So do you have the typical neighborhood broker (Merrill, Smith Barney, etc.)? I recently met someone looking into trend following for the first time. She is doing her due diligence and asking all the right questions of the trader she wants to hire to manage her money. The problem? She has a typical neighborhood broker already. I am sure her broker is a perfectly fine guy, but all he can say about trend following trading to her is that it is “risky”.

Of course her broker doesn’t attempt to define “risk”, he just throws the term around. He also doesn’t bother to acknowledge that all trading and investing is risky if you have no plan. I wonder if he thinks buying and holding the Nasdaq since 1998 is “risky”?

The good news is that this lady sees her broker’s weak argument. Over time more people will come to see her smart choice. Just as many will never get it.

I just finished a trip to meet with another great trend following trader who just happens to live and work nowhere near a major city. With a track record of 17 years (+20% a year), his performance alone is quite impressive, but his ability to do his “thing” on his terms is truly inspirational.

You have to also wonder about those people that attribute this man’s performance (and other trend follower’s performance) to “luck”. If you think a trader is lucky, but you have not taken the time to sit down and personally meet with him (doing all the needed quantitative and qualitative homework), you miss the point. Great traders are NOT lucky over time. Their “secret” is hard work. That is their enduring edge.

Long Volatility (trend following) white paper (PDF) from Anders Kulp, Daniel Djupsj

A reader wrote in recently to complain that trend following doesn’t really work and that all trend followers are using “new” techniques today. He also expressed his view that shorter term methods are superior.

He believes this white paper (PDF) is the future of trading.

My comments:

1.) Jim Simons has no peer. He is the best. There are no other traders like him. The costs to do what he does, however, and no one really knows what that is exactly, are huge. His PhD staff, data, & technology far exceed the costs of a trend following operation. I have met no one that does not have the utmost respect for Jim Simons. The question really is: “Is it better to try and be Jim Simons or invest with Jim Simons?”

2.) How can you easily tell trend followers have not changed their style of trading? Trend followers by and large have strong correlations of performance returns. They make and lose in the same months. They trade VERY similar styles. There now exists a nice population of trend followers, trading for some years, to analyze. The idea that they have all “changed” is simply not true when you examine all quantitative and qualitative evidence.

Hedge Fund Introduction: Read PDF Brochure

From a recent Financial Times story comes a pearl of trend following wisdom:

“David Harding at Winton Capital Management says his managers adjust the model systematically every month, no more, no less. “What you do not want to do is wait until you are in a beastly draw-down when you are having lots of problems with clients and say: ‘What we have discovered is a new thing that fixes the problem’. That’s what the marketing people tend to want but that is not the correct thing to do,” says Mr Harding.”

When you are on a losing streak, don’t start trying to reinvent the wheel. That’s David’s strong point.

The book Trend Following has now been signed for a Korean translation.

I accidentally flipped to CNBC today. It is like watching an episode of the Twilight Zone. How does Maria Bartiroma, 5 years after the bubble burst, with a straight face ask “analysts” for opinions on stocks? It is strangely bizarre. After seeing this odd TV spectacle, I decided to search Google to see if there were stories on CNBC ratings. From Bill Mann I found some fun insight that quickly backed my gut impression of CNBC version 2005. It doesn’t appear people watch:

“The past two years have been pretty positive for the markets. If CNBC’s ratings were tightly correlated with market direction, one would think that the ratings would have rebounded in sympathy, rather than continue to tank. CNBC was perfectly constructed to be the voice of record while the bull market raced ever higher. Many people compared CNBC with Disney’s (NYSE: DIS) sports broadcasting juggernaut, ESPN. But viewing sports and viewing stocks aren’t even comparable: The cost of rooting for the wrong “team” on CNBC is far, far higher. What CNBC was not constructed to do was offer up much in the way of useful, contrary information. It’s as if the network’s programming manager goes daily up onto the roof, checks the prevailing winds, and constructs the program to respond. The problem, of course, is that following the prevailing winds doesn’t help the viewers who come to the station to hear something useful. That’s overstating it. But the executive shuffle and the comments among NBC brass, along with the decline in viewership, however it is properly defined, are fairly conclusive pieces of data showing that CNBC in its present form is struggling…CNBC needs to matter. The network has the same talking heads on now that it did in the late 1990s. In the ’90s, they hyped dot-coms, in 2000 optical networking, and so on to today, when commodity and energy companies can do no wrong. The result is that CNBC viewers, if they count on you for information, are doing nothing but chasing the thing that has just happened. That’s exhausting, it’s counterproductive, and in the long run, it’s expensive. I’ve said this for years: Who cares what analyst on Wall Street raised or lowered guidance?”

I am in the middle of an extensive set of informational interviews with some of the great traders of today. I just finished a meeting yesterday with the President of a trend following firm who manages over $3 billion dollars for clients. A very down to earth guy, his most direct advice was for people to focus on their plan and not stay preoccupied with others’ plans. He drove home the point that if you dare to be great, in whatever your chosen profession, standing outside the crowd is where the great rewards will be found. If you only want to work for the man, you can’t be the man.

Read:

“In his highly popular annual letter to shareholders, America’s second-richest man expressed regret that his bet against the dollar had been so profitable, and urged the US administration to take action to deal with its widening trade gap and budget deficit. Mr Buffett, 74, one of America’s most successful businessmen for the past half century, said: “In no way does our thinking about currencies rest on doubts about America.”
Independent News & Media (UK) Ltd.

Read more:

“Warren Buffett, the world’s second-richest person, last year increased his bet against the U.S. dollar 78 percent to $21.4 billion, resulting in a $1.84 billion gain. He also said he would be happy if his bet were to fail.”
Reuters

I understand he is the richest guy out there, but this kind of talk is disingenuous. Do you really think he is “sorry” he made money shorting the dollar? I am sure the loyal buy and holders will ignore all of this and just blindly pretend that Buffett is still the “folksy” hero to the “everyman”. Why can’t Buffett just admit, “I made a great trade on the dollar?” This “I feel guilty” routine is just that – a routine.

NOTE: Please don’t ask whether I think Buffett is a success. Of course he is – a monster one. That is not my point.

The greatest “investor” Warren Buffett is trading like a trend follower these days:

“Mr Buffett’s bet against the dollar also grew. Foreign exchange contracts – mostly short positions against the US dollar–nearly doubled over the year to $21.4bn, generating $1.8bn in gains as the greenback fell against other major currencies. These currency profits were partly responsible for a sharper than expected rise in fourth quarter earnings from $2.39bn to $3.34bn, although Berkshire earnings are notoriously volatile due to the timing of investment gains.”
FT.com
March 5, 2004

That is some serious profit for Mr. Buffett! Buy and hold out the window!

NOTE: Please don’t ask whether I think Buffett is a success. Of course he is – a monster one. That is not my point.

“Men Behaving Badly” whitepaper explains “irrationality in decision making when defeat becomes hard to accept.”

Download now.