Interview with Martin Sandquist, Billionaire Lynx-Founder and Finance Innovator

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Martin Sandquist Mikael Syding Ludvig Sunström[Ludvig | Martin | Mikael]

For the first time, the elusive Martin Sandquist gives an interview.

Martin Sandquist is the founder of Lynx Asset Management. Lynx is one of the most successful hedge funds in Europe. They’re classified as a CTA and have 70 employees.

Me and Mikael interviewed him for our podcast “25 Minuter” earlier this week. The talk is 100 minutes–our longest episode ever.

We touched on many topics, but it’s all in Swedish. Due to popular demand, I’ve translated some of the top takeaways into English. I might do another post on this if enough people are interested.

Pay attention and you’ll find that many things Martin says are meta-principles that apply to reaching a high level at almost anything in life.

Key Takeaways:

  • The level of commitment needed to be the best at what you do.
  • Why self-studies are required to become an innovator.
  • How Martin trades and invests.
  • How to achieve expert pattern recognition (Martin’s method of deliberate practice).
  • Why global warming is a lousy scientific theory.
  • What Fourth Turnings are (and why they might cause a total transformation of the financial system!)

Martin reads a lot. He recommended 15 books during our conversation.

Martin Sandquist’s Top 15 Books:

  1. The Fourth Turning – Strauss, Howe
  2. The Scientists: A History – John Gribbin
  3. The Red Queen Matt Ridley
  4. Alchemy of Finance – George Soros
  5. The Blind Watchmaker – Richard Dawkins
  6. Wisdom of Crowds  – James Suroviecki
  7. Super Forecasting  – James Tetlock
  8. Black Box Thinking – Matthew Syed
  9. Fabric of Reality David Deutsch
  10. Mindset – Carol Dweck
  11. Market Wizards – Jack Schwager
  12. Reminiscences of a Stock Operator – Edwin Lefevre
  13. A Man for All Markets – Ed Thorp
  14. The Moral Case for Fossil Fuels – Alex Epstein
  15. Deep Thinking – Gary Kasparov

Martin specifically recommends The Fourth Turning, due to it’s relevance on the current state of the affairs. Read on to the end for more info on this, and to find out what Martin thinks about the future of the economy.

* * *

Excerpts From Our Interview

[Whenever it doesn’t say a name, it’s Martin who’s being quoted.]

How He First Got into Finance:

I have to mention the Market Wizard books. They got me into finance and made me feel that this was something I wanted to do. I read them some Christmas in the early 90s, and I don’t think I met my parents or friends during that entire Christmas. I just read those books. I became completely fascinated and felt that maybe this was something for me!

It was a revelation for me at the time that maybe intelligence wasn’t the most important thing. I’m not super-intelligent, I didn’t get high SAT scores or anything like that, but I’m very good at discipline.

How Martin Developed His Unique Skill Set:

I have a library of patterns that I’ve accumulated over the last 30 years of doing this finance stuff. You guys call it commonplacing; to have a place where you record these things, and then you follow those patterns in real-time. I’ve been using my special patterns since before–and during–my Lynx-time to build systematic [trading] models from.

Now I have a sort of systematic cloud that I can use to build comprehensive models from. I use this to build portfolios based on what I believe in, and each portfolio has very special attributes.

Right now, I have 6 portfolios: 3 stock-based and 3 futures-based. These all have very low correlation. That’s how you create a good risk-adjusted yield.

How to Improve at What You Do:

The most important thing, like Anders Eriksson says in the book Peak, which you probably read, is deliberate practice. You can’t just practice something, you gotta practice it deliberately; have a feedback loop where you check what’s wrong, what’s right, and you’re mentally engaged in the process.

Learn the Fundamentals, Then Start the Pruning Process:

…and then, you have 1000 different indicators, 1000 ideas…. Usually, you start out in the “fundamental side” [of finance], as I did, and you read company reports and stuff like that. Then I got into the technical side of it, I’m more visually oriented, so it was more natural for me. I struggled to understand company reports.

Then you start filtering it down to the things that seem to work and provide some type of predictive value. This is when the pruning process begins. You start to remove everything that doesn’t add anything. This is difficult, but you gotta be able to throw out the things that don’t add value to the prediction. A lot of people are using a bunch of stuff that doesn’t have any predictive value. But they’re still using it because it’s convention, or maybe someone else told them it was good, but they never tested it themselves to see if it’s actually good.

On Achieving Expert Pattern Recognition:

Looking at a graph for 5-10 seconds is enough time for me to know whether to go long or short, because I’ve done this stuff so much that it’s become completely intuitive.

Once You Get an Edge, Keep Expanding it:

Another thing about pattern recognition, and advice for improving it. It’s not just that you get an edge, and you apply that edge, it’s a continual process. Getting an edge is not a static thing, you gotta keep evolving, evolving, improving. It’s like the Red Queen Syndrome, you’re running as fast as you can just to stay in place. That’s part of my job too–to always evolve and find new patterns.

On Working Hard:

Mikael: How much did you use to work?

Martin: All the time, actually. It’s a little funny when I see this mattress behind you–let’s not reveal what your studio looks like, heheh–but it makes me think of when we had an office that looked like this, and we were trading all day long–covering the Asian markets–and there was a mattress from the old owner, that I used to sleep on in the office. The joke was what had happened on that mattress before I started using it. It might not have been the most hygienic thing. In those days, I was working all the time and I had one of these pagers. My girlfriends went crazy when it went off in the middle of the night and I had to put in orders to Australia.

Are You Committed? Maybe Not if You Go Out Every Week.

You need to be passionate about this. I remember when I was 20 and just got started with trading, and I said to this guy, that it’s important to have passion, be committed, and work hard. He said: “Oh yeah, I agree.” We kept talking and I asked him, “so what are you doing this weekend?” and he said “I’m gonna see my family, go to the cinema with my girlfriend, and do this other thing…” and I just thought: What are you talking about!? I thought you said you were committed!

At that time, this was all I did. I was completely insane. That was it, just checking a bunch of charts. That’s the level of passion you need, or it’s not going to work out.

The Worst Business Advice He Ever Received:

Not starting Lynx. No one thought it was a good idea. Professors, banks, friends. Very few believed in it.

If you have an idea that people don’t believe in, it’s probably a good idea. You shouldn’t pay too much attention to other people’s opinions. Especially not our education system, which tends to be very biased. I believe you need to try to think for yourself as much as possible, and engage in self-studies. I don’t think I’ve learned anything useful in school; everything of value I’ve learned by being passionate about some subject and studying it for myself, reading or watching YouTube.

Education is only a ticket in somewhere.

How to Become an Innovator:

If you want to do something in a unique way, it’s important you try to do it yourself. Otherwise, it’s probably the same as everyone else. In finance, you can’t do it like everyone else, because the majority of people in the financial industry don’t add value. A lot of them think they do, but ~70% of them can’t beat index. All these people–analysts, advisors, etc, they couldn’t make money if their life depended on it.

What Set Lynx Apart From Other Hedge Funds:

At first you had an edge just by being very disciplined, being systematic and following the model, all throughout the 70s and 80s, maybe even the 90s. Then everybody started to understand it, and that edge began disappearing. When we started Lynx, I think we had an edge by using different types of models too; not just trend-following models, but also mean-reversion models and intermarket models, which made other bets than momentum. This allowed us to have a higher return than the average CTA.

Wait Long Enough to Come Back With a Fresh Mind:

We had a rule that no one could touch the model for 6 months at a time.

How Martin Invests:

Martin: I’m a big believer in [Warren] Buffett’s circle of competence. You have to stick to what you know. I’ve made few investments–that I believed in, run by people I know.

Ludvig: Is this how you think: to be long-term oriented, make few choices, and have strict criteria for what to avoid?

Martin: Yeah, exactly. It’s either a business idea that I’m extremely exalted by, or people that I believe in a lot.

Experiment a Lot to Test Your Ideas:

This is what you do all the time in the market. If you have a hypothesis about a market reaction, you take a position on it, and then you’re either wrong or you’re right, and you gotta calibrate accordingly. [George] Soros puts it well in Alchemy of Finance, you have to try to falsify your ideas, and the market is like a playground for doing this. I read this book a lot, it’s on my nightstand.

Overcoming Commitment Bias:

This is the mentality you need. When you have a bad day, you have to be able to just forget it.

I never think about the entry price of my position, I just think “is this something I believe in or not?” and if I don’t, it’s gone. Doesn’t matter if I entered at 100, 50, or 1.

People want to feel like they’re right.

Bad memory is a plus in high finance.

The Importance of Routine When Your Life is Chaotic:

I’m very much a routine-person. I try to do the same thing every day, eating the same things for breakfast. It’s like this: When you’re dealing with the market, there’s so much chaos all the time that you want to have some routine in your day to be compensated for when your risk swings.

On Seeking the Truth:

My main thing is truth-seeking. I’m always looking for what’s true in everything. I think this is very interesting. What is true? There’s so much that people believe is true, that isn’t true. There’s a lack of truth-seeking in our society.

I think it’s a lot of fun to make predictions. You get this “God-feeling”; you’re not supposed to be able to predict the future, but still, when you combine these multiple ideas, you gain an edge and you’re able to predict the future sometimes.

–And it’s a lot of fun when you do, and you get that kick, “I think this thing is gonna happen”, and then it does!

Have Clear Criteria for What You Do:

When I started my trading, my goal was (1) to have high absolute return, (2) high Sharpe Ratio, (3) the concept had to scalable, meaning that if I find that it works, I have to be able to double down on it, and (4) it had to have a low correlation with other CTAs.

My fifth criteria in doing this was to have fun! I don’t want to follow every beat of the market. I like to think, do research, and other things.

Global Warming is Based on Poor Science

Martin: Now I’m going to become very impopular by bringing this up, because it’s controversial, but I’m irritated by the environmentalist movement. I think it’s gotten way out of control and has become anti-humanistic.

I think this catastrophic Global Warming theory has a lot of problems. If you look at it from a purely scientific point of view, it’s a very poor scientific theory. A lot of people don’t really get this, but scientific theories are not wrong or right; they’re just good or bad. And, if you evaluate the Global Warming theory in a scientific way, it’s not a good theory because it makes very poor predictions–and now we’ve got data since the 80s with these models–and it’s made bad predictions, none of them have been right basically. And it also doesn’t explain temperature change throughout history.

Ludvig: You mean with ice ages and things like that?

Martin: Yeah, and that we’ve had much higher concentrations of carbon dioxide, up to 10 times higher concentrations of carbon dioxide in the atmosphere than we do right now, without it derailing our temperature. And then it’s also become something of a religion. There are different confluent factors at play, with media pushing it, politics pushing it, and so on. What I’m most angry about, is that they’ve kidnapped scientific values with what they’re doing. And I don’t believe a lot of people understand the whole agenda with the environmentalist movement.

I don’t think it’s about climate, carbon dioxide, and that stuff; it’s just about one thing, and that’s that they want us to minimize the impact that humans have on the planet. They look at the human being as a parasite, and if all people disappeared, that would be a fantastic thing, because then Earth would be clean and pure and preserved. I think this is a very anti-humanistic and boring way of looking at the world. I think the most important thing is us people; human flourishing, that’s the absolute most important thing.

Mikael: You could even see it the opposite way, that if you’re a humanist, then the bigger impact we make on the universe, the better.

Martin: Right, we want to make a big impact because it’s the only way to protect ourselves against the climate. The climate is very difficult and tricky to handle. It’s been one of our big problems in history; to protect ourselves from the climate. It’s killed a lot of people. We need cheap energy to protect ourselves against the climate. There’s a great book about this, Alex Epstein’s The Moral Case for Fossil Fuels, which I recommend. He explains all of this very well: why it’s morally correct to keep using fossil fuels, and not just a necessary evil. Right now we’ve got 1 billion people without electricity. That’s not a good thing… and yet we’re more worried about polar bears on Antarctica. It’s weird.

The Future of the Economy:

I’m very pessimistic about the future. We’re now in the eye of the storm with the tech bubble that burst and the financial crisis which we haven’t yet seen the end of. I think it’s going to end in some sort of currency crisis. The faith in currencies is going away because we’re printing too much of it. That’s when gold comes in handy. I think we’ll go back to some type of gold, whether that’s a gold-backed currency or gold tied to some type of crypto-thing, like block-chain. We need to tie the currency to something tangible, because fiat doesn’t work.

The Fourth Turning & Total War:

Martin: A fantastic book you guys need to read, if you haven’t, is The Fourth Turning. I just finished reading it and I’m totally fascinated. It’s written in 97, so it’s been around for some time, but it describes generational cycles and we’re currently in one of these fourth turnings. A fourth turning–which is the final out of four turnings–is when crisis occurs. The last time we had one of these fourth turnings was the 29′ crash, the Depression, which became the climax that led to World War 2.  That’s what happens in a fourth turning: the whole systems gets transformed. This doesn’t mean it has to be a war, but that’s what’s happened in every other fourth turning, going back thousands of years, as he does in the book. These cycles go on all the time [through history]. They’re roughly 80-year cycles, with 4 of these turnings.

Mikael: You mean like a Kondratiev cycle?

Martin: Right, but this builds more on generational interplay and how that impacts the world. This book is fascinating. The authors predicted in 97′ that ‘now begins a fourth turning’. I think it started with the crash in 2000, or the 9/11 attack in 2001, or the 2008 financial crisis. Somewhere there was the trigger. We haven’t seen the climax. I think the climax will be something like World War 2. It doesn’t have to be World World 3, but the wars that take place during fourth turnings are total wars. It’s not like Vietnam, which happened during a second turning, where it’s like ‘hey, let’s cut it short and go back home.’

Mikael: It sounds pretty reasonable that it could be a digital war?

Martin: Digital war, yeah I suppose. It could be a war against terrorism. Who knows. But some type of total transformation that changes everything. I think it will be some type of currency crisis, and then I think gold will be used. I think you want physical gold outside of the banking sphere, somewhere in Switzerland.

…. But it probably won’t come down to soup lines. This time, we’re falling from a much higher level than we did during the 30s. I don’t think it will be that bad.

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  1. Very valuable stuff. Those book recommedations are gold. Just bought “The Fourth Turning”. Cheers.

  2. Had not heard about him before, but he is evidently a nuanced thinker. I don’t know much about global warming but I definitely agree that many of those people (in my experience at least) are becoming a bit extreme, like a cult.

    I would be interested to know if he said anything about how he focuses on fitness and health, like if he uses special health tests, or has chefs, coaches and personal trainers.

  3. Finance newbie says:

    Fourth Turning and Kondratiev Cycles were easily my top takeaways from this, as someone who is trying to make money on the market.

  4. Thanks for taking the time to translate these key points, Ludvig.

  5. Thanks for the write-up. Quite informative and useful.

    A few observations:

    -Books seems great. I have seen several referenced by other successful business people.

    -I notice it’s usually average people who recommend school and such things whereas the outliers and rich have different kinds of advice.

    -What he says about experimenting in the financial markets make sense I guess. But how do you do it?

    • I don’t know much about financial markets or what Martin Sandquist meant by “experimenting”, but it should be pretty easy to /simulate/ the effect of buying and selling decisions without spending any money. Lots of people could (and do) calculate how much money they would have made if they’d done something like buy $10,000 of Walmart stock in 1970. What they don’t do is figure how they would invest $10,000 if they had it today, and then track how their investment decisions would have worked out.

      The main thing lacking from such gedenkenspiel, I think, is any influence on the market itself caused by one’s decisions. For a $10,000 investor this is probably negligible, but for someone who has millions to play with or who is watched by other investors, they would have to account for feedback. You won’t see the real results of an imaginary fifty million dollar takeover bid.

      • I appreciate the answer Abgrund. Your assessment on the “Walmart takeover bid” and interaction of feedback / unintended consequences with market is what George Soros has called his Theory of Reflexivity, I believe.

  6. Thank you for the translation, very insightful.

    Rather than raw intellectual capacity, I see someone who actually *wanted* to succeed. It happened that finance paid the bills.

    It’s obvious most people put their lack of money before everything else.

    Whilst earning an income is important, more so is how you’re able to scale it. It seems that Martin has been able to do this well, albeit at the detriment of his personal life on occasion.

    The story of the dirty mattress and other anecdotes are my main takeaway. The finance stuff comes *after* you commit to making something of your life. The absolute secret to all achievement is to “risk everything” on its eventual success.

    Congrats on the continued success of 25M!

  7. Would be interested in another excerpt if you have the time.

  8. Several interesting things here; I’ll start with some short comments and maybe come back later to the things I disagree with.

    “It was a revelation for me at the time that maybe intelligence wasn’t the most important thing.” Intelligence is what you make of it. A lot of people with high test scores and nominal IQ can’t figure out how to wipe their ass in the real world.

    “A lot of people are using a bunch of stuff that doesn’t have any predictive value.” This is true of a lot more than just market analysis. Many things in our society have no valid predictive basis. No one actually knows what the impacts are of “water saving” toilets, electrical codes, most medications, speed limits, import tariffs, education spending, prostitution laws, or literally millions of other things, let alone what the impacts would be of changes. That never stops anyone from demanding or resisting changes, though, or thinking they know the impacts.

    “Education is only a ticket in somewhere”. This is true, at least of uni. That doesn’t mean that education is a bad investment; the right ticket can be more than worth the price of admission. Education may also have some value for people of modest intellect and initiative who otherwise would learn nothing at all outside a very limited horizon.

    “People want to feel like they’re right.” Not being able to change their mind about anything, especially publicly, leads most people into stupidity. Whatever profits speculators make in the markets come mainly from people who can’t admit they were wrong. Sellers of goods and services also take advantage of this to rip off the same people over and over.

    “…there’s so much chaos all the time that you want to have some routine in your day to be compensated for when your risk swings.” This relates to important ideas that are explained in BooH.

    On “Fourth Turnings”: I think the Kondratiev cycle is baloney, but I noticed thirty years ago when I read about it that major U.S. wars have previously been separated by about eighty years – but not for enough cycles to be more than coincidence. Major European wars, seem to be spaced about fifty-sixty years (if you count the Crimean War) for several cycles up until WWII, which came prematurely and has yet to be followed by any major European war.

    Maybe two generations is the usual time it takes for a nation to forget the hardships and sacrifices of war.

  9. Concerning global warming: I think Mr. Sandquist’s comments rather miss the point. The ability of models to accurately predict details does not necessarily reflect the accuracy of their underlying principles. To draw a parallel, consider the accuracy of economic models. Their uselessness in predicting the month-to-month or even year-to-year behavior of particular indicators is notorious. If they claim to predict for example the exact effect on the price of hotel rooms that will result from the government printing a billion dollars a year of paper money and giving it to banks, we would be justified in scoffing.

    Nonetheless, the law of supply and demand is still valid, and everyone will agree that sustained printing of large amounts of money will result in inflation, even if we don’t know exactly how much money will be printed and can’t predict how quickly prices will rise in any given market. There may even be commodities whose price declines, at least temporarily, as complex waves of effects cascade through the economy.

    The basic scientific facts that predict global warming are incontrovertible. Carbon dioxide does absorb heat that would otherwise be radiated into space. Carbon dioxide levels are unmistakably higher than they were a century ago. That this is a result of industrial production of carbon dioxide is at least highly plausible. There is, at the least, substantial evidence that global temperatures are beginning to rise, as predicted several decades ago. Neither the failure of any particular models to explain any particular facts, nor any localized downward fluctuations in temperature, in any way contradicts the supposition that industrial carbon dioxide emissions will contribute, or already are contributing, to higher overall temperatures.

    If someone thinks otherwise, I think the burden of proof is on them to show why this would not happen, just as if someone were to claim that printing billions of dollars in cash would not raise prices I would expect them to present some plausible explanation why not.

  10. One other thing I found interesting: I’m at least as pessimistic as Mr. Sandquist about the economy, and I think a huge stock market crash is sooner or later inevitable. However I have doubts about any gold-based monetary system ever re-emerging. Fiat money has obvious problems, but gold has problems as well. One of these is that there is not, and never in all of human history has there been, enough gold to serve as an exclusive medium of exchange. Economies have always required some supplementation (e.g. silver coinage, barter) or some way of amplifying the supply of gold (i.e. fractional reserve banking).

    In a modern economy where nearly all transactions are carried out by mere accounting, not even paper bank notes, it’s hard to see how money could be securely backed by gold. The value of gold held by a government could never be more than a tiny fraction of the actual money supply, and the government – the same one that can’t handle fiat money responsibly – would have to set rules for how money can be redeemed into gold and for how much gold it finds necessary to keep in reserve.

    The past behavior of the U.S. government, when its money was allegedly backed by gold, suggests there would be little or no benefit of a gold standard relative to pure fiat money. I agree that something better is needed, but I don’t think gold will do the job.

  11. Hey Ludvig, I think as an English reader and avid fan of your work, please do a weekly or monthly summary of your biggest takeaways or content from your podcast, it’s ashamed I’m unable to tune in. Thank you and I’m looking forward for your new book :)


  1. […] BONUS: Check out Ludvig’s write-up in English of our interview with billionaire and hedge fund founder Martin Sandquist here. […]

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