Whether someone is a fundamental trader/manager or not is irrelevant. Trends need to occur in order for a manager to make money. Their orientation might be from a value or a growth standpoint, but that hardly matters. The terms “value” or “growth” as adjectives are like saying I’ve got brown hair and hazel eyes. They help you group things like people and stocks.
Trend Following as an ethos is in our blood. It plays are major role psychologically in how we determine many of our choices – our tastes and preferences. Didn’t you want to have the cool jeans in high school? Didn’t you do everything you could to not have “skippy sneakers” or a bowl haircut?
There seems to be some dissension in the investment world because, at it’s heart, Trend Following is so easy to employ and understand, a sixth grader can get it. You don’t need a Ph.D, MBA, CFA, or CMT to to understand it.
In my experience as a teacher, professionals who are very invested in their intelligence (self-esteem wise) tend to be the most rebellious. Trend Following, they come to learn, completely annuls their need (and ability) to understand very complicated economic issues and the emotional need to make sense of why stocks go up or down. That doesn’t feel good. I can identify with that feeling. I like to be appreciated.
If a trader/manager holds a long position long enough, their “value” or “growth” story will likely come into favor. However, it will be Trend Following that moves a security up or down, and the fundamental story will come “true” – at least that’s what the stock pickers will say. The trend will be underway – new money or new demand can affect the price in an upward manner.
A good friend of mine, when asked about why a stock went up or down, would say, “Don’t know. Don’t care. My stops are in to manage my risk.” And that was his answer. Whatever the actual fundamental was at play didn’t matter. People vote their pocketbooks on election day, and in their trades.
Admittedly, it feels good to figure things out. For that I like crossword puzzles or trying to figure out a new guitar solo that I’ve heard. It’s also entertaining and fun to talk about stocks and commodities and what going on in the world. But a Trend Follower, albeit with many strong fundamental opinions potentially, only needs a buy or sell stop order to be triggered to enter or exit a trade. It is at that point (the price) where they become bullish or bearish.
Trend Followers can miss some of the initial bursts of a move, but they tend to be emotionally reconciled with that being a possibility…as long as they can catch the meat of the move.
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