Trading Food for Thought: March 26th Edition

Trading Food for Thought: March 23rd Edition

Trading Food for Thought: March 16th Edition

Famous Last Words: “No One Saw it Coming!”

Feedback in:

Michael,

I just wanted to take a moment to thank you for your work. I have read most of your books and they are exactly what I needed.

You see I am a veteran of the brokerage business (30 Years) and I have always known intuitively that something about the entire business was, and is, a lie. Analysts have no skin in the game, management doesn’t care if you make money, it’s all about assets under management that’s why they will never say sell. “Just buy more.”

You see I used to look at CFA’s as the smartest people in the room. Now I know that they are really just financial weathermen trying to predict the future. Something that can’t be done.

I have adopted for my clients a simple trend following rules based strategy, and it amazes me how hard it is to change minds. It is so simple they somehow think it can’t work. But I will keep plugging away and I know you will to.

The business needs to change even the other brokers in my office look at me like a freak when I tell them to stop listening to analyst’s and “stop buying stocks that are going down.” Old habits die very,very hard.

Just wanted to say thanks.

[Name]

The same listener wrote back the other day, almost a year later:

Michael,

As you can see we have corresponded before. I just wanted to drop you a line to tell you just how bad it is out here. As I mentioned previously I have 30 years under my belt in the brokerage business, but only in the last four or five have embraced rules based trend following.

Happily my clients that will listen with an open mind almost always say the method makes perfect sense. The problem lies with the people I work with, when I talk about having rules, following them, and being completely agnostic about what you own just make sure that what you own is going up they look at me like I have two heads. Like it is a cute parlor trick but could never work long term. Then I prove to them how much better off they and their clients would be if they would only have rules to sell what is going against them they shake their heads, agree, and forget everything I said.

My point is keep pushing these concepts when it hits the fan one of these days people are going to be destroyed because they won’t sell anything. And all my peers will be sitting with clients apologizing for not protecting the down side and saying, “No one saw it coming.” To which I will respond, “It wouldn’t matter if you had rules for selling.”

Keep it up, these ideas can change lives.

[Name]

Thanks!

Where is the Exit Strategy with Buy and Hold?

Feedback in:

Michael,

I’ve been listening to your podcast and really enjoy it. Thank you for bringing different perspectives on investing, and for all the trend followers you interview who are candid about their processes, advantages, and disadvantages. I really enjoy all the interviews, especially those with Jerry Parker.

I’ve got a question: You disparage buy and hold, but is it the same thing as trend following? Charles Dow (in my mind) is the inventor of trend following. He defined primary trends, that could not be manipulated, secondary trends that could be manipulated, and shorter term trends (daily) that are generally random.

When you think about it, buy and hold (in equities) is just a bet on the longest of primary trends, namely, that the market goes up and down, but it goes up more than it goes down. It is divorced from any fundamental analysis, and has a clear entry and exit points: buy when you have funds throughout your working career and sell when you need money for retirement.

Sure, it has more volatility and drawdowns than something like the turtle strategy, but it has bigger gains at times too – trend following can’t match the gains in large bull markets. Thus, a buy and hold person subjects themselves to more volatility and drawdowns to follow a long-term (and hopefully more lucrative) trend, while a Turtle uses systematic trading rules to trade on the shorter – akin to Dow’s “secondary” – trends to reduce volatility and drawdowns, sometimes at the loss of gain but likely with superior preservation of capital.

The only difference is the length of trend one wants to follow. Otherwise, they’re effectively the same. Entry and exit rules, no fundamentals, seeking to ride a trend.

Agree?

Thanks for keeping the trend following torch burning. Keep up the good work!

Cheers,
[Name]

Where is the exit strategy with buy hold?

Pretty big issue to leave out if making the comparison to trend following.

Trading Food for Thought: March 2nd Edition