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David Harding on EMT: Trend Following 5th edition

From my newest:

David Harding goes further, explaining EMT madness in an every-man way: “This theory of rational markets treats economics like a physical science—like Newtonian physics—when in fact it is a human or social science. Human beings are prone to unpredictable behavior, to over-reaction or slumbering inaction, to mania and panic. The markets that reflect this behavior do not assume some supra-human wisdom, they can and sometimes do reflect that volatility.”

Further translation: Human nature isn’t rational. It blows bubbles and then pops bubbles.

Ep. 508: Hysteria with Michael Covel on Trend Following

Hysteria with Michael Covel on Trend Following
Hysteria with Michael Covel on Trend Following

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“If you are in a dead end existence and feel like you need something else, get on a plane.” Fly to a foreign country, go alone, and do not have a plan. The influx of adrenaline from getting away and exploring can break anyone out of their day to day hypnosis.

Michael plays a series of news clips starting from the beginning of the Presidential race. The various clips start off profiling Donald Trump’s campaign as a joke, and then slowly morphing into him inching his way up in the polls and taking the Presidency. Michael then reads an excerpt from “Follow Me and Die” by Cecil Curry.

Michael ends the podcast with a quote from a recent Financial Times article featuring David Harding. The excerpt explains how Harding exploits the failures in the efficient market theory. He says that the markets are a psychological game and should not based off of fundamentals. Bet your money on the price, not what is happening in politics.

In this episode of Trend Following Radio:

  • Trump as President-elect
  • Trading off of price, not politics
  • Nazi’s in America
  • David Harding
  • Efficient market theory

Mentions & Resources:

“Following Me and Die” by Cecil Curry

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David Harding on Trend Following and Spreadsheets

Famed trend follower David Harding:

Taking a distant perspective, the trend following systems, which we developed in the 1980s, have just continued working. They didn’t work smoothly, but they continued to make money, so some level of success—providing you were not over-leveraged and you stuck to it—some level of success was eventually guaranteed, wasn’t it? Because if you keep making money, in the end the world’s going to find you. It’s not very quick, because it’s not very smooth, it’s not this high short ratio thing; its virtue is in trends forming in very high capacity. That’s its great virtue, because if you put a lot of money in it, it’s a very profound thing. It’s much more profound than many hedge fund strategies because it’s talking about the very exploitable effect in the price movements of whole asset classes. People talk about anomalies; it’s not like some small anomaly. It’s about the whole way the whole world works. It’s a theory about the way the world works, which is different from the theory that everybody in the financial world has about how the world works.

I did, I became very open. Of course Winton was relatively unsuccessful in the early 2000s. I actually went in when it was relatively unsuccessful. It became quite successful as a company, but several of our competitors, like Aspect, became much, much bigger and more successful because they had much more successful institutional sales, so I decided I might as well be hung as a sheep for a sheep is a lamb. And I started showing all the results that I hadn’t shown in 1993, so I started showing “this how it works.” Excuse me, but fuck it, this is my work. If I can’t make money, I’ll just show you it.

Yes, just following trends really. The trends changed slowly. The trends in the market, the slide in 2008, didn’t come out of the blue. It was a true bear market, a classic bear market, the kind of bear market that creates the need for the term bear market.

Had you computerized by that time, were you off the spreadsheets by this point?

A spreadsheet is a computer. This spreadsheet was just living somewhere inside a whole set of other computer programs. There’s probably a spreadsheet in NASA somewhere, one that was written in 1959 that’s still living in there somewhere. It’s just become part of a bigger thing.

It’s what Warren Buffett calls handicapping. That’s what he calls what he does, handicapping, which means setting the odds, so that’s what an investor has to do, they have to work out what the odds are.

The other thing, the book, it’s very important to realize that this is not a physical science, it’s social science, albeit it’s a bit of a wolf in sheep’s clothing, because it’s a social science which uses very rigorous and detailed mathematics. The thing about physical science is reality is what it is and it doesn’t change when you investigate it, whereas there are rules and laws that you’re seeking to tease out, whereas there aren’t any rules or laws in financial markets. There are no immutable eternal truths at all. That’s certainly nothing original I’m saying here. You can watch any presentation by James Simons and it’s the first thing he says, so it is obvious, but I suppose it needs more than one person to say it.

A lot of the scientists and mathematicians who have gone into financial markets are not sophisticated enough to grasp fully this point. They sort of felt that there are physical laws. In fact, the efficient market theory is the idea of a physical law. The mainstream have fallen into precisely the trap that I’m saying there’s no excuse for falling into. If you’re going into business that’s the first thing you should try not to fall into, is believing that you’re going into physics because you can use maths productively to improve your ability to make inferences, but it isn’t physics. It’s not.

Blunt. Direct. Learn from him.


Source: Securities and Exchange Commission Historical Society, Interview with David Harding. Conducted on June 18, 2013 by Ken Durr.

Listen to my interview with the advisor Mark Kritzman in my podcast episode 605.

“How we use mathematics to bring order to financial markets…”

Trend following insights:

Once you realised you are forecasting probability distribution conditional upon knowing something, then you can leave the technical analysis behind. You can then research conditional probability distribution on anything.

It is very advantageous to understand the level of uncertainty in the inferences you are making, and this is a fundamental mistake that human investors make.

Obviously, you can try and reduce that uncertainty by knowing more and more about the situation, like Warren Buffett. He reduces the uncertainty as much as he can by knowing as much as it is possible to know. That is a very different style to ours.

We have a much higher level of uncertainty than Warren Buffett when he makes an investment. But we have a much bigger and more dynamic portfolio. There are lots of ways to skin a cat, or lots of roads to Rome. My view is the success of our approach does not invalidate anybody else’s.

That is maybe not the only thing, but that is what I was: sufficiently desperate and needing to prove a point. Having these various motivations is what it takes to make you start a company–it does not just happen over a year and a half.

If you don’t know about this, dive in.

Source: Lawrence Gosling, Winton Capital’s Harding: How we use mathematics to bring order to financial markets. Investment Week, February 24, 2016. See

Ep. 430: The Mob Rules with Michael Covel on Trend Following Radio

The Mob Rules with Michael Covel on Trend Following Radio
The Mob Rules with Michael Covel on Trend Following Radio

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Michael Covel starts the discussion off with Mark Zuckerberg and the virtual reality realm we are entering. There is now an infamous picture of Mark Zuckerberg walking down an aisle with a huge audience behind him hooked up to helmets. All audience members are in a virtual reality. Michael bridges the gap between speculative follies of the past, with the virtual reality bubble we are about to embark on.

David Harding and James Holmes wrote a book titled, “The Pit and the Pendulum: A Menagerie of Speculative Follies.” Michael reads an excerpt from the book, giving a historical narrative about how people have behaved over the centuries. People always get excited about something new, and that “something new” historically always seems to crater and crash. The chapter Michael reads from is titled “Basking in an Indian Summer: The Bombay Share Mania of 1865.” The excerpt relates to cotton exports during the American Civil War. Bombay saw massive profits in cotton and silver due to cotton exports being halted in America during the war. Due to the boom in the economy Bombay saw huge expansion in their commercial sectors. Investors were only focused on the short term rather than long term.

When the American Civil War ended the Indian economy hit depression. Banks went bankrupt and the housing market crashed. The Bombay commercial world went totally bust. This is only one of many speculative examples that are in “The Pit and The Pendulum.” History always repeats itself. All speculative follies go down the same path. The only difference is the name or market caught up in the mania. Whether it be technology, cotton, or tulips, it’s all the same. How do you protect yourself from the next big mania? Educate yourself and have a strategy in place.

In this episode of Trend Following Radio:

  • Bombay cotton market 1865
  • Bubbles and mania
  • Profiting from the speculation
  • Having a plan in place

“All speculative follies go down the same path. The players involved look the same. They act the same. They talk to same. The only thing that is different are the names. It’s always a new technology. It’s always an innovation.” – Michael Covel

Mentions & Resources:

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