Michael Covel: News & Info.

A very “promising” email arrived here today:

“You will also discover how you can learn all the forecasting and trading secrets that allow our traders at XXX to make profitable calls 95 times out of 100 and pull average returns of 445%, 59%, 13%, and 701% on ForEx, indices, stocks and commodities.”

Wow. 95% accuracy! Come on. Give me a break.

This email goes right to the great desire so many seem to have — they want to be “right”. The average trader thinks accuracy is the goal. They mistakenly think that if you have high accuracy on your entries that you will make a fortune.

What if 95% of the time you make pennies and 5% of the time you lose thousands? What if you knew great traders have accuracy in the rough range of 35-50%? More importantly put aside high accuracy entry fallacies for a moment, when do you exit? Do you ever hear the charlatans bragging about “exit” accuracy? No.

“If all it took to beat the markets was a Ph.D, in mathematics, there’d be a hell of a lot of rich mathematicians out there.”
Bill Dries

New York Times: What is your I.Q.?
Hawking: I have no idea. People who boast about their I.Q. are losers.

New York Times: How can we know if you qualify as a genius physicist, as you are invariably described?
Hawking: The media need superheroes in science just as in every sphere of life, but there is really a continuous range of abilities with no clear dividing line.

The following statement crossed my desk the other day:

“The path to superior returns in the stock market is to anticipate changes in investor expectations. The question is how to do that.”

This statement is false. Great traders don’t anticipate. They surely do not attempt to anticipate “changes in investor expectations” — whatever that may mean exactly.

Great traders react to price movement. Great traders know that to anticipate is to predict. They know prediction is folly.

A family friend remarked the other day that “sell signals” had been given on satellite radio stocks. I said, “what if they keep going up?” He said, “the idea is to try and get out before the top.” I said, “how can you do that?”

I tried to get him to see that you can’t time the top, that you exit after the peak. He did not see the logic and continued the debate.

This friend has read Trend Following, but instead of debating the concepts within, he maintained his “beliefs” and stood his ground. He is convinced the top can be timed.

What translations have been secured for the book “Trend Following”? So far, German, French, Japanese, Chinese Traditional & Chinese Simplified translation deals have been signed. Stay tuned for availability announcements.

Even with the release of the book Trend Following, there continues to be confusion as to what trend following is all about.

Here are some statements that are false:

1. Trend following is not about “numbers”.
2. Almost all mechanical trading systems break-down eventually.
3. Price analysis alone is not useful.
4. Trend following volatility makes trend following trading systems more risky.
5. Technical & fundamental analysis together is wise.
6. You must anticipate changes in the market.
7. Fundamentalal analysis will help reduce false entry signals.

Before I go too far using the term “hedge fund” please recall an earlier comment.

That said, a great article from Mises.org offered:

“A market is only a means to an end; it a process set in motion by the actions of individuals and their valuations. It works as a means to satisfy various ends because, when unfettered, the pricing mechanism has a wonderful way of allocating scarce resources. Financial markets also provide strong built-in incentives to police themselves, since there is money to be made doing it.”
Christopher Mayer
Provident Bank

Read full article.

“China is set to tighten supervision of domestic companies trading futures overseas following a US$550m loss in derivatives posted by China Aviation Oil (Singapore) Corp, state press said Friday. An official from Sinochem, one of 17 state companies currently allowed to trade futures in selected overseas exchanges, was quoted by China Daily as saying “the regulators are very cautious”. He and other industry experts were cited as saying supervision was expected to become stricter after CAO’s losses. CAO, listed and headquartered in Singapore but majority-owned by the Chinese state-owned China Aviation Oil Holding Co, posted the losses when oil prices surged to as much as 55 dollars when it had bet that prices would fall.”
Media Reports

You would be a fool to bet against Chinese growth in the years to come. But when you read that a state-owned business was betting against oil price increases and then blew up, you must pause. I seriously doubt anything that is state-owned will be able to ever compete against the world’s great capitalists and speculators — and win regularly. The market is a tough place and if you are not ready to play with the big boys, they will teach you a lesson.

Mark Cuban, the owner of the Dallas Mavericks professional basketball franchise, has proposed starting a hedge fund that makes money from “gambing”.

Read:

1.) Mark Cuban’s blog entry.
2.) CNN/Money press report.

Whether Cuban’s project lifts off the ground or not, he should be saluted for his statistical thinking and his correct analysis that markets are inefficient. These beliefs (not the gambling fund as I don’t know how the great trend followers would feel about such a venture) place him in good company with trend followers. I would be curious if Cuban is aware of trend following trading.