More Reasons Why Trend Following Will Continue to Excel

I posted recently about a firm that was hesitant to believe in trend following. Here is their exact negative rationale:

“[Dear name of trend follower], unfortunately the Investment Committee is not able to confirm via the attached document that you have the required skills to analyze all the markets you claim to trade in your portfolio.”

“They further expressed discomfort about the mathematical models you use to initiate trades and cannot be guaranteed that your strategy will not result in a ‘LTCM-like’ blowout.”

“…the [Investment Committee] feel that the trend in commodity price inflation will end abruptly and reverse investments into this strategy.”

More reasons why trend following will continue to excel…

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13 thoughts on “More Reasons Why Trend Following Will Continue to Excel

  1. if these guys are so confident about predicting how markets will end, why do they need to invest in any outside entity???

  2. It drives me insane that people always bring up LTCM when talking about trend-following. Too many investment committees like this one seem to put all their faith in predicting the future when it’s generally been proved to be a futile task.

    I had a similar reply from an institution last week who said “we reject the use of complex instruments such as futures (?!) and believe in diversifying with a portfolio of global equities”….I don’t know where to start telling them how stupid they sound

  3. Leave ’em in the dark. The more unbelievers the better, as far as I’m concerned.

  4. Why do we need to convince others forcefully. TF works may be because others are unaware of full understanding to this strategy. I think we should confuse others so that our (TF believers) benefits continue. However, in doing so we will confuse our TF fraternity.

  5. last time i checked the bull mkt in silver ended “abruptly”. i bought plenty of silver Friday and Mon. Let’s see.

  6. The firm’s comments simply indicate that they do not understand trend following. Their comments are not knowledgable comments against it. Their thinking is stuck in the box of understanding and predicting market movements based on however they do that.

  7. Having work extensively with “asset allocators” the above letter is simply standard. Enormous sums of money are invested each day by committees like the one in the letter that simply know nothing about investing. Believe me, not terribly proud of this, I won many finals telling them exactly what they want to hear.

    What they want to hear
    – proprietary filter that ranks all stocks in a particular benchmark to filter out the “best” one’s (that statement has no meaning but it works)
    -we then perform fundamental analysis to pick out the really good ones (we have this many MBA’s and CFAs so they are really smart.
    – we have tremendous discipline on the sell side so trust me we will protect you on the downside.

    A few holes with that process. Some of the most obvious, they have all their managers fully invested at all times. The committee makes the asset allocation decisions. So when stress comes and correlations rise the entire portfolio gets hit. Regardless of what happens in the world this clearly poor strategy simply will not change.

    Clearly, a trend following system that could take advantage of changing markets (L/S) would fit nicely into the system but just doesn’t gain traction.

    As for the references to LTCM, they all wanted to give them money. Those that tried and didn’t get in now use the LTCM blow up as a sign of their brilliance. They also use it as a shield from actually doing research.

    If you could sit in the meetings with consultants and the “Committees” you would be shocked by how little they know about investing. They are “institutional” investers, smart money. They take poor models and dole out $ to the managers that tell them what they want to here. If you want to get $ from them come up with a way to “optimize” your portfolio. Essentially do the above nonsense analysis and then have a couple of PhD’s that then put buy/sell candidates through a couple of more screens and then we will have an “optimized” portfolio. Ask any of the jokers on the board what that means and they woun’t be able to tell you but they know it is important.

  8. The thing is, prior to 2008 people built their portfolios with supposedly non-correlated instruments that generally all became correlated when the market crashed. You would think that institutions might learn from this and allocate more to TFs as a result (seeing as they generally remain uncorrelated when the proverbial *hit hits the fan) but many of them haven’t and will make the same mistake over again!

  9. Michael:

    Great comment – I tried to go the route of Trend Following with my prior company when I was C.O.O. Actually got them to invest with Salem Abraham after meeting with Shaun Jordan and Salem in Canadian, Texas. Initial results were good – I was suddenly torpedoed out of the company but had invested privately with Abraham Trading. The company pulled its $5 million dollar investment at the urging of the Treasurer and their “financial advisors” who were strongly opposed to this investment structure. After they pulled out of Abraham Trading the firm registered monthly gains for 5 consecutive months. There appears to be a major “raodblock” into creative thinking and analysis and just “plain common sense.” Firms such as my past one are convinced that mutual funds will be the road to “financial heaven” – sadly they will wake up one day with a protfolio that is severly diminshed and their advisors will tell them that it is “amrket conditions.” Thanks for the great articles and work. By the way I am still invested with Abraham Trading and very satisfied with their approach, results and candor.

  10. A suggestion for the investment committee: use a stop loss, it’ll do wonders for your constitution…and if it never gets hit, well, your fund will hit new highs.

    And if your fund is so large that liquidity is an issue, read Jesse Livermore.

    By the way, if you’re standard fundamentalists, how’s your prediction of impending doom last August working out?…just days before the best run-up in stock prices in the last 50 years.

    By the time the fundamentalists are done analyzing the crap out of a market, any trend is usually over…and they’re left to hold and prey for the bounce.

    Good luck! Have fun trying to beat the negative S &P benchmark (odds are 80% against you!)while trendfollowers bask in our positive real returns.

  11. All of the mainstream buy-and-hold cement heads didn’t believe Nicolas Darvas either. He provided extensive documentation of his success and they rationalized it away. That’s good, though, somebody has to take the other side of the trade.

  12. Just finished visiting a blog on a financial site dedicated to fundamentals…

    A bunch of them bought silver stocks at a bargain last week because apparently there’s a shortage of silver in the world. Well…someone forgot to tell the silver co’s…these amateur fundamentalists are down up to 70% in a week! One lady says it’s all the money she has and she doesn’t know what she’ll do.

    If that’s true, she has no business trying to guess a bottom in a bunch of tanking stocks.

    Too bad she didn’t have at least some exposure to TF…it would’ve saved her retirement.

    Incredible…

  13. Comparing LTCM to trend following is deliberately misleading. TF *makes* money from the big market moves, either up or down. LTCM relied on markets being rangebound to make money.. and got killed when they moved too far in one direction.

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