John Hussman sources a ‘law’:

Dornbusch’s law: “The theorem is that financial crises take much, much longer to come than you think and then they happen much faster than you would have thought. So you have a chance to be wrong twice.”

Hussman himself adds:

“…we’re not quite to the point where we would conclude that a fresh economic downturn is “off the table.” Financial strains tend to come on abruptly. Until we observe debt restructuring and transparent accounting rules (especially some modified version of mark-to-market), it will be dangerous to think of economic risks as being “off the table,” when they are probably just hidden under a napkin.”

I like Hussman. Very bright fundamental guy. However, the theorem he cites, and his own words about the unpredictability of markets, sure makes trend following the prettiest girl available.

My firm now offers custom trend following/systematic programming. Open to all clients. More news to come. Contact for more or stay tuned.

This guy is on TV? Unreal.

He trades off sun spots?

Of course he does:

“What (former Federal Reserve Chairman Alan) Greenspan called exuberance is just the fact that these sunspots were going up,” he said. “If you really study it, (sunspot activity) is very regular.”

The doctor just asked me to cough.

Mike Hogan penned an article titled ‘Making the Trend Your Friend‘ in today’s Barrons. An excerpt:

BUY-AND-HOLD INVESTING is a loser, says Michael Covel, founder of Trend Following, one of several Websites devoted to the trading strategy of the same name.

“How many more decades can you go with negative returns?” he asks, referring to the disappointing aughts (www.trendfollowing.com). The unofficial chronicler of the 25-year-old active investing strategy, Covel claims that leading practitioners of trend following, like Boston Red Sox owner John William Henry, have collectively logged a 17.56% average annual return since 1984 compared with 7.37% for the Standard & Poor’s 500.

Trend following is grounded in the notion that a stock or sector in motion tends to stay in motion—until it stops. “Markets that break out are more likely to continue than to reverse direction,” maintains Covel. It’s equally applicable to short and long trades and to any class of asset—stocks, futures, currencies—with typical holding periods of a few weeks.

Trend following is similar to momentum investing, except that devotees studiously avoid using company fundamentals like revenue growth or positive earnings surprises as trade signals. The focus is entirely on price movement—although trend followers aren’t that enamored of charting or technical analysis, either. When a trend starts, most technical indicators turn in the same direction, says Covel.

THE KEY DIFFERENCE between trend following and most investment strategies is the lack of crystal-ball gazing. Trend followers make no attempt to forecast a trend’s duration, magnitude or key inflection points. Entry and exit triggers are decided at entry, and trend followers often arrive late to the party.

Its “buy high, sell higher” orientation smacks of the bigger-foolism that has tripped up so many investors, large and small. But trend followers don’t blindly chase bubbles. Their systems try to take the emotion out of investing through rules-based decisions, back-testing of trade theses and strict risk management.

A portfolio is usually spread across a dozen or more (hopefully) noncorrelated assets with tight trailing stops, which can be 2% or less below entry price. That means a high percentage of holdings can get stopped out in the search for a few home runs. Investors need a pre-defined fund allocation strategy that can withstand a losing streak.

“As many as 60% of initial bets will be wrong,” says Covel, “The biggest impediment to success is fear of failure.”

Covel operates several sites that explain the strategy, including michaelcovel.com and turtletrader.com. They are supported by the sale of books, CD-ROMs and seminars, but also offer considerable free content (www.trendfollowing.com/resources.html).

Shout to pragcap.com for the video idea.

This excerpt (image) from ‘The Winton Papers’ (wintoncapital.com) regarding risk and reward is priceless. That little bit of prose, courtesy of one very successful trend following trader, is investing ecstasy to those seeking enlightenment.

Don’t want enlightenment? Well, there is surely someone predicting the S&P will go higher tonight, along with someone predicting it will go lower…

Caught this tonight from a newsletter:

“We would have initiated new long positions today for a trade. If the market rises over the next several weeks, today will have been a good day to buy. However, no one can know the answer today. Every day there seems to be a surprise. We don’t know how to predict the behavior of foreign countries or their attacks. Seeing that this is a low volume trading week, we would not jump to any conclusions based on today’s actions. We would hold for now.”

I feel drunk.

I continue to post materials on Facebook that don’t make my blog. Connect here.

Burton Malkiel opines in the WSJ:

In the wake of the recent financial crisis, many investors believe that the traditional methods of portfolio management don’t work anymore. They think that buying and holding is outdated, and that success depends on skillful timing.

He adds to his tale:

An investor who used index funds and stayed the course could have earned satisfactory returns even during the first decade of the 21st century.

Who says I don’t let the other side float their boat?

On the east coast tonight, driving, and listening to some AM radio. Finance show. Older guy calls in asking how he can buy into assorted commodity markets and or emerging markets since they have run so far already. The female host assures him that there is still plenty of time and to jump in. He says that he likes to buy low and is waiting for a pullback. She starts talking of hyperinflation soon to come (names some African country to back her point) and leans the conversation toward food insurance.

I sigh.

Flipping coins would be better.

Look, I get the economic issues. Times are tough. Lot’s and lot’s of volatility. We could have major deflation or inflation. Nothing would surprise me.

But how do you trade off that stuff? Off that conversation?