I tell people all the time, “Don’t trust me, verify me.”

Source: behaviorgap.com.

In case you’re concerned that I will create a whole new generation of trend followers who will negatively affect the frequency, direction, and intensity of trends (as well as your ability to make money trading trends), forget it. Here are reasons why systematic trend following will continue to excel:

• Trend followers follow. They don’t generate trends. At the beginning or end of a major trend, there may be volatility, but it will be an extremely superficial, temporary effect.

• People play zero-sum games for many reasons. Not all play to win. Hedgers, for example, trade the market for certain reasons. It’s portfolio protection for them. Their insurance premium goes to trend following speculators. The hedgers are getting a benefit even when they lose.

• People would no longer buy and hold. Those believing in fundamental analysis (the vast majority of market participants) would have to switch how they trade.

• Most do not sell short. They now trade long only. That changes when?

• People would have to dump mutual funds. That will be hard with retirement programs literally mandating 100 percent investments in mutual funds.

• Most traders don’t think about how much to buy or how much to sell. They only worry about when to buy and rarely think about when to sell. That thought process is very hard to break for a mass trend following conversion.

• CNBC, WSJ, Bloomberg, etc. would need to stop broadcasting.

• Investors would have to disengage their emotions and egos from their trading. However, as long as there are human beings involved in the trading process, there will be excessive reactions and trends to exploit.

• People would need to stop gambling. I guess they might stop eating too.

Frequently the question is asked, “If trend following works so well, why aren’t more people doing it?” Acknowledging complete ignorance about the future is tough to accept, admit, and act on, but that is what trend following requires you to do.

The right attitude for trading success? Mission critical:

Fear is the dream killer, the silent voice that pushes us to lose our passion in a vain attempt to seek safety.

True that.

Below is one life path–attached to the nipple:

A better option? Be a linchpin.

A line I caught at The Big Picture:

“I confess, I think about the future. So do my colleagues. If someone who’s spent decades investing doesn’t have an opinion about what lies ahead, there’s something wrong. I believe our clients want us to apply the benefit of our experience in gauging and reacting to the opportunities and risks that lie ahead.

But I have a mantra on this subject, too: “It’s one thing to have an opinion; it’s something very different to assume it’s right and act on that assumption.” We have views on the future. And they can cause us to “lean” toward offense or defense. Just never so much that for the results to be good, our views have to be right.”

–Howard Marks, Oaktree Capital Management January 10, 2012

Marks is not a technical trend follower, but wise words about not worrying about being right.

The Dead saw it too:

Drivin’ that train
High on cocaine
Casey Jones you better
watch your speed
Trouble ahead
Trouble behind
and you know that notion
just crossed my mind

Trouble with you is
The trouble with me
Got two good eyes
but we still don’t see
Come round the bend
You know it’s the end
The fireman screams and
The engine just gleams

From Wired:

The world is a complicated place. Reality is dense with patterns, but these patterns are often subtle and inconsistent. We think we understand how things work — X always causes Y — but then Z happens. It’s very confusing.

Trend following doesn’t try to understand. It doesn’t care. The article from Wired is not about investing you say? You miss the point.

Paul Tudor Jones as quoted in the Foreword to The Alchemy of Finance:

In Patton, my favorite scene is when U.S. General George S. Patton has just spent weeks studying the writing of his German adversary Field Marshall Erwin Rommel and is crushing him in an epic tank battle in Tunisia. Patton, sensing victory as he peers onto the battle field from his command post, growls, “Rommel, you magnificent bastard. I read your book!”

Every day I say the same thing to myself.

From BBC:

There is an “unhealthy correlation” between the building of skyscrapers and subsequent financial crashes, according to Barclays Capital.

Examples include the Empire State building, built as the Great Depression was under way, and the current world’s tallest, the Burj Khalifa, built just before Dubai almost went bust.

China is currently the biggest builder of skyscrapers, the bank said.

India also has 14 skyscrapers under construction.

“Often the world’s tallest buildings are simply the edifice of a broader skyscraper building boom, reflecting a widespread misallocation of capital and an impending economic correction,” Barclays Capital analysts said. More.

I don’t think you can add this indicator to your trend following trading system!

From Reuters comes some serious lament:

“My parents’ portfolio got demolished with the financial crisis, and I just don’t want to roll the dice with the money I’ve saved up,” he says. “Down the road, if the volatility goes away and the stock market becomes a different place, it might be a different discussion. But right now, it all seems so shaky and sketchy. I just can’t see myself jumping in.”

His parents got cleaned out cause they were buying and holding or gambling or betting their life savings on Pets.com and sock puppets. Their kids, if they learn an actual trading strategy, should see markets as providing great opportunity.

To paraphrase: Even when market prediction cults prove to be built on sand, investors show a remarkable willingness to forget their disappointment, move on and chase the next guru promising an ability to predict tomorrow.

Simple thought, but loaded.

From my Little Book of Trading:

Even though he loved his job in the markets, Dave Druz soon entered medical school to hedge his bets. Yet he still took his vacations at the brokerage firm–working. Medicine was interesting to him, but he was 100 percent fascinated with the markets. Did he have lots of money? No. The only money he had was $5,000 in stock that his father had given him. Druz cashed that out and put it into his account. At that same time the brokerage firm offered him a job, a full time job to quit medical school and go work for them. They offered Druz $50,000 to start. That was really good money in the 1970s. A slightly drunk friend told him, “Dave, don’t take that job. You can be a really good trader, but if you take that job, you’ll never be a great trader. You’ve got to get a nest egg for security. You don’t want to trade with scared money. Finish medical school, be a doctor, and then you’ll be a great trader.” Does that make sense to you? Maybe not at first blush, but it was the wisest piece of information anyone ever told Druz. He has since seen many people over the years trading with scared money–meaning they would make decisions on the value of the money to them (read: emotional decisions about a new car, suit, or wife), and not follow the exact rules of their trading plan. “Don’t quit your day job” is another critical success lesson–write it down and tape it over your desk. Druz took his $5,000 and started to trade. He wasn’t very good at first, and his account dropped down to around $1,500. At that point he had hit rock bottom and trading success was beginning to move out of sight. He then received a message from his brokerage firm, “You got a fill on your trade.” Druz said, “I don’t have any orders in. I’m out of business.” The brokerage replied, “No, you had a ‘Good Til Cancelled’ order (GTC) in and it is ‘limit up’.” Druz was back in business! The universe apparently would not allow him to quit—he truly believed that. You too might think sometimes, “If I only had one more chance,” but when the next opportunity or chance does come around again you have to be willing to get in the game and play again—without thinking about your negative first experience. Second chances are telling you something. Heed their advice.

Nice.

From Charles Hugh Smith from ‘Of Two Minds’:

I have devoted significant portions of my books Survival+ and An Unconventional Guide to Investing in Troubled Times to an explanation of how community and self-reliance have atrophied under the relentless expansion of the dominant Savior State.

The social capital and “return on investment” earned from investing time and energy in community and other social networks has been replaced by a check from the Savior State–a transfer payment that surely beats the troublesome work of investing in community in terms of risk and return.

The net result of the Savior State dominating society and the economy is the rise of a pathological mindset of entitlement and resentment–the two are simply two sides of the same coin. You cannot separate them.

Once self-reliance has been lost, so too has self-confidence been lost, and the Savior State dependent–individual and corporation alike–soon distrusts their ability to function in an open market.

This is a truly sad, self-destructive state of affairs, and deeply, tragically ironic. The calls for “help” quickly lead to dependence on the Savior State, and that dependence quickly breeds complicity and silence in the face of repression and predation by the State and its corporate partners.

In a very real sense, citizens relinquish their citizenship along with their self-reliance and self-worth once they accept dependence on the State.

I often mention that the U.S. has much to learn from so-called Third World countries that are poorer in resources and credit. In many of these countries, the government is the police, the school and the infrastructure of roadways and energy. Many of these countries are systemically corrupt, and the State is the engine of enforcing that corruption.

Rather than something to be embraced and lobbied, involvement with the State is something to be avoided as a risk. In everyday life, people rarely encounter the government except in law enforcement or schooling.

As a result, people depend on their social capital and community for sustenance, support, work and connections.

This is not altruism, it is mutually beneficial.

Once a community dissolves into atomized individuals who each get a payment from the Central State, then they no longer need each other. Rather, other dependents on the State are viewed as competitors for the State’s resources.

These atomized, isolated individuals have a perverse relationship with the State and what remains of the community around them: lacking the self-worth earned from work or engagement/investment in a community, then their only outlet for self-identity is consumption: what they wear, eat, drink, etc. as consumers.

This dependence on the State also serves the State’s goal, which is a passive, compliant populace of dependents, and distracted, passive workers who pay their taxes. Thus dependence on the State and a hollow consumerism are ontologically bound: one feeds the other.

The era of debt-based consumption as the engine of “growth” and “prosperity” is coming to an end. Adding debt via credit no longer creates growth; it actually takes away from the economy by expanding debt service (interest payments).

The vast majority of developed-world people have had the basics of life since the late 1960s — transport, food, shelter and utilities. The “growth” since then depended on cheap, abundant oil and a consumerist mentality in which one constantly re-defines and renews one’s identity not from social investments in others or the shared community but from consumption.

Not coincidentally, this dominance of consumption as the only metric for “growth” (as opposed to, say, productive activity) has been paralleled by the dominance of the Central State.

The end of credit-based consumption will be a very positive development, as will the devolution of the Savior State. The Savior State is like oil–both are at their peaks and are starting their inevitable slide down the S-curve. The world they created was not as positive for human fulfillment and happiness as we have been told.

Indeed, study after study has found that people with the basics for life, a higher purpose that requires sacrifice and a tight-knit community are far and away happier than isolated, atomized, insecure consumers, regardless of their wealth and consumption.

This potential to re-humanize our economy is why I am hopeful.

Nice. Words for 2012.