Michael, As I suspect is the case of most of your informed readers, I’ve been enjoying tremendously the illogical ramblings you’ve been posting lately on your blog (e.g. Looking for a Trend, Much Ado About Nothing, etc.). It is amazing how many people just don’t “get it”. They seem to have great difficulty accepting a key concept: Trying to predict the future is impossible because of the complexity of the environment. The conventional deterministic logic that allowed the human race to survive in pre-history (i.e. finding a “reason” that explains how things happen) doesn’t work when analyzing complex systems. I studied physics in college, and I remember that once we went from the Newtonian deterministic world to that of Quantum Mechanics (which only gives you PROBABILITIES of particles being in a certain location of space/time) everyone had a difficult time grasping the concept (myself included). As numerous studies have shown, our brain isn’t “wired” to think in terms of probabilities, conceivably due to how our ancestors evolved millions of years ago - which I think is all to the good! If the majority of people understood probabilities and the limits of deterministic thinking (unlike the sloppy thinkers that you’ve posted), we might not be able to make money in the market using relatively straight forward trend following strategies. So all I can say is hooray for all the “Cave Men” out there!! Best regards, A. A.

Some great feedback on a post that mentioned ‘rain’ the other day:

Michael - The emailer who ridiculed the idea of betting on “rain” or “no rain”? I’d be happy to take those trades if I knew that a correct bet paid off 2-to-1, or 3-to-1, and an incorrect bet paid off 1-to-1! That’s what critics don’t ever seem to get about trend-following. Its not about being “right” or “wrong” - its about the expectation of the payoff when you win. I try to explain it this way to friends and colleagues (who never seem to get it either). Granted this is a generalized method that doesn’t include trading costs, etc, but I think it makes the point. I’m going to make 10 trades. Before each trade, I’ll identify a place on the chart where I will exit the trade for a loss of 1-percent of my total portfolio value if I’m wrong. Let’s suppose I make 7 bad trades out of 10. A little math: 7 x (-1%) = a loss of 7% to my portfolio. If I make even a tiny gain on each of the other 3 trades, let’s say 5% ( 3 x +5% = gain of 15%), then I’ve just made 8% (gain of 15% minus loss of 7%) after 10 trades, even though I was wrong a majority of the time. Simple enough. What’s the hard part? The hard part is admitting you were wrong on the 7 trades, and exiting when you said you would. In my opinion (and experience), a person can use whatever entry/exit method he/she wants - 55-day breakouts, MACD, stochastics, the moon moving into the house of Aquarius… You want to pick a bottom or a top because of a certain jiggle on the chart? Go ahead - as long as you’re only going to lose a fraction of your portfolio if you’re wrong. Once you embrace the idea of not getting hung up on predicting a market’s behavior, you are suddenly “freed from tyranny.” You no longer stay up until 4am analyzing charts and looking for the “holy grail” indicator. You no longer hem and haw over whether to buy or sell a promising stock, only to watch it go up (or down) a little each day until you feel like you’ve “missed the move” and have even more regret. It becomes easier to shut it all off at the end of the day. In short, you have a life. And best of all, you gain confidence, and over time, make money.

Feedback in from a reader:

What I am unwilling to do is to take something as a truism just because someone says that is the case. Of course, your counter would be “Look at the results of the “Great Traders” cited in your book; however, I could point out that the same rationale could be taken with, say, golf; look at Tiger Woods, or Ben Hogan or Sam Snead - and my response is that the exception doesn’t prove the rule - there are some standouts in any endeavor, and that doesn’t mean that the “common man” is going to be successful just because there examples of golfers following a certain methodology. I also can comprehend the concept of trading a trend, together with the prerequisites of money and risk management. Obviously, the later two points - money and risk management - are not necessarily unique to a trend following system. Nor for that matter need the systematic approach be unique. Where I have yet to read in your writings, both the book and your web site, is the “how” of finding trends to follow. Without fundamental research, it would seem haphazard to just choose a stock, or commodity, or whatever instrument, and hopping for the best that a person has picked the right vehicle. As Mr. Seykota has pointed out, any trend is a measure of the past, and there is no such thing as the future. I don’t buy that, but that is what his view is. What does seem likely, is that the so called “great traders” have through trial and error, experience, or gut feel, or intuition, developed a “feel” for the markets they are trading day in and day out, and are thus able to at least identify the most likely candidates to pursue. BUT, that ability has come with experience and knowledge of the markets they choose to trade; I would equate that with fundamental research. You call it what you will. Of course, an approach would be to “shotgun” the situation by diversifying to the point that one has covered all, or a significant number of, markets so that some are bound to go up if one is going long, or down in price if one is looking to go short. That doesn’t necessarily prove the efficacy of the system; it does prove that “chance” can prove you right given enough opportunities. The larger traders with higher capital can afford to spread their bets since they have greater capital amounts. The smaller capitalized trader either would have to significantly reduce the number of markets traded and/or place very small bets in a number of markets. It would seem that if any of the above is a reasonable analysis, then a very important part of trend following is diversification. And in so doing, chances are that at least one or more of the chosen markets are going to trend in the direction you hope for. If you can point me in the direction of any literature or whatever on the “how” and mechanics of how to find a market to follow the trend, I should be most appreciative. I apologize for the length of this. Thanks very much.

p. 227 of Trend Following goes right to your desire to pinpoint a trend. I agree with Seykota.

This post brought in this feedback:

IMHO, the author must be confused about trend following (and a technical approach to trading). If one were to create a model or system based upon observances of “rain” or “sunshine” (one type of “non-rain”) that would be a technical system, not a fundamental one. Making predictions is for people who like the feelings around appearing intelligent or being “correct”, which has nothing to do with being a profitable trader. If anything, it is emotional intelligence that matters most in trading. Also to consider that as a speculator, sometimes you don’t have to make any predictions or decisions about “the rest of the day” - you can just observe the weather and enjoy that, unless you like the feeling of making predictions. My guess is that your new fan likes those feelings.

This email came into tonight:

Hi there, I live in London and I want to buy shares on the London Stock Exchange, but I don’t know which shares to buy which are XXX principle compliant. Please guide me to where I can find out about this OR any group who is already buying shares according to XXX principles. Kind regards, XXX

This is the first email I have ever received like this. After 10 years and tens of thousands of emails, I hope this ‘thinking’ is not the start of a trend. To think like the above email in my humble opinion - is wacky. Beyond wacky, the markets are hard enough without tying one arm behind your back.

From the New York Times (link):

“Money from Wall Street has long been a factor in Washington and has tended to flow, with a policy agenda, to the ascendant political party. Giving by people in hedge funds, on the other hand, tends to be more personal and ideological. Some of the most aggressive donors have been Democratic supporters like George Soros, David E. Shaw of D. E. Shaw and James H. Simons at Renaissance Technologies, as well as younger executives like Thomas F. Steyer at Farallon and Marc Lasry at Avenue Capital, all of whom gave generously during the 2006 election cycle. While hedge fund money appears to be tilting toward Democrats of late, Republican donors like Julian H. Robertson Jr., the founder of Tiger Management, who has given more than $700,000 over the last three cycles, and Bruce Kovner at Caxton Associates have backed their party’s candidates and causes. Still, compared with the billions of dollars that hedge fund magnates have spent on art, mansions and other extravagances, these political donations are a pittance, held in check by federal finance laws that limit personal contributions to $2,100 and by a general reluctance to step into the public limelight. But with the rapid growth of their money and stature, an increasing number of the hedge fund wealthy are not just putting their money to work, they are forging personal and professional ties with a generation of politicians who have come to spend as much time raising money as they do drafting legislation.

Michael Mauboussin, Chief Investment Strategist of Legg Mason Capital Management (LMCM), is just an interesting thinker. His latest effort (PDF).