March 26, 2018
Every investment strategy experiences winning and losing streaks. They all take turns at the front and back of the line. Trend following has been sitting near the back of the line for the past 5-10 years, while stocks sit near the front.
Trend following performance derives from the aggregate trends of all the markets within the portfolio, not just one or two markets or sectors. Over the past few years, performance struggles as choppiness from other major asset classes weigh down positive performance from stocks.
This, while annoying, can happen from time to time. The next 5-10 years may not look like the past 5-10 years. Maybe stocks chop around for a while and commodities trend well. Maybe stocks and bonds both decline while commodities and currencies rise. Who knows.
March 21, 2018
For the past 5–10 years, trend followers have had to deal with a double-whammy — poor markets and no interest on excess cash. However, it appears at least one of those is changing for the better.
Interest rates are rising.
Today, the 3-month T-Bill yields ~1.75%. Even though this is pretty low on a historic basis, this is a welcoming sign given it sat near zero percent from 2009–2016.
March 17, 2018
The following factors make me bullish on commodities:
1) Multi-year congestion
2) Low volatility
3) A rolling Sharpe Ratio near historic lows and most importantly...
4) New price breakouts.
February 23, 2018
I believe the bond market presents the most intriguing opportunity for trend followers right now.
We’ve gone through an unprecedented time of low interest rates since 2008 and now that trend appears to be reversing. This trend may have more fuel than others given the extremely low volatility and overall feeling of complacency.
Long-only bond funds, especially ones that use volatility to size their risk, have built up massive positions so any uptick in volatility or reversal of trend might trigger a mass exodus — kind of like what we saw in stocks and volatility-related instruments a couple of weeks ago.
January 8, 2018
The Fed appears committed to rising rates as long as the economy and inflation cooperate. Some people in the investing community have raised concerns that trend followers will not be able to perform as well when interest rates rise due to the negative carry when holding short positions in bond futures. They believe the main reason trend followers have performed so well since the early 1980’s is because they rode the long side of the massive bond price trend. And if that gets taken away then trend followers lose their golden goose and won’t perform well.
Their point on trading the short side of bonds might be true, but they seem to forget that trend followers diversify like lunatics and have the ability to profit from trends in other areas like commodities, stocks and currencies when rates rise. Trend followers don’t rely solely on one market or asset class to provide all of the profits. If they don’t make as much money from shorting bonds, fine; there are many other markets to profit from.
In this episode, I take a look at trend following performance during rising rate environments over the past 50+ years and if significant trends occur during these periods.
December 21, 2017
I’ve been receiving lots of texts and calls from friends, and people I haven’t heard from in a while, regarding Bitcoin — what my general thoughts are; whether to buy it or stay away; is it in a bubble or not?
So I thought it’d be a good idea to take a look at some of the biggest bubbles over the past 40 years. We’ve seen bubbles in may different asset classes — stocks, agriculture, metals and energy.
I’m sure there are few I’m missing, but this is just to put Bitcoin’s current price action in perspective versus past bubbles.
December 12, 2017
In psychology, superordinate goals refer to goals that require the cooperation of two or more people or groups to achieve, which usually results in rewards to the groups.
Good investing requires a good system, good markets and discipline.
Often enough, it's the discipline part that ruins us. In my experience, there's many different systems that make money and, sure, markets can suck for a while but they eventually come around.
Maintaining discipline is very tough to maintain over time. When you throw investors, employees and family into the mix it becomes that much tougher.
To achieve long-term success in the markets, managers and clients (and family, employees, etc) need to work together. Managers need to communicate with everyone about how they invest and why they do it that particular way; also, give frequent updates on why they're winning or losing money and show examples of investments they've made so their support group can understand what's going on.
When investors are left in the dark and judge their managers nothing but on monthly or quarterly performance, then it's only a matter of time before they quit because a losing streak will come eventually.
December 6, 2017
"How much money have you made?"
"Where did you get in?"
People think these questions are important because they stimulate hopeful feelings of celebration (we've made a lot) and intelligence (we got in before others were talking about it).
But these questions don't have anything to do with doing the right thing today.
November 14, 2017
Risk is like gravity — it always there, but you don’t always feel or see it.
Today, we’re in between market storms. People have become more and more comfortable and complacent during the 8-year bull market. The relatively painless uptrend has lulled people into a false sense of security.
Even Janet Yellen says she doesn’t believe there will be another financial crisis in our lifetimes.
Collectively, we’re getting used to the way things have been recently — rising stock prices, low and declining volatility and little to no need for protection investments like hedge funds and macro CTAs.
I’m scared we’re getting used to things just in time for everything to change again.