This video clip excerpt posted on YouTube.com is from a presentation I gave at a September 2006 CLSA investors conference in Hong Kong.

Feedback in last night:

In “A Review From Mars“, Mr. Covel artfully dodged to address the real issue with his Trendfollowing advocacy: survivorship bias. Unless Mr. Covel can convincingly demonstrate that his profiled trades are not just “lucky monkeys”, I have a hard time suspecting that Mr. Covel is not just selling snake oil.

I believe that the notion that all trend followers who win are lucky survivors is not accurate. Sometimes those so love in math forget that you have to wake up each day and put your shoes on…and go make it happen. There are concrete reasons for failure and concrete reasons for winning. If we go down the logic I think you are heading, you would argue all great achievement in life is the result of the winning lucky monkey.

More feedback:

Michael, I think the point at which critics of your book and trend following in general get mixed up is the fact that you make the methodology of trend following sound so simple, especially in relation to other strategies such as fundamental analysis. The fact of the matter is that it is relatively simple, but that’s not the problem. What they miss is that trend following like any other successful trading strategy requires sometimes enormous amounts of discipline, patience, and persistence, and not everyone has it. Anyone who has spent any significant amount of time developing, testing, and/or trading a trend following strategy can see the potential of such a strategy (my guess is that your critics haven’t done so). However, these strong results in simulation or in ‘paper’ trading mean nothing without the qualitative tools to make it happen consistently in ‘real’ trading. The problem is it’s so much more comfortable for your “lucky monkey” critic to use and blame someone else’s blackbox strategy (fundamental analysis) when it fails, than to know that success or failure ultimately rests in your own hands. Keep up the good work.

I recently posted a reader comment and my feedback. That post generated this response:

“In your answer to the gentleman or lady regarding fundamental vs trend following trading, you berated him/her for seemingly knowing the difference, but hedging. You stated that your task was to educate. What education did you set forth? I must have missed it.”

He says trend following works, says trend following performance data is accepted, then says you need fundamental trading too because reality is far more complex than any one model. Isn’t that a rather stark contradiction? Isn’t the education the fact that this view of adding fundamentals to trend following is not doable except by the lone superstar here or there?

I saw this review recently about Trend Following:

“This is a poorly written book that is riddled with survivor bias. Furthermore, it never gives specific advice regarding how to find the trends to follow. Instead, it just profiles the heroics of guys who could see big trends coming (by some means other than systematic technical analysis) and won big by guessing right. What a frustrating piece of junk.”

I do not profess to be a literary giant and people will have different tastes for different writing styles. Fair enough. But the notion that the traders profiled in Trend Following (and trend followers not profiled) were “guessing” right for 30 years and were not using systematic technical analysis – is asinine.

Now in all fairness, maybe this reviewer doesn’t get what trend following is? I found another review by this same person for another book. It said:

I’m in the process of getting serious about investing as returns from existing investments are now a sizable part of my annual income. This book’s main argument, that the stock market is going to be flat, at best, over the next decade seems pretty persuasive. The most persuasive reasons for this are:

I’m interesting in joining a club of serious investors who want to pool what they are learning in the areas of small-cap and value investing.”

It is fair to say this reviewer doesn’t get it. Frankly, I would like him to see it, but I do it find interesting how some people simply miss what trend following is and how it works.

Feedback from Nick Glydon:

“I believe people still “prefer” fundamentals because they are striving for intellectual stimulation. You don’t sound very interesting at a cocktail party if you say Glaxo is going down “just because it is”, whereas if you can talk about cancer drugs, etc, etc, blah, blah people think you are interesting. Goldman’s salespeople can talk for hours about cancer drugs, Chinese GDP, and US housing data – they too like to seem “intelligent.” You have to ask “what are you trying to get from markets, money or perceived intelligence?” By the way, I am an technical analyst working for an institutional broking firm in Europe. Plenty of clients do follow our trend following advice, but very very few follow it exclusively – most try to “marry it” with fundamanentals of one sort or another. I also believe trend following works better in equities than in most other markets, as there are very many individual stocks which double, and double again – it doesn’t happen that often even in commodity markets. I’ve been a trend follower for 20 years! I like your book by the way, but the one I give the most to clients is still the O’Shaughnessey one – proves better to my audience that momentum matters. Cheers, and keep up the websites – very useful stuff.”

Feedback:

“Michael, I have been a trend follower for a couple of years now. Your book slapped me upside the head sufficiently to get me out of my fundamental analysis ways and see the light. There are a couple of things I still don’t understand though. Why haven’t more people abandoned traditional fundamental analysis, which has no consistency at all, in favor of trend following? I’m actually glad this hasn’t happened because then all us trend followers might be screwed because all the money would be moving together, but how is it that the old fundamental money still dominates the financial market industry? Is it just that firms like Goldman have so much riding on the fundamental investment fallacy that they don’t want people to change their investment strategies, because they have essentially figured out the way people react to stock fundamentals and can score big profits off of it with big money bets? Not only that, but how do fundamental analysis firms still exist in today’s market?”

Isn’t Goldman the exception? With that kind of access and money, are they different? Many think they are. Many think they are invincible. Others say exactly what you say, not as much because of fundamentals, but rather because of extensive leverage in an assorted collection of mean reversion strategies. Time will tell.

One man’s Ten Commandments (PDF). An excerpt:

“Discipline trumps conviction. No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always try to define your risk and, above all, never believe that you’re smarter than the market.”

A whitepaper (PDF) titled “Does a Change in Risk Regime Spell Trouble for Hedge Funds?”

Feedback from a reader who I have been debating with in email:

“Nobody disputes the virtues of trend following trading. Its performances are clearly recognized. The point here is that computer trading models sometimes fail. You recognized that too. Reality is more complex than any model. The problem with gold is that it is a lot influenced by political and economic factors. Obviously these factors are hard to quantify in a model.”

No knock against this man personally, but he has no clue. On one hand he is admitting the viability of trend following, but in the next breath saying you need a fundamental understanding too. I say, “Shit or get off the pot.” These two strategies don’t marry successfully. You are either or.

But perhaps the reason I find his post so useful is that he truly believes he gets what trend following trading actually is, but within a few more words, demonstrates his lack of any conceptual understanding. I post not to pick on him, but rather to educate someone else who might be confused as well.

Regardless of the life endeavor, greatness leaves a trail. What does it take? A good read from CNNMoney.com (PDF) on the subject.

This post brought in this feedback attempting to explain why certain opinions should be valued:

“Well, given that some hedge funds go bust, his message is quite credible. When he backs up his opinion with Mr. Volcker’s opinions, he gains additional credibility.”

‘Opinions’ mean more than decades of performance data by systematic traders? Explain that logic to me.

I received this feedback:

“Jim Sinclair said that just relying on computers and computer models cannot be a substitute for the real knowledge of the markets. What is your opinion about that?”

I responded: “Do you think his opinion makes sense given the public performance data of the traders you say he criticizes?”

He responded:

“Well, he seems to know a lot about gold and gold markets. He also seems to have forecasted correctly the present gold price action. It is not a bad idea to read first his comments.”

Here are the comments in question. I don’t understand how these comments refute trend following performance data.

Trading is not about hero worship. Meaning just because someone of note says something – do some homework. The numbers are either there or not. If trend following performance numbers did not exist for the many traders I have interviewed and or profiled, I never would have mentioned their names.