Michael Covel: News & Info.

Recent months of in-person interviews with great traders have only reinforced what I believe to be the essential ingredient of success: entrepreneurial zeal. Whether soft-spoken and retiring or crazy-men, these guys are self-made, often several times over. And it’s not the genius of a Trend Following system that makes them wealthy. It’s their self-discipline, willingness to be responsible for what they do, and their hard work. Trend Following rules are the easy part. It’s playing by them that is difficult. Frankly it all comes down to defining what you really want. Most people don’t want to become rich, they just want to be rich. That’s no definition. That’s a dream. To become anything you need entrepreneurial zeal. I met with a well-established trend following trader the other day who has become rich (in terms of money) but more important, has created a rich life in terms of family, community and place.

Since the release of Trend Following 11 months ago, feedback ranging from the average retail trader to the world class fund managers has been overwhelmingly positive. There appears to be a small minority unable to accept trend following trading, but the vast majority of market players have taken to the book:

Dear Michael, I bought your book on trend following, and while I am not even to close to finishing it, I can tell that I like it very much. What a great read, what an inspiring book! Thanks for writing it! Warmest regards from Amsterdam, Albert
Feedback 1

Mr. Covel, I purchased your book when it was hot off the press. As a market participant for over 15 years, and having read a lot of books on the markets, your work is excellent. Congrats on the success of your book. Thanks, David L., CFA
Feedback 2

I just finished reading “Trend Following” today. It is AWESOME! I am very greatful to you for writing it. In the mess of hundreds of useless investing/trading books, yours stands out with about 5 - 7 books that can actually help people make money! While reading your book I actually felt for the first time in my life that I could run a fund! I am 36 years old and it has been a life long dream of mine to work for or run a successful hedge fund. I always felt to uneducated to do it until now.
Feedback 3

Hi Michael, My name is Jack M. and I’ve just finished reading your book “Trend Following”. What an excellent and informative read. I have been researching this method of trading and this book helped me immensely. A little bit about me, I finished an Engineering degree in Queensland, Australia two years ago, but I haven’t found any job or career path that really interests me. I find it fantastic to find Trend Following…I hope to learn and use this method of trading in my life. Thanks again for your excellent book, Jack M.
Feedback 4

I just purchased the Michael Covel book Trend Following and have started reading it with much interest. As I was plowing through the first chapter, it began to occur to me that I am a closet trend follower, as are many of my value oriented colleagues. How did I arrive at that conclusion? Let’s go back to the answer that was given about fundamental analysis. That answer would certainly dispel any myths about trend following being better than fundamental analysis if it were truly the case that one ran the numbers, bought a stock and forgot about it. Trouble is, it doesn’t work like that. You get new information about your purchase at least every quarter. At that point, any money manager worth his salt is re-evaluating his holdings in light of this new information. Sometimes you revalue your holdings upwards, other times, downwards. Some change very little. Next look at current price versus the newly calculated valuation. If the risk/reward ratio is sufficient, buy more. If it’s not, hold what you have. If the valuation has gone down enough or the price risen sufficiently, you sell. It is interesting to note that, currently, most of the Graham and Dodd investors are holding a significant portion of their assets in cash (myself included). This is because there is nothing that meets our value criteria to buy and, of the holdings that we held, they have become overvalued enough to take profits on. So trend following and fundamental analysis are not mutually exclusive as some of you might think. If things are done properly, good fundamental analysts will follow a trend. As for your argument on position sizing (’fundamental analysis won’t tell you how much to buy’), you are correct in that statement. But trend following won’t tell you that either. Position sizing is a personal choice and is a necessary part of ANY competent investment program. The decision to add to positions that offer better rewards and sell out of positions with declining or negative rewards is critical. I look forward to finishing Mr. Covel’s book. I am still intrigued by trend following techniques. I do not argue with the successes of those who follow the techniques. Sincerely, Alan M., CFA
Feedback 5

So do you have the typical neighborhood broker (Merrill, Smith Barney, etc.)? I recently met someone looking into trend following for the first time. She is doing her due diligence and asking all the right questions of the trader she wants to hire to manage her money. The problem? She has a typical neighborhood broker already. I am sure her broker is a perfectly fine guy, but all he can say about trend following trading to her is that it is “risky”.

Of course her broker doesn’t attempt to define “risk”, he just throws the term around. He also doesn’t bother to acknowledge that all trading and investing is risky if you have no plan. I wonder if he thinks buying and holding the Nasdaq since 1998 is “risky”?

The good news is that this lady sees her broker’s weak argument. Over time more people will come to see her smart choice. Just as many will never get it.

I just finished a trip to meet with another great trend following trader who just happens to live and work nowhere near a major city. With a track record of 17 years (+20% a year), his performance alone is quite impressive, but his ability to do his “thing” on his terms is truly inspirational.

You have to also wonder about those people that attribute this man’s performance (and other trend follower’s performance) to “luck”. If you think a trader is lucky, but you have not taken the time to sit down and personally meet with him (doing all the needed quantitative and qualitative homework), you miss the point. Great traders are NOT lucky over time. Their “secret” is hard work. That is their enduring edge.

Long Volatility (trend following) white paper (PDF) from Anders Kulp, Daniel Djupsj

A reader wrote in recently to complain that trend following doesn’t really work and that all trend followers are using “new” techniques today. He also expressed his view that shorter term methods are superior.

He believes this white paper (PDF) is the future of trading.

My comments:

1.) Jim Simons has no peer. He is the best. There are no other traders like him. The costs to do what he does, however, and no one really knows what that is exactly, are huge. His PhD staff, data, & technology far exceed the costs of a trend following operation. I have met no one that does not have the utmost respect for Jim Simons. The question really is: “Is it better to try and be Jim Simons or invest with Jim Simons?”

2.) How can you easily tell trend followers have not changed their style of trading? Trend followers by and large have strong correlations of performance returns. They make and lose in the same months. They trade VERY similar styles. There now exists a nice population of trend followers, trading for some years, to analyze. The idea that they have all “changed” is simply not true when you examine all quantitative and qualitative evidence.

Hedge Fund Introduction: Read PDF Brochure

From a recent Financial Times story comes a pearl of trend following wisdom:

“David Harding at Winton Capital Management says his managers adjust the model systematically every month, no more, no less. “What you do not want to do is wait until you are in a beastly draw-down when you are having lots of problems with clients and say: ‘What we have discovered is a new thing that fixes the problem’. That’s what the marketing people tend to want but that is not the correct thing to do,” says Mr Harding.”

When you are on a losing streak, don’t start trying to reinvent the wheel. That’s David’s strong point.

The book Trend Following has now been signed for a Korean translation.

I accidentally flipped to CNBC today. It is like watching an episode of the Twilight Zone. How does Maria Bartiroma, 5 years after the bubble burst, with a straight face ask “analysts” for opinions on stocks? It is strangely bizarre. After seeing this odd TV spectacle, I decided to search Google to see if there were stories on CNBC ratings. From Bill Mann I found some fun insight that quickly backed my gut impression of CNBC version 2005. It doesn’t appear people watch:

“The past two years have been pretty positive for the markets. If CNBC’s ratings were tightly correlated with market direction, one would think that the ratings would have rebounded in sympathy, rather than continue to tank. CNBC was perfectly constructed to be the voice of record while the bull market raced ever higher. Many people compared CNBC with Disney’s (NYSE: DIS) sports broadcasting juggernaut, ESPN. But viewing sports and viewing stocks aren’t even comparable: The cost of rooting for the wrong “team” on CNBC is far, far higher. What CNBC was not constructed to do was offer up much in the way of useful, contrary information. It’s as if the network’s programming manager goes daily up onto the roof, checks the prevailing winds, and constructs the program to respond. The problem, of course, is that following the prevailing winds doesn’t help the viewers who come to the station to hear something useful. That’s overstating it. But the executive shuffle and the comments among NBC brass, along with the decline in viewership, however it is properly defined, are fairly conclusive pieces of data showing that CNBC in its present form is struggling…CNBC needs to matter. The network has the same talking heads on now that it did in the late 1990s. In the ’90s, they hyped dot-coms, in 2000 optical networking, and so on to today, when commodity and energy companies can do no wrong. The result is that CNBC viewers, if they count on you for information, are doing nothing but chasing the thing that has just happened. That’s exhausting, it’s counterproductive, and in the long run, it’s expensive. I’ve said this for years: Who cares what analyst on Wall Street raised or lowered guidance?”