S1 P3: Why Trend Following is the Greatest

S1 P3: Why Trend Following is the Greatest

December 6, 2017

[This is post #3 of Season 1. You can read last week’s post here.]

What are the qualifications for being “the greatest”?

Is something the greatest because it’s revolutionary? Is it the greatest because it’s first? Or maybe because it had a moment of spectacular performance?

There are many arguments for calling something the greatest, but ultimately it comes down to this: the good times were very good and they lasted a long, long time.

It’s one thing to have a shining moment. But one moment doesn’t make someone the greatest. Would anyone argue that the author of a one-hit wonder is the best writer of all time? Of course not.

It’s another thing to have a long career. Fabrice Santoro is an outstanding tennis player with a very long career. His incredible shot-making earned him the nickname “The Magician,” and he has the second most appearances in Grand Slam events all time.

But that long, successful career doesn’t get Santoro into the discussion for greatest ever. Case in point: you’ve never heard of him.

When you combine those two things, though, you can figure out who’s best.

Tom Brady (love him or hate him) has had a long career of sustained quarterback excellence as well as many individual years of elite performance.

Roger Federer (like him or love him) has had the best year of all time and an amazing career that’s still going on.

When your peak is better than everyone else in a snapshot and you’re also better than everyone else for a long time, it becomes clear that you’re the best ever.

It’s really not debatable.

And that’s why trend following is so great.

To start, the strategy made $200 million for famous trend-follower Richard Dennis in the 1980s (that’s $458 million in today’s money). That’s astounding.

And when Dennis taught this same strategy to his students in the famous Turtle experiment, the Turtles reportedly made $175 million in five years.

That’s incredible peak performance.

But the trading world is littered with strategies that worked once and never worked again. For example, the strategy used in the book/movie The Big Short will never repeat itself.

So how has trend following done since the ’80s?

Looking at the Turtles who have gone on to manage their own funds, they have gotten a yearly return of 50% or better 6 times since 1990. And that’s using low leverage because their clients are risk averse.

If we add in famous trend follower Bill Dunn, we get 6 more years of 50%+ performance.

That’s peak performance at the highest level over many decades.

The magic combination.

But that’s not all.

As I outlined in my podcast, there is research that shows that trend following has been amazing for centuries. Centuries!

For hundreds of years, research shows that trend following has outperformed buy and hold strategies (also a contender for greatest of all time) by about a 3 to 1 margin.

Trend following can have incredible short term performance and it’s also been around forever.

Check, check.

That’s why it’s the greatest strategy of all time.

Next week, we’ll dig in to what trend following means and what type of trend following methods in particular create this outlandish performance.