James Montier: Did He Miss the Trend Followers?

James Montier writes (PDF):

Tail risk protection appears to be one of many investment fads du jour. All too often those seeking tail risk protection appear to be motivated by the fear of missing out (not fear at all, but greed). However, the surge of tail risk products may well not be the hoped-for panacea. Indeed, they may even contain the seeds of their own destruction (something we often encounter in finance – witness portfolio insurance, etc). If the price of tail risk insurance is driven up too high, it simply won’t benefit its purchasers. When considering tail risk protection, investors must start by defining the tail risk they are seeking to protect themselves against. This sounds obvious, but often seems to get scant attention in the tail risk discussion. Once you have identified the risk, you can start to think about how you would like to protect yourself against that risk. In many situations, cash is a severely underappreciated tail risk hedge. The hardest element of tail risk protection is likely to be timing. It is clear that a permanent allocation is likely to do more harm than good in many situations. When it comes to timing tail risk protection, a long-term value-based approach and an emphasis on absolute standards of value, coupled with a broad mandate (a wide opportunity set, or, investment flexibility, if you prefer) seems to offer the best hope.

A paper seemingly written without knowledge of trend following’s success. Preparing for tail risk, which means successfully executing as a trend following trader, is not predicated on “timing” for success. It is but one element of the game, but surely not the core focus.

Note: Shout to Jason Rolf for PDF tip.

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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.

4 thoughts on “James Montier: Did He Miss the Trend Followers?

  1. Tail risk, black swan, etc. just fancy terms for the word “surprise”. There is no tail, no surprise, if you’re prepared for anything.

    There is no tail:

  2. he is a “value” investor, who is at the opposite end of the spectrum of Trend Followers…he probably is very anti- TF. his theory is value is the best hedge?

  3. I do like this line from the quote: “In many situations, cash is a severely underappreciated tail risk hedge.”

    This, of course, speaks to leverage. Ed Seykota, in Market Wizards, characterized risking more than 1% on any given trade as a “gunslinger mentality.” The most successful trend followers follow strict risk-management and money-management rules, i.e., no single trade, nor all trades in the aggregate, will bankrupt them. Their tail risk hedge is the cash NOT tied up in active trades. This is what allows them to weather the drawdowns that are never a surprise.

    Kudos to Mr. Montier for getting that part right, at least.

  4. Quotation and mutual funds:

    From above:

    “When it comes to timing tail risk protection, a long-term value-based approach and an emphasis on absolute standards of value, coupled with a broad mandate (a wide opportunity set, or, investment flexibility, if you prefer) seems to offer the best hope.”

    This echoes the clap trap coming from Fidelity’s top manager after today’s crash: “It’s important to take a long-term view of these markets.”

    What the hell does long-term mean? Buy-and-hold until you’re broke?

    Mutual funds are obviously trying to grab hold of their 2.5% “management” fee (they have no management!) with both hands. I dare them to adopt the compensation plan of TFer Bill Dunn whose only compensation is a portion of the gains of his clients.

    99.9% of the MBA’d, suit wearing, suckup sales morons calling themselves “fund managers” in the mutual fund world couldn’t earn enough to buy styling gel for their poodles if they took Dunn’s approach.

    Once again, the average American is getting supremely hosed with this latest installment of the “American Dream” (this one of a safe and sound retirement by investing with those who know best — NOT!). He won’t feel a thing until it’s over.

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