Tuesday, January 21, 2014

Morris, Investing with the Trend

Gregory L. Morris has been a technical market analyst for over forty years, which means he’s pretty much seen every kind of market—bull and bear, choppy and meandering, bubbles and crashes. He’s also seen the ups and downs of technical analysis’s reputation: it “used to be greeted with as much enthusiasm as Jeffrey Skilling addressing the Better Business Bureau.” (p. 399)

Investing with the Trend: A Rules-Based Approach to Money Management (Bloomberg/Wiley, 2014) is technical analysis at its finest. It is thoughtful and chock full of data and charts that support Morris’s overarching, well-developed theses that (1) markets trend much more than not and (2) risk is drawdown.

Morris challenges many tenets of conventional financial wisdom and practice, delivering well-placed punches, often with an element of humor. He starts with some flawed assumptions, such as that the markets are efficient, investors are rational, returns are random and normally distributed, alpha and beta are independent of correlation, and volatility is risk. And even though (and perhaps because) his own formal education was in aerospace engineering, he decries the insane overuse of advanced mathematics, “usually in the form of partial differential equations,” in financial papers, “more often than not just to hide an intellectual void.” (pp. 65-66)

He offers up some compelling images. For example, he writes: “When the market starts to decline significantly it is not the same as when someone yells ‘fire’ in a theater. In a theater everyone is running for the exits. In a big decline in the market, you can run for the exits, but first you have to find someone to replace you—you must find a buyer. Big difference!” (p. 138)

For Morris, technical analysis is “much more art than science; the science part is more related to the process of research than the actual analysis.”(p. 148) He is no fan of Fibonacci numbers, which he considers so much numerology. “As far as Elliott Wave theory goes, there are often so many complications and conditions introduced into using this type of analysis, that it is incapable of being proved wrong. Sometimes I think it gets adjusted more often than earnings estimates.” (p. 150) Seasonality doesn’t fare much better. He suggests that “seasonality is a perfect example of observable information; you just can’t make a trading decision based on it. … [I]nvesting decisions based solely on statistical evidence are unsound.” (pp. 156-57)

What Morris offers the technically inclined investor is research using a simple process of filtered waves and time to determine market trend, guidelines for selecting securities to buy, and a way to measure market risk. He spells all this out in great detail, with supporting evidence. He does not offer the system. Instead, he provides guidelines on how to set parameters that best meet an individual’s goals. The investor who follows a good system will have a major advantage over most folks who are invested in the market. As Morris writes, “a rules-based model along with the discipline to follow it will help remove the human subjectivity and those horrible human emotions that we all have.” (p. 399)

Morris’s own list of ten investing rules starts with an admonition to turn off the TV. He continues: “Develop a simple process, one that you can explain to anyone…. Create a security selection process based on momentum. Devise a simple set of prudent and reasonable rules and guidelines. Follow your process with discipline; without it, you will fail.” (p. 403)

Sounds deceptively easy and perhaps a bit vague, but Investing with the Trend is neither. It’s a first-rate account of how to develop a custom-fit trading model.

No comments:

Post a Comment