Remember the Southern Corn Leaf Blight of 1970? No? Well, I wouldn’t either except for the fact it changed my life — and perhaps yours as well.

“First reported in February in southern Florida, by mid-June the disease covered the entire state of Florida, lower Alabama, and most of Mississippi.

Reproducing rapidly in the unusually warm and moist weather of 1970, its spores carried on the wind, the new disease began moving northward toward a full-scale invasion of America’s vast corn empire.”

As the supply of corn was threatened, prices began to rise. I was blissfully unaware of the drama until my neighbor, a Merrill Lynch broker, helpfully filled me in with stories of the wonderful gains his clients were enjoying in corn futures. Did I want in? Yes, I did. And so began my immersion into the high-risk, high-reward world of commodities trading. As I explained in The Sound Mind Investing Handbook:

For a time, commodities became my driving purpose.… I remember making and losing $10,000 [that would be about $60,000 in 2015 dollars!] in a single day of trading.

I remember driving along the Pennsylvania Turnpike on a summer getaway with Susie and ruining the whole effect by stopping every 75 miles to call my broker back in Louisville. Every hour I stopped. Can you believe it? Susie couldn’t. But she just didn’t understand. I had left town still holding a heavy short position in frozen pork bellies and I had to be careful. (For you laymen, that means I had sold 200 tons of bacon I didn’t own to a buyer I had never met for a price one of us would soon regret. Obviously, I was hoping it wouldn’t be me.) I remember that I made more money in commodities than I ever made in stocks.

When we moved west for two years to volunteer our time with a Christian ministry, I left my commodity trading days behind — before re-entering the fray about 15 years later. My latter venture in the 1980s was not as profitable, except for six lessons I learned that have influenced the way we have designed SMI investing strategies you may be following:

  1. The Efficient Market Hypothesis (EMH), so popular on Wall Street and academia and the driver of the index-fund revolution in recent decades, was wrong. EMH asserts that all publicly available information is always fully reflected in stock prices, thus no one can expect to beat the market consistently. On the contrary, many famous investors and fund managers have a history of regularly outperforming the market. Beating the market is hard and rare, but it can be done.
  2. Emotions are stronger than reason. The markets can be volatile and irrational because investors often behave in emotional and irrational ways. Fear and greed are strong drivers of poor investing decisions. This means it’s essential to develop — and consistently follow — a rules-based approach to decision-making. The rules provide boundaries that serve to protect us from the markets and ourselves.
  3. Price trends (that is, performance momentum) can last longer and go further than anyone expects. We see this at the extremes of bull and bear markets.
  4. Momentum is the well-documented tendency of leading performers to continue being leading performers, and poor performers to continue being poor performers. Momentum has been one of the most highly researched finance topics over the past 20 years. The research has shown that momentum investing works well within and across nearly all markets, and over a wide variety of time periods.
  5. It’s easier and more profitable to jump on a trend that’s already in place than attempting to predict when and where the next trend will begin. Thus the market truism, “The trend is your friend.” Follow it, don’t fight it.
  6. Large losses undermine long-term success to a greater degree than is understood by the average investor (e.g., a 50% loss requires a 100% gain to get even). To control losses (and protect gains), you must have a robust selling discipline.

Building on these facts of investing life, SMI has consistently created strategies that are: (1) rules-driven, to provide a clear-cut and objective basis for decision-making, (2) trend following in nature (that is, not predictive or anticipatory); (3) momentum-based, seeking to invest only in the current leaders; and (4) governed by a firm selling discipline that tells us when to sell, take profits/losses, and move on.

You’ll recognize these traits in Upgrading, DAA, Sector Rotation and our other strategies.