The best traders don’t concern themselves with fundamentals or story…they just learn how to get in and out according to the trend, says Michael Covel, author of Trend Following. He also says the conventional wisdom about investing is wrong, and retail investors would do themselves a favor by forgetting what they’ve learned.
Kate Stalter: Today I’m speaking with Michael Covel, and many of you may recognize him as the author of Trend Following, and more recently, Trend Commandments. He’s also a noted market researcher as well as a filmmaker.
So Michael, for our listeners who may not be familiar with trend following, give us a brief explanation of what that is.
Michael Covel: Trend following is very simple. If the market is going up, you want to be long…you want to be riding that trend up. If the market is going down, you want to be riding that trend down and making money on the short side.
And so as a trend follower, the news, the fundamentals—none of this really is relevant. The real issue is which way the market’s trending? Can I get on board and can I make money, and to heck with everything else that’s going on in this world. The only thing that matters is that price movement.
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Kate Stalter: Now one word that I’ve heard—I’m sure you have too—bandied about lately to describe the current market conditions has been “trendless.” What do you think about that particular label?
Michael Covel: Well, yeah. You hear very volatile markets, et cetera. I think the critical question is, “What market are we talking about?”
I think sometimes we like to generalize and we say, “market.” Are we talking stocks, are we talking gold, oil, agriculture, what are we talking?
And I think the second part of my answer to you is trend following is not something where you can kind of say, “I’m going to be a trend follower today.” Trend following is a strategy you implement over many, many years.
What trend following is looking for is surprise events. By being a trend-following trader, you put yourself in a position to benefit when a black swan happens.
When the rest of the world is long only stocks and mutual funds and their world is collapsing, trend followers are taking advantage of that, in a very honest, ethical way. They just have a trading strategy that says, “When the world goes to hell in a handbasket, we’re going to make money.”
So in that context, it’s very difficult to say right now—because right now, today, could change tomorrow. So the critical issue is to have a strategy that adapts to every moment and not be worried about what’s going on exactly today. Does that help?
|pagebreak|Kate Stalter: Tell us a little bit, then, about the right mindset, to develop that kind of strategy.
Michael Covel: Well, that’s a big psychological question. I think the right mindset is to let go of almost everything one’s ever learned about finance and trading. I mean, most of what they teach in college and universities is an absolute waste of time.
I think most of the strategies used by the big investment banks are some kind of arbitrage, or they’re just leveraged long-only strategies. This is just not the way that most successful traders trade. It just doesn’t happen.
Kate Stalter: So it sounds like there’s definitely an element of tuning out a lot of what might be called “conventional wisdom.”
Michael Covel: Not only is it tuning out, it’s having a deep belief that conventional wisdom is the way to lose all of your money. It’s more than tuning out, it’s saying, “Hey, this is just wrong.” Conventional wisdom is wrong, period.
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Kate Stalter: You just brought up the fact that the market has to be viewed in terms of various asset classes or various markets, so to speak. I know that you do extensive research across all these asset classes—stocks, commodities, forex, ETFs. For the retail investor who’s maybe a bit scared or uncertain at this juncture, what’s the best way for that person to proceed?
Michael Covel: Abstract your mind for a moment. On the news, you hear about oil and gold. I don’t know anything about oil. I don’t know anything about gold. Well, trend followers don’t either.
Some of the wealthiest people on this planet, some of the best traders on this planet, could not tell you anything about the fundamentals of the oil market, anything about the fundamentals of the gold market and the corn market. These are just numbers at the end of the day.
If you look at a chart of corn and you don’t know that it’s corn, can you trade it? That’s the real question to ask yourself. So it’s not really about knowing what these markets even are. Who cares?
What you need to do is: When am I going to get in? When am I going to get out? How much am I going to bet along the way, so I don’t lose all of my money, and put myself in a position that when these markets trend, you’re on board to make money?
Kate Stalter: You had mentioned previously that you don’t believe it’s in the best interest of investors for you to be giving out stock picks and so forth. Tell me a little bit about that, why you feel that way.
Michael Covel: Well, I think I’m the only person that doesn’t do this. If you go on CNBC every day, or Fox Business, somebody’s going to tell you what they think is going to happen tomorrow. They’re going to either say, “Buy this or buy that,” and obviously Jim Cramer’s the most famous stock picker.
But the reality is, what good does that do? I mean, what do you do? Literally every day, you’ve got thousands of people appearing on TV saying to buy something or sell something. Who can pay attention to all of that? I mean, do they come on TV and tell you when to sell too?
And so then, when they tell you to buy something, how much of your limited capital do you buy with their pick? And when do you sell?
It’s almost comedy that we all, as smart human beings, don’t ask how this world of stock picking isn’t just laughed out of the showroom. We should be laughing about it. It’s entirely insane.
Kate Stalter: Is it a matter of everybody’s risk tolerance and condition in life—for their age, that sort of thing—being different across the board, that there’s no one size fits all?
Michael Covel: No, I think America has been seduced by gurus. And America and a lot of the world wants to believe that there are financial gurus that can tell you at any moment what’s going to happen, and it’s just not true.
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I’m not a guru. I’m a guy that’s done a lot of research and I can give people a lot of insights, but once you know what I can show you in my books, or whatever way I might be able to teach you…once you know that information, you don’t need me. You’re going to be self-sufficient.
When you’re a trend follower, you’re self-sufficient. You don’t need anybody else. You don’t need the TV. You don’t need the newspaper. You don’t need The Wall Street Journal. It’s all irrelevant. That’s a very, very different way to think.
Kate Stalter: It sure is. Not something that you hear about every day.
Michael Covel: I’m not sure we could find any case of doing a quick Google search of anybody talking like this on CNBC, ever.