BLOG: THE TREND FOLLOWING MANIFESTO

My first year Little League sponsorship emblazoned TurtleTrader on the uniform, but now a slight shift to be even more trend following inclusive:

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The headline:

Gov. Jerry Brown, disclosing the development in a video posted on YouTube, said that California’s shortfall was now projected to be $16 billion, up from $9.2 billion in January. Mr. Brown said that he would propose a revised budget on Monday to deal with it. “We are now facing a $16 billion hole, not the $9 billion we thought in January,” Mr. Brown said. “This means we will have to go much further and make cuts far greater than I asked for at the beginning of the year.”

Still want to trust the State for the fantasy of taking care of your financial nutrition?

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Consider a good read:

There’s nothing controversial about the claim…that in the last 20 years Wall Street has moved away from an investment-led model, to a gambling-led model.

This was exemplified by the failure of LTCM which blew up unsuccessfully making huge interest rate bets for tiny profits, or ‘picking up nickels in front of a streamroller’, and by Jon Corzine’s MF Global doing practically the same thing with European debt (while at the same time stealing from clients).

As Nassim Taleb described in The Black Swan these kinds of trades — betting large amounts for small frequent profits — is extremely FRAGILE because eventually (and probably sooner in the real world than in a model) losses will happen (and of course if you are betting big, losses will be big). If you are running your business on the basis of leverage, this is especially dangerous, because facing a margin call or a downgrade you may be left in a fire sale to raise collateral.

More:

The bottom line for Wall Street is that either the bailouts will stop and anyone practicing this crazy behavior will end up bust — ending the moral hazard of adrenaline junkie coke-and-hookers traders and 21-year-old PhD-wielding quants playing the Martingale game risk free thanks to the Fed — or the Fed will destroy the currency. I don’t know how long that will take, but the fact that the dollar is effectively no longer the global reserve currency says everything I need to know about where we are going.

The bigger point here is whatever happened to banking as banking, instead of banking as a game of roulette? You know, where investment banks make the majority of their profits and spend the majority of their efforts lending to people who need to the money to create products and make ideas reality?

Who plays the exact opposite & winning game? Trend followers do. So please knock yourself out and try to make a business out of picking up nickels laying in front of a moving steamroller. Just be aware that you will at some point get run over.

Note: The nickel/steamroller routine was LTCM’s way.

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Trend follower Mike Shell recently appeared on my podcast, and you can now see more of his trend following wisdom in Forbes. Shout out to the author Kate Stalter who I have come to know shares many of my big picture life views on Facebook. Remember: Life is unpredictable, just ride the trend.

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Douglas Stewart, trend following portfolio manager at Sherwood Forest Capital, appears on the podcast this week.

Listen.

Douglas Stewart in front of Virginia State Capitol

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Taleb on risk (PDF).

Excerpt:

Your money is at risk. No matter what you’ve put it in–stocks, bonds, derivatives, hedge funds, houses, annuities, even mattresses–there’s always the chance that you could lose it or miss out on a bigger opportunity somewhere else. Anyone who would tell you otherwise is either a fool or a huckster. Then there are those who do warn of risk but package it into a simple numerical measure that seems to put it within manageable bounds. They’re even more dangerous.

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The economic world is driven primarily by random jumps. Yet the common tools of finance were designed for random walks in which the market always moves in baby steps. Despite increasing empirical evidence that concentration and jumps better characterize market reality, the reliance on the random walk, the bell-shaped curve, and their spawn of alphas and betas is accelerating, widening a tragic gap between reality and the standard tools of financial measurement.

Those words were 2005 and now in 2012…J.P. Morgan is at the punch bowl again playing the same game.

Note: Taleb might be my favorite trend following inspiration–even if his intention surely is not to explain/promote trend following.

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Their views might not necessarily be winning trading bets (i.e. they are fundamentally driven), but let’s hope for society they are not prescient–cause the end result would be capital controls, more short sale bans, bailouts ad infinitum and Occupy Wall Street riots:

John Hussman: Unbalanced Risk.

More:

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How can you prepare to profit no matter what happens? Trend following, of course.

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All 2012 podcast episodes (interviews):

• Mark Melin Interview: Listen
• Tim Pickering Interview: Listen
• Tom Basso Interview: Listen
• Damon Vickers Interview: Listen
• Original Turtle Michael Shannon & Jim Byers Interviews: Listen
• Charles German Interview: Listen
• Nick Radge Interview: Listen
• Mike Shell Interview: Listen
• Charles Faulkner Interview: Listen
• Bob Pardo Interview: Listen
• Mike Dever Interview: Listen

All 2012 podcast episodes (Covel Manifesto):

• Michael Covel Manifesto Episode #12: Listen
• Michael Covel Manifesto Episode #11: Listen
• Michael Covel Manifesto Episode #10: Listen
• Michael Covel Manifesto Episode #9: Listen
• Michael Covel Manifesto Episode #8: Listen
• Michael Covel Manifesto Episode #7: Listen
• Michael Covel Manifesto Episode #6: Listen
• Michael Covel Manifesto Episode #5: Listen
• Michael Covel Manifesto Episode #4: Listen
• Michael Covel Manifesto Episode #3: Listen
• Michael Covel Manifesto Episode #2: Listen
• Michael Covel Manifesto Episode #1: Listen

Enjoy! These are all on iTunes too.

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Trend follower Kevin Bruce once had the opportunity to go to New York and see one of the major brokerage firms’ trading floors. He found it like Battlestar Galactica, with more screens and lights than you could imagine. He decided: “I couldn’t think in this environment.” You can never make decisions when the market is open; everything is like a flight plan, it’s got to be pre-planned. Trying to make decisions when the market is open is going to lead to emotional decisions. Everything must be thought out ahead of time. Know what you are going to do if it goes up, if it goes down, and if it doesn’t do anything. When all that is figured out, you put your system on autopilot. It almost sounds too simple, but that’s the way you need to do it, and that’s why you don’t need to stress out about anybody’s opinion.

More? See: The Little Book of Trading.

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From Zenhabits.net:

If you find yourself swimming with all the other fish, go the other way. They don’t know where they’re going either.

Indeed.

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