Wednesday, May 8, 2013

Minervini, Trade Like a Stock Market Wizard

Mark Minervini, U.S. investing champion in 1997, averaged a 220% return per year from 1994 to 2000 for a compounded total return of 33,500%. Yes, we all know that these astonishing figures coincided with a major bull market, but how many traders came anywhere close to his record during this period?

In Trade Like a Stock Market Wizard: How to Achieve Superperformance in Stocks in Any Market (McGraw-Hill, 2013) Minervini shares his SEPA (Specific Entry Point Analysis) trading strategy. It’s essentially a trend following/breakout strategy that screens for such variables as earnings surprises and relative strength and that looks for catalysts driving institutional interest. It relies on both fundamentals and technicals. Its focus is on youthful small- to mid-cap stocks.

There are strong echoes of Bill O’Neil, Ben and Mitch Zacks, Richard Donchian, even Jesse Livermore in Minervini’s work. That he borrows from such luminaries is not surprising. Having dropped out of school at the age of 15, he subsequently became “a fanatical student of the stock market. … Over the years,” he writes, “I’ve read an incredible number of investment books, including more than 1,000 titles in my personal library alone.” (p. 3)

Minervini’s approach is not for the lazy—unless, of course, you want to subscribe to his real-time service. Although some of the screens can be done with the push of a button, the investor will have to follow up with his own fundamental research and chart analysis. For instance, what is the quality of a company’s earnings? How powerful is the competition? As an example, Minervini writes that “It’s no coincidence that within only 15 trading days of Netflix going public, Blockbuster Video’s stock permanently topped out. … From the point at which Netflix went public [to its high in 2011], the stock increased more than 3,400 percent. During the same period Blockbuster’s stock price lost 99 percent of its value.” (pp. 102-104)

For those who have the guts to buy 52-week highs, for those who are looking for the next mega-performer, and for those who are willing to put in the time to become a skilled analyst and trader, Minervini’s book will resonate. Even those who are disinclined to chase performance (which often simply means buying after a trend has been established) will discover that the book has a lot of merit.

Instead of delving deeper into SEPA, however worthy a task, let me share three thoughts from his section on risk management.

“To achieve consistent profitability, you must protect your profits and principal. As a matter of fact, I don’t differentiate between the two. A big mistake I see many traders make is to consider trading profits as house money…. Let’s say I make $5,000 on Monday. I don’t consider myself $5,000 ‘ahead of the game,’ free to risk that amount shooting for the moon. My account simply has a new starting balance, subject to the same set of rules as before.” (p. 273)

And, a subhead: “If you’re not feeling stupid, you’re not managing risk.” He continues: “Making you feel stupid is the market’s way of pressuring you to act foolish. Don’t succumb. Remain disciplined and cut your losses. The alternative to managing risk is not managing risk, and that never turns out well.” (p. 289)

Finally, perhaps with a nod to Warren Buffett, “You will never achieve superperformance if you overly diversify and rely on diversification for protection. … If you are strict with your selection criteria and demand the best for your portfolio, it should be difficult to find a lot of names that are worthy to be included among your elite group.” (pp. 312-13)

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