Ep. 231: Two Centuries of Trend Following with Michael Covel on Trend Following Radio

Synopsis: Michael Covel discusses a white paper titled “Two Centuries of Trend Following”. Covel likes the fact that when he goes through their references, it’s all other academic white papers. Then, sandwiched in between the other white papers, “The Complete TurtleTrader” is referenced. Covel posted this on Twitter and received a response in which someone wanted to talk about the last couple of years of trend following performance. Trend following performance is going to differ depending on the trader, what’s in their portfolio, the type of system they’re trading, and the risk they’re taking. There isn’t some one magical elixir. Covel believes that you’re better off in the long-term trend following world, rather than in the short-term world. Still, the person Covel interacted with on Twitter was not concerned with the two centuries of trend following that the white paper talked about, but rather, “what have you done for me lately?” Covel moves on to talk about a recent monologue he did concerning a Yahoo Finance article in which he questioned the vocabulary of the talking heads. Covel looks at the responses to that episode, and then the larger view: Most people don’t have the foggiest clue what trading is; what Wall Street is. They’ve been listening to nonsense in the media. The lure is still out there. The buy and hold lure is still out there. But even worse is that “get rich quick” attitude. People don’t understand it as a science. Covel looks at at “The Wolf of Wall Street” and analyzes a segment from the movie. Covel uses it as an example of how most people view money-making and Wall Street. People don’t think like Covel’s podcast guests and writing subjects; they don’t think like Marty Bergin at Dunn Capital or Ed Seykota. This is what Covel is up against. He wants people to understand the science of trading. Covel also notes that his old newsletter system is being changed. If you want to continue to receive Covel’s newsletter, go to trendfollowing.com/subscribe-now. Want a free trend following DVD? Go to trendfollowing.com/win.

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Posted in Multimedia, Podcasts, Trading 101, Trend Following

Trend Following Firms and Trading Abroad

I receive emails every week asking for advice on trend following firms. Consider:

I am a listener of your podcast and have spent some time studying what you advocate. That said it seems like the only logical way to make investments in the traditional markets. In 2008 my retirement portfolio suffered a big loss and I began to reevaluate a life time of main stream traditional advice. Finding you and [Name] was a reinforcement of what I was realizing to be the true situation of the US monetary system. Suddenly all was clear to me. Being a Boomer I decided if I wanted to keep anything I had worked for it was time to make a change. At present I have taken a buy out from my old company and so I am either unemployed or an entrepreneur depending on how you look at it. My question: is there a firm who can take my existing portfolio and some cash and mange it using the trend following method. [Name] advises moving all your funds to Singapore or Hong Kong for safety which I agree with, but establishing a brokerage account to be managed there appears to be a problem for US citizens. Is there a company in the USA or elsewhere that can do this? The funds amount to about 1.6 million in USD value currently.

Thanks for any information.

M.J. [Name]

You will find many trend names across my 5 books. Best to start there. Unfortunately, I have no insights for USA citizens opening brokerage accounts abroad.

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Posted in Feedback

Ep. 230: Mark Minervini Interview with Michael Covel on Trend Following Radio

Synopsis: Today on the show Michael Covel speaks with Mark Minervini. Minervini is the author of ‘Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market’ and was featured in Jack Schwager’s ‘Stock Market Wizards’. Minervini and Covel discuss the importance of influences outside of the finance world; Minervini’s atypical background in music and how he got to where he is today; capturing ‘super performance’ and the trend; the importance of cutting your losers short; how Minervini spends his day; Richard Love and ‘super performance’ stocks; why Minervini is not a fan of diversification beyond the minimum amount that you can get away with; Richard Donchian, Jesse Livermore and their influence on Minervini; timeless strategies; Paul Tudor Jones and ‘losers average losers’; the importance of not just trading what you know; ‘new high ground’ and not being afraid of buying higher highs; risk management and bet sizing; the biggest areas where new traders often start off on the wrong foot; Howard Lederer and poker players as an analogy to traders; why you shouldn’t even turn on the television as a stock trader. For more information on Mark Minervini, go to minervini.com. Want a free trend following DVD? Go to trendfollowing.com/win.

Minervini

Note: These episodes will all play by clicking on “listen”, but they are large MP3 files. You may want to “save as” and save each MP3 to your desktop. All episodes on iTunes too.

Note: These episodes will all play by clicking on “listen”, but they are large MP3 files. You may want to “save as” and save each MP3 to your desktop. All episodes on iTunes too.

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Posted in Interviews, Multimedia, Podcasts

Trend Following, Momentum, Systematic Quant? Avoid the Mental Masturbation of the “Name” of the Game!

Article seen by Francois Sicart titled “Don’t Get Sidetracked by Momentum Chasing”:

In an early philosophy course, to introduce the concept (and danger) of extrapolation, our professor used the example of an Englishman landing in France for the first time. Seeing two red-headed women on the dock, he immediately calls his friends in London to report that all French women are red heads. The title of a recent Casey Research paper, “Extrapolation Fever”, recently reminded me of this example and its title seemed particularly timely. Extrapolation is the assumption that you can generalize from limited samples and/or that current trends will continue forever. Sadly, we all have a tendency to extrapolate and I have long believed that this is one of the worst biases of investing, responsible for the destruction of innumerable portfolios. This was the reason for my early adoption of a contrarian investment approach. Possibly the second worst investment bias is our need to believe a good story. As a trend matures, its causes become obvious to the average investor. He or she comes to assume that this is the way the world always works, forgetting that by the time a story is obvious to a majority, it is already reflected in the price of a stock or of the market. My view, and that of many contrarian investors, is that the world is cyclical. Economic indicators, for example, tend to fluctuate around either a long-term trend or a historical average, periodically “reverting to the mean”, as statisticians say. Financial markets, which are importantly influenced by the excesses of crowd psychology, do not only revert to the mean, but usually go through it, toward a more “exuberant” high or low. In financial markets, the most common use of extrapolation is called momentum investing, which consists of buying what has been going up on the assumption that it will continue to go up. Numerous studies have documented that momentum investing works most of the time: stocks and markets tend to do as they have been recently doing. The only problem is that many studies also show that (almost by definition) momentum does not work when it counts most, i.e. at major market turning points. And as I have pointed out before, in investments it is not how often you are right that counts; it is how much money you make when you are right. There is no need to revive an old argument about momentum versus value. Let me just say that I personally don’t know any rich momentum investors – at least not any that made and kept a fortune in the stock market. I do know a few rich and successful value contrarian investors, however. There also are some that I have mentioned in the past, whom I do not know but enjoy watching and reading: besides Warren Buffett and Charlie Munger, they include Jeremy Grantham, at GMO.; Howard Marks at Oaktree; and William Browne, of Tweedy, Browne. We not only have a commonality of views, but also similar experiences and career paths. All three gentlemen can also claim superior long-term investment records—and by long-term, I do not mean five year; I mean more than thirty years…There is no lack of successful investors besides those I mentioned above, and my requirement for a thirty-year-plus record may seem self-serving, since only an older investor can have such a record. For example, 56-year-old Seth Klarman, founder of the Baupost Group, has a stellar 25-year record and writes highly stimulating shareholders’ letters, BUT… I will respond like famous Chinese leader Zhou Enlai who, when asked what he thought was the significance of the French Revolution of 1789, reportedly answered: “It is too soon to say”. Today, there is one trend that has been in effect for a very long time and whose causes are well understood and routinely enunciated by even the financially less-literate: declining and low interest rates. Interest rates approached 14% in 1984 and, although recently doubling, have remained under 3% since mid-2011. And, while interest rates declined by 80% almost without interruption for 30 years, the Standard & Poor’s 500 Index gained a remarkable 1041%. Interestingly, I am finding the investor consensus is now overwhelmingly anticipating that interest rates will eventually rise again. So, expecting them to do so is not exactly contrarian. But my concern goes beyond just the stock and bond markets. Thirty years of “suppressed” interest rates, as economists say to describe the central banks’ aggressive role in reducing and almost eliminating financing costs in the economy, must have been addictive. All our instincts and economic reflexes are now unconsciously geared to this misleading environment and, for investors who have no experience pre-dating the early 1980s, it would take an exceptional imagination to picture what it was like to invest in an environment of high and rising inflation, high and rising interest rates. Some of the successful “old guard” may provide some guidance: Jeremy Grantham, in a Barron’s interview in March, believes the stock market may go higher, but for the wrong reasons: We do think the market is going to go higher because the Fed hasn’t ended its game, and it won’t stop playing until we are in old-fashioned bubble territory and it bursts … But to invest our clients’ money on the basis of speculation being driven by the Fed’s misguided policies doesn’t seem like the best thing to do with our clients’ money… We invest our clients’ money based on our seven-year prediction. And over the next seven years, we think the market will have negative returns. Howard Marks, in a lecture at Wharton (March 17, 2014), remembered his early career experiences, which taught him that with its Nifty 50 policy [early 1970s], Citibank had invested in the best companies in America and lost a lot of money; then it invested in the worst companies in America [junk bonds] and made a lot of money. He noted that “it shouldn’t take you too long to figure out that success in investing is not a function of what you buy. It’s a function of what you pay.” An asset of high quality can be overpriced and be a bad investment; an asset of low quality can be bought cheaply and be a good investment. Then focusing on the present, he warned that the current low return on credit instruments, due to low interest rates, has spawned some risky behavior in the market. “If the market is pro-risk, then risky securities can be issued. We have to make sure that it’s not we who buy them.” It would be hard to find a better conclusion than these two quotes, from investors who, over the years, have learned to let wisdom and prudence prevail over greed and short-term competition.

That disproved trend following?

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Posted in Feedback, Holy Grails, Systems Trading, Trend Following

“I Laughed My End Off…”

Some recent feedback on my latest Trend Following Radio monologue:

Michael, I laughed my end off listening to your brutally true evaluation of the talking heads on the financial channels!!! Love the podcasts.

And another:

Hi Mike, I don’t know anywhere else in the trading world where a podcast starts out with the godfather of soul & ends with the snarling vocals of Dave Mustaine. Love the content & everything you bring to the table. Sincerely,
James [Name]

Thanks for the feedback!

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Posted in Feedback, Podcasts, Trend Following

Ep. 229: William Adams Interview #2 with Michael Covel on Trend Following Radio

Synopsis: Michael Covel talks with Bill Adams in his second visit to the podcast. Adams is a private trader and systems developer. He is based in Zurich and works with institutional clients. Adams and Covel discuss if Adams views himself as a trend following trader; why the word futures can be problematic; broad diversification and diversifying on a number of different tiers; risk-based diversification; why making sure you’re in the game is the most important factor; why every business is seasonal; why price is the most important aspect to a trade; how Adams has (or doesn’t have) the “expertise” to trade certain markets; informing your system of various events as a quantitative or systematic trader; thinking about Adams’ strategy in the context of evolution; core baskets vs. satellite baskets; the adaptive aspect of what Adams does; the philosophical and operational aspects of volatility; average true range as a volatility measure; trading to make a return vs. trading as an economist; Adams’ greatest areas of challenge and frustration; Michael Lewis and whether the markets are “rigged”; and execution strategy. Want a free trend following DVD? Go to trendfollowing.com/win.

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Posted in Interviews, Multimedia, Podcasts, Trading 101

The Mechanical System Light Bulb Moment!

A recent email:

…read your book “Trend Following” on the plane. Your style of writing is amazing simple, clear, and direct. I used to be a journalist in the Marines so I appreciate well written thoughts. I especially love the stories and analogies you’ve captured. They are truth to me and have started the mindset shift I need to receive what trading has to offer. I’m not a college graduate. Just a simple knuckle-dragger who goes around Southern California to close deals and consult. I went to college to learn how to trade (never did and never finished). Since 1991 that’s all I’ve ever wanted to do–trade. Don’t know why, it’s just been calling me for years. Without being too long winded, I stumbled across Courtney Smith’s mechanical trading strategies. I never fully grasped the magnitude of mechanical trading until reading your work and I’m grateful and thankful to discover it. I look forward to riding the bucking bronco until I die. Thanks again for everything.

Welcome!

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Posted in Feedback, Trend Following

Ep. 228: The Vocbulary of The Media with Michael Covel on Trend Following Radio

Synopsis: Michael Covel cuts up a Yahoo Finance segment called “Are Social Media Stocks In A Bear Market?” with Michael Santoli and Jeff Macke. Covel dissects the terminology and words used by the media, and the position of the talking heads on this Yahoo Finance article. First, inspired by Larry Tentarelli, Covel discusses the idea of researching stocks. There is advice that says you should be doing one hour of fundamental research per week on every stock you own. If you own 50 stocks, that’s 50 hours a week. Covel thinks this advice is asinine, and points out that the best traders don’t do that. If the best traders in the world don’t do that, why should you? It doesn’t matter what the research tells you; if you don’t have a stop loss, you’re going to lose your money. Period. Covel then moves on to the Jeff Macke/Michael Santoli segment and dissects it each step of the way. Covel breaks down the terminology, including “crowded longs”, “chatter from brokerage firms”, and “hedge fund favorites”. Covel also discusses how we don’t know the why behind bubbles, inspired by his Justin Fox interview from a few days ago. Covel also discusses why you don’t need to know what a good price is on the way down; defining “smart money”, “aggressively buying”, and “leadership” in a trading system; and whether or not the market is “anxious”. Covel ends with something inspired by James Altucher’s article, “Ten Reasons You Have To Quit Your Job In 2014″. Want a free trend following DVD? Go to trendfollowing.com/win.

Media

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Posted in Multimedia, Podcasts, Trading 101, Trend Following

“That Annoying Covel Grows on You!”

Good feedback is always welcomed:

Hey Michael, was trying to write a comment following one of your podcast and couldn’t seem to get past the captcha. Just wanted to let you know that because of your show I can no longer listen to the radio. Yours guest are full of great insight which in turn promotes thinking. As oppose to listening to Bloomberg reporters which are just reading sheets of paper past down the line. To be completely honest when I first stumbled upon your podcast I found you to be a little bit annoying. But yours guests kept me listening. Since then you have grown on me, lol. I have read The Complete TurtleTrader and Trend Following, as well as many others. Market Wizards series, O’Neil, Livermore, Wyckoff, Darvas etc. Since reading Trend Following I have realized that my style has been more towards predictive TA then Reactive. But upon reviewing my trades it has been a mixture of both. While I continue on the journey of finding my style, keep up the good work. Apart from reading, your show is the only other thing that has promoted such healthy thinking in this field for myself. Thanks again Michael.

Mitch [name]

Thanks!

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Posted in Feedback, Trend Following

Don’t Put Yourself in a Box Dreaming of One Market Alone; Diversification Is Critical

Feedback in:

Hi, my name is James [name] and I’m from Malaysia. I would like to inquire about the trend following training program especially on the premium flagship system + training. I am only interested in currencies and I have been trading the spot forex market for about a year now, but I have never traded fx futures or fx options so far. My question is do you have training on trend following system that is only for forex trading? I have read through your webpage on premium flagship training and you mentioned that currencies (fx) is one the markets covered in this training but then you also mentioned that the instruments/system used is for ETFs, leaps options and futures, then what about forex trading? I am really interested to join the trend following training program if you can have it specialize for forex trading. By the way I have also read through the amazing turtle traders stories, but may I ask [if] any one of the successful turtle traders are major forex trader[s]? I hope you can enlighten me on this issue and I look forward to your favorable reply.

Thank you.
Best regards,
James [name]

You can use futures, leaps or ETFs to trade currencies (FX). Currency markets can be traded across those 3 markets. I don’t recommend the heavily hyped FX market alone (that is pushed by brokers online). Trade on regulated exchanges. Better. Yes, you can be a trend following trader on currencies, but why limit yourself to currencies alone? Diversification is the free lunch and you need to take it.

Note: All trend followers trade currencies, FX, forex or whatever you want to call it.

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Posted in Feedback, Trend Following
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