Monday, November 11, 2013

Birinyi, The Master Trader

Even though he is sometimes derided for being a perma-bull (or in his words, “a redundant bull” [p. 62]), Laszlo Birinyi has a long, proven track record which has earned him the title “a legend.” So the publication of The Master Trader: Birinyi’s Secrets to Understanding the Market (Wiley, 2013) is something of an event.

Birinyi’s investing style is difficult to categorize. He is no fan of technical analysis: “it is not predictive, it is not consistent, and it is not analysis.” (p. 1) And yet his money flows indicator is often included in technical analysis packages. No, no, he argues, money flows are not a technical indicator. “They are the ultimate fundamental input.”(p. 72)

In addition to money flows analysis, which looks at every trade (and, most importantly, the size of every trade) in every stock, Birinyi also uses anecdotal data to inform his trading. Magazines and newspapers, he contends, are “databases in disguise.” (p. 80) He also keeps track of the attitudes of commentators and economists.

And this is just the beginning. It quickly becomes clear that what he’s advocating involves a lot of work. Birinyi concedes the point but counters: “consider a portfolio of $100,000 which hopes to make 10 percent or $10,000. Working as a teacher or administrator or chef, how long would it take to accumulate $10,000? Three months, half a year? Why should you make it on Wall Street in only three days or six weeks?” (p. 196)

Birinyi’s firm crunches numbers relentlessly to analyze, among other things, market cycles, sector rotation, small vs. large stocks, growth vs. value, market sentiment, and the impact of the Fed. As he writes (though in connection with a suggested reading list), “you can never know too much about too many things on Wall Street.” (p. 281) Of course, what you know is more important than how much you know. Birinyi quotes Roland Grimm, former manager of the Yale Endowment, who said, “You have to be careful regarding the railroad analyst who knows how many ties there are between New York and Washington and not when to sell Penn Central.” (p. 244) Moreover, “sometimes too much data is actually a handicap as it incorporates different circumstances. Risk measures, as one example, before the advent of options were a totally different environment.” (p. 248)

In recent years Birinyi’s firm has “found portfolio enhancing opportunities in short-term trading by ignoring or omitting historical data.” And yet, “despite our efforts, we have not been able to develop metrics for shorter periods and have no confidence in others’ efforts to do so either. There is one exception—the next day—and even then only in certain circumstances.” (p. 250)

As for gaps, remember the old rule that large gaps have to be closed? Well, the new rule says that these gaps close only about 25% of the time. Within this number, however, there are tendencies even if no definite answers. “[I]n a world of computerized trading, models, and other mechanized inputs, gaps may provide a significant opportunity for human judgment.” (p. 275)

Times change, markets change, traders and market analysts come and go. But some things remain constant. Over the long haul careful, extensive analytic research combined with keen human judgment will triumph. Laszlo Birinyi’s career illustrates this constancy. The Master Trader details the principles, the studies, and the grunt work that contributed to his investing success over the decades.

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