Courtesy of Joshua Brown, The Reformed Broker
There’s more than one way to skin a cat. The stuff that Paul Tudor Jones has made his billions based on does not appear in any traditional investing text book. Ben Graham would read his stuff and roll over in his grave.
For example, the idea of being on the right side of a predominant trend – bring a concept like this into the Church of Value Investing and you might see the holy water begin to boil. And yet, it can work if applied correctly.
Here’s PTJ on his own chosen trend indicator, the 200-day moving average, via Tren Griffin at 25iq:
One principle for sure would be: get out of anything that falls below the 200-day moving average.”
I teach an undergrad class at the University of Virginia, and I tell my students, “I’m going to save you from going to business school. Here, you’re getting a $100k class, and I’m going to give it to you in two thoughts, okay? You don’t need to go to business school; you’ve only got to remember two things.
The first is, you always want to be with whatever the predominant trend is. My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: “How do I keep from losing everything?” If you use the 200-day moving average rule, then you get out. You play defense, and you get out.
Josh here – We run a tactical model in-house that is designed to respect trend and omits the kind of touchy-feely pseudo-intellectualism that often accompanies market or economic prognostication.
Part of this is because there is no Why. Or, more reasonably, if there is a Why, it is only very clear to the majority of people after the fact. Trends are confirmed or violated as a result of the process by which markets attempt to figure out the Why, in real-time. When the the crowd feels confident that it’s got the What and Why figured out, a trend solidifies. When this confidence is shaken – in either direction – a trend becomes invalidated and a new trend is born. Even if that new trend is trendlessness – what we’re going through so far in 2015, for example.
The kind of trading that Tudor does would be wholly inappropriate for wealth management clients, but its remarkable how universal this idea of respecting trend can be – and how versatile when applied to lower-turnover strategies.
Incidentally, after 8 months of consolidation, the US stock market’s primary trend is now flat. This can be a confusing time for people without a plan, people who are looking to headlines for guidance or who may be hoping to make it up as they go along. Doing so with one’s own money is one thing, but with other people’s money?
Source:
A Dozen Things I’ve Learned from Paul Tudor Jones About Investing and Trading (25iq)
See also, Joshua's previous article:
Quote of the Day: There is No Why
Some of the most brilliant people I’ve met are terrible investors because they’re constantly seeking out ways to explain why things happen the way they do in the markets. Even when you’re right about the way something transpires in the macro picture, you may come to the wrong conclusion about how the markets will react to that event.
When you’re constantly looking for a catalyst to explain every single move in the markets you start to see signals and correlations that just don’t exist. Most of the time we won’t know exactly why the markets moved a certain way until much later. Sometimes even with the benefit of perfect hindsight, investors still can’t agree on the specifics of the cause and effect. But to some the ‘why’ in the markets will always seem easy after the fact, so they keep searching for the answers.
Even if you know the Why, you still don’t know what will happen. And if you manage to somehow know the What, well you definitely can’t know the When. The good news is, knowing these things aren’t crucial for good investing. Conversely, searching for them in vain, with money on the line, can be highly detrimental.
[Picture via Geralt at Pixabay.]
