The reason behind that is the behavior of the investors, the people who own and move the stocks. We consider them to be our analysts. We just get into what people are buying and what people are selling.

Q:  Would you override the system if it still points in the direction of energy, for example?

A: Definitely not as there is no judgment here. We have a strict disciplined approach. Following this strategy and not over-weighting portfolios in a sector has saved us a lot of grief and we have been able to make money too.

Q:  Do you find any appealing stocks in the IPO market?

A: We don’t look at a stock until it’s been around for six months. It has to have a good long pattern because there’s a lot of volatility in the early stages of any company after its release.

Q:  Are there certain guidelines that you follow in your research process?

A: Basically, we say our strategy is the slope, not in the hope. The stocks and the indicators have to be in that slope, yet we have limits on the downside and the upside, so we’re not buying stocks with tremendous volatility. Our patterns are very tight and it’s been designed that way. Trading Expert Pro is software from a company called AIQ Systems. This software is typically used for short term trading purposes but I have found ways to use this software to find long term investment patterns, so the formulas are very unique.

Once I developed these formulas, I kept on testing it with data back to 1970. If it didn’t work, I’d go back and tweak it again, and test it again and again. I probably have tried our over 1,000 formulas to get to model that we have now.

In our Monday meetings we look at the fundamental factors of the economy so that we know what’s happening to retail sales, personal income, construction spending, etc. But we don’t use that in our analysis of buying and selling stocks. We just built a fundamental picture of what’s happening to the economy.

Q:  What’s your approach to portfolio construction?

A: Currently we’re entirely in long positions and we’ll stay that way until the indicators tell us to turn around. It’s a multi-cap product, so from a diversification point of view, it covers the entire universe of the United States equities. A year ago we were mostly micro-cap stocks, while today we’re almost 60% in large-cap stocks. It is the market that determines the construction of the portfolio, not us. This
is what people are buying and where their confidence and their money go.

Last year at this time we had about 150 to 170 stocks and right now we’ve got about 140 stocks. The turnover also depends on the economic cycle. From 1990 through 1998 the turnover was maybe 10% a year. Since 1998 through 2004 it was 100% a year, while right now it is about 50%.

Q:  Do you measure yourself against any index?

A: We use both the S&P 500 and the Wilshire 5000 indices. If you compare the Dow Jones with its 30 stocks to the Wiltshire 5000 index, over the last 20 years they are within 0.18% of one another. Those 30 stocks are a really good indicator of the market.

Q:  Overall, you have instant and frequent communication with the market charts and you’re leveraging to your benefit what the market is telling you through the charts. Is my understanding correct?

A: Yes, that’s a great analogy. As a result of that strategy, we don’t need analysts. We only rely on the way the formulas are structured. We digitize the market and that’s all we’re looking at. If the numbers say to be long, we’re going that way. We’re watching the way investors vote and they vote with their emotions or their confidence on the way up and fear or uncertainty on the way down. All I do is count confidence pulses or digitized pulses.

Q:  So you’re buying stocks, not companies?

A: Have you heard that a financial statement is a picture of management? I say that a chart is also a picture of management so we end up buying great companies. People find out what’s happening before it actually hits the newspapers. We sold off most of our energy stocks about three months ago. When the obvious is upon you, it is too late. When we were buying all of the energy and utility stocks two and a half years ago, clients were asking us why we were doing that and now they can see it’s made a lot of money for them.

Usually it takes four to six months for the stocks we buy to perform. Investors have a way of knowing what stocks are going to work about four to six months in advance and that’s what our model is based on.

Another example is that we have a lot of consumer discretionary stocks because people last year anticipated the growth in personal income and, respectively, in retail stocks. There are a lot of smart people around who do that kind of research. So we’re watching the numbers and we can leverage it just by looking at the patterns of the chart. We end up buying companies that we’ve never heard of until we looked at the patterns. No one individual is smarter than all of us.