I came across a “risk capacity” survey online. One of the questions with answer choices:

How would you rate your knowledge about investing in general and more specifically, the relationship between risk, return, and time?
A. significantly below average
B. below average
C. average
D. above average
E. expert

How does it help to pose this question to investors? The firm that poses the above question also makes these assertions on their website:

1. It is virtually impossible to beat a market over time through active investing.
2. Indexing is backed by Nobel laureates who have provided unbiased, rigorous, empirical research, most notably the Modern Portfolio Theory.
3. Stock pickers are analogous to gamblers who rely on feelings and emotions when making bets.
4. Time pickers or market timers move money in and out of different investments in an attempt to profit from short-term cyclical events, which is a futile endeavor.
5. Manager picking is not a reliable practice because the past performance of money managers does not predict their future performance. Star money managers fall from their stature sooner or later, since their stellar performance is attributed to Lady Luck rather than skill.

Whomever wrote the above 5 points has not read Market Wizards, Fortune’s Formula or Trend Following.

Trend follower Campbell and Co. from their web site offers this graphic with this explanation:

“The Effect of Adding Campbell Composite to a Hypothetical Portfolio Consisting of Stocks and Bonds Quarterly Returns from January 1972 - October 2005 (estimates)”

From a portfolio level perspective, many have a hard time digesting the fact that a “risky” investment added to an existing portfolio of stocks and bonds can actually increase return and reduce risk.

This audio excerpt (MP3) is from the new book Taming the Lion by Richard Farleigh.

Brett Steenbarger outlines an interesting aspect of bodybuilding called ‘train-to-failure’ (PDF). An excerpt:

“The vast majority of people live their lives the way uninformed athletes train: they take on too many demands, none of which are sufficiently intense to take them to failure. Theirs is the equivalent of lifting a twenty-pound barbell for hours on end. They become tired, but not strong. By the time they get old, they are chronically tired, and then retire from all demands. For many, retirement is an exercise in mental, physical, and spiritual deconditioning.”

Download PDF.

Feedback:

“Hello Michael, I have just finished reading your book and have found it to be very informative and would recommend it to anyone as one of my top 3 trading books. The trend following method I currently use is essentially a combination of two methods discussed in Appendix A of your book (”Trend with Pattern Entry” and “Donchian Channel”). On the very last page of the book there is a coupon to fill in to get a free trend following CD ROM. Is this available for people located overseas (I am located in Australia)? Once again, thanks for writing a terrific book. Have you / do you ever intend to come to Adelaide, South Australia? Regards, John Porton.”

Yes, the free coupon offer in the new edition of Trend Following is available for everyone across the planet. I have not been to Australia yet, but will be making the trip in the near future!

I was forwarded an article on year-end portfolio “rebalancing”. First it said:

“Lighten up on longtime winners like small stocks, gold shares and real-estate investment trusts.”

Then it said very next line:

“Make sure you have a full weighting of growth stocks, blue chips and Japanese shares — and don’t be too quick to trim your positions if they roar ahead.”

These statements contradict each other. How and why should you lighten up on longtime winners (I assume they are still winners), but also at the same time not trim positions that are roaring ahead?

Feedback from today:

“…what do you think of using weekly and daily data to ensure that a trend is happening?”

Trend following is definitely practiced using daily bars. I know some past and current trend followers who use weekly bars too. However, isn’t the real key still to answer the 5 questions first?

Feedback today:

“Wanted to add a comment to the 12/20 comment on shorter trends. I can relate. In my opinion, and with 7+ years experience, I believe what constitutes “a trend” is much like beauty, it’s in the eye of the beholder. It is very subjective…I, for instance, perceive markets in terms of “trends” that generally last from several days to several weeks. While I may trade a particular market 12 to 15 times in a year, the LT trend followers may only trade it once of twice.”

Short term trading is doable, but you better be Jim Simons or Toby Crabel. And you better figure out how to handle commissions and execution costs that will always be there to eat away profit. I add a brief new comment on this in the new edition of Trend Following in the appendix.