How to split the market

I bought my father a splitting maul for his birthday a few years ago. Turned out to be the best present I’ve ever given him. By the time I got to have a go with it in December, it was incredibly worn, almost misshapen, with heavy use.

For those who may not know, a splitting maul is a tool for splitting very large logs of wood. It’s a bit like a sledge hammer, but with a very broad, wedge-like axe head at the end, and although it may sound like a brute-like instrument, it actually requires a lot of strategy to use correctly.

You could hack away at a tree trunk with one of these and probably cut it in two eventually, but it’d take forever. To literally “go against the grain”, and swing wildly at the wood is an easy way to injure yourself.

To do it properly, you need to follow the grain of the wood, and use it to your advantage, effectively leveraging the wood against itself. Each tree’s grain is unique, but if you can find where it’s weak, and drive the heavy wedge of the maul into it, even the largest of logs can spring wildly apart with surprisingly little effort.

You may be wondering why I’m bringing up the mechanics of log-splitting in an investing letter. While I recommend chopping wood if you want to let off some steam, the same principle of going with the grain rather than against it can be applied to investing – following the grain, or the trend of the market rather than fighting it.

After decades of dealing in financial markets, and witnessing the extraordinary monetary intervention we’ve seen to prop them up, there are only a couple of strategies my colleague Tim Price trusts for building long-term wealth. One of them is going with the grain of the market, regardless of which direction that may lead, also known as trend following.

As my colleague Tim wrote in his book, Investing Through the Looking Glass:

When financial markets and asset managers experience times of extreme distress and heightened volatility, trend-following managers have the potential to generate super-normal returns. In 2008, for example, the prices of most financial assets collapsed. Trend-following managers, however, delivered dramatic positive returns.

One reason for this is their lack of any bias to the long side of markets – trend followers will simply follow the trend, and if the prevailing market trend is down, trend-followers will just as happily go short the market as long. They’re not wedded to a specific view on the market, just to the prevailing trend itself. In 2008, the FTSE 100 fell by 31%. The Mulvaney Global Markets Fund, a trend-following fund, made an after fee return of over 108%.

… History never quite repeats, but as and when global markets go risk-off in a major way, I expect trend-followers, once again, to deliver the goods.

The problem with trend following is that trend following funds can be hard to access for retail investors; they’re often hedge funds that are forbidden from advertising and so only take money from institutions or the well-connected.

But recently here at Southbank Investment Research, we’ve found a way for retail investors to get access to trend following. In fact, we’re broadcasting a webinar at 2pm today on exactly how you can follow the grain of the market yourself and turn a profit whichever way it turns. To get access, click here.

Over the past few months, the strategy has indeed delivered the goods, making a substantial profit as equity markets went down the tubes – Tim was right. Now to see if Tim’s other trusted strategy through monetary madness will come into its own: value investing.

All the best,

Boaz Shoshan
Editor, Capital & Conflict

Category: Market updates

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