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

Foreword

The Greek philosopher Aristotle wrote, “We are what we repeatedly do. Excellence, then, is not an act but a habit.”

The same is true of investment. Good investing is not an “event” like finding the next growth company or catching the next market turn. Rather, good investing is a disciplined process that converts research and training into a well-tested methodology, and then makes a habit of following that approach day after day.

Because profits are enjoyable, investors often believe that they are “paid” when their good ideas are comfortably working out, but that is an illusion. If you carefully study the returns of successful investors, you’ll find that their profits are more often a sort of delayed payment for actions they took much earlier: maintaining their investment discipline even when it wasn’t working in the short run; cutting losses when the evidence changed; and establishing investment positions when it was often uncomfortable to do so.

The financial markets may be efficient, but they are efficient in an interesting way. If all investors were identical and shared the same information, objectives, and temperaments, the markets might be efficient in the “academic” sense, and it would be impossible to outperform a buy-and-hold approach. But in reality, markets are full of greed, fear, uncertainty, and constant second-guessing. In that world, investors are scarcely willing to follow a well-grounded, thoroughly tested discipline once it has become uncomfortable. ...