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Trend Following with Michael Covel

Bestselling author Michael Covel is the host of Trend Following Radio with 5 million listens. Investments, economics, decision-making, human behavior & entrepreneurship--all passionately explored. Guests include Nobel Prize winners Robert Aumann, Angus Deaton, Daniel Kahneman, Harry Markowitz & Vernon Smith. Also: James Altucher, Dan Ariely, Jean-Philippe Bouchaud, Kathleen Eisenhardt, Marc Faber, Tim Ferriss, Jason Fried, Gerd Gigerenzer, Larry Hite, Sally Hogshead, Ryan Holiday, Jack Horner, Ewan Kirk, Steven Kotler, Michael Mauboussin, Tucker Max, Barry Ritholtz, Jim Rogers, Jack Schwager, Ed Seykota, Philip Tetlock & Walter Williams. All 500+ eps at www.trendfollowingradio.com/rss.
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Bestselling author Michael Covel is the host of Trend Following Radio with 5 million listens. Investments, economics, decision-making, human behavior & entrepreneurship--all passionately explored. Guests include Nobel Prize winners Robert Aumann, Angus Deaton, Daniel Kahneman, Harry Markowitz & Vernon Smith. Also: James Altucher, Dan Ariely, Jean-Philippe Bouchaud, Kathleen Eisenhardt, Marc Faber, Tim Ferriss, Jason Fried, Gerd Gigerenzer, Larry Hite, Sally Hogshead, Ryan Holiday, Jack Horner, Ewan Kirk, Steven Kotler, Michael Mauboussin, Tucker Max, Barry Ritholtz, Jim Rogers, Jack Schwager, Ed Seykota, Philip Tetlock & Walter Williams. All 500+ eps at www.trendfollowingradio.com/rss.

Jan 15, 2016

Today on Trend Following Radio Michael Covel interviews Peter Gray. Peter is an American psychologist who currently occupies the position of research professor of psychology at Boston College. He is also a well known critic of standard learning systems, and calls himself an evolutionary developmental psychologist. He studies why children are the way they are by asking questions like: Why are children so playful? Why are they so willful? Why do children do what they do?

Peter starts the podcast off saying, “There is an issue with the resilience of young people today.” Since the 1950’s there has been an increase of psychological problems among youth. Counselors are being flooded with trivial issues that in earlier years students would have taken care of themselves. Roommate issues, bad grades, breakups, etc. are a few examples of issues students are now deciding they need to see psychotherapists for. It’s not that people are biologically different than previous generations, it’s that our world has become radically different than the past. Children used to spend a lot more time away from adults, where they have to make their own decisions. They used to learn how to deal with bully’s on their own or getting lost and having to find their own way home.

Peter argues that as long as we are overly protective of young people, they will never grow up. Kids need to have the time and opportunity to get out in the world and figure out what they really enjoy. We aren’t letting children experiment, take risks and fail. Even sports have been taken away from the kids. Adult directed sports don’t let kids have creativity to solve their own problems. Children learn the most from playing with other children and taking adults out of the equation. Kids who are “play deprived” have real social consequences. Peter shares an experiment done with young monkeys. One group of monkeys got to play with other monkeys their own age, the other group of monkeys were only around their parents, not other adolescents to play with. The ones who were not able to play were socially incompetent. They would either get overly aggressive or nervous around others their own age. Over the past 50 years there has been a continuous decline of play between young children. Hence, you can see the rapid increase in social and emotional disorders among youth. Michael and Peter finish up discussing ways of implicating free play back into society.

In this episode of Trend Following Radio:

  • Hunter gatherer cultures
  • Self-reliance
  • Evolution of development in youth
  • Pros and cons of video games
  • Ways of implicating free play back into society
Jan 11, 2016

Today on Trend Following Radio Michael Covel starts off talking about goal setting for 2016. He reads a 100 day fitness regimen for 2016. The challenge clearly lays out what is expected, and has concrete rules in place. In contrast, he plays a clip form CNBC with a headline that reads, “Stocks to buy and hold for 50 Years.” Michael tears their predictions apart. He says betting on others “current flavor of the day” stock picks are not how you want to plan your next 50 years.

“Top Stock Picks from 2016” is the next article Michael reads from. “Pro Michael Farr shares his best bets for the market next year including oil stocks, healthcare and consumer staples.” Farr starts off by giving an overwhelming amount of fundamental data to back up his stock picks. In the middle of giving his fundamental data however, he acknowledges that he does not have a crystal ball (and is guessing). He then goes on to guess oil prices will be higher rather than lower three years from now. Michael uses his statement as an example of prediction without foundation.

Michael moves on to diversification. If you trade in the direction of the stock pickers he brought on today, then where is your diversification? Research has shown that you need diversification. If you put all your money into Facebook or Chevron, as his market guru examples have told you to do, then where will you be in 10 years if those companies go the wrong way? Put together a diversified portfolio with rules for entering and exiting. Know how much you are going to trade. Have a plan in place so you can be successful.

In this episode of Trend Following Radio:

  • Diversification
  • Goal setting for 2016
  • Crystal ball prediction
  • The importance of rules in goal setting
Jan 8, 2016

Today on Trend Following Radio Michael Covel interviews Ron Friedman. Ron is an award winning social psychologist that specializes in human motivation. He is author of “The Best Place to Work: The Art and Science of Creating an Extraordinary Work Place.” His book consists of over 1,000 academic studies that have been boiled down.

Michael and Ron start talking about factors that contribute to employee dissatisfaction. Ron says there are three main needs that we, as humans, need fulfilled: Competence, relatedness, and autonomy. There is clear evidence showing that when you have happy workers, you have a much more productive company. Free snacks and coffee, for example, make workers feel more at ease and productive in their workplace. Michael then asks, “How do you define a ‘workplace’.” Ron says that work use to be just confined to an office. Now a workplace could be anywhere you have a cellphone connection. Michael then asks, “How do you create success in the workplace?” Giving employees the opportunity to fail is one way to create success. However, it is the risk taking chances that are encouraged, not failure due to incompetence or laziness. Failure helps you learn and to improve for the next time. That is how you get a creative and innovative team. Getting in the habit of physically writing down what you learned from your failures is a great exercise to help you move forward and grow.

Michael and Ron then move on to the idea of flow in the workplace. Flow is the moment where you are so enthralled with the work you are doing that you forget time. Flow is more common in work then we realize. Video games are a great example of providing a flow experience. Video games give us immediate feedback, immediate recognition, and they provide progressive difficulty. Unfortunately most work environments are structured opposite of this thinking. 80% of people are not engaged at their work. Not being properly challenged is one reason for lack of engagement.

Michael and Ron talk about actionable steps to make a workplace better. Ron says that our physical surroundings affect our mindset greatly. Ceiling height affects your level of creativity, and personalizing your work space makes you more comfortable. He discovered that employees that sit by a window focus better and do better at their job. You can predict how satisfied employees are by the amount of daylight they are exposed to. Afternoon naps are another great tool. We have a biological need for rest that is just as pressing as our need for food or water. If we re-stock our brains with a 20 minute nap, it increases productivity. On the same note, the food you take in and how much you exercise affects how you think. It puts you in a better mood, helps you collaborate better with others, and go home feeling more satisfied. This is critical to employees long-term engagement. Michael and Ron finish up asking “How do you see the workplace unfolding into the future?”

In this episode of Trend Following Radio:

  • Flow in the Workplace
  • Creating a good work space
  • Disconnecting from work after hours
  • Creating balance in your life
  • Importance of exercise and naps
Jan 4, 2016

Today on Trend Following Radio Michael Covel begins with a clip from the creator of the psychological concept of flow, Mihaly Csikszentmihalyi. The first question Mihaly asks is, “What is the meaning of happiness? If each one of us is responsible and in control of our happiness, then how do you obtain happiness?” People feel the most happy when they are able to express who they really are. When people express their strengths, they are able to say, “Yes, this is who I am.” It makes life suddenly matter and creates happiness. Mihaly came up with the term “flow” from people he would interview and study. When they would describe being truly happy, they would describe the feeling as being carried by a current and floating along.

Mihaly brings up a personal experience from fighting in WWII. He said when people lost their property and personal belongings, most would crumble. This is when he became interested in the differences between people who were able to be strong internally as opposed to those who needed to lean on society and what it could provide for them. He says, “Everyone is the master of their own destiny and should not allow themselves to be pulled by the strings of fortune or fame.”

Mihaly then goes into how to gain flow in your own life. The first step is to be totally focused on an intention. How can you organize your life so you can have that focus everyday? Flow rarely just happens. You have to work at it and prepare yourself mentally, but you can get to the point where you don’t have to think about what you are doing. It just flows naturally. Mihaly uses surgeons and rock climbers as examples. Both disciplines require great concentration and muscle coordination. Once you are in the zone, you aren’t aware of anything else such as being a father, husband or what you are having for dinner. You are there simply as a surgeon or rock climber, present in the moment, flowing from one task to another in order to accomplish the end goal.

Michael then goes on to play another clip from Csikszentmihalyi where he talks about the “struggling artist.” He makes the point that you don’t have to be tortured to be creative. He goes into a study he did that showed extraordinary people mostly come from lower class or upper class families. He found that people who came from a fairly comfortable childhood didn’t seem to find the need to stretch and challenge themselves. Michael brings it all together with a thought provoking excerpt from Alan Watts.

In this episode of Trend Following Radio:

  • What is flow
  • How does flow happen
  • Dealing with worry
  • Addiction to thoughts
  • How to obtain happiness
Jan 1, 2016

Today on Trend Following Radio Michael Covel interviews Dr. Jason Williams. Jason is author of “The Mental Edge in Trading.” While going to medical school Jason fell in love with the brain and psychiatry. He was fascinated with figuring out all the different ways the brain worked. While finishing his psychiatry degree at John Hopkins he started working on a research project giving psychology tests to traders. The goal was to see if they could find any common themes among traders and how they think during trading. There are many similarities and he has built up a side business helping traders get in touch with their mental game.

Jason uses a test called the NEO PI-R. He explains the differences between the NEO PI-R and other personality tests such as Myers Briggs. He says that if you take Myers Briggs, and take it again a week later, the results are different 50% of the time. Myers Briggs gives extreme generalizations. It simply says if you are an extrovert or introvert and doesn’t go much deeper. Jason brings up horse jockeys and basketball players as examples. You can be tall, but not tall enough to be a pro basketball player. On the same note, you can be short, but not short enough to be a horse jockey. Looking at the extremes is critical. You need to look at not just if you are tall or short, but actually ask, “How tall are you? How short are you?”

“Once I know my personality, then what?” Jason says you need to ask yourself: What are my traits? Where am I on the scale? How can I use these to my advantage? How are they getting in my way? The NEO is a 5 factor model; neuroticism, extroversion, openness, agreeableness, and consciousness. Each trait has six sub-traits. Jason goes into depth with examples for all of the personality traits. For the most part, everyone has a personality and is unique. Sometimes the test will show you some “A-ha” surprise moments that give you a little more self-awareness. However, most people are in the middle of a personality trait scale. According to the laws of evolutionary psychology you don’t want to be too high or too low on the scales. It could drown out the logical or rational side of the brain.

One common thread Jason found between traders was that most have very low anxiety levels. Knowing when you are feeling anxious in the markets but not having the anxiety be so overwhelming that you are not executing correctly is important. Anxiety is what pushes you on and is somewhat of a barometer. The successful traders are able to adapt a trading strategy to their personality. He says it took his father, Larry Williams, some time to realize that it was better to create systems himself and let others execute. Sometimes it is better to adapt to your personality than try and change it.

In this episode of Trend Following Radio:

  • Using your personality to your advantage
  • Psychology of trading
  • What is the NEO PI-R test?
  • Why anxiety is important in trading
  • Commonalities among traders
Dec 28, 2015

On today’s episode of Trend Following Radio Michael starts off discussing his travel. One of his stops in early December was New York City to meet up with a few legends, one of them being Larry Hite. He talks a bit about their lunch conversation and how Larry has climbed the ladder of success. Larry paints the picture that he was just an average Joe from Brooklyn, and his success is fully obtainable if the right desire and drive is there.

Today's subject on Trend Following Radio goes along the lines of the rest of his conversation with Larry Hite. It’s all about the data. Michael makes it clear that his career would not exist if he did not have the opportunity to dig into the trend following data. You see all types of trend following traders up in the same months and down in the same months–that means something. Doesn’t matter why it happened, just that it happened. Further, many make the mistake of not caring about the psychological. You can have the best system under the sun, but if you don’t have the psychological toughness to carry it out then the system does not matter.

Michael goes on to read from an article out of The Washington Post titled, “Jeff Samardzija just proved athletes would be foolish to pick NFL over MLB.” America’s favorite sport is football, hands down. The dream of just about every father in America is for his son to play professional football. However, all data says to stop right now and turn your focus to baseball. The article states, “The top 30 contracts in the history of team sports – ranked by total compensation – all went to baseball players.” When you compare average players in the MLB with top players in the NFL, the MLB still comes out on top. “Through this season, [Calvin] Johnson will have collected $113,816,086 in earnings, making him one of the wealthiest non-quarterbacks in league history. Samardzija, by virtue of the five-year contract he just signed with the San Francisco Giants, is guaranteed to have earnings of $122,725,000 – and have another chance to dip into the till in 2021, when he’ll turn 36.” Mike pulls the article back to trend following showing that trend following numbers have made it and persevered through ups and downs. It may not be the most widely known strategy, but the data is real.

In this episode of Trend Following Radio:

  • The success of Larry Hite
  • Baseball vs. Football
  • Trusting the data
Dec 25, 2015

Today on Trend Following Radio Michael Covel interviews Thomas Sterner, author of “The Practicing Mind.” Tom was in the same career for over 30 years when he decided to make a switch. He self published the first edition of “The Practicing Mind,” and as it snowballed into a phenomenon, publishers started knocking at his door for wider distribution.

This is about practicing focus and learning to calm your mind. Not an easy task in today’s world with media constantly telling us we are incomplete in what we are doing. People incessantly crave closure, but closure is not always the answer. Tom says that immersing yourself in something that is ongoing puts you in a place of “being.” People are always trying to complete the next level, but being in a state of constant expansion is the best state to be in. He says that even the process of writing books does not have a beginning and an end. He looks at it as an ongoing process. When one book ends, then you can move on from saying what you needed to say and move onto the next phase of what you want to be said. Tom shares a personal story about becoming a musician. For years he had felt inadequate as a musician. It took some time but eventually he figured out that he had accomplished many milestones throughout his career but because he had a limitless ability to expand and grow as a musician, he would never reach the state of perfection he envisioned. Almost in an instant, his frustration and negative thoughts about his accomplishments washed away.

The importance of repetition is Michael and Tom’s next topic. Your brain responds to repeated action best. This can vary from swinging a golf club over and over again, to how you meet people and interact with them. Tom says, “Attention combined with intention is the goal.” Your process and repeated practice is what makes achieving a goal feel so good. Anything you can snap your fingers and have doesn’t feel nearly as rewarding. He says that “Your perception of what good is and how good you can get is ever changing.”

Lastly, Michael and Tom discuss multitasking and living in the moment of now. Tom says that the way we envision multitasking doesn’t exist. When you think you are doing a bunch of different things simultaneously, you are not. The brain is operating at higher speeds but we are not letting our brains concentrate in one area for a long amount of time so in consequence, our brain is atrophying. We are losing that part of our mental game. Slowing your mind down brings clarity and thought. Secondly it connects your mind to what you are doing. If you are just reacting to whatever your mind is creating than you have no control over what you are doing. Mindfulness is not something that can be mastered. You have to constantly work at it just like you would never say “I have mastered fitness so I don’t need to work out anymore.” It is a constant practice. The moment you catch your mind running off is when you start training your brain. If you can recognize yourself chasing your mind then that is being aware of where it is going. Mike says, “It is like an organized treadmill that everyone is on. There is this lack of awareness among people that they are not in control.”

In this episode of Trend Following Radio:

  • Attention combined with intention
  • Non-judgment
  • Perils of multitasking
  • Controlling your mind
  • Constant media chatter
Dec 21, 2015

On today’s episode of Trend Following Radio Michael Covel starts off with a short clip from Star Wars. Michael notes that Yoda and the force have unexpected connections with trend following. He then recounts a story that happened to him a few weeks ago where he feels “the force” was involved. While he was waiting to take a red eye to Tokyo with his parents a man asked if he could share the power outlet he was using. That man happened to be one of the world’s most famous computing pioneers. Michael agreed to share the outlet if he could take a selfie with him. It was a weird serendipitous moment that Michael attached “the force.”

Michael goes on to read from an article titled, “Meet David Harding: The Man Behind Models that Beat the Market,” published in The Australian Financial Review. The article highlights Harding’s accomplishments and views on trading. Harding stresses in the article that the only reason systematic trading has gotten big over the years is because it works. Harding’s company, Winton Capital Management, goes completely against the efficient market hypothesis and he has actually made massive money going against the theory. David goes on to say that investment management is an internal psychological war with yourself. You constantly doubt yourself but the challenge is rising above that self doubt and sticking with your system. If you allow every emotion to be built into your system then you do not have a system at all.

“Over-fitting and It’s Impact on the Investor” by the Man AHL Academic Advisory Board is Michael’s next interest. Over-fitting is finding patterns that aren’t actually there. It is a common phenomenon in science as well as trading and other fields of study. Analyzing a companies culture is a good way to produce less over-fitting results. Michael quotes different view points regarding the concept of over-fitting, finishing up with inspirational quotes by NBA player Kevin Garnett and Christopher Hitchens focused on “making it happen.”

In this episode of Trend Following Radio:

  • Star Wars and “The Force“
  • Efficient Market Hypothesis
  • Over-fitting in trading
  • Rising above self doubt
Dec 18, 2015

Today on Trend Following Radio Michael interviews Dave Huss. Dave discusses his transition from marketing consultant to entrepreneur. Formerly Dave did consulting work for paid advertising and now has transitioned into t-shirt design and sales (Michael notes that famed trader Salem Abraham had considered the t-shirt business before trading). He has been able to grow his business quickly due to a website called www.teespring.com. This website allows him to order shirts on-demand without any out of pocket expenses.

Dave comes at t-shirt sales in a trend following manor. One out of every ten shirts that he puts out will be a big winner. He makes it clear that it is very important he has a system. He limits his cost to $20 per shirt for advertising. If he doesn’t get a positive response from his $20 advertising push then he stops. He lets the market decide which t-shirt designs are worth pursuing. He has put out 500+ designs just this year. Six out of ten times he sells zero shirts. Three out of ten of those shirts sell 20 or 30 units and he breaks even, but one out of ten shirts will sell over 1,000 units. He never knows which will be the home run and which designs are going to be the duds.

Dave stresses how online marketing has become more and more a part of our lives. You have to participate in online marketing if you are going to have any kind of business these days. You find your most passionate fans in your business and hit them at the right time. You can’t put your head in the sand and think your business is going to make it.

In this episode of Trend Following Radio:

  • Contract work vs. Entrepreneur
  • Niche markets
  • Online marketing
  • Importance of a system
  • Survivorship bias
Dec 14, 2015

On today’s episode of Trend Following Radio Michael Covel features Larry Hite. Larry is unquestionably one of the founding fathers of systematic trend following. In 1981 he founded Mint Investments and by 1990 it was one of the largest trend following funds in the world. At the same time he formed partnership at Man group, which became wildly successful as well. In 2000 he decided to go another direction, focusing on proprietary trading and research, founding Hite Capital Management. Currently, Larry is partnered at ISAM with his long time colleague Stanley Fink.

Throughout today’s podcast Michael pulls quotes and excerpts straight from Larry’s chapter in “The Little Book of Trading.” Quotes range from probability advice to compound interest and one or all of them are certain to spark certain “Ah-ha” moments. Michael starts with Larry giving advice on the notion of being wrong. Larry stresses that being wrong is ok. He was wrong often and always built the possibility of being wrong into his models. He would ask himself, “How much can I afford to lose?” And work his risk in from there. Hite found that even having perfect knowledge of an end of year price wouldn’t guarantee riches. His research proved that you could only bet with 3:1 leverage on a stock, even if you had absolute knowledge of the stocks year end price, because you can’t predict the path a market might take getting there. Respecting leverage is key. Michael then brings up a dating story Larry shared about probabilities.

Michael then goes into Larry’s risk management. He stresses, “Make sure you are as prepared as possible. You can’t know everything but you can certainly be prepared.” Larry always starts from an assumed position of ignorance. You have to know what you don’t know. If you know what the worst possible outcome can be from the outset then you are starting with a great advantage. Mike finishes with one last excerpt from Larry taken from a paper titled “Life is a Bet.” In this excerpt Larry outlines why life is just a serious of bets. Some are large and some are small. Some seem trivial and some seem to have far greater impact on our lives. However, those trivial bets can quickly become paramount. Never discount a decision. It could be the one that makes or breaks you.

In this episode of Trend Following Radio:

  • Respecting leverage
  • Thinking in terms of odds
  • Being wrong is OK
  • Getting the odds on your side
  • Risk management
  • Life is a series of bets
Dec 11, 2015

On today’s episode of Trend Following Radio Michael Covel interviews Didier Sornette. He is Professor on the Chair of Entrepreneurial Risks at Swiss Federal Institute of Technology Zurich. He is also a professor of the Swiss Finance Institute, associated with both the department of Physics and the department of Earth Sciences at ETH Zurich. He has worked on the King effect, a theory used to predict economic bubbles. Didier also set up the Financial Crisis Observatory in October of 2008. He brings an interesting perspective to financial crisis’s, and bubbles.

Didier first realized his fascination with financial bubbles back in 1989. He received a grant to try and solve the equation of prediction. Didier goes on to discuss the different theories that stemmed from his research. A few years later, when the housing crisis hit the U.S., he founded The Financial Crisis Observatory. He founded it as a psychological response to the discourse he had with the markets. People didn’t have a clear view of what was happening. Nobody seemed to know how it happened, but to Didier it was so obvious and natural that the crisis occurred. He wanted to help inform people better with his observatory by showing concrete steps that lead to the housing collapse and other crashes that came before it.

Michael and Didier then go into discussing black swans. Didier does not believe in black swans because they relate to “surprise events.” He says that crisis’s are actually not surprise events at all. They can be expected and are human related. Instead, Didier believes in a notion he calls “Dragon Kings.” His theory is called Dragon Kings because a King is a special person in a country, and dragon means of unique origin. Dragon Kings is how he describes his version of, “surprise events.” Michael and Didier move onto talking about how the world is out of equilibrium. The world is consistently battered with surprises therefore the equilibrium is always off. A lot of economists refuse to acknowledge this and policy makers are not well educated on the subject. Lastly they talk about Didier’s financial bubble experiment. Didier then goes into his background in physics saying it gave him tools to look at things outside the box. Nature doesn’t function in disciplines just like our minds do not work in silos or disciples.

In this episode of Trend Following Radio:

  • The adaptive market hypothesis
  • Dragon Kings vs. Black Swans
  • New economy syndrome
  • Predictive markets
  • Finite singularity
  • Equilibrium of the world
Dec 7, 2015

Michael starts today’s podcast reading the biography of bestselling author Napoleon Hill. Napoleon was born in 1883 and died in 1970. He is most known for paving the way for the new thought and personal success movement with his book, “Think and Grow Rich,” which has become one of the best selling books of all time. Its premise is to help people realize they have the power to create success within themselves by way of conscious and unconscious thought. His message is straightforward, pragmatic and clear.

For the remainder of the podcast Michael plays a presentation by Napoleon. The presentation is centered on making a goal and how to use certain tools to achieve that goal. Napoleon starts off by explaining the power of motives. He says you have no right to ask yourself or anyone to do something unless you give an adequate motive. If you give someone a good enough motive to buy something from you or give yourself a a worthwhile reason to achieve a goal you can sell or accomplish anything. You can also trick your mind to believe anything by repetitive action. If you have faith in what you want to accomplish you will accomplish it. On the same note, faith without action is dead and faith without believing is dead. Napoleon believed that 98%-100% of people sell themselves short because they do not believe in themselves. He says, “The power of thought is the only thing humans have absolute control over.” By repetition, thought, and action you can educate your brain to pick up only the vibrations related to what you want. He stresses that you must make sure your subconscious mind knows you are the boss.

The power of motives, thought, and faith in yourself all goes into being able to create and carry out a plan successfully. Napoleon says to write out your major objective in life and give it a timeline. Make sure it is clear and precise. Keep your major purpose to yourself. Your actions speak for themselves, and the envy of mankind can slow you down. Also, leave your plan flexible. Nobody can put limitations on you except for yourself. With that being said, acknowledge your weaknesses but don’t let them overtake you. If you keep your mind positive, it becomes greater than all the negatives.

In this episode of Trend Following Radio:

  • Conditioning your unconscious mind
  • Setting goals
  • Laws of nature
  • Vibrations of thought
  • Using your greatest asset
  • Individual power
Dec 4, 2015

On today’s episode of Trend Following Radio Michael Covel interviews Barbara Fredrickson. Barbara is a professor at the University of North Carolina at Chapel Hill. She is the Kenan Distinguished Professor of Psychology, and the Principal Investigator of the Positive Emotions and Psychophysiology Lab at the University of North Carolina. She is a social psychologist that conducts research in emotions and positive psychology. Her main work is related to her Broaden-and-Build Theory of Positive Emotions which suggests that positive emotions lead to novel, expansive or exploratory behavior, and that over time these actions lead to meaningful long term resources such as knowledge and social relationships.

The podcast starts with Michael asking, “When did this fascination start with you?” Barbara explains that she has had a curiosity with emotional behavior all her life, but it was in college when she realized that almost all research was centered around negative emotions. She began being influenced by evolutionary science, neurosciences, and behavioral changes that occur with emotions. She sees her job as figuring out why positive emotions matter, and why they are important. All emotions have specific action tendencies whether negative or positive. She believes that positive emotions broaden our horizons and negative emotions have values that are much more narrow and specific. Positive emotions bring awareness. They help us become better versions of ourselves. Barbara goes on to explain that it’s not the intensity of positive emotions that are important, it’s the frequency. They are like waves, they arrive and then dissipate. Positive emotions don’t typically have as powerful of moments as negative emotions and that is why Barbara believes they have eluded the interest of scientists for so long.

Michael then brings up Barbara’s work with “the undoing effect.” Barbara expands on this hypothesis by saying, “It first started when other scientists looked at the physiological signature of emotions.” The undoing effect counters the current notion that negative emotions have a signature and positive ones do not. The study showed that positive emotions actually act as reset buttons to your negative emotions. Lastly, Barbara helps listeners look at love through the lens of an emotions scientist. She explains that when we share positive emotions with multiple people it is more effective than when we experience that same emotion individually. She also points out that love is made up of micro moments of positive experiences rather than long lasting ongoing experiences.

In this episode of Trend Following Radio:

  • Inner-experiences and well being
  • The undoing effect
  • Positive negative ratio
  • The body’s definition of love
  • Depression
  • The idea of soul mates
  • Emotional connections
Nov 30, 2015

On today’s episode of Trend Following Radio Michael Covel features a presentation by Charles Faulkner. Charles is a trader, mentor and author who has been featured in Jack Schwager’s “Market Wizards” series. Faulkner is an international expert on modeling the knowledge and performance of exceptional individuals, teams and organizations, and applying the latest research in cognitive neuro-science and linguistics. He has appeared on this podcast five times and has received more positive feedback than any other guest.

Today, Charles’ message is about goals. It is about setting large goals that are above and beyond your everyday concerns. Goals that give your life purpose. Charles comes at this topic in a pragmatic and scientific way. He breaks down how our brains function best, making goals easier to obtain. The first example he gives is a “monkey see, monkey do” experiment. The experiment showed that when you do something repetitively in the correct form, you have a much higher success rate than if you were to be sitting in the stands watching or doing a variety of the same act, but only occasionally doing it right. Charles then moves onto a study centered on the idea of taking internal dialogue and externalizing it. When you write down a goal and draw out what that goal means to you, that is externalizing your inner-dialogue. In addition to writing out your goals, it is important to talk them out. Charles has his students ask each other: “What are you going to do to achieve your goals?” “What will you see, what will you feel?” “Where will you be and who will be there?” Asking these questions vivify your goal. On the flip side, it is important to ask about the downsides. The more important the goal, the more negatives it’s likely to have.

“Goals are a way of directing your attention” says Charles. He goes on, “You don’t set one big goal, you set interim goals so you get rewarded along the way.” Charles goes on to talk about the importance of having milestones so you don’t get discouraged when your goal is not met immediately. People become attached to a certain outcome but they don’t think about why that outcome is important. He asks the question, “What is important about making a million dollars?” When you break down the reasoning behind your goal, it may uncover layers you had never thought about.

In this episode of Trend Following Radio:

  • How to set goals
  • How to achieve your goals
  • Externalizing your inner-dialogue
  • The importance of milestones
Nov 27, 2015

On today’s episode of Trend Following Radio Michael Covel interviews Ben Carlson. Ben is the Director of Institutional Asset Management at Ritholtz Wealth Management. He first gained fame with his blog, “A Wealth of Common Sense.” Following his blog success Ben wrote the book, “A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan.”

“A Wealth of Common Sense” is geared toward helping investors gain a simpler decision making process and developing a clearer way of thinking. This is where Michael and Ben take the conversation on today’s podcast. Ben says that people usually become their worst enemy while trading. Cycle to cycle or fad-to-fad is how so many plan their investing rather than building their trading off a solid foundation. Studying the emotional side of trading is a relatively new concept that has sprung up in the last couple decades, which causes people to overlook the necessity of its study in their trading. Ben says, “Envy is the worst of all sins because nobody enjoys doing it.” People are constantly tempted to follow what others do. With the amount of information and “noise” thrown around today we are more informed than ever but most aren’t putting that information in the right context.

Ben uses the documentary, “Jiro Dreams of Sushi” as a great example of having faith in a system matched with an extraordinary amount of discipline. There is nothing fancy about Jiro and his sushi. It is his discipline over the years to perfect his craft that has made him arguably the best sushi chef in the world. Whether it is creating the perfect meal or creating the perfect system, you have to give it time to work. Ben says that discipline is just not there for most people. Constantly asking, “Does this still work? Why should I continue to follow it?” Lastly Mike brings up the phrase “Market timing.” On a daily basis there is someone on T.V. predicting what will happen. The two talk about lack of understanding among investors, relating investment advisors as shrinks to their clients. They are not managers of money but managers of people.

In this episode of Trend Following Radio:

  • Diversification
  • The purpose of a long only commodities investment
  • Speculation
  • Index funds
  • Having a plan
  • Risk and Reward
  • Saying no
Nov 23, 2015

Today marks 400 episodes on Trend Following radio. To celebrate Michael has put together a compilation of Tom Basso interviews. Tom has been on Trend Following Radio four times and his interviews have been among the most popular episodes airing on the show. Michael plays the interviews back to back and throws in a bonus interview at the beginning. The bonus excerpt is a Tom Basso presentation from the early to mid 1990s.

Tom Basso is most famously known as “Mr. Serenity” in Jack Schwager’s “The New Market Wizards”. Now retired from managing client money, Tom was president and founder of Trendstat Capital Management. He became a registered investment advisor in 1980, a registered commodities advisor in 1984, and was elected to the board of the National Futures Association in 1998.

Throughout this 4 1/2 hour podcast Michael and Tom cover a broad range of topics including: Tom’s background and how he got into trading, speculation, emotional rushes, emotional devastation, catastrophic events, separating trading from politics, behavioral economics, advice to newcomers entering the CTA industry, location independence, time management, stoicism, black swans, and the importance of routine.

Michael and Tom also go through listener questions spanning topics including: trading regrets, money management vs. trading, tinkering with current systems, drawdowns, one-system vs. multiple systems, thoughts on Alan Watts, emotions during both losing and winning periods, exit strategies, practice trading vs. live trading, money management, risk control, how to handle skeptics, serenity, John W. Henry, coin flip entry method, percent betting, comfort with uncertainty, initial capital at risk vs. unrealized gains, and fighting against your gut reaction. This podcast includes a wealth of knowledge worth listening to over and over again.

Nov 20, 2015

On today’s episode of Trend Following Radio Michael Covel interviews Brett Steenbarger. This is his 2nd appearance on Trend Following Radio. He is a Clinical Associate Professor of Psychiatry at New York State University, author of “The Daily Trading Coach,” “The Psychology of Trading,” and “Enhancing Trader Performance.” His newest work is “Trading Psychology 2.0: From Best Practices to Best Processes.”

Michael and Brett start the podcast off by asking the question, “Do people really have that burning desire to succeed?” Brett says he does believe traders are drawn to trading for the money outcome, but also for the allure of not working a 9-5 job or the dream of scoring easy riches. Brett breaks it apart further by explaining the motivations for different traders: Practice and process are essential. He says, “You hear traders talk about finding your edge and sticking to your edge.” Finding your edge is a continual process because the markets are forever changing. You must adapt.

Brett goes on to discuss the importance of back-testing and how valuable it is to your strategy. He gives the example that elite performers spend more time in preparation than in performance. That preparation helps develop a strategy and prepare the performer mentally. It pushes the performer to develop the best of what they are doing. Brett then details the difference between repeated performance and deliberate practice.

Creativity is the next big topic discussed. Brett says it’s an individual’s creativity that breaks them away from the herd. A trader that has the creativity to diversify and test new strategies. Brett then touches on what it means to “trade your personality,” how paramount it is to have the right trading mentor, and the advantages of creating a checklist to bring out your best practices and make them routine. Lastly, Michael and Brett dig into the necessity of eating, sleeping, physical exercise, and yoga to help fuel a positive emotional experience in life and in trading. If you have been having trouble with the psychological aspects of your trading, this episode is for you.

In this episode of Trend Following Radio:

  • The emotional “buy in”
  • Checklists
  • Finding a smooth equity curve
  • Repeated performance vs. deliberate practice
  • The role of fitness and health in trading
  • The moment of now
  • Systems trading vs. discretionary trader
  • Relationship between volatility and volume
Nov 16, 2015

On today’s episode of Trend Following Radio Michael Covel talks critical thinking and behavioral finance. He begins with an article excerpt about locker room etiquette and loops around to the parallels between sports psychology and trading psychology. Michael argues that critical thinking has gone by the way side in the general populace and if you have an alternate way of thinking, one that is not with the masses, then you have a leg up.

Digging in Michael explores excerpts from a paper by Howard Marks titled, “Inspiration from the World of Sports.” The paper outlines the consistencies between sports and trading. Michael discusses bullet points from the article; 1. Trading and sports are competitive. Some succeed and some fail, and the distinction is clear. 2. In the long term the better returns go to superior investors. 3. An investment career can feel like a basketball or football game with an unlimited number of quarters.

Michael also explores from Howard Marks the career of Yogi Berra, his achievements and his baseball philosophy. Howard points out how consistent Yogi was in his performance and how that is exactly what he likes to see in his investing. Howard then compares Yogi Berra and Reggie Jackson (Reggie was far less consistent then Yogi). Howard says that he would rather have returns like Yogi, nice and consistent. Michael argues the case for trading like Reggie’s baseball performance. He says the Reggie Jackson home run model is more in line with venture capital, film financing, the MIT blackjack team, and trend following trading, for example. The point being that home runs will pay for the strike outs. Michael ends the podcast by pointing out that Reggie and Yogi are ultimately in the same game, but it is up to you to decide what style of trading you want.

In this episode of Trend Following Radio:

  • Consistency vs. the home run
  • Quarterly performance
  • Trend following performance
  • Emotion in human nature
  • Irrationality in investing
Nov 13, 2015

On today’s episode of Trend Following Radio Michael Covel interviews Jim Rickards. Jim was front and center during the 1998 LTCM blow-up. He was a partner and general counsel for Long Term Capital Management. Following their blowup, he was principal negotiator in the 1998 bailout of LTCM by the Federal Reserve. He has had a bird’s eye view of some of the most interesting events in the economy over the last 20 years.

Michael and Jim dive right into the sequence of events that lead to the devaluation of the Thai Baht in May of 1997. Jim then goes into the chronology of events that took place leading to the fall of Long Term Capital Management. He makes clear that LTCM had some of the brightest brains in finance working for them at the time, including Nobel Prize winners and a vast number of PhD’s from MIT, Harvard, Stanford, Yale, etc. Jim summarizes the events prompting Russia to default on their debt which let loose a sequence of events leading to LTCM losing four billion dollars in one month. Wall Street cared not for the four billion LTCM loss but because they had over 1 trillion dollars of derivatives contracts tied to LTCM positions. Many thought all of Wall Street would have been taken down if LTCM went down. That was when the Fed intervened and organized a bailout.

Jim goes on to talk about the changes that took place and the lessons that were learned from the fall of LTCM. He says the three lessons that should have been taken away from the crisis were; derivatives are dangerous, leverage is dangerous and getting banks involved is dangerous. The changes started with repealing Glass Steagall in 1999, rewriting laws so they could do “swaps” on everything, and then in 2006 the SEC changed leverage rules on brokers. So in short regulators ended up doing the complete opposite of what they should have learned from LTCM. Michael asks the question, “Why were the same people who were saying that the economy was great till the day it crashed, the same people that were responsible for fixing it?” Jim says policy makers never see bubbles. He gives two possible explanations for why policy makers act as they do; conspiracy or complete incompetence. He believes it is more incompetence rather than a conspiracy and goes on to explain why.

Michael and Jim then dive into “models”. If you have the wrong models you will get the wrong results every time. Michael notes that the right models are rooted in behavioral finance. Jim notes that the Fed does not use behavioral economics. Jim talks about the three elements that his model is based on: behavioral finance, complexity theory and inverse probability. He goes into great depth on what all of those models are and gives real life examples for them.

In this episode of Trend Following Radio:

  • 1997 devaluation of the Thai Baht
  • The collapse of Long Term Capital Management
  • The 2008 crisis
  • Complexity theory
  • Behavioral Finance
  • Inverse Probability
  • The Federal Reserve
  • Description of currency wars
Nov 9, 2015

On today’s episode of Trend Following Radio Michael Covel interviews Kathleen Eisenhardt. Kathleen is Co-Author of the best selling book “Simple Rules.” She is also the Co-Director of the Stanford Technology Ventures Program. Her book’s foundation is based on the argument that too much structure and too many rules don’t get products out the door and the other extreme, no rules or structure tend to not produce results either. In short, simplicity beats complexity. Her book “Simple Rules” is not just about rules in business, but in all aspects of life; sports, entertainment, investing, diets, etc.

Kathleen defines simple rules as shortcuts that save on time and are more commonly known as, “rules of thumb” (heuristics). Michael and Kathleen pull in examples from Google, Netflix, The White Stripes, Billy Bean and the Oakland A’s, General Motors, Stanford football and an expedition in the South Pole launched in 1912. Kathleen shows in all the scenarios how people who modeled the past failed and how the simple route conquered the complex every time. She stresses that the philosophy, psychology, and the system itself may not be so simple, but the rules to follow are.

Kathleen and Michael go on to discuss people who make a living out of of being complicated. Lawyers, accountants, lobbyists make a living out of having a lot of rules nobody can decipher. Kathleen discusses the differences in risk adverse people, more strategic people and the people who just go ahead and wing it in business and in life. Kathleen explains her three step process in creating simpler guidelines. “Bottleneck” is the 2nd rule in the three step process. The “Bottleneck” is what keeps you from getting to the objective. It’s what holds you up from moving forward. You solve the bottleneck and you have solved your problem.

In this episode of Trend Following Radio:

  •     Bottleneck concept
  •     Complexity is not always best
  •     Tax code for political gain
  •     Simplifying government
  •     Improving your probabilities with rules
  •     The Federal Reserve
Nov 6, 2015

On today’s episode of Trend Following Radio Michael Covel interviews Rob Walling. Rob may not be a trader, but he is a serial entrepreneur. And trading at its heart, after all, is an entrepreneurial activity. Rob started early. When he was eight his parents purchased an Apple computer and he learned to code to create video games, and when he got into college he realized coding could be profitable. He asked himself, “What can I do that I can leverage?” In the late 90’s he got his first paid job writing code for a consulting firm and around 2007/2008 he transitioned full time into creating and producing his own products.

Rob talks about learning from every job and every encounter. He speaks to real life experience and how it is paramount to success. Rob was passionate from the start about coding. He did it long before he thought it could be a paying gig. Michael and Rob also give examples of why you need to start at the beginning and figure out how to build your audience. If you are in your 20’s you especially need to realize that you don’t know everything. You are missing something. No matter how smart and motivated you are, you need that real life experience.

When trying to start your business Rob gives examples such as: pick a few people that resonate with you and focus in on them, only take the information you need at that point in time, and above all, stop shooting for the Zuckerberg “dream”. He sees so many businesses trying to be a “one hit wonder”. They aren’t thinking about building a business that is going to last. Rob has a straight forward approach to bootstrapping called the stair-step approach that he outlines on the podcast (as well as on his website).

In this episode of Trend Following Radio:

  • Rob Walling’s “Stair-Step Approach”
  • Growth hackers
  • The act of creating
  • Focusing on the “Unicorn” rather than reality
  • Filtering your information
  • Skin deep information
Nov 2, 2015

On today’s episode of Trend Following Radio Michael talks the timelessness of sticking with your system. Michael uses Jack Schwager and his books Market Wizards and The New Market Wizards as prime examples of timelessness. Although they were written years back, he argues they have not lost an ounce of value in today’s trading world. Michael harps on critics that say the Market Wizards books have no place in 2015 markets, noting that one of the great concepts introduced in Schwagers’ books was the notion of “systems”. Although the concept of having a system had been around for over 100 years, Schwager was one of the first to present and teach in an interview format.

Michael then segues into a clip with Howard Lindzon of Stock Twits. Howard further makes the point that having “Any system is better than no system”. He goes on to say, “You have to have a system to beat another system.” Howard talks about Jerry Parker, his trading style and why he has become so successful. Covel asks listeners, “What kind of system do you want? What are the risks and rewards? There are all kinds of systems out there. Have you done the work to find out the pros and cons? What kind of life do you want to have?” The system you choose will dictate that. People who tell you the Schwager books are dated are the same people that will sell you anything. These people go off of gut, intuition or even magical feelings, and that is their decision-making process. Trust that the highest achievers and money-makers on Wall Street trust their systems, painstakingly researched and developed. When times are good they leave it alone, and when times are bad they leave it alone.

Covel plays one last legacy excerpt from Bill Dunn. Dunn lays out that his approach is long term trend following and quantitative. His company does not override their signals ever and they have serious risk management programs in place. They have a 1% probability of losing 20% or more in a one month period. However, the client can choose more or less risk. He shows how his firm does not correlate with the S&P and their positions and trades are completely transparent to their clients. Dunn makes it clear that his performance is not a result of anyone’s judgment. It is a result of long tested simulations and models. Timelessness personified.

In this episode of Trend Following Radio:

  • Human nature doesn’t change
  • Timelessness
  • Behavioral finance
  • Sticking with a system
  • Risk management
  • Bill Dunn on trend following
Oct 30, 2015

On today’s episode of Trend Following Radio Michael Covel interviews Emil van Essen. Michael first heard of Emil from former turtle, Lucy Wyatt. The first thing to note is that he is not a trend following trader. He is a commodity spread trader. Emil has been a CTA since 1997, but his first trading experience was at the early age of 12. Emil delivered papers when he was younger and would take the money and invest in rare coins. The owner of the coin store happened to be a commodity trader. He helped teach Emil about trading commodities and even put in trades for him. Emil’s first trading job was in 1986 at the age of 21.

Michael and Emil start the podcast explaining spread trading. Emil describes trend following as one dimensional whereas spread trading in his view has a multidimensional trading surface because of all the directions a trade can profit rather than if the market only goes up or down. Emil refers to his trading as not systematic but model driven. At the base of his every trade is a model and they can tweak the model accordingly as they see fit–a big distinction compared to trend following.

Emil’s firm is one of the only CTA’s that are negatively correlated to trend followers. He also believes that following rules 100% of the time is a bad idea. “Our brains are far more smarter than computers,” he states. Emil adds, “We need to know not to be emotional about trades but if you don’t adapt to change then you won’t last.” Emil also throws around the controversial word, “prediction.” He says that when he says “predication”, it is actually more about “probability.” He tries to find a method that reliably tells him that something is going to happen more often than not. Emil says, “You try and find an edge. Find consistent behavior patterns that give you a risk adjusted return.”

In this episode of Trend Following Radio:

  • Growth of commodity ETFs
  • Diversification
  • Raising money vs. Making money
  • Quality Investors vs. Quantity of Investors
  • Beta and Alpha
  • Not all investors are created equal
Oct 26, 2015

On today’s episode of Trend Following Radio Michael talks about one of his favorite subjects: baseball and numbers. He profiles arguably one of baseball’s greatest managers, Earl Weaver of the Baltimore Orioles. Weaver believed that baseball, just like trend following, always came back to numbers. He knew the right formula was the 3-run home run.

Coincidentally, Covel’s favorite team growing up was the Orioles. They were one of the “it” team in the 1970s and early 1980’s. Unknown to most, Earl Weaver, the Orioles manager, had a strategy that was a foundation for the book (and later turned Hollywood movie) “Moneyball”. His approach to building a winning team not only applies to baseball, but also to many other aspects of life, including trend following.

Covel plays a clip about Weaver, profiling how he operated and changed the mentality of how to put together a baseball team. Focusing on every “out” was at the very core of his strategy. He looked at the whole arc of the game rather than just the beginning, middle or end. Weaver had a plan for every individual player on his team.

Weaver is just as responsible for Covel’s trend following mindset as some of the most successful trend following traders he has met. He showed that home runs win and pay for mistakes. Ask yourself: “How can I put myself in the position to capture the next home run?” That doesn’t mean to be reckless. The podcast ends with a classic Earl Weaver clip that throws a few “F” bombs around. Listener discretion is advised.

In this episode of Trend Following Radio:

  • Trend following as a numbers game
  • Earl Weaver’s Moneyball legacy
  • Why homeruns pay for the losses
  • Consistency as an illusion
  • Trading is/as a game
  • Know your strategy and stick with it
Oct 23, 2015

On today’s episode of Trend Following Radio Michael Covel interviews Charles Poliquin. Charles is recognized as one of the worlds most successful strength coaches and has coached Olympic to professional athletes. He speaks with Michael about his new venture with Ed Seykota as well as his vast health and exercise knowledge.

Poliquin was Canada’s second youngest black belt at the age of 14, has mastered 6 different martial arts, and is influenced strongly by Bruce Lee, karma and other eastern influences. After getting into karate at the age of 10, he moved into lifting weights at the age of 14 and fell in love instantly with the sport. He took on his first training client in his first year of college at the age of 17 and has named himself the “Strength Sensei ”.

Charles gives countless bits of advice on how to keep moving forward in life and fitness: “If you don’t have an expiration date then the goal doesn’t mean anything. There is no pressure.” Keep the competition going with yourself. Also, have a good balance of work and time off. He points out that sleep is one of the most underrated subjects within health and fitness, but it should be a priority. Lastly, Michael and Charles talk about testosterone levels and how they are deeply affecting men and women around the world. Charles explains both the environmental and nutritional basis for low testosterone and why it has such a huge impact on the human mental state.

“Progression not perfection is what you should be focusing on. “ --Charles Poliquin

“The general who sleeps the most wins the war.” --Charles Poliquin

In this episode of Trend Following Radio:

  • Long distance cardio vs. short sprint workouts
  • The importance of sleep to your health and fitness
  • Meditation and mindfulness
  • How testosterone levels affect the psychology of men and woman
  • Relationship between top athletes and top executives
  • How to stay motivated
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