Some Anecdotes and Life Lessons from the Market

After having been in the business for 32 years and running Dorsey, Wright & Associates for 20 years, there are so many anecdotes and stories to tell. Some of the articles that have resonated with investment professionals alike have been the articles Dr. Judd Biosiotto and I co-authored and here I want to share some of those with you but before we get to some of these, let me give you a little history on just how Judd and I came to work together. I guess Judd had the greatest influence on me when it comes to motivational writing. Judd and I have a long history together that began before I even had the pleasure of meeting him. I have been reading Judd's motivational writing in Powerlifting USA Magazine for many years. It's my favorite magazine by far, and Judd is the main reason. Oh sure, I love all the muscle stories and new techniques for lifting massive weight, but the articles that have had the greatest effect on me have been Judd's motivational writings. We, first and foremost, are connected through lifting weights. Both Judd and I have been world record holders in the sport of powerlifting. Judd had to leave the sport after breaking his back while performing a massive squat. True to form, however, he came back, not in powerlifting, but in the sport of bodybuilding. In his fifties, Judd won many national championships, beating bodybuilders much younger than him. Much of what he has written has motivated me to push on to achieve my own world records. Every time I read an article by Judd, I thought how closely his sports analogies applied to the stock brokerage business. I called Judd and asked whether he minded if I reworked his articles by intertwining my thoughts on the brokerage business. It was kind of a strange endeavor, weaving two authors' independent thoughts into one article, but he was all for it. The articles were to be free flowing, that is, we would not stop after each paragraph to let the reader know who wrote it. We just let our words meld together as one article, kind of like combining oil and vinegar to make a salad dressing. The first article we did engendered such a positive response from our clients that I knew we were onto something. Most importantly, we got our points across and we had fun doing it. If you enjoy these articles, I invite you to visit our website, where you can more articles by Judd and myself and the analysts at DWA including our book, Keep Pedaling Zen Farmer: DWA Essays on Investing.

On Taking Risks in Life

There are many similarities between the principles in sports and the psychology of the stock market. I am a world record holder in powerlifting, and in my endeavors to improve my lifts, I learned a lot from Judd Biasiotto's articles in Powerlifting magazine. I have gotten to know Judd personally, and we see so many similarities between our two businesses that we have written articles together. In fact, we will soon publish a book together that explains how some of the psychological aspects of sports competition can be applied to investing.

When Judd was working with the Kansas City Royals baseball team, his roommate, Branch B. Rickey III, met a guy who was willing to let us buy into a condominium project being constructed in Florida. The deal was that we could purchase up to 10 condominiums at a price of 10,000 each. At the time, 10,000 was a pretty good chunk of money, but the deal was extraordinary. If everything went as planned, there was a good chance we could double or triple our money in no time. Still there was a risk-there always is a risk. Because it was beachfront property, the taxes were very high. Unlike Branch, I did not have the money to invest long term. I would have to borrow the money at a fairly high interest rate and then hope that I could turn the property over in a short period. Otherwise, I would lose a lot of money. In the end, I decided not to do the deal. Of course, you know the end of the story already. The property is now worth anywhere from $500,000 to $1 million.

Yes, I could have been living in the Bahamas relaxing on the beach, but I failed to take the risk. There is one thing I'm certain of-if you don't have the guts to put yourself on the line now and then, your chances of success are limited. To reach the top, athletes-or anyone else for that matter-have to know how to live on the edge. They have to enjoy the elements of risk and a little danger. I'm not talking about taking needless, senseless, incalculable risks, like running with the bulls in Pamplona or attempting a 500-pound dead-lift when your personal best is 300 hundred pounds; such actions prove nothing except that you have the brain of an infant. What I'm talking about is intelligent, calculated risk-taking in which the risk in question has a legitimate cost-reward relationship.

This really speaks to the business of investing. You have to be a risk-taker to even survive in this business, much less flourish. Every time you buy a stock, you are risking your hard-earned money. If you are a broker, you are risking your clients' hard-earned money. If you can't operate in a high-risk environment, then the business of investing is not for you. I have met many investors and brokers who just couldn't make a buy decision for fear of losing their or their clients' money. It's good to have a healthy dose of trepidation in this business of investing money. That way you don't make stupid mistakes, but freezing only causes you to miss great opportunities. There is a big difference between having a healthy respect for risk and allowing risk to paralyze your thought processes. Many investors and brokers simply can't deal with market volatility. A fine line exists between managing risk and being controlled by risk. The stock market is not a place for the faint of heart. To reach the pinnacle in the personal or professional investment field, you have to learn to live on the edge, to enjoy the element of risk and danger-at least to a reasonable degree.

Look back through time and you'll find that people who had the courage to take a chance, who faced their fears head on, were those who shaped history. The people who played it safe, who were afraid to take a risk, well, have you ever heard of them? I love what Theodore Roosevelt said about this very issue:

It is not the critic who counts, not the man who points out how the strong man stumbles or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again because there is no effort without error and shortcomings, who knows the great devotion, who spends himself in a worthy cause, who at the best knows in the end the high achievement of triumph and who at worst, if he fails while daring greatly, knows his place shall never be with those timid and cold souls who know neither victory nor defeat. (Powerlifting, June 1999)

Roosevelt's words remind me of this business of investing, and how many critics are out there ready to pounce on your every misstep although they never step into the ring, never actually put their reputation or their money on the line. In the case of a professional, these critics never lose one minute of sleep because they are worried about other peoples' well-being.

Do you see yourself in the preceding quote? Those of you who are reading Point & Figure Charting, 3rd Edition, and learning from this CD are the people in the ring. You are here to learn this method to better help you fight the battle. You realize that nothing is perfect and at times you will err and err again; but quit, you will never do. As time goes on, you will begin to intuitively understand things in the market that used to baffle you. Eventually, you will reach craftsman status. The critics will continue criticizing because that is what they do best. Just turn the television on to any financial station and you will come away with gibberish. Once you nail down these principles of analysis, you will have no need for business periodicals or financial TV.

I remember vividly my broker years. My face was marred and bloodied many times but I was in the ring trying, striving for excellence. I just didn't have a plan back then. What a difference this information and way of thinking would have made if they had been available to me when I was a broker. Mix this with my enthusiasm and dedication to excellence and the combination is unbeatable. Many of you have already done this, and it makes me feel so good to see so many of you actually making a major difference out there in your own and others financial well-being.

Theodore Roosevelt was right, the credit goes to you the investor or broker who is actually in the arena, who at times comes up short again and again but in the end experiences triumph. This is why I wholeheartedly recommend you learn these methods and manage your money yourself. Win or lose, be the one in the ring where the action is. Make the decisions, take the calculated risk, live. Don't find yourself at the mercy of others or at the end of your career having ridden the bus and looked out the window, watching others reach greatness. It's all here for the taking. You just have to want it. Sports are full of great physical specimens, but there is a real shortage of athletes who are willing to play their game with reckless abandon, and athletes who are willing to put themselves and their careers on the line. Those who do are usually the ones at the top.

The truth in that last line inspires me. If you're not willing to risk, you have no growth, no change, no freedom. And when that happens, you are no longer involved in living; for all practical purposes, you have no life. You're dead, but you just don't know it. So risk, for goodness sake. Be a part of life. You have the power to be or do anything you want. You can produce miracles if you have a mind to. You have the magic, you just have to tap into it. Get in touch with it, make things happen, live-journey to the stars, push on to new galaxies. If you don't, you will never know your greatness!

What Does It Take to Do World-Class Work?

No matter what profession you are in, there are those who are world class and those who are other than world class. Professor Simon says: "It takes at least ten years of hard work-say, 40 hours a week for 50 weeks a year-to begin to do world class work. We found it takes eight seconds to learn a pattern for a day, and quite a lot longer to learn it permanently. That takes you to the million pattern estimate, if you allow for certain inefficiencies in learning and also for forgetting." This is why there are relatively few professionals in the investment business who could be called world class. The term we use for it is craftsman. How long do you think it took a cobbler in the seventeenth century to learn his craft? How about a cooper? I surmise that it would have taken about 10 years. Those who have reached world-class level have seen approximately 1 million patterns. This is exactly why it takes so long to become world class in the investment business. So many professionals jump from one thing to the next-they never take the time to do one thing well. To be world class, you must choose something to become a craftsman in. One of our analysts, Susan Morrison, calculated that during a 10 year period of charting about 400 stocks per day by hand for 50 weeks a year, she has seen about 1 million stock charts. This is why she has such insight into the Point and Figure Chart patterns of stocks, sectors, and the market. The rest of the analysts at DWA have similar experience. I get asked frequently, "What will happen when everyone is doing Point and Figure analysis." My response has always been that to become truly good at it one must take years of study, and most people do not have the time or the inclination to become a craftsman at this method of analysis. Only a select few will go the distance. A method becomes self-fulfilling when investors follow a "guru" (e.g., Joe Granville in years past) and simply do what he tells them to do until the inevitable happens. These investors are not interested in becoming well versed in the investment process. They simply want someone to tell them what to do.

Here is what normally happens. A broker or investor reads our report and using the website, gravitating to the breakout page. He looks at one symbol that says Double Top Buy Signal, buys that stock with no other analysis, and gets whacked. He then says this doesn't work and moves on to the next strategy. Every now and then, a broker or investor will pick up my book Point and Figure Charting, 3rd Edition and read it. He will then begin to implement the strategy. Somewhere down the road, he will keep a few charts by hand himself. His feel for the subject then increases tremendously. He loves the new confidence he has. He continues to learn and apply the method; years later he looks back and can see a distinct difference between his abilities then and now. His journey has still much further to go to reach world class, but he is on the way. His confidence is now high. He now maintains 200 stocks a day and looks at many more through our Internet system. When he nears the tenth year, he is approaching world class and the number of chart patterns he has viewed is approaching 1 million. He no longer needs to read the financial newspapers, or watch the financial TV shows. Major statements made by Wall Street pundits have no effect on his thought process. He (or she) instinctively knows what to do in various market conditions. He is like a child who has totally memorized the multiplication tables, and now instinctively knows 9 times 9 equals 81.

How many of you have been doing this for longer than five years and are now feeling comfortable with this investment process? You're on the road to world class. There's nothing like being world class at something. To get there takes determination, patience, and hard work. There are many other methods of analyzing the market that you might choose, from astrology to Gann angles. Whatever you choose, go the distance, become a world-class investor. You only have one life to live.

Flash of Genius - On Becoming a Craftsman

I was cleaning up my desk to start out the new year with a clean desk and I came across this article named Flash of Genius from Forbes, along with some of my commentary. What caught my eye was the sentence "We need to pay much more explicit attention to teaching pattern recognition." This comment was made by Professor Herbert Simon. The article went on to say, "Simon won a Nobel Prize in Economics in 1978 for theories of decision making that turn on the nature of human expertise. His central finding was that pattern recognition is critical. The more relevant patterns at your disposal, the better your decisions will be." I found it quite interesting when he discussed chess mastery. Most would think that mastering the game of chess relates to analysis but Dr. Simon suggests that isn't the case. Success in chess relates to pattern recognition. I can picture Bobby Fischer playing Kasparov of Russia in a chess match. Each is seeing patterns on the chessboard just as we would see patterns on a stock chart or a Bullish Percent chart. On General Electric's chart, it was clear to the trained eye that the stock was starting to make lower tops in 2000 and 2001 while the earnings were still rising. The untrained eye would not have picked up on this subtlety, but this pattern spoke volumes about the probable direction of General Electric. It's like a color-blindness test. Have you ever taken one in a doctor's office? Most people have. The patient looks at a card with colored spots on it. The person who is not color-blind can, without difficulty, see the number within the dots. Those who are color-blind cannot. The craftsmen in Point and Figures can see patterns that the uninitiated will never see, and this ability shifts them up to a much higher plane compared with other professionals in the business. By understanding these patterns whether on a chessboard or the big board, the initiated have the confidence to act rather than react.

"What makes a good doctor, lawyer or stock picker?" Simon asks. It all relates to pattern recognition. It relates to experience as well. "Mozart composed for 14 years before he wrote any music you'd regard as world class, . . . you can tell juvenile Mozart from 18 year old Mozart." He suggests it's the same in all fields. "Bobby Fischer got to grand master title in chess in just under ten years, and so did the Polgar girl. Brain power matters but so does experience." He goes on to suggest that even your doctor has probably diagnosed your problem before you finish telling him all the symptoms. We at DWA often know the answer to portfolio questions asked by our broker clients before they finish illuminating the problem.

Choking: Tips for Controlling the Terror of Coming Unglued

We tend to think of choking as something that happens in sports. Like the time you were in Little League and the game came down to your "at-bat." The adrenaline starts running, you get weak in the knees, and thoughts of failure dance through your mind. "Strike one," the Umpire shouts. You were frozen, unable to swing the bat. The fast ball flies past you, knee high. Two more shots at it. The next ball is pitched, you are not going to let this one whistle past you this time. You swing and miss by a mile, "Strike two." This is it. Two strikes, no balls and you're about to blow it. Your team needs you desperately, at this moment. The pitch from the crowd and your team mates, yelling "you can do it Tom," is rising and your adrenaline is rising too. No balls, two strikes, and you can't afford to let even a marginal pitch past. The worst thing would be to go down without a swing on the third strike. Time seems to downshift to slow motion. The pitcher is as determined to strike you out as you are to hit the ball. It's hard to swallow, and sweat beads appear on your forehead. You are about to choke. The ball is pitched, it's a slider, low and to the outside. You swing. All of a sudden, the ball isn't where you thought it was, it curves to the right. You swing for the fence. Nothing but air and the refrain from the umpire, "Strike three, you're out." You choked.

Choking is not only associated with sports. The same thing can easily come in this business. I've choked many times in the past. When I was a broker and operating without a plan, it was easy to choke. Clients came to me for advice that I was unprepared to give. Especially when I first came back from training school. It's not on paper anymore. It's for real. This is real, hard-earned money your client is entrusting to you. You were a whiz trading on paper but in the real world you start getting sick to your stomach. "What if I lose this money for my client?" On paper it's simple. I just select the right portfolio and let it "happen captain." If I'm wrong, so what, nobody gets hurt. Now if I'm wrong someone does get hurt. The market has been going down, I'm scared as hell as the business periodicals all are saying we're in a recession. My client wants ideas and I'm frozen. I begin to think conservative. Maybe I'll recommend something that just can't get hit. I remember the first premise of advising is "do no harm." Okay, I'll go with utilities, REITs, and a few high-yield consumer stocks that have low volatility. I'll also keep 30 percent Treasuries. You choked! The NYSE Bullish Percent just reversed up from below 30 percent, the Utility sector and the REITs just reversed down from above 80 percent (fictitious accounts and fictitious examples only) and Cyclical stocks are all washed out and their RS charts are reversing up from low levels. As the market takes off, your customer is losing money because you put him in low volatility stocks that were about to correct for the first time in two years. One month down the road, your customer is wondering if you have a clue. You realize you don't.

Let's talk for a second about controlling that phenomenon called choking.

1. Put things in perspective. In sports one must remember it's just a game. From the start put sports into perspective and you'll enjoy them more. Work hard, compete hard, but don't worry about winning or losing. The investment business is the same. Keep it in perspective. Work hard, compete hard (remember the market is your competitor and ready to take your money away from you as quickly as possible), but don't let the thoughts of winning or losing cloud your judgment. I bet you've all had a portfolio of stocks that was down for one reason or another. You desperately needed a winning trade so your luck might change. You let winning cloud your vision. You bought what you thought would be the stock that would make it right but you ended up making it worse as the stock you selected to get you right, got you wrong.

2. Don't be afraid to make a mistake. No one is successful all the time. Even Michael Jordan missed the last second shot now and then. Actually he missed it more often than you may think-about 50 percent of the time. When it came to crunch time, though, Jordan still wanted the ball. His shooting percentage when the game was on the line didn't bother him, because he knew that hit or miss, there was plenty more shots to take. That's the best lesson to learn-no matter what happens there is always another day.

3. Be prepared. When preparing for competition (you compete with the market every day) give it everything you have. The secret is to be overly prepared. When I was a broker I was unprepared and totally willing to begin selling the stock my quote machine mate was selling. I did not know how to be prepared. We simply did what the home office told us to do. Evander Holyfield has a wonderful philosophy about preparation. When he was to fight Mike Tyson for the first time he was asked by a sports reporter if he was nervous or scared. Holyfield said "I never get nervous when I'm in the ring, because I'm always prepared physically and mentally when I get there. I do everything I can in training. I work as hard as I can. When it comes time to fight, I know I've done my very best. When you have done your very best there is no reason to be nervous. Generally the people who get nervous and choke are the people who are unprepared. And if I lose, I can live with it, because I gave it everything I could." Without a doubt, confidence that comes from preparation is the "real deal." I got a call from a broker I talk to frequently from Everen in California. He just closed a $12 million account because he was prepared. He had this whole program laid out in understandable form and closed the account. He told me he was driving home from that meeting and he said "I've never felt more confident in my whole career as I do now." He also said he was readopting the title Stockbroker. He's going after another $10 Million account next week and my bet is he wins it. He's prepared, confident, and that is as contagious as the flu. Whether you are an individual investor or a broker, come to work prepared.