Alex Krainer is the author of Mastering Uncertainty in Commodities Trading: Generating sustainable profits in forex, commodities and financial markets through trend following.
In 2021 we ranked this title as the #1 Commodity Investment book in our annual listing of the best commodity titles.
Mastering Uncertainty is a promising a concise and fluff-free guide to why retail and professional investors alike often lose in the commodities markets, and what solutions exist to turn their fortunes around.
Alex is the founder of Krainer Analytics, a quantitative analysis company. Among other tools, Krainer Analytics develops the ‘I-System’, a proprietary trend-following model used by professional investors.
I’m delighted to report that Alex has agreed to be interviewed by Financial Expert. Please read the full review bleow.
Alex Krainers’ title sits within the following investing book genres:
Interview with Alex Krainer
Please could you tell us a little about your professional background and why you felt inspired to write the book?
Alex: That’s a great question, actually. I started working in oil trading in 1996 as a market analyst. As a recent college graduate, I initially focused on the fundamental economics of the energy industry, but it did not take a very long time for the limitations of this approach to become apparent.
In the late 1990s, global economic growth was in full swing but capital favored investments in information technology, telecommunications and pharmaceuticals. Investment in oil exploration and refining tightened and in an environment of strongly rising demand and tightening supply, it seemed like a no-brainer that oil prices would have to readjust upward. This was pretty much the consensus view in the industry.
Well, it turned out to be very wrong: between 1997 and 1999 oil prices halved, from low $20s per barrel to $10! It became obvious that we needed to improve our approach with quantitative methods of market analysis and my thinking converged on trend following which has been the school of thought I subscribe to ever since.
But doing technical analysis of price charts and building trading algorithms is such an esoteric, strange way to make a living that at some point I thought I should try to articulate how and why I ended up doing what I do and to explain the ideas that have made this approach so compelling to me. I remember thinking to myself once, if my mum asked me what I do, how would I even explain it? So that’s how writing “Mastering Uncertainty” ended up on my ‘to do’ list.
In the course of researching and writing your book – did you come across anything that surprised you?
Alex: Yes, but it’s not that I researched in order to write the book – instead, it’s the research which preceded the writing. It’s the things that I discovered which ended up compelling me to write the book. What are they? Well, they are many in fact.
The first one perhaps, was the realization that econometric analysis and forecasting are actually a waste of time if not something worse.
Another surprise was the discovery of technical analysis. Mind you, I came out of the university fully embracing the Cartesian intellectual tradition, the rigorous scientific method and the reductionist rationalism in science. When my boss asked me to read John Murphy’s book on technical analysis, I could not believe anyone in their right mind could even take that stuff seriously. But experience eventually instructed me that technical analysis was far more useful in trading and risk management than the scholarly econometric analysis.
I also discovered that the real struggle in mastering uncertainty is less to do with understanding the markets and far more to do with mastering your own psychology. After all, whatever the markets throw at you, the results of your actions depend on the decisions you make and execute – so the key is your mind, regardless of what’s in the external environment.
I’ll give you a perfect example: if you look at the statistics disclosed by retail brokers you find that as many as 3 in 4 individual investors actually lose money. And that’s in an environment where we’ve had the greatest bull market in history – about as favourable as it gets. Everyone should have been making significant profits, but that’s not what happened.
For budding financial writers, what is the one piece of advice would you give to those writing to educate beginners about commodities?
Alex: Well, my first piece of advice would be, get started. If you think you have something to share with others, put that book on your ‘to do’ list and commit to it. Set out an outline and then commit to spending at least a little bit of time writing it every day – even if it’s a single sentence, keep with it. Having now published three books, I can tell aspiring authors this: writing a book has been far and away the greatest gift I could ever give to myself. To extract meaning and structure out of that jumble of thoughts that’s running your internal monologue almost nonstop and to articulate it in a way that you can then share with others is a very rewarding feeling. I would highly encourage it.
Another piece of advice I’d give to aspiring authors is this: buy a notebook and keep a journal. Don’t type it into your PC or tablet, don’t dictate it into a recording device – write it out by hand. It’s hard to explain this, but I found this very useful. So many things we come across we ultimately forget. But to have it in a notebook you can flip through and review, this can catalyze new, original ideas at a later stage.
What else do you have going on that you’d like our readers to know about?
Alex: As I mentioned, experience has taught me to embrace trend following as perhaps the best, if not the only valid answer to the problem of uncertainty. I’m a bit appalled to discover that such a large proportion of individual investors actually lose money in managing their own portfolios, so I would encourage them to look into trend following as a way to bring a more disciplined, strategic approach to their trading. This is particularly important today as we are facing the prospect of high inflation, the widely anticipated commodity super-cycle and the inevitable bursting of the financial asset bubble in many markets around the world. These conditions represent a great source of risk for investors, but at the same time, they represent a great opportunity. It all depends on how you navigate the markets and manage your risk.
And finally, I like to ask all finance authors; when saving and investing your own money, what is your preferred investing style?
Alex: I like investments that don’t keep me up at night – the kind that don’t require a lot of trading, and frequent rethinking of your risk and your positions. As I’ve shown in my book, we find the greatest profit potential in large-scale price events which often span years. I believe it is worth identifying markets in which we can anticipate such events, taking a tolerable risk and just letting the markets do their thing. A good example was what happened to the price of Gold in the 1970s. As inflation accelerated, the price of gold rose 24-fold, from $35 in 1971 to $850 in 1980. Such events tend to happen in many markets and now that we’re entering an inflationary period, investors should keep this in mind and consider sticking with low trading frequency strategies that should help them capture a good deal of value from the coming price events.