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Bill Dunn’s firm made 50 percent in 2002 when the majority of investors were losing big from the Dot-com blowout. The firm made 21 percent in the one month of October 2008 when most of Wall Street was melting down. And into 2017 the firm’s track record exceeds 40+ years. Dunn Capital performance data is a clear, consistent, and dramatic demonstration of trend following.

Dunn was the original founder and chairman of Dunn Capital Management, Inc. By his original design the firm has always traded for above average returns. Dunn has no defined target for return (other than positive). There is nothing in their risk management that precludes annual returns approaching 100 percent. There is no policy, for example, if a Dunn portfolio was up 50 percent by mid-year, they would rest, and dial back for the rest of the year. Further, since 1984 their track record shows 10 drawdowns in excess of 25 percent (Did you know Warren Buffet has drawdowns too?). But whatever the level of volatility, this independent, self-disciplined, and long-term trend follower never deviates from the core strategy:

We have a risk budgeting scheme that certainly was ahead of its time in 1974 and is still – in our opinion – state of the art in [2017].86

It is easy to believe that Dunn Capital adheres to core rules set forth 40 years ago if you understand sound business principles: “Essentially, whatever you find will be as true 10 years from now, 20 years from now, 30 or 50 years from now as it is today and as it was 50 years ago. And if you can put your finger on those truths, then you’ve made a contribution.”87

Dunn Capital has always believed in order to make money you must live with volatility. Clients who invest must have absolute no-questions-asked trust in the firm’s decision making. This trend follower has no patience for questions about their ability to take and accept losses. This “full throttle” approach has proven itself for 40 years, making everyone involved, owners and clients, rich.

The Dunn risk-budgeting scheme or money management is based on objective decision making. “Caution is costly” could be the motto. At a certain point if they enter a market and if the market goes down to a point, they exit. To Dunn, trading without a predefined exit strategy is a recipe for disaster.

Dunn Capital’s risk management system enables the firm to balance overall portfolio volatility – something the average or even professional investor ignores. The more volatile a market, the less they trade. The less volatile a market, the more they trade. For Dunn, if risk-taking is a necessary means to potential profit, then position sizing should always be titrated to maintain the targeted risk constraint, which in turn should be set at the maximum level acceptable.

The Dunn system of risk management ensures discipline:

One of our areas of expertise in the risk-budgeting process is how risk is going to be allocated to say a yen trade and how much risk is going to be allocated to an S&P trade and what is the optimal balance of that for a full 22 market portfolio. The risk parameters are really defined by their buy and sell signals so it is just a matter of how much you are going to commit to that trade so that if it goes against you, you are going to lose only x percent.88

Extreme Performance Numbers

Like Dunn Capital’s philosophy this chart (Figure 2.1) assumes an in-your-face attitude and that is not negative. That performance data compares returns if you had hypothetically invested $1,000 with Dunn and $1,000 with the S&P. It demands a choice – either put your money with Dunn, learn to trend follow yourself, or pretend trend following does not exist.

FIGURE 2.1: Dunn Capital Management: Composite Performance 1974–2016

Next, consider two charts that reflect different periods of Dunn Capital’s trading history but tell the same story about their approach. The first one (Figure 2.2) is a Japanese yen trade from December 1994 to June 1996, where Dunn made a monumental killing.

FIGURE 2.2: Dunn Capital’s Japanese Yen Trade

Source: Dunn Capital Management

Nineteen ninety-five was obviously a great year for Dunn Capital. And in 2003 Bill Dunn walked through his trend following homerun with an audience that came away with an invaluable lesson:

This is 18 months of the Japanese yen and as you can see, it went up and down and there was some significant trends so we should have had an opportunity to make some money and it turns out we did. Because the WMA is a reversal system, it’s always in the market, it’s either long or short, trying to follow and identify the major trends. So while this is the first signal that’s shown on the chart and is long, we obviously must have been short coming in to this big rise. The rise was enough to tell us we should quit being short and start being long and it seemed like a pretty smart thing do and after we saw that big rise up.89

TABLE 2.2: Monthly Performance Data for Dunn Capital Management WMA Program 1984–2016 (%)

Dunn Capital is riding the trend up that first big hill of the yen in March 1995. They are making decisions within the context of their mechanical system. Bill Dunn continues: “Then we have significant retracement, which caused a short signal for the WMA program; our model has always incorporated near-term volatility and this volatility as we went long was far less than the volatility that was going on when we went short.”90

Bill Dunn summarizes the trade: “Now also because the volatility was very high here, this rise was not enough to give us a long signal and as a result, we rode this short position for nearly a year all the way down – where we got a long signal that was wrong and we reversed and went down to short. Now that was a very, very good market for our program, but some markets are not so good.”91

The confidence in Bill Dunn’s tone and delivery cannot be replicated in print. I feel fortunate to have the original tape.

Be Nimble

Bill Dunn, with a straight face after riding a trend to great profit, once noted: “The recent volatility in the energy complex has been quite exciting and potentially rewarding for the nimble.”92

What does Dunn mean by nimble? They mean they are ready to make decisions based on market movement. When an opportunity to get on a potential trend appears, they are prepared. They take the leap. They are nimble when relying on their system; they react to the Japanese yen move with precise rules because they trust their trading plan and risk management.

The second chart is the British pound (Figure 2.3) where, unlike the Japanese yen, the market proved unfavorable for Dunn Capital. It was a whipsaw market, which is always difficult for trend followers. You can see how they entered and were stopped out; then entered and were stopped out again. Remember, trend following doesn’t predict market direction or duration, it reacts – so small losses are always part of the game. Dunn managed the small losses because the British pound was only a portion of their portfolio. Their yen trade more than made up for losses on the British pound trade, because no matter how uncomfortable others are with that approach, for Dunn, big winners offset small losers in the long run.