Michael Covel: News & Info.

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An interesting white paper (PDF) from Eclipse Capital that examines trend following performance over 2004 and 2005.

Nassim Nicholas Taleb wrote:

“f one puts an infinite number of monkeys in front of (strongly built) typewriters and lets them clap away, there is a certainty that one of them [will] come out with an exact version of the Iliad.”

I have seen others take that thought and apply it to trend following creatively:

“…[all trend following performance from all trend followers] means nothing primarily due to survivorship bias and the effects of randomness. If you can show me statistical evidence of trend following working in any time frame, my hats off to you.”

I don’t get that comment. All trend following performance is just luck? And the lucky few survivors (apparently all of the trend followers in my book) are left over from an apparently long list of failed trend followers? That’s the logic to explain away their performance results?

Another reader added to the discussion:

“The ultimate question is not about “survivorship,” it’s a question of suitability and adaptability. The track record of trend followers isn’t just a record of survivorship - it’s a record of adaptability under varying conditions. No one can get to their destination simply by theorizing about the nature of the destination - that’s linear thinking. These folks do not get the journey (the process), so they focus on the surviving trend followers. They obviously have no clue how to get lucky. The key questions they ought to be asking are “how did these trend followers get to survive? … how did they get to be ‘lucky’?”

Some recent large trends in Gold, Silver, Copper, Crude and Unleaded Gas are padding pockets. Of course, interest rates have been moving too. All of this has been reflected in the performance of trend following money managers.

Salem Abraham has been at the trading game for many years now. His track record exceeds 18+ years (PDF). While his performance consistently grows, client restlessness never stops. Clients typically, and this is by no means unique to Abraham, panic at the “bottom” often missing the new equity highs. Study Abraham’s performance. There are key lessons there for all. More on Abraham here (PDF).

I was asked this morning a question from a reader of Trend Following:

“Do you have any references that discuss why the zero-sum concept is critical? The zero-sum concept is interesting theoretically, but seems to have no practical use or meaning. Thanks, John “

I am not sure how you say that after reading every last word of chapters 3 and 4 of my book Trend Following? It is spelled out….especially pages 109-111. I am up for any debate, but not following your foundation here. Hit me back and explain?

From today:

“TOKYO (Reuters) - Gold surged to a new 25-year high on Monday, buoyed by concerns over Iran’s nuclear ambitions and surges in oil prices, while silver powered to its highest since May 1983 on hopes for the first silver exchange-traded fund. Hedge funds and operators investing in the short term were anxious about shifting their funds into gold and silver for the purpose to diversify and to raise higher returns. Spot gold rose as high as $606.10 an ounce — the highest since December 1980, while silver rose to $13.33 per ounce, its loftiest since May 1983. Surges of gold and silver futures on the Tokyo Commodity Exchange spilled to bolster dollar-based spot prices as both London and New York markets were closed for Easter holidays on Friday. “We all know both gold and silver prices are too high, but no long holders are willing to sell, while short holders were getting heavily squeezed,” said Takashi Ogura, risk management section manager at Kanetsu Asset Management. “People don’t want to go against the present bullish trend, so prices are surging,” Ogura added.”

This all SOUNDS good, but this commentary means zilch. Gold is going straight up. It’s a monster trend. No explaining it. No fundamentals will cut it. Did the fundamental guys see the trend in advance? No. All you can do is have a plan to get in and get out. Have the entry/exit plan down and know how much to bet each time. That’s the most important thing to know about Gold or any other market.

David Druz, a trend follower with a lengthy track record, offered this tidbit on his web site:

“The robustness of a trading system is proportional to its volatility. This is the no-free-lunch part. A robust system is one which works and is stable over many types of market conditions and over many timeframes. It works in German Bund futures and it works in Wheat. It works when tested over 1950-1960 or over 1990-2000. Robust systems tend to be designed around successful trading tactics (origin of our “Tactical” name), classical money management techniques, and universal principles of market behavior. These systems are not designed around specific types of markets or market action. And here is the amazing thing about robust systems: The more robust a system, the more volatile it tends to be! This is because robust systems are not optimized to particular markets or market conditions. The converse is also true. You can design systems with excellent returns and low volatility on historical testing, but which work only for given periods in given markets. These systems tend to be curve-fit or market-fit and are not robust. For a system to have the highest odds of profitability over time and markets, the inescapable tradeoff is volatility. Diversification is used of course, but it will only dampen the volatility so much.”

Trend followers put out publicly available documents listing their backgrounds and performance. These are usually interesting to read even if not making an investment with that particular trader. These “disclosure documents” are freely available from the government via Freedom of Information requests and or directly from the trader. Here is one from David Druz.

Disclaimer: I have no business relationship with Druz. I write about what interests me. If you have a good idea for a blog entry here, drop me an email.

I came across this piece of writing from well-known author Robert Kiyosaki:

A few weeks ago, I was at a financial conference giving an investing talk. A hand from the audience shot up as I talked about returns on investments of 50 percent, 1,000 percent, and infinite returns. “That’s a load of rubbish,” shouted the person attached to the hand waving in the air.

“Because I don’t invest in those investments,” was my reply.

Kiyosaki went on to explain some real estate projects where he is making really good returns. The issue isn’t what Kiyosaki is making his money in; the issue is the defeatist attitude of that financial advisor waving his hand. The man had no creativity. His only experience or understanding was to accept what the “averages” were giving him in terms of stocks and bonds. Great traders, great entrepreneurs make things happen. They don’t just sit around and accept the “average”.

Feedback on Trend Following:

“A frequent (and valid) criticism of the book Trend Following is that its author often says the word “trend following” when in fact what he means is “mechanical systems trading” in general — forgetting that there [are] several major classes of mechanical systems, only one of which is trend following.”

No, that’s not what I mean. The book Trend Following is about long-term trend following trading. It lays out with detail the men who trade this way. Most trend followers are systematic, but the decision to systematically trade comes only after making the decision to trade as a trend follower. Trend following trading is a style. It is a method based on a philosophy. On the other hand, “systems trading” means nothing in the abstract unless you define what kind of system it is.