Every investor faces the same decision: do you smooth the ride or chase the extraordinary?
On one side lies the comfort of mixed allocation. Blend trend following with mean reversion and you’ll get smoother equity curves, smaller drawdowns, and something that looks more “palatable” to the allocator’s eye. But the cost of comfort is hidden: you are allocating away from the very events that rewrite portfolios … the outliers.
The Nature of Outliers
Outliers are statistical anomalies. They are rare, unpredictable, and often dismissed as luck. Yet they are the true engines of compounding. A single runaway trade, left untouched, can erase years of mediocrity and push a portfolio into exponential territory.
Market history is full of them:
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Oil in 2020: when prices briefly went negative. Trend followers holding shorts captured the type of move that defined the year. Mean reversion traders, leaning on the assumption that prices “had to bounce,” were decimated.
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The Japanese Yen in the 1990s, or the Euro in 2008: both delivered sustained moves where the patient trend follower thrived, while counter-trend players bled from repeated reversals.
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Bitcoin in 2017 and 2020: parabolic runs that defied logic, but rewarded those who simply held to the trend.
The lesson is clear: outliers cannot be predicted, but they can be harvested. And when they arrive, they matter more than anything else.
Mean reversion is the science of reducing luck. Trend following is the art of harnessing it.
The Mean Reversion Trade-off
It’s true that mean reversion strategies help reduce compounding drag. By smoothing portfolio fluctuations, they make the ride easier to bear. This is why allocators like them: a smoother line is easier to defend in front of an investment committee.
But here is the cost: in reducing volatility, you also reduce exposure to step ups, the extraordinary outlier events that not only offset compounding drag but more than accommodate it.
In other words, mean reversion removes the very payoffs that justify volatility in the first place.
Yes, you cushion the ride. But cushions don’t fly.
Even with adverse volatility, the extraordinary step-ups captured by trend following transform long-term compounding. Smoothing may feel safer, but it amputates potential.
The Comfort Illusion
This preference for smoothing isn’t just mathematical, it’s psychological.
I’ve sat across from allocators who would rather own a portfolio compounding at a steady 12% with low drawdowns than one lurching toward 20% with inevitable turbulence. The smooth line feels safer, easier to explain, more “institutional.”
But this is the comfort illusion. It is not safety, it is sedation.
Think of a river: it flows gently and smoothly, but its pace is slow, meandering its way to the ocean. By contrast, a waterfall is sudden, violent, and disruptive … yet it propels the water much further, much faster.
Markets are the same. Smoothing strategies keep you in the calm midstream, but they never deliver the accelerations that transform wealth. Outliers are the waterfalls: rare, unsettling, but decisive in driving compounding forward.
A smoother river doesn’t reach the ocean faster. The waterfall does.
CAS Lessons for Traders: Nature as Teacher
Complex adaptive systems (CAS) show us that extreme events are not exceptions — they are the rule.
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Forest Fires: Suppress every small burn (mean reversion) and the forest accumulates fuel until one catastrophic blaze wipes everything out. Trend following accepts small losses, leaving room for extraordinary resets that regenerate growth.
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Evolution: Most genetic changes (like most trades) are incremental and reversible. But it is the rare mutation, the outlier, that creates new species and shifts the trajectory of life itself.
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Predator—Prey Cycles: Populations don’t move smoothly. Rabbits multiply until foxes thrive, foxes surge until rabbits collapse, and the cycle resets. Markets echo this dance: liquidity, leverage, and flows interact to create feedback loops that drive abrupt, nonlinear outcomes.
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Markets: Just like ecosystems, liquid markets are not Gaussian. They are leptokurtic; fat-tailed, full of jumps, and prone to clustering of extremes.
Sometimes tail events cluster into crashes that drag everything down, think 2008. But just as often, a single market breaks free into an extraordinary trend. And in a large diversified portfolio, there is always an outlier somewhere.
This is why CAS provides a better lens than traditional statistics. Distributions assume independence and stationarity. CAS shows us interdependence, feedback, and continual adaptation.
Why I Am 100% Trend
I choose trend because I am not in this game to be comfortable. I am here to build a portfolio with the potential for extraordinary compounding. I accept the bleed, the chop, the discomfort, because I know the trade-off. By being 100% trend, I am fully exposed to the only part of the distribution that truly matters: the tails.
Mean reversion assists compounding drag, but trend following transforms compounding itself.
When the outlier comes, I don’t want a diluted position. I want to be all in, with a process that has no ceiling on the upside and clear rules for the downside.
Because in the end, outliers lift you. Luck, harnessed through process, is not something to fear. It’s the reason to play the game at all.