Ep. 285: Anthony Todd Interview with Michael Covel on Trend Following Radio

Synopsis: Today on the podcast, Michael Covel speaks with Anthony Todd. Todd is the CEO of Aspect Capital, one of the most successful managed futures trend following firms. Todd co-founded Aspect in September 1997. Before that, he was with AHL. Covel and Todd discuss why prices aren’t random; finding an inefficiency that the academic financial community refuses to acknowledge; the idea of “predictable” patterns in the market; the desire to know static positions; how crowd behavior drives trends; addressing misconceptions; using fundamentals in a systematic way; defining Todd’s medium-term style of trend following; why “it’s less about the genius of the trade and more about the repeatability of the approach”; how long you can be in a particular market before you give up on it; client understanding of trend following drawdowns; the phraseology of “crisis alpha”; the culture that Todd has built at Aspect; and Todd’s advice to young entrepreneurs. For more information on Anthony Todd, visit aspectcapital.com. Receive complimentary trend following DVD: trendfollowing.com/win.

anthony todd

Note: These episodes play by clicking “listen”. You may also want to “save as” each file to your device. All episodes on iTunes too.

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Posted in Interviews, Multimedia, Podcasts, Trading 101, Trend Following

Don’t Plagiarize The Lives of Others

Some words of wisdom from James Altucher:

Don’t plagiarize the lives of your parents, your peers, your teachers, your colleagues, your bosses. Create your own life.

Nice.

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Posted in Psychology

Dumb Luck

Don’t confuse luck with a profitable system. Dumb luck is just dumb luck:

Reader: I open[ed] an account with 10 USD and with trend following I make 20 USD in 6 days.

Covel: That is gambling. Not trend following.

Reader: But it’s profitable.

Covel: Someone wins the lottery, and you apparently won the scratch off this week. That’s not a system. Luck.

Note: Yes, some not so wise people occasionally write me.

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Posted in Feedback, Trend Following

Why Is Independence So Frightening?

Great article that hits the “sheeple” point home titled, “Why Is Independence So Frightening To Some People?”:

In past articles I have examined the nature of power and division in our society and have always come to the same conclusion, that there are only two types of people: the people who want control over others and the people who just want to be left alone. However, there are also subgroups that swim within the boundaries of each end of the spectrum. Often, psychologists and self-help gurus attempt to promote the idea that the defining quality of the average person’s life is whether he is a follower or a leader. I have seen this spectrum applied to every political and social organization.

Ironically, I have heard so-called “leftists” argue that the nature of their ideology makes them more adept at leadership and that conservatives are more prone to become followers (ostensibly because conservatives tend to be more religious). I have heard the same argument from people on the so-called “right,” only in reverse. The problem is that very few people in our society understand anymore what it actually means to be a leader. Most Americans today are followers, whether they know it or not. And sadly, followers tend to also seek out control over other people, if only to make up for the lack of control they feel in their own lives. That is to say, most followers tend to pursue petty opportunities for leadership.

The concept of leadership has become ridiculously warped. Many people feel that to become a leader, one must clamor his way through the system — be it government or corporate — and achieve artificial status, which others are conditioned to recognize and respect. One cannot become a designated “doctor”, no matter how personally skilled the individual, without earning the correct accolades from the establishment, accolades that are essentially bought at the right price or given as a pat on the head to those who excel at parroting the mainstream consensus. The same goes for scientists, economists, political authorities, etc. This creates a professional class, a percentage of the population whose opinions are treated with immediate reverence simply because of their titles.

The reality often ignored in mainstream thought, however, is that many “professionals” are actually more clueless than laymen, if only because they have been subjected to far more complex indoctrination. How many Ivy League economists, for instance, completely overlooked the inevitable collapse of the derivatives market and the housing bubble simply because they were taught by the mainstream system that such things do not happen in American finance anymore? The truth is, a glossy diploma from the establishment does not necessarily make one intelligent, nor does it automatically make that person a leader to be blindly followed.

Others in our culture assume that leadership is measured by level of influence. Influence, however, can be stolen, rather than earned. The number of fans and worshipers a person retains is not a measure of the real man or woman. Some people lie about who they are to gain popularity, while other people devour such lies because they are desperate for an icon to show them the path to an imaginary promised land. Celebrity — whether by aid of media, finance or bureaucracy — is almost always superficial.

Still other men and women believe that leadership requires empty gestures of cultural rebellion. Do our style preferences, body art, sexual orientations, musical tastes, obscure philosophical hobbies and elitist attitudes really make us different or unique? No, they do not. These things are an expression of our orientation to others, not an expression of our inner selves. One can live a life immersed in what we believe to be the wildly eccentric and still be an empty follower, devoid of originality and independence. My generation in particular has become so obsessed with superficial expressions of artificial individualism I think future historians will on day avidly study this era in stupified wonder. How many times a day do we log on to our social media website of choice or walk outside our homes only to ask other people to love and adore our looks, our cynical but smarmy sense of nihilism, or our wit, carefully crafted to please as large a portion of the collective as possible?

Carl Jung, one of the few psychologists in history I actually find useful, once said that all human beings are in search of a particular treasure, a psychological or spiritual treasure that is unique to them and makes them whole. Many people spend the entirety of their lives searching for this treasure in the world around them, rather than looking within, and they end their days feeling mostly miserable and thwarted. They look for it in politics. They look for it in religious representatives (without ever understanding their true relation to the religion). They look for it in wealth and stature. And they always come up short. This is the life of the follower, a life of endless transference in which complete happiness is always outside of oneself, somewhere over the horizon or in the hands of others.

One might ask what any of this has to do with independence and liberty? But, consider the implications…

How many socialists and collectivists in the world think THEIR happiness is dependent on the taxation of YOUR savings and labor, YOUR acceptance, YOUR submission to their ideal society. How many collectivists seek to complete themselves by forcing others to participate in their philosophical fantasies? How many of them will call you a “narcissist” or a “terrorist” because you only wish to make your own decisions free from the social pressures of their arbitrary group? They do not look within; they look without. And if you happen to be standing in their field of vision, you might become a prop in their self-serving theater.

Also consider that such collectivists will never be satisfied with the control they find in the outside world because the perfection they seek does not exist. Therefore, their efforts to force you to conform will only become more suffocating and demeaning to your humanity as time goes on. Followers are a cancer that never stops growing. They well eat up the Earth in order to diminish their fears. They’ll say they are doing it for the greater good, but in the end, they are only self absorbed brats playing at being socially responsible adults.

On the other end of the spectrum, there are many within the Liberty Movement who also suffer from the follower’s disease. They are the relentless crybabies on message boards screaming: “We keep talking about the problem but when are YOU going to give us a solution!?” Or they ask: “When is EVERYONE going to stand up and do something about this!?” Or, “When are all of you going to realize the magnificence of MY solution and follow ME?” Notice the inclusiveness of such statements. What they should be asking is: “What can I do myself to fix the problems I perceive?” These people are always waiting around for someone else to take action, while never taking action on their own. They are followers by default of their own apathy.

These are the folks looking for the next George Washington (or to become the next George Washington) on a white steed ready to charge into the center of D.C. like some ill fated Light Brigade. They are the bitter pills that rage over the fact that movement activists didn’t support their favorite random silver bullet solution flavor of the week, be it Bitcoin to ‘Operation American Spring’. They are livid because no one will march lockstep behind them into whatever halfhearted battle they envision. They become indignant when activists move to support methods outside of their ideal. They want YOU to follow the plan and planners THEY follow, no matter how poorly conceived the plan is, and if you don’t, then you must be some kind of traitor. They never consider that perhaps their ideal solution is actually destructive rather than practical, or that no one will rally behind them because no one has much faith in their abilities.

The point is, the fight for liberty is not a follower’s game. It is a fight that begins with individuals taking individual measures first and foremost, and if anything, inspiring others through their actions, not demanding fealty for themselves, or their pet strategies.

What can be done to instill independence and legitimate leadership in Americans once again? The conundrum is that such values cannot be instilled; they can only be encouraged. Each individual must make the decision on his or her own to stop looking for the world to fix itself, or them. Each individual must take the first step toward the long journey of becoming a self-reliant and self-owned human being. When faced with this conundrum, I can do nothing but make suggestions:

Find a useful skill, something that you love, and master it completely. Try to become the foremost expert on just one thing — not to impress others, but to challenge yourself. When people assert the incredible effort required to master a skill, they grow their sense of self-worth instead of measuring their worth by the guidelines of hollow academia or the collective.

Never look for traditional leaders. Always look for teachers. A real teacher is someone who seeks to make each individual his own leader through knowledge and empowerment. A real teacher has no desire to rule others, only to help others so that they do not feel the need to be ruled.

Independence comes from self-leadership. As long as you are reliant on the system or its participating oligarchs to decide your future for you, you will never be anything more than a follower, even if the system has given you a “place at the table” and a title to make you feel special. As long as you are vying for approval from the system or the collective, you will never be free. When you can stand in front of a hostile crowd of people and give your viewpoint without fear of how they may respond, then you are on your way to self-leadership.

If you see a problem in the world, stop asking permission to fix it! Stop waiting for the establishment to police itself. Stop concerning yourself with the actions of others and take your own actions, however small they might be. Revolutions are sparked in the minds of individuals and implemented by the hands of the courageous few. There will be no mass awakening and there will be no grand march to glory, so stop holding your breath. If there is an unrelenting evil in the world, then you must fight it if you expect anything to change. If you are the only person who recognizes it, then you may have to fight it alone. The potential for success or failure is irrelevant. It is the fight that matters.

If you are going to lead others, lead by example. Hopefully you have realized by now that true leadership has NOTHING to do with people actually following you. Much more important is the ability to show people how to achieve something more by building something of your own. There are also far too many Americans who seek to falsely elevate themselves by attacking the achievements of others from the anonymous comfort of their computers, rather than doing anything constructive on their own merit. There was a time when Americans were respected as people of action, rather than talk. When you do talk, do so from a position of strength. Talk as someone who has actually done something worth talking about.

If you are going to join, do so with the intent to learn, and to teach. All organization must be voluntary if it is to succeed in the long term, and voluntary organization thrives when participants contribute their knowledge and skill sets without sacrificing their individual self determination. The group does not outweigh the individual, because without the contributions of the individual, the group is meaningless.

Make a list of your dependencies. Do you have the skills to survive without a job? Without money? Without on-grid utilities? Without consistent aid from others? Can you live without modern comforts if you had to? Do you have the fortitude to endure great hardship? Have you ever endured great hardship, or have you avoided it your whole life? The more self-sufficient you are, the less you will need to look to the system or other people to make your decisions for you. You will become fearless, and fearless people cannot be ruled.

I believe independence terrifies some people because it requires a human being to challenge the unknown and take responsibility for the consequences if he fails. Followers trade in their mental and spiritual freedom to governments, oligarchs and gatekeepers so that they never have to face these difficulties. Sometimes, they are simply lazy. Sometimes, they lack confidence in their own abilities. Sometimes, they are just cowards. In any case, the result is the same: a life of relative ease riding the tides in a vast school of self-serving minnows but always prey to the ever circling sharks. I say don’t be a minnow; man-up, and build something of your own.

Good advice.

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Posted in Psychology, Trend Following

Victor Sperandeo Has Already Appeared!

Feedback in:

Dear Michael, I am a fan of you in mainland China. I love the podcasts you bring to us full of wisdom. I started to listen to you since the beginning of this year and never miss one episode. I’d like you to interview Victor Sperandeo. I want to hear his more detailed explanation on the trend and the trend changing.

Thanks a lot!

Yours sincerely,
[Name]

Victor appeared on my podcast. See: covel.com/itunes or trendfollowingradio.com. This type of feedback does make me chuckle. It happens all the time. I guess it becomes hard to see all of my guests across a list of 282 episodes. My usability needs to be fixed, clearly.

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Posted in Feedback, Podcasts

Ep. 284: Jason Fried Interview with Michael Covel on Trend Following Radio

Synopsis: Today on the podcast, Michael Covel speaks with Jason Fried. Fried is the founder and CEO of Basecamp (formerly 37Signals). Fried is also the co-author of the book Rework, which is about new ways to conceptualize working and creating. Fried and Covel discuss the first dollar Fried made online and other formative experiences; keeping business simple; making something more valuable than the dollars people give you; the intimacy of exchanging money; the idea of doing less than your competitors to beat them; building an audience; the “real world”; why an MBA program might not teach you much about entrepreneurism; corporate structure; focusing on what will not change; zen and the moment of right now; not focusing too far into the future; Fried’s experience with Jeff Bezos; and the idea of improvisation or “winging it” in business. For more information on Jason Fried, visit basecamp.com or follow him on Twitter at @jasonfried. Want a free trend following DVD? Go to trendfollowing.com/win.

jason fried

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Posted in Interviews, Multimedia, Not Wall Street, Podcasts

Baseball’s Science Experiment Gives Investors Something to Ponder

Great article from Brian Costa of the WSJ:

Take a peek inside the frazzled mind of a major-league hitter these days. It isn’t a pretty sight.

Pitchers are throwing harder than ever. Batters are striking out more often than ever. And their judgment is getting shakier: Hitters are chasing more pitches outside the strike zone.

It is enough to make some teams wonder: What if we could just rewire hitters’ brains to react to pitches better? As it turns out, at least three major-league teams are engaged in a covert science experiment to find out.

Several years ago, the Boston Red Sox began working with a Massachusetts neuroscience company called NeuroScouting. The objective was to develop software that could improve hitters’ ability to recognize pitch types and decide, with greater speed and accuracy, whether they should swing. The result was a series of no-frills video games that became a required part of hitters’ pregame routines in the minor leagues.

When Theo Epstein left his job as general manager of the Red Sox to become president of baseball operations for the Chicago Cubs in 2011, he brought the same methods to Chicago’s farm system. And last year, the Tampa Bay Rays made the neurological training games mandatory for minor leaguers—threatening to fine those that didn’t complete their assignments.

Now, a startup company with a near-identical name says it is in talks with four other major-league teams about providing tests to evaluate the neurological strengths and weaknesses of their minor-league hitters. The company, Neuroscout, would put electrode caps on players to measure their relevant brain activity during computer simulations of pitches coming at them.

Red Sox general manager Ben Cherington said the idea is to improve the connection in hitters’ brains between the visual stimulus of a pitch and the decision of whether to swing. “There’s a connection there,” he said. “And if you’re trying to hit a baseball moving at 90 miles per hour and moving in different directions, it probably helps for that connection to be strong.”

Though NeuroScouting’s games vary, most of them depict a ball coming from the pitcher’s mound toward the hitter. Using a laptop or tablet, players are given instructions such as, “Hit the space bar when you see the seams on the ball spinning vertically,” and are scored based on their reaction time and accuracy. The Rays have a leaderboard that shows players which of their teammates fared best on a given drill, like the high-scores screen at the end of an arcade game.

NeuroScouting executives declined to go into detail about their methods or their clients, citing teams’ demand for confidentiality. But Wesley Clapp, one of the company’s co-founders, said their software can identify how well each player’s brain reacts to specific pitch types—an outside curveball or a low fastball, for instance—and tailor their training to the areas where they need to improve the most.

“The best players have the best neural skills,” Clapp said. “It’s like a dimmer switch. The more you turn that dimmer up, you see more and more impact on the field.”

The need for hitters to react faster is clear. The average major-league fastball this year is 91.8 mph, according to the statistics website FanGraphs, a figure that has steadily increased from 89.9 in 2002. Hitters’ decision-making is slumping, too. They have swung at 30% of pitches outside the strike zone this season, according to pitch-tracking data, up from 27.9% in 2009.

But players are divided on the benefits of brain games that, for many, feel more like homework than baseball.

“For the most part, guys just seem like, every other day, ‘Ugh, I have to do this again,’ ” Rays outfielder Kevin Kiermaier said. “You try to get in a routine, and it’s like, ‘Oh, you have to do neuroscience or you’re going to get fined.’ ” He said that fines for players who skipped their assigned videogames were in the $25 to $50 range. Rays general manager Andrew Friedman declined to comment.

In the majors, where players have more autonomy, few choose to continue with the games. “People didn’t have that stuff 10 years ago. People could still hit,” Rays outfielder Wil Myers said. “Don’t try to reinvent the game.”

Nonetheless, teams’ interest in the neuroscience of hitting is only growing. What began as a training tool for the Red Sox has also become a scouting device. Before each amateur draft, the Red Sox assess hitting prospects in part based on how well they score on the NeuroScouting games.

Mookie Betts, Boston’s fifth-round draft pick in 2011, recalled meeting with a Red Sox scout in an empty classroom one day during his lunch period at a Tennessee high school. At the scout’s request, he completed a series of games on a laptop. “I was thinking, ‘What does this have to do with baseball?’ ” Betts said. “I guess I did pretty well, since he kept on pursuing me.”

Betts, 21, said the daily NeuroScouting drills he did in the minors helped put him on a fast track to the majors. “It gets your brain going,” he said. In 43 games through Thursday, his .363 on-base percentage ranked second among major-league rookies behind Chicago White Sox star Jose Abreu.

Teams still aren’t sure if any of this will boost their offense. The Red Sox have seen hitters such as Betts rate well on the neuro tests and blossom into productive players. But Cherington said other prospects have scored well and not panned out.

Likewise, Rays catcher Curt Casali said his hitting improved after the team introduced NeuroScouting while he was still in the minors last year, but has no idea if one had anything to do with the other. “You could just be a really good hitter,” Casali said.

The only thing teams know for sure is offense continues to fall. The major-league batting average is .251, which would be the lowest for a single season since 1972, the year before the American League introduced the designated hitter. The leaguewide strikeout total is on pace to reach an all-time high for the seventh consecutive year.

At this point, they don’t need to know an experiment will work. The fact that it might is enough. “Intuitively, it would make sense that this would be a helpful tool,” Cherington said, “but I just don’t know if anyone yet can prove that it’s predictive. The hope is maybe it can be.”

This type of “psych” article is exactly why I pursue so many behavioral experts for my podcast.

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Posted in Trend Following

Video Podcast Now Live on YouTube

Feedback in:

Hey Michael, Big fan of the podcast. This may be a weird question but have you considered doing your podcast in video format? Sort of like what Joe Rogan does. I think it would be pretty cool to get people to watch the interviews on video, whether your guest appears via Skype or in a studio.

Also, I’m a recent grad and instead of doing what all of my friends did, which is working at a bank, etc., I’m developing my own trend following system, which is going through its ups and downs but I feel very good about this endeavor. I read the first two chapters of your book Trend Following, along with The Complete TurtleTrader, Schwager’s Market Wizard series and Technical Analysis, and was convinced that this career path is for me. I think it aligns perfectly with nature in general. Anyways, your book opened me to a new world and a vast amount of information that I had no idea existed.

P.S. I will be on your podcast within 5 years. Watch me!

Thanks Mike,
[Name]

Thanks for idea, but does Rogan get 80 year old Nobel prize winners?! Meaning it takes younger media savvy people to do video. Maybe, I can pull your great idea off in the near future. That said, I did put my podcast on YouTube.

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Posted in Feedback, Multimedia, Podcasts, Trend Following

Phil Jackson’s 11 Mindful Leadership Principles

Phil Jackson’s 11 Principle’s of Mindful Leadership are worth reviewing, but #10 is the trend following creed:

10. When in Doubt, Do Nothing. “Basketball is an action sport, and most people involved in it are high-energy individuals who love to do something—anything—to solve problems. However, there are occasions when the best solution is to do absolutely nothing. I subscribe to the philosophy of the late Satchel Paige, who said, ‘Sometimes I sits and thinks, and sometimes I just sits.’”

Trend following = do nothing until you have to do something.

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Posted in Psychology, Trend Following

Trend Following Back in Fashion? It Never Left Fashion

Article from Miles Johnson titled, “Trend-following’ algo funds back in fashion”:

They are the fashion victims of the hedge funds world: funds that make money by copying exactly what everyone else has been doing. But more recently “trend following” trading strategies were regarded by investors as distinctly passé.

For most of the past decade, computer driven hedge funds that profit from identifying patterns across hundreds of different markets managed to make money consistently. The investors who placed money with these “black box” funds were rarely able to understand fully how they worked, but were confident that they would generate returns for their portfolios.

The financial crisis, and quantitative easing, threw a spanner in the works. With global markets drowning in central bank liquidity the computer-driven programs used by trend-following hedge funds severely malfunctioned, with many losing money over recent years.

Now, tentatively, it appears that many of these funds have shaken their long losing streak. AHL Diversified, the flagship trend-following fund owned by Man Group and one of the oldest of its type, has risen by 18 per cent this year, breaking a dismal run – having lost money in each of the past three years.

Isam, a $600m fund led by former Man chief executive Stanley Fink, has meanwhile surged by almost 22 per cent to become one of the top five performing hedge funds in the world this year according to data compiled by HSBC.

“At the start of the year many people said momentum following was broken and can never work again,” says one senior hedge fund figure. “I found that extraordinary. It was like in the late 90s when people in equity markets would say value was dead. To assume trend following was permanently broken was excessively brave”.

Other funds may not be performing quite as strongly, but they have at least not been losing money. Cantab Capital Partners’ $2.5bn quantitative fund is up 2.4 per cent compared with a painful fall of 27.6 per cent in 2013. Winton, founded by David Harding, the “H” in AHL, is up 2.2 per cent, a decline on the sector-defying 9 per cent return it generated for 2013.

While their very nature makes it hard to decipher exactly why the algorithms behind these funds have started to fire again, one recurring explanation the quants that run them identify is an end to the high levels of correlation across many markets seen during QE.

Trend followers, which mostly trade in and out of liquid futures markets across most asset classes, were left particularly frazzled. The high correlation removed the ability of the algorithms driving these hedge funds to spot the same trends as they could before. To make matters worse markets tended to fall together just as they had earlier risen in tandem, meaning any gains were soon wiped out.

Central banks determination to stave off an economic depression following the banking crisis of 2008 with record low interest rates had the effect of causing many markets to rise at the same time.

“The more correlation we have the less markets we have,” says a manager at one trend-following fund. “Since 2008 we basically lost our diversification, and we have only just got that back.”

Some managers argue that a smaller size can help their funds trade more easily in and out of less liquid futures markets, such as milk futures, and make money where others cannot.

“We have definitely benefited from our ability to allocate meaningfully to wider sets of differentiating markets,” says Mr Fink of Isam. “The significant experience in our team helps us allocate to a number of markets that are often both capacity constrained and challenging to trade efficiently and we will continue to exploit this area of advantage.”

All agree that this year has been the first since the crisis without a large number of interventions by central bankers in markets, meaning some asset classes are showing signs of reverting back to trading on fundamental factors.

There have been more unexpectedly sharp movements across certain markets this year, such as soft commodities and currencies, which computer-driven strategies have been able to take advantage of.

Conventional market wisdom at the start of the year believed that bond yields could not fall any further, meaning trend followers that were correctly positioned have made money as human traders rebalanced their positions.

And for now, the computers are winning. “Their models seem to be picking up something the [human led] macro fund managers are not,” says Alper Ince, managing director at Paamco, a $9bn investor in hedge funds.

Has there ever been an accurate media piece on trend following?

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Posted in Trend Following
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