Danie Pretorius of Morgan Stanley: Hit and Run

I recently posted about this view of my new book Trend Commandments:

I’ve found Covel’s previous books interesting, and have re-read ‘Trend Following’ multiple times. The latest book unfortunately does nothing to build on the previous works (for instance, there is still no attempt to deal with survivorship bias in the performance data), but instead loads the pages with random anecdotes and film quotations that tangentially supports his thesis. Disconcertingly, what the book lacks in substance is made up for in ego. If you’re not with him, you’re against him – and a moron. Successful value investors? Don’t exist (sorry Mr Buffet, you made your money through luck and speculating with derivatives). Covel admonishes the world for ‘going with the herd’… ummm… isn’t following a trend exactly that? Too light on science, way too light on humility.

As the post shows, it was debated extensively. Then last night I stumbled onto the reviewer’s real name, saw he worked at Morgan Stanley, and dropped him this simple email:

“I welcome the criticism, but why not use your real [full] name?”

He responded via his Morgan Stanley address:

Hi Michael,

Quite a surprise to hear from you – not sure exactly what your asking? Danie is my real name.

As you no doubt are aware, I am an equity analyst in South Africa. Please do not construe that to mean I am dogmatically attached to fundamental analysis, far from it. I must confess to having reread my copy of Trend Following multiple times. I think precisely because I see the limitations of fundamental analysis on a daily basis, I am conceptually a big fan of systematic trading with objective entry and exit signals, and why I’m so interested in the trend following concepts. Explains why I own all your books…

My criticism on the last book is simply that there was little in the way of new content to build on what you’ve covered before, and that any other trading/investing method is so summarily dismissed, which makes the book seem less objective.

I certainly don’t question the concepts inherent in trend following. However, while I realise the book is not an academic paper, I’m struggling to distinguish between the efficacy of the system & trading rules and the talents of the traders themselves. For instance, the Turtles had the same rules but wildly varying results; by the same token, a sample of successful long-term buy-and-hold investors says equally little about the style if the multiple failures along the way are not highlighted. I think it would add quite a lot to the body of knowledge to deal with (a) the failures in the trend following space – if these are known, (b) the differences between traders’ approaches, and (c) how the successful traders manage whipsaws. E.g., how important is market selection and model parameterisation vs. other factors?

Hopefully it’s clear that I don’t have an agenda here, just a genuine interest in the topic.

My private email address is […]. I look forward to the next book!

Danie Pretorius
RMB Morgan Stanley

I responded:

Hi Danie,

Why not use your real full name and firm name on your review? That was not left out due to the fact that Morgan Stanley raises assets for the very traders mentioned [in my books]?

Of course, there was an agenda. If there wasn’t you would have reviewed the book with a professional disagreement–like in [your] email.

You didn’t.

Michael Covel

This individual owns all my books, likes them all, is not really a diehard fundamental guy, but receives a paycheck from making daily fundamental predictions (see video)?

Take your best whack at me personally. Take your best whack at my work. However, if you are going to do so, please disclose when you are a fundamental guy who also works for a firm (Morgan Stanley) who raises assets for the very trend traders mentioned in the very book you slam.

An honorable enough request?

44 thoughts on “Danie Pretorius of Morgan Stanley: Hit and Run

  1. Wisdom from ‘The Bed of Procrustes: Philosophical and Practical Aphorisms’ comes to mind:

    “When you beat up someone physically, you get exercise and stress relief; when you assault him verbally on the Internet, you just harm yourself.”

    “Fragility: we have been progressively separating human courage from warfare, allowing wimps with computer skills to kill people without the slightest risk to their lives.”

  2. Its amazing how combative people can be when they are hiding, but then change their attitude when they can’t hide.

    It’s hard to counter the performance records of guys like Dunn, Parker, Harding, etc., with any facts.

    They throw out terms like “survivorship bias”, but have no facts to back them up.

    Most really want to believe they can gain an edge through fundamental data, but people don’t trade the data, they trade their market bias to the data.

  3. I think Danie Pretorius made fair criticism. Someone needs to learn to accept criticism. Trend Following is a great way to trade but their are several other different ways that work (better/worse than TF) well.

    Amit Saraf
    New Delhi, India
    Trend Following Trader
    Street Address) will all be provided on demnad

  4. Amit, why not address the issues in the post? Hit me with as much criticism as possible, but if you leave out your last name because it might expose duplicitous behavior–I am calling that critic out.

  5. hmmmm

    Well that is generally how people criticize, hiding their identity, making indirect references and comments.

    Michael you are doing a very good job in trader education and keep up the good work. I would rather prefer to ignore baseless criticism.


    Amit Saraf

  6. The above post is very funny but ironically Michael has set up one of the best “survivorship bias” tests that I am aware of…

    What I mean by this is that over a million copies of “trend following” have been sold and (I guess) thousands of people have taken his trading courses – how many of these “new” traders do you think will be successful in the future?

    Say in 10 years time do you think we will have a million successful trend followers?

    The problem with the past is that we don’t see the failures (only the winners) – this is the heart of survivorship bias and can’t be disproved by providing “winning” data.

    Say in 10 years time do you think we will have a million successful trend followers?

    The problem with the past is that we don’t see the failures (only the winners).

  7. There is a difference between a method that works (eg.trend following)and a trader that is efficient.So a million people read Covels stuff but only a handfull execute via hard work,research,etc.Does this mean the method doesnt work or is due to trader efficiency?Van Tharp has done work with some huge funds and found that trader error caused a drop of more than 40% in performance in some of these firms in a year.Dangerous to presume that a method doesnt work when its more likely the trader execution thats ineffective.

  8. Adam, this “Survivorship Bias” crap is getting old. Trendfollowing works aside from the practitioners. Covel points out traders like Dunn, Abraham, Harding, and others to prove the point about STICKING WITH THE SYSTEM. Yes, sometimes trendfollowers go off the reservation and fail. Covel points this out repeatedly. But, the only reason to bring up “survivorship bias” is if you’re going to invest in a trendfollowing index. If you’re trading on your own, what do you care if some make it and some don’t? TRADE THE PLAN!

    “The problem with the past is that we don’t see the failures (only the winners).” Really? In 2008, the media wasn’t talking about all the poor saps who bought 15 houses they couldn’t afford? They were all talking about the TFs who made a killing? As Michael first mentioned in “Trend Following”, everyone talked about JWH, but nothing was mentioned about Nick Leeson? Still, to this day, the average Joe has no idea who Bill Dunn is.

    “The problem with the past is that we don’t see the failures (only the winners).” Let’s say this is true. Great! I don’t want to emulate failures anyway. I want to learn how the best do it, and emulate them.

  9. Lets assume you are right – do you think we will have thousands of successful trend traders in 10 years time?

    If you are saying that most novice traders fail because they don’t follow their plan then fair enough – but isn’t this precisely what the books/courses are trying to teach (i.e. to follow the plan)?

  10. I don’t care if we’ll have “thousands of successful trend traders in 10 years time”. I only care about what I’m doing for myself and my clients.

    “If you are saying that most novice traders fail because they don’t follow their plan then fair enough – but isn’t this precisely what the books/courses are trying to teach (i.e. to follow the plan)?”
    So, not only should Covel teach TF, but also should implant desire and discipline? Should he administer by pill or iv?

    Come on Adam, you’re grasping at straws.

  11. Adam your arguments say everything about your ability to succeed–you have zero confidence in yourself. You have never been an entrepreneur–that is clear as day. Your style of thinking would never allow any innovation or success in life as you just quit before you begin. Your thinking would never have you start the next great business, take any risk, or achieve anything of note. How could you with your attitude?

    You are right that lemmings, people with no confidence, people with no discipline, etc.–will fail–at anything. I have been an entrepreneur for over 15 years. I trade my own account. Everyone with a pulse can tell that when someone proffers your style of argument–that there is no success there. The whole idea of showing pro trend following success is show what can be done. Your argument that they are all lucky left over monkeys lacks common sense. Frankly, it is not bright.

    Why don’t you tell us exactly what you do? Everyone here knows what the answer will be. Working for the man somewhere with no hope of ever being the man. From now on instead of the academic whine that all success is luck, you should also include your personal disclaimer: “I am afraid of my shadow.”

  12. Funny last post.

    If Adam lacked any self confidence, well now he really has no hope after reading your post.

    Mike, I’ve always wanted to ask you this: have you made more money selling your books, or trading your own account?

    Its cool if you prefer not to answer.



  13. One subject that never goes away.

    It appears that most people cannot see that outcomes and decisions are not the same thing. You can analyze outcomes statistically. But such analysis says zero, zilch, about decision processes. It’s just surface stuff. It misses the deeper hidden reality.

  14. “I am afraid of my shadow” , haha that’s classic

    To Adam L

    The problem is not the Trend Following “system”, based on entry/exit signals, and proper bet-sizing

    The problem is that the trader does not adhere to the system 100% of the time and does not execute every signal. Very few people have the emotional discipline to trade systematically.

    The weakest link in any trading system is the trader. Period.

  15. Jad, I have nothing to do with Adam’s self-confidence. He has been pushing up the same tire argument on here for a long time. Also, curiosity about all aspects of my business…will just have to continue to exist! However, I have decided to take on a massive new challenge. News to follow!

  16. Trender, Todd–some excellent language I wish was added verbatim in my new book.

    Also, why is it that the only form of trading where this survivor nonsense surfaces is in the TF space? Because TF is a threat to all of those critics…as they are all attached to some other inferior strategy. It’s playa hating.

  17. Michael,

    I am a big fan and have posted several times.

    Dude, “playa hating” re-think that.

    Keep up the good work and don’t take s$#% from anyone but keep the suburban street cred angle to a minimum.

  18. It´s not about STICKING WITH THE SYSTEM, it´s about having a system that is worth sticking with. TF is not a system it´s a philosophy/style/strategy. There are TF systems that work fabulous and there are TF systems that don´t work or don´t work particularly good. Just take a look at some of the TF websites. JWH Financials and Metals program is nearly nine years in a drawdown now. JWH International Foreign Exchange Program materially underperformed the S&P500 since its inception in 1986. There are several Superfund programs that are down since 2004. Of course there are also very profitable TF programs with shorter draw downs. Salem Abrahem is an example. Bottom line: past performance is no guaranty for future returns.

  19. David, you make a good point, but it is both…the system must have an edge, and the trader must adhere to the system 100% of the time.

    Unless we are on the inside we do not know if the cuase of JWH and SF under-performance is system based, or trader based. Maybe they used discetion in some way, didn’t take every trade, or changed the system mid-stream. Missing one or two key trades can have a drastic effect on performance.

    Trend Following is a strategy. My point is that in a majority of instances, the cause of traders to perform poorly is based on their emotional issues, lack of discipline, etc.

    Agreed not all TF systems are alike.

  20. Poor returns by a trend follower = trader is at fault (“he must have used discretion”)

    good returns by a trend follower = “proof” it works.

    All in all very bad logic.

  21. Ed Seykota on ALWAYS following the rules


    – Ride Winners
    – Keep bets small
    – Follow the rules
    – Know when to break the rules

    Gotta know when to alter things a bit

    My favorite Seykota quotes

    Charting is a little like surfing. You don’t have to know a lot about the
    physics of tides, resonance, and wave dynamics in order to catch a good wave.


    This is my favorite one

  22. Can someone post a list of all the failed trend followers who did everything right, but just unluckily failed? Thanks!

  23. Cut losses, ride winners…, that is just as easy as buying cheap and selling dear. In the end you have to devise unambiguous rules. By the way, fiddling the whipsaw song is not as funny as ed seykota makes it look like.

  24. To AdamL.

    I profitably trade 3 different TF systems. If I wrote down the rules for you on someone else, they may not get the same results if they do not execute 100%

    Others may have profitable swing trading systems that I fail to trade properly.

    Its like a Formula 1 racecar. With a skilled driver at the wheel, will generate millions in winnings. With the wrong driver, certain death.

    Its not the racecar is faulty, it is the driver.

    Some traders die a slower death than others in the markets.

  25. If you accept the argument that the dominant investment style of CTAs is trend following, Fung and Hsieh (1997), then the paper posted at the Social Science Research Network here
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1279594& might be an eye opener for you.

    With regard to post #24, perhaps the “graveyard module” of the Lipper-TASS database, mentioned in the above paper, would be a good place to start.

  26. A great example? Many people think the Turtle who wrote a book was a great success. Not true. All factual evidence, now freely available, refutes that. Not my opinion, but rather government depositions, his words, etc. So why did his firm, which blew out, fail? People like Adam would just look at the end data point and say, “Trend following firm Acceleration Capital failed which buttresses the notion that the winners are just lucky survivors.” Adam only looks at the *end*.

    I look at *how* it happened.

    Big difference.

    The difference between doing the real work to understand and doing cursory academic mental masturbation.

    Everyone does get what they want–including their version of the truth.

  27. It seems that people who post here and other places – who have obviously tried and failed at Trend Following – try to justify their failures by saying Trend Following doesn’t work.

    They do not want to accept that either,

    -they don’t understand it,

    -they do not have the discipline to trade systematically

    -they do not want to invest the time and effort necessary to research, test,and develop a profitable system.

    These ridiculous debates of if it works, survivorship bias, etc are just a weak excuse.

    The trader would be better off looking at why others can make it work and they can not. But most don’t want to take that look in the mirror.

    Ok back to looking at my 5 digit winner long sugar, through Trend Following.

  28. #25 david says ride winners and cutting losers is just the same as buying cheap and selling dear. In fact it is the exact opposite. Chaep and dear are ambiguous terms that in reality have little to no meaning. Winners and losers are the opposite. A loser is a trade that goes down. Set your stop and that little loss stays just that little and you move on. Winners are positions that go up. Most cut them short because they feel “it is expensive” “too far too fast” blah blah blah. they then come up with some useless anchor to defend adding to losing positions, it’s price to EBITDA is its lowest in three years(actually from recent research I have read). Winners go up, keep em. Losers go down sell ’em. Get a $20 a month membership to stockcharts.com and go to the overlay section and click on price channels. Buy when price breaks above the upper channel and short when it breaks below the lower channel. There, you know more now about making money in the market than 99% of the monkeys out there. Here are real world examples of positions of mine that I have now that I bought using the 20 day channel. SBUX 1st week of March still own. LULU bought April 27 still own, stop came close several times but never hit. GLD bought March 1 added today as it breaks out again. Bought SLV Feb 14 and sold 3 days before the top, broke the rules but made a ton. Bought it back today. DBA buy today. Why, hell I can find any number of reasons that “explains” why but I do not care why these things are working. You can use trend following for stocks bonds commosities etc. Hey get a free month of stockcharts and use the price channel overlay and you can be a trend follower today. It is not rocket science. If you have that you have more than a lot of the Turtles had. Just get going and show discipline.
    Discipline – Training to act in accordance with rules.

  29. RE Geetesh

    geetesh is no longer at Vanguard he is with SummerHaven Investment Management

    This is what he did at AIG. Beautiful. I am sure he wrote several White Papers on the weak Sortino on TF and the beauty the “underwriting standards” in the Subprime Mortgage Market. He felt it important to capitalize Market not me.

    Vice President AIG Financial Products
    Public Company; Capital Markets industry

    June 2007 – October 2008 (1 year 5 months)

     Development and marketing of alpha and beta commodity trading strategies.
     Analyzing the underwriting standards in Subprime Mortgage Market.
     Analyzing the performance of managed futures industry.

  30. Statistical analysis is no substitute for direct observation and thinking. Statistical analysis comes AFTER observation and thinking – it’s a way to put the thinking to the test. What are we observing and thinking about? Process. It’s what Nassim Taleb calls the generator.

    The irony is that if we get any insight into a process the question of survivorship–bias becomes a moot point since we are psychologically less prone to misinterpret random events. We’ll understand what produces winner and losers. It’s always those folks that have the least insight into processes that conjure survivorship-bias.

  31. There is just a real lack of understanding of what trend-following is in general and hence why it attracts so much criticism. It is human nature to fear / criticise that which you do not understand. After all, a little knowledge is a dangerous thing……

    I cannot tell you how many institutional investors shun trend-following simply because they can find a better sharpe ratio (and those who have read David Harding’s view on Sharpe Ratios will understand how flawed this is) elsewhere and genuinely believe there is some sort of magic bullet out there that can get you high returns for no risk.

    Let those people believe what they want to believe as I think TFs will ultimately have the last laugh

  32. Hi Michael

    Gotta say I find your response to Danie Pretorius’ criticism unncecessarily defensive and boorish.

    Surely one should be permitted to observe that a book does not add much to the groundwork laid by its predecessor, and to express regret that a particularly thorny issue (SB) is not satisfactorily addressed? Isn’t it fair comment to say that trend following stands on its own merits, and does not need to be validated by attacking and dismissing proponents of alternative strategies?

    Don’t really understand the beef about his failure to disclose his professional status either. (and it seems, neither does he) RMB-MS is a relatively small player in South Africa, which itself has an economy the size of Wisconsin’s. As far as I know there are no domestic funds which offer exposure to pure trend-following strategies, so there is no apparent conflict of interest that I can discern.

    Unlike Marc Faber and others who have offered appraisal under their company banners, DP is an employee of RMB-MS. Had he stated this in his review he would then have had to append a cumbersome disclaimer “The views of this writer do not necessarily reflect the views etc. etc.”

    Isn’t it possible that he simply offered a personal view which stands alone from his professional mandate?

  33. RE 39

    I have closed several institutional “Finals”. Consultants, the vast majotiry of whom have never bought a stock, are the driving force behind who gets in the final. They place people in a style box and try to select the “Best” guy in the box. They actually spend the vast majority of their time thinking “inside” the box. The culture is to reduce any chance of being second guessed. If when you met them you mentioned adherence to our philosophy and process a few times, passion several times then you were golden. My closing line after going through the pitch book was ” we look for stocks with a predatory thirst, we always display a terrifying singlemindedness of intent in all we do (never guess where I got those lines). Book it. People understand Trend Following better than you think. The problem for consultants is that it is a tougher sell to clients, they like most people will not do any more work than they have to. The problem is that clients have been brain washed into thinking that the guys that manage money are brilliant and they see what is coming before the other guy and they want to be wowed by the “why”. As well all know the why is usually more buyers that sellers or damn it broke out. TF says we know things are going to trend and we’ll ride all of them going forward. Those that fail to breakout will be sold at small loses and those that break out will be worked for all they are worth. To see if this is wise check out our performance. The average County, State investment department does not want to hear that, they want to sound “smart ” as they describe some monkey’s Alpha Tilts & Timing Ultra Alpha Model, that is the way it will always be. The niche nature of TF is what will allow it to continue to do well.

  34. Couldn’t agree more Tom.

    MC – Don’t mean to go off topic but would be really interested to hear your opinion on why people prefer a 15%/15% TF over a 30%/30% one (ie return / max drawdown). I know you touched on this in one of your earlier books about one of the traders (I forget which one) who reduced the leverage of his programme to raise more assets.

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