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This chapter is from the book

Change

There are plenty of people who ignore trend following’s tremendous track record and argue that it is outdated, inferior, or it plain doesn’t work.

“Has Trend Following Changed?” was the topic of a panel at a Managed Fund Association’s conference. Patrick Welton saw that there is no evidence that trend following has changed. To prove this fact, he constructed 120 trend following models. Some were reversal-based, and others were not. Some were breakout style trading systems based on price action with others relying on volatility and band-style breakouts. The average holding periods ranged from two weeks to one year. The results gave almost identical performance characteristics in periods covering the late 1980s, early 1990s, and late 1990s.

Welton also addressed the misconception that the sources of return for trend following had changed. He pointed out that starting from first principles, it was a fact that the source of return for trend following resulted from sustained market price movements. Human reaction to such events, and the stream of information describing them, takes time and runs its course unpredictably. The resulting magnitude and rate of price change could not be reliably forecast. This is the precise reason why trend following works.24

Burt Kozloff, a consultant in the fund industry, also confronted trend-trading skeptics head on two decades before trend followers’ fantastic October 2008 returns:

  • “In February, 1985, on a tour of Germany sponsored by the Deutsche Terminborse, several advisors and pool operators were making a presentation to a group of German institutional investors. Among them were two trend-based traders, Campbell & Co. and John W. Henry & Co. During the question-and-answer period, one man stood and proclaimed: ‘But isn’t it true that Trend Following is dead?’ At this point, the moderator asked that slides displaying the performance histories for Campbell and Henry be displayed again. The moderator marched through the declines, saying: ‘Here’s the first obituary for trend-based trading. Here’s the next one...and the next but these traders today are at new highs, and they consistently decline to honor the tombstones that skeptics keep erecting every time there’s a losing period.’ Campbell and JWH have made their investors hundreds of millions of dollars since that time. It might, therefore, be a mistake to write yet another series of obituaries.”26

A new trend following obituary, often oblivious to real facts, and often rooted in ignorance, will be written every few years by mutual fund defenders, player haters, and cranks despite the incredible amounts of money made by trend following practitioners. Perplexed at Wall Street’s lack of acceptance, one trend follower responded:

  • “How can someone buy high and short low and be successful for two decades unless the underlying nature of markets is to trend? On the other hand, I’ve seen year-after-year, brilliant men buying low and selling high for a while successfully and then going broke because they thought they understood why a certain investment instrument had to perform in accordance with their personal logic.”27

I have found though that trend followers generally seem to be oblivious to those who question their strategies. Why spend massive energy constantly defending yourself when you are producing monster returns year after year? That said, I do enjoy spending time to make the defense for them. The subject is too important and too valuable for the average investor to let it go under the radar.

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