An Interview With Paul Desmond: Masters in Business (Audio)

ago that essentially was the forerunner of these podcasts. He had just won the Charles Dow Market Technicians Award for the most significant uh technical paper looking at bear markets and and how bottoms are formed. And I started a correspondence with him on email and he got back to me and said, oh, that paper was really interesting, but now I'm working on this new paper on how market

tops are formed, and it's really fascinating. We had to go back and re create all this data from the twenties that didn't exist, and he was just really enthusiastic, and so we ended up um through a series of phone calls that were recorded and transcribed, created these these long conversations which became A Q and A with Paul Desmond Part one and two. Originally it ran on the On the Street dot com and and now it's a

little difficult to find there. I know it's buried somewhere in there, but I reproduced it on my blog, The Big Picture, which is results dot com. I'll put a link in uh the page I I do on this podcast to those original um Q and A s if you want to uh, if you want to see them. I actually just reread them the other day and they're really really good. But at Conversation was really the first

time it popped into my head. Hey, I could find these really smart guys with really really interesting experiences and get them to speak about that, and maybe someone would want to pay attention and and and listen to it or read it. And um really, Paul Desmond was the first Masters in Business we've ever done before we were

doing radio, by the way, he be. This is a long podcast, but he tells some fascinating stories about how he met Mr Lowry and and some anecdotes about Joe Granville that I find to be hilarious if you know who Joe Granville is. But um really an unusual and interesting conversation with a lot of of details. If you're a technician. If you're a chartist, this is the podcast for you. So, without any further ado, here is my conversation in with Lowry's Paul Desmond. This is Masters in

Business with Barry Ridholts on Bloomberg Radio. This week on Masters in Business on Bloomberg Radio, my guest is Paul Desmond. For those of you who may not know who Paul is. No, he is not a member of Dave Brubeck's quartet. He is president of Lowry's Research, which is the oldest advisory firm in the United States. Paul joined Lowry's as Director of Research in nine four, meaning you just had your

fiftieth anniversary last year. UM. The vast majority of Lowry's subscribers or professional investors, including many of the largest hedge funds in the world. Paul was the president of the Market Technicians Association and the recipients of the Charles H. Dow Award given for original and groundbreaking research. And the piece that you won that award for was called Identify bear market Bottoms and New bull Markets. We'll talk about that a little while, um. Speaking of bear market bottoms.

In two thousand nine, you were honored by the Technical and you were honored as Technical Analysts of the Year by Technical Analysts magazine. Bull Desmond, Welcome to Bloomberg. Thank you very much. I'm delighted to be here. So people who um are not in the industry may not have heard of you, but I found you a long time ago when you had won that Dow Award for that paper, and you and I actually had, I want to say, it's about a dozen years ago, an extensive conversation about

how market bottoms are formed. And at the time a paper you were working on which was called how Market Tops Are Formed, and we I ended up writing that up that got published. It's actually still on the block side. If anyone wants to read this one from oh four or five something like that, it's called uh it just searched for Riholts and Desmond and that will come up. And that's a really a fascinating conversation. Um, but let's jump right into this. What did you do before you

were working at Lowry's. I was in the army, So I went from college to the Army to Lowry just like that. Yeah, I've got the shortest resume animals. There you go one job years. That's that's a little unusual. So that naturally leads to the next question, which is,

how did you become a technician right out of the army? Well, I my my my father was an investor of some size and UH and suffered a series of heart attacks and and UH couldn't handle the portfolio anymore, and so I took over for a short term, short time, and and I knew nothing about what I was doing. So I spent a great deal of time at the public library trying to try to figure out what made sense

and would you learn? In the library, I saw a lot of things that did not work, that I did not enjoy or did not feel what it was the right way to go. But but I did run into I had. I had a major economics in college, and so I was very familiar with the laws supply and demand, and believed in the law supplying the man very much. And I started looking for things that fit along with the law supplying the man. Finally got down to the point where I was doing some point in figure charting.

I was looking at value line and then all of a sudden I ran across the lowry material. And I was in the Miami Library at the time, and saw that the Lowry's had a Miami address, and so so I read a lot of their material and and felt this was exactly what I was looking for because it was based on the law of supplying demand. So how do you go from research markets to manager Dad's portfolio to applying for the job as had of research. I

really wasn't applying for the job. I was trying to learn more about the stock market, and so with the Miami address, I thought, well, this is a chance to just go over there and maybe get a chance to learn more. Serendipitous right there, Yes, I was, I was put together. I went over to the address that was on the reports, and instead of an office building, what I found was I was. I was in the State area of Miami and right along the Brickle Avenue estates

and I got to a gate. UH went through the gate and at the at the end of the property was three or four story brick colonial homes, incredibly unusual in Miami, and Uh, I pulled over. They had a separate garage and I guess mads quarters. And I pulled in there and there was a there was a man in the bushes tending to the flowers, and I said I said to him, is there anybody around here from

the Lowry organization? This is actually on a Saturday. And he came up out of the bushes with an old head on, you know, dirt all over his fingernails, and said, I think we can find somebody around here. And his name was L. M. Lowry, the founder of Larry Research. And so we we went into actually the major quarters have been converted into his private office and so we sat went in and sat down and I just said, you know, I've seen your material in the library and

like to learn more about it. And we sat and talked for oh, I think three hours. The first time you're meeting him, just come on into my lair and talk to me. Yeah. I always thought in college that there must be some place in the world that you could go to get a master's degree or PhD in stock market analysis, and I think this is it. And he said, well you can learn you know, I think I think you can learn a few things here. And um,

did he offer you a job? Well, yeah, sort of sort of a sort of a job at a phenominal again as an intern it was almost almost an internship. Is this is masters in business on Bloomberg Radio. I'm Barry Ridholtz. My guest this week on Masters in Business is technical analyst Paul Desmond of Lowry's. You've been called the technicians technician, which is a term I I really like. Before we start talking about market bottoms, I have to ask one question, which is a quote of yours. You said,

if you're looking at fundamentals, you're already too late. Explain what you meant by that, Well, the fundamentals are are delayed. People buy and sell stocks not because of what they know today, but what they think is going to happen

in the future. So they look at today's or rings reports and they say, I can see the ear rings are positive now, but I just don't think they're going to be that positive six months from now, and therefore the market starts to turn down because of that change in psychology, and um the ear rings reports are still positive, but the but the market turns out the same thing.

At market bottoms, the market traditionally turns up because investors are saying, yeah, I can see how bad things are right now, but I think in the next six months things are going to get better. So so let's talk a little bit about that. Let's talk about market bottoms. This is the piece that you won the Charles Dowe Award for um how how bare market bought ms are made. Let's talk a little bit about the oh seven o nine financial crisis and market bottom. How did that compare

to prior bear markets? Was that typical or was that an a typical bottom? No, it was it was rather rather typical bottom. We we we saw. The conditions that are necessary for a bottom are twofold number number one. You have to see the the selling exhausted. In other words, people have to capitulate, dump stock and just give up exactly. You have. It has to reach the point where people say, just get me out of the stock market. I don't ever want to see his stock again in my life.

And at that point there's no more sellers to drive prices down. That's what you mean by exhausting, exhausted exactly. Now. The second part of it which has to be there is uh that the buyers who are sitting on the sidelines have to look at the bargains that are available at that point and say, boy, this is an opportunity that I haven't seen in a dozen years, and they come running back in with great enthusiasm to grab up

all these bargains. So it's a one two punch. You have to exhaust the sellers and then you have to bring the bring the buyers back in again. That's interesting that simultaneously you have the psychology of some people I'm going to describe it as reacting emotionally, Hey, just make the pain stop, do whatever you have to do, versus the more objective, value oriented people who say, well, it may feel terrible, but look how reasonable these things are.

That's right. And what you find generally is that the average investor is panicking right at the bottom. They're saying, oh my goodness, I you know, I have to sell now because I'm gonna lose. If I don't, I'm gonna lose everything I've got. I remember, and we were at Dow or so during the O nine bottom, and all of a sudden, out of the woodworks, we were getting forecast for Dow five thousand, Dow three thousand, Dow one thousand, and that sort of background noise I think really scared

the living daylights out of people. Absolutely did. And and that those are the conditions that typically invest occur at a market bottom. So let's talk a little bit about that bottom in your um white paper that won the dowt Ward. You talk about down days and days. Describe

what that is and tell us what it means. Well, we were looking for some way to to to to indicate that we reached a market bottom, and a lot of writers have talked about capitulation and uh and in a in a very vague general sense, but nobody had come up with a way to specifically identify the kind capitulation that occurs at market bottoms. So we went back and looked at the amount of volume that was traded

on the downside during periods of the market decline. And there's the sellers volume, how much how much of the volume was due to sellers and how much of it was due to buyers? And what we found that when you get into the point where investors are panicking, uh or more of all of the volume traded on the market that day is traded on the downside, meaning it's

at a price lower than the previous price. Exactly, because whenever I've brought this up to people, one of the comments I often hear is, well, what do you mean more sellers and buyers? Every share that's sold someone's buying it shouldn't there be an equal amount. But you're really talking about are these shares sold um sold lower or are they bought higher? Yeah? Yeah, which you have to look at. The stock market is a double auction system where the buyers can raise or lower their prices and

the sellers can lower or raise their prices. And so what you're constantly watching for is to say, um is the mood of investors towards selling more than towards buying. Uh. So there's always a buyer, always a seller. But the question is who is the most anxious to do business, who's driving the actions. If the seller is anxious, then the price will go down. If the buyer is anxious, the only way he's going to get that stock away

from the seller is to raise the price. So it's who's impatience and just wants either in or out at that moment's right, and and at the at these at near these major market bottoms, the impatience is all on the downside. Just get me out of this place. I don't I don't want to ever see a stock again. So we talked about down days when the vast majority of the trading volume is to the downside, but surprisingly right around bottoms you also end up, as you've written,

with an update, explain what happens. You don't always and that's the that's the important point is you can have a series of these ninety percent downside days where investors are are panicking, but the buyers are sitting on the sidelines saying, you know, prices just don't look that good to me. I really can't get too enthusiastic about buying here.

If that, if that's the way they view the bargain prices, that there will be more sellers, there will be more downside days, and so you don't you can't just view the selling as being the key to the market bottom. It's it's a one two punch of you need to see the sellers panic and then you need to see the buyers come rushing back in. If the buyers won't rush back any and then the market decline will continue until prices eventually reach the point where the buyers are

really enthusiastic about coming back into the mark. And that's when we get that's what is upside day so and others in nineties, in the nineteen seventy nine seventy four market decline. We saw sixteen downside days without ever seeing and until we finally saw a ninety percent ups a day. And what year was that? When seventy three and nineteen seventy four was two year two year bear market? Amazing. This is Masters in Business on Bloomberg Radio. I'm Barry Ridalts.

Our guest this week on Masters in Business is Paul Desmond, President of Lowry's and a gentleman known as a technicians technician UH, an award winning analyst of stock market history. Let's talk a little bit about a fairly interesting problem which I think a lot of people are unaware of, and that's what happens when we market cap weight various industries. The SMP five hundred is cap weighted, many of the other industries are also. Other indusicries are also cap weighted.

What you've been critical about this, what's the problem with cap waiting market in disease, well, particularly in particularly in old bull markets, the camp being late in the cycle, not not not nineteenth century bull markets liked or something along those lines, and where you're transitioning from from an old bull market into a bearer market in that period, the big cap price indexes are incredibly deceptive, and we're in that kind of stage right now in two thousand

and fifteen. This is now an old six years old bull market exactly. And what what you're seeing is that is that the small camp segment of the market was the first part to begin to turn down, most sensitive to economic conditions, or just the first thing that sellers started dump. Well, I think they're the most speculative stocks that they tend to be overpriced more than more than most stocks. They're they're the the most uh a liquid, least amount of coverage, not much about there. They're kind

of one trick ponies. If if, if there, if their companies don't if their company's product does not do well, that you know they're pretty much gone. So anyway, what we've seen is that the market does not always move in tandem and knows it's not a single entity. It's a series of of areas of strength and weakness. And so the first stage of of a transition from a bowl market to a bearer market is weakness in small caps.

Then at the later point, maybe several months later, you see the deteriorations start to occur in the mid cap stocks. And then later than that it occurs in the big cap stocks. So if you're watching the big cap indexes like the SMP five index, you're missing out on all the weakness that has already occurred in the um, in

the small cap, in the mid cap and Nicklas. Example, at the top on the top day in two thousand, which I think was January twelve, or this is the this is the absolute top day of the of the SMP five index. If you look to inter inside the market, you'd see the fifty five percent of all of the stocks listed on the New York Stock is Change were already down by twenty or more from there from their high. So more than more than half of the index is already in a bullmarket. Yeah, but you can't tell that

because the leaders are still going higher. Absolutely, because the big caps are the last thing to turn down, and therefore they hide all of the weaknesses occurring in the small cap and mid cap stop. So we saw that in two thousand with what people called the Horsemen of the Technology index. We saw that in the late sixties or mid sixties, we had a twenty year bull market after the World War two ended, and that narrowed to the nifty fifty similar concept. Those were the best known

biggest gap stocks. Yeah, that wasn't That was in seventy, seventy two and seventy three, so really forty years into uh, twenty years into a huge post war rally. Yeah, and you and you see other You see other situations in which a part portion of the market is going in one direction and a portion of the market is going in another direction. For example, in seventy seven, the Dow Jones Industrial Average was down almost all year long. They

was down from his highs. At the same time, the small caps and mid caps were making new bull market highs. You saw the same pattern in two thousand. Actually, what was happening in two thousand was the technology stocks were extremely weak. They were probably down. The big caps were down maybe thirty five, and the mid caps and small caps we're making new highs. The SMP mid cap and the SMP small cap indexes made their highs in UM

April of two thousand two. Most people say, well, the bear markets started in early two thousand and lasted until March of two thousand three. UM. But first big for mid caps and small caps, they were actually going in the opposite direction from the big caps. Again, if an investor can't couldn't see that that condition, they missed a huge opportunity. This is Masters in Business on Bloomberg Radio.

I'm Barry Ridholtz. We're speaking with Paul Desmond, technical analysts at Lowry's also president, and he has been either working there or running the place since nineteen sixt you. Um, last time we spoke, you were working on a paper about how market tops were formed. What you subsequently put out and has become a widely acclaimed piece of research. Let's talk about a data point that I pulled from

your research that I find absolutely fascinating. Of the fourteen major market tops from ninety nine to two thousand, the average percentage of stocks making new highs for the day was only six percent. Explain how that happens and and what that means? Well, uh uh what? What? What occurs is that in the past, people used to think of the market as a single entity. The market goes up and it goes down, all in unison, that that stocks moved together. That's true at market bottoms, but it's far

from true at market tops. Market tops are very much like the autumn season, which is what we are right in the middle of now. And and in the autumn, what's happening is the leaves are changing color, and everybody's saying, oh, isn't that isn't that beautiful? But the if the leaves could talk, they'd be screaming out to you saying, winner's coming, winner's coming, winners coming. You better get prepared because winners coming. And nobody's paying any sense to it, all say, oh,

are there the leaves? Pretty well, the same thing happens in the stock market is that individual stocks drop out of the bull market one by one by one, very much like the leaves falling off the trees. That the process starts with the small caps. Almost always starts with the small caps. Then it moves to the mid caps. Uh. In those are area is the few people are looking at.

You know, if you said, when was the last time you saw open the paper or a magazine and saw a picture of the chart of the small cap Price INDEXUS, it's you never see it. You see the SMP five. So so those are stocks that you don't even know exists. Um, so they start to roll over. First, they're the first leaves to fall off the trees. Then the mid caps start to fall off the trees. And that process is all taking place while the s m P five hundred is still in a rising pattern, because the big caps

are the last thing to turn down. So the what you typically find is the this This study started with us going back and looking at at what was going on in I've I've always been fascinated with the idea that I've had a number of people who a number of our clients who were actually at in the market in nineteen say to me, you know, the market was just going up in and then it just crashed. There was no warnings, there was no nothing, And I thought,

that just doesn't make any sense to me. Nothing happens without some warning signs around it. That you can't think of anything in life that doesn't have warning signs. Lightning can't occur without white clouds turning the dark clouds turning to black clouds. At least in hindsight, you should be able to say, oh, this was the warning sign we missed. Sure, if you know what to look for, then it's pretty simple to see. If you don't know what to look for,

then you're gonna miss it almost every time. So so what did you find in ninety nine? We found that when the when the Doal Jones Industrial Average reached its peak in on September three, only two point three percent of the stocks on the New York Stock and Change we're making new highs that day. Now, that was supposed to be the market high. How could only two point

three percent be making new highs? There be six making new highs in actuality, thirty thirty or thirty five percent of the stocks on the New York Stock Exchange, we're already down by or more from their highs. So we went back and we created an advanced decline line. That's a simple way of just saying how many stocks are participating in the up trend, how many stocks are not

participating in the up trind. And what we found was the advanced decline line was in a steep decline from September two years, two years prior to the to the top. And each day, what that was saying was there are more more and more leaves falling off the trees and winters coming u So it was constantly warning you that the market was becoming thinner. There were fewer and fewer

stocks that were producing profits for portfolio. It was it was encouraging portfolio managers to get rid of all of the dead wood that was in their portfolios and start start calling out stocks that were no longer in the bull market and therefore moving towards a more defensive position for the coming winter. So let's stay with that full foliage metaphor that that you use so well. If I recall what you had said previously, at the average market peak, at least of the stocks and the brought in the

seas are already down. Is that a rough number the equivalent of at the peak of full foliage leaves have already fallen off the trees, exactly. And those are the stocks that have already dropped off are almost always initially in the small cap segment and in the mid cap segment. So again, very different called for the average investor to see, and so you need the tools to say, I can see that, I can see that stocks are falling off

the trees. I can see that I can see that it's the small caps that are rolling first, and that's a warning sign of a coming bearer market. Let's talk a little bit about something related, which is uh something you had written about the New York Stock Exchange, which you had termed as really not much of a stock exchange because more than half of the issues on it are on stocks. UM. So, so describe what's actually on the New York Stock Exchange, and then we'll talk a

little bit about your operating company only index. Well, if you if you go back in time and and let's say you went back to the forties or the even the fifties and looked at what was registered on the

New York Stock Exchange. At the time, it was all common stocks, and then it was preferred stocks that were general convertible into common stocks UM also operating common stock companies and preferred and and and and convertible preferred So the convertible preferreds because they were tied to the common stock through the through the conversion process, they moved like

common stocks. What happened in was there were products around, particularly particularly from the developer called neuven Nouvene had developed a number of products that were primarily for the retirement community, mostly bonds and interest issuing. Yeah, they were. They were. They were essentially portfolios of of individual bonds, all with an approximately same maturity date. And UM they didn't have

an aftermarket. They had no way to sell if somebody wanted to sell the shares for any reason in between the maturity dates. There was no market. So Nouvene and a number of products like that went to the New York Stock Exchange and said, we need we need an aftermarket and you need more volume on the on the exchange, and so they made a deal, uh that that essentially said the place should have been renamed the New York Stock and Bond Market, but they didn't do it. That

was still called the New York Stock Market. But investors were not aware of the distortions that were occurring because of the fact that so many bonds were now listed on the New York Stock Exchange. So so you mentioned it's bonds, it's closed in funds, it's reads. But more than half is that still true today? More than half

of the NYC is not operating company domestic common stock. Yeah, it's actually about fift and and another part of it's in there that is that instead of convertible preferred stocks, we now just have preferred stocks, and those stocks trade more like bonds than they do like stocks. So in order to in order to eliminate all these potential distortions, we simply said what what investors wanted to know is how are common stocks domestic common stocks moving on the exchange.

And so we created a new universe called the operating Companies only, and the only thing that's in that group is is is domestic common stocks. So let's let's go back to how market tops were formed. Then I want to talk about specific market tops. So what do your clients said? Nine? There was no warning, but you went back and there was plenty of warnings warning what about which a lot of people look at the black Monday van as having no warning. It just came out of

no act. Now the same same thing again. You need to know where to look and you need to have the indicators to be able to see it. The advanced decline line that we were talking about in nine in the seven case topped out in March of Night seven and was in a significant decline by the time that the break occurred in October. We've been speaking with Paul Desmond. He is the president and had to research at Lowry's Market Research. You can you can hang around and continue

chatting for a while. So if you enjoy this conversation, be sure and check out our podcast extras where we keep the tape rolling and continue speaking. Be sure and check out my daily column. You can see that at Bloomberg View dot com. Follow me on Twitter at rid Halts. I'm Barry Ridults. You're listening to Masters in Business on Bloomberg Radio. You're listening to the podcast portion. I don't know why I do this with my arms. I do that every uh every time. Paul, thank you so much

for for coming by today. I've been looking forward to to revisiting this conversation. I still get emails about that earlier conversation we had. I actually had someone at the Street dot com transcribe it and we published it in two parts the Street dot com. It's somewhere on the side it's buried, but I I took the original text and and reposted it on my blog it hilts dot com years ago. I still get emails about that, and people ask me about lowry Is. I'm like, hey, they're

an operating company. You have questions, contact them. I know you could download all of your white papers at Lowriies dot com and order reprints of all sorts of stuff. So let's let's talk about some of the questions and some of the things um we missed. Before I get into some of my regular questions, and these are these

are actually real questions. I'm not just making this stuff up. Um, So let's talk a little bit about technical analysis, which some of my friends think of as voodoo, and I always have looked at it as really, let's think of this as a measure of psychology and as the battle between supply and demand for market shares. And I found that has always been a helpful way to to frame

technical analysis. What do most people misunderstand about about technicals? Oh, you know, it's a broad, uh broad category, and there are a lot of different approaches to the stock market that all kind of fit within the in the category of technical. Now, O, if it's not fundamental, then it fits into the category of of of technical. So if you're not looking at earnings and value and price, then you're you're it's a big umbrella. And that's everything from

charts to momentum to fib cycles. It's it's the moon, the tides of the moon. Well, we're trying to keep it serious, like when I and I know there are people who and I apologize to those of you who follow astrology as a way to invest your money, and I apologize for you essentially being broke. But um, but within the realm of quasi, I don't even know the right words. Let's hold tides and and astrology aside. But when we look at things like Fibonacci and Elliott wave.

So I'm gonna ask you the same question in two different ways. The first, let me ask you this, what are your favorite indicators, favorite technico indicators that you use to help form your view of the market. Well, let me go back just the second. Nobody knows where the word technical came from, right, other than it's different than fundamental. Yeah, when I when I was president of the Market Technicians Association, we made an effort to try to go back and

find out who first used the word technical. Couldn't figure it out, and what you know, in my in my estimation, we should not use the word technical. We should be using the word supply and demand. Right, how do you how would you call that it? So I'm not a fundamental analyst, I'm a supply demand That's very interesting. You

think that more accurately describes what the so called technicians do. Yes, it's it's the it's the foundation of everything that that people in the general category of technical analys so when when you're looking at a chart, what you're really seeing is the daily battle of demand versus supply. Exactly as prices rise is because the buyers were more anxious to

do business than the sellers. Or if prices are dropping, is because the sellers are trying to get rid of their stocks and they're lowering the price in order to get rid of it. And the important point is that if you if you go back to every economic textbook that's probably that's ever been published, in turn to chapter one, maybe chapter two, it's about the law supplying demand, and it says the law supply demand is the foundation is

the starting point of all all economic analysis. MM. So it makes sense that that we would look at that, at those at that chapter and say, okay, now what we need to be doing is because they're saying this is the foundation, this is the starting point. We need

to be looking at supply and demand. But somehow the Fundamental school says, well, we look at supply and demand for loyal we look at it for real estate, we look at it for gold, we look at it for orange juice, we look at it for qualities, but not the stock market. For some reason, some and they exclude uh, the laws supplying demand from from the analysis of the stock market. That's a fascinating thing. How the how the stock market is all of a sudden excluded or supplying

demand is excluded from the stock market. It's almost you know, it's almost the same as saying, um, we all recognize that at night when they get start out, you tend to come in the house, and when the sun is up, it's it's tend to get outside and and and uh go about your business. In the wintertime, we wear heavy clothes and we turn on a heater. Uh. In the summertime, we turn on an air condition here, and we're light clothes.

So we're constantly adapting. We're changing as conditions are around us. Change. But then the fundamental school says, well, that all applies to everything else in life, but not the stock market. The stock market, we just stay fully invested. We always stay invested. We wear this same clothes all year round. Uh, we were if we're wearing bathing suits when winner comes, we just keep wearing bathing suits. Makes no sense at all.

That's a fascinating way to look at it. Well. Supply demand approach simply says the supply the changes in the forces of supplying demand will warn you of the changes in investor psychology, so that when uh summer in place, or when we go back earlier, and when when springtime comes, you're aware that this is a wonderful opportunity to plant your money in in common stocks and and see it grow.

But it also shows you the erosion that takes place in autumn, in the autumn of the stock market, and allows you to to recognize that a lot of stocks are not not not going up anymore. And if they're not going up, then you then you are exposed to the risk without any of the reward, and the better, more logical thing to do is to to go to cash. So let's talk a little bit about the psychology of this. How much of what technicals are so called technicals, I

shouldn't really use that that tim around you. How much of that is really just a measure of psychology. It's it's it's it's exactly what you're doing. And then that's exactly why the fundamental school doesn't like us technical analysis, because they're saying psychology is is an art form, it's not a it's not a science. And um, but but prices go up and down because buyers are more anxious

to buy than sellers are to sell. And so what you find is that the major turning points in the stock market occur because of psychology, not because of evidence provided by fund the fundamental school. In other words, at a major market bottom when you should be buying, the economic news is all bad. Earnings are horrible, corporations are going bankrupts. Uh, you know, everything is bad. I think think back to March o nine, earnings had plummeted almost

a hundred percent. That we're still doing four hundred thousand job losses a month. GDP was still contracting. If if you were looking at the economic fundamentals, the last thing you would want to do is put money into stocks in March o nine. And yet there's no better time in the past decade to have put money into the equity market, exactly. And so and so an intelligent investor has to learn that they need to be a contrarian investor and they need to view major mark at declines

as as an opportunity to make profit. Is that the decline is producing the opportunity to buy it extremely low prices. The bowl market as it goes higher and higher and higher is creating an opportunity for people to be caught in that in the in the in the coming bear market and um and suffer those losses. So so you need you need to be able to see whether buyers and sellers are gaining control of the markets so that you can change as market conditions change. So, so let's

stick with various technical indicators. Um, what are your favorite things to look at? Obviously market breath one of the most important things. Yeah, it's it's it's all subsets of supply and demand. So its case to say, how, how in what ways can you measure your supply and demand. While you can measure it in terms of value, you can measure it in terms of momentum. Do you find volume? Is um worthwhile to to analyze or it's extremely important? Sure,

Let's let's say that. Let's say that you're there, Uh, let's say that you're thinking about buying a piece of real estate and you're you're saying, I'm looking for a piece of real estates are going to appreciate in value.

So I'm going to go over to this new development that's down down the street and I'm going to say, um, uh, if I bought one of these houses, do you think that would appreciate and value and the and the answer to that is the case of saying, uh, well, here's one development where where the buyers are lined up around the block trying to get in, trying and have money in their hand, trying to trying to buy these buy

these buildings. Here's another development mile away where there's two or three people looking at the properties, which one do you think is going to appreciate in value? So the volume of transactions simply tells you the strength of buyers or the strength of the lack of lack of strength. And if if there's only a few people interested in a particular piece of property, then the chances are the value of those pieces of property are not going to

increase very much. Whereas where the line that around the block, the prices are probably gonna go up is because people want that that particular kind of house. So it's it's Brooklyn versus Staten Island. Is really the housing market in Brooklyn is on fire. Other borrows not not as much, although I'm sure someone's gonna email me and say no,

everything's gone crazy. And Staten Island also starting to pick up in Queens and the Bronx now is just really there's not enough land and they're not building a whole lot more and it's gone, it's going crazy. So when you use the real estate metaphor, I'm just thinking the prices of apartments in Brooklyn, you go to Park Slope or Brooklyn Heights or cal Gun, they're just off the chart.

It's amazing, And well, let's in this process. Is supplying demand works not only in real estate, not only on For example, if everybody knows if you want to buy a car, uh, you buy a car when there are no buyers around, and there's a huge inventory of cars on the on the dealer's lot, and end of the month or end of the year, the last week between Christmas and New Year's those are your best deals exactly.

And that that's simply a case of saying you're you're you are going to buy when the forces of supplying demand are at their worst for the for the dealer. The same thing with if you want to buy an air conditioner, you better buy it in the wintertime. They'll buy it in July. That's a mistake where there are no buyers lined up in the middle of winter to buy air conditioning units, and so you get a you

get a drum antically better deal. That's using the law supply and demand in in a smart fashion to to take advantage of the changes in in the forces of supplying demand. So, so we mentioned some of your your favorite indicators. What sort of approaches the technico analysis do you think the jury is still out on or or you don't think really is provides a whole lot of insight. Anything stand out that you don't understand why people deploy

that astrology aside? Yeah, what what's interesting is there? There there too two areas of UH interest in technical analysis. One one is the UH psychology side of it. The other side of it is are things like fibonacci um on my list and UH game and some of some of these UH And what's fascinating is that a number

of these approaches are based upon the physical world. In other words, we've all seen that picture of that Leonardo da Vinci creative, a man standing with his arms spread out, And what that's demonstrating is what is called the golden measurement, golden ratio, golden ratio, that the length of your arm is the same as the length of your leg. Or whatever.

And and it's a is a physical thing that says, no matter who you are, no matter when you're born, where where, where you are in the world, that measurement is always the same. Uh. Fibonacci is much the same as as simply says that there there's a there's a natural ratio that exists in nature. They've seen that the nut shell with the declining spiral, And the problem with that is there from the physical world. And what controls the stock market is not the physical world. It's the

emotional world. It's a buyers versus sellers. So I'm always skeptical of those things that come from the natural world that say there's only so far that that stock can move. Uh. You know, if you if you think of the range of human emotion has almost no limit to it. And so to say that, you know, that's a certain things you can only go so far is a naive So I know Elliott wave is the three count five count three, and for some reason that's supposed to be magic. Feminacci

is the retracement on the golden ratio. I'm trying to remember again, was gaining something with nine. It was a box that people would draw dots on. And that's another one that I just never was able to wrap my head around. No, nobody fully understands game. Well, that makes it easier to sell sell a newsletter if nobody understands it. But you have the magic uh, we have the magic secret. Here send us four nine your first years uh subscription.

So it's interesting you you said that, UM, tell me about some of the technicians that you've um followed in the past. Who who's always stood out to you as Wow, that guy really understands charts and supplying the man and is value added. Well, uh, you know, I have to start with L. M. Lowery. Sure he was. He was a genius. I've I really felt very privileged to spend time with him. He was he was not only a

good analyst, but he was a good philosopher. He understood he understood human nature, and having a having an understanding of psychology and human nature is a very valuable tool when you're trying to deal with the changes in the trends of the start market. So so I'm gonna interrupt you there before we talk about and I'm writing down this down so I don't forget about it. I never heard that story you told earlier, which sounds fascinating than

in en four. You're researching in the library in Miami to try and get a handle on your dad's portfolio after he has a heart attack. You find Lowry's and just on a lark some Saturday, you drive to the address. What were you expecting, like an office park, and you're gonna pull in and and let me go see what this brokerage like firm is gonna have. What what was

your thinking to say, let's go visit Lowry's. Uh, you know, the Mimi Library um is four or five miles away from the address that was on the on the on these reports. So that's that's just so coincidental. And see what's going on? How how serendipitous is that that you're in Miami you look at this and it's five miles away. Yeah. Well, a lot of life, a lot of good things in life occur because of serendipitous theme on this show. I can't tell you how many people have said that over

and over again. Hey, you gotta get lucky. So well, you know, this whole study in nineteen nine was the same kind of a thing. We were doing this study in nineteen twenty nine. We were collecting this data and a very boring process, and it occurred to me, you know, I wonder what was going on in people's minds in September of ninety nine. What what do you suppose the news stories were that were in the journal? And what what was the thinking of the day and so on

and so forth. So I got out the micro film for September third nine, put it up on the machine, and there wasn't much commentary in the Wall Street Journal in those days, and so I quickly ended up on the trading page. And I I started looking down the trading page, and what obviously is over on the left hand side is always the same thing today. The high for for each stock was over on the left hand column, and then over on the right side was the clothes for for for that day. And the first stock on

the list was not a New Highs. And the second stock on the list was not a New Highs. And the third stock on the list was down about twenty And I thought, something's wrong here, because this is supposed to be the high for the market. And that was part of the the recognition that the market is doesn't

exist at major market tops. It's all about individual stocks, and so what we what we found from from just that serendiper us, the question is, you don't wonder what was going on in the day we we we found out that two point three percent of all the stocks on the New York Stock Exchange were at new highs that day, meaning nine seven point seven percent of all stocks were not at recognized when the market is at a record exactly and and at the same time, thirty

around thirty five of all the stocks on the New York Stock Exchange we're already down by or more from their highs. So so so on the top day of the doal Jones Industrial lanverage of the stocks were already in bear markets. And what was was interesting about it is what we now know is that it was it was the small caps and the mid caps that had been rolling over for some time that caused that particular situation.

But if you were simply looking at the doal Jones Industrial Average, which is a big cap index, you could never see the weakness that was a ring in the small caps or the manicamps. So the big caps camouflage what's happening. They completely completely hit it. And the doal Jones Nostra language was actually deceptive in holding people into the market when they should have been looking at the

individual stocks. Although who knew back then? Who had the faintest idea, Hey, the mids small caps are rolling over, I better sell in September twenty nine. Let me bring you back to that day, that Saturday when you decide to leave the Miami Library and drive over. So was that Mr Lowry's home, the big man right on It was right on Biscayne Bay. So he obviously was very successful. Was that as an investor? Or? Was that? As How did he become so successful and sitting with such a

huge homestead. He had a strong understanding of supplying the man, So you can make money with that in the market, in real estate, in in buying and selling cars, and in iron is selling oil. He made his He made a variety of fortunes in a number of areas really well, by recognizing the changes that we're going on in the economy and saying now is a good time to invest in oil. Now is not a good time to invest in oil, but it is a good time to invest

in real estate. Uh, it's not good to invest in real estate in one area of the country, but it is good to do it in another So you you pull up, you're you're on Biscayne Bay. Is this like a big gated property. I'm trying to ualize, you know. I started to drive in, and I was I was in my late twenties, and I had, you know, I had what were you driving? Oh? So this is sixty three sixty four a little sports car. Um not a didn't belong in that area of the city, you know.

And I actually I drove in the gate and there was a line of royal palms going down the driveway to leading to the house. And my first thought was I'm going to get arrested. He really And I turned around and left, No kidding, yeah, because I thought, you know, I don't belong in this. I don't belong in this area. This this was the prime pieces of real estate in all of South Florida, And um, what made you turn around and go back? I thought, what are they gonna

arrest me for? I'm not doing anything wrong? You have the I'm here, I'm looking for this. The people who put this out. You gotta take some risks in life, you know. So I just thought, you know, what are they gonna do to me? So you turned around you went back down down this driveway with centuries of royal palms on either side. Yeah, and then and and there was there was this elderly man in the bushes, picking flower, tending to a bunch of flowers. Did you assume this

was the gardener? Oh? Sure, you had no idea straw hat overalls, absolutely governed in soil and who knows what notn on his knees. That's that's some some picture, some

picture you're painting. So so this is the the garage slash maid's quarters away from the main It was a house I think there were four or five uh for you know, area for four or five cars, and then and then a two story building attached to that that was I think originally it was maid's quarters, smaller obviously than the main the main house, dramatically small y. Yeah, and uh he converted it into his office and so, uh it fits very nicely for these roles will be

small operation that he was running at that point. So you see the gardener on his knees, playing in the dirt. How do you what do you say to him? Said? Is there in anybody around here from the lowry organization? And he said, yeah, I think we could find somebody. And he got up, he got up all of his knees, and he took me into the into the office, and and I thought he was just leading me, you know, somewhere where there'd be somebody to talk to. And uh,

and all of a sudden we were in in an office. Um, and he was sitting in a big chair. And how did that conversation progress? That sounds like that's just one of those stories, uh, that you couldn't make up if you tried. Yeah, it was simply case to saying, you know, I was at the public library. I saw little Harry material. I was really enthused and attracted to it. I went through a lot of it and and UH found it, uh that I was drawn to it, that it had

a natural, natural draw to it. It was based on a little law supplying to me, and I've never seen anything else that it was really focused on supplying demand. How long had he been running Lowry's research at that point in time. Oh, he started the company in nineteen and he he created a five year history going back to ninety three. So our history had always been from

nineteen thirty three to the present time. And it wasn't until uh, nineteen, we finished a study that that we started in the mid seventies that covered the period from nineteen twenty five to nineteen thirty two. So now our history goes from to the present time, eighty eight years. Where did you find the data for five to thirty two? The Wall Street Journal on microfilm? So you're looking at daily stock prices in order to figure out what was

going on. Yeah, and it's a horrendously difficult job. I can image so, because you have to not only pull that ada, but then you have to verify it and second check it in. But I'm still entranced by the story of you in Mr Lowry's office. So you start speaking with the gardener slash owner of the place. Give me a little color on on that conversation. How did

that progress? Well, I just told him I think I think he was impressed that there was a young man sitting there that that had an interest in the same things that he had an interest in. Who were his clients at the time they were The clientele has always been primarily professional investors institutions. That's where we've always aimed at work. We don't really make any attempt to go

after the general public. Our stuff is a little too esoter for most of most investors, so he's surprised that some twenty year old kid pulls up in a sports car wants to talk about his work, not the you conversation he has. You said, you spoke for three hours. Yeah. Finally his wife called him on the phone and said, we're in a world, are you? Said, I was afraid that, you know, you got bit by a snake or something, and she she said, you know, I can't imagine what

was taking you so long? And he said, oh, having, we're having a good time here. And uh so I think we went on for maybe another half an hour or so, and finally she, I think she called again and said the dinners ready, you know, get up here. So, so, when did he offer you a job? There? Was it that conversation or subsequence of it? Um? Uh? I said to him. I said to him, uh, you know, all the time that I was in college, I was interested.

My interest was not in banking and economics. My interest was how do you make money in the stock market? And I never had a course in that, and I didn't teach that, and I kept thinking there must be some place in the world you can go and take a course and how to make money in the stock market. And I told him, I said, you know, I'm sitting here talking to you. This is the place to come to get a PhD and how to make money in the stock market. And I want to I want to

be around here. I'm willing to work for nothing. I just and he said, well, we can work that out, and we almost did. Um. So when did you start working for them? That's less than ten days later, And that was so you essentially asked for a job. The job was created for you looking for a job, you know, I was. I was looking for education. That's an amazing thing. How many people were actually working for him at the time, Oh, I think four or five? So it was a small

research shop and institutional client base. Was he sending a written newsletter or how was he? Well? Everything everything? Pretty much? When I got there, everything that we did was on a weekly basis um. Because there wasn't no internet, no computers, no technology like the telephones were all long distance calls and nobody nobody made long distance calls that they could avoid it, um. And so everything that we did was

mailed out on Fridays and we did it. We did an analysis of the general market as a as a separate product, and then we had a an analysis of about oh maybe four or five individual stocks that we put out in uh and uh you know, we had a printing press and used a backup of a memeorgraph. So that's how rough, how rough things were in those days. And so that would get stuffed in an envelope and

sent out the clients. Yeah, we have that. We had we had to beg all that stuff up and take it to the post office and in the get a processed. We take it to the Miami Airport just to try and speed up the process and get it to him, get it to much as soon as we could. So you mail that on a Friday afternoon. When does that show up in investors homes or offices? Well, you know, in those days, uh, even even in Los Angeles, you'd pretty much have it on Monday morning. Oh yeah, post office.

Post office was a you know, a different entity than it is today. Just to say the least. Um. So you had mentioned obviously Lowry, I don't know it does what did he always go by initials or is there a first name there? Uh? He he always he always went by initials, that there was a there was a tendency in those days to be more formal and uh. For example, uh uh, the founder of Fidelity phones, Mr Johnson, no one, no one would dare to call him by

his first name. It's always Mr Johnson and uh. And so Mr lur felt very much and he was in he was in that same era and you just you just didn't use first names until until you were engaged. Quick, quick digression. I know there's a formal protocol around Bloomberg, what you say and do around Mr Bloomberg, But I'm a high functioning idiot and I don't know these things, and I have, Um who was it? Oh? Is Professor Taylor from Chicago? And sometimes your mouth operates before your

brain has an opportunity to to engage. We walk out of the studio and literally as we're walking out, Michael Bloomberg is walking by, and like in the idiot that I am, I just blurred out, Hey, Mike, do you do you know Professor Taylor? And the second it comes out of my mouth, I'm thinking, well, this was a good run, thanks for coming by. You're done, and um, he turns around Andy Chicago, Right, He's got an amazing

memory's great with names and faces. And he turns around it and so the two of them start having a conversation and I'm like, wow, that I dodged a bullet there. And every time I've interacted with him, it's always been me speaking before the brain has a chance to get in the way, and it's always hey, Mike, And I know that's the wrong, wrong thing to say, but well he seems to be very good natured about it. You know.

I think everybody goes a little bit of that. Uh. One of one of our employees introduced me to somebody last week is this is my boss. And I took him aside afterwards and I said, you know, I just don't like that term. I don't like to be called that. It has a negative implication. It feels weird. It's it's not negative, but it feels like saying this is the man, this is the man who can who can ruined my life, throw me out on the street any time that he

chooses to. You know. So, so you mentioned Lowry's and then in some of your writings you've mentioned gould Is that I'm getting the name rights. It's in Goold was an early, early technician, Um, who did fabulously well. Right, he was incredibly successful if if memory serves, yes, he did. He did do quite well. He was an interesting character and I think he I think he drew a lot of people to him because he because he was he was a fabulous character as well as a as a

good analyst. But but uh, one of the areas that Edson Coold did a lot of work in talking about the nature of market bottoms. But it was all vague, you know, as he'd say, there's there's there's dramatic Uh, there's dramatic panic and volume tends to expand And you'd say, well, it tends to expand. What what does that mean? What

does tend to expand mean? And um? When you when you'd go back and and and try to figure out exactly what he was talking about, what you realized was that these early technicians were working in an area where the the amount of information available to them was very, very small. We're so spoiled. We have access to infinite amounts of you can slice and dice the market a

million ways today. They I when I took the technical analysis course way back when with Ralph Akimpora, the generation that was just behind me, told stories about they would do their charts by hands every day. I did charge my hand for how long did you do that? Well? This study on ninety percent days that we were talking about earlier, that was all done with a slide rule. A slide rule. Wow, yeah, I know I still got

it today. I wonder how much we lose by all the computer power if you're not in the thick of it, seeing it from that angle, you could crunch a lot

more numbers, but you might miss a little something. You know what's happening if you if you look at the medical profession and you go back a couple of hundred years, you say, in the late seventeen hundreds, early eighteen hundreds, the the place that medicine was at was that the body was a single entity, and if it got sick, if it was showing signs of sickness, you'd bleed it. You cut a vein open and let's let some blood out and get the bad blood out of the out

of the body. That was what you do for cancer, what you do for a headache, for a cold, for a broken foot, You bleed um. And then the medical profession started saying, well, you know, it's it's not that simple. There's a thing called a kidney that, or there's a thing called a heart, or there's anything called uh, you know whatever, pancreas, whatever else, and there's still there's these individual organs. Well, then the next step was to say, it isn't really the organs, it's the it's the excels

that make up the ris. Uh. And so now we're at the point where we're saying if you if you try to go back to a case of saying that the body is a single entity, they laugh you out of the room. It's it's a case the same. Getting down to the cellular part of the body opened up all kinds of things allowed us to see all kinds of things that we never could have seen before. The stock market is exactly the same thing. In the early days, everyone considered the market to be a single entity, that

all stocks moved together. Uh. That that that all stocks made a high at the same time, they made it low at the same time, so on and so forth. That big camp made camp and small capital all moved in unison with each other. And now we know all

that's wrong. And what we've done in order to learn that is that we're breaking down the market from a single entity approach to almost a cellular approach where we can see each an individual stock, and with that individual stock, we can see upside volume, downside volume points, gain points, loss advances, and declines for each individual stock. And in addition to that, we see momentum, and we see a

whole bunch of other side issues. And so, uh, we're learning new things about the stock market that we've never seen before, and that is we're doing that right now. This this study of that we completed in is precisely that that people thought that the stock market in n was was a single entity, and that couldn't been further from the truth. So our knowledge of market trends and how to deal with the stock market is is expanding

at a tremendous rate. And we are now in a position where where I strongly believe um that it is entirely possible likely that using the proper tools, bearer markets are a thing of the past, that that they exist, but our ability to sidestep those bear markets is a very uh valid concept and and in fact we we we have recently set up a new money management operation

to prove it. We're taking a position of saying we're gonna put you and and you're gonna actually manage money using your methodology to participate in markets to the upside, get out of the way of the top, let the bear market play out, and get back in near the bottom. Is that the So what is what is the name of this money management entity going to be called called capital? Um? But the big thing is that the biggest problem that all investors have had, the very biggest problem, has always

been bear markets. And what we wanted to do is demonstrate that that that uncertainty, that lack of knowledge about bearer markets has been overcome and we are in a position to sidestep versa of the entire bearer market. So so, who are the consistently, who are the investors in Lowry's capital going to be? Are these going to be institutions? Well, I'm the first one, so literally putting your money with putting my mouth money more mouth is And uh, I

believe in this. You know I've spent you know, I've spent a good literally fifty years yeah, well plastically studying major market tops. I've probably put twenty years into it. And um, so we've we've we've attacked the major problem that all investors are facing, and we've we've conquered that issue and so everything else is small, small problems. Now, so let's let's talk about that a little bit and then we'll come back to any other analysts or mentors

you've had. So we really just hinted at this earlier. So your studies that say we know how markets top, it's small caps, it's main caps, it's big caps, we actually run a tactical model that does something similar, and in August it moved to an all bond position from three different size caps. Positionings are in it and it generated. It's all quantitative, there's no chin stroking, but it's some of it is uses some of the theories and and

research that you've put together. And this went to cash or bonds um in August, and we watched the market in September, you know, have a rough first half and started to recover in October. Where do you think we are in the topping process um of the bullmarket that

began in March two thousand nine. Well, there's a P five for all practical purposes made high in in in like the late July, it was it was a little bit of the previous high, but by by by nickels and dimes, and previous high of a month or two of previous down about a couple of percent. Yeah and yeah, but what we're seeing in this small caps are dramatically off their much us on. So I think we're probably

still in the relatively early stages. We're still at the point where where most of the investors that I talked to about bear markets are saying, oh, you know, there's no bear market. They don't see any bear market. Um. And part of that is because they're they're not looking. They're they're concentrating on corporate earnings, and corporate earnings will never never warn you of a bear market. Uh. That's

simply what the history of the of corporate earning shows. Um. But to some extent, it's that investors are saying, well, the the SMP, it's worse than here, has been off twelve and a half percent from it's high. That's a that's a short term correction. Uh, and and it's gonna go back. I'm going to go back to new highs Now. Well, my answer to that is, um, Uh, with all the deterioration that has occurred behind the scenes, now there's if

you say small cap, who cares about small caps? Small caps are about of all of the shares traded on the New York Stock They're really the canary in the coal mine. Yeah, that's right, and mid caps are in the same general range. Big caps are are something between twelve and so you really need to pay attention to what the what the small caps are doing in the mid caps are doing because they are the majority of

stocks traded on the New York's Doctor. Actually, the SMP five hundred index is made up sixty five of mid cap stocks. Uh, and so so what you're really looking at when you look at the SMP is that is maybe twenty five or thirty or forty stocks there that that are capitalized the air heavy capitalis, but the bulk of by by numbers or mid cap capitals. So you're not looking at the full five hundred you're looking at you're looking at or less. And then what's driving the

price of the index? Yeah, in at the top of the seven excuse me, in the top in two thousand and eight, two thousand and seven, they're in October of two thousand seven, there were eighteen stocks of the SMP five hundred making new highs that day? What's typical? What do you usually see? So, in other words, that's three and a half percent, is that right? Oh? Yeah? And and in early stage of renewable market, uh stocks making new highs on any single day would be in the range.

Really wow, that's a huge that's a huge number. Um. So we mentioned Gould, we mentioned Lowry's. Any other um analysts or technicians that were influential to your thinking? Oh boy, um uh, you know there there there were other people that were contemporaries in mine and I thought, I thought, added to the edit to my knowledge, and well, Bob Farrell of Merrill Lynch would be number one, And a lot of people mentioned him. Dave Rosenberg of formerly of

Meryl has has brought his name up. Other people that brought his name up repeatedly. He was a master and he's still He was a master at He was a master at training other people. He didn't keep it to himself. And what you find is dozens and dozens of people say I learned technical analysis at the at the knee of Bob Ferrell. Yes, he is still around. He's still serving a small group of of of institutional investors and

very active, very very active in the market. Um. Anyone else Worth mentioned Allen Shaw, I knew you're gonna go there. Um well, Allen Allen was in charge of technical analysis for Smith Barney and um a legend amongst technicians. Yeah. He added to the He added a lot to the field, and he trained a lot of people. Luigia Mata is still active. Louise worked with with Allen for oh, probably

twenty years or so. Um. You know those those are kind of people that really added to the added to the overall knowledge of technical analysis and and brought the brought the industry forward and brought some professionalism into it. But quite fasting. Anyone else, uh sticks out? Or is that is that a good enough list to Uh? Oh? Those are those are the people that you know, I think, I think I'm really important to my learning process. Um anyone you you you mentioned Luis Humana, anybody else who

who is from the current generation of technicians stands out? Um? Well have you felt Phil Roth used to be with Morgan Stanley Fell. Roth is an incredible analyst. He is a is an incredible uh uh knowledge of the investor psychology and the application of that information. Um. You know there's there's a there's a dozen people that would be on the list that we have. We haven't got that much. So let's let's hold off with the list right there, and let me keep plowing through some of um, some

of my favorite questions. I don't want to forget any of these. So we already talked about what you did before you worked on Wall Street, you were in the army, and we discussed your early mentors. Any other investors influence your your approach, anybody who was running a fund or managing money, or anyone along those lines. What are you really looking at the research and analysis side, For the most part, our relationships with our clients tends to be

kind of one sided. UM. So it was that we don't we don't see we don't see the clients side of it very much. UM. In fact, many of our clients do not like anyone to know that they subscribe to lowry analysis. That's interesting. There's a very famous there's

a very famous author who lives in New York. He's I don't know how many books he's written, but a lot of books, very well recognized, and he in every book that he writes, he has a chapter in there that says, whatever you do, do not ever use technical analysis. And I was sitting with him several years ago and I said to him, you know, I don't understand this. Uh. You in every one of your books you say, don't ever,

don't ever use technical analysis. But he's a subscriber. He's been a subscriber to ours for before I got to Lowries, he was a subscriber. And I said, you know, why why you take this position when when you use our work regularly? He said, you don't do technical I mean you do. You don't do technical analysis. That's not technical analysis. You you know, you know that's what I'm talking about. So then he in his books he names three technicians. Uh, and uh, I can tell you now because uh one

of the it's recently gone Joe Granville, of course. And what he's what he what he said was told the story about some of the mistakes that Joe Granville has made in calling market turns. So for people who don't know Joe Brandville, he was a guy who in the seventies was essentially about as good a market time or as there was. He caught every seemingly caught every twist and turn of that market that had huge moves up

and huge moved down. And then in nineteen it was either eighty or eighty two the market made its final turn, and he never made that turn, and he could never

get on the right side of the market after that. Yeah, and then there were there were at least two other technicians that are still still with us that i'll i'll, I'll not name, but he in those three cases, he went through a litany of all the mistakes that they that these three guys had made, and how you just don't want ever, you know, want ever give them a chance to to take your money away from you. And um, I said, do you know those three people? He said, no,

I've never met any of them. And I said, well, I know all three of them, and they are the most egotistical human beings I've ever met in my life. Really well, Brandville used to be just larger than life guy who's supposed to be you know, moved markets and was proud of the fact that he moved mark when he would say sell and the market went down, and

the Wall Street General would call he proud as a peacock. Right. Yeah, Well, when he was a child, there was an evangelist that traveled around the Midwest and um, every once in a while at the gatherings he is this evangelists would draw huge crowds, and every once in a while, I think maybe twelve or fourteen times during his career he would see a face in the in the crowd and he would call them up and he would put his hand on their head and he would say, this is a

special person. This person is going to do incredible things in the World's going to have an incredible impact on life, as as it isn't. Joe Granville was one of those people. But meanwhile, this guy is doing this in every town he goes and every year, well, wow, the world is filled with special people. Well, actually, some somebody kept track of theirs. There several books ought about this evangelist call his name, no, I don't at the moment, but then a list of all the people he had put his

put his hand on. He was also curing sickness and all that had those folks. Joe always felt as though he was this very special human being that had a special purpose on being on the face of the earth. So his ego, uh was, was at a completely different level than the rest of us. You know, that's the problem with getting a couple of big calls right, if you don't realize how rare and occasionally lucky those calls are.

And by luck I mean somewhat random, even if if you have a methodology behind it, that could go to your head very easily and suddenly you're you think I love the line. Was a Peter Drucker who used to say, we use the word guru because the word Charlottean is too long to fit in the headline. Is Was it that sort of thing? I don't know if Granville was a Charlottean, because for a decade at least, going by the histories that I've read, he was I don't want

to say infallible, but a whole lot more right than wrong. Well, Charlottan. The word Charlottan to me says, I know I'm a crook. So he ate his own cooking. He believed in himself. Uh I was in at a conference I think it was. It was in Miami Beach, and there used to be

conferences back in this seventies and eighties. Uh I used to refer to him as a thousand experts from out of town, and and so the the people that were running this conference had a cocktail party for all the speakers, and so I made I I was sitting in the in the in the cocktail area, and this young man, this is just an example of the ego. Young man, all dressed up in a very nice suit, came over to my table where I was sitting and he said, excuse me, Mr Joseph P. Grenville, would like to join

your grouping. Who would that be acceptable to you? And I turned around him and I said, if Joe wants to come and sit out over here, tell him to come on over. And then he walked out from behind a curtain like a grand entrance and grand entrance, and he was dressed in a white linen suit with a red um silk shirt and a red tie and the excuse me, a red kerchief in in his pocket and bright red shiny shoes and um, you know, just I mean, really, really,

really an outfit. And he came over to the table and he sat down and I said to him, you you did a fantastic job up there on the podium today, and he well, of course, he said, well you realize, of course that last year I received the award in Las Vegas for the greatest entertainer of the year, and that that was the way he was. So a crowd gathered around the table while I was sitting there, no crowd move when Joe came. All of a sudden, it

was a big crowd. What what year is This has to be pre eight too, right, yeah, I think it was. I think it was in the I think it was in the late seventies. And he has to have a couple of years on you, oh quite sure years. So yeah. So anyway, uh, somebody, somebody, somebody that was in the crowd said to him, Joe, you've missed every major market top in the last twenty years. And Joe started telling the story. He said, well, yeah, I there's no reason

for that. In fifty seven, Um, I got involved in playing bridge, and I became one of the greatest bridge players in the history of the world. And the kings and queens around the world were inviting me to come to their countries to play bridge with them, and so I was. I was completely involved in meeting with all of these heads of state around the world, and I wasn't paying any attention to my numbers. And that's my

fifty seven decline. Missed the fifty seven decline. In sixty two, I got involved in um sailing lightning sailboats, and he I quickly became one of the greatest lightning sailboat captains in history. And people were inviting me to come to participate in regatta's all across the world to sail my lightning boats. And he said, in sixty two, I wasn't paying attention to my numbers because I was I was winning sailboat races. And so I missed the sixty two decline.

And he went on and on like this, every top and decline. It was he had become the greatest expert in the world and gemology or whatever it was. And and somebody in the crowd said, oh my god, I'm gonna sell all the time. I gotta get to a phone right now. I've got to sell all my stock and he and he said, why why would you do that? And he said, because Joe Granville just married a twenty two year old woman. He's gonna be He's going to

be involved. Otherwise, I'm surprised. No one said, imagine, if you the greatest expert in all these things, only applied that to the stock market, how much money you can make for you and your subscribers. Yeah, that's uh so if that was the case, if he missed all these great tops, how did he have that reputation in the seventies for beings he fled? He developed a concept called on Bailan's volume. Sure, of course that still exists today. Yeah.

And and as he says, O b V, if you'd paid attention to on Bailance volume, you would have caught those tops. Is that true? Sort of kinda not really? More often than not? Yes, Okay, it's a good tool. So then why did he miss the turn when the bullmarket of eighty two to two thousand began? You know, two year old life? Yeah, that's that's hilarious. Um, let's

talk a little bit about books. I only have you for another twenty minutes or so, but any any books, fiction or nonfiction stand out as as significant or informative or worthwhile to you. Um there's a book that I recommend every everybody. Anybody ever asked me about what's a what's a good book to read? There's a book called The Richest Man in Babel. Oh. Sure, I've read that years ago. It was fabulous. It's a true story. Is that the case. I always thought of it as a parable. No,

that's a real true story. It's a by the way for people listening. It's a very thin, short book. You could sit down and bang it out in an out in an afternoon anyway. And I reminded me of another book. There's a similar book to it, that same sort of concept, but a true story dating back to the thousands. Yeah, there's a there's a small little I think it's probably maybe a one page explanation at the back of the book.

The book itself is about a number of people who grew up together and one of them becomes extremely rich and powerful. Yeah, and the rest of them are camel drivers and things of that sort. And he he he brings his old friends in and they asked him how in the world did you get so rich and so successful? And he reveals to them the secrets of how he became,

the secrets of how anybody can become successful. In the back of the book, there's this a very short thing that says, uh, the story of this man was, uh was he was identified on clay tablets that were found at the site of the original Babylon. And so it's a it's an actual true story. Uh, and that that simply adds to the whole thing to say, this isn't just something that some writer sat down and dreamed up.

This is this is true concepts. Uh. Along those same lines, well, you know it was as far as influences, there used to be a fellow on the radio named Earl Nightingale. Okay, and this goes back into this into probably the fifties and sixties and seventies. I think he died in the mid eighties, but he would he had a radio show every day, and he kind of dwell on how to get ahead in the world. And I thought, how to how to conduct yourself in life and and everything else.

And he told us he told us story one night that had a huge impact on me. Uh, he said, he said, you know, when I was preparing for the show today, a young man called me on the phone and said to me, Mr Knightonale. Um, I've I'm just a few years out of college. I've I've been trying a career and uh, it's not working out for me. And um, I was wondering if you could tell me some some area of enterprise that I could that I'd

have a better chance to success. And so Mr Nightingale said to him, uh uh, well, what what area are you in And the Fellows said, well, I'm in life insurance. And Mr Nightingale said, well, I've always believed that there's one answer to success. It all comes down to the same thing, no matter no matter how it plays out,

and always them back to the same thing. If you want to be successful, look around the world and identify a big problem something, That something is a lot of people, a large number of people are are trying to deal with and can't deal with. Then find a solution to that problem. So just solve the world's biggest problems and solve a problem a problem. It doesn't have to really be the world shaking problem, but it could be a case they're saying, you know, kids have kids have always

had trouble time shoes. So if you can make a velcrow strap that goes across that solves a problem you can make, you can be successful. So, so you identify a problem, come up with a solution, and then go to the people who have the problem and tell them you've got a solution. And he said, you know, I can't imagine a big your problem existing anywhere else in life, but death, that death is a big problem. So he said, you're already in an area that has is dealing with

a huge problem and you have a solution. You have a solution. But he said, you're you're the way you're going about it is all wrong. He said, you're calling your people up, and what you should be saying to him is, Mr Jones, death is a real problem for you, and I've got a solution. No, you're not doing it that way. You're calling Mr Jones up. You say, Mr Jones, I got a problem. I need to feed my family, I need to buy a car, I want to have a new nice house, and I don't have enough money.

So I've picked you out as a solution to my problem. He said, you're going about it all wrong. Well, uh, as far as the stock market goes, that same story is coming back to me again and again and again and say, the biggest problem that all investors have, cancer is something else. And you know, but in the stock market, the biggest problem that every investors faced with is bear markets.

Bear markets seem to sneak up on people, don't. They don't seem coming, they don't seem to be able to emotionally, they don't seem to be able to do what is necessary to do to avoid them, and um, and they usually end up uh selling near the low of they. I mean, that's a real problem for investors. And so I've spent probably oh at least twenty five years fixated on looking at major market tops, how bear markets develop, how they occur, and what you can do to avoid them.

And so that was a huge influence on my life. Nightingale, the gentleman's name is is Nightingale? Night and Gale? Any other books you want to mention besides it's just man in Babylon before we move on to the next question in our last few minutes, No, I think that's that's a that's a good one. That's a good place to stop. And I read that so long ago. I have to go. I know I have a copy of it somewhere. I'm

gonna have to pull that and reread it. Um. So the last four questions are should go back to one more one more book Reminiscences of a Stock market Trader, uh talking about um the boy Plunger, right, which, UM, I don't know anybody who hasn't read that. That's that's a standards it's a standard book, but it's timeless, tells you everything. It tells you a lot of the lessons you need to learn in order to be a successful investor.

There there are things in that book that if you just changed the name of the stock, you wouldn't know. It wasn't written a week ago. It's the same thing. Um, okay, so you joined Lowry's over fifty years ago. What are the most significant things that you've seen change in the market, Perhaps that people don't really pay attention. What do you think is the most important changes we've seen since you've entered this field? Well, uh gee, something's uh would would

be the creation of ETFs. It's so funny you said that because Jeremy Siegel said the exact same thing a few days ago, same exact answer. What why why are e t F so important? Sorry I don't disagree with you, but but why why do you think it's so important? Well, it's it's it's been fascinating that the the mutual fund industry, uh has persisted this for as long as it has more mutual funds than actual stocks. Well, and yeah, that's right.

And and what what we have is saying you know, when mutual funds were originally created, people were recording all of the information about prices and who owns it and everything else with a pencil and paper. Uh. And so to get out of a mutual fund, you had to sell on one day and get your money on the next day. We would sell after the close because they had a wait for closing prices. Even if you called

during the day, they wouldn't sell. Yeah. Sorry, And in most cases you had to call before two o'clock in the afternoon in order to get that day's price. Um in some cases they wanted to even earlier, and it was simply a case of saying they didn't have the mechanical equipment necessary to be able to arrive at a

price in a short period of time. But the eighties, you know, computerization has coming now and now we can solve anything in a millisecond, and the mutual fund industry is still sitting there saying, well, you gotta put in your trade before four o'clock or or you don't get

today's trade. How is that possible? Is that just inertia that these guys have managed, because if you look at the long term charts, it's clear that ETFs are rising, attracting more and more assets, and many of the mutual fund companies are running into increasing their plateaued at best only a handful of Vanguard is an exception, continues to gain assets. You look at Fidelity not not as much. Well.

I think part of this because Vangard Vanguard picked up the idea of a fixed portfolio of the index in the s and UH there are two for their two thirds um indexes and one third active manner um. And I think the reason has persisted that way is because it's it's convenient for the owners of of the mutual funds to say, well, you can't get out of our funds fast, so you have a chance to rethink, rethink your your idea of trying to sell our mutual funds.

And Vanguard has been a leader in that approach of saying they essentially say, listen, give us your money, we'll go away and we'll see you in forty years. It's it's worth that for them, and and to a large degree it's worked out for their clients. But the Vanguard client is a different client. They tend not to be They're a set and forget and we'll see in thirty years sort of client. The average investor is very different than the average vanguard investor. They're looking at the news,

they're getting there, but they're panicking at the bottom. It's a very different philosophy than we see with UH with Van Guard so so E t fs a real big innovation. Well, E t F have simply come along and said said, we're moving into the modern world. Instead of being priced once a day, we're going to be priced day long, TI tick all day long, and that that makes it a very very acceptable tool, not only the small investors, but also the institutions. We've seen a huge growth on

the institutional side. At the same time it's growing for small individual investors. So lowry capital not gonna issue an E t F on your Yeah, we're we're going to be creating interest in very near future. Because I think in a lot of ways it's the perfect investment for all types of investors. It works, works for small investors, work for big investors. Sufficient, it's it's inexpensive, it's easy to it's easy, it's it's hard to find a downside. John Bogel not a big fan out of him because

he says it encourages over trading. But your sort of et F is not designed to be actively traded. I'm assuming that internally you guys are handling the trading or any value slash timing related decisions. Yeah. We we think that we think that our ETF will eventions will will essentially be buy and hold, buy and whole type of investments. Um, that we take care of the changing the portfolio internally. We we moved from bowl market to bear market and make make all the changes that need to be made

for an investor. That that's fascinating This next question. So I was gonna ask you what did you see as the next major shifts? Um. Well, uh, you know, there's bring some One of the things that affected us a great deal was was the change in the uptick rule. Took place in two thousands around June two thousand seven. There used to be a rule that you could not sell short until there was an uptick in the in

the price. And for reasons that are just absolutely beyond me, they the SEC chose to remove that remove that control. Good timing to it was put into place. Yeah, it was put into place as a result of the crash. Another word, JUNO one sellers piling on and it's one thing if you own a stock and you want to sell it, but we don't want people short selling and driving it lower. You at least need a little bit of up trading in order to get a short loss, right.

And that makes sense, doesn't Yeah, And so why they why they removed the rule that was that was created to avoid another ninety nine and they they made the change just in time for the for the two thousand seven two thousand nine market. And then they went the other way and said, Okay, nobody can short bank or related stocks. So they messed up one direction, and then

they went too far in the other direction. Uh. The the the biggest thing in my mind that's occurred in in in my career is that the New York Stock Exchange used to be an institution and it went from being an institution to being a profit making corporation. That's a huge, huge change, which with major, major ramifications. Yeah,

and I think that was absolutely wrong. That that's what led us to the world of high frequency trading and and all these other things that are h the loss of the specialist, and and now we end up with a bunch of computers standing making markets, which isn't the same as having a person responsible for creating an orderly market, and and and some rules that have been in place for decades um the ability to the ability to jump jump in front of another investor by by and so

uh right, front running. Front running used to be a thing that was a really serious problem, and now it's just ignored. Well, it's not even ignored. It's that the exchanges sell co location servers and data feeds and they let the h f T sniff out incoming orders and let them run ahead. And you know that that's an issue because that basically the profits of the h f T s are coming out of someone somewhere. It's a zero sum game. And if they're sliced, the pie is

getting bigger. That means the investors the pie is getting smaller. That said, a number of big shops, including Vanguard, has said it adds liquidly, it allows us to execute orders more more easily. I'm not fully convinced. Uh well, I think it's an interesting thing that people are saying that because of what they're saying is we're allowing people to front run because it's to our particular advantage to have them able to front run. And the new York Stcuchans

used to be about ethics. Ethics was paramount paramount. Yeah, I couldn't agree today we say, well profit mode at this paramount. They should have stayed as a utility, as a public they should have been in square and not a for profit construct and people that people that represented the New York Stocuchian should have been appointed by a committee and too important in should it should have been conducted on the most ethical levels that could possibly be

done on. So last two questions you your story of how you started a Lowry is Lowry's is certainly unique. What sort of advice would you give to a millennial or someone just graduating college today starting out in a career in finance study the law supply demand number one um UH and I think I think I would have to say, search out a mentor. I know I know of a lot of extremely capable UH supply demand type UH analysts that that have that they have taken great

pride in serving as a mentor to other people. You mentioned Alan Shaw, you mentioned Bob Farrell that that sort of thing of of teeing up the next generation of and and there are a lot of people that enjoy it. I mean it's not it's not as though you have to go to them and and cajole them in the in the giving you a job. It's a case of saying, uh. In any company that's trying to grow, you're looking for those those exceptional people who are really willing to to

have another education. And and that means that you've got to be willing to work along hours. You've got to be willing to sit and listen to uh somebody like me pontificate uh and and tell you the information. And then you've got to be and you've got to go and apply it. And you've gotta there's a lot of hard work that you need to do to to take information, to take advice, and then and then create actual experience

of seeing that advice payoff. And um, I think finding a mentor is is we'll put you, We'll put you miles and miles ahead of the competition. So people pulling up on a Saturday afternoon while you're in the dirt playing in the garden, is that is that how people find you? Yeah, the same location, You're still in the same building. Have we have we have we have several people in our office that came to us, came to

us and pretty much set the same fashion. Really, one of the people's been with me for twenty five years now, fascinating And our last question, and I suspect I know the answer to this one. What do you know about investing today that you wish you knew when you started fifty years ago? Oh? Um? Well, uh, some of this recent work that we've done is is uh has been about tops and bottom incredibly revealed. Yeah, it would have absolutely fifty years ago people You know, people were dramatically

suffering with with bear markets. Um um. They had no idea as to as to how to how to avoid them. They didn't know what was going on the market was a single entity. They didn't have they didn't have any way of looking inside. I often I often use the example of saying if you went to a doctor, uh, and you said, doctor, you know, hurting all over. I don't know what it is, I just hurt all over. And the doctor says, I'm looking at your face. Your face looks good, your skin good color, and your skin,

your eyes are bright. I think you're healthy. Here's here's my bill for two hundred dollars. And you'd say, you'd say to him. Doctor, there's no way to do an analysis of a patient. I want you to take me in the laboratory and the okay, I want you to put me through sixteen different kinds of machines and see what's going on inside. It's not the outside, it's the inside that's really important. In stock market analysis, the same thing. The outside is the S and P five hundred INDEXS,

the Dow Jones Industrial Average, all of that stuff. The inside is supplying demand. It's the forces of buyers and sellers. It's the volume and the price changes and momentum and breath and all of these other factors that determine whether the market is in an uptrend or in the entrant. And um uh you know, now, all of a sudden, we know these things, and I should I should say these are not commonly known situations. For example, we're doing

the segmentation of of of the market. Uh, segmentation of not only the advanced declines, but upside and downside volume and points gaining points, austin all kinds of other factors. I don't think that anybody else in the industry. I don't know of anybody else in the industry that's doing that kind of work and what you've learned over these years would have been really helpful back in Oh. You know what you have to think about is this if

it right now? Right now? Of all the money managers in the world have a have a philosophy that you cannot see a bearer market coming. There are no warning signs of a bearer market. They just appear out of nowhere, and the only thing you can do is endure them. There's anything that you try to do to avoid a bearer market, you'll just you'll just follow it up and

it will make things even worse. Um. So, of all the money managers leave that, what we've done is we've found in the last few years that they're absolutely wrong. Number One, there are warning signs. There are There are numerous warning signs that occur over a long period of time, and that an investor can easily use those warning signs to to move to the sidelines in advance of the dramatical losses. What do you think is going to happen to a money manager who has that information available to

them compared to a money manager that doesn't. That's a huge advantage to say the least ss are going to move around I'm looking forward to seeing what happens with this new ETF that you're going to be putting out. UM, and thank you so much for being so generous with your time and spending UH all these hours with us. We really appreciated. I've been chasing you to do this for hours. I actually asked you at a conference not

too long ago in New York. Hey, let's let's let's do this, and I'm glad you took me up on my offer. We've been speaking with Paul Desmond. He is the president of Lowry's Research Service, the oldest continuously operated UH technical and analytical service UH in the United States, if not in the world. If you enjoy these conversations, be sure and check out all of our other chats UM. You can find them on iTunes. Just look up an inch or down an inch and you'll see the whole run.

Check out my daily column on Bloomberg View dot com. Follow me on Twitter at rid halts Um. I want to thank my recording engineered today has been Genie. Charlie Volmer is our producer, and my head of research is Michael bat Nick. I'm Barry Ridhults. You've been listening to masters in Business on Bloomberg Radio