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Hi Michael

I guess the mindset of turning off from the noise of the news and concentrating only on the price action and sticking to your tested Trading system even when it doesn’t feel right. A good example would have been where I follow Jim Rickards, Bill Bonner, Jim Rogers and Peter Schiff where they’ve been warning about another stock market collapse due to an increasing US National debt and also escalating National Corporate and personal Debt to unsustainable level that cannot be paid back with current GDP growth rates yet the Stock indexes continue to rise or rather they where going up despite the warnings I’ve been reading the past couple of years.

Using a simple 30/50 Weekly average would have kept you in the trade during this period. I Personally moved out mostly of equities in my Private Pension Fund a year ago put a 20% allocation to physical gold. One of the issues with pension funds is if there is sudden crash the Fund manager can restrict exit from the fund for 6 months so you cant just easily pull your money if you see your chart reversing to the short side

I know this is a lot easier with spread trading but i wouldn’t have a large enough bank to trade over long periods at present. Most of my money goes into my pension. What i do in my pension fund is use the gone fishing portfolio strategy of re-balancing once a hear with my 20% allocation to each of cash, gold, bonds, commodities, equity and insight currency funds. So I’m selling a part of the funds that went up and buying more of the funds that have gone down and its been doing well. Lot of friends in work are all in equities and they brag about their big gains but they won’t sell either when the market turns thinking it will come back.

Regards
[Name]

Hard to be a trend trader on one market alone.

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Hi Michael,

I always enjoy your podcast and think you are a gifted speaker. Contacting you for 2 things:

1) do you have transcripts for your podcasts? In particular I am in interested in the Markowitz podcast. In addition to being shocked as your were about his youthful voice, I was also surprised at his candor about the misrepresentation of his work throughout the industry. Would like to see some of his specific statements. I often share the contents from memory with friends but am starting to forget the exact wording.

2) I take issue with your criticism of buy/hold. I too am an independent futures trader, Wharton MBA, and was a very profitable interest rate and credit derivative trader at Merrill Lynch in the 90s – generated over $100M pnl in less than 10 years. But recently I dug deeply into the long only side, dissecting historical data going back 150 years in a myriad of ways. The persistence of long term broad stock market performance was very surprising.

I too always wondered why a rational investor would subject themselves to an investment likely to lose 1/2 its value (possibly multiple times) over his investment time horizon. I still make a living as a discretionary trader but after carefully looking at the data I have a newfound respect for buy and hold…if properly managed for liquidity needs. Standard industry practice of blindly making decisions based on meaningless rules of thumb is ridiculous.

Let’s say that I define risk not as a statistical measure but as the probability that I can’t meet predefined annual liquidity needs (defined as 5% of portfolio value) starting at age 65 and continuing into perpetuity (wishful thinking). Nothing ever changes in terms of asset allocation or approach – manage solely for liquidity needs (which may mean for next gen when health deteriorates). My basic thesis is that the market will always go up in the long run, subject only to the fall of US capitalism or, say, 30 years of 20% compounded growth such as Greece or Japan.

With rare exceptions, market corrections and subsequent reversions to an adequate IRR (say 5% compounded annually from previous peak) are surprisingly short. Most are inside 18 months and only 6 corrections in the past 100 years extend beyond 5 years before recovering sufficiently to yield 5% CAAR. The notable exceptions being 8/1929 (25 years to 5% IRR), and 7/2000 (18 years to 5% IRR).

I can’t manage liquidity risk with a long only equity index over weeks or months, but I can manage it over 5 years. From a practical standpoint, I can maintain a 5 year liquidity bucket that I only refill if market at a sufficient price level to reflect, say, 7% CAAR from last peak. Else I draw from the bucket and expect at some point to have to sell at a lower price when a correction extends beyond 5 years. But at only 5% of the portfolio the impact would be quite small.

Interested to hear your view on the idea.

Keep the podcasts coming! Very refreshing

Thanks for your note.

I don’t have transcripts up yet unfortunately. In terms of buy and hold I lay out my best take on that in my 2017 edition of Trend Following. Right now the world is primarily long only. That seems dicey.

Food for thought:

• A History of Bear Market Bottoms
• Behind the Market Swoon: The Herdlike Behavior of Computerized Trading
• Don’t Fall For It
• The Republican Party Needs to Embrace Liberalism
• The Allure and Myth of Safety
• Where the Black Swans Hide & The 10 Best Days Myth
• The Spacing Effect: How to Improve Learning and Maximize Retention
• Crypto Craze Drew Them In; Fraud, in Many Cases, Emptied Their Pockets
• Why Experimenters Might Not Always Want to Randomize, and What They Could Do Instead
• 35 years ago, Isaac Asimov was asked by the Star to predict the world of 2019. Here is what he wrote
• Introducing The 14-Day Stoic Challenge. New Year, New You
• Married Men Outearn Single Men (and Women as a Whole)
• Winton Capital’s Idiosyncratic Founder on Artificial Intelligence and Statistical Fallacies
• One Giant Step for a Chess-Playing Machine

Enjoy.

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Tero Isokauppila is author of “Healing Mushrooms” and founder of Four Sigmatic, a natural super foods company specializing in mushroom-based drink powders. In 2012, he founded Four Sigmatic, spreading to Europe and Canada and eventually brought the business to the U.S. in 2015.

Tero grew up on a 13 generation farm in Nokia, Finland with both of his parents in the health, wellness and agriculture sphere. Some of his earliest memories were going into the forest when he was about 2 or 3 and picking herbs, berries, and mushrooms. He loved the berries but found the mushrooms so “odd.”

There is estimated to be about 1.5 million different types of mushrooms–that’s about 6 times the amount of mushroom species over plant species. Mushrooms are used for food, soil, psychedelic purposes, and medicinal. They are present in just about every aspect of life however not many realize how integrated they are in their everyday life.

There are two genres of mushrooms–functional and culinary. Generally, functional mushrooms are eaten for health reasons and culinary mushrooms are eaten for taste. Functional mushrooms grow on trees and culinary mushrooms grow in the ground. Skin, eyes, vitamin D, minerals, immune system boosters, and brain functions are all areas mushrooms can help in the body. Through Four Sigmatic, Tero has developed coffee’s, tea’s, elixirs, and other boosters enhanced with mushrooms to target all tastes and appetites.

An episode direct to health and wellness coupled with entrepreneurial drive.

In this episode of Trend Following Radio:

• Gut health
• Functional mushrooms
• Culinary mushrooms
• Super foods
• Mushroom coffee
• Reishi

Mentions & Resources:

• Tero Isokauppila
• Healing Mushrooms
• Mushroom academy

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Mr. Covel,

I listen to almost all of your podcasts. I just finished listening to the one with Jonathan Tepper on “The Myth of Capitalism.”

It is one of your best ever. You did a great job of asking questions and leading the discussion. Mr. Tepper is taking on a subject that needs more publicity and scrutiny.

I wish that you, through your podcast, can find other guests to continue to enlighten the American people on this subject–restrained competition.

Thank you for your time.
[Name]

Thanks!

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Hi Michael,

I found your blog and have been listening to some of your awesome podcasts. I’ve already found them inspirational. I’ve been using a trend following strategy with my portfolio for 2 years now because trend following just fits my personality better than buy and hold, but I’ve always had a bit of a worry in the back of my mind that it didn’t work well during the 1937-41 period. It had a -50% drawdown during that period due to some really ugly whipsaws, especially the May 1940 mini-crash. Anyway, other than 1937-41, it performed really well historically, and I tested it out of sample on other countries’ markets since 1970 and it performed well there too, especially Japan, and I’ve been concerned about a “Japan scenario” where markets could go sideways or down for decades.

Anyway, my strategy generated a sell signal in October, I sold, then it generated a buy signal (just barely) at the end of November and I bought. Of course I’m sitting on big whipsaw losses now and my strategy will very likely generate a sell signal at the end of this month to lock in the loss. But I’ve been thinking this month about what would have worked during that 1937-41 choppy sideways market. One thing that worked was using an economic indicator like the unemployment rate as a confirming signal before selling, since the worst drawdowns have happened in recessions (at least in the U.S.). Using unemployment rate to confirm the trend-following sell signal, you avoided about half the loss of the 1937-38 recession and were fully in the market during the 1938-41 volatility and avoided locking in those whipsaw losses, which helped a lot compared to just using the trend following signals. However, I found that using unemployment rate hasn’t worked so well in other countries like Japan and Italy since 1970 where the unemployment rate didn’t even start to increase appreciably until the market was already down over 30%.

If I decided to start using the unemployment rate as a confirming indicator for 25% of my trend-following portfolio, then I wouldn’t have a sell signal this month since the unemployment rate hasn’t started rising yet, and I wouldn’t have to lock in that whipsaw loss. I also really think the bottom is in for this correction and it’s just going to be a whipsaw like the 2015-16 and 2011 corrections, but I know I need to take thinking and gut instincts out of this entirely.

Would you add an economic indicator as a confirming signal if it improved results a lot for 1937-41? I haven’t really found anything else that helped much during that period, it was so choppy and volatile. I know it’s not investment advice, I’m not looking for that, just what you would do?

Thanks for reading and I appreciate your time.

Thanks,
[Name]

1. Why the fundamentals?

2. Why one market alone?