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Trend Following Debates … Ongoing

A conversation that flowed from my response to a random email:

Paul: As a former portfolio manager and risk management specialist, I understand the extremely difficult task that investment managers have maneuvering volatile and powerful market swings. During the past century, mathematicians, physicists, and financial engineers have dedicated much time and effort analyzing market movements. The objective to create a reliable quantitative model for when to enter a rising market and when to exit a declining one has been overwhelmingly unsuccessful. Since most have no identifiable way to signal a change in overall market direction, advice has predominately been to diversify and hold. [Name], a Calgary based independent investment research and consulting firm has accomplished what was previously thought impossible. We have developed a unique mathematical approach to the analysis of long term market cycles which alerts us to changes in the directional trends that we apply to a number of broad global indices. Our algorithm takes into account multiple cycle movements with the goal of identifying windows of opportunity to lower the risk of investing. The strategy which we’ve spent years developing is used to analyze broad based global market trends, and ultimately gives us specific entry and exit signals. The extensive testing of our system which has encompassed over 250 years of market data and 10 global sectors has resulted in a model that significantly outperformed the analyzed indices. This substantial out performance is a rare achievement compared to our peers in the investment industry. For more information please check out our website at www.[name]. We also encourage investors to contact their financial managers to compare their results with ours to see how we can help them improve their profitability.

Michael Covel: Are you familiar with trend following?

Paul: Absolutely! Cycle and trend analysis is the basis of all my research. Don’t be fooled by the CFA, I was trying to figure out what the heck they’ve all been looking at. FYI – I’ve read your Trend Following a few times now.

Michael Covel: But this line: “The objective to create a reliable quantitative model for when to enter a rising market and when to exit a declining one has been overwhelmingly unsuccessful.” Sure seemed inaccurate! The proof is across my 5 books.

Paul: I have heard of and seen some managers have successful runs but no one to claim a specific static ‘black box so-to-speak’ model or strategy that consistently outperforms during the long run. Maybe some have kept that secret but nothing that I’ve seen that could be or is being marketed to the general public. My approach would not make anyone rich, but the portfolio strategy could be easily used by the masses to protect their capital – most of whom suffer from the grossly overpaid and underperforming mutual fund industry. My 3.23% average outperformance rate still allows an investment manager to collect fees and for the investor to be satisfied with an above average index return which is extremely rare as you know. I am working with the DIY investor as well as the investment advisor. Both parties I find are confused and end up just investing in mutual funds because they don’t know any better.

Michael Covel: All of my books have decades of performance data. Systematic traders using price data to make decisions. Not sure what your definition of “run” is, but decades of proof should be sufficient!

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Posted in Feedback, Trend Following
2 comments on “Trend Following Debates … Ongoing
  1. Jim Rohrbach says:

    I have been identifying changes in the trend of the market in real-time for over 40 years and on May 13, 2013 Timer Digest featured me on their cover and ranked me 5thl in the country. Time for Paul to get out of his uninformed world. Michael, at least he is reading your books, even if the message is not getting through.
    Jim

  2. Johnson says:

    On “All of my books have decades of performance data. Systematic traders using price data to make decisions. Not sure what your definition of “run” is, but decades of proof should be sufficient!”.
    I may paraphrase a few people , but it is a theory can be true until proven otherwise (just a counter example) , no matter how many confirmations you get in between, like a zillion white swans do not prove the non existence of a black swan (absence of evidence is not evidence of absence,…). So “decades of proof” are not proof, but should be sufficient for would be trader to seriously learn from it.
    One (2,3,4,10,100…we are over 6 billions) example (Bill Dunn) cannot speak for the trend followers that are now footnotes of history, as Casanova was maybe the sole survivor in his kind of activity. Mister Dunn has showed that his way has worked. I think the point is more to dismiss “buy and forget you invest” than anything else.
    If I believe reactive trend following is the way to go (and it has been so great to me), it is because of this “super simplified version” (I know, simple thing can be dangerous) of the 2 first laws of thermodynamics: 1/ nothing disappears but is transformed (any instrument issued must be held by someone until it is retired) 2/ systems always tend to maximum entropy (and we are humans after all). What is in between 2 states is always a trend. For me it is not a system, not a philosophy, just the way complex system evolve.
    I will allow myself to expand on 2 points I heard in your podcasts:
    1/the first is on day trading: if time is replaced by price movement (as option traders normally should do for hedging their books) as the X axis, what beautiful, and thanks tradable, intraday trends ! Time is really not the best to plot prices.
    2/ Using twitter/ internet news is a nice filter (why go where everybody crowds ?), and gives good and resilient results, especially on stocks (yes it is possible to back-test over 20000 thousands stocks, for as long as twits and internet news can be collected, it is just a matter of doing the (big) homework).

    Keep on these podcats, they are always a good shaker to the “routine”, and I really enjoy being surprised. I especially liked the interview of Charles Faulkner.

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