Thoughts on Volatility and Risk in an investment

Some trend following critics have expressed a familiar sentiment:

…the consistent volatility [and drawdown] of these systems makes it an untenable strategy, at least for me.

It’s true that trend following is untenable for those that cannot stand the feelings of being in a drawdown. For those that are ok with drawdowns, perhaps an untenable strategy is one that avoids volatility at all costs, thereby effectively avoiding large returns as well. Great trend followers have seen drawdowns come and go. They also know the kind of returns that typically follow periods of drawdown. Maybe that helps them stay on their system. It constantly amazes me that during the good times everybody wonders how these folks make so much money, and during the drawdowns everyone wonders why those guys are so stupid as to keep trading those obviously “dead” strategies.

An Excerpt from the Complete Turtle Trader on Richard Dennis’s Thoughts on Volatility

Dennis’s success eventually caused more serious problems. In the mid-1980s, critics accused him of strong-arming the market. They blamed him for too much market volatility. Words like “collusion” were thrown around. Dennis was not buying it. He said, “One man’s volatility is another man’s profit.”

When Dennis was a guest on a radio show in 1984, a caller assured him that if he traded long enough, he would give it all back.

You could feel the anger. Some people simply did not want to hear about a young guy making millions. Even though everyone knew exchanges needed speculators, too many people didn’t want those same risk-takers to make a profit.

volatility trading strategies
Sometimes you just need to take a risk during times of volatility. Picture by Stuart Caie, CC

Dennis himself appeared before Congress as they investigated the “efficiency of the markets”—unable to define what that phrase meant. His detractors were silenced after government regulators testified that the total buying and selling by Dennis did not breach exchange limits.

Soon, Dennis would join the political fight at a whole new level. He became one of the largest Democratic donors in the country, often focusing his generosity on standard politicians and assorted underdogs. From donating millions to battered women’s shelters to the decriminalization of marijuana, causes without wide publicity appealed to him (he would give away 10 percent of his earnings every year). While call- ing himself a liberal libertarian, he once donated $1,000 to former Black Panther Bobby Rush.

Dennis did more than just write checks. He became good friends with Bill Bradley and supported Walter Mondale (1984) and Bruce Babbitt (1988) for President. He lobbied hard against conservative stalwart Robert Bork. There was a rational justification in Dennis’s mind for his political ideals: “If it’s something everyone hates but you think is right, those are the important things to do because no one else is going to do them.”

However, becoming a successful politician on the basis of supporting the have-nots of society was not as easy as trading to make millions. It wasn’t enough merely to fund his causes; Dennis also wanted to “work” them, and immediately ran into roadblocks. Politics was not a zero-sum game, and he got frustrated. “Politicians, at worse, are mind- less replicas of what their constituents think. People . . . don’t want to hear painful truths.”

When invited to participate in the diplomatic dances that made up Washington politics, he stepped on toes, and seldom refrained from voicing his opinions. Former Federal Reserve chairman Paul Volcker was once introduced to Dennis. He told Dennis that he didn’t “like those casinos you have out there in Chicago.”

Dennis was well aware that he was being indulged because he was rich and would be listened to only if he had something significant to say. Soon after he founded his new 1982 think tank, the Roosevelt Center for American Policy Studies in Washington, D.C., it began to flounder.

Washington was a tough market no matter how many millions you had. And now Democrats were frustrating him, too. He said, “My principal irritation with liberals in general: they don’t understand how it can possibly be true that you make the poor richer by making everyone richer. I don’t understand that they don’t even consider that possibility.”

The problem in a political world was that Dennis couldn’t work the floors of Congress the way he had the Chicago trading floors. It was one thing to own one of the six original copies of the U.S. Constitution (which he did) and an entirely different thing to try to influence modern political leaders. He was impatient.

Ultimately, over time he would become a board member of the libertarian Cato Institute, serving with such notable peers as John C. Malone, chairman, Liberty Media Corporation, and Frederick W. Smith, chairman and CEO, FedEx Corporation. He also joined the board of the Reason Foundation, another libertarian think tank.

Volatility Trading Strategies

How are volatility and risk related in an investment and just what is volatility trading? This is a system where you trade on the volatility of the underlying process, such as the value of a index, as opposed to price itself. For further information read this article on the FT Site.

Trend Following Products

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Michael Covel Trend Following Products
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