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Systematic Trading & Trendfollowing

A clip from Eagle Financial's Jack and Bill Show where Eric gives a brief explanation of systematic trading and shares his view on the investment style - trendfollowing.

Key Takeways

Systematic trading provides the rigor and discipline to implement a successful investment strategy.
Warren Buffet has rules for trading, a systematic approach is just a pre-planned way of executing those trading rules.
Trendfollowing is a type of systematic trading that allows investors to participate in extended profitable moves and ensures that they avoid extended unprofitable moves. For example, stick with a new stock as it repeatedly breaks out to new highs and then exiting the position when the momentum starts to break down.

Transcript

Bill McCollum: That's a terrific explanation, Eric. Thank you. But you're a little different, I mean, as far as it's how you're investing because your approach, it's systematic, it's trend following. Would you explain what that means?

Eric Crittenden: Yes. Systematic just means you have a disciplined set of rules that you stick to. It doesn't mean they never change, but it means that you honor them, they're transparent, you know them, the people that are investing with you know them. It gives you rigor and the ability to stick with something and not let social pressure or fear or greed or any of this other stuff get in the way. That's what systematic means in this context. What was the other word you brought up?

Bill: Trend following.

Eric: Yes, trend following. I hate the term trend following. I hated it when I was younger, I hated it when I was in college. I thought, ""Well, that's the dumbest thing I've ever heard of."" It sounds like you're just chasing performance, or it’s something my niece would do, trend following on some new gadget or something. All it means in practice is you stick with your winning positions, and in a disciplined manner, you cull your losing positions before they get big enough to hurt you and your investors.

It's really just saying, ""Hey, when we have stuff that's working, we're going to stick with that and just leave it alone and maybe even press the gas if that's the right thing to do, but we're going to hold our winners strong."" When we have things that aren't working, we're not going to let those things get out of hand.

Unfortunately, somebody decided to wrap the phrase 'trend following' around that, and I guess it's technically accurate, but the connotation around that phrase is not something I'm super proud of, but that's all it means. Like a professional poker player, you're going to bet big when the odds are on your side, and you're going to fold and keep your losses small when you don't have any cards. Same thing with a portfolio."

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