Book Review of: Trend Commandments

Trading For Exceptional Returns

Price: $13.51
List Price: $25.99
You save: $12.48 (48%)

(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 houses.

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 trends.

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 Mobs, 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.