Paul Mulvaney: Trend Following Trader

Paul Mulvaney wants to make the most money possible over the course of his lifetime, and so far he’s headed in the right direction. Mulvaney is known as the trend following trader who made over 100 percent in 2008, but I’m willing to bet that there will be more 100 percent years to come. His insights are especially useful for readers who still dream about getting rich, not the opportunity for a couple of thousand dollars a month in retirement income living at Del Boca Vista Phase III (Seinfeld fans are with me).

Look at baseball. The home run hitter is the one we pay to see. Everyone wants to be there when a 500-foot home run is blasted into the upper deck. Even if you know nothing about baseball, balls hit far into blue sky inspire awe. Trading is no different. Making the most money possible is what captures our imagination. Its what we all want, even if some of us are deathly afraid to admit it.

Unfortunately, in today’s culture, wealth building is something frowned on, especially if you end up with more than your neighbor. That attitude did not stop Paul Mulvaney. He generated returns of 11.6 percent and 45.5 percent in September and October 2008, at the exact time Lehman Brothers collapse was scaring the wits out of everyone. Home runs? An understatement. Unapologetic wealth creation, check. Is he a trend follower? Yes.

Mulvaney’s returns challenge the widespread view that trading based on mathematical models, the ones built on historical chart patterns and trends, don’t work. His full-year return in 2008 was in excess of 100 percent. That return should grab you by the throat with some discomfort.

Risk and Volatility

Many equate risk with volatility. They think big returns that come from high reward trend following systems (like Mulvaneys) are much, much riskier than actuality. In fact, acceptance of higher risk in a trend following investment can actually lower the risk of your stock and bond portfolios because when trend following zigs, typical stock and bond investments zag. However, that is a very difficult concept to get people to accept.

Risk of ruin, otherwise known as taking too much risk so you have no more money, has to be your foundation. Mulvaney, for example, will only stop trading his system if his account value drops to a point where he cant trade his strategy. So risk of ruin is that real point where he cant actually trade all of the markets that his system dictates to trade.

Believing in the value of your system to the extent that you would continue trading until you literally didn’t have a dollar of capital left to trade is the conviction of a winner. The lesson? If you can avoid blowing up, you should continue to trade your trend following system. That’s the only way to get rich. Or, maybe, you can invent the next Facebook. That’s another option.

Follow the Leader

Sit in on part of my interview with Mulvaney to hear more of what makes him a leader to follow:

Covel: When you talk about creating terminal wealth what do you mean exactly? Bill Dunn is approaching 80 years old and he’s clearly not dialed it back from the chase for big returns. Trend following legend Richard Donchian traded into his 90s. How do you perceive your trading as you move forward in life? Do you perceive there’ll be a time where you change your desire for absolute returns or do you say, “You know what, I’m 46 years old. This is what I love. This is what I want to do and I’m going to try and hit the biggest home run I can over the course of a lifetime?”
Mulvaney: Yes. Just keep going for the home run. If I take a 100 percent drawdown while trying to make that home run, then fine. Then Ill say, “Well, great, I had a great run at it.” I have had two separate 12-month periods when I generated over 100 percent. Eventually when or if I overdid it, and it brought me down, great, I would still not be dissatisfied with my career if that happens.
Covel: I was speaking to a very successful firm with a 30-year track record. They give the client what he wants, which is less volatility. However, the guys that run it said, “We don’t trade for less returns for our personal accounts. In our personal accounts, we want to get rich. We trade for trend following absolute returns.”
Mulvaney: That’s what I do. Most good traders take more risk with their own money than they will with client money.

Wise.