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August 1998: LTCM Loses to Trend Following

Bill Dunn of Dunn Capital, Business Week 9/14/98, As Good As It Gets, p.190

Trend followers (including turtles) accept a trend as confirmation of direction. Trend followers add to positions aggressively in a systematic manner as long as the trend goes their way. They react to the market. They do not predict.

A buy and hold approach on the other hand may produce profits like in 1995-99, but those so called gains were blown apart in 2000-02. How does one ever exit from a buy and hold strategy? They don’t.

The future is unknown, but if you want to be ready in advance for directional changes, a non-predictive system such as trend following is extremely wise and prudent.

Trend Followers Whip It Up

Bill Dunn of Dunn Capital knows what it is all about:

We don’t make market predictions, we just ride the bucking bronco.

The month of August 1998 killed those long the US stock market. Trend followers, however, made single month killings over many markets going both long and short.

  • Abraham Trading (2nd generation Turtle), +23.38%
  • Chesapeake, +7.15%
  • Dennis Trading Group, +13.50%
  • Eckhardt, +31.00%
  • Dunn Capital, +27.50%
  • Rabar, +19.20%
  • Saxon, +50.00%
  • John W. Henry, +17.7%

What markets did they all win in?

Yes, many firms lost big money in August 98, but those firms were buy and holders, NOT long term trend followers. You ask, “Why this is relevant today?” If you have to ask that question you are in deep trouble!

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