Not many books on investing and finance get a paperback edition, let alone a second edition. Trend Following: How to Make a Fortune in Bull, Bear, and Black Swan Markets by Michael Covel just published its Fifth Edition. This edition of the book is highly revised and extended and includes a Foreword by Barry Ritholtz.
There is no shortage of information on Abnormal Returns about momentum and trend following. I own a first edition of Trend Following and cited material from it in my own book. I have also appeared on Mike’s popular podcast. When Mike asked me to write a blurb for the new edition I was happy to do it. It seemed like a natural to send Mike some questions via e-mail about the book.
Below you can find my questions in bold. Mike’s (unedited) answers follow. Enjoy!
AR: Most finance/investing books ever make it into paperback, let alone make into a Fifth edition. What do you think has made Trend Following stay relevant for so long?
MC: Great question. A little more than an investing answer… I wish none of my books ever went paperback! That is a publishing convention that only hurts authors in my opinion. But off my soapbox and to your point Trend Following has endured for several reasons:
1. The famous names, some of the biggest in trading literature, starting with Schwager’s Market Wizards, are traders employing trend following methods.
2. Ongoing track records prove and give credibility to #1. Like Bill Dunn’s fabulous record in the newest edition.
3. Enough smart people know EMT is off base. Thus strategies like TF will always have a place at the table.
4. I push hard. For example, when October 2008 hit I told my then publisher we must do a new edition. They were afraid to say no.
However, my last edition was early 2009. So with 13 years more experience since the first 2004 edition, and with no fear of tearing up a book that has already sold 100,000+ copies, I convinced Wiley it was time for the epic rewrite and expansion to 230,000 words.
AR: In your mind what has changed in markets, trend following, etc. since your first published Trend Following?
MC: Philosophically, big picture, nothing has changed. Markets represent people–all of their greed and fear. That will never change. When Daniel Kahneman is proven wrong people can then use my books as kindling.
AR: The reaction to a recent Bloomberg article citing research on the skew inherent in stock returns fascinated me. You highlighted research by Cole Wilcox and Eric Crittenden to this very effect years ago (which I cited in my 2012 book). Are you surprised that fundamental findings like that have to be re-discovered every so often?
MC: It’s big business to get every last soul into a passive index or associated with a buy and hold mutual fund. It’s the biggest game in town and those folks get paid fees of massive note. Anything that interferes with the gravy train is persona non grata. This newest edition of Trend Following is simply another vantage, another perspective. It will inspire love and hate, as any work should when it takes sides.
AR: One of the knocks against momentum investing is that there seems to be no consensus academic model for why it should work over time. Given all the academic research that shows momentum in all sorts of markets and time periods, are you ever concerned that it could get arbed away?
MC: Ah, the “get to the root of it” question. If I thought I could answer this quickly and succinctly there would not be a 688 page dead weight weapon in your hands now. But let me get precise some. No one wants to take a drawdown. The sizeable majority believes there is a money spigot that they turn on for straight line riskless returns every single freaking month. That is of course certifiably insane, but huge swaths of populations believe it with their every fiber. Let Mr. Buffett add a key point:
“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” —Warren Buffett
Look at Bill Dunn’s track record:
If you consider Buffett, Dunn, and Kahneman, how does an arb ever work to eliminate momentum opportunity when the human population is always losing people to old age perhaps right when they figure it all out? Then the new ones come into the game with the same human frailties ready to reinvent nature with the utmost confidence. And of course all along the way Wall Street is selling a much different product with little incentive to sell TF except on the margins. It’s always wash, rinse, repeat.
AR: What, if anything, do you make of the fact that trend following strategies are now available in mutual fund form including the giant AQR Managed Futures Fund?
MC: I am much more interested in strategy than instrument discussions. Of course, it’s great that Cliff Asness likes and utilizes trend following.
AR: You have spoken to Kathryn Kaminski, co-author of Trend Following with Manged Futures: The Search for Crisis Alpha about this idea of managed futures as providing ‘crisis alpha.’ Do you think this idea has been over sold?
MC: Crisis alpha is a valid marketing point. 100%. However, trend following is far more than black swan protection alone. Remember, when absolute returns were important? Shoot, almost every big name today was built on outsized gains in their early track records. Are big numbers bad? And where else do you get trend following’s diversification across stocks, rates, currencies, metals, commodities, energies, etc.? Nowhere.
Finally, trend following always has and always will adapt to a changing environment. It’s built to last from the ground up.
AR: Today you may be as well known for your podcast than you are for your writing. How has doing the podcast changed your outlook on trading, business and life in general?
MC: I am more relaxed after 500 plus episodes… even if the episodes don’t show. Many of my guests are “mind pros” (for lack of a better term; see www.trendfollowing.com/behavior) and they bring unparalleled wisdom. It’s like being in school every week. When I get off an episode with Harvard Law prof Cass Sunstein, for example, I am exhausted. Need immediate rest.
A great example of outlook change? Anders Ericsson was a guest. 90 minutes of discussing deliberate practice. You walk away more calm from that. Here is a guy who has dedicated his life to practice and in 90 minutes I get much of his best. A trading one? Listening to how Martin Lueck helped launch AHL with David Harding. Regular guys with vision and persistence. Of course, I respect their immense work, their efforts, but when you go behind the scenes you learn they are not gods. Smart guys with balls and an entrepreneurial bent. All across my podcast are these stories. And unlike some podcasts, I have curated guests differently. Much of my guest direction is personal passion. No grand script or path. Just a process and then see what happens next.
AR: For authors out there: what the relative effort in writing a book versus subsequently revising it?
MC: This was a major rewrite and expansion for me. I went through every line. I added new content everywhere. Removed dead weight as needed. Then added brand new interviews and research sections. I also did passes to remove individual extraneous words, i.e. cut ‘the’, cut ‘really’, etc. My view? It’s a new book. The goal was to get definitive. Hope some will say I got close. That said, I am not so sure my author experience means much for anyone else. Everyone has got to take a path and rest assured it won’t be predictable a straight line!
AR: Thanks, Mike. Good luck with the book!
*As mentioned before I wrote a blurb for Trend Following: How to Make a Fortune in Bull, Bear, and Black Swan Markets. The publisher also sent me copies of the book which I am using for a giveaway to my readers.