Operational Questions & Answers - Part 4

The NASDAQ Exclusion Issue:

In the book, you mention that there is no reason why this approach wouldn't work with NASDAQ stocks. Do you ever trade the Investment Grade Issues there?

• In the 30+ years that I've been fine tuning this methodology, I just haven't had the need to go there, although the specific stock selection rules would certainly apply. However, my Statistics That Matter (and the new IGVSI Market Stats) are based on the NYSE alone, and I would avoid getting involved in securities that trade within a market that is generally known as a more aggressive and speculative medium.

• Also, the Brainwashing Book only reasons that the approach should work with NASDAQ stocks. That possibility has never been tested.

Science or Art:

What's become clear to me over the three years I've been using this approach is that there are aspects of both art and science inside. Do you agree?

• Absolutely, and that is totally a function of the amount of experiences that is reflected in the overall methodology. The science is a near-equal partner with the management art that applies it to the day to day decision making, and all of this takes place within a structured and well thought out portfolio investment plan.

• However, it is not rocket science, and not even one fancy formula is necessary to do it profitably.

• Interestingly, I think that there is more Psychology than Mathematics and Finance involved, on both an individual and on a group basis, but that's all covered in the book.

• In my experience I've found that engineers and attorneys have the most difficulty with it while retailers and generalists have the least. The three people who I personally know have been using the approach since 1979 are a Restaurateur, a Dentist/Orthodontist, and a Manager.

What do you think about taking smaller (say 5% to 7%) profits if you can do so fairly quickly? I have had several that didn't make 10% and I've watched them move back to about even.

• This question comes up often. 10% is a target, not a hard and fast rule. Three sevens beats two tens in this game as well.
• Experience will hone your profit taking judgment. On an old position, any profit is just fine. Quick profits take the best advantage of the "McDonald's Principle", and there is always something else to buy. If not, the market will correct soon anyway.
• Never hold on above the target 10%, but there is no shame in 5%. Remember, you'll never get poor taking profits.
• Within extended corrections, you (should) find yourself taking almost any profit at all once the Smart Cash has dried up.

Miscellany/Observations:

In the Brainwashing Book, the subject of Insider Trading Activity is barely touched upon, if at all. Why?

• The KISS principle strikes again! There are a lot of people following this information on a regular basis... particularly the institutions. This type of activity finds its way into price fluctuations and adds to volatility. I feel that it is just another of the thousands of different pieces of information that you could look at if you wanted to but really don't need to deal with at all. It's in there.
• There's a statement about the word know in the Brainwashing book. It doesn't exist in the Investment World. So if insider trading figures make you feel like you know something, you are probably wrong.

Is cyclical just one of those buzzwords coined by the Institutions to make us afraid of these stocks? Their volatility seems to provide more frequent trading opportunities.

• You got it. Volatility is your dearest friend, and cyclicals are perfect trading stocks. It's the market value obsession that does this... as far as I know, the Working Capital Model is the only cure.

If All Else Fails, Please Read the Instructions...again:

Do you have a one page summary of the rules for operating within your methodology?

• Having the rules on one page, as you put it, would be a big (but convenient) mistake. There are some rules and many guidelines, I've found that many people take an engineering approach to the methods I describe. That's not necessary or recommended. These are decision making thoughts and approaches to be implemented as things happen during the trading day and for the overall long term goals of the portfolio.
• It's more important to understand the concepts and the rationale for the guidelines than to commit the guidelines to memory.
• If you find one of these somewhere, call 9-1-1!

I’m really interested in starting a portfolio based on the ideas outlined in The Brainwashing of the American Investor and I’d like to know the risk-side of the equation. What’s the average % draw down for a typical portfolio?

• I don't pay much attention to market value draw down, I expect it. The larger it gets, the more opportunities either for buy more or for new portfolio additions there will be. This is a basic principle: you must learn to love corrections almost as much as you love rallies... they're just not as much fun.

• A focus on draw down is similar I think to an obsession with total return... if it ain't realized, it ain't important.
  

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