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Andres Drobny: Going Against the Grain


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Andres Drobny is a man who likes to do things differently. He first got into the financial markets by means of a letter sent to the Financial Times; his professed trading style is to go against the majority; and he has sited a company that is focused on the global financial markets, in California – a location he acknowledges does not have the immediacy or intellectual stimulation of New York or London for instance, yet does provide a great lifestyle.

The letter that started him on the road to his present position was part of a determined effort, as he explains. “I was an academic in England, teaching at a tenured post at the University of London after studying at Cambridge. My students were running off to The City and earning three times what I was, which invoked a certain jealousy I suppose.

“I also wanted to test myself, so I got into a programme of writing letters, one of which was printed in the Financial Times – it was about the dollar,” he says. “It caught the eye of the head of research at Bankers Trust, who got in touch with me and so I went to work for Bankers. A year and a half later I was head of research.”

Drobny recalls very clearly what he said in that 1987 letter. “It laid out serious dangers to the dollar,” he says, “Dangers that I believe exist currently – in fact, last year the FT published another of my letters on that very theme.”

Drobny’s first employment move within the markets came about by rather more conventional means – word of mouth. “Alan Wheat had left Bankers to build the derivatives business at CSFB and was hiring former BT people. They, in turn, approached me to help build a global currency business at CS.”

In spite of a successful time at CSFB, by 1997 Drobny was restless. “I wanted to change my life,” he says. “We had built the business from virtually nothing to a $200-300 million/year business, but I wanted something different. I had spent a lot of time in California visiting clients, and was spending more and more time there. In the end, I decided to move to the beach and change my life entirely, and told the bank I was retiring.”

The retirement did not last long. “I got bored,” he explains. “So I approached a former client of mine, who gave me some office space, and I started writing a commentary on the markets for a few clients. From there the business grew – we are still a small company but we have an ever-widening product range which includes money raising and business management.”

Unconventional

In an era in which consensus seems to be the accepted way forward in most walks of life, Drobny remains committed to a trading style that appears to have as much to do with market dynamics as economics. “I am a counter trader by nature,” he says, “But the whole concept of counter trading is not about trading against a trend per se, it is about trading against conventional wisdom. It is about having a feel for what the objective reality is on a medium term basis and looking for trigger points when either you are at interesting risk/reward levels at which to put trades on, or the market is leaning too far the other way.”

Drobny is quick to refute suggestions that his style is risky, and argues that his approach actually involves less risk. “If you trade with the crowd and you are right, you tend to make a little bit of money,” he says. “If you’re wrong you can lose a lot of money. If you are trading against the crowd and you are wrong you often lose a small amount of money, but if you are right you can make a lot. Counter trading by my definition is about a well-balanced risk/reward strategy.”

Finding the weak spot in the markets is also key to Drobny’s strategy, as is the timing. He acknowledges that the more mature a trend becomes, and the more the market is with him, the harder it is to hold onto the position. He has been an equity bear for some time now, but is finding it harder to trade the market. “It’s very hard to trade equities now because the trend is mature, and you keep getting these 1500 point rallies which cannot be ridden out. You have to get out and then look for cliff edges to go short again,” he says.

As a means of describing this strategy, Drobny reveals that he recently sold US financial stocks. “The idea is this,” he says. “Japanese financials have priced in deflation, they are at 20-year lows, European financials are back to 1997 levels, but the US remains in the middle of its range of the past four years. The BKX Index on Bloomberg has a 600-900 range, but it looks to me like we are falling off a cliff at 750. This is what I consider to be a good risk/reward in a mature market, I can sell here with a stop just above 750 (he has recently moved his stop down to 700).”

Drobny has equally interesting ideas on the US dollar. One could be forgiven for believing him to be the eternal dollar bear as he once again believes the US currency is in trouble; however, this would do him a disservice – it is only a coincidence of timing.

Although he confesses that he finds the dollar’s resilience “puzzling” he remains confident another fall, against the European currencies, is on the horizon. “The consensus is that dollar strength after the equity crack in 2001 was due to portfolio flows; however, I believed this to be untrue,” he says. “My hypothesis is that it was corporate-driven, firms were cash starved and were borrowing wherever they could and repatriating it back to the US. Around the start of this year, firms’ cash flows improved and they did not need to borrow as much, which is how I caught the dollar down leg – the corporate inflow supporting the dollar was removed.”

Drobny compares these events to 1984-85, another time the dollar collapsed after a puzzling period of strength. “At that time, the dollar kept going up when everyone thought it should have been going down,” he says, “And it turned out to be portfolio flows from Latin America that were holding it up, as investors got out of that region as economic instability grew. When those portfolio moves finished, the dollar collapsed – I think it could happen again.”

Although he stresses that he uses “anything that helps me think about the market’s process”, history has its role to play in Drobny’s calculations. He currently sees comparisons between the current economic cycle and that of 1973-74. “I have been pushing the 1973-74 analogy for some time now,” he says, “Because that was the last business cycle that was a profit cycle. Yes, the oil price shock had a big role to play then, but it worked through the economic and financial system by hitting profits. That differentiates it from the interest rate cycles of 1993 and 1980-82.

“I believe that we are currently also in a profit cycle,” he continues. “And in such a cycle it is not clear that the authorities can change the trend. Milton Friedman made his reputation by arguing that the depression in the 1930s was due to policy errors. The conventional wisdom is that the depression in Japan in the 1990s was due to policy errors. However, I think there is an alternative opinion that says the authorities may be able in such circumstances to effect things on the margin. But, in a profit cycle the adjustment path requires recessionary conditions to resolve a problem of low profitability.

“What is happening to us now is like a laboratory: it’s a test case of one of the oldest debates in economic theory: Are depressions caused by policy errors or shifts in the rate of profits?” he queries. “My presumption is that Friedman did not understand the process that debt/default creates. In that light I would suggest that the authorities in Japan did the right thing, maybe they didn’t ease as quickly as [Fed Chairman] Greenspan would have and they stretched out the depression – it has been a long slow grind – but that is not so important. The real problem was they did not cure the cancer of bad loans. The US, equally is not clearing the problem of the current account deficit, which did not adjust during the downturn, therefore they have just delayed the day of reckoning.”

Discipline

Whilst at Bankers Trust, Drobny was somewhat unusual in that, as well as being head of research, he also traded. He stresses it was “just in small”, but those researchers that back up their ideas with trades are few and far between. Since leaving the banking community he has not actively traded, something he feels is a mixed blessing. He does get to sleep at night, but he also misses the “buzz” that trading brings.

“I do get frustrated sometimes, but it’s all about cost/benefit analysis,” he says. “Although I miss trading, and still get the itch, I have the lifestyle that I chose for myself, and it’s much better than that of a trader. I have been approached with the idea of running a fund [Drobny Global Advisory already has a link-up with California-based fund manager Big Sky Capital] and I get tempted, but my lifestyle is so pleasant I prefer to get the best of both worlds.”

Whilst acknowledging that it is a “close trade-off” between a largely anxiety-free lifestyle versus the excitement and potential returns from trading, Drobny also supplies further justification for his decision to remain an advisor. “My talent in the markets has been in finding good trades, my weakness has been in running those trades,” he says. “The really great traders are those that have the stomach to carry big positions for a long time – that’s how you make really big money in these markets. I find the trades, but typically find them difficult to run over a sustained period.”

Developing the debate further, he notes that whilst having a position can cloud an analyst’s judgment, it does provide discipline. “This is an extension of the ‘talk is cheap’ concept,” he says. “If you are trading, the first thing you have to consider is the risk/reward. Trading experience also lends some credibility. In fact, we built the currency business at CSFB around a ‘trade with us’ philosophy.

“Applying trading tactics also means that you have to be able to admit when you are wrong – you have to have a stop,” he adds. “And as with trading, it is not about always getting it right, it’s also about achieving consistency.”

So for now at least, the West Coast beach beats the East Coast office. Lifestyle has won out over the need to be close to the action. Drobny admits that he misses the “noise” of the markets that one can only hear from close quarters, but adds that as one door closes, another opens – in the form of Japan. “Whilst my timing has been thrown off a little by being in California and right at the end of the trading day,” he says, “By being here I get to look at Japan a little more. When I was in London I found there was a pretty aggressive and successful timing element to my trading that does not exist here, and on balance I think that being in California is a demerit in the markets. But, I have learnt to step away and think in a broader brush.”

As long as the ideas are generated, one suspects that the current mix of business and lifestyle will remain Drobny’s ideal. The ideas are continuing to flow freely – he currently has a preference for a trade at the long end of the Euribor curve and is repeating an old strategy from the ERM II days by looking for a sharp retracement in Eur/Czk as the markets realise that EMU accession may not come on time. These are further examples of his risk/reward counter trading style.

Drobny points out that a good trader knows there are two sides to an argument. Throughout his career he has apparently made a habit of going against consensus, but he stresses that he is always aware of the counter, and prevailing, argument in the markets. Perhaps his choice of location is another example of his contrary nature when it comes to the markets, but thus far, defying market consensus has served him well.

Profit & Loss

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