My guest today is Kathleen Eisenhardt, the Stanford W. Ascherman M.D. Professor and a faculty member in the Stanford Technology Ventures Program. Professor Eisenhardt is also author of over 100 articles in research and business journals, and the first author featured in Harvard Business Review’s OnPoint collection. She has been a Distinguished Visiting Professor with Insead’s Entrepreneurship and Family Enterprise area.
The topic is her book Simple Rules: How to Thrive in a Complex World.
In this episode of Trend Following Radio we discuss:
Bottleneck concept
Complexity is not always best
Tax code for political gain
Simplifying government
Improving your probabilities with rules
The Federal Reserve
“There are two kinds of complicators. One are people who are risk adverse. They just want to lock everything down so there is no problem. If they plan for every contingency then they have it covered. The problem is that you can’t predict contingencies.” – Kathleen Eisenhardt
Most people are sheepish. They love the crowd and can’t break free. Consider an excerpt from Trend Commandments:
You see them. Maybe you are one. Some are so connected to their BlackBerry, they can’t imagine it not being in their hand 24/7. Compulsive gaming. Second Life. People are looking at screens, sometimes multiple screens. Some think teaching students to multitask is important for future jobs. Jobs doing what? Serving Ritalin with a splash of Patrón?
Attention deficit disorder is so pervasive, and so ubiquitous, that very few of us even see it as a major concern. People are supremely distracted, and that equals behaviors driven by the moment. Not behaviors purposeful and thought out.
While making a documentary film (www.brokemovie.com) one of the first places my crew visited was a sheep farm. Those animals were so scared to be separated from the group it is terribly hard to put their fear into words. Late in the day of the shoot, I got really close to the herd and tried to split them in half. They panicked to reform their group. They had to get back to one cohesive crowd. They made no sounds. Their faces were expressionless. They just moved their feet—fast.
Humans live to be part of a group too: The group offers safety, confirmation, and simplifies decision-making. Further, if something goes wrong, it is far more comforting to be with others than to be alone—the old saying, “misery loves company,” rings true.
Just wanted to say thanks for the great content over the years. I finally gave my notice to my employer this last Tuesday and am going out on my own in ten days. What is amazing is how addicting the steady paycheck is. I had multiple consulting clients lined up with contracts signed before I pulled the plug on the corporate gig and I still struggled to pull the cord. Thinking about some of the incredible people’s stories that you profile on your show helped me finally get off my ass and pull the trigger.
What’s amazing is once I made the decision that I was going for it a whole world of opportunities opened up. Now in addition to the consulting business I have another product that me and a couple of business partners are getting ready to manufacture and sell. Once you step away from the insane amount of wasted time in corporate America and decide to go do your own thing life becomes much more creative.
BTW, what I’m doing has nothing to do with money management or trading. It has everything to do with being a free person and taking control of my life. Your show has broad appeal.
My guest today is Rob Walling. Rob may not be a trader, but he is a serial entrepreneur. And trading at its heart, after all, is an entrepreneurial activity. He is an author, podcaster, and angel investor. He is the author of Start Small, Stay Small: A Developer’s Guide to Launching a Startup, which was published in 2010. Walling is the founder of email marketing software Drip that was acquired in a life-changing exit by Leadpages in July 2016.
The topic is serial entrepreneur.
In this episode of Trend Following Radio we discuss:
Rob Walling’s “Stair-Step Approach”
Growth hackers
The act of creating
Focusing on the “Unicorn” rather than reality
Filtering your information
Skin deep information
“Software becomes like building a skyscraper. You can’t go back and replace that foundation. Once it’s up, its just too hard.” – Rob Walling
“It’s easy to be great, its hard to be consistent” – Steve Martin
“You can’t jump to the majors if you haven’t played little league yet.” – Rob Walling
Seth Godin makes the case for my business (unintentionally):
Who is this for?
Is it for people who are interested, or those just driving by?
For the informed, intelligent, educated part of your audience? For those with an urgent need?
Is it designed to please the lowest common denominator?
If you’re trying to delight the people who are standing on one foot, reading their email and about to buy from a competitor because he’s cheaper than you, what compromises will you need to make? Are they worth it?
I recently created a starting point for my trend following world.
Please enjoy my monologue Everyone Needs a Trading System to Profit 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:
Human nature doesn’t change
Timelessness
Behavioral finance
Sticking with a system
Risk management
Bill Dunn on trend following
“Find the wizard behind the right curtain and you have a chance.” – Michael Covel
“The system protects you from being human.” – Howard Lindzon
Perhaps not surprising, trend followers have spent as much time observing and understanding human behavior as they have trading. Understanding human behavior and how it relates with markets is commonly referred to as behavioral finance.
Behavioral finance evolved out of a contradiction between classical economic theory and reality. Economic theory is based on the assumption that people act rationally, have identical values and access to information, and use rational decision making. The truth is people are irrational and seldom make completely rational decisions even if they think they do. I have had the good fortune to learn from some of the top minds in the field of behavioral finance. From Nobel Prize winner Vernon Smith to Charles Faulkner, my eyes have been opened. Faulkner outlined the core issues:
“The current proliferation of electronic technologies— computers, the Internet, cell phones, 24-hour news, and instant analysis—tend to distract us from the essentially human nature of markets. Greed, hope, fear, and denial, herd behavior, impulsiveness, and impatience with process (‘Are we there yet?’) are still around, and if anything, more intensely so. Few people have absorbed the hard neuroscience research that reasons arrive afterwards. That given the choice between a simple, easy-to-understand explanation that works and a difficult one that doesn’t, people tend to pick the latter. People would rather have any story about how a series of price changes happened than that there is no rational reason for it. Confusing hindsight with foresight and complexity with insight are a few more ‘cognitive illusions’ of Behavioral Finance.”
Faulkner is correct, but that doesn’t make his words easy. The problem is that by not accepting that truth, you will get into trouble one way or another, as Carl Sagan reminds us:
“It is far better to grasp the universe as it really is than to persist in delusion, however satisfying and reassuring.”
A few years after writing Trend Following I came across another great mind in the field of human behavior and psychology, Alan Watts. Consider some feedback from a listener:
Mike,
Thanks for turning me on to Alan Watts through your podcasts. Below is a link to an audiobook that I think you may find interesting, considering your interests in yoga and other eastern traditions. Andrew is a Lama (not a llama) and an old friend of mine: Here
On today’s episode of Trend Following Radio Michael Covel interviews Emil van Essen. Michael first heard of Emil from former turtle, Lucy Wyatt. The first thing to note is that he is not a trend following trader. He is a commodity spread trader. Emil has been a CTA since 1997, but his first trading experience was at the early age of 12. Emil delivered papers when he was younger and would take the money and invest in rare coins. The owner of the coin store happened to be a commodity trader. He helped teach Emil about trading commodities and even put in trades for him. Emil’s first trading job was in 1986 at the age of 21.
Michael and Emil start the podcast explaining spread trading. Emil describes trend following as one dimensional whereas spread trading in his view has a multidimensional trading surface because of all the directions a trade can profit rather than if the market only goes up or down. Emil refers to his trading as not systematic but model driven. At the base of his every trade is a model and they can tweak the model accordingly as they see fit–a big distinction compared to trend following.
Emil’s firm is one of the only CTA’s that are negatively correlated to trend followers. He also believes that following rules 100% of the time is a bad idea. “Our brains are far more smarter than computers,” he states. Emil adds, “We need to know not to be emotional about trades but if you don’t adapt to change then you won’t last.” Emil also throws around the controversial word, “prediction.” He says that when he says “predication”, it is actually more about “probability.” He tries to find a method that reliably tells him that something is going to happen more often than not. Emil says, “You try and find an edge. Find consistent behavior patterns that give you a risk adjusted return.”
In this episode of Trend Following Radio:
Growth of commodity ETFs
Diversification
Raising money vs. Making money
Quality Investors vs. Quantity of Investors
Beta and Alpha
Not all investors are created equal
“Long only commodities is the gateway drug into commodities.” –Emil van Essen
“If your trend trading you are always capturing that extreme volatility, whereas if you are spread trading you are sometimes the victim of that volatility and if you are not well diversified then you have a problem.” –Emil van Essen
