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Trend Following Machines Cash in—Again

All these years later, all these stories later, and CNBC still has a difficult time explaining trend following to the masses. One good excerpt:

Funds managed by ISAM, Cantab, AHL, Systematica and others produced double-digit gains over the first three months of 2015, according to private performance figures obtained by CNBC. “Trend followers and other macro investors clearly outperformed,” said Robert Christian, head of research at K2 Advisors and Franklin Templeton Solutions. “What’s carried people is just classic, good old trend following.”

Note: ISAM is Larry Hite’s shop. One of my favorite no-nonsense trend following pros.

Legacy of the Legendary Trader Jesse Livermore

Jesse Livermore was an outstanding trader. The insights he shared with the world are invaluable. Josh Brown wrote a great article featured on www.ritholtz.com pointing out some of his great nuggets of wisdom as well as how he would react in this day and age with news outlets streaming 24/7:

There are those who would convince you that it is somehow smart or in your best interest to be manically switching your investments around, back and forth, long and short, on a daily basis. To pay attention to this kind of overstimulation is the height of madness, even for professional traders.

The most storied and important trader who ever lived, Jesse Livermore, would be tuning these daily buy and sell calls out were he alive and operating today. Because while he was a trader, he was not of the mindset that there was always some kind of action to be taking.

Jesse Livermore’s legacy is a bit of a double-edged sword…

On the one hand, he was the first to codify the ancient language of supply and demand that is every bit as relevant 100 years later as it was when he first relayed it to biographer Edwin Lefèvre. Livermore himself sums it up thusly: “I learned early that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that.”

On the other hand, Livermore’s undoing came at precisely the moments in which he ignored his own advice. After repeated admonitions about tipsters, for example, Jesse allowed a tip on cotton to lead to a massive loss which grew even larger as he sat on it – violating yet another of his own cardinal rules.

And of course, other than for a few moments of temporary triumph in the trading pits and bucket shops of the era, Jesse Livermore was not a happy man. “Things haven’t gone well with me,” he informed one of his many wives by handwritten note, before putting a bullet through his own head in the cloakroom of the Sherry-Netherland Hotel.

But he did leave behind a wealth of knowledge about the art of speculation. His exploits (and cautionary tales of woe) have educated, influenced and inspired every generation of trader since Reminiscences was first published in 1923.

In my opinion, some of the most useful bits of knowledge we get from the book concern Jesse’s discussion of timeframes and patience. Many traders, particularly rookies, approach the game with the idea that they’re supposed to be constantly doing something – in and out, with a trembling finger poised to click the mouse again and again. Consequently, they get on the treadmill of booking wins and losses without ever really moving the needle. They end up with tons of brokerage commissions and taxes to show for their efforts, but not much else.

Being a trader doesn’t mean one must always be executing a trade, just as being a house painter doesn’t mean that every surface needs an endless series of coats.

Many rookies are surprised to learn that Livermore, the idol of so many great traders, advocated a lower maintenance, higher patience approach as he matured. In his early days, Livermore was dependent on the short-term funding and scalping activity of the bucket shops. Once he graduated and had his own capital, he was able to lengthen position holding times and could even afford to do nothing for extended periods.

Here are nine surprising things Jesse Livermore said regarding excessive trading:

  • “Money is made by sitting, not trading.”
  • “It takes time to make money.”
  • “It was never my thinking that made the big money for me, it always was sitting.”
  • “Nobody can catch all the fluctuations.”
  • “The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money everyday, as though they were working for regular wages.”
  • “Buy right, sit tight.”
  • “Men who can both be right and sit tight are uncommon.”
  • “Don’t give me timing, give me time.”

and finally, the most important thing: “There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.”

Jesse was a trader but he knew the value of staying with positions and sometimes not trading at all. Once he began to follow tips from others or trade when he should have abstained, all of his progress had come undone, and with it, his sanity.

We are fortunate to be able to learn from his mistakes and to sidestep the errors that eventually cost him everything.

Jesse Livermore Books:

• How to Trade in Stocks (PDF)
• Reminiscences of a Stock Operator (PDF)

Recommended Trend Following Posts and Podcasts

Twenty Eight Years On Wall Street

Trend Following Wisdom of Jesse Livermore

Reminiscences of a Stockbroker

Bitcoin Trend Following

On Holding

Striving for Excellence

Who Makes the Sausage? Ryan Vlastelica!

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Ever stop for a second to observe who makes the sausage? A headline written today by Reuters Ryan Vlastelica:

“NEW YORK (Reuters) – As a last-minute deal to resolve spending negotiations in Washington appeared less likely, U.S. stock investors braced for what had previously seemed remote: a shutdown of the U.S. government that could spark a major equity decline.”

That background of course allowed him to make a prediction of a major stock market decline.

Party on Garth.

Note: If you happen to be a much larger player in the media that immediately thinks I am unfairly picking on a young reporter — I could care less. The financial media matrix is gross from top to bottom. Plus, I pick on the top too.

Flight Plans with Trend Follower Kevin Bruce; No Battlestar Galactica Screens Needed

Trend follower Kevin Bruce once had the opportunity to go to New York and see one of the major brokerage firms’ trading floors. He found it like Battlestar Galactica, with more screens and lights than you could imagine. He decided: “I couldn’t think in this environment.” You can never make decisions when the market is open; everything is like a flight plan, it’s got to be pre-planned. Trying to make decisions when the market is open is going to lead to emotional decisions. Everything must be thought out ahead of time. Know what you are going to do if it goes up, if it goes down, and if it doesn’t do anything. When all that is figured out, you put your system on autopilot. It almost sounds too simple, but that’s the way you need to do it, and that’s why you don’t need to stress out about anybody’s opinion.

More? See: The Little Book of Trading.

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