Wednesday, July 12th, 2006
Growth investing and trend following at war?
There has been a war bubbling away for some time between fundamental investors and trend followers. Legendary trend trader Ed Seykota labels fundamentals as ‘funnymentals’. The trend followers are cheered on by Michael Covel, who runs the turtletrader.com internet site and penned a 
book on the method.
“Trend Followers ignore predictions, whatever they are based on,” Covel says. “Year-over-year or quarter-over-quarter changes in sales and earnings are meaningless to a trend follower since these fundamentals have no bearing on what a price will do tomorrow.”
So it seems that growth investors and trend followers are destined to be in opposing camps and can never live side by side. After all, you can’t be one or the other. Right? Wrong! It is possible to be both a trend follower and growth investor. How?
FUNDAMENTALS ARE A FILTER
Firstly, view fundamentals merely as a filter. There are thousands of stocks to trade. But as many investors and traders will attest, growth stocks trend better. Basically, they have better momentum and if they’ve gone up they have a tendency to keep rising. This was noted in a recent piece on academic research into growth investing.
TREND FOLLOWING IS FOR ENTRIES AND EXITS
Secondly, become a trend follower for entry and exit. Stocks should only be bought when they are trending up (according to your definition of a trend). There is nothing new about this. Traders and investors have been buying stocks hitting new highs, or breaking out of resistance, since time immemorial.
WHY BOTHER?
Thinking as a trend follower has the benefit of avoiding the most common trap of fundamental investors: they think they know what’s going to happen. They don’t! As Covel points out, trend followers accept they don’t know what will happen in the future and so they don’t try and make predictions. They merely enter the trend and ride it till the end. Thinking like a trend follower will allow you to milk profits and exit losing positions quickly rather than using fundamentals to rationalize holding on to falling stocks or exiting winning stocks too early.
There are growth investors who buy purely on fundamental considerations. But for those who incorporate technical analysis, thinking and entering positions as a trend trader is extremely effective. To do that, always remember that fundamentals are simply a filter. Fundamentals are not predictive. Most importantly, fundamentals are separate from trade entry and exit, which should be based on price movement alone.
Word Count: 397. This entry was posted on Wednesday, July 12th, 2006 at 6:07 pm and is filed under Trend following. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
