Ep. 556: R.P. Eddy Interview with Michael Covel on Trend Following Radio

R. P. Eddy
R. P. Eddy

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R.P. Eddy is an American businessman, venture investor, former U.S. government official and former U.N. diplomat. He is currently the CEO of Ergo, a strategy and geo political intelligence firm. R.P. is also co-author of “Warnings: Finding Cassandras to Stop Catastrophes.”

How did Fukushima happen? There were lots of Cassandras who knew there were issues. There were warnings thousands of years old, along with experts telling officials not to build the nuclear plant so low. Hurricane Katrina in the United States is another example where there were Cassandras who had the foresight to fix potential disaster, but were ignored. What would have happened if there was foresight to Saddam Hussein and the Kuwait invasion? A man named Charlie Allen had that foresight but was pushed aside.

With such credible people having undeniable evidence being ignored, this brings up the question: How does a dynamic change in government happen? It doesn’t. R.P. did a study finding that 1% of the public think for themselves to make informed decisions. As people turn on the T.V. or surf the internet they find biased information. It’s hard to sit down, find unbiased information and make opinions of their own. When we have Cassandras who come out with real data and information to make changes that can save thousands, it is hard to decipher if they are chicken little or the real thing.

R.P. profiled in depth Cassandras ranging from: Fukushima, Katrina, Madoff, 2008 collapse, the rise of Isis, and the invasion of Kuwait. In every instance the Cassandra went to the decision makers and asked the question, “Why are you ignoring all the data?!” The more outlandish the warning, the easier it is to be ignored. People who understand what is wrong with our brains, the ones who doubt themselves and double check data are the traders and leaders who thrive. Michael and R.P. end discussing nuclear weapons theory, North Korea, potential Cassandras, India vs. Pakistan, and why we should all stop and reassess the information that is fed us.

In this episode of Trend Following Radio:

  • Indicators and warning
  • Analysis and foresight
  • Pax Americana
  • Fukushima
  • Corruption vs. competence
  • Bernie Madoff
  • Black Swans
  • 2008 collapse

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Trading Food for Thought: May 21st Edition

2017 Trend Following Table of Contents

Foreword by Barry L. Ritholtz

I. Trend Following Principles

1. Trend Following
Winning versus Losing
Investor versus Trader
Fundamental versus Technical
Discretionary versus Systematic
Hiding in Plain Sight
Change Is Life
Follow the Trend to the End When It Bends
Surf the Waves

2. Great Trend Followers
David Harding
Bill Dunn
John W Henry
Ed Seykota
Keith Campbell
Jerry Parker
Salem Abraham
Richard Dennis
Richard Donchian
Jesse Livermore and Dickson Watts

3. Performance Proof
Absolute Returns
Volatility versus Risk
Zero Sum
George Soros
Berkshire Hathaway

4. Big Events, Crashes, and Panics
Event 1: Great Recession
Event 2: Dot-com Bubble
Event 3: Long-Term Capital Management
Event 4: Asian Contagion
Event 5: Barings Bank
Event 6: Metallgesellschaft
Event 7: Black Monday

5. Thinking Outside the Box
Billy Beane
Bill James
Stats Take Over

6. Human Behavior
Prospect Theory
Emotional Intelligence
Neuro-Linguistic Programming
Trading Tribe
Curiosity, Not PhDs

7. Decision Making
Occam’s Razor
Fast and Frugal Decision Making
Innovator’s Dilemma
Process versus Outcome versus Gut

8. The Scientific Method
Critical Thinking
Linear versus Nonlinear

9. Holy Grails
Buy and Hope
Warren Buffett
Losers Average Losers
Avoiding Stupidity

10. Trading Systems
Risk, Reward, and Uncertainty
Five Questions
Your Trading System
Frequently Asked Questions

11. The Game
Don’t Blame Me
Decrease Leverage, Decrease Return
Fortune Favors the Bold

II. Trend Following Interviews

12. Ed Seykota
13. Martin Lueck
14. Jean-Philippe Bouchaud
15. Ewan Kirk
16. Alex Greyserman
17. Campbell Harvey
18. Lasse Heje Pedersen

III. Trend Following Research

19. A Multicentennial View of Trend Following
The Tale of Trend Following: A Historical Study
Return Characteristics over the Centuries
Risk Characteristics over the Centuries
Portfolio Benefits over the Centuries

20. Two Centuries of Trend Following
Trend Following on Futures since 1960
Extending the Time Series: A Case-by-Case Approach
Trend over Two Centuries

21. Trend Following
Introduction to Different Trend Following Models
Diversification between Different Trend Following Models
Aspect’s Approach to Trend Following
Aspect’s Model Compared to Other Trend Following Models

22. Evaluating Trading Strategies
Testing in Other Fields of Science
Revaluating the Candidate Strategy
Two Views of Multiple Testing
False Discoveries and Missed Discoveries
Haircutting Sharpe Ratios
An Example with Standard and Poor’s Capital IQ
In Sample and Out of Sample
Trading Strategies and Financial Products

23. Black Box Trend Following—Lifting the Veil
The Strategies
Performance Results and Graphs
Sector Performance
Performance of Long versus Short Trades
Stability of Parameters
Are CTAs a Diversifier or a Hedge to the SP500?

24. Risk Management
Risk Management
Optimal Betting
Hunches and Systems
Pyramiding and Martingale
Optimizing—Using Simulation
Optimizing—Using Calculus
Optimizing—Using the Kelly Formula
Some Graphic Relationships Between Luck,
and Optimal Bet Fraction
Nonbalanced Distributions and High Payoffs
Almost-Certain-Death Strategies
The Uncle Point
Measuring Portfolio Volatility: Sharpe, VaR, Lake Ratio, and Stress Testing
Stress Testing
Portfolio Selection
Position Sizing
Psychological Considerations

25. How to GRAB a Bargain Trading Futures…Maybe
How to GRAB a Bargain Trading Futures
Following Trends Is Hard Work
Figuring Out How the Pros Do It
A Computer Model of the Pros
A Terrible Discovery
Solving the Mystery—Why Does the GRAB System Lose?
Often It Is Out of Sync with the Market
Worse Still, It Misses the Best Moves!
Maybe Being Profitable Means Being Uncomfortable?
GRAB Trading System Details
Buys on Break of Support, Sells on Break of Resistance
Testing Reveals Some Behavior I Do Not Expect
Difference between Parameter Values Defines Character of GRAB System
GRAB Trading System Code

26. Why Tactical Macro Investing Still Makes Sense
Managed Futures
Defining Managed Futures and CTAs
Where Institutional Investors Position Managed Futures and CTAs
Skewness and Kurtosis
Basic Statistics
Stocks, Bonds, Plus Hedge Funds or Managed Futures
Hedge Funds Plus Managed Futures
Stocks, Bonds, Hedge Funds, and Managed Futures

27. Carry and Trend in Lots of Places
Carry and Trend: Definitions, Data, and Empirical Study
Carry and Trend in Interest Rate Futures
Trend and Carry across Asset Classes
Carry and Trend across Rate Regimes

28. The Great Hypocrisy

Afterword by Larry Hite
Trend Following Podcast Episodes
About the Author

Ep. 555: Denise Shull Interview with Michael Covel on Trend Following Radio

Denise Shull
Denise Shull

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Denise Shull is a performance and decision coach to traders and athletes. She is well known for her effectiveness in assessing performance under high pressure situations. Denise began her Wall Street career in 1994 as trader and desk manager on the Chicago Board Options Exchange. She was always fascinated by the psychology side of trading from the outset of her trading career. In 2015 she offered critical insight on how to put together one of the main characters of the hit show “Billions” on Showtime.

Denise has counseled an extremely wide variety of traders with all kinds of personalities and trading styles. However, at the end of the day everyone is human and all traders have common psychological threads which she points out. When Denise analyzes a client she tries to understand a sequence of feelings that person is making and what the patterns of their feelings are. At first it is just about her figuring out how a clients brain works, and then she helps them see the patterns.

What was the trigger for Denise to go down the path of studying the mind and human behavior? Starting from a young age she enjoyed observing and counseling friends. In her mid to late 20’s she started looking at her friends relationships and seeing that the people were all different but the scenarios were the same. A teacher helped point out a theory of Freud’s. Freud believed there is a critical period for attachment and self image when you are a child. Denise gives examples of how human reactions stem from a template made in the first 2-3 years of life.

Michael and Denise finish up talking fractals, psycho analytics, efficient market theory and compare notes on Nobel Prize winner Harry Markowitz.

In this episode of Trend Following Radio:

  • Bio-psychology
  • Attachment theory
  • Neurosciences
  • Conviction as data
  • Fractal emotions
  • Efficient market theory
  • Self blame as a positive

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RCM Alternatives Reviews the Trend Following New Edition

Great review of the new edition of Trend Following from by RCM Alternatives:

We’re not sure if author Michael Covel has a tattoo across his back of a trend in a market like Sugar, but suffice to say the man loves him some trend following. We follow him on twitter @Covel and listen to his wonderful podcast from time to time – so when we saw the news that he had released a new and improved fifth edition of his book “Trend Following,” with its new tagline: “How to Make a fortune in Bull, Bear, and Black Swan Markets” we had to see what was new. We’ve read all of Covel’s books over the years but realized with this recent edition that we had never reviewed any of them on the blog, despite including them on our Required Reading list.

So we got to reading all 600+ pages. It’s a beast of a book, but at least there are lots of “pictures” in the form of charts and tables.

The Highlights:

One of the more surprising additions to the new version hit us right off the bat – with the forward written by blogger/investment advisor/Bloomberg columnist Barry Ritholtz. Barry writes great stuff, but the surprising part is that he mostly writes against investing in anything except buy and hold stock market and real estate investments. And here he is doing the foreword for a book on decidedly not buy and hold folks – managed futures hedge fund strategies and legends. Perhaps he’s coming around, and understanding the math will unseat some biases for him.

Once you get into the meat of the book, Covel starts by digging into the principles behind trend following, which seems as old as the hills to us, ingrained in our psyche… BUT may be new to those who haven’t lived it.

Trend followers are traders, not investors – going long and short. Trend followers are systematic – removing emotion and fake news and bogus earnings reports, and all the rest. Price rules all. Price is the final determinant. Trend following can be a bumpy ride – indeed, it can be argued that the bumpy ride is what results with the payoff.

The best part of the book remains the highlighting of trend following legends. As Covel says, “the wise and most efficient way to understand trend following is not by learning rules…. But by reviewing every last detail of the traders who practice it…” and he gets right into it, starting with none other than the largest trend follower in the world, $20+ Billion Winton Capital’s David Harding (although he might not like that moniker). After that, there’s Boston Red Sox and Liverpool Football Club owner John Henry and a host of others famous in our line of work. As the line in ‘Top Gun’ goes, the list is long and distinguished, just like… “

  • David Harding – Winton Capital
  • Bill Dunn – Dunn Cap
  • John W. Henry – John Henry Funds
  • Ed Seykota – Prop Trader
  • Keith Campbell – Campbell
  • Jerry Parker – Chesapeake
  • Salem Abraham – Abraham
  • Richard Dennis – Prop Trader

Some of the best nuggets in here include John Henry starting with a $16,000 managed account; Ed Seykota’s amazing average of 60%, after fees, in his prop account between 1990 and 2000, and a copy of the 60+ questions asked of those applying for the famous turtle trader program. Next he goes into the “performance proof” for trend following, which he neatly packages here with tables upon tables of trend following managers long term returns spanning 100s to 100s of percent, and correctly noting that volatility doesn’t equal risk in a special way for trend followers, which tend to have their volatility to the upside. This section also highlights the “inevitable,” as Covel calls it, with trend following – the drawdown, where we get this great quote from Harding:

“…Managers are obliged to wear their worst historical drawdown like a scarlet letter for the rest of their lives.”

There’s also this great chart in the performance section when talking about drawdowns, Trend following gets a bad rap, but is essentially no riskier in terms of drawdowns than many others. We wish he would have included Ackman and his Valeant trade in there.

Next up, are analyses of ‘Big Events, Crashes, & Panics” such as the bust, Great Recession, and Long Term Capital Mgmt., etc. We were disappointed not to see our chart included, but he tackles it more from a manager by manager perspective instead of via an index. It’s worth noting most authors would have led with this, whereas it’s merely another characteristic of trend following to Covel. Sort of like the gravy on top of the already well-structured investing thesis.

The rest of the book is a bit more entertaining, straying away from pure talk about trend following with a nicely done chapter on the explosion of sports analytics following Billy Beane, MoneyBall, and the obvious corollaries to a systematic mathematical approach to markets. He also takes on Nate Silver, CNBC pundits, Warren Buffet, and the stock market in general in the chapter “Holy Grails,” while exploring the mindset and decision making chops needed to succeed in trend following (it’s not natural behavior). He finishes with a few hundred pages of actual rules for building your own trend following system, manager interviews, and reams upon reams of trend following research charts, data, and tables. Much of this the expanded part!

We certainly learned a thing of two after giving the book another read. Whether you’re a newbie to Trend Following or live by the trend following rules religiously, Covel’s books are the definitive source on all things trend following – from the history of the method and the strategy rules to the emotions needed to stick to it and the legendary money makers who’ve plied this trade for decades. So no matter if you watch energy prices out of curiosity or invest millions in managed futures strategies, this is the book which will help you understand the who, why, and how prices and those investments following them may be moving the way they are. Grab your copy here!


Trading Food for Thought: May 18th Edition

Ep. 554: The Yale Model with Michael Covel on Trend Following Radio

Yale Endowment
Yale Endowment

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The Yale Endowment is the crème de la crème. Nothing beats it? Their AUM is about 25 billion. Michael evaluates and reads some of the 2016 copy of The Yale Endowment. He wants listeners to decide if it is an example of how the best think, or if it is how one of the best operations self-describes themselves. Michael ends with breaking apart an excerpt from a presentation that David Swensen gave on his portfolio management strategy.

In this episode of Trend Following Radio:

  • Yale Endowment
  • Portfolio management
  • Black box trading
  • Mean variance analysis
  • Harry Markowitz
  • Passive index
  • Forecasting

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