Bill Miller ‘Gets’ Trend Following
The first edition of
Trend Following hit the streets in April 2004. Almost immediately,
the book made a splash landing in the top 500 of all books available at
Amazon.com. Soon the success of the book brought me in contact with an
assortment of even more Wall Street pros. Late that same summer, Richard Cripps,
the Chief Market Strategist at Legg Mason, wrote a review of Trend Following.
Following his review, he invited me to their Baltimore headquarters for lunch
with his colleague, Timothy McCann. We had a great conversation regarding my
book and the Legg Mason Equity Compass, a systematic trading model for stocks.
After our conversation, Richard escorted me up a flight of stairs to a
non-descript door. I had no idea where I was headed. Upon entering the room, I
was surprised to find it filled with what I could only guess were young
investment banking associates listening to a speaker who stood before them at a
podium. Michael Mauboussin, Legg Mason’s Chief Investment Strategist, smiled and
motioned for me to sit down. I quickly recognized that the speaker was Bill
Miller, the renowned fund manager of the $20 billion dollar Legg Mason Value
Trust. Bill Miller has beaten the S&P 500 Index for 14 straight years. Miller
continued to speak for a few more minutes, and then introduced me to the
audience and invited me to the podium. Until that moment, I had no idea I would
be asked to speak. For the next hour, Miller, from one side of the room, and
Mauboussin, from the other side, alternately peppered me with questions about
trend following, risk management, and technical analysis. As I continued to
field questions, I realized that the audience was primarily fundamentally
trained, but very curious and open to hearing about new ideas and concepts.
After the presentation, I thanked Miller for the
opportunity to make my case. I asked him how he found out about my book. He
said: ‘I read a lot. I surf Amazon.com for all types of books. I came across
yours, bought it, liked it, and told all my people at Legg Mason that they
should read it.’ At that moment, I knew Trend Following was catching on in a big
way. Forget sales – I knew that if the book’s message had struck a chord with
Bill Miller, I was on to something.
(However) as every author knows, especially
first-time unknown authors writing about relatively obscure subjects such as
trend following trading, you spend a significant amount of your time on the road
promoting your book. Since I fit the definition of ‘first-time unknown author’
to a tee, that’s exactly what I did, with no idea whether Trend Following would
sell ten or ten thousand copies. To my delight, the book has sold tens of
thousands of copies and is being translated into a surprising number of
languages. But as a result of the book’s success, I soon found myself point man
for confusion about the strategy and performance of trend following style
traders. With each forecast of doom, usually in the form of book review, column,
and/or interview, I tried to ‘set the record straight.’
I’d usually start by addressing the assumption
that generates much of the confusion in the first place – the efficient market
hypothesis. The hypothesis essentially says that you can’t find an edge to beat
the market, and simply sticking with a benchmark or index is the best path to
take for profit. Proponents of the efficient market hypothesis argue that
because markets are efficient and prices fully reflect all information, traders
who consistently outperform the market do so out of luck, not skill. Of course,
in the real world, markets are both efficient and inefficient, some more than
others. In the real world, there are traders who do beat the market by a wide
margin, and many of them are trend followers. But great trend trading does not
translate into only up years. 2004 and 2005 have showed both the typical trend
following drawdown and the typical trend following recovery. What accounts for
the patience, discipline, and commitment to long-term success as a trend
follower? It may ultimately be about making a profit, but it is also an
understanding and keen appreciation for the scientific method. Just as
scientists start with a hypothesis, trend followers start with a certain view of
the world. Their divergent view sees the world in trends. Facing the reality of
any and all market environments head on is the philosophical foundation of trend
following.
Note: Above excerpt from November 2005
Trend Following: How Great Traders Make Millions in Up or Down Markets, New
Expanded Edition.
Michael W. Covel is the founder and
President of Trend
Following. A researcher of the most successful Trend Following investment
managers, he has been in the alternative investments industry consulting on
Trend Following to individual traders, hedge funds and banks for ten years. His
best selling book,
Trend Following: How Great Traders Make Millions in Up or Down Markets, New
Expanded Edition (Prentice Hall, November 2005) is a complete and
concise guide to trend following. It includes interviews with great trend
followers who have won millions if not billions in the market. The trading world
has embraced the book with endorsements from Van K. Tharp, John Mauldin, Ed
Seykota and many more. Trend Following is now in its fifth printing, and is
currently available in a Japanese translation with Chinese, German, French,
Korean and Russian translations soon to follow. Teaching and sharing unique
insights about Trend Following trading and alternative investments has earned
Mr. Covel respect as a rational and logical voice in uncertain times. Mr. Covel
also writes for numerous industry publications including Your Trading Edge,
Stocks, Futures and Options Magazine and International Petroleum Finance and is
consistently quoted and interviewed by a variety of financial publications.
Mr. Covel is also Managing Editor at
TurtleTrader.com, the
leading Trend Following news and commentary resource since 1996. Thousands of
visitors from more than 70 countries as well as hundreds of trading
professionals engaged in years of debate and interchange making the site the
rich archive of trading information, data and opinion that it continues to be
today. TurtleTrader, one of the largest & strongest trading community on the web
with over 7.5 million unique visitors since its inception, also functions as a
resource center for the Trend Following Educational Course.