Ep. 654: No Real Magic with Michael Covel on Trend Following Radio

Fun Picture Serious Subject
Fun Picture Serious Subject

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Today’s podcast features chapters 3, 10 and the Epilogue from Michael’s newest edition of Trend Following taken from his audio book.

Principles and lessons woven throughout Trend Following are timeless and endure through whatever current event may be rolling through the news.

In this episode of Trend Following Radio:

  • Absolute Returns
  • Volatility versus Risk
  • Drawdowns
  • Correlation
  • Zero Sum
  • George Soros
  • Berkshire Hathaway
  • Risk, Reward, and Uncertainty
  • Five Questions
  • Your Trading System
  • Frequently Asked Questions

Mentions & Resources:

“Every episode you always say to reach out… Well I never have, until now.”

Feedback in:

Hello Michael,

I have been an relentless listener of your podcast since the Fall of last year. I’ve listened to all the new episodes since then, and I’m quickly making my way backwards to take in the years I’ve missed. I cannot tell you how much you have helped me with my mindset and goal setting. Every episode you always say to reach out and you’ll provide the necessary steps to get started in trend following. Well I never have, until now.

I was just listening to Episode 559 where you interview Daniel DiPiazza. I can relate to the conversations you had with Daniel because I am a 26 year old, with a useless degree, and working a 9-5. So actually, I can relate to most of it besides the levels of success you both have achieved (but I’ll get there). I was particularly drawn to when you gave your story about reading Unlimited Power by Tony Robbins. You talked about how Spielberg had repeatedly gone to the Universal Lot to watch how movies were made and to be close to the action. You went on to explain your path of reaching out to specific fund managers for advice, which have now become some of your best friends. Your small, but BIG story has inspired me to follow in your footsteps down this path of discovery.

Michael, I do have two things to ask. Would you graciously provide me with any material or insights that would get me going in the right direction and continue my learning. I’ve attached a document which outlines my notes from Chapter 5 of The Complete TurtleTrader. I wanted to show you this because this chapter is gold. This chapter has provided me an excellent foundation for risk management, position sizing, making decisions, etc. Secondly, you spoke about needing a creative approach in reaching out to fund managers. What was your unique approach and do you have a particular mistake that you learned from?

Thank you for your time.

Your follower,
[Name]

Start here. Then read every link in the nav bar and footer.

“Looking forward to the next updates…”

Feedback in:

Hi Michael,

Thank you for the e-mail course, it helped me consolidate my thoughts on my study and focus on the principles of trend-following and am looking forward to the next updates. There’s is so much to download into my brain on the subject of trend following and I find it totally fascinating to learn about it’s history, technique’s and art.

Your podcast is awesome! My wife and I discuss the topics you put out there almost on a daily basis to broaden our horizon. Thank you for your time and dedication!

I also just spotted these two clips from a movie from 1991 called ‘Other People’s Money’ that you may like, if you haven’t seen this movie.

This first speech is by the president of New England Wire & Cable Company (Gregory Peck), I think this speech is a good representation of the language used by people with a ‘hold’ / buy-and-hold mindset:

Here is the counter argument speech of Lawrence “Larry the Liquidator” Garfield (Danny DeVito) who talk about ‘cutting losses, obsolescence and reminds the crowd why they are stockholders in the first place’:

All the best and greetings from London.

[Name]

Thanks. Great clips.

Nobel Prize Winner Eugene Fama on the Discovery of Momentum

Nobel Prize Winner Eugene Fama
Nobel Prize Winner Eugene Fama

From the Economic Rockstar Podcast:

Nobel Prize Winner Eugene Fama: Nothing is perfectly anything so there has to be some amount of inefficiency in markets. It seems to be very difficult to find it and it’s very difficult to identify it among portfolio managers.

Interviewer: And would that be due to human behavior or the nature of humans in terms of how they are trying to process the information? Whether they process it correctly or not.

Fama: Well I don’t know. The basic reason is that prices and returns are so noisy. There is so much randomness in them that it is difficult to identify actual skill.

Interviewer: So from that you had the surge in research of stock market anomalies. How and what an anomaly is like a falsification of the EFH where people…

Fama: It is usually a falsification of the other part of the hypothesis which is the model for risk and return.

Interviewer: It implies with the studies that markets can be beaten if you use a particular trading strategy. For example a momentum strategy.

Fama: Ya, Momentum is the biggest example. Very difficult after that to find anything that is actually robust.

Interviewer: Ya, especially if you look at something like the January effect. There are so many different types of effects that they all seem to smooth out over time. There is almost a randomness in that in terms of returns.

Fama: There has been studies that come out that look at the so called anomalies and say how many of them are observed in data outside of the data used to discover them and then you find that lots of them really disappear when you look at them in new data. But that is an area that still needs to be flushed out. See there is a problem in academics where everyone wants to publish new papers. That’s the way they advance and get tenure and get higher salaries. They also get notice on wall street for doing it. So there is an incentive to dredge the data and come up with things that will be attention grabbing. But won’t necessarily be there in new data and active places for investment strategies.

Interviewer: I find that based on readings of the studies myself even though I have not performed any of the research independently but looking at it we see trend lines where there is a disappearance of some of these anomalies and not the momentum effect. Did you find it entertaining or did you find it difficult at the time or did you just blank it when academics were putting this research out to try and make a name for themselves given the popularity of the topic at the time or did you find it a personal attack?

Fama: No, I don’t really have any vested interest in it. The first person that I know of that discovered momentum was Cliff Asness [I think that is who he said]. He was one of my PhD students. He is an investment manager at this point. But he came to me and showed it to me and thought I would be upset by it but I said “This is the data and this is what it says so publish it.” But he had already been scooped at that point because Jegadeesh and Titman had the same results like 6 months earlier. So Asness never got credit for it.

Interviewer: Ah that’s unfortunate.

Fama: He is very rich now so it doesn’t really matter.

Interviewer: Wow that’s what counts then actually

Fama: No, not really.

Interviewer: It doesn’t really matter

Fama: But he is quit successful actually so he doesn’t need that.

Interviewer: Ya, but even Jegadeesh and Titman themselves got criticized for perhaps data mining their work in order to have the data fit their model.

Fama: Well right. So robustness is the name of the game and their results were scrutinized by many people thereafter and applied to different time periods and different markets and they showed up pretty well so that is one anomaly that seems to be robust. And it is what it is. You have to live with it. It contradicts market efficiency I think but that’s the name of the game. All scientific theories have anomalies otherwise they are not theories. They are reality.

Interviewer: That’s true actually. That’s the beauty of economic science.

Fama: That’s the beauty of all science. All science is you purpose models. You test them and you come up with some stuff that say “this works pretty well” and you come up with other stuff that says ”this doesn’t work well” on this particular so called anomaly and so you either tweak the model to incorporate that or you just accept it as one of the shortcomings of the model. That’s why you call them models.

Who discovered momentum? A question that has no exact answer. However, my answer here is much more complete (and accurate).

“I have really embraced riding the wave and trading the F-ing trend…”

Feedback in:

Hi Michael,

I have really embraced riding the wave and trading the F-ing trend; not caring about what the media or “experts” are saying on TV. I have completely turned my results around since getting your book and listening to your podcasts. I know trend following isn’t for everyone but I love it!

Thanks for all of your hard work!

Cheers,
[Name]

Thanks.

Ep. 653: Alexander Elder Interview with Michael Covel on Trend Following Radio

Alexander Elder
Alexander Elder

Subscribe to Trend Following Radio on iTunes

Alexander Elder has written some of the most popular trading books of the last 30 years. He grew up in Estonia among a successful family of doctors. Alexander followed in his family’s footsteps, becoming a doctor and making his way on a cargo ship. He ran from his ship to a U.S. Embassy, escaping from his country. His decision to jump ship was literally the best decision of his life. He is author of Trading for a Living, considered a modern classic among traders, an international best-seller, translated into 16 languages, and recently newly revised and released under the title, The New Trading for a Living. This is his second appearance on the show.

How is Alexander’s trading different? Alexander is motivated by creating quality. He has a sense and intuition for it. Someone who is losing money looks at their situation “like a rabbit running from a snake.” Alexander thinks differently. He trades by way of systems. He has his orders set for the day, goes skiing, then comes back to the computer to watch the last hour of trading to see if he needs to make any adjustments. He learns from his mistakes and makes sure his systems are the highest quality they can be.

What was the pivotal moment that broke Alexander into the trading direction he is in? There was not one moment, but many losing ones. He hates to lose. He overcame his losing over time with persistence and stubbornness. He studied his systems and trades vigorously until he had a winning system.

Another motivation? Knowing that failure was not an option. Alexander grew up in a successful family with money – If he failed in his home country, he would have been taken care of. However, now that he was in the United States, he knew if he failed he would be on the street. There would be nobody to take care of him. Do you hit rock bottom and paddle up? Or do you stay there and become a bum? Alexander chose to paddle up.

In this episode of Trend Following Radio:

  • Robustness
  • Persistence
  • Importance of record keeping
  • Systems trading
  • Skiing and yoga – staying in the moment of now

“The best buying opportunities occur at the point of maximum danger.” – Alexander Elder

Mentions & Resources:

“If I’d learned anything it was that conventional wisdom had nothing to do with the truth…”

Feedback in:

Michael,

I am reading this book titled “The Hard Thing about Hard Things” and came across the passage below and I instantly thought of you. It starts on page 51 in the book. In reference to looking at companies to acquire:

Surprisingly, among the four existing network automation players, the company that we thought had the best product architecture, Rendition Networks, had the lowest revenues. This made some of our business people skeptical of our technical evaluation. However, if I’d learned anything it was that conventional wisdom had nothing to do with the truth and the efficient market hypothesis was deceptive. How else could one explain Opsware trading at half of the cash we had in the bank when we had a $20 million a year contract and fifty of the smartest engineers in the world? No, markets weren’t “efficient” at finding the truth; they were just very efficient at converging on a conclusion–often the wrong conclusion.

Enjoy and keep up with the great podcasts!

Sincerely,
[Name]

Thanks! My preface here (PDF) makes the case too.