From Bloomberg:

“Chapman Capital, a Los Angeles- based hedge fund, is seeking a private investigator to monitor the private lives of company executives, the Financial Times said, citing a job advertisement on a New York Web site. Robert L. Chapman, who runs the fund, is known for writing blunt letters to companies and has warned in the past he would use covert intelligence, the newspaper said. “Understanding what is motivating executives of underperforming companies is a big part of our efforts,” the newspaper cited Chapman as saying in an interview.”

Would you put money with Chapman Capital? Seriously, they view this as part of their investment process?

Barton Biggs doesn’t like trend following much. Some feedback from a reader:

Michael, I asked for and received as a Christmas present Barton Biggs’ book “Hedge Hogging”. Barton makes it very clear in the introduction that the book is to be read for entertainment purposes and not lessons in trading. After reading pages 24 through 30 of the book I can see why. Pages 24 through 30 contain a discussion of his hedge fund’s short position in oil in 2004. The short position was taken, and I quote, because “We believed that much of the open interest represented speculative longs that were in the trade because of trend-following models. In other words, they were momentum investors who bought oil mindlessly (in our opinion), simply because the price was going up.” After that particular piece of fundamental wisdom I will definitely be reading the book for entertainment purposes only. Of course they lost money and, worse, they lost clients because of their oil position. They actually increased their short position as oil went up. If you’re going to trade fundamentals only then fine. The biggest danger to these fundamental guys (and some quant-driven guys) is that the more their position goes against them the more attractive it becomes and so they wind up throwing more money into a losing position (LTCM, anyone?). As a CFA charter holder, I find it especially appalling how few of these guys are able to recognize and resist the siren’s song (where’s the money management?) and wind up crashing onto rocky shores. Regards, Paul

Feedback:

Hi, I have been listening to your podcast and I must say that am quite impressed! It is so refreshing to finally hear some intelligent comments in a world full of BS. I have been in academia for the last ten years and I have to constantly (at least for the first 5 years) fight to get my professors to understand that CAPM, APM etc are very flawed models. Firstly because they don’t take into consideration market anomalies. Secondly because of their very limited way of looking at risk by not including trends (slope of the moving average). Fine, markets are random in the short term (short-term=bull/bear traps=Devil) but in the long term it is so obvious that markets are trending. A Nobel prize for a flawed model what a bunch of …. Anyway, I am finishing my PhD in economics soon and I am thinking of applying to all top investment banks. My question is: Is there any bank hedge fund that applies systematical trend following that you recommend that I could apply to? Regards, Marcus

Exclusively? None, but its not their mission to begin with. Hedge funds? Many.

Jesse Livermore’s bio ‘Reminiscences of a Stock Operator’ is always good reading (PDF).

I just caught a Forbes article about the current US stock market. An excerpt:

“The message for investors from all this is to be cautious. There’s no reason to think the market is about to tank – on the whole it isn’t obviously overvalued. But there’s good reason to fear that big profit increases may soon be a thing of the past, and with them the big market gains of the past four years. Even Quinlan, who doesn’t think corporations are going to give up the ground they’ve won from labor in recent years, is worried that slower economic growth will nonetheless mean slower profit growth. What it all adds up to seems to be a forecast for a relatively flat stock market. But for some irritating reason, the market doesn’t usually do flat. Beware, then, of falling stocks.”

Boy I needed that during this slow week after Christmas. Nothing like heading into the new year with a solid prediction!

The Legend of Robin Hood (PDF) is good reading for the holiday season.

A good multimedia link from the New York Board of Trade sent in by a reader. It is about futures trading basics.

My prior post brought in this feedback:

For the answer to your question, see above. I am actually baffled by this question. How can anyone read “Trend Following”, say that they think it’s an excellent book, and then ask that kind of question? This reader’s question is just further proof of why trend following has always been an effective trading strategy and will continue to do so in the long run. It is the fact that people can have “it” right in front of their face and still not get “it” that assures me that I can continue to employ a trend following strategy successfully. How can you see the results and read JWH’s comments on the ability to presuppose change and ask that question? The lesson I take from this is that we should never underestimate the impact of a biased perspective on our ability to filter information and identify truth versus fiction (i.e. forecasts and predictions). Keep up the good work.

And this:

I find such feedback at your site very interesting. I notice certain personality types struggle to see the simplicity of the forest while overanalyzing the complex subtleties of the trees and miss the point. Most mathematical types expect to be lectured by the data. It somehow escapes them that the data is there to serve, not instruct. Trend following is the theory. It is the first principle. It is a means of ignoring, not assessing complexity. Complexity always resides with the individual. Sometimes NOT knowing about a “problem” eliminates it. I find the most relevant part of the book is the front cover.

And this:

The question asked about where is the mathematical theory in the book Trend Following that predicts the success of trend following techniques a priori reverses cause and effect. The existence of any such mathematical theory would axiomatically be a derivation from empirical observation. There is a statistically significant amount of return data from hundreds of trend followers (myself included) that shows the efficacy of general trend following methodologies. In addition, there is audited percentage return data from hundreds of trading firms that demonstrates irrefutably that trend following is a successful endeavor. There is no reason or need to ask for a mathematical theory (before the fact) that proves success other than the common statistical measurements of return data used by all. Success is thus a result of the techniques used by trend folowers, but not necessarily codified as a mathematical proof.
Michael Gibbons
Gibbons’ Trading LLC

And this:

Michael: I could not help but respond…mathematical proof ?…huh?…hey I’m just one of those dummies with a major in political science and philosophy…but if your long and the line on the chart is moving up to the right hand corner or, if your short and the line on the chart is moving down towards the right hand bottom corner life is good is it not?…seems to work for me as long as I stick to my position sizing rules to keep from blowing my wad when something unexplainable happens with my underlying that I can’t figure out the reason for on my abacus! Merry Christmas from the great White North

And lastly:

Happy Holidays Mike, The relevant part of the book, in the “New Expanded Edition,” is between the front and back covers. My guess is his years spent in the US educational system has him jade-d. If he can’t find the relevant section, I’d humbly suggest he “put the book on the table and come back next week.”

A reader forwarded in “The Study of the Decade (PDF).” An excerpt:

Over the next few years, you will be hearing a great deal about a ground-breaking new study that is just now starting to receive nationwide attention. The only notice of it that I have seen in the public media just appeared in a popular money magazine: “A new study compares the cost and performance of more than 4,000 mutual funds–some sold by brokers, some selected by people on their own–from 1996 to 2002. The people won.” In other words, do-it-yourselfers outperform financial advisors. Was the difference trivial? In another section, the article stated, “Estimated annual amount by which funds that people bought on their own outperformed broker-sold funds: $8.8 billion.” The number $8.8 billion was in very large type. Those are fighting words. But more and worse is to come from the popular media. This monumental study will surely be misinterpreted by some in the media. Clients could be outraged. A few may vote with their feet. The questions we must ponder is, “How do we defend ourselves? How do we establish our economic value?” The vast majority of all financial advisors have long assumed they helped their clients achieve financial goals. At least when it comes to mutual fund investing (the most common service financial advisors offer), this study implies that financial advisors add no value.

I was sent this the article excerpt below this morning. It reminded me of earlier Christopher Cox criticism:

Fears that hedge funds will rock the financial boat are greatly “overblown,” and are based “more on ignorance or simplistic caricatures than on actual knowledge.” That’s the assessment of Washington Post columnist Sebastian Mallaby. Writing in Foreign Affairs magazine, Mallaby states that “popular resentment” stems from the fact that hedgies “earn too much,” rather than the much-ballyhooed concern that they pose a systemic risk to financial markets, which some say could be controlled with proper regulation. Mallaby points out that such risk is “neither limited to the hedge fund sector nor best addressed through regulation of it,” noting that most proposals are “so vague as to be impossible to evaluate or are poorly suited to addressed the supposed problems.” The author explains that those larger-than-life earnings “reflect the workings of a daunting star system” in an industry that each year attracts smart analysts “just as thousands of aspiring movies stars arrive in Hollywood.” Mallaby takes issue with the assessment that hedge funds are concerned only with profits “without regard to any costs or consequences that might follow.” In fact, he says, hedge funds “do not so much create risk as absorb it,” viewing them as “quasi insurers” that shoulder “risks that others wish to avoid.” In other words, hedge funds should be seen not as “locusts” as one German so famously labeled them, but “benevolent firefighters.” He admits that hedge funds can pose a serious risk if they become too large – picture the fallout from Amaranth Advisors debacle had the losses mounted to $26 billion rather than $6 billion. But, he notes, “imposing some arbitrary regulatory cap on the size of hedge fund would unjustly penalize successful firms.” He concludes, “The best safeguard against the risk posed by large funds is the presence of other large funds.”
–December 2006 Hedge Fund Daily

Feedback:

I could find no discussion of the mathematical theories which predict the success of trend following methods [in your book]. I believe that this omission is a deficiency in an otherwise excellent book. Of course, there is the possibility that I’m just stupid and can’t find what I’m looking for when it’s in front of my face. If this is the case, please forgive the above comments and direct me to the relevant part of the book. I have the “New Expanded Edition” [of Trend Following].

I will open this up to all readers for feedback.

I have over a long time been able to find ‘access.’ Readers see it and emails like this result:

I am writing you because I have a burning desire to become a professional trader. I graduated college in June with a degree in Economics and History, and currently, I am putting my full-time efforts into educating myself about trading. I have read your book on three separate occasions within the last two years, and I frequently reference it. I feel as though I have built a good theoretical foundation, and now I would like to take my learning to the next step by working with a mentor. The search for a mentor has proven difficult since there are no real conventional methods to finding one. I know you have come across many prominent figures within the trading community, so I was wondering if you know of any traders who would be willing to take on a hard-working, devoted, and smart student. I live in Orange County in Southern California, but would follow an opportunity if I believe in it. If you do not know of anybody in particular, but could point me in the right direction, that would also be greatly appreciated. I am sincerely sorry if this is a waste of your time, but I am trying to find the right guidance in order to help me find the path of least resistance in accomplishing my goal. I would be grateful of any suggestions you might have. Thank you very much and Happy Holidays, Brett

I don’t consider your email a waste of time. That said, there is no short answer to your question. The old adage of knocking on doors – literally – is still true. I do have one lead that may provide education and networking. Attend a Managed Funds Association conference. Many of the men I write about attend and speak at these events. It’s a great way to listen, learn and meet people.