Hi Michael. Dan in Boston here, hope you are well. I’ve been devouring your podcast after I heard you on the Stansberry podcast. Thanks so much for sharing all the info / state of mind, it’s F%$ing awesome!
Question for you regarding dividends. Will you ever hold a stock that’s trending downward because it’s throwing off solid dividends? I know you can’t talk individual stocks (assuming you can’t) so I’ll just say I bought a BDC that’s throwing off a monthly dividend, annual rate is over approx 12%. I’ve got a few other BDCs all throwing off similar dividends which are generally trading sideways but I’m up on a couple of them. Seems like they are a hidden jewel that nobody cares about. I bought them after the were dis-included from the Russell 2000 ETFs so I got ‘em at rock bottom prices.
I bought the one I’m referring to before I discovered and began to knuckle down into trend following. It’s trending downward but very slowly. My technical indicators are obviously negative but they aren’t screaming toward the bottom, just very slowly shaving off a few cents per day. I may of course hit my stop, however it’s only about 15 cents shy of my buy price, and the dividend is keeping me slightly ahead and reinvesting it I’m still in the green. I’m adjusting my stops to reflect that as well, so either way if I stop out I’m not gonna get hurt too badly, if at all.
Question is do you ever factor dividends into your trend following? I probably answered my own question as I’m still making money on the stock, but would love to have your feedback.
Keep up the great work man, I just finished chapter one of the Little Book of Trend Following and I’m sure within the next few months I will read all your books. I too believe people are sheep and freeloading off the system, I’m an entrepreneur anyway, so trend following is a natural extension of my life.
Cheers
Dan
Thanks Dan for the nice words! Let me keep it simple–judge the trade by price action always (not dividends). Holding onto a losing stock because it is spinning off a dividend is not trend following. Perhaps, the math works and it is ok for your situation, but it’s just not trend following.
Trend followers understand that life is a balance of risk and reward. If you want the big rewards, take the big risks. If you want average rewards and an average life, take average risks. Charles Sanford gave a commencement address that is timeless. It said in part:
“From an early age, we are all conditioned by our families, our schools, and virtually every other shaping force in our society to avoid risk. To take risks is inadvisable; to play it safe is the counsel we are accustomed both to receiving and to passing on. In the conventional wisdom, risk is asymmetrical: it has only one side, the bad side. In my experience—and all I presume to offer you today is observations drawn on my own experience, which is hardly the wisdom of the ages—in my experience, this conventional view of risk is shortsighted and often simply mistaken. My first observation is that successful people understand that risk, properly conceived, is often highly productive rather than something to avoid. They appreciate that risk is an advantage to be used rather than a pitfall to be skirted. Such people understand that taking calculated risks is quite different from being rash. This view of risk is not only unorthodox, it is paradoxical—the first of several paradoxes which I’m going to present to you today. This one might be encapsulated as follows: Playing it safe is dangerous. Far more often than you would realize, the real risk in life turns out to be the refusal to take a risk.”
Life is fraught with risk. There is no getting away from it. However we try to control the direction of our lives, there are times when we fail. Therefore, we might as well accept that life is a game of chance. If life is a game of chance, to one degree or another, we must be comfortable with assessing odds in the face of risk.
In the early 1990s, Commodities Corporation (a famed trading incubator that taught and bankrolled new traders) invited a group of Japanese traders to its company for in-house training. One up-and-coming trader at Commodities Corporation took his new friends to lunch. He told his guests how important risk management was, and to risk only 1 percent per trade. He was clear that experiencing small losses were part of his process to ultimately finding big winners. The Japanese traders, with puzzled looks on their faces, asked, “You have losses?” Ouch! Time for everyone regardless of country to learn about small losses, and to love them, even if that means your account will occasionally have drawdowns. What are drawdowns? Drawdowns are those non-fun time periods where your small losses add up to reduce your account size. They happen. The key is to quickly and successfully recover from them by sticking with your trend trading system and waiting patiently for big trends to reappear, which let you get back to making new money again (and paying for all of those small losses). How much can you lose? That’s an important question to answer, and it comes down to the risk you take (which will vary by your personal choice). However, trend following is much easier to believe in when you consider the length of professional trend trading track records, especially the really long track records that offer proof of viability. That said, some will spend a lifetime trying to avoid any loss (even though that is impossible).
My guest today is Megan McArdle, a Bloomberg View columnist who writes on economics, business and public policy. She founded the blog “Asymmetrical Information”.
The topic is her book The Up Side of Down: Why Failing Well Is the Key to Success.
In this episode of Trend Following Radio we discuss:
“Trophy kids” and taking the monkey bars away
The idea of a regulator out there trying to guarantee our safety
Why the companies that make it aren’t the ones with the best strategic plan–it’s the ones that execute (and fail well)
The power of experimentation
Nobel winner Vernon Smith and experimentation
The idea of learning in crisis
How sunk costs are difficult for a large part of the population to grasp
Van Halen, errors, and M&M’s
Normative error
Small, manageable risks
Forager morality vs. farmer morality
A story about Kentucky Fried Chicken (KFC)
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New York (May 02, 2014, 6:27 PM ET) — The special master in the Refco Inc. securities fraud multidistrict litigation on Friday recommended that a New York federal judge enter a $669 million judgment against five defendants, for their roles in the scheme that brought down the massive commodity brokerage.
Under Ronald Hedges’ proposal, ex-Refco Group Ltd. President Tone Grant, former Refco CEO Phillip R. Bennett, former Refco Vice President Thomas Hackl [see: Acies Asset Management, S.A.], PlusFunds Group Inc. Founder and Chairman Christopher Sugrue, and Refco Group Holdings Inc. would pay $669,370,9991, plus $78,430 in interest for each day after April 29 until the judgments are entered.
While the defendants had already been judged years earlier to be liable by default, Hedges’ report focused on the damages the group owed stemming from the massive losses Sphinx and PlusFunds investors incurred.
The special master indicated that the group should be held “jointly and severally liable” for the mutlimillion- dollar judgment, leaving the individuals’ portion of the damages owed unclear.
The recommendation will now head to U.S. District Judge Jed S. Rakoff, who is overseeing proceedings for the consolidated suits.
The five defendants are all named in the sprawling litigation brought by liquidators and trustees for Sphinx Ltd., which was induced into depositing hundreds of millions of dollars into accounts that were exposed in the $1.5 billion Refco scheme.
Sphinx and PlusFunds, which helped manage its investments, lost approximately $263 million when Refco collapsed in 2005. Sphinx has since entered liquidation proceedings, and PlusFunds filed for Chapter 11 bankruptcy protection in 2006.
Many were found guilty of criminal charges related to the con, including Bennett, who is serving a 16-year sentence, and Grant, who received a 10-year term of his own.
The suits arose from revelations that Refco executives had concealed $430 million in debt through complex trading and lending schemes and shell companies, in an effort to bolster the company’s financial reports.
Refco sought Chapter 11 protection in October 2005, two months after a $583 million initial public offering, and about a year after it was purchased for $1.9 billion in a leveraged buyout by Thomas H. Lee Partners LP.
Five days before Refco sought protection, more than $312 million was transferred from the Sphinx accounts at Refco to unprotected offshore accounts. The hedge fund group ultimately settled with Refco creditors, agreeing to turn over $263 million.
Meanwhile, federal investigators believe Refco had been covering up customer trading losses by transferring securities to appear as debts owed by Refco Group Holdings Inc., a holding company controlled by former directors. Directors later hid RGHI’s receivables from auditors by transferring funds to make the debt appear to be from an entity not related to RGHI, prosecutors alleged.
The plaintiffs are represented by Lee M. Andelin, Leo R. Beus and Dennis K. Blackhurst of Beus Gilbert PLLC; and David J. Molton, Andrew S. Dash and Mason C. Simpson of Brown Rudnick LLP.
Counsel information for the defendants named in the recommendation was not immediately available Friday.
The case is In re: Refco Securities Litigation, case number 1:07-md-01902, in the U.S. District Court for the Southern District of New York.
Refco Inc.’s former Chief Executive Officer Phillip Bennett and two of his ex-colleagues were ordered to pay $671.7 million to Sphinx Providence Ltd. and its hedge funds for losses stemming from a $2.4 billion fraud at Refco.
U.S. District Judge Jed Rakoff assessed the damages, including interest, against Bennett, former senior vice president Christopher Sugrue, former executive vice president Thomas Hackl [Acies Asset Management, S.A.] and Refco Group Holdings Inc., an entity Bennett owned and used to hide more than $1 billion of debt.
Once the biggest independent U.S. futures trader, New York-based Refco collapsed in 2005, two months after raising $670 million in an initial public offering. Refco Inc., as it was known after the IPO, filed one of the biggest bankruptcies in U.S. history, after having revealed Bennett’s holding company owed it hundreds of millions of dollars.
In the ruling, which was made public today in Manhattan federal court, Rakoff followed last month’s recommendation of a special master assigned to the case. Rakoff didn’t address the special master’s conclusion that former Refco Group Ltd. President Tone Grant should also be held responsible for the damages.
Bennett is serving a 16-year prison sentence. Grant is serving 10 years.
Sugrue was chairman of PlusFunds, which filed for bankruptcy in March 2006 after the disclosure of its relationship with Refco helped spur investor withdrawals.
My guest today is Cullen Roche, the founder of Orcam Financial Group, a financial services company based out of San Diego. He also runs a very well-known blog called Pragmatic Capitalism (pragcap.com).
The topic is his book Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance.
In this episode of Trend Following Radio we discuss:
Entrepreneurism
Investing in yourself
The advantages of starting a blog
Why the word “pragmatic” is a word that has become central to Roche’s universe
Eliminating your biases
Why the US going bankrupt is a myth
The myth that central banks exist to enrich bankers
Dr. Laurie Santos and her work with monkeys
Bringing risk down to something we can measure
Warren Buffett
Hedging your bets
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