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.â€
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.â€
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 Followingâ€
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 Followingâ”