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

Define the Trend? Wrong Question

June 30, 2007

A trader asked a question:

I have been searching far and wide for a trader who can define a trend. None have lived up to the task...I have read piles of books and none have been able to answer my question either.

Ed Seykota on his FAQ answered:

Part of the problem you may be having in defining a trend is that trends do not exist. Like the past and the future, a trend is merely an idea. There is no such thing in nature. Trend is an idea about the overall average historical direction of prices; trend is a convenient way to view history; trends do not indicate the direction of prices in the moment of now, or even exist in the moment of now. Furthermore, The methods you use to define trend (to view history) are entirely up to you, so you get to define trend any way you wish; everyone may have a different idea of "the" trend. Let's say you make a graph the volume of air in your lungs. If you define trend by the one-second average, your air volume trend may change several times per minute. If you define trend by a 90-day average, then your air volume trend may gradually increase for several decades and then decrease.

Reason Bran

Reason Bran is good for you.

Feedback on Feedback

June 28, 2007

Feedback in:

About the feedback you received on auctions from Marc, I think it's fascinating that he starts out with "tremendous controversy about the 'true' value of these paintings" with the word true in quotes, a quotation mark usage I agree with, but then goes on to say "everything from obscure low-value art, up to Picasso works" without acknowledging that the worth of a Picasso is just as much a "true" value, arbitrary and determined solely by how much a buyer is willing to pay, as that of so-called "low-value art," yet he places no quotation marks around the phrase low-value art. It's fascinating because he probably did this unconsciously, not aware of the glaring contradiction.

Good day,
Neil

Hedge Clipping

June 26, 2007

Is there a way to get above-market returns on the cheap? John Cassidy writes. The New York Times adds to this with Building a Hedge Fund, With No Manager Required.

Fairness Doctrine

June 25, 2007

Forget liberal or conservative, the idea of a "fairness doctrine" is subjective !@#$. This excerpt should scare thinking people to their core:

WASHINGTON, June 24 (UPI) -- U.S. Sen. Diane Feinstein, D-Calif., said Sunday she is "looking at" the possibility of reviving the fairness doctrine for U.S. broadcasters. Feinstein, speaking on "Fox News Sunday" with Sen. Trent Lott, R-Miss., said talk radio in particular has presented a one-sided view of immigration reform legislation being considered by the Senate. U.S. talk radio is dominated by conservative voices. "This is a very complicated bill," said Feinstein. "Most people don't know what's in this bill. Therefore, to just have one or two things dramatized and taken out of context, such as the word amnesty -- we have a silent amnesty right now, but nobody goes into that. Nobody goes into the flaws of our broken system." Feinstein said the measure before the Senate "fixes those flaws" but that doesn't get presented on talk radio, which she said "pushes people to ... extreme views without a lot of information." Asked if she would revive the fairness doctrine, which used to require broadcasters to present competing sides of controversial issues, Feinstein said she was "looking at it." "I remember when there was a fairness doctrine," she said, "and I think there was much more serious correct reporting to people."

Put aside this particular issue, what happens when it is another issue? What happens when it is the issue of money and markets? Where do these lines get drawn and by whom?

Why Do Retirees Buy Big Houses

June 24, 2007

The guys over at the Freakonomics blog have a nice comment on a new book that tackles our continuing odd decision-making habits.

Channeling Your Inner Millionaire

June 23, 2007

A nice little article on channeling your inner millionaire.

Senator Levin Wants Hedge Funds Taxed More

June 22, 2007

Feedback in:

Mike, did you catch the interview on Bloomberg with Senator Levin who is spear heading a bill to increase taxes on equity and hedge fund managers? It is absolute horseshit! This idiot senator actually says one of the reasons they want to pass this bill is because they are trying to make things "fair" and these hedge fund and equity funds are not "contributing anything to society." FAIR?! Shit, life isn't fair! Don't these types of vehicles stimulate the economy by generating global competitiveness? This will ultimately hurt long term investing. Why do the politicians think American investors need their hands held? I just don't get it...

I thought Matthew K.'s profanity was useful. Anyone have the link for the video?

Mark Cuban on Hedge Funds

Mark Cuban has a nice fundamental piece on hedge fund/private equity IPOs here. Fundamentally, he makes sense. Good sense. But what if the Blackstone IPO goes from its current $35 a share to $200 over the next 2 months even though Cuban may be right? Would you skip that hypothetical trend just because you could not justify it?

More fundamental analysis here.

Auctions

June 20, 2007

Feedback in:

I really enjoyed your audio comments on the Japanese fish market. You really captured it well.

Best wishes, Marc

Compromised market games sure do imitate real life

June 19, 2007

Take a read of an article by Chuck Jaffe about recent stock picking fun at CNBC. An excerpt:

The story involved the shenanigans that have occurred in two well-publicized stock-picking competitions, one run by TheStreet.com and the other by cable business-news channel CNBC. TheStreet has called off the first round of its "Beat the Street" competition because some contestants apparently had taken advantage of the system by which the game was being run. The site didn't disclose exactly how the purported cheats were gaming the system, but said all of the participants of the first contest could enter its next stock competition, and that the $100,000 in prize money will carry over and be part of a much bigger prize for the next go-round.

Hedgies

June 18, 2007

Food for thought about hedge funds - the basics.

Long Ago Wisdom

June 17, 2007

From the introduction to Wall Street Speculation, Its Tricks and Its Tragedies (published 1902):

Wall Street speculation is the most stupendous game known to the world of chance; as compared with it, the game of Monte Carlo pales in utter significance; in no other game are the stakes so high, is success so transitory and failure so overwhelming. It is a game in which the wealth of Croesus changes hands in a single hour, a game in which a few manipulators behind the scenes pile up millions on top of millions year after year; but in which the vast majority of the outside public, who tamper with it, go to financial and often to physical and moral ruin.

Expert Predictions Go Expertly Wrong

June 16, 2007

Dale D. writes me with a good reminder that we all know intuitively, but forget:

Michael,

Regards,
Dale D.

Fundamental Perspectives Equal Emotional Volatility

June 15, 2007

An excerpt I caught from Market Wire on Yahoo Finance this weekend:

QUALICUM BEACH, BC--(MARKET WIRE)--Jun 16, 2007 -- Profiting from the stock market has just been made much easier. Powerful new technologies combined with proven Value Investing strategies deliver the performance most investors only dream of. With just one click you're shown the top undervalued stocks with the greatest built-in margin of safety. "Ultimately a stock's value depends on its fundamentals," said Mark Hing, President of Aptus Communications. "Investors who keep their eyes firmly planted on fundamentals and remove their emotions from the investment equation are best positioned to increase their returns and minimize their risks in the markets."

Hold on! Sticking to a pure fundamental approach is the antithesis of removing your emotions from the investment equation. Fundamental perspectives are always tied to subjective interpretations of things like balance sheets (which of course are often "massaged" into whatever number the executive wants).

Reviews from Odd Sources

June 14, 2007

Feedback in:

Michael:

Chuck Cain

Bubbles on the Brain

June 12, 2007

Marc Andreessen writes on his blog about perma-bears. An excerpt:

But as with other habits ingrained into us by evolution, the habit of predicting doom and gloom when it isn't in fact right around the corner might no longer make sense. On Wall Street, investors who have this habit are known as "perma-bears" and generally are predicting the imminent collapse of the stock market. This habit keeps them from being fully invested. Sure, they're well protected during the occasional crash of 1929 or 2000, but by and large they massively underperform their peers who take advantage of the fact that most years, the economy grows, and the market goes up. They have disappointing careers and die unhappy and bitter. In reality it seems very difficult to predict either a bubble or a crash. Lots of people predicted a stock market crash... in 1995, 1996, 1997, 1998, and 1999. They were correct in 2000. But as soon as the stock market recovered in 2003 and 2004, they were back at it, and there have been similar predictions from noted pundits ever since -- incorrectly.

Top Trading Cities?

June 10, 2007

I found this article (PDF) from TRADER Monthly fun reading, but if you actually believe there is relevance to a listing like this for trading success, well I have some swamp land in Florida to sell you...

"Even Idiots Can Make Money"

June 09, 2007

From today's Washington Post...excerpts that need little setup:

Until recently, it was hard to blame the average Chinese investor for assuming that the stock markets only go up. Since June 2005, the Shanghai composite index has gained about 300 percent. Chen Junjie, 34, who works at a consulting company, used to joke that if the Chinese stock market had a motto, it would be "Even idiots can make money."

Continuing:

The Chinese stock markets, which are largely closed off to foreigners except for a select group of institutional investors, are dominated by inexperienced individual investors struggling to understand capitalism. They have driven up shares of companies that are known to be corrupt or losing money. Investment strategies in China are far from scientific. Many investors flip stocks after a few days. Stocks with lucky numbers 6 and 8 in their trading symbols are considered good buys. Xu Wenming, who works in importing and exporting, said he invested a lot in the Pudong Development Bank because, he said, "Pudong is a good name." Pudong refers to the part of Shanghai east of the Pu River. Yu Xueqin, a retired office assistant, invests in companies that produce retail products because government officials are "always saying China is a big populated country and the need for consumer products is big." In the past, posts on Internet investment boards were mostly tips about how to invest. Now they are filled with desperate tales of caution. A woman, who said she was 48, described how she took $26,000 out of savings bonds without her husband knowing and put it into the stock market, only to lose money. "I am sweaty, shaky, like I'm about to collapse," she wrote.

Tsukiji Fish Market in Japan

June 08, 2007

Sometimes I see very bright people, people with advanced degrees and or accomplished careers, just cringe at the idea of "how" markets work. The simplicity of an auction, what really is happening, doesn't register with them. They seem to think more about it then they should. It becomes overly complicated in their minds. A great way to show and explain stock and futures markets? The Tsukiji fish market in Japan:

The Tokyo Metropolitan Central Wholesale Market, commonly known as Tsukiji fish market is the biggest wholesale fish and seafood market in the world and also one of the largest wholesale food markets of any kind.

I had the opportunity to view and film the exchange for the first time this week. If you get the chance, deal with the jet lag when in Tokyo, haul yourself out of bed at 5am and check this market it out. It is truly a unique experience.

View image.

"...Fairy tale of the ignorant masses..."

June 07, 2007

Feedback in:

Michael - some feedback for you. I've been in the "startup" mode in my trading business for a year and a half now. This seems a far cry from the "spend a couple of months getting going" plan I started with. Yes, I too fell for the quick and easy, fast buck, this trading game is a cinch, fairy tale of the ignorant masses. I had the misfortune of making 3 months' earnings in one and a half days early in the game; this was followed by a 1 months' earnings overnight trade soon after. Do you suppose I was a wee bit heavy on those two? Now, after watching a near 90% drawdown last year and a much more docile 10% drawdown so far this year, I find the need to replenish my trading equity and salvage a few remaining strands of gray, albeit short, hair. Why did I tell you this? Because in the midst of the blood, sweat, and tears, you send out the Battle at Kruger video clip. I would say I can identify most with the calf - never give up. So, with the nauseating prospect of going back to a wage to bolster the old equity and put food on the table, I had to chuckle at the allegory of the calf and my struggle to succeed at this game. I also realized how much I look forward to your "f'morn f'mation" audio clips and the great reference material. Thanks for the inspiration. Keep up the great work! Rick R.

Everything to Everyone

From the AP today:

"Historically, we're at lows," said Michael Church, portfolio manager at Church Capital Management, referring to interest rates. "I don't think 5 percent is some sort of hard and fast number where this market turns. I don't think 5 percent is going to compel people to take money out of equities." "Everyone seems to like to focus on this 5 percent level. I think it's in many ways mythical. Five percent is really not that high of an interest rate." He contends that after the run-up in stocks that began in the second half of last year and accelerated in recent weeks, Wall Street was due for some retrenchment. "I would be concerned if we didn't have some profit-taking and some mild pullbacks here and there."

After you read that, what do you do? The ability to speak noise seems to be one of the best skills on Wall Street.

Hmm..."China Shares Tumble as Panic Spreads"

June 05, 2007

From Reuters:

"I knew the market would go down, but I did not expect it would be this fast. After a small plunge, it should go up, but it is not going up," said Madame Wang, a pensioner in her 50s, who put some of her savings into stocks during the bull run. "Next time I will remember -- once the market falls, I will sell all my stocks." Another disillusioned investor at an Everbright Securities branch in Shanghai's financial district, a woman in her 30s surnamed Xu, said: "I used to have confidence in the stock market. But how can I have confidence now that it has fallen so much. I have no more confidence. Even if the government wants to regulate the stock market, it should not be done like this."

Why did she have confidence when it was going straight up, but not now?

Hedge Funds Behind Growing Use Of Quants

From Hedge Fund Daily comes the hedge fund world through the lens of a newbie reporter:

For hedge funds, it does not compute to use human analysts, when an electronic version can do basically the same job. And thus, Reuters reports, hedge funds, which were early to adopt new investment methods, are being credited (or perhaps, blamed, if you’re an analyst), for the burgeoning growth of quantitative strategies. “It’s all about trying to create an artificial analysts,” one unnamed portfolio manager at a quant hedge fund told Reuters. “It may not do it as well (as a human), but it makes up for it in volume.” Reuters cites as evidence of quant success to two of the industries top hedge funds that use them, D.E. Shaw and Renaissance Technologies, which were formed by math professors and are well-staffed with scientific types. Following their example, even non-quant hedge funds are expanding their use of computer models. “It doesn’t necessarily mean that Wall Street analysts are going to go out of business,” Ron Papanek, director of strategy at RiskMetrics Group, said in a Reuters interview,” but it does mean that there are other ways to be successful in identifying value.” He further noted that the fact that the biggest hedge funds are using its means “this form of analysis has legs.” Taking some of heat off hedge funds for equity analysts woes, Brad Hintz of AllianceBernstein, said the human kind are “doomed” also because regulatory investigations into analyst conflicts years ago has resulted in lower trading commission, and that’s put research on the cutting block as firms try to save on operating costs.

How can an author write about quantitative trading strategies in June 2007 and with a straight face make the case that these efforts are innovative or new? Systems trading has been around since the time of Richard Donchian - that's back to the 1950s and earlier. Don't get me wrong, Simons is a trading stud, a legend, but the basic ideas of 100% mechanical systems is not ground breaking.

Follow the Leader?

June 04, 2007

James Altucher writes about investing in China with an example stock to consider:

First on the list is CNOOC Ltd. (CEO), also known as China National Offshore Oil, which pays a yield of 3.6%. It has a P/E of 9.4 and a PEG of 0.32. Cash in the bank totals $4.6 billion. It's understandable to be worried that companies in communist China can be shut down at a moment's notice. But this is a company with $4.6 billion in the bank, trading at a tiny multiple of earnings and returning cash to shareholders. With such a low P/E, steady earnings growth, dividend growth, and a low PEG, I can easily see the stock doubling by year-end. SAC Capital also owns CNOOC. The hedge fund, run by Stevie Cohen, has returned over 30% per year since it started in the early 90s. And that’s after taking up to a 50% performance fee. This means that gross returns before fees (which is all we care about since we're just piggybacking, not investing in the fund) often exceeds 60 percent. Citadel Associates also owns it. This fund is run by Ken Griffin, who started it out of his Harvard dorm room when he was 19 with a $100,000 investment. Now Citadel has over $15 billion under management. A recent New York Times profile speculated if Citadel would be the next Goldman Sachs. One of my favorite hedge funds, Renaissance Technologies, also owns CNOOC. Renaissance is very quant driven and only hires Ph.D.s but that formula has been very successful. Currently, Renaissance is are out raising a $100 billion hedge fund, which would be by far the largest ever. My theory is they are buying every stock that has a lot of cash in the bank and a low P/E ratio. CNOOC certainly qualifies.

Three billionaire hedge fund managers supposedly own this stock. That means what?

1. How does anyone really know these hedge fund pros own anything? And if you did, are they going to call you when it is time to sell?
2. Calling Simons' fund, Renaissance, a favorite is hardly difficult. Everyone knows Simons is in a different league.

My point? Think critically...please!

Wall Street Myths

June 03, 2007

Wall Street might have "10 myths" (read article), but you alone are responsible for making your decisions with your money. No excuses.

Tokyo Trip

I should have posted a note earlier, but if you live or work in Tokyo, drop me a line. I am in town for a few days for a speaking engagement and will have time to get an interview or two in for print and or video.

Gouged by Gas Prices?

June 01, 2007

Give me a break from John Stossel (read full):

Were you "gouged?" buying gas this week? Or maybe over the Memorial Day weekend? Did you pay those record high prices we've heard about? It's time to say give me a break! But & to whom? Drivers we spoke with called gas prices "ridiculous." And the media says it's a new record. Newscasts on CBS, NBC, ABC all announced new record highs. On Fox News, Jon Scott told viewers, "the average price of gas has hit a record high of, get this: $3.18 a gallon." Well, get this: It's not a record high. That's what they say in the media, but it's only a record high if you don't adjust for inflation. And that's just silly. You might as well say the movie "Rush Hour II" made more money than "Gone with the Wind." The media ought to quote prices in real dollars, but maybe when they get excited, they just don't bother. Once you adjust for inflation, it turns out gas cost more 25 years ago, in March 1981. When the 1981 price is converted to 2007 prices (not 2006 prices, as the EIA did), last week's average price of $3.22 is seven cents below the record, $3.29, which by the way was a monthly average.

9 Full Innings

So true. So true.