The Master Trader: a Book Review

日期:2014/07/08

The Master Trader by Laszlo Birinyi reveals the secrets of some of Birinyi's greatest successes and most celebrated techniques. Such secrets are timeless, valuable, and thought provoking as I often learn walking down the street with the very recognizable Laszlo after our tennis games, when a grateful passer by stops him "You're Laszlo Birinyi, the guy from Wall Street Week, aren't you. I owe you so much. You recommended Apple to me when it was 3 and Amazon at 50 and I bought them. And now, my whole family is sitting pretty because of you.".

Among the public, Laszlo is most famous for having by far the best record on Wall street week, 1000% versus the average of 270% for the other panelists during the 1992 -1999 period that the program was in its hayday. Among professional investors, he is most renowned for inventing the concept of money flows, a measure of the dollar value of a stock bought and sold during a short period. He is also the developer of a myriad of practical, tested money making ideas for individual stocks and the averages that are widely used by investors.



Some of his other discoveries, are the beauty of sprained wrist stocks, companies that are hit hard by temporary concerns but have not had their basic business model hurt, the predictive value of corrections of more than 20%, likely moves after big days, the moves after gaps, the rotation of industry performance during various segments of the market cycle, the superiority of growth stocks over value stocks in recent years, the long term unprofitable record of smart bears.

Most important of all the insights in "The Master Trader" is the snap shot of a creative and curious man who never accepts conventional wisdom, and has the patience and persistence to go back to the original sources to ferret out the truth from the mumbo jumbo. Those traits were noticed by Mike Bloomberg while Birinyi was a neophyte at Salomon Brothers and quickly led to his becoming head of equity research at the firm. He refined his money flow indicator and applied it in the short and long term to stay ahead of the market.

Birinyi is well known and highly respected by Barrons readers. His stock picks, market calls, and indicators are frequently cited. He was the subject of a thoughtful interview in January 2009, where he elicited one of his favorite themes— the experts are always behind the form, the number of stocks down 50% in a year varies inversely with future market moves, and recommended buying Amazon at 50 among other great calls.

He runs a successful investment firm with mid 9 figures under management out of his Westport estate, still likes to eke out a profit or two in his own trading, and publishes a daily advisory service that applies the myriad indicators he has developed to picking individual stocks, and future market performance for the day and the fray.

The question arises why would he reveal his secrets in a book, and how valuable is the book, which retails for $65 in the Wiley Trading Series. My guess is that he feels that after 35 years in wall street, he has a responsibility to restore some sense to the mumbo jumbo that is often accepted as wisdom on wall street. He believes that the data that is used, the records that are kept, and the performance figures that are reported are misleading and often harmful to the investor. Before he shuffles off, he feels the responsibility to rectify the situation. All investors would prosper from reading this book which should serve as a Baedecker for market people.

The Table of Contents of the book, always a good place to start lists 94 golden nuggets and hidden treasures for market people. Some of my favorites:

The Advance Decline Line : A Favorite but Why?

Technical Analysis fails a Rigorous Test

The Dow Theory in Real Time

The Issue of Cyclically Adjusted Price Earnings Ratios

The Public Versus All Others

The Demise of the Japanese Market was Structural

How to Tell Whether We Are in the Eighth or Ninth Inning

Group Rotation Exists

The Fed Tightens: It Hurts Only for a Little While The Morning after a Big Day

It's 10 AM: Do You Know Where Your Stocks are Going

Gaps Provide Opportunity and then Some

Cost of Timing the Market

One can become overwhelmed from the treasures revealed in the 224 figures and 97 tables contained within the book. However, there is one overriding theme and lesson that the book teaches: "It's smart to be Bearish but Not Necessarily Profitable." Here's why. "The Market does not articulate its positive insights while the negatives are front and center. We appreciate that it is disconcerting to read the morning papers regarding global strife, political corruption, man's inhumanity to man and nature, and still have an optimistic outlook… The Negative is Obvious: the future is opaque."

The studies contained support this view. Stocks with big declines go up in the next 3 months. Sprained wrist stocks that suffer big declines from ephemeral causes like the big banks when they are caught with their hands in the cookie jar tend to recoup their losses. By getting out of the market and missing the 5 best days each year, a buck invested in 1900 would have diminished to about 1 cent by 2012. Compare this to the $40,000 or 50,000 that you would have received by buying an index fund with this 1 buck during the same period as documented by Dimson Marsh and Staunton. Yes, when you get out of the market when you see that there is a likelihood of a catastrophe you can reduce your chances of suffering a big drop. But you also reduce you chances of gaining the immense drift that compounding a 8 or 10% a year return from stocks or a 15% return on capital can obtain. Which is better? As Jim Lorie, the founder of the Center for Research in Stock Prices at the University of Chicago liked to say, "When you get out, you never know when to get back in".

The book has many virtues but there is one weakness. Birinyi seems unaware that there is considerable randomness in the market. You can't expect every regularity or forecast to repeat. Time and again he shows how this or that forecast or insight turned out to be wrong. Yet even the best regularities are right some 60% of the time. Furthermore, the cycles are ever changing. The things that work the best in one period frequently work the worst in the next. Many of the studies for example that Birinyi reports that have alluring profits in the 2009 to date period, would have led to disastrous losses in 2008 and 2000. This is a small price to pay considering the many recurring and startling insights contained in the hundreds of documented regularities that do show consistency.

An edited and perhaps more sprightly version of this review appears in Barron's of July 7, 2014 on Page L28.