Opinions, Stocks, Luck and Psychopaths!

Opinions, Stocks, Luck and Psychopaths!

Opinions

You want a good trend following “opinion”? There is no such thing. For example, consider words from Mark S. Rzepczynski, Ph.D., President & Chief Investment Officer of John W. Henry and Company:

“The uncertainty we faced in the summer may be coming to an end if the slow growth theme continues to take hold. This may allow for greater trend potential; nevertheless, we will not hold to any prediction or place undue confidence in any trend. Our objective is to stay focused during these times and not allow any biases to affect our disciplined and systematic trading approach.”

Mark reminds us all that his opinions don't alter the objective trading systems employed by John W. Henry and Co. Does this logic hit home with everyone? No. Consider this email I recently received:

“I have been doing some research on my own and I wanted your opinion about a subject: The Iraq Dinar as an investment. While I understand that its value may raise or fall, do you think it is a good buy and hold investment? Currently, 250,000 in Dinar are being offered at various prices. All at less than $200 USD.”

I would want to know the answers to these questions before I consider any investment (including in the Iraq Dinar):

1. What would be the trigger for you to enter?

2. What would be the trigger for you to exit with a loss?

3. What would be the trigger for you to exit with a profit?

4. How much of this would you buy or sell given your particular account?

The Iraq Dinar is just another market and probably not yet one you can trust in terms of liquidity and transparency. But if you do have a market that you can trade, you better answer the questions above first, instead of seeking "opinions" from "gurus".

Stocks

What about stocks? The skeptics always assume trend following is not for stocks. A reader writes:

"Just read “Trend Following” book and most comments revolved around commodity trading. I have been mostly trading pullbacks in momentum stocks, but it seems that I have been making more money on the up trending stocks. Where can I receive some info on trend following stocks?"

What is a momentum stock? What is a pullback? What exactly, down to numbered precision, is an up trending stock? This is just all jargon.

The term commodity is confusing when used by most. When the word is used, most people mean the futures markets and futures markets cover all markets across the globe including stocks. Trend followers don't care what they trade and they surely don't limit themselves to so-called "commodities".

Luck

In a Yahoo news piece the other day I noticed this bit of writing which has tossed around for seemingly decades:

"Larry Williams is noted for winning the World Cup Trading Championship by the largest percentage gain of all time. He turned $10,000 of real money into $1.1 million in less than a year during the contest."

In the article, Larry Williams is asked about the contest:

"Sure, I won the Robbins World Cup trading championship, I took $10,000 of real time money, not paper trading, in 12 months up to $1.1 million. That is an accomplishment, I guess...What I did was maybe lucky, who knows..."

I am glad Williams decided to use the word "luck" for his effort. While perhaps impressive, his effort has not been repeated. And that's the rub for me. Why do some people keep touting this contest win, this one year only performance, still to this day over 15 years later?

David Harding, a man with a trend following track record exceeding 15 years not just one year, has noted the problems with short-term results and short-term thinking:

"It is very dangerous to read too much into short-term results."

Harding’s words are short and to the point. A small sample size means zilch.

Psychopaths

From Bloomberg the other day, research backing the importance of the emotional component needed to be a great trend follower (or any trader for that matter) was revealed:

"Functional psychopaths'' make the best investment decisions because they can't experience emotions such as fear, a study by researchers at Stanford Graduate School of Business showed. Fear stops people from taking even logical risks, meaning those who have suffered damage to areas of the brain affecting emotions, and can suppress feeling, make better decisions, the report showed. The ability to control emotion helps performance in business and the financial markets, the researchers found."

We all know this intuitively, but finding proof in people with actual brain damage is quite remarkable. And you can be sure that these “functional psychopaths” would have no need for something like Jim Cramer's TV show Mad Money. I saw his show on a flight the other day for the second time. It's one thing for Cramer to do this show circa 1999, but today in 2005 it's flat out loony.

Of course, many people are justifying Cramer’s show since it has a large audience. That’s fine though because as trend followers know, it takes losers armed with bad strategy to provide winners to those with good strategy.

Michael Covel

Michael W. Covel is the founder and President of Trend Following™. A researcher of the most successful Trend Following investment managers, he has been in the alternative investments industry consulting on Trend Following to individual traders, hedge funds and banks for ten years. His best selling book, Trend Following: How Great Traders Make Millions in Up or Down Markets (Prentice Hall, May, 2004) is a complete and concise guide to trend following. It includes interviews with great trend followers who have won millions if not billions in the market. The trading world has embraced the book with endorsements from Van K. Tharp, John Mauldin, Ed Seykota and many more. Trend Following is now in its fifth printing, and is currently available in a Japanese translation with Chinese, German, French, Korean and Russian translations soon to follow. Teaching and sharing unique insights about Trend Following trading and alternative investments has earned Mr. Covel respect as a rational and logical voice in uncertain times. Mr. Covel also writes for numerous industry publications including Your Trading Edge, Stocks, Futures and Options Magazine and International Petroleum Finance and is consistently quoted and interviewed by a variety of financial publications.

Mr. Covel is also Managing Editor at TurtleTrader.com®, the leading Trend Following news and commentary resource since 1996. Thousands of visitors from more than 70 countries as well as hundreds of trading professionals engaged in years of debate and interchange making the site the rich archive of trading information, data and opinion that it continues to be today. TurtleTrader, one of the largest & strongest trading community on the web with over 7.5 million unique visitors since its inception, also functions as a resource center for the Trend Following Educational Course.