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Investing with the Trend: A Rules-based Approach to Money Management

Book Description

Investing with the Trend provides an abundance of evidence for adapting a rules-based approach to investing by offering something most avoid, and that is to answer the "why" one would do it this way. It explains the need to try to participate in the good markets and avoid the bad markets, with cash being considered an asset class. The book is in three primary sections and tries to leave no stone unturned in offering almost 40 years of experience in the markets.

Part I - The focus is on much of the misinformation in modern finance, the inappropriate use of Gaussian statistics, the faulty assumptions with Modern Portfolio Theory, and a host of other examples. The author attempts to explain each and offer justification for his often strong opinions.

Part II - After a lead chapter on the merits of technical analysis, the author offers detailed research into trend analysis, showing how to identify if a market is trending or not and how to measure it. Further research involves the concept of Drawdown, which the author adamantly states is a better measure of investor risk than the oft used and terribly wrong use of volatility as determined by standard deviation.

Part III - This is where he puts it all together and shows the reader all of the steps and details on how to create a rules-based trend following investment strategy. A solid disciplined strategy consists of three parts, a measure of what the market is actually doing, a set of rules and guidelines to tell you how to invest based upon that measurement, and the discipline to follow the strategy

Table of Contents

  1. Foreword
  2. Preface
  3. Acknowledgments
    1. Chapter 1: Introduction
      1. Believable Misinformation
      2. Indicators and Terminology You Should Be Familiar with
      3. Living in the Noise
      4. Data
  4. Part I: Market Fiction, Flaws, and Facts
    1. Chapter 2: Fictions Told to Investors
      1. Believable Misinformation in Investing
      2. The Void of Accountability
      3. Hiding behind Statistics
      4. You Must Remain Invested or You Will Miss the 10 Best Days of the Year
      5. Diversification Will Protect You?
      6. Dollar Cost Averaging
      7. Compounding Is the Eighth Wonder of the World
      8. Relative Performance
    2. Chapter 3: Flaws in Modern Financial Theory
      1. What Modern Portfolio Theory Forgot or Ignored
      2. Modern Portfolio Theory and the Bell Curve
      3. Standard Deviation (Sigma) and Its Shortcomings
      4. Improper Process
      5. High Sigma Days We All Remember
      6. Rolling Returns and Gaussian Statistics
      7. Risk and Uncertainty
      8. Back to the Original Question: Is Volatility Risk?
      9. Is Linear Analysis Good Enough?
      10. Linear Regression Must Have Correlation
      11. The 60/40 Myth Exposed
      12. Discounted Cash Flow Model
    3. Chapter 4: Misuse of Statistics and Other Controversial Practices
      1. The Deception of Average
      2. One If by Land, Two If by Sea
      3. Everything on Four Legs Is a Pig
    4. Chapter 5: The Illusion of Forecasting
      1. The Reign of Error
      2. An Investment Professional’s Dilemma
      3. Gurus/Experts
      4. Masking an Intellectual Void
      5. Earnings Season
      6. Are Financial Advisors Worth 1 Percent of AUM (Assets under Management)?
      7. Economists Are Good at Predicting the Market
      8. News Is Noise
    5. Chapter 6: The Enemy in the Mirror
      1. Real Time versus History
      2. Behavioral Investing
      3. Behavioral Biases
      4. Bias Tracks for Investors
      5. Investor Emotions
      6. Investors as a Whole Do Poorly
    6. Chapter 7: Market Facts: Bull and Bear Markets
      1. Calendar versus Market Math
      2. Stock Exchange Holidays
      3. Understanding the Past
      4. Bull Markets
      5. Bear Markets
      6. Just How Bad Can a Bear Market Be?
      7. Bear Markets and Withdrawals
      8. Market Volatility
      9. Highly Volatile Periods
      10. Dispersion of Prices
      11. Secular Markets
      12. Secular Bull Markets
      13. Secular Bear Markets
    7. Chapter 8: Market Facts: Valuations, Returns, and Distributions
      1. Market Valuations
      2. Market Sectors
      3. Sector Rotation in 3-D
      4. Asset Classes
      5. The Lost Decade
      6. Market Returns
      7. Distribution of Returns
  5. Part II: Market Research
    1. Chapter 9: Why Technical Analysis?
      1. What Is Technical Analysis?
      2. I Use Technical Analysis Because.
      3. The Challenge of Technical Analysis
      4. Technical Indicators
      5. Some Things That Bother Me
    2. Chapter 10: Market Trend Analysis
      1. Why Markets Trend
      2. Supply and Demand
      3. What Do You Know about This Chart?
      4. Trend versus Mean Reversion
      5. Trend Analysis
      6. Indices Analysis Summary
      7. Trend Analysis on the S&P GICS Data
      8. Trend Analysis in Secular Bear Markets
    3. Chapter 11: Drawdown Analysis
      1. What Is Drawdown?
      2. Drawdown Terminology
      3. The Mathematics of Drawdown and Equivalent Return
      4. Cumulative Drawdown
      5. S&P 500 Drawdown Analysis
      6. S&P Total Return Analysis
      7. Dow Jones Industrial Average Drawdown Analysis
      8. Dow Industrials Total Return Analysis
      9. Gold Drawdown
      10. Japan’s Nikkei 225 Drawdown
      11. Copper Drawdown
      12. Drawdown Intensity Evaluator (DIE)
  6. Part III: Rules-Based Money Management
    1. Chapter 12: Popular Indicators and Their Uses
      1. Moving Averages and Smoothing
      2. Stochastics
      3. RSI (Relative Strength Index)
      4. Moving Average Convergence Divergence (MACD)
      5. A Word of Caution
      6. The Binary Indicator
      7. How Compound Measures Work
    2. Chapter 13: Measuring the Market
      1. Weight of the Evidence Measures
      2. A Note on Optimization
      3. Indicator Evaluation Periods
      4. Price-Based Indicators
      5. Breadth-Based Indicators
      6. Slope of Moving Average
      7. World Market Climate
      8. Cyclical Market Measure
      9. Relative Strength
      10. Dominant Index
      11. Trend Capturing Measure
      12. LTM—Long-Term Measure
      13. Bull Market Confirmation Measure
      14. Initial Trend Measures (ITM)
      15. Trend Gauge
    3. Chapter 14: Security Ranking, Selection, Rules, and Guidelines
      1. Ranking Measures
      2. Pullback Rally Analysis
      3. Pair Analysis
      4. Ranking and Selection
      5. Rules and Guidelines
      6. Asset Commitment Tables
    4. Chapter 15: Putting It All Together: The “Dancing with the Trend” Model
      1. Weight of the Evidence
      2. Investing with the Weight of the Evidence
      3. Ranking and Selection
      4. Discipline
      5. Sell Criteria
      6. Tweaking the Model
      7. Model in Action
      8. Risk Statistics, Ratios, Stops, Whipsaws, and Miscellaneous
      9. Mutual Fund Expenses
      10. Turnover and Taxes
      11. Watching a Tactical Strategy over the Short Term
      12. Benchmarking
      13. Full Cycle Analysis
      14. Actual Results from a Rules-Based Trend-Following Strategy—Dancing with the Trend
      15. Mean Shifting
    5. Chapter 16: Putting Trend-Following to Work
    6. Chapter 17: Conclusions
      1. Financial Advice
      2. A Compilation of Rules and Guidelines for Investors
      3. Secular Markets and the Efficiency Ratio
      4. The Rules-Based Trend-Following Model in October 1987
      5. The Flash Crash of May 6, 2010
      6. Final Observations
  7. Appendix A: Passive versus Active Management
  8. Appendix B: Trend Analysis Tables
  9. Appendix C: Market Breadth
  10. Appendix D: Recommended Reading
  11. Bibliography
  12. About the Author
  13. About the Online Resources
  14. Index
  15. End User License Agreement