August 7, 2017
Reduce the rules in your investing strategy to make it more robust and easier to execute.
We all hear that simple is better; that complex doesn’t work as well and is harder to execute over the long run. Complex rules tend to promote confusion and second-guessing – things that can wreak havoc on any investing strategy.
Investors insist on making things too complicated. Many even believe that simple rules cannot make money over the long run; that the only way to win is be some kind of genius math whiz or have super-human intuition. No. No. And no. Simple and effective works.
August 1, 2017
When you take the road less traveled, you hear a lot of negative chatter from others and from yourself when you don’t perform well. But winners don’t give in or tell people what they want to hear; they stick to the process instead.
If you watched the Super Bowl, you saw two games — one where the Patriots sucked and one where they could do no wrong. The Patriots, unlike the Falcons, didn’t panic when the game wasn’t going their way. They stuck to their game plan and the rest is history. Bill Belichick (head coach of the Patriots) always says, “Do your job” and “Next play”. He focuses on process 24/7. Only the super committed can hear these soundbites, put their frustration aside and execute.
July 24, 2017
Apex predators don’t succeed all that often. Tigers succeed only 5% of the time; Polar bears 10% and Leopards 14%. All they need is one big kill every once in a while to stay atop the food chain.
Tigers, lions and other predators know their game. They balance persistence and knowing when to quit; hunting only for the home-run and conserving energy.
Investing is no different.
Trend traders lay low most of the time; expending little energy while waiting for a big trend to emerge. Most of the time, like lions and other predators, we come up empty. Frustration occurs, but it doesn’t distract us from the process. You keep at it and eventually you make a big kill.
July 17, 2017
Embrace cycles and use them to your advantage. Pretending they don’t exist and attempts to eliminate the part of the cycle you don’t like, the losing streak, doesn’t work.
The investing world doesn’t like cycles. It prefers investment strategies that produce consistent profits with little variation. I believe the collapse in interest rates intensifies this desire for consistent profits. One problem with investing in such strategies is that they’re likely curve-fit to the current market environment.
In the short-term, they can do no wrong; nailing the timing on every trade – buying bottoms and selling tops. The risk, though, hides somewhere in the future when market conditions inevitably change. As a result, the strategy no longer syncs up with the markets and performance comes off the tracks, often resulting in blowups.
July 12, 2017
Prioritize returns and educating investors. Have the ability to think and execute without distractions. Build rapport with current and prospective investors. Say what you have to say, not what you think others want to hear. Tell the truth no matter what.
I speak out about running a small and more importantly a lean operation in an industry where you’re not seen as “cool” unless you manage +$100M in assets and have a staff of PhD’s and MBA’s. I’m not opposed to managing a high level of assets, but only if it means I get to focus on trading, research and educating investors. If managing a lot of money means taking on the extra baggage of doing business with uninformed and unwilling-to-learn performance-chasing investors, having to tell people what they want to hear just to get and keep their accounts and spending more time with these people than my wife, family and friends then no thank you. Not interested.
I thought I’d address some of the reasons why I launched Melissinos Trading with the priority of generating solid returns and education instead of running a large and complex shop.
Blog post: http://www.michaelmelissinos.com/blog/why-i-choose-lean/
July 10, 2017
AQR updates their paper from a few years ago on Trend Following performance over the past 100+ years.
They highlight that performance since 2010 has been the worst stretch in the backtest. The main reason for this has been an increase in correlation between many different markets. When correlation increases, trend followers cannot follow and profit from many different trends.
Over the past eight years or so, correlation has increased severly. They notice that high correlation environments tend to hurt Trend Following performance and it thrives in low correlation environments.
July 6, 2017
Across the globe, bond prices are declining. From Australia to Europe to the USA, prices are sitting and/or rolling over towards 52-week lows.
Could this be the beginning of a major reversal in interest rates? Who knows, but investors have to prepare just in case.
Investors who have profited and gotten used to the 30-year bull market, especially in the U.S., might be less inclined to adapt. They think a bull market in Treasuries and other government bonds is the norm, so they don't bother closing their long positions.
Trend Followers know better. They respect the market. They know that old regimes and long-standing trends can break down at any time without mercy. They don't bother feeling nostalgic. Instead, they adapt as soon as possible within the rules of their own strategies.
On this episode, I walk through the charts of some of the major government bond markets and comment on their current trends and some possibilities for the future.
June 26, 2017
Great trends can exist despite low and declining volatility. People seem to have gotten the idea that trend following performance has been poor over the past couple of years because of low market volatility. Not true. Trend reversals and false breakouts are the culprits, not low volatility.
I don’t root for volatility. I root for trends. Sometimes markets trend despite low and declining volatility. They can exist with high and increasing volatility too, but positive trend following performance does not need high volatility.
Full article: http://www.michaelmelissinos.com/blog/positive-trend-following-performance-depends-on-persistent-trends-not-high-volatility/
June 23, 2017
The soil matters most.
Without great soil, wineries cannot make great wine. Without big trends, traders cannot make big money. Wine-makers are at the mercy of their geographical location; traders, at the mercy of the markets. There’s a reason why wineries don’t exist in Nebraska and why trend traders don’t make money in stagnant markets.
Much of what contributes to making great wine lies outside of our control – location, soil and weather. If a guy in Iowa wants to open a winery, he knows he has to go to where grapes grow. He cannot force the issue in Iowa. He’s simply in the wrong place to make wine. This says nothing about his talent, will or hustle. He just has to adapt to the reality that running a successful winery cannot be done in Iowa. He’s gotta move.
In trading, we depend on trends to make money. Long-term traders, like myself, need months of price persistence to produce a profit. Outside of stocks, markets have been fairly stagnant for the last couple of years. Like a winery, a large part of what we need to succeed lies outside of our control. I have no control over what markets do and there’s nothing I can do to change them. I simply have to wait it out until the soil (markets) become more fertile.
Blog post: www.michaelmelissinos.com/blog/wine-and-trading/
June 19, 2017
Trend Following, by design, leaves money on the table. It does not try to milk every trade for every penny.
It aims for profit, but not greed.
It accepts missing tops and bottoms in order to capture the middle of trends.
We humans love predicting, buying bottoms and selling tops. The cost of these behaviors outweigh the profits, though.
Many people choose not to buy stocks during this 7–8 year bull market because the perfect buying opportunity never occurs. The market never pulls back enough to justify getting in; no one wants to be the sucker who buys the top.
Being a human, myself, I understand this pain. However, waiting for a pullback to get in at “better prices” often times keeps you out of the market altogether and, as a result, you miss the trend. The pain of missing the long-term trend outweighs the pain of overpaying in the short-term.
Blog post: http://www.michaelmelissinos.com/blog/leaving-money-on-the-table/