2011 Year-End Report

This made me think about the unkind year 2011 was for investors, especially for us trend followers. Incidentally, over many market cycles, there have been periods where trend following and price/volume action were declared dead. This leads me back to the above movie reference. Investors feel that with all of the government intervention, bailout packages for banks and now countries, quantitative easing, high frequency trading computers… I can go on and on… that trend following, and those experienced in it, can be thrown out the window.

At the very least, these same investors feel trend following strategists should be placed on the sidelines to think about their respective game plans and what changes need to be made. However, the markets are very different in that they are driven by HUMAN EMOTIONS. Sure, rules and policies change and play a role, but the markets move based on human emotion and you need to understand that from an investment psychology viewpoint to be able to outperform in the long run. What makes trend following investors successful over the long-term is that they continue to apply their systems through thick and thin, withstanding negative periods of continued losses, knowing the markets will always trend again. Experience to realize that the behaviour of market participants never changes is PARAMOUNT!

Unfortunately, human nature takes over and the markets vices of fear and greed doom investors. In times of negative results even the best trend followers and market professionals that have a solid methodology and strategy get frustrated and overwhelmed and decide to make changes in an effort to generate positive results. Sometimes this may work in the short-term, but the reality (and there’s genuine proof in the numbers) is that if they just endured a bit longer the trend would have emerged and the model would have profited and recouped any losses they previously surrendered.

The same can be said when the markets have massive upside runs. That climatic exuberance drives investors, like herds of cattle, into the market in an all systems a go fashion. This leads to bubbles, which leads to steep losses; some investors may never recover from these periods. Being able to harness the experience of trend following with a systematic approach to the markets will lead to the strongest performance over time, due to the limiting of every investor’s pitfall – emotional based decisions.

IMPORTANT NOTE - In this challenging, trendless environment that has gone on for about a year; many strategies have been knocked around. Michael Covel wrote "Trend Following," which contains interviews with successful long-time trend followers such as John Henry, Bill Dunn, and Ed Seykota. As Covel outlines in the book, these guys are no stranger to negative periods over their 25+ year careers. Yes, even these trend followers have had a difficult year in 2011. The bottom line is that they have always more than recovered, thus maintaining the integrity of their outstanding long-term track record of outperforming their peers and the markets.

So far, 2012 is exuding an uptrend in the markets. Just like all other times in history, when trend following is declared dead or at the very least in trouble, when investors and professionals alike are spooked out of the market and shy to get back in, and when media reports are bleak at best (this is all in a very negative environment of course); we see the trend shift and the markets move higher. Right now there is a change happening, as leading stocks are acting better (only slightly at this time) and indexes are following suit. Institutional volume on the buy side is returning and that higher volume is the horsepower that leads to a further and faster continuation of the trend. The current uptrend is weak, so we are looking for insight by way of leading stocks and institutional buying to provide further confirmation.

Here's to a 2012 that potentially marks a return to trending markets… oh, and preferably to the upside. As always, we continue to thank you for entrusting us with your wealth and your confidence.

Sincerely,

YOUR TEAM!

READ THE FULL NEWSLETTER

• Investment Performance
• Our Discretionary Positions and Performance
• Monthly Performance Vs. the Indexes

See the full PDF version of this month's commentary as well as the archive in our Market Info Section