Interview With Tom Dorsey: Masters in Business (Audio)

for a couple of hundred million dollars. If you are technically oriented, if you are a technician, chartist, plant anything along those lines, you will find this conversation quite fascinating. Dorsey Wright is not the sort of technical newsletter that's read by the lay person or the investing public. It really has been a how to guide for some of the savvier people in the brokerage world and sells ID. I recall visiting other people's offices and laughing saying, hey,

this Dorsey right on the desk. Anyway, we spoke to almost two hours. Uh. It ranged far and wide. If you're at all interested in in relative strength, portfolio management, technical analysis, port and figure charting, you will find this UH conversation to be a tour to force. So, without any further delay, my conversation with Tom Dorsey. This is Masters in Business with Barry Ridholts on Bloomberg Radio this week.

My guest is Tom Dorsey. He is the founder and former CEO of Dorsey Wright and Associates, a technical research and advisory daily read that I recall spending lots and lots of time with the early part of my career. It pretty much was a regular on my desk. Last year this was sold to the NASDAC for almost a quarterbillion dollars. Dorsey Wright is based on an idea called point and figure charting, which will get into but the underlying concept is you must have a clear strategy based

on objective, unemotional data. Welcome to bloom Bark. It's pleasure to have you, Thanks Barry. So I want to start out with a quote of yours and and have you respond to that. Strict modern portfolio theory has driven a commoditization of financial analysis to the detriment of analysts and investors. What does that mean? Well, when you're thinking about modern portfolio theory, it's something that goes back. UH. Probably thirty forty years ago, and it's it's it's it's fundamental buy

and hold. A person comes into an office, takes a test, determines that he's a moderate investor, immediate goes into a into a moderate pie and uh, that's rebalanced twice a year and you stay that way as long as your risk level doesn't change. So you've got to come in and retake a test to make your risk level change before anything will change there. So it can miss a lot of changes in the overall market. But it's something that you'll probably find that nine percent of advisors use.

Makes a lot of sense. So we talked earlier. I mentioned objective on emotional data is key to a strategy, but you have noted that a lot of people don't really have much of a strategy. No, that's the thing. People are human, you know. Well, it's like Mike Tyson said, you walk into a ring with it with all all kind of plans and a strategy until you get hit one time. Right, everybody has a plan until the're hit in the face, until they're hit in the phase it

And that's exactly what happens here. The strategy is great until all of a sudden you feel sick to your stomach. The market is going down and it's let's get out, and it's getting out exactly at the wrong time. So that's the hard part. Is what we have done at Dorsey right is we've taken the emotion out of it and made everything rules based. So when it feels the feels the worst, you have to understand that the systematic

approach is going to do it job. Sometimes it doesn't feel so good, like right now, but most of the time it works fine. So one of the things you would send along these lines, um studies have shown investors tend to achieve subpart performance when they allow those emotions to take over and when they fail to adhere to a consistent said a rules. So if you have these rules that will prevent you from engaging in emotional behavior, how does an investor find the discipline to stick to

those rules. Well, that's a good question, Barry. How do you know, because again, like I said, you're dealing with human emotion. When you embrace. When you sit down with your advisor and he's using a rules based system and explains the rules to you and you embrace those rules, that's where you need to step back and just let it happen. When things feel bad, that's the time typically in that type of a program, to add money to

the to the portfolio, not take money out. Take for instance, what we do is probably gonna underperform maybe once every four quarters somewhere in that nature. You'll feel bad. You're gonna a position one way in the market's going the other way, precisely exactly, And typically what happens there Really, when you're looking at a rules based program like ours, which is relative strength, the it's like shifting a car.

It's trying to find traction. So you go from first gear to second gear, you let off the gas, you push in the clutch, you change it from first to second gear, you put let the clutch back out, you put the gas back on. You've lost momentum. And then once you catch second gear, that's when you found the direction. But when nothing's when there's no direction whatsoever, like like lately exactly, that's when it underperforms. So how did you become a technician? How did you find your way to

looking at price as opposed to looking at the fundamentals? Well, Barry, it was absolutely accidental because I was a stockbroker Maryland's first back in the mid seventies. Um had to be a rough period. Oh it wasn't rough because I started exactly at the boy him of the market when people

had been wiped out. Between nineteen seventy four. I got the distinct pleasure of graduating from Maryland Sales School, coming back to to mary Lynch and Richmond, Virginia, picking up the phone and now I'm on the white Horse and I'm gonna help everyone, and they've just been lost. They just lost about six point market was more than sm was more than cut and half over that period exactly, So no one was really interested in the twenty some

year old kid coming in to help them. But I realized if I'm going to be successful, I had to become an expert at something. So I chose the option market, which had just debuted the year before in April of nineteen seventy four. So I became an expert in options by studying weekends and whatnot. Ultimately that led to Wheat First Securities, which was a large regional firm, hiring me to come across and develop and manage their first option

strategy department. That's funny, I mentioned I read you when I was early in my career. Similarly, from Wheat first, I read Don Hayes. His office was right next to mine. So in the last minute, we have and we're gonna spend a lot more time on point and figure next segment. What makes point and figure different from traditional charting, Well, because point and figure charts are not updated every day. Uh, there are certain things that have to happen before chart

is updated. It's made out of xs and o's and looks kind of funny to people, but there is a learning process that you have to go through when you to understand the buy signals and sell signals in in uh, in point and figure. What has to happen for a point and figure chart to be updated, Well, what has to happen is the stock either has to reverse columns by three boxes or more, meaning the price has to come down to come down by three typically a certain

amount exactly. So it's really that doesn't happen, it's not gonna be updated. I'm Barry rid Helts. You're listening to Masters in Business on Bloomberg Radio. My guest this week is Tom Dorsey. He is the founder of Dorsey Wright Associates, which is a research and newsletter firm that was sold to the nast Act for a couple hundred million dollars

last year. Before we get into the specific of point and figure charting, you come out of the Mary Merrill Lynch sales program, uh, which I know is a fairly fundamental approach to looking at stocks. How did somebody like

you in the early seventies find your way into technical analysts? Well, it was totally by accident, Barry, because when Wheat First Security hired me to to leave Mery Lynch and come across and develop and manage their first option department, I realized I need to hire somebody who really understood the markets.

And I hired this guy from Charlotte, North Carolina. Name was Steve Kane, and he brought with him a little book written in nineteen forty seven called the three point Reversal Method of Point and Figure Stock Market Trading by A. W. Cohen. And he said, would you read this so you'll understand the operating system in my mind when I come to you with a stock or the sector, or the market or that type of thing. I said, I do it, and I took it to a Virginia beach that weekend

with my wife. Read the first paragraph of the introduction brought me back to my economics education in the university, and I had the epiphany right then that I knew I had to teach this to my brothers and sisters for the rest of my life because it brought me back to econ one on one, which was the most important course I ever had in the university. Supply and demand. Absolutely, that's the key to all of the irrefutable law of

supply and demand. And this methodology was created simply as a logical, organized way of recording the imbalance between supply and demand. So we we talked earlier about xs and o's. In other words, you know, it's not so much that you're looking at a line chartum on a screen, but you're essentially looking at x's when the stock is rising, oh's when the stock is falling. Um. Why didn't this

method ever go mainstream? If it's if it's so successful, well, I'm actually glad it never did go mainstream because it's because for you, it takes it takes uh an education to do this. You've got to want to learn point and figure charge. Anyone could look at a regular charge in Bloomberg or yeah, but this real. You need to have some background. You've got you need to have some background, and not that much background. I mean, I'm not selling a book, but you could read my book in your

and you've got enough. So the one of the key questions anytime I mentioned point and figure charting to people, well why should I use that method as opposed to regular technical analysis. Well, one of the things is it's number one easily programmable because the computer already understands ones and zeros, It understands xs and ohs like you can't imagine. Um, there are relative strength things that we can do with the point and figure charting that you really can't do

with bar charts. Bar charts are updated every day, no matter how inconsequential, the more minute by minute, as often as you want to be in the thick of it, so they only whisper when a particular signal is given ers or something should be done with a point and

figure charts yells at you. You see a stock rise to a particular point four times and it can't get through that level, and the fifth time it finally gets through that level, it's yelling at you and says, you know, that supply that was at that level all this time could be even a few years. In the case of Coca Cola, back could be a few years. And finally it's it's it's sopped up all that selling pressure and this breakout suggests is going much much higher. I like,

I like that explanation. Regular charts whisper point and figures. Yeah, they shout that that's that's really quite quite interesting. So one of the things, and again I was a reader of Dorsey Wright for many many people should realize that for those of those folks who might not have been on the cell side, on the brokeren side at any part of their career, this was pretty much a staple across broker's desks and strategist desks all over Wall Street.

Lots and lots of people were reading Dorsey Wright. And one of the things that I very vividly remember was your concept of is the offensive team or the decent offensive team on the field, Please explain that for for the average lay person, that's a concept that day's back to nineteen and Earnest Staby began thinking about what we needed in the market, and he's basically said, we need a soulless barometer that will begin becoming negative when the

markets at at the top, and positive when the markets at the bottom. Something totally confounding two investors that when things look the best, we need to start getting negative. So in N. W. Cohen created what's called the bullish percent index. Now, the beauty about a point in figure chart is a buy or sells signal by singing will simply a column of excess that exceeds the previous column of excess. That's simple. Just think in your mind, that's

all excess that exceed a previous contents. So a a higher price right on a certain range, that's right, and you can see it's it's so visual, it's unbelievable. The

computer can see this easily. When you look at the New York Stock Exchange, which has about two thousand stocks on it somewhere in that area, and we calculate the percentage of stocks that are on by signals, that that means if we went through, if I gave a seventh grader every chart on the New York Stock Exchange and said look to the far right hand side, and every stock you see that has a column of excess that exceeded a previous column of excess counted as counted over here.

Set it in a pile. Then we'll divide by the total and we get a percentage from zero to a hundred. So there are different risk levels, but in general, when it's in a column of x's and rising, you have the football. So when you have the football, you should be playing offense. Now, field position is a different story. If you're near the seventy level, that would suggest that everyone is in that wants to be in, and you may have the football, but your field position is terrible.

That tells you what plays you probably should run. If you're down at the line level and you have the football, then you can be gonna run much more aggressive plays. Conversely, when it's in a column of OS and declining, in other words, more stocks going on cell signals, which is a column of OS exceeding a previous column of OS, it suggests to you that the defensive team is on

the field. Play it that way, play defense. And that's probably the most important market indicator that we have ever had created back in and I could effectively manage the market just with that. So you mentioned that's your favorite indicator. What other indicators do you pay attention to, and perhaps more importantly, what other indicators do you completely ignore? Well, the other ones that we pay attention to, our bullish percents on other types of indexes, like the NASTAC. We

do bullish percents on all the sectors. We look at the percentage of stocks that have positive relative strength in a particular industry, sector or the market, and it's the same zero to a hundred grid. You look at that like a football field zero to a hundred uh hundred yards exactly, and when you're above seventy you have bad field position. Below you have good field position column of X, as you have the ball column of o's you don't have the ball. And then we look at all kinds

of things like that relative percent of stocks. So in in the last minute we have define what relative strength is. And again for the lay person who may not be familiar with this, relative strength is like an arm wrestling contest. You might have two people and everyone's see an arm wrestling contest, and you see two people on television arm wrestling, and one guy summarily beats the other guy. He has

better relative strength than the person. He just two strong guys, one of them is just a little stronger than the precisely and you can do that for different stocks in different sectors. Yeah. Absolutely, I mean it's something that we did, we did nine years ago. We should do that by hand because we didn't have computer systems to do it. I'm Barry Ridholtz. You're listening to Masters in Business on

Bloomberg Radio. My guest this week is Tom Dorsey. He is the founder and FORMACYEO of a technical research firm. Dorsey Wright sold last year to the NASDAC for two hundred and something million dollars uh and now Tom is the CEO and c i O of his own family office, running money for his own account and and the family's account. I want to talk a little bit about power shares, e t F and some of the strategies you developed. But before we get into that, not technicals, but let's

talk about technology. How has technology changed what you do every day? Barry. That's a great question because you know, technology has had such a major effect on our whole industry. Anything that can be automated will be automated. And you've got to understand that with technology, our relative strength work that we do for our E t F and and the comparisons and contrast we do. We used to do by hand. Back twenty eight years ago, I started charting.

I'm early in my career. I worked with a gentleman named Guy Ortmann, who introduced me to both Don Hayes and you. He's now I believe that um Scarsdale Equities, but at the time it was Prime Charter, which was ultimately sold to Oppenheimer. Hard to keep track of, remember account and easy. He used to do charting by hand. He would show me here's where this was, and you could look at the screen, and you can look at a computer, but it's not the same thing as actually

writing it down by hands. That's exactly right. We used to day before we had the computer capacity to do it. So many people And do you do five hundred stocks a day past the book to the next person? They did that by the by the end of the week, each persons seen. That's unbelievable. It's amazing. But boy, you like, just like you said, how do you get a better feel than doing it that way? But you can't do there. You know, there's only a certain amount of things you

can do. Take for instance, if we wanted to create a matrix on the standard pours five. In other words, I want to create the way we do a relative strength charters, divide one thing by another. If I wanted to compare coca cola to pepsi, I would divide the price of coke by pepsi. That gives me a number. I take that number. I plotted on a chart. It looks like a regular trend chart, but it's not. It's

a relative strength chart between the two. When it's rising, the first one is doing better what it fall Precisely, it's just spread between the two exactly. And if I did that on the SMP five hundred, we have to create two fifty charts. In other words, each one relative to a number, two, relative to the number three, relative to all five hundred. So two fifty charts. You've gotta

have a lot of employees or good computer exactly. Now, we do overnight seven and a half million relative strength charts every single night, comparing the world, Malaysia, Indonesia, Indonesia to France, France to the United States, everything you can think of. That that's an incredible number of permutations, which actually leads me to my next question. So you run a lot of different strategies. How do you develop these new strategies? How do you come up with these ideas? Well,

you come up with the ideas. We sat in a circle for twenty eight years. Nobody's ever had an office at Dorsey Wright. I never had an office of doors. Right, we sit together. So there's a constant hum in the office of discussing things and talking about different things. And they all come from that type of thing. Person will a company will call us and say, hey, we're interested in X, y Z, can you create that forest? Then the ideas start to float around, and and they come

in the most unusual ways. I was looking at I was looking one day out the window and I saw a guy cutting the grass with one of these big moors, And I thought to myself, who helps him? Does he go to a major wirehouse and open an account with two thousand dollars? No, they don't let him in the door. So who helps him? So I created a model called the People's Portfolio, and I compared in contrasted three things on a relative strength basis, the standard ports cap weight

against the standard ports equal weight. Both trade. They trade totally differently against cash. Cash was in there as the risk management tool of the piece, and whichever one won the arm wrestling contest against the three of the portfolio went in over what time period is that just continuous? How often does that readjust maybe once every three years? Oh yes, I was gonna say, that's a longer term cycle, very long term cycle. But I define many money managers

to outperform it. It's a challenge because sim typically the cap weighted does great at the end of his cycle, right, and then when it rolls over, it's the eagle weight that does much precisely. But instead of trying to call the point that that you're at the end of the cycle, let the work do it. Let the relative strain do it. And when that changes and it points to another direction,

that's where you go. And So instead of sitting back saying, gee, whiz, you know, I've got all I've I've got a PhD in and this and that and mathematics, and I'm going to figure out when that end is No, wait for the wait for the rules based program to do it. I'm Barry rid Halts. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Tom Dorsey. He is the founder of Technical analyst firm Dorsey Wright and basically a fixture on Wall Street for many years.

Dorsey Wright is now part of NASDAC, having been sold last year. Let's talk a little bit about momentum and what it means. What's the significant momentum to either a market, a sector, or a specific stock. Simply this berry. Everyone understands things in motion and to stay in motion until acted upon by an opposite force. That's the same thing

that happens in the market. People are trying to catch a knife, so often they want to buy things that are down or going down, and they think that the lower I buy it, the better I'm going to be getting nice bounce back up. That's not the case. Things in motion tend to stay in motion. That's where you want to be and what acts upon it. It's all supply and demand. If you have demand for a particular stock,

there are more buyers and sellers willing to sell. Prices gonna rise until all of a sudden supply comes in. That's where that opposite force comes in and supply overtakes the amount of demand available. The up move stops and it begins to down move. So that's really all it is. So One of the things that early in my career I had explained to me was that when institutions buy something, they just don't go out and buy a million shares today and that's it. Typically it's in response to some

portfolio change. They're buying it. For larger institutions, pension funds, retirement accounts, and money just flows in on a regular basis. So as long as that four oh one k or institutional money keeps flowing in, they're going to continue to buy more or less the same names over and over again. And as long as there's a limited amount of supply at various prices, that stock is just gonna keep marching higher until more supply comes in or the buying slows down.

Is that a fair way to describe. Yeah. Absolutely, And they don't go in and just buy today, and they buy until they've they've got enough in that sitt and then he go do something else. They have more accounts coming in, more money coming in, they're gonna buy in the right places. Take for instance, back in the year two thousand October two thousand, an interesting thing happened all of a sudden, after a number of years where large cap was the place to be uh a large cap

and cap weight it was the place to be. It switched to small cap and equal weight. And not only it went from growth which was the place to be, to value and that was a major change. All you had to do at that point in time with that major change is by a value stock equal weighted small cap and leave your customer alone for the next thirteen years, go play golf every day. Precisely you did extremely well.

So these things are not overnight phenomenons that happened, and there was buying pressure in that for probably thirteen years until this begins to change. So put that into context. You have throughout the nineties, technology, especially big cap, is just running away. You had some especially on the NASTAC, you had some thirty years. People forget the young guns out there, don't remember what it was like in the late nineties. It was insane. It was like the Roaring

twenties had to be pretty close. And and at least when you look at it historically, I not that old, so I don't remember, but I do remember. I do remember the nineties, and I do remember that was astonishing. That peak them around March of that year, and you're saying it took another six months or so for the money to start flowing in a different direction. It clearly was flowing out of the big cap. You know, you had only a certain number of horsemen in the SMP

five hundred. I think it was something like ten or twenty stocks were responsible for almost all of the games. And absolutely because towards the end of the what do you want that that's a point in time where when it switches to cap waited saying, you know what you should own an index just only SMP five hundred. Don't worry about diversifying. That's what you should own. And that's where it was at the end of into the year

two thousand UM. Most of the time from there it's been a market of stocks where you want to own individual stocks, but that was the point in time you want to own the index. So let's go back to October two thousand. What was it in point and figure charting that would have given you an indication, Hey, go from big cap too small cap, from cap weighted to equal weighted, and go from growth to vale. You it's that relative strength calculations that we do. When they're done

every night, they don't change every night. I mean this was five years coming, and all of a sudden, you're watching these two guys aren't wrestling, and the guy who loses every single time for five years, all of a sudden beats the other guy. Why he's in the gym working out. He's getting stronger. You don't realize it, but all of a sudden, that day comes that he wins. And if you're watching it and you have alert set,

they it can't escape you. So I do recall from March two thousand, two October there was a pretty hefty sell off. But I also noticed, from having been in the industry for as long as I have, that when you reverse yourself and say, I know, we've been talking about big cap and growth and and momentum uh for

a long time, but now it's time to switch. What sort of pushback do you get from clients and investors when you've basically trained them, Hey, you get rewarded by this over and over again, and now a new it's a new game. Yeah, it's not so much the push back that there's a new game. It's a pushback that when you say there's a new game and they don't see the new game yet, we're experiencing it right now, right now, we have where there's a major change taking

place in this market. When you think back to two October of two thousand and eleven, that was a tough year. But at the end of two thousand eleven, all of a sudden, for US to six asset classes, US equities became number one that you should overweight in your portfolio, and that stayed from two thousand and eleven to two thousand and sixteen. Just recently it moved out of number one place, number two, went to number three, slid back

to number two marginally. But it's saying something is wrong here. But what's happened is you have healthcare, biotechnology, drugs and whatnot that that helped carry this the whole way have totally fallen out of bed. So they had positive relative strength when they came out. I mean it was like the snap of a finger bingo. Now all the things that you were doing that were positive relative strengths for

those years. You find this year in two thousand and sixteen year at a loss relative to the SMP five. That's when people begin to get upset. They think everything has to be perfect. We're speaking with Tom Dorsey, formerly of Dorsey Wright and now c I O of his own family office. So if the US as a market was leading the train and now is two or three, what has risen to the four? What parts of the

world are are starting to look more attractive. It's interesting because what went to what number one and number two and then six asset classes that we have. We look at international equities, US equities, cash, fixed income, commodity commodities, and foreign currencies. What moved into number one place? Fixed income to place was held for a few weeks and it's still marginally there. Uh is cash now that was interesting. Cash has moved up, not to US Cash has a simple m N Y m k T, so we look

at it just like money, regular money market. We look at that symbol like it's like it's IBM or General Motors or whatever, and it has moved up to number two spot. Um, something is going on here and there's a major change taking place. I see commodities began to move up from number six level to number five level, So they were the bottom of the barrel. Now they're beginning to come off of the bottom of the barrel.

What about international which is emerging? Internationals at is at the bottom, but I'm finding some international some some emerging markets. I trade Indonesia direct doing extremely well. They're in Indonesia's So going back to the original concept of waiting for a momentum to develop, if you're looking at emerging markets, you're probably if you're long emerging markets, you're probably not going to see a whole lot of positive gains anytime soon.

But if you're looking at something that's ranked six out of six, does that mean there's a lot of potential upside down the road. Yeah, but where's down the road? I don't know. It might be down the road. That's a trillion dollar question. That could be. That's the thing, it's a trillion dollar question. You don't know how long

that road is. So you have to wait until the actual change your relative strength charts begin to change and begin to win the arm wrestling contest, you'll find I think if if commodities is is one of the ones that's gonna move up to number one, like two thousand and eight, commodities held number one rank for what sure you know, if that's going to be the case, then you probably find international move up to during the during the decade of two thousand and two, thousand and ten,

the last place you'd want to invest in equities was the United States. International was the play that whole time. We'll think of all the emerging markets are big commodity exporters. Is at the time, China was one of the big drivers of that. In China's in the Emerging Market index. So that that makes perfect sense. So you had mentioned earlier you don't have an issue with cap weighted indices.

I know some people do. You're just suggesting there are times when cap weighted is desirable or more desirable, and there are other times when equal weighted is more. That's exactly right, you know. And and when I explained cap weighted to people, it's like Congress. In the Senate, Congress is um cap weighted. If you look at look at California, state state, the more and more more representatives the Senate is equal weighted gets to and that's a great, great

way to look at it. So sometimes it's the Senate, sometimes it's the Congress. You just wait to see what happens because this it's that they both sit down their arm wrestle every single day and you watch and see who's gonna be winning. It's you don't change on a daily basis. Signals on on relative strength and point and Figure can last two or two and a half years. So if people want to find your writings or your perspective,

what's the best place for them to track you down. Well, you can go to Dorsey Right dot com www dot Dorsey Right dot com. We do a podcast every week that's free to anybody. If you just go to that site, Dorsey Right dot com you can see it. And we're one of the oldest podcasters in the country. We're on five hundred and some weekly podcasts. And you also you have a number of books, but the big one important figure is called it's called Point and Figure Charting exactly

that and you'll see my picture on the cover. Um it's the fourth edition Point and Figure Charting. It's pretty much all you need to know. You know, we've been hiding in the open for twenty eight years. We you really read that book, you see exactly what we do. We tell you exactly how to do it, but nobody wants to do it. You know. Harvard professor once said, uh, people don't want the quarter inch drill, they want the quarter inch hole. And that's what we try to give

a manefits or teach the same thing. If you enjoy this conversation, be sure and stick around for a podcast extras where we keep the tape rolling and continue chatting. Be sure and check out my daily column on Bloomberg View dot com or follow me on Twitter at Riolts. I'm Barry Hults. You've been listening to Masters in Business on Bloomberg Radio. Tom. Thank you so much for doing this. I'm really excited to have you here. I've been looking forward to this for a while, Barry. Anytime, I love it,

I enjoy it. I said this earlier when we first met. I've been reading your stuff, no exaggeration, for so many years. Um, I feel like I know you personally. And it's funny because people say that to me and I have a hard time understanding that. And now it's like, oh, I kind of get that you read somebody for a decade. It's like I kind of not understand what he thinks. I understand the philosophy, and like I mentioned earlier, I started as a trader. I went into the research side.

I worked with some people where that were religious Dorothy Right adherents, if only because it was clear the fundamental side of things wasn't getting it done, and they wanted a structure, they wanted a model. You're really popular, or at least in my experience in the nineties and the two thousands, Dorothy Doroth c right was really popular amongst a certain contingent of the brokerage community. Right. Exactly, it's

always been professional for us. We don't have any real uh any, any real large clientele and individual investors, not not a retail audience, no, not retail at all, only professional oriented. And now that business is changing, are you still finding the same reception to what you guys do or how has that morphed over the years. Well, back in back in the beginning, advisors needed something desperately to help them manage portfolios, and the technical side was just

never there at the firm was always fundamental. So the technical side resonated with them an in particular point and figure because it's easy for anyone to understand. In fact, Tammy was my right hand. Remember Tammy, We've been into Gates Elementary school teaching this to seventh graders and and and they catch on in about forty minutes. Adults take

a lot longer to d program. But it's so simple that kids can understand it, and it's it's professionals need the help to stay in the business where individual investors will do it for a while, all of a sudden the stock goes down. They thought it would go up there going on vacation, they canceled. So we're professional and we and our portfolio and charting system for what we do in portfolio charting because it's probably the largest in

the world on the internet for portfolio and charting. So I'm We talked about relative strength, we talked about some of your favorite indicators. What what are some of your least favorite indicators? And I went to Twitter and asked people and these are the suggestions they had given me to ask you. Um, Elliott Wave, everything rings in here. It's crazy Elliott Wave. Your fan of Elliot Wave at all? No,

I don't understand it. That's my five waves, three waves, two up, seven down down, two thousands something like that. I don't Barry, I don't get it. You know, that's my problem. I've I'm not even a member of the Market Technicians Association. That's interesting, and that's because I am. I'm a member of the Egyptian Technical as Society. Why is that well, because I've been to Egypt so much and I like these like them they're great people. Do they use point and figure in Egypt practically a bunch

of X is. You're exactly right. I've been there, uh so numerous times. There are some people to do. But um I'm remember the International Technical and Society, but only because I like to go internationally and meet all the different technicians. I don't understand a lot of the types of things like Fibonacci, retracements, gan angles. You know, it's it's the thing, the sixties seven percent or whatever the heck it is. I don't get it always looks good

in retrospect, but never perspectively. My problem is I'm not smart enough to understand that. I think that a lot of these things have a degree of randomness in it, and we're easily fooled by our pattern recognition subroutines. Um. So people sort of impose what they you know, it's a roth Chack test. People impose order on on that disorder and see things that I don't know if it's there. I think Fibonacci is a fascinating concept. I love the idea of him as a mathematician and what he's done.

But UM, if you read this defense fascinating book called Um Against the Gods, where there's a whole discussion on on Fibonacci as a mathematician, as an early person who identified how to deal with risk, how to mathematically determined risk. But it had nothing to do with stock patterns or anything like that exactly. And that's the problem. That's why with me. If it doesn't apply to UM, if it doesn't apply to portfolio management, doesn't mean anything to you.

I don't know how it can because people don't trade anymore. The regulation that's come on us since has been incredible, the new regulation that's coming from the Department of Labor. Now you have to be a portfolio manager. You've got to be a retirement portfolio manager. These things don't necessarily fit in that vernacular, so to me, I don't use them. So let's let's talk about some other technicians who who are out there. Are there any technicians that stand out

to you, anybody you particularly like? Follow? No or you? Yeah, there's you know, like UM. Number one would be Ralph Akapor, great friend of mine. He's the founder of the Market Technicians Association. He's just a wonderful, wonderful person. He's retired now and I would love to go on the road with him and do some talks. That would be fun. We had him here as a guest. He was terrific. I took the course with him. I don't know, twenty years yeah, absolutely, it was really it was really i

opening and fascinating. And even though I'm no longer an active trader I was twenty years ago. Understanding what he taught me is just helped my understanding of what's going on. I don't trade day to day, but it's nice to understand what people are thinking about day to day as someone in the business as I, but but as I go a little further. If I go to go to the far East, let's go to the other Let's go halfway around America, I would say, Mohammed al faith In

in Indonesia, Jakarta, Uh, Gideon Lapian in Chicago. In Jakarta, I go to Malaysia. Qualit. I'm poor. Fred tam one of the greatest in the world. So you think technicians are everywhere, are around the world, in every country. It's not just the United States. People think, oh, technicians are here, They're everywhere. You mentioned three countries in the Pacific, rim Indonesia.

What are those folks trading, Well, they trade Indonesia. They're trading the Indonesian market and the Far East market, which would be Malaysia. In Malaysia, each each one of the technicians in his own country will trade that his own country mostly. But um, those markets deep and broad enough and liquid enough that these guys can trade. That's a great question because I've been trading now probably for fourteen years direct in Indonesia, and I have an account at

east Samuel dot com. And you could trade the Indonesian market from the US directly through a third party broker. Yeah, absolutely online. I mean, the world is open for business. Anyone that wants to do this can do it. And I love trading Indonesia because it's there's a lot of anomalies there that can be It's still not perfectly efficient a lot of time. So I don't can't pronounce the name of the company, But is that is that important

when I look at the chart? You know? So we run models on all these countries too, So you you mentioned models is a question I've always wondered about. Maybe you can help me with this, So when you have a model, how could you tell the difference between a model that's temporarily out of favor and something that no longer works well for us? It's always gonna be temporarily out of favor, because I know relative strength works absolutely for us. That's the direction we have. Relative strength has

been working since before I was born. And that's a long long time ago, Barry. Let me tell you. And Uh, it's a matter of being out of favor for a while. Like I said, relative strength will be out of favor one quarter out of four or five. It's going to happen while it's trying to find attraction, you know, because some years you have, Barry, some years when you look at the disparity between the best performing asset class and the worst performing asset class, there's not much in the

middle there. My favorite graphic is that quilt the chart of all the boxes representing and and they more than six. They'll break it into twelve or fourteen asset classes. And here the returns for each asset class year by year, and some years the best performing one is worst is flat or negative. Exactly. That's a huge spread. Exactly, that's a huge spread, but a lot of times you don't find a huge spread in these, so a lot of

times the spread is pretty narrow. And when the spread is narrow, picture of car spinning its wheels and it's trying to find traction. It just can't. It just keeps throwing the dirt behind it, and once it finds traction, something breaks out. Like um, let's let's say back in two thousand eleven, you had the healthcare drugs biotechnologies break out. All of a sudden, those wheels catch and that and

the car shoots forward. You know, until then it's spinning its wheels, So that will happen with relative strength when there's no real dispersion between best and worst. Around that time, it's so funny. I'm fond of reminding people to not allow their personal politics to influence their investing. And around that time you had the Supreme Court say, uh, what

we call Obamacare was not going to be overturned. And we looked at each other and said, well, hospitals, pharmaceuticals, the whole health care sector just got another ten million people courtesy of the taxpayer, are going to be consumers. That's probably good for the sector. And we got huge pushback from people saying, well, you know, I don't know. I don't really like opomacare or this or that. I'm not asking you how you're going to vote. I'm asking

you what sectors are gonna do well relatives. That's exactly right. And you have to be agnostic totally. I mean you've got to walk down. You know, people will ask me, what do you think? I don't. I don't have the luxury of doing that, because if I could figure these things out, if I was clairvoyant, we'll be doing this talk from Verona, Italy on my shipping fleet. It's an expensive indulgence to allow your politics and to on either side, left or right. It should really be kept separate, it

asked me. Politics are for the voting booth, but when it comes to investing, you have to be an object like we're we're right here in a room that's self contained. Here, there's no noise outside, double glass and that type of thing. That's where you need to operate with your portfolio. Double glass, no noise, and that's it. Objective evidence bets right and keep it separate. So let me ask you another question.

And again I asked people on Twitter, Hey, what should I ask Tom Dorsey, and one of the questions came up was this, what's the problem with buy and hold? Well, the problem with buy and hold and and and there, and there is no problem with that if a person wants to do that, because there may be it may be an investor who says, you know what, I'm gonna make a bet on the five largest companies of America. And that's it. And exactly I'm done. And I don't have to have a broker, I don't have to pay fees.

I buy it one time. I'm making a bet on America. Fantastic if you did that hundred years ago, Man, you made a great bet. I mean it's been it's been a great ride. But what will happen, though, two, is when you when you put your foot in that stirrup and you're just you're just a buy and hold, you miss things that are happening. Let's say you were buying hold back in October of two thousand and all of a sudden, what happened was the market went to small

cap uh equal weight and value. You missed it. So for you're you're sitting there in a in a in a cap weighted SMP five hundred the next thirteen years you wander performed. I want everyone let's listen to this. Go just go on on Yahoo finance and look at the difference in performance between the RSP which is the equal weighted standard, and the SPX, which is the cap weighted Look at the difference. Go back twenty years and say which one would I have preferred to be in,

and you'll see that they traded totally different. Right in the nineties, you want the cap weighted. In the two thousands, you want the equal weighted exactly. And then after when when has now we're now we're at cap weight. It's been cap weight here recently, but if you look at the long term picture, it's long term picture is still equal weight, but more recently cap weighting has been been to play and large cap has given way to small cap or small cap has given way to large cap. Now.

So so now your e t F that looks at both of these variations, it's always in either cap weight or equal weight. That that's the option. No, it's not. That's not the option. We could be in some of each. I mean it doesn't how how how doesn't have Well what we look at as as a general As a general rule, we don't cap weight any of our e t f s. They're all equal weighted. Take for instance,

our PDP, our technical leaders. We look through stocks one it's a quarter, and we do that arm wrestling calculation, massive number of charts we have to create. We pick out the one hundred strongest out of and that goes into the portfolio and that's gonna be your your PDP for the next quarter. And that's done pretty well, that's been out right. What what's the track record of that e t S? Oh god, I couldn't begin to performed.

It has um But here's the thing. Very when you look at that, it's almost like a sector rotation kind of model, because when you look at the things in that universe and it says, gee, we're gonna push you into the one hundred, it's pushing into the one hundred strongest. So pushing you into the one strongest is going to put you into the sectors that are doing the best. And you you mentioned earlier the strategy that shifted back and forth. Is that an e t F or is

that state? Well, we have probably eighty five different models that run on on our system, on our portfolio excuse me. On our website, those are like unwrapped ETF. So that's an interesting question. Take for instance, our F v. Frank Victor. That's that E t F garnered the most sponsorship in in buying any E t F in a shorter period time. Came out in two thousand and fourteen. In one year, we had about four billion dollars in a snow four billion. Now f E stands for it's set first trust five. Okay,

so we look at the first trust twenty sectors. We do the arm wrestling contest on a rollatives train basis, pick the top five and that is basically it. We let the top five wiggle back and forth until it's until they cross a particular level. So that's not readjusted on a on a set timeline. It's based on price exactly, I mean based on relative straight as long as they stay in that, you know, which is like a picture,

like a baseball game. You watch your picture and your picture starts out and he's doing really well until the fifth inning. Then all of a sudden he's sarting to hit people with the ball and they're hitting home runs on him, and and boy, all of a sudden, the coaches, something's wrong with his relative strength. I gotta I gotta take him out of the portfolio. In other words, I gotta call over to the bullpen. He calls over the bullpen and says, who's throwing the heat? He means, who's

got the best relative strength? Because I gotta take this guy off the mound, because he's starting to get weak. I put him in the dugout. I bring the guy who has the best relative strength out of the dugout, and he becomes the picture. So that's how things come in and out of the portfolio like that. The f V the First Trust five has been has gone years without without a change until recently all of a sudden

would happen in First Trust five. The things that carried it over the last five years, which was we were in the healthcare drugs, we were in um technology big time we had and also we had no oil. It would not let a relative strength portfolio a sector that's been in free falls, right. But if you were a fundamental portfolio, you'd have you'd have to have part of it. You wouldn't be able to be out of oil, which we were out of oil. We wouldn't let it in. So a lot of times it's what you don't that

really makes the difference. So the first Trust five was a model. Those were the five E t fs and and what you did is you bought those five E t f s as a professional, and whenever a change took place, we emailed you if you're running that as a separate model and a separate model, and probably about four billion dollars was in that model because it's available to our professionals. Now, the interesting thing there is the

wirehouse broker who needs Q SIPs. He has to satisfy compliance, he has to satisfy branch manager, customers want to see things in the portfolio and whatnot. He buys the model. We took that model and wrapped it up into an E t F which was symbol f V Frank Victor exactly the same thing, except one Q SIP over here, which service the individual investor UH managers who pay a fee whenever they buy a stock, they have to pay a commission. So this worked perfectly for them to have

one symbol that wrapped up that model. But on the other side you had the wirehouse broker who wanted the QUE SIPs. So they both trade side by side. We have eighty five different models that could be wrapped up into an A t F. And and how many A t F do you have? I'm actually trying to pull that up. Probably about seventeen, uh well totally total, maybe twenty. I'm not sure exactly how many of them, um And what's the U M of all those I'm trying to do. If you just look at the E t s themselves,

I would say probably after this last decline. Maybe that's not an insubstantial amount of money. No, it was higher before the market market took them away. But we've been at this game for a long time. I worked with the first d t F that ever came out with which Joseph Rosello was head of marketing at the Philadelphia Exchange. That was the first E T F that ever came out, which was what the cash index participation unit symbol BUS

participation right. This was back in the mid eighties. Joseph Rizzello was the head of marketing at the Philly Exchange. They brought this this, uh we called it the SIP. It was simple b I G which was dal Jones and simple SNP, which was standard in ports, and they traded on the Exchange. So it was the first e t F that traded, but they ran into trouble and got sued by the Futures Exchange in Chicago because that

e t F was backed by futures not stocks. And so now you have the Dale Diamonds and the SMP Spiders. That's the same thing, except they're backed by stocks not futures. I wonder why they used futures and stead guess it was just it was it was cheaper to do it that way. You had the same thing, but it was cheaper. What happened then then the next e t F that came was the Toronto Stock Exchange came down and used the same template and created the Toronto Index Participation units

backed by stock, and that still trades. That's amazing, that's still trades to this day. I'm looking for this. Look at that list. That's impressive. Um. So we went over buy and hold. We went over a number of different strategies, and we talked about your love of Fibonacci and Elliott wave, which is always it's just it's just that I don't understand them. So it's not I'm not slamming them. I wouldn't say anything against them in the right hands, every

every every bit of technical analysis works. But it's just in my hands. The only thing I've ever looked at or used or anyone a d w A has ever done this point in figure charting. So let me get to my last two questions that we skipped during the main part, and then I'll get to my favorite questions. Um, So, the past twenty years, we've seen the rise of high frequency trading. We've seen all these ztfs, we've seen a shift towards index thing. What has any of this stuff

done to the strategies that you employ? Nothing? Nothing, nothing, absolutely nothing in fact, In fact, the point in figure charts, if you look back to the old guys who wrote about it, A. W. Cohen and Ernest Staby, they always said the faster chart forms, the better it is because the same players are still there. It's not like a chart pattern forms today and two and a half years it's still the same chart pattern everybody's going. So you say, wow,

the market has moved got more volatile, things have gone faster. Okay, that's great, it's even better for us. And um, the other question we I skipped, so smart beta has been getting quite popular is there a risk that becomes too popular. Well, now you have to understand, Barry, that smart beta really is a marketing term. You're not the first person who said that. You know, it really is because to me, smart the way they look at smart beta is anything

that's not capitalization weighted. But the way I look at smart beta is things that are rules based that if you're going to be smart about it. You know, let's say with the kale. We talked about the kale before on the radio. If you want to make kale taste good, there are a thing you need to do to it. If you want to create a portfolio of of exchange trader funds, there are some things that fit together well,

some things that don't fit together well. So with the rules based program, that's how you're gonna create your portfolio. I always look at you. You ever watch the Master Chef on TV show all right now? Whenever they go into the Master Chef pantry, everyone runs in with their basket, same ingredients or different ingredients, right, different ingredients they got the same They have to make the same thing, but

they're gonna pick different things. When I look at that Master Jef pantry, I see E T. F s. That's all I see. And they're assembling things out of exactly they're picking the protein to picking everything. And with with a money manager like yourself, you have all those things available to you. It's your job to create a fantastic meal for your customers. So you have the selection of everything in that master chef pantry, and that's how you create your your your portfolio for e t f S.

That's really interesting, you know. I always thought it was a fascinating coincidence that the standard for an index is cap waited when we know there are so many problems with cap waiting towards the end of the sectors, at the end of the cycle especially. But that said, I don't really see so much of a difference between cap waiting profitability rating. If you look at some of the things that UM Research Affiliates does rob or not, instead of doing it cap waiting, they do it by profitability

dived and yield. All these different metrics, you still end up with an index that isn't actively traded. You're just using a different basis for assembling it, like the relative strength First, I'm sorry, you hit on it perfectly very when you said a different way of assembling it. So you come to me and you say, Tom, I'm going to use astrology to pick my stocks. And I'm gonna come to you with a hunter stocks and and and

this is like when Jupiter's line with Mars. We're gonna do this sector and when you bring to me the stocks will organize it. We'll do We'll put our relative strength on it. Organize it. If it's junk that you give me, I'm gonna give you the best junk. I put the best junk precisely, precisely, so it's two hands. What's the name of the et F by the way, the astrologer relative is that one that's out there. No, there's not one out there, but you never you never

can't tell when that will happen, you know. But but that's the idea that you play with piano with both hands. You could give me. I love to have a fundamental report saying, hey, these stocks are truly right and just a fundamentally sound et cetera. Can you deal with these beautiful I love it first trust does the alphabex way of fundamental rea alpha dex. I'm not sure exactly how they haven't never come to me and told me how they do it, but they do a great job at it.

They give us the list. Everything that First Trust does is alphabex fundamentally organized. Then we take that fundamentally organized and create the portfolio and manage the portfolio. And so we play with the piano with both hands. They play the fundamental side, we play the the technical side. I've worked with a friend years ago. He used to call that technamentals is the technical side. He is the fundamental side.

You marry the two together. Ralph at Kempor you mentioned earlier, was fond of saying, fundamentals tell you what to buy, Technicals tell you when when exactly precisely. All right, so let's jump to some of my favorite questions. These are what I asked all my guests, and and usually we get some we get some some interesting questions. You mentioned

you were an economics major at university. What did you do before you found your way to merrow lynch Well, I spent four years in the Navy, first and a couple in Vietnam off the coast, and they so I was in from nineteen nineteen sixty seven, beginning of nineteen saw some submction of it. I didn't see that I was on an aircraft carrier. Okay, the planes we shot off the action, so you were relatively safe work on the ship. Absolutely so, so how did you get from

you're in the South Pacific Sea to Maryland. That's when I went back to college, and so I did the Navy first college. Second, I went on the g I bill and going to school. And g I bill was, well, I could, I could pay my tuition, but you know, much money left. And by the end of the By the end of that, I was driving a car with no reverse, and you know, so by the time it was it was time to graduate, I said, I'm tired of being poor. Wait, you're driving a car with no reverse.

Reverse you wherever you parked it, you had to make sure you're coming straight out of it. That's hilarious. I I had a VW bug that there were periods of time where I had no battery, but it was a stick. So as long as I parked on a hill, that's right. It was the same thing I could pop it into. And that's the stuff we did back then. You know, when hey, your college, you're broke, you're putting it working away through school. No way I could pay to get a reverse put in that thing. So I just kept

on going forward. That hilarious. But by the way, that's where the momentum strategy came from. As long as you're facing in the right direction, exactly there you go. That's uh. I gotta go where there's money. And a friend of mine said, well, i'd be Wall Street and said what do they do. He said, well, it's like Merrill Lynch and you know stock market. So I applied to Merrill Lynch. I applied exactly at the end of the terrible bear market that customers have gone through. They were not hiring

anyone and most of their customers had left them. So I went to Richard's Wine Cellars, which is part of Canadagua Industries, one of the largest wineries in the country. This was in Petersburg and I was a production supervisor until and this is the way paths happened to you in life. Certain things happened. You can take the path or not to take the path that leads you somewhere else.

And this came to me and he said, you know what, I was at um a career counseling meeting up in Washington, d C. He said, Merrill Lynches is now hiring, and I said, you're kidding me. So I reapplied to Merrill Lynch. I badgered them to the point they couldn't take it anymore. Gave me an interview. They figured, hey, this guy's a good sales Yeah, he won't give The secretary of the manager finally called me and says, you've gotta stop this. He can't you know you kill see you Tuesday, I

knew I was in. I still didn't know what a stockbroker did. It didn't matter, No, it didn't matter. It was like, I'm in the best company, the biggest company in Wall Street, Wall Streets kind of cool. I don't know what they do yet, but I'm going to study. And when I passed the series seven, in one second, when I saw that on one Liberty Plaza down here, I saw that posted up there, I went from a

nobody to a somebody in one second. How long did you stay at Mery Lynch for Well, I stayed to Mary Lynch about five years, close to that, and then went to Wheat for Securities to develop and manage their option department. All right, and you were with Wheat first for how long? Nine years? And nine years? Because I had set the age of forty to start my own company. That was the last forty was to cut off day. And at thirty nine I gave my resonation, so I

had to go on Target. I didn't do that until fifty. But that's okay, you did it worked out. Um, that's that's kind of fascinating. So you were at at two well regarded places. Wheat First, which eventually became First was bought by First Union First Union First, and then there might have been one or two other steps before that became Well. I think there were two other steps before a while Fargo Fani took him and you were at you were at Meryl. So who were your mentors at

these places? Well, I had no mentors at those places. The two mentors I had in my in my business life was one the late Jim Yates, I know the name Jim Yates of d y R and Associates, Dalton Yates and Revco. Jim was I think the most premier

option expert in the world. To me, he was He was able to teach me and understanding of options that I have rarely ever seen in anyone else and rarely ever utilize his way of thinking, which brought me back to statistics one on one, the second most important course in college and the normal distribution, and Jim was very important in that. Next was um was that Chartcraft and um oh my thinking about his name art Craft. Art Craft was been around for a while. It had been

around for a long time. Chart Craft and Investor Intelligence, and the late Mike Burke was the president, not president, but he was the editor the chart Craft in and um Um Investor Intelligence. They came together and chart Craft was that was the company that sent you the monthly books on point and figure charting. You've got the big thick books and they updated you once a month and that type of thing. Mike Burke was one of my mentors. He was a great guy. He was almost like he

was almost like Einstein. He would get up in the morning and he would walk out in one sleeve would be buttoned down the other sleep we rolled up and he would figure out why why not do that? You know? But he was the very clear thinker. And one of the things I'll never forget about Mike. He came to me when didn't come to me, but we were talking one day and he said, Tom, he says, let me tell you something. I said, what's that, Mike? He said, the market will do what it wants to do, and

that was it didn't anymore. And that's so profound owned that when you sit back and think about it, why watch TV, Why get ideas from all these different places? When the market will do what it wants to do. Then listen to the market, which you have to listen to the market. Don't listen to something else, the things that you think the market should do because of X, y Z, because of Janet. Yellen did this and and Greenspan did that. The market will do what it wants

to do. I started as a trader, and I used to have those discussions with people, and I would get these long, convoluted explanations as to why this should happen. Or I love hearing people say, well, you know, if the market wasn't interfered with, here's what would happen. How do you know? How do you know what the market would do? And how do you how do you know that every time the market you know, you look at history, every time the market is cut in half, there's always

some sort of response from the powers that be. You could pretend it doesn't exist, but the market tends to anticipate that, and it tends to respond regardless of whatever our narratives on. That's exactly right. It's gonna do what it wants to do, and you could either be along for the ride or not. That's right, exactly, we'll be going in the opposite direction. It's it's and that's always been summed up with don't fight the tape, but some

people never seem to uh learn that message. Well, today, with news blogs, all kinds of different things, you can get news and information about the markets twenty four hours a day everywhere you go, and there's always an ax to grind. There's always uh no, there are no disinterested parties, you know, so you've got to be disinterested yourself. You've got to look at the rules and regulations that you

set up, you know. It's it's also fascinating you mentioned that I always hear from various people about, well, I'm gonna do this as opposed to that because I've read all this research and I think this is what's going to happen. My answer is always yeah, but everybody's read that research. It's out there, it's public. You're trying to

forecast based on on on a some public information. If everybody has access to the same info and you're if you're using to use your your chef metaphor, if you're using the same ingredients as everybody else, you can't really do anything special. Everybody is is cooking more or less the same thing. If you want to do something special, you need some special ingredient or special approach. And either it's going to be a disaster or a home run.

But if everybody's cooking the same things and reading the same things, everybody is going to be part of the crowd, and they're gonna be so so performance. Yeah, and people today, you know, money managers today, I implore anyone I talked to, I said, whatever you do, get it computerized. Anything that

can be computerized, anything it can be, will be. And you've got to understand that a lot of people out there that thought they were going to get by with a particular investment approach is now out there for everybody. So let's let's talk about other investors might have influenced your approach to point and fear who who else has been If not a mentor, but who else has influenced your thought process? Well, it's gonna sound like a strange answer, Verry,

But no one, no one. Those two were the most important to me, and for what I learned from them and how they opened my mind in the way they think it's a lifetime. I can continue on down those two lines. Yeah, I and I and I try to put the blinders on, because, um, these things are distractions. There's a lot of noise relative to the signal, and the noise, you know, I have to block the noise out.

So a couple of things, to me, you know, is simple, straightforward. Economics, to me, is the most important and icon one on one, the most important course I ever had. I was going to ask you if statistics was the second most stat one on one, because it taught me the normal distribution. Those two things right there, the irrefutable off supply and

demand and the normal distribution. My god, you have a lifetime of thinking about strategies and things like if I mentioned to you said, you know, if you look at a normal distribution, I'm looking at men's heights in the world. Some some men are too hot to all, some of the men are too short. Most of us are in the Middlebury were one standard deviation above or below trend if you look at every trade you made in the market, and we've done this with our models, sixty eight percent

of US men's heights are in the middle. Sixty percent of everything you do with will be one standard deviation above trend goes up, a little down, a little bit down up. So it says, if sixty eight percent of the time everything is middle, and what's the right strategy that will be a neutral strategy. So for most investors,

what's that neutral strategy that makes the most sense? Covered writing? Oh, really absolutely, because you're dealing with something that's sixty eight percent of the time is going to be hanging around the center. You can't do naked straddles, you can't do nate, you can't do naked anything. You're gonna be in court. I mean as an there's a ton of risk relative to reward with that. But the covered right is the

one strategy that's a neutral strategy. That's right sixty. You own an index or you own a group of specific stocks. You're writing call options on this, so you're taking in that that income stream from that, and the only major shift is going to be either when you get the stock gets called away to the upside or if there's a downside move which ultimately either leads to new covered writing or using a stop blow strategy to get out

exactly do you understand it completely? But also to for someone like yourself, where you run a tremendous amount of money, you could look a little bit of money. You could look at you run a tremendous amount. I'm I'm running a smidgeon. You could create an index that, let's say, looked like the standard and Pours five looked like the Russell two thousand, and there's index options that trade, so you could sell these index options against that portfolio where

nothing is kept off. So two out of so it's more than two out of three times. This is going to be an outperforming strategy. Absolutely absolutely and that and that takes you to stat one on one. Anybody should just go google normal distribution, learn it, love it, embrace it, and uh. It just gives you an idea of what to do. So whenever you look at you might buy a particular stock. On our charts, we have a normal

distribution on the side of each chart. So if you see it move up to where it says top your three standard deviations above trend, that's telling you the stock has done well, but the probability is it wants to go back to the middle reversion coming back being reversion. That's the point you sell a call against the position. So there's a lot of simple stuff that you can do with stat one on one, any con one on one. Fascinating. So let's talk about books. What are some of your

favorite books out there? Well, you said books in general, right, any from any any live that you can walk in or Amazon or whatever. My favorite book that when I finished reading it, I said, what do I read now? Is Shanta Ram Shanta Ram. I can't think of it now, who um? But it's about a guy who breaks out of um a maximum security prison in Australia, goes to Bombay, India and it begins there. Oh my lord, you're not

gonna put this book down. This book, and I suggest you listen to it rather than read it, because the book is so thick. Listening to it you get all of the accents and things that are involved in the Indian accents. It's wonderful for me. I listened to books because I'm dyslexic, uh, and I easier than read it. Yeah. I don't read books because it's too hard for me. It was hard for me all my life to In fact, I wrote my first book before I read my first book.

But when books on tape came out, then I found out I was a bookworm and I didn't even know it, you know. So whenever I get in the car, I'm pressing the button. If I'm on the treadmill and press I'm listening to books constantly. So Anti ram I would say, listen to the book that sounds interesting. What else do you like? Another one I like is the four hour work week. Excuse me, yeah, four, it's four our workwek exactly. I was gonna be about to say day, but it's weak.

The reason this is important one of the guys in my office is a huge fan of his. The reason that's important, Barry, is I believe that through technology, if you have things that are computerized, everything that can be computerized is going to be. You should be able to run a billion dollar portfolio from a cruise ship with an iPhone. We we've been talking about this pretty consistently, and again I've been finding that running a small office,

what we're capable of doing with fourteen thirteen people. Twenty years ago would take fifty people to do just simple things like the portfolio rebalancing once or twice a year, and things like tax lost harvesting. It used to take three or four Green visored accountants a week to do this for a portfolio of a few hundred families. Now you push your button as a software called i reboll that's integrated into the custodian and you could set it up, go find me some tax losses to offset the tax games,

and it's it's astonished. That's a great example. Back in the day you said you needed all these people with the green shades or a week, but exactly for a week. Now it's been automated. What will be automated, can be, will be. So now it's automated. So why couldn't you do that from Thailand? You certainly could. Why then why aren't you on the beach in Thailand because I'm here talking to you. But the concept is you can, and

that's why the four hour work week. What's cool about the four hour work week is it's got all kinds of websites and things you can go to. Yeah, that will help you become more efficient yourself. Like if you wanted to have an assistant in India. You can do that. There are places you can go in India there will be your assistant, just like she's with you now, except when you're asleep. She's working. He's sleeping. When you're working. You want to get get me reservations for dinner to night.

So and so I also need flowers from my wife. I need you to do this whatever it's there available. So The Four Hour work Week is a great book to make you think about more things that you can do become more competent in less time. Alright, that's book number two. Give me one last book. I love this broad selection of stuff because normally it's the Intelligent Investor and and things like that. This is really fascinating. Yeah, and I'm you know, all of a sudden you start

to go blank. You think about all of the books that that that. What are you reading right now? Right now? What am I reading? That's a great question. The Great Deformation, Um, that was trying to remember who wrote it? That was by um, oh god, what's his name? He worked for Ronald Reagan, got taken out to the wood stock stockman, exactly stockman. This is the phrase the wood shed too. I remember exactly. Remember that taken out to the see

I'm all dough to appreciate that. Remember that. Well. The answer thing thing about this book is if you really want to understand the deformation or the desecration of our free market system within with interest rates in the and the financial system, this is going to give you a great understanding going back to FDR days. It's not an easy thing. That's why I think you should listen to this book too, because, yeah, if you sit down and start reading it in five minutes, you might fall asleep.

But if you're driving the car and you know, I think you're gonna stay awake. But it's a pretty meaningful book. And I find myself going back over and re listening and re listening. He's a fascinating guy. He really I saw him. I think it was Stephanie Rue. I think it was on Bloomberg. I saw him describe how the way he described it was. Stockman described it was the financialization of the US economy took fifty years to slowly develop and then blew up in the crisis, and we've

we've basically the tail is wagging the dog. He used to say, finance in Wall Street. That's where he came from. He came from finance, went into politics, went back to finance. Finance used to serve industry and now finances just another industry.

And that was a major shift. If I'm not not misquoting him at all, you're right, and which you and things you learned in this book is like in N. Two, the Thomas Amendment, you wouldn't even think about this, but gave FDR the right to cut the gold backing on the US dollar by fift gave him the right to back at not in gold, but in silver to create money if he wanted. And that was the beginning of

the financial system getting totally out of hand. And every administration, bar none, from there forward has carried it even further. And the Obama administration now he carried even further. Every one of them have whether you're Republican or Democrat or whatever. But you think back to two when this happened with a Thomas Accord, that was the point at which that ball started rolling. The fear was that you were constrained with what the the uh Traasury up could do by

the gold standard, which had its own problems. And now it's unconstrained and you have a whole different set of exactly, and it's it's damned if you do, and Dan, if you don't, let me give you one more. Okay, this this is great. Uh. The author is Martin Truce t R o O S. T. And his are travel books. But it's not the kind of travel book that you would think, Okay, let's go to Hawaii and here's you

need where he needs. He actually goes to these places and talks about what it was like for him to live there, and um, all series of books he's done. One was Sex and Drugs with the Cannibals or something like that. It sounds I mean, it's he is so funny. He's a great wordsmith. That would be dangerous, Yeah, it could be. It could be very dangerous. But he talks about living in Vana Wattu and what it's like to

live there. And but it's not a travel book where you're gonna, oh gee, I'm gonna go to this hotel and stay there. No way. Then he does one of them. My favorite was, um, it was about China and it's called Lost on Planet China, which is a total riot. His books are all as funny as you could possibly get. He's a great words Smith and um t R O double O S T Yeah, Truce Martin, Trust Martin, Truce, I take, and I would listen to his books because

Cyrus Vance who reads the books, really does. That's who you would expect would be reading books on tape, you know, Cyrus Vans. Yeah, yeah, well he's a big reader of on tape. Maybe there's two Cyrus Vances, the former political guy and and is then am I thinking about the right person? Maybe there's two of them because this he I have searched for books that are read by Cyrus Van. Yeah, so I would read the book because he read it.

That's fascinating, all right. When I, by the way, when I post this on on the blog and on on Bloomberg, I'll include the list of recommended books that people want to want to find that they'll be able to get it. So, last couple of questions I normally have you for a little lore time. Um, so what's changed since you've joined the industry? And is it a good thing, a bad thing or does it not even matter? What's changed is regulation.

That's the big thing that's changed, because if you think back to nineteen seventy five, Arier, were you in business. I was in high school and next high school. But I do recall when when the commission ceiling was removed. That was the early seventies, exactly a huge chance exactly where I'm coming from right now. That's put us on the path of where we are now with feedbase, because that was May day. May one, nineteen seventy five is

when commission deregulation happened. And we used to charge massive commissions uh to customers, all the same thing, but they were massive. Nineteen seventy five when deregulation came in Charles wap started, was the first year of charsh wab And I can tell you right now we laughed at Charles Wapson. Who would ever deal at a discounter? I mean that would do now? I mean we used to wear three piece suits and if you needed a standard poor sheet, we could mail it to you. That was technology. Then

you know we've got the technology. It's the post office and Joshua began. That was what began the move toward discount and lower fees and and and for us, this was the beginning of a change from commission to fee base. Because what happened is I think the um the firms like Marrilynch, Pierce, Fentner and Smith. The partnerships look at this and said, you know, this is not for us any longer. Let's sell out to banks. And all of them did. Pain Webber, Jackson, Curtis Smith, Barney Harris up them.

They all sold out to banks. Banks became the owners. And what do banks understand? They understand fee, They don't understand commissions and fee, and they understand risk. You're all concerned about defaults and whatever. Precisely they don't get commissions. So everyone began to move more towards the fee basis. Well, Dorsey Wrighting Associates, I looked at I looked at us as a pilot fist. You ever look at a pilot

pilot fish s little fishing falls. The shark he didn't he didn't get close enough to the sharks amiel to get eaten. But he stays back and no no other fish bottles, lots of crumbs and exactly a little protection. That's right. That's us. We were pilot fish, and and the shark was merrill lynching and all the rest of the big guys. So whatever direction they went, we had

to go. So that's why we began creating models and feed base models way before anyone else because we knew if I didn't follow that shark and I kept doing commission business and trading business, that's where they were going away from and we had to go with it. So that began the move towards fee base, which is which

is where we clearly are now. The last data point I saw on this, between Morgan Stanley and Merrill Lynch, they twenty years ago they were less than ten percent fee based, and now about two thirds about you know, what's going to cover the other third is this new regulation now from UM Department of Labor that's on four oh one K that's on retirement accounts, on retirem accounts exactly. Is not an insubstantial amount of It's not. I would bet a huge chunk of their fee based stuff is

already accounting stuff. And and that's active is probably although you would think the tax are qualified standard would would be better for active than UH than the fee based strictly from a tax perspective, Well, it's going to change things totally where the guy that typically doesn't think about the fiduciary and operating in the in the right exactly for the customers on the same side of table. But

here's something also. If I come to you and I say, Barry, I want you to take your your IRA or your your your corporate retirement account and roll it over to an IRA and I'll manage it. Boy, I better be right in telling you that, and I better give you all the reasons, and I better document this. And when we do this, you and I are going to sign a contract. That's what's different now, the three changes that

have become really really significant. When that happens, you have to say, Okay, I'm gonna be like a lawyer or an accountant, and I'm gonna be a fiduciary. In second, I have all these transparency rules. Anything that I need to disclose, I'm gonna disclose. In third, if there are any conflict of interest. There was just a huge article in New York Post today about daily News of the Post, one of them about one of the big firms I don't remember which is running these sales contests sell X

y Z, when a when a vacation trip. If you're getting paid outs and therefore it's not necessarily the client's best interest, but you want to win a contest, you better disclose that and if there's a conflict, you better be up for it. I think that for the long haul it's gonna be good for investors, but over the short term there's going to be an adjustment process. There is. There really is, because a lot of a lot of advisors who deal in ira A type accounts and rollovers

and that's leader business. I'm going to find that theory incomes probably gonna be cutting cut in half. You know, the thing that started this whole process way back when was a lot of four oh one K and the nonprofit version of it is four oh three B. There were studies that were showing that they were jammed full of high cost annuities that were running like you complained about two and twenty, these guys were charging six and eight percent in retirement accounts and that was just so egregious.

That started the ball rolling downhill. Um. So, you know, it's always unintended consequences regardless of who's doing So back to your question, regulation, I mean, that's that's that's the big that's the main thing that has happened along the way. You know, back in back in if you came in and you want to do an option trade. Barry, I would do the option trade. No documents needed, No, we send those out two months later. Oh man, you can't options by the end of you want to discuss options.

You have a whole bunch of paperwork to send, You have things signed that you need backed. It's uh, there are a lot of eyes to dot and tees to cross. Not that it's necessarily again on the on the UM edges, there was some really bad behavior and that's what led to a whole lot more regulations too. It's always that way. You have to stop the bad actors. In order to uh,

you have to be overbroad. You're gonna bring up a whole lot of um, You're gonna bring up a whole lot of of good actors when you're trying to stop the bad actor. Absolutely no doubt about that. So what do you see if regulation has been what's changed over the past twenty or thirty years, what do you see

as the next major shift that's coming. Uh, let's let's look at e t F s. The next major shift and we're already doing this at Dorsey right, is embedding risk and risk management in the e t F itself. How do you do that with cash So remember we said I said money market m N Y m k T is a symbol to us. So take for since our first Trust five. The first Trust five operates by itself and it keeps the strongest five out of twenties sectors. For first trust done extremely well over time, the returns

have been been very very good. It's not because we have a first Trust five plus cash. So now cash has already moved up the level and overtaken of the portfolio. And that's done on a relative strength basis, not relative strength. This rules about this Trump guy, I'm gonna move to cash. No, none of that has to be rules based. So there's no gut feeling involved here, no emotion involved. It moves in so it's moved to cash with it. So these are this is what's gonna happen. Now, there's uh UM

Horizons has a has a good covered writing program. We have a model that has our PDP, which our technical leaders who plus the horizon covered right. The horizon covered right acts as that um that buffer that acts as that the breaks of the portfolio. So it'll bring that piece of the equation down to a point five delta point being is we're creating products now with risk management

embedded in it. That's fascinating. You don't really hear a lot of that sort of of strategies that developed that that's really fascinating, and you see this as the next phase of ET. Absolutely, we're gonna have to do that because again, it takes that human emotion out and a lot of things that you have. You say, you know, we have the first trust five that stays, it's always going to be a percent invested, even in markets that you shouldn't be. But that's a that's a market call

on on our part. So we can't go in and say, gee, we think the market is going to go down. Now let's take the first trust. So someone who's an allocator who says I have a slot for equities, Hey, I'm gonna go to Tom Dorsseton and say give me the five best sectors and I'll build it into this and I'll deal with and you'll risk with your bond and you'll deal with it exactly in this case. It's embedded in the E T F. And And now I'm down to my asked two questions, which I are my favorite

too when I ask everybody. So imagine a a recent college graduate or a millennial comes to you and seeking career advice. What sort of advice would you give them? For somebody who's interested in in going into finance, Okay, I would give them and I and I operate this way. When I when I bought the building that has my family office, it's right across the parking lot from the building from the Business School of Virginia Kamal University. So my office is open for any VCU business people to

come by and talk to me. I'm always open to mentor them and talk to them. So they do. And one of the first things I tell them, I say, what should I do now when I when I graduate, go to China and teach English? I said, go to China. And one of we I had an intern named Jesse, and he came to me said I'm going into business. I said, I said what Why? How old are you Jesse? He said twenty two? I said, why do you want to bother with that? Right now? I said, go to

China and teach English? Would do that right now? He exactly went online, got high, went to China, taught English, and then stayed there another year, built a business helping us companies come across and do the paperwork, and now he's back in the US working. But my point being is when you're twenty one and twenty two years old, why do you want to get into business? Now, go to China for a year, then go to Australia and bartend for a year, then then backpack for Europe around

Europe for a year. Now you'll be all of twenty four and a half years old, and now you get a resume. I want to see and on three contents, you've seen the world. You might speak a little Chinese, which is gonna become essential, and you know the Chinese culture that's important. So that's what I tell these people is go to China to begin with and teach English. Secondly, if they want to get into this business man, it's not the same as when I got into it. When

back in the day it was so romantic. I mean, if you went to a cocktail party and you said you were a stockbroker, that was the coolest thing in the world. Because nobody could buy stocks themselves, they had to do it through you. You were registered with the New York Stocking Change. Today, anybody can do anything they want to do. It's not even it's not even eight bucks. It's free. That's it's a site called robin Hood. You could buy stocks for free, absolutely no cost whatsoever. Folio Advisor,

same thing. You know. So the world has changed, and I'm not sure I would say get into this business. But if they really wanted to learn something that you will become the best at it. Be the go to person for whatever it is that you want to do. Don't just learn in a cursory way because you're gonna end up at the call center. If you're truly great at something, then you won't. That's fascinating. And my final question.

You began in nine seventy five. You said, say four right at the end of that, so that was forty two years ago. What do you know about investing today that you wish you knew when you started forty two years ago. Well, I'll tell you what. It takes a lot of whiskers in this business. And you know, you gotta walk around the block a lot of times to get to a point where you have a general good understanding about what's going on in Wall Street. But I

would say the point in figure charting. You know, if I could have been serious about it at that age, in my twenties. Then it would have gotten me on this road a lot sooner. You know, I had to learn through the school of hard knocks. If if that, if that guy didn't bring that point and figure charting book to me that day as he walked in, What's what's the probability that the first guy I hired my option department brings me this book? This one book, it's a lot and it was a lost art. Why this

one book? And then the two of us look at this book. He looks at it as a way of trading. I look at it as a way of changing the whole industry. And these things that happened to you along the way. Sometimes you've got to have a little age on you to have that perception and understanding, you know. So I guess it all was exactly right. At age thirty nine, I had to start the company. By forty I did at them. I was ready. Then I'd learned enough.

If I tried before that, maybe maybe maybe I wasn't ready, Maybe it would have failed. I don't know, Tom. This has been absolutely fascinating for me personally. Like I said, I've been reading your work for early since early early in my career. I mentioned, I uh was introduced to you at a place called Prime Charter, which is now part of Oppenheimer and it has been um absolutely a privilege and pleasure to chat with you. Thank you so much for for doing this. I want to say one

more thing, Mary hit me. You know how we got together. I've been a reader of you. I read your blog. Remember I loved what you had written, and I emailed you tell you that the the Mutual Admiration Admiration Society will it's you guys used to quote me. I used to pull stuff out that I had done in quote exactly and it was always a thrill from me. It's like God, I was in a green newbie when I started reading to us, see right, and now I'm occasionally

quoting in there, and I was just thrilled to death. Well, well it's a pleasure me in absolutely. For those of you who enjoyed this conversation, please be sure to look up an Inch or down an inch on Apple iTunes and you could see the other eighty five or so of these. Be sure and check out my daily column on Bloomberg View dot com. The blog Tom was talking about is the big picture. It's at Ridholtz dot com.

I would be remiss if I did not mention Taylor Riggs and Charlie Volmer, the producer and booker of the show. Mark is my recording engineer, and Michael bat Nick is my research assistant. You've been listening research assistant. He's actually the director of research and helps me put all these questions together every week, and I wouldn't be able to do these shows without him. You've been listening to Masters in Business on Bloomberg Radio.