Book Review: Way of the Turtle

The Way of the Turtle is essentially a book about momentum investing (or trend following). The author (Curtis M. Faith) was one of a group of 23 individuals who in 1983 were trained by two highly successful traders in the art of trading futures.

By reputation the turtle traders as they were known were very successful traders. The fact that they were systematically trained to trade futures in a specific manner using specific techniques and succeeded is what makes this an interesting case study. Essentially, if the premise of the story if true then anyone should be capable of being trained to succeed as trader. Since derivative instruments are zero sum games (actually, negative sum games once transaction costs are paid), by definition not all participants in the market can make money as momentum investors. That said, the author presents a good deal of statistical evidence to support his contention that with the right approach an investor should have a high degree of confidence in his ability to succeed as a trader.

Given the logical impossibility of all traders making money from the futures market (even allowing for the role of hedging participants),I remain sceptical of the merits of momentum investing as an investment strategy. That said, the book is well written and the arguments presented are both logical and well supported. Also in the back of my mind is the fact that both the economy and the prices of investment asset classes move in cycles. Viewing momentum trading as a tool for identifying and capturing these cyclical movements does make sense to me.

One other point I liked about the approach to investing described in the book is the importance of deciding when to exit an investment, both for the purpose of preserving capital and for the purpose of exiting a successful investment. For all investors (whether active traders or not) preservation of capital has to be the most important rule of the game - something that I have lost sight of in the last six months.

Maybe, just maybe, this book has done enough to make me take another look at the question of momentum when making my investment decisions.