My father was a chemist and a boss dyer at a woolen mill. He was a good provider for his family and was very frugal. He had been a prisoner of war in Germany in world war II and had walked the death March across Germany for six months. He knew what it was like to starve. After working for about 20 years he had enough savings to invest in stocks. Unfortunately for him other investors seemed to accumulate investable funds at the same time and the stock market was high. This was in the time period of 1967 to 1968. His stockbroker recommended stocks like Westinghouse and other companies that the brokerage firm was underwriting. My dad lost money on all of them.
My dad read a book entitled, "How To Make The Stock Market Make Money For You", by Ted Warren. Ted had never earned more than $ 200 per week, but had made a great deal of money in the stock market. The book was basically a primer on long term technical analysis. My dad did much better after reading this book and he taught its principals to me.
In 1969, I graduated from college and became a stockbroker with Bache & Co. Bache & Co sent me to New York for a six month's training program at NYU. I tried to share the research that was given to me with friends and had disastrous results. The stock market had peaked in 1968 and did not bottom until 1974 at about 570 on the Dow Jones Industrial Average. Luckily for me I used Ted Warren's basic methodology and was able to buy stocks at value prices which over time worked out very well. Other brokers working with me fared very poorly over this period.
In 1973, Burton Makriel authored, "A Random Walk Down Wall Street". The basic message was that stock prices move in a random fashion and that analysts and fund managers offered little value to investors. It wasn't until 1976 after continuing to do very well for my clients I decided to research the logic of my approach. I was working with Ray Hanson Jr. at Barclay Douglas & Co in Providence RI I convinced him to work with me on this project.
The Research Project
At the time there was no data base of stock history that could be gathered by computer that was accessible to us. We found a chart book publisher with an unbroken history of chart books beginning in 1936. The chart book publisher had some of the books on hand, but we had to go to Putnam Funds, Fidelity Funds and other management companies to get the missing books. We knew the basic concept was to find good stocks that had fallen out of favor and traded for an extended period in a base without making a new low. We had to look at thousands of these charts to determine our two basic rules. We had two concerns. Number one, if we bought these stocks too early our gains would be inhibited by the length of time the stock remained stagnant in the base. Number two, some of these companies failed early in the base period. After many hundreds of hours of perusing many thousands of stocks we empirically determined or two basic rules.
Our study, published in 1978 proved that stocks do follow a discernible pattern that can be recognized and exploited. You may view the results by Googling, "Eleven Quarter Stocks", an independent website. The recommendations at the end of the book also had average gains of over 466%. Thus from a data standpoint the proof is certainly enough to refute the classic, "A Random Walk Down Wall Street". Also data from 1978 to present shows that the patterns still are working.
HOW CAN THIS KNOWLEDGE HELP YOU MANAGE YOUR MONEY BETTER?
I would caution you not to be deceived by the simplicity of the rules of this concept. While they may appear obvious once they have been pointed out to you, this in no way alters their value. It is easy to understand and difficult to execute. Why? Because the rules are consistent and human emotions are not. It is people who have to act on their knowledge of these rules, and people are swayed by powerful tides of fear, greed, and impatience.
I have used this logic in working with thousands of people. Most will quit because it takes a long term patient perspective. Often when the indexes are rising these stocks are not. After waiting two years with no profit, your stock rises 50% only to drop back where it was previously. Some stocks have very big rises and entice you to buy more only to drop substantially. My way of dealing with these issues is to invest only about 10% in a group of these stocks, especially after a cyclical market decline. It is much easier to hold if you do not over invest. Your knowledge of cycles will help you in mutual fund investing as well. Take very little risk after the markets have risen for three years without big corrections and buy more aggressive assets after a four year cycle bottom. I have used this knowledge to advantage except when I make a great deal of money, I have lost a couple of times by investing too heavily in biotech stocks at too high prices. Unfortunately I have human frailty's too.
I intend to sell the study, "Non Random Profits" as an eBook along with the rest of the story.