On today’s episode of Trend Following Radio Michael Covel starts off with a short clip from Star Wars. Michael notes that Yoda and the force have unexpected connections with trend following. He then recounts a story that happened to him a few weeks ago where he feels “the force” was involved. While he was waiting to take a red eye to Tokyo with his parents a man asked if he could share the power outlet he was using. That man happened to be one of the world’s most famous computing pioneers. Michael agreed to share the outlet if he could take a selfie with him. It was a weird serendipitous moment that Michael attached “the force.”
Michael goes on to read from an article titled, “Meet David Harding: The Man Behind Models that Beat the Market,” published in The Australian Financial Review. The article highlights Harding’s accomplishments and views on trading. Harding stresses in the article that the only reason systematic trading has gotten big over the years is because it works. Harding’s company, Winton Capital Management, goes completely against the efficient market hypothesis and he has actually made massive money going against the theory. David goes on to say that investment management is an internal psychological war with yourself. You constantly doubt yourself but the challenge is rising above that self doubt and sticking with your system. If you allow every emotion to be built into your system then you do not have a system at all.
“Over-fitting and It’s Impact on the Investor” by the Man AHL Academic Advisory Board is Michael’s next interest. Over-fitting is finding patterns that aren’t actually there. It is a common phenomenon in science as well as trading and other fields of study. Analyzing a companies culture is a good way to produce less over-fitting results. Michael quotes different view points regarding the concept of over-fitting, finishing up with inspirational quotes by NBA player Kevin Garnett and Christopher Hitchens focused on “making it happen.”
Listener: Maybe its just me, but it struck a chord. The fact that average folks cannot equate to large sums of money is bang on. I mean if one spends there time looking for bargains at Walmart, how can they possibly comprehend millions let alone billions. The brainwashing and their ignorance prevents them from that. The Kevin Bruce story is simply amazing. What a humble human being. He understood what most never will at such a tender age that its all about the freedom and not the bling. Truly inspiring for the masses that want more out of life than the status quo or as I like to call it the neighbor quo!
Listener: David Harding calling the SPY a system, who the heck would ever have the courage to go on CNBC and tout that? The Godfather clip, inner confidence at its finest. As human beings we seek the answers everywhere but from within, where they truly lie. Truly inspiring and motivational at least for me, and this is coming from a guy who’s favorite quote is;
“The more time I spend among humans,the more I love my dog.”
Here is an example of that from The Hedge Fund Journal:
David Harding spent two years at Sabre Fund Management, each day drawing hundreds of charts by hand, like a true craftsman. Every chart was bound into big leather folders, and in turn each chart pattern was copied into other folders. He likens it to an old-fashioned publishing house. Harding noted without irony that the company was run by accountants, and that “there certainly was method in what was done there.” He continues “I certainly regard my time there as the foundation stone of my credentials as an empiricist. There is nothing like drawing thousands of charts by hand to fix them in your mind. In fact I regard this phase of exhausting taxonomy of technical analysis as being like the relationship used to be between biology and taxonomy in the life sciences. Until something like 1830 you had gentlemen scientists collecting leaves and putting them into folders, and it wasn’t until Darwin that he and others started putting some order on it. Only by arranging data and putting it in order can you get any pattern out of it.
Today on the podcast Michael Covel talks about the idea of resilience and the ability to operate with variability as the norm. There’s going to be volatility and you can’t make it go away; to operate with variability as the norm is to be a trend following trader. If you try and make it go away, you might end up falling with the next 50% drop in the S&P killing your account. Because it will happen. There will be another major equity drop. There will be the same panics that we saw in 2000 and 2002, the fall of 2008, and October of 1987. Most people will lose 50% of their net worth because they don’t have a strategy that deals with variability. The 100-year flood doesn’t happen every 100 years; it happens every 2-3 years. Covel moves into a clip with David Harding of Winton Capital Management and quotes author Nassim Taleb about surviving when the black swan flies in. It’s the difference between taking a punch when you’re prepared for it or being caught off-guard with a punch to the gut when you least expect it. Those that simply buy and hold stocks and put their trust into the government and the Federal Reserve? They’re the ones getting a punch to the gut that they don’t see coming. Next, Covel moves into another clip from Michael Lewis (author of “Liar’s Poker” and “Moneyball”) about what was behind “Moneyball” and how rather than being a story about baseball it is about misinterpreting value and misappraisal. Building off what David Harding said, Lewis also talks about the idea of measuring, counting, and using statistics to make good judgments. What David Harding and Michael Lewis are getting at is not generally accepted. Most aren’t paying attention. Covel shares a quote from a Stanford psychologist: “A man with a conviction is a hard man to change. Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point.” In many ways, that’s what Covel feels like when he’s trying to get the ideas of trend following across; that’s what he’s up against. He’s also up against the buy & hold mutual fund industry, who love fees. They have no desire to tell their clients about trend following strategies, how to look at the world from a statistical perspective, or how to prepare yourself for the next black swan. Covel is fully aware of the controversial nature of his views and the idea of trend following in general, and he closes by reading a polemic and playing a clip from author Christopher Hitchens, as well as another king of controversy: Glenn Danzig.
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