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

Wallstrip Chat: Michael Covel & Lindsay Campbell

March 30, 2007

VIDEO: Wallstrip Chat with Michael Covel.

Check out the interview above. As a side note, while I may not act daily as a full-time trader for clients, I am a full-time entrepreneur who takes on healthy risks continually. My career earnings have come from business ventures, real estate, investing with traders and trading. However, at this stage of my life I have no desire to go the direction of managing money for clients (and all the associated red tape). Stay tuned for another interesting development!

Larry Williams Opines

March 29, 2007

I caught a review of TurtleTrader recently from Larry Williams. In part it said:

"Long story to this website; mostly negative, vile stuff about people that is not correct, and sets themselves out as the savior...Where is their heart? This is not how good thinking people treat others. There are many ways to make a good cup of market soup.. some like it hot, some like it cold, some like it in the pot, nine days old."

Controversial, tough, opinionated, passionate is my goal. I would be curious as to the exact "vile" parts of my websites. I do thank Larry for taking the time to give free press.

Turtle Religion

March 28, 2007

One of the more interesting aspects of the Turtles involved the differing religions of those involved in the process. From a relapsed Catholic to Christian to Jewish to a Jehovah's Witness - the Turtles and everyone involved in the process were a melting pot of personalities and beliefs all unified under Dennis' will. Is there any one religion that worked out better? There is no evidence to draw any conclusion there.

Despite

March 27, 2007

I met with an old pro trader yesterday in his NYC office. He runs one of the largest clearing firms on the NYMEX. He has his unique way of doing things and clearly is not a trend follower. That said, his concern about knowing how to take losses properly echoed the wisdom of Wall Street's great trend traders. His most interesting comment was about the word "despite". He loved to see the word. For example, if you see the talking heads saying, "Despite bad news Apple stock went higher", he would view that as an opportunity to go long even more. Conversely, if he saw "despite good news, Apple went lower", he would go short. He wasn't trying to preach fundamentals or "news" reading, but just wanted to pass along his insights from the last 20 years. Sure, it was short and simple wisdom, but then again most good Wall Street wisdom is that way, the hard part as he reminded me is the execution.

Rich Dad Misses the Price Point

March 25, 2007

An excerpt from a recent Rich Dad Poor Dad column by Robert Kiyosaki:

So how can I say that the market is crashing even if it continues to go up? To see the true crash, educated investors need to compare apples to oranges, not apples to apples. When you compare the Dow to the Dow, or the S&P 500 to the S&P 500, that's comparing apples to apples. The Dow at 12,000 appears better than the Dow at 9,000, just as an apple at $1 a pound looks better than at $1.50 a pound, even though it's still the same apple. All that's happened is the price per pound of the apple has gone up -- the apple hasn't changed. Years ago, my rich dad taught me to be a comparison shopper, especially when it comes to investments. He said, "You need to understand value more than price. Just because the price of something goes up doesn't necessarily mean the value has gone up." He also told me, "If prices go up without a corresponding increase in value, it means the value of the asset has actually gone down." This holds true for all assets, including stocks, bonds, and real estate. For example, when the price of a house goes up it doesn't mean that the house is more valuable. And prices going up may mean that something else is going down in value. In today's global markets, what's going down is the purchasing power of the U.S. dollar.

He is right: price going up doesn't mean value is going up. But does it matter? If you have a strategy predicated on riding price increases (long for profit) and riding price decreases (short for profit), why then does it matter if you are able to discern the elusive "value" or not?

Interview?

If you live in the Washington, DC Metro area and would like to be interviewed (on film) about the subjects I write about, drop me a line. I have found that question and answer formats work much better than standing in front of the camera preaching, hence my desire to get others involved.

Beta & Alpha

March 24, 2007

From 'Professional Adviser' comes an article titled 'Taking a Bet?'. An excerpt:

"A traditional investor invests on the basis of expectation and hope. The expectation is that they will enjoy the market return (Beta) and the hope is that their manager will produce something on top of that (Alpha). The problem is that Beta is now commoditised, and can be accessed for as little as 0.2% annually. Consider this in the context of a typical active long only manager where 90% of returns are derived from market exposure (Beta). That means the client is paying 1% annual management fees yet receives only 10% potential Alpha. That translates into an overpayment of Beta of somewhere in the order of four and half times."

Without the jargon this means what? Billions are being paid in fees to mutual funds to deliver something that is basically free now. Article (PDF).

2007 State Street Hedge Fund Research Study

March 22, 2007

A study (PDF) from State Street about hedge funds.

Comedy of Predictions

March 21, 2007

Wouldn't you just like to be able assemble all the "why" comments over the last month from the talking heads to explain this chart? That chart can't be explained. All you can do is accept it as is.

Hedge Fund Losses in 06 Mean Nothing

I caught this headline blurb from the AP:

U.S. hedge funds that once managed $35 billion shut down last year as more big firms ran into trouble, according to a survey released on Monday by industry publication Absolute Return. At least 83 U.S. hedge funds shut in 2006. The largest was the $9.1 billion multistrategy fund run by Amaranth Advisors LLC, which ranks as the biggest hedge fund collapse in history, Absolute Return said. Also among the folded funds: Archeus Capital Management's Animi Master Fund, which oversaw $2.65 billion at its peak; another run by Sagamore Hill Capital, which once held about $2.6 billion; and Saranac Capital's Citigroup Multistrategy Arbitrage/Saranac Arbitrage fund, which topped out at $2.2 billion. Five other funds that once managed at least $1 billion also shut last year. That's a big change from 2005, when none of the hedge funds that folded ever had $1 billion in assets, Absolute Return noted. Still, most of the hedge funds that shut down last year were small: Almost half of those funds never reached $50 million in assets. That suggests the $1.4 trillion industry is evolving into a business dominated by the bigger firms, Absolute Return said.

If the style of trading is not defined, if the manager is not noted, then aggregate statistics for hedge fund losses serve little purpose other than giving naive reporters something "fun" to write about for that day.

What's In a Name?

Heather Flick writes at Trader Daily:

Hated by many and understood by few, most hedge funds today are not even, literally, hedged. This is an industry in need of an extreme makeover...The name “hedged fund” was coined by A.W. Jones, a late-blooming Australian immigrant who in his 40s developed a strategy for eliminating market risk by taking complementary positions. Selling some stocks short while buying others long, he built his portfolio to have equal total value, rendering market-wide moves in either direction a wash. He hedged his bets based on stock picking rather than market direction, thereby creating a win/win situation. Today’s hedge funds are private-investment pools open to a limited number of accredited (savvy, rich) participants. These pools can invest in almost anything, which encourages creative management strategies unavailable to other, more regulated funds. That’s basically it. Although governed by the rules of private offerings, partnerships and LLCs, the term “hedge fund” actually has no legal definition.

That is a nice primer. It adds to a comment of mine from before.

Subprime Mortgages: Don't Worry the End is Probably Not Here!

March 19, 2007

The following comment is not meant to pass along a fundamental view about what direction you should take trading certain mortgage lenders. Rather it is a nice logical view from Ben Stein on the true economic impact of the troubled lenders we have all been hearing about:

Today, the reason is supposedly terror in the subprime mortgage market. To put this as frankly as possible, this is just nonsense. Even if subprime delinquencies and defaults are up, they're a tiny portion of total mortgages. Suppose 13 percent of subprime mortgages are in default. Subprime itself is less than 15 percent of total mortgage debt, so that means that roughly 2 percent of mortgage debt is delinquent or in default. Yes, that's more than it used to be, and is a disaster for the subprime mortgage companies. But when a mortgage defaults, the lender takes back the house or condo, sells it, and usually recovers about 75 percent of the loan value or more. That means the real loss would be about 25 percent of 2 percent, or 1/2 of 1 percent. In the context of a market as huge as the nation's mortgage market, that's not a lot. A few companies will go bankrupt, and someone will make a killing buying their bonds and portfolios at a huge discount as they turn out to be worth a lot more than people thought in March 2007. But it won't mean a lot to a roughly $14 trillion economy, of which the subprime mortgage market is a tiny blip.

Bank Stocks: Proceed with Caution; Huh?

March 18, 2007

The International Herald Tribune ran with this article (PDF) recently. An excerpt:

Sticking with institutions that safeguard money instead of taking big risks with it may be the best course after a multiyear expansion, especially given the penchant that bankers have for poor timing. It is always possible that they have learned from past mistakes, but Sellar, for one, is not willing to bet too much on it. "I don't think they're more resilient," he said. "They try to talk good talk about improved risk models and stress-testing different scenarios, but you're never able to know which scenario will lead to a blowup. A lot of them didn't manage to miss Enron."

The ending analysis, at least the Enron part, is on target. The problem is the 'squishy' way they get to that understanding: its all fundamentally driven.

All Versions & Translations

March 17, 2007

An updated link of all versions and all translations of my books.

Jeremy Siegel View

March 15, 2007

Jeremy Siegel offers this view about recent market activity. An excerpt:

When stocks were in this uptrend, the market attracted many "trend followers" or "momentum players." These are speculators who make no judgment about whether stocks are cheap or expensive but only want to jump on the bandwagon. There's an old expression on Wall Street -- "Make the trend your friend" -- and that's just what these speculators did. But these trend-followers knew that the bull market wouldn't last forever. They protect their profits by placing stop-loss orders below the current price. A stop-loss order tells the market maker to sell whenever the stock penetrates a predetermined level. Because the market never moved down 2 percent for so long, many stop-loss orders were placed 2 percent below the market. Once the 2 percent limit was breached, a wave of selling broke out.

Best Life Magazine Q&A

This is an interview I did last fall that just appeared in late February 07 (PDF version). As a fun contrast, this is a review of my book Trend Following seen recently:

I cannot believe that a reputable publisher actually picked it up. The only explanation is - Covel is "kissing up" to some big money hedge funds and uses his book to promote them, hence they muscled the publisher....a big cluster fuck if you actually paid money for this piece of shit.

I love crazy people! This guy sounds like he needs a hug from someone or at least some mild electric shock therapy.

A Comment on George Soros

March 14, 2007

I offered some comment (PDF) recently to a reporter who openly admitted she was new to the subject of George Soros. I think she did a good job of "getting it" for a newbie.

Paperback Edition of Trend Following Is Out

The paperback edition of Trend Following is out. It includes a second forward by Charles Faulkner. High resolution cover.

New Century Financial Corporation: Oops

March 13, 2007

Today, New Century Financial Corporation was all the news. Stock cratered. Straight down. Get ready for the dog and pony Congressional hearings show. I am sure there were accounting problems. If they violated the law, executives should get ready for their own version of HBO's Oz. However, don't complain if you are still holding the bag at $1.66 a share. There were clear warning signs in the price movement long before the meltdown. There were no excuses for not exiting, that is unless you were dollar cost averaging (losers average losers).

Money Still Learning to Lobby

From today's New York Times:

Big Money Still Learning to Lobby By JENNY ANDERSON: The hedge fund industry seems resigned to no longer be a wallflower in Washington as it joins the lobbying dance with Congress.

The Turtles Nearly Twenty Five Years Later

Writing a book about the Turtles was an entertaining yet confusing process. It was entertaining because once the curtain was pulled back on the story and the characters were revealed as real people, not simply a homogeneous group of all presumed "winners", true insights were revealed. What separates the winning Turtles today from those Turtles who have literally had no success since 1983? It is a core question addressed in my upcoming book. Why was the process confusing? Some Turtles who have never talked until now, opened up. Others who had gone on record over the years, got tight lipped. I still don't know exactly what it is that some of them want kept from the public eye. In the end, they are all just people, which is motivating for everyone else who did not answer the 1983 and 1984 want ads.

Life, Liberty and the Pursuit of Hedge Funds

From Trader Daily:

Does the public want to be protected from its own feeblemindedness in judging investment risk based on wealth? The SEC asked, albeit not in those words, and the public took ample advantage of the opportunity to comment. The answer was an emphatic: "No!" Last December the SEC proposed raising the required-asset bar for would-be investors in hedge funds and other pooled investment vehicles. The period for public comment on the suggested rule change ended on Friday, and the SEC had received more than 500 responses to what it had predicted would be an uncontroversial issue. Individuals from around the country protested the notion that assets in the safe were any way to judge financial acumen. Investors who qualify under current rules were horrified that they could be regulated out of the best and broadest range of investment opportunities available to them now. Some industry voices also questioned the impact on competition, as newly created hedge funds often depend on smaller investors to get off the ground. This feedback, though, may not be enough to influence the SEC's ultimate decision on the rule. Since December, there has also been a contrary trend in thinking, which is that the higher-level entry requirement should also be extended to investments in private equity. As distinctions in investment strategy become harder to make among hedge funds, private equity and venture capital, the result may be a broader investor accreditation requirement applied to all.

More.

Social Investment Research Analysts

March 12, 2007

Am I the only person who thinks this is nuts and impossible to execute? Once the Social Investment Research Analysts weed out companies involved in nuclear power, major manufacturers of tobacco products, alcoholic beverages, weapons, and firearms, companies that have serious and persistent human rights problems or directly support governments that systematically deny human rights (does this rule Google out due to censorship in China?), the field has been narrowed hasn't it?

"Are Some Stock Analysts Rewriting History?"

March 11, 2007

I caught the headline "Are Some Stock Analysts Rewriting History?" An excerpt from the article:

In their paper titled “Rewriting History,” professors Alexander Ljungqvist of New York University, Christopher J. Malloy of the London Business School and Felicia C. Marston of the University of Virginia say they found 55,000 changes to the database from 1993 to 2002 that tend to make certain stock analysts look good. The database is widely used by fund managers, academic researchers, by regulators to track questionable activity on Wall Street — and by The Wall Street Journal to assemble its annual list of the best analysts.

Remember the Gomer Pyle surprise, surprise, surprise (MP3) line? It is amazing that this much effort goes into categorizing predictions. Am I surprised that efforts might go into making the prediction mavens look good? Not exactly.

Go to Second Article from Slate >

Modern Markets Scorecard

March 10, 2007

This Modern Markets Scorecard (PDF) from Rydex paints a case for diversification. Mebane Faber is thanked for bringing this to my attention.

A Chart Is a Chart

After 2 weeks of Wall Street's press core manically feeding us "news" about crashes, mini-crashes, Greenspan speeches, corrections and every other factoid under the sun, we are left with THIS. Is there anything special on that chart? After 2 weeks of "the world is ending", what is so unique about that month of movement on the Nasdaq? I am sure some data cruncher can find any number of charts that look exactly like that one. My statement doesn't mean that every quant or trend trader cleaned up in the last 2 weeks. The big difference is that trend traders expect loss, expect the unexpected and accept the volatility. The fundamental news driven crowd start with a prediction, then when it all backfires, we see the histrionics of the last 2 weeks.

1938 Wisdom Part 2

March 08, 2007

Last night I posted an excerpt from The 1938 book "Commonsense Speculation". Another very relevant excerpt:

Never forget that all market profits are "paper" until collected. A $1000 or $100,000 paper profit can soon turn into a loss from mental lethargy or indecision.

Continuing:

Inasmuch as 99% of speculators trade on the bull side, get out somewhere while the going is good. For most people a bull market is like a trip in a elevator. Floor after floor is called out by the starter, but few emerge. Finally, to continue the metaphor, the elevator reaches the roof as the bull market is culminating. Then the machinery breaks, the car plunges to the bottom of the shaft, and the passengers - most of them badly injured - struggle to climb out of the wreckage that a bear market has brought.

Of course, it goes without saying that getting into a market, or getting out, requires a preset plan before you ever take the first step to speculate.

1938 Wisdom Part 1

March 07, 2007

The 1938 book "Commonsense Speculation" offers:

One of the most commonest of speculative sins is to be unduly influenced by the previous high of a stock. If the price has declined a good many points, a universal feeling is to assume that it cannot go much lower. The stock market can do anything and an individual stock can go almost anywhere - up or down - in the course of a dynamic move.

Further the book quotes the head of Chase National Bank from 1937 regarding speculation:

I know the whole system of speculation in securities is questioned by some; that speculation, as a whole, in any market is condemned by some; I know that there are those who identify all speculation with gambling, and would not rule out all speculators as social parasites who have no useful function. But the verdict of impartial economists on this point is clear and very nearly unanimous. The difference between speculation and gambling is that in gambling artificial and unnecessary risks are created; whereas in speculation the risks already exist and the question is simply who shall bear them.

James O. Rohrbach on Recent Stock Market Action

March 06, 2007

James O. Rohrbach forwarded me some of his recent commentary:

If you listen to the to the Wall Street Experts, you know exactly what caused the big drop and you know where the market is heading from here. It's amazing how these people can get on the tube and tell us exactly what is going to happen. I am listing a few Expert comments that I heard. They really clarify the current situation:

There, now you know exactly what caused the drop on Tuesday and you know exactly how to proceed with your investments.

"Fundamentals" Are A Flying!

March 05, 2007

When there is no volatility, the fundamental explanations in the "news" (regardless of how useless) don't stand out as much. Now, they "look" inane. From the AP today:

NEW YORK (March 5) - Wall Street managed to stabilize itself Monday, although investors remained nervous about nagging mortgage default concerns and tumbling stock markets abroad. t managed to stabilize itself Monday, although investors remained nervous about nagging mortgage default concerns and tumbling stock markets abroad. The major indexes fluctuated as investors tried to size up where the market was headed, and as traders swooped in to take advantage of stocks left severely depressed by last week's big decline.

1. How is "stabilization" defined with precision? Is there a rule or number?
2. How is "nervous" defined with precision? Is there a rule or number?
3. What investors are worried about "nagging mortgage default concerns"?
4. Now that markets are "fluctuating", should we view that as something new?
5. Investors now have the ability to "size up" market direction? How do they do that exactly?
6. "Severely depressed" means what in terms of a precise number?

Don't Call Me a Loser

March 04, 2007

Feedback in from last night:

Hi Michael, I have been a subscriber to your newsletter and have read your book. I understand there are many great trend followers in the past and will have many more in the future. However, I find your complete dismissal of other systems a little disturbing. I have read a few cases, where you have labeled readers who question trend following as losers or otherwise. Has it occurred to you that there may be more than one way to do things? While you cite the various trend followers as proof that trend following works -- fine, it does. But at the same time, you can't completely ignore the successes of others that do not use trend following.

Clearly, Warrren Buffett is not a loser, but he is my opinion the ultimate unrepeatable outlier. And my use of the term "loser" has been to describe market "losers" as in losing money. There are winners and there are losers. Should we not talk about losing situations like the LTCM crisis? Or should people who buy and hold no matter what, making less money than trend following, be excused from criticism? Given the fact that most people have still never heard of trend following and that most academics still say it doesn't really work, your email feels like a compliment.

Market Forces or "Why Explanations"?

March 02, 2007

Feedback from a reader:

According to what I learned in school: aren't assets priced based on market forces? Supply and demand? What I don't understand is, when I read news articles, the market is supposedly experiencing a correction now. What correction? Aren't those assets prices based on people's demand for then? Whatever the price is at any particular moment that is the price that people are willing to pay. How do we determine at any point they are not 'overpriced' and how can anyone do that when prices are constantly changing?

Barry Ritholtz assembled some of the better "whys" to explain the correction:

4 of his top 10 myths of the Great Correction of 2007:

1. Chinese regulators caused the meltdown.
2. It was Greenspan's fault.
3. Blame China's market crash.
4. A Dow Jones Glitch caused the plunge.

More good ones?

Why No Capital Requirements for Las Vegas?

My podcast (MP3) on proposed new hedge fund requirements brought in a simple, but powerful thought:

"Where are the net worth requirements and risk disclosures in Las Vegas casinos?"

Give Me a Break!

March 01, 2007

From ABC News today:

Tuesday, just after the New York Stock Exchange bounced in and out of the 500 point pothole, an interesting item appeared on the blog site for the U.S. News & World Report. In it, senior writer James Pethokoukis asked the interesting question: "Did the Drudge Report help tank the stock market?" In fact, there were a number of other, more likely, causes, ranging from Alan Greenspan's warning that morning about a possible impending recession, falling durable orders and housing sales, rumors of China instituting a capital gains tax, etc. But still, Pethokoukis's question was intriguing.

It is not an intriguing question. It is an ignorant question. Excuse me while I go pull my hair out...

Read article.