Vid. 004: Trend Following Performance Data

When I first graduated from college with my MBA, I set up a meeting with Jim Massey, thinking he was someone who could make me or break me. But it didn’t go as I expected. In this video, I talk about why you shouldn’t rely on other people’s judgement of the market (think Bartimoro and the like). Instead, learn a system that will help you come out on top next time the Black Swan hits and the stock market collapses.

In this video, you will hear about:

  • How I met Jim Massey
  • Who comes out on top of every stock market crash
  • Why the different stock market bubbles are all related
  • How to learn from trend following performance data

Items mentioned in this video:

Reading list:

Don’t listen to people who think they can win by riding an inflated market bubble. You will go bust eventually, and the central planners won’t be there to bail you out.

[toggle Title=”View full transcript”]I have a fun story today. This is my start. Early 1990s. I don’t know anybody. I don’t know anybody on Wall Street, but I want to meet people. I want to meet top people. I had recently graduated from Florida State with my MBA. I could find one Florida State alumni who had been really successful on Wall Street. His name was Jim Massey. He had just retired as CEO of Saloman Brothers in London. He was on Wall Street’s Top 100 Paid as well. I knew this man could break me or make me – at least, that was my thinking at the time.

I went and I had lunch with him at a small café in Greenwich, Connecticut. He didn’t say a word. I was blabbering on, and I realized about a half hour in that he had never even looked at me. He clearly didn’t care what I had to say, and I realized this was going downhill fast. All I said to him was, “Mr. Massey, this isn’t going very well. Have I said anything to you today where you thought I was full of shit?” He’s eating; he looks up and he says, “Yes. You said you wanted to be the best. You don’t want to be the best. You just want to win. Now let’s go talk.” Now, for those of you that are familiar with the Liar’s Poker book written by Michael Lewis, Jim Massey was the guy that the trainees first met.

So anyways, this was my first exposure, my first exposure to Wall Street. And there happened to be at that time a very famous trader at Saloman Brothers named John Meriwether. Summer of 1998, Long-Term Capital Management, now run by John Meriwether, formerly of Saloman Brothers, and two Nobel prize winners. Basically they had figured out a strategy based on the Black-Scholes model where they could eliminate or control risk. It didn’t work. It bombed. It bombed so badly that the entire financial crisis that we live today started then. That was the first bailout. Summer of 1998, that, from a fundamental perspective, was it.

Now, the cool thing about trend following, my world, it’s a zero sum game. When Long-Term Capital Management, with a terrible strategy, went under, there were winners on the other side of Long-Term Capital Management. Those winners? Trend following traders. Trend following traders were on the other side of Long-Term Capital Management.

How could you have found that out? Well, for me, you look at the performance data. You go look at the performance data of the trend following traders. You can look at their month by month data. Here is Long-Term Capital Management going under. We all know what the global markets are that everyone’s trading. And here’s trend following performance. Wow. What a lesson. What a lesson, right? You want to believe that maybe a strategy, which I’m in the middle of, trend following, you want to believe that there’s some viability to it, there’s some veracity, some truth. Long-Term Capital Management goes under. It requires a massive bailout, it requires the government to get involved, the treasury to get involved, and who were the winners, the silent winners?

The Nobel prize winners were all employed at Long-Term Capital Management. Perhaps the Nobel prize should’ve gone to a man like Bill Dunn, who were on the other side of Long-Term Capital Management’s losing positions in global financial markets.

Just to kind of mess you up a little bit and go in a slightly different direction, as I talk about financial crises and I go this direction, keep something in mind: they’re related. The summer of ’98 required a bailout. The stock markets probably would have collapsed then, but they didn’t collapse until spring of 2000. So we had built a huge bubble in the NASDAQ, boom! It pops in the spring of 2000. Everyone panics; the fed gets involved; they lower interest rates to 1% by spring of 2003, and boom, another bubble is on. Another bubble is racing ahead. So the real estate market takes off. Another bubble ensues. Boom, it pops the fall of 2008. Oh, look, another surprise crisis, another Black Swan. Who are the traders on the other side? When October of 2008 hits, who were the winners? It was the trend following traders again on the other side.

Now, I have mentioned this in prior podcasts: we will face another meltdown, another 50% meltdown in the S&P. When? I don’t know. But that’s not the point. Let’s talk about bubbles for a second. I want to give a foundational view to bubbles. What we have is this threading. One bubble leads to another bubble, precipitates another bubble, and they all connect, like connect the dots when you’re a kid. Summer of 1998 when Long-Term Capital Management goes under, connects with early 2000, connects with the fall of 2008, and connects with where we are today.

So where are we today? We’re in the middle of another bubble. That’s the way life is. Can I tell you when it’s going to pop? No, I can’t. But let me give some idea about how these bubbles unfold and why people do it. Vernon Smith. He won the Nobel Prize in Experimental Economics. He appeared in my film Broke: The New American Dream. Vernon went into the lab and modeled, looked at people trading the markets, and to his surprise, bubbles developed. People got confused on the fundamental value and the trading value. They would get confused. The fundamental value is going down and the trading value, the bubble value, is going up. He was able to model this in the classroom, in a lab, so to speak. And they can’t really put their finger on it, like what triggers people, what causes people to just ignore all fundamental value and just go with this massive bubble?

Well, as a trend following trader, I don’t care, because what trend following does is it gives you a chance to get on the right side of those bubbles so you don’t get decimated, so you can make money. And when the surprise happens, you’re like, “Whoa, I’m in a good position. I’m in the Black Swan strategy. I can manage all of this volatility. I have a strategy that doesn’t require me to go broke or to have the government bail me out.”

So what’s the lesson? The lesson is performance data. I want you to learn from trend following performance data. Look at my book, Trend Following Analytics. Look in the appendices of all of my other books: Trend Following, The Complete Turtle Trader. Look in those appendices. Look at the month by month performance data. Now, when your friend or your buddy comes up to you at a cocktail party and they say, “Hey, I’ve got this friend of mine, he’s trading Elliott Wave, or he’s looked at the numbers behind the Great Pyramid and he’s going to tell me what’s going to happen tomorrow.” Yeah, yeah, okay. Ask him where the track records are. Where’s the track records for all that stuff? What’s great about trend following is you can look at the track records. You can look at very successful traders, going back decades upon decades upon decades. That performance data of trend following traders, that’s where you get confidence from. That’s where you learn from.

Once you start to look at the performance data, you can say, “Wow, these trend following traders were all making and losing money at the same months. What global markets were moving during those months?” This is the investigative work that you have to do, the deductive work that you have to do. What you don’t have to do, you can turn on CNBC and see how Bartiromo looks that day or some other hottie on Bloomberg or whatnot. You can do whatever you want to do. You don’t have to listen to me. You could turn me off. I’m not Brad Pitt. Once again, a slight divergence.

Okay, let me give you some takeaways for today: three books. Emotional Intelligence. If you’re going to become a trend following trader, you not only got to have the IQ part down, you’ve got to have that part down too. Big lesson. And since I’ve mentioned Long-Term Capital Management, this hedge fund that went belly up in August of 1998, which is the ground zero of many of the crises we face today, read the book When Genius Failed. Great stuff. Absolutely great stuff. #3, I want you to read a book called If You Want to Write by Brenda Ueland. Very inspiring.

Lastly, find the performance data. Study the performance data of trend following traders. There’s where your confidence is. You want to get ahead and you want to protect yourself from the Black Swan that will surely hit again – because that S&P meltdown is right around the corner. I can’t tell you when, I’m not a predictor, I’m not a forecaster, but it’s coming, and you’d better be ready. Strap it on.

Subscribe to my trend following podcast to learn more, and stay tuned for my next video.

Have a question about understanding trend following performance data? Ask in the comments or send me an email.

You might like my 2017 epic release: Trend Following: How to Make a Fortune in Bull, Bear and Black Swan Markets (Fifth Edition). Revised and extended with twice as much content. Out April 24th 2017.