Why a Long Term Trading System is Best | with Scot Billington

Episode Overview

• Scot Billington of Covenant Capital shares his journey and trading philosophy, emphasizing that simple, mechanical trend-following systems are more robust and repeatable than complex ones.
• The discussion highlights how a practical business insight—the enormous impact of transaction costs—led to the strategic decision to adopt a long-term trading timeframe.
• Billington recounts the early, challenging days of his firm, detailing how surviving a major drawdown required a rigorous, data-driven validation of their model, not just emotional conviction.
• The conversation explores the firm's identity as a "boutique" manager, focusing on the advantages of staying nimble to access diverse markets, rather than pursuing asset growth at the expense of performance.
• A key evolution of their model is explained: the strategic shift away from symmetrical short trading due to the mathematically superior, unbounded profit potential of long-side trend trades.

Key Concepts

• Simplicity as Sophistication: A core philosophy that a simple, robust, and repeatable trading model is superior to a complex one, as it is easier to test, scale, and execute without emotional bias.
• Systematic vs. Discretionary Trading: A systematic or mechanical approach is favored for its testability, scalability across different markets, and its ability to enforce emotional discipline by making the process consistent over time.
• The Impact of Transaction Costs: High transaction costs from short-term trading can severely erode profits. Adopting a longer timeframe is a direct strategy to minimize these costs and improve net returns.
• Conviction Through Crisis: Sticking with a trading model during a significant drawdown requires a systematic validation process to rule out flawed research or a broken model before concluding it is a temporary run of bad luck.
• Boutique Manager Philosophy: The belief that a trading firm can be more effective by remaining a moderate "boutique" size, which allows for agility and meaningful exposure to a wide variety of markets, in contrast to massive funds whose size can impede performance.
• Asymmetry of Long vs. Short Trades: In trend following, long trades have theoretically unlimited upside and benefit from intra-trade compounding, whereas short trades are bounded by zero, giving long-side trades a mathematical advantage.

Quotes

• At 06:51 - "The same decisions that I made in June of 2004, I'm going to make in December of 2018. It's the same process, it's a much more repeatable process." - Scot Billington, on the primary benefit of a systematic approach: removing emotion and ensuring consistency.
• At 22:58 - "It's pretty reasonable to assume that 80% of that would flow immediately into the profit column." - Explaining the direct financial benefit of reducing transaction costs by adopting a longer-term approach.
• At 27:20 - "The tragedy would be if we had a winning trading model, ran into bad luck early, and had to quit." - Articulating the core fear that drove their long-term business plan and the need to survive initial drawdowns.
• At 51:00 - "We are not attempting to be the Fidelity of CTAs." - This quote clarifies their philosophy of prioritizing performance and agility over simply managing the largest possible amount of assets.
• At 56:52 - "A short trade is bounded... it's certainly bounded by zero." - This is the central premise for why long-term trend following has a mathematical edge on the long side.

Takeaways

• A simple, mechanical trading system is often more effective than a complex one because it removes emotion, ensures consistency, and is easier to validate.
• Minimizing transaction costs by extending your trading timeframe can be one of the most direct and powerful ways to increase net profitability.
• Surviving inevitable drawdowns requires a disciplined process to re-validate your model's logic, rather than abandoning it based on emotion or short-term results.
• For a trading firm, prioritizing agility and performance over asset gathering can be a significant competitive advantage, allowing for meaningful trades in a more diverse set of markets.