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Ep. 554: The Yale Model with Michael Covel on Trend Following Radio

The Yale Model with Michael Covel on Trend Following Radio
The Yale Model with Michael Covel on Trend Following Radio

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The Yale Endowment is the crème de la crème. Nothing beats it? Their AUM is about 25 billion. Michael evaluates and reads some of the 2016 copy of The Yale Endowment. He wants listeners to decide if it is an example of how the best think, or if it is how one of the best operations self-describes themselves. Michael ends with breaking apart an excerpt from a presentation that David Swensen gave on his portfolio management strategy.

In this episode of Trend Following Radio:

  • Yale Endowment
  • Portfolio management
  • Black box trading
  • Mean variance analysis
  • Harry Markowitz
  • Passive index
  • Forecasting

Mentions & Resources:

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Ep. 536: The Most Important Thing with Michael Covel on Trend Following Radio

The Most Important Thing with Michael Covel on Trend Following Radio
The Most Important Thing with Michael Covel on Trend Following Radio

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Howard Marks is a billionaire value investor with four decades of success. Although a value investor, his thought process mirrors trend following in many aspects. Michael plays an excerpt from Howard covering his thoughts on price, the lack of value in forecasting, efficient markets, surviving market randomness, and high yield bonds. Trend following and value investing may be two different worlds, however, there is a lot of overlap in how Howard trades and how trend followers trade.

In this episode of Trend Following Radio:

  • Price action
  • Forecasting
  • Value investing
  • How to think about investing
  • Black swans

“You should not act as though the things that should happen will happen.” – Howard Marks

Mentions & Resources:

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“Nate Silver was by far the most accurate forecaster in the 2016 election”

Feedback in:

Nate Silver [my article that generated the feedback] was by far the most accurate forecaster in the 2016 election.

While most modelers pegged Clinton’s chances at greater than 90% (in some cases 99%), Silver had Trump as a 35.2% chance few days before the election. That was pretty darn good handicapping.

You are confusing prediction with handicapping, which is surprising given how much you have talked about poker and probabilities and black swans. If I were grading Nate Silver, I would give him an A+, because that is the grade he earned. I even heard him talk about the possibility of systemic failure in polling and got ridiculed.

What’s the point of his kind of political analysis? The usefulness? There is none. The vast majority of people (who know of him) think he has some predictive up or down power. That’s what he wants (likes), even if not accurate. Then people in the weeds can show up to say “oh no you missed his point, it’s his great handicapping skill.” Yeah, I see how clever this mathturbation is.

Gotta Lie To Get Invited Back

After posting the below commentary on my Facebook page I got an interesting response:

This exchange followed:

Alan: Thank you for your thoughtful analysis of my market commentary March 16th. A “Trend Follower” should appreciate my confidence and reasoning that the bull run is still intact. As a market veteran of 25 years with thousands of TV appearances this may be a great opportunity to discuss the insignificance of news nonsense with your podcast listeners. Pick a time I would like to come on to talk media and its negative impact on trading discipline. I am the first to tell traders to turn off the TV as there is very little to help you make money. It is mostly infotainment to keep you emotional and tuned in to pay advertisers. In fact, I have developed a financial news aggregator to search, sort and share market video. The time saving app breaks down the markets into categories and plots the videos from news sources on price and time charts for perspective. That said I make the best effort to give a well thought out actionable trade idea on each of my appearances as opposed to speaking in broad generalizations. Trading is all about risk control, probability, money management and implementation of a trading plan. It should be methodical and boring and as we all know watching television to cheer lead positions does not add to profitability. Looking forward to schedule the podcast interview.

Covel: Hold on. You are the guy on CNN? The guy with videos literally every day providing near useless fundamental factoids and interpretations of what will happen next? And now you are emailing me to say trading is all about risk control, probability, money management and implementation of a trading plan. Don’t you think that is disingenuous? You tell me you have made 1000s of appearances, but [now] you tell people not to watch? I am not [Jim] Cramer. My podcast is not that. Best we agree to disagree right here, unless you can convince me how my eyes are lying to me when I watch your videos of broad generalizations.

Alan: I cannot change the game if I do not appear on TV. Producers and hosts do not understand the markets and create a crisis de jour. My job is to be optimistic of opportunities in any and all market conditions. Stressing a plan of action instead of fear is what I do. Having CNBC on for 10 hours a day or watching Cramer doesn’t help anybody make money. At best it may give 2-3 nuggets of information that could be explored for profit potential. People think news helps when in fact the WHY is of no importance compared to the HOW the market is moving.

Covel: You can’t let the TV hand feed you non-stop and then bite the same hand. None of what you are saying to me was on CNN.

Alan: I gave CNN reasons why I remain optimistic at a time when investors have renewed fears. Calm confidence. Participating in the TV discussion is more productive than not doing so to showcase my disciplined approach. My development of the [name] shows my recognition of this news noise issue and the need to better inform investors.

Covel: Maybe you know the truth, but to appear on TV so much is for you to play a game–their game. Try appearing on TV and tell the real truth. They won’t ask you back. Then you will have made a real advance in your credibility.

Predictive Technical Analysis is the Same as Fundamental Analysis

From Richard Russell:

April 5, 2011 — It’s time to clear the record and to make my current thoughts clear. Lowry’s was correct, and my PTI was correct all along. We’ve been in a primary bull market and we’re still in one. The costly and brutal decline from the 2007 high to the 2009 low was, in fact, an almost unprecedented correction in an ongoing bull market. The stock market panic-collapse was a direct result of the crash of the housing bubble. I mistakenly took the vicious decline of 2007 to 2009 as a turn in the tide and a bear market. At the March 2009 low, the (bull) market was extremely oversold. The relentless climb since the 2009 low (see chart below) was the result of a compressed bull market that was charging higher as it made up for lost time. It was like a rubber band that has been stretched too far and was snapping back to its original shape. But what of the situation now? The great bull move that started from the 2009 low is, at this point, probably near a state of exhaustion. The entire rise from the March 2009 low to the present has not yet undergone a full correction of the advance. The climb from the March 2009 low to the present added 5853 points to the Dow. The stock market now is heavily over-bought. Lowry’s Buying Power Index is off its high, and Lowry’s Selling Pressure Index is above its low. Thus, a correction should not be surprising. Considering that the Dow has gained 5853 points from its low, a one-third correction could take the Dow back to 10449. A 50% correction could take the Dow down to 9474.

Question — What should we do if the market does correct?
Answer — If the stock market corrects from the current area, I’d suggest buying the DIAs as near to the bottom of a correction as possible.

Question — Russell, why didn’t you advise buying the DIAs at or near the March 2009 decline lows?
Answer — I didn’t advise buying because I mistakenly thought the 2007 to 2009 decline was part of a major bear market. I was wrong. As it turned out, the decline was a deceptive and vicious correction within an ongoing bull market. As of now, the bull market is still in force. Therefore, any forthcoming correction should serve as a buying opportunity.

This is not trend following. I think Russell has many sage points to make, but after watching his comments for the last 2 or 3 years, enough for me. This is fundamental analysis wrapped in a so-called trend following wrapper. If I have seemed like a Russell follower over the last few years, I deserve criticism. I don’t read his stuff every day, but when this came across my desk, it was time to set the record straight.

Eric Schmidt of Google Can’t Predict the Stock Market

From Eric Schmidt Google’s CEO:

“There are many, many things that Google could do, that we chose not to do.”

He added:

“One day we had a conversation where we figured we could just try to predict the stock market. And then we decided it was illegal. So we stopped doing that.”

Google is a great search engine. It won the title of search king and Schmidt has made a fortune. Congratulations. However, when he says stuff like this it makes everyone with a pulse think he was just a lucky idiot.

The 50 year Forecast? Ahem… Bullsh**

Feedback in:

“Dear Michael Covel, I’m a financial professional analyzing the financial markets of any type. I’m working free, not dependent to ant company or institution. During last 6 months, I aware of an important formation taking place in DOW. It’s the long term SHOULDER-HEAD-SHOULDER formation which will lead DOW to fall down well below 5,000 assumably 1,000 to 2,000 band within two years or three. I’m not sure how to read this decline and its consiquences [sic], which is very sharp, the second after 1929, maybe the first of its kind. It certainly lead to a crisis by affecting first USA markets and then soon the rest of the world. With this decline, DOW will reach the lower line of the “increasing trend path or band of all time” (100 years) and then a new era will start, and DOW will reach 10,000 points again in 10-15 years of time, and then it will reach 100,000 within next 50 years. Note that this is just a forecast,as hundred thousands of analyst doing every day, but this is of its kind and a bit different then usual when you think of time span and its possible effects. Wait and see, test and prove my view with no doubt it will happen. Friendly speaking, I want to convert this forecast into cash. (It’s just a forecast before it occurs).That’s why writing to you. I think Soros fund management is the right place to make use of this info into cash in most effective way possible. Dear Michael, I appreciate if you share this forecast with George Soros himself.”
Best Regards,
Cemal, S.

I love crazy people. Can his prediction happen? Sure. Is there any system that he has to get to that forecast beyond making it up? No.

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