Josh Charlson, director of alternative-strategies research at Morningstar:
“It’s [Trend Following] a little bit of a black-box approach: We can understand the contours of it, but it’s not easy to see all the inside mechanisms.”
In 2016 those referring to trend following as black-box should be [blank].
My guest today is Vineer Bhansali, founder and CIO of Long Tail Alpha. Vineer’s 29-year investment career started at Citibank, where he founded and managed the Exotic and Hybrid Options Trading Desk. He later joined Salomon Brothers in its Fixed Income Arbitrage Group, followed by the CSFB Proprietary Trading Group. Dr. Bhansali was at PIMCO for 16 years, serving the last eight years as MD and Head of the Quantitative Portfolios Team, which he founded in 2008.
The topic is his journal A Behavioral Perspective on Tail Risk Hedging.
In this episode of Trend Following Radio we discuss:
Is trend following mean reverting?
Tail risks
Tail hedges
Human behavior and biases
Importance of a dynamic portfolio
“[Trading] really very much depends on people’s behavior and your extraction of what is driving that behavior.” – Vineer Bhansali
I want to first say thank you for all the great material and insight you’ve put out into the universe regarding trend following trading. I have all of your books and have listened to every single episode of Trend Following Radio. Both your books and podcasts have provided me with a plethora of information on the subject of trend following and the general psychological mindset needed in order to be a successful trader.
I also wanted to say thanks for helping me with the motivation I needed to finally leave Los Angeles for the first time since college to go out and travel, something I’ve wanted to do since I graduated. As a 28-year old guy with no children, I really had no excuse as to why I wasn’t getting out there and seeing the rest of the world. Also, your mantra of “you’re gonna die”, though simple, helped push me in the direction of taking more risks.
Right now I’m living in Bangkok. Through listening to your podcasts, I know you spend a decent amount of time over here in Southeast Asia. I was wondering if you had any public speaking engagements or live appearances over in this part of the world. I’ve read all of your material and listen to every podcast but I think it would be awesome to see you speak in person about trend following. I don’t see any future speaking engagements listed on the website but since I happen to be living over here for the moment I figured it couldn’t hurt to ask.
Anyway, thanks again for everything and much peace and prosperity my friend.
[Name]
You are welcome, but no new news yet on live events. Stay tuned.
[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’ 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.
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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.
Please enjoy my monologue Everyone is a Closet Trend Follower with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.
In this episode of Trend Following Radio:
What is a technician?
Diversification
Risk management
Trading off price
“Price creates the reality for investors because investors take their behavioral cues from price and the media fashions their headlines from it.” – Josh Brown
I recently started listening to your podcast and love it! Just listened to your podcast related to baseball v football. Question, do you have analysis or know of any experts that have done the same type of trend tracking on what small businesses are most profitable to invest in over time? Example, starting a restaurant and franchising vs a car dealership vs owning a car wash etc.
Thanks in advance for any direction. Keep pumping out the great content.
[Name]
