The Big Short: Jamie Mai's Tips

Jamie Mai

Mai is the founder of Cornwall Capital, they followed a bottom up fundamental approach to the markets. They focus on profiting from esoteric market inefficiencies. One major characteristic that Cornwall’s strategies incorporate is that they are structured and implemented as highly asymmetric positive skew trades. Therefore, trades in the upside potential far exceeds the downside risk.


One of these trades included a short bet on the subprime mortgages known from the book “The big short”. Cornwall Capital had an average annual compounded net return of 40% and 52% gross with a Sharpe ratio of 1.12.


One of the interesting aspects he mentions about trading psychology is the risk on and risk off mentality which started to represent itself after the 2008 financial crisis. In the interview he mentioned “In the aftermath of the 2008 financial crisis, a clear risk-on/risk-off paradigm emerged in the markets, and particularly the foreign exchange (FX) markets. If it was a risk-on environment, everybody piled into currencies with exposure to emerging markets and commodities, such as the Australian dollar. When it was a risk-off environment, everyone fled currencies like the Australian dollar and piled into safe-haven currencies,such as the Swiss franc.


Before the 2008 financial crisis, the correlation between the Australian dollar and Swiss franc had ranged between modestly positive to modestly negative for many years—in other words, there was no strong relationship between the two. After the financial crisis, however, the Australian dollar and Swiss franc exhibited extreme inverse correlation because of the risk-on/risk-off psychology that dominated the markets. It got to the point where, if the Swiss franc was up sharply, you could be relatively sure that the Australian dollar would be down sharply and vice versa.”


Not many retail traders will take this into account as they do not consider related markets such as the bonds, equities and commodities market. Identifying the risk on and off cycles can help you as a trader confirm a bias on which direction the market is likely to move.

There were also 4 key points that Mai uses when investing:


1. Mai will find mispricing in a theoretically priced world: identify trade opportunities that arise from prices which are based on one of several standard pricing assumptions that may be entirely inappropriate based on the specific circumstances applicable to the given market.


2. They select trades in which the probabilities appear to be significantly skewed to a positive outcome: At Cornwall they apply this rule by making sure the trade has an estimated gain of the success multiplied by the probability of the positive outcome to be twice as large as the estimated loss if it fails multiplied by the negative outcome probability.


3. Implement trades asymmetrically: this involves structuring trades so that the downside is limited while the upside is open ended. A common way of achieving this type of return risk is being a buyer of options when there has been a mispricing identified.


4. Wait for high conviction trades: stay on the sidelines and do nothing until there is an opportunity that meets this guideline. Having the patience to wait for high expected value trades greatly enhance the return risk of individual trades.


Mai is also a followed of being flexible in his trade opportunities and ideas. He will routinely change his view based on the research conducted. An example would be his trade in dry bulk shippers where he started off that these companies were a buy but ended up with the exact opposite exposure when his research indicated that his initial hypothesis had been entirely erroneous. This supports the fact that the good traders will get out of a position when they realize they have made a mistake. The great traders will take the opposite position when they realize their original view was wrong.

Upgrade to the new and improved LogicStrategy™ to access over 23 countries worth of analysis.

Do you want better trades?

Hey, we're Logikfx. We're determined to make consistent trading a reality for all. Get email notifications of all our up-coming trade ideas and much more. The question is, are you ready?

 LEARN TO TRADE 

 COMPANY 

Logikfx.com simplifies complex financial trading information and processes, so anyone can have complete confidence with their Forex or Stocks portfolio.

 

Learn to trade through online videos, articles, webinars, and workshops. The Logikfx Portal has everything you need to build yourself a long-term trading plan.

Recognition

Nominated as ‘Best New Forex Education & Training UK 2020’ - by Global Banking and Finance Review

Macro Currency Strength Meter ranked as 'best automation tool for retail traders' - by E-Forex Magazine

©2017 - 2020 Logik Fx Ltd

1/1

Headquarters

Logikfx

The Colmore Building, 

20 Colmore Circus Queensway, 

Birmingham 

B4 6AT 

United Kingdom

Business Hours

Mon - Fri: 8am to 11pm

Sat: 6am to 11am

Sun: Closed

Disclaimer

Trading in securities can lead to significant losses, that may exceed your initial investment. You should seek advice from a licensed professional to determine if trading is for you. Logik Fx Limited is not an investment advisor. Further, owners, employees, agents or representatives of Logik Fx Limited are not acting as investment advisors. All persons and entities (including their representatives, agents, and affiliates) contributing to the content on this website are not providing investment or legal advice. Nor are they making recommendations with respect to the advisability of investing in, purchasing or selling securities, nor are they rendering any advice on the basis of the specific investment situation of any particular person or entity.

 

All information on this website is strictly informational and is not to be construed as advocating, promoting or advertising registered or unregistered investments of any kind whatsoever. All of the information on this website is for educational purposes only and is not to be construed as investment or trading advice. ​For the full disclaimer click here.