What is dangerous is for Americans not to be in the stock market. We’re going to reach the point where stocks are correctly priced and we think that’s 36,000
 . . . It’s not just a bubble. Far from it. The stock market is undervalued.

James Glassman 
Dow 36,000²

Another psychological aspect that drives me to use timing techniques on my portfolio is understanding myself well enough to know that I could never sit in a buy and hold strategy for two years during 1973 and 1974, watch my portfolio go down 48 percent and do nothing, hoping it would come back someday.

Tom Basso

Al Capone famously said: “It’s a racket. Those stock market guys are crooked.”

That’s dead on.

The crooked abound. Or, to be kind, I will call them ignorant. Or, to be nice, I will call them wrong. I often wonder if my great-great-uncle Frank Mast (Balys Mastauskas; my grandfather’s uncle) passed a little of that good-fight-attitude genetic material along. (Assistant State Attorney Mast is captured on the next page, face to face with famed crime boss 
Al Capone at a Chicago courthouse.)

The rackets found on Wall Street always overflow with Holy Grails—those predictions, secret formulas, and divine interpretations that promise otherworldly knowledge and riches. They are most often delivered in the investment world through a black box—a closed system where the inputs and outputs are known, but the internal analytical workings are left top secret, only for the high priests’ consumption.

Whenever we see evidence that our rules are even remotely correct, our sense of security is boosted. When we are faced with evidence contrary to our rules, we quickly rationalize it away.³

With the title alone [Dow 36,000] causing hysterics, placing this on your coffee table will elicit your guests to share their best Dot-com horror story. How they invested their $100,000 second mortgage in Cisco Systems at $80 after reading about it, waiting for it to become $500 (as predicted in this very book) only to see it dive to $17. Just the thought of this book gives me the chuckles.

Amazon Review of Dow 36,000⁴

Black box positioning goes far beyond markets. It is not surprising in a modern, interconnected age when you take a smart guy, rows of computers, proprietary formulas, and code only the one smart guy can see, and then add a string of successful forecasts, boom—you end up with a nerdy, made-for-social-media superstar who suddenly makes prediction cool for the proletariat.

Nate Silver is that it guy. Consider:

• He successfully called the outcomes in 49 of the 50 states in the 2008 U.S. presidential election.
• He successfully called the outcomes in 50 of the 50 states in the 2012 U.S. presidential election.

Thus, Silver became the go-to smart numbers guy overnight. He went from baseball stats expert to political stats expert. His mathematical model for elections beat political journalists and commentators at their own game—so goes his Moneyball-for-politics narrative. In short order his followers on Twitter surpassed 1 million, his book became a bestseller, and FiveThirtyEight.com became ubiquitous—even offering investing insights such as, “Worried about The Stock Market? Whatever You Do, Don’t Sell.”

Yet for anyone who followed the 2016 presidential race, Silver’s political predictions went bust. Over the course of 2016 Silver posted daily election odds that jumped around like a cat on fire—not exactly surprising if your new guru status forces you to offer forecasts every day of an election cycle for over a year.

History is not a good guide to the future.

Jerry Parker

He admitted in his laborious mea culpa, “How I Acted Like a Pundit and Screwed Up on Donald Trump” to not using his statistical models on Donald Trump’s candidacy. He instead used educated guesses, which blew his statistical-model-made-me-famous-you-can-now-trust-I-am-not-a-typical-pundit-with-built-in-biases storyline out of the water. Worse yet, the way Silver outlined his predictions, he could say he was right no matter what happened. For Silver’s followers, his 2016 hedged forecasts, his arguable mathturbation, doesn’t matter:

• “Look at Nate’s record. Trump was an outlier.”
• “There was not enough historical data.”
• “He gets most of them right.”
• “Nate’s winning percentage is so high.”

Those weak retorts illustrate the faulty foundation in Silver’s approach: He leaves out the surprises, the unusual, and unexpected. He has no way of predicting or accounting for those. On Trump’s win, Silver said as much, “It’s the most shocking political development of my lifetime.” But no one can predict outliers, so if someone like Silver pretends he can—watch out. Spyros Makridakis, in his famed 1979 paper “Accuracy of Forecasting: An Empirical Investigation,” showed simple beats complicated and moving averages beat tortuous econometric routines. Would moving averages also have predicted the two elections that made Silver a household name?

Only when the tide goes out do you discover who’s been swimming naked.

Warren Buffett

Nonetheless, Silver defenders come back to the 49 out of 50 and 50 out of 50 in 2008 and 2012—proof, they say as they ignore 2016. But in 2008 and 2012, what percentage of those were hard calls? For example, California is blue no matter what. So there is always a huge risk in relying on strategy that gets the easy calls right and punts on the hard ones.

These are not terribly new inconsistencies to ponder. The efficient market theory—the strategy that runs the world’s money—also has no solution for surprise (i.e., black swans). Silver illustrates the conundrum across a different discipline, but with the same pressing problem. In summer 2016, Nassim Taleb, father of the black swan, launched a detailed criticism of Silver into the public sphere: “@FiveThirtyEight is showing us a textbook case on how to be totally clueless about probability yet make a business in it.”

The intellectual cage match: Nassim Taleb versus Nate Silver.

Pick your side carefully, it just got real.

From error [loss] to error [loss], one discovers the entire truth [trend].

Sigmund Freud

Buy and Hope

After the Spring 2000 stock market bubble implosion and after the October 2008 crash, passive indexing or buy and hold as a sound investing strategy both should have been permanently labeled junk science. Yet that did not happen. Investors still fall into the lemmings line and obey mantras such as “buy and hold for the long-term,” “stay the course,” and “buy the dips.” These happy talk market prayers share the same problematic issue inherent in Nate Silver’s weakness: no accounting for surprise.

I bought SNAP even when I was pretty positive I would not make a profit in the short run, but just because I am a fan of the product.

Chris Roh 
25-year-old trading for 1 month 
New York Post 
March 13, 2017

Jerry Parker proffers the alternate case:

Trend following is similar to a democracy. Sometimes it doesn’t look so good, but it’s better than anything else out there. It’s a worse investment now, let’s say, than it was in the '70s or '80s. But so what? What other choice do we have? Are we going to buy market breaks? Are we going to rely on buy and hold? Buy and hope, that’s what I call it. Are we going to double up when we lose money? Are we going to do all these things that everyone else does? Eventually people will come to understand that trend following works in other markets, markets that produce trends.⁵

SNAP is tapping into the pride of ownership (for millennials) which we don’t see often in the stock market.

Dan Schatt, Stockpile
New York Post 
March 13, 2017

Consider the NASDAQ market crash of 1973–1974. The NASDAQ reached its high peak in December 1972. It then dropped by nearly 
60 percent, hitting rock bottom in September 1974. The NASDAQ did not break permanently free of the 1973–1974 bear market until April 1980. Buy and hold did nothing for investors from December 1972 through March 1980. Investors would have made more money during this period in a 3 percent savings account. History repeated itself with the 77 percent 
drop in the NASDAQ from 2000–2002.

Making matters worse, pure buy and hold strategy during an extended market drop makes recovery back to breakeven difficult if not impossible. Buy and hold investors have been led to slaughter by an industry with powerful conflicts of interest. They believe armed only with tremendous patience, they will make a good long-term return. These investors expect to make back most, if not all, of any loss. They believe the best place for long-term capital is the stock market—long only—and if they give it 5 or 10 or 20 years they will rock and roll. Investors need to understand they can go 5, 10, and 20 years and make no return at all and even lose money.⁶

You will run out of money before a guru runs out of indicators.

Neal T. Weintraub

To compound problems, buy and hold panders to market revenge. Investors want their money back. They think, “I lost my money in 
XYZ stock, and I’m going to make my money back in the same stock come hell or high water no matter what.” It’s now personal. They can’t fathom sunk costs or admit passive holding forever might have seriously unexamined fissures under the surface. They buy and hold no matter what happens, regardless of how many times they get kicked in the teeth. It’s a version of Stockholm syndrome with bad investing strategy as the captor.

Jonathan Hoenig sees where many fall down: “I am a trader because my interest isn’t in owning stocks per se, but in making money. And while I do trade in stocks (among other investments), I don’t have blind faith that stocks will necessarily be higher by the time I’m ready to retire. If history has demonstrated anything, it’s that we can’t simply put our portfolios on autopilot and expect things to turn out for the best. You can’t be a trader when you’re right and an investor when you’re wrong. That’s how you lose.”

If you use a system, you automatically have a seat belt on for protection. That keeps you from making portfolio buy sell decisions the next time CNN’s Don Lemon postulates that a missing Malaysian Boeing 777 may have entered a black hole.

There is little point in exploring the Elliott Wave Theory because it is not a theory at all, but rather the banal observation that a price chart comprises a series of peaks and troughs. Depending on the time scale you use, there can be as many peaks and troughs as you care to imagine.⁷

Warren Buffett

Warren Buffett is positioned as the single biggest proponent of value investing and buy and holding—accurate or not. Like Sir Galahad, 
he has achieved his real Holy Grail, and I am the first to salute his immense success. However, can you achieve what he has via insurance companies and arcane tax advantages? No. He is the classic exception to the rule. There is only one Buffett. Unfortunately, many mistakenly assume Buffett is the simple buy and hold investor: “Honey, Warren made all of his money holding Coke for 40 years!” Uh, his $60+ billion net worth is far more complex than that.

For example, Buffett was once against financial derivatives: “‘Things are less lucrative in the stock market. We have more money than ideas,’ he said, adding that 6 percent to 7 percent was a fair rate of return in the current environment. The company has more than $37 billion in cash to invest. One place the money certainly won’t go is derivatives. ‘There’s no place with as much potential for phony numbers as derivatives.’ Buffett’s billionaire vice chairman, Charlie Munger, couldn’t resist chiming in. ‘To say that derivative accounting is a sewer is an insult to sewage.’”⁸

Warren Buffett is not warning investors about potential risk when he recommends stock investing. I am concerned that people will just blindly follow that advice not realizing the risk until it is too late & then they sell at the bottom.

Julian Rubinstein 
ValueWalk 
March 5, 2017

Sun Microsystems probably has the best near-term outlook of any company I know.

James Cramer
September 7, 2000⁹

Sixteen days later, Buffett changed tune: “Berkshire Hathaway Inc. announced today that it has sold $400 million of a new type of security, named ‘SQUARZ,’ in a private placement to qualified institutional investors . . . ‘Despite the lack of precedent, a negative coupon security seemed possible in the present interest rate environment. I asked Goldman Sachs to create such an instrument and they responded promptly with the innovative security being announced today,’ said Warren
Buffett.”¹⁰

If Buffett was forthright at first, what made him change two weeks later and create an instrument so complicated and secretive not even his press release could explain it? Even more confusing is that Buffett contradicted himself a year later, lambasting with vigor his financial Frankenstein creation: “Derivatives are financial weapons of mass destruction, carrying dangers, while now latent, are potentially lethal . . . We view them as time bombs, both for the parties that deal in them and the economic system.”¹¹

In 2008 Buffett was again trading derivatives, and helping to promote government bailouts. Still today, in 2017, his firm maintains massive derivative positions. The Buffett legend of value investing or buy and hold as his strategy to make billions has permeated the public consciousness with books by the literal dozens. And when he launches a new derivatives strategy against his legend, no one talks. Long-time fund manager Michael Steinhardt was the exception: “[Buffett] is the greatest PR person of recent times. And he has managed to achieve a snow job that has conned virtually everyone in the press to my knowledge . . . and it is remarkable that he continues to do it.”¹²

Warren Buffett is an investing icon and deserves high praise, but unlike trend following, where there are examples of multiple trend following winners, there is only one Warren Buffett. It makes you pause. Is he the sole survivor?

A few years back, I sat down with a trend trader. He has a 30-year-plus track record making on average 20 percent a year. The topic of Warren Buffett came up. While he was very respectful of Buffett, he was bewildered how some could call his trend following trading luck, but those same people could see Buffett as skilled. This trader pointed out the thousands of trades he has made. He noted his trend-trading peers also produced thousands of trades over decades. He saw it more logical to make an argument for Buffett’s success much more connected to luck given the relatively few leveraged trades that helped make him so astronomically wealthy: Coke, Gillette, American Express, Goldman Sachs, and Wells Fargo.

Imagine you are at a car auction hoping to buy a beautiful red '66 Corvette. Imagine the car that is being auctioned before the Corvette is a 1955 Mercedes Gull Wing Coupe that sells for $750,000. The Corvette is up next and the Blue Book price is $35,000. What would you bid? Now imagine the car before yours was a “kit” car replica of the Gull Wing Mercedes that sold for $75,000. What would you pay now? Research has shown that incidental price data can affect what you are willing to pay. We have a tendency to pay more if the preceding price is considerably higher.

Jon C. Sundt

Losers Average Losers

There’s a famous late 1980s picture of Paul Tudor Jones, the great macro trader profiled in Market Wizards, relaxing in his office. Tacked up on the wall behind him on a loose-leaf sheet of paper is the simple phrase in black magic marker, “Losers Average Losers.”

Jones’s wisdom was lost on James K. Glassman back during the Dot-com bubble “If you had Enron in your portfolio and didn’t sell it at $90 or even at $10, don’t feel embarrassed. As Alfred Harrison, a money manager at Alliance Capital Management Holding LP, which owned a ton of Enron, put it, ‘On the surface it had always seemed to be a fairly good growth stock. We bought it all the way down.’”¹³

When people say the market is over-valued and there’s a bubble, whatever that means, they’re talking about just a handful of stocks. Most of these stocks are reasonably priced. There’s no reason for them to correct violently anytime in the year 2000.

Larry Wachtel
Prudential Securities 
December 23, 1999¹⁴

Glassman and Harrison were dead wrong. What they call dollar-cost averaging is averaging a loser (Enron) all the way down. Traders should feel sick if they average losers, not embarrassed. When you have a losing position, it is telling you something is wrong. As unbelievable as it seems to the novice, the longer a market declines, the more likely it is to continue declining (Google every white paper you can find post-2010 on “time series momentum”). Falling markets are never places to buy cheap—unless you expect to live forever, and that might not be enough if whatever market flops to zero.

In our zero-sum world if the trend is down it is not a buying opportunity, it is a selling opportunity—a time-to-go-short opportunity. Even worse, as an active money manager for clients, Glassman admitted 
to averaging losers as his strategy. To top it off he opined: “Could the typical small investor have discovered a year ago that Enron was 
on the brink of disaster? It’s highly unlikely. Still, if you looked for the right thing, you would have never bought Enron in the first place.”¹⁵

Hold on, there was a way to spot Enron’s problems. The price going from $90 to 50 cents was a clear indication the brink of disaster was right around the corner hiding in plain sight. Jesse Livermore knew 80 years earlier how to avoid averaging losers:

I have warned against averaging losses. That is a most common practice. Great numbers of people buy a stock, let us say at 50, and two or three days later if they can buy it at 47 they are seized with the urge to average down by buying another hundred shares, making a price of 48.5 on all. Having bought at 50 and being concerned over a three-point loss on a hundred shares, what rhyme or reason is there in adding another hundred shares and having the double worry when the price hits 44? At that point there would be a $600 loss on the first hundred shares and a $300 loss on the second shares. If one is to apply such an unsound principle, he should keep on averaging by buying 200 at 44, then 400 at 41, 800 at 38, 1,600 at 35, 3,200 at 32, 6,400 at 29, and so on. How many speculators could stand such pressure? So, at the risk of repetition and preaching, let me urge you to avoid averaging down.

Jan, the bottom line is, before the end of the year [2000], the NASDAQ and Dow will be at new record highs.

Myron Kandel 
Anchor CNNfn 
April 4, 2000¹⁶

If you want a guarantee, buy a toaster.

Clint Eastwood

Others have tried to average losers as well. Julian Robertson ran one of the biggest and most profitable hedge funds ever. However, his run ended. On March 30, 2000, CNN excerpted a letter Julian Robertson sent to Tiger’s investors blaming his fund’s problems on the rush
to cash:

As you have heard me say on a number of occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much. The result of the demise of value investing and investor withdrawals has been financial erosion, stressful to us all. And there is no real indication that a quick end is in sight.¹⁷

Tiger’s spiral downward started fall of 1998 when a catastrophic trade on dollar-yen cost the fund billions. An ex-Tiger employee was blunt: “There’s a certain amount of hubris when you take a position so big you have to be right and so big you can’t get out when you’re wrong. That was something Julian never would have done when he was younger. That isn’t good risk-return analysis.”¹⁸

I am of the belief that the individual out there is actually not throwing money at things that they do not understand, and is actually using the news and using the information out there to make smart investment decisions.

Maria Bartiromo 
CNBC 
March 2001¹⁹

The problem: Tiger’s shaky strategy foundation. Robertson was open to criticism: “Our mandate is to find the 200 best companies in the world and invest in them, and find the 200 worst companies in the world and go short on them. If the 200 best don’t do better than the 200 worst, you probably should go into another business.”

Sifting through information was Robertson’s forte. According to one associate, “He can look at a long list of numbers in a financial statement he’d never seen before and say, ‘That one is wrong,’ and he’s right.” Although that talent is impressive, being able to read and critique a balance sheet doesn’t necessarily translate into profits. What do Julian Robertson, “losers average losers,” the Dot-com stock crash, and October 2008 have in common?

Bubbles.

The 2008 crash was no different than the tulip bulb bubble made famous in Holland. In 1720 when the South Sea Bubble was at its height, even Sir Isaac Newton, the greatest genius of his time, got sucked into the hysteria and he eventually lost £20,000. Wash, rinse, repeat.

Although bubbles appear as blips in history, the aftermath is long-term disaster, resulting in severe recessions and government interventions (QE, ZIRP, NIRP, and the Fed buying common stocks) that make it worse. Bubble collapses over the past 500 years have always thrown nations into recessions lasting a decade or longer. What lesson can be learned from mass delusion? Human nature continues to be the way it has always been and probably always will be.²⁰

You have to say, “What if?” What if the stocks rally? What if they don’t? Like a catcher, you have to wear a helmet.

Jonathan Hoenig

Today, sane investors should do more than trust a suit for financial well-being. Glancing at a pension statement once a quarter—the meat of EMT propaganda sold for 40 years—won’t cut it in the modern world. You can no longer pretend it is retirement money and the nest egg will go right back up. Take a quick view of the Japanese Nikkei 225 stock index (see Figure 9.1). The index reached nearly 40,000 in 1989. Now, over 25 years later, it is still in the range of 20,000. The Japanese do not believe in buy and hold, and should you? With USA stocks at all time highs, interest rates at 0 to negative, can you pretend stocks will go up forever with no 50 percent decrease ever again?

Going back in time, Table 9.1 shows a chart of the hot tech stocks of 1968:

Booms and busts all look the same: Boiling down to the terrible twins of greed and fear. Unfortunately for investors, journalists are too quick to use fear based copy to push investors into blindly accepting the new normal as their fait accompli:

Billionaire hedge fund manager Bill Ackman sold his 27.2 million shares in Valeant Pharmaceuticals at around $11 each. Ackman’s Pershing Square Capital Management purchased Valeant at an average cost of $196 a share in 2015.

CNBCMarch 13, 2017

Now, with your portfolio trashed and Social Security looking insecure, you may be having nightmares about spending your retirement haunting the mac-and-cheese, early-bird specials, or about not being able to retire until six years after you’ve died. With the bull market gone, will the impending retirement of the post-World War II generation be the Boomer Bust?—If you work hard, save and adopt more realistic expectations, you can still retire rather than die in the harness. Earning maybe 9 percent on stocks isn’t as good as the 20 percent that you might have grown used to. But it’s not bad.²¹

What makes the Dow at 10,000 particularly noteworthy for us is that it means that the index has to rise a mere 26,000 more points to vindicate the prophecy of those two jokers who achieved 15 seconds of fame when we were in full bubble by predicting it would hit 36,000. We kind of miss them; they were always good for comic relief. Another 500 points and we’ve a hunch they’ll be back peddling the same old moonshine.

Alan Abelson 
Barron’s 
December 15, 2003 ²²

Saying 9 percent compounded is not bad compared to 20 percent compounded mindlessly ignores the pure math. Imagine the last 25 years 
and two investments of $1,000 each. The first investment generated 
9 percent for 25 years, and the second investment generated 20 percent for 25 years:

• $1,000 compounded at 9% for 25 years = $8,600.
• $1,000 compounded at 20% for 25 years = $95,000.

Here are two examples of not having a real compounding plan, but rather trusting buy and hope as the only strategy:

• “What do you do if you find yourself at retirement age without enough to retire on? You keep working,” John Rother, AARP’s policy director.
• “I’ve worked hard all my life and been a responsible citizen and it’s not supposed to be threatened at this point,” Gail Hovey who works for nonprofit groups in Hawaii.

No one wants to see Gail homeless. Yet, no one wants society to reward one group’s harebrained mistakes with government bailouts paid for by a second group that did not make the same errors. Recall the 2008 bailouts and ponder the next round of bailouts sure to follow the next crash. Life should not be contorted into fair when it isn’t. No political body should legislate outcomes. It is fine to compound trading gains, but it’s not fine for government to compound idiocy.

Even well-paid top professionals running pension assets are always no-exit-plan buy and holders when the chaos reveals who is swimming naked: “Every major investor in the nation was heavily invested in WorldCom [Dot-com-era scam]. They were one of the largest corporations in America,” stated the New York State comptroller.²³

There is no greater source of conflict among researchers and practitioners in capital market theory than the validity of [trend following]. The vast majority of academic research condemns it as theoretically bankrupt and of no practical value . . . It is certainly understandable why many researchers would oppose [trend following]: the validity of [trend following] calls into question decades of careful theoretical modeling claiming the markets are efficient and investors are collectively, if not individually, rational.²⁴

Their plan was the same idiocy employed by the State retirement plans of Michigan, Florida, and California that also lost in Dot-com bubble favorite WorldCom because they all had no exit strategy:

• The State of Michigan reported an unrealized loss of about $116 million on WorldCom
• The State of Florida reported an unrealized loss of about $90 million on WorldCom
• The California Public Employees Retirement System (CalPERS) reported an unrealized WorldCom loss of about $565 million

Referring to $8.4 million in WorldCom stock that dropped in value to only about $492,000, Robert Leggett of Kentucky Retirement Systems said, “Until you actually sell it, you haven’t lost it.”

Ouch. That is not logical.

Make sure as an observer of these players you too don’t get caught up in the particular market or year—as if only the current day can teach a lesson. It’s the wrong-headed psyche of these decision makers that’s worth noting. Learning from losers after all is quite a smart strategy. Ed Seykota summed up the competitive playing field: “The best measure of your intention is the result you get.”²⁵

Avoiding Stupidity

CNBC anchor Joe Kernen’s first interview with trend following trader David Harding instantly became a case study for the media zeitgeist. At the time of this interview, Harding’s firm, Winton Capital, was managing $21 billion dollars in assets for clients via trend following strategies (today over $30 billion).

Kernen started the interview reading from a piece of paper describing Harding as a systematic trend follower who believes scientific research will succeed in the long run. He wondered out loud if computers were used and asked Harding to describe his trading strategy.²⁶

Harding, on remote from London, responded his firm “goes with the flow.” He said he follows trends and makes money going long on rising markets and short on declining markets. He said there had been enough trends for his firm to make money nearly every year for the last 15 years.²⁷

Fundamental analysis creates what I call a reality gap between what should be and what is. The reality gap makes it extremely difficult to make anything but very long-term predictions that can be difficult to exploit, even if they are correct.

Mark Douglas

Kernen pounced, wondering whether he could blame Harding and other trend followers for oil and gold going higher and “for the pendulum swinging much further than it should on a fundamental basis.”²⁸

Harding thought there might be a kernel of truth to Kernen’s point, but there was only so much time to elaborate. Kernen, under his breath, with a huge wide smile emerging, interjected: “Uh, yeah.”²⁹

Harding reminded Kernen his firm was limited by speculative position limits set by government and his trading size was tiny by comparison to major investment banks. Harding went on to further clarify he doesn’t trade by a “gut feel.” He added: “We don’t just make it up.” He also didn’t apologize for his scientific approach to markets, an approach he defined as “rigorous.”³⁰

Kernen replied with a shot across the bow, bringing up failed hedge fund Long-Term Capital Management (LTCM). He saw it as ironic that LTCM folded in the same year (1998) Harding’s firm launched: “I heard science and I heard you’ve never had a down year, and it just reminded me of LTCM.” Kernen talked sarcastically about the Nobel Prize winners at LTCM, their “algorithms,” and the fact they never had a down year until their blowup.³¹

Harding quickly clarified his firm did have a down year in 2009 and his performance success went back over two decades—23 years to be exact. He noted his first firm AHL (which he sold) was now the world’s largest managed futures fund. He also addressed LTCM head-on, stating 
the book When Genius Failed (the story of LTCM blowing up) was “required reading” at his firm.³²

Once an opponent throws down hypocrisy, inconsistency, cognitive dissonance, confirmation bias or a belief in the State as savior or daddy--the hammer comes down. We should all have that hammer.

Michael Covel

Kernen, with condescension, quipped: “I bet it is.” He then went on to ask Harding if he could provide some of his best “picks.” That question makes perfect sense for every fundamental trader who thinks he can predict the future, but it is a ridiculous question to ask a trend following trader. Harding replied he could not forecast markets: “I can’t give you best picks.” He pointed out his success comes from having a slight edge and proper betting.³³

Kernen, still not about to acknowledge anything positive about trend following, smugly asked if Harding would know when the party was over. Harding was nonplussed, noting that there has been a long history of successful trend following going back 40 years. He also compared recent trending markets to another era—the 1970s.³⁴

Kernen, with little journalistic objectivity, shot back that he had heard those kinds of expressions before: “Please let there be another real estate boom because I spent all the money I made.’ I heard commodities guys saying that for a while [too].” He then wrapped up with standard pleasantries and one last zinger saying that he hoped Harding could come back again “with the same moniker, same title.”³⁵

Consider a definition of critical thinking:

Critical thinking is the intellectually disciplined process of actively and skillfully conceptualizing, applying, analyzing, synthesizing, and/or evaluating information gathered from, or generated by, observation, experience, reflection, reasoning, or communication, as a guide to belief and action. In its exemplary form, it is based on universal intellectual values that transcend subject matter divisions: clarity, accuracy, precision, consistency, relevance, sound evidence, good reasons, depth, breadth, and fairness.³⁶

With that in mind:

Whoever wishes to foresee the future must consult the past; for human events ever resemble those of preceding times. This arises from the fact that they are produced by men who have been, and ever will be, animated by the same passions. The result is that the same problems always exist in every era.

Niccolo Machiavelli

1. Is it believable Joe Kernen, the anchor of CNBC’s longest-running program, had no knowledge or comprehension of trend following, or other descriptions of it such as managed futures or CTAs? If he was forced to raise his right hand under the threat of perjury, do you think he would still have such limited understanding of trend following and managed futures?
2. When Kernen asked about trend followers purportedly pushing markets further than they should be fundamentally, did that mean he had a way to determine the correct price level of all markets at all times?
3. When Kernen brought up LTCM in attempt to compare Harding to its demise, did he not understand Harding did not believe in efficient markets? Had he ever looked at a monthly up-and-down track record of Harding or any trend follower?
4. Why ask a trend following trader for “picks”?
5. When Kernen asked Harding if he would come back with the same moniker and title, was he implying he believed Harding would blow up soon and be back on CNBC under some reformulated firm name—like what the proprietors of LTCM did after their blowup? Has he ever asked Warren Buffett that question?
6. When you find yourself feeling manipulated by the press, remember: “People are sheep. TV is the shepherd.”

Now I could easily see some painting this interview differently:

• “Harding set himself up for the LTCM tie-in by framing himself as a computer science shop looking at data and being black box.”
• “You have to expect Kernen to kick you. That’s what he does. Just like you know what you’re going to get from Glenn Beck or Stephen Colbert.”
• “Harding says, ‘We are the smartest guys on the planet, trends work, and we look at a lot of data.’”

A reader who runs a fundamental advisory service wrote me:

Whether Kernen’s questions were clueless or not is really irrelevant. He did not argue with Harding on any point, and he gave Harding a good opportunity (within the time available) to explain how his firm implements trend following. [Kernen] was an “adult in the room.” I’m thinking that’s the way serious trend followers ought to consider presenting themselves instead of sarcasm and “we don’t predict” as if that is an obvious answer to any question.

One of the things that’s striking about talking to people who are politically working in D.C. is, it’s so hard to tell what any of them actually do. It’s a sort of place where people measure input, not output. You have a 15-minute monologue describing a 15-page résumé, starting in seventh grade.

Peter Thiel

The evidence does not bear those criticisms out. There is a deeper game at play beyond my questions. Joe Kernen is not devoid of academic intelligence. He holds a bachelor’s degree from the University of Colorado in molecular, cellular, and developmental biology and a master’s degree from MIT. He worked at several investment banks including Merrill Lynch. I am no Harding apologist, but I have spent time with him. That research time, coupled with his public career and track record, make him one of the most learned trend trading voices of the past 20 years.

Kernen had a pre-formulated agenda. His questioning was a transparent attempt to marginalize Harding and by extension trend following. Imagine if the interview started like this:

We at CNBC believe in efficient markets and the use of fundamental analysis. Our business model also requires viewers to watch 24/7. Today, we have a guest on who has made billions with trend following trading, which does not require fundamental analysis or CNBC and makes a mockery of EMT. Would you like to know how to make money without ever watching our channel again? Welcome David Harding!

Anyone who doesn’t take truth seriously in small matters cannot be trusted in large ones either.

Albert Einstein

You can bet no one at CNBC ever pulled any David Harding SEC filings. I did. Here is one:

Winton’s investment technique consists of trading a portfolio of over 100 contracts on major commodity exchanges and forward markets worldwide, employing a totally computerized, technical, trend-following trading system developed by its principals. This system tracks the daily price movements from these markets around the world, and carries out certain computations to determine each day how long or short the portfolio should be to maximize profit within a certain range of risk. If rising prices are anticipated, a long position will be established; a short position will be established if prices are expected to fall.

The trading methods applied by Winton are proprietary, complex and confidential. Winton plans to continue the testing and reworking of its trading methodology and, therefore, retains the right to revise any methods or strategy, including the technical trading factors used, the commodity interests traded and/or the money management principles applied.

Happiness is not something you postpone for the future; it is something you design for the present.

Jim Rohn

Technical analysis refers to analysis based on data intrinsic to a market, such as price and volume. This is to be contrasted with fundamental analysis, which relies on factors external to a market, such as supply and demand. The Diversified Program uses no fundamental factors.

A trend following system is one that attempts to take advantage of the observable tendency of the markets to trend, and to tend to make exaggerated movements in both upward and downward directions as a result of such trends. These exaggerated movements are largely explained as a result of the influence of behavioral biases, amongst market participants.

A trend following system does not anticipate a trend. In fact, trend following systems are frequently unprofitable for long periods of time in particular markets or market groups, and occasionally they are unprofitable for spells of more than a year, even in large portfolios. However, in the experience of the principals, over a span of several of years, such an approach has proven to be consistently profitable.

What we have been seeing worldwide, from India to the UK to the US, is the rebellion against the inner circle of no-skin-in-the-game policymaking “clerks” and journalists-insiders, that class of paternalistic semi-intellectual experts with some Ivy league, Oxford-Cambridge, or similar label-driven education who are telling the rest of us 1) what to do, 2) what to eat, 3) how to speak, 4) how to think… and 5) who to vote for.

Nassim Taleb

The Winton trading system has been developed by relating the probability of the size and direction of future price movements with certain oscillators derived from past price movements, which characterize the degree of trending of each market at any time. While this is, to some degree, true of all trend-following systems, the unique edge possessed by the Winton system lies in the quality of the analysis underlying this relationship. This enables the system to suffer smaller losses during the inevitable whipsaw periods of market behavior and thus take better advantage of the significant trends when they occur, by focusing more resources on them.

The system was developed by research on price data of a variety of futures contracts between 1981 and 1991 (known as the “in sample data”), and subsequently tested on the data from 1991 to 1997 in order to assess its potential. It has subsequently been updated several times to incorporate more recent market data. This procedure seeks to avoid the risk of over-optimizing, which occurs when a system is allowed to fit itself to the historic data.

Harding and Winton are crystal clear that their world revolves around a non-discretionary system:

Trade selection is not subject to intervention by Winton’s principals and therefore is not subject to the influences of individual judgment. As a mechanical trading system, the Winton model embodies all the expert knowledge required to analyze market data and direct trades, thus eliminating the risk of basing a trading program on one indispensable person. Equally as important is the fact that mechanical systems can be tested in simulation for long periods of time and the model’s empirical characteristics can be measured.

The system’s output is rigorously adhered to in trading the portfolio and intentionally no importance is given to any external or fundamental factors. Whilst it may be seen as unwise to ignore information of obvious value, such as that pertaining to political or economic developments, the disadvantage of this approach is far outweighed by the advantage of the discipline that rigorous adherence to such a system instills. Significant profits are often made by the Winton system, by holding on to positions for much longer than conventional wisdom would dictate. An individual taking trading decisions, and paying attention to day-to-day events, could easily be deflected from the chance of fully capitalizing on such trends, when not adhering to such 
a system.³⁷

CNBC once invited me to their offices. They paid my Acela train travel from Washington, DC to New Jersey, so it seemed like a no-brainer opportunity to go behind the scenes of the evil empire. I had no speci­fic knowledge of what they wanted, but the meeting was with producer Susan Krakower, who had invented Jim Cramer’s show. Once there, it was clear they were looking for new content. The meeting was in a small, windowless office with Krakower and her two female lieutenants. A Jim Cramer poster hung behind her. It was exactly like when Jerry and George went to meet with NBC on Seinfeld.

Krakower sat in front behind a large desk, and her two lieutenants flanked on either side. It was triangulation. They peppered me with small-talk questions, yet seemed to have no clue about my writings, research, or thinking. They had not read my books. They only had a headshot I had not seen before (something you might imagine an actor brings to a Hollywood casting call).

She asked me to hypothetically program 10 hours of CNBC airtime. The idea for new programming was blunt: trend following, not more stories. My inability to play the game did not help, and it was easy to see candor was taken as an insult. The conversation bounced around for 30 minutes and—surprise, surprise—there was no further dialogue.

Walking through CNBC’s studios that day reminded me of The Truman Show: A constructed reality, a staged, scripted TV show. Except instead of it being one person (Jim Carrey’s character) who does not know reality, CNBC’s fake plays to a worldwide audience daily, week after week and year after year.

The biggest cause of trouble in the world today is that the stupid people are so sure about things and the intelligent folks are so full of doubts.

Bertrand Russell

Analysts go on CNBC daily with unverifiable opinions, and to this day I know many viewers will think, “He sounds bright; he works for JPMorgan, and he’s using a lot of financial jargon I don’t understand, so he must know something I don’t.”

He doesn’t know what will happen tomorrow.

The fact so many commentators said you could buy so many stocks in the middle of whatever bubble—and were entirely wrong—is proof positive the Wall Street opinion machine is not the answer, nor will they ever have the answer.

We are what we repeatedly do. Excellence, then, is not an act, but a habit.

Aristotle

Even though there is never sound rationale for listening, of course many do, and they become angry when advice proves disastrous. At one point, one discredited analyst became a whipping boy for investors refusing to accept responsibility:

• “Every time my broker mentions him, I get nauseous.”
• “For the past few years, every time I’d call them, they’d say, ‘He likes [name]’ or ‘He really likes [name].’ As a result, I now own hundreds of shares of these duds.”
• “So now when it comes to investment research, we need to think twice about the veracity of top-rate advice and stock picks from someone earning $20 million a year.”
• “He should have warned that this epochal bubble was doomed to burst. After all he was the industry’s greatest seer.”
• “However unfair it is to blame just him, here’s a situation when one person’s contribution to wholesale disaster is impossible to overlook.”
• “Telecommunications stocks were explosive. New companies went public, old companies saw spectacular growth, and he never once warned us that this was all a mirage.”

No human investigation can be called real science if it cannot be demonstrated mathematically.

Leonardo da Vinci

I am not defending any analyst, but if investors have their life savings tied up in market predictions, they are in trouble no matter what. If one stock tanks, leaving a price trend evidence trail, or an entire sector implodes, investors can’t whine. No one forced anyone to listen to anyone. It is a choice. Anyone who held Fannie, Freddie, AIG, Bear Stearns, or Lehman Brothers all the way down over the course of 2008, or most recently anyone who held Deutsche Bank or Valeant Pharmaceuticals all the way down, they have no one to blame except the person staring back in the mirror. Valeant, for example, dropped 95 percent since its August 2015 highs. Many of the world’s most famous investors (i.e., Bill Ackman/Pershing Square) ignored that drop for an assortment of reasons to “hang on.”

Yet, in a blame-everyone-else society, certain populations will always refuse responsibility for their decisions. Although they might have lost more than half their portfolio in the last 30 years, they still eagerly accept invitations like this beauty from a brokerage firm that technically imploded in 2008³⁸:

[Pick a name] cordially invites you to an educational workshop . . . Topics discussed:

• Stock Market Forecast for [fill in the blank 
whatever year].
• When will the recession end?
• What do I do now?
• What are the factors of a good stock market?
• How did this bear market compare to others?

Forecasts are financial candy. Forecasts give people who hate the feeling of uncertainty something emotionally soothing.

Student of Ed Seykota’s

This firm has produced useless forecasts for decades and still does. But it went under in 2008, only to be rescued by a government-led 
buyout. Now, almost a decade later, clients have little memory of the then-artificial resuscitation needed to leave their life savings in the hands of all the wrong people.

Never let the fear of striking out get in your way.

Babe Ruth

And of course there is always more fun, games, and chaos on the way. No one knows the exact timing of the next pinprick, but you can bet another black swan is already gearing up for a Pearl Harbor sneak attack. On the other hand, if you are glued to every word from the talking heads for their supposed extra-special ability to forecast the trend change, you are in big trouble.³⁹

Assets, once in motion, tend to stay in motion without changing direction, and that turns the old saw—buy low, sell high—on its ear.⁴⁰

Enron stock was rated as Can’t Miss until it became clear that the company was in desperate trouble, at which point analysts lowered the rating to Sure Thing. Only when Enron went completely under did a few bold analysts demote its stock to the lowest possible Wall Street analyst rating, Hot Buy.

Dave Barry⁴¹

The way we human beings operate helps to explain why speculative bubbles don’t even need the Internet or social media in order to thrive. Looking at the chart of any asset price is enough for investors to reach similar (and hasty) conclusions without phones, e-mails, and such. In short, the fear of missing out is an indirect social contagion.⁴²

You think: “Can’t everyone improve and get better?”

Some can, sure, but not all—no way.

Trend follower Jean-Philippe Bouchaud throws cold water on lizard brain decision-making improvements for the masses: “Human brains have most probably changed very little for the last two thousand years. This means that the neurological mechanisms responsible for the propensity to invest in bubbles are likely to influence the behavior of human investors for as long as they will be allowed to trade.”⁴³

Summary Food for Thought

• Things happen.
• Jerry Parker: “‘I didn’t see it coming.’ No one did.”
• Some feel forced to do something rather than sit there.
• Stop searching for value. Even if you locate value, that alone does not ensure your ability to buy, sell or bet right.
• Stock tips only indicate the buy side of the equation. They always leave out the sell side.
• Charlie Wright: “I have sat through hundreds of hours of seminars in which the presenter made it seem as if he or she had some secret method of divining where the markets were going. Either they were deluded or they were putting us on.”
• Mark Twain: “If you tell the truth, you don’t have to remember anything.”
• Brian Fantana in Anchorman: “They’ve done studies, you know. Sixty percent of the time, it works every time.”