"Winning on Wall Street"
What Martin Zweig had to say about making profits
I wrapped up reading Martin Zweig’s “Winning on Wall Street” over the weekend. I thought I’d give an overview of the substance of the book. With most books about Wall Street, I assess their value by how much it alters my stock selection process or macro economy understanding. This book reinforced many of my tools for understanding the economy as a whole and provided a few more tools to do so. The bigger impact it had on me was stock selection.
Mr. Zweig starts off his book with a series of indicators to measure the health of the economy. He breaks them down into four major categories; monetary, momentum, sentiment, and seasonal.
For monetary, he primarily focuses on the Fed. This isn’t a shock. The Fed drives the market with it’s actions. Martin honed in on the Prime Rate, the Fed’s discount rate, the Fed Funds Rate, and the Fed’s reserve requirements (which were set to 0% on March 26, 2020). I believe substituting the interest rate on reserve balances should take the place of the now discontinued reserve requirements. Martin also watched the G.19 Consumer Credit data release very closely.
For momentum, he would use the advance/decline ratio, up volume:down volume, and a 4% rule. The 4% rule is simply; if the market goes up 4% in a certain amount of time, its bullish. Outside of the 4% rule, the others have been covered in other books and in other places. I’m not much of a momentum guy. I’ll look at the chart and it’ll tell me if the stock has momentum or not. If I get really serious, I’ll compare the company’s relative strength against the S&P500.
For sentiment indicators, Martin relied on mutual fund cash/asset ratios, option trading activity, secondary offerings, and IPOs. It is really challenging to find a good resource on the mutual fund cash/asset ratio. Option trading activity has skyrocketed as retail investors have easier access to trading them. I was already looking at IPOs as a sentiment indicator. It might be prudent to add secondary offerings.
Finally, Zweig tackled the seasonal trading tendencies of the market. This also wasn’t new. It’s been widely known that certain months and days of the week are prone to advances or declines (Fridays are typically good days for stocks, Mondays not so much). He really emphasized the pre-holiday ramp that can happen in the market. He also went into detail concerning presidential cycles.
Year 1 = stock market averaged +3.3%
Year 2 (midterm year) = +0.3%
Year 3 = +7.0%
Year 4 (election year) = +4.8%
I found this interesting at first but then quickly realized that a lot of this probably had to do with the current resident of the White House exerting pressure on the Fed to loosen monetary policy in the run-up to a re-election bid.
Martin really struck a chord with me in his analysis of bull and bear markets. His indicator for an upcoming bull market was the following formula: Fed action + 2:1 Advance/Decline ratio over 10 days. For Bear Markets, there were only three conditions; extreme deflation (ever wonder why the central bank is so focused on preventing deflation, this is why), very high P/E ratios, an inverted yield curve. All bear markets during the 20th century had at least one of these conditions, most had two. I found this pretty interesting since we’ve seen the yield curve invert recently and have had very high P/E ratios.
At the end of the book, he goes into detail in how he picks his stocks. Martin wrote a very popular investment letter. As any good salesman would do, he gave away some but not all of his secrets in picking stocks. He starts with a value/fundamental investor approach, strong growth in earnings and sales as well as a reasonable P/E ratio. He would also review insider buying. Martin believed that insiders can sell for all sorts of reasons but they only buy for one reason, because they believe the stock price will go up. He focused on buying into strong price action and he was adamant about setting up stop-loss targets.
I’ve already been focused on buying into relative strength and setting stop-loss targets but his discussion about insider buying really clicked for me. I’ve read other investment books that had highlighted it to a degree but it never really seemed to be a big factor for me. I’ve been watching a few of Roaring Kitty’s youtube videos and insider/hedge fund buying was a big point of emphasis for him. I see this as something that I will incorporate into future stock analysis.
