Feedback today:

“Hi Michael, I enjoy your updates and information on trend following. Have read your book – congratulations, excellent work. We are an Australian fund manager with a quant and behavioral model which in essence is a trend following system. A value manager that I was speaking to yesterday pointed out this article in the Sydney Morning Herald (PDF) which I thought you may find an interesting read. We were discussing value investing and trend following etc etc. He just didn’t get the point. I had a great belly laugh at the word ‘insidious’ used in this article. Obviously the journalist in question doesn’t quite get it either. Kind Regards, Tony P., QLD Australia.”

Yes, the use of the word ‘insidious’ is quite humorous!

Brett Steenbarger, at a recent FIA event panel, offered insights regarding trading mentoring. You can listen to the 1 hour long audio presentation here. You will need the free RealPlayer to listen to this audio.

Christian Baha, CEO of the trend following firm Superfund, is profiled in the current BusinessWeek. The profile paints a compelling portrait of Baha’s firm and their desire to expand the message of hedge fund investing to the general public. However, the article’s desire to make Superfund’s trend following strategy appear as hocus pocus or some form of a Holy Grail, misses the boat. The author of the article doesn’t seem to “get” trend following trading. Side note? The hard copy issue is much more interesting as it includes numerous pictures.

This arrived in my email box today:

“The major indices have rallied over the past several weeks in response to an $11/bbl drop in the price of crude oil. Market players need the price of crude at a minimum to stabilize before sending the major averages and the broad market higher. In the near term this may be a tall order as this week traders once again bid crude higher in reaction to stepped up Mid-East tensions. My readers know that as long as crude oil remains on a roller coaster that stocks will have tough sledding. Even the energy issues which I have long advocated are having a difficult time. Investors need to remain patient until the market gives a clearer indication of where it wants to go.”

If you follow the advice above, how does it help you to answer these questions?

1. How do you determine what market to buy or sell at any time?
2. How much of a market should you buy or sell at any time?
3. How do you determine when you enter a market?
4. How do you determine when you exit a losing position?
5. How do you determine when you exit a winning position?

At Ed Seykota’s FAQ he was recently asked:

“Would you recommend [attending] your seminar based on the following:

Am I going to be able to put together a trend following system after your seminar and start trading?”

Seykota responded:

“You can put together a trend following system if you are willing to do so.”

Seykota always holds the mirror up. Are you able to look into it?

Feedback today from Isaac Mehary:

I enjoyed your recent blog entry titled ‘give and take‘. It is in our nature to find ‘reasons’ that soothe whatever our psychological needs might be…At the end of the day, there has to be a trend from point A to point B…to realize a profit. Hack away at the unessentials and the trend is all that remains, even for fundamentalists and Paul Tudor Jones.”

A reader, Jose Rodrigo, wrote me last night:

“Hello Michael, Let me say I really like your website and read it regularly. I subscribe to the trend following philosophy and I’m a trend follower myself, however I am also a person who seeks the truth. It seems you present some inaccuracies in your recent article and on your website. In your article you say (in quotes):

Actually you can. See Jim Rodgers, who is a long term trend follower and bases his decisions on fundamental and economic analysis. See also George Soros.”

I disagree. The technical trend following I write about in my book, the style specifically practiced by the men profiled and their performance data, is not fundamentally based. Trend following does not attempt to answer “why” questions, fundamental analysis does. Jim Rogers, who I like and admire, said this to me:

“I am not a trend follower as you probably know.”

Jose continued by quoting me again:

“The great trend followers trade objective methods.”

It depends on what you mean by “objective”.

I am clear about “objective” in my book. Very clear. Jose continued:

“Successful trend followers trade a system that is adapted, so to speak, to their individual and subjective tolerance to risk and reward.

I know – I state this. Jose continued:

“If it were an objective method, then all trend followers would choose one system: the one that produces the maximum profit.”

That’s not true. That logic doesn’t make sense to me. Once again, I have made the case why not all trend followers trade balls to the wall. Jose continued:

“Let me quote from ‘Market Wizards’: “Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years, I have often been missing the meat in the middle, but I have caught a lot of tops and bottoms. If you are a trend follower trying to catch the profits in the middle of a move, you have to use very wide stops. I’m not comfortable doing that” and “Elliott Wave theory allows one to create incredibly favorable risk/reward opportunities. That is the same reason I attribute a lot of my success to the elliott wave approach.”

You have ignored all of the specific performance data in my book and latched onto one quote from Paul Tudor Jones. Direct access to Jones’ performance is not available so we are not able to compare his performance numbers to trend followers from a correlation stand point. Jose continued:

“Just because you and I can’t or won’t make money using the methods you criticize doesn’t mean no one can do it.”

Can you outline objectively what Elliott Wave actually is?

“I understand your business is trend following, and it doesn’t make sense to promote Elliott Wave on your website, but using quotes from a contratrend trader on your website doesn’t make sense either.”

Paul Tudor Jones has made the bulk of his money from big macro trends.

Thw Wall Street Journal ran a piece the other day discussing the “letters” hedge fund managers send clients. Take a read (PDF). An excerpt:

“Struggling to find just the right words to explain a run of bad luck to investors, money manager Michael Roth looked to literature for inspiration. He found his muse in Edgar Allan Poe. That is why Mr. Roth, who helps run Stark Investments, a Milwaukee hedge fund with $7.6 billion in assets, recently wrote one of his periodic letters to investors as a takeoff on “The Raven”:

The poem goes on for three-and-a-half pages. Along the way, it not only refers to the new Federal Reserve chairman, Ben Bernanke, but also manages to rhyme “trading floor” with “macroeconomic lore.”

I am not sure what to make of these efforts.

Not a Prince fan, but I do recall his lyric:

“So tonight I’m gonna party like it’s 1999…”

Apparently, in Japan, it’s 1999 all over again. Read up on the day trading craze.

Can you accept the idea that in order to be successful you must “surrender” to the market? If you can stop worrying about what might happen or what should happen, then you are free to focus on what the market is doing right now. Isn’t that where the money is to be made? In the moment of right now?

I just received the full cover of the Korean translation of Trend Following. You can view the cover here. The publisher is TheNan Publishing Co. and the ISBN is 8984053244.

At Ed Seykota’s FAQ he was recently asked:

“I notice the stock currently trading around 360, down from about 435 overnight, down from about about 475 earlier this month. How can an earnings report cause such a big sell-off?”

Ed responded:

“In the Causal Model, disappointing earnings “cause” a 20% sell-off in the stock price. In the System Model, you look for evidence of a shift in the intention of the culture, such as buying toys, turning the job of keeping the corporate ethics over to management and compromising the company motto. In the Trend Following Model, you simply notice the long-term trend is still up and the short-term trend is sideways to down and you follow your system.”

I like the way Ed Seykota thinks.