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

U.S. Stocks Roar; Why?

May 31, 2007

U.S. stock markets are roaring. What does it mean? You should be long. Why? They are going up. How long will they keep going up? No one knows. "That's not a good enough answer for me! Why not? What is the alternative?

Lions, Crocodiles and Buffalos

May 30, 2007

Barry Ritholtz writes at his blog:

...this video clip from the South African jungle. It is utterly fascinating -- I can guarantee you've never seen anything like this before. Perhaps there are some lessons in it for life.

He is right, this video of the "wild" is teaching a lesson for many aspects of human life.

Trading Lessons from Leonardo Da Vinci

A good read that adapts Leonardo Da Vinci precepts to trading.

Stamp Tax; Say What?

May 29, 2007

From the AP comes news of the new Chinese "stamp tax" on trading:

BEIJING (AP) -- China's move to raise a tax on share trades, aimed at slowing a boom that could lead to a possible market bubble, seems to have worked, at least for now. The main Shanghai Composite Index tumbled 6.5 percent to 4,071.27 Wednesday after hitting a record high on Tuesday. The Shenzhen Composite Index for China's smaller second market fell even more, closing down 7.2 percent at 1,199.45. The decline in Chinese shares hit other markets, too, although not as dramatically as on Feb. 27, when investors around the world flinched from a nearly 9 percent slide in the Shanghai index. The retreat in Chinese shares came after the Finance Ministry tripled the "stamp tax" on stock trades from 0.1 percent to 0.3 percent, effective Wednesday. The ministry was trying to "cool (the) stock market," the official Xinhua News Agency said. "This policy change reveals the government's concern about a possible stock market bubble," said Citigroup economist Minggao Shen, describing the tax hike as Beijing's first formal move to cool the boom. "The market didn't know what the government was thinking until now." Despite the drop, Shanghai's benchmark index is still up 52 percent for the year, following a 130 percent jump in 2006.

Why doesn't the AP reporter have the guts to say that sounds nutty as hell? A stamp tax? Picking bubbles? Deflating them a little, but not too much? All organized by typical government busy bodies? But perhaps they have figured out, perhaps this all ends well. I smell the same kind of aroma that took over America up until March 2000.

We Never See the Future

May 28, 2007

We never see the future.

Innumeracy

John Allen Paulos is his book Innumeracy writes:

Some would-be advisor puts a logo on some fancy stationery and sends out 32,000 letters to potential investors in a stock letter. The letters tell of his company's elaborate computer model, his financial expertise and inside contacts. In 16,000 of these letters he predicts the index will rise, and in the other 16,000 he predicts a decline. No matter whether the index rises or falls, a follow-up letter is sent, but only to the 16,000 people who initially received the correct "prediction." To 8,000 of them, a rise is predicted for the next week; to the other 8,000, a decline. Whatever happens now, 8,000 people will have received two correct predictions. Again, to those 8,000 people only, letters are sent concerning the index's performance the following week: 4,000 predicting a rise; 4,000 a decline. Whatever the outcome, 4,000 people have now received three straight correct predictions. This is iterated a few more times, until 500 people have received six straight correct "predictions." These 500 people are now reminded of this and told that in order to continue to receive this valuable information for the seventh week they must each contribute $500. If they all pay, that's $250,000 for our advisor. If this is done knowingly and with intent to defraud, this is an illegal con game. Yet it's considered acceptable if it's done unknowingly by earnest but ignorant publishers of stock newsletters, or by practitioners of quack medicine, or by television evangelists. There's always enough random success to justify almost anything to someone who wants to believe.

This is a great example showing how unsuspecting (& hopeful) people can be swayed into believing that a guru has magical predictive powers. It happens all the time.

Finger Length Predicts SAT Performance

May 27, 2007

From LiveScience.com comes another attempt to have nature be more important than nurture when it comes to achievement:

A quick look at the lengths of children's index and ring fingers can be used to predict how well students will perform on SATs, new research claims.

Continue reading Finger Length Predicts SAT Performance »

Panicky Sheep? It Appears So

May 25, 2007

An excerpt that for most people will make them "uncomfortable":

Washington—Whether people are making financial decisions in the stock market or worrying about terrorism, they are likely to be influenced by what others think. And, according to a new study in this month's Journal of Personality and Social Psychology, published by the American Psychological Association (APA), repeated exposure to one person's viewpoint can have almost as much influence as exposure to shared opinions from multiple people. This finding shows that hearing an opinion multiple times increases the recipient's sense of familiarity and in some cases gives a listener a false sense that an opinion is more widespread then it actually is.

More (including PDF report)

Famous Last Words

May 23, 2007

From the WSJ comes a list...

Sept. 5, 1929 -- "Sooner or later a crash is coming, and it may be terrific."
-- Businessman and statistical analyst Roger Babson, quoted by John Kenneth Galbraith in "The Great Crash 1929"

Mid-October 1929 -- "Stock prices have reached what looks like a permanently high plateau."
--Yale economist Irving Fisher, just days before the market crash

Nov. 6, 1982 -- "Sell all stocks. This is a bubble market, not the normal entrance to a new bull market. ... The recent rise of 37.1% in the Dow average in 12 weeks is the largest bet Wall Street has ever placed on expected economic recovery. It equals the final blowoff rise between June and September 1929."
-- Technical analyst Joseph Granville, after the U.S. had entered a new and at that time unidentified bull market

Oct. 19, 1987 -- "The Dow could be as low as 1900 next February."
-- Market strategist Elaine Garzarelli of Shearson Lehman Brothers, a couple of weeks before "Black Monday."

March 17, 1999 -- "How high will the market go? ... Our calculations show that with earnings growing in the long term at the same rate as the gross domestic product and Treasury bonds below 6%, a perfectly reasonable level for the Dow would be 36000 -- tomorrow, not 10 or 20 years from now."
-- James K. Glassman and Kevin A. Hassett of the American Enterprise Institute, in Wall Street Journal commentary

March 28, 2000 -- "What we are concerned with is the market is not as undervalued as it was." And: "We didn't make bearish comments today. What we said was, we have been very bullish, that was correct. We now are less bullish than we were."
-- Analyst Abby Joseph Cohen, of Goldman Sachs, about three weeks after the Nasdaq reached what remains its all-time record, 5048.62. About two weeks later, the Dow and Nasdaq suffered their biggest point losses to date, 617.78 for the Dow and 355.49 for the Nasdaq.

Has This Song Played Already?

May 22, 2007

A May 22 2007 article in FT.com China’s day-traders look for ‘black horses’ by Geoff Dyer is scary yet comical:

The thousands of ordinary Chinese who are signing up each day to trade shares are not too concerned about the conventional ways of valuing a stock, but they need to know the difference between a ghost and a black horse. Chinese have combined a traditional delight in word-play with their new-found passion for stocks to create a rich supply of colloquial jargon for investing that is bandied around brokerage offices. “Ghost shares” are highly risky, but “black horses” have beaten expectations. Buying cheap to sell high later is known as “fighting for the hat”, while selling at a loss to avoid further losses is “meat slicing”. Investors who think a piece of news will boost prices claim to be “lifting the sedan chair”. When a fund manager was sacked last week for allegedly manipulating share prices, websites hummed with talk of “rat investors”, the term for insider traders. There is even a Chinese phrase that could define the current boom. On top of bulls and bears there is the “deer market”, when large groups of amateur, short-term speculators cause markets to move in erratic jolts. The jargon is being quickly learned by the long lines of new day-traders who have helped push share prices up 52 per cent this year – on top of last year’s 130 per cent rise – but who are making the market look increasingly over-valued. Despite an interest rate rise on Friday aimed at cooling the market, retail investors ignored the messages from Beijing and opened 287,000 trading accounts on Monday, 35,000 more than on Friday. The explosion in day-trading has created some unintended consequences in Shanghai in the form of unwashed dinner dishes, badly ironed shirts and dusty floors. In recent weeks the city has developed a shortage of ayis, the domestic helpers who do chores in the homes of middle-class families, because some have found more gainful employment playing the market. Sheng Min, who runs a Shanghai agency that recruits ayis, says his company started to face problems finding new domestic helpers in April because of the stock market fever and now has 50 per cent fewer women on its books than usual. “We occasionally receive phone calls from employers complaining about their ayis,” he says. “Some of them seem to be more interested in chatting about stocks with their friends than working.” Zhang Wei works most weekday mornings in several houses around the city, but for the last few weeks she has been visiting a brokerage in the Hongkou district of Shanghai in the afternoons. “Last month I made almost half my salary from investing,” she says. With an eye on the new day-traders, a man placed an advert on the Taobao auction site last week selling signed doctors’ certificates for one month off work for Rmb100 ($13, €9.70, £6.60). The advert has since been removed. Cynics would say speculator-ayis are a sure sign of a bubble, but if everyone continues buying, prices will keep going up – even in a deer market.

Copyright. The Financial Times Limited 2007

Not What You Expected

May 21, 2007

From the Freaknomics blog:

A study by University of Toronto assistant professor of organizational behavior Jennifer Berdahl found that, contrary to the conventional belief that a woman’s acting “feminine” in the workplace leads to sexual harassment, just the opposite may be true. Berdahl’s paper concluded that women who “act like men” are more likely to experience harassment, possibly because of the conduct’s use as a tool to reinforce traditional gender roles.

Scam Artist PDF

May 20, 2007

An interesting (and sad) read regarding scam artists in the investment field. An excerpt:

Q: Most people probably think that only some- one who is uneducated or naive or stupid would fall for these pitches. True?
A: Totally not true. The majority of clients that I dealt with over the years were white- collar types of people. They were people who were already successful. They were people who had cash - had made money - and had worked very hard for it. They were doctors, they were dentists. [That] was a big group we went after - dentists. Dentists love to be loved by people.

Q: Dentists?
A: They sure do, because nobody likes going to the dentist. They're the easiest group to sell. There are companies that just sell [investments] to dentists.

You Don't Have to Be Einstein to Get Rich

May 19, 2007

An article from Selena Maranjian titled You Don't Have to Be Einstein to Get Rich builds off the Turtle experiment even if the author was unaware of the Turtles:

Pop quiz! What factors help determine how wealthy you'll become in life? I initially guessed that education, intelligence, skills, and socioeconomic origin played a role.

Continue reading You Don't Have to Be Einstein to Get Rich »

Churn

May 18, 2007

Question: What do you think of Moving [Average] 2 and Moving [Average] 5? From my research, these indicators look reliable.

Ed Seykota Answer: I think the two-day moving average and the 5-day moving average are fairly reliable as ways to churn accounts and generate commissions.

Trading State Management Series

May 16, 2007

Jason Brumbalow at The Trading Authority passed along (2) videos:

Neuro Associative Conditioning

Trading As Mental Warfare

Taking a Loss

May 15, 2007

From Trader Daily:

The most common reason traders are reluctant to take a loss is their fear that once they do, the trade will rebound. Sound familiar? If this is how you think about taking losses, try to recognize that this kind of thinking might well prevent you from reaching your potential. It might even destroy your career. So stop trying to be right all the time - trading is a game of probabilities, which means winning and losing are necessary components. No one gives a bonus check to the trader who was 'right' the most over the course of the year. To coin a phrase, wrong happens. Great traders know how to implement damage control and are willing to take a loss. Are they scared and hesitant? Of course, but that doesn't prevent them from doing what they need to do to stay in the game. If George Washington hadn't decided to abort the Battle of Brooklyn and cede Manhattan to the British at the start of the Revolutionary War, for example, we'd all be eating 'crisps' and watching the 'telly' right now. He took a loss - but lived to fight on. That's what true champions must sometimes do. A client of mine - I'll call him Aaron - is a bond trader at a major bank. He was earning seven figures annually but envisioned taking his game to another level. During our first meeting, Aaron showed me his numbers, proudly pointing out that he was winning a healthy 81 percent of his trades. He rambled on, saying that his number was the highest in his group and telling me his managers had asked him to train other traders to be as 'consistent as I am.' I looked Aaron straight in the eye. 'Was your performance bonus based on your winning percentage?' I asked him. He paused. 'No,' he replied. 'Exactly my point,' I told him. Put simply, Aaron needed to stop obsessing about being right and start focusing on making money. Several follow-up meetings made it clear that he was taking his winners quickly and holding his losers way too long, even adding to them in some cases. I challenged him to think about what might be triggering this tendency. 'The trade can always come back,' he told me. 'Maybe I'm just not giving it enough time.' That's not an answer; it's a rationalization. 'Come on,' I told him. 'You're either a control freak or a perfectionist, but you always seem to have to be right. And this is limiting your ability to reach your potential.' Aaron, I was discovering, was afraid to admit when he was wrong. So I presented him with a simple formula to help him get out of his own way: H + W + P = E. Hoping + Wishing + Praying = Exit the trade now!

Doug Hirschhorn, a former Division I baseball player and commodities trader, has a Ph.D. in sport psychology. He is the coauthor of The Trading Athlete and has served as trading coach for Deutsche Bank, Schonfeld Securities and Balyasny Asset Management. He is currently a consultant for financial institutions, trading firms and hedge funds. E-mail him at headcoach@tradermonthly.com.

Avoiding the Hard Part

May 14, 2007

From the 'Card Shark' in Trader Magazine:

I see a lot of players quit a game way too soon. I'm not just talking about leaving the table. More often than not, 'quitting' refers to the way someone plays after getting ahead a certain amount. Up enough to be satisfied, he quits the game by default because he stops taking chances and looks only for the locks.

On the flip side many people seek to "time" when they start trading or any entrepreneurial activity for that matter. What was the old Patton saying about a violently executed plan today being better than a perfect plan next week...

We Have Seen This Before

May 13, 2007

The article below from the AP has some choice quotes. This ain't gonna end good!

1st-Time Investors Buy Up Chinese Stocks
Sunday May 13, 3:14 pm ET
By Joe Mcdonald, AP Business Writer
First-Time Investors Pour Money Into China's Stock Market, Which Has Soared to Dizzy Heights

"We still can make money," Ding said as she stood at the counter at Tiantong Securities with the paperwork for her new account. Asked what stocks she would buy, Ding said, "I don't know. I'm still learning."

Continue reading We Have Seen This Before »

Are We Really Capitalists in America?

May 12, 2007

From the AP comes "Congress on the loose":

Hedge Fund Managers Step Up Activism
Saturday May 12, 1:41 pm ET
By Marcy Gordon, AP Business Writer
Wealthy Hedge Fund Managers Step Up Activism in Washington As Tax Rumblings Grow Louder

WASHINGTON (AP) -- With Congress always looking for new ways to boost tax receipts and protect individual investors, it's natural for hedge fund managers to worry that they have a bull's-eye on their chests -- especially now that word is out that some of them made more than $1 billion apiece last year.

Continue reading Are We Really Capitalists in America? »

Running from Leverage

May 10, 2007

Emma Humbert wrote a review of A Demon of Our Own Design recently on Victor Niederhoffer's site:

I have a problem with this book, A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation. It irritates me to no end that Richard Bookstaber made his money first at Salomon Brothers and then at a major hedge fund that goes out of its way to block hedge fund regulation of any form. His career and fortune was made working at firms that use a lot of leverage and highly complex investment strategies to make money. And he was in charge of risk. But now that he has become a long/short equity manager, a relatively simple strategy that does not require much leverage, he is saying leverage and complexity are bad things. I find the whole thing a little disingenuous. Which is not to say the author does not make some valid observations.

Seasonality

May 09, 2007

Lindsay at Wallstrip tackles seasonality.

What Makes a Pro Trader?

Brett Steenbarger writes on what makes a professional trader. Nice piece. However, the word "professional" can be replaced with the word "great" to possibly make an even better point.

Sleep Deprivation Can Threaten Competent Decision-making

May 08, 2007

An interesting read probably not pondered by many:

Science Daily (link) - Gambling is a risky activity that can potentially result in the loss of a significant amount of money. A study published in the journal SLEEP finds that sleep deprivation can adversely affect a person's decision-making at a gambling table by elevating the expectation of gains and making light of one's losses following risky decisions.

Continue reading Sleep Deprivation Can Threaten Competent Decision-making »

Boone Pickens: "Stop Demand with Price"

May 07, 2007

James Altucher at Stockpickr.com writes:

T. Boone Pickens is perhaps the world's greatest oil investor. He's been drilling for oil, buying oil companies and running oil-based hedge funds since 1951 and right now he's saying oil will top last year's high of $78.80 and break through $80. "You will have to stop the demand with price," he said at a recent Milken Conference.

Some of the best one-liners around! And while he says that, and there is no doubt he believes it, Pickens, while using different technique than trend followers, makes his big money off of big trends.

Fools?

May 06, 2007

From Warren Buffet's annual conference:

The “Sage of Omaha” has said repeatedly he is in fine health and does not want to retire. However, uncertainty over who will succeed the 76-year-old investor upon his death has weighed on the share price of Berkshire, the US insurance-to-clothing conglomerate he has built. Mr Buffett, Berkshire’s chief executive and chief investment officer, wants the next generation of leaders to split the roles. He has said he has three, unnamed, internal candidates for the chief executive position. During the meeting, Mr Buffett criticised the “electronic herd” of hedge fund managers, saying their fast trades in and out of assets were a “fool’s game”.

I find it hard to call Jim Simons a fool, who seems to fall within Buffett's criticism. But frankly, I am not sure what Buffett means by in and out. He may be criticizing holding periods of 6 months as in and out. Or to him a one year holding period could be in and out. How can you call the hedge fund managers who produce billions in profit every year, not trading like Buffett, fools?

Hedge Fund Fraud Risk

May 05, 2007

http://www.youtube.com/watch?v=orFrvK9Vfko

Can Any of These Guys Define Risk?

So hedge funds are "risky" (Watch Video), but mutual funds that lose over 80% are not?

Cramer On Games Hedge Funds Play

Watch on YouTube. This is from a while back, but worth keeping in mind if you are heading down the path of trying to be a day trader.

Keep It Simple

Sometimes, with all the noise, all the complexity, all the trading rules...simple is where it is at. Jeffrey Strain recently listed 5 ways on Yahoo Finance where patience can help you achieve wealth. Sure, some of it is the standard issue stuff we all should know, but his points are good reminders.

1. It helps forgo instant gratification: Being patient allows you to wait until you have the money to purchase the things that you want. But it's not easy to show patience in a society where instant gratification is advertised as being the norm and credit is easy to obtain. If you aren't patient, however, it means that you will likely use a credit card to pay for things you don't have the money to pay for. This is how people get into credit card debt, which will deteriorate savings and hinder your ability to become wealthy.

5. Patience helps you look long term: Even if you create a solid wealth-building plan, there will still be bumps in the road. When these bumps occur, it's important that you have the patience to stick to your plan instead of panicking. If you end up abandoning your plan at the first sign of trouble, you will likely end up much less wealthy than if you have the patience to stick to your plan the entire time. Stocks fluctuate over short periods of time, but they usually go up over a long period of time. It's important to take a patient, long-term view in wealth creation.

"Why" Doesn't Matter to the Technical Trader

May 04, 2007

"Why" Doesn't Matter to the Technical Trader (PDF) is an article I recently wrote for SFO Magazine.

Chinese Investors: Only Bull Market Babies?

May 02, 2007

An article titled "t’s like a casino set up by the Communist Party" (PDF):

If Chinese banks can be worth as much as the best America can deliver, why not its primary metals businesses? No reason, declared investors on the Shanghai stock market on Monday as they pushed the price of newly listed Aluminium Corporation of China - known as Chalco - up almost three fold. Against an offer price of 6.60 yuan, the quote topped 20 yuan before settling at 18.50. That values the business at 238bn yuan, or $31bn - just a fraction below America's Alcoa, the world's largest aluminium producer. Bizarrely, the Shanghai price was roughly twice the quote available in Hong Kong, where Chalco's H-shares are also now listed. Asked about the discrepancy by a Reuters reporter, Chalco's chairman Xiao Yaqing, said: The H shares should move closer to the A shares. Neither Xiao or his Chinese mainland investors seem to be reading the Western financial press. Amid almost daily evidence that Chinese stock market have parted company with reality, The Economist has become the latest to warn that tens of millions of Chinese are risking their shirts, noting that if it goes wrong, things could get nasty. If the bubble were to pop, it could have a bigger impact on social stability than any previous downturn in the stockmarket's 16-year history. There are now more than 91m accounts held by individuals at brokers or in mutual funds. Estimates for the number of investors vary widely. At the height of the last market boom, in 2001, there were 60m accounts but perhaps fewer than 10m investors. There are certainly many millions more now. New accounts at brokers are being opened at a rate of more than 200,000 a day, touching a high of more than 310,000 on April 24th. The total so far this year is more than 8m, which is around ten times as many as in the whole of 2005, when the market began to emerge from a four-year slump. Apparently, so many employees are spending their time trading stocks online that some companies have introduced fines. Many continue surreptitiously trading and sharing tips through e-mails, instant messaging and texts. Despite market wobbles, the bulls have quickly returned. As one Chinese investor puts it to The Economist: "It's like a casino set up by the Communist Party."