07 May Trend Following With Michael Covel Podcast
Ep. 1: Mike Dever
- Two return drivers from stocks: Multiples and EPS growth
Ep. 2: Bob Pardo
Ep. 3: Charles Faulkner
- Risk is risk of loss. Anything else is just pretending. – Charlie Munger
Ep. 4: Mike Shell
- Active risk management is more important
- Think about what would break your system
Ep. 5: Nick Radge
- We are brought up to be right. We go to university and the people with better marks get the better jobs, get the better career, the highest salaries, the better lifestyle. So naturally when it comes to trading, people tend to go for a strategy with a higher winning percentage and they think there must be some kind of complex formula to do that. That’s just not the case at all.
- Simplicity works best because simplicity is robust.
Ep. 6: Covel on Trend Following
Ep. 7: Michael Shannon & Jim Byers
Ep. 8: Covel on Trend Following
Ep. 9: Damon Vickers
Ep. 10: Tom Basso
- Think about what your clients want. A great idea which is not understood by client is useless.
- Importance in this order: Psychology, money management, entries and exits.
- Focus on the process. The outcomes will take care of itself.
Ep. 11: Tim Pickering
- It is not enough to have good returns. This is running a business (hedge fund business).
Ep. 12: Covel on Trend Following
Ep. 13: Mark Melin
- Sharpe Ratio penalizes upside volatility, when upside volatility should be a good thing.
Ep. 14: Douglas Stewart
Ep. 15: Larry Tentarelli
- If you are ever going to make any money (financial independence), you are either going to work for yourself or work with money.
- Predictive technical analysis (pattern recognition charting etc) and reactive technical analysis (trend following)
Ep. 16: Francisco Vaca
- There is no wealth creation in the futures market. It is a zero sum game. However there’s also no wealth destruction. So is there a wealth transfer?
- There is a risk transfer from the hedgers, similar to the insurance industry.
- Does not necessarily agree that trend following does well when long equities does badly. Thinks that it’s just different. (i.e. low correlation)
Ep. 17: James Rohrbach
Ep. 18: Jack Schwager
- Rock climber and his “no adrenaline approach”.
- Know where to exit before entering a trade.
- Pick your stops based on what invalidates your trade, not based on how much you can risk.
- The best way to profit from bubble is to stay long. Bubble moves tend to be very smooth. After the bubble bursts the move is jagged.
- Markets behave differently in different environments – Ray Dalio.
- Put on trades where if you are right, you make a lot of money but if you are totally wrong, you don’t lose a lot.
- Ray Dalio’s point is: if you can find truly uncorrelated strategies, you can increase the return to risk ratio. He finds ideas with different return drivers. Not so much to correlations. Correlations are misleading and backward looking. Things that are uncorrelated can become correlated and vice versa. He puts together at least 15 core ideas that are different.
- Majority of investing and academic community sees volatility as risk. It’s not always so. For example, a strategy like selling out of money options: Most of the time return stream is smooth and enjoys low volatility but once in a while when market has huge move, the strategy can be hit badly.
EP. 19: Todd Miller
Ep. 20: Timothy Sykes
Ep. 21: Covel
Ep. 22: Mike Aponte
- He uses 0.4 Kelly Criterion for reduced volatility in Blackjack.
Ep. 23: Covel
Ep. 24: Tony Balize
- Trend following on stocks. One approach is to be long only. Another approach is long equities and short index.
Ep. 25: Covel
Ep. 26: Mebane Faber
- Learn lessons from the most successful in your field.
- 3 determinants in portfolio returns. Asset allocation, market timing and security selection. Most academics accept that most of portfolio returns come from asset allocation but Faber disagrees.
- Pursue active management where it’s possible. (i.e. private markets, micro caps etc)
- Generic trend following strategies are not return enhancing. The importance is in reducing drawdown and volatility of the entire portfolio.
- Returns can be enhanced by using relative strength.
Ep. 27: Scott Patterson
- Dark pools and HFTs
Ep. 28: Covel on Entrepreneurship
- Hunt your own food
Ep. 29: Mike Dever
- Human nature does not change
Ep. 30: Covel on thinking outside the box
Ep. 31: Jason Gerlach
- Accept the unknown, embrace it
Ep. 32: Covel on Zen
Ep. 33: David Stendahl
Ep. 34: Gil Morales
- Losers average losers (averaging down) – In denial.
Ep. 35: Patrick De Villiers
- Every investor is a great investor on hindsight.
- After failing at predictive strategies, looked at the successful investors around. Decided to focus on trend and outlier moves.
- Risk asymmetry is similar for oil exploration and venture capital. Small losses, potential big wins.
- Trend following is not sexy enough for the money management business although media likes behavioural finance.
- Likes the fact that majority of the world is long only because that means more money for trend followers.
Ep. 36: Covel on entrepreneurship
- Take personal responsibility for your life.
Ep. 37: Ryan Holiday
- News funnel: Everything happening > journalist exposed to > journalists write about > published > everything consumers exposed to
- The difference between the new rich and poor might be the access to Quality information versus the crap information found everywhere in the internet.
Ep. 38: Brad Rathe
- Learnt from Liz Cheval her humility and how unemotional she is to extreme events.
Ep. 39: Eric Prentis
Ep. 43: Van Tharp
- Position sizing most important
Ep. 45: Howard Getson
Ep. 46: Ralph Vince
- Very important to articulate your criteria: for e.g. pension funds have clear criteria to meet i.e. 4% liability in certain year. All investors need to be able to clearly articulate their criteria.
Ep. 50: James Altucher
Ep. 101: Covel on Apple
EP. 109: Covel on Richard Russell and Dow Theory
Ep. 118: Covel on The Trends of China
Ep. 120: Covel on Trading, Not Taking
Ep. 224: Tom Dorsey
- To succeed in this business I had to become expert in one area. I cannot be a general practitioner
- Runs portfolio using Point and Figure
- There is no more Wall Street, it’s California Street
Ep. 224: Covel on media vocabulary
Ep. 316 Gary Antonacci
- In academic world momentum means relative strength
- Relative strength momentum is also called cross sectional momentum
- Absolute momentum to practitioners is called time series momentum to academics
- Likes to combine relative and absolute momentum. Relative as investment selection and absolute as filter
Ep. 319: Salem Abraham
- Oct 1987 eurusd move: 37 standard deviation move. Dec 2014 usdchf move: 45 standard deviation move. Be careful of standard risk measures
- Take small risks. Diversify across markets
- Don’t do good deals, do great deals
- Location independence. You can be anywhere
- Trade as many uncorrelated markets as possible
Ep. 323: Jerry Parker
- Have multiple exits. It’s all random. No one knows when is the best time to get out. Get out at multiple places and timeframes
- The entry is the most important. (and by that he means doing the trade.) Can’t afford to miss the big trend
- Being able to go short is important for diversification and risk control
- Use the same system on all markets
- Weight the trades/markets equal. Non-correlation is important
Ep. 328: Robert Seawright
- Uncomfortable with outlook and predictions even though he does it in his professional roles.
- While it’s easy to prove that markets are inefficient, its also difficult to consistently beat the market. For most investors most of the time, it would make sense not to find the next Seth Klarman and simply invest in the way that’s going to give you the best chance of meeting your goals.
Ep. 329: Terrance Odean
Ep. 330: Nigol Koulajian
- People chasing returns because it feels good
- It’s not about the super complicated Math. Less is more. Optimization can be highly unstable
- The lack of discipline or lack of integrity for some CTAs will become obvious during the next equity downturn
Ep. 331: Douglas Emlen
Ep. 332: Brian Proctor
- To avoid over optimization, use a blend of metrics or out-of-sample price series.
Ep. 336: Colin Camerer
Ep. 337: William Ury
Ep. 338: K.D. Angle
- Power of compounding. The compounding project.
Ep. 339: Tim Price
- To clear out a recession, let government do nothing.
- In current environment, asset rich benefits and disaster for savers.
- The debt level is currently higher than before Lehman collapsed.
- Three options:
- Sufficient economic growth to reduce debt
Ep. 340: Tim Ferriss
- Location independence. With a laptop and mobile you can work anywhere.
- 20-80 Pareto Principles
Ep. 341: Mike Dever
- Do not seek to optimise performance given inputs to get the best risk adjusted returns, on the efficient frontier
- Ask how to get the most predictable performance so that whatever results shown after running historical data through your model has a high probability of getting the same set of results going forward
- Retain predictability by trying to capture return drivers in its pure form. Similar concept to keeping the strategy simple to avoid over fitting
Ep. 342: Victor Ricciardi
Ep. 343: Ryan Holiday
Ep. 344: Martin Lueck
Ep. 345: Spyros Makridakis
- Less is more
Ep. 346: Gavin Serkin
Ep. 347: Kathryn Kaminski
- Momentum as a premium comes in spurts.
- Drawdowns happen in stocks too but people tend to be less upset due to perceived understanding compared to a black box.
- Return is very difficult to predict but risk can be managed and controlled.
- Diversification is allocating across risk.
Ep. 348: Covel
Ep. 349: Donald MacKenzie
Ep. 350: Michael Melissinos and Glenn Graham
Ep. 351: Covel on logical fallacies
Ep. 352: Tim Larkin
Ep. 353: Steve Burns
- Institutional money is not necessarily smart money
Ep. 354: Covel on Babe Ruth Effect
Ep. 355: Ed Seykota
Ep. 356: Covel on passion
Ep. 357: Jonathan Fader
- Focus on the process, not the outcome.
- Confidence is the sum of all your thoughts. You are what you think (eat).
Ep. 358: Covel on China Trip
Ep. 359: Campbell Harvey
- On the topic of skills versus luck. Great analogy: You have a bunch of 100 dices. Drop them on the floor, pick up the sixes. Drop the sixes again, naturally you will not get as many sixes this time round. (Sixes are the top performers).
- One of his papers found that CEOs are much more (10x) risk tolerant compared to general population. Thinking about this, (possible) they enter the firm as junior employee, take risks, got lucky and things worked out (risk takers who got unlucky drops out), rise to the top. Non risk takers remain at the middle.
Ep. 360: Covel monologue
Ep. 361: Francisco Vaca
- Defines short term as holding 8 days, medium term as holding 36 days and long term as holding 100 days.
- Short term systems can be traded now due to drop in transaction costs.
Ep. 362: Covel on speculation
Ep. 363: Blair Hull
- You have to get an advantage; you got to stay in the game.
Ep. 364: Covel on simplicity
Ep. 365: Chris Clarke
- The price knows more than I do.
- You need a proven edge that is sustainable over time. Like casino operators.
- Edge should be based on market truths.
- Market trends
- Volume confirms trends
- Trend following very tough to sell. Winton played down the concept and appealed to institutional investors.
- Risk management is most important.
Ep. 366: Covel on statistical mindset
- Computer is just a tool. Automate as much as we can.
Ep. 367: Eric Crittenden
- Relative momentum ends up concentrating positions in the more volatile securities.
- Absolute momentum is agnostic to volatility. For higher volatility securities there will be less exposure. For lower volatility securities there will be more exposure.
- Risk can be controlled through position sizing.
Ep. 368: Taylor Pearson
- Playing in the rules or playing with the rules
Ep. 369: Covel on market predictability
- Liz Cheval: “It’s not about learning from the tech bubble; it’s about learning that we are incapable of learning anything from the tech bubble. We may have learnt something in the short run but we will collectively forget it within 20 years. If you are not convinced that we are going to repeat the larger pattern like every generation since the Roman Empire, consider this, …it is mind numbing to study financial history because it is so repetitive. We don’t do sort of similar things over and over, we do the EXACT same thing over and over. We have followed this pattern over every major pattern starting with the coin mania in the Roman Empire. Tulip mania is my favourite example, … … the defining features of tulip mania are identical to the features of every market boom and bust right up to the latest tech bubble.
Ep. 370: Covel on Instruments vs. Strategy