THE SEARCH
My father was a chemist and head dry cleaner in a wool mill. He was a good provider for his family and he was very frugal. He had been a prisoner of war in Germany during World War II and had walked the Death March through Germany for six months. He knew what it was to starve. After working for about 20 years, he had enough savings to invest in stocks. Unfortunately for him, other investors seemed to be accumulating investable funds at the same time, and the stock market was high. This was in the time period of 1967 to 1968. His stockbroker recommended stocks like Westinghouse and other companies that the brokerage firm was underwriting. My dad lost money on all of them.
My dad read a book called “How to Make the Stock Market Make Money for You” by Ted Warren. Ted had never made more than $200 a week, but he had made a lot of money in the stock market. The book was basically an introduction to long-term technical analysis. My dad did much better after reading this book and he taught me the principles of it.
In 1969, I graduated from college and became a stockbroker at Bache & Co. Bache & Co. sent me to New York for a six-month training program at NYU. I tried to share the research they gave me with friends and had disastrous results. The stock market had peaked in 1968 and didn’t bottom out until 1974 at around 570 on the Dow Jones Industrial Average. Fortunately for me, I used Ted Warren’s basic methodology and was able to buy stocks at value prices which worked out very well over time. Other brokers who worked with me did very poorly during this period.
In 1973, Burton Makriel wrote “A Random Walk Down Wall Street.” The basic message was that stock prices move randomly and that analysts and fund managers offered little value to investors. It wasn’t until 1976, after continuing to do very well for my clients, that I decided to investigate the logic of my approach. I was working with Ray Hanson Jr. at Barclay Douglas & Co in Providence RI and I convinced him to work with me on this project.
the research project
At that time there was no stock history database that could be compiled by computer and accessible to us. We found a chart book publisher with an unbroken history of chart books beginning in 1936. The chart book publisher had some of the books available, but we had to go to Putnam Funds, Fidelity Funds, and other management companies to get the missing books. We knew the basic concept was to find good stocks that had fallen out of favor and were trading for a long period at a base without hitting a new low. We had to look at thousands of these charts to determine our two basic rules. We had two concerns. Number one, if we buy these stocks too early, our gains would be inhibited by how long the stock remained stagnant on the basis. Number two, some of these companies went bankrupt early in the base period. After many hundreds of hours of perusing thousands of stocks, we empirically determined two basic rules.
THE RESULTS
Our study, published in 1978, showed that actions follow a perceptible pattern that can be recognized and exploited. You can see the results by searching on Google, “Eleven Quarter Stocks”, an independent website. End-of-book recommendations also had average gains of more than 466%. Thus, from a data point of view, the test is certainly sufficient to refute the classic “A Random Walk Down Wall Street.” Also the data from 1978 to the present show that the patterns continue to work.
HOW CAN THIS KNOWLEDGE HELP YOU MANAGE YOUR MONEY BETTER?
I warn you not to be disappointed by the simplicity of the rules of this concept. While they may seem obvious once they’ve been pointed out to you, this in no way alters their value. It is easy to understand and difficult to execute. Why? Because the rules are consistent and human emotions are not. It is people who have to act on their knowledge of these rules, and people are swayed by powerful tides of fear, greed, and impatience.
I have used this logic when working with thousands of people. Most will quit smoking because it requires a long-term, patient perspective. Often when the indices are going up, these stocks are not. After waiting two years with no profit, your stock rises 50% only to fall back to where it was before. Some stocks have very large increases and prompt you to buy more only to fall substantially. My way of dealing with these issues is to invest only around 10% in a group of these stocks, especially after a cyclical market downturn. It’s much easier to maintain if you don’t invest too much. Your knowledge of the cycles will also help you invest in mutual funds. Take very little risk after markets have risen for three years without major corrections and buy more aggressive assets after a four-year cycle. I have used this knowledge to my advantage, except when I win a lot of money, I have lost a couple of times by investing too much in biotech stocks at prices that are too high. Unfortunately, I also have human frailty.
I intend to sell the study, “Non-Random Benefits” as an e-book along with the rest of the story.