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Ep. 416: Market Timing Confusion with Michael Covel on Trend Following Radio

Market Timing Confusion

Market Timing Confusion

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Today on Trend Following Radio Michael Covel talks prediction. He opens with an excerpt from Seth Godin on how he thinks 2016 will unfold. His predictions are based on events that have always happened and will always happen, poking fun at the idea of having a “crystal ball look” into the future.

Michael moves on to market timing and reads an excerpt from The Institutional Investor titled, “Market Timing is Back in the Hunt for Investors.” The article states that market timing can be done correctly if you use a combination of trend following and contrarian views. Michael disagrees with the article stating that you need diversification. You can’t pick one stock and try and predict the top or bottom. Making that kind of bet on one market will bankrupt you. You need a portfolio of diverse markets so your winners can pay for your losses.

Michael then plays three clips from Daniel Kahneman on overconfidence, playing odds, and why we make the choices we do when spending money. Most of what we read in the paper is about overconfidence. People put a lot more weight on negative events then on positive ones. However, many decisions people make are optimistic. Kahneman says it is good that we have a lot of optimism in society. Unfortunately, over confidence and loss aversion seem to work in opposite directions. Most do not know the odds when they take risks. People save and borrow at the same time. Investors tend to view each stock they buy as an individual account rather than part of a bigger picture. These are just a few examples of how society as a whole is generally narrow-minded. Kahneman shows how intricately trading and psychology are linked together throughout the three clips. Michael finishes up the podcast with Ed Seykota singing.

In this episode of Trend Following Radio:

  • Diversification
  • Seth Godin’s 2016 predictions
  • Market timing
  • Understanding psychology in trading
  • Pitfalls of overconfidence

“Conflict is fed by overconfidence.” – Daniel Kahneman

“If market timing is a sin, then there are times when even saints can be tempted into sinning a little.”- Clifford Asness, Antti Ilmanen and Thomas Maloney

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