Here are excerpts:
Art Collins: Discuss how you became a trend following advocate.
Michael Covel: Going back a ways, even before Richard Donchian, some very bright people started to realize that the whole notion of having all the fundamental data in the world didn’t address the most pertinent questions. You still have to decide, when exactly do you enter, when do you exit, how much do you bet, and what will your total portfolio consist of. Those kinds of questions don’t get answered just by having all the fundamental facts in the world. Many trend followers tended to arrive at their understanding independently of each other. They were scientific in their approach and they knew they had to come up with a method that would answer those kinds of questions. Interestingly, after my book came out, I found myself giving advice to otherwise sophisticated people who don’t “get” trend following. I sat down the other day with a very large hedge fund that was closing in on a billion dollars with just a small select group of principals. They were more comfortable making an allocation to a fundamental trader trading one market alone. They just couldn’t wrap their arms around the idea of trend following being a skill set that works across all markets. I’m getting that kind of response.
Art Collins: These are valid arguments regarding the downside of fundamentals, but why do you advocate trend following in particular instead of some other technical approach?
Michael Covel: Tell me another technical strategy where you can find over a dozen traders with similar trading methods and [profitable] records, month by month, over 20 plus years. There has been a group of trend following traders with consistently good performance results over a very long period of time. You can look at that data. That was the nexus of my book-how could I write it if I didn’t have [corroborating] data? It would have just been my opinions. There are all kinds of books out there telling you to try other approaches-try Elliot Wave, try this, try that. There was no data behind it. I’ve followed people who are trend followers not only by their own admission, but their performance data bears them out. Some people in the last few years have tried to sell themselves as not being trend followers, but the performance data clearly shows they are.
Art Collins: So you’re a trend following advocate, which explains the theme of your website. Why did you name it after the turtles?
Michael Covel: The turtle story in Market Wizards [by Jack Schwager] was an introduction. My first response, like a lot of people was “Wow!” Then I asked myself, “How do you figure this out?” The dozen or so [participants] were given knowledge and then they all became Golden Children. They were given the so-called “Secret To Success”. We didn’t have any great thought process behind the name we chose for the site. It was more like “Let’s go ahead and break down the mythology of the Turtles.” Once the site was named, you could, in hindsight, have said it would have been more clarifying to name the site “Tend Following.” On the other hand, going with TurtleTrader.com really did help break down the mythology and get people to understand there are no secrets. I can’t recall off the top of my head if [Schwager] espoused that they were trend followers. If he went even that far in the book, it was disguised somehow. Maybe he didn’t even know. Whatever was behind it, the Turtles did come across as something very mysterious, their technique was unknown, and for that reason, they got a great PR run until we helped break it all down.
Art Collins: They still seem publicity-shy for the most part, which is strange considering Dennis, by his own admission, has moved away from Turtle methodology.
Michael Covel: It was a different time and place, but I think the whole legend probably helped many Turtles raise money for a long period of time.
Art Collins: So from a PR standpoint, it was better that they not talk?
Michael Covel: Yeah. They were the mysterious Turtles who produced these fantastic returns. I don’t really think the Turtle legend applies so much today, and in fact, I might argue that the air of mystery that some of them thought worked so well early on might have in the long run hurt them. There was a period of time in the late 80s, early 90s where the mysteries of markets were more acceptable. Today, people just want to know, “Ok, come on. Tell me what’s going on. Let’s talk.”
Art Collins: So they were deliberately going for some sort of trader cross-section?
Michael Covel: Given the diametrically different results of how some of these folks turned out, it makes sense. I think you’ve also got to consider Dennis’ point about when they were under his control verses later on. I think he was also trying to prove something about ambition and the passion to become an entrepreneur. What people forget is, if you’re selected to be a Turtle under Rich Dennis and he gives you a system and he gives you money, and he says, “go do it,” what’s the risk for you? When you have to become Jerry Parker or Paul Rabar [two that turned out great on their own] and go out and start a business, hire people, and worry about paying the bills, that’s where the risk is. Some of those guys like Parker and Rabar got that part of it and some of them didn’t. That could be a differentiating element.
Art Collins: So maybe part of the Dennis/Eckhardt debate was “can people be trained well enough to become independent trading entrepreneurs?”
Michael Covel: Well, there were five years between the time he hired these folks and the time they went out on their own in 1988 or so. Do you think he was thinking that far ahead? I don’t know. But again, Paul Rabar is approaching a billion dollars under management. Jerry Parker is [in the billions]. Then others are either out of the game entirely, or if they are in the game, aren’t doing much beyond tooting their Turtle horn. It’s the entrepreneurial thing. I can only go by what Rich himself said, but it dovetails with my theory. He turned on the lights for them. He supplied the brokers, the money and the system. When that stopped and they were faced with “oh my gosh, do I want to do this on my own? Can I do it on my own?” It brings in a whole slew of other factors such as how do really you make something happen in life?
Art Collins: Although the wide swings you’re routinely forced to endure are a big drawback of trend following, wouldn’t you say?
Michael Covel: I did a radio interview with Bloomberg [recently] and got asked a similar question. I said that if you’d been long the Nasdaq since January of 2000, you’re still in the middle of a 60 percent drawdown five years later. I can’t think of any bigger swing than that. I think all trading is risky. It’s all about having knowledge and understanding what your strategy is and where you’re trying to get with it. To some degree, I have a complaint with the CFTC [Commodity Futures Trading Commission] there, because the CFTC forces trend followers to wear their worst drawdowns like the Scarlet Letter. They force a lot of risk disclosures, and that’s all fine except that nobody else has to do that. A lot of these other trading approaches kind of get a cakewalk in terms of scrutiny. It makes investors feel like trend followers or CTAs [Commodity Trading Advisors] or futures market traders are more “risky”, but I get back to my Nasdaq -60 percent drawdown five years later [investing in equities]. If that’s not risky, I don’t know what is.
Art Collins: What should someone devising trend following systems be shooting for, besides the obvious answer of potential for making money?
Michael Covel: That depends on the person. Some of the folks I’ve been talking to shoot for lower return and lower risk. Others go balls to the wall and try to make as much money as possible shooting for absolute returns.
Art Collins: Let’s ask it this way: considering the issue of large drawdowns and givebacks, is there a prudent or optimal approach to skinning the trend following cat?
Michael Covel: Do you skin it or just accept it as reality?
Art Collins: So you’re saying it’s all relative. Is there any methodology you advocate for ensuring you’re staying within acceptable risk parameters?
Michael Covel: From everything I’ve seen, the more you risk, the greater your chance for reward and the greater the chance for a steeper drawdown. It’s the risk quotient. There’s a great trend follower in London name David Harding who says “Look, I’m a risk manager and I can tell you precisely what we’re going to risk every day. But I can’t tell you what we’re going to make.” That’s tough for people to wrap their arms around sometimes. But that is reality. “Do you want to accept reality?” is the question for all of us.
Art Collins is the author of the book Market Beaters among others. He has been successfully developing and trading commodity systems since 1986. Shortly after implementing his first programs. Art exchanged his managerial position in an automobile dealership for his true passion. He became a full-time floor member of the Chicago Board of Trade.
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