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Trend Following RadioEp. 605: Interview with Mark Kritzman Interview

Mark Kritzman
Mark Kritzman

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Mark Kritzman is a Senior Lecturer in Finance at the MIT Sloan School of Management, founding Partner and Chief Executive Officer of Windham Capital Management and serves as a senior partner of State Street Associates. Mark has written six books, his latest titled “A Practitioners Guide to Asset Allocation”.

Mark began his career on Wall Street in 1974 and was immediately drawn toward systematic trading. At a time when there were not many quantitative traders, he was affectionately titled a “token quant” within his company.

Over the years Mark has been an advisor to many funds. While working with various companies it became clear fund managers were mixing how they invest with how they would choose asset classes. He decided to break down the most basic and logical ways of organizing the investment process. What are some components of an asset class: stable composition, be investable, internally homogeneous, externally heterogeneous, raise the utility of a portfolio, and you should be able to access it in a cost effective way. From there, depending on a persons risk, different combinations of asset classes would make up a portfolio.

Being in the game as long as Mark has, he has been able to witness the enduring and turbulent nature of markets. He saw one silver lining come out of the 2008 financial crisis – it provided a context where investors could go back to the basics of trading, and in particular, recalibrate how they manage risk. Mark finishes the podcast talking fixed weight portfolios, Peter Bernstein on scaling portfolio risk, dynamic asset allocation and explaining Samuelson’s Dictum.

In this episode of Trend Following Radio:

  • Definition of an asset class
  • Actively managed portfolios
  • Passively managed portfolios
  • Time diversification
  • Portfolio diversification
  • The fallacy of large numbers
  • Leverage
  • Value at risk
  • Risk management
  • Fear and greed
  • Risk and reward
  • Exposure to risk

“Time does not diversify risk.” – Mark Kritzman

“If we just step back, start with the basics and move on from there, that introduces comfort to the investment process.” – Mark Kritzman

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Ep. 581: Collin Seow Interview with Michael Covel on Trend Following Radio

Collin Seow
Collin Seow

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Collin Seow is author of “The Systematic Trader: How I turned a $250,000 debt into profits through stock trading.” He also is a qualified Chartered Portfolio Manager with a Certified Financial Technician qualification, and a member of MENSA Singapore and Technical Analysts Society Singapore.

Michael and Collin switch discuss the “Singaporean perspective.” What is the Singaporean perspective and what helped lay the foundation for their success? The founding fathers of Singapore set forth strict rules and regulations so people knew what they could and could not do. The system was laid out clear and concise. Citizens knew what their boundaries were down to the last detail. For example, there are rules defined ranging from whether or not you can chew gum to how far trees are allowed to be planted apart from one another.

Collin moves from the Singaporean perspective socially, to their perspective on trading. More traders in Asia seem to be open to the idea of systematic trading. When he back tests a system, he doesn’t just look at making money, he tries to figure out how to filter out the losses. He wants to protect what he has so the returns will take care of themselves. Picking a certain percent that you’re willing to risk on a trade is not necessarily intuitive. Collin also looks at both position trading and swing trading, and adjusts his risk according to trading style. Although there are many different styles, and factors that play into how one will trade, Collin still attributes over 50% of trading success to having the right psychology.

In this episode of Trend Following Radio:

  • Different types of momentum trading
  • Singaporean perspective
  • Risk management
  • Position trading vs. swing trading
  • A sense of entitlement in today’s society

“At the end of the day it isn’t about having the right strategy, it’s about having the right mindset.” – Collin Seow

“If you don’t have an edge, how the hell are you suppose to play the game?” – Michael Covel

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Ep. 579: Mihir Desai Interview with Michael Covel on Trend Following Radio

Mihir Desai
Mihir Desai

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Mihir Desai is author of “The Wisdom of Finance: Discovering Humanity in the World of Risk and Return.” Mihir is currently the Mizuho Financial Group Professor of Finance at Harvard Business School and a Professor of Law at Harvard Law School.

He wrote his new book with two goals in mind: 1. Demystifying finance and 2. Have people look at finance in a more inspirational way. After each financial bubble bursts, the public repeatedly retreats to stereotypical ideas of finance. Mihir doesn’t want to wait for a generational shift to take place for finance to be looked at in a positive light. Financial literacy has gone by the way side in schools. How do you get children to think about basic risk taking? How do you think about protecting yourself? How do you buy insurance? How do you pool your money as a family? He hopes his book may help change some views and enlighten.

Mihir explains why diversification isn’t important just in the markets, it is important to diversify in all aspects of life. As an athlete you should workout all your muscles not just pinpoint one area. Or if you are looking at your health, you should look at all aspects of your health, not just what you are eating or how you are sleeping. Broaden your outlook and diversify your time and energy accordingly.

What is Agency theory? If you give someone money to invest, why do you get the money back? Arguably this is the biggest problem in modern finance. 150 years ago most people were self employed. Nowadays we appoint people as our “agents”. We have a system where we give money to people we don’t know and expect them to take care of it. Michael and Mihir end the conversation talking about people finding their path and true happiness in life rather than doing what their parents or society has told them to do.

In this episode of Trend Following Radio:

  • Reputation of finance
  • Diversification
  • Risk management
  • Black-Scholes model
  • Behavioral phenomena
  • The magic of leverage
  • The asshole theory of finance
  • Agency theory

“Luck is a dominant force in your outcome. That is lost on a lot of people in finance.” – Mihir Desai

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Ep. 568: Steve Burns Interview with Michael Covel on Trend Following Radio

Steve Burns
Steve Burns

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Steve Burns and Michael Covel get together yet again to discuss all that is trading.

After a lifelong fascination with financial markets, Steve Burns started investing in 1993, and trading his own accounts in 1995. It was love at first trade. A natural teacher with a unique ability to cut through the bull and make complex ideas simple, Steve took to blogging and social media by founding New Trader U in 2011.

Since then, New Trader U has attracted hundreds of thousands of visits a month, becoming the go-to resource for people wanting to build a strong, trading foundation. New Trader U offers an extensive blog resource with more than 1,000 original articles (Steve posts daily and is the author of numerous trading books).

In this episode of Trend Following Radio:

  • Trend following
  • Taking a loss
  • Risk management
  • Proper psychology
  • Mindset

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Ed Seykota on Trading Heat

Ed Seykota adds:

Seasoned traders know the importance of risk management. If you risk little, you win little. If you risk too much, you eventually run to ruin. The optimum, of course, is somewhere in the middle.

Placing a trade with a predetermined stop-loss point can be compared to placing a bet: The more money risked, the larger the bet. Conservative betting produces conservative performance, while bold betting leads to spectacular ruin. A bold trader placing large bets feels pressure — or heat — from the volatility of the portfolio. A hot portfolio keeps more at risk than does a cold one. Portfolio heat seems to be associated with personality preference; bold traders prefer and are able to take more heat, while more conservative traders generally avoid the circumstances that give rise to heat. In portfolio management, we call the distributed bet size the heat of the portfolio. A diversified portfolio risking 2% on each of five instrument & has a total heat of 10%, as does a portfolio risking 5% on each of two instruments.

Our studies of heat show several factors, which are:

1. Trading systems have an inherent optimal heat.

2. Setting the heat level is far and away more important than fiddling with trade timing parameters.

3. Many traders are unaware of both these factors.

Don’t know yet? Dig in.

Enjoy one of my interviews with Ed Seykota here.

Risk Management Lessons from the Valeant Saga

The case for clearly defining your exit strategy

By Ross Hendricks

It pays to pack a parachute.

A host of high profile money managers learned that the hard way recently when their investments in Valeant Pharmaceuticals reversed course.

For example, the Sequoia fund returned four times as much money as the stock market from 1970 through July 2015. What’s more, they did it with less volatility and lower drawdowns.

But Sequoia Fund’s brilliant performance came to a halt in the last year because of a single investment in Valeant.

At the peak, Valeant made up more than 30% of Sequoia’s portfolio. When Valeant began losing altitude, Sequoia’s managers failed to consider an exit plan. Instead of pulling the ripcord and exiting their positions, they added 1.5 million shares at the end of 2015 – only to see the stock nose dive a further 70%.

Valeant
Valeant

Trust the process

The lesson here is clear. You won’t always be right, and you must have a process in place for the inevitable times when you will be wrong.

A rules-based investment process like trend following establishes predefined exit points before entering each position. This process defines exactly how much capital is at risk with each position across the portfolio. That allows you to cut losing trades quickly – before they ever have the opportunity to grow into career-ending losses.

Here’s how a simple trend-following strategy could have worked on Valeant:

Using a 200-day moving average would have gotten you into the stock during much of its move higher through 2013 and 2014. Then you would have gotten out of the stock above $200 per share – before it lost nearly 90% of its value.

With this kind of strategy, you will give up some profits when stocks fail to trend higher, like in 2014. But giving up this relatively small upside allows you to systematically avoid disastrous losses.

That’s a small price to pay for a softer landing.

Valeant
Valeant

Ross Hendricks is a senior portfolio consultant.

Ep. 385: Paul Slovic Interview with Michael Covel on Trend Following Radio

Paul Slovic Interview with Michael Covel on Trend Following Radio
Paul Slovic

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This time on Trend Following Radio, Michael Covel talks with Paul Slovic. Paul is president of Decision Research and a professor of psychology at the University of Oregon, and today he talks with Michael about the science behind risk perception.

To demonstrate how people tend to conflate actual risk with their perceptions of risk, Michael and Paul discuss a topic that’s always been a hot button issue in the public consciousness, nuclear power. In the early days of this industry, people were rightfully concerned with the possible mismanagement of such a potentially dangerous technology – concerns seemingly crystallized by the partial meltdown at Three Mile Island in 1979. Similar concerns continue to be raised today, particularly in light of the Fukushima disaster of 2011. But as Paul explains, neither of these tragedies can completely outweigh the obvious benefits of nuclear power. It’s a case of risk perception to overcome the actual risk posed.

The conversation also focuses on the role of the media in influencing people’s decision-making processes. Why is it, you might ask, that the media spends so much more time pushing negative stories than positive ones? The answer, according to Paul, goes back to biology. It’s a survival mechanism in human beings that we’re affected far more by negative stimuli than positive stimuli. This makes sense when you consider the external dangers we’ve faced in our evolution. So today, we tend to harp on the bad things that happen while ignoring the good.

In this episode of Trend Following Radio:

  • The psychometric paradigm of risk perception
  • Balancing risk vs. reward
  • The concept of affect heuristics
  • How the media sways the public’s risk assessment
  • Fast vs. slow thinking
  • Risk in the context of decision making

“Bad is stronger than good. If something goes wrong in a system it decreases our trust in the management of that system more than when something goes right. Something goes right, it doesn’t really boost our trust and confidence. It’s the negative that outweighs the positive, and the negative is being conveyed to us much more frequently and forcefully through the media than the positive is.” – Paul Slovic

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