Blind Spot
My post here brought in this comment:
You’re stubborn [sic] stuck on the faulty idea that investors who buy and hold don’t sell when they see problems ahead or brewing. Buy and hold is as valid an investment/trading strategy as trend following or reading tea leaves. The losses or drawdowns of some of your so called “great traders” are staggering; why aren’t they smart enough to get out when the trend goes against their position; they seem to buy and hold come hell or high water. As you so often say, “they just don’t get it”. Neither do you. John Hudson.
There were legions of buy and holders “smart” enough to time the market to get out? Interesting. In terms of trend following, this post reveals no understanding of what trend following is, how it works, or why it behaves as it does. I am sure others out there will do a better job of correcting John than I. Please make responses, if any, educational not attacking. John does sound like someone caught in the last few weeks of a buy and hold down turn.
Ladi Added:
October 16th, 2008 at 7:59 am
Wow, looks like someone is taking things really personal. Mike…are you running for President or something. Haha! I thought this was suppose to be a place for intellectual exchange of opinions. Anyways, John needs to understand that drawdowns are not caused solely by holding in on a trade that’s going against you, it can also be from the relationship between volatility and adding more positions while the trade unfolds.
John Added:
October 16th, 2008 at 1:20 pm
Dear Mr. Hudson,
What do you use as a signal to sell? What kind of “problem ahead or brewing” tells you to get out? If I used your system, I’d go broke rather quickly due to all the second guessing. You need a set of trading rules to trade by. Buy and hold just doesn’t work unless you have an extremely long time horizon.
I’m curious how you did over the past quarter.
John
Ken - Today's Breakout Stocks Added:
October 16th, 2008 at 7:44 pm
Anyone who bought and held the Nasdaq from 2000 to 2002 had an 80% drawdown. Is that not “staggering”? I would advise John Hudson to start thinking about risk reward ratios and not just drawdowns.
Jake Andrews Added:
October 16th, 2008 at 7:55 pm
Why worry over this guy? He wants to promote self-fulfilling prophecy by saying, “look these guys have lost money, therefore, their system must not work. See I told you so” I might be speaking alone, but, there is no warrant to give any response, since there is nothing worth responding to, let alone anything educational. I would, however, ask him to 1.)support his claims better and 2.)be more clear with what he is trying to say. Simply stating, someone’s loses are “Staggering” can mean anything (0-100+ % loss). Is he defining validity in terms of drawdowns, smarts, in contrast to trend-following?
Michael, you should ask him this and see how he responds. Thank you.
Budfox Added:
October 16th, 2008 at 10:55 pm
If you are in one of these periods where the S&P chops around for 20 some-odd years (we are ten years into one right now), then you will not make any money in that period. You could be invested in US Tbills or bank CDs and out perform by a 3-1 margin over the same period. And you would not have a single drawdown and virtually no risk.
You need to forget about trend following your not even on the same planet.
401Ks/Investment planners that charge 2% management fees and employ a buy and hold strategy are toast. A forty percent drawdown and the management fee on top of that will destroy all prospects for return of capital. Twenty years of 2% fee will take over 40% of your money. When the market crashed in 1929 it took 25 years to make it back to all time highs.
Buy and hold for an average guaranteed return of 15% in the S&P 500 is the biggest lie purported on the American people. But don’t worry, if you can’t afford to retire in 20 years and there is enough people just like you, then you can band together and make the rest of us pay and our kids pay for your stupidity. Good luck and happy trading! Opps..I mean averaging into losers.
JBajaj Added:
October 16th, 2008 at 11:54 pm
Dear Michael, please dont break your head trying to convince theses buy and hold guys to trend following. It is because of people like these that trend followers make money. Most buy and hold investors are broke today as against trend followers who are actually short or sitting on cash.
Fred Added:
October 17th, 2008 at 8:45 am
I’m in the middle of Michael’s books, so maybe I will soon learn the answer to my question —– I am not clear yet on the difference between “cutting losses quickly” on one hand; and accepting large drawdowns on the other hand within a trend following system. I do know that cutting losses when one “sees problems ahead or bewing” is a matter of guesswork.
Michael Covel Added:
October 17th, 2008 at 8:55 am
The cutting of many small losses can add up to a larger drawdown. Accepting a drawdown does not mean you were not cutting losses.
Petter Added:
October 17th, 2008 at 1:00 pm
I agree with JBajaj. It is an important point JBajaj is making. And I would add that trend following systems also depends on others to make the trades which produces the price signal used.
Ken - Today's Breakout Stocks Added:
October 17th, 2008 at 3:17 pm
I totally disagree with JBajaj. Trend followers make money because of trends, not because of buy and hold guys. If anything buy and hold guys tend to trade against the trend. And trading against the trend obviously doesn’t help the trend. For example, if a market is dropping, buy and hold guys just hold, or worse they will buy because they think its just a dip. Holding or buying in a down market does not help the downtrend, it does the exact opposite.
Greg C Added:
October 18th, 2008 at 4:12 pm
Buy and hold investors are under a flawed strategy. That strategy being that the stock market will ALWAYS have a bullish tendency. Whats to say that this bear market will the new norm? Best to trade the trends and follow the markets than try to tell it what to do (to be bullish all the time).
Mike Shell www.Shell-Capital.com Added:
October 22nd, 2008 at 11:04 pm
Mr. Hudson,
If they are a selling, then they aren’t a buy and hold investor. By definition, a true buy and hold investor buys and “holds”.
But what I found most interesting was the comment; “sell when they see problems ahead or brewing”. That seems to imply they know the future. I don’t think we ever “see” anything “ahead”. We only see what is here and now. One may believe they see the future, but that is only true for them…
And Michael is right. A drawdown doesn’t mean they are letting losses get out of hand. It is instead likely due to many losses in a row. That is a necessary part of the process for those trend followers looking for large profits. The important thing to understand about those traders drawdowns is that they are within their expectation. They know the magnitude of drawdown their system needs in order to arrive at the objective. So they simply accept it as part of the process. As a trend following portfolio manager, I can tell you drawdowns are simply a necessary part of making the kind of profits you see printed. For those of us running a more absolute return program, drawdowns are small and the equity curve more smooth. It’s all relative to your objective.
Most investors/traders never enjoy large long term profits because they’re willing to breath in, but not willing to breath out. They instead cut their profits short (so they can count it as a “win”) and let their losses get large (because its important to them that they be right, so they’re willing to hold and hope the market proves them right).
Good luck. Keep learning.
taylor boyd Added:
October 23rd, 2008 at 7:18 am
I agree with Greg C. What if the assumption of an infinite growth spiral is a flawed idea?
Daniel Peter Added:
October 23rd, 2008 at 7:34 am
I feel bad for all those mom and pop investors that were hooked on buy and hold, or should I say, “buy and hope”. Look at the VIX right now, it’s self fulfilling, in a great trend, so was oil, so was real estate, and I bet trend followers make a killing on the crash as of late. The problem with buy and hold and fundamental investing is that it doesn’t matter what the price should be, supply and demand make the price. Therefore, fundamentals aren’t always in line with price. So all those folks who owned some nifty fifty stocks, or some “safe” stocks, probably learned their lesson this time around.
James O. Rohrbach Added:
October 24th, 2008 at 8:30 pm
“Buy and Hold” is an excuse for doing nothing.
Mark Mueller Added:
October 25th, 2008 at 10:45 am
The first thing I had to learn in trading was how & when to get in. The next thing was how to scale in without slaughtering myself, the third and most important thing was risk & money management; however, far and away the hardest thing was learning how & when to get out.
Alex Added:
November 6th, 2008 at 4:30 am
Michael,
Loved your books, love your site. Looking forward to the film.
I have been trading my own capital in a trend following fashion since the start of 2008. I am up about 65% YTD, and enjoying the experience very much.
I am currently working a fulltime job at the same time, which means, I am working far more hours than I would like.
I am thinking of leaving my job and starting a fund. Initially managing my capital, and that of a few family and friends.
However, despite searching high and low on the internet, I cannot find out how to do this. Are you able to point me to some information on what is required to established a fund.
Thanks,
Alex.