The Arrogance Of Counter Trend
One of my all time favorite columns while I am away
By all accounts Steve Jobs was a horrid human being. He abandoned his out of wedlock child. He browbeat his employees and mercilessly cast them aside after years of loyalty. He told his just pregnant girlfriend that he preferred his former girlfriend and spent months thereafter asking friends who they thought was prettier. He even parked in handicapped spaces because he had no patience to find a free one.
The portrait of Steve Jobs the person is diametrically opposite to that of Steve Jobs the businessman. As a businessman Steve Jobs remains lionized. He is viewed a great innovator who has radically simplified the computer experience and that’s all true. Yet the same skills that propelled him to the top of the business world may have also been responsible for his death. By now we have all read the story of how he delayed cancer surgery for 9 months relying instead on the magical thinking and wish fulfilment much like a shaman in some primitive tribe in the Amazon forest rather than the CEO of the most technologically advanced company in the world. Steve Jobs has always succeeded by challenging conventional wisdom, but sometimes conventional wisdom is right and his last attempt at bucking the trend killed him.
I was thinking about Steve Jobs a lot this week, as well as about John Paulson -- another guy that has been defied in the press for having called the housing bubble, only to lose more than 45% of investors money this year -- a track record that the most amateurish of FX traders would have a hard time making worse. These two guys made all of their money by essentially trading counter trend. (Making computers more expensive, when everyone was slashing prices, shorting CDO’s when everyone was long, etc, etc etc) And that can certainly be an incredibly profitable system in both business and markets. However, the danger of counter trend is that you get arrogant. After beating the system so many times you begin to feel invincible and you lose the humility to stop yourself out. Sometimes that results in losing money and sometimes it results in death.
I’ve often remarked that for all the talk of trend trading very few retail traders actually pursue the strategy, which ironically enough is why most traders fail. Trend trading represents the apotheosis of conventional thinking and for most of us ( myself front and center) is an anathema to the way we view ourselves. All of us like to be viewed as creative and original, but the truth of the matter is that often the most original move in the markets is to follow the crowd.
This point was really drilled into my head this week in the wake of the EUR/USD trade. After watching a parade of analysts on TV (myself included) trying to call the top in the pair, I became convinced that it would trade higher and squeeze all the much-too-clever shorts mercilessly. I tweeted a mea culpa just before the pair broke through 1.4000 figure and swept all the sellers away.
Anti-trend trading teaches you arrogance, while trend trading teaches you humility. You tell me which one works better in the long run.