Interview With Michael Covel: Masters in Business (Audio)

Episode Summary

Executive Summary: The episode is a wide-ranging Masters in Business interview with trend-following trader and author Michael Covel. It covers his path into finance, the Richard Dennis Turtle Traders experiment, why trend following persists, the role of psychology and risk management, and lessons from global travel in Asia about markets, demographics, and capitalism.

Main Topics: Michael Covel’s path into finance (Priority: 4/5): Covel explains how a political science background, graduate school, and a drive to get rich led him into Wall Street, where early conversations with senior traders shaped his approach. The Turtle Traders experiment (Priority: 5/5): The discussion revisits Richard Dennis and Bill Eckhardt’s famous experiment to prove traders can be taught through rules, discipline, and risk control, not just innate talent. Trend following as a trading philosophy (Priority: 5/5): Covel outlines trend following as a systematic, price-driven approach using diversified futures portfolios, position sizing, and predefined exits rather than prediction. Behavioral finance and psychology (Priority: 5/5): The conversation emphasizes Kahneman-style behavioral errors such as loss aversion, framing, herd behavior, and the importance of treating capital as inventory. Podcasting, interviewing, and learning (Priority: 3/5): Covel discusses how podcasting became a way to learn from experts, and how long-form interviews with thinkers like Kahneman, Arrelly, and others broadened his perspective. Asia, demographics, and capitalism (Priority: 4/5): Covel contrasts the energy, commerce, and buildout of cities in Asia with what he sees as an aging, overregulated, and less adventurous America. Film, bubbles, and the 2008 crisis (Priority: 3/5): He reflects on making Broke and how the film became a commentary on leverage, bubble behavior, lotteries, and the housing crisis unfolding in real time.

Key Arguments: Great trading can be trained: the Turtle Traders experiment suggests disciplined rules and risk management can create successful traders from novices. Trend following works because it exploits persistent human behavior—people chase trends, cut losses poorly, and repeat the same mistakes across eras. Futures are well suited to trend following because they offer leverage, liquidity, and diversification across asset classes. Risk management is more important than prediction; the key question is not what will happen, but how much can be lost if you are wrong. Loss aversion and framing bias cause investors to make poor decisions, especially when they focus on outcomes in emotionally charged ways. Capital should be treated like inventory in a business: it must be measured, preserved, and redeployed rationally. A good investing process is mechanical or rules-based; gut instinct is unreliable for managing large pools of capital. Asia’s rapid growth, merchant culture, and infrastructure buildout make it feel more dynamic than the U.S., which Covel describes as older and more bureaucratic. Demographics matter: younger populations and expanding cities support entrepreneurial energy and market growth. The 2008 crisis and the housing boom showed how leverage and mass irrationality can distort behavior, making broad public participation in bubbles dangerous.

Data Points: Trend Following book sales: 100,000-plus copies - Covel says his bestselling trading book sold over 100,000 copies. Richard Dennis annual profits: $80 million in one year - Ritholtz references Dennis’s legendary 1986 commodities trading year. Dennis’s early fortune: First million by age 25; about $200 million by age 37 - Used to illustrate Dennis’s rise as a legendary floor trader. Turtle Trader applicants: About 2,000 applications - Dennis and Eckhardt screened applicants after placing ads in major newspapers. Turtle Trader trainees: Approximately 20 people - A small group was selected and trained over two years. Turtle Trader training: Approximately two weeks - Covel describes the initial training period as short and intensive. Turtle Trader result: $100 million profit over 3.5 years - The group’s collective performance after training and capital allocation. Bill Dunn track record: Over 40 years; roughly 16%-19% after fees - Referenced as one of the most durable trend-following records. David Harding firm size: Around $30 billion - Winton Capital is cited as having grown massively under Harding. Winton starting size: About $5 million in 1997 - Used to illustrate long-term growth in trend-following assets. Kahneman Nobel Prize: Shared with Vernon Smith - Discussed as a milestone in behavioral economics and experimental economics. Vietnam war deaths: 60,000 Americans; 3.5 to 5 million Vietnamese - Used in a discussion of war memory and perspectives in Saigon. Asia speaking tour: 7 cities across 4 months - Covel says a speaking tour turned into his move to Asia. China presentation audience: 1,000 to 1,200 people - He describes a large event in Beijing where the translation failed and the audience intervened. Vietnam demographics: 90 million people; 45 million under age 30 - Used to explain Vietnam’s youthful, growth-oriented energy. Apple performance: 27,000% over 30 years - Ritholtz cites Apple’s long-run returns to discuss survivorship and drawdowns. Buffett drawdowns: Five drawdowns of 30%+; two of 50% - Used as an example of enduring volatility even for the most successful investors.

Pivotal Quotes: "you don't want to be the best, you just want to win" — Jim Massey: The early Wall Street lesson that altered Covel’s mindset about competition and performance. "you can teach people to do what I do" — Richard Dennis: The core belief behind the Turtle Traders experiment and the nature-versus-nurture debate. "How much can you afford to lose?" — Larry Hite: A concise definition of risk management and the centrality of loss control in trading.

Implications: The episode argues that durable investing success is built on rules, discipline, and psychology—not prediction. It also suggests Asia’s dynamism and demographic tailwinds may offer a sharper view of capitalism’s future than the U.S.