Pod Insights Michael Covel's Trend Following Ep. 1343: The Value of Fundamentals with Michael Covel on Trend Following Radio About this episode Please enjoy my monologue The Value of Fundamentals with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive. --- I’m MICHAEL COVEL, the host of TREND FOLLOWING RADIO, and I’m proud to have delivered 10+ million podcast listens since 2012. Investments, economics, psychology, politics, decision-making, human behavior, entrepreneurship and trend following are all passionately explored and debated on my show. To start? I’d like to give you a great piece of advice you can use in your life and trading journey… cut your losses! You will find much more about that philosophy here: https://www.trendfollowing.com/trend/ You can watch a free video here: https://www.trendfollowing.com/video/ Can’t get enough of this episode? You can choose from my thousand plus episodes here: https://www.trendfollowing.com/podcast My social media platforms: Twitter: @covel Facebook: @trendfollowing LinkedIn: @covel Instagram: @mikecovel Hope you enjoy my never-ending podcast conversation!
Transcript 0:00 Speaker 00 Of course, I always talk trend following. But there are other strategies. For example, fundamental analysis. Fundamental analysis is Bloomberg, CNBC, Jim Cramer, whatever guru has whatever opinion based on some piece of data and then predicts what will happen at any point in time. This is fundamental analysis. And if you are inexperienced, if you're young, even if you're old, it seems perfectly logical. If I gather all this information, I can do something with it.
0:45 Speaker 00 I can analyze it. And I've heard in the back of my mind that Warren Buffett does this too. So if Warren Buffett does it, why not me? Well, first off, let's put Warren Buffett off to the side. He's one of the best investors ever. You're not him. I'm not him. Nobody is him. Now, you can go down the rabbit hole and you can study Warren Buffett. But honestly, if you really want to trade like Warren Buffett, it's probably better just to give your money to Warren Buffett. But most people really aren't thinking about Warren Buffett. They're thinking about the fundamentals. What can they know? What edge can they get?
1:28 Speaker 00 How can they exploit something by knowing some piece of data that supposedly nobody else knows? Therefore, you buy cheap. This is the mentality. This is the thought process. I think it hits everybody. How can it not? This is the world we live in, nonstop.
1:53 Speaker 00 And you'll get people who use some data, make some bets, get rewarded, and then they're out there talking up their books, so to speak. They could just be regular people, some influencer, some podcaster. "I took this piece of information and I made a bet and I made a million dollars and therefore, listen to me." That's their message. "Therefore, listen to me because I did this and this happened." But what they don't say is, "Something else could have happened."
2:26 Speaker 00 It's not strategy. It's one-offs. How is that useful?
2:32 Speaker 00 Going back in time, I always thought the most interesting thing, and I've said it on this podcast for over a decade, the most interesting thing about trend following is to look at the professional traders who trade as trend following traders, whether they're low risk or high risk, trying to make a moderate amount of money or trying to make crazy F you money. You can see their performance. Very valuable information over the decades. Extremely useful. Because it tells you that what's happening today is just one day. And if you want to go through
3:11 Speaker 00 your life making a big bet, if you want to bet it all on one day, well, you can do that. And that's what the fundamental analysis world is all about. Here is my opinion about this data. Therefore, you should invest right away. They might help you get in, but they're not there to help you get out. But this kind of thinking that I'm describing today, this analysis, most people don't care if they're long, if it's a bull market and they're making money.
3:48 Speaker 00 They only care if the long-only strategy craters. Then, all of a sudden, they wake up and they come to Jesus quite fast. But today, I want to spend a few minutes to describe some of the reasons why fundamental analysis can be very problematic. First, lagging information. Fundamental data, earnings reports, economic indicators, it's often released after the fact. By the time traders act on it, markets may have already priced in the information, reducing the edge.
4:33 Speaker 00 So you're not sitting there, listening to the hot tip, beating the best investors in the world to the punch. It's not happening. Even though I say this, right now, kind of concretely, logically, again, people don't care if they're long only and the market's going up. They only wake up when you know what happens. Number two, subjective interpretation. PE ratios, revenue growth, these things can be interpreted differently, depending on the guru. You could have two gurus working for the same company, interpreting the same fundamental
5:14 Speaker 00 information, giving you different things to do. It happens all the time. So you've got two gurus out there, analyzing the same data, and they're reaching opposing conclusions. This is the path to inconsistency. It's actually the path to insanity, as far as I'm concerned. Number three, market noise. Look, there's gonna be volatility. There's gonna be short-term price movements, driven by whatever, and that can overshadow any fundamental signal that you're supposed to act on.
5:57 Speaker 00 Market noise is not a problem for trend followers. I mean, you might lose money during a whipsaw period, during a market noise period, but that's expected. And trend following, if you can't handle that, you can't be a trend-following trader. But the fundamental people don't think that way.
6:17 Speaker 00 Again, it's all about the perfection. I've got the edge. I know something that no one else knows. And therefore, I will make my million bucks overnight. And I will retire to Fiji next week. I know how that has come to be. There is infinite numbers of people out there that promote that bullshit. Some jerk off, standing next to a Ferrari. You don't know who he is. He's just rented the car to make you think all of his fundamental predictions and guru powers got him that Ferrari. It's actually kind of funny, if you think about it, how stupid us human animals are that we can fall for this stuff.
7:02 Speaker 00 Number four, incomplete data.
7:06 Speaker 00 Publicly available fundamental data. Does that capture all of the company internal information? Good question, right? Does Warren Buffett perhaps have more information as a fundamental trader than you do? Yeah, I'm willing to bet he does. Let's say there's a huge conflict inside some company. Management, lawsuits, whatever, macroeconomic shifts. You've got an incomplete picture if you're going by publicly available fundamental information. On the flip side, do trend following traders care? No, because there's a price every day.
7:53 Speaker 00 And all we trade off is the price. We don't care if the price represents accuracy or value. It doesn't matter. You simply follow the damn price. Number five, in terms of reasons why you might want to consider the complexity of fundamental analysis. Time intensive. You've got to evaluate financial statements, industry trends. Looking at economic conditions requires significant time and expertise. Are you going to do all that? Can you do all that? That was one of my concerns when I got started.
8:35 Speaker 00 I didn't have the training to be Warren Buffett or Seth Klarman. But then one day, a little bird landed on my shoulder and said, "Hey, Mike, there's something else out there that allows you to work around, to hack around, your lack of fundamental analysis, your lack of expertise, your lack of connections, your lack of everything." Actually, that wake-up call that I had is not dissimilar to almost every trend filing trader I've ever talked to.
9:06 Speaker 00 They had their wake-up call at some point in time, for some reason, something happened. And they said, "Damn, there's another way." Number six, using fundamental analysis, can you over-rely on historical data? You know, if you're just looking at the past performance, revenue, profit margins,
9:30 Speaker 00 is that going to predict exactly what's going to happen tomorrow? Do you even want to be in the prediction business? Is there evidence for prediction being a workable skill in financial markets? Assuming you're not one of the best hedge fund managers in the world. And let's be frank about this as well. There are some hedge fund managers, who I will not name, who probably only have a skill of working in the system. Meaning, they don't necessarily have some great repeatable strategy. But what they do have is access.
10:13 Speaker 00 What they do have is closeness, connections. And if you get to be big enough, and you have enough power, you're like a bank. It's not strategy anymore, it's monopoly. It's pure power.
10:30 Speaker 00 Now, that's fantastic, I guess, if someone does it legally. But you don't even know if they've done it legally.
10:39 Speaker 00 So I always go back to the trend following traders that you can see their performance track records and it's all out in the open. You're not having to guess how they got there. They have to have performance and you can see whether they raised money or not. That's it. You don't have to sit back and ponder. Is it all legit? It is legit. The damn audited track records of trend following traders exist with the Commodity Futures Trading Commission on file in Washington DC. You can do a Freedom of Information Request and you can get those documents. And of course, there's always the risk that some trend following trader is a scam.
11:23 Speaker 00 But you know, when you look at the performance of trend following traders and you compare the performance and the performance can be similar, it really reduces the likelihood of a scam. Back to fundamental analysis. Concern number seven, market manipulation. What about accounting? All the accounting tricks and the bullshit they can do. Stock buybacks. Misleading guidance. You've got to rely on all this stuff. You've got to rely on corporate guidance if you're going to be a fundamental trader. You've got to listen to these people and believe that they're telling you the truth.
12:08 Speaker 00 Is there always evidence for that? No, there's not. As a fundamental trader, if your strategy involves something like venture capital where you know a certain number of your trades or investments are going to blow up just naturally because you can't predict a damn thing, then I guess that's tolerable, but it's just completely different than something like trend following. Somebody can manipulate the price of some company or some market and force that price to go way up. And from a trend following perspective, who gives a shit? You just follow along.
12:50 Speaker 00 At the end of the day, if it's a fake move, you're making money on a fake move. This is the world we live in. These are markets. You really have to think about who you are up against, what you are up against, the conventions that exist in modern society, how we all have to play ball, so to speak. You can stay in this fundamental realm where you deal with all these issues that I'm bringing up today, or you can put those issues aside and say, fuck it, I'm just going to trust price. Now, here's an issue that can also affect trend following traders. Number eight, liquidity, volatility impact issues, low liquidity markets, high volatility events.
13:35 Speaker 00 Shit can happen. It can go against you. Look at tariffs under Trump. Not a good situation for trend following traders. Probably not a good situation for anybody. That's not necessarily a criticism of Trump. I'm just saying, that tariff environment, that is pretty damn chaotic. Rapid price swings up and down. There's no trading strategy that's really set to excel in that type of environment. Number nine on the list here, crowded trades. If certain fundamental metrics are widely followed, the trades can become overcrowded.
14:17 Speaker 00 Reduces profitability if you're a fundamental trader. Too many people chasing the same opportunity. Now, from a trend following perspective, you don't think that way because you don't care. You don't know. You're not trying to figure out value. If some market is taking off and the fundamental trader thinks too many people are on board, the trend following trader is just like, well, I know I'm not going to capture all the move. I know I'm gonna have to exit at some point in time. And I'm just trying to get a chunk of it. I'm trying to get a piece of the trend. Very different mindsets. Fundamental analysis requires you to trust a lot of people.
15:01 Speaker 00 And I'm not gonna say, because there are people that were just regular Joes who probably put $5 in with Warren Buffett in 1950 and made a billion bucks, figuratively. I'm sure it happened. But what good is that for you and me? Playing the lottery is not what we're supposed to be doing here. We're supposed to be rational. We're supposed to be logical. We're supposed to have a plan, to focus on a system and not just look at the outcome, not just look at the lottery winners out there who are saying, "Do it like us. We won the lottery." No, that's not the objective. That's not what we want to do.
15:44 Speaker 00 Number 10 on my list of issues with fundamental analysis, often a mismatch with your trading horizon. Now, generally speaking, fundamental analysis will be better, again, if you're looking at it from a Warren Buffett perspective. It's gonna be better over the long term. But let's be honest, most people are pretty close to day traders. And there is absolutely no way, if you're attempting to use fundamentals, and let's use the Trump tariffs as an example, imagine trying to use fundamental analysis to trade
16:25 Speaker 00 the markets in the middle of the up and down of all of the tariff announcements. And who are you really up against anyways? You were up against professional, short-term traders with billions under management who might have had access to Trump information ahead of time and were pushing and pulling the markets while you were just sitting there, listening to CNBC, Bloomberg, Kramer, whatever. Not a snowball's chance in hell to get anything except a major kick in the balls. This is life. There's all kinds of strategies out there.
17:08 Speaker 00 And you don't necessarily have to only be a trend following trader homer 100% of your money. You don't have to be 100% into Warren Buffett. Same with trend following. You could be 100%. And many, many examples of people who have done this and have excelled. There are also people out there who have spread their wealth around, looking at these things from a diversification standpoint. I want some money in Buffett. I want some money in trend following.
17:41 Speaker 00 They often make and lose money at different times. There is some real Harry Markowitz logic right there. And I gotta say, every time I hear the name Harry Markowitz, I think back to meeting him for the first time. I think it was 2007 in San Diego and I had him on this podcast at least once. And he is no longer with us, but the father of modern finance. Take a few minutes to study what you can learn from the Nobel winner, Harry Markowitz. A really fun, interesting guy that I feel exceptionally lucky to have met. And you can hear it on this podcast, at least I hope you can hear it.
18:20 Speaker 00 But his first appearance on this podcast, I remember he answered the phone and he was probably like 90 at that time. And he answered the phone something like this, "This is Harry Markowitz." And he kinda sounded like a teenager. What a great way to be. In this unusual life that I live, I feel fortunate to have met some of these pioneers. And fortunate to turn around and share back some of their wisdom with you today, just as I have done on getting you to think about fundamental analysis. And even that, I don't even know how many people use the term fundamental analysis. Who the hell knows what people call it? We all get caught up in these terms. But sometimes they're not really relevant
19:04 Speaker 00 other than trying to talk with people and try to share a perspective to give people a feeling of are we talking about the same thing? So I implore you to take your time, whether you're new or experienced. Take your time and look clearly at something like fundamental analysis. Look clearly at something like trend following. Make honest comparisons. Don't just dial it in. Don't just assume. Don't just feel like you've got it all covered because you're long only and we're in a bull market on equities. I mean, you could do that.
19:45 Speaker 00 But you don't want to be the guy that wakes up one day and you're in trouble. And this happens. Right when we all think that we've got it figured out, right when we think we're protected, right when we think we can see into the horizon and we know when a meteor is coming or it's not coming, that's right when we get clipped. Arrogance, ego, whatever domain in our life. If that's where we are, we in trouble. We all in trouble. I see you again next week.
20:29 Speaker 00 I see a time when those awake will understand how to make money in up, down, and surprise markets. Whether new trader or experienced, college student or financial advisor, protecting against a crash or just trying to make a lot of money. Trend following offers everyone an answer in uncertain times. To get started immediately, send me an email, [email protected] . I will send you the right trend following steps to take along with my free video. But if you want to buy and hold, trust the government and trust Wall Street, this is absolutely not for you.
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