Why more information doesn't always work

Salem Abraham: Canadian, Texas Visit

Took quick trip down to Canadian, Texas on Thursday and Friday to visit with Salem Abraham (trading around $150M as a trend follower with a near 20 year track record). More to come about the trip, but it was a starting point for my second book now underway. Article on Salem & His Brothers (PDF)

Canadian is in the Texas panhandle. It is a small Town, but an absolutely great place to visit.

Mark S. Rzepczynski Wisdom

Mark S. Rzepczynski, President of John W. Henry and Co., offered this comment for May 06 (PDF). The last paragraph titled "Handicapping Markets - More Information Does Not Always Work" is the section I like.

Note: I am not biased to JWH. They simply put out regular and interesting content. If you know of other firms I should be covering, drop me a line.

Not at This Time

Some feedback from a reader explaining why trend following is not wise today:

"The problem is you will spend a lot of time and effort just breaking even on what are presently very stagnant markets. While it is true one might make 50% or more by joining the short sellers every time the markets panic, if one is uncomfortable with the added risks of short selling, one must find at least one home run long position once in awhile, e.g. 50%, 100%, etc. (I pick 100% just as a round number large enough to overcome the retarding effect of position sizing on that rare home run you might get by trying to trend follow in the chop.) What I am suggesting is that markets today are so correlated and so stagnant that you cannot find any long investment that will stand out far enough to get ahead of all the losing trades one has to endure in trend following this sort of market. Markets are very choppy and increasingly correlated because of globalized trading. "Low opportunity" as you say. I guess this is my point and criticism of trend following as a useful trading tactic at this time."

Thanks for the feedback. Comments:

1. Which 'markets' do you mean?
2. How do you define 'at this time'?
3. How do you explain the success seen here: www.jwh.com, www.wintoncapital.com, www.grahamcapital.com, www.chesapeakecapital.com, etc.? Are their results just 'luck'?

Michael J. Mauboussin: More Than You Know

Michael J. Mauboussin has a new book out called More Than You Know: Finding Financial Wisdom in Unconventional Places.

I was not aware of Michael's new book until he sent me a copy, but I feel silly for missing its release in April! Michael's writings have influenced me greatly over the years and many of his quotes are in Trend Following. He has the unique ability to break down the very complicated into the very simple. Read his new book if you like to learn! Avoid it if you like stock tips!

"Narrow Minded Jackass" Follow-Up

Recently I had a reader call me a narrow minded jackass for my $1 contest. That comment brought this rather sarcastic feedback from another reader:

"In order to prove that 'predicted technical analysis does not work' , we need to define 'predicted technical analysis' and 'work'. Does the common technical phrase 'a flag always flys at half mast' mean that if you happen to pick the right breakout from the flag and it travels exactly as high as the run-up to the beginning of the flag, then I guess it 'works', depending on your measurements and of course adjusting for a little bit of slippage and such, and you know if it comes within 1 point of your target well that's close enough, right? Or maybe it's that 5th wave in the Elliot wave format that pushed up exactly 0.618x the length of the 1st plus the 3rd wave, or is it just the 3rd wave, I forget? Oh yeah that head and shoulders, you know that's a sure winner because when that breaks down from the right shoulder you know for sure that the market will dive to the exact length of the measurement from the base to the peak of that head and shoulders. Oh yeah, I just love trading the support and resistance bands because they are always spot on - so predictive like shootin fish in a barrel. This is why trading is so blessed easy it almost pains me to take so much money this way- you know that MACD, it's like reading tomorrows Wall Street Journal - yeah there's no way you'll ever prove this stuff doesn't work, I mean just look out your window there are guys and girls drivin Ferraris all over the world because of all the riches they have claimed from predictive technical analysis. Good luck with this one - oh hang on a sec, I've gotta take this call from Nostrodamus, he's gonna tell me what orders to place Monday morning. Just another narrow minded jack ass (here)."
Mike Marchese

The reader who originally wrote in with the 'jackass' comment saw the above response and responded:

"Your response to my comment that you are a narrow minded jackass not only reinforces my belief but tells me that you are also delusional. I recommend you see a Psychiatrist."

This subject appears exhausted!

Words Mean Things

From yesterday's headlines:

Stocks Climb As Oil Plunges
Wednesday May 31, 11:05 am ET
By Christopher Wang, AP Business Writer
Stocks Climb As Oil Plunges; Energy Market Welcomes Latest Move by U.S. in Iran Dispute

NEW YORK (AP) -- Plunging oil prices pushed stocks sharply higher Wednesday as the United States' latest move to settle the dispute over Iran's nuclear arms program eased the energy market's worries about a supply cutoff from the petroleum-rich nation. The pullback in crude oil helped calm inflation jitters as investors grew hopeful that the minutes from the latest Federal Reserve meeting would shed light on the outlook for interest rates. Traders have been scouring for clues on whether to expect higher lending rates after the Fed said in early May that more rates hikes could be needed to battle soaring energy prices.

A 1% drop in oil is a "plunge"? Huh?

How can you, Christopher Wang, know for sure that this oil "plunge" calmed "inflation jitters"? How did you determine that? Is that your opinion or some form of research you conducting in the last 24 hours? Yes, I am being sarcastic, but don't you have any need to connect your words to some form of measurable reality?

Position Sizing Feedback

Feedback from a reader:

"While the idea of sizing one's position according to anticipated volatility and available capital sounds reasonable on the surface, recently it appears that all markets in all countries are well correlated. Thus in the current environment position sizing doesn't manage risk very much. For example, if all your appreciating positions decline as simultaneously and deeply as they appreciated, what's the use trying to allocate risk with a 1% thimble? Look at metals for example. Why bother diversifying among the commodities and producers with position sizing? The same result would have been obtained by simply exclusively buying any one of gold, copper, or zinc alone. Diversity among exploration companies and types of metals with (trend) trading position sizes just makes a messy portfolio. In the end they all sold off more or less at the same time and by roughly as they appreciated compared to 100%. Let me explain a bit more about "compared to 100%". I am talking about all available investments being well correlated in the sense of trend following. In Trend Following as I understand it, one seeks the 100% or greater return on investment in a few trades rather than trying to make small gains over many risky capital intensive trades. Furthermore, if you look at every stock exchange in any country that nearly any stock that went up also went down by a comparable amount relative to 100%. If you look at forex, it is ALL US dollar. Dollar goes up a bit, dollar goes down a bit."

Selecting a portfolio to track and trade is not just guessing. Correlation must be considered and even then it is not a perfect diversity measurement 100% of the time. Sometimes, in the short-term, everything can quickly move together.

This reader continued:

"You need huge leverage to get a trend out of the US dollar chop. That's not really trend following is it?

Trend following trading does not attempt to use vast leverage to make money in choppy markets. Period. Trend following loses money in choppy markets.

This reader continued:

"Is this the end of speculative trend following? If it's not dead, maybe position sizing isn't so important in the modern era of investing?"

How can the question of "how much?" ever go out of style? I am not following the logic.

How Do You Apply These Comments?

I came across a market newsletter that aggregated various comments from investing newsletters. How do you actually apply the following four comments?

"It's increasingly clear that the primary characteristic of the current marketplace is that there is too much money around, looking for places to put it, perhaps to work, but more evidently to play with. It is reminiscent of one of Fraser's useful buttons: 'Money to burn will find a home.'...In sum, this is not a market climate suitable for initiating long-term investment positions, nor is it suitable for speculation...nor for brilliant market timing. Such slow and teasing deterioration requires patience. Better to be a wallflower than a gambler."
Justin Mamis
The Mamis Letter
April 3, 2006

"In an environment of global event risk, potential fixed income market turmoil, and deteriorating industry group performance, our advice remains to be defensive."
Michael Belkin
The Belkin Report
April 3, 2006

"I believe The Market will continue to groan forward this month, possibly even challenging the old highs. But I don't think the underlying fundamental, technical, economic, and sentiment factors are in place to sustain it. For that reason, we need to begin the process of rebalancing our portfolios. ...I see a flat-to-declining U.S. market ahead. We'll begin to sell our U.S. market-sensitive issues - even some of those that I still believe in long-term. My plan is to move you more completely into metals, timber, and energy, all of which will move contra to the market in general, as well as to seek some special situations in foreign markets to which the U.S. market correlates poorly."
Joseph L. Shaefer
Investor's Edge
April 2006

"The greenback now looks vulnerable to a breach of 88.00, which would increase the risk profile toward 86.00 and negate the potential for the U.S. dollar to fulfill the previously anticipated upside."
Ron Daino
The Day of Reckoning is NOW for the U.S. Dollar...And It's Failing!
April 5, 2006

I am not questioning the intelligence of these men. There is a side of me that always like a good market story, but I just don't see how these kinds of statements can be applied to 'when to buy', 'when to sell' or 'how much to buy or sell'.

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, New Expanded Edition (Prentice Hall, November 2005) 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.