"Trend Following Masters" - Andy Lin's Long-term Stock Investment Blog

Table of Contents

Book Summary

Trend Following Masters, written by Michael Covel, discusses advanced investment topics such as investor psychology, decision-making, biases, and behavior through interviews with over ten renowned psychologists, behavioral finance professionals, investors, and fund managers. It is highly recommended reading for investors.

Investing

Those who cannot accept losses are likely to accept bets they cannot afford—in the world of trading, the inability to accept losses is one of the main reasons for failure.
Richard Dawkins, in his most famous book The Selfish Gene, states that people act only after knowing everything and calculating, but in reality, people have no idea how they act.
People manage capital more effectively (minimizing losses and preserving capital) when they take less risk than logically optimal.
Investors have a limited tolerance for market downturn risk.
A trader with a good track record is a good trader. Because the last thing people who act impulsively, foolishly, and distract themselves want to do is look in the mirror. Keeping a record is creating a mirror of your own behavior.
We tend to think, “I knew something bad would happen, I just never thought it would happen to me.” Some studies have found that we delegate danger to others and claim the benefits for ourselves.
Humans tend to project the recent past indefinitely into the future.

What are the common traits of successful traders?

According to Jack Schwager… Research in Schwager suggests that successful fund managers have distinct personalities and trading styles, and their trading methods align with personality traits. A quantitatively-oriented person might be very different from someone strong in thought processes and pattern recognition. Each person finds a way to leverage their strengths through their trading.

I’m unsure of my personality

People say: I’m not sure what my personality is, and even if I knew, how would I decide which direction to take? It’s not just about personality traits, but also our cognitive style—how we perceive things. We need to leverage our strengths in both areas.

Successful trading can provide real clues to some of the personality traits and cognitive strengths that contribute to our success. Research on traders has found that average holding time is a significant variable. Especially in terms of cognition, I would emphasize that traders and investors are psychologically different.

For long-term investors, whose operating time is longer, in-depth fundamental research is even more necessary. In other words, for (long-term) investors, the focus is not on the daily fluctuations of assets, but on the accumulation and results of long-term research, which will influence their more accurate investment decisions.

This is a significant advantage compared to active day traders who focus on understanding the market. Day traders observe rapid market fluctuations, focusing their investment strategies on quickly capturing market changes and patterns for trading, without deliberate research, reading, or calculations; their emphasis is on identifying rapid patterns.

This involves the difference between slow thinking and fast thinking: deep thinking versus rapid pattern recognition, as Connerman stated, are two different brain functions, two different modes of information processing.

Furthermore, we can distinguish between two types of traders or investors. One type is highly adventurous; they are more extroverted, more thrill-seeking, more proactive, and willing to take on more risk for higher returns. The other type is less interested in absolute returns, preferring risk-adjusted returns, and dislikes taking risks.

Your biggest enemy is human nature.

—Basketball Coach Bob Knight Knight: “Your greatest enemy isn’t anyone else, it’s human nature.”

We all have strengths and weaknesses. But Coach Knight embodies the importance of preparation. It’s not just about winning, it’s about preparing to win. Human nature is inherently inclined to avoid effort; we crave comfort. As I mentioned before, we won’t grow unless we push ourselves—basketball players are no exception.

Human nature makes us reluctant to go to the gym, reluctant to practice, reluctant to research the market, and reluctant to develop new strengths. Overcoming this is crucial.

Talent and Practice

Consistent practice is key to maintaining a high level of performance. After stopping practice for several years, performance will revert to mediocrity.
Children should lead practice and master their interests, with parents providing support and encouragement.
Only experts can identify areas for improvement and become experts in their field.
Long-term preparation Preparation.
Highly effective traders spend more time preparing than actually performing. There’s a significant amount of time spent practicing behind the scenes before a competition. Preparation works on two different levels: first, it helps develop strategies and methods; second, it builds mental, psychological, and emotional preparedness. Preparation time is correlated with success because it broadens a trader’s horizons and enables them to perform at their best.
Among high-performing traders, although they may all have a long history of excellent performance and manage large sums of money, their practice and preparation methods differ. Some may perform poorly because they lack the deliberate practice to develop into a discipline. In other words, there are differences even among the best-performing traders.

Markowitz’s Portfolio Model

The author admits to having had the opportunity to spend an afternoon with Harry Markowitz a few years ago. Interviewee Gerd Gigerenzer stated, “First of all, Markowitz wasn’t wrong. He developed an optimized model called the Mean Variance Portfolio Model.” (Portfolio) If you apply the assumptions in his model, then the model is useful. But to claim that Markowitz’s model works in the real financial world is another matter entirely. If someone says that, then that person is likely mistaken.

Interestingly, when Harry Markowitz invested his retirement savings, did he use this optimization model that earned him the Nobel Prize? No, he didn’t; he used a simple shortcut: allocate your funds equally. So, if you have two stock choices, allocate half each; if you have three stock choices, divide them into thirds.

From another perspective, the larger the sample size, the better the Markowitz model performs. So, considering the uncertainty of the stock market, how many years of stock data do you need to say that the Markowitz model performs well? The answer is 500 years.

Scientific Statistics

Maximizing expected utility theory, based on statistics, was proposed as the solution to all decisions—as if statistics were the answer to everything! “Statistics is a very important tool, but it only applies to situations where you are certain you can correctly predict the world.”

Modern dating websites use this algorithm for matching, and Hundreds of personal traits are weighted and calculated to find the perfect date. I dare say these websites are no more successful than having an experienced person who knows you well make the decision for you—and this remains true in Asian countries. There is no evidence that the algorithms of these dating websites generate relationships that are superior to traditional methods of finding a partner.

Risk Assessment

To better understand risk, you need two tools. When you can spend time calculating risk, you need statistical thinking; when you can’t, you need good heuristics. This doesn’t mean we’ll always make the best decisions, because in a world full of uncertainty, no one can predict the best outcome. But broadly speaking, we should invest more in people.

Note: “Heuristics” comes from Ancient Greek and refers to a quick, experience-based thinking shortcut rather than rigorous logical analysis. It is also translated as heuristic, strategy, convenience judgment, etc.

The Illusion of Control: Why People Love Ineffective Research?

James Collins’ book Good to Great Of the 11 companies mentioned in the book From A to A+, none appeared in Fortune’s top ten most admired companies from 2001 to 2015. Yet, James Collins’ book Good to Great remains a bestseller.

We love hero stories, and James Collins is a hero. “We like to hear things we think will help us.” But just as most hero stories are wrong, so are many management books. People still enjoy reading them, perhaps applying some concepts and even making some improvements, but this isn’t based on past research; it’s a placebo effect—it makes us feel better.

Speaking of heroes—many people wish someone could say on TV, “I know what will happen tomorrow!” Even without evidence that such predictions come true, people still clamor to hear it. This is the “illusion of control”—we’d rather believe in the illusion of controlling the future than accept the reality of our own actions. A reality beyond our control. That’s why we buy fire insurance for our homes—because we accept that we can’t predict when a fire will break out, so we try to do things to predict it.

Resources, Gambles, Future

If you want to be a good decision-maker, you must think probabilistically because you’re constantly faced with many choices.

The problem is that we don’t explicitly treat our decisions as gambles. Our resources are limited (money, time, happiness, health, etc.), and we must invest these limited resources in a decision that leads to some possible futures, but these futures are only “possible.”

Every decision we make is a gamble because we have limited resources. And resources aren’t necessarily money. Then, we have some possible outcomes, and most of the time we’re gambling with ourselves. This means that future event A will lead to a certain future version of myself, future event B will lead to another future version of myself, future event C will lead to yet another future version of myself, and so on.

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The content of this site is the author’s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.
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