Understand Foundations for Trend Following Success

Do you ever wonder why trend following has excelled for so long? Or ponder why it has worked so consistently? The trend trading fund AQR Capital has shown that trend following investing has delivered strong positive returns over diverse economic environments each decade since 1903–over 110 years. Let that sink in.

Unfortunately, most investors have still not heard of trend following. They know buy and hold, fundamentals and value investing. Those are the fast food investing strategies sold by the Goebbels inspired investing propagandists. These are the happy talk strategies delivered via a constant drip, drip that will leave you destitute at the end of an investing lifetime–guaranteed. However, a little observation should raise serious concerns for an awake investor. Gluskin Sheff’s David Rosenberg recently noted a problem inherent in value investing:

From 2000 to 2007, the correlation between the Fed’s balance sheet and the direction of the S&P 500 was less than 20%. Since 2007, that correlation has swelled more than four-fold to 86%. This is the missing chapter in the classic Graham and Dodd textbook on value investing, published 80 years ago.

John Hussman adds to that view:

I strongly believe that more favorable return/risk prospects will emerge over the course of the coming market cycle, and that locking in elevated, distorted prices and depressed yields in the belief that “the Fed has our back” is a speculative mistake, a misguided superstition, and an analytical error. To embrace present market and economic data at face value–without recognizing that generating this data relies on enormous monetary distortions and government deficits–is like believing that you’re Louis XIV just because you’ve built a massive cardboard Palace of Versailles in your front yard.

True that, but the Fed is nothing more than an enabler for the general public’s bad habits and poor decision-making. Consider a view on how we got here from Charles Hugh Smith:

Permanent adolescence is the state of resolving insecurity, fear and social defeat by buying things that promise the invulnerability of a fantasy self and world, and by indulging in instant gratification to mask the self-destructive derangement of broken ecosystems: not just in the natural world, but in our bodies, in our society, in our economy and in our politics.

Nurturing permanent adolescence, anxiety and alienation are highly profitable, for people responding to the fear and anxiety of Thanatos (the instinct for destruction) will not only become malleable consumers, they will lose their grip on Eros, the instinct for life and love. Once lost to the Dark Side, they have no way to experience health or intact ecosystems; their world darkens as there appears to be no alternative to the Status Quo.

Health is horribly unprofitable; illness, anxiety and alienation are highly profitable. That is the destructive essence of our sociopathological “engine of growth,” narcissistic consumerism.

How exactly do fundamental guys make investing decisions off “narcissistic consumerism”? They don’t. They guess, throw darts, peacock, pontificate, prance, predict and pretend. Those are their investing strategies.

That system, that wide societal attachment to the Matrix, insures black swan outliers. And if you know the black swan is swimming looking to come ashore how are you planning to protect yourself and your account when it does?

Hint: Trend following is the alternative for those still conscious.

4 thoughts on “Understand Foundations for Trend Following Success

  1. AQR isn’t a “trend trading fund,” it’s a multi-strat asset management firm offering, per its website, “alternative investments as well as a broad spectrum of long-only funds.”

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