Please enjoy my monologue My Sins My Own with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.
In this episode of Trend Following Radio:
Process vs. outcome
Sports and trading analogies
Statistical thinking
“Think through all the possibilities, know the probabilities and be ready.” – Michael Covel
“Progress was not in the result, the progress was in the poise.” – Brad Stevens
A host of high profile money managers learned that the hard way recently when their investments in Valeant Pharmaceuticals reversed course.
For example, the Sequoia fund returned four times as much money as the stock market from 1970 through July 2015. What’s more, they did it with less volatility and lower drawdowns.
But Sequoia Fund’s brilliant performance came to a halt in the last year because of a single investment in Valeant.
At the peak, Valeant made up more than 30% of Sequoia’s portfolio. When Valeant began losing altitude, Sequoia’s managers failed to consider an exit plan. Instead of pulling the ripcord and exiting their positions, they added 1.5 million shares at the end of 2015 – only to see the stock nose dive a further 70%.
Valeant
Trust the process
The lesson here is clear. You won’t always be right, and you must have a process in place for the inevitable times when you will be wrong.
A rules-based investment process like trend following establishes predefined exit points before entering each position. This process defines exactly how much capital is at risk with each position across the portfolio. That allows you to cut losing trades quickly – before they ever have the opportunity to grow into career-ending losses.
Here’s how a simple trend-following strategy could have worked on Valeant:
Using a 200-day moving average would have gotten you into the stock during much of its move higher through 2013 and 2014. Then you would have gotten out of the stock above $200 per share – before it lost nearly 90% of its value.
With this kind of strategy, you will give up some profits when stocks fail to trend higher, like in 2014. But giving up this relatively small upside allows you to systematically avoid disastrous losses.
In 1995, psychologist Daniel Goleman published his best-seller Emotional Intelligence, a powerful case for broadening the meaning of intelligence to include our emotions. Drawing on brain and behavioral research, Goleman demonstrated why people with high IQs often flounder, while people with modest IQs often do extremely well. The factors that influence how well we do in life include self-awareness, self-discipline, intuition, empathy, and an ability to enter the flow of life, character traits most traders would not consider particularly useful for garnering profits from the markets.
Being self-aware also means understanding what you want out of life. You know what your goals and values are and you are able to stick to them. For instance, if you’re offered a high-paying job that doesn’t square with your values or your long-term goals, you can turn it down promptly and without regret. If one of your employees breaches corporate ethics, you deal with it instead of either ignoring it or worse yet making a half-hearted response because you pretend to yourself it won’t happen again.
Emotional self-control makes anyone more productive. However, Goleman is not saying we should repress our feelings of anxiety, fear, anger, or sadness. We must acknowledge and understand our emotions for what they are. Like animals, biological impulses drive our emotions. There is no way to escape them, but we can learn to self-regulate our feelings and, in so doing, manage them. Self-regulation is the ongoing inner conversation that emotionally intelligent engage in to be free from being prisoners of their feelings. If we are able to engage in such a conversation, we still feel bad moods and emotional impulses just as everyone else does, but we can learn to control them and even to channel them in useful ways.
A trend follower’s ability to delay gratification, stifle impulsiveness, and shake off the market’s inevitable setbacks and upsets, makes him not only a successful trader, but also a leader. Goleman found that effective leaders all had a high degree of emotional intelligence along with the relevant IQ and technical skills. While other “threshold capabilities” were entry-level requirements for executive positions, emotional intelligence was the “sine qua non” of leadership. Without emotional intelligence, someone can have superior training, an incisive and analytical mind, and infinite creativity, but still won’t make a great leader.
Now consider recent feedback to me in email:
Psychology is not a science, an art, a philosophy nor a religion. Why would I want to waste my time with people whose subject is completely unworkable?.
Yours truly,
[Name], a satisfied Scientologist for 48 years.
I can understand that. If I was in a cult I would say the same.
Note: Take a listen to some of the best minds in the field of psychology here.
Please enjoy my monologue The Big Short Never Ends with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.
In this episode of Trend Following Radio:
Ponzi schemes and scams
The Enron scandal
Valeant meltdown
Ego in trading
“Limit the impact of your bad decisions to small loses. Limit your downside and don’t ever make an excuse that you are smarter in ‘just this one trade.’ There is no excuse.” – Dr. Steve Sjuggerud
My guest today is Anders Ericsson, a Swedish psychologist and Conradi Eminent Scholar and Professor of Psychology at Florida State University who was internationally recognized as a researcher in the psychological nature of expertise and human performance. Ericsson studied expert performance in domains such as medicine, music, chess, and sports, focusing exclusively on extended deliberate practice (e.g., high concentration practice beyond one’s comfort zone) as a means of how expert performers acquire their superior performance.
The topic is his book Peak: Secrets from the new science of expertise.
In this episode of Trend Following Radio we discuss:
Discipline and practice
Solo and group practice
Flow state
Social Motivation
The late birthday rule
10,000 hours of practice
Nature vs. nurture
Brain plasticity
“To optimize the benefits of deliberate practice you have to be in control of your own training.” Anders Ericsson
My guest today is Tom Bilyeu, an American Entrepreneur. He is best known as the co-founder of Quest Nutrition and the co-founder and CEO of Impact Theory.
The topic is entrepreneur.
In this episode of Trend Following Radio:
Discipline and practice
The Quest belief system
Escaping the Matrix
Tom Bilyeu’s ultimate reading list
Being authentic
Obesity
Autopilot thought process
International food regulations
Letting go of being right
Reaching your true fans
“Do that which moves you towards your goals. Do not do that which moves you away from your goals” – Quest belief system
“You can learn what you need to learn, and if you are willing to accumulate enough skills, there really is no limit to what you can do.” – Tom Bilyeu
You must use trend following like technical analysis as a tool not a religion. I do believe quantitative easing is good because it drives the stock markets up and as a trader I make my money and pocket when the stocks are going up not with philosophy therefore I believe in Wall Street’s industry and the SEC and the Fed and US government whether good or bad ethically as they are a fact all those so called gurus predict or praise one thing and make money as counterparts as trading is binary buyer or seller by taking the opposite direction/position example Bill Bonner predicted in Money Week mag a few years ago that QE would lead to financial disaster leading to hyperinflation but there is no unemployment right now in the us 5 % there is a growth 3 % / year the highest standards of living in the world big house / cars etc. it is an affluent society but for a tiny minority of lazy couch potato people of course you get my point the truth is none can predict the future and if directors from the fed with a background of PhD in economics from Harvard the most brilliant people cannot they have the best reports from administrations then gurus cant either.
I believe as a taxpayer QE is fair because it drives my stocks up on the market and i want my money back because unemployed workers do not pay taxes and even if QE does not create enough jobs in the real world economy who cares
The worker should learn how to play the game and risk his money on the stock exchange instead of watching football games on TV all day
No pain no gain.
There will always be losers and winners and it is a matter of choice
My feedback:
1. Trend following is a tool. You have some misunderstandings you can correct if you are curious.
2. There are some points in your rant I think might make sense, but other parts are incoherent.
