Synopsis: Michael Covel talks to Nick Radge in his second visit to the podcast. Radge operates The Chartist (www.thechartist.com.au) and is the author of the book “Unholy Grails”. Radge lived in Singapore for two years and he and Covel talk about their shared experiences traveling in Southeast Asia. Covel brings up the lack of familiarity with trend following when giving presentations in Southeast Asia and how, just like in the US and Europe, 99% of the people out there really don’t understand what constitutes a real trend following strategy. Radge and Covel break it down to the basics and use Apple as an example of how a trend following trader might look at one particular example. In Apple’s case it’s possible to see 700 as an anchor and think that although it’s at 450 now, it’s got to go back up. It’s easy to take the value investing perspective and think that you’re buying a quality stock on discount. However, there’s one core thing that Radge stresses people have to understand is the undeniable truth: every company that goes bankrupt exhibits the exact same traits. They all trend down in a sustained manner; they don’t just open and go bankrupt on one day. A company trends down over a sustained amount of time and eventually goes bankrupt. Of course, Radge isn’t saying that Apple is going to go bankrupt; he simply says to pay attention and not get anchored to a higher price. Warren Buffet’s idea of buying a good company on sale doesn’t apply because he’s obviously looking at things that people can’t or won’t pay attention to– and his performance can’t be replicated. Anchoring yourself to a price is dangerous, and Covel and Radge break down the idea of “anchoring” even further. Radge defines it as when an investment has reached a particular level that an investor has become emotionally attached to and has future expectations of the investment reaching past performance peaks. A trend follower would follow a stock that is at least moving in the right direction to start. Covel and Radge further discuss education, how the trend following world is foreign to many people who have been educated in the “right” places, and how the idea of taking losses and being incorrect in your position seem to be counterintuitive to them; the importance of drawing distinctions between traditional value investing and alternative systems like trend following; how the name of the game for many fund managers is not necessarily performance but funds under management; playing the game of mathematics vs. playing the game of picking the right stocks; why the US stock market has gone straight up despite all the fear going on elsewhere in the world, and why you shouldn’t “fight the tape”; closet trend followers; why price can’t be faked (and how sentiment plays into the picture); trade restrictions, cultural attitudes, and the importance of being able to step out of the crowd; why individuals have an advantage over fund managers; the value of understanding trend following even when you don’t actually use it as a strategy; spotting ‘trends’, how you can’t spot a trend until it’s started or until it’s over, and using hitchhiking as an analogy for trading; how trend following is useful when outlier events and black swans appear; using rules and strategies to fight fear; the difficulty of using Warren Buffett as an example, and the problems the arise when managing larger amounts of money; and Radge’s thoughts on being an entrepreneur. Dig in! Free DVD? www.trendfollowing.com/win.
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