How Covel inadvertently exposed the chasm between investors and traders

As a rule, I don't do book reviews. However, regular readers know that I am a big fan of trend following models and I use them extensively in my asset allocation work. When a publicist offered a free review copy of Michael Covel's Trend Following, 5th Edition: How to Make a Fortune in Bull, Bear and Black Swan Markets, I jumped at the chance.

The book also featured a forward by Barry Ritholz. Ritholz's partner Josh Brown recently wrote that they use trend following techniques for tactical asset allocation, which is a sensible decision that I wholeheartedly agree with:

At my firm, we use trend for tactical asset management. It takes everything above into account- not only the things, but people’s actual reaction to the things, a sort of realpolitik for markets. Will it always work? Doubtful. What is the downside when it doesn’t work? What is the expected benefit when it does? Is there a behavioral aspect to why it makes sense to include tactical in client portfolios? We think so. Not everyone would agree that this is worthwhile.

After all that buildup, the book left me vaguely disappointed. Covel's approach has been to be a cheerleader for traders who use trend following techniques without digging into the deeper issues that face investors. He treats trend following almost as a magic black box that everyone should use. He doesn't take the next step to discuss the characteristics of this class of strategies, which sophisticated investors think about when they consider the use of such techniques have a place in their portfolio.

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