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Interview With Ned Davis: Masters in Business (Audio) · Masters in Business

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Speaker 1: I p c V is Masters in Business with Very
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Speaker 1: Riddholtz on Boomberg Radio. This week on the podcast, we
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Speaker 1: have an extra special guest. His name is Ned Davis.
0:29
Speaker 1: He is the founder of the highly regarded Ned Davis
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Speaker 1: Research and author of numerous books. Will talk about that later.
0:37
Speaker 1: Quick interesting story. Long before Masters in Business came along,
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Speaker 1: I had been kicking an idea around about finding these
0:46
Speaker 1: really successful, articulate, intelligent people and sitting down and having
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Speaker 1: a conversation with them, and I think Ned. I'll include
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Speaker 1: the link to this on on the blog post. Ned
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Speaker 1: may have been the very first person and I spoke
1:01
Speaker 1: to UM. We didn't on the radio. We did it
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Speaker 1: uh unedited. It was pretty much straight through. It's very rough,
1:08
Speaker 1: but the concept for this show pretty much came from
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Speaker 1: a conversation I had with him. Uh. He is one
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Speaker 1: of the best regarded technicians around, a technicians technician. If
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Speaker 1: you were at all interested in quantitative technical trading, UM,
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Speaker 1: you're gonna love this. So, with no further ado, my
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Speaker 1: conversation with Ned Davis. My special guest today is Ned Davis.
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Speaker 1: He is the founder of renowned technical research firm ned
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Speaker 1: Davis re Research. Ned was a regular on This Week
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Speaker 1: with Lewis Rukeiser. He frequently graces the pages of Barons
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Speaker 1: and other financial publications. He founded ned Davis Research in
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Speaker 1: and now employees well over a hundred people. He is
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Speaker 1: the author of the Triumph of Contrarian Investing, Markets in
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Speaker 1: Motion and being Right or Making Money, and he's probably
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Speaker 1: best known as a technicians technician. Ned Davis, Welcome to Bloomberg.
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Speaker 1: Thank you for having me. Uh. You know, it's it's
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Speaker 1: really interesting that we have you here because when I
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Speaker 1: first started doing this, before we were broadcasting them on
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Speaker 1: the radio, you were one of the first people I
2:24
Speaker 1: spoke with, uh, and we did a phone interview. I
2:27
Speaker 1: want to say that was like eight or ten years ago.
2:30
Speaker 1: A lot of stuff has happened since then. Let's let's
2:33
Speaker 1: talk a little bit about your background. You were studying
2:37
Speaker 1: French and I believe it was Paris when you decided, um,
2:42
Speaker 1: I'm gonna change my career direction. Tell us, tell us
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Speaker 1: about that incident. Well, actually, I was at the University
2:48
Speaker 1: of North Carolina and I had decided I wanted to
2:51
Speaker 1: be a doctor, and so I was a chemistry major.
2:54
Speaker 1: And then I decided did not want to be a doctor.
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Speaker 1: And I had was spinning part of a year in France,
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Speaker 1: and uh, so I had to graduate with something else.
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Speaker 1: And I really liked French literature, so uh that's the
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Speaker 1: way I graduated as a French major. Um, I wasn't
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Speaker 1: really sure what I wanted to do. So they have these,
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Speaker 1: uh I guess psychological tests that test your aptitude and
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Speaker 1: your interests, and they said my aptitude was in math,
3:25
Speaker 1: but I didn't wasn't interested in math. And what I
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Speaker 1: was interested in it was verbal, but I wasn't any
3:29
Speaker 1: good at verbal. So I's thinking. I had had two
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Speaker 1: jobs in the summer at a company called J. C.
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Speaker 1: Bradford Company as an intern, and I really liked that
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Speaker 1: you're able to write and read and write, and uh,
3:40
Speaker 1: you be able to use your math skills. I said, well,
3:42
Speaker 1: this is this is a perfect for me. So then
3:45
Speaker 1: I ended up going to Harvard Business School, which I
3:47
Speaker 1: thought I was going to learn business, but it's actually
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Speaker 1: a management school, which is not what I wanted. So
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Speaker 1: then I worked went to work full time Bradford Company.
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Speaker 1: So somewhere in the middle of that, I recall you
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Speaker 1: telling a story about study French and France. Someone made
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Speaker 1: a reference about your southern accent and you were kind
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Speaker 1: of thinking, really, I'm not sure if this is for me,
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Speaker 1: am I misremembering, Well, it was. I really did not
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Speaker 1: know much French one. And when I went to France
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Speaker 1: and uh, you know, I was trying to learn the
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Speaker 1: language is best I could. And uh we had a
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Speaker 1: class and the teacher said, oh, thank you for saying that.
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Speaker 1: Uh this was in French, of course, and she said,
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Speaker 1: I always wondered what Lyndon Johnson would sound like speaking French,
4:31
Speaker 1: and now I know, and I'm thinking, Lyndon Johnson can
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Speaker 1: barely speak English. So I decided that, uh, speaking French
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Speaker 1: was not going to be my skill set. So you
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Speaker 1: go to j C. Bradford, you start penning a daily
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Speaker 1: technical report. What will your go to indicators or charts
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Speaker 1: back at that time. I think I was pretty much
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Speaker 1: a traditional chartist at that time and just looking at
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Speaker 1: chart patterns and uh trying to pick out stocks and
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Speaker 1: up trends and stay away from stocks and down trends.
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Speaker 1: But of course I was studying a lot of other
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Speaker 1: uh i'd say, independent research at the time, so I
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Speaker 1: was trying to learn from that. So I pretty much
5:12
Speaker 1: I selt self taught myself my field. What was it like,
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Speaker 1: really beginning your education in the field in what turned
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Speaker 1: out to be a pretty long bear market in the
5:22
Speaker 1: sixties and seventies. Yeah, I actually I think that makes
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Speaker 1: a big difference when you ask people what your outlook
5:30
Speaker 1: is on the market, and I said, when when did
5:32
Speaker 1: you start in the business, And if you started in
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Speaker 1: sixty eight like I did, you were going to live
5:38
Speaker 1: the first fourteen years and a really grueling bear market.
5:42
Speaker 1: So a quote of yours goes something like this, We
5:45
Speaker 1: are on the We are in the business of making mistakes.
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Speaker 1: The only difference between the winners and the losers is
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Speaker 1: that the winners make small mistakes while the losers make
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Speaker 1: big mistakes. Discuss that a bit the whole. One Buffet's
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Speaker 1: got a quote and he says his rules. Two rules
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Speaker 1: for making money. And he said rule number one, don't
6:06
Speaker 1: lose money. And he said rule number two, don't never
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Speaker 1: forget rule number one. So, uh, it's all about compounding
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Speaker 1: interest and compounding your returns. And if you take a
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Speaker 1: horrible loss, uh, you know, if you lose fifty on
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Speaker 1: a stock, u's not a fifty percent rise, it gets
6:24
Speaker 1: you back to even it's a it's a hundred percent rise.
6:27
Speaker 1: So if you have a big loss, it it's really
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Speaker 1: hard to compound your returns. So I knew there was
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Speaker 1: gonna be mistakes in the business. I'm just trying to,
6:36
Speaker 1: you know, is find out a mistake and cut it
6:38
Speaker 1: as quickly as possible. I think that's the key. And
6:42
Speaker 1: early in your career you had made a number of calls,
6:45
Speaker 1: some of which were very big calls. But I have
6:48
Speaker 1: been following your career and reading you for so long.
6:52
Speaker 1: I know you're thinking on predictions and forecasting has evolved
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Speaker 1: a lot. Tell us a little bit about that. Yes,
7:01
Speaker 1: you know, it's a business of forecasting. That's what clients
7:04
Speaker 1: want to want you to do. So that's what I
7:06
Speaker 1: tried to do. And I studied forecasts, and I saw
7:09
Speaker 1: a lot of forecasters make some dramatically correct forecasts, but generally,
7:15
Speaker 1: uh they would make a great forecast and a couple
7:18
Speaker 1: of years later make a terrible forecast. And it was
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Speaker 1: just like a flame out in the night. And I
7:22
Speaker 1: didn't want my career to be that way. And I
7:25
Speaker 1: was lucky enough to have some some some really good forecasts,
7:29
Speaker 1: but I still was suspicious. And when you go back
7:31
Speaker 1: and study the forecasting record, For example, the Federal Reserve
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Speaker 1: Board of Philadelphia has been studying for fifty years consensus
7:40
Speaker 1: a professional economists and they look at their forecast for
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Speaker 1: the following year. There's been seven recessions since nine seventy
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Speaker 1: and the economists as a group, obviously individual economists have
7:54
Speaker 1: done better, but as a group they called none, not
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Speaker 1: a single one of the seven recessions. And interestingly enough,
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Speaker 1: in the last since two thousand and one, they've been
8:05
Speaker 1: eighty I think eighty six percent of the time they've
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Speaker 1: been too low on their forecast. Excuse me, the forecasts
8:13
Speaker 1: have been too high for what the economy has actually done.
8:16
Speaker 1: So it's a very tough field forecasting. You launched your
8:19
Speaker 1: firm in really a couple of recessions, A long bear market.
8:25
Speaker 1: That must have been a really challenging time to launch
8:28
Speaker 1: a new uh services fun Well, actually, you know, we
8:33
Speaker 1: were we sell ourselves as risk managers, and it had
8:37
Speaker 1: been such a long period of high risk that uh
8:41
Speaker 1: people were looking around for risk managers. And uh also
8:46
Speaker 1: it just so happened after that period long period of
8:49
Speaker 1: time six haiti. Most of the time I was with J. C. Bradford,
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Speaker 1: And of course retail brokerage firms are historically bullish and
8:56
Speaker 1: should be. But uh So, anyway, us to the time
9:00
Speaker 1: that I was there, I was negative and it was
9:03
Speaker 1: just about the early period that I was turning more
9:07
Speaker 1: bulish on the long term out look. So that that
9:10
Speaker 1: was a very fortunate thing. And um so I left there.
9:14
Speaker 1: I was a partner Bradford's, but I wanted to, I
9:19
Speaker 1: guess my contribution to the businesses that uh this was
9:24
Speaker 1: really before computers had taken over. In fact, they had
9:27
Speaker 1: just started over, taking over the back offices, and uh
9:31
Speaker 1: so I wanted to make the research that I do
9:33
Speaker 1: computerized so that I could test some of these things
9:36
Speaker 1: that that people saw on charts and see if any
9:39
Speaker 1: of them worked. So you've got a lot of pushback
9:43
Speaker 1: from Bradford saying, hey, I really think we should adapt
9:46
Speaker 1: the new technology to our practice. They weren't very keen
9:49
Speaker 1: on that. Well that the answer basically was if if
9:52
Speaker 1: it ain't broke, don't fix it, which is which is
9:55
Speaker 1: a good answer. But this is something I wanted to do.
9:58
Speaker 1: And there were a couple of Bradford broker ed Mendel
10:00
Speaker 1: and Kent Reagan Stein that they wanted to go out
10:03
Speaker 1: and try this, and uh, we already had a pretty
10:05
Speaker 1: good following, so uh, we were were We were nervous
10:09
Speaker 1: about it obviously, but we um, we didn't use any
10:14
Speaker 1: debt and we put up our own money and uh,
10:16
Speaker 1: you know, we had enough customers and we made a
10:18
Speaker 1: go of it from the beginning, launching with a handful
10:21
Speaker 1: of customers or a decent number of customers. How to
10:23
Speaker 1: make that transition fairly even? What were the first fairly easy?
10:28
Speaker 1: What were the first couple of years like, um, when
10:31
Speaker 1: you were building the business? Well, you know it was
10:36
Speaker 1: I'm not a manager, I I'm a research nerd and
10:39
Speaker 1: that's what I like to do. So uh, Eddie and
10:43
Speaker 1: Kent were in Atlanta, Georgia, which Eddie Mendel and Kent
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Speaker 1: Reagan Stein, and they were. They were in Atlanta, which
10:49
Speaker 1: is where the sales were, and I was in, uh,
10:52
Speaker 1: just outside of Sarasota, Florida, where I lived, and so anyway,
10:57
Speaker 1: I had to put together some people and was uh
11:00
Speaker 1: it was it was fun being a Being a starting
11:03
Speaker 1: manager is not something that I liked doing, but it
11:05
Speaker 1: was fun. So after a few years you developed quite
11:08
Speaker 1: a reputation. And one of the things that Davis Research
11:12
Speaker 1: was known for was these specific research projects requested by clients.
11:18
Speaker 1: In fact, uh recently they were doing more than two
11:22
Speaker 1: thousand UH client generated research projects a year. How did
11:27
Speaker 1: that approach develop and how how how do people approach
11:32
Speaker 1: you with, Hey, I has an idea I want to
11:35
Speaker 1: test out. Well, once we built our own software and
11:38
Speaker 1: had the computers around, you know, my idea actually was
11:43
Speaker 1: building a company similar to what Value Line had built
11:46
Speaker 1: in the fundamental research area. UH. And I remember specifically
11:51
Speaker 1: the date, the date that Arnold Bernhard died because Value
11:54
Speaker 1: Line stock went up big that day, and I thought, this,
11:58
Speaker 1: this is the kind of firm you want to be
12:00
Speaker 1: old that people want your data, they want your charts,
12:03
Speaker 1: they want your studies. They aren't necessarily looking for you know,
12:07
Speaker 1: a guru that walks on water. They so I decided
12:11
Speaker 1: to try to build a company like that. So yes,
12:13
Speaker 1: we set up a client services department where we would say,
12:18
Speaker 1: you have research questions, you bring them here and we'll
12:21
Speaker 1: do the research for you. And we actually we won't
12:24
Speaker 1: share the research with our own research team. It's it's
12:27
Speaker 1: your proprietary product, and uh it's it's been a good
12:30
Speaker 1: product for us. And we've come up. Actually, you know,
12:34
Speaker 1: I don't know come we've come up. I've come up
12:36
Speaker 1: with a lot of ideas on my own, but we
12:38
Speaker 1: probably we say we're client driven, and uh, some of
12:42
Speaker 1: the best ideas I've had, we're client ideas. Give us
12:45
Speaker 1: an example of some typical client client requests or some
12:49
Speaker 1: unusual client requests. Well, you know a lot of times
12:53
Speaker 1: that we'll have a chart and they'll want to see
12:55
Speaker 1: it back further or they'll want to see a different
12:57
Speaker 1: version of it. Uh um. But you know, we had
13:01
Speaker 1: a lot of crisis events when I got into the business,
13:05
Speaker 1: and people said, what did the market do after there's
13:09
Speaker 1: a major crisis event? So we went back and you know,
13:12
Speaker 1: we tried to study history, and you know, there was
13:14
Speaker 1: Pearl Harbor and there was JFK's assassination. I got in
13:18
Speaker 1: the business. You know, Martin Luther King and Robert Kennedy
13:21
Speaker 1: died the first assassinated the first year, and then you
13:24
Speaker 1: had Penn Central and and and on and on. So
13:27
Speaker 1: we put all this together and I saw what the
13:30
Speaker 1: market did, and and uh, it was fascinating. Generally there
13:34
Speaker 1: was a a sell off, as you would expect on
13:37
Speaker 1: the news, but very short term and almost you know,
13:41
Speaker 1: six months to a year later, the market was almost
13:44
Speaker 1: always higher. So we had we had put this study together,
13:47
Speaker 1: and uh we had shown it a couple of times
13:49
Speaker 1: in publications, and then uh, on nine eleven, um, we
13:53
Speaker 1: got a call from We put it out again and
13:56
Speaker 1: we got a call from Barns and they wanted to
13:58
Speaker 1: use it. And uh, you know it as terrible as
14:02
Speaker 1: that tragedy was, the study was very timely and that
14:06
Speaker 1: you know, there was a week cell often it was
14:08
Speaker 1: a very scary time. But uh, the market did recover
14:12
Speaker 1: after that pretty well. So in response to unexpected geopolitical events,
14:17
Speaker 1: markets wobble and then go about resuming the prior trends exactly.
14:20
Speaker 1: Sometimes sometimes you know, they do better. Uh, it's it's
14:24
Speaker 1: it's the logic's a little difficult to understand. But if
14:28
Speaker 1: you're a nervous holder of stock and some bad news comes, uh,
14:32
Speaker 1: you panic out, and uh, then who's left or are
14:36
Speaker 1: strongholders of stock? So you know, it's at that point
14:39
Speaker 1: it's it's hard to get people to sell. After you've
14:42
Speaker 1: gotten the nervous people out, you've got good strongholders of stock. Counterintuitive,
14:46
Speaker 1: but you get a wash out and then you're only
14:49
Speaker 1: left with with people who are not likely to to
14:53
Speaker 1: jump out at any given moment. When the exception to this,
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Speaker 1: of course really and they're not many, but the exception
15:00
Speaker 1: was Lehman, which was a panic event that uh there
15:04
Speaker 1: was systemic and I think that that is a key
15:08
Speaker 1: when you're looking at crisis events. If if if it's
15:11
Speaker 1: going to uh take down the financial system, then and
15:14
Speaker 1: the study is not gonna work. But pretty much anything else, wars, bombings,
15:19
Speaker 1: terror attacks, uh you know, the worst things you can
15:22
Speaker 1: think of, assassination of a president. Uh, these things pretty
15:27
Speaker 1: much all fit the same pattern. Even Lehman Brothers was
15:29
Speaker 1: September eight. Markets had peaked October oh seven, so it
15:34
Speaker 1: had been practically a year of downtrend that wouldn't the
15:38
Speaker 1: only real difference between the trend is Lehman just precipitated
15:42
Speaker 1: in an acceleration. That's partly true, but I think the
15:46
Speaker 1: systemic part to the banking systems critical. Let's talk a
15:51
Speaker 1: little bit about um technical analysis. So you were an
15:56
Speaker 1: early adopter not only of technical analysis, it of technology
16:01
Speaker 1: as well. Tell us how that changed the way you
16:04
Speaker 1: looked at markets. Well, you know, you start off you
16:08
Speaker 1: read Edwards and McGee, a technical analysis book or a
16:12
Speaker 1: lot of other really well written books on chart patterns,
16:16
Speaker 1: and uh, then you start applying that and you, uh
16:21
Speaker 1: you see a head and shoulders bottom, and you say, oh,
16:24
Speaker 1: my goodness, is stuck is turning up? And then you're
16:27
Speaker 1: reading another report and somebody's looking at the same chart
16:30
Speaker 1: and they say, oh, no, that's that's a head and
16:32
Speaker 1: shoulders top, and uh it was almost like, uh, you
16:37
Speaker 1: made your own reality. You looked at a chart and
16:40
Speaker 1: you saw what you wanted to see. So uh, I
16:43
Speaker 1: said that I can't do this. I have to uh
16:47
Speaker 1: have it more quantitative. I've got to test these things
16:50
Speaker 1: and see whether they work or not. So that that
16:52
Speaker 1: was the idea really of going to technology. I also
16:56
Speaker 1: at that point had gotten interested in other people that
17:01
Speaker 1: seemed very successful in the business. One of my mentors
17:04
Speaker 1: was a guy named Edson Gould and Uh. He was
17:08
Speaker 1: a technician, UM, but he also really believed that the
17:13
Speaker 1: stock market and the economy were driven by crowd psychology,
17:17
Speaker 1: and he was also a study or of the Federal
17:19
Speaker 1: Reserve Board. Also became good friends with Marty's why. He
17:24
Speaker 1: started out as a sentiment guy too, and he ended
17:27
Speaker 1: up like me, don't fight the Fed, don't fight the tape.
17:30
Speaker 1: So so Marty's wage is always my answer to the
17:34
Speaker 1: question how come there are no rich technicians? And the
17:37
Speaker 1: answer is there are a ton of very successful people
17:41
Speaker 1: who use technicals as a fundamental basis of their trading
17:45
Speaker 1: and their investment strategy. Did you get a lot of
17:48
Speaker 1: pushback from your work from the fundamental community? I think originally, uh,
17:56
Speaker 1: there were only a handful Alan Shaw Feral. They were
18:00
Speaker 1: really only a handful of technicians that that were UH
18:05
Speaker 1: in high regard, and so it was difficult at first.
18:08
Speaker 1: But you know, again, once you go through a bear market,
18:11
Speaker 1: people look around and say, you know, I need to Uh,
18:14
Speaker 1: I can't just buy and hold all the time without
18:16
Speaker 1: concern over anything. I have to, you know, manage my risks,
18:19
Speaker 1: and so it's gotten obviously a lot more popular. How
18:24
Speaker 1: did technicals differ at the institutional level and the retail level. Well,
18:31
Speaker 1: I think retail was, you know, more interested in just
18:35
Speaker 1: you know, short term movements and stocks, and uh, institutionals
18:40
Speaker 1: are more interested in a big picture, uh, maybe tying
18:44
Speaker 1: it in with the macro and and and the FED
18:47
Speaker 1: and sentiment and a lot longer term things. And I
18:51
Speaker 1: had also gotten interested uh you know in the in
18:55
Speaker 1: the FED, Federal Reserve boards. Uh, you know, emphasis on
19:00
Speaker 1: in the stock market, and so trying to put things
19:02
Speaker 1: in perspective. Guy named Hamilton's Bolton with the bike credit
19:06
Speaker 1: analysts had put together a monetary thermometer which was really
19:10
Speaker 1: one of the first models that they had timing model
19:14
Speaker 1: using a Federal Reserve statistics and I was really fascinated
19:17
Speaker 1: by that. So these days there's a near infinite amount
19:23
Speaker 1: of charting software. You could pretty much access a ton
19:27
Speaker 1: of really highly detailed um technical studies, some of which
19:33
Speaker 1: are are free, some of which are fairly modest modestly priced.
19:37
Speaker 1: What has the ubiquity of computing power and all the
19:41
Speaker 1: software done to the world of trading and investing. Well,
19:45
Speaker 1: it's a it's a it's a good question, and the
19:48
Speaker 1: answers complicated. Uh, there's a lot of good ideas. You know,
19:52
Speaker 1: this happens to be one that fits my psyche on
19:55
Speaker 1: how to invest. But there's a lot of good ideas
19:57
Speaker 1: about how to invest and how to make money. The
20:00
Speaker 1: one key problem is if something gets too popular, it's
20:04
Speaker 1: gonna hurt its effectiveness. So um, but this is true
20:08
Speaker 1: of anything. I remember in the nineteen eighties, which was
20:12
Speaker 1: a big period because it was the start of my company,
20:14
Speaker 1: and uh it was it was a bullmarket period and
20:18
Speaker 1: people didn't need risk advisors for a while, and and
20:21
Speaker 1: uh we got into seven and uh I got really,
20:26
Speaker 1: uh really worried about derivatives and what they could do
20:29
Speaker 1: to the market. But anyway, that are your friends of
20:32
Speaker 1: portfolio insurance or something broad portfolio insurance, which was part
20:37
Speaker 1: of part of using derivatives to do portfolio insurance. And
20:40
Speaker 1: actually I thought portfolio insurance is one of the coolest
20:43
Speaker 1: ideas I've ever heard of it and actually fit exactly
20:47
Speaker 1: what I want to do with my heads work. I want,
20:51
Speaker 1: you know, I want to protect my portfolio and a
20:53
Speaker 1: downtrend and so it was a great idea and it
20:56
Speaker 1: was widely sold on Wall Street and then uh, you know,
20:59
Speaker 1: the mark it started down and unfortunately I was able
21:02
Speaker 1: to to sort to sort of see this one. So
21:06
Speaker 1: anyway that we had, we had a crash that I
21:08
Speaker 1: think was calls really by a great idea that got
21:11
Speaker 1: too popular. So, um, this is the thing when technical
21:15
Speaker 1: analysis gets so popular. Everybody's looking at the same patterns
21:19
Speaker 1: and the same breakouts and acting on them. It's not
21:22
Speaker 1: going to act as well as if you could find
21:24
Speaker 1: something that nobody's looking at. Let's talk a little bit
21:27
Speaker 1: about the stock market and what separates good investors from
21:32
Speaker 1: not so good investors. Uh, you wrote something not too
21:36
Speaker 1: long ago in one of your books, or maybe it
21:38
Speaker 1: was a little while ago. Good investors, successful investors have
21:42
Speaker 1: four basic traits. Their objective, their disciplines, they're flexible, and
21:48
Speaker 1: their risk averse. Is it that simple, It's just those
21:51
Speaker 1: four things. You do that and you're good to be
21:53
Speaker 1: a good investor. Yes, it's complicated when you say those
21:57
Speaker 1: things together because people think, well, discipline is the opposite
22:01
Speaker 1: of flexible. But when we use the term flexible really
22:04
Speaker 1: really thinking about open mindedness and and This is one
22:07
Speaker 1: of the curses in my life, or one of the
22:10
Speaker 1: gifts in my life, is that if there's a debate,
22:13
Speaker 1: I could pretty well take both sides, uh and do
22:16
Speaker 1: a pretty good job. That means you're objective. I have
22:19
Speaker 1: a gift of being able to see both sides. The
22:21
Speaker 1: negative is it's it's hard to be a hundred percent
22:25
Speaker 1: black or white when you can see the world's actually gray.
22:30
Speaker 1: What about what about risk of verse because we're taught
22:33
Speaker 1: that risk aversion often leads people to be too quick
22:36
Speaker 1: to jump out of equities when they should be a
22:38
Speaker 1: little more risk embracing. Yes, well, that's a good question
22:42
Speaker 1: because it happens to be the one piece of my
22:46
Speaker 1: philosophy that it has changed over the years because there's
22:50
Speaker 1: a lot of risk takers that have made a lot
22:52
Speaker 1: of money. But what they do is they manage their risks.
22:55
Speaker 1: So they'll they'll take a big position, but if it
22:59
Speaker 1: if it goes hour or the news changes that they
23:01
Speaker 1: get out. So it's still a matter. It's still a
23:05
Speaker 1: matter of risk management. But I think the term risk
23:07
Speaker 1: averse was came from being in the market from two
23:13
Speaker 1: frankly so, speaking of which those who study history are
23:18
Speaker 1: contemned to repeat its mistakes. How difficult is it for
23:22
Speaker 1: investors to learn the lessons that history presents to us? Well,
23:28
Speaker 1: it's tricky because you want to learn the correct lessons
23:31
Speaker 1: and you don't want to learn the bad lessons, and
23:33
Speaker 1: it's a little hard to know, uh, which it is.
23:36
Speaker 1: So what happens is there will be a period of
23:38
Speaker 1: time and there was a mistake during that period of time,
23:41
Speaker 1: and everybody learns and says, well, I won't make that
23:44
Speaker 1: mistake again. And then times change and periods change in
23:47
Speaker 1: areas change, and uh, everybody's learned that the lesson of
23:52
Speaker 1: that period, but not the next period. So again, I
23:55
Speaker 1: think the real lesson is studying, Uh, studying history is
24:00
Speaker 1: seeing Mania's bubbles saying, uh, you know extremes from extreme
24:06
Speaker 1: pessimism to extreme optimism, and uh, how these end up?
24:11
Speaker 1: How how they end up? And uh, that's the lesson.
24:14
Speaker 1: It's not just put oh portfolio insurances is something I'll
24:19
Speaker 1: never do again. That that's not really the lesson. The
24:22
Speaker 1: lesson is it got too popular, the market got too high,
24:25
Speaker 1: there was too much optimism, and that that that is
24:28
Speaker 1: a terrible combination. That's the lesson to learn. So so
24:32
Speaker 1: between the extremes of of too much pessimism like we
24:37
Speaker 1: saw in eighty seven and seventy three, seventy four and
24:41
Speaker 1: oh three and oh nine, and too much optimism with
24:45
Speaker 1: sixty six, and go through the list sixty six and
24:49
Speaker 1: two thousand and then again in in oh seven, although
24:52
Speaker 1: I don't know if that was as much too much
24:54
Speaker 1: optimism as as you mentioned a systemic problem. Where are
24:58
Speaker 1: we in that spectrum between too much negativity and too
25:01
Speaker 1: much enthusiasm? Yes, I mean it was Templeton that said, uh,
25:05
Speaker 1: bull markets are born and pessimism. They rise on skepticism,
25:11
Speaker 1: they mature on optimism, and they die on euphoria. And uh,
25:15
Speaker 1: I think that's pretty much what we've seen. Uh since
25:19
Speaker 1: two thousand nine, we've gone through those phases. And I
25:22
Speaker 1: think after the election, for for whatever reason, we got
25:26
Speaker 1: we went into the euphoric stage. And you can see this,
25:29
Speaker 1: uh in all kinds of consumer confidence, business confidence, UH
25:34
Speaker 1: CEO confidence, UH soft sentiment data got way way higher
25:41
Speaker 1: than it was for it. But we just this isn't
25:44
Speaker 1: this is an early phase of euphoria. So I don't
25:46
Speaker 1: I don't necessarily think this is the end, but I
25:49
Speaker 1: think you can certainly seem see euphour you and that
25:52
Speaker 1: that's uh, that's a high risk phase. So so what
25:55
Speaker 1: should investors do to manage their risk? What's what's the
25:59
Speaker 1: best approach for someone's listening to this, they have a
26:02
Speaker 1: couple of million dollars in the four oh one K
26:04
Speaker 1: and their investment portfolios, how should they manage that? Well,
26:09
Speaker 1: you know, as if if you're a chartist and that's
26:12
Speaker 1: your your background, you can see formations, you see demand
26:17
Speaker 1: on a chart, or you see trend lines and UM
26:21
Speaker 1: or you just use stop losses below important lows and uh,
26:26
Speaker 1: if the market turns down, you you just get stopped out.
26:29
Speaker 1: Other people might want to right now, the protection the
26:34
Speaker 1: insurance portfolio insurance for portfolios, the vix is very low.
26:39
Speaker 1: Vix is how much it costs to buy options. The
26:41
Speaker 1: vix is very low. You can buy some puts to
26:43
Speaker 1: protect your portfolio, uh, some hedge fund short stocks, you
26:48
Speaker 1: can use, put some money in cash and wait for pullback.
26:51
Speaker 1: So there's a lot lots of things you can do.
26:54
Speaker 1: So is an interesting um question that comes up with
26:59
Speaker 1: the eyes of technical technical analysis, which is thanks to computers,
27:05
Speaker 1: we could pretty much put anything on a chart. How
27:08
Speaker 1: how advisable is it to chart everything you possibly can make?
27:13
Speaker 1: You look at earnings, you could look at everything from
27:16
Speaker 1: GDP to what have you. There really isn't any data
27:19
Speaker 1: series that can't be put on a chart. Now, and
27:22
Speaker 1: that's what we do. I mean, that's what my business
27:25
Speaker 1: does pretty much. And we we actually analyze the economy
27:29
Speaker 1: pretty much the same way we do the stock market,
27:31
Speaker 1: and we use centimon indicators, we use trend indicators. Uh.
27:35
Speaker 1: In the economy, there's a lot of indicators that tend
27:38
Speaker 1: to lead the economy, So we put most of our
27:41
Speaker 1: emphasis on the leading and leading economic indicators. And when
27:45
Speaker 1: they're turning up and are strong, then that's a good sign.
27:49
Speaker 1: So we I do this somewhat. In the stock market,
27:51
Speaker 1: there's certain groups and sectors that tend to lead the market, uh,
27:55
Speaker 1: and so we put our main emphasis on those the
27:58
Speaker 1: trend of those all. So we look for the economy
28:02
Speaker 1: or the stock market, we look for the Federal Reserve
28:04
Speaker 1: Board and what are they doing? Because they control the
28:06
Speaker 1: cost of money and the availability of money, And if
28:09
Speaker 1: you're looking at supplying demand, which is what technical analysis
28:12
Speaker 1: is all about, how can you ignore the Federal Reserve Board?
28:15
Speaker 1: You really can't talk to me about big MO. It's
28:18
Speaker 1: one of my favorite charts of yours. How did how
28:21
Speaker 1: did the idea come about? And what tell us what
28:23
Speaker 1: it actually depicts? Okay, Big MO is just the trend
28:26
Speaker 1: of a hundred hundred industry groups, hundreds of industry groups,
28:30
Speaker 1: and it's the cyclical trends. So we're talking, you know,
28:33
Speaker 1: a year or two kind of trends. Uh, But I
28:37
Speaker 1: called it and put the MO in there. We also
28:40
Speaker 1: look at rates of change, how fast a group is
28:43
Speaker 1: rising or falling in the momentum indicators UM are trends sensitive,
28:48
Speaker 1: but they're not exactly trend indicators, so they can be early.
28:53
Speaker 1: So when you put the trend following indicators and uh,
28:56
Speaker 1: the momentum indicators together, I think you can get a
28:59
Speaker 1: little closer to tops and bottoms, and big motto right
29:02
Speaker 1: now shows about of those industry groups are still in
29:06
Speaker 1: strong uptrends and and that that's a decent figure. It's
29:10
Speaker 1: high neutral, I would say, mili bullish, and we we
29:13
Speaker 1: use below fifty as as a warning sign. So you
29:17
Speaker 1: mentioned UM the rising sentiment indicators earlier. H Someone did
29:22
Speaker 1: a study not too long ago that showed the largest
29:25
Speaker 1: gap ever between soft survey sentiment information and hard actual data.
29:34
Speaker 1: What do you what do you think of that gap
29:35
Speaker 1: between between the two. Well, I think clearly the soft
29:41
Speaker 1: tends to be leading UH leads the hard. So the
29:45
Speaker 1: fact that the soft is strong in the heart is
29:49
Speaker 1: weak UH is not necessarily a bad sign. However, this
29:54
Speaker 1: works much better depending on where you are in a cycle.
29:59
Speaker 1: If you're coming out of a recession and there's a
30:02
Speaker 1: lot of unused labor, unused capital, there's a lot of
30:05
Speaker 1: savings around UH, and then sentiment source will people have
30:10
Speaker 1: the ability to go out and and spend. And we
30:13
Speaker 1: saw this in two thousand nine, two thousand ten. Now
30:16
Speaker 1: we're getting the same kind of sentiment readings now, but
30:19
Speaker 1: we've had nine years of an expansion and and people
30:22
Speaker 1: have very little savings. They're up to their teeth. Uh.
30:26
Speaker 1: You got over a treeon dollars in student debt. You know,
30:28
Speaker 1: I've got a tree in dollars a credit card debt,
30:30
Speaker 1: and you've got a tree in dollars in auto debt. Uh.
30:34
Speaker 1: So it's a lot different things. So, yes, I think
30:38
Speaker 1: the hard we think the hard debt is going to
30:39
Speaker 1: come on, but not by much so since we're talking
30:43
Speaker 1: about sentiment. How noisy is the series of sentiment data.
30:47
Speaker 1: It seems that there's a lot of fairly wild swings
30:52
Speaker 1: over short periods of time. Well, it just depends on
30:56
Speaker 1: who you're you know, what your survey is. If it's
30:58
Speaker 1: futures traders, they're gonna be pretty quick. Uh. You know
31:03
Speaker 1: a C e O s don't change their opinion that often.
31:07
Speaker 1: So it depends. But there there are small surveys and uh,
31:12
Speaker 1: if Trump proved anything, he proved that you know that
31:15
Speaker 1: polls aren't always right. So what we do, Uh, we
31:20
Speaker 1: look at a lot of polls. We also look at
31:22
Speaker 1: what people are doing in terms of option trading, Uh,
31:26
Speaker 1: how optimistic people are, upside volume versus downside volume, a
31:31
Speaker 1: lot of measures of activity. And we put all these
31:34
Speaker 1: together in a composite model. I think we Uh, one
31:37
Speaker 1: of the ones we use as twenty eight indicators in it.
31:40
Speaker 1: So if some of them are are fake news, then
31:43
Speaker 1: you hope the majority picks up the correct picture. What's
31:46
Speaker 1: what's the name of that particular charter And well we
31:50
Speaker 1: have the indie our crowd sentiment poll. We have been
31:53
Speaker 1: speaking with Nid Davis, co founder of nid Davis Research.
31:57
Speaker 1: If you enjoy this conversation, be sure as stick around
32:00
Speaker 1: for the podcast extras, where we keep the digital tape
32:03
Speaker 1: rolling and continue to talk about all things technical. Be
32:06
Speaker 1: sure and check out my daily column at Bloomberg View
32:09
Speaker 1: dot com. Follow me on Twitter at rid Holts. I'm
32:14
Speaker 1: Barry rid Holts. You're listening to Masters in Business on
32:17
Speaker 1: Bloomberg Radio. What could your future hold more than you
32:26
Speaker 1: think because at Merrill Lynch we work with you to
32:28
Speaker 1: create a strategy built around your priorities. Visit mL dot
32:31
Speaker 1: com and learn more about Merrill Lynch. An affiliated Bank
32:34
Speaker 1: of America. Merrill Lynch makes available products and services offered
32:36
Speaker 1: by Merrill Lynch. Pierce, Feder and Smith Incorporated, a registered
32:38
Speaker 1: broker dealer. Remember s I PC. Welcome to the podcast.
32:44
Speaker 1: Thank you so much, ned for doing this. I have
32:47
Speaker 1: to share the funny story. When I first started writing
32:52
Speaker 1: for Bloomberg about three or four years ago, they came
32:56
Speaker 1: to me and said, what would you like to do?
33:00
Speaker 1: There was a whole long story, and the takeaway was
33:04
Speaker 1: I want to sit down with accomplished, intelligent people and
33:07
Speaker 1: have a conversation about their career and their impact on
33:11
Speaker 1: markets and business and what have you. You were one of,
33:15
Speaker 1: if not the first interview I had done, and so
33:19
Speaker 1: I said, like this, like this Ned Davis interview. Here,
33:22
Speaker 1: here's a SoundCloud in bed. Take a look at it.
33:26
Speaker 1: And in hindsight, it's very rough. It's on the phone.
33:31
Speaker 1: The old um the reference from Malcolm Gladwell in Outliers.
33:38
Speaker 1: You do something for ten thousand hours, you eventually get
33:41
Speaker 1: good at it. I haven't quite done a full ten
33:43
Speaker 1: thousand hours, but you're about a hundred and fifty something.
33:47
Speaker 1: We've been doing this now for three years. And when
33:49
Speaker 1: I listened to that interview in preparation for this interview,
33:53
Speaker 1: I have to say you were very patient, very kind,
33:55
Speaker 1: because I was just got awful then. UM, but I
33:59
Speaker 1: really appreciate you coming back and and letting, uh, someone
34:03
Speaker 1: improved version of me have this conversation. UM. So thank
34:08
Speaker 1: you very much for for flying up for this. I've
34:11
Speaker 1: been a fan of your work for forever. We didn't
34:14
Speaker 1: get to talk about the books during the broadcast portion,
34:19
Speaker 1: but I have to ask you a few questions about
34:21
Speaker 1: these because these are really very significant books in the
34:27
Speaker 1: world of investing. The first one that I have to
34:30
Speaker 1: talk about is this one being right, we're making money
34:34
Speaker 1: now collector's edition, you can't find that. I've I've had
34:37
Speaker 1: this for I don't know how long underlined and highlighted.
34:41
Speaker 1: What was the thinking behind writing that book? Well, again,
34:46
Speaker 1: I was, you know, trying to outline my philosophy mainly
34:49
Speaker 1: for clients. But uh that spending time on trying to
34:54
Speaker 1: forecast and be right is interesting. I certainly continue to
34:59
Speaker 1: do that, but really the focus should be on how
35:02
Speaker 1: to make money and so uh and again we use
35:07
Speaker 1: the tape, the trend, the sentiment, and the Federal Reserve
35:10
Speaker 1: Board uh to make money. But I think the one
35:14
Speaker 1: of the big things is, as I mentioned it early,
35:17
Speaker 1: is the magic of compound interest and and this is
35:20
Speaker 1: just a simple math thing that every kid should learn
35:22
Speaker 1: in school. But again, if you have a draw down
35:25
Speaker 1: like twenty nine to thirty two in stocks was eight percent,
35:30
Speaker 1: you have to you have to uh go up five
35:33
Speaker 1: hundred to get back to even. And it took many,
35:37
Speaker 1: many years. So uh, I don't want we didn't want
35:42
Speaker 1: big drawdowns. That's that's the key to making money. And
35:46
Speaker 1: one of the things that I've been thinking about since
35:49
Speaker 1: I read this book so long ago was when people
35:52
Speaker 1: make forecasts, there's a tendency to marry those forecasts, meaning
35:57
Speaker 1: despite evidence coming their way that they're wrong, they stick
36:01
Speaker 1: with the forecast regardless and don't adjust their portfolio appropriately.
36:07
Speaker 1: In other words, they're willing to lose money in order
36:10
Speaker 1: to hang around long enough for their forecast to eventually
36:13
Speaker 1: come true. How dangerous is that? Well, you know, we
36:19
Speaker 1: have another expression that we'd like to use in my
36:21
Speaker 1: shop is we all make our own reality. And this
36:24
Speaker 1: this was shocking the first time I heard it, because
36:26
Speaker 1: I figured reality's reality. But sometimes when I'll be before
36:30
Speaker 1: an audience, I'll say, how many of you are sports fans?
36:34
Speaker 1: Let's say, are you Knicks fans? And I'm in New
36:37
Speaker 1: York And they'll say yes, And I'll say, well, how
36:39
Speaker 1: many of you have ever gone to a game and
36:41
Speaker 1: thought the referee favored the other team? And of course nobody,
36:45
Speaker 1: nobody raises their hand because we see what we want
36:49
Speaker 1: to see. Uh, you know, we want the Knicks or
36:51
Speaker 1: whoever our team is, to win, so we always go
36:55
Speaker 1: to the game and think the referees, uh were for
36:57
Speaker 1: the other team. When the NBA's NBA's actually done studies
37:01
Speaker 1: that show, if anything, it's very slight, but there is
37:04
Speaker 1: a small favor Uh, there's a small advantage for the
37:07
Speaker 1: home team and the calls in an average game. So
37:10
Speaker 1: this is something we see with our own eyes. So
37:13
Speaker 1: it's very easy. You have a position, you want it
37:17
Speaker 1: to work. You tend to read things that confirm your
37:20
Speaker 1: opinion and you don't read things that may not. So
37:24
Speaker 1: this again goes back to that flexibility thing. This is
37:27
Speaker 1: is important. Uh, or or even just say hey, I'm
37:31
Speaker 1: gonna put a stop loss there. If i made a mistake,
37:34
Speaker 1: I made a mistake, I'm done. The sports metaphor is
37:37
Speaker 1: so perfect. I'm a basketball fan. I'm a Knicks fan,
37:41
Speaker 1: and of course Patrick Ewing would never got the call,
37:44
Speaker 1: but Shack and Jordan, No, he's did. I'm not a
37:47
Speaker 1: big college basketball fan. But Joe Besseker of Emerald Asset
37:52
Speaker 1: Management is a huge fan and doing the n I T.
37:55
Speaker 1: I think it was the finals that are played at
37:57
Speaker 1: the Garden. He I get a call one day, Hey,
38:00
Speaker 1: I'm I got courtside seats. You want to come see this.
38:03
Speaker 1: I'm not a basketball fan. If you I'm not a
38:05
Speaker 1: college hoops fan, he goes. If you've never watched the
38:08
Speaker 1: game in the garden courtside, you have to come see this. Okay,
38:11
Speaker 1: So we go watch this really exciting game pretty close. Um,
38:15
Speaker 1: only he's a fan of his alma mater who actually
38:18
Speaker 1: made it. And I'm watching the game and Joe is
38:22
Speaker 1: just distraught because every call is absolutely the worst call
38:27
Speaker 1: ever made to mankind. And RALF, come on, the guy
38:31
Speaker 1: took six steps. He's walking. I have no dog in
38:34
Speaker 1: the fight. I could care less. And I'm like, hey, Joe,
38:37
Speaker 1: that was a step and a half. It's a layup.
38:39
Speaker 1: You're allowed to And it was a moment of clarity that, oh,
38:43
Speaker 1: your subjectivity really affects the way you perceived the wall.
38:46
Speaker 1: It was. It was amazing going to a game where
38:49
Speaker 1: you didn't care who won and watching people's reaction. Yes,
38:53
Speaker 1: I think it was extraordinary. Population Madness of Crowds McKay
38:57
Speaker 1: wrote it, and he said, Uh, an individual taken by
38:59
Speaker 1: themselves is rational. When you put the individual on a crowd,
39:03
Speaker 1: it becomes a blockhead. Uh you know, it's it's just
39:08
Speaker 1: totally Crowd psychology is really really strong. It's overwhelming, it
39:13
Speaker 1: takes all of us over and uh, it's it's really
39:17
Speaker 1: a very different than than an individual psychology. So another
39:20
Speaker 1: book I wanted to ask you about was the triumph
39:23
Speaker 1: of contrarian investing crowds man is and beating the market
39:28
Speaker 1: by going against the grain. So a question I always
39:32
Speaker 1: have about contraining investing investing is, well, Mark's markets have
39:37
Speaker 1: a tendency to go up over the long haul, and
39:40
Speaker 1: we have a tendency to see these long trends. Can
39:43
Speaker 1: you be a contrarian in the midst of a ten
39:47
Speaker 1: or twenty year bull market? Yes, well, that that you know,
39:51
Speaker 1: we like to say we go with the flow. In
39:54
Speaker 1: other ways, we go with the crowd until they reach
39:56
Speaker 1: an extreme and begin to reverse. And it's at that
40:00
Speaker 1: that small moment of time where it pays to be
40:03
Speaker 1: a contrarian. So it's it's a it's a bad mistake
40:06
Speaker 1: to say I'm just gonna go against the crowd. That
40:09
Speaker 1: that will not get you anywhere. You've got to really
40:11
Speaker 1: wait for extremes. And a question I didn't get to
40:16
Speaker 1: during the broadcast portion was about competitors you launched in.
40:21
Speaker 1: Were there any real technicians doing the sort of work
40:25
Speaker 1: you were doing? Then? Who were your competitors as a
40:28
Speaker 1: research firm? I don't think there were really any uh
40:34
Speaker 1: competitors doing technical research. Uh I mentioned earlier, Hamilton Bolton
40:40
Speaker 1: and the bank credit analysts. They did a little bit
40:43
Speaker 1: of technical, a lot of monetary. Uh. And certainly they're
40:48
Speaker 1: they're one of our competitors. You know, I'd like to
40:51
Speaker 1: compete with I s I uh ed Hyman because it's
40:54
Speaker 1: just a champion. Uh And uh there's now Cornerstone Macro Research,
41:00
Speaker 1: there's Rin Maak, Jeff de Grafs, a friend of mine,
41:03
Speaker 1: and uh so I would say that those all now
41:08
Speaker 1: have a technical element to them. So it's broadened out.
41:12
Speaker 1: Given the change in the commission structure that's out there
41:15
Speaker 1: and the shrinking of institutional sales desks. Is this end
41:22
Speaker 1: of the industry getting smaller and less competitive or is
41:24
Speaker 1: it just consolidating with a handful of firms that seems
41:28
Speaker 1: to have figured out how to add value to the process. Uh.
41:34
Speaker 1: You know, it was concentrated by Wall Street banks and
41:38
Speaker 1: now there's there's a lot of independent firms that are
41:42
Speaker 1: doing a great job. So, uh, I don't know it.
41:45
Speaker 1: It has changed. Certainly, commissions have changed. They were fixed
41:49
Speaker 1: when I got into the business. And uh. Uh so
41:53
Speaker 1: it's gotten harder, but the business has changed. It's always changing.
41:57
Speaker 1: So let's talk a little it's always changing. That's that's
42:00
Speaker 1: pretty sage advice. Let's talk about the rise of quantitative
42:06
Speaker 1: and indexing. What what does the rise of low cost
42:09
Speaker 1: passive index in mean to the world of active investing
42:13
Speaker 1: And what does that mean to a firm that sells
42:16
Speaker 1: its research to to money managers. Well, you know, if
42:21
Speaker 1: if everybody's an active manager and they're competing with each other,
42:25
Speaker 1: then um, it's gonna be a horror. It's gonna be
42:29
Speaker 1: very difficult to beat the averages. So they're charging high
42:33
Speaker 1: fees to be active managers, and some of them are
42:37
Speaker 1: very successful, but on average they're they're not doing any
42:41
Speaker 1: better than the market averages. So I think John Bogel
42:45
Speaker 1: had a great idea that to put these index together
42:49
Speaker 1: and uh, low fees and uh this would be a
42:53
Speaker 1: better investment for most people over the long run. And
42:55
Speaker 1: I think I think that's that's true. However, I noticed
42:59
Speaker 1: today I just up and to see a Bloomberg thing
43:01
Speaker 1: where there was a chart and they said there's more
43:04
Speaker 1: index funds now than there are stocks, and uh. So
43:08
Speaker 1: again this is a popular idea. It's a good idea,
43:12
Speaker 1: there's nothing wrong with it, but if it gets too popular,
43:14
Speaker 1: it will blow up, just like all the other big ideas.
43:18
Speaker 1: When does this get too popular? What do we Vanguard
43:22
Speaker 1: is four trillion, three trillion of which is passive, black
43:25
Speaker 1: Rock is five trillion, most of that is passive. At
43:29
Speaker 1: what point, or much of that, I should say, is passive?
43:32
Speaker 1: At what point does this get to be too big? Well,
43:36
Speaker 1: you know, after Al Gore invented the internet, uh no,
43:40
Speaker 1: and we had all the dot com stocks, I I thought, gosh,
43:43
Speaker 1: this has got to be a bubble, certainly, and and
43:47
Speaker 1: of course it continued for for for a number of years,
43:50
Speaker 1: and it's even bigger today. Uh But uh So, I
43:54
Speaker 1: think you can't just say, uh, it's extremely popular. You
43:59
Speaker 1: have to wait till the trends give up a little bit.
44:01
Speaker 1: You have to wait till the FED becomes a little
44:03
Speaker 1: more hostile. And at that point, I think you make
44:05
Speaker 1: the bet passive investing it is done. And I think
44:08
Speaker 1: it's a late phase, lead phase. Okay, nothing nothing nothing
44:12
Speaker 1: wrong with passive investing, nothing wrong with portfolio insurance. There's
44:15
Speaker 1: nothing wrong with growth stocks. It's just when they get
44:18
Speaker 1: too too popular and and we're still not there yet,
44:22
Speaker 1: you're saying we're getting there, which raises which raises the question,
44:28
Speaker 1: and you've written about this a lot, is the role
44:32
Speaker 1: of emotions in investing? How First, how important is it
44:36
Speaker 1: to keep emotions out? And then second what can investor
44:40
Speaker 1: do to to maintain that? Yes, well, that's that's why
44:44
Speaker 1: we put together these sentiment composites. And they ask go
44:47
Speaker 1: Warren Buffett one time the secret of success? And you
44:50
Speaker 1: know he's a fundamental individual value investor, and he said, Oh,
44:54
Speaker 1: our secret is we we try to buy when everybody's fearful,
44:58
Speaker 1: and we try to sell when everybody is greedy. Uh
45:02
Speaker 1: and U. Which is not a fundamental It's not a
45:05
Speaker 1: fundamental thing at all. In fact, to me, it's a
45:08
Speaker 1: very technical thing because when everybody's optimistic, they've already bought,
45:12
Speaker 1: and so who's left to buy? And when everybody's pessimistic again,
45:16
Speaker 1: you've run off all the nervous sellers, so you've got
45:18
Speaker 1: strong sellers of stock. So that's the idea is actually
45:23
Speaker 1: the same thing that Buffett did. Uh. We we try
45:26
Speaker 1: to put these sentiment polls together to see when there's
45:29
Speaker 1: fear and greed, and we try to tell ourselves, oh,
45:31
Speaker 1: I know the news is terrible, but you know, you know,
45:35
Speaker 1: sometimes cloud's part and uh, you know, it's a good
45:39
Speaker 1: time to buy. And by the way, our poll got
45:41
Speaker 1: very very cautious before the election, and uh it uh
45:46
Speaker 1: marks done pretty will since before the election. Is um
45:49
Speaker 1: So you really essentially saying one Buffet is a closet technician?
45:53
Speaker 1: Is that one? Absolutely? Absolutely? And John Templeton I mentioned
45:58
Speaker 1: earlier he was also supposed to be a on a
46:00
Speaker 1: menalist and he described the market and and another one
46:04
Speaker 1: uh uh Buffett said that has really struck home with me.
46:09
Speaker 1: He said, you know, it's not that I like pessimism.
46:13
Speaker 1: I just like the values that pessimism produces. So there
46:17
Speaker 1: you've measure, You've put together now fundamentals, which are values,
46:21
Speaker 1: and you've put together sentiment, which I think is technical.
46:24
Speaker 1: So you do when there's a lot of pessimism, you
46:27
Speaker 1: tend to get better values, and when there's a lot
46:30
Speaker 1: of euphoria, you tend to get an overvalued market. So
46:34
Speaker 1: it's really there's not really a struggle here in the
46:37
Speaker 1: long run between the technician and a fundamentalist. All right,
46:40
Speaker 1: so let's shift over to my ten favorite questions. I
46:44
Speaker 1: asked these of all my guests, UM tell us about
46:49
Speaker 1: the most important thing people don't know about your background. Uh,
46:56
Speaker 1: they probably don't know that I speak French. Do you
47:00
Speaker 1: still speak French? I speak French and so so what
47:05
Speaker 1: what don't they know about you? You once spoke French,
47:09
Speaker 1: but pretty much that's uh, that's faded, you know. I
47:13
Speaker 1: I'm really uh very uh persistent in my work, have
47:19
Speaker 1: been doing this for fifty years. I'm very focused on
47:21
Speaker 1: my work. But uh, I try to have some balance
47:24
Speaker 1: in my life. And uh I have four kids and
47:26
Speaker 1: two grandkids, and uh I don't know exactly what what
47:31
Speaker 1: role I had except being there, but uh, I'm very
47:34
Speaker 1: proud of them, So I think that gives my life
47:36
Speaker 1: some balance. Tell us about some of your early mentors. Well,
47:41
Speaker 1: I mentioned UH Hamilton Bolton, I mentioned UH Edson Gould.
47:49
Speaker 1: UH to really outstanding pioneers. UH named Marty's Waga talked
47:54
Speaker 1: about and we did some research in conjunction with each other. UH.
47:58
Speaker 1: Norman FoST Back UH another guy that did a lot
48:01
Speaker 1: of to try to put technicals into studies and test
48:04
Speaker 1: them historically. Stock Market Logic was the name of his book.
48:08
Speaker 1: And U right now people still doing technical analysis that
48:15
Speaker 1: I do like I do successfully. Jim Stack, who's invest
48:18
Speaker 1: tech and and there's guy Dan Sullivan who does the
48:21
Speaker 1: charters service that has a real time track record that's terrific.
48:25
Speaker 1: And uh so you mentioned Jeff Dera, Um any other
48:30
Speaker 1: technicians We've We've spoken to Jeff de Graf, We've spoken
48:33
Speaker 1: to John Roke. Who else? Who else do you think
48:36
Speaker 1: is an interesting you know? I really, Um, well, I
48:42
Speaker 1: I read a lot. I I try not to. Uh again,
48:46
Speaker 1: it's it's the thing about being at the game, the
48:48
Speaker 1: crowd psychology. Uh. I try to let my charts talk
48:52
Speaker 1: to me, and so I try not to read to
48:54
Speaker 1: too many competitors. Were So you mentioned a number of
48:58
Speaker 1: people who influenced your roach to technical analysis. Any other
49:02
Speaker 1: technicians that were formative to you in your early days. Um,
49:08
Speaker 1: I really like Bob Farrell and Merrill Lynch he uh,
49:13
Speaker 1: you know, Bob Farrell had an opinion, but he uh
49:17
Speaker 1: he would give both sides. Uh, he would give a
49:21
Speaker 1: balanced view and and uh sort of lean one way
49:24
Speaker 1: or the other. And that really appealed to me. I
49:27
Speaker 1: I just did not like the approach that the world's
49:30
Speaker 1: all black or all white. It's a bullish or you know,
49:33
Speaker 1: sell everything. And I just don't think the world worked
49:36
Speaker 1: that way and he was able to pull it off.
49:38
Speaker 1: And uh he he had a lot of good, good
49:41
Speaker 1: rules and uh the ten rules of market investing man,
49:46
Speaker 1: and they're excellent. And you mentioned Alan Shaw earlier, right
49:51
Speaker 1: some people. I believe he was the co founder of
49:54
Speaker 1: the Market Technicians Association and very much an influential UM
49:58
Speaker 1: technico analyst. Um. What what's your relationship with Alan? Uh?
50:04
Speaker 1: I know him and I used to you know, I
50:05
Speaker 1: get I used to read his work and uh again
50:08
Speaker 1: he's a he's a level headed uh and he's a
50:11
Speaker 1: nice guy. He's an honest guy. And uh he helped
50:14
Speaker 1: a lot of people in the business to get into
50:16
Speaker 1: it and taught him stuff. And uh so let's talk
50:19
Speaker 1: a little bit about books. What you mentioned, um, Uh
50:24
Speaker 1: Edwards and McGee Edwards and McGee, Yes, and uh, Charles
50:29
Speaker 1: McKay had the extraordinary popular delusions in the Madness of Crowd.
50:34
Speaker 1: There's been some other books written about manias. I think
50:36
Speaker 1: these are all very very useful books. Uh. A guy
50:40
Speaker 1: named Sobel wrote a book on the Big Board, which
50:43
Speaker 1: is a history of the New York Stock Exchange. Uh So,
50:46
Speaker 1: he's gone over a lot a lot of periods. I
50:49
Speaker 1: like history books. Uh. And then Marty's Way Head, Winning
50:53
Speaker 1: on All Street and Norman Foss pat Market Logic and
50:57
Speaker 1: would be some of my favorites. Uh. What do you
50:59
Speaker 1: what do you read to relax? Do you read anything
51:01
Speaker 1: that's not technical analysis, markets or history? You know? I
51:06
Speaker 1: read like sports. I read about sports. Uh. I don't
51:09
Speaker 1: like to discuss politics, but I like politics. I really
51:13
Speaker 1: liked it. It's gotten more and more fascinating. And um
51:17
Speaker 1: some other fiction I really don't read a lot. Uh.
51:21
Speaker 1: I read just recently my kids maybe read A Boys
51:24
Speaker 1: in the Boat which is a story of rowing and
51:26
Speaker 1: uh uh Washington State that went on and won the Olympics.
51:31
Speaker 1: Uh and uh it's a fascinating book, quite quite interesting.
51:36
Speaker 1: Um So tell us what's changed since you joined the industry.
51:40
Speaker 1: What do you think are the most significant shifts that
51:42
Speaker 1: we've witnessed over the past few decades. Well, it's it's
51:47
Speaker 1: the same thing any anybody would know that we've gone from,
51:51
Speaker 1: you know, uh, drawing with paper and pen and and
51:54
Speaker 1: uh absolutely everybody has about Alan Shaw, uh, Ralph Alkumpora.
52:01
Speaker 1: They all talk tell about charting by hands. What does
52:06
Speaker 1: that do for? Not only that I had a big
52:09
Speaker 1: I had a big wall in my office. Basically my
52:11
Speaker 1: wallpaper were charts that I put up and and mark
52:15
Speaker 1: by hand. And now, of course everything is technology, and
52:20
Speaker 1: uh so I'd say that's that's the biggest change. And
52:24
Speaker 1: there were a lot of I think there were a
52:26
Speaker 1: lot more inefficiencies when I started in the business. If
52:30
Speaker 1: you wanted to study market inefficiencies, you could you could
52:33
Speaker 1: find them. And uh, with algorithms and computers, uh, and
52:37
Speaker 1: all these bright guys doing this stuff, I think there's
52:40
Speaker 1: a there's a lot less of that. So from that standpoint,
52:44
Speaker 1: I think that the business has gotten a lot tougher,
52:46
Speaker 1: and you have to be flexible and you have to
52:48
Speaker 1: adjust because it's changing all the time. When when you
52:52
Speaker 1: were charting by hands versus doing it today where you
52:55
Speaker 1: just push a button on a computer, do you lose
52:58
Speaker 1: anything in the process of not day by day spending
53:02
Speaker 1: forty five minutes putting together however many hundred charts you
53:06
Speaker 1: were doing by hand each day. What's lost when you
53:09
Speaker 1: when that goes away? I gets I thin guess there's
53:14
Speaker 1: some kind of feel, But if you go through enough charts,
53:17
Speaker 1: I think you get the same kind of field. So no,
53:19
Speaker 1: I don't think I don't think I've lost much from that.
53:22
Speaker 1: Um So, given that technology has been the prime driver
53:27
Speaker 1: of changes in the past, what do you think the
53:30
Speaker 1: next major shifts are going to be in the industry. Well,
53:35
Speaker 1: here's the thing. You know, in every age, there's something
53:40
Speaker 1: that comes along that catches people's narrative. And uh, what
53:45
Speaker 1: you wanna do is be in a position that when that,
53:49
Speaker 1: when that changes, that you can take advantage of it.
53:52
Speaker 1: And and you'll read rules. I have rules, and I
53:56
Speaker 1: teach rules and philosophy. But again, if they get too popular,
54:00
Speaker 1: they quit working. And so that's what makes us a
54:03
Speaker 1: fascinating business. It makes it so difficult to forecast. Alan
54:06
Speaker 1: Abelson had this line one time, and I loved it.
54:09
Speaker 1: He said, just just about the time you you learn
54:11
Speaker 1: how to play the game, they change the rules. And uh,
54:15
Speaker 1: so I think there's a lot of truth in that.
54:18
Speaker 1: And so I think that you know what we need
54:20
Speaker 1: to do is is stay flexible, uh, disciplined and um
54:25
Speaker 1: and go against whatever gets overly done. Professor Andrew Low
54:30
Speaker 1: and m I t called it adaptive markets. No matter
54:33
Speaker 1: what the circumstances are, eventually markets adapt to it, and
54:38
Speaker 1: those rules stopped working. Um tell us about a time
54:42
Speaker 1: you uh you failed and what you learned from it?
54:44
Speaker 1: What what was something where gee that didn't work out
54:47
Speaker 1: is expected? What was the takeaway? Well, you know again, uh,
54:52
Speaker 1: I said, one of my rules is don't don't fight
54:54
Speaker 1: the Fed. Well, uh, you know, the FED was tightening
54:58
Speaker 1: right into to thousand and into two thousand seven, and
55:02
Speaker 1: and as soon as uh, well as bear Stearns blew up,
55:06
Speaker 1: they started easing. So you said, well, the market can't
55:09
Speaker 1: go down because the Fed's gonna, you know, gonna protect it.
55:12
Speaker 1: And that's that's one of my key rules. Well, the
55:15
Speaker 1: FED kept easy and the market kept going down. So
55:19
Speaker 1: I didn't This is not a mistake because I saw
55:22
Speaker 1: the trend turning down and I saw the sentiment where
55:26
Speaker 1: it was with with the housing bubble, and uh so
55:30
Speaker 1: that didn't throw me off. But in the late nineteen nineties,
55:34
Speaker 1: uh one of Ghoul's indicators was the dividend yield on
55:38
Speaker 1: the doll and he said, when it gets down below
55:40
Speaker 1: you know, three percent, the markets in trouble. Well it
55:43
Speaker 1: did that in late nine and that I think that's
55:46
Speaker 1: one of the reasons. Uh, you know, the Greenspan said
55:50
Speaker 1: irrational exuberance. But the market kept going up. So uh,
55:55
Speaker 1: that was an indicator that I think it never failed
55:57
Speaker 1: and it felt in that case and it got me
55:59
Speaker 1: too ushes too soon. So what do you do outside
56:03
Speaker 1: of the office to keep either mentally or physically fit?
56:06
Speaker 1: What do you what do you do to relax? Well,
56:09
Speaker 1: I try to work out. We actually have a gym
56:11
Speaker 1: at our at our office, and so I try to
56:14
Speaker 1: do that. I play a little golf and then uh,
56:17
Speaker 1: you know, we we live on the west coast of Florida,
56:19
Speaker 1: and uh, we do quite a bit of boating. My
56:22
Speaker 1: my younger boys are both big fisherman, so I pretty
56:26
Speaker 1: much have to have to get out on the water.
56:29
Speaker 1: You don't fish, you're on the gulf. So I was so,
56:31
Speaker 1: I was gonna say, they're looking for tarpon and bone
56:34
Speaker 1: fish and what else? Do you ever go with them fishing? Well? Sometimes, yeah,
56:38
Speaker 1: what what what are they? What do they take? Tarpan
56:40
Speaker 1: is one of the favorites. But we're a grouper and
56:43
Speaker 1: snapper area. We got some really good fish, full edible.
56:48
Speaker 1: You catch and release the rest we release everything that's
56:52
Speaker 1: not good eating. Yeah, for sure. What sort of advice
56:55
Speaker 1: would you give to a millennial or a recent college
56:58
Speaker 1: graduate who's just beginning their career in markets or interested
57:03
Speaker 1: in technico analysis, how would you advise them? Well, you know,
57:10
Speaker 1: I got into this business, uh, at the at the
57:13
Speaker 1: beginning of an incredible bull market. So I would say,
57:16
Speaker 1: you know, I've had a lot of luck from from
57:18
Speaker 1: a timing standpoint, but I could have quit this business
57:23
Speaker 1: a long time ago, and I continue to work. Uh.
57:26
Speaker 1: And the reason is because I love it and and
57:28
Speaker 1: what I love about it is that one year it's
57:32
Speaker 1: energy that's driving the stock market, and the next year
57:35
Speaker 1: it's housing, so I gotta be a housing expert, and
57:38
Speaker 1: the next year it's geopolitical and and it's just always changing.
57:43
Speaker 1: So I'm a person that loves to learn the world's
57:46
Speaker 1: changing and and it's fascinating. I can get an education,
57:50
Speaker 1: a new education every year, and I get paid paid
57:53
Speaker 1: well to do it. And the markets are fascinating, and uh,
57:57
Speaker 1: you know, to go into an industry, let's say you
57:59
Speaker 1: go into the ill industry and you're stuck there for
58:01
Speaker 1: fourty or fifty years. I mean, I'm in a different
58:04
Speaker 1: industry or there's a different industry, technology, whatever that's driving
58:09
Speaker 1: the market every year. So I think it's a fascinating business.
58:13
Speaker 1: I think people should go in it and uh um,
58:17
Speaker 1: you know I love it. And our final question, what
58:20
Speaker 1: do you know about technical analysis and markets today that
58:24
Speaker 1: you wish you knew back in the early seventies when
58:28
Speaker 1: you when you first started Well, as I said earlier,
58:32
Speaker 1: I I started out as a forecaster, and I think
58:34
Speaker 1: that's uh that's a good way to lose money and
58:37
Speaker 1: be wrong. So uh uh so I I that's one
58:42
Speaker 1: thing I would have gotten into that earlier obviously, And uh,
58:46
Speaker 1: I do think when you look at charts just is
58:49
Speaker 1: the pure technician. A lot of times you see what
58:52
Speaker 1: you want to see, and so I think you've got
58:54
Speaker 1: to try to quantify it, uh as much as possible.
58:58
Speaker 1: So how closely have you followed the field of behavioral
59:04
Speaker 1: economics as it's developed of the past let's call it
59:08
Speaker 1: thirty thirty five years, Because a lot of what you
59:11
Speaker 1: reference on the technical side very much tracks what what
59:15
Speaker 1: the guys like Danny Kahneman and Bob Shiller and Richard
59:20
Speaker 1: Thaller have been saying for for quite a while. You know,
59:23
Speaker 1: there's a lot, like I said, there's a lot of
59:25
Speaker 1: good ideas out there. I think though, if you don't
59:27
Speaker 1: put it in a big macro con context. If you
59:31
Speaker 1: just take one area and you focus on it, then, uh,
59:36
Speaker 1: that's a mistake. So you gotta put it in context. Uh.
59:39
Speaker 1: For example, right now, I'm I'm a I was a
59:42
Speaker 1: huge well I'm a huge fan of the Laugher curve.
59:46
Speaker 1: And Kennedy did it and it worked wonderfully. Cut rates
59:50
Speaker 1: from one to seventy. Reagan came in, he cut them
59:53
Speaker 1: from seventy to fifty. Then he cut them from fifty eight.
59:56
Speaker 1: We had a boom in the sixties, we had a
59:57
Speaker 1: boom in the eighties. Great idea, right, Well, then George
1:00:01
Speaker 1: Bush tried it in two thousand. Didn't work and because
1:00:05
Speaker 1: we were in a different phase of the cycle. So
1:00:09
Speaker 1: when you have a rule and everybody's got a rule,
1:00:12
Speaker 1: a Kinesian rule, Yes, there was a good, good, good
1:00:15
Speaker 1: reason for deficits and bailots at one point, right, but
1:00:18
Speaker 1: it doesn't work at another point in time. So I
1:00:21
Speaker 1: think this is the problem with this kind of thing,
1:00:25
Speaker 1: just getting focused on one area. You've got to put
1:00:27
Speaker 1: it in context. Let me push back on the Laugher
1:00:30
Speaker 1: rule for a second. When you have very high taxes
1:00:33
Speaker 1: and you cut them significantly. You get a huge impact.
1:00:37
Speaker 1: Exactly when when you make minor changes. What did Bush do?
1:00:42
Speaker 1: Exactly what Trump wants to do thirty five exactly? Nobody
1:00:47
Speaker 1: remember when when Reagan came in, they were all manner
1:00:52
Speaker 1: of um, tax shelters and deferments. His tax change immediately
1:00:59
Speaker 1: led to a whole range of behavioral changes. Accountants, lawyers, investors, Hey,
1:01:04
Speaker 1: this real estate shell do you have? It's done? You
1:01:07
Speaker 1: better move your money elsewhere. And a lot of it
1:01:09
Speaker 1: finds its way into but three or four percent nobody
1:01:12
Speaker 1: is doing a wholesale revision of it. It's an incentive,
1:01:16
Speaker 1: but it's very small. It's I you ask pump people,
1:01:19
Speaker 1: if you drop your next dollar from nine to seventy,
1:01:23
Speaker 1: what would that make you want to work hard? Yeah?
1:01:25
Speaker 1: And then you say, wait, what about if you went
1:01:27
Speaker 1: from thirty nine to thirty five? They went, really, yeah,
1:01:31
Speaker 1: I'll take the extra cash, but I'm certainly not changing
1:01:34
Speaker 1: my entire Kennedy did it after two recessions eight and sixty,
1:01:39
Speaker 1: and Reagan did it after two recessions eighty and eighty two.
1:01:43
Speaker 1: And now we've had a nine year expansion and we're
1:01:45
Speaker 1: gonna now we're gonna stimulate cutting taxes. So I just say,
1:01:49
Speaker 1: there's nothing wrong with the rule, there's nothing wrong with
1:01:53
Speaker 1: the incentives, but it depends on when it happens, what
1:01:58
Speaker 1: error went, what the cyclists. That's the problem with having
1:02:02
Speaker 1: a set mindset. You you referenced your following politics from Afar.
1:02:07
Speaker 1: Who else do you think has some interesting political theories
1:02:11
Speaker 1: as to what's going on these days? Uh? You know,
1:02:19
Speaker 1: I there was a commission that and I think this
1:02:23
Speaker 1: was Obama's really biggest mistake. But anyway, he had a
1:02:27
Speaker 1: commission to to look at the fiscal monetary structure Simpson bowls.
1:02:32
Speaker 1: And it was bipartisan, last bipartisan commission we've had, and
1:02:37
Speaker 1: uh almost I mean nobody liked it because somebody was
1:02:41
Speaker 1: getting gored somewhere, was getting something taken away. But uh,
1:02:45
Speaker 1: I personally felt like that that was a great idea,
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Speaker 1: and uh they just neither the Democrats nor Republicans would
1:02:53
Speaker 1: do it. But I think essentially that was a lot
1:02:56
Speaker 1: of the things we needed to do. We have been
1:02:59
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