In 2004 ,Optionetics magazine a leading provider of investment education and publishing, interviewed me for their publication. Editor Jeff Neal gave the interview featuring Lussenheide Capital Management, Inc. in their publication. We are rerunning the article here for your benefit as the information then is as timely now years later as ever!
Optionetics: Bill Lussenheide is the President of Lussenheide Capital Management Inc. [LCM] and is a Registered Investment Advisor. LCM uses historical, empirical and mathematical timing systems to manage risk and enhance return. Bill has spent the last 30+ years researching the economic and market history of the past century. This combined with real-time trading have produced computer-based timing models that monitor intermediate trends for entry and exit points.
Speaking with Bill and seeing his true commitment to the trading business was not only refreshing but inspirational as well.
Optionetics: How did you first get interested in trading?
Bill: As a young boy, both my father and I were Numismatists (coin collectors). At one of the coin dealerships that we use to attend auctions at, there was also currency trading. I was fascinated by the live action, of individuals slapping down foreign currencies and trading it for other currencies. In the background there were the old style clicker boards that updated the markets. I started reading about money, and the history of it. This of course led to a study of the stock markets, economic theory and history, and eventually trading systems.
Optionetics: Do you prefer short term trading to longer term trading? Why?
Bill: I actually prefer intermediate term trading, about two to four times a year. I believe that short term trends exhibit too many random characteristics and whipsaws, and that very long-term systems require too large of a drawdown once a market turns. In the tradeoff between minimizing whipsaw signals, and lowering draw downs, I believe that the intermediate term viewpoint represents the optimal "emotional" sweet spot.
Optionetics: What are the things you like best about being a trader?
Bill: It isn't really a matter of liking or disliking, it is the matter of minimizing risk! Preserving capital and lowering risk is the key to trading. For this reason, I firmly believe in trend following systems that are designed to lower volatility and limit draw downs.
Optionetics: How do you treat losses and account drawdown?
Bill: An important puzzle piece for any trader is to let your profits run, but to cut your losses short. I define this always by using a mathematical trend following model, and always obeying all signals both buy and sell, that it generates. I do not believe in using subjective reasoning or judgment for trading decisions.
Optionetics: What are some of the key rules that you feel are most important for a trader to keep in mind when evaluating any potential trading opportunity?
Bill: First rule, stop evaluating and rely on a valid, non-optimized trend following trading model. At any given moment, there will always be a great argument on why a market should go up from here, and at the exact same moment there is always a great argument on why it should also go down! Trying to figure this out on a "seat of the pants" or "subjective manner" is absolutely futile. Much like a pilot who must fly by trusting his instruments, a wise trader does the same with his trading model.
Optionetics: What are your favorite markets you like to trade?
Bill: We track seven asset classes...NDX 100, SP 500, NIKKEI 225, Europe STOX, XAU, US GVT. LONG TERM BONDS and REITS. We use enhanced index mutual funds that use options for extra leverage, like those available from Rydex and Pro Funds for younger more aggressive accounts.
Optionetics: What is your most memorable trade?
Bill: Two come to mind, and both were because of their defensive nature. I was in cash during the market crash of 1987, and on 9-11. It wasn't because I was a genius or "Market Guru" but the fact that our trend following model had already identified a declining market and signaled us to move to the safety of money market funds.
Optionetics: With all the different technical analysis tools out there how does a new technician avoid information overload or “analysis paralysis”?
Bill: I believe that the more complex a system, the less likely that a system will work in the future. A system should be trend following in nature, not predictive. Optimization or curve fitting should be avoided. A valid system should have less than 5 trading rules within its parameters. Simpler is superior, not inferior!
Optionetics: What kind of technical analysis and fundamental analysis tools do you employ?
Bill: We use simple moving averages with a trading envelope. For new money (buys that are added to a current position) we use a combination of short-term indicators such as the McClellan Oscillator, RSI and MACD.
Optionetics: What mistakes do most people make in the markets?
Bill: Not knowing when to stay out of the game. One must be willing to sit patiently in a cash position sometimes for months at a time. Those who view this as a form of entertainment or a game will be hurt. Those who are addicted to always "having action" will eventually be in the wrong market at the wrong time.
Optionetics: How would you characterize your approach to the markets?
Bill: Trend following. This of course means that you will NEVER catch a market at its extreme low, or at its extreme high. However, there is plenty of money to be made by participating in 80% of the UP market and avoiding 80% of the down market.
Optionetics: What do you think are the greatest misconceptions people have about trading and investing?
Bill: Unrealistic expectations about potential returns. Trading should be viewed more importantly as a risk management tool rather than a radical performance enhancer. Our goal is to add 3 to 5% a year over buy and holding, but doing so with 33% less risk and with much less drawdown. This is the real beauty of trading, lowering risk and protecting capital.
Optionetics: How do you see the major indexes performing?
Bill: Again, being a trend follower and not a prognosticator, I will react to the markets "in the present". I can give you a great argument on why the market should give back 25% from here, and just as well give you a great argument on why the markets should go up 25% from here also. I trust that the collective intelligence of the market, with each dollar being a vote in the consensus, is much smarter than any of us. For that reason, we will track the major trends and follow them, whether we understand the fundamental reasons why they are trending or not.
Optionetics: Thanks, Bill, for taking the time to share your trading thoughts with our Optionetics reading audience. Bill’s attention to risk control and his success in the markets is something all students of the Optionetics methodology can appreciate.