Who are the best traders in the world?

US politicians, of course.

“It’s interesting to note that the one group of investors with astonishing predictive powers is US senators, who outperformed equity markets by 12 percentage points a year over eight years, as measured by Georgia State University researcher Alan Ziobrowski,” wrote Moneyweb.
“That performance was better even than corporate insiders, who beat the markets by 5%, while ordinary investors underperformed by 1.4%.”

What insights, wondered Ziobrowski, did US senators possess that gifted them such extraordinary investment success?

It makes sense that those with insider knowledge will smash the markets. US senator Elizabeth Warren was estimated by Forbes to have a net worth of $12 million in 2019 – not bad for a politician on a salary of $174,000 a year.

No wonder Elon Musk is doing lifestyle audits of senior government people in the US. This is what forensic auditors do when they want to zero in on corruption. They look for people obviously living beyond their means.

Here’s a sobering stat for those trying to make it as day traders:

A survey of six major brokers reveals a stark reality: 71-80% of their clients lose money. Nearly 80% of those using quantitative strategies face losses, and among active day traders, up to 95% lose money.

These are the frightful realities that face any investor looking for an edge in the market.

Trend Following – A Path to Success

In his book Trend Following Bible (available for free and absolutely worth the read), fund manager Alex Krainer makes the case that the world’s most revered investors – such as Warren Buffet and Benjamin Graham – have achieved their success not just because of the brilliance of their stock selections, but by simply following the trend. It’s worth noting that trends tend to go on far longer than common sense would dictate.

When Buffet (actually his company Berkshire Hathaway) bought 7% of Coca-Cola in 1988 for $2.60 a share, it was already considered pricey at a time when the company’s market cap was $16 billion.

He bought more in 1989 and 1994. The 1994 purchase was 3X higher than the average he paid in 1988 and 1989.

Today’s market cap is nearly $300 billion. Today Berkshire Hathaway owns 9.2% of Coca-Cola, making this its fourth largest holding (after Apple, American Express, and Bank of America).

This initial investment is today worth $27 billion.

Why not buy a much bigger chunk at a much cheaper price?

Why average up rather than average down?

Buffet was simply following the trend. Like Benjamin Graham, Buffet positions himself as a value investor, and he certainly is that. But he continued to invest into a rising trend and continued holding Coke stocks which have maintained their trend since the 1980s. He is, in reality, a trend (or what we might call a momentum) investor.

Coca-Cola stock price USD

Source: Macrotrends

Another Example: Geico Insurance

Another Berkshire Hathaway holding is Geico Insurance, ironically the most profitable component of Benjamin Graham’s portfolio before Buffet took it over. Graham bought 50% of Geico in 1948 for $712,500 and continued to hold it even though he saw the share price multiply to levels that seemed unsustainable.

As the father of value investing, one might think he would sell out at a good profit and look for another under-valued asset. Instead, he continued to hold. He, too, was a trend follower.

The Power of Trend Following

The most successful traders are those that simply follow the trend. And those trends can go on far longer than logic suggests.

There are those who believe we are long overdue for a market crash. We had a mini-crash in 2020, but that corrected in a matter of months. The economy might go into recession (as Ed Dowd believes will happen in 2025) but the stock market will likely recover from whatever temporary shocks are thrown at it.

The Cantillon Effect

It’s called the Cantillon Effect. Those closest to newly created money (banks and big corporations which buy government debt) cause asset prices on the stock market to rise. You will only see consumer inflation respond later.

That’s why stock markets have continued to rise despite tepid economic growth. It also explains why the 1% seem to get richer while everyone else lags.