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ESSENTIAL STOCK PICKING STRATEGIES
What Works on Wall Street
Daniel A. Strachman
John Wiley & Sons, Inc.
Copyright © 2002 by Daniel A. Strachman. All rights reserved.
Published by John Wiley & Sons, Inc.
Published simultaneously in Canada.
ISBN: 0-471-40063-7
Printed in the United States of America
ACKNOWLEDGMENTS
There are many steps and processes that one completes in order to get a book from just an idea to the point where it is bound and sitting on the shelf in a bookstore. All along the way there are many people who contribute to making the concept become a reality. However, a few individuals have contributed greatly to making this particular project happen, and I would like to thank them for their guidance and support during the past year that I have been working on this project. The individuals are in no particular order: Sam Graff, the best newspaperman east of the Mississippi; Sarah Theodore, a fantastic librarian and researcher unlike any other; Desmond MacRae, a truly one-of-a-kind individual with theories on practically everything; and Jeff Zack, a dear friend who always provides me with great advice and guidance on my projects. I need to thank all of the money managers who agreed to be profiled in these pages—because without them there would be no book. Special thanks also to Annette, Stanley, David, Ruth, Amy, and Felice for their guidance and support.
Of course no book would get published without a publisher, so to all of the people at John Wiley & Sons, especially Pamela van Giessen and Joan O’Neil, thanks for everything. I hope this book is everything you intended it to be when you gave me the go-ahead to write it.D
ANIEL A. STRACHMANNew York City
April 2002
INTRODUCTION
Over the past six or seven years everything was the stock market and the stock market was everything. Cabdrivers, teachers, waiters, and window washers—everybody was talking about this stock or that stock and how every single one was going up. No longer did you need to know anything about fundamental or technical analysis or anything about a company’s balance sheet or income statement to make money in the market. All you had to do was place an order, hold it for a day or two, and
bam! You were a Wall Street whiz! The stories were all over television, radio, and print, not to mention the Internet. They told of people who made millions when their companies went public or by putting a pittance into a start-up tech company. Some individuals even saw the value of their retirement accounts triple overnight. Everyone had the bug and the bug had everyone. Even people in other professions got into the act. Investing novices who never before had a penny in the stock market began to expect that they would make 30 to 40 percent a year on their mutual fund investments. And many mutual fund managers and salespeople told them that they were right. It was as if the investing public was under a spell, believing that the market could not go down. The haze of greed blinded everyone.“I got used to buying a stock at 10 in the morning and making 10 or 15 percent by 2 in the afternoon and selling it before the close,” said a graphic designer who lives in Manhattan. “Sometimes it took a day or two, but I would almost always make 20 to 30 percent on every stock I purchased. Trading stocks become a better business than my actual business.” The tech craze seemed to blossom overnight as stocks went from 9 to 90 in a matter of minutes. The demand clearly outweighed the supply. For a while it seemed as if it was never going to end. Yet as quickly as people started making money, they began to lose it. By the spring of 2000 times had changed—changed for the worse. First the small technology companies began to run out of money (they never made any to begin with) as they burned through the cash they raised by going public. Then the large technology companies started to have problems. Slowly the nontechnology companies fell ill as well, and before you knew it the markets took to their sickbeds and did not seem as if they were ever going to get up. The problem had too many causes to write about in this book. The stock market from the mid-1990s to early 2000 will be fertile territory for books and business school lectures for years to come. And while many people delight in schadenfreude, I don’t, and therefore I have chosen to leave out the horror stories about people losing millions in a month and to move on to the good stuff. One of the main problems was that for retail investors, trading stocks stopped being fun and turned into something that resembled work. It stopped being fun because people had to dig to find good investments. Many people—or at least many of those who had experienced such huge growth in their portfolios—had little or no experience picking stocks or making sound investment decisions. These people had grown accustomed to buying anything with a tech or dot-com slant to it without understanding the first thing about the company. Now they came to realize that to invest wisely, you need to understand a company. That takes study, and many people didn’t want to put in the time. The problem wasn’t just with the retail investor but also with many of the so-called investment professionals. The tech bug bit them, too, giving them a sort of tech tetanus that left them unable to move out of the sector in time. Like the rest of the investing public, many of these men and women have also had a hard time picking winners, because the game has changed and they no longer understand the rules. Instead many are sitting in a daze, lost in a new fog. So what really happened, and how did things get so out of control? Well, I don’t really have an answer, nor does anyone else. One thing I do know: If you look at the history of the markets, you will find that markets like the ones of the midand late 1990s happen again and again. The difference between the 1990s and other bubbles, though, is the fantastic growth of news and information about the stock market. Many things killed the bull market, but not the least of them was the Internet.
Twenty years ago, it was next to impossible to get market prices in your home or office. Now not only can you get live prices, but you can get indications of who is willing to buy or sell a stock, learn the volume of shares traded, and, in some cases, see who is buying what and why.
“It used to be that the only people who had market information or intelligence were people in the market,” said one longtime broker. “Nowadays, everybody not only thinks that they are in the market, but they believe that they have as much information about the market as the professionals have. In some cases they do, but in most cases they don’t, and that is why people are getting hurt. Everyone thinks it is a level playing field, but in reality it is not.”When the market did turn into a bear, the media enjoyed reporting that one of the reasons was because very few money managers and day traders had previously experienced a down market. I think they should have reported that those investors and some money managers and day traders had forgotten the past, creating a problem that has stifled the growth of the market. People tend to forget how good they had it and how long it took them to recover from the bad times. Many people believe that they can predict which way markets and individual stocks will move. Some have been very successful at it, while others have been pretty poor at it. One thing that seems to be certain is that the key to successful investing is being able to withstand both the good times and the bad.
Like the gambler who keeps just enough chips in her pocket to play another day and the soldier who retreats so he can fight again, the key to successful investing is time and the ability to withstand hardship. You have to live to invest another day, and while this may sound easy, it isn’t, because we are dealing solely with money! Money—it’s been called “a pain in the ass,” “the root of all evil,” and “the one thing that makes the world go round.” Whatever it is, people like it, and they like it even more when it comes to them with ease. They like to spend it, they like to flash it, and some may even like to roll around naked in it. Many people believe that regardless of who you are, what you do, or how much you have, you can never have enough money. Back in 1995, I was a trainee working at a large New York institutional brokerage. As part of my training, I rotated through every area of the firm’s brokerage units. The trading desks in most firms look the same, so unless someone tells you what a particular desk is trading, it is very hard to distinguish one group from another. On this particular day, I was in the municipal bond area, an area that was on the verge of extinction, partly because the stock market was on a tear. We were all talking about this new stock issue, Netscape—how it was about to go public and was going to go through the roof, and how we all wanted to short the stock because it seemed unfathomable that the stock of a company that basically did nothing more than make getting to the Internet easier was worth anywhere near the amount it was trading for. Besides, at the time very few people used the Internet for anything more than e-mail. Little did we know that it was the start of something big! From that point on, every Internet stock, as well as almost every other initial public offering, seemed to double in price, if not triple, right out of the gate. It was quite a ride. It was a ride that many investors will remember for a very long time. Many will long for the days of the Internet craze—forgetting the heavy losses—and wish for the days of doubles and triples in a matter of hours. They’ll look backward nostalgically, of course, only until the market turns and stocks start going up again. Still, maybe the opportunity exists right now and investors don’t see it. Maybe there are people out there who don’t need skyrocketing markets or the latest craze to post strong returns. Maybe there are people who have done well and continue to do well regardless of market conditions. This leads me to the idea behind Essential Stock Picking Strategies: What Works on Wall Street. The purpose of this book is to provide you with unique insight into money managers. It is for readers who want to learn about the different investment styles and strategies of money managers who have made sound investment decisions over a significant period of time. It is not to make these men and women out to be the best or necessarily the brightest; it is merely to show that consistency is the most important thing when it comes to investing. The idea is to illustrate that having strict investment principles and following a strict investment strategy is more important then finding the next best thing. I wrote this book to give you a better understanding of what works on Wall Street, so that you can profit from good investment strategies and make money in both bull and bear markets. I have chosen money managers who have solid track records and who have been in the money management business for some time. Most of them are names that you will not recognize, and there is a reason for that—a reason you will understand when you finish this book. A great Wall Streeter once said, “Never confuse brains with a bull market.” I believe the people profiled in these chapters have the brains to be successful in both bull and bear markets and that these pages offer you the chance to profit from their brains.
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