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Tag: risk

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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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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Ancient Man Had No Risk Management

Posted on by Michael Covel

Putting risk into the discussion:

“There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose. Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can encourage you to take more bad bets in the future. You can also lose a good bet, but if you keep placing good bets, over time, the law of averages will be working for you.”
–Larry Hite, Trader

Continuing:

“Life is nothing more than a series of bets and bets are really nothing more than questions and their answers. There is no real difference between, ‘should I take another hit on this Blackjack hand?’ and ‘Should I get out of the way of that speeding and wildly careening bus?’ Each shares two universal truths: a set of probabilities of potential outcomes and the singular outcome that takes place. Everyday we place hundreds if not thousands of bets – large and small, some seemingly well considered and others made without a second thought. The vast majority of the latter, life’s little gambles made without any thought, might certainly be trivial. ‘Should I tie my shoes?’ Seems to offer no big risk, nor any big reward. While others, such as the aforementioned ‘speeding and wildly careening bus’ would seem to have greater impact on our lives. However, if deciding not to tie your shoes that morning causes you to trip and fall down in the middle of the road when you finally decide to fold your hand and give that careening bus plenty of leeway, well then, in hindsight the trivial has suddenly become paramount.”
–Larry Hite, Trader

Continuing:

“Ancient man had no risk management. Everything was left to ‘fate’ and the whims of the gods. Because ancient man felt that he was merely a victim of circumstance he did not see a need to plan for the future. Therefore, he had no future. In his book Against The Gods: The Remarkable Story Of Risk, Peter Bernstein plots out the history of man’s discovery of the law of probabilities and risk management. Suffice it to say, economic progress seems to run parallel with man’s ability to discover, quantify, and manage risk. Risk and reward are two sides of the same coin. One is not present without the other. You cannot receive the reward unless you are willing to take the risk and you cannot expect to keep that reward unless you learn to mange that risk. It is imperative to master both subjects if you expect to be successful in any endeavor, especially the arena of investing/trading.”
–Source: Pearce Financial LLC

The only thing you can control as you face the markets each day? Your losses.

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Busted flat in Baton Rouge… waiting for a train

Posted on by Michael Covel

Not all trend followers are the same and not all stick to their rules.

A few years ago a young guy under the tutelage of a known and famed trend follower (not a Turtle in this example, but I know two Turtles who walked the plank so to speak) started a fund. He raised over several hundred million in assets under management. He was making good money, but the credit crisis started and for whatever reason this trader went from systematic trend following to discretionary day trading leaving fellow employees scratching their heads (can’t make this up). It did not end well. Firm is gone now. So what do we all do with this example? Is that a trend following failure or something else? Clearly, it is something else. I know quite a few examples like this. Do some money mangers get into trend following, raise $, get in over their head then start changing this or that because of some gut impulse… and go bust? Absolutely. Rules in this world are important.

Lessons? Manage risk, and the reward will follow. Ignore your process and that opening lyric from “Me and Bobby McGee”…will happen. In my book, there is as much to learn from the consistent trend following studs as there is to learn from the cons and quitters.

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William Eckhardt: Limit Portfolio Risk!

Posted on by Michael Covel

willaim eckhardt

Bill Eckhardt, the systems trading pro and former partner of Rich Dennis, once offered:

“…many prospective clients have asked me what’s the most I’ll lose on one trade. I can look up these statistics, but this is not something I would ordinarily pay any attention to. It doesn’t matter how little you lose on an individual trade, but how much you might lose on your whole portfolio. You’re not going to keep a ship afloat just by making sure the leaks are small. The important thing is to limit portfolio risk, the trades will take care of themselves.”

Eckhardt may have lost the bet with Dennis over the Turtles, but it was his hands on instruction that was critical to the Turtles’ development. How do I know? Almost all of the Turtles I talked to were quick to credit Eckhardt. It should also be noted that Eckhardt, not Dennis, has the 15+ year continuous perfomance record going back to the early nineties!

Much more on Eckhardt is in my book. Find out more about Eckhardt in the turtle trading system pdf.

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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.

Larry Hite on Risk

Posted on by Michael Covel

Some wise views from Larry Hite:

“We don’t really trade silver…we don’t trade the S&P…we trade the differences. We really are risk managers. We take on risks, try to exploit them and we leave when they turn against us. That is what we get paid for. Basically we are in the risk transfer business. We take on what people want to sell, sell what people want to buy and hope to make a profit. The reason why one goes to a portfolio is because there are real limits to perfect knowledge. I’ll give you an example. Say you knew which commodity, stock or currency would appreciate the most in the following year, and you knew exactly what its price would be. We did this experiment looking backwards in fact in our database. The question of when you take a position is how are you going to trade the line…how much of a position are you going to leverage. Now, if you have perfect knowledge, would you leverage 5 to 1, would you leverage 10 to 1, 2 to 1? Well it turns out that if you leverage more than 3 to 1 that you are a loser. Because we found that if you did 3 to 1 you would have, even with perfect knowledge, you could go down a third. So that, the only perfect knowledge you could have, would be if you knew every wiggle on the line. Then you would know exactly how much to leverage. But you don’t.”

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.

David Harding Offers Sharpe Ratio Criticism

Posted on by Michael Covel

David Harding of trend follower Winton Capital argues for more than simple acceptance of the Sharpe ratio as the measure for assessing “risky investments”:

“The Sharpe ratio appears at first blush to reward returns (good) and penalise risks (bad). Upon closer inspection, things are not so simple. The standard deviation takes into account the distance of each return from the mean, positive or negative. By this token, large positive returns increase the perception of risk as though they could as easily be negative, which for a dynamic investment strategy may not be the case. Large positive returns are penalised, and thus the removal of the highest returns from the distribution can increase the Sharpe ratio: a case of reductio ad absurdum for Sharpe ratio as a universal measure of quality! We might suggest an improvement by considering only the negative semi-standard deviation for the denominator, a measure known as the Sortino ratio. However it still remains vital that the semi-standard deviation used is meaningful, in the sense that it is calculated from a sufficiently well-understood return distribution, where the assumptions of stationarity and parametricity can be made.”

More.

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.