Michael Covel: News & Info.

While attending a party last night I was introduced to an executive. This man has traveled and lived throughout the world over a 25-year career. His academic background includes a MBA from a top US school.

He had been told that I had a book out about the “markets” and immediately started offering opinions even though he had no idea of the topic:

“So you make projections? I think forecasts are a bunch of shit.”
“Economics are worthless as a science.”
“No one has any idea which way the market will go.”

After listening to 15 minutes more of the same thing but said a different way, telling him that I agreed did not seem to register. I then said my book was not about forecasts, projections and economics. He finally heard that. I tried to give a brief overview of trend following trading making the case that some serious money had been made beating the market averages for the last 30 years.

Without even asking follow-up questions he started talking about his investments across multiple mutual funds outlining their poor performance. He was already convinced that there could be nothing in a book that could possibly help. While these conversations are not much fun sometimes, they are always great reminders of why there will always be winners and losers in the market game. Big egos simply prevent many people from ever helping themselves.

Yes, it doesn’t have anything to do with trading, but this page gives background on the Tyrannosaurus Rex imagery new to my personal blog site.

A recent article I wrote for TradingMarkets.com.

Suggestions for trading from the old pro and founder of Commodities Corporation Amos Hostetter:

1. Experience must teach. Follow it invariably.
2. Observation gives the best tips of all. Observe market behavior and experience shows how to profit.
3. Buying on a rising market is the comfortable way. The point is not so much to buy as cheap as possible or go short at the top prices, but to buy as & sell at the right time.
4. Remember a market is never too high for you to begin buying or too low to begin selling. Let your tape reading show you when to begin. After the initial transaction don’t make a second unless the first shows a profit.
5. There is a great deal in starting right in every enterprise.
6. When something happens on which you did not count when your plans were made, it behooves you to utilize the opportunity.
7. In a bear a market it is always wise to cover if complete demoralization develops suddenly.
8. Stick to facts only and govern your actions accordingly.
9. What is abnormal is seldom a desirable factor in a traders calculations. If a market doesn’t act right, don’t touch it.

Commodities Corporation was the original trading mentor long before Richard Dennis and the Turtles. Commodities Corporation, as noted in my book, taught or funded many of the great market wizard trading pros.

This presentation (MP3 audio) once given by Bill Dunn is interesting. It goes along with the charts in the book “Trend Following”.

Bernard Drury, a top trader, took a typical not so typical route to trading success. An excerpt from Futures magazine:

“So, how does this Russian language major do it? Not surprisingly, he attributes his success to lots of hard work and a little good fortune. Just out of Dartmouth College, Drury took a job as a trader in the grain markets at the Minneapolis Grain Exchange thinking the international aspect of trading would put his Russian skills to use. Though he never needed to speak the language, he grew more interested in the trading industry. His next job took him to Washington, D.C., where he worked as a writer analyzing the grain markets and how agricultural policies affected them. For more than eight years, he watched the grain markets and learned to anticipate certain responses to news and events, a skill that would come in handy later. “I was eager to get back to trading. So in 1990, I moved back to Chicago to trade for myself,” Drury says. It’s no surprise that he stuck to what he knew and traded grain spreads. “It was serendipitous that I chose to study for the MBA while I was in Chicago because, as part of a class project, I did research on the managed futures industry,” he says, describing how that in-depth look turned his attention to a new aspect of trading. “I am lucky I did that class project because it encouraged me to set up a CTA firm of my own.”

Today, Bernard has left the fundamentals behind and is a successful trend following trader.

A few years back a former pupil of Richard Dennis started touting his new money management firm. This man (who we will call “Bob”) had never traded for profit except while under Dennis’s guidance, so his nearly 20 year absence from the markets was greeted mostly with a yawn by the investment community. Nonetheless, “Bob” hooked up with a less than savory broker (who was fined shortly after the fund started) to raise money and started touting his trading prowess in chat rooms.

“Bob’s” firm started their track record in Spring 04 and got up to $800,000 under management from client additions. Yes, even with a resume that connected with Richard Dennis, less than a million dollars was all that could be raised. At the end of July 05 that number was down to around $300,000 from a combination of extremely poor performance and hasty client withdrawals. Uh oh.

Of course, the markets have been up and down, but compared to his peers “Bob” has seemingly blown up. How can this happen? If you have all the trading rules in the world, but you are sloppy, lazy and a poor businessman with many failures behind you, trading failure is not exactly a surprise. I am still amazed that some people think that trading rules will repair poor character.

Interestingly, I had met “Bob” before, so none of this was unexpected. As one hedge fund associate commented to me recently, “I saw [his] recent numbers….game is over.”

Sometimes it can be very educational to post comments from people that don’t quite get “it”. That said, more from yesterday’s “angry” reader:

“Even more disturbing are the extreme lies in your “approach”. Trend followers use “systems” and “money management” to make money based on momentum. They buy high and hope that there are enough suckers to buy higher. How can you describe that as sound investing? You make it sound like this is some form of intelligent investing. Like there is some rhyme or reason. There are no sound principles behind it. No intelligence. No reason. Just hold and hope and hope you get out before the crowd. Trend following depends on someone else being dumber than you. Buy high and hope someone else buys higher. It is nothing more than that…You sell a crummy irrational approach to investing that is no more successful than most mutual funds. You are no different than the people you bash every day.”

He also added in email to me:

“You don’t even understand the roots of Trend Following. Ask the pros if they believe in an efficient market? They will most likely say that the market is inefficient (how can they beat an efficient market?) and therefore predictable (for trend following to work the market MUST be inefficient). But if the market is inefficient (predictable), then why do your “pros” use a theory/system that relies on unpredictability?”

I understand what he is saying in his first quote above (and yes he has no clue about what he speaks), but can someone decipher the second quote?

Once again, if anyone else out there has this view of trend following trading after reading my book, I would like to hear from you.

I have a reader who really seems to hate and not understand trend following trading at the same time. One of his comments tonight:

“In the market, everything works and nothing works. If you use Trend Following then you rely on other people being dumb enough to buy after you. It is nothing more than that. And some times you will get lucky and some times you won’t.”

If anyone else out there has this view of trend following trading after reading my book, I would like to hear from you.

From Trader Daily a good quick and dirty bio on Larry Hite:

“As a visually impaired, scholastically challenged kid growing up in Brooklyn, Larry Hite was never voted most likely to succeed — he didn’t even learn to read until the fifth grade. Only toil and sweat could have propelled the scrawny kid to greatness, and toil and sweat were out of the question. “I didn’t want to work for my money,” Hite, 64, says unapologetically. “I wanted money to work for me.” His game plan worked. The ideas Hite concocted in the 1970s and ’80s spawned empires and industries: Man Group, PLC, might not be the beast it is today — it’s one of the largest hedge-fund managers on the planet — had it not collaborated with Hite two decades ago on a revolutionary joint venture. Likewise, Hite forever changed futures trading in 1972, when he published a paper titled “Game Theory Applications” in The Commodity Journal, helping to usher in a new kind of quantitative speculating that masters such as Jim Simons now practice.”