Summary of Martin Zweig, winning on Wall Street

These are quotes and summaries of what I learned from Martin Zweig’s Book, ‘Winning on Wall Street.’

When fed tightens and interest rates rise, stock markets perform poorly, and visa versa

When fundamentals for a stock deteriorate, sell it and don’t refuse to take a loss as can’t afford to bruise your ego.

Accept your mistakes, deal with them and learn from them.

In baseball a person who hits 2/3rds of the balls is in the Hall of Fame, so don’t expect to get it right all the time.

Look at stock market’s P/E ratio, dividend yield and book value to see if it is over valued, especially during periods of speculative mania.

Only a fool can be totally sure.

Deal in probabilities not certainties, so the aim is strategy and not preaching.

Page xvii, If he thinks that the market will probably crash in a particular month and does a put for it, it will still only put 1% of his assets into it. This is because it’s about probability and the puts will be worthless if it doesn’t happen in that particular month, or go down to enough of a degree to make it worthwhile.

Reality is cutting the risk to the bone when the indicators weaken, hoping that you will make a few bucks when conditions are good, and praying your survive the crashes so that someday you can make money in the bull markets and have money left to do so.

He breaks historical composite readings into 10 deciles, such as top 10% etc.

He is measuring monetary, sentiment and tape (the total stock market price) conditions.

A credit crunch is where the yield curve turns negative.

If the stock market has a grossly overvalued P/E ratio and yields, has been rocketing upward for years without a major correction, which has produced doubles or more in the Dow, things get risky.

A crash is coming if whenever there are minor dips people think the solution is not to fear the dips and just to buy more.

You need constant access to reliable market indicators, and when they tell you to do something, you do it. The mistake is to ignore or distrust your own indicators, like a pilot second guessing their compass.

The key is patience to wait for the fat baseball pitch and not just swing at anything. Only do it when the odds are in your favor as the indicators are in the right direction.

Page 2, from mid 1980s to 1995 the Zweig forecast had a return of 898.9%, on a compounded basis that is a 16% annual return why.

Page 3, book doesn’t track all the variables he tracks on the market activity or it would get hopelessly complicated. So he has simplified his approach to make it understandable and workable for the non-professional reader.

The major direction of the market is dominated by monetary considerations, primarily Federal Reserve policy and the movements of interest rates. To monitor these he has several indicators but he has found to be very reliable.

Momentum is like a rocket being launched to the moon, if it takes off with a lot of thrust, it has a chance of making it out of the Earth’s atmosphere. Without this momentum it will flop. This momentum is the final arbiter of any investment decision, he never fights it.

Picking falling shares because you think they have hit the bottom is dangerous. It is easier, safer and in most cases just as rewarding to wait until they have hit the bottom and taken a little bounce upwards before buying them.

He uses sentiment indicators as early warning systems and it’s suprising how often do called expert opinion can be.

He monitors fundamentals, which is the actual value of a particular stock, such as earnings, dividends and balance sheets.This only helps with individual stocks, not the whole market. 90% of input on stock picking is from the fundamentals, then 10% from predicting the market as a whole.

Big money is from being on the right side of major moves, not from swimming against the tide.

Be fully invested when market going up and fully in cash when goes down.

Trends have a higher probability of continuing than not.

2/3rds of the time markets are neutral, or rising and declining moderately. During this time might trade profitably selecting the right individual stocks, but investing in the whole market during a strong bull market gets the best returns.

Pick stocks with P/E ratio, earnings trend and a few balance sheet items. Not care what makes, as long as consistent earnings for 4-5 years.

Not buy stock at the bottom, buy if going to climb and acting well relative to the market. Buying on strength costs a premium, but increases possibility of being right.

It’s not buy at the bottom and sell at the top, it’s buy when the probability is greatest that the market will advance.

If bottom is 4000 and top is 6000, you buy at 4300 if let’s say 90% probability it will go higher. You might sell at 5700 when probability is good that the market will decline.

It’s about probability of loss or decline.

You are cutting losses and running with profits.

You can be right with individual stocks as little as 30% of the time and still do well, if you can get out when the getting is good

Follow and don’t fight the trends.

You want to get out so you are able to pursue future gains.

You have to make mistakes to come up with something that really works. Benjamin Franklin, ‘The things that hurt instruct.’

Uses stop losses (sell orders at predetermined levels) to stop him fighting crippling battles. Whenever buy a stock, he generally sets them 10-20% below current level. Level depends on stock’s trading pattern.

If stock goes up, he raises the stop loss price so still protected.

They might sell a stock that then rises again, but the probabilities are that they save you and there is always another stock

Need to be flexible, so take advantage and be aggressive when during the less common times you should be so, then the rest of the time be conservative.

Most important trait in investing is discipline to follow your method and not be tempted by things that weaken your resolve, such as a ‘hot tip’ someone gives you.

Second most important is flexibility. Eg. bearish when the market is collapsing and people think that brokerage houses are going to go bust, but then bullish if the Fed steps in and a rally starts that looks like it’s going to continue.

Whatever preconceived ideas you have, you respond to changing conditions

You need:
1, Discipline
2, Flexibility
3, Patience

You wait for the tape to give it’s message before you buy or sell

Stay in tune with the tape and interest rates.

As a kid he loved numbers.

Committee made decisions in the stock market tend to be mediocre, he’s never heard of a great investor who operated by committee

You need to be alert to never get caught in a stock market collapse.

The whole idea with Graham, Dodd, and Cottle is to buy stocks with good value that are selling at reasonable multiples and paying satisfactory dividends, and to make allowances for risks.

He wanted to look at the movement of markets as a whole, about technical factors such as the market’s own price action, crowd psychology, or the impact of the Federal Reserve and monetary and economical variables.

Let your profits run and cut your losses, as Jesse Livermore did.

Professor Wade Young ‘Buy on strength, sell on weakness.’. Most novices think it is ‘buy on weakness and sell on strength’, which is how they get themselves into trouble in the market.

Technical analysis in purest form is study only of those variables you can see on the ticker tape, namely price and volume.

He went through data from the securities and exchange commission going back to world war II  and found that-

-When options investors got two optimistic – buying lots of calls ( the option to buy 100 shares of a company stock price at a specific price over a stated time period) and shunning puts – the stock market was genuinely heading for trouble.

-Also the reverse, when options players were very bearish on the markets favoring puts (the right to sell 100 shares of a company stock at a stated price within a specified period of time) and selling or avoiding calls, the market was usually near the bottom.

– when option players were extremely active, it was a negative sign.

– when option players shun the markets and option volume dropped off, it was frequently a good time to buy.

Basically the old country opinion, ‘don’t follow the crowd’.

From this he invented the puts/call ratio technical benchmark.

He found that most speculators were not very successful and on balance lost money. They weren’t right very often regardless of whether, as a group, they were bullish or bearish.