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Why Trend Following Is Wise from Many Angles

What follows are three different views I found relevant to trend following success. First, Bob Prechter offers:

“You can go all the way back to 1929, and [the Fed] was doing what its job is supposed to be, which is to put dampers on exuberance and only make money easier when the markets are down and the economy is contracting. Following that plan, the Fed raised the discount rate in 1929 to 6%. Here at the 1937 high, it raised margin requirements and bank reserves. In the 1968 bull market, when the public was excited about stocks, the Fed raised margin requirements and raised the discount rate to 6%. In 2000, right at that high, the Fed again raised its discount rate to 6%. In 2006, when the housing market was topping, and a year before stocks topped, it raised it to 6¼%. What is it doing now? The market is right back in the rarified areas that it was when the Fed dampened speculation, but now the Fed is doing the opposite. Not only has the Fed not raised the discount rate to 6%, or even to 1%, but it is keeping the Fed funds rate at zero, and it is promising a 0% Fed-funds rate through 2015, three whole years. This 180-degree turn tells me that the Fed is in a panic.”

Real simple: want to trust that system to take care of you? Of course not. Trend following is wise for anyone who sees the moral hazard at play and still has a pulse. How can you go about breaking away from the current Federal Reserve daddy/mutual fund/CNBC/”fundamentals till you drop” Matrix? Seth Godin offers:

“The best way to get unstuck? Don’t wait for the right answer and the golden path to present themselves. This is precisely why you’re stuck. Starting without seeing the end is difficult, so we often wait until we see the end, scanning relentlessly for the right way, the best way and the perfect way. The way to get unstuck is to start down the wrong path, right now. Step by step, page by page, interaction by interaction. As you start moving, you can’t help but improve, can’t help but incrementally find yourself getting back toward your north star. You might not end up with perfect, but it’s significantly more valuable than being stuck.”

One way to approach being unstuck? Copy the best’s understanding of fallibility. Atul Gawande offers:

“What I found over time, trying to follow and emulate people that were focused on achieving something more than competence, is that they weren’t smarter than anybody else, they weren’t geniuses. Instead they seemed to be people that could come to grips with their inherent fallibility–fallibility in the systems that they work in, and with what it took to overcome that fallibility.”

“Bingo!” The Turtle story as but one example fits the bill.

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Posted in Psychology, Trend Following
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