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CHAPTER 1
My Story — Lessons Learned
At times I think I must have been born on the floor of the New York Stock Exchange. Having been introduced to the stock market at the ripe old age of twelve, I never imagined being involved in any other business. I guess I was destined to pursue a path toward the stock market arena. My friend of fifty-four years, Ken, still reminds me of the time I questioned our sixth-grade math teacher, Mr. Toth, in front of the entire class concerning a statement he made while lecturing to us about the stock market. While he doesn't recall the specific point I took issue with, Ken remembers me being correct. Time does fly. Mr. Toth, a young man back then, is now retired.
I can still remember my dad taking me into the local Shearson, Hammill & Co. brokerage office in Paramus, New Jersey, during the late 1960s. I was numbed by the sight of the ever-changing green stock quotes emblazoned on the black background of the tickers in the brokerage office. The top ticker was confined to listings on the New York Stock Exchange (otherwise known as the "Big-Board"), while the bottom tape housed American Stock Exchange (also known as the "AMEX") listings. I loved watching the different numbers appearing on the quote machine as my dad punched in his stock symbols. The device used at the time was a Bunker Ramo machine, on which you could retrieve a stock's current quote, bid and asked prices, and volume on a single screen measuring around four inches square. Who could have imagined the giant multiscreen and brightly colored displays now in common use, with monitors stacked two and three high and simultaneously housing hundreds upon hundreds of constantly flashing financial quotes with charts galore? Believe it or not, back when I started you could only request one quote at a time. It seems primitive now but looked totally high-tech back then.
You could sometimes see the grimaces or smiles on the faces of those punching in the quotes as they reacted to the numbers appearing on the screen. The market's verdict was evident in their expressions. On a typical afternoon you could see the entire spectrum of emotions, from winning and losing to disappointment, frustration, and acknowledgement. It was all there — the same emotions and feelings we express in our everyday lives translated into the monetary realm on a tiny screen.
Occasionally, my dad and I journeyed into Manhattan to visit his broker at Gruntal & Co., while back in New Jersey Edwards & Hanley, Merrill Lynch & Co., and Janney Montgomery Scott, Inc. (among others) were the recipients of my visits. I'd frequent as many as three on the same day during summer break, speaking with anyone who would listen (and when they didn't listen I spoke to them anyway). My thirst for information was never quenched; nor should it ever be, since when you stop searching for ways to improve your performance in either the stock market or in life, you surrender to contentment.
I later saved my dad the trouble of driving me to the local brokerage branch every afternoon by purchasing a three-speed bicycle (a hot item for a kid back then; kind of like a Tesla in today's terms) with the profit from my very first stock trade. I credit my dad with igniting my interest in the stock market. No, he wasn't in the business; he worked for a trucking company. My mom was a secretary. I became seriously hooked on the stock market when my dad let me invest some of my Bar Mitzvah gift proceeds in five shares of Mattel (the toy company) in the late 1960s. Upon selling the shares for a tidy profit, I proclaimed my desire to drop out of school in search of my great stock market fortune. My mother quickly extinguished that fire!
However, as I later learned, everyone must pay a price for their entry into the stock market arena — everyone. I didn't know it at the time because I was making money in my investment endeavors. From Mattel it was on to Ideal Toy, and then on to other winning trades like General Mills. I accumulated more and more money with these profitable transactions, mistakenly believing it was my stock picking skills that were generating my profits as opposed to the favorable overall market climate (otherwise known as "confusing brains with a bull market"). All the while I never bothered to consider the downside part of the investment equation. But time caught up with me. Did it ever!
In early 1973, as the Dow Jones Industrial Average reached new all-time highs amid some bullish market headlines, I never imagined what would happen next. But the trap was set. I'd come home from school each and every day, huddle near my dad's Clairtone stereo, and hear a lady at the stock exchange rattle off loads of closing stock price quotations. I didn't like what I heard as the numbers blared from the dual speakers. I was losing money — and in stereo! The market was trying to tell me something, but I didn't listen. That's the trouble; people listen to the news, the analysts, the economists, the strategists, the statisticians, and so-called experts, but they don't listen to the stock market — the greatest analyst of all! At any rate, my money dwindled under the weight of one of the worst bear markets (at the time) since the Great Depression, when the Dow Jones Industrial Average experienced a staggering decline of approximately 88 percent before bottoming in the summer of 1932. After topping the 1050 mark in January 1973, the Dow Jones Industrial Average sank below the 600 level in the fourth quarter of 1974. I watched on television as President Nixon resigned from office in August 1974, but that didn't stop the market from continuing to slide. In fact, on August 8, the day the president announced that he would resign the presidency effective at noon the following day, the Dow Jones Industrial Average traded in the 800 area. It was downhill from there, with the average sinking to a daily closing low of 577.60 on December 6 of that year. Ouch!
You see, as I also found out back then, key events that you think will produce a significant and sustained market-moving impact often don't, especially when a majority of folks are thinking similarly. One should never take comfort in the fact that many other voices are supportive of your investment view. To quote legendary technical analyst Newton Zinder, to whom I referred earlier, "On Wall Street, to know what everyone else knows is to know nothing." The market often has other plans in mind, and that's why it's important to listen to its message and not be swayed by the crowd. And let's face it — I couldn't have another Bar Mitzvah reception to replenish my capital and compensate me for my market losses.
Etched in my memory during that vicious bear market period was seeing the vacant branch office of a well-known former brokerage firm, DuPont Walston, Inc., while I was waiting for a bus in front of the Public Service Electric and Gas Company building in Newark, New Jersey. It was a humbling experience indeed, opening my eyes to the risks in the brokerage business. I was attending Rutgers University in Newark at the time, pursuing an economics degree. What a period 1973–1974 was — one of the worst on record, but one that helped lay the foundation for my most serious stock market education yet. Luckily, at the time I was learning these lessons I was just beginning in this business and hadn't amassed any serious capital (even though what I had invested seemed like a lot of money at the time). That's the best way to learn big market lessons — with small amounts of money.
You see, a college education, however helpful and in many cases essential these days, is no substitute for a stock market education. What one learns in the college classroom and what one learns in the stock market classroom are two very different things. All the degrees in the world, however advanced and costly (sorry Moms and Dads), cannot adequately prepare you for what you'll face when entering the arena of financial gladiators. The stock market has a language all its own and you need to learn it. It does not come from a textbook. It must be studied — from scratch. You must be willing to discard any and all preconceived notions you have about investing. This isn't easy. You'll probably have to think long and hard on this one, but you must succeed in doing so to have a chance of getting in sync with the market. Learning the market's language from scratch is the single most important lesson this book contains. That's what I did in 1974.
While attending a neighbor's Eagle Scout graduation one evening, I met a stockbroker from Herzfeld & Stern. His name was Norman. I was telling him about my stock market experiences, in particular a holding of mine that was going down in the face of good news. I didn't understand the disconnect between a favorable news report on the company and the resulting selloff in its underlying shares. Norman mentioned that bad corporate news, which wasn't as bad as the analyst consensus was expecting, could actually be better for the underlying shares than good news that fell short of the bullish consensus forecasts. Degrees of bullishness and bearishness? I thought. Confusing, to say the least. Norman also told me that news was not treated the same way in a bull market as it was in a bear market, and that in addition my stock had a "double top" and a general bear market climate was in force. "What's a double top?" I asked. He informed me that it was a term used in an investment discipline called technical analysis and invited me to visit his New York City office — an offer I immediately (to put it mildly) accepted.
As well as I can recall, I spent the better part of an afternoon there. As I departed his office after that visit, Norman offered me the option of taking home either a bunch of annual (company) reports stacked against his wall or a chart book containing price graphs of several hundred stocks barely half an inch thick. Fearing imminent hernia surgery if I tried to carry those heavy annual reports to the bus terminal for my journey home, I opted for the chart book. It was my entry into the world of technical analysis, an investment discipline from which I have since never veered.
As a technical analyst, I gauge the price movements of a stock (or market or index) with charts and a variety of other supply-demand research tools to try to obtain clues as to their future course, as opposed to analyzing the condition of the underlying company (or industry or economy). The latter are known as fundamental considerations and include information like earnings per share, revenues, dividend analysis, balance sheet data, management personnel, product lines, research and development plans, and other related corporate information. As part of their analytical duties, fundamental analysts visit the company, speak with management, and analyze an array of financial material prior to issuing their often lengthy research reports, complete with earnings and revenue estimates and frequently an investment conclusion.
The technical analyst, on the other hand, isn't interested in the news but rather in the stock's or market's response (that's the key word) to this news in terms of their price movements relative to a variety of supply-demand tools. These movements, which can be measured on an intraday, daily, weekly, monthly, quarterly, or even yearly basis (or variations thereof), form price patterns over time that, among other things, the technical analyst attempts to successfully interpret.
My strong personal belief (to put it mildly) is that if I want to try to predict the future movement of a stock, I'm going to follow — you guessed it — the stock, not the company. Repeat, not the company! Why would I want to analyze the company when it's the stock in which I'm investing my hard-earned capital? If I were investing directly in a company then it makes sense to me to analyze that particular entity, but not when it's shares of stock in which I'm interested in investing. In those cases I want to go right to the source where my money is being deployed. Think of it like this: let's say you've met someone whom you'd like to ask out and get to know better. Would you ask out her siblings or other family members to do this, or would you go straight to the source of your interest? I think you get my point.
Remember that when a "margin call" (an obligation to add capital to an account in instances where money is borrowed from the brokerage firm and the account value dips to a certain level) is received that it's based purely on "technical" (price) considerations. The fundamental condition of the underlying companies — no matter how stellar they may be — play no role. Think about that. You can own shares in the most prestigious companies in the universe, with uninterrupted streaks of rising earnings and dividends and a product line and management team second to none, and still receive that dreaded margin call.
Don't forget that the market's overall trend exerts a powerful influence on its component issues — thus, the popular saying that "the trend is your friend." Lots of money has been made purchasing the shares of poor companies, just as generous amounts of capital have been lost buying the shares of great companies. Since the majority of issues are going to move in the direction of the primary market trend, beginning with an analysis of the individual company doesn't make much sense. Unfortunately, this key investment fact (like so many others we'll discuss herein) doesn't receive nearly the attention it deserves. Hard-working and devoted Wall Street analysts spend countless hours analyzing loads of corporate data and company trends to arrive at an investment conclusion, when in fact it's the market's major trend that will decide the underlying stock's direction in many, if not most, cases.
Never forget the importance of respecting the market's primary trend. Investing is not as simple as finding a great company, purchasing its underlying shares, and waiting for profits to materialize. Not to the technical analyst. If that were so, you wouldn't have legions of disappointed investors year in and year out.
But while I'm a technical market analyst, utilizing tools like trend lines, moving averages, pattern recognition, market breadth, varying time frames, divergence analysis, and reversal analysis (among others) to make my investment determinations, I must stress at the outset of this book that no matter what your investment discipline is, the truest measures of its worth are as follows:
1. Does it address market risk and capital preservation considerations?
2. Are you satisfied with the resulting track record?
3. Can it aid in getting you out of a position prior to a serious decline?
I have many friends and acquaintances from across the market spectrum — both technically and fundamentally investment oriented. No matter what discipline they choose to utilize, my hat's off to anyone with a respectable track record achieved with the highest moral and ethical standards. There are wonderfully gifted fundamental analysts out there, far smarter than I'll ever be. It's just that I can't look at reams of corporate financial data and have any idea what that offers me in terms of correctly gauging the movement of stocks or the market in general.
It's like having all the statistical information and performance data on a car you're interested in buying but still not knowing how it will drive. Looking good on a statistical basis may not accurately reflect how it will perform. Road conditions are also an important consideration in that regard. If they're treacherous, the financial equivalent of which is a primary bear market for stocks, you'll want to avoid traveling on both no matter how good your "vehicle" looks.
Relationship-wise, how often have you felt someone seemed like a potentially great match after reviewing his interests and other pertinent information "on paper," only to conclude after meeting him in person that the match wasn't meant to be? Just as there's no substitute for interacting with someone face-to-face to thoroughly assess them and draw a personal conclusion, you need to view the action of the stock and overall market by directly observing their respective price movements to arrive at an investment decision. Any other way places distance between you and the market. That's how a technical analyst thinks.
This book is not intended to tell you which individual stocks to buy or sell, but more importantly to suggest some key rules and insights that comprise an investment approach and philosophy which you, the investor, can use for the rest of your investment lifetime. In fact, some of your very own life experiences should come in handy when considering a potential course of investment action. That's why I chose the title Relationship Investing. By using life experience as the common denominator, I believe that I can assist in simplifying the process of making difficult investment decisions while simultaneously relating to the largest possible pool of investors. Hopefully, you'll be able to achieve potentially improved investment results while better addressing market risk. Remember, the stock market is both judge and jury, and its verdict is final. Like it or not. Period!
(Continues…)
Excerpted from "Relationship Investing"
by .
Copyright © 2017 Jeffrey S. Weiss.
Excerpted by permission of Skyhorse Publishing.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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