A conversation with Ponch Rivera and Moose McGrath on No Way Out
Some conversations move forward because both sides already share a vocabulary. The recent episode of No Way Out with Brian “Ponch” Rivera and Mark “Moose” McGrath was one of those. We arrived at the same set of ideas from different directions, them through the OODA loop, complex adaptive systems and the free energy principle, me through decades of trying to make a predictive model survive in a market that punishes prediction. The territory we ended up exploring is, I think, where the next interesting work in markets actually lives.
This post is a brief tour of where the conversation went, and an invitation to listen if any of it lands.
The wrong tool for a reflexive system
I came into markets the way most people do. I adopted the orthodoxy I was handed. Value investing, fundamental analysis, the assumption that markets are downstream of the economy and that better data plus a sharper model would close the gap between forecast and outcome. The model kept failing in ways that were not random. They were structural.
The market is not a system we evolved in. It is a reflexive system populated by intelligent agents, each running their own predictive model, each impressing a small directional force on price through their actions. Prediction is the wrong shape of tool for that. The future is not hidden in fog, waiting to be revealed by better instruments. The future is being written, iteration by iteration, by the very participants trying to forecast it.
Prediction is a short-term measure in a system that is continually rewriting itself.
The benchmark you get and warfare does not
Here is the move that took years to make and seconds to say. Stop predicting. Start aligning. Markets give us something that almost no other complex adaptive system offers, a benchmark that consolidates the collective opinion of every participant into a single observable. That benchmark is price.
Ponch caught this immediately. Warfare gives you no such guide rail. Terrain, logistics, the enemy’s intent, every variable demands its own predictive engine. In markets, the engine can be replaced by a follower. I do not need to know where price is going. I need to keep my error from price small, and I need to be present when the rare large move arrives.
That is the whole of trend following stated philosophically. The mechanics are simple. Adopting them is not, because the mind will continuously try to hack your rules-based system.
Carved by impossibility
Most analytical frameworks in markets are generative. They ask what causes a structure to exist. They drill down through organs and cells and atoms looking for the constituent parts that explain the whole. I think this gets the direction wrong.
Structures in complex adaptive systems are not generated. They are carved. They are what is left behind after a process of elimination, the residue of countless agents acting under constraints, the survivors of an ongoing test against a fitness landscape. A coastline is not built. It is what remains after everything that could not survive that geometry has already been removed.
This is why fractals appear at every scale in markets. Not because someone designed them in, but because the iterative process of survival and elimination, operating without rulers or timepieces, produces self-similar structure as a matter of mathematical necessity.
Fractals are the natural geometry of what survives.
The geometry of wealth
If markets are fractal and change arrives in punctuated bursts rather than gradients, the architecture of wealth has to match. Wealth compounds multiplicatively. A fifty percent loss demands a one hundred percent gain to recover. The cost of large errors is not symmetric with the benefit of large wins, and the asymmetry is not minor.
Two principles follow. The first is the minimisation of loss, which protects the compounding base. The second is the exploitation of outliers, which is where geometric wealth is actually built. A handful of events in the tails will dominate the entire track record. Cocoa from two thousand a tonne to twelve thousand. Buffett’s Coca-Cola. The names change. The structure does not.
Diversification, in this frame, is not about diluting risk. It is about spreading a net wide enough to be present when the next outlier arrives in a market you could not have predicted in advance.
Convergence, not derivation
We spent the back half of the conversation in deeper water. David Bohm’s implicate and explicate order. John Wheeler’s participatory universe and his line that the boundary of a boundary is zero. Cantor sets as the mathematical structure that allows a universe to be finite but unbounded. The free energy principle as continual alignment through model revision.
I want to be careful about how I frame my relationship to that material. I am not a scholar of Friston, Boyd or Bohm. I am a practitioner who arrived at adjacent ideas from the inside of a different problem. When I describe trading as a process of continual alignment by rewriting our models to ensure minimal surprise, I am not deriving anything from active inference. I am noticing that two paths have converged on the same shape.
That convergence is what makes the conversation with Ponch and Moose generative. We are not duplicating each other’s work. We are triangulating on something real.
Thanks
Thank you to Ponch and Moose for hosting the kind of dialogue that is rarer than it should be. Thanks also to Jerry Parker, who made the introduction, and to Keith McCullough at Hedgeye, who has been carrying the complexity flag in public for a long time.
If any of the above resonates, the full conversation is linked at the top of this post, and longer treatments of these ideas live in Complex Adaptive Markets and Carved by Impossibility.
Find more at atstradingsolutions.com — The Traders Outpost.
Richard Brennan writes on systematic trading, complex adaptive markets, and the philosophical foundations of trend following at atstradingsolutions.com. His books include The Fractals of Finance and Complex Adaptive Markets. The forthcoming Carved by Impossibility completes the trilogy.
Want the theoretical foundation for why trend following works?
The Fractals of Finance: Determinism, Adaptation and the Geometry of Markets
The book explores the full architecture of feedback, fat tails, and fractal structure in financial markets, and what it means for how we trade, invest, and understand risk.
Available now on Amazon in paperback, hardcover, and Kindle.
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.
Available now on Amazon in paperback, hardcover, and Kindle.