can't afford to take the loss. I'll wait for the bounce. Then it doesn't bounce. It goes down another 20%. Then you're forced out and now you have no money left to catch one that maybe would have worked. You have to stay alive. I always tell people, you got to stay alive long enough to get lucky.

Corey McLaughlin: Awesome.

Jason Shapiro:  And that's what taking losses is all about, taking quick.

Dan Ferris: Managing your luck. All right. So we're actually at our – it's time for our final question and it's the identical question for every guest no matter what the topic, even if it's a nonfinancial topic. That question is simply, if you could leave our listeners with a single thought today what would it be? If you've already said it, by all means, repeat it.

Jason Shapiro:  You're not going to make money over time in the markets by being smarter than the market. You're just not. Look, if you're an investor it's a different thing. If you're a long term, own the stock market investor, good for you. That's a great thing. If you're trying to be a trader and trade the markets long and short and this and that, you got to know that the answer is not you're going to make money because you're better at predicting the future than other people because you're not. Nobody is.

You're going to make money because you're better than other people at cutting losses and letting winners ride. That's where you're going to make money. That's it. I've said it to people before. When they call me a market wizard, I say, "If I am a market wizard," and the reason is because I cut losses very, very well. I'm a market wizard because I'm really good at losing money. That's it, man. That's it. The rest is just there to fool you, man. It's going to fool you and it's going to hurt you over time.

Dan Ferris: Wizardry is humility in that respect. Listen, man, thank you so much for being here. I really appreciate it and thanks for being of a mind to want to get the word out and using us to do it.

Jason Shapiro:  Great.

Dan Ferris: All right, Jason. Have a great day and I hope we'll be able to talk to you again in, I don't know, 12 months or so and just see what you're up to.

Jason Shapiro:  Any time, man. Any time. Just hit me up. It's great talking to you guys.

Corey McLaughlin: Thanks. That was great.

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Well, it's really a lot of fun to have yet another market wizard on the show. I'm glad it was Jason because he's – most of them are trend followers and he's a contrarian. He's looking for the big turns. It was good to hear about his process and the Commitment of Traders report and then that sounds like the beginning of his process. Commitment of Traders you'll see people tweeting and doing reports and things and saying, "Well, Commitment to Traders says something. So I'm going to go the other way." That's not the end for him. That's the beginning. I found that pretty interesting too.

Also interesting that he tried to automate the thing and there's just – it works better when he uses his discretion in addition to the system. I found all that fascinating. I find these Market Wizards absolutely fascinating. They don't get into the Market Wizards books without having a really, really excellent long-term track record. So I love these guys and Jason in particular is a fascinating guy.

Corey McLaughlin: Yeah. That was great. It's great to talk to a real pro trader like that, in case nobody got the sense of that. That is who he is. You can check out his stuff, Crowded Market Report, which he started relatively recently is one of his publications. It's just great that you hear from a guy with a track record that he has – you can look that up too – explain to you there's no secrets here. It's what all the people in those books have said is what he's saying. You just have to stick to it. Everybody is human.

You got to have a process and a plan if you're getting into trading and understand that we're talking about trading here. We're not talking about long-term investing either and that sort of thing and picking stocks for 10 or 20 years. This is totally different than that. If you want to trade, you got to have a process to do it. That might be one of the best lines I've ever heard. He's great at losing money, is the secret. That's something when you get into this it's totally counterintuitive, but it's so the truth.

Dan Ferris: Yeah. I've actually – I've heard something like that before from other traders. "Mostly what I do is lose money." Because it's not unusual – we should let everyone know, it's not unusual for really great, successful, very wealthy traders to lose money on more trades than they make money on. I read somewhere recently where it said George Soros made money on 30% of his trades. He said his big thing in life was knowing when he was wrong and fixing his mistakes, which to me sounds like going long, having the market go against you, and turning around and going short, that kind of thing, which is really, really highly unusual. In fact, most people are unable to successfully short their longs that go against them and vice versa.

Corey McLaughlin: Yeah. If you have the stomach and the time line to accept small losses along the way, then you can last because those are going to happen.

Dan Ferris: Yeah. I'm talking about that particular thing though because Jason's catching big turns, which is a little bit different from what I'm talking about. What I'm talking about is people have either the experience or just the mental process and the psyche or whatever you want to say, the mindset to be long. Very few people can handle being short at all and the idea of shorting one of your longs or longing one of your shorts, it just cuts against what is reasonable to expect out of any human being.

Then there's another thing entirely, which is what Jason does, which is getting these market turns right. I'm glad that he – I felt his most important point was I wait for the market to confirm it, by the way. It's not – you're not stepping in front of the oncoming train because you're pretty sure he's going to hit the brakes. No. He's already hit the brakes by whatever indicator you might use to establish that in the market, but I think that's important. I was thinking of our old friend, Jeff Clark, from gosh, forever ago. He said something that I said during the interview that I'll never forget. He said, "When I go short, I wait till the chart curls over." Obviously, Jeff is more interested in price than Commitment of Traders, but same idea.

Corey McLaughlin: Yeah. No. That's a great point. And the fact that he has – you can tell he's got set goals for returns for himself, his clients using his particular strategy. So once you have that, a goal, and you have the strategy of – or you know the way that you can achieve that goal, it becomes a lot easier to stick to cutting losses and stick to a process when you believe and you've done it over time, that it works. That was another important part I picked up from him was I think generally I know I'm pretty bad at looking back if something actually worked or admitting that it didn't and keeping track of that over a long period of time. I think once you do that, it helps you see if something is working or not. You can – this is not a game you want to just be playing off of gut.

Dan Ferris: Right. So what you're – I noticed that too when he was talking like he must have used the phrase, "And I keep track of that. And I track that. And I measure that." You're holding yourself – the point about humility, it cuts across the entire enterprise of trading because you're holding yourself against all of these – the market itself when it comes to a given trade being confirmed, whether or not your process works over time based on your results confirming that, etc., etc. His discussion about the automated system versus automated system plus his discretion, which he confirmed that the discretion was better than just the system by itself.

You constantly are having – it's a scientific endeavor. You're making hypothesis and the market is either proving them correct or incorrect. When you prove them incorrect, you have to change them, which is a really important point. You got to get your – like he said, get your ego out of the equation and have all these things in place and treat it like a business and, like I said, a scientific endeavor. It's hard, man. It's really hard. It's a 9 a.m. to 9 a.m. job.

Corey McLaughlin: Yeah. It's his job. He said it. It's a job. I think anybody even dabbling in trading can hopefully learn something from that.

Dan Ferris: Yeah. Just the idea of the market confirming or disconfirming. As he was speaking, I have one particular stock in mind in The Ferris Report and I'm having to sit here and think. I do have – I used trailing stops and things and the stop hasn't been hit yet, but there's – if it's a short fund and the market is making a new high, maybe I don't need to wait until the stop is hit. So that's something I need to wrestle with. I need to say, "Is the market disconfirming me when my stop is hit or does it disconfirm a short fund when market makes new high?" I'm not sure which way I'm going to go. I need to decide because the newsletter is coming out. It'll be out by the time you hear these words.

I just thought, "Wow. Yeah." You should – in other words, that's the idea I want to leverage into. I already have the automated relatively set process in place. Most folks want to leverage into their ability to predict the future and say, "I'm going to double down. This thing is down 10%, but yay. I'm going to double down," or down 20 or 30 or 50 or whatever it is. "Oh, but I'm going to buy more because I just know it." That's not what you leverage into. You leverage into the market confirming or disconfirming whether or not you're right. If the market has really, truly disconfirmed or confirmed you got to admit it. You got to say, "Yeah." That's the real disconfirmation or confirmation. That's the way to think about this stuff, not I'm sure it's all going to work out in the end. That's not – that's hope. That's not a strategy.

Corey McLaughlin: Yeah. Then you will – it will not all work out in the end if that is the way you're going.

Dan Ferris: All right. Man, that was so cool. I love talking to Market Wizards in general and we've had some that – we had Chris Camillo on here. Very interesting guy. Totally different way of looking at the market and now Jason Shapiro. Different way of looking at the market. He's looking to go the other way. Very bold. So that was really super enjoyable for me. I know Corey loved it too. That's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did.

We do provide a transcript for every episode. Just go to www.investorhour.com. Click on the episode you want, scroll all the way down, click on the word "transcript" and enjoy. If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at investorhour.com, please. And also do me a favor. Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts, and while you're there, help us grow with a rate and a review. Follow us on Facebook and Instagram. Our handle is @investorhour. On Twitter, our handle is @investor_hour. Have a guest you want us to interview? Drop us a note at [email protected] or call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my co-host, Corey McLaughlin, until next week I'm Dan Ferris. Thanks for listening.

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