Wednesday, December 2, 2009

Wilkinson, Technically Speaking

There are quite a few technical analysis interview books on the market, but Technically Speaking: Tips and Strategies from 16 Top Analysts by Chris Wilkinson (Traders Press, 1997) is by far one of the best, especially for those who want to hold positions for more than ten minutes. The author, it is important to stress, interviewed top analysts, not top traders. They may not have made the most money or achieved the status of heroes, but since they earned their living analyzing and advising, they had to be a bit more cerebral. The interviewees were Stan Berge, Ralph Bloch, John Bollinger, Marc Chaikin, Paul Desmond, Peter Eliades, Bob Gabele, Paul Montgomery, John Murphy, Martin Pring, Phil Roth, Lance Stonecypher, Dan Sullivan, Jim Tillman, Stan Weinstein, and Newton Zinder. Some of these names should be familiar to technical traders; others, I have to admit, I had never heard of.

I started with the most intriguing name and discovered that Lance Stonecypher is an analyst for Ned Davis Research. Now that’s a very familiar name. And in one brilliant paragraph he summarizes the four characteristics that are the basis of the philosophy at Ned Davis Research and that the top investing winners, despite often contradictory styles, share. Let me quote it in full.

“First, they all used objectively determined indicators rather than gut emotions to trade. Ned has a riddle he shares with clients relating to this. There is a room with three people in it. One is a high-priced lawyer, another is a low-priced lawyer, and the third is the tooth fairy. In the middle of them is a one hundred dollar bill. Suddenly, the lights go out and then come back on. The $100.00 has disappeared. The question is, ‘Who took the one hundred dollar bill?’ The answer is the high-priced lawyer because the other two are simply figments of the imagination. The point is that we want to make sure that what our indicators are saying [is] really factual rather than a figment of our imagination. It is absolutely critical that we stick with objectively determined indicators. The second characteristic is that all of these winners are very disciplined in their approach. They stay with their system through good times as well as bad. In classical Greek tragedies, the hero is always ruined in the end by some psychological character flaw. We often use this as an analogy because a common flaw of many investors is that they let their ego or personal feelings become involved in their market views, which makes it extremely difficult to admit mistakes. Discipline allows us to control our mistakes. The third key characteristic is that while disciplined, all of these people were flexible enough in their approach to change their minds whenever the evidence shifted. I remember back to the crash of 1987. Marty Zweig had done a study which showed that in every case, following a stock market decline of 30% or more, the economy always sank into a depression or severe recession. And yet within days after the crash, when his indicators turned very bullish, Marty turned bullish as well despite a lot of his fears. So he was flexible enough in his mindset that he shifted his outlook based on his objective indicators. The fourth characteristic is that all of these people are extremely risk averse. Ned Davis once asked Paul Tudor Jones what he did at work all day. He said, ‘The first thing I do is try and figure out what could go wrong and then I spend the rest of the day trying to cut my risks.’ Now, here is a commodity trader who is known as a risk taker, but I say he is risk averse. So, these four tenets: objectivity, discipline, flexibility, and risk management are the cornerstones of our investment philosophy.” (pp. 354-55)

To me that one paragraph alone is worth the $35 price of the book. But this nearly 500-page 8 1/2” x 11” book is jam packed with valuable information for investor and trader alike. The interviewer has done a masterful job of steering the conversations to bring out the best in each of these analysts. No cookie-cutter model here. She seems equally at home with those who rely on cycles, interest rate models, or volatility indicators. And, by the way, when you’re reading this book, don’t pick and choose your way through. There are valuable insights even for the experienced trader and investor in virtually every interview.

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