All I needed to Know about the Stock market I Learned in Kindergarten

By Paul Townsend  Associate Vice President – Investments, Wells Fargo Advisors LLC
3/9/12
Review A-

I attended Paul’s talk at our local AAII Chapter meeting this Saturday. Turns out I had heard him speak many years back in Birmingham, MI at a local AAII chapter there. It was interesting to see how his methods and perspective had changed from then.

Although Paul has a catchy title, let us be real – they certainly could not teach these methods at Kindergarten! After debunking the first myth with his title I found Paul’s talk interesting and informative. He still uses Dorsey’s Point and Figure (P&F) techniques combined with trend lines and has combined this with IBD and Dorsey Wright’s Relative Strength comparison tools to pick and invest in the strongest. I like that – and I think that strategy comes from William O’Neill, the founder of IBD. Buy strength as the strong rise faster in an up trending market.

Paul points out that the most important lesson one needs to master is to have a disciplined method to Buy – Hold – Sell a stock, mutual fund or ETF. He has also been disillusioned with mutual fund money managers and has switched to ETFs. He learned his lessons in 2002 when he blew through his IRA account holding tech stocks like Sun Microsystems from 60 to 4. Unfortunately I did the same back then, which is what prompted me to learn technical analysis… Paul gave a basic lesson in Point and Figure charting. I have read Dorsey’s book on P&F and also tried it with Metastock and although it is fairly sound if you stick to it and follow it, I found it to be no better or different than any other technical analysis tool. I did like the fact that Paul has stayed with P&F charting and expanded his tool kit by using IBD and Dorsey Wright’s comparative strength analysis to select ETFs in a portfolio.

“As long as you are being rewarded for the risk you are taking, we should hold the stock” is one of his quotes. Agreed.

Another quote from Paul has to do with following a disciplined method that makes you do what you don’t want to do – buy and sell at the right time.

“My job is to get men to do what they don’t want to do” – Tom Landry, legendary Dallas Cowboys football coach.

Paul attributes success in investing to the P&F method which allowed him to stay with his big winners for a long time – 1-2 years. He points to his holdings in MCD which he just exited after being in it for 1-2 years. He clearly has learned to use P&F and understands how P&F ties to support and resistance, and when a stock is above a trend line. He also had charts showing the fall of Enron and how P&F had allowed him to advise his clients to exit when the stock was in the 70’s. Same with C where he saw exit signals when C was 49.

None of this is earth shattering in my mind. Basic technical analysis also permits you to do the same. Part of the key is how clear is the method in giving you a Buy and Sell signal and finally do you believe it enough to follow it? The real gem in his talk was at the end when he described how he has adapted and follows Dorsey Wright’s Relative Strength matrix to select which ETFs he stays in. This is the essence of how I manage my 401K choices as well. Visiting Dorsey Wright’s website gave this white paper that I will highlight

http://dorseywrightmm.com/downloads/hrs_research/White%20Paper%20-%20Relative%20Strength%20and%20Portfolio%20Management.pdf

There are many more gems there and I will enjoy digging and hunting for them. I believe there is good value in Relative Strength (RS) analysis to select the strongest. Still, I find the drawdowns can be excessive and therefore prefer to use tactical asset allocation models to limit my buy and hold times or use options to reduce the volatility.

I heard Dorsey give a talk at the MTA meeting here in Charlotte last year. He was very confident and impressive. I really like what he is doing. Also, I like IBD. Perhaps the key here is that Paul has evolved and found a good combination in Dorsey Wright’s methods and IBD to put a complete package together.

For full disclosure I must say that a friend of mind did give Paul a large sum of money to manage about 7 years back. Paul did not do much with it and his results were very mediocre. My friend eventually pulled the money out. While Paul gives a great talk and has put some great tools together, I cannot verify how good he is as a money manager at this time. I will stick to my own methods. I still appreciated the talk he gave and will spend more time with using IBD and relative strength as one of my strategies to select what I should put money into and will take a close look at the Dorsey Wright website..
http://dorseywrightmm.com/

And remember  “Up is good and Down is bad, unless you are short the market”.