Debunking Trading Myths

Debunking Trading Myths

Let’s debunk some trading myths.

“Trends don’t last forever. If a stock becomes too popular it will reverse, leading to a sharp decline, from which you can lose a lot of money.”

Response: What does that have to do with trend following? A fundamental investor or a value investor could be on the same stock.

There was a stock a few years ago that was being touted by a well known value investor here in Australia, and it went up and up and up, and I think when it was about ten dollars, the valuation was fourteen dollars and everyone was going wild for this stock. On the first dip, everyone piled in because they got their opportunity to buy at a discounted price apparently. It valued at fourteen and it dipped to eight, so let’s get on board. Well, the stock went down to about two dollars, and it never recovered. A lot of people got burned. You can value a stock at whatever you like but the only reality is market price.

Remember that a trend follower, if the price does reverse, will get out. They won’t ride the price down.

“Trend following is time intensive”.

Not true. I say to clients that it will take them less than ten minutes a day to trade the Growth Portfolio. The real time is probably three minutes or four minutes a day. In this day and age, with computing power that we have and off the shelf software packages, I put my account balance into my software, I push the button, it generates the buy and sell signals as well as the position sizing. I can even connect that software to my broker so it places the order –I do that, and I’m done. Don’t get me wrong, it’s taken 25 years to get to this point, but it takes less than five minutes a day. It is not time intensive.

Time intensive is reading annual reports, visiting company headquarters, speaking to CFO’s, CEO’s and staff, and that kind of stuff –that’s time intensive. That’s what fundamental and value investors do. That’s not what we do. We’re quant based, we just push the button and it generates the buy and sell signals, and we move on.