The Innovator’s Dilemma by Clayton M. Christensen is a great read for trend followers. Christensen recently offered in an interview:
They were looking at the book [Innovator’s Dilemma] for answers rather than for understanding. They were saying ‘tell me what to do’ as opposed to ‘help me understand so I can decide what to do.’…[Wall Street analysts] are theory-free investors. All they can do is react to the numbers. But the numbers they react to are measures of past performance, not future performance. That’s why they go in big herds. Wall Street professionals and business consultants have enshrined as a virtue the notion that you should be data-driven. That’s at the root of the inability of companies to take action in a timely way.
Christensen clearly outlines a key tenet of the trend following mindset. Trend following is never based on having all the data. It’s based on odds and reaction. Think about it. If you look at a stock such as Yahoo and witness its great rise and decline you can say ‘you should have bought here and sold there’. But isn’t that 20/20 hindsight? No, you simply needed a trading plan of attack before the great rise up and great decline down.
What Christensen is driving at is the notion that you must be able to make decisions in the face of not knowing how the trend will look when it’s all over. You must have a plan to act early before trend direction is obvious to the masses. You must be set and ready to go (and entered) long before the CNBC watchers decide the trend is underway and jump on. Those people are always a day late and a dollar short. Those people are the herds Christensen alludes to. Those people don’t make the money, they lose it. And given that trading is a zero-sum game, the money that those people lose goes directly to the other people with the plans of attack designed to win their losses.
“We know that prices move up and down. They always have and they always will. My theory is that behind these major movements is an irresistible force. That is all one needs to know. It is not well to be too curious about all the reasons behind price movements. You risk the danger of clouding your mind with non-essentials. Just recognize that the movement is there and take advantage of it by steering your speculative ship along with the tide. Do not argue with the condition, and most of all, do not try to combat it.”
“The market reflects all the jobber knows about the condition of the textile trade; all the banker knows about the money market, all that the best-informed president knows of his own business, together with his knowledge of other businesses; it sees the general condition of transportation in a way that the president of no single railroad can ever see. It is better information on crops than the farmer or even the Dept of Agriculture. In fact, the market reduces to a bloodless verdict [THE PRICE] all knowledge based on finances, both domestic and foreign.”
In response to questions concerning his opinion on where individual markets may be headed, Jerry Parker had this to say:
I don’t know nor do I care. The system that we use at Chesapeake is about the market knowing where it’s going.
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