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The recent financial devastation coupled with 401k's becoming the new pension plan point very clearly (in my opinion) to the need for control. Control your 401k, don't let it control you. Max out not merely your contributions to it, but max out it's performance using a disciplined and consistent... More
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  • Panic, Fear, Hope, And Return-To-Panic: Interview With Michael Covel 0 comments
    Dec 31, 2012 11:19 AM | about stocks: BBRY, BAC

    This may be the most important interview you have read in a long time. In it, I interview the interviewer, Michael Covel. Michael became fascinated with "cracking the code" of top moneymakers in the financial markets and his second major passion is teaching and coaching others how to implement both the mindset and strategy of those top moneymakers. Some of his research has culminated in four books. The Complete TurtleTrader: How 23 Novice Investors Became Overnight Millionaires (2009) and Trend Following: Learn to Make Millions in Up Or Down Markets (2009) are good starting points for those who want to learn more. One of the main points in his teaching is how to escape the cycle of panic, fear, hope, and return-to-panic in a "cult of the news" age, from one supposed crisis to another.

    Case in point #1:Greek debt crisis - the country ETF for Greece (GREK) is currently up 42% from the 9/5/2012 trigger point at 12.55, and it subsequently went to a high of 19.00 in 5 weeks, or about 50%. What happened to all the noisy news about Greece?
    Case in point #2: The current news obsession is the "Fiscal Cliff." Yet, during that time, Research in Motion (RIMM) went from a possible trigger point of 9.25 on 11/16/2012 to a high of 14.21 on 12/14/2012, or 53% in less than a month (it is currently up 27% despite a pullback). Bank of America (BAC) had a trigger point of 8.50 on 9/7/2012, and is currently up 35%. These are three non-correlated (unrelated) financial instruments that are up substantially despite the "news" environment. Very soon, there will be another news cycle that will dominate. [Note: a simple trigger system, or Trend Following system (see interview below), would be "breaking a monthly or multi-month high on larger than average volume."]

    Some of Michael Covel's biggest fans are the top trader's themselves, such as Ed Seykota and Larry Hite, who were both featured in Market Wizards: Interviews with Top Traders (1988) by Jack Schwager. I consider this to be a seminal, groundbreaking work in which the average person can get inside the head of some of the top moneymakers. Michael Covel launched a podcast on January 26, 2012 that, in my opinion, follows in the this "Market Wizards" tradition. Michael has leveraged his network and contacts, and uses his knowledge of the financial markets to be able to create some very helpful interviews. The audio format lends itself to not only gaining knowledge from these people, but also for feeling the personality behind consistently profitable financial market participants.

    GC: I am speaking with Michael Covel. He's a best-selling author, entrepreneur, teacher and film director. He is the founder of, which later expanded into, a popular online resource focused on an investment style known as "trend following" which allows investors to profit in both up and down markets. Michael passionately teaches the lessons of the great traders who have made their fortunes over the last four decades. His books include, Trend Commandments, The Complete Turtle Trader, and The Little Book of Trading.

    It's a privilege to speak with you; I really appreciate you picking up the podcast microphone and encouraging people to manage their money, and to maximize their profits with Trend Following.

    I began by asking Michael how did the idea of doing a podcast come about?

    MC: It started with two to three minute segments on iTunes and later expanded into longer teaching podcasts. I really enjoyed the process of being able to connect with people on such a global scale, and in over 100 countries. On Facebook, people enjoy being able to communicate with others, but it is usually a relatively small circle of friends, whereas with these podcasts, I am able to reach so many people, but in a direct and immediate way.

    GC: If I were Stephen Colbert, I might ask this type of question: what is the machine, and why does it not want us to profit? Could you define the "machine" and the "system."

    MC: The machine is the big institutional investment conglomerates such as Goldman Sachs, the big banks, mutual funds, the Fed. The machine is designed to make the average person trust in the ability of the Dow to keep going up forever and gives them a false sense of security in the belief that the Fed and the government will take care of us, in the metaphorical sense of tucking us in bed, giving us a goodnight hug and a kiss on the cheek. It prevents the average person from being able to take advantage of up and down moves, and it also means that the average person can and will get caught in big downturns when the financial markets implode such as in 2008 when the "system" failed, after everything turned into a huge bubble. While I certainly respect what someone like Warren Buffett has done, it is difficult for the average person to make money as a buy and hold investor. We could look at he Nikkei (Japanese stock market index) and it could be a reflection of what we could become if we weren't propped up artificially by low interest rates and Quantitative Easing. In a sense, the system tells us we need to go to college. Someone can have a college degree, but it doesn't mean you can make money from it.

    GC: I remember a Charlie Rose interview with Warren Buffett in which Warren said that he didn't see any good values (2006). It is difficult for most traders to not be able to participate.

    MC: An investor can make money when the market is going up or down, and that is a diversified foundation for the mind.

    GC: In a very real sense, your podcasts seem to be a very good way of bypassing the publishing and broadcasting world, and yet they are an extension of your published works. Unlike other financial podcasts, which are news driven, your podcasts revolve around a very definite theme, which is trend following. It seems like you have two types of podcasts. One type is an interview, and the other type is kind of like an audio-blog. Is that deliberate, did you set it up that way, or did it evolve over time?

    MC: Well I had no guests at first, so I had to go out and say something at first. I've done a lot of interviews, plenty of competent people from prize winners to $20 billion under management hedge fund managers who sat down and spoke with me before, but this was something new (the podcasts), before I get some guests I need to say something interesting; let people hear how I sound and let them know what direction I am going before they commit, because people are nervous, people don't necessarily want to come on and do a podcast if they don't think this person is competent, this person is going in a good direction, so it started with a monologue, or as you say a sort of audio blog post, and then I just sort of started doing interviews, and I guess now there are two different forms, I don't know what to make of that or if I should continue doing that or change that...

    GC: Well it seems to work; some weeks you may do more than two, but you are certainly very prolific, because I know it must take a lot of preparation in an otherwise busy life to be able to do that, so I think the format, to me, is a very good setup.

    So in the past you have described trend following as an obscure style of trading. When you say that you have "cracked the code" - what do you mean by that, and do you think the podcasts help people understand that?

    MC: Well, yes it's obscure, it will always be obscure, because most people want to believe in the lottery, hence the most recent lottery jackpot drawing [of over $500 million] and so if you have a very rational style of trading that goes against the machine or the matrix, something that you can't find in a class on a college campus that talks about or teaches this, except a mention from a particular professor here and there. Actually one of the guests on one of my podcasts, Mark Shore, teaches some on it, but there's very little, so as far as cracking the code, I've cracked the code for those people that want to be awake, who want to learn something new, so the podcasts, all of my works, the books, the film, the blog posts, twitter, the Facebook posts, are all feeding on each other so that those that want to learn about trend following, or those that already know about it to gain some more confidence.

    GC: Yes. You mention Mark Shore. I certainly enjoyed that interview, and I guess what I appreciated about him was his flexible attitude and take on the market; depending what the market was like he would take profits as his positions were going up [rather than wait for a strict sell rule]. Tom Basso and Mark I think both mentioned that there's nothing to be ashamed of if you only have one [futures] contract and you're catching the trend, if in a dangerous market environment. In terms of what Mark Shore said, and I know he's a professor and teaches an accredited class [on futures trading], financial instruments, and I'm sure you get into this with some of your courses, only trend about 30% of the time, so I guess some people may not want to overstay their welcome, and I know that you mention the "Whipsaw Song" [by Ed Seykota, available on Youtube] and have a link to that, and that's something everyone should get into their head.

    MC: Well, that's life, and that's what the markets do, and you can either accept that or be a part of the banking-mutual fund-Fed-government system or you can go more in a Trend Following type direction. They are tough choices, they are really tough choices for people, especially as we talk about the Matrix again, the machine, there is so much propaganda that pushes people in that direction. It's hard. How do people that are leading a normal busy know it's amazing, people who live most of their adult life making money, then their investment choices with all that money that they have saved are often willy nilly, or not very thought through. I'd rather see people do nothing that just trust the machine.

    GC: To tie in with that, you featured Alan Watts [clips also available on Youtube] in a recent podcast, and he does have a wonderful way of speaking, and his main point seemed to be, "What do you desire [if money were no object]?" And regarding Trend Following, could you comment on the ways it is more desirable than other forms of trading that you have experienced or looking at fundamental investing and so forth.

    MC: Well, the way I understand value investing, I salute anyone that has had as much success as Warren Buffet, he has had tremendous success, but I'm not so sure that the success he's had is the exact way that all the acolytes that show up at the Berkshire Hathaway annual meetings think that he has achieved it. And so, I can only look at fundamentals, and value investing and all that kind of stuff, and say, okay, I'm going to go in this direction and look toward someone like Warren Buffet, and when it all goes wrong like in the fall of 2008, I'm just going to pick up the phone and call the President [of the United States] and get a bailout. So, you could be long the Dow or you could not be long the Dow. I don't know that any of this fundamental and value stuff during the last 4 or 5 years especially, or going all the way to the dot com bubble has proven to be better than just guessing or just sticking with an index. So I just don't see the value. I see a lot of misinformation part of the machine, and I don't see the ability of people being able to predict tomorrow, and I think what I love about Trend Following is that you don't have to predict tomorrow, but if you're a fundamental guy, you've got to be able to predict tomorrow, if you're a value guy, you've got to be able to predict tomorrow.

    GC: And even someone like Warren, I remember Charlie Rose interviewing him back in 2006 when he said he couldn't find anything worth investing in. A lot of times when he gets in something, it's a sweetened deal [warrants, etc], like that deal he got with Goldman Sachs back in 2008. Not everybody has access to that, and certainly with trend following, it's very accessible for anybody.

    MC: Well, yes, Trend Following is definitely accessible for anybody. Now, when anybody chooses that is a whole different ball game. You got to be on the search for something. You've gotta know something is wrong, that something is broken. If you like to trust things in this world and you don't like to think critically. Something completely unrelated to Trend Following, I read this the other day on Facebook, is the value of college degree. A lot of people will say, "You need a college degree." I don't know that you need a college degree. The first thing you need to do is make money. There are a lot of people out there with a lot of fancy college degrees that aren't making money. And then when you look at a situation where typical corporate jobs are getting squeezed, middle management is getting squeezed, I think it's in a place right now, when you think from a Trend Following perspective, from an entrepreneur's perspective, which is really what it is, it's like, "How do I take care of myself? How do I take personal responsibility? How can I navigate a world that is constantly changing? It's constantly downsizing. Is it going to 'take care' of me any more? How do I take care of myself?" And how do you take care of the big flood, the Black Swan that you know will swim in and just knock everybody silly. How do you prepare for that?

    GC: Michael, when did you first realize that you were interested in teaching?

    MC: Well, years and years ago when I was helping people learn...let me see, how can I answer that: I just sort of fell into it. When I put up a website many years ago, I was showing people almost out of the gate how Trend Following worked. And when I was trading my own account, I thought it was an interesting way to connect with people, to use the internet...because back in the mid 90's, when you looked at the internet, it was like, "Wow, I'm going to be able to connect with the whole world right now." This is changing the whole game. And there's still people that don't necessarily have that experience of massive connectivity across the net. I think I'm in a unique situation in many ways, but a lot of people, maybe they use Facebook to connect with their local friends, but they don't really connect outside of their world where they live and where they grew up. Now I've had the experience over a long time to connect with people in over 100 countries. It's just changed me.

    GC: I have your birth date here in your bio, but you must have been 30 years old when you started where you were setting up a systematized trading methodology for teaching people. So this is something that you must have felt from very early on, and then it eventually grew into a Podcast. Of course that was obviously pre-iTunes. It's something that has really blossomed in the last year it seems.

    MC: Yeah, well my first book came out in 2004. It sold a lot of copies, over 100,000 copies, which is pretty good for a trading book, my book Trend Following. I had no particular plan. For someone that's listening and they are trying to think about, how do I become a person that is able to navigate the world and build a business. And I've just been motivated to get this message out. And I realized that it's not a message that is going to interest the corporate finance types, or the "Machine" as we've talked about, and I've just been motivated to get that message out, and it's enabled me to meet a tremendous number of interesting, bright people who have continued to affect my life and teach me to this day.

    GC: Yes. I think it was last week or the week before that you said that this was something that you liked doing, and that people like to hear it, and found it helpful and it sort of grew from there.

    MC: I didn't really know what to expect, the podcast traffic is really interesting, to see the growth of that; and I realized that it was an effort kind of thing, and that if I did it five days a week, I think there would be even more listeners. People get into their shows so to speak, and they get into it on a regular basis, so I have to decide, do I want to do something five days a week, do I want to have guests all the time, and turn this into a real media type of deal.

    GC: Well, I tell you what, my wife loves listening to your podcasts also, by the way, and we had to go out and get a seventh generation iPod, so I could put on all the podcasts over the last year, and have easy access to them.

    MC: What does she like listening to on there? Not that I'm assuming that she's a complete finance nerd! But what does she like in particular?

    GC: At first she was wanting some kind of a quick answer, you know, like, "What's the system?" And I said, you know, it doesn't matter what system is involved, it's all about risk management, and the attitude, because if you take too big a risk, and you don't know how to manage your risk it doesn't matter. So, after that she went back to listening more and then realized what I was talking about, because she's a trader herself, and has been trying to improve, and I think it has really helped her attitude, just in the last few weeks that she has been listening. [When I asked her later, she said that she especially liked the fact that the traders Michael interviewed were not the typical Wall Street types.] It was actually through another podcast that we heard about yours. Just as a general comment, I've come across people who don't even know what a podcast is, one person with a four year degree I can think of, and these people have iPods, that's the amazing part about it! These are not trading people, and I know you've said in one of your podcasts that it's good to hang out with non trading people also, it gives you some good perspective. I guess one of the paradoxes of the information age is the fact that, according to studies that have been done, people actually get stupider despite the information age or maybe because of it, and with the flood of information, they don't know what is important to them and what to access, and I'm sure you've thought about that too.

    MC: Yes, I think people struggle with what to do with all this information, because society right now is non stop information from the time you wake up to the time you go to bed, and how useful is it for making decisions. I think that's what's great about Trend Following too, you don't have to worry about all that stuff to make decisions. What's the one thing that I have that I can make a decision with, and that's the price, and you make your decision off that. That's really nice! But that's really hard for people to accept. I think that if you're glued to the TV and that magical voice on the other end will say something that makes you smile and makes you feel good, and they're going to tuck you into bed, and give you a big hug and a kiss on the cheek and it will all be better, and there's someone who takes care of you and all that fun kind of fun stuff. It's kind of like a prison, and who wants to be in a prison? That's not my cup of tea!

    GC: I was also thinking of what my wife used to like before, for several months now, and he does the same kind of thing you do, he comes out with the book, follows it up with podcasts, and an audiobook right away (I think only one of your books is in audio format right now)....and that would be Joel Osteen, and she has listened to his books and podcasts over and over again, and it really has helped her, and from what she tells me also, her attitude, you know, the positive mental attitude is definitely important, and I know you've said yoga has really helped make you more centered and focused on the now, and that kind of thing. And certainly some of the other authors you have mentioned help you to focus on the power of now. So it's really important having that attitude of winning, and not letting the "system" take advantage of you, as you've said.

    MC: Yeah, I think it's tough, it's tough for people. How do you just tune out? How do you tune out your friends, your neighbors, all the voices, the TV, the prognosticators, the announcers, they all sound so serious, they've all got nice haircuts, they have great pancake makeup, the lighting is perfect, and they talk with such authority, and they "must" be right, they "must" be on your side, they "must" be telling you something that you really need to know. Or maybe they just want you to watch, because when the commercials come on the advertisers make a lot of money, and you go buy some laundry detergent after watching the latest political segment.

    GC: In your chapter on Richard Dennis in The Complete TurtleTrader, you point out that he was a natural born teacher. Can you relate to that, because here was a man that made $100's of millions but he seemed to have a great love for, and derived a great amount of satisfaction from teaching, training and coaching, and that kind of thing, and that's obviously what you seem to do in your podcasts.

    MC: Yeah, I have fun with it, I have fun trying to find out how things really work and then exposing that...that's fun!

    GC: You've studied these people so in depth over the years, do you think there are any other traits that you share with Richard or some of the other traders?

    MC: Well, if you read some of my books you'll see that there is some negative Trend Following performance, you don't win every month. Rephrase that [question] for me. I want to be able to give you a better answer.

    GC: You've studied the mental attitude, and the lifestyle, and the overall type of trading that these people do, so I was wondering if you find yourself, well I know we all compare ourselves to others in several different ways, so I was just wondering if there are any other traits that you share with Richard or any of the other people you've could be discipline, it could be anything like that.

    MC: I think it's to be outside the system. It seems that everyone that I've met and learned from over the years, I would make it almost analogous to a wildcatting oil speculator. You're outside the system, you're comfortable not working for the "man." Because no matter who I've sat down with over the years in the Trend Following world, there is a commonality. And Larry Hite talks about this, Larry was in the first Market Wizards book, and we'll have these casual conversations on the phone all the time. Larry is in a different league than I am, but when we talk, it's not about the size of our bank accounts, it's the commonality in our thinking. And it's that entrepreneurial, outside the system, don't trust the system way.

    GC: And to bring it around to Jack Schwager, who has also done a lot of documentation of traders over the years, how do you think you are similar or different?

    MC: I think the biggest similarity is that we have both communicated with some very bright traders, and have had access to very bright traders, very successful, and I have stayed in one specific genre, and Jack has definitely spread out to more genres. However, if you go back to that first Market Wizards book, quite a few of those guys were Trend Following traders, of the variety that are in my world. Some of them overlap. Jack brings in different guys that are completely unrelated to trend following.

    GC: So apart from teaching, what are you passionate about, and I know some of this comes out in your podcast, but for those who have not listened to your podcast.

    MC: So, let's see, I'm in southern California right now, and I have become a workout lunatic, and I guess that sounds southern California-esqe already, so basically between two trainers, and 5 or 6 days a week, and from yoga to pilates, to boot camps, to sprints, you name it,, I've tried to build my life around physical and mental health, and then try to make everything else become secondary, and I'm addicted to the exercise high, so to speak. So if I have any kind of high, it's that, what I'd call the yoga bliss, where you just sit there after two hours of yoga and you can't move because you can't feel anything in your body, and your brain is blank. I'll take that all the time.

    GC: Well, I hope you'll share that with the world, as to how you see the world differently or better (to use a value judgment). Does that have anything to do with why you are going to be traveling in February, and how long are you going to be away?

    MC: I don't know how long I'm going to be away. It's going to be many, many months, to be sure. It's going to be most of Asia, two or three weeks in each location, you name it, I'll be there. I'm doing some speaking over there too. There will be a lot of yoga along the way. It will be a way to get off the grid, a change of pace.

    GC: What do you think your are moving toward?

    MC: Well, Larry Hite and I have been discussing a book, a collaborative project that is in the works, and we really don't want it to be a trading book per se, more of a life book. And I have a feeling as well, on this journey I will end up creating something that is different than what I have created so far. I don't know what it is because I have to get in the middle of it first.

    GC: I like that attitude: experiencing life and see where it leads you. Well, I think that covers a lot of ground. I think in one of your Twitter-feeds you said that another of your books is coming out in audio format; I think you mentioned The Complete Turtle Trader.

    MC: Yeah, I'm getting it done. I'm not reading it myself, I don't have the patience right now. I've got a good voice-over guy I don't know why the publishers didn't want to do those to begin with. Anyone who pays attention to the publishing world, just take a look at Tim Ferris' work, he's at the forefront of causing the publishing world to go crazy, I love it!

    GC: It's causing them to go into meltdown basically!

    Is there anything else you wanted to mention real quick in terms of how you'd like to see people impacted, that kind of thing?

    MC: I'd just like people to stop for a second. You mentioned Alan Watts, that video, What Would You Do if Money Was No Object? Go find that video if you haven't seen it on Youtube. My mother immediately said to me, "You sound like some hippie philosopher talking about this stuff." But one of the things he talks about is how parents will pass along the same thing to their children, and it becomes this chain that doesn't get broken. How do you break the chain? You know, if you're living in the suburbs right now, and you're working for the Man, and you're saying to yourself, the only thing you want to do is send your kids to college, because this is how everybody else has done it for the last three generations. Stop for a second! Do something different, you know. Look at Jim Rogers moving to Singapore to have his little girls learn Mandarin. So something different. Don't just do the American suburb thing. There's a reason, not because I'm a negative, pessimistic guy, but there's a reason why I titled my film, Broke, The New American Dream. Not that you HAVE to be broke, but there are a lot of people that are looking at it wrong.

    GC: What's a good way for people to get more information for those that are not familiar with your books or you podcast.

    MC: is the absolute best way, and my Twitter is @Covel and on Facebook it's Michael Covel.

    Disclosure: I am long RIMM, BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Disclosure: I am long RIMM, BAC.

    Stocks: BBRY, BAC
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