Confused traders can make you money
Let’s face it: many are
flat out confused as to what steps to take to consistently have the chance to
make money in the markets. That confusion is opportunity. In a dog
eat dog world we all need people throwing good money at bad ideas. Good money at
bad ideas invariably finds it’s way to those using good ideas. Never forget the
zero sum world
we live in. That said, confusion persists. Consider an email I recently
received:
“…sometimes the “intuitive feelings” are right.
Remember Jesse Livermore who had a hunch before the earthquake in San Francisco
1907 and sold big the shares of a railway company? Well, it was definitely an
intuitive move. If you observe the markets for long, you develop sort of a sixth
sense and you can guess even the weekly moves of stocks, although not 100%
accurate. Sometimes hunches are good, but they cannot form a system.”
Intuition can definitely play a role in success.
But the word “sometimes” is the problem here. “Sometimes” is not a term you can
rely on. How do you quantify it? On top of that, why would it matter if you were
100% accurate or not? Trend followers, and other great traders of other styles,
don’t sit around with the goal of being 100% right. I have always maintained
that chasing “accuracy” as the Holy Grail is fool’s gold (MP3).
Worse yet for this trader he doesn’t consider that his wrong moves may go to pad
the bank account of a trader with the right moves. But even when traders start
to digest the idea that losing traders can be good for you and we need plenty of
them, it doesn’t always click. Consider a gentleman who wrote me last week:
“I have been reading your book and learning from
it. I have a question. You frequently site the winners and losers during
particular historic events. There seems to be some implication that the money
that was lost by one was gained by another, but there is no direct evidence of
this except the percentage gains and losses of these traders at this time. What
I mean to ask is, for example, in the Barings situation was John Henry short the
Nikkei while Leeson was long, or were the gains of others made in different
markets. If the gains of others were made in different markets, how do you
justify the position that certain traders took the money that another lost? The
same question could be asked of LTCM and the others. Please respond I am very
interested in what you have to say on this subject.”
I do think this explanation is made clear in my
book “Trend Following”. The evidence presented is far more than just “some
implication”. However consider further this statement from John W. Henry
made shortly after the release of my book detailing Barings and
zero sum.
Consider too this statement from a large fund that was on the other side of LTCM.
Interestingly, here is an original promotional document from Long Term Capital Management (10 MG).
LTCM still 7 years later is a fantastic case study and a monster cautionary
tale. You can read about those who won LTCM’s losses in Trend Following,
understand the background in the book When Genius Failed:
The Rise and Fall of Long-Term Capital Management by Roger Lowenstein and read a
great white paper from the CATO institute on LTCM.
If my conclusions were wrong, the naysayers would
be out in full force presenting a valid counter argument. In some ways even
people that seem to get the lessons are afraid to accept their conclusions. Look
at the gentleman above who seems distraught at the possibility of winning the
mistakes of bad market players. Why would he feel that way? He doesn’t seem to
understand that as long as he has that attitude he could very well be the next
loser giving his money over to a winner in the zero sum game.
Jim Cramer: Creating More
Confusion?
In the eternal search for market “hype” I noticed
BusinessWeek’s recent article on Jim Cramer titled The Mad Man Of Wall Street.
An excerpt:
“Cramer hits a button, and a haunted voice from
above yells, “the house of pain!” to cue his cameramen to run to the right. From
Cramer’s cartoonish-sound-effects console comes the roar of a bull. “O.K., home
gamers, listen up: This is what the bottom looks like!” he hollers through a
megaphone. “You need to start buying ’cause stocks are going to rise!” he says,
later adding: “The Fed’s job, which is to kill the economy, is almost done!
Pretty soon Greenspan is going to be in Sunrise Senior Living.”
I understand this is a very popular show with a
loyal audience. However, if you watch this show everyday does Cramer tell you?
1. What to buy or sell?
2. When to enter exactly?
3. When to exit with a loss?
4. When to exit with a profit?
5. How much of your limited capital to “bet” at any one time?
If he doesn’t do this for you what’s the point of
watching?
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 (Prentice
Hall, May, 2004) 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.