Stock price movements are seen following a pattern!

THE SEARCH

My father was a chemist and head of dry cleaners in a wool factory. 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 through Germany for six months. He knew what it was to starve. After working for about 20 years, he had enough savings to invest in stocks. Unfortunately for him, other investors seemed to be accumulating funds to invest at the same time and the stock market was high. This was in the time period from 1967 to 1968. His broker recommended stocks such as Westinghouse and other companies that the brokerage firm was underwriting. My dad lost money on all of them.

My dad read a book called, “How to Make the Stock Market Make Money for You” by Ted Warren. Ted had never made more than $ 200 a week, but he had made a lot of money on the stock market. The book was basically an introduction to long-term technical analysis. My dad did much better after reading this book and he taught me its principles.

In 1969, I graduated from college and became a stockbroker for Bache & Co. Bache & Co sent me to New York for a six-month training program at NYU. I tried to share the research given to me with friends and had disastrous results. The stock market had peaked in 1968 and did not bottom until 1974 at around 570 on the Dow Jones Industrial Average. Fortunately for me, I used Ted Warren’s basic methodology and was able to buy stocks at value prices that over time worked very well. Other runners who worked with me did very poorly during this period.

In 1973, Burton Makriel wrote “A Random Walk on Wall Street.” The basic message was that stock prices move randomly and that analysts and fund managers offer little value to investors. It wasn’t until 1976, after continuing to do very well for my clients, that I decided to investigate 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 that time, there was no computer-compiled inventory history database that we could access. We found a chart book publisher with an unbroken history of chart books starting 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 find out. 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 on a basis without hitting a new low. We had to look at thousands of these charts to determine our two ground rules. We had two concerns. Number one, if we bought these stocks too early, our earnings would be inhibited by how long the stocks remained stagnant on the basis. Number two, some of these companies went bankrupt early in the base period. After many hundreds of hours of examining many thousands of actions, we empirically determined two basic rules.

THE RESULTS

Our study, published in 1978, showed that populations follow a discernible pattern that can be recognized and exploited. You can see the results by Googling “Eleven Quarter Stocks”, an independent website. Recommendations at the end of the book also had average gains of more than 466%. Thus, from a data point of view, the evidence is certainly sufficient to disprove the classic “A Random Walk on Wall Street.” Also the data from 1978 to the present show that the patterns still work.

HOW CAN THIS KNOWLEDGE HELP YOU BETTER MANAGE YOUR MONEY?

I advise you not to be fooled by the simplicity of the rules of this concept. While they may seem 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 the basis of their knowledge of these rules, and people are carried away by powerful tides of fear, greed and impatience.

I have used this logic when working with thousands of people. Most will quit smoking because it requires a long-term patient perspective. Often when indices go up, these stocks don’t. After waiting two years with no earnings, its shares are up 50% only to fall back to where they were before. Some stocks have very large rises, prompting you to buy more only to fall substantially. My way of approaching these issues is to invest only about 10% in a group of these stocks, especially after a cyclical market downturn. It’s so much easier to maintain if you don’t over-invest. Your knowledge of cycles will also help you invest in mutual funds. Take very little risk after markets have risen for three years without major corrections, and buy more aggressive assets after a minimum four-year cycle. I have used this knowledge to advantage, except when I make a lot of money, I have lost a couple of times by investing too much in biotech stocks at too high prices. Unfortunately, I too have human frailty.

I intend to sell the study, “Non-Random Profits” as an e-book along with the rest of the story.