Comments on: Book Review: Trend Following (4)

By: David Merkel

David Merkel — Tue, 05 May 2009 04:59:21 +0000

Michael, I agree on 1 and 2, and have said so in this review series. I am not a buy-and-hold investor. That said, my mother, my first investments teacher, who has done very well over the years, is a person whose normal holding period was a decade. To do that, one has to pick quality companies, which she did.

And, I agree with 3. The game is tougher than most think, which is why many hedge funds adopted trend following methods in their trading. It gets tougher still when many of these quantitatively-driven funds crowd the market, and then momentum (trend following) strategies fail. Then money exits following momentum, and after a time, momentum starts to work again. What a game.

By: Michael Covel

Michael Covel — Sun, 03 May 2009 21:41:19 +0000

Trend following is not more broadly embraced by the money management community for many reasons. A few:

1. Buy/hold mutual fund businesses that mimic the market take little intellectual firepower and spin off great fees. Those folks don’t want their applecart knocked off the road.

2. Universities teach theory. Most professors have not heard of trend following. Most have no clue of trend following performance going back decades. Lots of mammoth egos are locked in ivory towers across the land.

3. To embrace trend following is to admit to the world that the game is tougher than most advisers want their clients to know. If you spend 25 years pumping buy and hold, stock tips, etc. and that game springs a leak, everyone now knows the trust is broken.

By: David Merkel

David Merkel — Thu, 30 Apr 2009 20:13:44 +0000

Sean, I’ll look into it, thanks. Eric, posted the answer last night.

By: Eric

Eric — Thu, 30 Apr 2009 02:18:14 +0000

David,

I ask b/c that is how we measure whether a portfolio mgr. is doing a good job or not. People quote what the Buffett’s, Whitman’s, ect’s results have been over long period of time, so why can’t that be discussed of trend followers? That’s all, that’s the reason I ask. I’m not trying to “pick sides”, I think its easy to try to get to “cute” as to the why’s and what for’s. It all comes down to consistency and risk management/drawdowns. There is more than one way to skin a cat.

By: Sean Everson

Sean Everson — Wed, 29 Apr 2009 23:41:51 +0000

David,

You should check out Richard Tortoriello’s book “Quantitative Strategies for Achieving Alpha”. They do a great job of examining many proven factors such as growth, value, and momentum in a very careful and analytical manner. End result is just what you say. Many different approaches work — just not all of the time. Strangely enough there was not much difference between the best valuation and momentum strategies. Both were shown to be fairly consistent winners over the 20+ years studied.

By: Paul in Kansas City

Paul in Kansas City — Wed, 29 Apr 2009 15:18:41 +0000

Numbers are the numbers; but this hangup over this issue is not useful. 1) Should we only listen to Warren Buffet based on past performance? probably not based on the last 5 years; but in my opinion it would also be foolish to take that position; there is no wisdom to be gained by analysis even though the last 5 years were “poor”? 2) I have a client account that I manage that is flat from October 2007; am I a lot better than Buffet?? (the numbers say so); but the job of that specific account was to “be careful” and look for equity assets to generate income; I didn’t over swing at pitches and had a ton of cash the weekend Lehman failed; I didn’t manage it this way predicting the apocalypse. That result is indicative what I was supposed to do and how events played themselves out. Luck matters!!! An “investor” unwilling to trade or sell for risk control probably got killed in that time frame. 3) I use the poker analogy all the time; if you have poor cards do you aggresively bet or not? All sorts of reasons pro and con; but how the cards are dealt and the other players reactions at the table will be the determiniant of success. If you have a better analogy I’m all for it! All strategies work under certain scenarios; the challenge is correctly guessing the scenario and adjust investment strategy accordingly. One last thing; a wise man can still be penniless.

By: David Merkel

David Merkel — Wed, 29 Apr 2009 14:53:14 +0000

Eric, that’s the fetish question for Covel followers, and I don’t think it is relevant. Give me some more meat on the bones. Why do you want to know that, and I will answer it.

By: Eric

Eric — Wed, 29 Apr 2009 10:40:38 +0000

David,

Do you have audited results of your performance over a long period of time such as many of the managers that Covel does?