Today’s guest is author, entrepreneur and professional poker player Annie Duke. Michael Covel and Annie Duke discuss several of the countless ways in which the psychology of gambling overlaps with that of trading, investment and other aspects of business.
Annie explains the importance of thinking probabilistically for decision-makers. Gamblers, like investors, can sometimes become so focused on their losses that it begins to affect their decision-making process in a negative way. Annie calls this “tilt” and says it occurs when players put too much emphasis on outcome. She points out that so long as you are getting an overall return on your investment via a positive expectation, small losses should be both expected and absorbed.
Michael and Annie also discuss further in depth expectancy and how the top minds in both trading and gambling think about the long-term. When involved with risk, it is always important to think realistically. If there is a 90% chance of success, don’t round it up to 100% simply to boost your confidence. This way, if the venture fails, you won’t feel the need to discard your strategy since there was always that 10% chance of failure. Overall, your odds of success are still very good. This is why Annie’s thinking is so important for all of us.
In this episode of Trend Following Radio:
Want a FREE Trend Following DVD? Get it here.
Get a free Trend Following DVD here.
Today, Michael Covel reads a recent piece from Barry Ritholtz about the Death Cross: that foreboding moment when the 50 day MA falls below the 200 day MA. Then Michael looks at how a Twitter debate between Cliff Asness of AQR and Jerry Parker of Chesapeake Capital, sparked by the article, led to an examination of momentum v. trend following.
The so-called Death Cross is viewed by many to be an omen, a signal of dark days to come. And while that could be partly correct in the context of a complete system, the Death Cross is just a signal. It’s a mistake to think of it in apocalyptic terms that something will happen in 6 months time, etc. The Death Cross is the type of signal that can work for the investor with a robust, diversified portfolio within a system that doesn’t aim to predict the future. This is all about what’s happening in the present price, so you can take action now.
Michael also plays and comments on a Bloomberg interview with Barry Ritholtz, discusses the folly of predictive technical analysis, and hammers home the fact that trend following is the only proven form of quantitative trading.
Want a FREE Trend Follwing DVD? Find it here.
Get a FREE Trend Following DVD by going here.
Many that aspire to be successful investors or traders look up to Warren Buffett as a role model. Yet the chances of anyone amassing that wealth by following the same path as Buffett are extremely unlikely. Debating survivorship bias seems perfectly appropriate, but that's never broached.
On the other hand, becoming the next Bill Dunn or Ed Seykota (or fill in the blank with the name of any trend follower) has much more possibility. In the trend following world there are many more successful traders, successful examples, which is much more motivational and inspiring.
In this episode, Michael Covel curates excerpts from Kevin Bruce, Jim Simons, and David Harding. All three talking about systems and or trend following. The important point about systems is not just selecting the right one, but also sticking to it once selected. Often people are tempted to make discretionary calls and override a system, defeating its original purpose. Instead, the potential rewards and risks inherent in a trend following system should be evaluated at the beginning, discretionary calls made at the outset, then let the system run without interference. That is the path to potential success.
Get a FREE Trend Following DVD here.
Want a free Trend Following DVD? Get it here.
Get a FREE Trend Following DVD here.
Many of the investment and trading approaches available today simply do not perform the same way in the real world as they do during simulation. This is why it's important to “look under the hood” of your trading strategy to understand how something works instead of simply taking it on faith.
This episode’s guest has appeared on the podcast twice before. Eric Crittenden is one of the key mind's behind Longboard Mutual Funds, a firm that has over 300 million dollars under management. Crittenden was also featured in Michael Covel's "Little Book of Trading".
In this episode, Eric Crittenden talks about creating a mutual fund based on trend following principles, why investment returns are not normally distributed, how financial simulations differ from the real world, and how to control risk in a trend following system.
Eric has many insights into trend following and trading in general, and has the financial data to back up his findings. He has also published several research papers on the matter, which are linked to below.
In this episode of Trend Following Radio:
-Relative momentum vs. time momentum
-Survivorship bias in the financial advisory market
-Defining risk – how much are you willing to lose?
-Why trend following works for both high-risk and low-risk assets
-Identifying the “sweet spot” client for fund managers
-The difference between most mutual funds and direct-managed funds
-Financial simulations vs. real life
Get a free Trend Following DVD here.
Bonus episode that discusses new trend following trading system available now. This episode is only for those listeners seeking a trend following trading system.
Want to get a FREE Trend Following DVD? Find it here: http://www.trendfollowing.com/win
Speculation has become a pejorative for some in recent times. A quick search yields the following definition of speculation: “forming a theory about a subject without firm evidence.” Yet if we look at the origin of the word, “speculor” means “to observe” in Latin. To speculate is to observe, and to make decisions based on those observations. In business and in life, there are ultimately two choices: to speculate or to gamble. The difference between the two is simple: the first has a strategy behind it; the second does not. The first relies on predetermined parameters for making decisions; while the second leaves decisions up to circumstance or emotion. In this monologue, Michael Covel talks about the philosophical foundation of success: speculation. This episode features many notable quotes from famous economists and traders, going back as far as the 1800s. The wisdom of these men is the foundation of trend following, and is as relevant today as ever. In this episode of the Trend Following podcast: why speculation is such an important concept, the philosophy behind trend following, watching results rather than causes, cutting short your losses, timeless excerpts from as early as the 1800s, and the early beginnings of Wall Street. Free trend following DVD: www.trendfollowing.com/win.
A May 25, 1959 Time Magazine article called “Pas de Dough” was recently forwarded to Michael Covel. It was about a professional dancer named Nicolas Darvas, who had made two million dollars trading stocks. This was probably one of the first trend following articles to appear in a major publication. Sports metaphors when it comes to trend following work great, but there are clearly others. For example, both trend following and dancing judge the public’s enthusiasm and use that as the indicator for the next move. In this monologue, Covel talks about the article and Darvas' book, breaks down the fundamentals of trend following, and explains why the philosophy behind trend following still applies today. He also comments on how trend following can be applied to the current black swan economic situations in China and Greece. What trend following and dancing have in common, the philosophical foundations of trend following, stock trading and location independence, why relying on “fundamentals” is fool’s gold, what being a silent partner in the trend means, why Darvas’ thinking from 1959 still applies today, the importance of having no ego when it comes to trading. Free trend following DVD: www.trendfollowing.com/win.
There is a common problem in finance when it comes to evaluating investment managers’ performance: the factor or skill vs. luck. When a manager performs well over a number of years, it is not clear whether the success can be attributed to the manager’s skill and strategy, or random luck. And vice versa, when a manager performs badly, it can be difficult to pin-point whether it was due to lack of skill, or simply bad luck. Another factor that is commonly misunderstood in finance is risk. Understanding the differences between risk, volatility, and skew is essential to developing a well-performing trading strategy. Campbell Harvey studies these phenomena. He is a finance professor at Duke university, and research associate with the National Bureau of Economic Research in Massachusetts. His research papers on these subjects have been published in many scientific journals. In this episode, Campbell Harvey and Michael Covel discuss risk tolerance, evaluating trading strategies, Harry Markowitz’ classic paper on portfolio selection, and the importance of differentiating between volatility and skew. In this episode of Trend Following Radio: Survivorship bias, and not being fooled by randomness, Why people with higher risk tolerance experience much higher upsides, Understanding process vs. outcome, The difference between volatility and skew, The importance of recognizing that asset returns are rarely “normally distributed”, When it is appropriate to apply a general framework, and when it is not, The Sharpe ratio – is it always relevant?, Harry Markowitz, Jim Simons, and Nassim Taleb. For more information and a free DVD: trendfollowing.com/win.
Michael Covel presents a monologue today about his recent trip to Mainland China (Beijing). A trip that centered on his presentation to 1100 Chinese investors and traders. For those listeners that have not yet traveled to China--either for business or vacation--Covel offers a wide-ranging primer. There is no doubt that from a business perspective especially--the time for China is now. The population is massive, the energy is overwhelming and the desire is infectious. Regardless of your current understanding of China, your perception of their government or the many other misunderstandings so prevalent in the West--China has at its core a deep desire for business and success. The adrenaline is simply to be felt. And yes, they want to learn trend following too. Free trend following DVD: www.trendfollowing.com/win.
Today on the podcast Michael Covel speaks with Dr. Jonathan Fader. Fader is a licensed clinical psychologist and is the team psychologist to the NY Mets baseball team. Fader also writes a blog for Psychology Today entitled 'The New You'. He maintains an active clinical practice, is an assistant professor of Family Medicine at the Albert Einstein College of Medicine and teaches in the Beth Israel Residency Program in Family Medicine in New York City. Fader and Covel discuss motivational interviewing, sport psychology techniques, process v. outcome, the mistake of focusing only on results, mental state and stress, mindfulness, Facebook distraction, Eastern traditions, the moment of now, and quieting the mind. Issues discussed apply to life, trading, sports and business--Fader offers insights we can all use. More on Fader at www.jonathanfader.com. If you would like a free trend following DVD go here: www.trendfollowing.com/win.
Michel Covel offers a take about passion -- the critical element of your success. An excerpt from the recent Birdman film and comments from Pink Floyd's Roger Waters help make the case. In Birdman the Michael Keaton character approaches a critic in a dive bar. Everyone is afraid to approach the critic, the fake gatekeeper. Keaton shows the passion. Are you afraid of the gatekeeper? Great. You have already lost. Next, Roger Waters talking about the classic song Brain Damage from the Dark Side of the Moon reveals his motivation, his passion. "Got to keep the loonies on the path." It doesn't matter your endeavor, trading, investing, entrepreneur--if passion is missing you are the walking dead, already 2 steps behind. The good news? Passion can be turned on instantly. It is in your power.
Michael Covel speaks with Ed Seykota on his second visit to the podcast. Originally profiled in the classic book 'The Market Wizards', Seykota has played a pivotal role in the growth of trend following trading for 40 years. This conversation breaks down into three parts: Govopoly, the Trading Tribe and trend following. Govopoly is Seykota's most recent book. In it he sees the economy transforming from a free and open societal structure to a controlled structure. The Govopoly system is taking over. It's not about another election to solve this, or to try and fix it. It is what it is and best we can all do is to cope with it. Seykota sees the Trading Tribe as one means of coping. The Trading Tribe is an association of people who commit to excellence, personal growth and supporting and receiving support from each other. The members of the Trading Tribe trade roles, becoming in turn senders and receivers for each other. Lastly, Seykota and Covel discuss trend following. Specifically, Seykota shares early experiences with Richard Donchian and his solo time with mainframes testing some of the first trend systems via computer. Finally, Seykota shares his motivation for his life (and some insights about puzzles). For more: www.seykota.com. If you would like a free trend following DVD go www.trendfollowing.com/win.
Michael Covel discusses one of Michael Mauboussin's white papers, “The Babe Ruth Effect”. This paper first caught Covel’s eye over a decade ago. It makes the critical point that big wins can pay for small losses (expected value thinking). Covel discusses the expected value mindset and how it relates to other fields, especially venture capital through a blog entry by Chris Dixon. Next, Covel connects a podcast episode titled “Good Bubbles, Bad Bubbles, and Where Unicorns Come From” with Bill Janeway, a venture capitalist and partner at Warburg Pincus. Covel shares a few excerpts covering liquidity and survivorship bias (all in this frequency v. magnitude mindset and all relating back to the Babe Ruth effect). Covel brings these topics to trend following as well. Want a free trend following DVD? Go to trendfollowing.com/win.