Episode 15: Inside the Loop — Uncertainty in War and the Markets (Part Two)

A smaller room this time. Mike Melissinos and Ben Ford could not join us, so Jerry carried the trend following side where Mike would have come in, and Moose headed up the strategists’ side on his own. As it turned out, that made for one of the most heated and enjoyable conversations the show has produced.

Part One was about the condition we all work under: you cannot see the future, your plan will not survive contact, and you still have to act. Part Two is about the craft, what you actually do with that. How you win when your chance finally comes, when to let go, how you survive a blow, and the kind of mind that holds it all together. And running underneath it, the same idea that carried the whole special. In war, you have to predict, because nothing tells you where the enemy will be. In trend following you never predict, because the price already gives you the crowd’s answer. Prediction on one side, following on the other.

⚔️ The Orthodox and the Unorthodox: winning when your chance comes

In any fight there are two kinds of force. The ordinary one that holds the line and keeps the enemy busy, and the extraordinary one, the surprising move that actually wins the day. For trend followers that maps almost perfectly onto how the money is made. Most trades are small losses, the steady cost of showing up, and then every so often one runs and pays for the lot.

Jerry took us to 1993, a year that came down to a single trade. He was trading forty or fifty markets back then, and one client had instructed him not to trade commodities. The only thing that moved all year was coffee, on the back of a Brazilian freeze. At the end of the year that same client asked why he had broken even while everyone else had made money. The answer wrote itself. There is a particular frustration, Jerry noted, in eliminating a market for no good reason and then watching it become the year.

Moose took the war side and went straight to Sun Tzu, the one book Boyd could never find fault with across eight or nine translations, and to the employment of Cheng and Qi, the orthodox and the unorthodox. A Marine trains endlessly on the conventional, the drills and general orders and immediate action drills, so that when the environment refuses to match the book, he can reach for the unconventional. And then he made the point of the segment. Surprise is an output, not an input. You cannot decide to deploy surprise. You can only create the conditions where a mismatch emerges and the other side can no longer compute what is happening. He illustrated it with a story about jumping out to scare Rich, only for Rich to have anticipated it and turned up in a scream mask, leaving the rest of the room wearing their coffee.

Rich put the question to the room: in war the surprise works because there is a mind on the other side to fool, but in markets there is nobody to surprise, so when the big winner finally pays, did we outfox anyone or was the rare event simply enormous while everyone else huddled in the ordinary? Moose reframed it around anticipation rather than prediction, and around Boyd’s constant game of interaction and isolation. The client who banned commodities did not interact with his world, did not anticipate, and isolated himself into a poor outcome. Adam admitted he is constantly surprised by markets, that the year’s profit almost always arrives from a source nobody expected, and that the discipline is simply playing the odds and executing day by day. Jerry landed the practical warning: the most dangerous moments for a systematic trader are the ones where, for whatever seemingly good reason, you are not able to follow your own process.

🏔️ The Culminating Point: knowing when to let go

Clausewitz noticed that an advance has a culminating point, a place where the attack has outrun its own supply and strength, and the very next push, the one that feels like it should finish the job, is the one that breaks you instead of the enemy.

Rich was careful with the translation, because there is an easy misreading. This is not about taking money off the table as a trend matures. Trend followers do not do that. It is about not dragging the giant position a huge trend built for you on into the next trade. When the trend ends, you take the exit and go back to the small starting bet.

Jerry said cocoa had it all, that almost every lesson the markets can teach is in there somewhere. Do not remove something from your portfolio because it has not made money in a long time. Put things in because they diversify. The backtest is the answer to every question. And then the line of the segment, prompted by a story about Mike: a stock had run thousands of per cent and then sold off hard, and Mike’s followers were asking where he got out. His answer was that he did not, he was still in. That, said Jerry, was the only correct answer. The correct answer is never how much profit you gave back. It is that you followed your rules.

Moose gave the room a genuine education on Clausewitz, and it was not reverent. He recommended Robert Coram’s biography for its account of Boyd’s battle with him, and offered the comparison that Clausewitz is the John Maynard Keynes of warfighting: no matter how thoroughly he is debunked, he still prevails over Sun Tzu or Boyd or guerrilla thinking, in the same way Keynes still prevails over Hayek and Mises. There are valuable things in him, friction and the culminating point among them, but there are places where he misses the mark entirely. Then Moose gave the culminating point its real edge: it is where success becomes the danger, where complacency creeps in and you rest on your laurels rather than reorienting. His example was the 1976 Formula One season. James Hunt took the championship by a single point and then checked out. Niki Lauda kept going, kept trying to get better. If you are not shattering and rebuilding your models even when you have won, you have begun your journey to obsolescence.

Jerry brought it back to the book: when a trade ends it is over, clear conscience, unemotional, and the next trade is a new trade with the new reality of higher volatility, which usually means a much smaller position. He warned against the mentality that says you messed up the long side so you will make it back on the short, and reminded us of the old turtle rule about being wary of a trade when the last one was a winner.

Rich asked whether the top can ever be seen coming or only spotted after it turns. Adam suspected not, and used equities to show why: a market can be statistically expensive on a Shiller PE or a composite valuation model and still be in a perfectly good trend, and the trend follower has to ignore that genuinely valid information and trade the system. Jerry admitted the frustration of watching others call the top, the sector and the stock, then retire before we get to see them give it back, and how easily the success of others contaminates your own worldview. Moose closed it with Marshall McLuhan: we look at the present in the rear-view mirror, marching forward while facing backwards, and that is precisely how the complacency sets in.

🛡️ Defence in Depth: surviving the blow

In war you do not stop an attack at a single line. You build depth, layer behind layer, trading a little ground to absorb the blow so that no single break is fatal. For trend followers that is risk management in one image: spread across many markets, size each one small, so no single trade can sink the book.

Jerry was blunt about the alternative. People concentrate in stocks and sectors and countries and call it diversification, and it works for long periods right up until the fifty to eighty per cent drawdown. Concentration breeds confidence, confidence yields to leverage, and the blow-ups follow. Then came the line of the episode: thankfully, the trend follower is no expert. Because he is an expert in none of these markets, he needs the diversification, and he can make a great deal of money in soybeans having never seen a soybean. There is no number one through ten best idea. They are all small bets with the same expectation.

Moose took defence in depth into Boyd’s four qualities, variety, rapidity, harmony and initiative, with variety and rapidity doing the work here. You need optionality for circumstances you did not anticipate, and you need to introduce those variations quickly enough that your opponent can no longer compute what is happening. But he also flagged that defence in depth is not really a Marine concept. Marines are built as an offensive instrument, to strike where the enemy is weakest and catch him off guard, not to hold ground for its own sake. Rich described trend followers as predators lurking in the abyssal depths, and Moose recognised it immediately: the crocodile taking the gazelle at the water’s edge.

That opened the twist Rich wanted to land. For trend followers, the wide net is not only defence. Jerry explained that nobody loves diversification more than the systematic trend follower, but we do not use it the way the rest of the world does. We deliberately include correlated markets, WTI and Brent, because one can trend while the other sits still. He reached back to the first big turtle trade, February heating oil, which doubled and tripled while the January and March contracts barely moved. Roughly five to ten per cent of the portfolio will have a big trend in a year, so the wider you cast the net, the less bad luck can shut you out entirely. We are outlier hunters, and the net is how we hunt.

Adam added the honest version of what that feels like: trend followers seem to be losing all the time, because half the trades are losers, and the job is to become a really good loser, graceful in it, while letting the winners run. Jerry then took issue with a cliché he cannot stand, that you should only mind the losses because the winners take care of themselves. They do not. Nothing in life takes care of itself. If you mishandle the winner, it does not pay for the losses, and the whole edifice fails.

🧠 The Strategist’s Mind: holding your view lightly

Everything in the special comes back to the mind that holds it all. A mind that holds its view of the world lightly, knows the moment that view has stopped matching reality, and has the courage to tear it up and build a new one.

Rich made this one personal, and it is the most honest story in the series. Back in his value investing days he thought he had found a clever edge: rather than chase the blue chips everyone was watching, look at the small suppliers quietly connected to them. One such minnow supplied equipment to BHP. When BHP posted a strong earnings report, the logic felt airtight, that strength had to flow downhill, and he invested heavily. What he had not read was the fine print of the contract between the miner and the supplier. At almost the exact moment he was buying, the supplier was being replaced. The thing he was betting on had already been cut at the root. What followed was a violent outsized move with him on the wrong side of it.

For want of a nail the kingdom was lost. For want of one contract clause he never read, the whole thesis was lost. The chain was invisible looking forward and obvious only in hindsight. And here is the part that made him a trend follower: the price already knew. The moment that contract turned it began showing up in the behaviour of the stock, long before any report would have told him. The market was writing the answer in real time while he argued with it from a spreadsheet.

Moose took that to Boyd’s strategic game of interaction and isolation, and to his definition of strategy as a mental tapestry of changing intentions for realising some aim in an unfolding and often unforeseen world of many bewildering events and contending interests. It is not enough to see what you can see. You have to allow for the unseen, because a fixed plan set in granite will get rolled by a reality that does not work that way. He offered McLuhan’s distinction between figure and ground: we fixate on the figures we can see, while it is the ground shifting beneath us that undoes us.

Jerry, asked what has actually kept him in the game for four decades, said it is believing in the thing itself, waking up and watching it work, and the sheer fun of seeing it hold up against other people and other ideas. He would change at any point if he found something better, and in forty years he has not. He closed on mentorship: handing someone the book on trend following is like handing someone the book on being a Marine and telling them to go be one. There is a bootcamp for a reason. You need to suffer, to lose, to get out of the ivory tower, and nothing replaces a mentor who has been through the battles.

Adam brought the psychology home with a clean framework: type one errors, the false positives, entering invalid low-quality trades, driven by greed and impatience. And type two errors, the false negatives, hesitating and missing a valid high-quality trade, driven by fear and paralysis. Both damage the P&L differently, and knowing which one your own personality tends toward is a real path to improvement.

Rich’s closing question to both camps was the deepest seam of the series: if the whole game on both sides comes down to tearing up your model before it traps you, what actually separates a great Marine from a great trend follower, once you set aside the fact that one is handed a price and the other is not? Moose answered with the willingness and humility to keep learning, and made the case that the Marine Corps is the most intellectual of the services precisely because Marines are given a small book of things they cannot do and enormous latitude in everything else. Adam noted the parallel of operating comfortably in chaos, while acknowledging the stakes are not remotely comparable.

🐢 A note on what comes next

This may be our last episode for a while. We are taking a well-earned break as we consider changing the format and bringing you something rather different going forward. Nothing is decided yet, and we will keep you posted on when, or if, the show returns in a new shape.

Which makes this the moment to thank people properly. To Moose, who came onto a trend following show and showed us how much of our own world we could see in his, and to Ben, who could not be with us for this one but was such a part of getting the conversation started. To Mike, absent today, who brought the live book and the energy to Part One. To Jerry, fifteen episodes of the calmest, most generous wisdom anyone could ask for, who has given this show its backbone. And to Adam, for keeping us all honest about what is really going on between the ears, and for making this a partnership rather than a solo act.

📚 The Books

Want the theoretical foundation for why markets adapt? Complex Adaptive Markets: How Living Systems Shape Finance explores the full architecture of feedback, emergence, and adaptive behaviour in financial markets, and what it means for how we trade, invest, and understand risk. 👉 https://www.amazon.com/dp/B0FKZP8FQJ

Want the theoretical foundation for why trend following works? The Fractals of Finance: Determinism, Adaptation and the Geometry of Markets bridges complexity science with practical trading implementation, with a foreword by Jerry Parker, original Turtle Trader. 👉 https://www.amazon.com/dp/B0GHTH1WNK

Want a practical field manual for trading trends and capturing outliers? The Aussie Turtles Trend Following Guide: A Field Manual for Hunting Outliers adapts the timeless principles of the original Turtle traders into a systematic, rules-based approach for modern markets, co-authored with Adam Havryliv. 👉 https://www.amazon.com/dp/B0FT1NCXP4

All three are available now on Amazon in paperback, hardcover, and Kindle. If you have read any of them, a short review goes a long way in helping more traders discover them.

🌐 Episode Resources

Connect with Mark “Moose” McGrath at the No Way Out podcast, alongside Brian “Ponch” Rivera.

Closing Thought

Eight ideas across two episodes, and the striking thing was how little translation the two worlds needed. The Marine who has to anticipate an enemy who can be deceived, and the trend follower who never guesses because the price already holds the crowd’s answer, turned out to be practising the same discipline in different clothes: refusing to be trapped by a model of a world that will not sit still. Moose put it as well as anyone. Reality is always changing, so you have to keep destroying and creating your perception of it, because what worked once will not necessarily work again. Jerry has spent four decades proving the same point with rules rather than briefings. And somewhere in the middle of all that, a small supplier lost a contract that nobody read, and a young value investor learned to follow the price instead.

Stay systematic. Stay patient. And may the trend be with you.

🎙️ Turtle Talk is here to equip traders and enthusiasts with the tools to succeed in the ever-evolving world of trend following. Make sure to subscribe, rate, and share the podcast!