The Traders Journal

Stock Market Mastery: Blending Fundamental & Technical Analysis Part I

The Harvard Business Review (November, 2014) just published its list of the Best Performing CEOs.  This list should interest investors since these top 50 CEOs have been undeniably effective in delivering total shareholder returns which averaged 1,350% while on the job.  That translates into a 26.2% annual return!

One classic example of why investors should hitch their wagons to these “best” CEOs, such as Warren Buffett at Berkshire Hathaway (BRK/A), is that those investors who did so have been rewarded with a 950% return over the past 20 years.  

From my experience in Silicon Valley, these individuals are obviously talented and driven with a very high bandwidth, are just as often somewhat quirky.  Their shareholder letters can make for interesting reading as they reveal their key business principles and management styles.  

Common to most of this group (and unlike many short-term focused CEOs) is that they focus on the long term and possess a powerful strategic vision as to implementation.  Another common denominator is that their companies connect effectively with customers, employees and the communities where they operate.  Interestingly, about a quarter of them are MBAs and a quarter are engineers by training.  That is all fundamentally good and academically interesting, but as an investor, I believe performance is paramount.

The key point of this blog is that the Harvard Business Review article highlights the top CEOs who run great companies, but you’ll need technical analysis to separate the great companies from the great investments.  In my book, it’s only a great company if the stock I own appreciates in value.  

There are a number of CEOs on this list who only achieve two out of three.  I’m looking for a great CEO, a great company and a great stock chart.  I demand three out of three.   That being the caveat, it was easy to sift through the stock charts of all these CEOs’ companies and find the 3-for-3 players.  

I would encourage both fundamental and technical investors to make the effort and review these charts to prove to themselves the power of blending both disciplines.  I’ll share half a dozen companies that interest me with the disclaimer that I own or have owned a number of these equities. The average performance gain of these six stocks over the past three years ranges from 200% appreciation up to 425%.

1.    John Martin, CEO of Gilead Sciences (GILD), +425% gain. 

2.    Reed Hastings, CEO of Netflix (NFLX),  +350% gain.   I’m very familiar with this ex-Marine who also has a masters degree from Stanford.   He started Pure Software, which he took public in 1995, and then was chased by venture capitalists who wanted to give him money for whatever his next business venture might be.  He started Netflix in 1997, and the rest is history.  A guy like this is recognized by his peers as exceptional on many fronts.  He was on the board of Microsoft until 2012 and he is still on the Facebook board.  Brilliant guy, but to you fundamentalists, I submit that you best use a chart when investing in his volatile stock.

3.    Steven Luczo, CEO of Seagate Technology (STX), +300% gain.  

4.    Paul Bisaro, CEO of Actavis (ACT), +280% gain.

5.    James Gallogly CEO of LyondellBasell Industries (LYB), +240% gain.

6.    J. Michael Pearson, CEO of Valeant Pharmaceuticals (VRX), +200% gain.

The key takeaways are that talented CEOs who run first-class companies are worthy of your consideration, but only if they have a track record of delivering shareholder value.  Call it “rational analysis” where you blend fundamentals and technicals and where the happy result is one plus one equals three!

Trade well; trade with discipline!
-- Gatis Roze

Five Advantages Individual Investors Have Over Institutional Investors

The walls of advantage once held by institutional traders over individual investors have come crashing down.  Emerging from the dust, there now marches an entire army of real advantages that individual investors hold over their formerly superior big brothers.  

In the worlds of fundamental information, charting tools and trading costs, these institutional armies no longer have the high ground.  The field is indeed much more level. 

Despite all the talk about program trading, derivatives and flash crashes, I urge you not to become demoralized or dispirited.  Don’t tiptoe to the sidelines.  My objective here is to increase your overall personal satisfaction with your individual investing efforts while bolstering your confidence and stimulating a call to action.  There are dozens of actual advantages that we, as individual investors, have over institutional investors.  I want to share five that come to mind.

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Wizard Investing: Assembly Required, Construction Prohibited

Read the Market Wizard books.  These remarkable investors use proven off-the-shelf tools and indicators which they then assemble into whatever profitable methodology that they’re most comfortable with.  What they don’t do is construct black boxes with proprietary indicators and complex algorithms and then proceed to make billions.  Yet it takes years – even decades – for many ordinary investors to realize it’s not about secret tools or esoteric indicators still waiting to be discovered.  It’s about the investors themselves.  

In auto racing, the cliché is bet on the driver, not the car.  Contrast this to horse racing which is notoriously fickle.  Why?  Because in horse racing both sides of the equation are flesh and blood – that’s where the unpredictability lies.  In F1 auto racing, you would likely win more times than not by betting on the top drivers.  Since only one side of the equation is a living being, it is far less unpredictable than horse racing.

My point is that likewise in the investing arena, more energy needs to be spent by investors on keeping a trading journal and reading books that help them better understand themselves – the flesh and blood component in the equation.  These are the high leverage activities that the Market Wizards have told us about for years.

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Definition of Money Management

Google “money management” and you’ll get back a quagmire of non-sequiturs, disjointed, inconsistent and incomplete information.  There is no single comprehensive definition.  There isn’t even any number of consistently similar definitions.  Yet what do most Market Wizards disclose as one of the keys to their success:  money management.

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A Virtual PhD in Institutional Style Investing: Tensile Trading ChartPack Update 5.0

Each quarter, I present you with the ultimate equity shopping list.  A virtual 5-star smorgasbord of alluring delights, showcasing the stocks that Fidelity is presently buying in each of its 40 Select Sector Funds.  This is no newsletter XXX hypothetical model portfolio of recommendations.  Rather, it is the actual equities that they are buying and that are showing up in the top 10 holdings in these  40 Select Sector mutual funds.  Frankly, I look forward to Fidelity releasing their quarterly holdings like a child waiting for Santa to appear at Christmas.

Over the past year, this quarterly review of Fidelity’s 40 Sector Funds has literally evolved into a methodology unto itself.  It yields many tradeable ideas, charting insights, management strategies (when they replace portfolio managers) and offers a PhD equivalent in investing as if you are being personally mentored by  Jesse Livermore himself.  

After all, these are Fidelity’s best and brightest sector specialists who each focus exclusively and in-depth on just one market area.  Most equities’ big runs start with these specialist funds and often their ideas get picked up by the larger Magellan Fund or Contra Fund who further sponsor a big run with the result being that many high probability winning investments can be found here by us individual investors.  

I have many insights to share with you from this quarter’s update pertaining exclusively to Fidelity, but more on those specifics later.  This is the first anniversary of the Tensile Trading ChartPack, and the depth of this quarter’s updates honors that fact.  Let me describe the updates.

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CANSLIM on Steroids

Profitable investing demands a unique type of profitable thinking.  Once you’ve achieved this consistently in your thinking and investing, you are ready to move on to focusing on
how best to nudge the probabilities in your favor with respect to all elements of your methodology.  Specifically, the example I’ll use in this instance is William O’Neil’s CANSLIM methodology that is so widely used.

I’d like to thank my friend Tom McClellan (of McClellan Oscillator fame) for bringing together two CANSLIM experts and traders for an enlightening evening last week.  My first exposure to William O’Neil and his methodology was in graduate school, just as he was starting the Investors Business Daily newspaper.  Back then, he came across as an almost shy but clearly brilliant investor when he spoke to our class about his trading methodology.

When I began trading full-time, my methodology was heavily influenced by his books, his newspaper and his CANSLIM approach.  Over time, as I managed to achieve both profitability and consistency in my investing, I began to look for what I’ll call ‘probability-enhancers’ to layer on top of the standard CANSLIM paradigm.  For this reason, the other night as I listened to both CANSLIM traders who were presenting their versions of O’Neil’s methodology, I could not help but revisit my own growth as a trader.

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Why Investors Need to Appreciate Fine Wines

As I sip my 2008 Cabernet Sauvignon, I ponder all the similarities between myself, as an investor, and Marty Clubb – the extraordinary winemaker at L’Ecole 41 in Walla Walla whose wine I am enjoying.  His vines produce sensational wines because he diligently prunes the branches as any widely acclaimed gardener would do.  He chose a outstanding location for his vineyard, and he uses the local climate to his advantage, whatever the weather offers up in a particular season.  

Marty regularly prunes the branches of his vines to promote growth and prepare it to blossom because fruitful branches yield a higher quantity and quality of grape.  Since nonproductive branches are not only worthless but can infect the rest of the vines, they are cut off, separated from the tree and burned.  This farming analogy perfectly illustrates what investors should be doing as well if they aspire to bottle vintage profits.

Investors need to pick a location and focus on working that location.  In other words, know what you know and don’t try to trade the entire market, long and short, options and futures, penny stocks and blue chips, currencies and commodities.  Pick a location within the market that you understand and enjoy – then focus to grow your profits there.

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Smart Beta Funds Leading to Stupid Choices

The latest wave on Wall Street’s beach of complexity and opaqueness is a new type of ETF fund referred to as a Smart Beta Fund.  I’ve even heard these new funds referred to as Bionic Beta Funds.  Consider this a case-in-point and follow-up to my blog last week where I ranted against Wall Street’s purposeful complexity.

It’s no longer a case of passive (index) funds versus active managed funds.  Now, they offer ETFs that are semi-active.  These funds operate in the overlapping area between passive rules-based ETF funds and actively managed discretionary portfolios.  According to Morningstar, there are now at least 342 such funds in the USA.

My concern is that these funds keep ratcheting up the sales pitch before they actually produce any noteworthy results.  None of them has existed through one full market cycle, yet not so smart investors are acting recklessly aggressive by throwing big money into these so-called “Smart” Beta funds.  

To go along with their unproven track records and bionic marketing claims, some of these funds reference proprietary indexes with little or no discernible edge being offered.   Many of these funds sponsors are adept at promising greater returns, but I’m not yet convinced that I’ll be adequately compensated for the greater risks.  

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Wall Street's Complexity versus Investors' Profits & Simplicity

“Any darn fool can make something complex; it takes a genius to make something simple.”  -- Pete Seeger

As a long-time trader, I am living breathing proof that simplicity and profits are positively correlated while complexity and profits are inversely correlated.  In other words, as my 25 year investing career has jettisoned multiple methodologies and numerous indicators, my profits have became more regular and predictable while my losing ratio has diminished.  This is the absolute antithesis of what Wall Street wants you to believe.  

Wall Street lives and breathes on complexity.  They pitch derivatives of every variety and alternative funds for specific self-serving reasons.  

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Gerald Loeb's Battle Plan for Investment Survival

Sometimes the things that need to be said can’t be said any better than they were said in the past.  I’m a big fan of Gerald Loeb (1899-1974), the man Forbes called the most quoted man on Wall Street.  I’ve written about this extraordinary investor before.

http://stockcharts.com/articles/journal/2013/05/gerald-loebs-timeless-wisdom-1899-1974.html?

These are the six elements of what Loeb described as his ‘Battle Plan’ for investment survival.  I believe we still have a lot to learn from G. M. Loeb.

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