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Ep. 383: Lawrence McMillan Interview with Michael Covel on Trend Following Radio

Lawrence McMillan
Lawrence McMillan

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Today on Trend Following Radio Michael Covel talks with Lawrence McMillan of McMillan Analysis Corporation. The topic of discussion is options, their value in terms of overall strategy, and how their trading has evolved over the preceding decades.

The conversation opens with Lawrence talking about his days at historic Bell Labs – a research company founded in the 19th century by Alexander Graham Bell – and the initial difficulty in working with options due to their complicated nature and the level of technology required. Later, Michael asks Lawrence to talk about the CBOE Volatility Index (VIX) and how, since the subprime crisis of 2008, many are looking at the VIX as long-term insurance for the future. One of the problems with that strategy, as Lawrence points out, is that many people fail to take into account that VIX only measures market expectations for the next 30 days.

Also discussed today are leverage as a financial tool and the concept of the black swan – unforeseen events that have a major impact, but only rationalized after the fact. Lawrence brings decades of experience and wisdom, gain perspective.

In this episode of Trend Following Radio:

  • American vs. European-style options
  • The logic behind VIX
  • Leverage as a tool
  • Understanding puts and calls
  • Long and short selling
  • Examining the subprime mortgage crisis of 2008

“I’m not counting on disaster. I don’t want there to be disaster. I don’t want my house to burn down, but I do want insurance in case it does. That’s our basic strategy.” – Lawrence McMillan

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Ep. 375: Mark Sleeman Interview with Michael Covel on Trend Following Radio

Mark Sleeman
Mark Sleeman

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Today’s guest is Mark Sleeman of MS Capital Management. Mark is a self-taught trend following trader who’s been trading since the late 80s.

Michael Covel asks Mark about the road that led him to trend following and his early experiences as an trader. Mark talks about how, in the beginning, he was only looking for a way to make money. But with his engineering background, when he happened upon systems trading, everything fell into place. So confident was Mark in both his system and his own abilities, in fact, that he was willing to sell his house to get started (to raise trading capital).

Mark points out that investing based on “bottoms and tops” alone is pointless since no one can predict where the market will turn. The key to smart investing is a diversified portfolio that can sustain small losses long enough to catch those big wins. Trend following is the only proven system with decades of empirical data to back it up, and it’s the only way to trade if you want to become a long term survivor.

Other areas of discussion include the psychology of trading, understanding that patience doesn’t come naturally (has to be learned), and the importance of maintaining a life outside the markets.

In this episode of Trend Following Radio:

  • The fallacy of “buy low, sell high”
  • The psychology of trading
  • Keeping your losses small
  • The importance of maintaining a life
  • Focusing on the strategy, not the instrument
  • Understanding that patience has to be learned

“You’ve gotta be robust because you’re gonna see good markets and you’re gonna see bad markets. I’ve certainly seen both, and expect to see more of both.” – Mark Sleeman

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“Improve Our Odds While Controlling the Risk”

Feedback in:

Hi Michael,

I have read one of your books, bought your movie, “/broke/”, from Amazon.com, and have been a podcast listener/fan for over 2 years now. I am a William O’Neill-style, long [term] stock trader, but as a computer programmer and system architect by trade, I am refining my own trading style on more of a trend following rooted philosophy. That is why I cannot stop listening to your podcast. It is great from your insight/commentary to the top-notch and interesting guests that you showcase! I would say it rivals the quality of TED Talks for me.

Anyway, I appreciate you making this information available so those traders like me can continue to learn and improve our odds while controlling the risk. Take care!

Sincerely,
[Name]

Thanks for the nice words.

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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Ep. 359: Campbell Harvey Interview with Michael Covel on Trend Following Radio

Campbell Harvey
Campbell Harvey

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There is a common problem in finance when it comes to evaluating investment managers’ performance: the factor or skill vs. luck. When a manager performs well over a number of years, it is not clear whether the success can be attributed to the manager’s skill and strategy, or random luck. And vice versa, when a manager performs badly, it can be difficult to pin-point whether it was due to lack of skill, or simply bad luck.

Another factor that is commonly misunderstood in finance is risk. Understanding the differences between risk, volatility, and skew is essential to developing a well-performing trading strategy.

Campbell Harvey studies these phenomena. He is a finance professor at Duke university, and research associate with the National Bureau of Economic Research in Massachusetts. His research papers on these subjects have been published in many scientific journals.

In this episode, Campbell Harvey and Michael Covel discuss risk tolerance, evaluating trading strategies, Harry Markowitz’ classic paper on portfolio selection, and the importance of differentiating between volatility and skew.

In this episode of Trend Following Radio:

  • Survivorship bias, and not being fooled by randomness
  • Why people with higher risk tolerance experience much higher upsides
  • Understanding process vs. outcome
  • The difference between volatility and skew
  • The importance of recognizing that asset returns are rarely “normally distributed”
  • When it is appropriate to apply a general framework, and when it is not
  • The Sharpe ratio – is it always relevant?
  • Harry Markowitz, Jim Simons, and Nassim Taleb

“These people that are taking a lot of risk, with enough luck, will rise to the top. The person that is risk-averse is stuck in the middle” – Campbell Harvey

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The Truth: A Two-Edged Sword

The truth is, almost everything about superior investing is a two-edged sword:

-If you invest, you will lose money if the market declines.
-If you don’t invest, you will miss out on gains if the market rises.

-Market timing will add value if it can be done right.
-Buy-and-hold will produce better results if timing can’t be done right.

-Aggressiveness will help when the market rises but hurt when it falls.
-Defensiveness will help when the market falls but hurt when it rises.

-If you concentrate your portfolio, your mistakes will kill you.
-If you diversify, the payoff from your successes will be diminished.

-If you employ leverage, your successes will be magnified.
-If you employ leverage, your mistakes will be magnified.

HT Howard Marks.

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