What if Buffett Was a Forex Trend Follower?

Aug. 25, 2021

Buy when others are fearful.

That’s one of Warren Buffett’s favorite mantras and it’s been regurgitated by value investors and “Retire Early” experts for years.

And it’s great advice.

Kind of.

The powerful idea behind that catch phrase is based on seizing the opportunity to buy “valuable” assets at rock-bottom prices.

“Valuable” is the key word, though. Valuable has to actually be valuable. It can’t be a guess. It has to be a 99.9% certainty.

For example, if you see a beach house for sale that has gone down 40% in a recession, then buy it as soon as you can. For sure, a beach house is going to stay valuable. The only reason it’s gone down is because everyone is fearful.

It doesn’t work all the time, however.

Buying Enron when others were fearful was a complete disaster:

Remember, Enron was one of the top ten biggest, most successful companies in America at the time. It was “valuable” — until it went to zero. The play was to sell when others are fearful.

How about Bear Stearns? The venerable firm had been around forever. It was surely valuable. What if we bought more when others were fearful?

We’d be broke.

So, the value of something is absolutely critical. If it won’t be valuable forever, then there no way in [redacted] we should be buying when others are fearful.

How do we know it’s valuable then?

One way is to spend 14,000 hours reading financial reports and then making your best guess. That guess should probably entail buying something that’s been around forever. Buying Coke when others are fearful, for example, is probably a smart play. Coke is not going anywhere. You’d be getting value at a temporarily depressed price.

We can also bet on a concept, especially if that concept has been around for centuries.

Hmm, let me see. What’s a concept that has produced profit forever and will produce profit forever?

How about trend following?

At what point will trends cease to exist?

The answer, of course, is never. Trends will always be around.

So what if you’re trading an instrument that’s always had huge trends since the day it started trading…and it stops trending for a while?

Are the trends gone forever?

Or should we buy more of our strategy when others have gotten scared to trade it?

Isn’t buying when others are fearful about trends the highest-possible percentage play we can make as traders?

Betting on trends coming back is clearly as smart as buying Bank of America on a severe dip.

Some would say betting on trends is way smarter because trends are more eternal than someone’s idea of “valuable”.

So, if that’s true, what would that look like? How would Buffett do it?

We’ll take a look in the next Newsletter.

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