Trend following works BUT most people cannot digest the spells of underperformance and/or drawdowns that inevitably occur. You must be patient and control your fears. The chart below is taken from the October monthly report of a very successful trend-following fund with a track record starting in April 99. The red lines show all the 5 drawdowns that would have led many investors to think, “is the system broken?”. As you can see, all drawdowns have been followed by higher equity highs, and it beat the pants off to Buy & Hold (S&P500 total return, orange line). My question is: How many investors have stayed the course through thick and thin? Very few, I suspect.
Sincerely,
Manuel Blay
Editor of thedowtheory.com
