Trend Commandments, by Author (Hardcover, 2011)|
(You can print this review in landscape mode, if you want a hardcopy)
Reviewer: Mark Lamendola, author of over 6,000 articles.
Having read and reviewed The Complete Turtle Trader,
a previous work by Covel, I readily agreed to read and review Trend Commandments. This book is
philosophical and conceptual in nature. It doesn't present a "foolproof system"
in cookie-cutter fashion, under the idea that you just do these steps and you
can't lose. Anyone looking for such a book can do just as well picking up the
scam of the day (which this book is definitely not).
This book lays the groundwork for any trader who wants to succeed. That
brings us to the question, "What is a trader?" In the world of alleged investing, there are two types of players: investors
and traders. Most people do not understand the distinction. So, I'll explain.
An investor is someone who owns part of a company and is "invested" in it by
virtue of more than just money plunked down. That person has a long-term, active
interest in ensuring the success of that company. And a personal stake. The word
"invest" is key, here; look up its etymology and history. A true investor can't
invest in very many companies at the same time. There simply is not enough of
that person to go around.
You might invest in your brother in law's machine shop, for example, and
because you are invested you provide some resources to help it succeed. Maybe you make business contacts, or perhaps you handle vendor negotiations. You probably sit on this company's board. You are
not concerned much with its stock price, but you sometimes lie awake at night
thinking about its cash flow. That's investing. You are, in a sense, wearing (like a vest) the business. It's part of what you put on each day.
Then there is trading. People who think they "invest" in mutual funds are not
investors. They have no stake in the companies owned by the fund and typically
can't name three of the top ten the fund has shares in. They are traders,
despite the language abuse that pervades our society.
Another way to look at this would be rentals. If you buy two or three rental
houses that you plan to hang on to as your long-term business, you are an investor. You're managing those investments and taking the
risks. What happens with those particular houses is important to you and you can
probably answer any questions anyone asks about the costs and condition of those
But if you buy into a real estate mutual fund, you probably have no idea
what is going on with any particular property. You are concerned only with the
return on your investment, as evidenced in the share price.
The share price concept is key, here. Keep it in mind. It's something Covel
comes back to again and again in this book.
Covel castigates "buy and hold," and that stance is correct regarding stock
and commodity traders in general. I think for mutual funds, it's incorrect,
because the fees and tax compliance costs involved in switching and trading
seldom justify moving from one fund to another. For true investors, of course,
it's all about buy and hold. But for traders, that strategy is normally based on emotion
rather than results.
Covel correctly points out that the famous "buy and hold" star Warren Buffet
isn't actually a "buy and hold" guy. He's made tens of billions doing the
opposite. Is he really going to advise other people to emulate him and thus
dilute his profit potential? Not likely.
Trend Commandments helps the reader overcome misconceptions and bias in the
area of financial trading. Covel's basic point is that if you want to get
exceptional returns, you have to follow the trends. In particular, pricing
Earlier, I pointed out the difference between investors and traders. As you
can imagine, an investor is very concerned about the fundamentals of the
company. An investor looks at the financials, the operations, and other factors
that affect profitability and long-term viability. This is very time-intensive.
And it's why most people who think they are "investors" are actually
traders. They aren't invested, they are merely hoping to trade from a lower buy
price to a higher sell price. And typically get panicked into doing the reverse.
But wait, you say. What about the stockbroker who sends me research on a
company I want to buy stock in? Well, read the research. What's its point? To
predict where the stock price is headed. Based on what? Based on things that
don't determine the stock price. Those things you're reading about are
fundamentals, and while logic dictates they should predict stock price
direction, history shows they do not.
This sad fact of life is well-documented in several works, including
Messiahs, and Markets, and in other books by Covel. So if you are a trader, you
can't rely on fundamentals to guide you. What, then, is a reliable means of predicting the
stock price direction? The answer to that question is what this book is about.
If you're a trader, you need that answer.
This book consists of 241 pages, plus a 4-page bibliography that is pretty
much a "must read" list for any serious trader. It's written in Covel's
recognizable and enjoyable style.