— Michael Covel (@Covel) January 8, 2015
Trend following can be a counterintuitive. It goes against the orthodoxy of buy and hold, fundamental analysis, value investing, Warren Buffett, EMH and Federal-Reserve-Trust-the-Government ZIRP policy. Further, it is not day trading, HFT, Elliott wave or candlestick patterns. All market prediction strategies are false narratives.
Trend following is something different. Trend following reacts to market movements.
Just listened to your podcast on the universal kick-in-the-ass known as the death of the McJob. I couldn’t agree more. What people do not realize, however, is that through osmosis we pass our attitudes on to our children. If we are afraid to get out from under the weight of societal expectation to be another drone zombie with the rest of them, what message does that give to our children? A child looks up to its parents for guidance and reassurance. We see it during, say, a thunder storm, where our children are nervous and instinctively glance over at us to see if WE are afraid. Well what if we are and we show it? What do we communicate to our children if we show our fear? The obvious answer is that they then become afraid because they rely on the parent to show them the things they should be afraid of.
So when a parent does not follow your message, does not get out there and make something happen, and instead retreats into the illusory safety of corporate zombi-ism, they have let down their child in a way that goes far beyond not giving them the latest toy or a ride to the mall. They have basically told them that there is safety to be had by huddling in a collapsing building. So if people won’t take your words to heart for themselves, then they should at least do it for their children.
By the way, Mike, I’m writing this from my hotel room overlooking The Bund in Shanghai. I’m here visiting my daughter who graduated last year as a top-notch high school student and winner of a couple significant citizenship awards. She has read all your books and has the Trend Following mentality. Last summer she made the decision to head to China to learn Mandarin and to see more of the world before going to university. And in case everyone thinks that what you’re saying is all about money, she is volunteering for a charity that helps Chinese kids make a difference in their world because she herself wants to make a difference. Because of her can-do attitude, the money is already there; it’s a given, because once you are there mentally, the results are inevitable. She has had no trouble accumulating the money she needs to achieve her goals, but she’s taking this year to go beyond the money, and as you probably guessed, I couldn’t be more proud of her. She not only thinks it, she does it.
Thanks Michael, keep up the message!
Thanks Dale. I couldn’t have said it better myself.
If you want to live a life of complacency, a life that is run by what the masses are telling you to do, then that is your choice. Just know that your children will be subject to the same kind of ruling over their lives. Don’t lead them to believe that “there is safety to be had by huddling in a collapsing building”.
John Hussman writes about investors with no plan who buy at the top, panic, sell, and get killed:
“This is my retirement money. I can’t afford to be out of the market anymore!”
“I don’t care about the price, just Get Me In!!”
“It’s a healthy correction”
“See, it’s already coming back, better buy more before the new highs”
“Alright, a retest. Add to the position – buy the dip”
“What a great move! Am I a genius or what?”
“Uh oh, another selloff. Well, we’re probably close to a bottom”
“New low? What’s going on?!!”
“Alright, it’s too late to sell here, I’ll get out on the next rally”
“Hey!! It’s coming back. Glad that’s over!”
“Another new low. But how much lower can it go?”
“No, really, how much lower can it go?”
“Good Grief! How much lower can it go?!?”
“There’s no way I’ll ever make this back!”
“This is my retirement money. I can’t afford to be in the market anymore!”
“I don’t care about the price, just Get Me Out!!”
Obviously, he is not a price based trend following trader, but his understanding of trading psychology dovetails nicely with trend following.
A reader writes:
Hey Mike. Davie [name] Here. You know Mike, there is something that I keep hearing from two of the most prominent financial advisers in the country and it drives me crazy every time I hear it. I can’t understand how two men who are obvious very intelligent and gifted can be so ignorant of the truth. The two men are Dave Ramsey, and Rick Edelman. I have heard them both on more than one occasion in which they were promoting their buy and hold philosophies that there are no “market timers in the forbes 400 wealthiest list”. Then they go on they point out that “however, the number 2 guy on the list, Warren Buffet is a long term buy and hold guy”. This just drives me crazy Mike because it simply isn’t true and two men who are “experts” in money ought to know better. Sure there is one guy who claims to be a buy and holder on the list named Warren Buffet though as you have pointed out, he really may not have built the bulk of that wealth through classic buy and hold strategies. But that’s beside the point. The point is that of course there are many many more than that one guy who are on that same list who are indeed market timers which is just a fancy word for trader. What is it with Ramsey and Edelman Mike? Have they not heard of George Soros, or Ray Dalio, or T Boone Pickens, Stevie Cohen, James Simons, Paul Tudor Jones, Stephen Feinberg, Bruce Kovner, Eddie Lampert, David Shaw, Louis Bacon, Jeffrey Gendell, Stephen Mandel, Israel Englander, Richard Perry, David Tepper, Stanley Drunkenmiller, William Von Mueffling, John Arnold, John Paulson, or Julian Robertson??? I could go on. All of these guys to my knowledge are billionaires whose net worth is high enough to be qualify for the Forbes 400 list. And that’s not to mention the hoards of “market timers” who may not be wealthy enough to be on the list but certainly are among the top one tenth of one percent of the world wealthiest individuals. Men such as Boaz Weinstein, or Bill Dunn. You know Mike, I can name a heck of a lot more super wealthy “market timers” than I can long term buy and holders. The only super wealthy buy and holders I can name are Warren Buffet and Peter Lynch. It really annoys me that Dave Ramsey and Rick Edelman continue to claim that no one can make any money by trading. It simply isn’t true. I was the guy who sent you the article from yahoo news about the guy who lost in faith in the market. If you read that article, you would have noticed that near the end of the article, they pointed out that the man they highlighted in the article had lost about 90% of his money and only had $800K left. Unbelievable Mike! You talk about taking a 50% draw down with buy and hold! This guy was a multimillionaire with about $8 million in his retirement account, and his buy and hold strategy combined with obvious additional poor choices resulted in him losing about $7.2 million dollars! Meanwhile, these “market timers” I mentioned above had their net worths rise and rise and rise through the past few years. I know this because, I remember reading about many of them in trader monthly magazine back in 2006 and many of them had not even accumulated a billion dollar net worth by then and now most of them are multi billionaires. I really wish Ramsey and Edelman would educate themselves more on this issue before they speak. There! I’m done ranting! I love ya man!
Thanks Davie, but Ramsey and Edelman do what they do on purpose. Very much on purpose. It’s up to everyone out there to figure out their motivations for misleading. Hints for their “why” can be found here: Dave Ramsey 5 foundations.
Want to be a millionaire? Start thinking and acting like one! That means joining the minority who make sound moneymaking decisions every day. How? First, understand that there are no free lunches. Second, all traders must pass through the enlightenment barrier before they can win big and it all starts with superior investor education:
Profit in Up and Down Markets:
Trend following doesn’t swear an allegiance to a bull or bear market. It follows trends to the end. No matter how ridiculous trends might appear early and no matter how insanely extended they might appear at the end, follow trends. Why? Because they always go further than anyone expects. Ignore momentum at your peril.
No More Buy and Hold, Analysts or News:
Trend following decision-making doesn’t involve discretion, guesses, ‘gut’ feels or hunches. It’s not day trading or buy and hold (hope). It doesn’t involve passive indexing, in and out trading or fundamental analysis. No more 24-hour news cycles, daily turbulence or sensational hype. No black boxes or magic formulas either. Hope is the most addictive drug. Let go of the Holy Grails. The good news? Complete beginners can learn trend following.
Trends exist everywhere, always coming and always going. Whether fashion, business or whatever, we all want to find trends and ride them as far as they can go. Markets are no different: they trend up and down too. That said, no one can predict a market trend, you can only react to them. Trend following never anticipates the beginning or end of a trend. It only acts when the trend changes. However, there is no need to figure out ‘why’ a market is trending — just follow it. You don’t need to understand electricity to use it!
The Big Money of Letting Profits Run:
Trend following aims to compound absolute returns. It doesn’t shoot for ‘average.’ Do you really want to be exactly like your neighbor? The goal is to make the big returns, not generate passbook savings returns. Trend following also has the unique ability to lie in wait for ‘targets of opportunity.’ That means ‘outlier’ events (read: unpredictable surprises like the 2008 market crash) can make you huge money.
Risk Management is Top Priority:
Trend following always has defined exit protocols to control ‘injury’ to your account. Stop losses and proper leverage usage are standard practice. Trend following also has low to negative correlations with most other investment opportunities. It eliminates exposure to group think and toxic assets. Eliminating exposure is a winning move whereas hedging can actually increase your exposure. Trend following is the best protection for when bubbles pop and everyone starts running for cover.
Takes Advantage of Mass Psychology:
Markets, which are always changing, are only our subjective expectations reflected objectively. Interestingly, people’s reactions to change always remain the same (i.e., they bet wrong as a group). Trend following takes advantage of ‘panicky sheep’ behavior to make money. How? Strict discipline minimizes behavioral biases. It solves our eagerness to realize gains and reluctance to crystallize losses. Let’s face it too many people believe what pleases them and social conformity means that even if the group is wrong, we go along. Most behaviors are simply driven by the impulsive moment of now. They aren’t purposeful, thought-out choices. Trend following wins because of that.
Scientific Approach to Trading:
Trend following doesn’t require a belief, but rather it relies on unwavering principles proven over decades. It has a defined edge just like the MIT card counting team that beat Vegas casinos (read: mathematical game theory from the movie ‘A Beautiful Mind’). Be the casino and not the hapless player! How? Trend following uses hard rules rooted in numbers (think process not outcome). And remember, frequency of correctness does not matter, the magnitude of correctness matters! ‘Winning percentage’ means zilch. How much time will trend following take? No staring at the screen drinking ‘Red Bulls’! Once you are setup, minutes a day is all you need when you approach trading like an engineer.
Strong Historical Performance in Crisis Periods:
Trend following prepares for the worst at all times. It is adaptable to differing climates and environments performing best during periods of rising volatility and uncertainty. Guess what? The unknown will happen again! Are you ready? You have to be able to ride the bucking bronco while also riding the storm out. But that said, the day you have to do something, you are screwed. Trend following, like a lion waiting to strike wounded prey, is very patient.
No Traditional Diversification:
Trend following is not restricted to any single market or instrument. A focus on ‘price action’ allows trend following to be applied to an exceptionally large variety of markets. Price is the one thing that all markets have in common. That means a system for treasury bonds will work on the Euro too. And if you switch it over to coffee, something totally different than treasury bonds, it still works. Trend following is robust! But don’t expect the ‘tape’ to lecture you. You have to trust your buy and sell signals and follow all rules.
No Government Reliance:
Forget Social Security, bailouts, stimulus plans and roads to nowhere. Those won’t help you to make money, but they might help you to lose money. When the Fed takes the ‘training wheels’ off the economy will you be ready to mint cash or will you just sit there and take it again? If your portfolio is grounded in sound principles you can win, but the government has nothing to do with sound anything!
The market does not care about you or know you. It doesn’t care about your dreams or desires. It is the ultimate authority so you better listen to it.