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Ep. 362: Speculation Wins Today with Michael Covel on Trend Following Radio

Speculation Wins Today with Michael Covel on Trend Following Radio
Speculation Wins Today with Michael Covel on Trend Following Radio

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Speculation has become a pejorative for some in recent times. A quick search yields the following definition of speculation: “forming a theory about a subject without firm evidence.” Yet if we look at the origin of the word, “speculor” means “to observe” in Latin. To speculate is to observe, and to make decisions based on those observations.

In business and in life, there are ultimately two choices: to speculate or to gamble. The difference between the two is simple: the first has a strategy behind it; the second does not. The first relies on predetermined parameters for making decisions; while the second leaves decisions up to circumstance or emotion.

In this monologue, Michael Covel talks about the philosophical foundation of success: speculation. This episode features many notable quotes from famous economists and traders, going back as far as the 1800s. The wisdom of these men is the foundation of trend following, and is as relevant today as ever.

In this episode of Trend Following Radio:

  • Why speculation is such an important concept
  • The philosophy behind trend following
  • Watching results rather than causes
  • Cutting short your losses
  • Timeless excerpts from as early as the 1800s
  • The early beginnings of Wall Street

“Cut short your losses, let your profits run on.” – David Ricardo

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David Ricardo’s Golden Rules: Trend Following in the 1700s

David Ricardo (19 April 1772 – 11 September 1823) was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. According to an 1838 book, The Great Metropolis, Volume 2, Ricardo had certain golden rules:

“As I have mentioned the name of Mr. Ricardo, I may observe that he amassed his immense fortune by a scrupulous attention to what he called his own three golden rules, the observance of which he used to press on his private friends. These were, “Never refuse an option when you can get it, Cut short your losses, Let your profits run on. By cutting short one’s losses, Mr. Ricardo meant that when a member had made a purchase of stock, and prices were falling, he ought to resell immediately. And by letting one’s profits run on he meant, that when a member possessed stock, and prices were raising, he ought not to sell until prices had reached their highest, and were beginning again to fall. These are, indeed, golden rules, and may be applied with advantage to innumerable other transactions than those connected with the Stock Exchange.”

Said another way: trend following.

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