Noted value investor Jeremy Grantham maps out why trend following wins (PDF) — which I am sure was not his intent. He seems to think like my style of trend trading, even though his way to get there is quite different.
Note: Shout to www.pragcap.com for finding the PDF.
Today, I had the opportunity to share face-to-face experiences with a handful of key lieutenants at a prominent trend following firm. They also provided a great background from their then small start-up to current respected veteran status. Their track record? It extends over 30+ years. They have been around the block to say the least. How has their basic trend following philosophy remained under the radar? That was the question I kept asking myself. How can a college finance class serve any purpose if these types of trend traders are not on the syllabus? Well, it can’t.
Our firm can not promise you will earn like returns of traders, charts or examples (real or hypothetical) mentioned. All past performance is not necessarily an indication of future results. Data presented is for educational purposes. This information is not designed to be used as an invitation for investment with any adviser profiled. All data on this site is direct from the CFTC, SEC, Yahoo Finance, Google, IASG and disclosure documents by managers mentioned herein. We assume all data to be accurate, but assume no responsibility for errors, omissions or clerical errors made by sources.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
As a society we have been conditioned to believe that there is a difference between gambling and investing. Of course, this partially true, however, the degree to which we “invest” and “gamble” is smaller than most are likely comfortable admitting. The majority of us have been conditioned to believe that buying a share of Bank of America is vastly different from placing a bet at a roulette table. A closer inspection of “investing” and “gambling” shows that the two are closer than the Wall Street sales machine would like you to believe.
60 Minutes aired an excellent piece this past Sunday about Billy Walters (video attached below). Walters is a Las Vegas gambler widely acknowledged as one of the greatest gamblers Vegas has ever seen. He’s so good that he has to bet anonymously through partners due to the fact that most casinos won’t take the other side of a bet from Walters. The few casinos that do bet with Walters do so mainly because they want to know what he’s thinking. But Walters isn’t truly a gambler. Walters is so good that he feels safer gambling than investing. And ironically, it isn’t the casinos in Vegas that have taken Walters for a ride over the years, but Wall Street. Walters claims that it is not Vegas where the thieves live, but rather the men in suits on Wall Street.
Before we can understand the difference between gambling and investing it’s best to define each. Gambling is placing capital at risk of loss with an uncertain outcome in a system in which the odds are generally unfavorable. Gambling has an inherently negative connotation because it is generally a term used to describe games in which the player is a guaranteed loser over the course of the game’s lifetime. Unlike investing in equities, a bet at a casino generally has unfavorable odds. The game is intentionally devised as such. Investing, on the other hand, is placing capital at risk of loss with an uncertain outcome in a system in which the odds are generally favorable. The primary difference between gambling and investing is the determinability of the outcome. The lottery for instance, is entirely unpredictable. Purchasing government bonds has a high level of predictability. Read the rest of the article.
I spent some time with Francisco Vaca a few years back in Florida. He offered a nice view on my book ‘The Complete TurtleTrader’:
“Regarding your new book [“The Complete TurtleTrader“], I can say that after hearing the turtle story many times from many of the people that are part of the story and after reading many articles about such story, this is by far the most entertaining, inspiring, extensive, and honest story of the turtles I have ever read.”
Vaca’s background? He currently is an associate with original Turtle Paul Rabar. How did he get started?
“…a friend…told me there was a job for a programmer at a commodity trading firm. He had thrown away the job ad, so I picked it out from the garbage! It turned out to be at C&D Commodities, which was co-founded by Richard Dennis of ‘turtle’ fame.”
That ‘find the ad in the garbage can’ was long after the original Turtle experiment. Read a recent article on Vaca (PDF).
This anonymous blog comment (well, he changed his name, but used the same IP as other non-anonymous posts) is quite possibly the most ignorant comment yet on my blog:
“Madoff’s monthly returns (before the fraud was exposed) looked like a trend follower’s nirvana — constantly rising NAV without drawdowns. Madoff investors showed trend-following “savvy” by investing with him knowing that the trend-is-your-friend-until-it-ends (Unfortunately the drawdown came instantaneously — and the Madoff NAV was limit down in perpetuity.)”
How do you spot the next Madoff? Anyone making 1-2% every month is either a scam or will blow up.
