Michael Covel is the author of the internationally bestselling book Trend Following

Capitalism, Happiness, and Beauty

June 29, 2004

Capitalism, Happiness, and Beauty by Ludwig von Mises.

Forecasting Folly Reminder

From a recent Barrons:

Reading the entrails of animals may not be an infallible method of divining the future. And it holds inherent and obvious drawbacks for the fastidious. But, for all that it's undeniably primitive and ancient, as a guide to coming events the entrails approach is at least as reliable as most of the contemporary tools of prophecy, and the shamans who employed it were as often on target as are any of the present-day soothsayers and their vaunted computer models. So what else is new? We're glad you asked that question, because there is something new. And that is solid confirmation of the errant nature of forecasting, especially that genre of the black art that traffics in financial and economic auguries. For such confirmation, we are indebted to Pierre Lussier, proprietor of the Investment Information Provider, who sent to us a neat study he did starkly entitled, "Street's Track Record." Using a survey by the Federal Reserve Bank of Philadelphia of a variegated mix of duly anointed economists (they nest in brokerage houses, banks, universities, private firms and consulting outfits), along with securities analysts' earnings forecasts, Pierre has gone back to 1982 and traced the accuracy -- or lack of it -- of predictions one and two years out on a clutch of economic variables and corporate profits. What he found, not surprisingly, is that the further out the forecast, the greater the forecasting error. The clairvoyants were relatively -- and we stress relatively -- successful predicting housing starts, unemployment and long-term interest rates. They were pretty awful on inflation and GDP. In a rare nice-guy mood, we would rate the analysts' projections on profits as middling. Specifically, on housing, the average gap between what the wannabe Nostradamuses said would happen and what really happened was 5% in one-year forecasts, 11% in two-year predictions. On unemployment, the seers averaged a 5% miss on one-year, and 12% on two-year, forecasts. On long-term interest rates, they were off by 10% in their expectations a year hence and 17% in two-year predictions. Their average error guessing short-term interest rates was 14% when they looked ahead one year, which ballooned to 47%, when they attempted to foretell rates two years out. On inflation, the professional economists were off 29% when reckoning the rate a year in the future; they missed by 41% trying to gauge what the rate would be two years out. They were wildly off the mark in their guesses of nominal GDP: by 102% one year ahead and 109% two years away. Analysts, as intimated, fared so-so doing their clairvoyant shtick. Their forecasts of operating earnings a year ahead went awry by 14%; when they pushed their luck and tried to see two years out, they missed, on average, by 25%. What's the moral? Well, if you're a forecaster, never look back and keep forecasting. And if you're a civilian, at the very first whiff of a forecast, reach for a grain of salt; better yet, go buy a Ouija board of your very own.

Victor Niederhoffer Review

June 28, 2004

There has been a wide cross section of positive endorsements for Trend Following since the late April 2004 release. However, Victor Niederhoffer's negative review may be the best endorsement yet.

Why is his negative review positive?

1.) Niederhoffer does not believe Trend Following works. He felt this way (and stated so) long before Trend Following hit the shelves. He ignores all performance data of all trend followers for the last 30 years -- and continues to draw the conclusion that trend following trading is "horoscope reading".

2.) Niederhoffer's review appears to be a response to pages 136-139 of Trend Following. These pages cast a less than positive light on his trading technique.

Government Intervention

June 26, 2004

Government intervention is one of the many root causes of "trends". This article won't tell you when to buy and sell or how much to buy or sell, but it does show the forces always there making waves.

Spotting a Trend?

June 24, 2004

Trend Followers do not just "spot trends" or "find trends". Keep in mind, Trend Followers have less big wins and more small losses. When you enter a market, as a Trend Follower, you do not know whether it will be the "big one" or not. But you still have to enter, follow your rules, and stick with your philosophy. Bottom line: you never know the full extent of a big trend until it is over and a matter of public record. The idea that you can "find a trend" smacks of an ability to predict. Prediction is fools gold.

Impressionable and Imitative

June 21, 2004

"No matter what the models say, traders are not machines guided by silicon chips; they are impressionable and imitative; they run in flocks and retreat in hordes."
Roger Lowenstein
When Genius Failed: The Rise and Fall of Long-Term Capital Management

John Mauldin Endorsement

June 18, 2004

John Mauldin of Millennium Wave Investments offered this endorsement of Trend Following:

"Covel has created a very rare thing - a well-documented and thoroughly researched book on trend following that is also well-written and easy to read. It touches on a wide variety of the principles and practices which make for successful trend following. This is one book that traders at all levels will find of real value."
John Mauldin
Millennium Wave Investments

Author of Bull's Eye Investing and editor of Thoughts from the Frontline

Fundamental Blather

June 17, 2004

Alan Farley, of RealMoney.com, offers today at Yahoo Finance:

"Now is a good time to ask yourself whether things are getting more or less bullish than they were a month ago. At this point it's obvious that things are getting incrementally better. First, traders have already priced in a higher rate environment. Second, the terror influence is losing its fear factor. Third, the key June 30 date for Iraq and the FOMC meeting are approaching quickly. Most analysts think that particular day is very important to the markets, but traders know better. They're focused squarely on the time period leading up to the date because the markets discount major events before they happen. So we should see buying and selling activity next week based on traders' assumptions for the rest of the summer. Students of the 1990s may recall that many rallies began just as the Fed announced rate hikes. Those booming markets illustrated the absolute dominance of certainty over speculation when it comes to fiscal policy. In other words, a timely rate hike can put the conjecture and worry behind traders so they can concentrate on something else. The "something else" in this case should be the quality of second-quarter earnings. The news on that front may be outstanding because we've seen few negative preannouncements, although we're right in the middle of confession season. I think the problem is that everyone is so fixated on world events right now, they haven't noticed that American companies are firing on all cylinders."

How can one deduce from this writing when to buy, when to sell or how much to buy or sell? How can one measure objectively any of his statements to actually use them as part of a trading system or plan?

Reversion to the Mean

June 15, 2004

James Simons, President of Renaissance Technologies, offered in a roundtable forum:

"I heard this story and I think it's true. Anyway, it's a pretty good story. It's about how the Air Force trains pilots. When a trainee made a good landing, he would be praised. When a trainee made a bad landing, he would be ridiculed. Well, it was perfectly clear to the general that the first approach was lousy and the second approach was good. He had statistics demonstrating that when you praised a pilot who made a perfect landing, his next landing was not likely to be as good. Whereas, if you berated a pilot who made a bad landing, his next landing was likely to be much better. However, if you think about it, it doesn't matter what you do, because landings are most likely to be average. If a pilot had an exceptional landing, his next landing was likely to be average. If he had a poor landing, his next landing was likely to be average, also. By slicing the data and only looking at what follows good landings and praise, you only see part of the picture. You must consider how data was selected before you can draw conclusions. This example is closer to home. We interview a lot of managers, because we do some asset allocations. Although I haven't compiled careful statistics on this, it frequently seems that a manager with a marvelous record does not perform as well after I invest with him. Why is that? Well, do managers who lost 35% in the last three years show you their records? No, those guys aren't showing anyone their records. You are seeing a sample of the best managers, a sample of "good landings." Going forward, some people do better and some people do worse, but reversion to the mean is probably a persistent phenomenon in both managing money and landing airplanes."

Social Work v. Capitalism

June 14, 2004

Excerpts from Wall Street Journal article:

"The conclusion is unavoidable: If you have a good education, you shouldn't just consider getting rich. Creating and amassing wealth is an outright moral obligation. Do so and you can take comfort not just in financing public services but in knowing that you are giving people what they need or want, generating jobs and underwriting the affluence that makes art, justice, environmental protection and other social goods possible...Of course, making yourself a pile of money is good for you too. You'll live in a better neighborhood, drive a safer car, get to be more selective in choosing a spouse and enjoy a longer, healthier life. Your kids will get a better education, which in turn will mean more of the same for them, too -- and will better equip them to improve the world still more...From a moral standpoint, it is clear that Alex has done his part. With such an eleemosynary career under his belt -- and such bulging bank accounts -- he has decided to indulge himself and stop making money. The money he already has is busily reproducing itself, of course, and meanwhile he is spending most of his time figuring out how he can use it to make the world a better place. Sounds like fun, no?"

Source: http://online.wsj.com/article/0,,SB108690610119134476,00.html

The Wisdom of Crowds

June 13, 2004

The Wisdom of Crowds by James Surowiecki.

Trillion Dollar Bet

June 09, 2004

"The question that I don't yet know the answer to, and I suppose what the partners of Long Term Capital, I can suppose what their answer would be, but I don't yet know the balance between whether this was a random event or whether this was negligence on theirs and their creditors' parts. If a random bolt of lightning hits you when you're standing in the middle of the field, that feels like a random event. But if your business is to stand in random fields during lightning storms, then you should anticipate, perhaps a little more robustly, the risks you're taking on."
Trillion Dollar Bet (PBS Special)

David Druz Endorsement

June 08, 2004

David Druz, a long-time trend follower, offered this endorsement of Trend Following:

"Trend Following: Definitely required reading for the aspiring trader."

David S. Druz
Tactical Investment Management
Trend Follower for 25 years, Haleiwa, HI

David S. Druz was formally educated in engineering, with an emphasis in computer science, and in medicine. While pursuing his education, Dr. Druz became fascinated with markets and market theory and began managing his own futures account in 1975. He developed the Tactical Trading System over the next five years. While in college he worked part time in the research department of a Futures Commission Merchant. Thereafter he pursued a dual career in futures investments and medicine from 1975 until 1991 when he retired from medicine to devote his time fully to Tactical Investment Management Corporation which he founded in 1980. Dr. Druz is considered to be an authority on trading systems and is often consulted in regard to their construction, testing, and implementation

Van K. Tharp Endorsement

Van Tharp, originally profiled in The Market Wizards, offered this endorsement of Trend Following:

"I think the book did a superb job of covering the philosophy and thinking behind Trend Following (basically why it works). You might call it the Market Wizards of Trend Following."
Van K. Tharp, Ph.D.

In the unique arena of professional trading coaches and consultants, Van K. Tharp stands out as an international leader in the industry. Helping others become the best trader or investor that they can be has been Tharp's mission since 1982. Dr. Tharp offers very unique learning strategies, and his techniques for producing great traders are some of the most effective in the field. Over the years Tharp has helped people overcome problems in areas of system development and trading psychology, as well as in success related issues such as self-sabotage. He is the founder and president of the International Institute of Trading Mastery, Inc., dedicated to offering high quality products and services for traders and investors.

Tharp uses a combination of skills and education to fine-tune his strategies to coach, consult and teach traders and investors. He received his Ph.D. in psychology from the University of Oklahoma Health Science Center in 1975. He is a certified as a Master Practitioner of NeuroLinguistic Programming (NLP), a Certified Master Time Line Therapist, a certified Modeler of NLP, and an Assistant Trainer of NLP. He has used his expertise in NLP to create the successful models of trading and investing upon which so much of his work is based.

Dr. Tharp is the author two acclaimed books published by McGraw Hill; Trade Your Way to Financial Freedom, and Financial Freedom Through Electronic Day Trading.

In addition, Tharp is the only trading coach featured in Jack Schwager's best selling book, The Market Wizards: Interviews with Great Traders. Tharp has published numerous articles in various industry publications and has been featured in publications such as Forbes, Barron's Market Week, Technical Analysis of Stocks and Commodities, Investors Business Daily and Futures and Options World, just to name a few.

Charlie Wright on Risk Management

June 06, 2004

Charlie Wright of Fall River Capital paints a true picture of risk management:

"I often tell the story of the great fish restaurant that opened up just down the street from my office. It opened with great fanfare and was ranked in the top five restaurants in the city. The food was outstanding. But it only took a little more than a year and this great restaurant was out of business. Why? Because the key to running a good restaurant is not the food--it is cash management and risk control. It is making sure your business is run efficiently, keeping your costs (risk) in control, and managing your staff effectively. If you believe that the taste of the food is what makes a great restaurant, think of how great the food is at your favorite fast food restaurant. But, someday, watch how well that restaurant is run. Just as in the restaurant business, the key to profits in trading is not in the prediction or the indicator, but how well the trading strategy is designed and executed. The ability to achieve risk control and cash management will make the difference between a successful trader and an unsuccessful trader. If you ever have the opportunity to watch a successful trader, you will see that they don't worry about where the market is going or about predicting when the next big move will take place. They aren't looking to tweak their indicator. They are worried about their risk on each trade. Is the trade being executed correctly? How much of their total account is at risk? Are the stops in the right place? And so on."
Charlie Wright
Chairman of Fall River Capital, LLC

Charlie reminds us all that great decison-making is needed for running a trading firm or running a restaurant.

Joey Reiman on Thinking

June 05, 2004

1. Big thinkers are on fire.
2. Big thinkers never lose in their imaginations.
3. Big thinkers bet the farm.
4. Big thinkers marinate in thought.
5. Big thinkers think better together.
6. Big thinkers don't take no for an answer.
7. Big thinkers turn reality into fantasy.
8. Big thinkers live their lives with purpose.
9. Big thinkers think with their hearts.

Presidential Market 2004

June 03, 2004

Presidential Market 2004

Tom Basso Endorsement

June 02, 2004

Tom Basso was originally profiled in The New Market Wizards by Jack Schwager. He recently offered the following endorsement of Trend Following:

"I think that this book documents a great deal of what has made Trend Following Managers a successful part of the money management landscape (how they manage risk and investment psychology). It serves as a strong educational justification on why investors should consider using Trend Following Managers as a part of an overall portfolio strategy."
Tom Basso
Retired CEO, Trendstat Capital Management, Inc., Scottsdale, AZ

Sure Thing? No.

There will always be promises of magical formulas or secrets to wealth. The latest to come across my desk is the camarilla equation. Read these two links:

http://www.camarillaequation.com/interview.html
http://www.camarillaequation.com/

You will never hear a trend follower speak like this. If you ever hear a trend follower state that his process is "convoluted"...walk away.

What is Entrepreneurship?

June 01, 2004

"...if a formerly good entrepreneur should suddenly make a bad mistake, he will suffer losses proportionately; if a formerly poor entrepreneur makes a good forecast, he will make proportionate gains. The market is no respecter of past laurels, however large. Capital does not 'beget' profit. Only wise entrepreneurial decisions do that."
Murray N. Rothbard

Japanese Book Translation

A Japanese publisher has purchased the rights to Trend Following: How Great Traders Make Millions in Up or Down Markets. A Japanese language version will be available soon.