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Ep. 606: Jeff Bezos Is a Trend Follower with Michael Covel on Trend Following Radio

Jeff Bezos Trend Follower
Jeff Bezos Trend Follower

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Michael throws Jeff Bezos, Amazon and trend following into a giant melting pot. Jeff Bezos is a trend following trader – along with venture capitalists, Hollywood, the MIT black jack team, Warren Buffett (to some degree, yes), and many more.

Michael notes an excerpt from a document written in 1983, gleaning wisdom from Richard Dennis and Bill Eckhardt. Not relevant today? Think again. Richard Dennis makes it clear in the document that you never know where the next home run is coming from – missing a big payout is just as bad as taking a loss. Are you guilty of forgetting about big opportunity when trading? Do you focus too much on your downside? Most unfortunately get fixated on the downside and ignore the positive unknown.

Michael also notes an article written by Li Jiang titled, “What I Learned From Reading Every Amazon Shareholders Letter.” Li lists key lessons he has pulled from shareholder letters: type I and type II decisions, end each day of business like it is the first day, always operate like a hungry upstart, only the paranoid survive, make small bets because you can’t predict anything, move fast and break things, and if you are offered a seat on a rocketship – don’t ask which seat, just get on. Jeff Bezos’ words dovetail seamlessly with trend following philosophy. Thinking outside the box is essential to making great things can happen.

In this episode of Trend Following Radio:

  • Jeff Bezos
  • Amazon
  • Type 1 errors/decisions
  • Type 2 errors/decisions
  • Sunk cost
  • Opportunity cost
  • Prediction
  • Trend following is dead?

“You never really know which market is going to be the one that is the big payoff.” – Richard Dennis

“If you are offered a seat on a rocket ship, don’t ask which seat, just get on.” – Jeff Bezos

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Ep. 593: Scott Galloway Interview with Michael Covel on Trend Following Radio

Scott Galloway
Scott Galloway

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Scott Galloway is a professor at New York University Stern School of Business teaching brand strategy and digital marketing. He has started nine firms and his weekly YouTube series has generated millions of views. Scott is also author of “The Four: The Hidden DNA of Amazon, Apple, Facebook and Google.”

Amazon, Apple, Facebook and Google are arguably the most influential entities in the world. These companies have deconstructed who humans are as a species and reassembled who humans are, in the form of for-profit companies. They have scaled up so fast and become so successful by understanding humans most common questions and producing answers instantly. Scott breaks down the specific reasons each of these companies have individually thrived: Google = God, Facebook = Love, Amazon = Consumption, and Apple = Sex.

Mediocre and cheap products have been pushed in years past. However, people have new tools allowing them to practice due diligence and find what product is best for them personally. A better product is the best and only way to brand in today’s marketplace. With customer reviews built into Google and Amazon, they have changed the entire course of how people buy.

These four companies have done a lot of good, but have they become so big that they have become bad for society? In some ways, they are leveraging their power to unhealthy heights. Amazon, Apple, Facebook and Google yield more money and more power than some foreign governments. This has allowed them certain privileges such as tax avoidance and immunity to government oversight. What is another negative? Amazon has literally sucked the oxygen out of other top companies such as Nordstrom, Macy’s, and Sears. Facebook and Google have taken over the digital marketing world. If you are not working with Facebook or Google, then you are marketing with newspapers or magazine — rapidly declining markets. Amazon, Apple, Facebook and Google are not only in zero sum markets, they are creating zero competitors.

What are some great leadership qualities from these top companies? Jeff Bezos, for example, has always kept a long term outlook on consumption rather than short-term. He also has combined fast and free service. Tim Cook has tripled the value of Apple. Apple is the first company in history to have great quality and spend extremely low on production. Facebook has shown tremendous agility in their management. Michael and Scott finish the conversation talking government, and how these companies yield their power in the political arena.

In this episode of Trend Following Radio:

  • Amazon, Google, Apple, and Facebook
  • Eco system of Silicon Valley
  • Zero sum nature of Amazon
  • Jeff Bezos
  • Tim Cook
  • Mark Zuckerberg
  • Political views of Amazon, Google, Apple, and Facebook
  • Strong leadership qualities
  • Monopolies

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Trend Follower David Druz on Systems

From The Little Book of Trading trend follower David Druz has a plan:

Once a system’s algorithms and parameters are established, the system must be followed exactly and religiously. A system cannot be second-guessed or used intermittently. Values of variables cannot be altered. Parameters cannot be arbitrarily changed. A robust system works over many types of market conditions and over many timeframes. It works in German Bund futures and it works in wheat. It works when tested over 1950-1960 or over 1990-2000. Robust systems tend to be designed around successful trading tactics not designed around specific types of markets or market action. And here is the amazing thing about robust systems: The more robust a system, the more volatile it tends to be! Druz gives this advice: “There are whole families of trend trading ideas that seem to work forever on any market. The down side is they are very volatile because they are never curve-fit. They’re never exactly fit to any particular market or market condition. But over the long run, they do extract money from the market. You want to be focused on how you divvied up the risk in your portfolio, how much risk you take in each market, how many contracts you trade in each market, that’s the stuff that really counts…if you have money management wired, you can let volatility go because you know it doesn’t have any correlation with the risk of ruin. You can use volatility to your advantage.”

Wise.

“Play Calling Is About Probability, Not Certainty”

Take two traders who win 40 percent of the time with their winners being three times as large as their losers. One has a history of 1,000 trades and the other has a history of 10 trades. Who has a better chance in the next 10 trades to have only 10 percent of their total trades end up winners instead of the typical 40 percent? The one with the 10–trade history has the better chance. Why? The more trades in a history, the greater the probability of averages holding true. The fewer trades, the greater the probability of moving away from the average.

Consider a friend who receives a stock tip, makes some quick money, and tells everyone about it. There is a big problem with this scenario. His population of winning tips is extremely small–one to be exact. That’s statistically insignificant. He could just as easily follow his next hot tip and lose all of his money. One tip means nothing. The sample is essentially anecdotal evidence.

Thinking in terms of statistics is everywhere if you are observant. During a Monday Night Football game, one of the announcers, Ron Jaworski, put numbers and odds in perspective for playing the game of football: “Play calling is about probability, not certainty.”

It is the same in trend following trading.

Bernard Drury: Grain Trader Turned Trend Following Trader

Bernard Drury (PDF) is a trend trader today, but he started as a fundamental grain trader. He is in my new book.

Disclaimers:

Our firm can not promise you will earn like returns of traders, charts or examples (real or hypothetical) mentioned. All past performance is not necessarily an indication of future results. Data presented is for educational purposes. This information is not designed to be used as an invitation for investment with any adviser profiled. All data on this site is direct from the CFTC, SEC, Yahoo Finance, Google, IASG and disclosure documents by managers mentioned herein. We assume all data to be accurate, but assume no responsibility for errors, omissions or clerical errors made by sources.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

Francisco Vaca: The ‘Turtle’ Scientist

I spent some time with Francisco Vaca a few years back in Florida. He offered a nice view on my book ‘The Complete TurtleTrader’:

“Regarding your new book [“The Complete TurtleTrader“], I can say that after hearing the turtle story many times from many of the people that are part of the story and after reading many articles about such story, this is by far the most entertaining, inspiring, extensive, and honest story of the turtles I have ever read.”

Vaca’s background? He currently is an associate with original Turtle Paul Rabar. How did he get started?

“…a friend…told me there was a job for a programmer at a commodity trading firm. He had thrown away the job ad, so I picked it out from the garbage! It turned out to be at C&D Commodities, which was co-founded by Richard Dennis of ‘turtle’ fame.”

That ‘find the ad in the garbage can’ was long after the original Turtle experiment. Read a recent article on Vaca (PDF).

Trading Numbers, Not Markets

An excerpt from my book The Complete TurtleTrader:

Richard Dennis’s friend Tom Willis had learned long ago from Dennis why price, the philosophical underpinning of Donchian’s rule, was the only true metric to trust. He said, “Everything known is reflected in the price. I could never hope to compete with Cargill [today the world’s second-largest private corporation, with $70 billion in revenues for 2005], who has soybean agents scouring the globe knowing everything there is to know about soybeans and funneling the information up to their trading headquarters.” Willis added [when talking about trend followers], “They don’t know anything about bonds. They don’t know anything about the currencies. I don’t either, but I’ve made a lot of money trading them. They’re just numbers. Corn is a little different than bonds, but not different enough that I’d have to trade them differently. Some of these guys I read about have a different system for each [market]. That’s absurd. We’re trading mob psychology. We’re not trading corn, soybeans, or S&P’s. We’re trading numbers.”

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