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Private Asset Management - Harloff Capital Management - w/Gary Harloff


Welcome to the strategic investor. Join us is we interview. Some of the world's most productive asset managers and uncover sophisticated and unique investment strategies in the markets. Here is your host Charlie Wright. Hello and welcome again to. Strategic Radio on Talk Radio where we bring you investment strategies. You are not hearing elsewhere. That is certainly the case today. And we'd like to walk him Gerry Karloff. Phd In engineering a principal at Har Lawf- capital management and founder of our loft capital management. He's also a hedge fund manager and editor of the Intelligent Fund investor speaks to us from their headquarters. Outside of Cleveland. Ohio where it snowing today Gary. Welcome to strategic investor radio. Hi Thank you for having me today Charlie so Gary Young Guy like me he received European. Phd's sometime back in aerospace engineering and your work experience is. I hope our whole audience gets this model. Building and analysis from Computational. Fluid Dynamics of supersonic inlets hypersonic vehicle design et Cetera et CETERA. So no question about it and you and I would have difficulty talking about such things over dinner. So give us a short background of yours and you started You formed khaw capital management in one thousand nine hundred ninety four so tell us about your background history here right well Charlie I started out on the farm upstate New York and I when I was twelve years old. I saw split nick fly overhead and I was very interested in in Split Nick In those days and I took an interest and from high school I went to University of Texas in Austin to study aerospace engineering. And the first week there The Dean of Engineering came out and got all the freshmen in one room. And he says shake hands with front back side left side right side because only one of you is gonNA graduate in the Aerospace Engineering Department. And that's the way it turned out. Only one of five cut could graduate. And so that's how I started out and engineering Took my interest for many years and I found out over the years that I liked computer simulation of this and that one thing led to the other and I I went to work at bowling. And did some supersonic inlet calculations that were state of the art. At the time I I studied How fast and how strong inlet shockwaves were inside the inlet when the compressor stopped working and I wondered about that. You Know Gary. We'll have to talk about that off nine some time. Yeah so anyway I moved around a little bit from From Bowling and Went to West Palm Beach and I worked at Pratt Whitney on jet. Engines stability from a computational standpoint and one one Lunch time I had lunch with a computer analyst and he said to me that nobody can model the stock market and that tweet my interest that was quite a while ago I've been trying to bottle the stock market ever since and so I'm all self taught in this area read a tremendous amount of stuff and does a tremendous amount of original research over the years and Later on I I worked at Deal we in Oak Ridge on uranium solution mining and I did a lot of computational work there and after that came to NASA Where I worked in computational fluid dynamics as you said and other areas and I entered a Two different contests that were one year long and they were in the area of mutual funds switching. That's where you buy Some basket of mutual funds. And then you trade it after So long and I started doing this Trading at least once a month maybe faster than that and after one year. I was finished with place. The first year I entered the next year I finished third place in the United States. So I had some sense that I was Read simply competitive on a national scale at that point and a few years later. I I left NASA To work for my own firm and to do computational work and the investment area and almost all of the stuff I do now is based on my own original research. I don't believe in most other people's work I guess that's the nature of the beast that I that I am at this point and so I started a fee-based registered investment advisory firm in ninety. Four as you said and We're a fiduciary and we put our clients. I I was in a another contest a few years later. Nineteen Ninety nine Steve Challenge whose pass now Had been tasked by someone that he knew to start a newsletter so that this wealthy investor could figure out who the market timers were for mutual funds. And so I got in that database and in nineteen ninety nine. I got the highest return and for the previous fifteen years that Steve Cohen's had monitored and I've been monitored by timer digest for many many years now and they featured me on their cover of five times and I'm supposed to be featured this month as well and often. I'm in the top ten timers in the United States of of somewhere. North of hundred different timer. So I do market timing and we'll talk about that in a few minutes. I guess but That's how I started where I am now. Charlie Okay Gary will thank you very much so so you you manage money. Full-time and you also are a hedge. Fund manager Indian Fund investor new charge for that for subscription fees. Or you send it out to let people know. How does that work? I don't charge for that It's a monthly. I've published it for About twenty seven years I put one of my strategy results in there and so The intent of it is to give a ranking and sorting of the investment opportunities on a worldwide basis and with my own My own index of different Funds and indexes. Okay so so so. Tell us here. Gary First of all it sounds like you. Invest in markets through mutual funds. You do not invest in stocks correct. Correct stocks are too hard for me. Okay and tell us. Basically by by using words that I in our listeners would understand here basically. How do you do you? Use Fundamental analysis do use. Technical analysis is a quantitative analysis. What do you look at in general? We're not looking to define the secret sauce that you use but would you look at it in general In general we don't employ fundamental quantitative or technical analysis Our work is original and developed over many years as I mentioned roughly nineteen nine hundred seventy. I went to the library this before. The Internet and I tried Use Fundamental Analysis and after a while I realized that because the accounting systems differ from one sector to the other that you couldn't translate Information from one sector to the other so I gave up on technical analysis Way Back when and in the eighties I did a lot of Excuse me I think. I should've said fundamental analysis and early and late eighties. I did a bunch of technical analysis to learn what was available and at the end of that The Decade of the eighties. I realized that technical analysis really doesn't work well especially when everybody uses it. Which is the case. Today you know with the advent of the Internet and TD AMERITRADE and fidelity and a lot of these brokerage houses now provide technical analysis for free so my conclusion is that that all that stuff does not work. Even Charley. You Got Eighty to ninety percent of all the trades in the United States. Come from computer programs and no human are touching these traits and so they are programmed with technical analysis. I don't know how individual can be competitive against all those machines all over Wall Street so I had to Develop original strategies And the market timing work I do is Kinda called University Beta strategies. So I take Ah One index and Crunched numbers out it and try. Try to figure out if the trend is going to continue or not Caring about noise and signal and try to invest That way the one is a huge problems with the stock market is. The noise is horrendous and the signal is law so you need to get some kind of a signal and filter out the noise. That's a real challenge. Charley yeah well no question about it you and me and everybody else here. So he's basically a trend following a strategy that you try to to us here. It is Mostly it probably could be quantified that way trying to figure out a trend now as the Internet has come up and as time has gone on the trends have gotten faster and faster what used to be a month is now a week and so Over the years the The competition For this has really vastly improved. So trend following is important but the trends. Don't last long. Charley Yeah so How how granular do you get in the mutual funds? Do you go down to the sector level or do you just invest in one or more of a half a dozen different diversified mutual funds for international emerging markets Europe. Us Stock Market Gold Bond Market etc high. Yeah what are your potential opportunities? Where what I tried to do over the years. Charlie is to develop something. That's that can work for a wide variety of indexes and funds so. I actually have I use a database from fast track. You probably are familiar with it so fast. Track has a bunch of data that they publish every evening End of the day an a bunch of ATS. But I my my own systems work on a global basis A variety of sector basis Bonds indexes gold. So what I've tried to do over the years is to Develop systems that worked for almost anything all over the country. Charlie so you can be in. How many positions at one time you pick one? Do you pick fourteen. How does that market? Yeah my market. Timing is for one index. At a time I call that university Beta strategies so I do about seven or eight Indexes routinely and my My Money Management has a fun number from say Of three or four to about eight or nine. And those I I Alter on a maybe a week or two week basis to change them I try to. I think I have a concept that I try to follow the elephant of investing the elephants. Being the big boys on Wall Street that have lots of money and control the global table so to speak and I try to walk behind. This elephant is the elephant goes through and the strategies that they employ change. I tried to follow those With a numerical sense so that I can do good and try to avoid big losses. Okay and would you say that Finding out identifying the footprint of the institutional investors of mutual funds etc is that extremely hard to do is getting harder. easier How does that work? I don't actually try to do that. But in a CO conceptual way I do so. It is getting a harder as time goes on and the computers. Get faster you know. Wall Street has moved their trading computers. Very close to the stock exchanges so that the response time is very fast and now it's a it's on a global basis that used to be only US trading and now with the markets like they are they trade Twenty four seven and so the competition has gotten a much much more difficult to do that. Yeah in a key. Conceptual way I try to Find the footprint of the Wall Street traders and I have a lot of computer programs and optimizes and such to try to make the best case. I can okay. So let's ask this question here. Changing just a little bit Gary what do you wish that more? Investors and advisors better understood about investing money and not give it all back and bear market. That's certainly the goal. Why do you think that you have been able to do that? Better than others ever since Charlie That ninety percent or maybe higher of investment advisors in perhaps one hundred percent of individual investors are buying hold people so they they never try to identify and follow an elephant as it moves along. They just buy something and put it in their drawer and keep it for six months or a year. So there's no no changes for the the The investing process changing. Okay yeah no question about that especially in retirement plans like 401k off on Iras etc. So what do you say to people when they say you cannot time the market? We've seen study after study. That says well you know only about three percent I think of the investment advisers are able to time the market. I think most of those are primarily trained as engineers But even engineers. It's hard because not only. Do you have to have a sense of modeling? But the the real problem with the market as you well know is the unsteadiness of the markets and I wanted to do the study and published it in two thousand ten ten years ago now about how modeling the US business cycles. I I took quite a long time to build this computer model and I presented it at a talk that I gave Jacksonville Florida to whole bunch of university professors in economics and finance and I had to run my computer model not in real time but I had to run a computer simulation. One hundred years sharply for the noise and the economic cycle to steady out and from that I concluded that the Federal Reserve cannot possibly control the US business cycle and I was a student of the Federal Reserve computer models for quite some time But anyway the noise and the unsteadiness is a huge challenge to this whole endeavor so most people are not trained to keep up with unsteadiness unsteady calculations phenomena changing coming in and out sector rotation as some people call it. That's very crude Description of the market but All those things are really hard to keep up with Charlie. Yeah no no no question about it here. To what degree do you find the market to be random? I think maybe one hundred percent on short term really sign short-term throws well within a week or two. Okay that's how I would define short term and the market is. There's a lot of tools put together that are for a random Gallician if you will distribution function and the market is not that it's not not that kind of A distribution curve. You have when you grade your students in a class where you get half the kids get a pass and you know ten percent get eight and ten percent. Don't Yeah Yeah Okay. So so tell us a little about the Those that Become clients of yours. Why do they do that well? They're looking for something different I think I'm in a small class of investment advisors who try to Manage quiet money on an active basis. And I'm fee based and a lot of Advisors are not so we have to put clients interest? I also We we take discretionary authority through paperwork over the client's because we do a lot of trading And so some people WANNA professional trading. They're out and others don't so If they look for someone who's experienced and Looking for a technically oriented activity that that's what we can to you said you use mutual mutual funds verses. Etf switches typically for trading type Advisors what they use today yeah Atf's have come on relatively recently several years. I'm not sure how many there's been studies. I know you've seen these studies that show that the When you trade. Ats You get You get a lot of slippage and so if you trade Those things every day For one year he can give up forty percent of your portfolio value to the slippage. So I don't like. Etf because of the slippage problems and I trade Each I mean Mutual funds because they're only priced once a day. And there's less chance for manipulating the prices and I've had to move to write. Exim parole funds primarily for my investing because Almost all the other of mutual fund families will not tolerate a lot of trading. So I've I've had to move to bright accent pro funds. Some of the companies like fidelity won't put up with right. So what do you do end of day trading and if day Sometimes I can trade twice a day but I actually don't like to trade once a day. Well IT KEEPS. It Simpler. No no question about it. So what would you say? Gary is the best advice you ever heard. Read a received about investing by law sell high. Charley Yeah no question about it that that brings another question. Are you long only okay or or overshoot short things on how you go ahead? I'm sure right now. A couple of mutual funds. So I I have an optimize that tries to figure out what percentage should have in each of the funds that I select and then they're all selected by the computer program so In in horrible times like an eight the whole market Is GOING DOWN? Everything correlates on the downside. So you've gotta be short there so I analysed Regularly the long and the short funds Charlie so It just depends on the market When I'm long and short and so I I use the computer to help me out with that because these are hard decisions You know they've got to be gut wrenching. So so Tell us why does the market moves rapidly? How long do you stay in a particular position? Typically if the market is moving fast I might stay a little bit longer than average like the trade every two weeks but sometimes it's maybe four. Maybe six weeks I have to take the the timing from the market. And it's it's Kinda hard to know how to stay in step with the market but if you if you stay with it lying it's like riding a horse you can kind of tell when it's When it's time to say when it's time to leave you know With the advent of the Fang stocks over the last few years. There's in giving such strong performances. Has that made it more difficult or easier for you. That's a hard one charlie. 'cause I don't trade stocks. I know what you mean about the thing stocks that I think there are. There are tell on the market. Probably When you've got Some of the I guess a handful of stocks five or six. That are doing so well that that tells you that the ones at least at the top. The this is a strong upmarket. So in general I I tend to think of the market as Being organized by generals and soldiers and so a lot of times if the generals stocks stay at the top and you have a whole bunch of soldier Mutual funds underneath. That are all doing well. This is great but when the market starts to get overpriced. Then a lot of the soldiers get Shot and so the list that I Monitor and calculate Usually get shorter and shorter. So the the Fang stocks or the generals. I call them They'll stay at the top and this has happened Several times in the past during Bear markets the list gets Shorter and shorter. And at some point the whole thing falls apart but as long as those Generals are there and you have enough footsoldiers behind them. The market is good. Like it is right now Charlie. So Gary Question would like to ask all of our guess. What keeps you awake at night. Why worry about my computer models and I I tr- keep trying to update them and make them more powerful and more reliable All the time and I'm real worried about bear markets and the market. Timing is very hard to pull off. I worry about at a lot. Well you're not alone there. No question about it and Gary another question. We'd like to ask all of our guests. What book on investing would you recommend for investors? There's a book I really like. Called active investing wealth management for high net worth individuals. And by the way Charlie. I wrote that book ten years ago. It's available on the Internet's one hundred forty four pages. I wrote it for High net worth individuals and universities to us and their finance departments so I think a suitable for investing who WanNa know more about best practices in this financial industry. Okay so thank you for that. Very much Gerri. Congratulations on writing. So for those. Who would like to know more work and they go? I have a couple of websites are capital dot com and I have another site called university. Betas STRATEGIES FIDUCIARY ADVISORY FIRM DOT COM. So those are two websites and personally they can reach me. Gary Hart Law Fat Wallet Dot Com and my phone number. Charlie is four four zero eight seven one seven two seven eight okay so you are definitely available and we really appreciate that. So how about final words for listeners? Here Gary well we have our own money alongside our client money. I think that's rather unique. We strive for performance and we try to avoid bear markets. Not many people can do do that. We have original models and I don't know of many other advisers who have original models and we have strategies to help the clients financial situations. Oh and one last thing Charlie may be with you well. It's hard to avoid it These days no question about it. So Gary Thank you very much for joining us today. This has been very very interesting. And we really appreciate it. And our best wishes for years and and Karloff capitals continued success here. So thank you Charlie pleasure talking to your home okay again. We've been talking with Gary Karloff. Phd In Engineering Principle Harlow off capital manager management a hedge fund manager and editor of the Intelligent Fund investor. You've been listening to strategic investor radio and OC Talk Radio and We love to have your visit our website and listen to all of our PODCASTS and chose strategic investor radio DOT COM and Charley right wishing you an enjoyable week and productive investing own strategic investor radio production of talk radio provided for educational purposes only content of this program and the views of the guests should not be considered as recommendations talk radio or investment advice from the host. Charlie Wright or any other entity attached to this production investor should always consult qualified financial investment tax or legal professionals prior to investing.

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