The reason why I use trend-following as core strategy is simple. I believe that prices and trends tell me something about the macro economy in a way that looking at fundamental data about the economy do not. I review fundamentals, but there is a lot of noise in this data. There is noise in prices, but prices are primal to determining return. There is no ambiguity about what the data are saying when I am long a market and prices are trending lower. This is price efficiency in a very real sense. The trend is efficiently telling me that I am wrong.
I read the newspapers and research but there often is no clear consensus on what the data are saying and how it should be interpreted. I listen to central bankers and cannot say there is a clear message that can always determine the direction in price. I hear the stories about a market, say oil, and cannot determine whether the price decline is driven by declining demand or increasing supply. It is hard to weight these alternatives. Knowing and understanding market behavior is critical, but money management is often about engineering and getting the performance problem right.
I do currently know that the consensus of buying power is for higher equity prices. I look at the trend. I do know that oil prices are out of equilibrium because prices are trending lower. Price trends have lower ambiguity than data because data are one step removed from return generation. Fundamentals and risk factors change and may tell me something about what may happen in the future, but if I follow a base case that trends will continue, I will likely have a performance tailwind to help.
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