1. How and why did you get started investing? What is your background?
I started hanging around the brokerage firms when I was 4 years old. I was told to sit in the corner, to be quiet and not cause any trouble. My father and his friends would be busy reading charts, discussing things, reading the tape. The office manager was a man by the name of John Bolman. The firm was called Walston & Co., eventually bought out by DuPont, at its peak in the early 1970s. It was the second-largest brokerage firm in the country. Ross Perot was in there, acquired the firm in 1973. As I got older, I was given paper, crayons, eventually pencils, rulers, compass, etc. As a kid, I had no bias or baggage; they asked me if the stock symbol was going to move higher or lower. I just pretended that I was an ant crawling up and down a hill, making sure I did not fall off a cliff.
When I first became a broker with E. F. Hutton, I was placed next to the office of John Bolman; I was the youngest broker in the state at that time, and he was the oldest. I expressed to him that I wished I had all this knowledge, experience, wisdom and wealth. He replied, "I'll give it all to you if you can make me 20 years old again." He told me the story of how and when he became a stock broker. It was right after the Crash of 1929. No one wanted to be a stock broker. The test was only 20 questions –Â easy –Â and he got to take it home over the weekend and turn it in the following Monday.
2. Describe your investing strategy and portfolio organization. What valuation methods do you use? Where do you get your investing ideas?
I am top down, asset allocation, a realistic investment objective, which is: I started off as an assistant E. F. Hutton portfolio manager. The firm would give me the asset allocation. It would give me a list of securities that I could own, guidelines of no more than 10% in any one stock, 20% max in any one industry, 30% in any one sector, 50% max in any super sector. From there I have grown over the years. Consistent positive returns to outperform the Standard & Poor's 500, outperform intermediate aggregate bond index and rank consistently (quarterly) in the upper 20% of all money managers. To do this, there needs to be an investment strategy, a methodology and asset allocation process, a security selection process, great securities and technically great and timely prices for entries and exits, risk management. I look for themes, Fed policy. I want to know what the major styles of investing are doing, how they think, what makes them tick. I want to know what the 20 to 50 largest pools of money are doing. I cannot know every single security, but if I can understand the former, analyze money management styles and the 20 to 50 largest pools of money, then I can be on the manager or the style. How dark pools work, HFT's hedge funds, the various money managers, the mutual funds, indexers, retail public and just the hierarchy of things.
There is a lot of research out there on valuation. It is illusive, but we want to know what the overall Street is thinking. Standardized or normalized, I want to be long what the market wants and cannot get enough of, I want to be short what the market hates, is trapped long with and wants to and cannot get rid of it fast enough. Things do not go from undervalued to normal value to overvalued and repeat; it could go from normal value to undervalued to very undervalued, extremely undervalued. Likewise it can go to overvalued, ridiculous value and ludicrous overvalued. Valuation, basically over the years we all form a network of friends who are plugged in/connected. Former and current analysts from across the country, hedge fund managers, directors of major firms, etc.
Themes, price action, the standard sources and then just stay ahead of them. Know who the better fundamentalists are as 70% of the industry is fundamental dominated. We need to understand them, their habits, tendencies, strengths, limitations in order to feed off of it. Most of the better conventional managers are a combination of: 1) valuation, 2) earnings and earnings momentum, 3) relative strength, trend, technicals and 4) insider activity. Got to understand the calendar, the time cycles, who is late, early, etc. Fundamentals – interview the company, the competitors, the customers, the suppliers and then figure out who is lying. The market will tell the story ahead of time.
3. What drew you to that specific strategy? If you only had three valuation metrics, what would they be?
I was fortunate to become the senior investment management analyst at Kemper Securities from 1988 top 1993. I oversaw $4 billion of money in my office, plus I was an integral part of searching through, screening, selecting, monitoring and working with the top 30 money managers from a list of almost 10,000 for the whole firm at Kemper Securities. Instead of figuring out the mix of and timing of the securities, I would try to figure out the top money managers and work with them to outperform the markets. The money managers I worked with were a variety: Aggressive growth, growth, growth at a reasonable price, core growth, value, contrarian, high private value, sector rotation, theme, quasi indexing, market timer, asset allocation, international, cash, short, intermediate and long-term fixed income, interest rate anticipator, swing manager, dividend capture, etc. I would move money between 30 money managers as my forecasts and the markets action showed me.
Most conventional traders, investors, money managers change the allocation and mix of stocks, bonds and cash. I tried to go a step further, select the best in the business in their respective areas, and move the money around through them. If you could imagine that I asked you to be one of my 30 money managers that I would allocate a portion of $4 billion to you, sometimes more, sometimes less, and pay you 1% of the assets under management per year, but billed quarterly, so really it is 0.25% per quarter. One percent of $100 million is $1 million per year for your fees, now add to that if I place you into my company's select list of money managers under a wrap fee program for the 5,000 plus brokers with the company at that time. I get to talk to the key people of each firm daily if I want to, and because they are running the trades through my firm, I get to see everything they are buying and selling. Of course we talk. I know their styles and can figure out what they will be doing ahead of time.
I am not a valuation person. It takes too long to play out, need to react fast and let the others play catch up. I would say that I am into price action, order flow and technical analysis.
4. Which books or other investors changed the way you think, inspired you or mentored you? What is the most important lesson learned from them? Which investors do you follow today?
There are so many books and people who helped me grow into what I am. It would take me a whole day to show my list and thank all the people who I am grateful to for my growth. Lots of books, lots of mentors, not just in the financial markets, but in life such as psychologists, athletes, martial artists and what history of the human race has to show us. Of course it is the victors who write history, and so we must connect the dots and read between the lines. Not only learn from the best, see exactly what they are doing but the whole gamut of people, the traders, the analysts, the money managers, etc. I also want to understand the leaders, the masses, the laggards, and basically the whole bell-shaped curve. Smart money is smart; they cover their tracks well. I also like to track dumb money; they will be my food supply, are much easier to track, and I do not want to be on the same side of the of the field with them.
I have learned from my mistakes, but I can only make so many mistakes in my lifetime and recover from them. So I try to be observant of my clients, the other brokers, their clients, money managers, even the best ones, other analysts and people in life. I tried to learn from all their mistakes and again the mistakes of those before us in history. A wise person learns from mistakes, an even wiser person learns from the mistakes of others. Markets and humans are dynamic. We are not competing with an inanimate object; we are not fighting with a punching bag. The market which is a summation of all the other competitors wants to take our money as much as we want to extract money from them. It is like the SPY vs. SPY cartoon in Mad Magazine. People will always try to build a better mouse trap, there is an evolution to things, and a cycle prevails. There is no end. We cannot be perfect. All we can do is live and flourish in the flow of life and the markets, read the nuances, monitor, adjust and make the necessary changes. It is a game of how smart, how quick and active we are versus the competition.
We always want to know who controls the largest pools of money, the trend, the theme, the federal government, the game, the rules that apply. Who is great today will become popular, gain too much of a following, become an open book, predictable and lose their effectiveness and then another will come and the same will happen.
5. How long will you hold a stock and why? How long does it take to know if you are right or wrong on a stock?
I will hold a stock, ETF, futures, indices as long as it shows me the best of all other alternatives to give me the best reward with limited, minimal and controllable risk; still I can hold a portion, trade in and out a portion, front run with futures and/or options and hedge with the prior as well along the way. How many things and times does something go straight up? There will be a lot more zigs and zags along the way to make it more profitable. Also, risk management? Is a stop loss absolutely safe? Stocks can gap down, have delays, shut down for trading; financial securities have lock limit down days, the exchange can shut down, etc. Knowing when to be in, when to press, when to pinch, when to hedge, how to hedge, when to run is what I see in most of the great traders.
It should not take long if I am trading like immediately; I try to enter at situations, circumstances, events where I am catching the acceleration, a reversal, the stock or security should not go against me at all, and if it does not go my way almost immediately, then I step out with no damage versus people who want to stay in, wait and may be willing to risk 7% of the capital. I add when I am winning. Again, if it does not go my way immediately, I may step out. We must look and read things like: What is the market trying to do? What is it supposed to do, and is it doing a good or bad job of it? If people trade against the trend, looking to be a hero and pick the top or bottom, it can be dangerous; they have to be right immediately or be able to withstand a lot of pain and the element of ruin. But people have big egos and want to look for the tops, short the tops and buy the bottoms, I do not try to buy the bottom now and short the top; I buy after the bottom is behind me, and there is a movement to get long. Also, I short when the top is behind me and people/institutions are trapped long and want out.
6. How has your investing approach changed over the years?
Rather than try to know everything or cover too much, I have cut down, covering less and knowing it more intimately. Some people will screen through thousands of stocks to find the ones that meet their criteria. I look for the more predictable ones and be able to trade them long, short or sideways. My universe is much more narrow now. Rather than buy stocks, I can buy an ETF with futures and options surrounding it. Such as the SPY ETF; it has the most options surrounding it, liquidity galore, and I can build and maneuver well with the SPY, the surrounding options and the futures. The Nikkei, the yen, the U.S. dollar, the euro, metals, energy, agriculture, interest rates. I trade and invest what has volume, institutional sponsorship (institutions cannot get in and out in a day, therefore I have time to tag along for the ride). Large cap stocks such as Apple (AAPL, Financial) and Berkshire Hathaway (BRK.B, Financial) which are institutional darlings and get overowned, overgrown and go to extremes. Money managers at times will just buy names like these and let Apple and Warren Buffett do all the work. I find that instead of looking for high reward and high risk, I look for reasonable reward with high accuracy, low risk, then use leverage and add when winning, on continuation patterns.
7. Name some of the things that you do or believe that other investors do not.
I follow sentiment; well, others do, but not in the way that I do. There is a dominant thing or things in the history of the market. One it was the OEX. I do not want to give away my relative advantage now, but I will give a few clues/hints. What is the largest playing arena, what controls the industry, what are money managers graded or judged upon, is the whole industry pretty much quarterly, how does this game of relativity among the money manager work. Any one, any analyst, any firm, politician, etc. can say anything, but how can we see where the put their money where their mouth is, just what are they doing, where is the smart money, versus the dumb money? How do we know if the market is ready to move higher or vulnerable to the downside? If I revealed it, I would be cutting my own throat. How does one effectively handicap the markets? Does one understand the arb activity of buy and sell programs, how they are used, hedging before selling, front running before buying, whipping around for sector rotation, latent, positive, operative, negative arbitrage?
8. What are some of your favorite companies, brands or even CEOs? What do you think are some of the most well-run companies? How do you judge the quality of the management?
Other people are better at this than I am, but if the markets agree, then ride them until they do not and things change; a trend is a trend is a trend.Just look at the Dow Industrials since inception, things come and go, things change, we just change with the times. I judge how the markets judge them. In the end only the market is always right; it does not care what I or almost anyone else thinks, believes or feels.
9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?
There are so many stock screeners, but other people are using the same; there are many other smart people, and what will give a person an edge to be even ahead of this game? Please read the story about Dan Zanger's success long ago; I used to leave my 386 Compaq computer running all day and night trying to screen stocks. Whatever I can do to screen, others can, too, and the large firms with teams or brain power will be able to do it better. So again, rather than screen though thousands of things, I just try to know a dozen things intimately well and trade them up, down, sideways, expanding, contracting, etc.
10. Name some of the traits that a company must have for you to invest in it, such as dividends.
What does a high quality company look like to you and what does a bad investment look like? Talk about what the ideal company to invest in would look like, even if it does not exist. Now we can explore two extremes. High beta unknown and ungrown and ready to explode, or large cap, known and grown, smaller, predictable, accurate movement and gains, with small risks that one can easily overcome, turn to their advantage or work out of and use leverage. I need high volume on the underlying security, optionable, high volume and liquidity, correlation with liquid futures, and institutional sponsorship. No stock is forever; look at all the great ones of the past. But an index like the Standard & Poor's 500 is self-correcting as the weak components are replaced with stronger components. Much more predictable, lots of options and futures to build and offset and razzle dazzle with. Bad news –Â surprises on one of even a few companies –Â is not so critical.
Dividends are not so critical to me; they are to others as for tax reasons, the income and it has floor to the price. Most managers will probably want to say, unknown, ungrown, mid-cap, exploding earnings, high private value, reasonably valued. But a lot of people will already know that.
11. What kind of checklist or homework do you utilize when investing? Do you have a specific approach, structure, process that you use? Or do you have any hard cut rules?Â
Capitalization, volume, institutional sponsorship, intermarket analysis, correlation with other securities, indices, futures, and high liquid volume on options. Seasonality, arbitrage count, sentiment, market cycle, coordination of time frames, order flow, leading vs. lagging indicators, chart patterns. I am giving it away already.
For the most part, my methodology is much like how I used to play blackjack and count cards. The basic strategy is 80% of the time, and we deviate from there based on the conditions, the decks, the number of cards and aces left proportionately to the cards remaining. To win, we need to know the odds, how to play each hand, how to keep track of the cards that left the deck so we know what is left in the deck, how to bet accordingly, when to progress, when to press, when to run, when to double down, split, surrender, hit or stand, etc. We must also know how dealers can stack a deck, read the dealers as they are human too. Example: The dealer shows a 10 value card, checks underneath to see if it is an ace; they have to take a second look, they do not have a 21 hand, then it is a 4 card that they mistook for an ace. Also the many other tells that they give away.
Again, rules, laws, religion are all man made and can be used as a guideline, but it takes a pro's pro to understand when to not follow the rules or deviate. Rules are made to be broken. Nothing is 100%. There is no end game in which one can find the Goose that Lays the Golden Egg or the Holy Grail.
12. Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?
I have meta goals, strategic planning, tactical and standard operating procedures. It varies for all of those levels. At the SOP level, I just have all my monitors and computers running, and trade accordingly.
At the tactical level, it involves some brain work. The strategic level could be more important for the large big critical decisions. I will consult my brain, heart, gut, instincts, meditate a little and talk to the smartest people I keep in contact with in the business.
Rarely, they may not want to talk to me and could be lying, too. I let others do that.
13. How do you go about valuing a stock, and how do you decide how you are going to value a specific stock? When is cheap not cheap?
Again, I let the market forces tell me that, buy what people want and cannot get enough of, be short what people do not want and need to get rid of.
14. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?
I am not a bargain hunter, do not try to look for the bottoms, do not want to be a contrarian. Even if you buy the bottom, it could stay down for a long long time. It is not time efficient. Again, go where the volume and institutional interest is, and where I have a relative advantage. It is like going into a poker game; I need to know who the stooge or stooges are ahead of time. If I cannot figure that out, then it means I am the stooge and need to leave ASAP.
15. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
I am nimble; I can be in, out, long, short, reverse on a dime. I trade the U.S., Asian and European session; I trade it up, down and sideways. The market has a lot of interest and participation; it means there will be a lot of price movement, and that is great for me. Players are not leaving, and many more are looking to get in. Overvalued, undervalued, it does not matter to me. Just predictable movement and volume. What concerned me the most is the markets become too efficient, people get too smart and I lose my edge. I loved it before when the public watched television and got quotes that were 15 minutes delayed; they had to call their brokers. I had live quotes and could call the floor and trading desks. Still, I was a step behind all the large arb firms with their armies of traders on the various floors and exchanges, and their team of rocket scientists and mainframe computers. The gap between the public and myself has narrowed considerably.
16. What are some books that you are reading now? What is the most important lesson learned from your favorite one?
Again, there are so many, I could rattle off at least 100 of them. To understand the markets, one should at least look at the books of Edward and McGee (technical analysis) and Graham and Dodd (fundamental analysis) to start and go to the next level from there.
17. Any advice to new value investors? What should they know and what habits should they develop before they start?
At my level, I do not know how to relate to a newcomer, especially in the value area. My expertise is in technical analysis.
18. What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
I am the wrong person to ask. Graham and Dodd, and Warren Buffett may be good places to start.
19. Describe some of the biggest mistakes you have made value investing. What are your three worst investments that burned you? What did you learn and how do you avoid those mistakes today? Â
Being overconfident, not believing that we should never say never and that rules are made to be broken, not taking full responsibility for my own decisions. Now if I have to rely on someone else's opinion, then that means that I do not know for myself. If I am sitting on the sidelines then fine but not when I am in a postion.
Trying to predict blindly, the market tells us what to do; it is a beast, bigger and stronger than all of us combined, I am not in the prediction business, but in the go along with the flow business. I cannot move the market; I am but a speck of dust in a strong current, a small piece of cork on a raging river. My biggest mistakes were shorting too soon and trying to short the top, buying too soon and trying to buy the bottom as the largest magnitude of price movement is often made at the tail end of the cycle or move.
Do not try to be the hero, shorting tops and buying bottoms are for heroes and dead heroes. I am not forced to play; we must think for ourselves and be responsible for what we do. If I cannot make up my mind, the market will make it up for me. Do not marry a position; it is not for better or worse, in sickness and health, for richer or poorer and until death do we part. Got to be able to change our minds on a dime; it is guerilla warfare and more. Do not try to win the battle but lose the war. Master says to the grasshopper, "Do you want to make money, or do you want to be right?" Forget the ego and fame, just make money.
20. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?
For most people, our minds and emotional state will be like a roller coaster and move like the markets. Over time, we do not let it bother us; we become robotic, and it is just a part of the game. But If one can handle it, we still need to be able to be flexible, versatile and be able to relate to the masses. How does one go from being a rational genius back to an emotional impulsive basket case and back to the former effectively? The people who have seemed to accomplish the most in history are just below the Mensa Genius level, for they are smart and yet can relate to perhaps 98% of the players in the game –Â or at least understand them.
If people are too far to the right past the genius cutoff level, they cannot relate to the masses, which are supposed to be their food source. They cannot think like a normal person; they are into what should be versus it is what it is. My late martial arts buddy from Hong Kong would also want both of us to see what it is like to be on the giving and also the receiving end of it all. So in the market, I want to know what it is like to be right and wrong from the short side and the long side, and how people react and behave under certain conditions. Again, we have to understand intimately how our opponents thinks, feel and what they will do under various conditions. We need to be proactive and creative and stay ahead of the curve.
21. How does one avoid blowups in value investing?
Most people will say paper trade, sell stops, asset allocation, diversification. We do not live long enough to just paper trade. What I did long ago was to try and relive the U.S. stock markets so I searched with a master technician friend (Richard) the archives and we got the data on the Dow Industrials going back to 1895. From there, we got graph paper, scotch tape, mechanical pencils, erasers and plotted it all, one bar at a time; from there you can relive it and accelerate the learning process. We went on to do that on the S&P 500 since inception –Â utilities, transports, etc. I was a young stock broker at that time; when older affluent gentlemen looked at me, they would ask me, "Hey, kid, so how long have you been following the markets?" I would respond, "Since 1895, before you were born. If you come to my office, I can show you all of it, how it happened and where it should be going next."
Paper trading and back testing can help if one does it well, but as Bruce Lee said, "Boards do not hit back." We cannot fight punching bags and dummies alone and become pros. It is a great place to start, but there must be live realistic sparring/fighting/trading eventually, perhaps with a mentor next to the beginner.
22. If you are willing to share, which companies do you currently own and why? How have the last five to 10 years been for you investing wise compared to the indexes?
I have outperformed the S&P 500 benchmark consistently.
Now you see me, now you don't. What I say now might not apply tomorrow or even in the next five minutes of the next market session. The market is around the clock.
Division is one of the keys. In order to make the year, we need to make the quarters; to do that, we need to make the months, weeks, days and sessions within a 24-hour day (U.S., Asian, European), the flow of the markets in the four six-hour sections of a normal day, the opening, the resolution, the move into the lunch break, the whips, the fake-out moves, the closing moves, the rebalancing moves, the carry over into the next major world session.
How does one make an 80% return per year? Slowly but surely, one step at a time, 5% compounded is about 80% per year, 1.25% per week is about 5% per month, 0.25% per day is about 1.25% per week, and 0.08333% per global geographical session is about 0.25% per day. Now the pressure is not on. Another thing I have learned is when you are hot and can do no wrong, then press, and shop until we drop. If we are cold, unfocused, distracted, cannot read things right, then stay out. We should not be pressed to make a certain amount of money in a given period of time. If we do, then we cut our profits short when we made enough and could be making a lot more because we have the hot hand and the conditions are right. Conversely, if we are cold and the market conditions are not right for us, then we should not be forced to play and probably lose. Experienced pros have somehow acquire this talent.
23. Here's a fun one – Which stock would Warren Buffett (Trades, Portfolio) or Benjamin Graham buy today if he were you?
That is a funny one. If they were me, they would be trading the equity indices from the long side and using futures, options. They are longer-term stock pickers; I am a chameleon as I adapt to the markets and a market timer. They are great at what they do; I cannot be as good as they are if I play their game. We have to play, do and use our relative advantage and play our game.
Thank you for asking to interview me.
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