After reading this I’m thinking about the herd mentality of humans you portrayed in the film “Broke”. And one of the biggest is coming soon – “Black Friday” – herds of people going to the mall.

The herds love fundamentals and fundamentalists and so do I (for a different reason)!

Keep the encouragement coming!

Jim

Cy, with all due respect, I think you may miss the point. The comment that “trend following” is a “black box” is a untrue statement.

First, I Google the definition of “black box” to find:
A black box is any device, sometimes highly important, whose workings are not understood by or accessible to its user.

Trend following is a rules based strategy, which by definition is no hidden in a ‘black box’. With that said, cleary not all details may be disclosed publicly. But I can speak for my firm when I say that we do indeed disclose the decision-making process to the firms investors. In fact, it’s a requirement that they know.

Also, I wouldn’t assume that all trend following systems or methods or portfolios have drawdowns large enough to cause puke-a-tion. Mine, for example, has a maximum drawdown threshold well within the puke level.

Of course, we are speaking on the specific comment “black-box nature of a trend-following strategy”.

The other part of the comment “Trading decisions are made according to undisclosed rules that aren’t based on fundamental analysis” seems to imply that if it isn’t based on fundamental analysis, then you maybe should be concerned.

I will suggest that fundamental analysis is purely a black box. Since the future is unknowable because it doesn’t exist. You see, fundamental analysis seeks for forecast something that doesn’t yet exist. Now, that’s a black box. You really don’t know how other managers make decisions. Or, if they’ll make then consistently in any way.

So if you understand the basics behind “trend following” and the basIS behind it, then you know isn’t at all a box.

While the ETF’s the author wrote about may well be a “black box”, we can’t say the same about “trend following” as a method for entry and exit.

Maybe you can see how those comments may be rather offensive to those of us employing a trend following method.

And I will add that not all trend systems are “down slightly” this year. I can speak for myself when I say the trends in 2009 have been just as exploitable as 2008.

I would like to thank John Jannarone for doing his part to confuse investors and keep them using the same old strategy (if Buy & Hold can be called a “strategy”) that has failed them in the past, and will continue to do so in the future.

The market is to a great extent a “zero-sum game”, and if Trend Followers and other savy quant-based traders are going to make above average returns, someone has to take the other side of that trade – and it might as well be the “typical” investor that Mr. Jannarone’s article is addressed to.

MC-

In John’s line of work, I’d imagine you develop a thick skin pretty quickly, but that you for the deference.

Mike Shell (and others)-

I think where we’re not seeing eye to eye is that I’m reading this article as an article about a certain ETF and not trend following at large. Believe me, I don’t love the last paragraph either (especially the second sentence), but the paragraph does start out saying “the question for ETF investors…” And while you may argue that trend following is not a black box strategy (an argument I agree with), in the context of this particular ETF, I don’t think the term “black box” is completely inappropriate. Its not clear to me exactly what the fund’s holders will know about the fund’s positions and when, but I’d imagine the fund can’t be completely transparent with its investors without opening itself up to significant execution issues. Again, I don’t think this makes the fund any more black boxish than a marco fund with a manager taking random positions based on “fundamentals,” but then again I don’t know that such an ETF exists.

Cy- We are simply correcting an error. I realize that John was writing specifically on a ETF that will use some form of trend-following method. We’re not speaking to support said ETF and know nothing about it. My point is in regard to the comments that were specific to “trend-following” as a method.

He said “The bigger question for ETF investors is the black-box nature of a trend-following strategy.”

Notice he said “… THE black-box nature of A trend-following strategy…”. If he was speaking specifically to the ETF’s strategy, then it should have said “… it’s black-box…” or “… the ETF’s black-box”. After reading the article, I believe its pretty clear that the author is confused about “hedge funds” and “trend-following”. So perhaps he should better educate himself on those topics. The ETF itself may indeed use some unknown (black-box) method, but trend-following as a method based on specific rules for entry, exit, size, so its a method whose rules are known because they are defined. We probably can’t say the same for a fundamental investor whose method is much more qualitative, intuitive, and opinion based.

This seems to be a case of “adaptive attitudes”.

“Adaptive attitudes: We develop the same attitudes as people we associate with. Journalists and analysts belong to social groups that they identify with, just like other professionals and extensive readers of each other’s output. This may lead to adaptive attitudes.”
Tvede (1999)

Source:http://adaptive-attitudes.behaviouralfinance.net/