I am looking forward to a future show with more details from Dunn Capital. If I’m not mistaken, they would have a practical opinion on the usefulness of both Bayesian Inference and Efron’s bootstrap method. Efron, of course, is the author of the Bayes critique cited above.
Per the Kaminski piece, there is no guarantee that 800 years of evidence won’t be undone by a perpetual and implacable tyranny of central bank price discovery suppression. This research looks suspiciously like new marketing materials from Greyserman/Hite etal. In today’s world It is absolutely invalid to say that stop orders which lost money on concentrated bets in the US stock index will be a justifiable risk control cost when the market gaps down 50% over a weekend because the Fed finally sh*ts the bed. How can any credible trend follower say they don’t care to know anything about unprecedented and precarious risks to the monetary system in their analysis?
Dunn seems to have taken more into account than ISAM. An educated guess about Dunn’s risk throttle is that one of the inputs is proportional to the difference between the overnight rate and the CPI.
Further to reducing risk in a low payoff environment (throttling), one of your other guests, Peter Schiff, (who you must interview again) has a decent theory that CPI and the overnight rate will never again cross paths or at least not until Keynesian central banking is dead and buried.
BTW, if something goes wrong with the monetary system, have you considered the possibility that agricultural markets and other markets with lock limits could suddenly and simultaneously be both lock limit up and lock limit down?
I’m guessing, in your mind, you have this idea that it is impossible for all positions to simultaneously lose because there is both a long and short side. One side has to win by definition, right? Well, maybe not…
Think about the situation where the monetary system is pushed to the breaking point. Where in the CME rule book does it say a market can’t be locked both up and down? Trend following strongly depends on the assumption of knowing prices or at least a sensible price ranges. What happens when this is suddenly a bad assumption?
DUNN CEO already appeared on my podcast. TFs don’t use Fed analysis in their trading. Of course, as you note, the world could end. In that case far more issues than trading will be relevant.
Hi Michael, so I’ve read the book Linchpin and indeed is full of great advice. It reminds me of the book The Leader Who Had No Title, by Robin Sharma, and I totally agree with the philosophy that everyone should do their absolute best and create “art”. Now I understand better your business model of giving so many gifts to the community like your podcast (which I started listening), your PDFs, videos and all that; I wanted to thank you for offering so many valuable information to the world. Now, Linchpin focuses mostly on how an employee should act and think, indeed the ideas can be applied to entrepreneurship as well but the thing is that I want to excel in the financial markets and there’s not much art you can do there. Here’s the thing, I have a vision in mind to make Master of the Universe type of money. I want to become a Market Wizard and I want your advice. My plan for now is to simply learn as much as I can from the experts (like you and [name]) and start growing my account. My question is, is there a better way? should I be looking to go into the money management business, maybe go work for a hedge fund or open one? Or can I achieve my goal just by trading my own account? Which is better? Oh and one more thing, I know you’ve studied Tony Robbins and he kept mentioning that he coached a guy who made $500 million in the 1987 crash, do you know who he’s talking about? Because he never mentioned his name.
I believe the trader Tony Robbins is talking about is Paul Tudor Jones. I don’t think working for a hedge fund is necessarily how you become a hedge fund titan. Starting a hedge fund is the path. Right? Trade your own account, then friends and family, then others. That’s the path.
It must be obvious, from the start, that there is a contradiction in wanting to be perfectly secure in a universe whose very nature is momentariness and fluidity. But the contradiction lies a little deeper than the mere conflict between the desire for security and the fact of change. If I want to be secure, that is, protected from the flux of life, I am wanting to be separate from life. Yet it is this very sense of separateness which makes me feel insecure. To be secure means to isolate and fortify the “I,” but it is just the feeling of being an isolated “I” which makes me feel lonely and afraid. In other words, the more security I can get, the more I shall want. To put it still more plainly: the desire for security and the feeling of insecurity are the same thing.
Want security in your investments? That’s what you crave? That’s your number one goal?
Hint: You will never get there.
Accept that the desire for security and the feeling of insecurity are the same thing, and you are on your way to making some money. Start here.
Source: Watts, Alan W. (2011-11-16). The Wisdom of Insecurity (Vintage) (pp. 77-78).
From CNBC recently:
“Such [trend following] funds use computer models to predict trends in the prices of stocks, bonds, currency, commodities and other markets, betting that valuations tend to revert to a mean following swings up or down.”
On the basic description of trend following strategy how does he get it so wrong? Not even close. Predictions? Valuations? Mean reversion?
Note: My email exchange with the author:
Me: In your piece you say this: “Such funds use computer models to predict trends in the prices of stocks, bonds, currency, commodities and other markets, betting that valuations tend to revert to a mean following swings up or down.” On the basic description of the strategy how do you get it so wrong? Like not even close. Curious.
CNBC: Thanks for the feedback. What about it do you think is off?
Me: When did trend following become about predictions, mean reversion and value? If you did not know and got it wrong, ok. But should correct it.
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.
Hi Michael, since I started trading the system with real money, I’ve had a more difficult time getting traction. However, this is because I started at the beginning of March when leadership rotation kicked in big time and the main US equity indices basically stopped trending. Are you seeing others having a similar experience over the last 8 or so weeks?
Two months is two months. Just a blip on the screen relatively speaking for trend following. You have examined typical trend following records in my books, for example?
Big picture is big picture. Small picture is small picture.
Hi Mike, I just listened to a recent interview by the CBC with Jason Padgett. He had a traumatic brain injury which had the curious effect of making him a math savant, particularly regarding geometric patterns. The subject matter is interesting in and of itself and he just released a book about it. There’s a short passage in the interview at 12m35 where he mentions he was approached by a financial company in Toronto that wanted to hire him to analyze charts. His response will be right up your alley. He basically concluded that it’s not possible to “predict” future price action from chart patterns. Worthy of a sound bite or maybe even as a guest?
Keep up the great work!
Awesome. Thanks. I reached out to his publisher.