It All Boils Down To: People Don’t Change

A recent interchange:

Listener: First, I wanted to let you know I listened to the Master’s in Business podcast with Barry Ritholtz over the weekend. Really great. I am a fundamental investor with typically long holding periods (normally 1 – 5 years), but have realized I need a better system for timing entries and exits. I have read some of the recent research on combining momentum with value, and I think it makes a lot of sense, so I’ve decided to add a momentum component to my investing (ironically, I did this last week before hearing the podcast). Assuming that this would be useful for my needs, my question is how much of a time commitment is required? I run my own business, and I have the ability to spend an hour or so each day on trading, etc., but I cannot be married to the screen 24/7. Would I be able to make use of this system? Thanks, and, again, really liked the podcast.

Covel: Let me first frame trend following this way: You can trade on daily close prices OR weekly close prices (done both ways). Weekly close prices would mean taking weekly close prices and using that data to prepare signals (if any) for Monday. So that takes you firmly away from day trading stare at the screen 24/7 trading (that’s never been trend following). Feel free to follow-up.

Listener: Actually, I did think of a follow up. I just want to be sure this sounds like something I can use in conjunction with fundamental investing. Basically, say I have a screen of 50 – 200 stocks that I like on a fundamental basis. Can I use the trend following methodology profitably to enter and exit the positions (until they fall out of my screen) or is that limiting the universe of investments too much? Thanks again.

Covel: Trend following is trend following. I would let it run as is. You want that benefit. If you have another strategy, great. Now you have a multi-strategy approach with one of those two strategies being trend following.

Listener: I’m sold on the idea, but if it really works why hasn’t the strategy been competed away? Thanks.

Covel: You have read Daniel Kahneman’s Thinking Fast and Slow? Behavioral finance? People don’t change. Why has oil dropped over 70% in 2 years? Humans are human.

Masters in Business
Masters in Business

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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.