The subtitle of this book is “learn to make millions in up or down markets” and inevitably makes you think of the myriad of get-rich-quick books that are around. While there is an element of that, there is rather more to this book than that. As a fundamental analyst I am a little surprised to find myself reading it, even more to find myself agreeing with much of it. But you won’t be surprised to find that there are caveats.
I came to this book two ways. Recent events and readings (Taleb and Mandelbrot in particular) have made it clear to all that market returns have fatter tails than many previously assumed. An analyst’s mind then turns to how to take advantage of that. Option pricing is one obvious route, though the maths might be somewhat hard. But another established way seems to be trend following. As someone who has followed Man Group for some time I am more than a little aware of their AHL funds. These are quantitative trend following hedge funds which use futures to invest across a large range of asset classes. Over the long term their performance is outstanding, though it has been prone to drawdowns which have been both long and deep enough to provoke stock investors to wonder if the strategy is broken. Each time it has bounced back and gone on to achieve new highs, earning Man Group millions in performance fees.
Covel is clearly an evangelist for trend following. Not only does he believe in it, but he believes nothing else works. Fundamentalists are dismissed, buy & hold given short shrift and only short term traders are given a small concession in an Appendix (but its hard!) His statistical analysis is far from rigorous, listing several successful trend followers but this (perhaps inevitably) is a far from comprehensive sample. He does show trend following can work, not that it will.
Much of his psychological musings are sensible, even for other sorts of investors. Indeed this is probably the main insight for most people. Covel advocates using systems and cutting losses immediately. The presence of a system actually make this easier – when you have chosen a position its much harder to admit you were wrong and change your mind. Its probably worse in a corporate situation where you’ve had to persuade others to agree with you. But this is probably the biggest problem fundamental investors have, going against their mantra of believing in their decisions, so putting this as an overlay could be hard.
The final question is does the subtitle hold? Could you or I go out and make millions? Well maybe. First you need to find a system – the book gives an example in an appendix but basically you’re on your own (though I suspect there are other books which may help!) Secondly you need to have faith in the system to trade it in the long run. My comments on AHL clearly apply to all these traders – there will be bad times. Very bad times. This is a long term game. You will need to have enough faith in the system to sustain you through the bad times. You also need to be able to put on enough trades to get to the statistical average – and we’re not talking small numbers here. Maybe if you have hundreds of thousands of pounds/dollars/etc you could diversify across markets and make your trading costs bearable. On one level I’m convinced – trend following is a viable trading strategy. But its far from easy, and personally I think I’ll stick with Man Group. At least I can afford a position in that.