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Negative Reviews Pack Powerful Lessons

Spotted the following review. It appears written by an Ellsworth Toohey doppelganger. That said, if you are sitting on the fence, or trying to better understand trend following, these types of reviews are very educational. The issue for you: what education will you take from it?

“What kind of cynical marketer calls a book “Trend Following – Learn how to make millions in up or down markets”? There’s even a helpful tagline: “The strategy that made millions in the 2008 Market Crash” (their emphasis). Michael W. Covel, apparently. I’ll make a number of generous assumptions and follow through their consequences. First, let’s assume that the strategy of trend following which materially is the subject matter of his book can, either through individual endeavour, or through investing in the right trend following investment manager, produce annualised returns of 100%. Second, let us focus on 2008, as the tagline invites us to do. If a strategy made millions, let us conservatively assume it to be two million (USD assumed) that year. So, we have a strategy which we generously allocated 100% returns to, and which made a two million dollars in profit. In order for that to have happened, the adventurous reader must have risked two million dollars of their own money. Yet clearly this cynical marketing ploy isn’t aimed at the world of high net worth investors, but the interested investing public. They will not have anywhere near two million dollars to invest, so the disingenuous exhortation is mostly exploitative hyperbolic marketing. Assumed daily compounding would bring the initial deposit required down somewhat, but you get the point I hope. I decided to buy this book and read it. My conclusion is Covel is a fundamentalist trend-follower. The phrase sounds like an oxymoron, since so often trend-following is pitched against a fundamentals based approach to investing (whether that be analysis of commodity supply and demand effects, analysis of the capital structure and balance sheet of firms or macroeconomic analysis). By fundamentalism I mean a kind of quasi-religious blind faith in an approach which accompanies an almost evangelical re-description of investment reality in terms of them and us. Them being anyone who thinks they can make investment or trading decisions that use a valuation model based on anything other than price action. Us being those who rely on price action only. You’ll find in this book a kind of anti-intellectualism shared by many blind-faith religious people. Historically, the branch of finance which tried to bring intellectual rigour to the examination of market prices arguably started with Bachelier in 1900. To be sure, before this was a series of practices and assumptions aimed at applying rules of thumb to trading. Examining only price action (including volume and open interest, where appropriate) is clearly a kind of primitive attempt. The analogy I think of is in trying to explain the movement of oceanic water. Examining nothing other that the surface phenomena of price action is analagous [sic] to looking at surface wave movements only – where the wind explains some part of the movement. Now what might really be moving bodies of water requires a fundamental model – for example, how gravity, the moon, ocean floor structure, temperature might explain the movement of oceanic water mass. This isn’t to say that the wind explanation is subsequently wrong, rather it is incomplete. It is an open question whether finance is at a stage where the fundamental models hold up well to our reality – for example the efficient markets hypothesis (EMH), which largely looks to debunk some of the ‘price action’ approaches, has come in for some recent well aimed criticism. It could be argued that the EMH tried to sweep away many theories of price action with a single factor (beta, in the pure formulation) or multiple factors (in the later Fama French formulation). Set against the academic position is some evidence of consistent, long-lasting out-performance of some price action funds (in particular, that subset which relies on so-called momentum effects – the eponymous trend followers of the Covel book). Rather than impartially presenting the evidence, Covel instead, like any good evangelical sectarian blind-faither, pitches the story as one of competition between two mutually incompatible doctrines. He, and a fair few trend following investment managers, make a virtue of the ‘know nothing’ approach they espouse (you could call the approach ‘phenomenological’ instead if the spirit of charity overwhelmed you). They mock the fundamentals failures and lay claim to be the direct beneficiaries of the many failures of fundamentals based investing. None of this is necessary. Both approaches can coexist, and perhaps should. He does a great disservice to the science behind the momentum effect with his empty rhetoric. To borrow a term from Comte’s classification of the stages of sceince [sic], he’s degraded the science of the momentum effect into a kind of metaphysics.”

Once past the ad hominems, the section set out in ‘blue’ — is this chap’s massive misstep. That is the take away.

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Posted in Book Reviews, Critics, Feedback, Trading 101, Trend Following
13 comments on “Negative Reviews Pack Powerful Lessons
  1. daniel says:

    Big misstep. Who cares why oceanic water is moving; it’s moving!

  2. Todd Miller says:

    “…where the wind explains some part of the movement”. Who cares that the wind plays some part? Who cares what plays the other part? All we know is, it’s moving.

    Some will never get it.

  3. Alexander says:

    Instead of going on a long-winded pseudo-scientific rant, why didn’t the good chap, Ellsworth, post his track record?

  4. Michael Covel says:

    I wonder how accepting pro trend following track records, along with all of the other supporting pieces of evidence that back those, was blind faith?

  5. Gary says:

    I know why he didn’t like it Michael. You didn’t use enough big words!

  6. Jaytrader says:

    Those who can, trade.
    Those who can’t, criticize.

  7. “I do not care why the ocean waves are moving. I just want to ride them as a surfer does so they can push me forward.” Jesse Barkasy

    There! Use that for your book Michael. Let me know is that wins a spot in your book.

  8. Jeff Waters says:

    “Rather than impartially presenting the evidence, Covel instead, like any good evangelical sectarian blind-faither, pitches the story as one of competition between two mutually incompatible doctrines.”

    This is a fair comment IMHO.

    Trend following works. But surely whilst it’s a truth, it’s not the only truth. For example, there are fundamental traders who make a good return year after year. OK, many fundamental traders also lose money consistently, but any approach is only as effective as its exponents are skillful and disciplined. As as was recently pointed out in reader comments in this blog, some trend followers combine trend following with other techniques.

    Jeff

  9. Michael Tatman says:

    He might consider reading the book more than once. That assumes he did more than just scan it to begin with. I find it hard to understand why he said there is no evidence, when in fact, the numbers speak for themselves.

  10. Andre says:

    “Yet clearly this cynical marketing ploy isn’t aimed at the world of high net worth investors, but the interested investing public. They will not have anywhere near two million dollars to invest, so the disingenuous exhortation is mostly exploitative hyperbolic marketing. Assumed daily compounding would bring the initial deposit required down somewhat, but you get the point I hope. ” Well I believe that he doesn’t know that nowadays one can be “exploited” :) with 50 bucks byuing a share of the AQR Managed Futures, right? Or wait, how about investing with these guys Covel says? Doesnt take 2million. Dont waste ur talent with this Ellsworth, he’s not acutally “worth” anything

  11. Persistent S says:

    Hi, I wrote this review, and am also a trader who mixes trend following with fundamentals. My trading returns have certainly improved since adding in trend following considerations to my investment decisions but I’m happy to admit I have a lot to learn. My long tern returns (since 2003) have been annualised 28%. 2010 – 8%. Jan 2011 – 14%; Feb 2011 3% so far. My Sharpe ratio is SHIT, however, and this bugs me. Surely none of this matters for the purpose of this book review. Book reviewers don’t need to be great traders. A person’s ideas stand independent of whether he can trade or not. I’m also a libertarian so found the Toohey reference quite amusing. I do think however that the comments here reinforce my opinion. Jeff Waters was quite fair, I think.

    My point is: making a religion of this thing can run the risk of diminishing the human spirit of investigation. Cue Daniel’s “Who cares” comment. Tod Miller’s comment. Jesse’s comment.

    Alexander, Gary, Jaytrader your comments were pretty vacuous and I don’t have anything to say – though I did add some performance returns. Hope you like them.

    Michael, C., Michael T., I say in the review there’s clear evidence for momentum based strategies. And I believe it. I base some of my trading on it.

    Michael T., I invite you to read the review a second time. I updated it a bit. Alexander and Gary, best not to re-read it because it still has long words in it.

    I’m all for success, individualism, independence, libertarianism, political freedom, honesty, and especially good thinking.

  12. Joe Harman says:

    My first post to Michael Covel’s website: Ellsworth Toohey would have us believe that oceanic water movement can somehow be predicted if all the underlying fundamentals are known. I suppose he predicted the 2004 Indian Ocean tsunami.

  13. Persistent S says:

    In the spirit of light heartedness I thought I’d rewrite my review especially for Gary and Alexander.
    Just to repeat, don’t take it too seriously.

    Dude, your book’s cover overly sucks. You gotta eat your own shit on drawdowns and lay off over-selling your own gang’s holy grail at the expense of everybody else’s. You gotta know that people really are making money in the markets using good shit that ain’t just price action. You gotta know there really is another side to this stuff other than prize-winning surfing. Keep on surfin’ by all means but please quit tryin’ to turn other people off to the other wonders of the ocean. Maybe some days somebody real smart might invent an even cooler way of having fun while gettin’ rich from the ocean, but not of they swallow your medicine.

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