From the June 2014 issue of Futures Magazine • Subscribe!

Investing with the Trend: A Rule-Based Approach to Money Management

Investing with the Trend:
A Rule-Based Approach to Money Management

By Gregory L. Morris
Bloomberg Press (An Imprint of Wiley)
$80; 480 pages

Morris, currently chairman of the Investment Committee for Stadion Money Management and its chief technical analyst, provides his four decades of stock market insights and research to assist self-directed investors become more consistent and profitable.

Throughout the book, Morris provides critical comments on many of the myths of Wall Street that still persist, and then debunks them all with facts and figures.

Moreover, he discusses the tools of modern finance and their short-comings. There is also an extensive discussion of secular bull and bear markets and their inevitability over time.

Coupled with his real-time investing experience, he clearly demonstrates that rule-based trend following methods perform better than the overused and inferior buy-and-hold approach with less risk and higher returns. Morris’ delivers extensive systematic back-testing (for example, using the S&P 500 Index, the Dow-Jones Industrials and other indexes) for each concept he presents. More than 80 pages of testing results are provided.  Moreover, select tables and charts are available online at a Wiley website that is provided.

According to the author, the stock market is not efficient and can be exploited by smart investors to make a profit. That is because most investors are affected by their emotions and act accordingly, usually with bad results.

Initially, the author provides a definition of 35 key terms so the reader will understand future chapter material.

It takes more than two-thirds of the book to get to the author’s investing model. This fact alone illustrates his judicious approach to presenting the necessary background information on the stock market before explaining his investing strategy.

Considerable time is spent on reviewing a number of technical indicators that Morris finds useful in assessing the market’s health. Technical analysis bridges the gap between the analysis and taking action. Therefore, investors using these indicators should react to the market not predict what it will do. His favorite price-based indicator is 14-day Stochastics with horizontal lines at 20, 50 and 80. In his work, he found that average drawdown is a much more accurate measure of loss than maximum drawdown, and moving average convergence/divergence is useful for trend determination, and the relative strength index works well as a divergence indicator.

Investors need a specific investing process not a random, guessing approach. The first step in investing is to understand the current state of the stock market by looking at a combination of technical indicators that unemotionally tell the story of what is actually happening and whether a trend change is occurring or not. Morris provides actionable information as opposed to observable information. The overriding theme is risk avoidance.

In two chapters at the end of the book, Morris puts everything together so the reader can see how the investing process works with all the key components, including the results of his model against the benchmark. He also provides numerous quotes, tidbits, bibliography, websites and lists that will help investors better understand and expand upon the material presented.

The single goal of his book was to provide sufficient evidence that investors can successfully invest using methods that are not in the mainstream of Wall Street. This goal was definitely accomplished, as the reader will find the answer in this book.

Morris has provided a trail-blazing review of the current workings of the stock market, the ton of misinformation disseminated on Wall Street and in the finance arena, and the benefits of using his thoroughly tested rules-based trend following methodology with technical analysis. This lengthy book will take time to digest, as it contains extensive research data that support Morris’s profitable strategy—but it is worth the time.

Leslie N. Masonson is a trader and the author of Buy DON’T Hold and All About Market Timing (Second Edition). Reach him at lesmasonson@yahoo.com.

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