The title of my film Broke: The New American Dream was inspired by Ed Seykota’s classic line:

“Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.”

Yes, in many ways, due to bad choices (trusting that mutual funds always go up, buying condos with no money down and taking money out, making investing decisions off news heard on CNBC, etc.), “broke” is definitely the new American dream. Is there a way out of that? You bet. My film is the needed way out. It is a real prescription for taking control of your financial life.

Note: This is the only documentary ever produced grounded 100% in a trend following philosophy.

Jim Collins writes:

After finishing our luck analysis for Great by Choice, we realized that getting a high ROL required a new mental muscle. There are smart decisions and wise decisions. And one form of wisdom is the ability to judge when to let luck disrupt our plans. Not all time in life is equal. The question is, when the unequal moment comes, do we recognize it, or just let it slip? But, just as important, do we have the fanatic, obsessive discipline to keep marching, to push the opportunity to the extreme, to make the most of the chances we’re given?

Getting a high ROL requires throwing yourself at the luck event with ferocious intensity, disrupting your life and not letting up. Bill Gates didn’t just get a lucky break and cash in his chips. He kept pushing, driving, working — and sustained that effort for more than two decades. That’s not luck–that’s return on luck.

For all you trend following critics who shout “lucky survivors”…you only hurt yourself and your understanding of success.

A man who exists only on the printed page once said:

“Man cannot survive except through his mind. He comes on earth unarmed. His brain is his only weapon. But the mind is an attribute of the individual, there is no such thing as a collective brain. The man who thinks must think and act on his own. The reasoning mind cannot work under any form of compulsion. It cannot not be subordinated to the needs, opinions, or wishes of others. It is not an object of sacrifice.”

He added:

“The creator stands on his own judgment. The parasite follows the opinions of others. The creator thinks, the parasite copies. The creator produces, the parasite loots. The creator’s concern is the conquest of nature–the parasite’s concern is the conquest of men. The creator requires independence, he neither serves nor rules. He deals with men by free exchange and voluntary choice. The parasite seeks power, he wants to bind all men together in common action and common slavery. He claims that man is only a tool for the use of others. That he must think as they think, act as they act, and live is selfless, joyless servitude to any need but his own. Look at history. Everything thing we have, every great achievement has come from the independent work of some independent mind. Every horror and destruction came from attempts to force men into a herd of brainless, soulless robots. Without personal rights, without personal ambition, without will, hope, or dignity. It is an ancient conflict. It has another name: the individual against the collective.”

It’s all you if you want to get ahead.

A 1997 PBS show worth watching…

Worth watching starting at 7:17:

Nice. Very nice.

Feedback in:

Hello Michael,

I had one of your clients who purchased one of your courses call me last night. I told him I wished I had you as a mentor or had access to the knowledge you present when I started trend following. I have to be candid with you, anyone reading your material has to consider themselves to be very lucky. When I started investing in CTAs and my own trend following in 1994 it was really a challenge (actually still a challenge). I knew nothing at that point and it has been a marathon! Those that internalize the covenants expressed by you regarding trend following and have the mental fortitude to face the inherent challenges of trend following stand the distinct probability of compounding money overtime.

My story is very short but can be applied to everyone especially when they truly take to heart all of your materials. I sold a business in 1994 and had no idea what to do with the proceeds other than I did not feel comfortable just investing in the stock market. I asked my accountant & attorney for suggestions. They introduced me to as they stated, “Their most successful client as far as investing” (he was not a Wall street Guru, he was a dentist). They told me he was “Trend following”. I had no idea what that was nor did anyone I asked. In 1979 he also did not like the stock market and invested $200,000 in very simple basic robust ideas of trend following that are demonstrated in your books. Donchian breakouts, moving average cross overs…very basic concepts. Fast forward to today, he has a $5 million dollar account plus trading accounts for his kids & has pulled out over the years $12 million dollars. I would say humbly I probably made every mistake possible [learning trend following]. If I had read your books back when I started in 1994 I would have saved myself probably a tremendous amount of money and mental aggravation. However, from these mistakes I learned how to be a better trend follower. I learned the importance of risk per trade, the idea of how to determine which markets to trade, importance of risk per sector, importance of max $ risk per contract, importance of measuring open trade risk versus my core equity and of course margin to equity. Prior to your material this knowledge was not openly available.

More so in your material you have encouraged me to get through the inherent draw downs & even worse the extended durations of draw downs by proving the concept of compounding money over time with the commodity trading advisors you highlighted from Hawksbill to Dunn & many others. I vividly remember the challenges of 2005 and 2006. Through trend following I have been able to compound money over long periods of time even though it has not been easy. I am living overseas in Israel [now]. [I am] living my family’s dream because of the profits…generated over time via trend following. There is no strategy that is liquid, transparent and gives the potential to profit in all market conditions such as trend following. Albeit trend following might not be for everyone and past performance is not indicative of future performance, [but] trend following is a lifetime strategy for me.

I am truly surprised how many do not know or understand trend following. In addition to investing in CTAs [regulatory term for trend following] & running my own proprietary trend following trading, I recently started my own CTA to leverage my knowledge and experience gained over the years. One of the tools I have been using to educate potential clients is giving them a copy of one of your books.

I want to thank you for the fantastic work you have done over the years & wish you great success.

Andrew Abraham
www.AbrahamCTA.com

Thanks!

Stephen Horan writes:

Everywhere we turn, psychological tests are available to help us better understand ourselves and our own behavior. But often these tests fail to shed light on a person’s relationship to risk, particularly the risk of losing money.

That’s why I like to do my own thought experiment. When I speak to groups, I often ask the participants to consider the following scenario:

Suppose you are sitting in a captivating presentation and someone comes in and locks the door. Then the person announces that everyone in the room is free to leave under two circumstances. You can leave if you pay a $1,000 fee (à la Hotel California) or you can leave after flipping a coin and going double or nothing. If the coin turns up heads, you exit for free; if it’s tails, you pay $2,000.

On a consistent basis, some 80 to 85% of the people in the room choose to flip the coin. The results are always very biased toward flipping, and that says something about the human tendency toward loss aversion.

The classical theory of the rational, economic man would have him avoid risk and thereby avoid the coin flip. The difference in this case, however, is the negative expected returns (a loss of $1,000 in each case since with option B you have a 50% chance of paying $2,000).

Since negative returns are at play, a loss aversion mechanism kicks in, and people will actually go double or nothing in order to keep from losing—thereby taking more risk.

The first reaction I get is surprise from people who otherwise think they make “rational” decisions regarding money. They realize for the first time the innate nature of loss aversion. That’s why I put the term “rational” in quotes. People are not necessarily “irrational” or stupid on this point; they are simply being human.

That thinking is foundational to becoming a successful trend following trader.

Note: Shout to Alistair Evans for the hat tip.

Worth watching — now.

Watch this. Specifically at the 2:50 mark and Citibank:

Caught this line at The Big Picture about chasing markets in one direction that might end up turning and going the other way (the whipsaw):

The systemic fear of going down with the ship keeps you on shore. You wake up one morning and find the ship has left dock. You jump in and try to swim to catch the ship and almost drown in the choppy waters. All while thinking you’re not sure if the ship will eventually hit the iceberg that kept you on the shore in the first place! Miss the boat and if stays afloat for six months, in the words of Donald Trump, “you’re fired!”

This fear is exactly what trend following aims to conquer in its philosophy and technique.

I don’t doubt John Hussman’s intelligence, but his view of putting money to work in the markets is radically different compared to trend following. Consider an excerpt from his recent analysis:

As of last week, the Market Climate for stocks remained hostile, with a clearly negative expected return/risk profile. Strategic Growth and Strategic International remain tightly hedged. That said, we’re beginning to see some emerging speculative elements in our analysis of market action. When there is ample negative news to smack speculators back to reality, it’s difficult for speculation to get “legs,” but speculation can take on a life of its own even in overvalued markets when there is a pause in flow of fresh concerns. Given our continued expectations of oncoming recession, and the likely inadequacy (from the market’s perspective) of bailout provisions in Europe, my impression is that further speculation is likely to be quickly smacked, but I won’t impose that impression on the objective evidence. While we would expect to retain a tight line of put option protection in any event, measurable improvement in market internals over the next few weeks would likely provoke us to accept a small positive exposure by covering some of our short index calls – at least until overvalued, overbought conditions are joined by overbullish sentiment. I doubt that we’ll observe even that modest constructive shift in the data, but am keeping an open mind. More often, overbought rallies in negative Market Climates (as we observe today) simply fail.

This is a great deal to digest. Multiple fundamental/economic factors coming from seemingly every direction. On the other hand, trend following ignores the need to know and takes a different tact:

• No one can predict the future.
• If you can take the would-be, could-be, should-be out of life and look at what actually is, you have a big advantage over most human beings.
• What matters can be measured, so keep refining your measurements.
• You don’t need to know when something will happen to know that it will.
• Prices can only move up, down, or sideways.
• Losses are a part of life.
• There is only now (Note: Shout to Charles Faulkner).

Now, lets get practical. Answer the following five questions, and you have a trend following trading system:

1. What market do you buy or sell at any time?
2. How much of a market do you buy or sell at any time?
3. When do you buy or sell a market?
4. When do you get out of a losing position?
5. When do you get out of a winning position?

Said another way:

1. What is the state of the market?
2. What is the volatility of the market?
3. What is the equity being traded?
4. What is the system or the trading orientation?
5. What is the risk aversion of the trader or client?

You want to be black or white with this. You do not want gray–which is what I would argue Hussman’s analysis leans toward. If you can accept that mentality, you will have trend following down.

Note: Excerpt also from Trend Commandments.

From Barron’s today:

The fact that we are struggling daily to hold above a level first reached nearly 13 years ago is both sobering and, viewed in the proper light, profoundly encouraging for true long-term investors. Henry McVey, Kohlberg Kravis Roberts’ head of global macro and asset allocation, suggests in a new white paper that “we are finally returning to a time of ‘stocks for the long run’…Anyone who believes in mean-reversion investing has to consider the current starting point for equities at least somewhat attractive.”

Nothing like betting your hard earned capital on that.