So, why isn't everybody a trend follower?

Key Markets report for Thursday, July 24, 2025

Following on from yesterday’s report, I thought I’d address again the question: if trend following is so great, why isn’t everyone a trend follower? It really boils down to the conceptual question: do markets move in trends or not? Many investors either implicitly or explicitly embrace the “random walk” theory which holds that security prices fluctuate randomly and therefore there are no such things as trends.

I had a debate once with a university professor of finance who held that view and simple price charts weren’t going to sway him at all. In fact, he treated me as a bit of an illiterate flat-earth conspiracy theorist for even suggesting that markets move in trends. Renowned Harvard psychologist Steven Pinker wrote that “we hallucinate trends in the random walk of markets..”

Indeed, it is easier to ignore trends if you work in academia, but if you are a market practitioner, you can only ignore trends for so long. One of the most accomplished investors, Paul Tudor Jones (PTJ) conceded that, "One thing I have learned over time is that the best thing to do is let market price action guide your decision-making..." Two years later, in his 3 May 2022 letter to investors, PTJ explicitly endorsed trend following:

"If there was a strategy that I would want to employ right now, if someone put a gun to my head, I'd say simple trend following strategies. They are not too popular today... They will probably do very well in the next five to 10 years."

Coming from a successful investor with a lifetime's experience in the markets, this statement carries some weight. Indeed, as I wrote in the past, it may be that trend following is to portfolio management as Arabic numerals are to mathematics.

Why “not too popular”?

But why should trend following be "not too popular"? At the very least, it could be regarded as an alternative approach, a way to have a source of second opinion about the markets if our own convictions are mistaken. The reason why the approach is still regarded as voodoo by many professionals in the industry is due to the mindset barrier which is not based on an objective appraisal of the strategy's merits, but simply the result of cultural bias and groupthink.

Most market professionals by far rely on fundamentals analysis and forecasting for their investment decisions. So it is fair to ask, how well does that approach work? Well, we have mountains of empirical data on this and as it turns out, not all that great. In any given year, about 2/3rds of active investment managers underperform their market benchmarks. Furthermore, among the managers who do outperform, a majority fail to repeat their success year after year. Over longer time intervals, the proportion of managers who underperform their benchmarks regularly exceeds 90%.

In some categories, the long-term percentage of underperforming funds can approach 100%. For example, according to the SPIVA U.S. Scorecard, over the 20-year period through June 2022 precisely 100% of large cap growth funds underperformed the S&P 500 Growth index. Based on such extensive empirical evidence, the inescapable conclusion is that in this domain, experts have a very robust tendency to destroy rather than add value.

If this is so, then whatever they base their expertise on should at the very least be questioned. I do not believe that the problem is in not having enough analysis, not enough facts and figures, nor the lack of computing horsepower to process it all: the problem is that the whole approach doesn't work - not sufficiently to afford anyone an edge over the markets.

At the same time, many trend following funds have outperformed benchmarks as well as most other active investment managers over time periods spanning decades. Unfortunately however, groupthink is extraordinarily difficult to dislodge as I discussed in the article on Roman vs. Arabic numerals: while the merit of Arabic numerals was obvious and beyond all doubt, their adoption took centuries. This was not because people did not 'get it' but because an entire industry of "experts" grew up around the use of Roman numerals who made a comfortable living by making calculations on behalf of clerical and political authorities (honest errors included) and they fought tooth and nail to preserve the privileges they enjoyed from their knowledge advantage over others.

The long held belief implied in this newsletter is that trend following should, at the very least, be heeded as an essential reality check and second opinion on the direction of the markets. For best results, trend following should be used to the exclusion of most other forms of decision support, particularly economic fundamentals, market forecasts and valuation metrics.

To learn more about TrendCompass reports please check our main TrendCompass web page. We encourage you to also have a read through our TrendCompass User Manual page. For U.S. investors: an investable, fully managed portfolio based on I-System TrendFollowing is available from our partner advisory (more about it here).

Today’s trading signals

With yesterday’s closing prices we have the following changes for the Key Markets portfolio: