(Un)Knowns

Donald Rumsfeld passed away on June 29th 2021. He was a Secretary of Defense in two U.S. administrations, became both the youngest and person to hold this position.

I am not going to pass judgment on the political career and actions of Mr. Rumsfeld. Instead, I would like to draw your attention to a quote from him, which – while made in a completely different context - is staggeringly relevant for the world of Trend Following:

“…as s we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns - the ones we don't know we don't know”

On this week’s episode of the Systematic Investor podcast series Mark Rzepcynski reminded our listeners of the above quote and drew a direct connection to the world of Trend Following.

The reason why Trend Following is an important and valid approach deserving to be included in EVERY investor portfolio is that it’s capable of handling the black swans of the world, i.e. the unknown unknowns.

Trend Following achieves that by deploying a systematic approach that works regardless in any set of market conditions regardless how extreme. This is the first crucial aspect that helps Trend Following perform exceptionally well in periods of severe market dislocation such as the Global Financial Crisis in 2008.

The second crucial aspect is the belief that all relevant information is included in prices. Staying away from the notion of fundamental value allows Trend Following avoid the all-too-common trap of discarding a certain scenario just because it appears impossible from a fundamental perspective. On the contrary, Trend Following is a nimble investment approach that is not witted and constrained by the notion of what the price should be from a fundamental perspective.

And yes, while these arguments may seem a little philosophical, they are still extremely important because they explain why Trend Following is such a unique investment approach that deserves a sizeable allocation in virtually any portfolio.

If you are interested in my conversation with Mark in this week’s episode of the Systematic Investor podcast series, I warmly invite you to tune in and find out yourself.