Michael Mauboussin, Chief Investment Strategist of Legg Mason Capital Management (LMCM), authored this paper titled Long-Term Investing in a Short-Term World (PDF).

Janice Dorn, M.D., Ph.D. sent me this piece. I like it:

There is a Zen Koan that says: Don’t just do something-sit there.

The most difficult thing for traders to do is to sit there and wait. Why? Because, we live in a society that is on a total dopamine, hypomanic binge. This is never more clearly manifest than by those who absolutely have to be in the markets at all times, desperately need to be trading and simply cannot wait. They are human do-ings, rather than human be-ings.

(more…)

Since so few articles are written on short selling, take a read (PDF).

Perusing Yahoo Finance tonight looking for some ‘fun’ logic I found this pearl:

“NEW YORK (AP) — Wall Street has finally come to grips with the fact that the Federal Reserve is going to raise interest rates until inflation is well contained. Now investors will focus on whether those rate hikes are going to pressure corporate profits. There’s very little economic data in the week ahead, which is not necessarily a bad thing. In recent months, Wall Street has shown a tendency to overreact to economic reports, even when analysts say the numbers are insignificant or inconclusive. The Fed’s month-long tough talk on inflation has coincided with a month-long selloff based on inflation fears. Now, however, with the Fed all but certain to raise rates at its meeting at the end of this month, Wall Street’s attention will turn to corporate earnings. This is “preannouncement” season, in which companies issue revised forecasts on their earnings. Preannouncements, which often aren’t scheduled in advance, can be either good or bad, and can send a stock sharply higher or lower.”

It’s Sunday night. One of the largest portals for finance news just posted this comment…so what do you do with it? Do you buy something tomorrow? Sell something? Is this comment meant for stock traders? Bond traders? Commodities traders?

What does “tendency to overreact to economic reports” mean exactly? How do investors “focus on whether rate hikes are going to pressure corporate profits” or not? And if you are able to do this, what then?

I am confused.

At a presentation at Superfund’s offices recently I met trend following trader Jean Jacques Chenier. Jean Jacques is the developer of the Trendoscil system (Alterama has the license to trade the Trendoscil system):

“The Trendoscil system is designed to make the bulk of its profit on long term trend following trades; the shorter time frame/counter trend improvements were implemented primarily to smooth the volatility in trend less periods.”

An overview of the firm (PDF) and top 10 ranking (PDF). There is always something to be learned from other traders…

Some feedback on Jim Cramer:

“Michael, I am not sure if you have already read this (link to blog), but I think you will find it of interest and a bit humorous too. Any thoughts you would like to share are welcome. Kind Regards, Muaad”

That is nice piece of fun writing, but did the writer need a bear market to start to doubt the wisdom of relying on Cramer’s stock tipping?

An article titled Negatively Skewed Trading Strategies (PDF) by Glyn A. Holton is definitely worth reading. Well said. For those not following the logic here completely, take a read of Chapter 4 and 8 of Trend Following.

Some feedback on above report:

Michael: When I used to own an FCM, we had a saying for option premium sellers, “they ate like birds and shit like elephants”. And they scared the crap out of us. Regards, Jack Zaner.

Thanks, Jack. Sometimes the short and simple sentence best describes it all!

Last night I gave a presentation to a lively group at Superfund’s Fifth Avenue office. Aaron Smith of Superfund had invited me up to speak a few months back. True to his word he provided forum space and let me cover whatever trend following topics I saw fit. I give Aaron (and ultimately Superfund’s CEO Christian Baha) credit as I brought up the full range of topics including positive stories about some of their competitors. Why do they allow this? In my opinion they are actively working at the big picture of providing education along with their hedge fund business model. Outside speakers like myself don’t like to be constrained and they accept that. It is refreshing.

After the presentation I spoke with a writer from Reuters who covers the hedge fund space (he had read 1/2 of my book so far). He was probing more as he was not really ‘getting’ trend following. I put a quick chart on the white board showing a move from 50 to 150. I asked if he cared what the market was and why it went from 50 to 150 as long as he could be long. He agreed that he would not care if he could catch that move. But then, seconds later, he says, “but how do we know why it went to 150?” We went round and round. He kept coming back to the idea that there must be a need for knowing why the market moved. He rationalized that if you knew the fundamentals you could surely add that knowledge to trend following and do even better.

It was a great example of a bright guy not seeing the trend following picture just yet. We agreed to continue the conversation as I promised to get him over the hump.

The odd thing about this article (PDF) describing Wall Street’s culture of risk? Why don’t the banks and other players have a plan to make money when shit hits the fan? Why is the unexpected viewed as something to manage and limit as opposed to being a great opportunity (trend following view)?

Wise feedback:

“Hi Michael, I’m a trader in the Asian Markets and I’ve always been baffled at why many of my colleagues don’t seem to understand how markets work. I just read you book, Trend Following, and now I understand just a little bit why. I have a friend who just finished his CFA examinations recently and after discussing with him my actual trading experiences as well as the ideas in your book, he mentioned that given the way finance is taught nowadays, it’s very possible to pass the CFA examinations and not know the first thing about real, practical, and successful trading. By the way, I keep this quote from William Arthur Ward near my desk, and I think it perfectly captures the essence of trend following and trading. Best Regards, Doc”

“To laugh is to risk appearing a fool,
To weep is to risk appearing sentimental
To reach out to another is to risk involvement,
To expose feelings is to risk exposing your true self
To place your ideas and dreams before a crowd is to risk their loss
To love is to risk not being loved in return,
To hope is to risk despair,
To try is to risk to failure.
But risks must be taken because the greatest hazard in life is to risk nothing.
The person who risks nothing, does nothing, has nothing is nothing.
He may avoid suffering and sorrow,
But he cannot learn, feel, change, grow or live.
Chained by his servitude he is a slave who has forfeited all freedom.
Only a person who risks is free.
The pessimist complains about the wind;
The optimist expects it to change;
And the realist adjusts the sails.”
- William Arthur Ward

Some feedback from a reader explaining why trend following is not wise today:

“The problem is you will spend a lot of time and effort just breaking even on what are presently very stagnant markets. While it is true one might make 50% or more by joining the short sellers every time the markets panic, if one is uncomfortable with the added risks of short selling, one must find at least one home run long position once in awhile, e.g. 50%, 100%, etc. [I pick 100% just as a round number large enough to overcome the retarding effect of position sizing on that rare home run you might get by trying to trend follow in the chop.] What I am suggesting is that markets today are so correlated and so stagnant that you cannot find any long investment that will stand out far enough to get ahead of all the losing trades one has to endure in trend following this sort of market. Markets are very choppy and increasingly correlated because of globalized trading. “Low opportunity” as you say. I guess this is my point and criticism of trend following as a useful trading tactic at this time.”

Thanks for the feedback. Comments:

1. Which ‘markets’ do you mean?
2. How do you define ‘at this time’?
3. How do you explain the success seen here: www.jwh.com, www.wintoncapital.com, www.grahamcapital.com, www.chesapeakecapital.com, etc.? Are their results just ‘luck’?

Michael J. Mauboussin has a new book out called More Than You Know: Finding Financial Wisdom in Unconventional Places.

I was not aware of Michael’s new book until he sent me a copy, but I feel silly for missing its release in April! Michael’s writings have influenced me greatly over the years and many of his quotes are in Trend Following. He has the unique ability to break down the very complicated into the very simple. Read his new book if you like to learn! Avoid it if you like stock tips!