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

Do It

October 31, 2004

"Just do what you do best."
Red Auerbach

Red's bio can be found here.

Hot Hands

October 29, 2004

The relevance to trading is clear. The relevance to any probabilistic field is clear. Understand the Hot Hand in Sports.

Michael Panzner Endorsement

October 28, 2004

"At a time when the conventional wisdom is often wrong and many traditional indicators have lost their relevance, it's good to know there is resource out there that traders can depend on. With its timeless wisdom and valuable insights on making money, Michael Covel's Trend Following is definitely your friend."
Michael Panzner
Author of The New Laws of the Stock Market Jungle: An Insider's Guide to Successful Investing in a Changing World

French Translation Deal Signed

October 27, 2004

A deal to translate the book Trend Following into French has been signed.

Legg Mason Follow-up

October 25, 2004

Richard E. Cripps, CFA & Chief Market Strategist at Legg Mason, offered a review of Trend Following recently. In a follow-up document he stated:

"Trend Following, by Michael Covel, is a new book gaining popularity among investors. The book is challenging to the methods of conventional portfolio strategy. We point out the similarities in the approach of trend following and the PPS model."

Download Legg Mason Report on Trend Following and their PPS Model.

Request for Insight

October 24, 2004

I spoke before a group of fundamental-based analysts and money managers at a major investment bank recently. While almost entirely fundamentally driven in their daily actions, this group was eager to see into the "trend following mindset". As Wall Street moves forward and continues to distance itself from the dot-com bubble, those willing to entertain new ideas and questions old assumptions will br the winners.

From my perspective there are many problems with fundamental analysis. Edwards and Magee argue the cons to such analysis:

"Of course the statistics, which the fundamentalists study, play a part in the supply-demand equation - that is freely admitted. But there are many other factors affecting it. The market price reflects not only the differing value opinions of many orthodox security appraisers but also all the hopes and fears and guesses and moods, rational and irrational, of hundreds of potential buyers and sellers, as well as their needs and their resources - in total, factors which defy analysis and for which no statistics are obtainable, but which are nevertheless all synthesized, weighed and finally expressed in the one precise figure at which a buyer and a seller get together and make a deal·"

Terror Futures

October 21, 2004

Granted, this was debated some last summer, but this article on "terror futures" is still great food for thought. Download PDF here.

HedgeStreet Articles

October 20, 2004

Two articles discussing the new exchange HedgeStreet.com:

Article 1

Article 2

Some other innovative exchanges include:

OneChicago

TradeSports

Of course before trading new instruments, always best to check for liquidity.

Marc Faber Endorsement

"As a contrarian investor I have been skeptical by default of trend following models. Still, after reading Michael Covel's excellent and eye opening book about some professional traders, who with iron discipline follow market trends up and down and in the process achieve impressive capital gains, I find myself more inclined to endorse a trend following approach to investments. In fact, I wished that at times I would have had the kind of discipline the trend followers have in terms of entirely reversing their investment positions once the trend dictated such a posture. I think that Michael's Trend Following is an outstanding read from which all investors can learn to trade markets better by limiting their risks and maximizing their profits through a more disciplined approach to investments."
Marc Faber
Managing Director, Marc Faber Limited
Editor, Gloom, Boom & Doom Report

German Translation Deal Signed

October 19, 2004

A deal to translate the book Trend Following into German has been signed.

Book Update

October 18, 2004

Trend Following is currently the #1 book in the investing categories of 1.) stocks, 2.) futures and 3.) options at Amazon.com.

Investment Bank Death

If you are still of the mindset that your local Merrill broker is the guy to talk to about your "money", think again. An excerpt from the NY Times:

"For years, analysts have said that Merrill, as well as Morgan Stanley, a similar stand-alone investment bank, may have to merge with a larger commercial bank. But in recent months, the hum of speculation has taken on a higher pitch. The talk comes as the two firms' stock prices continue to lag behind those of their peers: Merrill's is down 20 percent from its high this year, while Morgan Stanley's is off 23 percent from its 2004 peak. That both the future and the relevance of these two storied Wall Street institutions are being questioned at all is testimony to the broad changes in the financial landscape over the last few years. The Morgan Stanley name embodies the essence of white-shoe financial wisdom, dating to the 1930's, when the firm was carved out of the original J. P. Morgan. For its part, Merrill Lynch, as the first Wall Street firm to popularize the idea of marketing stocks and bonds to small investors, symbolizes the idea of democratized stock ownership in America. Universal banks like Citigroup and J. P. Morgan, with their swollen balance sheets and ripe ambitions, are encroaching more than ever on Merrill's and Morgan's turf. European banks like Barclays, Royal Bank of Scotland and HSBC are also looking to expand in the United States. Even onetime regional banks like Bank of America and Wachovia have been hiring droves of investment bankers and brokers. Merrill Lynch and Morgan Stanley, in other words, are being squeezed on all sides. "The business models of these firms may not be sustainable," said Richard Barrett, who runs the Credit Suisse First Boston investment banking unit, which is responsible for bank mergers. "Inevitably, Morgan Stanley and Merrill Lynch should align with the big balance-sheet providers."

Start making the transition now to running your money (or at least use a money manager) -- as it appears days of chit chat with the friendly neighborhood broker may be going the way of the dinosaur. If you don't bring value -- what's the point?

Ethics and Economics of Private Property

October 16, 2004

Ethics and Economics of Private Property.

Money is Not Evil

October 15, 2004

Money is not the root of all evil.

Guy Kawasaki

October 13, 2004

I enjoy Guy Kawasaki's writing. An excerpt to think about:

"Play to win and win to play. Playing to win is one of the finest things you can do. It enables you to fulfill your potential. It enables you to improve the world and, conveniently, develop high expectations for everyone else too. And what if you lose? Just make sure you lose while trying something grand. Avinash Dixit, an economics professor at Princeton, and Barry Nalebuff, an economics and management professor at the Yale School of Organization and Management, say it this way: "If you are going to fail, you might as well fail at a difficult task. Failure causes others to downgrade their expectations of you in the future. The seriousness of this problem depends on what you attempt." In its purest form, winning becomes a means, not an end, to improve yourself and your competition. Winning is also a means to play again. The unexamined life may not be worth living, but the unlived life is not worth examining. The rewards of winning - money, power, satisfaction, and self-confidence - should not be squandered. Thus, in addition to playing to win, you have a second, more important obligation: To compete again to the depth and breadth and height that your soul can reach. Ultimately, your greatest competition is yourself."

He continues:

"Obey the absolutes. Playing to win, however, does not mean playing dirty. As you grow older and older, you will find that things change from absolute to relative. When you were very young, it was absolutely wrong to lie, cheat, or steal. As you get older, and particularly when you enter the workforce, you will be tempted by the 'system' to think in relative terms. 'I made more money.' 'I have a nicer car.' 'I went on a better vacation.' Worse, 'I didn't cheat as much on my taxes as my partner.' 'I just have a few drinks. I don't take cocaine.' 'I don't pad my expense reports as much as others.' This is completely wrong. Preserve and obey the absolutes as much as you can. If you never lie, cheat, or steal, you will never have to remember who you lied to, how you cheated, and what you stole."
Guy Kawasaki
Palo Alto High School Baccalaureate Speech 6/11/95
Author of The Art of the Start

No Prediction

From today's AP:

"While oil prices are around 80 percent higher than a year ago, they are still more than $27 below the peak inflation-adjusted price reached in 1981. Still, many market observers say prices are likely to continue to skyrocket because of continuing supply concerns. "It's a small correction just before the winter season. It's November (delivery), the December, January prices will be more expensive," said Misui Bussan, chief commodities strategist for Tetsu Emori in Tokyo."

Unlike Mr. Emori, the great trend followers freely admit they have no idea what direction oil will continue in. They do know they can only make decisions based off today's price movement.

Brazil, Weather & Trading

October 12, 2004

The ominous headline from Barrons reads:

Coffee Jitters: Brazil weather watch under way

The article states:

"It's springtime in Brazil and dry weather, not frost, is the biggest threat to the nation's coffee production. In the winter, any mention of chilly weather can roil coffee futures, but since groves were moved north (closer to the Equator) in the last decade or so and out of the frost belt, growers' worries over frost damage have been superseded by drought concerns. After an upward jolt in September, coffee futures on the New York Board of Trade slipped in early October as traders responded to wet-weather forecasts for Brazil's new crop. "We're waiting to see if Brazilian groves get enough rain for blooming, and then more to fix the flower and allow buds to grow," says Rodrigo Costa, a trader with Fimat USA. "September was very dry, but October is usually a rainy period." Brazilian trees flower in October and November. A front bringing needed rain to groves should arrive Oct. 11-14, according to the local Somar service. "We're in volatile weather trading now, and the market's especially sensitive since the next Brazilian crop is expected to be smaller based on the tree cycle," Costa says.

If you were to rely on this type of analysis or if you were to gain this level of fundamental expertise in Brazilian coffee yourself...how exactly would it help to trade the coffee market for profit?

The best traders don't use weather analysis for buy and sell signals.

Legg Mason Book Review

October 11, 2004

Read Legg Mason review of Trend Following from Richard Cripps.

Richard Cripps

Full PDF review here.

Wrong Place to Blame

October 10, 2004

Larry Elliott of The Guardian put forth the following on "funds" on October 4, 2004:

"The International Monetary Fund is to step up its surveillance of hedge funds as part of an attempt by the global community to tackle the speculation that has driven oil prices to $50 a barrel in recent weeks...Germany's finance minister, Hans Eichel, told the annual meeting of the IMF that speculation by hedge funds - highly borrowed investment funds that take big gambles on market movements - was responsible for high oil prices...[The IMF] stepped up its pressure on Opec for further increases in oil supplies but said it also wanted the IMF to supervise a "dialogue" between countries that produce oil and countries that consume it. The IMF believes that hedge funds often exploit a lack of public information about reserves and stocks to manipulate the price."

The market is the market. It goes up and down. Attempting to place "blame" for high or low prices is a waste of time. Trade the market price is our only option. Deal with reality would be the message to the "suits" at the IMF.

Not Hedge Funds

October 08, 2004

Why call them hedge funds? Good question. Why call them commodity trading advisors (CTAs)? Another good question. Consider a quote from Futures Magazine:

"Hedge funds should be renamed, perhaps to 'anything-but-hedge' funds."

Hedge funds do not make money by hedging. They make money by speculating. They take risk and hopefully reward will follow. The term hedge fund confuses the issue.

On the other hand, many trend followers are regulated by the government. The CFTC calls them Commodity Trading Advisors (CTAs). How does this make sense? CTA is a misnomer. It doesn't come close to accurately describing traders that take positions in stocks, bonds, currencies and energies. Sure, many trend followers trade physical commodities, but many do not.

I would like to see the terms hedge fund and commodity trading advisor disappear. Let's just call the men and women who trade client capital fund managers. There will be far less confusion!

Wasted Energy on Wrong Path

October 06, 2004

Jeff Neal recently wrote a piece for Yahoo Finance titled "Taking Note of Changing Fundamentals". An excerpt:

"When performing fundamental analysis it is extremely important to be keenly aware of major changes and shifts from the baseline or historical model. For example, consider how important oil is to our economy today-but looking back before the invention of the internal combustion engine, oil played virtually no role.  And as energy prices continue to rise, someday we might find a viable substitute that may reduce the importance of oil. Developments like these always must be accounted for. There are many factors that alter the fundamental balance between supply and demand. Things like new economic sectors being created, commodities becoming obsolete, global politics, changing economic systems and new technology all have a very profound impact on a markets underlying fundamentals. Numerous events in our history clearly illustrate fundamental shifts. Consider the introduction of the low cost/ high-speed personal computers and the impact it has had on productivity, employment numbers and the health of the overall economy. With the widespread use of this technology, the traditional positive relationship between employment and inflation does not apply as much anymore as computers continue to replace more workers in more areas. And it is not only technological advances but also natural events like diseases, environmental changes or unforeseen disasters that can impact typical fundamental relationships between markets. For example, what would happen to markets if Western cultures turned away from red meat entirely and converted totally to a vegetarian diet, or the third world nations changed to the western diet? Consider the impact that would have on the grain, meat, and vegetable prices, as well as other foods. This would truly be a major fundamental change. The important thing to remember as a fundamental analyst is that when a major change is recognized, it is paramount that you evaluate the impact, why it occurred, and how much it should contribute to your fundamental analysis going forward. It is not just enough for you to just review baseline correlations between supply, demand and price, you also must recognize when old relationships are giving away to new. Develop a feel for cause and effect as well as supply and demand."

This is the same stuff I heard in my MBA program. Study the fundamentals. Know all the ratios. Big problems await you if you follow this line of reasoning.

Take a step back. Think about it. If you happened to master all of what he writes about...how would it help you to know when to buy or sell or how much to buy or sell at any given time?

It doesn't help you.

HedgeStreet

October 05, 2004

A great new and regulated exchange:

"HedgeStreet is a new electronic marketplace that empowers online investors to trade innovative financial instruments based on economic risks and opportunities in their daily lives."

Visit HedgeStreet.

Pride

October 04, 2004

Excerpt from Innerworth newsletter:

"Extreme pride can be a danger for trading, and is the downfall for many. Trading is hard enough without introducing additional psychological pressures to feel superior to others, maintain social status, or save face. When pride drives trading decisions, one is likely to take unnecessary risks in order to make big wins to keep up appearances. Controlling pride is vital. It is important to develop internal standards of self-worth. Don't compete with other people. Learn to compete with yourself. Develop your own rules and standards related to your skill as a trader. When you reach your standard, you can feel a little pride, but don't feel the need to tell others about it. If you can feel proud of your accomplishments, without feeling the need to brag about how well you have done, or exaggerate how well you are doing, then you will have learned to feel a true sense of pride and self-worth."
Innerworth.com

Experts Predict?

October 03, 2004

Here is a headline from this evening:

Associated Press
Jobs Report Could Set Direction of Market
Sunday October 3, 8:39 pm ET
By Michael J. Martinez, AP Business Writer
Meandering Stock Market Could Gain Direction With Jobs Report;
Experts Predict Modest Increase

This headline reminded me of the classic Extraordinary Popular Delusions and the Madness of Crowds.

Buffett & Coke Stock

October 02, 2004

An excerpt from Barrons' Alan Abelson this weekend:

"Coke stock has benefited from a halo effect from its association with Warren Buffett, who bought his 8% stake when the stock was really cheap, beginning in the late 1980s. But the halo is a bit askew now that Coke has called into question Buffett's famous assertion that he owns companies that can be run by almost anyone. To the contrary, Isdell [Coke CEO] must prove -- and fast -- that he's the right person to come up with the tonic Coke needs."

The Coke chart of the last year is not pretty if you are a "long only" trader. Coke has been trending down. A trend follower follows the trend...whether or not a company can be run by "anyone" or not. Who knows and who cares. The goal is to trade a stock for profit not debate the merits of the CEO!

Howard Simons Endorsement

October 01, 2004

"The toughest play in baseball is to catch a ball hit directly at you. The toughest thing for any trader is to stay with the trend. The temptation always is to get fancy, to fade the long-term move, to pretend that you are smarter than the market somehow. The big money is made by identifying the trend and sticking with it no matter what. Michael Covel has written an indispensable work to help you do just that."
Howard Simons
President, Rosewood Trading, Author and Trading Consultant

Howard Simons

Howard L. Simons is a Contributing Editor of Futures Magazine, wherein he has published more than ninety articles since 1994, and writes the weekly Futures Shock column for TheStreet.com, on which he has published more than 200 articles. He served as a professor of finance at the Illinois Institute of Technology from 1994 through 2003, where he taught classes in futures markets, market analysis and trading system design, fixed income trading stratgies, energy market derivatives and advanced topics in market analysis. Mr. Simons' educational background includes as BA in international relations from the Johns Hopkins University, a MA in international economics from the Johns Hopkins School of Advanced International Studies, and a MBA in finance and econometrics from the University of Chicago.