Reasons for Trend Following

Some economic data (they come out of the woodwork almost daily and hence pretty impossible to track) was good in Germany and in the US. Markets naturally rallied in Europe and as I write this note S&P is also up 3 points. However, none of the assets hit their trend change levels. So we have Nifty, Nikkei, HSI, HSCEI, KM1 and Euro Stoxx continuing to be SELLs. Even S&P became a SELL day before yesterday. Crude, Copper and Silver remain sells and Gold remains a BUY. Currencies continue to depreciate vs the USD (despite a fall in the Dollar yesterday). Finally, I remain short on the Nifty. Will cut my short positions and go long only above 5624.

Now for my topic of the note. A Reason for Trend Following. But before that I want to talk about the BIG SHORT-Michael Lewis' book. Interesting read you will agree. Interesting people too- all of them who are featured there. Two of them specially captured my imagination. Dr Michael Burry- the Asperger Syndrome afflicted medical practioner who came from Deep Value investing to buying CDS and Steve Eisman the Equity fundmanager with a dark view of the world who moved from equity investing to buying CDSs. What was interesting was the amount of hardwork and pain both endured before the bets paid off. Dr Burry apparently spent months pouring over CDO propectus. He bought the CDSs and then had to wait for 2yrs enduring large premium losses before seeing a single $ out of his investment. He also had to endure court cases from his investors with all the stress that is involved. Just imagine the amount of courage and strength of conviction required to take such large bets against the conventional wisdom.

This made me wonder whether I have it in me to do at least some of the things that these special people did. Did I have any of their traits? I checked -

Ability to work hard-- NO

Work long hours--Yes only if it involves being a film critic and having late dinners with beautiful actors .

Go against the crowd--Never done that

Be unconventional--How can you call a person who decided to be an engineer unconventional? Be unique--The word does not exist in my dictionary.

High level of intelligence--Would have gone to an IIT if I had any, wouldn't I?

Then why is it that I was even remotely successful in my chosen career of equity trading. I realised that I was lucky to have stumbled upon the one job that I was eminently suited to do. My charachter traits and Trend Following are in perfect sync. Trend Following always is with the crowd and hence there is no unconventional thinking or going against the crowd and consequently none of the resultant stress. Trend Following is inherently a very simple activity and therefore no high level of intellectual ability is required. It is perfectly suited for my laziness since I take all of 15 minutes to decide my trades for the day-if any. I then relay the trade to my colleague-(Notice I do not even punch in my trades myself!). I then get around to watching TV (Notice I did not say Business TV) I watch mostly cricket (watching movies in the office might just be frowned upon by others).

And somehow, just like that, at the end of doing this for a full year I have money in my prop account. There must be somebody up there looking after me! If all these are not Reasons for Trend Following then I do not know what else is!