Trend Following Keeps You Out Of The Waterfall

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In their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Trend Following Keeps You Out Of The Waterfall. Here’s an excerpt from the episode:

Tobias: There’s a good response. “Every day I get a little more weighted toward trend following. I don’t want to be long equity and I don’t want to think about all this doom and gloom. Just ride the trend wherever it goes.”

Bill: Not a bad idea.

Tobias: There’s a lot too it statistically– [crosstalk]

Bill: I’d rather a CTA. [crosstalk] have a CTA. They’d be well at times.

Tobias: You could do it with anything. Using any of those like the 2000 data study and out of different asset classes seem to work pretty well over a long period of time. I don’t think it always does. It doesn’t work well in periods of time, ironically, what we’ve just gone through, because there’s a lot of whipsaws to get people in and out.

Bill: Yeah. I just think you got to ask yourself, “If I get out of the strategy, I’m running and I get into some trend following and I get whipsawed, am I going to be okay with that?” Because that I think the way that those return streams are characterized is a lot of small losses followed by a big run. Is that fair?

Tobias: Yeah, I think that’s what they’re aiming for. You could look at Japan as an example. If you implemented some trend following on the Nikkei, you got pulled out– You would have stayed in the market all the way to the very top, even though you knew it was hundred times CAPE, you knew it was too expensive and you’re desperately trying to get out. You’re just waiting for it to cross over.

Jake: You got out pretty reasonably good timing then for that?

Tobias: You did. You did. Because then it proceeded down so far and then the– [crosstalk]

Jake: Still going. [laughs]

Tobias: Well, it proceeded down so far. That was ’92 and here we are. It didn’t cross over or I’m not sure if it even has. It was below for so long and it got you back in at the bottom. You’ve not performed as well since the bottom in Japan, but relative to how much loss you didn’t take from the top, you’re still ahead. I think that’s the thesis for a lot of the trend following. It keeps you out of the waterfall. I don’t think– [crosstalk]

Bill: Yeah. You got to think about the times that you want to do it right. Yeah, that’s right, because you can get gapped and screwed on stuff like that.

Tobias: That moves around too much.

Bill: Yeah, on an index. If I did something like that, I’d probably do a 50-day, 200-day because you don’t want to do 30 and 10. Then you’re just trading all the time.

Tobias: All of them get whipsawed. All of them get in and out at the wrong time. Corey Hoffstein and the ReSolve guys– Sorry, I’m just blanking a little bit on what they currently call themselves [unintelligible 00:52:33]. I’m sorry, I don’t know what they’re currently trading under. But they don’t look at– [crosstalk]

Jake: Adam Butler.

Tobias: Adam Butler. Yeah, Adam Butler, it’s true. They look at the agnostics. They just say, “Use all of them. Put a small amount of capital in each and pull it out.” Because they’re all going to be– [crosstalk]

Bill: Oh, that makes some sense.

Tobias: So, you’re never in or out. It’s not binary.

Bill: Yeah. That way if you’re high off of crossover or something, maybe some of the shorter ones get you in and– Yeah, huh, okay. That sounds logical.

Tobias: No, It’s just now it’s getting more complex, because you’ve got however many buckets you decide, however many moving averages you decide, that’s one.

Bill: Yeah. How many markets are you going to do it on?

Tobias: Equity strategy has 10 buckets for trading SPY.

Jake: Yeah. One underlying.

Tobias: Now, you’ve got thousands of portfolios tracking just– Probably, it works. You can do it with the computer. It’s just hard to build.

Bill: Yeah, you’d want it on commodities too, I would think, if you really want to be diversified. You don’t just want to have it on one market.

Tobias: Right.

Bill: Yeah.

Tobias: So, I hope that you’re in something all the time.

Bill: Yeah. So, good luck with that idea.

Tobias: [laughs] Yes, you can do it.

Bill: I actually don’t think it’s a bad idea.

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