Please enjoy my monologue Expanding Your Thinking with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.
In this episode of Trend Following Radio:
Why embracing uncertainty pays big
Trend following: it’s human nature
Losses: acceptable when you strategize to cover them
The sunk cost fallacy
Opening your mind to alternative ways of thinking
The mistake of blindly accepting the word of “authorities”
“I remind you there is a new kind of special occupation. I refuse to call it a discipline or a field of study. It’s called futurism. The notion here is that there is a way to study trends and know what the future holds. That would indeed be valuable if it were possible. But it isn’t possible. Futurists don’t know any more about the future than you or I. Read their magazines from a couple years ago and you’ll see an endless parade of error.” – Michael Crichton
An excerpt from: The Secret World of Jim Simons by Hal Lux:
Like all quantitative money managers, Renaissance aims to find small market anomalies and inefficiencies that can support profitable trading on billions of dollars of capital. Though all quant shops are alike in their dedication to models Let the best algorithm win! Renaissance’s approach differs from the “convergence trading” popularized by John Meriwether’s Long-Term Capital Management and similar arbitrage shops. Convergence traders price financial instruments based on complex mathematical models, find two different instruments that are cheap and expensive on a relative basis and then buy one and sell the other, betting that the prices will, at some point, have to return to their proper level. The Renaissance approach requires that trades pay off in a limited, specified time frame. And Renaissance traders never override the models. Back in action, Medallion made its mark through rapid, short-term trading across futures markets. “I have one guy who has a Ph.D. in finance. We don’t hire people from business schools. We don’t hire people from Wall Street,” says Simons. “We hire people who have done good science.” “We have three criteria,” says Simons. “If it’s publicly traded, liquid and amenable to modeling, we trade it.” Unusual for a hedge fund, the heart of Renaissance is not its trading room an uncluttered room where a score of traders buy and sell around the clock but rather an auditorium with exposed beams that seats 100 and features biweekly science lectures. Last month a molecular biologist presented research on colon cancer. “When you hear someone talk about an interesting use of statistics it helps trigger your thinking,” says one Renaissance employee.
I remember a few years ago, sitting in the private office of one of the best trend following traders around (performance and assets), talking about this very issue with him: how does Simons really trade?