“Those who do not think that employment is systemic slavery are either blind or employed.”
And:
“They think that intelligence is about noticing things that are relevant (detecting patterns); in a complex world, intelligence consists in ignoring things that are irrelevant (avoiding false patterns).”
BUY-AND-HOLD INVESTING is a loser, says Michael Covel, founder of Trend Following, one of several Websites devoted to the trading strategy of the same name.
“How many more decades can you go with negative returns?” he asks, referring to the disappointing aughts (www.trendfollowing.com). The unofficial chronicler of the 25-year-old active investing strategy, Covel claims that leading practitioners of trend following, like Boston Red Sox owner John William Henry, have collectively logged a 17.56% average annual return since 1984 compared with 7.37% for the Standard & Poor’s 500.
Trend following is grounded in the notion that a stock or sector in motion tends to stay in motion—until it stops. “Markets that break out are more likely to continue than to reverse direction,” maintains Covel. It’s equally applicable to short and long trades and to any class of asset—stocks, futures, currencies—with typical holding periods of a few weeks.
Trend following is similar to momentum investing, except that devotees studiously avoid using company fundamentals like revenue growth or positive earnings surprises as trade signals. The focus is entirely on price movement—although trend followers aren’t that enamored of charting or technical analysis, either. When a trend starts, most technical indicators turn in the same direction, says Covel.
THE KEY DIFFERENCE between trend following and most investment strategies is the lack of crystal-ball gazing. Trend followers make no attempt to forecast a trend’s duration, magnitude or key inflection points. Entry and exit triggers are decided at entry, and trend followers often arrive late to the party.
Its “buy high, sell higher” orientation smacks of the bigger-foolism that has tripped up so many investors, large and small. But trend followers don’t blindly chase bubbles. Their systems try to take the emotion out of investing through rules-based decisions, back-testing of trade theses and strict risk management.
A portfolio is usually spread across a dozen or more (hopefully) noncorrelated assets with tight trailing stops, which can be 2% or less below entry price. That means a high percentage of holdings can get stopped out in the search for a few home runs. Investors need a pre-defined fund allocation strategy that can withstand a losing streak.
“As many as 60% of initial bets will be wrong,” says Covel, “The biggest impediment to success is fear of failure.”
Jack Zaner wrote me today with a great quote from David Eckstein (2nd baseman for the San Diego Padres) about what it takes to play successful baseball in a pennant race:
“The ball doesn’t behave differently in September than it did in the spring. It moves no faster. It hops no harder. The trick is to stick to your routine in the face of accumulating anxiety; to play the game as if you were installing widgets on an assembly line. The game doesn’t change unless you allow it (to) in your mind.”
When you read that you are left with one of two choices:
1. The author(s) have no idea what they are talking about.
2. The author(s) are purposefully not telling the truth.
Bubbles (read: “crisis”) are a part of human condition. They will never be eliminated. Government rules will NEVER keep human beings from building financial bubbles. Why is this such a simple concept to outline, but seemingly beyond the comprehension of all journalists?
“The Truman Show is a 1998 American comedy-drama…The film chronicles the life of a man who discovers he is living in a constructed reality soap opera, televised 24/7 to billions across the globe.”
Bottom line, from a trend trading perspective — price is king and follow it. But from a “what-the-hell-is-going-on-in-the-world-today” perspective — it is ‘The Truman Show’
In the last few weeks the media has gone ‘all in’ on recovery. All is rosy. The Dow is up. Good times are back! And when the media goes all in many love to point out (me included) that the magazine cover indicator is often great contrary evidence to where we are really headed.
That said, the cover indicator is more fun than substance. Meaning, trend followers don’t build into their technical trend following systems the cover indicator. So it sounds great, and the psychology behind it makes sense, and sometimes it works out, but if the numbers of your system don’t say to do something — sitting still is the best course of action.
