Michael Covel: Trend Following 101
Peter Coyne: Mike, first of all, welcome to Agora Financial. We’re excited to bring your work to our readers.
Michael Covel: Thanks. Great to be part of your team. I’m glad you’re taking the initiative to expose this powerful strategy to your readers.
Coyne: That’s what I want to discuss with you. Could you briefly explain the main idea behind the trend following approach?
Covel: The basic approach is that nothing is predictable. I’ll reiterate, because this is absolutely crucial, and it is regularly disregarded by most market participants: There is absolutely nothing that can be predicted!
Trend followers simply say: “We’re going to follow along.” We’re the silent partners. Whichever way the market moves, that’s the way we’re going. And that’s how we’re able to profit in up and down markets.
If you’re happy with 5–10% gains you can make from the “buy and hold” approach, trend following is not for you.
Our goal is to make “knock your socks off” returns by capturing big, unexpected trends.
Coyne: But if making predictions is not part of trend following, how does it work then?
Covel: It works by way of prices, the best indicator in the world. If the price of any stock goes up, then that is a clear indication of market participants willing to buy at higher price. This is also true of prices falling.
All of this is based on the idea of a pro-cyclical momentum or trend: If something goes up (or down), it will likely continue to go up (or down).
Here’s the bottom line: If you want to make the big money, price is the only thing that matters. Everything else is useless. CNBC, news, fundamentals, broker opinions, talking heads, etc.: That’s all noise.
That’s all crap that distracts you from making money.
Coyne: But aren’t you oversimplifying things a little bit? I mean, how do you know these trends exist if forecasts are impossible?
Covel: This is what the stats tell us. Studies have shown that there have always been trends in the markets — in fact, for more than 800 years. I think that is a pretty valid basis for a trading strategy.
More important, I’ve personally met some of the great trend following traders over the last 30 years.
People like John Henry, who used his trend following gains to buy the Boston Red Sox for $700 million.
Or Bill Dunn, who made $80 million in 2008 when the rest of the world was blowing up.
Or Michael Marcus, who turned an initial $30,000 into $80 million simply by using a trend following strategy.
Ever since the first edition of my book Trend Following, I have met literally dozens of trend following traders managing collectively billions.
And a few years ago, I started regular podcasts with interesting people from the financial industry or related fields. Among them are many well-known names such as Nobel Prize winner Harry Markowitz (portfolio theory founder), Jack Schwager (author of the Market Wizards book series) and Marc Faber (fund manager and author).
These people come to my podcast because, like myself, they know trend following works.
But you’ll never hear about this strategy on CNBC or in the mainstream media. In fact, many of your readers probably have ever heard of at least two of the traders I’ve just mentioned. I know Faber’s a regular.
Coyne: So if trend following works so well, why do you think most people haven’t heard about it?
Covel: The entire financial industry wants to keep this strategy hidden from the general public.
For example, we all know CNBC makes its money from ads. They need ratings for that. So they cater to an audience of news junkies in an attempt to score ratings.
But you don’t need to watch the news to profit from trend following. Which is why you’ll never hear about it from CNBC. That would be like a bakery telling you don’t need to buy bread.
Same with the mutual fund industry and other financial advisers who keep telling you to “just buy stocks and hang in there.”
The industry spends millions through lobbying in Washington and propaganda (i.e., “academic research”) to keep trend following traders from advertising their performance.
Why do this? They have a stranglehold on the average investor that they don’t want to lose. They keep the average guy stuck in “buy and hold” dead-end strategies to spin off their massive fees.
That’s why I like to say that trend following is the truth the system doesn’t want you to know.
Coyne: How did you actually become aware of the trend following idea yourself?
Covel: I told this story in my book The Complete TurtleTrader. You may have heard about this famous story. It’s the true story of how a group of ragtag students, many with no Wall Street experience, were trained to be millionaire traders.
These traders are known as turtle traders. Well, in 1994, I read about the turtle trader Jerry Parker in a magazine. It was the first time I heard about trend following. He had made $30 million in one year, which made me curious.
It wasn’t just about the large sums of money… I was intrigued more by the question of how he had acquired the skills required to achieve such a feat. I found it fascinating that it was apparently possible to learn how to trade. Before that, I used to think that, like Warren Buffett, I would first have to master “value,” work at Goldman Sachs and trade on the basis of fundamentals.
After years and years of research, now I know this is all BS. Anyone can learn how to make huge sums of money in the markets.
Coyne: So why do you think trend following is better than other strategies?
Covel: Well, imagine putting your retirement on autopilot. Follow a simple set of rules and you’ll grow richer than you ever thought possible.
Sound too good to be true?
The turtle trader story proves it’s not.
I’ve personally met many people who became millionaires following this strategy.
You can certainly go the buy-and-hold path. But if you go that path, just keep in mind we’ve seen this in the past 15 years. Are you prepared to see no gains for 30 years or longer?
You may be feeling pretty good right now that stocks have been going up for the past few years. But we all know the stock market doesn’t always go up.
When the Fed rigs rates to boost stocks to unsustainable levels, bubbles, bubbles and more popped bubbles are normal. So can you really stomach your adviser telling you to ‘just hang in there’? Let’s face it…
This buy and hold/hope scheme will leave you underwater 20 years from now. Next time the market plunges 50% or more, will you be ready?
I know trend followers will be. Because we’re always ready to follow the market. We’ll be ready to pocket the big gains by investing in the direction of the main trend.
Coyne: What does your own trading style look like?
Covel: I have pre-defined rules that give me buy and sell signals. Trend following decision making doesn’t involve discretion, guesses, gut feelings or hunches. So I make no discretionary decisions but always know exactly what to do.
Coyne: How did you make these rules?
Covel: I’ll talk more about these specific rules in the future. But the whole strategy is based on extensive back-testing. I have computer programmers testing the ideas for me.
Coyne: What time frame do you trade in?
Covel: My investment horizon is long term because that’s where the largest movements occur.
In addition, you can enjoy a much better quality of life when you are a long-term trader… and don’t have to spend the entire day sitting slavishly in front of the screen.
Coyne: Mike, thanks for taking the time to talk.
As Addison unveiled yesterday and above, we’re launching a new endeavor with Michael.
We were confident the response would be positive. But frankly, it’s been even greater than we expected. If you missed it, click here now.
Wall Street likes to tell you it can’t be done, but Michael’s trend following strategy proves that you can make money in any market — up, down or sideways. Everyday people using his approach managed to double their money in 2008, for example, when everyone else was losing their shirt. One of Michael’s readers, Patrick, was so happy with his service, he wrote Michael to say, “Our full-year return in 2008 was in excess of 100%.”
Another wrote, “We have not had a losing year yet. We made just under 100% return in 2008. We can’t thank you enough for sharing the wisdom of trend following with us. Thanks again, Michael!”
The market just had its worst start to a new year ever. And it’s trending lower again. That’s why we think Michael’s proven strategies are the ideal way to go right now. Don’t delay. Click here now if you missed out yesterday.
Editor’s Note: Be sure to sign up for The Daily Reckoning — a free and entertaining look at the world of finance and politics. The articles you find here on our website are only a snippet of what you receive in The Daily Reckoning email edition. Click here now to sign up for FREE to see what you’re missing.