Michael Covel’s Official Site

This sure is a chart worth staring at. What a story it is. Fortunes made and fortunes lost.

Read March 2005 commentary from old pro trend follower.

There are critics of trend following out there. But their typical method of operation is to launch personal attacks instead of debating the strategy on the merits. That said, in today’s Washington Post Howard Kurtz wrote an article titled “For Every Story, An Online Epilogue Via E-Mail and Blog, Anyone’s a Critic”. Some excerpts of where the anonymous chat/blog world has gone:

“ABC’s Linda Douglass says she has “learned that I have not just critics but people who seem to hate me that I don’t even know about.” “It’s very nasty and personal and scatological,” says Washington Post reporter Dana Milbank.” But the increasingly caustic nature of some online criticism is prompting many journalists to complain that their honesty and motivation are being trashed along with their work.”
Howard Kurtz

“You want to pay attention to what legitimate critics are saying out there,” Nagourney says. “In journalism, you screw up from time to time. But it’s become so toxic — attacks for the sake of attacks.” “As for “smear artists” on the Internet, Greenfield says, “The freedom that it gives anonymous twerps to spew out invective — that they don’t like the way you look or think you’re an idiot or a child abuser — that’s just part of the process.”
Howard Kurtz

“There’s so much noise that you have to tune it out. It’s very rare I’ll write any story that doesn’t get criticized by someone…Complete strangers make assumptions that they know your innermost thoughts.”
Howard Kurtz

In Tom Friedman’s book The World is Flat he argues:

“It was like they were all ‘pod people’, living in a parallel universe, who were in on a big secret. Yes, they all knew the secret, but nobody wanted to tell the kids…everyone is going to have to improve themselves and be able to compete. It is just going to be one global market. Don’t be fooled by the calm. That’s always the time to change course not when you’re just about to get hit by the typhoon. The way to avoid being caught in such a storm is to identify the confluence of factors and to change course even though right now the sky is blue, the winds are gentle, and the water seems calm…After all look how clam and sunny it is outside.”
Tom Friedman

Friedman, while he did not plan it, lays out the case against buy and hold (hope). The Nasdaq is still down -60% after 5 years. Had enough yet?

Two good PDFs from Michael Mauboussin of Legg Mason.

I met with another great trend follower last week in his office. He has been trading as a trend follower since the early 1980’s. Based in the New England area, he currently trades $1 billion in his fund. The big picture lesson? Humility. This man knows there are ups and downs. He understands there is volatility. Unlike some trend followers, he trades with less risk shooting for less of a return. With all of his success though, he is humble. He keeps grounded. I am sure there are up and coming traders full of ego, but this man is not one of them. He knows the market can take away what it gives and he is always worried about managing the downside. More to follow in the coming months…

Two weeks ago I met with a near billion-dollar hedge fund in their Texas office. Funded primarily from the principals’ personal wealth (they hit it big with one of the top technology firms of all-time), their firm was seeking insights into trend following. They want to invest with trend following traders, but they are having a hard time wrapping their arms around a strategy (trend following) not rooted in fundamentals.

The three executives I met with at this hedge fund were more comfortable with a trader who traded one market alone. They liked the idea that a trader might be able to fundamentally know everything he could about that one market. They liked the idea of that type of skill compared to trend following skill. The trend following skill of reducing all markets to the common denominator of price just did not connect with them.

My gut says they will eventually put money with trend following traders. This group is very bright and they are doing extreme due diligence on trend following trading. Unlike some who dismiss trend following, these folks will get it since they are willing to learn something new.

View this screenshot from Yahoo Finance yesterday. From the headline, to the story copy, to the content of the advertisement, how does any of this help you to know when to buy or sell a market?

A reader writes in today:

I like the “inspirational trader talk”…I read Michael Covel’s book Trend Following…and I’m finding myself as frustrated with the website as the book made me. It seems like one long advertisement for the “star money managers”. I want to be a “Trend Follower” myself. I study price charts and am looking for true insights into mechanical trend following.”
Reader

Trend following starts with an idea. It starts with a philosophy. It starts with curiosity. It starts with the passion to make it happen — above all else. It doesn’t start with some magic indicator. It doesn’t start with some Holy Grail or some “wondrous line of computer code”. It doesn’t start with whining!

The book Trend Following uses examples of the thought process, philosophy and technique of great trend following traders. The book has reached tens of thousands of readers. The feedback has been overwhelmingly positive. For that I am grateful. But what about those that miss the wisdom of the great traders? Wisdom anyone can take and apply?

There is a lesson to be learned from the words of the reader above. For some people even if there were some “magic”, if they had it, they would still cry they didn’t have it. I bet the above reader will search his whole life and will never find “it”…when “it” will be right in front of him the whole time.

I attended a hedge fund event put on by a top MBA program recently. The event had no trend following traders, but did have several fundamentally based hedge funds as speakers.

One man who spoke was obviously a very bright guy. An economist by training, he currently runs a long/short hedge fund. He spoke for over an hour working through chart after chart of various economic indicators. I felt like I was back in my MBA program!

He mapped out a scenario that left me feeling like that 10 years from now the Nasdaq chart could look like the Nikkei has looked like for the last 15 years. He laid out the case for interest rates, housing bubbles, consumer demand, over-capacity, etc. Given his grasp of the subjects, he will probably be on target with his various economic projections.

When he finished he left me with the strong feeling that his economic view might be right, but his trading plan (whatever it might be exactly), might lag. Meaning markets often move contrary to the fundamentals. They overshoot. They go down when the fundamentals are positive. They go up when the fundamentals are negative. How was this extremely bright guy connecting his strong economic view to the basics of when to buy and when to sell? What was his entry and exit plan? His money management plan?

I left his presentation with blanks.