Michael Covel: News & Info.

In a Yahoo news piece the other day I noticed this bit of writing which has tossed around for seemingly decades:

“Larry Williams is noted for winning the World Cup Trading Championship by the largest percentage gain of all time. He turned $10,000 of real money into $1.1 million in less than a year during the contest.”

In the article, Larry Williams is asked about the contest:

“Sure, I won the Robbins World Cup trading championship, I took $10,000 of real time money, not paper trading, in 12 months up to $1.1 million. That is an accomplishment, I guess…What I did was maybe lucky, who knows…”

I am glad Williams decided to use the word “luck” for his effort. While perhaps impressive, his effort has not been repeated. And that’s the rub for me. Why do all these people keep touting this contest win, this one year only performance, still to this day over 15 years later?

David Harding, a man with a track record exceeding 15 years not just one year, has noted the problems with short-term results and short-term thinking:

“It is very dangerous to read too much into short-term results,” said Winton Capital Management’s founder and managing director David Harding, who was a co-developer of AHL, along with Aspect Capital founders Michael Adam and Martin Lueck.

An even better story of perhaps too small of a sample (and sheer luck) can be found here.

Feedback from author of Predict v. Follow:

“Hello Michael, I just wanted to let you know that it was my quote you used. I’m glad to further the discussion on your website since it has helped me greatly. Thought I would take the opportunity to let you know what I thought of your book and comment on it. Your book has caused me to do some soul searching to what kind of trader I want to be, how I will enter markets and how and why I will exit. It forced me to define an approach to trading, to carefully pick markets to trade, and to think how I would choose risk management levels. No book can be all things to all people, but your book forced me to rethink my trading strategy and attempt to trade like a professional trader would trade. By the way, technical charts do serve a great purpose, they are the records of missed markets of most fundamentalist’s and guru technician’s. Why do they miss most markets? p. 140 of your book answers this question (I think the best concept in your book). Thank You.”

Read the new book Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone.

Review of book at BusinessWeek.

More on the Kelly formula.

I was forwarded this quote that addresses the idea of technical analysis and where trend following fits into the grand scheme:

“From John Murphy’s book technical analysis is defined as the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. There is the key difference. Predictive vs following. A lot of the “tools” in technical analysis books are centered around prediction v. following. A classic example of this concept would be the idea of a price target off a head and shoulders top. A true market technician would set a price target based on the size of the formation and forecast the most likely next “leg” the market would go to. A true trend follower would never set a price target, they prefer to let a trailing bar stop take them out of the market when prices start to reverse against them or some other similar method. You can use technical analysis “tools” to help you follow the price movement and act more like a follower or you can use technical analysis tools to help you predict, the choice is yours. Another important point is that if someone told you they were a trend follower, that would imply that they are that type of trader. Technical analysis is a wide concept that would need to be refined in order to generate a particular trade system.”

I agree with all except the idea that prediction may be an option. Technical analysis for so-called prediction is fool’s gold.

Richards J. Heuer, Jr. wrote the free online book Psychology of Intelligence Analysis for the Center for the Study of Intelligence at the United States Central Intelligence Agency. The relevance to great trading and great traders is straightforward.

Here is the table of contents:

Author’s Preface
Foreword by Douglas MacEachin
Introduction by Jack Davis
PART I–OUR MENTAL MACHINERY
Chapter 1: Thinking About Thinking
Chapter 2: Perception: Why Can’t We See What Is There to Be Seen?
Chapter 3: Memory: How Do We Remember What We Know?
PART II–TOOLS FOR THINKING
Chapter 4: Strategies for Analytical Judgment
Chapter 5: Do You Really Need More Information?
Chapter 6: Keeping an Open Mind
Chapter 7: Structuring Analytical Problems
Chapter 8: Analysis of Competing Hypotheses
PART III–COGNITIVE BIASES
Chapter 9: What Are Cognitive Biases?
Chapter 10: Biases in Evaluation of Evidence
Chapter 11: Biases in Perception of Cause and Effect
Chapter 12: Biases in Estimating Probabilities
Chapter 13: Hindsight Biases in Evaluation of Intelligence Reporting
PART IV–CONCLUSIONS
Chapter 14: Improving Intelligence Analysis

I have noticed the CIA’s web server can be iffy so be patient.

Yesterday I mentioned the recent research “Investment Behavior and Negative Side of Emotion” published in Psychological Science. You can purchase that article online here for $26. I make no money from this and have no relationship with the publisher or authors.

From Bloomberg today comes an article that firmly backs the importance of the emotional component needed to be a great trend follower (or any trader for that matter):

“Functional psychopaths” make the best investment decisions because they can’t experience emotions such as fear, a study by researchers at Stanford Graduate School of Business showed. Fear stops people from taking even logical risks, meaning those who have suffered damage to areas of the brain affecting emotions, and can suppress feeling, make better decisions, the report showed. The ability to control emotion helps performance in business and the financial markets, the researchers found.”

(more…)

I wrote recently about having seen Jim Cramer’s TV show Mad Money for the first time. Yesterday traveling down to South Florida, I saw his show again on the plane’s TV. It’s one thing for Cramer to do this show circa 1999, but today in 2005 it’s almost criminally insane broadcasting. I notice that many people are justifying the show since it has a large audience. So even though the entire show is useless by any measure of investor sophistication, it’s alright since so many people watch it. Here is a good take on the show.

A good quick read (PDF) about how rather than shrinking risk, the behaviour of following the herd by investors adds to it.

Today I received:

“As a UK resident, I’ve just read the excellent book on Trend Following. To cut things short, re. the advice on p. 246, can you advise me how to find a trend following trader to trade for me.”

Sure, here is a good tracking service for trend following fund managers.