Gregory L. Morris's latest book, Investing with the Trend: A Rules-based Approach to Money Management, was published on December 31 of last year, the same day the Dow and S&P 500 set new all-time highs. The Dow was up 153.2% from its March 2009 low and the S&P 500 had risen an even more impressive 173.2%. These massive rallies were the reversal of devastating drawdowns during the Great Financial Crisis. The Dow and S&P 500 had declined 53.8% and 56.8%, respectively, since their pre-crisis all-time highs in October 2007.
How do we invest to minimize the losses and maximize gains in this sort of environment? Buy-and-hold strategies, regardless of diversification techniques, would have produced modest results over this six-plus year timeframe, and the emotional stresses of the savage bear sell-off were excruciating for the buy-and-hold mindset. Investors with a longer history will recall similar emotions during the irrational exuberance of the dot-com bubble and subsequent crash. Unless you were one of the few who sold near the tops and bought near the bottoms, the 21st century has been a manic-depressive nightmare for investing.
If any of these comments resonate with you, then make Greg's Investing with the Trend your next book purchase ... and in light of the current market action, the sooner the better. The book is divided into three parts, each containing several chapters. In the bullets below, I've provide a 50,000 foot overview of the topics covered in each part.
Part I: Market Fiction, Flaws, and Facts
- Fictions Told to Investors: Greg examines the marketing spin and underlying reality of several familiar concepts: Buy and Hold, Protection with Diversification, Dollar Cost Averaging, etc.
- Flaws in Modern Financial Theory: Over the past several decades many academic theories of investing have dominated the world of finance: Efficient Markets, Modern Portfolio Theory, Volatility Risk, etc. Greg uses his analytical skills to deconstruct the underlying assumptions of these theories in the context of market reality.
- Misuse of Statistics and Other Controversial Practices: How does the "World of Finance" achieve its sell-side goals? Greg takes a close look at "The Deception of Average" in the routine parlance of the professional financial community.
- The Illusion of Forecasting: Greg's opening remark captures the essence of this chapter: "I adamantly believe there is no one who knows what the market will do tomorrow, next week, next month, next year, or at any time in the future -- period."
- The Enemy in the Mirror: The title of this chapter is self-explanatory. It offers an excellent and succinct overview of the many behavioral biases that profoundly influence and ultimately compromise our investment decisions.
- Market Facts: Bull and Bear Markets and Market Facts: Valuations, Returns, and Distributions: These two chapters round out the first part of the book with a compendium of fact, figures and graphs to illustrate historical realities of the market. Without a reasonable grasp of this material, it is impossible to make intelligent decisions about investing.
Part II: Market Research. Here Greg transitions from a focus on the historical context and challenges of investing to an overview of technical analysis.
- Why Technical Analysis?: Greg offers a convincing rationale for this analytical discipline. This chapter also includes a number of Greg's personal opinions about the limitations of some of the traditional indicators used in technical analysis.
- Market Trend Analysis: Here Greg focuses on the fundamentals of market trends, trend versus mean reversion, and trend analysis as a discipline. This chapter includes several extensive tables of supporting market data.
- Drawdown Analysis: An understanding of the massive risk potential of drawdowns is critical to wise investing, which Greg covers in detail. I was delighted to see his reference to my "break-even curve" in this chapter. He also uses the percent-off-high technique, one of my favorites, to illustrate the impact of drawdowns in the market.
Part III: Rules-Based Money Management. After providing a perspective on the market, modern financial theory and the rudiments of technical analysis, Greg gets to the heart of the matter - investing with the trend.
- Popular Indicators and Their Uses: First off, we need a sound understanding of the relevant indicators suitable for identification and analysis.
- Measuring the Market: This is a chapter that defies summary, one that I read, re-read and read again. Here Greg explains the many metrics that can be used individually and in combination to assist in trend identification.
- Security Ranking, Selection, Rules, and Guidelines: The world of the markets and investing constitute an overwhelming amount of information. How do you sift through the details to determine what holding should be bought? The solution is a rules-based strategy with this goal: "to remove human input from the selection process."
- Putting It All Together: The "Dancing with the Trend" Model and Putting Trend-Following to Work: Much of Greg's book reads like science, but it ultimately culminates in art -- the art of dance being his apt metaphor for successful investing. To maximize our success as investors, we must learn to dance with the trend, which requires an intimate understanding of our partner, the trend.
As I mentioned out the outset, Greg's book became available at what may in retrospect be remembered as critical period for understanding trend analysis and making investment decisions accordingly.