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Trend Following Good News; Bad News

Good News Bad News
Good News Bad News

[Trend Following] fills a void in a marketplace inundated with books about buying low and selling high, index investing, and all other types of fundamental analysis, but lacking any resource or, for that matter, practically any reference to what I believe is the single best strategy to consistently make money in the markets. That strategy is known as trend following. Author Van Tharp has described it succinctly:

“Let’s break down the term ‘trend following’ into its components. The first part is ‘trend.’ Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices … ‘following’ is the next part of the term. We use this word because trend followers always wait for the trend to shift first, then ‘follow’ it.”

Trend following trading seeks to capture the majority of a market trend, up or down, for profit. It aims for profits in all major asset classes—stocks, bonds, currencies, and commodities. Unfortunately, however simple the basic concepts about trend following are, they have been widely misunderstood by the public. My desire to correct this state of affairs is what, in part, launched my research. I wanted to be as objective as possible, so I based my writing on all available data:

• Trend followers’ month-by-month performance histories

• Trend followers’ published words and comments over the last 30 years

• News accounts of financial disasters

• News accounts of the losers in those financial disasters

• Charts of markets traded by trend followers

• Charts of markets traded by losers in the financial disasters

If I could have written books comprising only numbers, charts, and graphs of trend following performance data, I would have. However, without any explanation, few readers would have appreciated the ramifications of what the data alone showed. Therefore, my approach to writing Trend Following became similar to the one Jim Collins describes in his book Good to Great, in which a team of researchers generated questions, accumulated data in their open-ended search for answers, and then energetically debated it.

However, unlike Collins who was writing about generally well known public companies, trend followers form a sort of underground network of relatively unknown traders who, except for an occasional article, the mainstream press has virtually ignored. What I have attempted to do is lift the veil, for the first time, on who these enormously successful traders are, how they trade, and what is to be learned from their approach to trading that we might all apply to our own portfolios.

Trend Following challenges much of the conventional wisdom about successful trading and traders. To avoid the influences of conventional wisdom, I was determined to avoid being influenced by institutionalized knowledge defined by Wall Street and was adamant about fighting “flat earth” thinking. During my research, starting with an assumption and then finding data to support it was avoided. Instead, questions were asked and then, objectively, doggedly, and slowly, answers were revealed.

If there was one factor that motivated me to work in this manner, it was simple curiosity. The more I uncovered about trend followers, the more I wanted to know.

Feedback from a listener:

Hi Michael.

I’ve been listening to your awesome podcast for a few months now and it has intrigued me quite a lot. Thank you so much for putting it up out there.

I never really thought about money before. I’m one of those suckers who has been keeping the money in the bank, too skeptical of financial advisers, too afraid and ignorant of the stock markets. At some point obviously I started to realize that I needed to be in control of my savings and start planning my future. I’ve been reading a lot about the markets, but nothing makes as much sense as your words.

Despite understanding your message (at least I think I do), I actually don’t know how to exactly implement that way of thinking on a personal strategy. I am a dentist living in London, 2 small kids at home, so not a lot of time on my hands. I have been putting some of my savings on a buy and hold strategy with Vanguard equity funds. But without a doubt I am dependent on market timings and on the hope things will always “get better.” And that doesn’t seem to be very sensible.

So, I am contacting you in the hope you could help me to have some more clues on how to start on a trend following strategy that could fit my circumstances.

With great admiration,
[Name]

My father is a dentist. I feel a kinship! Good news and bad news: Good? Trend following can help anyone. Bad? Need to do some prep. Here are some starters: Start Now and an Intro Video.

Trend Following Passion is Contagious

Feedback in:

I [wish] I had read your book many years earlier! And your profiling of the long term track records of the some of the big practitioners inspires confidence and this has been borne out [in] academic studies [too]. Although I do not have the time to do trend following personally being a busy physician, I am beginning to deploy monies in managed futures especially because it offers a favorable tax structure. I have been an investor in hedge funds which have generated large short term gains leading to a heavy tax burden over the years.

I am using your resources to research many of the managers with good track records. Do you have any suggestions as to your favorites? I am looking for managers that offer leverage in addition to their standard program. I am currently invested in QIM which has 3x leverage and with Abraham Trading which offers 2x leverage.

Last, your passion is contagious and keep up your good work.

I don’t give recommendations on pro traders, but thanks for the nice words. I will try to keep it all going straight ahead!

Thoughts on the Feedback Following my Tom Basso Interview Podcast

Some great feedback came through the other other day:

It’s because of you my friend that I’ve come to know so many in the space. Thanks for your efforts.

His personal message to me (above) was followed by his newsletter to his clients:

In my career, I’ve had many mentors, some of which I’ve met and some not.

Tom Basso is one of these people, and I was fortunate to get to meet him last week where he was generous enough to give me over two hours of his time over lunch in Scottsdale. Tom is also getting added to the email list and may be able to contribute some wisdom from time to time.

The Trader Tom Basso
Tom Basso Picture from Twitter

Tom Basso trader is probably most known for being profiled in the bestseller, The New Market Wizards, where he was nicknamed “Mr. Serenity.”

The scope of our discussion was very broad… Tom left the money management business largely because of the frustration of working with clients who constantly made poor decisions that were rooted in fear and greed. Tom produced decades of double digit gains for clients on a very attractive risk-adjusted basis yet many never achieved these results because of emotions and performance chasing. As you know, I write on these subjects regularly because they matter that much.

One thing Tom mentioned that was particularly interesting was how at the later stages of his career (approximately 10 years ago) Tom put together a diversified program that was a combination of strategies, asset classes, and products (meaning futures, ETF’s, mutual funds, etc.). He said he himself was the largest customer and it seemed that many people just simply didn’t grasp the value. Regulatory restrictions about combining multiple products together (such as equities and futures) made it overly obstructive. This, in essence, is exactly what I’m trying to do with LCD (Lorintine Capital Diversified) as it mimics endowment level diversification.

The benefit of a multi-strategy single account is it doesn’t give you the opportunity to miss the forest through the trees and take from those who may be underperforming in the short term in favor of those who are currently performing best…essentially the process of buy HIGH and sell LOW where you should be doing the opposite. Tom mentioned how he had a client during the Black Monday crash of 1987 (largest single down day in history where the Dow lost over 22%) that he had set up one account as a stock portfolio and another account as a hedging portfolio where he would short equity futures based on his quantitative market measurements… The client ended up making money on Black Monday (about 1.5% from Tom’s memory) while of course the stock account was down significantly it was more than offset by the short futures account…The client ended up firing Tom as an equity manager because they couldn’t see past the losses in the stock account…yet if this would have been done collectively in one account they would have only seen the net gain (on the worst day in history where many traders went bankrupt). Unfortunately, I’ve witnessed much of this type of behavior in 2014 as some things never change.

This game is incredibly simple, yet not at all easy. It’s simple the same way that getting in shape or losing weight is – just get on almost any decent diet and work out consistently and you are almost guaranteed results… yet few have the discipline to do it day after day for the long term. Make it your goal in 2015 to follow your plan. If you don’t really have a plan it’s like not being able to spot the sucker at the poker table… because you’re it.

Enjoy the ride!
[Name]

Thanks! Read more on new edition reviews. Be sure to listen to my special compilation of Thomas Basso Podcast Highlights and my interviews with Mr Serenity here and Here.

Find Fund Managers Across Books and Podcast

Feedback in:

Hi Michael, I really enjoy your podcast and the alternative ideas you put out. Please keep up the good work! I was wondering if you could help me with a question please. If one had around USD100,000 to allocate to a trend following manager would there be one or a couple of stand-out managers that you would put forward. I understand you are obviously not in a position to make specific recommendations: the question really just goes to accessibility of particular funds for that size of investment, as I understand that amount is too small for many funds. I have been in contact with [Name] at [Name] already, but would like to thoroughly explore options. I would prefer a manager that only takes carried interest and no fees in down period. By way of background I am Australian citizen but a long term resident of Japan.

Many thanks
[Name]

Absolutely no names, other than all the leads you can find across my podcast and books!

Ep. 301: Jim Rogers Interview with Michael Covel on Trend Following Radio

Jim Rogers
Jim Rogers

Michael Covel speaks with Jim Rogers on today’s podcast. Rogers is an American businessman, investor and author currently based in Singapore. He is the Chairman of Rogers Holdings and Beeland Interests, Inc. He was the co-founder of the Quantum Fund and creator of the Rogers International Commodities Index (RICI). Rogers does not consider himself a member of any school of economic thought, but has acknowledged that his views best fit the label of Austrian School of economics. Covel gives some of his personal history with Rogers, noting that he also first read about him in the Market Wizards book. Covel also notes that Rogers’ Investment Biker book inspired him to travel. Covel joins Rogers for an in-person conversation from Singapore. They discuss why it shows that the kind of people that travel are the kind of people you want in your country; infrastructure in China; stereotypes of various countries in Asia; China’s military; current Fed policy in America; what “can-do” spirit can do in a state of decline; why the next crisis might be worse than the last; the importance of language skills; participating in big long-term bets with regard to countries; and why, if he could, Rogers would put all of his money into North Korea.

Listen to this episode:

You Are Right… The World Could End

Feedback in:

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.

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