The Times (soon to be the Tampa Bay Times) reported recently that Colorado State University hurricane team drops December forecast, citing inaccuracy. According to the article, "the main difficulty with the December forecast is the unpredictibility of El Nino." Of course, the article included comments from many meteorologists applauding the change including Jeff Masters at Weather Underground who said "It is about time" and Mike Clay, Chief Meteorologist at Baynews 9 who said "That's the proper scientific method. They gave it 20 years."
So what does this have to do with investing, you may be asking?
Actually plenty, just as forecasters after 20 years of compiling research have now realized they cannot predict the number, direction and severity of hurricanes that will hit the U.S. in a given season. We continue to laugh at the number of investment advisers trying to get their 10 minutes of fame by predicting the next move in the markets.
If these markets have taught us anything (and they have), no one knows the direction of the markets, especially over the short-term. This is why we think it is ludicrous to try.
Markets are inefficient because the participants are inefficient. Therefore markets move as much on fear and greed as they do on fundamentals or areas of support and resistance.
Our investment solution is to instead let the market tell us and react accordingly. We are trend followers.
As Micheal W. Covel states in his book Trend Commandments, "Trend following trading is reactive. It does not predict market direction. Trend trading demands self discipline to follow precise rules (no guessing or wild emotion)."
The greatest thing about trend following as investment advisors that you don't need to know anything about the direction of the market or about a particular investment. You don't have to know supply and demand fundamentals or even be the first to digest recent news. Trend followers don't care.
If the market (or a market sector) goes up—we buy. After we buy if it starts to lose money, we get out. No predicting…just reaction to market trends and price movements.
If the market goes down….we sell or go inverse the market (short). After we sell if it starts to lose money for us, we get out. It is really that simple!
Did you get that! We can and do make money on bear markets. If you are behind in your retirement savings or other financial objectives, you don't have to absorb more losses or even flat returns. You can participate in both up and down markets.
So the bottom line: no one knows for sure what direction markets will move. Like the hurricane forecasters, we have learned to just stop trying. However, trend following allows us to react to market moves, get involved and yet control risk if it moves against us. It is just that simple!
Also check out our Education Section for the video How to Stop Worrying About Losing Your Money In a Market Downturn. (Top Video)
good inforamtion for the investor and reader
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