Michael Covel’s Official Site

Michael, concerning the “Anger on Top of Anger“, it’s a shame that this trader criticizes trend following without giving his suggestions on what makes a profitable trading system. I’d like to know his definition of a “top trader” or a “top hedge fund”. It’s quiet possible that he thought Brian Hunter was a top trader, or Amaranth was a top hedge fund. Anyways, I suppose in his mind it is better to be on “top” and blow up, than be in the middle and have long term profitability.

I still want to know if the angry guy in question feels as if his hedge fund is lucky too?

From a WSJ ‘golf’ article comes an excerpt about the long run:

So how should golfers treat luck, both good and bad, when it happens to them? Don’t be paranoid or solipsistic. Gio Valiante, a mental-game consultant and author, says golfers “must separate what is controllable and what is not controllable.” Weather and bounces, both good and bad, are definitely not. Dr. Valiante, who wrote the book “Fearless Golf,” said golfers must “expect the best, but prepare for everything.” When it seems that all the bounces are going your opponent’s way, remind yourself that golf is a “fair game” and over many rounds of golf, the bounces do even out. For what most of us call luck, Dr. Valiante uses the more mathematical neutral term of probability. In other words, the golf gods aren’t always against you. Really. But this time, pay up, pal.

Some recent feedback:

But you are out of your league here, Covel. I’ve got an office full of traders, for one of the top hedge funds in the country, laughing at you over here on their coffee break because you are so out of your league in this discussion on statistics. Our CEO and founder agrees with us, and you have his name on your website. I’d be careful to publicly disagree and post your [incorrect] opinions on your blog until you are certain you are correct about something…Statistically, it is a certainty i am right — that there is no proof these surviving trend following managers are not just black swans who dodged bullets well enough to stay alive.

That is feedback from a man who subscribes to the million monkey theorem. His view? All trend following traders with success are simply lucky. I asked if that applied to everything in life? Microsoft, Google, etc. I asked if that applied to other styles of trading beyond trend following? I asked if it applied to his firm (which I don’t know the name of)? He did not answer.

The American Psychological Association put out a press release:

Swedish Studies Show That We Can Spot Snakes In The Grass Faster Than Harmless Objects

WASHINGTON - It’s long been thought that the common phobias of snakes and spiders are reminders of homo sapiens’ primal past. Now new studies suggest that human perception evolved to accurately and efficiently spot these environmental threats. The research appears in the September issue of the Journal of Experimental Psychology: General, published by the American Psychological Association (APA).

(more…)

This excerpt regarding shark attacks paints a useful picture for traders and entrepreneurs alike:

Bite & Spit: These attacks are characterized by a forceful initial strike, often lifting the prey and shark clean out of the water. The prey is then released and the shark moves away, leaving the animal to bleed to death. This was considered to allow the prey to die whilst preventing injury to the shark from a wounded animal. This method of attack…was based on bite wounds observed on surviving pinnipeds and accounts of White sharks leaving the prey after an initial incapacitating attack.

Logic, reason, discipline - forget it. I just read this and my entire world view shifted instantly:

Hi! I’m Jason Hommel. Let me tell you how you can make money, by investing in silver and silver stocks! I’ll tell you why silver prices must keep going up (probably far higher than $25-$50/oz.) due to the shortage of silver! Many silver stocks can rise 5 to 10 times as fast as silver! Many natural resource stocks have already risen by 1000% and more, and other stocks can do that too! How will you know which silver stocks to buy? Get on my email list!

There are literally millions of plausible reasons why energy has been dropping in price. Does it really matter why? When you look at the charts of Crude Oil, Natural Gas and Heating Oil - why would it matter why these markets have gone straight down as long as you were short and able to profit?

Feedback in tonight:

Michael, one of the sectors i follow over at our hedge fund … is the energy sector. Wanted to mention some observations that I have. Now that you pointed out to me to observe trends in all aspects of life, I have done so, and sort of clarified a few things.

Trend 3: Oil and nat gas prices. both are heading down and are dumbfounding the “experts”. Economics 101 tells you that the price of a good or service (or commodity) will head to the marginal cost of supply, which in the case of oil, is about $42/barrel. No one mentions this on CNBC or any of the other talking heads stations. and, because of so many mutual funds, pension funds and hedge funds, have made their numbers on the energy stocks. Amaranth and Mother Rock will not be the only cucarachas to see the light of day. We’ll certainly will have another fund(s) blow up and probably a big pension fund or money mgr have huge down ticks in performance as a result.

I see your view, but from a trend following perspective, a follow the price perspective, I would argue that you are providing elaborate fundamental views. You COULD just make your decisions off price movement alone…and forget the fundamental analysis and predictions.

An interesting press release:

David Harding

A new Professorship designed to help improve people’s understanding of the mathematics of risk is being established at the University of Cambridge.

The new Winton Professor of the Public Understanding of Risk will seek to help individuals, institutions and government refine their decisions in risky situations.

Risk is a factor in all human activity and different people react to risks in very different ways. Questions requiring a scientific ability to assess the chances of something happening – or not happening – arise all the time. Here are some examples:

• Following the poisoning of the Russian ex-spy Alexander Litvinenko, traces of polonium-210 were found at various locations in London that he had visited. Statistically, how probable is it that someone who visited the same locations at a later stage would contract radiation poisoning?

• A recent study of transfusion patients given blood contaminated with the human form of mad cow disease has indicated that the 24 still alive are at “substantial” risk of contracting vCJD. What are the risks of contracting vCJD via a blood transfusion? How do they compare to the risks of getting the same condition by eating meat?

• An apparently healthy woman is judged to be at risk of breast cancer and is advised to undergo mastectomy. Should she do so?

• A person has to cross a main road to reach the shops. Should (s)he walk straight across the road, or use an available footbridge instead?

• How sensible would it be for me to invest in the stock market today? Might delaying improve my prospects greatly?

• A 29-year-old man decides to marry his girlfriend of three years. What is the chance that he will meet a more suitable partner at a later stage?

As these examples show, risks need to be considered in both the most ordinary of situations, and in high-pressure environments. Risk assessment is often based on analysis of data, but there is always a danger that statistics can be abused. Expert evidence in courts has been subjected to close scrutiny in recent high-profile cases such as the prosecution in the USA of OJ Simpson, and the cases of SIDS (sudden infant death syndrome) in the UK.

“The way to confront risk is via mathematics and statistics,” Professor Geoffrey Grimmett, head of the Department of Pure Mathematics and Mathematical Statistics, said. “This new Professorship will enable Cambridge to play an important role in clarifying the understanding of risk in many fields of human endeavour. It will strengthen our ability to reach out beyond Cambridge to government and the public alike.”

The new Winton Professorship has been created in perpetuity in the Statistical Laboratory of Cambridge University, thanks to a £3.3 million donation from The Winton Charitable Foundation. David Harding, a Cambridge alumnus and Managing Director of Winton Capital Management, a London-based hedge fund, is a Trustee of the Foundation.

“My time at Cambridge studying Natural Sciences showed me the importance of accuracy in empirical information and its interpretation,” he said. “This has been a key factor in my career in finance and is highly relevant to our awareness of the risks that affect us in our everyday lives. I am delighted to make a contribution to public debate and policy by helping create this new position at Cambridge.”

Professor Alison Richard, Vice-Chancellor of the University of Cambridge, said: “The Winton Charitable Foundation has been wonderfully generous in its support of the Cambridge 800th Anniversary Campaign. Endowed positions such as the Winton Professorship are of very special value to the University and I look forward to appointing the inaugural holder of this major new post.”

Feedback from a reader about trend follower Ken Tropin (Graham Capital):

I have great respect for Ken Tropin who from my standpoint runs his business using same the philosophies he manages his trades. He takes a small percentage risk on traders and their strategies, cuts his losers, and piles into his winners - trend following techniques can be applied to more than just trading. I will never forget in one of my interviews when he said “I am smart enough to know that I don’t know where the markets are going.”