Trend Following, 5th Edition

Section IIITrend Following
Research

Academicians settled on volatility as the proxy for risk as a 
matter of convenience. They needed a number for their calculations that was objective and could be ascertained historically and extrapolated into the future. Volatility fits the bill, and most of the other types of risk do not. The problem with all of this, however, is that I just don’t think volatility is the risk most investors care about. Rather than volatility, I think that people decline to make investments primarily because they’re worried about a loss of capital or an unacceptably low return. To me, “I need more upside potential because I’m afraid I could lose money” makes an awful lot more sense than “I need more upside potential because I’m afraid the price may fluctuate.” No, I’m sure “risk” is—first and foremost—the likelihood of losing money.

—Howard Marks¹

If you talk to these extraordinary people, you find that they all understand this at one level or another. They may be unfamiliar with the concept of cognitive adaptability, but they seldom buy into the idea that they have reached the peak of their fields because they were the lucky winners of some genetic lottery. They know what is required to develop the extraordinary skills that they possess because they have experienced it firsthand.

Anders Ericsson²

I never know where connective tissue to make a case for trend following will be found. It’s always serendipity. For example, Bob Seawright was a guest on my ...