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The Mother of All Evil: Trend Following 5th edition

From Psychology of the Stock Market (1912), one year before the Federal Reserve System was established, the behavioral school comes into focus:

“The psychological aspects of speculation may be considered from two points of view, equally important. One question is: “What effect do varying mental attitudes of the public have upon the course of prices?” “How is the character of the market influenced by psychological conditions?” A second consideration is: “How does the mental attitude of the individual trader affect his chances of success?” To what extent, and how, can he overcome the obstacles placed in his pathway by his own hopes and fears, his timidities and his obstinacies?”

This wisdom is clean, clear, and instantly true for those awake.

These days, however, speculation is positioned as a pejorative among the intelligentsia. While I enjoy Oliver Stone’s outsider status, his film Wall Street: Money Never Sleeps (2010) paints speculation quite differently, as his film’s main character Gordon Gecko profanes, “The mother of all evil is speculation.”

If you share Gecko’s belief–retire now.

Note: My newest book dives deeper.

Tulipmania: Human Behavior Stays the Same. Trend Following Takes Advantage.
Tulipmania: Human Behavior Stays the Same. Trend Following Takes Advantage.

Trend Following: “Speculation as a fine art…”

Dickson Watts a trend following father:

Before entering on our inquiry, before considering the rules of our art, we will examine the subject in the abstract. Is speculation right? It may be questioned, tried by the highest standards, whether any trade where an exact equivalent is not given can be right. But as society is now organized speculation seems a necessity.

Is there any difference between speculation and gambling? The terms are often used interchangeably, but speculation presupposes intellectual effort; gambling, blind chance. Accurately to define the two is difficult; all definitions are difficult. Wit and humor, for instance, can be defined; but notwithstanding the most subtle distinction, wit and humor blend, run into each other. This is true of speculation and gambling. The former has some of the elements of chance; the latter some of the elements of reason. We define as best we can. Speculation is a venture based upon calculation. Gambling is a venture without calculation. The law makes this distinction; it sustains speculation and condemns gambling.

All business is more or less speculation. The term speculation, however, is commonly restricted to business of exceptional uncertainty. The uninitiated believe that chance is so large a part of speculation that it is subject to no rules, is governed by no laws.

This is a serious error. We propose in this article to point out some of the laws in this realm. There is no royal road to success in speculation. We do not undertake, and it would be worse than folly to undertake, to show how money can be made. Those who make for themselves or others an infallible plan delude themselves and others. Our effort will be to set for the great underlying principles of the “art” the application of which must depend on circumstances, the time and the man. Let us first consider the qualities essential to the equipment of the speculator. We name them: Selfreliance, judgment, courage, prudence, pliability. 1. Self-Reliance. A man must think for himself, must follow his own convictions. George MacDonald says: “A man cannot have another man’s ideas any more than he can another man’s soul or another man’s body.” Self-trust is the foundation of successful effort. 2. Judgment. That equipoise, that nice adjustment of the faculties one to the other, which is called good judgment, is an essential to the speculator. 3. Courage. That is, confidence to act on the decisions of the mind. In speculation there is value in Mirabeau’s dictum: “Be bold, still be bold; always be bold.” [8]

4. Prudence. The power of measuring the danger, together with a certain alertness and watchfulness, is very important. There should be a balance of these two, Prudence and Courage; Prudence in contemplation, Courage in execution. Lord Bacon says: “In meditation all dangers should be seen; in execution one, unless very formidable.” Connected with these qualities, properly an outgrowth of them, is a third, viz: promptness. The mind convinced, the act should follow. In the words of Macbeth; “Henceforth the very firstlings of my heart shall be the firstlings of my hand.” Think, act, promptly.

5. Pliability the ability to change an opinion, the power of revision. “He who observes,” says Emerson, “and observes again, is always formidable.”

With me?

You better be.


Ep. 400: Special Tom Basso Compilation with Michael Covel on Trend Following Radio

Tom Basso
Tom Basso

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Today marks 400 episodes on Trend Following radio. To celebrate Michael has put together a compilation of Tom Basso interviews. Tom has been on Trend Following Radio four times and his interviews have been among the most popular episodes airing on the show. Michael plays the interviews back to back and throws in a bonus interview at the beginning. The bonus excerpt is a Tom Basso presentation from the early to mid 1990s.

Tom Basso is most famously known as “Mr. Serenity” in Jack Schwager’s “The New Market Wizards”. Now retired from managing client money, Tom was president and founder of Trendstat Capital Management. He became a registered investment advisor in 1980, a registered commodities advisor in 1984, and was elected to the board of the National Futures Association in 1998.

Throughout this 4 1/2 hour podcast Michael and Tom cover a broad range of topics including: Tom’s background and how he got into trading, speculation, emotional rushes, emotional devastation, catastrophic events, separating trading from politics, behavioral economics, advice to newcomers entering the CTA industry, location independence, time management, stoicism, black swans, and the importance of routine.

Michael and Tom also go through listener questions spanning topics including: trading regrets, money management vs. trading, tinkering with current systems, drawdowns, one-system vs. multiple systems, thoughts on Alan Watts, emotions during both losing and winning periods, exit strategies, practice trading vs. live trading, money management, risk control, how to handle skeptics, serenity, John W. Henry, coin flip entry method, percent betting, comfort with uncertainty, initial capital at risk vs. unrealized gains, and fighting against your gut reaction. This podcast includes a wealth of knowledge worth listening to over and over again.

In this episode of Trend Following Radio:

  • Speculation
  • Fighting against emotions
  • Catastrophic events
  • Separating trading from politics
  • Advice to newcomers entering the CTA industry
  • Time Management
  • The importance of routine
  • Money management vs. Trading

“I realized that every time I had a loss, I needed to learn something from the experience and view the loss as tuition at the College of Trading. As long as you learn something from a loss, it’s not really a loss.” – Tom Basso

Mentions & Resources:

Listen to this episode:

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Abdallah Salem el-Badri Plays Dumb About The Zero Sum Nature of Markets and Speculation

OPEC chief Abdallah Salem el-Badri pumps the propaganda:

“The fundamentals should not lead to this dramatic reduction (in price). I believe that speculation has entered strongly in deciding these prices.”

Name a time when speculation did not play a role in markets? Asked why speculation was back, el-Badri said:

“I have no idea.” [Covel: “WTF!”]

Speculation never went away. The markets are zero sum. There will always be winners and losers. Some, like Abdallah Salem el-Badri, don’t like to lose and unnamed speculators thus get positioned as “bad”.

Bottom line, speculators just happen to be the wise winners this time.

Note: Read this:

speculation dickson watts

Speculation Breakdown

Article from ZeroHedge titled Doug Casey’s 9 Secrets for Successful Speculation. Nine points made worth driving home:

Secret #1: Contrarianism takes courage.
Secret #2: Success takes discipline.
Secret #3: Analysis over emotion.
Secret #4: Trust your gut.
Secret #5: Assume Bulshytt.
Secret #6: The trend is your friend.
Secret #7: Only speculate with money you can afford to lose.
Secret #8: Stack the odds in your favor.
Secret #9: You can’t kiss all the girls.

All issues expanded in original article. #4? Not trend following.

Speculation: The Root of All Evil?

Is speculation the root of all evil? Consider this excerpt from my third book, Trend Commandments:

The film director Oliver Stone believes that speculation is evil. That’s interesting. He has written some fantastic scripts. He has directed Oscar-winning films. Nevertheless, to say that speculation is “the mother of all evil” is disingenuous. When Stone sets forward to make a new film, he’s speculating that you will spend your money and watch his film. There is nothing wrong with that. That’s life. That’s a good thing.

Speculation in markets is essential too. Think about what drives a market. It is millions of people speculating to make money. One of the most successful trend following traders knows deep down how important speculation is to finding opportunity:

“Speculari, the Latin root of the verb “to speculate” has the literal meaning to observe. To be successful this observation must, of necessity, be detached and unemotive and thus where great social and moral issues are at stake, it is perhaps not surprising that distrust and hostility among the general population can arise particularly when the speculator profits at a time of general discontent. Yet this detached observation is clearly in the spirit of the natural scientist and the act of speculating for money is in the spirit of the empirical scientist’s restless yearning to add to empirical knowledge and put theories to the test.”

Regardless of whether you win or lose, you are speculating—trying to get ahead. Every time you get into a car, you are speculating. If you go to the Apple store to buy an iPhone you are speculating the phone is more valuable than your dollars. Additionally, you are speculating the iPhone will work. When you turn on a show you are speculating that it is worth more than something else. All of these activities don’t always work out, and that is the nature of speculation. All speculators are not winners.

So why is it bad to take advantage of an opportunity that you recognize? It’s not.

Speculate this: Do you consider yourself an investor or a trader? Investors put their money into investments hoping value will increase over time. Typically, they have no plan if it goes down. They usually hold on, praying value will reverse and go back up. Investors typically succeed in bull markets and lose in bear markets. They usually have no coherent response when the losing starts. They often hang tight and continue to lose even more.

Traders are different. They have a defined strategy to put money to work for a single goal: profit. Wise trend traders do not care what they buy or sell as long as they end up with more money in the long run. Bottom line, winning traders don’t invest, they trade. It is a massive distinction. Consider timeless qualities essential to speculation:

    1. Self-reliance: A man must think for himself and must follow his own convictions. Self-trust is the foundation of successful effort.
    2. Judgment: That equipoise, that nice adjustment of the faculties of one to the other, which is called good judgment—essential to the speculator.
    3. Courage: That is, confidence to act on the decisions of the mind. In speculation, there is value in the dictum: Be bold, still be bold; always be bold.
    4. Prudence: The power of measuring the danger, together with a certain alertness and watchfulness, is very important. There should be a balance of prudence and courage; prudence in contemplation, courage in execution.
    5. Pliability: The ability to change an opinion, the power of revision. He who observes and observes again is always formidable.

I don’t care whether you ever trade, but those precepts should be the first life lessons taught to grade school kids.

Live it. I like that Covel. Wise excerpt.

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