Accept Your Beatings: Five Lessons from Eric Crittenden
What a brutal drawdown, a copper mine, and a stack of report cards reveal about getting paid for discomfort.
Early in our conversation with Eric Crittenden, the founder of Standpoint Asset Management said something that ended up shadowing everything that followed: “The best opportunities present themselves when you are psychologically and socially under pressure. That’s a reoccurring theme over my career, for sure.”
When we last spoke with him, trend following was struggling badly. This time, he was describing one of the best environments of his nearly 30-year career, and the two facts were connected. The strategy got paid precisely because it had just been painful, and because most investors cannot stand in the spot where the paying happens. Across drawdowns, hedging desks, copper mines, and investor statements, the conversation kept circling the same question: who gets compensated for doing the uncomfortable thing, and what does it actually take to collect? Here are five lessons from a manager who has built an entire firm around the answer.
Lesson 1: The Recovery Starts While You Still Feel Terrible
Eric walked us through the worst stretch of his recent career without flinching. Heading into it, his fund held what he described as “pretty much a full risk on” book: long stocks across Europe, Japan, the US, and Canada, long the dollar, long gold, moderately short bonds. “Kinda like a 1980s style portfolio,” he recalled. “Exactly what you didn’t want on when it hit the fan.” Abrupt trend reversals whipsawed nearly everyone he follows in the industry, and the drawdown ran fast, from a mid-February peak to an early April bottom. Even Eric, who noted that “it takes a lot to get emotion out of me,” admitted he started to feel it near the lows, which happened to land around his birthday.
His summary of the experience was characteristically dry. “What can you do other than just manage your risk and accept your beatings when they come?”
The lesson sits in what happened next. The regime born after a drawdown, he explained, is “usually the most fertile soil for finding new trends that are not trusted.” The richest premiums hide in exactly the moves nobody wants to touch yet, and a systematic process earns its keep there because it “forces you to get on the right side of these new trends before you can come up with a thesis as to why they’re gonna work, and then get that thesis through an investment committee, and get everyone signed off on it.” By the time the story feels comfortable to tell, much of the money has been made. The investors who recover are the ones whose process never asks their feelings for permission.
Lesson 2: When Something Works, Sitting on Your Hands Is the Job
After a drawdown like that, the natural urge is to fix something. Jason Buck asked Eric what hurdles he puts in place to keep himself from tinkering under pressure, and the answer was revealing: he tinkers constantly, just never with the live system. On the research side, every drawdown produces a menu of plausible improvements, from profit targets to covariance tricks, and “it’ll always look great right then.” The test is applying the fix continuously through history. Run it that way and the pattern repeats: “It worked great two times in 50 years, but the rest of the time, it was a huge drain on your profitability, or it actually increased risk.”
That intellectual honesty leads somewhere humbling.
“For some people, myself included, it’s hard to just sit on your hands and do nothing, but that’s simply the right answer eighty-five percent of the time in this business. You know, if you have a good thing, don’t mess it up.”
When he decomposes the most successful long-term track records he has encountered, he finds approaches that are “blunt and simple and durable, and not very sexy,” while the dazzling, elaborate systems built by people he considers smarter than himself rarely produce comparable results. The discipline cuts in both directions. He removed nickel from his portfolio for structural reasons, a tiny market dominated by a couple of Russian oligarchs and murky counterparty risk, but he argued that kicking out a market simply because it has not trended is a terrible mistake. Cocoa has been his most profitable market since launch, and a lot of people skipped it because it was, in his words, such a pain in the ass for a couple of decades.
Lesson 3: Find Out Who Is Paying You, and Why
The best story of the conversation reached back to Wichita State University, where a young Eric founded a club called Students of Finance. Many of its members worked on hedging desks for Kansas farming syndicates, and their compensation baffled him. They generally lost money trading, yet “it seemed like the more they lost, the more that they got compensated. I’m like, ‘What is going on here?’” The answer, once he dug for it, reframed his whole career: hedgers are not trying to make money. Proper hedging reduces bankruptcy risk, which lowers a firm’s cost of capital across the entire business, a benefit worth far more than the trading losses.
His favorite illustration is a copper mine. When copper rallies, the implied profit margin tempts the miner to expand production, but ramping up takes months and real money, and prices could round-trip before the new supply arrives. Selling futures locks in the margin and makes the expansion safe. The miner goes short copper while being bullish on copper. So who takes the other side? “Not very many people wanna be on the other side of that trade, right? And we don’t have a vested interest, so to get us to come in and provide that liquidity to you, there has to be some sort of implied risk premium that we’re gonna collect.” He calls it the trend following risk premium.
He extended the logic to financial markets through what he termed “hedge-like behavior,” social and political pressure against chasing what is up or dumping what is down, then immediately undercut his own confidence: “I can’t prove this, but I think that’s why it persists is ‘cause you can’t actually prove it’s true.” The principle travels well beyond futures. Every durable return stream is payment for solving somebody’s problem, and if you cannot name the counterparty and their motivation, you may be the one with the problem.
Lesson 4: Markets Don’t Owe You a Schedule
For all that conviction, Eric’s estimate of the raw premium is modest, perhaps two hundred to three hundred and fifty basis points before diversification and leverage do their work. Worse, it arrives on its own clock. “You can’t just take, say, corn and say, ‘Every year I’m gonna make 6% in corn,’” he pointed out. “It’s like, no, it’s 10 years of dead money and then you make 150% return in corn.” Markets exist to match buyers with sellers and clear, and “the markets don’t care that we wanna make eight percent a year like clockwork every year. They do not care.”
His image for the right posture stuck with us. “It’s kinda like being a little boat on a big ocean. If it decides to storm, it’s not up to you. You just have to figure out a way to survive the storm and keep going west or whatever direction you’re trying to go.”
The industry’s answer to that lumpiness is to sand it down with profit targets and volatility smoothing so clients will hold on, and Eric conceded the motivation is noble. But those techniques “build fragility into the program,” surrendering convexity precisely when it matters. He compared it to a Floridian who pays hurricane insurance year after year, watches nothing happen, cancels the policy, and then meets the hurricane. He kept his own trend program pure and accepted the consequence: “If you do what’s right for people long term, they’ll punish you in the short term because they don’t like the symptoms of what you have to give up in order to get what they need long term.”
Lesson 5: Most People Don’t Actually Want Diversification
Eric has a recurring experience at social events. Someone learns what he does for a living and pulls out an investment statement with twenty or forty holdings, eager to discuss the laggards at the bottom. “They view it as a report card, right? There’s A’s, B’s, C’s, and there’s F’s at the bottom.” They want to fire every F. But a genuine diversifier must be earning an F while the risk assets earn their A’s; that is the entire job description. Firing it means, as he put it, “they’re essentially saying, ‘I don’t want a diversified portfolio. I just don’t want it.’” He has seen plenty of trend programs post positive long-run returns while their investors earned “negative investor-weighted returns because they buy high, sell low, buy high, sell low, wash, rinse, repeat over and over and over.”
His response was surrender, of a specific kind. He gave up trying to convince anyone, describing the effort as an uphill battle where “you’re just getting kicked in the face every single day of your life.” Instead, in the summer of 2019, his coworkers issued a challenge: “Just build what you would put all your money into and what you would stick with for 30 years.” He built it, a single fund pairing global equities with trend at roughly equal risk, partly with his own mother in mind, since she would henpeck him to death if it failed to grow along a reasonable path. The math behind it remains counterintuitive to most allocators: “You take a mean nasty thing like the S&P 500 that has huge drawdowns, and you push it into a trend program, and your drawdowns get smaller and your variance gets smaller and your returns get higher.” If investors will not hold the medicine separately, blend it into something they can swallow.
The Bottom Line: Getting Paid for the Uncomfortable Seat
Every thread of this conversation traced back to Eric’s opening observation about pressure. The market pays people who will occupy positions that are psychologically and socially difficult: buying what just went up, holding the line item earning an F, doing nothing when every instinct screams to act. Eric’s career amounts to a recognition that this premium is real but also humble, lumpy, and unclaimable by anyone relying on willpower alone. So he engineered willpower out of the equation, with systems that take positions before a thesis exists, a research process that vetoes seductive improvements, and a portfolio packaged so investors never have to stare at the uncomfortable part in isolation. The best opportunities arrive when you are under pressure. The investors who collect on them are the ones who decided, long in advance, exactly how they would behave when the pressure came.
Watch the full episode here: