Fear drives all in today’s world. Two operations who have not let fear dictate their trading are Berkshire Hathaway and Dunn Capital. Both have 40+ year track records that should be studied. What was their system? How has it worked? If you look at the month by month and year by year of these two much can be learned. Both track records have not just gone up, up, up–they have had massive drawdowns (at least by the definitions of mortals) and still they have been able to persevere. No matter who you are, the ability to adapt to the markets is mission critical.
I really enjoy your podcast and thank you for doing it. You are spot on and have added a lot of value to my thinking and challenged limiting mindsets I wasn’t even aware I had.
It would be really helpful if you talked about drawdowns and your “process” for getting through them and overcoming the standard human emotions they generate. Assuming someone is doing everything perfectly in their trend following execution (proper position sizing, diversified, ignoring the news, not looking at charts, using risk capital, etc.), do you have a process for getting through a drawdown when time marches on so slowly and our impulses are now now now?
Let’s say you believe trend following works how do you keep yourself sane and unemotional during difficult stretches. Do you have a process you use?
Today’s podcast guest is Chris Clarke, ex-Goldman Sachs executive director and founder of Lawrence Clarke Investment Management. Clarke has been developing trading systems for decades.
The conversation today gets into the psychology of systems trading. Trend following is inherently simple to understand, and does not require above-average intelligence once the system is in place. Yet so many people, including most fund managers, tend to downplay trend following and keep seeking the “holy grail” – a magical system that will supposedly make them money without any downside. An interesting metaphor for this that Chris offers is that of weight loss. Although the theory of it is simple (diet and exercise), most people keep seeking the magic bullet that will make them achieve results without following the system. Much the same with trading.
Another topic that Michael Covel and Chris Clarke talk about is understanding the difference between risk and drawdowns. Drawdowns are normal, and will be there for as long as trend following as a strategy exists, and the markets keep trending. Ultimately, trend following is about human nature, and that’s not about to change.
In this episode of Trend Following Radio:
Trusting the system once you choose it
Being prepared to trade no matter which way the markets go
The importance of edge, and why gamblers lose
Looking at the math behind trading strategies
Understanding “market truths”
Drawdowns vs. risks
“The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.” – William Eckhardt