Learn how one man made his trend following fortune and became a legend: Watch the free video now.
Hi Michael. Dan in Boston here, hope you are well. I’ve been devouring your podcast after I heard you on the Stansberry podcast. Thanks so much for sharing all the info / state of mind, it’s F%$ing awesome!
Question for you regarding dividends. Will you ever hold a stock that’s trending downward because it’s throwing off solid dividends? I know you can’t talk individual stocks (assuming you can’t) so I’ll just say I bought a BDC that’s throwing off a monthly dividend, annual rate is over approx 12%. I’ve got a few other BDCs all throwing off similar dividends which are generally trading sideways but I’m up on a couple of them. Seems like they are a hidden jewel that nobody cares about. I bought them after the were dis-included from the Russell 2000 ETFs so I got ‘em at rock bottom prices.
I bought the one I’m referring to before I discovered and began to knuckle down into trend following. It’s trending downward but very slowly. My technical indicators are obviously negative but they aren’t screaming toward the bottom, just very slowly shaving off a few cents per day. I may of course hit my stop, however it’s only about 15 cents shy of my buy price, and the dividend is keeping me slightly ahead and reinvesting it I’m still in the green. I’m adjusting my stops to reflect that as well, so either way if I stop out I’m not gonna get hurt too badly, if at all.
Question is do you ever factor dividends into your trend following? I probably answered my own question as I’m still making money on the stock, but would love to have your feedback.
Keep up the great work man, I just finished chapter one of the Little Book of Trend Following and I’m sure within the next few months I will read all your books. I too believe people are sheep and freeloading off the system, I’m an entrepreneur anyway, so trend following is a natural extension of my life.
Thanks Dan for the nice words! Let me keep it simple–judge the trade by price action always (not dividends). Holding onto a losing stock because it is spinning off a dividend is not trend following. Perhaps, the math works and it is ok for your situation, but it’s just not trend following.
Trend followers understand that life is a balance of risk and reward. If you want the big rewards, take the big risks. If you want average rewards and an average life, take average risks. Charles Sanford gave a commencement address that is timeless. It said in part:
“From an early age, we are all conditioned by our families, our schools, and virtually every other shaping force in our society to avoid risk. To take risks is inadvisable; to play it safe is the counsel we are accustomed both to receiving and to passing on. In the conventional wisdom, risk is asymmetrical: it has only one side, the bad side. In my experience—and all I presume to offer you today is observations drawn on my own experience, which is hardly the wisdom of the ages—in my experience, this conventional view of risk is shortsighted and often simply mistaken. My first observation is that successful people understand that risk, properly conceived, is often highly productive rather than something to avoid. They appreciate that risk is an advantage to be used rather than a pitfall to be skirted. Such people understand that taking calculated risks is quite different from being rash. This view of risk is not only unorthodox, it is paradoxical—the first of several paradoxes which I’m going to present to you today. This one might be encapsulated as follows: Playing it safe is dangerous. Far more often than you would realize, the real risk in life turns out to be the refusal to take a risk.”
Life is fraught with risk. There is no getting away from it. However we try to control the direction of our lives, there are times when we fail. Therefore, we might as well accept that life is a game of chance. If life is a game of chance, to one degree or another, we must be comfortable with assessing odds in the face of risk.
In the early 1990s, Commodities Corporation (a famed trading incubator that taught and bankrolled new traders) invited a group of Japanese traders to its company for in-house training. One up-and-coming trader at Commodities Corporation took his new friends to lunch. He told his guests how important risk management was, and to risk only 1 percent per trade. He was clear that experiencing small losses were part of his process to ultimately finding big winners. The Japanese traders, with puzzled looks on their faces, asked, “You have losses?” Ouch! Time for everyone regardless of country to learn about small losses, and to love them, even if that means your account will occasionally have drawdowns. What are drawdowns? Drawdowns are those non-fun time periods where your small losses add up to reduce your account size. They happen. The key is to quickly and successfully recover from them by sticking with your trend trading system and waiting patiently for big trends to reappear, which let you get back to making new money again (and paying for all of those small losses). How much can you lose? That’s an important question to answer, and it comes down to the risk you take (which will vary by your personal choice). However, trend following is much easier to believe in when you consider the length of professional trend trading track records, especially the really long track records that offer proof of viability. That said, some will spend a lifetime trying to avoid any loss (even though that is impossible).
Synopsis: Michael Covel speaks with Megan McArdle on today’s podcast. McArdle is a Bloomberg View columnist who writes on economics, business and public policy. She is the author of “The Up Side of Down: Why Failing Well Is the Key to Success”. She founded the blog “Asymmetrical Information”. Covel and McArdle discuss “trophy kids” and taking the monkey bars away; the idea of a regulator out there trying to guarantee our safety; why the companies that make it aren’t the ones with the best strategic plan–it’s the ones that execute (and fail well); the power of experimentation; Nobel winner Vernon Smith and experimentation; the idea of learning in crisis; how sunk costs are difficult for a large part of the population to grasp; Van Halen, errors, and M&M’s; normative error; small, manageable risks; forager morality vs. farmer morality; and a story about Kentucky Fried Chicken (KFC). Megan McArdle can be found on Twitter at @asymmetricinfo. Want a free trend following DVD: trendfollowing.com/win.
Consider some feedback:
Michael, a couple of things: first, in your very interesting interview with Ben Hunt, you and he spend some time criticizing financial regulations and regulators. Particularly you dislike the idea of private trades needing monitoring and some oversight. Yet, it is clear, the private trades of 2008 that packaged mortgages as first class investments sold to others – when clearly they were not – damaged our economy in very disastrous ways. And this was possible because all these trades and investment vehicles were sold in private with zero oversight or regulations. It seems that oversight and regulation were very necessary but had been dismantled over the years. In addition, allowing the banking industry to no longer hold deposits safe from trading loss had a terrible domino effect. So I have trouble with the fully anti-regulation commentary I sometimes hear from your stuff. But on to other things – since neither of us can control that anyway. The Motley Fool is in our weekend paper. The following article appeared this Sunday. It had some content that seem to contradict some of your commentary. Specifically, putting Soros as a fundamental trader and then the study that showed fundamental traders having more success than technical traders. Care to add your clarifications for all our benefit? One I see that is a glaring difference is the idea that all technical traders predict the outcome for a stock. Here’s the article:
Technical or fundamental?
As you learn about investing in stocks, you’ll run across two key approaches: fundamental analysis and technical analysis. We at The Motley Fool have long favored the former. Fundamental analysts study companies and make investment decisions based on factors such as financial health, competitive advantages, management quality, growth prospects, profitability, price-to-earnings (P/E) ratios and macroeconomic factors. In contrast, technical analysts focus on charts reflecting companies’ stock price movements and trading volume, and make investment decisions based on patterns they see in them. Fundamental analysts explain that shares of a company’s stock represent a piece of a business, and that investors are buying a piece of that company’s future cash flow generation. Technical analysts believe that price patterns repeat themselves because we humans react similarly to similar market events — so they seek certain patterns.
Technical analysts ignore many determinants of a company’s performance, including its regulatory environment, country of operations, etc. If two companies, no matter how wildly different, happen to have similar historical charts, a technical analyst will predict similar outcomes for each. That defies logic, don’t you think? Think, too, of the world’s most famous successful investors, such as Ben Graham, Warren Buffett, Peter Lynch, John Templeton, Shelby Davis, Philip Fisher, George Soros, David Dreman and John Neff. Despite their different approaches, each outperformed the overall market using fundamental analysis. It’s hard to come up with a group of hugely successful investors known for using technical analysis.
A 2008 study by New Zealand’s Massey University tested more than 5,000 technical analysis strategies in 49 different countries. The result? Not one added value “beyond what may be expected by chance.” A study of Dutch investors found technical investors earned lower returns. You can succeed with a bad strategy, but usually only in the short term and often due to luck. The evidence strongly suggests that buying stocks using technical analysis will lose you money. Large nest eggs can be built over many years using fundamental analysis — or simply by investing.
The article at the end that criticizes TA and cites Dutch investors, I talked to them. Arvid Hoffman is on my podcast explaining what it is they exactly studied, and it was not trend following. Fool article misleading as usual–since their inception. Further, it is the typical article critiquing predictive TA and ignoring reactive TA (or trend following). Additionally, regulation is fine as long as it is equally applied and not part of an overall crony capitalistic system. As of now it is clearly part of a crony system. Lastly, the only reason the private trades were a disaster in 08? Because the government bailed out GS with QE and ZIRP. Let the bad companies fail. Bankruptcy regulation was firmly in place in 08. It was not allowed to work because the system is rigged. The issue is not more regulation or less, it’s a case of a rigged system.
New York (May 02, 2014, 6:27 PM ET) — The special master in the Refco Inc. securities fraud multidistrict litigation on Friday recommended that a New York federal judge enter a $669 million judgment against five defendants, for their roles in the scheme that brought down the massive commodity brokerage.
Under Ronald Hedges’ proposal, ex-Refco Group Ltd. President Tone Grant, former Refco CEO Phillip R. Bennett, former Refco Vice President Thomas Hackl [see: Acies Asset Management, S.A.], PlusFunds Group Inc. Founder and Chairman Christopher Sugrue, and Refco Group Holdings Inc. would pay $669,370,9991, plus $78,430 in interest for each day after April 29 until the judgments are entered.
While the defendants had already been judged years earlier to be liable by default, Hedges’ report focused on the damages the group owed stemming from the massive losses Sphinx and PlusFunds investors incurred.
The special master indicated that the group should be held “jointly and severally liable” for the mutlimillion- dollar judgment, leaving the individuals’ portion of the damages owed unclear.
The recommendation will now head to U.S. District Judge Jed S. Rakoff, who is overseeing proceedings for the consolidated suits.
The five defendants are all named in the sprawling litigation brought by liquidators and trustees for Sphinx Ltd., which was induced into depositing hundreds of millions of dollars into accounts that were exposed in the $1.5 billion Refco scheme.
Sphinx and PlusFunds, which helped manage its investments, lost approximately $263 million when Refco collapsed in 2005. Sphinx has since entered liquidation proceedings, and PlusFunds filed for Chapter 11 bankruptcy protection in 2006.
Many were found guilty of criminal charges related to the con, including Bennett, who is serving a 16-year sentence, and Grant, who received a 10-year term of his own.
The suits arose from revelations that Refco executives had concealed $430 million in debt through complex trading and lending schemes and shell companies, in an effort to bolster the company’s financial reports.
Refco sought Chapter 11 protection in October 2005, two months after a $583 million initial public offering, and about a year after it was purchased for $1.9 billion in a leveraged buyout by Thomas H. Lee Partners LP.
Five days before Refco sought protection, more than $312 million was transferred from the Sphinx accounts at Refco to unprotected offshore accounts. The hedge fund group ultimately settled with Refco creditors, agreeing to turn over $263 million.
Meanwhile, federal investigators believe Refco had been covering up customer trading losses by transferring securities to appear as debts owed by Refco Group Holdings Inc., a holding company controlled by former directors. Directors later hid RGHI’s receivables from auditors by transferring funds to make the debt appear to be from an entity not related to RGHI, prosecutors alleged.
The plaintiffs are represented by Lee M. Andelin, Leo R. Beus and Dennis K. Blackhurst of Beus Gilbert PLLC; and David J. Molton, Andrew S. Dash and Mason C. Simpson of Brown Rudnick LLP.
Counsel information for the defendants named in the recommendation was not immediately available Friday.
The case is In re: Refco Securities Litigation, case number 1:07-md-01902, in the U.S. District Court for the Southern District of New York.
Another article from Bloomberg, “Ex-Refco Executives Hit With $672 Million Court Judgment”:
Refco Inc.’s former Chief Executive Officer Phillip Bennett and two of his ex-colleagues were ordered to pay $671.7 million to Sphinx Providence Ltd. and its hedge funds for losses stemming from a $2.4 billion fraud at Refco.
U.S. District Judge Jed Rakoff assessed the damages, including interest, against Bennett, former senior vice president Christopher Sugrue, former executive vice president Thomas Hackl [Acies Asset Management, S.A.] and Refco Group Holdings Inc., an entity Bennett owned and used to hide more than $1 billion of debt.
Once the biggest independent U.S. futures trader, New York-based Refco collapsed in 2005, two months after raising $670 million in an initial public offering. Refco Inc., as it was known after the IPO, filed one of the biggest bankruptcies in U.S. history, after having revealed Bennett’s holding company owed it hundreds of millions of dollars.
In the ruling, which was made public today in Manhattan federal court, Rakoff followed last month’s recommendation of a special master assigned to the case. Rakoff didn’t address the special master’s conclusion that former Refco Group Ltd. President Tone Grant should also be held responsible for the damages.
Bennett is serving a 16-year prison sentence. Grant is serving 10 years.
Sugrue was chairman of PlusFunds, which filed for bankruptcy in March 2006 after the disclosure of its relationship with Refco helped spur investor withdrawals.
The details are not pretty.
Thomas Hackl (more)
Also read the whitepaper from Edward Pekarek (Pace Law School) titled “The Due Diligence Defense and the Refco IPO”: here.
Trend following is no more dead than the sport of sailing, or the act of kite flying would be considered dead, if for a period of time the wind didn’t blow. Like a sail boat or a kite, a trend following trading model is designed to capture the power of environmental forces. When the requisite environmental forces don’t occur for stretches of time, activities that depend on those environmental forces are not going to be successful. But if the wind stopped blowing for a month, would that mean that the concept of sailing or kite flying no longer makes sense? Of course not. The physics of both activities would still make perfect sense, and once the wind started blowing again, sail boats will sail and kites will again fly. The same holds true for trend following. Just as the wind will always return to blow in the future, the forces that drive price trends, greed, fear, euphoria, panic, will return at some point and when they do, trend following trading models will make a great deal of money.
Synopsis: Michael Covel speaks with Cullen Roche. Roche is the founder of Orcam Financial Group, a financial services company based out of San Diego. He also runs a very well-known blog called Pragmatic Capitalism (pragcap.com). His new book, Pragmatic Capitalism, was just released. Roche takes apart the soundbites of the media and gets at how things really work. Covel and Roche talk about entrepreneurism; investing in yourself; the advantages of starting a blog; why the word “pragmatic” is a word that has become central to Roche’s universe; eliminating your biases; why the US going bankrupt is a myth; the myth that central banks exist to enrich bankers; Dr. Laurie Santos and her work with monkeys; bringing risk down to something we can measure; Warren Buffett; and hedging your bets. For more information on Cullen Roche, visit pragcap.com. Want a free trend following DVD? Go to trendfollowing.com/win.