Friday, March 16, 2012

Schulz, The Intelligent Chartist, part 1

The inter-library loan system worked its magic and I managed to borrow a copy of John W. Schulz’s 1962 book The Intelligent Chartist. For those who don’t hang on my every word, I referenced this book in my recent review of Deemer on Technical Analysis where, in his bibliography, Deemer described it as “the most intellectual discussion of and reasoning behind technical analysis ever written.”

I assume this book is now, according to copyright law, in the public domain even though it’s not exactly easy to find. So I’m going to devote three posts to sharing material that isn’t covered in the standard texts on technical analysis or Dow theory. Expect lots of quotation marks.

Let’s start with the author himself. Schulz is described as “a nationally known stock market analyst. His 26 years of professional activity in Wall Street furnish a deep background in the fundamental as well as in the technical approaches to stock market problems. As a partner in the New York Stock Exchange member firm of Wolfe & Co., he is a working stock broker and investment adviser. For the publishing affiliate of his firm, he writes ‘The Interim Technical Review’ and produces ‘The Annotated Portfolio of Selected Point & Figure Charts’, - subscription services offered under the Trend & Value masthead. He also contributes a semi-monthly column on stock market matters to Forbes Magazine.”

This book was published by WRSM Financial Services Corp., a corporate affiliate of Wolfe & Co. The publisher didn’t do its author proud. The book is a paperbound typescript, produced in the days that typewriters were omnipresent and typesetting costs were steep.

So much for the preliminaries. Let’s move on to the material that I’m brazenly lifting without commentary. I’m not even bothering with page references. The theme for today is the relationship between price and value.

“Under practical working conditions, neither the professional fundamentalist nor the professional technician have the choice of waiting for the exceptional cases, - ideal because their extreme price distortions produce stark contrasts and tend to minimize doubt. Cases of radical overpricing and radical underpricing, like major-trend highs and major-trend lows, are comparatively rare, by definition. … So the mutual problems are generally those that the analyst encounters in the large gray area between crass extremes. This is the great middle ground across which a trend – of price or of value, depending on your analytical viewpoint – moves between peak and trough. Here is where you spend much the best part of your time; and here is where conclusiveness is at a premium. Here is where you need your head most; at the extremes you may mostly need guts. Or, to put it differently, when the circumstances aren’t critical, you must be.

“What makes the problems basically identical for either analytical persuasion is a very simple fact of stock market life: a common stock is a two-dimensional thing, - it has value and it has price. The fact itself is simple, all right, but it’s really the source of all our troubles. … In the vastly overwhelming majority of cases, these two qualities are firmly attached to the stock.

“They are also firmly attached to each other; that is, they never break the bond between them, but that bond is extremely elastic. You could call it the factor of relative desirability. Now, it takes no particular experience or insight – just some reflection – to conclude that price is more volatile than value.”

“In a sense, perhaps the crucial peculiarity of the price-value relationship arises from the fact that the rubber band of desirability pulls both ways simultaneously. If value exerts a pull on price, it is also true that price exerts a pull on value. The idea may strike you as odd until you start to think about it. The point is that, except in ‘special cases’, every attempt to define the ‘intrinsic’ value of a stock calls for a certain amount of estimating; and this, in turn, calls for the exercise of judgment and also gets involved with prejudices and preferences. In other words, the notion of intrinsic value, which sounds so positive and objective, really includes a large dose of valuation, which is largely subjective and quite elastic. There is a large component of valuation in price, too; and it is actually from this component that the connecting rubber band of desirability grows.

“To put the matter simply, desirability – and with it, valuation – tends to rise and fall with the price of a stock. Intrinsic values always look bigger in a strong market and smaller in a weak market.”

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