Ep. 1396: SpaceX with Michael Covel on Trend Following Radio

Recently, I talked about SpaceX. Everyone's talking about SpaceX. It priced at 135 a share, it opened near 150, it went to 225, and then it's come back down to around 150 at the moment. That is some major volatility.

Now, the company didn't change in two weeks. The rockets are the same rockets. What changed was the price. And the price doesn't give a shit what you believe.

That is the whole episode in one sentence, frankly. The story is not the trade. The story might be the greatest of our lifetime. It's still not the trade.

And the last two weeks just proved that in front of the world. A price doesn't know or care about your thesis. It doesn't read Elon's biography, it moves. Your only job is to have a plan for that movement before it begins.

That is the game. That is trend following. Now, hear me clearly. I'm not here to tell you where SpaceX goes now.

I have no idea. I don't predict and you can't predict. That's the whole point. I'm walking you back through these last few weeks because they are the cleanest mirror that we have been handed recently to look at our own psychology.

Everybody had a feeling about SpaceX. Everybody has a feeling about Elon. I have a great feeling about Elon. I love the guy.

He's awesome. Now, of course, he might have some things to complain about, but whatever, we all do. But from a big picture standpoint, he's a rock star, an entrepreneurial rock star. But let me be clear about today.

I'm not giving a stock tip. I'm not telling you to buy SpaceX or to sell it or to short it. I don't have a position in it and I have no prediction. What I'm going to hand you today is something way more valuable than a tip.

It's a way of thinking that works on SpaceX and the 10 names after it. A tip feeds you for a day. A method feeds you for your lifetime. Let's talk a little bit about a company coming public.

by the time a company does come public, the easy money was made in private by people you're not going to meet at prices you will never see. The whole point of the offering is for the insiders to have somebody to sell to you. That's not evil. That is the structure in the open.

The insiders are not breaking rules. They are the rules. And look, there's just no reason to really focus on this too much. We've seen it over the decades.

IPOs, they come out. Some go to the moon. Some come down. Some go up.

All kinds of volatility, completely normal. But let's get more into this psychology because belief is a beautiful thing in life. In markets, it's a slow leak. It's a trap.

You decide a company is great. The leader is brilliant. The product, the future. Without noticing, you let that conviction become your trading plan.

You buy because you believe. You hold because you believe. You add because you believe. And belief has no exit.

Look at what conviction does once you own something. Every good headline confirms you. Every bad one is a buying opportunity. The price falls and you don't see a warning.

You see a discount. It falls more and you do not see risk. You see your conviction being tested. You take it personally, and you dig in to prove the market's wrong.

That's not investing. That's an argument with a wall, and the wall always wins. And underneath all of it sits ego. The believer does not just want to make money.

He wants to be the one who saw it first, who called it, who had the vision when everyone else doubted. The trade becomes about his identity, about being right. And the moment a trade is about being right, you have lost. Because now you cannot exit a loser without admitting you were wrong.

And the ego would rather lose money than admit that. The best traders that I've seen, the trend following ones, no ego. They will tell you flatly, I have no idea where this goes. And they stay with it in a total calm place.

Because their edge was never about being right. The amateur needs to be right. The professional, the right strategy needs to be disciplined. They're not the same goal and they lead to very different bank accounts.

Look, here's a cruel part to this. You can be right about a company and still get destroyed. You bought at the wrong price. You bought too much.

You held through a decline. You had no plan to survive. And you were forced out at the bottom while the world changer recovered without your money in it. Being right about the future is worthless if you cannot stay solvent long enough to be there for it.

Solvency first, vision second. We have seen this movie before, the euphoric run, the everyone is a genius phase. And then the price, remembering gravity, all in two weeks instead of two years, but the full feature, the one that teaches the most, is older. And if you are old enough, you have watched this exact film, the late 90s, the dot-com bubble.

The internet was going to change everything, and it did. This is the trap inside the trap. The believers were right about the technology and still lost everything. Keep that in your pocket.

Back then, a company could add dot com to its name and the stock would jump Now it AI Again let me be really clear I have no idea what going to happen with SpaceX I not telling you it pets Not even coming close to that. For all I know, SpaceX could be the greatest investment ever. the greatest trade ever. Or it could be great trades spread over time, but not straight up.

This is how you have to approach this. It's not about predicting a crash. Predicting a crash is just believing in reverse, the same disease. Do the harder thing.

I say do the harder thing. Stand in front of the enormous story and admit you cannot tell whether it is the trade of a lifetime or the graveyard again. Then build a way to participate that survives either one. The believers had no conviction and no exit.

When wrong arrived, they had nothing between them and ruin. I want you to make sure that doesn't happen to you. So where does the trend-following trader put his attention on the actual price of SpaceX? Not because the story does not exist, but because the price already contains every story.

Every believer and skeptic, every fund and founder, all of it nets into that one number and its movement. The crowd has already voted. The price is the tally. And you know what?

That drives people crazy. You mean you would trade SpaceX without caring about the fundamentals? For the trade, yes. I care whether the price is trending, which way, and how to manage my risk.

You can look at the fundamentals. You can notice the valuation, file it. It's interesting. But it does not get a vote in your decisions.

It is color commentary, not the play call. Why be so stubborn? Because the story is where they get you. Greed rides in on a good story.

Fear on a bad one. Hope, denial, ego. The whole circus travels on narrative. The price feels nothing.

It can't manipulate you. Anchor to the price and your rules and you have built a wall between your money and your feelings. Anchor to the story and you have invited the feelings into your account. Now look, let's be frank.

We live in a time where so many people spend so much time professing their feelings. And if you're like me, you reach a point where you're like, I don't give a shit how you feel about anything. I don't care. I don't care about some random person, some random influencer, some random corporate head and their feelings.

I don't care about some man on the street and their feelings. Who gives a shit? We can't give a shit. It's a waste of our time.

What I'm really pushing for is kind of a masculine reordering of the thought process. Now, don't get me wrong. The feminine mystique is terribly important. The feminine way is terribly important.

But that way, when it comes to the markets, is not wise. The markets need us to have a certain objectivity. The markets don't need a subjectivity of feeling. And that subjectivity of feeling permeates society today.

And so it is terribly hard that if you're going to go down the trend-following path, you have to block out so much of the world and its histrionics coming at you like a fire hose 24 and 7. Let me shift gears a little bit on SpaceX. Let's talk about valuation. You want me to say that SpaceX was too expensive, priced for perfection, valued at a number that made no sense next to its earnings.

Fine, whatever. At its peak, it was worth more than Amazon and more than Microsoft on a sliver afloat while losing money. Absurd? Probably.

So what? And of course, within a year, it could be double the price it is today. Who knows? Valuation is one of the most reasonable-sounding ideas in investing and one of the worst timing tools ever invented.

It's not a timing tool. I mean, something could be expensive and get more expensive for years. Something can be cheap and get cheaper until it's gone. A high price tells you expectations are high does not tell you what happens next.

And what happens next is the only thing that pays. How many brilliant skeptics shorted the most overvalued names of the last 20 years, dead right about the valuation, and got run over before they were ever proven correct, if they survived to be proven at all? We know the famous line, the market can stay irrational longer than you can stay solvent. Most people quote it.

They quote that line and then they ignore it or forget it. And here's kind of the twist that breaks people. The most expensive stocks in history have produced some of the largest trends in history. The thing that looked absurdly overvalued kept going and going.

and the trend follower who simply rode the price made a fortune, while the value purist screamed about fundamentals from the sidelines. Expensive is not a sell signal. Expensive is a description of mood. A market price for perfection can stay priced for perfection for a very long time, and the only way to participate safely is to follow the price up with a stop, not to stand in front of it with a valuation model and get run over When SpaceX comes public and the valuation goes vertical I didn treat that as a reason to buy or sell It was just a weather point Expectations enormous which means the moves could be violent in both directions.

And violent in both directions is exactly what happened the last two weeks. Useful, but not necessarily a signal. Price is the ultimate verdict. And here's the thing.

You're never going to know the right price for SpaceX. Nobody does. There is no such thing. What we need is to detect when a lot of money is moving in one direction, ride it while it lasts, and step off when it is.

We are not valuing the company. We are following the behavior of capital. Capital leaves footprints, and those footprints are the trend. We follow the footprints.

We do not interview the feet. Let the analyst argue about what it's worth. You will be watching what it does. Worth is an opinion.

Movement is fact. Trade the fact. Now, this is a terribly important part of all of this. The principle, the big principle, never risk a meaningful chunk of your account on any one single trade.

Not your favorite, not your highest conviction, especially not the one you are certain about. Because certainty is when you are most dangerous. A disciplined trader, SpaceX or Bitcoin or whatever, risks a small, fixed, predetermined fraction on any one trade. No single bet is allowed to threaten your survival.

Ever. The whole strategy of trend following is dependent on you being there for the next trade. Survival is not a defense. Survival is the offense.

You stay in the game so the game can pay you. A lot of people probably bet their fortune on SpaceX at price level 200. And they've lost half in less than two weeks. It could go back up.

But what kind of plan is this? What kind of plan is this? Where's the discipline? What's the strategy?

I can't argue with you if your strategy is, I'm betting the house on Elon, I'm trusting Elon, and that's it. That is a legitimate strategy. From a risk standpoint, it might be a touch high risk, but it's a strategy. I think the challenge for you is to say, well, if that is one strategy that you believe in, compare it to another strategy like trend following.

The mindset of, before I enter, I have already decided how much I'm willing to lose on this trade. Small and fixed. The same discipline as every market you trade. From that number and your exit, the position size falls out.

The math tells us how many shares. You're not picking your trading size from excitement. This is derived from risk, from math. and ultimately if you want to be around for the long run if you want to be around when you're an old guy you have some capital you got to spread your capital across multiple positions.

SpaceX is one position and there will be some one person who had some small position and we'll hear about them 50 years from now, and they made a bloody fortune perhaps on SpaceX. And there will probably be just as many people that you never hear about who went broke. As I talk about SpaceX, it's such a great example for the compression of time coming public at I think 135 or 150, going to 225 in just a few days, and then back down to 150. This is our modern world, right?

We've got to get rich within a week. That's what we're being sold. That's what SpaceX is really selling you, the general public, that not only do you have to get rich, which I agree with completely. We should all want that goal.

Why not? But what SpaceX is doing covertly is convincing everyone that you're wrong if you don't get rich in four days. Isn't that the fucking lottery? I mean, that's the lottery mindset.

And don't tell me it's not happening. Of course it's happening. The whole world is watching SpaceX go public. The whole world is talking about the first trillionaire.

And damn it, I support the idea of a guy like Elon being the first trillionaire. Why not? He made a bunch of shit happen. He deserves it.

But that's independent of us trading his stock price. And look, he got rich over a long time, making a lot of different decisions that had nothing to do with buying and selling a stock. So the idea that you might get rich in three or four days, and again, this is the sad artifact of what has happened with SpaceX. But how many people now are just going to sit around and wait for the rest of their life for the next SpaceX?

Assuming there's going to be another one like, what, every five minutes. And then the game is to be in front of your screen, trying to time it all, betting a fortune. And the game is going to be sitting in front of a screen, trying to time it all, betting whatever fortune you have that you going to make millions in three days four days We live in a crazy world And I think if you can actually accept the idea that we live in a crazy world that is also an opportunity Because if so many people are seduced by the idea that they're going to make a bloody fortune within four days, that is a great opportunity over the long run for people with a good plan, a good strategy, like trend following.

You don't want to be the riverboat gambler, the all-in bet. That's not what you want to be. And look, I understand also, as a side tangent to this whole conversation, a lot of people think this is all about some kind of innate gift. You were born with it.

No, it's not about being born with anything. There is more than enough evidence of trend following, the strategy, transferring from one person to another person to believe that you can be that third person. A lot of people think that it's just the turtle trader story. It's not just the turtle trader story.

I've been in Larry Height's offices. Plenty of people in Larry Height's offices beyond Larry Height have made a bloody fortune. Trend following is the ultimate transferable skill. It's not the ultimate transferable guarantee.

Nobody can guarantee that you're going to make money. But if you do your homework and you find out what something like trend following is, what constitutes it, who have been the winners, why have they been the winners, how did they learn their strategies? If you go down this path, tell me another world in the trading world where there is this kind of environment, this environment of learning, where is it? You've got guys like Tom Basso and Jerry Parker online, on X, on podcasts, talking and sharing nonstop.

They're not telling you what's going to happen tomorrow. They're not telling you what's going to happen with SpaceX, but they're sharing the mindset just like I am today. The thought process, the discipline, the thinking. That is so cool about the trend following world.

So many people willing to come together to share, to let other people know about this particular type of strategy. But I want you to take this with you. The story is not the trade. The price is more honest than the narrative.

Wait for it to become a market, then treat it just like another market. Risk small, the same small, whether you love the name or not. Set your stop and obey it. Cut losses fast and let your winners run.

Be wrong cheaply and often so you can be right hugely once in a while. And never push the whole stack to the middle because the story made you feel certain. That's the difference between gambling and trend following. One is feeling dressed up as conviction.

The other is a system you can run for the rest of your life. The hype came and it will come again on the next name and the one after that. The headlines will scream. The believers will charge.

The gamblers will bet it all. And the machine will roar that everyone is getting rich without you. And you will be calm. You will have your rules written down before the first print.

You will know your risk before you ever click buy. And you will let the market tell you what it is doing and you will follow. Not the smartest person in the room, the most disciplined. Not the one who believed the hardest, the one who managed the best.

Over a lifetime, that is the only one who wins. And do not mistake any of this for caution dressed up as wisdom. I'm not telling you to be timid. Timid people never catch the big trends either.

I'm telling you to be disciplined, which is a different thing entirely. The disciplined trader takes real positions, rides real trends, and reaches for the outlier when it comes. He simply does it, with his survival protected, his risk fixed, and his ego at the door. Bold and disciplined are not opposites.

The reckless are not brave. They are just reckless, and the market collects from them eventually every time in this great zero-sum game. Real boldness is staying in the game for 30 years and being there when the trade of a lifetime finally shows up. Stay disciplined.

Protect your capital. Follow the trend. And I will see you on the next one. 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, TrendFollowing offers everyone an answer in uncertain times. To get started immediately, send me an email, michael at coval.com. 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.