My father was a chemist and chief dyer in a woolen mill. He was a good provider for his family and 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 to death. After working for about 20 years, he had enough savings to invest in stocks. Unfortunately for him, other investors seemed to be building up investable funds at the same time and the stock market was high. This was in the period from 1967 to 1968. His broker recommended stocks like Westinghouse and other companies that the brokerage firm underwent. My dad lost money on each of them.
My dad read a book called "How To Make Money In The Stock Market" by Ted Warren. Ted had never made more than $ 200 per week, but had made a lot of money in the stock market. The book was essentially an introduction to long-term technical analysis. My dad did much better after reading this book and taught me the principles.
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 have tried to share the research given to me with friends and have had disastrous results. The stock market had peaked in 1968 and did not bottom out until 1974 at around 570 on the Dow Jones Industrial Average. Lucky for me, I used Ted Warren's basic methodology and was able to buy stocks at value prices which over time worked really well. The other brokers who work with me have done very badly during this time.
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 are offering little value to investors. It was not until 1976 that after continuing to do very well for my clients, I decided to research the logic of my approach. I was working with Ray Hanson Jr. at Barclay Douglas & Co in Providence R.I. I convinced him to work with me on this project.
The research project
At the time, there was no such thing as a computerized inventory history database that was accessible to us. We found a card book publisher with an unbroken history of card books starting in 1936. The card book publisher had some of the books on hand, but we had to turn 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 traded for an extended period of time in a base without lowering again. We had to look at thousands of these charts to determine our two ground rules. We had two concerns. First, if we bought these stocks too early, our gains would be inhibited by how long the stock remained stagnant in the base. Second, some of these companies went bankrupt at the start of the reference period. After several hundred hours of reading several thousand stocks, we have empirically determined two ground rules.
Our study, published in 1978, proved that stocks follow a discernible pattern that can be recognized and exploited. You can view the results on Google, “Eleven Quarter Stocks,” an independent website. The recommendations at the end of the book also saw average gains of over 466%. So, from a data perspective, the evidence is certainly sufficient to refute the classic, "A Random Walk Down Wall Street". Data from 1978 to present also shows that the models are still working.
HOW CAN THIS KNOWLEDGE HELP YOU TO BETTER MANAGE YOUR MONEY?
I caution you not to be fooled by the simplicity of the rules of this concept. While they may seem obvious once they are pointed out to you, that doesn't change their value in any way. It is easy to understand and difficult to perform. Why? Because the rules are consistent and human emotions are not. These are the people who must act on their knowledge of these rules, and people are swayed by mighty tides of fear, greed, and impatience.
I have used this logic while working with thousands of people. Most will quit smoking because it takes a long-term patient perspective. Often, when indices go up, these stocks are not. After waiting two years with no profit, your stock increases by 50% to drop back to where it was before. Some stocks have really big rises and cause you to buy more in order to go down significantly. My way of dealing with these questions is to only invest around 10% in a group of these stocks, especially after a cyclical market decline. It's a lot easier to own if you don't over-invest. Your knowledge of cycles will also help you invest in mutual funds. Take very little risk after the markets rise for three years without large corrections and buy more aggressive assets after a four-year cycle low. I have used this knowledge to their advantage, except when making a lot of money I have lost many times by investing too heavily in biotech stocks at too high prices. Sadly, I also have human frailty.
I plan to sell the study, "Non Random Profits" as an eBook with the rest of the story.