The similarity between baseball and trading

In baseball the great players (and teams) hit home runs, not just singles.
Baseball players who score the most runs are home run hitters, not those with
consistent batting averages. Successful trend following traders act the same. Ed
Seykota of www.tradingtribe.com once
said:

“When you’re up to bat, it doesn’t pay to hedge your swing…true for stocks
and true for (Barry) Bonds.”

Trend following is always about the home runs. Think there is more safety in
hitting singles? (or short-term trading’s small gains). Think again. If you’re
going to play in a zero sum game, better play to win. Just ask Earl Weaver the
legendary baseball manager of the Baltimore Orioles who approached the game with
many “laws”. His fifth law:

“If you play for one run, that’s all you’ll get…I hated playing for one run…But
I didn’t always take my own advice. I never bunted with Frank Robinson or Boog
Powell or Eddie Murray at the plate.”

Isn’t that a great line? Play for one run and that’s all you will get, the
“secret” to baseball or trading success. I’m a big fan of Earl Weaver’s, as I
make clear in my book Trend Following:

“Earl Weaver designed his offenses to maximize the chance of a three-run homer.
He didn’t bunt, and he had a special taste for guys who got on base and guys who
hit home runs.”

At the same time, trend followers exercise discipline so they don’t strike out
(lose all their money). Oh they have small losses, but they cut their losses.

Sure you might want some consistency in how the markets treat you, but guess
what, the market isn’t always consistent. Now if you think you are smarter than
the market, and you find some inane theory to make you feel like you have found
the key, please, let me in on your secret. Because for me, as a trend follower,
the actual market price means more than my perceptions, and just like when I was
playing baseball, I set aside my ego and play the game that’s going on now. What
kind of game is that? A waiting game. If you’re not comfortable with waiting it
out, consider the approach to the market of a hedge fund that imploded last week
leaving investors out in the cold:

“Marketing materials for Bayou describe Mr. Israel, 47, as a “third-generation
trader” who has been trading since 1978. His was a short-term strategy in which
he would rarely keep positions for more than three days. He was satisfied eking
out small gains rather than making big, directional bets on sectors or industry
groups. What Bayou does best, a recent investor note said, “is hit singles on a
regular basis.” (source: New York Times)

A hedge fund that “hits singles” goes bust. Surprise? No. For whatever reason
many people think they are playing it safe by trying to get the so-called small
consistent profits. Unless you are Jim Simons or Toby Crabel, great success in
the “singles” game appears to be a mirage.

Some traders just can’t wait for that market opportunity to hit a home run. They
persist in equating patience with not doing anything. They want and need to feel
active. Perhaps it’s the comfy feeling of steady progress they get “hitting
singles on a regular basis”. Problem is, change doesn’t just roll along in small
increments. Change can be catastrophic. Just ask anyone caught in the
devastating path of Katrina. Sometimes the safe feeling of hitting singles and
going for the sure-fire quick profit is more important to people than the
reality of how poor and dangerous such strategies really are.

On the other hand, some will claim that trend following trading is no different
than the infomercial Wizetrade. For those who do not know or those living
overseas, Wizetrade.com is an infomercial
running non-stop here in the United States. It promises clear “signals” for buys
and sells. Wizetrade doesn’t tell you how the signals are generated (it is a
black box), it just tells you to buy on a “green” light and sell on a “red”
light. This might sound very simple (and maybe plain stupid), but it is selling
like crazy to those who think they have found a nice & easy alternative to buy
and hold…a way to hit the so-called “sure fire” singles and not have to wait for
those homeruns.

Trend following is not the same as the infomercial Wizetrade. However, it makes
me wonder that even if a strategy such as trend following is described in
detail, can everyone get “it”? A better question: does everyone want to get
“it”? Of course not. Most traders still want to believe in systems that predict
market trends which is about as far from trend following trading as you can get.

Flavia Cymbalista in writing about George Soros (not a trend follower, but a man
who has made a fortune off trading trends) explains a key tenet applicable to
all great traders:

” …he (Soros) operates with that which eludes any particular cut of market
reality: intrinsic uncertainty. Rather than assuming a static order, Soros
embraces the lack of fixed references in his guiding principle, the belief in
fallibility, meaning both the belief in his own fallibility and the belief that
the misconceptions and misunderstandings that go into our decisions help shape
the events in which we participate.”