Boo-yah!

Ok, I admit, I don't get Cramer's Mad Money from a trading or investing standpoint. Consider this piece from the Jim Cramer Mad Money Wikipedia entry:

"The majority of the hour features the flamboyant, colorful Cramer shouting, leaping, and gesticulating around the set and at the camera, all while providing his viewers with investment advice. Arguably, this format skews the show more towards being entertainment rather than a source of financial information. Many financial professionals attest to Cramer's skill at picking stocks and explaining principles of sound investment; the individual investors who call into the show also seem to hold Cramer's advice in high regard. Cramer himself says that the goal of his show is to entertain the viewer and provide the viewer with good, sound investment advice. Cramer is usually standing up with the fisheye lens Steadicam close to his face, zooming in and out, all the while providing his stock picks and his reasoning (with his voice inflection known to suddenly change from calm to shouting). Cramer also throws various objects on the set (papers, pencils, etc.) and even smashed up a model plane when explaining his thoughts on Boeing stock; on another episode he used a telephone receiver to destroy a computer keyboard."

I know some very smart people who refuse to say anything untoward about Cramer's show. They always say it is just entertainment and never get close to any criticism. But is it just entertainment? Do people really just watch because it is fun and wacky? I maintain people watch because at the root of the show they feel they are getting some investment value from it. The show's comedy works because it is assumed the underlying foundation of the investing advice offered is sound. Is it? The basic premise of the show is "stock tips work". Do stock tips work? Would this show have excelled in 1999? You bet. Would this show have excelled in late 2000? I don't think so. What does that say about the audience mindset giving Cramer such great ratings?

Railing against the use of stock tips is not new. Reflect on this excerpt from Reminiscences of a Stock Operator:

"A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don't believe in tips. If I buy stocks on Smith's tip I must sell those same stocks on Smith's tip. I am depending on him. Suppose Smith is away on a holiday when the selling time comes around? No, sir, nobody can make big money on what someone else tells him to do. I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment. It took me five years to learn to play the game intelligently enough to make big money when I was right."

I wish Cramer all the success, but I just have an odd feeling about so many new people adopting bad habits (taking stock tips) in their understanding of the markets and trading.

Recent Trend Following Performance

Recent performance for trend following traders has been very strong. March and April were very great months. Some performance from across the board:

"The Winton Futures Fund gained an estimated 5.58% in April to bring the compound annual average rate of return in 103 months of trading to 20.23%."

Others? Jason Dekker saw +21.43%. Dunn saw +10% in April. Turtle Tom Shanks of Hawksbill made +25% for April. Martin Capital's RMS returned +33.82% for April. Will post others as they come in. Of course, this is only a few month stretch. There can and will be down periods, but in the long run the performance of trend following traders continues to be impressive.

Read, for example, the John W. Henry April 2006 commentary (PDF). An excerpt:

The current program (John Henry) gains did not require complex stories or interpretations of Chairman Bernanke¹s testimony. It required following what the market was telling us. News is important, but we are not trying to integrate the news that is occurring. The markets will do that better than we can. Our job is to find the trend and manage the risk. The recent strong performance was not the result of special insight but a simpler approach of following our discipline.

Compounding Magic

We all know and hear about how important compounding is, but sometimes a great example can make the case much more clear. Here is a take on "compounding" from a reseller of the Winton Capital trend following fund:

"There's a good rule of thumb for estimating realistic returns from equities over time. Take the rate of inflation and add on a risk premium of 3%. With inflation currently at around 2.6%, you could expect returns from equities to be around 6% over the next few years. However, big external shocks can have a significant negative effect on equity markets and there is no guarantee that you will get back what you invest. The Matrix Ascension Plan aims to give you higher returns than equities over the next seven years and capital protection. The Matrix Ascension Plan enables you to benefit from the returns of a Fund managed by Winton Capital Management, a company that has a track record of producing high returns for investors. In October 1997, they launched the Winton Futures Fund which has provided investors with annualized returns of 21.01%. As a comparison, the annualized returns from the FTSE 100 Index over the same period have been 0.28%. To put these returns in some sort of context, if you had been the buyer of Vincent van Gogh's 'Irises' in 1947, you would have paid $80,000. The next time it changed hands, in 1987, it was bought for $53.9m. This seems an extraordinary rise in value but mathematically it shows a compound average annual growth rate of 17.7% - less than the annualized returns from the Winton Futures Fund over the last six and a half years."

The van Gogh compounding example is money. It really points out the "magic" of compounding. To those who preach the wonders of +8% compounded, try +20% for a wakeup call contrast.

What Number to Believe?

From the Enron trial comes this tidbit about the difficulty in believing company "numbers":

HOUSTON (AP) -- Last-minute changes to quarterly earnings reports prosecutors contend were ordered by Enron Corp. Chief Executive Jeffrey Skilling to improve the company's reputation on Wall Street were accurate, and not the result of improper tapping of company reserves, a defense expert testified Wednesday. "The whole process of financial reporting, in a company as large as Enron, to get financial statements out ... is an enormous undertaking," said Walter Rush, an accounting expert hired by Skilling. "And people are scrambling, trying to get these estimates put together. "There are changes going on up to the very last second. It is universal. Every company goes through this."

These are the comments of expert witnesses, that is a given, but still it means the financials are impossible to really know. How can you successfully forecast share price direction using fundamental analysis with company numbers you can't trust?

Intentions

Ed Seykota, who is a master systems trader, never forgets the human side of trading. Consider Seykota's take on 'intentions' at his web site:

"Intention = Result. The thing you state as your intention may not be your real intention. In that case, you intend to not manifest your statement intention as part of a larger (secret) intention. For example, you promise to show up on time and show up late. Your intention may be to gain attention by making people wait for you."

So many people fixate on rules and techniques, but forget "intentions". As you approach your daily life, contemplating how you will find the big score, have you thought about your true intentions? The trading psychology part of the equation is just as important as the quant side of the equation.

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.