Trading with the Trend

2008

What does trading with the trend mean? A very simple reason why ‘buy and hold’ offers average returns is because you wear all market conditions. You are fully involved in the good times, which is what you want to be, but you’re also involved in bad times, like the GFC. Now, I haven’t met too many people that whine about the good times. You continuously hear people whine about the bad times when the market is trending down. If we think about it fundamentally to get optimum results, you want to be fully invested when the market is good –that is going up. You don’t want to be exposed when the market is going down like during the GFC. The error so many investors made back in 2008 was that they stayed invested all the way through 2008, a very bad period.

2009

Then, come 2009, they were so shell shocked and paranoid about the world finishing, that they couldn’t stay invested when the market rebounded. Whereas, we did the exact opposite. We went to cash –we were fully in cash by about June 2008. We sat that way till about February, March 2009, and we hopped on board and had a brilliant year in 2009. Not because we picked it. We had no idea what was going to happen and we had no idea that it was going to be such a sustained downtrend through the GFC, but the price action led the way.

Our Philosophy

So our philosophy is pretty simple. To maximise return, you don’t want to be involved during the bad times, but you want to be involved during the good times. Trend following allows you to do that. We don’t follow trends on the downside, so we’re long only. The reason why we don’t follow trends on the downside is twofold. First of all, if you remove the sustained move in the GFC, you will see historically that long term trends to the downside really haven’t been prevalent. So the market has this natural inclination to rise but generally downside momentum is very swift, very fast, and tends to bounce back very quickly. So it’s not perfect for trend following.

The other thing to consider as well is that during the GFC, short selling was banned across the board. What’s the point of relying on a strategy that you can’t use exactly when you need to use it? We only trade on the long side.