Michael Covel: News & Info.

“Michael Covel’s Trend Following: Essential.”
Ed Seykota
Trend Follower for 35 years, Incline Village, NV
The Trading Tribe
Ed was originally profiled in The Market Wizards by Jack Schwager

Ed Seykota

“Covel has created a very rare thing - a well-documented and thoroughly researched book on trend following that is also well-written and easy to read. It touches on a wide variety of the principles and practices which make for successful trend following. This is one book that traders at all levels will find of real value.”
John Mauldin
Millennium Wave Investments, Arlington, TX
Author of Bull’s Eye Investing and editor of Thoughts from the Frontline

“I think the book did a superb job of covering the philosophy and thinking behind trend following (basically why it works). You might call it the Market Wizards of Trend Following.”
Van K. Tharp, Ph.D.
Author of Trade Your Way to Financial Freedom
President, International Institute of Trading Mastery, Inc.
Van was originally profiled in The Market Wizards by Jack Schwager

Van Tharp

“I think that this book documents a great deal of what has made Trend Following Managers a successful part of the money management landscape (how they manage risk and investment psychology). It serves as a strong educational justification on why investors should consider using Trend Following Managers as a part of an overall portfolio strategy.”
Tom Basso
Retired CEO, Trendstat Capital Management, Inc., Scottsdale, AZ
Tom was originally profiled in The New Market Wizards by Jack Schwager

“Michael Covel has written the definitive book on trend following. With careful research and clear insight he has captured the essence of the most successful of all trading strategies. Michael knows his subject matter and he writes about it with passion, conviction and enthusiasm. This enjoyable and well written book is destined to become a classic.”
Charles LeBeau, Rolling Hills Esatates, CA
Co-author of Technical Traders Guide to Computer Analysis of the Futures Markets

Chuck LeBeau

“Michael Covel mixes a unique blend of trend following matters with the thoughts and quotes of successful traders, investors and society’s leaders. This is a valuable contribution and some of the best writing on trend following I’ve seen.”
Robert (Bucky) Isaacson, Woodside, CA
Managed Money and Trend Following Pioneer for 30+ Years
More on Isaacson

“Michael Covel’s Trend Following is a breakthrough book that captures the essence of what really makes markets tick. Diligently researched and comprehensive in scope, it will replace Market Wizards as the must-read bible for a new generation of traders.”
Jonathan Hoenig
Portfolio Manager, Capitalistpig Hedge Fund LLC, Chicago, IL
Fox News Contributor

Jonathan Hoenig

“Trend Following: Definitely required reading for the aspiring trader.”
David S. Druz
Tactical Investment Management
Trend Follower for 25 years, Haleiwa, HI

“Michael Covel reveals the real secret about trading - that there is no secret. His points are peppered with wisdom from experts across the industry.”
John Ehlers
President, MESA Software

“Trend Following by Michael Covel? I’m long this book.”
Bob Spear, Annapolis, MD
Developer of Trading Recipes Software

“Trend Following is an engrossing and educational journey through the principles, pitfalls, players and psychology of aggressive technical trading of the investment markets. Rich in its wisdom and historical study.”
Gerald Appel
President, Signalert Corporation

“Those who seek shall find, and once they find they will be disturbed, when they are disturbed they will marvel and reign over all. This was written 2000 years ago by St. Thomas and still holds true today. If you do not focus on your own path to discovery you will not succeed as a trader. Michael Covel’s book certainly places you on the correct path and focuses in the right direction. A fair wind to all that sail those pages.”
Arthur Maddock, Naxos, Greece
President, Portara Capital Offshore

Risk: what exactly is it? Ponder wisdom:

“Since we live in a world without crystal balls that allow us to clearly see the future, prudent investing is all about the management of risk and expected returns. A problem that both investors and investment advisors face is defining what exactly is risk. As you will see, risk can be many different things And since risk can be many different things to different people, investors/advisors are faced with deciding which risks are the most important to manage…Another risk that should be carefully considered is that of the unexpected negative surprise. Unfortunately, one of the most common and severe mistakes made by investors/advisors is to treat both the highly unlikely as impossible and the highly likely as certain. Prudent investors know that history teaches us that just because something has not yet occurred, does not mean that it cannot, or will not, occur in the future. One has to look no further than to the events of September 11, 2001 for proof of this important point. The potential for negative surprises should be built into any investment plan. Forewarned is forearmed. There is yet another risk investors/advisors must deal with-maverick risk. As Robert Arnott points out, “practitioners ‘know’ that the greatest peril is the risk of being wrong and alone. As such, we fall prey to the Keynesian dictum that it is more acceptable to fail conventionally than to succeed unconventionally. Decisions that leave an investor alone carry the inherent risk of being both wrong and alone. If an investor is wrong and alone, a strong likelihood is that the assets’ owner will not have the patience to see the investment decision through. The decision, even if correct in the long run, will be reversed before it can succeed.” We are all familiar with the expression “misery loves company.” Experiencing relatively low (but still positive) investment results may create more psychological risks to the investment plan being abandoned than experiencing losses if everyone around is having a similar experience.”
Paul Petillo

Excerpts from an interview:

Omega Research: Jack, in your own words, how do you define system trading?

Jack Schwager: Well, the essence of system trading is that it applies a set of specific rules for getting into positions, whether it’s on the buy or sell side, and every bit as important for getting out of those same positions. And there is no ambiguity. When certain conditions in the market arise that fulfill those rules, you enter the trade and when certain conditions exist that signal the exit of the trade, you liquidate it. And that unambiguous approach is what I would call systematic trading.

Omega Research: So do you believe that the systematic approach to trading is one of the best ways to trade successfully in today’s markets?

Jack Schwager: Well, I think it’s a very good approach for many people and it’s a matter of personality. For someone like myself, who does not like or do well under the emotional pressure, I think it’s a very good way of trading markets and it’s one which I think many people would find works well for them.

Omega Research: Did you find in your interviews with the Market Wizards that any of that group of elite traders used the systematic approach to trading?

Jack Schwager: Some of them did. A couple that come to mind are Ed Seykota, who managed only a handful of accounts and kind of while ago, but he, over the course of about 20 years, transformed accounts from $15,000 to $15 million using purely systematic approaches. There was another trader by the name of Larry Hite who had a company, Mint Investment, who at the time I interviewed them, were managing close to a billion dollars. So a couple of the traders who did have particularly impressive results did use purely systematic approaches. To be honest, though, the majority did not and that is because a lot of the market wizards had very kind of almost intuitive types of approaches which don’t translate into specific rules. And that is also a skill element which for most people wouldn’t make any difference anyway because they don’t have that natural instinct or talent to trade the way that these people do. So it still would mean, for most people, that a systematic approach might be the best avenue to start out with.

Charlie Wright of Fall River Capital offers some pearls of wisdom about trading as a business:

“Thinking of trading as a business has helped me enormously as a trader. It puts everything into perspective and helps me deal with my own psychological difficulties with trading execution. Once I stopped viewing trading as speculation, my trading improved. Once I realized that I was not going to get rich quick, that trading was not easy money, my trading improved. Once I realized that almost no businesses are successful overnight, my trading improved. Once I realized that I had to make an investment in the business, both in terms of my own education and in equipment and working capital, my trading improved. One concept that is commonly taught in business schools is that of ‘barriers to entry.’ This is a very simple concept that has important ramifications as you consider trading as a business. The basic principle is that the higher the barriers to entry in a business, the higher the investment to establish market share but ultimately the higher the margins and profits. A good example is the beer business. Controlled by several large breweries, it would be financially very difficult to start up a new brewery and acquire significant market share. When Phillip Morris bought Miller, they spent over a billion dollars to acquire the business and do the advertising and promotion necessary to obtain market share. But Miller was successful, and when they achieved the share of market they wanted, the profits were outstanding. The reverse is also true. If an industry has low barriers to entry, and there is a relatively small up front investment, there is much competition for profits and lower margins. This is the case for many service businesses, real estate brokers, securities brokers, cleaning services, etc. Restaurants are also a relatively low investment business. All you need is some decent space for tables and some cooking equipment and you are in business. However, the competition for customers is intense and thus the margins are low. There is no good or bad when analyzing barriers to entry for a particular industry. If the investment is low, the stress comes from being smarter and superior than everyone else at making money. If the barriers are high, the stress comes from taking the large financial risk and the uncertainty of obtaining the target market share. Either way, the business is always difficult. Trading is a low barrier business. You basically need a computer, a broker, and a modest amount of capital and you are in business. But because of the low barriers to entry, the competition for profits is very high. There is no such thing as gaining market share. Many people wrongly conclude that low barrier businesses are easy to start and trading is no exception. Many new traders think that trading will be easy and they will get rich quick. Experienced traders know that this will not happen. Trading is as difficult as any business I have ever been involved in. The main point to remember is that trading is a business with low barriers to entry. This means that the competition for profits is very high and you will have to be smarter, more disciplined or more creative than the majority to make money.”

Why Capitalism is Inevitable

Michael Mauboussin produced some great writing while at CSFB. Here is a complete list of all white papers from the Consilient Observer.

“I define fundamentals as being whatever market participants are thinking about the market. These ever-changing fundamental stories may be better described as being transient investment themes. The history of markets demonstrates that the extreme of every economic era is defined by a compelling concept that becomes so simple and so popular that it effectively becomes a slogan. Memetics, which is the study of the propagation of information, provides some insight into this phenomenon. A meme, similar to a gene, is an information code that is transmitted from person to person. The semiotics memetics model suggests that when these transient investment themes enter the propaganda realm, they finally lose their power to attract new investors into their paradigm. This understanding has identified extremes such as the “Fantasia” deflationary climax in the fall of 1998, the E*Greed extreme of 2000…”
Woody Dorsey

Over the course of researching and writing the book, Trend Following, I met with a wide range of traders, investors and market experts. Most of the players I met with were straight shooters who were open, direct and honest. I found it refreshing considering that for the past two years we have been bombarded with constant bad news about corruption, greed and dishonesty in practically every industry from natural gas (Enron) to finance, accounting, telecom and so on. So it is nice to know that there are entrepreneurs with great vision playing the trading game to win, but also playing with a sense of integrity. However, that does not negate the presence of those who play the game by their own less forthright rules.

For example, as has I have noted in my book and online, there is a huge disparity in the success of Richard Dennis’ students. Some were big winners, but, some were big losers such as one former “industry player” (a student of Dennis) who turned out to be an extreme disappointment.

During my first meeting with this person, he told me that he was launching a new airline. At the time I had no idea whether or not he had the ability to do this, but my limited knowledge of his background at that point made me take him at his word. So I suspended my judgment. Unfortunately my “wait and see” attitude disappeared rather quickly for in the next few hours it became painfully obvious that this individual did not have the resources to start an airline. In fact he was most likely finding it difficult to pay rent each month. Wow I said to myself — what a contrast to other students of Richard Dennis. Here was a student who had had some success, but now was in debt with serious delusions of grandeur.

The moral of the story can be found in human behavior. You can have all the training in the world from the world’s best teachers, but if your motivation and ability to follow through and stick to it are not there and if you have lost your moral compass, assuming you had one to begin with, you will probably end up like this former student of Dennis down and out.

You should work to have an understanding of the whole of Trend Following trading:

Listen to MP3 audio.

One source of trends comes from so-called “Shock-Free Monetary Policy”.