For the past couple of years many of us have been in love with Apple. Their products, their style, and their stock. It was a great story as long as the stock was going straight up. On today's podcast Michael Covel talks about all things Apple: the worship; the seemingly romantic love of Apple stock; and the drop down to $450 a share from its peak above $702.10 in September (down 35% from its peak). Covel compares the fundamental viewpoint looking at Apple today to the trend following perspective that is purely based on price action. The Wall Street analysts all seem to insist that they can predict the future, but none of them predicted this. So, what does this mean? Is Apple a "broken company"? Apple had a profit of 13 billion dollars, sold 28% more iPhones and 48% more iPads, and the stock still went down. Covel looks at several articles from Wall Street analysts and notes that none of these people were saying what they're saying now when the stock was at 700 a share. Covel creatively points out the complete drivel coming from these analysts, and notes how nothing has changed on Apple's end but the price of their stock. So why is this only being pointed out now? And what is Covel's ultimate point? Follow the price action. Trend followers don't have to know anything about what's going on inside the back room of an Apple store. This is a classic example of a trend: ride the train up, ride the train down. Is the stock cheap now? What if it's at 350 or 250 next month? Do you buy on the dip? If the market is going down, get out or short it. The price knows more than any Wall Street analyst. There is no way on the planet to attach all fundamental views to the movement of the stock price. If the best traders on the planet don't have these insights, how can the stock jockeys at CNBC and Bloomberg, for example, have them? Free DVD: www.trendfollowing.com/win.
Inspired by a blog post by Barry Ritholtz, Michael Covel goes over his own list of "Things I Don't Care About". You can have the intravenous drip straight into your arm, but what does all that commentary do for you? Ultimately, if you're a trend following trader or any type of investor you need a process. You need a set of rules that tells you where to enter, where to exit, and how much to bet of your limited capital at all times. Regardless of account size, volatility, etc. You need a process that determines that for you. If you have that then eliminating all other stuff is paramount. And it's not just for trading reasons; it's for life reasons. Covel goes through Ritholtz's list and compares it to his own. On the flipside Covel also goes through a list of the things he does care about: Knowing how the "behind-the-scenes" action really works; the traders that he has learned from in his books; having honest interactions with people; Alan Watts; Ken Tropin's white papers; The Winton Papers; the Zen Habits blog; and Seth Godin's website. Covel relates several stories from traders such as Salem Abraham and David Harding which taught him some valuable lessons. Covel explains that if you want to be good at anything you have to be passionate about it. You have to care, you have to get inside it, and you have to own it. In the next segment Covel talks about the idea of the efficient market hypothesis, which is one of the foundational pillars for academics. They claim to have mathematical formulas which can predict the future, even though the underlying assumptions are false. Life is much easier for a professor who can fall back on beautiful mathematics. Unfortunately, many people have been sold up the river using investment products based on efficient markets. Covel quotes Charlie Munger of Berkshire Hathaway regarding extreme proponents of the efficient market hypothesis. Munger, even though he's a value investing guy, knows there are outliers and black swans. He knows that markets aren't efficient. Munger notes that mistaken professors were "too much influenced by rational man-models of human behaviors from economics, and too little by foolish man-models from psychology and real world experience." How can there be rational man when Jersey Shore gets high ratings? There's no such thing as rational today. Even if there was markets still might go in a completely different direction from what rational is even deemed to be. Free DVD: www.trendfollowing.com/win.
Michael Covel talks to Eric Crittenden. Crittenden is a Founding Partner responsible for managing all research, risk quantification and trading operations at Longboard Asset Management. He's also been featured in Covel's own Little Book of Trading. Covel and Crittenden talk about Crittenden's beginnings, coming from a medical background and switching majors to economics. Crittenden got to see the world from two different perspectives: one from a biostatistics and natural sciences perspective, and also from a business school perspective. Crittenden is a little different than some of his counterparts in the industry in that he focuses more on "why?" than "what?". Covel and Crittenden talk about sustainability vs. short term inefficiencies; being "ultra long term trend followers" and some of the reasons why he believes it to be the most robust approach; Crittenden's peers and influences--particularly Tom Basso; the start of Longboard Asset Management; why Crittenden decided on a "trend following mutual fund" model, and the benefits to that model; looking at performance data and understanding when trend following (or the media perception of it) falls "below average"; diversification and the markets Crittenden chooses to trade; risk control at Longboard; who can buy into Longboard and the minimum investment required; whether most of the large liquid markets work within the robust structure Crittenden has developed for trading--and the one (only, single) market that long term trend following would have produced a loss on within the last forty years. Crittenden also gives an explanation on the source of trend following returns that might be one of the clearest explanations of the topic that Covel has heard to date.
Michael Covel opens up with some Johnny Cash. Like most of Cash's music it's a simple song. It's powerful, but it works. And its simplicity is exactly why it works. Covel dedicates today's episode to the topics of simplicity, prediction, and risk, and presents three articles revolving around each of these ideas. First, Covel mentions an article that appeared in Business Week regarding how Japan's fear of risk is getting dangerous. For those not aware the Japanese stock market is down 76% still from its 1989 high. That would have to be an entire generation--an entire country--that no longer believes in the stock market. That's not the reason Covel brings up the article; rather, it's the "play it safe" mentality. He goes on to discuss the tendency to focus on downsides rather than opportunities. The attitude of risk-aversion in Japan explains why few Japanese students choose to study abroad, why regulators hold up vaccinations, and why 844 trillion yen (almost twice the country's yearly economic output) sits idle in cash at home and in savings accounts earning 0.02% interest. We're not far away from this attitude coming to America, but with that comes an opportunity for you to profit. Covel isn't picking on Japan; it's just a useful example of the risk-averse attitude that seems to be spreading. Covel moves onto an article from Golf Digest called "What Predictions Say About Us". Predictions are about pretending to know. Covel points out one particularly compelling quote: "Human beings are wired to predict. In ancient times, predictions served as a psychological counterweight to the extreme uncertainty of life. As we've gained more control over this daily existence, predictions help encourage the illusion that we're in charge of our own destiny. The more that is unknown, the greater the urge to predict." Somehow we've come to think that we can predict almost everything. It's hard-wired into us. If you can understand that so many people are destined to predict (and continually predict incorrectly) it can put you in the position to profit--if you've got a strategy that's predicated on *not* predicting, i.e. trend following. Covel moves on to discuss simplicity quoting an article called "One Trick Pony". The article talks about Peyton Manning and Tom Moore, who teamed up with a NFL strategy that they used with great success. Their strategy was based on running the fewest play concepts of any offense in the league. It's not about trying to surprise the opponent, but in mastering a strategy that works. That's trend following, too. It's relatively simple, it's robust, it's big, and there aren't a lot of moving parts. It is what it is--which is a great opportunity for profit. Free DVD: www.trendfollowing.com/win.
Michael Covel sets the tone for today's propaganda-themed show with two clips: A Rod Serling monologue from "The Twilight Zone" and the infamous Apple "1984" commercial. Covel goes on to discuss an article about David Harding of Winton Capital--a trader who has become one of the major faces in trend following trading due to his track record in the last decade. The article notes Harding's -3.5% 2012, calls his success a "blip", and generally presents criticism without any foundational understanding of Harding's techniques. Covel tears the article apart point-by-point. It's a perfect representation of how the media misrepresents the facts. Covel's isn't motivated to critique this particular article because he's a David Harding fanboy--rather, his goal is to point out the intellectual dishonesty put on display so often in the media. Covel questions the motives of the writers; dispels the myth that massive computational power is needed to be a trend following trader; and questions how one 3.5% down year can possibly be considered a "plunge" or "blip" in the larger context of Harding's track record. The authors state that Harding was "blindsided by market uncertainty", but trend following is built on accepting the fact that a black swan can appear in at any moment--a fundamental concept that the authors clearly don't understand. Next, Covel discusses Dave Ramsey and Ric Edelman; radio hosts who both are convinced that you can't make money trading. So, they convince you to buy and hold mutual funds (perhaps some of which they've helped create) and leave you hoping for the best. Covel takes both of them on and dispels their claims that no one in the Forbes 400 makes their money trading. So, why do Ramsey and Edelman persist in putting out such information? Because they have something to sell. Covel has something to sell too, but he gives both sides of the story. He lays out the buy and hold strategies and compares them to systematic trend following. It's just clear who the winner is when you see the whole picture. Ramsey and Edelman neglect to talk about trading successfully; it's all part of the propaganda machine. Think critically. Don't be a sheep. If you want to obtain something more than average, you've got to keep your eyes wide open and look for the propaganda. Free DVD: www.trendfollowing.com/win.
The first monologue of the new year! Covel goes on to review four things that have recently hit his desk that highlight the misinterpretations of trend following and trading in general. The first, regarding a speaking gig in Beijing, concerns itself with distinguishing between reality and unreality. The second comes from Teller, of Penn and Teller fame. Covel goes on to discuss whether a trading system should be specifically designed to suit your personality--something Covel doesn't necessarily agree with. He gives examples of the Turtles, AHL of London, Larry Hite, Ken Tropin--all traders who have different personalities but are similar in their systematic approaches. It's not about whether trend following trading "fits" your personality--it's about the fact that it works and there is performance data that proves it. The third example comes from a listener, and Covel discusses time decay and "choppy markets". The fourth comes from Jim Rohrbach, who put a piece out in late December in which he caught a radio show that stated "the stock market is always right". Paraphrasing Rohrbach, Covel notes that the market does what it wants to do. When the market doesn't do what a trader thinks it should do, they insist the market is wrong. We may not like or agree what the market is doing any any particular time, but it's futile to say the market is wrong or to invest opposite the market. It's as simple as being long when the market is going up, and being short when it's going down. Of course, you need rules to deal with that: choppy markets, knowing when to exit, and keeping losses to a minimum--that's what Covel teaches. Free DVD: www.trendfollowing.com/win.
Michael Covel speaks with traders Chris Kacher and Gil Morales, authors of the new book "In The Trading Cockpit with the O'Neil Disciples: Strategies that Made Us 18,000% in the Stock Market". Their book is a step-by-step instruction guide to implementing Morales and Kacher's trading methods. Covel starts off by asking Kacher and Morales about the "fiscal cliff", why quantitative easing is not the answer to economic growth, and why all of this isn't necessarily relevant to making money. None of it matters if the Dow ultimately goes from 13,000 to 26,000. Regardless of your political views you shouldn't be sitting on the sidelines if that happens. Ultimately, the trend is your friend. In a pure trading mindset, all this news, the fiscal cliff, the debt limits--they aren't necessarily relevant to making money. Covel, Kacher, and Morales go on to talk about their new book, "In The Trading Cockpit with the O'Neil Disciples"; the "O.W.L." ethos, and the story behind it; reversion to the mean mentality, and how it can often be the kiss of death for traders and investors; trading psychology, the idea that "you must lose to win", how the least important statistic is your percentage of gains v. losses in your trading account; dealing with emotionalism and why clients often want to hear something that will make them feel better; teaching people to let go of the news and simply watch the price action; why people think that "this time is different", put their trust in the central economy, and why trend following will survive into the future; understanding that investing is always a process of changing along the way; and what mental clutter in the way of fears, biases, concerns and more can build up in the mind and get in the way of clear and decisive decision-making. Dig in! Free DVD: www.trendfollowing.com/win.
Today on the podcast Michael Covel speaks with Tushar Chande. Chande is a trader, author, and the co-founder and head of research at Rho Asset Management in Switzerland. Chande has had a long and distinguished career in technical analysis; he brings a unique perspective on how to look at the markets as a trend following trader. Chande was born in India and began his career intending to become an engineer. He came to America and earned his Ph.D. in metallurgical engineering from the University of Illinois in 1984; however, when he came to the end of his Ph.D. studies he started look outside his chosen career path and found the world of finance. Chande's research skills as an engineer were easily transported to analyzing numbers in finance which gave him a leg up in his early trading days. Covel and Chande discuss Chande's other early influences, and chart the journey from his days as an engineering student to his accomplishments as a systematic trend following trader. Covel and Chande also talk about the analogy between sports and trading, how the best sportsmen rely on having a stable and predictable environment (unlike the markets); evaluating performance within the context of the market; discretionary trading v. systematic trading; learning through "trial and terror"; the Rho Trend Barometer and the ability to quantify the environment; the problem of indexes; the Sharpe ratio; the importance of market movement to trend following trading; "the black box disease"; trusting your system; cognitive biases; the benefit of the "black swan" and outlier events and why these events are so beneficial to a trend following system; and whether "one-hundred Ph.D.'s are better than one". Free trend following DVD: www.trendfollowing.com/win.
Michael Covel monologue.
In his book "Trend Commandments" Michael Covel included a "cheat sheet" for the reader. It opens up with this quote: "Golf is not safe. My grandfather died playing golf. Speaking up is not safe. People might be offended. Innovation is not safe. You'll fail; perhaps badly. Now that we've got that out of the way, what are you going to do about it? Hide? Crouch in a corner and work as hard as you can to fit in? That's not safe either. Might as well do something that matters instead." The cheat sheet focuses on core principles of trend following trading: profit in up and down markets; no more buy & hold, analysts or news; no prediction; the big money of letting profits run; risk management; a scientific approach to trading; strong historical performance during crisis periods; no traditional diversification; ride the horse that's winning; no government reliance; and taking advantage of mass psychology. In his last podcast before Christmas 2012 Covel gives a cheat sheet podcast of sorts too; he presents invaluable audio clips from his collection of great trend following traders. These legendary traders include William Eckhardt; Bill Dunn (talking about risk management from his perspective); and Jerry Parker (talking about the difference between mean reversion and trend following). Why is it hard to accept their principles outlined? They sound rational and reasonable, right? Covel also excerpts a speech from Elizabeth Cheval to explain her view of chronocentricity. Covel continues on with three clips from David Harding of Winton Capital Management and again asks the question, "Why don't we all go his way?" Unfortunately, much of the wisdom illustrated is not accepted or taught in mainstream education. Covel ends with a clip from author Seth Godin to help illustrate why current education models are dead ends. There is a way out, but waking up is a first step to financial freedom. Free DVD: www.trendfollowing.com/win.
Today's podcast is about the six inches between the ears: your mind, your ego, and the mental part of the game that is so important to being a successful trader, entrepreneur, or pretty much anything that doesn't involve working for the man. Michael Covel opens up by talking about a book by Brenda Ueland called "If You Want to Write". Specifically, it's a book about writing, how to write, and how to think about writing. However, Covel notes that you can take the word "writing" and insert anything and have it apply: trend following, basket weaving, running--it doesn't make a difference. That's the way the book was written, and that's what Michael Covel gets at in today's episode. Understanding the precepts that Covel talks about in today's episode are relevant to trend following trading, being an entrepreneur, having a good life, having good friends, or having a family. For those of you that might be "quant jocks", and might not think the emotional and psychology are as or more important than the numbers, Covel passes along an anecdote about legendary trend following trader Ed Seykota. It's the internal, the ego, the psychology, the emotions--all these pieces wrapped together are the foundation for all success. Covel goes on to read selections from a new e-book compilation from several different authors, and connects the dots. He covers fascination, gumption, focus, leaping, timeless, confidence, passion, poker, and adventure. It's not time to just count another year. It's time to plan an adventure--whether it's travel, becoming a trend following trader, or anything else that speaks to you. Regardless of whatever success you want to achieve, this is it. If you can get the mental side of the equation down, you're going to win. Free DVD: www.trendfollowing.com/win.
Michael Covel talks with trader and author Richard Weissman. Weissman is a professional trader with over 25 years of experience. His most recent book is "Trade Like a Casino: Find Your Edge, Manage Risk, and Win Like the House". Weissman considers himself a "swing trader", and he and Covel compare this approach to that of a trend following trader. Covel and Weissman have some contrasts in their techniques, including Weissman's use of fundamentals in his trading, and they work out their differences along the way. However, regardless of the name they give to their individual trading styles, Covel and Weissman have plenty of commonalities and they discuss some classic precepts that are important to the foundational philosophy of any good trader. The two explore Weissman's path from how he started trading with his father in 1987 to how he made his way to where he is today. Further topics include the background to Weissman naming his book "Trade Like a Casino", and how Casinos and the gaming industry are the models for successful speculative trading; the influence of Jack Schwager's work; risk management; positive expectancy; how Weissman defines trends and signs of strength; the idea of "don't anticipate, just participate"; positive expectancy and the probability skew; the connection between table limits and risk management; how there are no truly "safe investments"; some tools that Weissman has used to influence his own trading psychology and smooth out the emotional highs and lows; not letting a high price stop you from buying, and not letting a low price stop you from selling; Weissman's concept of "the opaque urn"; and the three things you can guarantee. Weissman and Covel also go over some of Weissman's great one-liners: "don't tug at green shoots" and "trade the market, not the money". Free DVD: www.trendfollowing.com/win.
Michael Covel talks with Tadas Viskanta. Viskanta is the founder and editor of the Abnormal Returns blog and a private investor with 20-plus years of experience. His first book, "Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere", is out now. Viskanta calls his blog a "forecast free investment blog", and that sort of outlook certainly appeals to Covel and his trend following philosophy. Covel and Viskanta cover a wide range of topics, from investment philosophies and strategies to the challenges authors and bloggers face in the world today. Specifically, Covel and Viskanta discuss the disadvantage given to those who follow the constant data stream from the media; why Viskanta felt the need to write "Abnormal Returns", and the strategy and style behind it; the phrase "abnormal returns" and trying to measure returns over and above the risk taken; underperforming; preparing for abrupt change in the markets; Viskanta's move from value investing to a more systematic strategy--and Covel's early experiences with value investing material; now that so many global barriers are easy to cross, why so many people have "home bias" and difficulty placing global investments; why people still look at the markets with rose colored lenses and so easily forget the bubbles of the past; the behavior gap; why having a suboptimal strategy that you can follow in a systematic way is better than having no strategy at all; the ramifications of instant feedback in the blogosphere; and why you need a burning desire to be an author today. Yes, some territory is covered! Free DVD: www.trendfollowing.com/win.
Michael Covel talks to Jonathan Davis, one of the UK's leading writers on investing. Davis has written 3 books, is a regular writer for the Financial Times, and is the director for three investment companies. Covel and Davis talk about Davis' new book "Professional Investor Rules" which has a bit of a fundamental flavor to it. Hardcore trend followers need not get bent out of shape, however; Davis and Covel's conversation crosses strategy lines and gets to the heart of some important investing and economic topics. Davis has been following the markets for over thirty years, first as a journalist, and has had quite a history. He was fortunate enough to spend some time at MIT studying and writing a thesis about Warren Buffet, whom he met on several occasions. His new book looks into the lists of rules that professional investors had made for themselves over the years, both for education and entertainment purposes. Covel and Davis talk about what's going on in Europe, where the socioeconomics might be headed, how the history of Europe plays into the problem, and how Davis sees it playing out; the importance of performance data; how "the recent past is out to get you"; how volatility is not something the average investor instinctively understands; investing in Asian markets; the efficient market theory; the idea of "the hedgehog" (people who only really know one thing) and "the fox" (people who know many things, and are constantly looking for more) in the context of investing, and how the foxes can allow themselves to be adaptable and flexible to all sorts of market conditions over time. Davis also shares his take on David Harding of Winton Capital, and his view of Marc Faber.
The debate now is all about the fiscal cliff. You seemingly can't turn on the TV, the radio, or look on the web without it. When it comes down to it, the debate is really about money. It's quite crass and crude, the debate about money in America, because we've lost site about what money is and what it represents. It's become an inanimate object that we all desire, but they way it's discussed in popular culture, politics, and most everywhere you look, it's become a pejorative. Most people don't even want to think about it. Michael Covel discusses money and what it represents: It's the exchange mechanism amongst honest people. We use money to give each other our value. That's the way it works. So, in the spirit of this thought process, Covel reads an excerpt from "Atlas Shrugged". He notes that he was given this book to read as a homework assignment after meeting famed trend following trader Ed Seykota. We all know there are vastly different opinions on Rand. Some people love her and build upon her work as the foundation of their ethos, and others refer to it as a childish teenage dream. Regardless of your views on Rand, the excerpt Covel reads can be appreciated for its intelligence and wisdom about money. Free DVD: www.trendfollowing.com/win.
Michael Covel discusses a sketch he recently saw on gapingvoid.com depicting an office with a poster on the wall that says: "Fanatical: Kiss every hope of leading a normal life goodbye". Covel relates and wishes that he could impart this message upon people. If you listen to the words that Covel says, perhaps the enthusiasm that he brings can also bring you to see your life as fanatical. You've got to be fanatical, whether you're going to be an entrepreneur, or a trend following trader. You have to be focused, you have to be passionate, and you have to understand. You have to *want it*, otherwise you simply won't get there. Covel goes on to discuss a white paper by SEB Asset Management in Sweden. There's always ups and downs in trend following strategy. A strategy that makes a promise to make you money every month is a fraud. There will be periods of time while you follow a trend following strategy where you have drawdowns. It's just the way it works. But if you live to play another day, you can come up on top in the end. However, if you believe that the world has changed forever in such a way that there are no more business cycles, no severe banking crises, real estate crises, government bond crises, and corporate crises; that there will never be any large movements in the currency markets, no longer any social or military crises, and no major recovery from these crises--then trend following investments is unnecessary. Do you really expect there to be no future change? If we accept unpredictability, trend following is the best strategy to follow. Covel goes on to talk about the Fed, and whether we want the Dow to be elevated at the expense of our interest income. Covel continues on with the idea of information overload. How do you make decisions with it all? You can't. It's not a day trading rat-race. The most successful people in the world take a step back and look at the big picture. Simple makes money, simple finds freedom, and simple can be inspiring. The complexity is useless. Knowing every single data point does nothing for you in the long run. It's just a game of trivial pursuit. Also: Covel announces product specials for the month of December--a great long term trend following system.
Michael Covel talks with Barry Ritholtz, an author ("Bailout Nation"), newspaper columnist, blogger (www.ritholtz.com), equities analyst, television commentator, and CEO of Fusion IQ. Ritholtz is deep down a quant guy, but brings strong views and opinions. However, he won't sit around and "fight the tape". Covel and Ritholtz talk about the price of paying attention and why you should be selective in what you watch, read, and listen to; the onslaught of political information; the insatiable need to consume information and knowing when it's the right time to quarantine yourself from being influenced by someone in particular; Ritholtz's views on gold, why attaching your emotional well-being to it is wrong, and how it won't be quite as valuable as most people think in the event of a crisis; cutting your losses short and letting your winners run; the real value of intuition; how Ritholtz views the world and where we're at right now, societal and economic cycles, and how you can't be a doom and gloomer seeing what's coming down the pipeline in the next generation; and the importance of not being cash rich and time poor, getting "lost in the screens", and leading a good life instead of always chasing money for its own sake. Ritholtz brings a fun and engaging edge to the podcast. He also appeared in Covel's documentary film "Broke". Ignore his wisdom at your financial peril. Free DVD: www.trendfollowing.com/win.
Michael Covel talks about the incessant search for the "new new thing". He quotes author and blogger Seth Godin and his article, "The Decline of Fascination and the Rise in Ennui". Covel notes how the only constant in life and trading is change. Uncertainty is the root of trend following and if you have a philosophy that's grounded in change, you'll have a strategy that responds well to the world of ebbs and flows. You'll have a strategy that won't leave you blindly sitting there and will let you participate when a market either goes up or down. It won't leave you at the mercy of the latest "new new thing". So, which strategy can make you money in unending change? Trend following is a fantastic option. Covel goes on to quote Michael Mauboussin and notes the importance of process vs. outcome and the tricky subject of luck: "If you compete in a field where luck plays a role, you should focus more on the process of how you make the decisions and rely less on the short term outcomes. The reason is that luck breaks the direct link between skill and results. You can be skillful and have a poor outcome, or unskillful and have a good outcome." Covel discusses the criticism of people that expect positive trend following performance every month. Look in the books, look at the charts--trend following is a long term strategy. As Covel has said in the past any strategy that gives you a steady 1% a month is probably Bernie Madoff or Long Term Capital Management (i.e. soon to be exposed or busted). Covel goes on to quote an article by PFP Wealth Management regarding the essence of trend following. Covel also uses the classic Pixies song, "Debaser" and notes that it has about as much to do with your trading as turning on CNBC or Bloomberg. Think about it. Free DVD: www.trendfollowing.com/win.
"Mr. Serenity" Tom Basso, the trend following trader famously featured in Jack Schwager's "New Market Wizards", returns to the show to speak with Michael Covel. This time, the focus is on questions posed by listeners. Basso and Covel go over the questions and talk about subjects such as the video of philosopher Alan Watts that Covel discussed on a recent podcast that asked, "what if money was no object?"; how Basso manages his emotions during both losing and winning periods; what drove Basso to "enjoy the ride" and whether there were periods in his life when it was difficult to do so; exit strategies on winning positions; Basso's use of hedges; the process behind taking a developed system from testing to live trading; what Basso learned from his earliest large drawdown; Basso's use of money management and risk control; Basso's advice to the first time programmer; how to handle skeptics of trend following; whether Basso considered the notion of serenity from the very beginning of his career; the career of John W. Henry; Basso's coin flip entry method, and the importance of exit strategies; percent betting; diversification; what would cause Basso to stop trading a particular system; comfort with uncertainty; Basso's views on initial capital at risk vs. unrealized gains; and fighting against your gut reaction when your system tells you otherwise. Basso brings a wealth of knowledge in answering these listener questions, so hop on and (as Basso says) "enjoy the ride".
Note: This original #83 episode has to been updated to include all Basso interviews so far. 4 hours plus!
As America approaches Thanksgiving this week Michael Covel is feeling reflective. He plays a speech by author and philosopher Alan Watts asking, "What would you do with your life if money was no object?" Covel shows you how you can make money, but asks: What will you do with it once you have it? It's about freedom, it's about finding options. It's not just about protecting it once you have it. So once you have the money you need what are you going to do with it? Covel goes on to discuss the importance of making something of yourself; of not sitting there and completing the dry obligations of the day. You need a shake-up in your life. It's time to find something different. Next, Covel plays a talk by author and blogger Seth Godin. Covel riffs off Godin's Q&A session noting the importance of finding something you truly feel passionate about, but knowing that it might not necessarily mean you'll be the next Apple. The important thing is to start now; don't wait until you finally realize the industrial revolution is over. You don't have to have a plan--just put yourself into motion. That's what Covel did: Start with your passion, and figure out how to pay the bills around that. Whether it's investing, building a business, entrepreneurship, or anything else (like trend following). Godin is great at explaining that accepted systems are dead. You have to create and use your own microphone to get your message out. Covel also discusses resistance, being able to survive to play the next hand, the importance of bet size, and diversity in your betting. Don't become emotionally invested in one idea; you might have to adjust within the place that you love. Next, Covel talks about a recent experience he had with government bureaucracy with regard to an international deal and how his experience might hint at future ills. Free DVD offer: www.trendfollowing.com/win.
Michael Covel analyzes a recent interview from famed trader Hugh Hendry of Eclectica Asset Management given at the Buttonwood Gathering held by The Economist. Hendry is not a trend following trader--at least publicly--and Covel gives some insight on how some very important trend following ideas have made their way into Hendry's work. Unlike Covel's comment on David Harding's interview from several weeks ago, this analysis is not about the skewed media perception of trend following, but rather how big name traders like Hendry use trend following philosophies in their trading, even if they would deny the label. Stick with it as Hendry talks about some of his fundamental views, because the trend following principles sneak up on you later in the interview. A narrative and a story is important in trying to sell yourself, and some of Hendry's thoughts belie the fundamental perspective on trading he presents to the public; Covel helps to read between the lines and see the underlying trend following thread inherent in Hendry's work. Covel comments as Hendry gives his thoughts on central bank manipulation and the consequences of those actions; how Hendry doesn't want to hear from the ridiculous analysts that can't help you in buying, selling, allocating to assorted markets in your portfolio, having a bet size strategy, and having a risk management strategy; how he made 50% in October of 2008 (and how this leads Covel to believe some trend following strategies might have been employed); and how Hendry is a student of uncertainty.
Michael Covel speaks with Robert Greene, the bestselling author of the classic book, "The 48 Laws of Power", in addition to other bestsellers such as "The Art of Seduction", "The 33 Strategies of War", and "The 50th Law" with musician and entrepreneur 50 Cent. His new book, "Mastery" is out. Covel and Greene came together through their mutual friend Ryan Holiday (author of "Trust Me, I'm Lying"), a past guest on Covel's podcast and a former apprentice of Greene. Covel talks to Greene about the influence "The 48 Laws of Power" had on Covel's own writing; using the 48 Laws as a defense strategy rather than as a cutthroat offense; some of Greene's early influences that led him into his writing career; using Zen Buddhism and meditation as a tool to gain perspective and focus; the importance of using your unique life experiences in your career to create an irreplaceable style; and embracing opportunity. When "The 48 Laws of Power" unexpectedly pushed a button in the hip-hop community, Greene and musician 50 Cent began a collaboration that eventually became "The 50th Law". Covel and Greene discuss the stories surrounding their collaboration, why 50 Cent should be taken seriously as an entrepreneur, and how he embodies the paradigm found within Greene's new book, "Mastery". On the subject of "Mastery", Covel and Greene discuss how Greene mined the biographies of both contemporary masters and masters throughout history to discover how these people reached new levels and developed a different kind of intelligence. These people are highly creative, can connect ideas in a way that no one else can, and have become masters in their own respective fields. Greene made the startling discovery that genius, talent, luck, and intelligence did not lead his subjects to this power. Rather, they went through a process: They went through apprenticeships, mentored with the right people, knew how to observe what was happening around them, absorbed all of the rules of their field, developed skills, and had many failures. They aren't superhuman. They went through a process that Greene discusses in extremely clear terms in his new book. Greene makes the case that given the competition in today's world, becoming a master in your field is the only way to achieve true success. Special offer DVD: www.trendfollowing.com/win.
Michael Covel starts with "It Was a Very Good Year" by Frank Sinatra because what's more useful as a human being? Is it more useful to get all geared up about elections, or to listen to a Frank Sinatra sing a nice walk through life. A pleasant, easygoing way. Of course, the pleasant easygoing way is better. Covel discusses what the election means for both sides, even if he doesn't seem to care one way or the other: On the conservative side, if you keep running social issue candidates, you'll never win an election again. To the liberals, if you think the government can give you economic freedom, you'll never have economic freedom. So, where is Covel going with this? He goes the Frank Sinatra way, the go-with-the-flow way. Every couple of years, someone says "trend following is dead". Usually it's right at the time trend followers have a drawdown. The idea is to have your wins far outweigh your losses. You'll have volatility in your returns. Life is volatile and you can't predict what's going to happen. You can only make your bets, have stop losses in the market, and say "I'm going to get out if I lose this amount of money". Covel quotes Jason Gerlach of Sunrise Capital (a firm with a 30 year track record of success) as a response to those that say "trend following is dead": "Trend following is no more dead than the sport of sailing or the act of kite flying would be considered dead if, for a period of time, the wind didn't blow. Like a sailboat, or a kite, a trend following trading model is designed to capture the power of environmental forces. When the requisite environmental forces don't occur for stretches of time, activities that depend on those environmental forces are not going to be successful. Once the winds started blowing again, sailboats will sail, and kites will again fly. The same holds true for trend following. Just as the wind will always return to blow in the future, the forces that drive price trends: greed, fear, euphoria, panic, will return at some point, and when they do, trend following trading models will make a great deal of money." Covel again notes AQR's paper discussing trend following's positive returns dating back to 1903 as evidence of this. Yes, there's a chance wind will never return, but do you want to bet everything on that?
Michael Covel talks about his upcoming trip to Asia (with a special song intro for Korea). His plans include a speech in Tokyo, time spent in Singapore, Bali, Penang, KL Thailand, with various speaking events throughout. Covel's Asian odyssey is sure to be documented in the podcast. Covel also thanks the listeners for the success of the podcast. People feel stuck, and Covel talks about Stephen Cope's "The Great Work of Your Life: The Guide to the Journey of Your True Calling". Most Americans don't want to be on the endless treadmill, and maybe trend following is a way to get the freedom that you need in order to find your calling. Next, Covel discusses a quote from Bob Prechter, of Elliott Wave fame. Covel doesn't think that predictive techniques work, but Prechter had a fantastic piece of writing that Covel shares that analyzes some of the Fed actions in the past compared to what they're doing now. Covel contemplates what this might mean, and how it shows the Fed might be in a panic. But what does this mean to a trend following trader? Very simply, it's just another reason to employ a trend following strategy. If the Fed has dampened speculation in the past by raising interest rates to pop a bubble, and today you've got markets right back at the all-time highs but rates are still at 0%--what might this mean? If this scenario is accurate, what strategy do you employ? You can either trust the system, or you can put in place a strategy that only places trust in price action. Look at what Prechter says to inspire you to become a trend following trader. So how do you adjust? Covel goes on to discuss how to get "unstuck" quoting author Seth Godin: "Starting without seeing the end is difficult, so we often wait until we see the end." Next, a quote from Atul Gawande that talks about knowing your fallibility, and the importance of practice and nurture (in trend following). Covel also discusses an upcoming massive searchable .PDF file that he's putting together featuring 15 years of research containing background documents, systems, and other research materials. Covel's special offer new DVD: www.trendfollowing.com/win.
Michael Covel talks with Michael Mauboussin. Mauboussin is an author ("More Than You Know", "Think Twice: Harnessing the Power of Counterintuition"), investment strategist in the financial services industry, professor at the Columbia Graduate School of Business, and serves on the board of trustees at the Santa Fe Institute (an independent, nonprofit theoretical research institute). Mauboussin joins Covel to discuss his new book, "The Success Equation: The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing". Covel and Mauboussin discuss luck and skill, how they cross over and play off each other, and how both of those factors have played a part in both Covel and Mauboussin's careers. Even though their strategies may differ, the foundational elements in Mauboussin's work applies to Covel's trend following world perfectly. Covel and Mauboussin also discuss how Mauboussin came to start working on "The Success Equation"; how losing on purpose can define skill; how sports can provide great examples of what Mauboussin contends regarding skill and luck; the human desire and emotional need to tell stories, and how that plays into peoples' difficulty untangling skill and luck; Stephen Jay Gould's notion of the .400 hitter in baseball and the paradox of skill; physical limits and improvement in skill over time; sample size issues; process vs. outcome; what to do when you're the underdog and how complicating the situation can help when you're in that position; improving your guesswork on where you are in the luck-skill continuum; persistence and predictive value; and building skill. A must read new book! Special offer new DVD: www.trendfollowing.com/win.