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Ep. 376: Overcoming Bias with Michael Covel on Trend Following Radio

Overcoming Bias with Michael Covel on Trend Following Radio
Overcoming Bias with Michael Covel on Trend Following Radio

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Human beings have a strange habit of trusting other humans, even when the trust isn’t warranted. Everywhere in mainstream media, statistics are used and misused to convey an agenda. All too often, people ignore the agenda and buy into this engineered information.

To be successful, both in life and in trading, a person must move beyond this behavior. You need to be a skeptic. You can’t put blind faith into a system that doesn’t make its agenda clear. You probably shouldn’t trust it even if the agenda does seem clear. This is just as true when considering pollsters like Frank Luntz as it is when listening to the sales pitches of discretionary traders on Wall Street.

In today’s episode Michael Covel discusses the biases we have as human beings that lead us to poor investing decisions. Most notably, it is a bias that prevents us from trusting algorithmic trading, even when a human alternative is demonstrably worse. Through entertaining and insightful clips, Michael demonstrates why algorithms deserve our trust: their accountability and their ability to be back tested through different market conditions.

The episode is full of interesting sound clips and passages from bright minds such as Penn Jillette, Leda Braga, Daniel Dennett, Lasse Pedersen, and David Harding.

In this episode of Trend Following Radio:

  • The use and misuse of statistics
  • Using skepticism to your advantage
  • The advantages of algorithmic trading
  • Leda Braga on why ‘Black Box’ isn’t a fair term
  • Daniel Dennett’s simplifications of algorithms and computing
  • Trend following as simple agnostic rules that can easily be passed to a computer
  • Efficient market theory failure during surprises

“You want to be a contrarian. You want to be on the other side of the coin. Don’t be with everyone. Stand to the side. That’s where the opportunity is…” – Michael Covel

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Ep. 373: Lasse Pedersen interview with Michael Covel on Trend Following Radio

Lasse Pedersen
Lasse Pedersen

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Today’s guest is Lasse Pedersen, finance professor at Copenhagen Business School, principal at AQR Capital Management, and author of the new book “Efficiently Inefficient”. Pedersen earned his Ph.D. in finance from Stanford University and has over a decade of experience in the industry.

The conversation opens with an examination of the two opposing views on how markets operate. One view holds that markets are fully efficient and reflect real values, while the other contends that market prices are inefficient and tied more to investors’ emotions than anything else. Pedersen discusses his own interpretation — that markets are neither fully efficient nor fully inefficient, but rather a combination of the two — and that it’s this equilibrium that provides the stability needed for investors to make gains.

Michael Covel and Lasse Pedersen discuss the commonalities in the varied strategies of some of the most successful investors in the world, many of whom are interviewed in Lasse’s new book. One such commonality with these investors is their constant awareness of risk management, and the concept of gambler’s ruin. But at the same time, as Lasse is quick to point out, many of these financial legends freely admit that some of their greatest lessons were learned through their losing trades.

Other topics include the rise of quantitative investing, the role of hedge funds in the economy, and how leverage can effectively be used as an investment tool.

In this episode of Trend Following Radio:

  • Discretionary vs. quantitative trading
  • The importance of sticking to your financial plan
  • The various investment styles of the successful
  • How reflexivity affects market prices
  • Backtesting to identify effective investment strategy
  • The role of hedge funds

“I think that good quant investment managers can really be thought of as financial economists who’ve codified their beliefs into a repeatable process. They are distinguished by their diversification, sticking to their process with discipline, and the ability to engineer portfolio characteristics.” – Cliff Asness

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