CHAPTER 1
A Multicentennial View of Trend Following
Cut short your losses, and let your profits run on.
—David Ricardo, legendary political economist
Source: The Great Metropolis, 1838
Trend following is one of the classic investment styles. This chapter tells the tale of trend following throughout the centuries. Before delving into the highly detailed analysis in subsequent chapters, it is interesting to discuss the paradigm of trend following from a qualitative historical perspective. Although data-intensive, this approach is by no means a bulletproof rigorous academic exercise. As with any long-term historical study, this analysis is fraught with assumptions, questions of data reliability, and other biases. Despite all of these concerns, history shapes our perspectives; history is arguably highly subjective, yet it provides contextual relevance.
This chapter examines a simple characterization of trend following using roughly 800 years of financial data. Despite this rather naive characterization and albeit crude set of financial data throughout the centuries, the performance of “cutting your losses, and letting your profits run on” is robust enough to garner our attention. The goal of this chapter is not to quote t-statistics and make resolute assumptions based on historical data. The goal is to ask the question of whether the legendary David Ricardo, the famous turtle traders, and many successful trend followers throughout history are simply a matter of overembellished ...
