Or maybe in serious state of denial…
In this “open question” to Fama (and his sidekick French), I am referring to this recent entry on their forum:
“Market Timing with Moving Averages: An ancient tale with no empirical support”…
There is only a short bridge to cross to extend this quote; and interpret what Fama is saying as “Trend Following does not work”.
Now, if I were dubbed as the father of the Efficient Market Hypothesis, as Eugene Fama is often described, and if my career were based on this theory, saying anything other than the above would probably equate to an academic hara-kiri. This slightly puts things in perspective about how objective this “insight” really is.
This reminds me of a quote by “very smart” quant trader Vic Niederhoffer (wait, remind me: how many times did he blow up?):
Trend Following is one of the stock market’s biggest con, I would even go so far to compare the concept to a cult like scientology… I get the same sort of value from Trend Following as I do from supernatural operators such as Uri Geller and horoscope readers.
On the other hand, here is a very much à propos quote from Jerry Parker, one of the most successful Turtle Traders and Trend Following Wizards:
The reason we make money? It’s the simple moving average systems. Two-thirds of that is what drives our profits. Our little filters to get in early, to get out quicker, volatility filters, if that is how we’re going to essentially generate returns, we’re going to be in bad shape. The core simple moving average or breakout systems [are key].
from The Complete Turtle Trader
For recap, here is a long-term track record from Chesapeake Capital, run by Jerry Parker (taken from this historical wizards performance data post):
One single year in the red since 1988…
History is littered with “men of science” hanging on to their wrong theories, and there is no reason for this to have changed: last I checked nobody had discovered THE universal truth and knowledge…
I don’t know about you, but between an academic defending their theories with rhetoric and a successful practitioner, I know which one I am choosing to pay attention to.
Of course, Jerry Parker is not an isolated case and there are plenty of successful Trend Following Wizards using concepts similar to moving average market timing.
There is still the issue of survivorship bias when looking today at managers successful in the past (i.e. how many failed along the way, I do not know).
However there are many studies comparing buy and hold with moving average strategies, such as the Golden Cross. I’m not going to publish yet another one of these studies showing the risk-reward superiority of moving average market timing vs. buy and hold; but they are aplenty on the web (Mebane Faber’s timing paper/system, Blackststar fund’s Stock Trend Following study, or Mike Stokes’ post to name a few). Most of the better studies test for different lengths of moving averages to ensure that the concept works robustly across various timeframes, rather than with isolated “data-mined” parameter values.
How is that for empirical support?
One area where Trend Followers and Fama surprisingly seem to agree on is fat-tailed distributions (cf. Fama’s work on stable paretian distributions in market price returns – notably with B. Mandelbrot). I say “surprising” because I believe that fat-tailed distributions are one of the main source of Trend Following profitability (as per this post), and therefore a main reason for moving averages to work…
To me, this is plenty of evidence supporting the use of Moving Averages (or equivalent). I’d love to hear what you think about all these, Messrs Fama and French?