Some winners from the summer volatility.

This post drove this feedback:

Mr. Covel: Can’t pass this up. Indeed, I understand the concept and use of analogy. Use it myself now and then. I thought the story on Depend(s) simply was not constructive. My initial reaction was that, not unlike a good many other situations, the person who received the largess from P&G or whoever, may have, to put it very gently, been exploiting a situation. To people I know, I would be more blunt, and say rip off. But I am neither suggesting that or even saying that.

The flip side of your position might place blame on the decision-making of an entity that should have known better. Exploiting a situation is the nature of capitalism. Same thing in the markets. You seem to be placing a moral view on my action. Your argument would be akin to blaming the winning side for the losing side’s losses in a zero sum game.

I have known Dave Goodboy for a few years. He is not a trend following trader and has not been afraid of dropping criticism my way, but he did have a very nice comment on my new book:

“A historic romp into the minds, motivations and methods of the legendary turtles and the men who created them. Covel has written the definitive guide to the often misunderstood world of the turtles. Even as a turtle skeptic, i enjoyed Covel’s book greatly, it should be required reading for all market participants”
Dave Goodboy
Eagle’s View Asset Management, LLC

Hot-headed investors are better? Hmm…something seems amiss.

What is a market? To some people it is a simple question, not worth their brainpower, as they already get it. Those readers can go ahead and tune out, but for many others it is confusing concept. To many highly educated people the term simply doesn’t resonate. They can’t wrap their arms around it. I have an odd and simple example of a market (albeit a limited and illiquid one).

Years ago (back in 1997 I believe) I bought the domain name depends.com for $100 (among the hundreds of domains I bought across the board on all subjects). While the reaction of many might be that I was violating Kimberly-Clark’s trademark, they would be wrong. Their trademark was ‘depend’ (no ‘s’) and I never did anything with my ‘depends’ domain to damage or infringe on their trademark. Bottom line, ‘depends’ is simply a word and a great domain.

That said most people know adult diapers as ‘depends’ (with the ‘s’) not as ‘depend’ (Kimberly-Clark’s brand name). Not surprising Kimberly-Clark (symbol: KMB) first came to me in February 1998 to try and buy the domain depends.com. They offered $100 USD to “reimburse” me for the registration fee. I only paid $100 for the domain, so I immediately felt their low-ball offer and reasoning (“reimburse”) was not serious.

In September 1999 they offered $500 USD.
In December 2000 they offered $250 USD.
In March 2001 they offered $2000 USD.
In January 2002 they offered $2000 USD.
In July 2005 they offered $4000 USD.

After 2005 I forgot about the domain and their offers. My market only had one bidder, Kimberly-Clark, and I had no time to actively build up bidders. It just was not on my radar screen, which was perhaps foolish because I have made $100,000 USD over the last 8 years selling a handful of domains. A nice part-time hobby if you will.

This summer though an article about a domain auction house caught my eye. I figured that perhaps they could create a market of more than one bidder. They listed depends.com and 7 people bid on it. Here is the bidding:

Bidder 6 Aug/23/07 12:34 PM EST 15,499 USD
Bidder 7 Aug/23/07 12:29 PM EST 14,999 USD
Bidder 7 Aug/23/07 12:28 PM EST 13,000 USD
Bidder 6 Aug/23/07 07:49 AM EST 10,100 USD
Bidder 5 Aug/20/07 01:13 PM EST 10,000 USD
Bidder 4 Aug/19/07 12:23 AM EST 1,000 USD
Bidder 1 Aug/18/07 02:54 PM EST 750 USD
Bidder 4 Aug/18/07 06:55 AM EST 600 USD
Bidder 1 Aug/17/07 05:02 AM EST 400 USD
Bidder 3 Aug/17/07 02:42 AM EST 350 USD
Bidder 1 Aug/17/07 01:34 AM EST 250 USD
Bidder 2 Aug/16/07 07:55 PM EST 200 USD
Bidder 1 Aug/16/07 03:31 PM EST 80 USD

The final sale price was $15,499 USD (small change in the big scheme of things of course).

The auction was anonymous, but WHOIS is not. Today I found out that Kimberly-Clark was the buyer after all these years. A market is ultimately a buyer and a seller agreeing on a price. That’s it.

Postscript: I would be curious to hear from others about their analysis of the biases and opportunity costs of both Kimberly-Clark and myself regarding this transaction. To me, on a very low scale, low dollar amount, this transaction represents “markets” well.

We are looking for diverse range of families and singles of all ages in Washington, D.C. Metropolitan area to tell their stories on camera. You must be available for two days October 1-15 for videotaping in home/or other local location. Please email 4-5 sentences about who you are, how you invest, why you’d like to be in the film and how you can be contacted. I am not averse to participants from other locations, but you would need to travel to DC area. Contact.

An email that came in today (edited down some for readability):

“I worked at a large London futures brokerage firm for much of the ’90s…so had first hand insight into enough of the daily business in terms of trading of Bill Eckhardt and Richard Dennis and many of the ever growing army of “system traders” old and new, such as Dunn, to admire and respect the validity of their strategy.

(more…)

An email newsletter that came across my desk:

Risk levels continue to rise in the stock market as investors remain unsure as to whether or not the Fed will lower interest rates at their meeting later this month. Investors would be well served to keep a portion of their portfolio in the safety of cash and/or short-term bonds until the market sorts itself out as the odds are increasing that the market will retest the lows set on August 16th. If that is the case how the market reacts at that time will dictate whether or not the volatility will continue or whether the up-trend will resume. During times such as these it is better to protect your portfolio than to risk significant losses. The first rule of investing is to avoid the big loss. It is far easier over time to regain lost ground if you miss an opportunity while the market is advancing than it is to dig yourself out of a hole if you take a big loss. Just ask any investor who bought tech stocks in 1999-2000. The tech heavy NASDAQ 8 years later still needs a 100% gain just to break even with the all-time high set in 2000. Protect your portfolio as much as possible until a lower risk buying opportunity presents itself.

The line that really caught my eye was “until the market sorts itself out.” That phrase puzzles me. What does it mean?

A nice comment from Bill Miller about my new book The Complete TurtleTrader:

“If you want to beat the market, you have to do something different from what everyone else is doing, and you have to be right. In this fascinating and instructive book, Michael Covel tells how a group of novice traders used a system that generated trades that were both different and right, and which made them a lot of money. If you want to understand the real world of trading, read this book.”
Bill Miller, Chairman and Chief Investment Officer,
Legg Mason Capital Management

More on Miller.

I write in my book Trend Following of Bill Dunn’s great success (he made hundreds of millions) and his nearly three decades of impressive performance. However, there has been negative performance in the last few years. His drawdown is well over 50% (not necessarily unusual for him), but it has extended for several years (that is unusual). Time will tell!

Funny (and relevant) cartoon.

Feedback in:

I just had one question in relation to “flat markets.” You have mentioned in the podcasts, that it is during the time where markets are relatively flat, that trend followers are accumulating a lot of small losses. In order to minimize the size of these losses, would it not be best to be out of the market completely and then return to the market once an upward trend has been established?

Good point. Your question, your point is one of the many reasons you can find differing performance among traders who trade as trend followers.