Michael Covel: News & Info.

Philip J. McDonnell, a critic of mine, offers this piece about me in one of his recent comments. Not sure what he is illustrating with his comment though (I don’t profess to be mathematician). Decades of trend trading performance was made up by me? All trend traders are lucky? That said, I welcome the interest.

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.

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?

I have had my share of critics. There are those who don’t like trend following trading. There are those who don’t like the fact that TurtleTrader.com was even started and has become a great resource for thousands. I have met and talked with many of these people. Some are stand up people with differing opinions, some live in a world of deception. A few of the latter are somewhat well known.

That world of deception is something I have come to know more about in the last 6 months. Specifically, the deception of email and chat forum posts. Consider that last fall on the same day I received (2) emails. One was from a supporter and a considered friend of mine for years. The other email was an anonymous attack email telling me how dumb I was. Fair enough. One good email, one bad! That’s life. Ah, but here is where it gets interesting. Those (2) emails, both sent from Yahoo email accounts, had the same IP address. It was the same person.

Then in the last few months, unrelated to the case above, I started noticing chat forum posts offering agenda type criticism. There seemed to be (2) people leading the charge. One of critics was from a “name” known in some small Wall Street circles, the other was an anonymous alias. The named critic heaped on the negatives from his perspective and so did the anonymous critic. However, the anonymous critic with the alias was VERY praiseworthy of the other critic who was using his real name. It all struck me as odd since they sounded like the same person. The two chat forum posters were one in the same. They were posting under the same IP address.

In a past life I was a baseball catcher. On the baseball field we had a way for dealing with people like these. It was called a fast ball high and tight, and if they got hit, well, that was the point.

One of the best quotes about internet chat forums comes from David Silverman in an issue of Stock, Futures and Options Magazine:

Just as they did in the pits, traders continue to trash-talk, deceive, manipulate, confuse and lie. What I was told so many years ago remains fresh today, and anyone who does not understand this and totally relies on the information they read in chat rooms may get eaten alive. That the Internet is being used to pass misleading information about the markets - and thousands of other things - comes as no great shock, but what I realized as I read one bogus posting after another, is that the anonymity the medium provides can make chat room lies far more insidious than any ever told in the pit. On the trading floor, market professionals, fully aware of the rules of the game, aware of the stakes involved, and able to look any trader in the eye to help determine the degree to which the truth might be shaded, needed protection only from the egregious lie. In chat rooms, by contrast, where the naive and uninitiated congregate with the potential hustlers and con men, it is no fair fight. Anonymity fuels the liar’s sense of invincibility, and often statements are so bold and outrageous it’s amazing anyone takes this nonsense seriously.

Victor Niederhoffer recently posted on his blog:

I have often thought that there are hidden signals in markets. My favorite signal is silver, which I call the omniscient market in that whenever something is good or bad it seems to hit the silver market first. Recently, I have been discovering the hidden signals in the Dow Jones, which seems to go the 50 and 100’s during the day, much more than randomness would suggest. Another hidden signal is the movement in bond prices that always seem to predate a major move in stocks. Another one is the Israel market, which I have found quite useful in predicting where the US markets will waft.

If Niederhoffer can profit from this, and stir clear of those sudden market moves that quash belief in mean reversion, I wish him well. The word “prediction” strikes as a problem in waiting.

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.

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.

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.

I caught this criticism of trend following recently:

“Not only is trend following invalid statistically but, looking at the bigger picture, it has to be invalid logically without even running your unusual tests. If wealth distribution is to remain in the range of 20 to 80, trend following cannot exist. In other words, if the majority followed the trend (hence the concept of trends), and if trend following is in fact profitable, the majority will become rich and the 20-80 distribution will collapse…So in brief, no - trends do not exists and can not exist either statistically or logically, with the exception of the forever upward drift of population and general markets with some curves steeper than others, those of the countries with the extra weapon called land and immigration.”

I am assuming this guy would argue that every dollar ever made by a trend following trader was just dumb luck? Don’t the performance numbers mean something to a guy like this? Of course, trend following is really about answering these 5 questions:

* How do you determine what market to buy or sell at any time?
* How much of a market do you buy or sell at any time?
* How do you determine when you buy or sell a market?
* How do you determine when you get out of a losing position?
* How do you determine when you get out of a winning position?

At the end of the day everyone needs a trend to make money, but the five questions are where the rubber meets the road.

This guy has been writing in for a while now. His latest:

Mr. Covel: In the interest of trying to figure out the efficacy of trending et al, I did a search for CTA returns. I came up with the Barclay Index; this may or may not be germane, but if it’s right, the average returns aren’t anything to write home about. If I have it wrong, then please point me in the direction for information as to what these great and not so great traders get in the way of returns.

The same answer applies. It is worth noting that this reader does have my book.