Ep. 579: Mihir Desai Interview with Michael Covel on Trend Following Radio

Mihir Desai
Mihir Desai

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Mihir Desai is author of “The Wisdom of Finance: Discovering Humanity in the World of Risk and Return.” Mihir is currently the Mizuho Financial Group Professor of Finance at Harvard Business School and a Professor of Law at Harvard Law School.

He wrote his new book with two goals in mind: 1. Demystifying finance and 2. Have people look at finance in a more inspirational way. After each financial bubble bursts, the public repeatedly retreats to stereotypical ideas of finance. Mihir doesn’t want to wait for a generational shift to take place for finance to be looked at in a positive light. Financial literacy has gone by the way side in schools. How do you get children to think about basic risk taking? How do you think about protecting yourself? How do you buy insurance? How do you pool your money as a family? He hopes his book may help change some views and enlighten.

Mihir explains why diversification isn’t important just in the markets, it is important to diversify in all aspects of life. As an athlete you should workout all your muscles not just pinpoint one area. Or if you are looking at your health, you should look at all aspects of your health, not just what you are eating or how you are sleeping. Broaden your outlook and diversify your time and energy accordingly.

What is Agency theory? If you give someone money to invest, why do you get the money back? Arguably this is the biggest problem in modern finance. 150 years ago most people were self employed. Nowadays we appoint people as our “agents”. We have a system where we give money to people we don’t know and expect them to take care of it. Michael and Mihir end the conversation talking about people finding their path and true happiness in life rather than doing what their parents or society has told them to do.

In this episode of Trend Following Radio:

  • Reputation of finance
  • Diversification
  • Risk management
  • Black-Scholes model
  • Behavioral phenomena
  • The magic of leverage
  • The asshole theory of finance
  • Agency theory

“Luck is a dominant force in your outcome. That is lost on a lot of people in finance.” – Mihir Desai

Mentions & Resources:

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“For some reason today was the day I discovered your podcast…”

Feedback in:

For some reason today was the day I discovered your podcast. I listened to your interview with Art Collins and of course I loved it. As a financial advisor, for the past decade, I have built client portfolios using the research from Dorsey Wright & Associates. So, I am already a devout trend follower but I think this is the ideal time to take my knowledge and commitment to another level. Please send the free video and anything else you think I should look at! Thanks so much!

Best,
[Name]

Will do.

Check out also this.

Ep. 578: Be the Man with Michael Covel on Trend Following Radio

Be the Man
Be the Man

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You won’t expect or see this episode coming… First, consider a truism: Asian American students dominate in academia. Asian Americans know that if they get the right scores, and check off all the boxes, they get the good school. However, this is not how it works at Harvard and other Ivy League institutions. They don’t operate based on who has the best test scores.

Michael reads a passage from a New York Times article illustrating the injustices in Harvard’s admission processes. Once one ethnic quota has been filled, that’s it. No more students can me admitted. Public universities handle their admission process differently. Asian Americans make up 34% of The University of California’s student body as apposed to about 15% of Asian Americans allowed to attend the Ivy schools due to diversity regulations.

“America, the home of equality?” This catch phrase has gone by the way side. When students work hard, but then are slapped down because of their race, this goes against the American dream. And when the system turns against you its time to make a choice: Fight against it or walk away? Michael’s answer is counter-intuitive and dovetails with trend following.

In this episode of Trend Following Radio:

  • Ivy League quotas
  • The American dream
  • Asian Americans
  • Fair competition
  • The secret sauce myth
  • Letting go

Mentions & Resources:

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Ep. 577: Art Collins Interview with Michael Covel on Trend Following Radio

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Art Collins is author of “Beating the Financial Futures Market: Combining Small Biases Into Powerful Money Making Strategies”, “When Supertraders Meet Kryptonite”, “Market Rap: The Odyssey of a Still-Struggling Commodity Trader” and “Market Beaters.” He has been trading systematically for the past 30 years.

How was Art Collins able to get Richard Dennis, Bill Dunn, Bob Pardo, Mike Dever and Larry Williams (to name a few) to talk? He made the interviews more like a partnership, than an interview. He made an impressive name for himself which led to positive word of mouth spreading.

What does robustness mean to Art? He uses four rules for prudent testing: 1. Don’t settle on your best result if it is a “diamond in the rough”. 2. Strategies should test well in various markets, particularly similar ones. 3. You don’t want your results to be bunched up in limited time frames. 4. Stay focused on testing concepts you understand in the markets.

Throughout the years Art wasn’t only focused on trading markets. He also studied how to beat the blackjack table and how to skew the odds in his favor when betting on sports. Trading football lines, and trading the price of stocks – what’s the difference? There isn’t much of a difference when you take a technical and systematic approach to them. It’s about keeping emotions out of it. He never wanted to be a cowboy trader or thought of as a “genius”, he just wanted his systems to work. Michael and Art spend the rest of this episode diving into card counting, mechanical systems, gambling on football, data mining and the fools errand of making $1,000 a day.

In this episode of Trend Following Radio:

  • Systems trading
  • Richard Dennis
  • Card Counting
  • Mechanical systems
  • Robustness
  • Data mining

Mentions & Resources:

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“…the best entry system?”

Feedback in:

Dear Michael,

I recently finished your new book, Trend Following. This is your best work to date and I thoroughly enjoyed reading it!

I was hoping to get some guidance from you regarding the best entry system. In chapter 23 of your book, you do a great job of comparing the 50-day channel breakout to the 10X100 simple moving average crossover. It appears to me that the moving average results were superior to the channel breakout method. While both methods have demonstrated good historic results, which method do you recommend today?

Thanks and best regards,
[Name]

It’s not an either or answer.

Both work.

Please don’t think my answer is curt or blunt, it’s not!

Ep. 576: Political Bulls with Michael Covel on Trend Following Radio

Political Bulls
Political Bulls

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Michael reads an article he recently wrote for The Observer. He weaves in commentary throughout and speaks to the gross misuse of political power. Michael portrays politicians and the D.C. culture as a dog and pony show.

In this episode of Trend Following Radio:

  • Parliament of Whores
  • Bill Clinton presidency
  • Political dog and pony show
  • 2000 stock crash

Mentions & Resources:

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“The views expressed… make me feel both encouraged and uncomfortable…”

Feedback in:

Mr. Covel,

I would like to sincerely thank you for your massive contributions to the world of finance. I have been listening to your podcast for almost a year, and I just read your latest edition of Trend Following. Each of these has been life changing. The views expressed in each piece of work make me feel both encouraged and uncomfortable.

I am encouraged because many of your trend following and life philosophies match my own. I am uncomfortable because some of them are the exact opposite of my own.

Being that discomfort creates growth, I am excited about further exploring the views that make me feel this way. In that spirit, I would like to ask a question or two about how my current trading system does not match up with some of the trend following principles,

1. As a rule, I do not short companies whose PPE outweighs their market capitalization. My reason for this is that they become prime candidates for acquisition or restructuring which could really hurt my short position. Do you have any rules in your system where fundamentals or external factors will cause you to not take a position even when the trend is strong? Do you think any kind of rule like this is justifiable?

2. I currently use a 5% trailing stop to exit a winning trade with 10%+ profit. After reading your book, I think this is too conservative. What are your thoughts on the use of trailing stops to exit winning trades?

I know that you are a very busy man, and I will not be offended at all if these questions go unanswered. I will continue to listen to older episodes of your podcast and read more books on trend following in the hopes that I can find them myself.

Keep up the great work. Your passion shines through and is very inspirational.

Thank You,
[Name]

Thanks for your nice note.

Let me ask out of the gate: Why the need for fundamentals, a trailing stop and a profit target?

Let’s start there.