Michael Covel: News & Info.

Brett Steenbarger sent this essay recently:

“Why do we trade? To be sure, trading allows us independence, the opportunity to work for ourselves. Trading also offers the prospects of a lifestyle in which evenings and weekends need not be consumed by work. Some of us crave the competitive aspect of trading, doing fresh battle each day. Others approach trading as a puzzle to be solved, deriving a sense of intellectual achievement. Finally, there is income. A successful trader can make seven figures in a year and many of the traders I work with are living proof of that. So why do they trade? Once you have the money, all of trading’s lifestyle advantages could easily be yours. Needs for competition and intellectual stimulation could be met in so many other ways. Why do traders remain traders long after they’ve won the game? Perhaps we can illuminate this question by asking it of practitioners in other fields. Why do artists continue their craft long after they receive recognition for their paintings, novels, or films? Why do elite Special Forces troops stay in units that test their mettle even after they’ve earned their coveted badges? A gifted athlete such as Michael Jordan earned plenty of money and honors and, in fact, did retire on a couple of occasions only to return to his game. Why? There is something deep here that speaks to the nature of productive work. People retire from jobs and even careers, but they never abandon their callings. For some, work means something more than earning a living or achieving a lifestyle. Work is their path in life. It is the way they have chosen or perhaps that has chosen them for self-expression and self-development. Suppose the pastor of a large, successful church wrote a book, made significant money, and promptly retired from the clergy and all religious life. What would that say? Surely, we would think, this person’s faith could not have been too heartfelt. But why should our productive work mean less to us than the clergy means to a devout pastor? Presumably, the religious life meets deep, important needs for the pastor. Is it really so different for the artist? The athlete? The trader? The great professions are those that serve as personal playing fields. They are the arenas we choose to express and develop ourselves. In mastering a discipline, we cultivate self-mastery. In writing a poem or placing a large trade, we capture in a single act our vision of how we see the world at that moment. The great occupations are great precisely because they are such meaningful playing fields. Long after we’ve earned fame and fortune, the calling remains to be more than we are, to return to the arena and do battle with our limitations. The profound urge to extend the human grasp is common to all the great callings. To run faster, to capture more beauty, to predict ever better: in no small measure, our work is our pursuit of the godlike, however fleeting. Maybe it is our different images of the godlike that animate our career choices. If my deepest view of godhood is that of a meek and all-forgiving Christ, perhaps I will be drawn to an occupation of service. If my deepest view is more akin to the ancient Greeks, whose gods sent heroes on quests, then my calling may be on a battlefield or a playing field. Either way, in work we find something divine within ourselves. Whether as scientists, monks, or traders, we strive for those moments when we are just a little closer to perfection, a little nearer to immortality. That is why we trade.”
Brett Steenbarger

Dan Ferris, Editor of a newsletter titled “Extreme Value”, writes:

“Amazon.com’s initial public offering was 3 million shares at a price of $18 each (presplit). Bill Miller, manager of the Legg Mason Value Trust, bought Amazon’s stock at the IPO, back in May 1997. Miller sold that first position, later saying it was, “the dumbest thing we ever did.” Miller bought Amazon again at $80 a share in 1999. Amazon’s stock price fell apart, just like every other Internet stock. Miller responded by doing the only sensible thing he could do. He bought more. A lot more. As he told Fortune magazine, “We started [buying] again in mid-2000 when the stock was in the $40s, and then we bought it all the way down. Our buying increased as the stock fell. If the stock was $35, we’d buy 50,000 shares; at $25, we’d buy 150,000 shares; and at $14 we’d buy 300,000 to 400,000 shares.” Miller says he finished buying “between $7 and $8.” Miller’s buying strategy goes by a name you might be familiar with, dollar cost averaging. Dollar cost averaging is when you spend the same dollar amount no matter what the stock price is. If you spent $700 for 100 shares last December, that same $700 will buy you about 139 shares at today’s prices. If you bought $10,000 worth back then, $10,000 would buy you 39% more shares today, and so on. Today, Amazon is around $37 a share. Miller’s average cost for the stock is around $19.69 per share. He paid as much as $82 for some of his shares, and he’s still up 88% with the stock 55% below his initial entry price. From his highest price to his lowest price, the stock fell 91%! And he’s still up 88%! I doubt many people can say that they’ve ever made an 88% profit from a stock that fell 91% while they were holding it. Brilliant as Miller’s strategy is… the “trend is your friend” crowd reacts to Bill Miller’s behavior like an ape in front of an obelisk. Buying stocks that are falling in price? Throwing good money after bad? It’s sacrilege!”

How many pure play dot-com survivors were there? 5 or 6 big ones? How many 100’s of companies would you have lost all of your money if you were dollar cost averaging? Trend followers refer to “dollar cost averaging” as “losers average losers”.

Milton Pollack, who was appointed a federal judge by President Lyndon Johnson in 1967 and oversaw many notable corporate corruption cases, has died in Manhattan. He was 97. I used a great quote of his in my book:

“Seeking to lay the blame for the enormous Internet Bubble solely at the feet of a single actor, Merrill Lynch, plaintiffs would have this Court conclude that the federal securities laws were meant to underwrite, subsidize, and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches, but which delivered such riches to only a scant handful of lucky winners. Those few lucky winners, who are not before the Court, now hold the monies that the unlucky plaintiffs have lost, fair and square, and they will never return those monies to plaintiffs. Had plaintiffs themselves won the game instead of losing, they would have owed not a single penny of their winnings to those they left to hold the bag (or to defendants).”

Yes, the Judge wasn’t much for whiners.

Linda Stern of Reuters recently wrote in a column titled “Strategies for a Sideways Market”:

“The bulls and the bears are in this together, scratching their heads and wondering what’s going to happen next. Up and down, down and up. As soon as you think you know where the stock market is going, it doesn’t…An increasing amount of money has been flowing into fast-trading (and often short-selling) hedge funds that may be whipsawing the market with their staccato trading patterns…What’s a small-time investor to do? Perhaps it sounds facile, but the best thing to do with a sideways trending market is “not much.” Plain folk who are stashing away money for college, retirement, or that rainy day don’t have the computer models that those hedge fund managers are using. Nor do they have the deep pockets to carry them through should their models fail. But they do have one thing going for them: The upward trend of the U.S. stock market. Most investors who stick with their long-term program of regularly investing in a diversified portfolio will be richer in five years regardless of where the market goes on Tuesday … or Wednesday … or Thursday…The market will shake itself soon enough. And those slow-steady investors will be ready when it does.”

Some commentary on this commentary:

1.) If you actually think you know where the market is headed, you are delusional.

2.) Blaming hedge funds for a sideways market is silly. A sideways market is a sideways market. The concept is not new. There were sideways markets a hundred years ago.

3.) The writer thinks 5 years of buying and holding will solve your problems. Where would you be if you bought the Nasdaq Jan. 1, 2000 and held till today? Would you not be down -60% still? When does the buy and holder of the Nasdaq ever get whole again in this example?

“Trend Following by Michael Covel explains the wisdom behind the trending function of the markets. The practical application of this philosophy is based on the pervasive logic of price behavior. Market Stories and Market theories will come and go but trends will remain. Follow them…and study this book.”

Woody Dorsey
Author of Behavioral Trading and creator of Market Semiotics

TheStreet.com’s Arne Alsin offered some very bad advice on August 12, 2004:

“The irrational investor sells shares during periods of price weakness, presumably on the expectation that declining prices are a harbinger of problems to come. That’s faulty logic for several reasons: Share prices rarely reflect reality. Asking the market for a full and fair price quote for your shares, each and every day, is asking too much. The principal purpose of the equity market is to provide liquidity, not to accurately price shares. For example, over the last four years, Boeing’s market capitalization has fluctuated between $20 billion and $60 billion. That’s an outrageous swing in valuation, considering that the underlying business has not changed that much. During this period, Boeing’s sales have fluctuated very little, with a weak aerospace business balanced by a strong defense business. It doesn’t matter which asset class you’re talking about, it never makes sense to accept a price for your asset simply because the offer is lower than it was last week, last month or last quarter. Long-term investors in particular should view current bids for their stocks as largely irrelevant. Once a position is taken, it doesn’t matter if the bid increases or decreases…In the aggregate, profitable companies always increase in value over time.”

A reader responded with:

“I found “idiotic” as you say…that [this writer says] “share price rarely reflects reality” and the implication that balance sheets and valuations do reflect reality. At what point does price reflect reality? He uses the term “long term” ambiguously and neglects to point out that your time horizon may coincide with a 77 percent meltdown in your equity. Has he forgotten that that 1929 highs were not surpassed until 1954 or that 1969 highs weren’t surpassed until 1982? He doesn’t point out to the “long-term” investor that we have just finished a secular bull equity market and if history holds true it might be a while before one will recoup the losses from the buy and hold strategy he is touting. If I was retiring in 2000 and the market tanked and I just kept buying all the way down with no idea of when it was going to come back, what do I do now? I guess I just rely on social security to live on. Everyone is entitled to his or her opinion but anyone who uncritically follows this advice deserves whatever befalls them. [A] quote from…Nathaniel Branden come to mind: ‘If we stay aware of the fact that we are responsible for our choices, decisions, and actions, we are far more likely to choose, decide, and act in ways that will not later become causes of embarrassment, shame, or regret.’”

TheStreet.com should not be telling people that once you take a position it doesn’t matter if it goes up or down. That is poor advice.

Brokers aren’t advisers:

“Click on the individual-investor page of Merrill Lynch & Co.’s (MER.) Web site, and you’ll be wooed with promises of soup-to-nuts financial advice. Rather than merely peddling stocks, Merrill’s brokers offer “a relationship that provides you with a lifetime of solutions.”
BusinessWeek

BusinessWeek goes on to point out:

“Sounds enticing — and a lot like the service offered by independent financial advisers. But there’s a crucial difference: Adviser have to meet higher standards designed to protect investors. Not all do, but the rules give investors more legal safeguards. While brokers must recommend investments that are “suitable” to your financial status and goals, advisers have a fiduciary duty to put your interests ahead of their firms’. And advisers can’t sell you stock from their own accounts without prior consent, while brokers have to notify clients of such trades only after the fact.”
BusinessWeek

I would take it a step further than just talk of “brokers” & “advisors”. What is the basis of any advice is the ultimate question.

A recent interchange from Seykota.com:

Question: “…how do I spot when the market is trending to a new level?”