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Tag: risk management

Ep. 90: Richard Weissman with Michael Covel on Trend Following Radio

Posted on by Michael Covel
Richard Weissman
Richard Weissman

My guest today is Richard Weissman, a professional trader with over 25 years of experience and an author. Weissman considers himself a “swing trader”. He is one of the world’s foremost authorities and thought leaders in the fields of derivatives, risk management and technical analysis.

The topic is his book Trade Like a Casino: Find Your Edge, Manage Risk, and Win Like the House.

In this episode of Trend Following Radio we discuss:

  • Weissman’s path from how he started trading with his father in 1987 to how he made his way to where he is today
  • Background to Weissman naming his book
  • The influence of Jack Schwager’s work
  • Risk management
  • Positive expectancy
  • How Weissman defines trends and signs of strength
  • The idea of “don’t anticipate, just participate”
  • Positive expectancy and the probability skew
  • The connection between table limits and risk management
  • How there are no truly “safe investments”
  • Some tools that Weissman has used to influence his own trading psychology and smooth out the emotional highs and lows
  • Not letting a high price stop you from buying, and not letting a low price stop you from selling
  • Weissman’s concept of “the opaque urn”
  • The three things you can guarantee

Listen to this episode:

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The Illusion of Control: Dancing with Chance

Posted on by Michael Covel

From INSEAD:

First you accept that there are things you can’t control. Then you try to assess the uncertainty and finally augment your plan to make sure you manage risk more effectively.

That means using models, independent opinions, internal and external advice and any other means to assess the unknown risks and to make your business nimble and open to change when the unexpected happens.

“You are better off focusing your energy on planning for the range of possibilities that could actually happen.”

For example, he says it’s very difficult to tell which start-up businesses will be successful in the early stages. If you accept that, a better strategy is to try to diversify over a number of projects just as venture capitalists do. Not all the projects will pay off but you diversify your risk so that you have a better chance of nurturing one that will succeed.

Chance and randomness play a significant role in business and in our lives. “The point is not that the world is hopeless and you shouldn’t do anything, it’s just that we should do a more careful assessment of what we can predict and what we can’t predict. And where we can’t predict then the effort and the resources are better spent on planning,” Gaba told INSEAD Knowledge.

“Instead of trying to predict this, which you actually cannot, you are better off spending your resources and effort on planning for various contingencies.”

And when it comes to managing risk in investing, the authors have pillars of wisdom: “Be average. Be patient. Be risk aware. Be balanced.”

Another vantage to consider? “What can we learn from expert gamblers?”

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Too Much Data Is Toxic–Trend Followers Get This Terribly Important Principle Deep in Their Gut

Posted on by Michael Covel

An excerpt (source):

In business and economic decision-making, data causes severe side effects —data is now plentiful thanks to connectivity; and the share of spuriousness in the data increases as one gets more immersed into it. A not well discussed property of data: it is toxic in large quantities —even in moderate quantities.

More:

The more frequently you look at data, the more noise you are disproportionally likely to get (rather than the valuable part called the signal); hence the higher the noise to signal ratio. And there is a confusion, that is not psychological at all, but inherent in the data itself. Say you look at information on a yearly basis, for stock prices or the fertilizer sales of your father-in-law’s factory, or inflation numbers in Vladivostock. Assume further that for what you are observing, at the yearly frequency the ratio of signal to noise is about one to one (say half noise, half signal) —it means that about half of changes are real improvements or degradations, the other half comes from randomness. This ratio is what you get from yearly observations. But if you look at the very same data on a daily basis, the composition would change to 95% noise, 5% signal. And if you observe data on an hourly basis, as people immersed in the news and markets price variations do, the split becomes 99.5% noise to .5% signal. That is two hundred times more noise than signal —which is why anyone who listens to news (except when very, very significant events take place) is one step below sucker.

More:

To conclude, the best way to mitigate interventionism is to ration the supply of information, as naturalistically as possible. This is hard to accept in the age of the internet. It has been very hard for me to explain that the more data you get, the less you know what’s going on, and the more iatrogenics you will cause.

Trend followers tackle the issues raised by Taleb by making their trading decisions off the market price. Boom–one piece of data for all of your trading decisions–price.

Article Source: Ritholtz.com.

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James Montier: Did He Miss the Trend Followers?

Posted on by Michael Covel

James Montier writes (PDF):

Tail risk protection appears to be one of many investment fads du jour. All too often those seeking tail risk protection appear to be motivated by the fear of missing out (not fear at all, but greed). However, the surge of tail risk products may well not be the hoped-for panacea. Indeed, they may even contain the seeds of their own destruction (something we often encounter in finance – witness portfolio insurance, etc). If the price of tail risk insurance is driven up too high, it simply won’t benefit its purchasers. When considering tail risk protection, investors must start by defining the tail risk they are seeking to protect themselves against. This sounds obvious, but often seems to get scant attention in the tail risk discussion. Once you have identified the risk, you can start to think about how you would like to protect yourself against that risk. In many situations, cash is a severely underappreciated tail risk hedge. The hardest element of tail risk protection is likely to be timing. It is clear that a permanent allocation is likely to do more harm than good in many situations. When it comes to timing tail risk protection, a long-term value-based approach and an emphasis on absolute standards of value, coupled with a broad mandate (a wide opportunity set, or, investment flexibility, if you prefer) seems to offer the best hope.

A paper seemingly written without knowledge of trend following’s success. Preparing for tail risk, which means successfully executing as a trend following trader, is not predicated on “timing” for success. It is but one element of the game, but surely not the core focus.

Note: Shout to Jason Rolf for PDF tip.

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Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.

A Value Investor’s Perspective on Tail Risk Protection

Posted on by Michael Covel

You are a value investor? You want to protect against tail risk? Two choices:

James Montier says this.

I say this.

Don’t get me wrong, I like Montier’s behavioral views on markets. There is, however, a better solution to tail risk and it rhymes with …bend wallowing.

Note: Tip to Cullen Roche for the Montier paper.

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Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.

Sports Betting: Billy Walters the Trend Follower

Posted on by Michael Covel

Insights on Billy Walters:

As a society we have been conditioned to believe that there is a difference between gambling and investing. Of course, this partially true, however, the degree to which we “invest” and “gamble” is smaller than most are likely comfortable admitting. The majority of us have been conditioned to believe that buying a share of Bank of America is vastly different from placing a bet at a roulette table. A closer inspection of “investing” and “gambling” shows that the two are closer than the Wall Street sales machine would like you to believe.

60 Minutes aired an excellent piece this past Sunday about Billy Walters (video attached below). Walters is a Las Vegas gambler widely acknowledged as one of the greatest gamblers Vegas has ever seen. He’s so good that he has to bet anonymously through partners due to the fact that most casinos won’t take the other side of a bet from Walters. The few casinos that do bet with Walters do so mainly because they want to know what he’s thinking. But Walters isn’t truly a gambler. Walters is so good that he feels safer gambling than investing. And ironically, it isn’t the casinos in Vegas that have taken Walters for a ride over the years, but Wall Street. Walters claims that it is not Vegas where the thieves live, but rather the men in suits on Wall Street.

Before we can understand the difference between gambling and investing it’s best to define each. Gambling is placing capital at risk of loss with an uncertain outcome in a system in which the odds are generally unfavorable. Gambling has an inherently negative connotation because it is generally a term used to describe games in which the player is a guaranteed loser over the course of the game’s lifetime. Unlike investing in equities, a bet at a casino generally has unfavorable odds. The game is intentionally devised as such. Investing, on the other hand, is placing capital at risk of loss with an uncertain outcome in a system in which the odds are generally favorable. The primary difference between gambling and investing is the determinability of the outcome. The lottery for instance, is entirely unpredictable. Purchasing government bonds has a high level of predictability. Read the rest of the article.

Watch:

More.

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Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.

Smacking the Home Run: Fat Right Tails

Posted on by Michael Covel

A good reminder:

Opalesque: You have some winning trades, some losing trades, how do you know you’ll come out ahead?

Trend follower Ken Tropin: In this business you need to have ample payoffs from your winning trades but make sure your losing trades do not generate big losses—so the returns have a fat right tail but not much left tail! Suppose over time you make money on half your trades and lose money on the other half. If the winning trades are double the size of the losing trades, then you have a pretty profitable investment.

Source. More on Kenneth Tropin here.

How can you move forward immediately to Trend Following profits? My books and my Flagship Course and Systems are trusted options by clients in 70+ countries.

Also jump in:

• Trend Following Podcast Guests
• Frequently Asked Questions
• Performance
• Research
• Markets to Trade
• Crisis Times
• Trading Technology
• About Us

Trend Following is for beginners, students and pros in all countries. This is not day trading 5-minute bars, prediction or analyzing fundamentals–it’s Trend Following.