Trend Following is the GPS of Investing

In many areas of life, stories are king: sales, marketing, children’s bedtime routines, and raucous dinner parties. And analogies are a powerful ingredient of good stories.

On a recent family vacation, I discovered perhaps one of the best analogies for how trend following helps financial advisors.

‘Hey Siri…’

I am fortunate to have a great relationship with my in-laws. As a result, it is common for my family to include them when we take road trips. As a member of the Boomer generation, my father-in-law is often a slow adopter of new technology. There are few innovations he has been slower to embrace than GPS. This is exacerbated by the fact that, prior to retirement, his career had him on the road often, which meant he memorized how to arrive at various destinations. Old habits die hard, as they say, and so he generally prefers to take those well-worn paths as opposed to listen to what Siri has to say on the matter.

During a summer of 2024 trip to the North Carolina mountains, I was reminded of his hesitance to trust GPS – but also blessed with an excellent narrative for the benefits of systematic trend following.

The Analogy: GPS & Trend Following

Our road trips often start with my father-in-law asking, “Which way are you going?” My answer is generally the same: “Whichever way the GPS takes me.”

As you might imagine, this answer is unacceptable to him. Second guesses about the route usually follow. “I wouldn’t go that way,” is a typical reply. A few scoffs of “Really?!” also might be heard. In the end, I generally follow the GPS guidance, but if we are taking separate vehicles, it’s not uncommon for him to take his own way and for us to meet up again at the final destination. As you might guess, when we go different ways, my family/car tends to arrive first by following the GPS.

And in a nutshell, this is systematic trend following. It is equivalent to an investment GPS because, in our opinion, it:

• Uses algorithms (i.e., rules) to get you from point A to point B in an efficient way
• Is indifferent to which road (i.e., asset) it uses to get there and at times avoids the herd (i.e., traffic)
• Offers multiple paths to get there (i.e., multiple timeframes)
• Can be used whether you drive fast (i.e., aggressive) or slow (i.e., conservative)
• Can be modified to fit your preferences (i.e., using things like ETFs, individual stocks, or derivatives…or avoiding tolls)
• Re-routes you if you get off track (i.e., cuts losses quickly)

Trend following is also like a GPS in that it is not perfect.

Accidents and traffic still happen, as markets and highways are unpredictable. As a result, others may have questions and second guesses.

With that said, it does an excellent job of getting you to your destination efficiently, without the headache of wondering whether you took a wrong turn or having to pull over and ask for directions.

Boring is Beautiful

To some, it is more fun/exciting/praiseworthy to figure it out on your own. Fundamental research, uncovering hidden gems, and making predictions all have a certain appeal to human nature.

We do not disagree about the appeal. However, we are not in the business of asset management for fun, excitement, nor praise. We are in it to bring our clients to the desired destination as on time and as safely as possible – and we seek to do so every single time. We are in it to win. We are in it to support financial advisors as they help their clients reach their goals.

The problem with all those exciting aspects of investing is that they generally carry a high failure rate for most investors. Their typical alternative is a mostly passive approach, which generally does well for large stretches until a financial crisis comes around. We believe a systematic, trend-following approach bridges these two extremes and is the most effective way to manage portfolios.

As a result, we will continue to embark on journeys with our partnering financial advisors, much like I will continue to take road trips with my father-in-law. We will continue to happily endure the second guessing and questions, keep following the GPS, and stay focused on arriving on time.