Michael Covel: News & Info.

This podcast brought in this feedback:

“Hi, I am a college student who is a big fan of your podcast. One of the ideas I like the most is this notion of accountability and taking responsibility for one’s one actions. It’s a theme that constantly comes up in your reports. I thought of this theme when I was having breakfast with Roger Porter, a professor at Harvard University and former high-ranking official in economic policymaking in the 1980s and 1990s. We were talking about the bailout of LTCM. We agreed that allowing people to experience the consequences of their actions is a good thing and about the craziness of this notion of being too big to fail. I immediately thought of the many times I have heard the same message in your work. Keep it up in 07!”

Another reader disagreed:

“You are incorrect. The Fed did not bail LCTM out. No US taxpayer money was used. A consortium of 12 banks took control of the fund by investing $3 Billion. It wasn’t even a bail out. All the original principals and their investors of LTCM lost 99% of their equity in the fund. The NY Fed did help organize the bailout because the markets had frozen up under the fear of massive defaults. Go back and read “When Genius Failed” by Lowenstein. This doesn’t invalidate any of the other good points you make regarding LTCM and their badly implemented strategies.”

Nonsense. The supposed defaults should have been allowed. Read.

At Ed Seykota’s web site he was recently asked a question by a reader who was risking 40-50% of his equity on each trade. Ed responded:

Hmmm … you are risking 40-50% of your Equity on one trade. Professional trend traders typically risk around one percent as much as you risk. You can test your system a couple ways.

1. You can back-test it on a computer and notice it goes broke on small whipsaws.
2. You can run it in real-time, as you are doing. When you go broke, your test is complete.

Seykota, in an earlier response to another reader, offered wisdom to those looking for the ‘end’ of trend following:

Unwavering commitment to following a system is essential to making it work. Those who do not keep their commitments seem to generate justifying beliefs, such as the idea that the market’s job is to derail systems. Such beliefs are consistent with the experience of abandoning a system - right before it becomes profitable.

I just came across James B. Stewart’s view for 2007. An excerpt:

This year, the first week’s trading was an indication how much of the conventional wisdom rests on the assumption that the Fed has stopped raising rates, and will likely begin reducing them in 2007. To me, this is the biggest risk for believers in the conventional wisdom. Higher-than-expected rates could slow or reverse the drop in the dollar, dampening returns for foreign investments. The sharp pullback in emerging markets last year was triggered by rising longer-term interest rates in the U.S. and fears this would damp the global expansion. My hunch is that a similar scare will afflict markets at some point this year, which will likely represent a buying opportunity. But longer term, I think the conventional wisdom is right. Sooner or later, the Fed will begin to reduce rates.

Whew. Glad I read that. Now I KNOW what will happen this year! I did love Stewart’s Den of Thieves however.

From the Wall Street Journal:

The New York Stock Exchange plans a pilot program later this year that could bring real-time stock-price data to millions of Internet users. The NYSE Group Inc. unit was expected to file a proposal with the Securities and Exchange Commission today. If the proposal is approved by the federal regulator, NYSE will sell to Web sites for $100,000 a month the ability to publish trade prices on the NYSE with virtually no delay. Web site operators including Google Inc. and General Electric Co.’s CNBC, have both agreed to provide their data to users without charge, if the plan is approved, and NYSE has also held discussions with several other Internet providers such as Yahoo Inc., said people familiar with the matter.

Isn’t the implication that real time quotes for the average “investor” will “help” them? I just found the article odd. On the face of it real time quotes surely sounds great to most people. However, once everyone has real time quotes, does anyone expect that there will be some new class of super successful investors due to speedy quotes alone?

A short video clip from a speech of mine about Amaranth.

A follow-up:

Michael-After re-reading your exchange with “the fastest man in Michigan” and after reviewing his response to my valid input AT LEAST FROM MY PERSPECTIVE, I am reminded of something my mentor [Name] told me in the early 80’s. Early in our relationship I asked his opinion on XYZ or whatever. Here was his response: “[Name] I have learned over the years to never give anyone your honest advice. Firstly they will not take your good advice and secondly they don’t need your bad advice so don’t give ‘em ANY advice!” I have learned over the years how true his belief continues to be on an almost daily basis.

Full cover image.

Feedback in tonight about this post:

Given your exchange with the trader who is a former collegiate athlete, thought you might find this article interesting. The person being interviewed (a trading coach) makes a pretty persuasive argument that athletes must be “unprogrammed” in order to succeed in trading. As a former Naval Aviator I find (I’m biased, I know) that aviators actually have a pretty good mindset for trading given the focus on pre-flight planning and knowing emergency procedures.

Here is an excerpt from the interview the above feedback refers to:

StockTickr: Do you think trading and sports are similar?

Dr. Doug: Not really. In fact, I find I have to deconstruct the athlete mentality from most traders. You see in sports, you are conditioned to believe that if you fail you just need to work more on your weaknesses or try harder to get improved results. In trading this is not always the case and sometimes may even create more trading problems and even worse performance. Also, in sports you are taught to always think positive and to visualize the successful shot or throw. In trading, to be successful you have to first think about how bad things could get before you do the trade. You have to know, understand and be comfortable with your downside risk. Could you imagine a golfer before hitting a shot thinking about what he is going to do if he ends up hitting it in the water hazard? That is not what you or I or anyone would call a game plan for successful golf. Fact is athletes and weekend athletes should be spending their time visualizing success whereas successful traders have to spend their time imagining “what if” scenarios, disaster situations and how to employ solid risk management. Success in sports is about maximizing the upside, while success in trading is oftentimes more about controlling the downside and letting the probabilities play themselves out. On the surface sports and trading seem very similar, but go down a few layers and the mental game is quite different for each.

Read full interview here.

Feedback from an old pro trader who has made some great contributions over the last year:

Hi Michael-As always I continue to enjoy some of the exchanges you have with both seasoned and new traders. Early in my trading career I found myself hung up on the “need” to be right rather than the “desire” to make money. I learned early that being “right” of having a high % of winners had very little to do with my overall trading success. Those who have a need to be right with a high % of winners will find themselves passing on their best trading opportunities assuming they use some degree of discretion in their trade selections. One of my trading buddies enjoys a trading success rate annually of around 15% winners with 50% losers and 35% breakeven trades. In 2005 he made over 300% on his initial beginning of year trading capital and we are talking a 7 figure account not $10,000 so this guy is the real deal. He chooses not to trade public money for several reasons not the least of which is occasional drawdowns. This is a risk/reward numbers game and most who think it is something else usually face a “forced awareness” at some point in their trading careers. To further emphasize my point everyone has seen ads on the internet for systems being promoted for say a 90% accuracy. I bet 3/4 of these systems are based on a set of past criteria that have very little to do with their future performance. Let’s say we do 100 trades in a calendar year. The average winning trade makes a net $100 so we make a net $9000 in the “winners”. Now the bad news is the 10 losing trades are for $1000 so we lose a total of $1000 for the year in a system that had 90% winners. Now I realize this is a stretch from reality BUT mathematically this is what happens once a trader commits capital to the so-called “sure thing” trading systems! Have a great day!

The comment above brought in this feedback from the “trader” who originally talked of how important accuracy was:

I enjoy fanciful stories that say “My buddy made 300% on his intial capital”. HAHAHA! LOLROF! This is a retort that is suppose to hold merit. That was Stand Up comedy. An this guy go on to say: “This is a risk/reward numbers game and most who think it is something else usually face a “forced awareness” at some point in their trading careers. To further emphasize my point everyone has seen ads on the internet for systems being promoted for say a 90% accuracy. I bet 3/4 of these systems are based on a set of past criteria that have very little to do with their future performance.” He is saying “SHOW…ME…THE…RESULTS!” I’ll show them NOW criteria. Let’s do the experiment now Michael. TAKE THE CHALLENGE. I done this for 6 years and lost my trading account over 7 times from 2001 - 2004. This puts hair on your chest. Now my trading system is “Cut mine losses short” and “let’s my profits run”. Now I win and PROFIT consistently. You refuse to address PROFITABILIY! You only want to focus on accuracy. You ignore PROFITABILITY. PROFIT. PROFIT. +3% per month. Is this simple enough for you? Blake

Don’t worry, I won’t torture anyone with more from Blake. It is useful to see how the zero sum game works though.

Dear Michael, Allow me to indulge my thoughts with regard to this post that I found very interesting. First of all apologies if this is not the correct mail address to send this to but I could not find another way to reply to the post. To begin, it sounds like this chap has never had a serious loss and I hope he never does. The tone in his email is quite extraordinary. Just like the the athletes he described he was, they are the ones that if they start to loose competitions they tend not to be able to turn it around. The main reason being that they don’t realise that loosing is part of the game. The only difference is how you deal with the losses that will ultimately determine if you will succeed or not. I say this because I was a promising football player (or soccer I should say) in England until several substitutions during games caused doubt in myself and I slowly but surely disappeared from the scene. Ultimately where I think he is mistaking is equating frequency with magnitude. I won’t even go into monthly return target that he appears to be setting. That’s a recipe for disaster. The market just doesn’t allow you nor are their enough opportunities to do so unless you take huge leverage. And we know what can happen then….In sports, frequency equals magnitude. That is, your number of tournaments/competitions entered (frequency) will equal to the number of races won or lost (magnitude). In trading this does not. You can be wrong over 70% of the time and still have a positive return. The reason being that magnitude in trading has a component to it called risk management. The old adage “cut your losses short and run your profits” is probably the oldest cliché in the market place but one whose power is often overlooked and misunderstood by most participants, professionals and non. Kind regards, Leonardo Cecchini