The future may not be clear, but our commitment is so when you sit with an advisor at Merrill Lynch, we'll put your interests first. Visit mL dot com and learn more about Merrill Lynch, an affiliative Bank of America. Mery Lynch makes available products and services offered by Merrill Lynch. Pierce Veteran Smith Incorporated or Registered Broker Dealer. Remember s I p c V is Masters in Business with Very Riddholtz on Boomberg Radio. This week on the podcast, we have an extra special guest. His name is Ned Davis. He is the founder of the highly regarded Ned Davis Research and author of numerous books. Will talk about that later. Quick interesting story. Long before Masters in Business came along, I had been kicking an idea around about finding these really successful, articulate, intelligent people and sitting down and having a conversation with them, and I think Ned. I'll include the link to this on on the blog post. Ned may have been the very first person and I spoke to UM. We didn't on the radio. We did it uh unedited. It was pretty much straight through. It's very rough, but the concept for this show pretty much came from a conversation I had with him. Uh. He is one of the best regarded technicians around, a technicians technician. If you were at all interested in quantitative technical trading, UM, you're gonna love this. So, with no further ado, my conversation with Ned Davis. My special guest today is Ned Davis. He is the founder of renowned technical research firm ned Davis re Research. Ned was a regular on This Week with Lewis Rukeiser. He frequently graces the pages of Barons and other financial publications. He founded ned Davis Research in and now employees well over a hundred people. He is the author of the Triumph of Contrarian Investing, Markets in Motion and being Right or Making Money, and he's probably best known as a technicians technician. Ned Davis, Welcome to Bloomberg. Thank you for having me. Uh. You know, it's it's really interesting that we have you here because when I first started doing this, before we were broadcasting them on the radio, you were one of the first people I spoke with, uh, and we did a phone interview. I want to say that was like eight or ten years ago. A lot of stuff has happened since then. Let's let's talk a little bit about your background. You were studying French and I believe it was Paris when you decided, um, I'm gonna change my career direction. Tell us, tell us about that incident. Well, actually, I was at the University of North Carolina and I had decided I wanted to be a doctor, and so I was a chemistry major. And then I decided did not want to be a doctor. And I had was spinning part of a year in France, and uh, so I had to graduate with something else. And I really liked French literature, so uh that's the way I graduated as a French major. Um, I wasn't really sure what I wanted to do. So they have these, uh I guess psychological tests that test your aptitude and your interests, and they said my aptitude was in math, but I didn't wasn't interested in math. And what I was interested in it was verbal, but I wasn't any good at verbal. So I's thinking. I had had two jobs in the summer at a company called J. C. Bradford Company as an intern, and I really liked that you're able to write and read and write, and uh, you be able to use your math skills. I said, well, this is this is a perfect for me. So then I ended up going to Harvard Business School, which I thought I was going to learn business, but it's actually a management school, which is not what I wanted. So then I worked went to work full time Bradford Company. So somewhere in the middle of that, I recall you telling a story about study French and France. Someone made a reference about your southern accent and you were kind of thinking, really, I'm not sure if this is for me, am I misremembering, Well, it was. I really did not know much French one. And when I went to France and uh, you know, I was trying to learn the language is best I could. And uh we had a class and the teacher said, oh, thank you for saying that. Uh this was in French, of course, and she said, I always wondered what Lyndon Johnson would sound like speaking French, and now I know, and I'm thinking, Lyndon Johnson can barely speak English. So I decided that, uh, speaking French was not going to be my skill set. So you go to j C. Bradford, you start penning a daily technical report. What will your go to indicators or charts back at that time. I think I was pretty much a traditional chartist at that time and just looking at chart patterns and uh trying to pick out stocks and up trends and stay away from stocks and down trends. But of course I was studying a lot of other uh i'd say, independent research at the time, so I was trying to learn from that. So I pretty much I selt self taught myself my field. What was it like, really beginning your education in the field in what turned out to be a pretty long bear market in the sixties and seventies. Yeah, I actually I think that makes a big difference when you ask people what your outlook is on the market, and I said, when when did you start in the business, And if you started in sixty eight like I did, you were going to live the first fourteen years and a really grueling bear market. So a quote of yours goes something like this, We are on the We are in the business of making mistakes. The only difference between the winners and the losers is that the winners make small mistakes while the losers make big mistakes. Discuss that a bit the whole. One Buffet's got a quote and he says his rules. Two rules for making money. And he said rule number one, don't lose money. And he said rule number two, don't never forget rule number one. So, uh, it's all about compounding interest and compounding your returns. And if you take a horrible loss, uh, you know, if you lose fifty on a stock, u's not a fifty percent rise, it gets you back to even it's a it's a hundred percent rise. So if you have a big loss, it it's really hard to compound your returns. So I knew there was gonna be mistakes in the business. I'm just trying to, you know, is find out a mistake and cut it as quickly as possible. I think that's the key. And early in your career you had made a number of calls, some of which were very big calls. But I have been following your career and reading you for so long. I know you're thinking on predictions and forecasting has evolved a lot. Tell us a little bit about that. Yes, you know, it's a business of forecasting. That's what clients want to want you to do. So that's what I tried to do. And I studied forecasts, and I saw a lot of forecasters make some dramatically correct forecasts, but generally, uh they would make a great forecast and a couple of years later make a terrible forecast. And it was just like a flame out in the night. And I didn't want my career to be that way. And I was lucky enough to have some some some really good forecasts, but I still was suspicious. And when you go back and study the forecasting record, For example, the Federal Reserve Board of Philadelphia has been studying for fifty years consensus a professional economists and they look at their forecast for the following year. There's been seven recessions since nine seventy and the economists as a group, obviously individual economists have done better, but as a group they called none, not a single one of the seven recessions. And interestingly enough, in the last since two thousand and one, they've been eighty I think eighty six percent of the time they've been too low on their forecast. Excuse me, the forecasts have been too high for what the economy has actually done. So it's a very tough field forecasting. You launched your firm in really a couple of recessions, A long bear market. That must have been a really challenging time to launch a new uh services fun Well, actually, you know, we were we sell ourselves as risk managers, and it had been such a long period of high risk that uh people were looking around for risk managers. And uh also it just so happened after that period long period of time six haiti. Most of the time I was with J. C. Bradford, And of course retail brokerage firms are historically bullish and should be. But uh So, anyway, us to the time that I was there, I was negative and it was just about the early period that I was turning more bulish on the long term out look. So that that was a very fortunate thing. And um so I left there. I was a partner Bradford's, but I wanted to, I guess my contribution to the businesses that uh this was really before computers had taken over. In fact, they had just started over, taking over the back offices, and uh so I wanted to make the research that I do computerized so that I could test some of these things that that people saw on charts and see if any of them worked. So you've got a lot of pushback from Bradford saying, hey, I really think we should adapt the new technology to our practice. They weren't very keen on that. Well that the answer basically was if if it ain't broke, don't fix it, which is which is a good answer. But this is something I wanted to do. And there were a couple of Bradford broker ed Mendel and Kent Reagan Stein that they wanted to go out and try this, and uh, we already had a pretty good following, so uh, we were were We were nervous about it obviously, but we um, we didn't use any debt and we put up our own money and uh, you know, we had enough customers and we made a go of it from the beginning, launching with a handful of customers or a decent number of customers. How to make that transition fairly even? What were the first fairly easy? What were the first couple of years like, um, when you were building the business? Well, you know it was I'm not a manager, I I'm a research nerd and that's what I like to do. So uh, Eddie and Kent were in Atlanta, Georgia, which Eddie Mendel and Kent Reagan Stein, and they were. They were in Atlanta, which is where the sales were, and I was in, uh, just outside of Sarasota, Florida, where I lived, and so anyway, I had to put together some people and was uh it was it was fun being a Being a starting manager is not something that I liked doing, but it was fun. So after a few years you developed quite a reputation. And one of the things that Davis Research was known for was these specific research projects requested by clients. In fact, uh recently they were doing more than two thousand UH client generated research projects a year. How did that approach develop and how how how do people approach you with, Hey, I has an idea I want to test out. Well, once we built our own software and had the computers around, you know, my idea actually was building a company similar to what Value Line had built in the fundamental research area. UH. And I remember specifically the date, the date that Arnold Bernhard died because Value Line stock went up big that day, and I thought, this, this is the kind of firm you want to be old that people want your data, they want your charts, they want your studies. They aren't necessarily looking for you know, a guru that walks on water. They so I decided to try to build a company like that. So yes, we set up a client services department where we would say, you have research questions, you bring them here and we'll do the research for you. And we actually we won't share the research with our own research team. It's it's your proprietary product, and uh it's it's been a good product for us. And we've come up. Actually, you know, I don't know come we've come up. I've come up with a lot of ideas on my own, but we probably we say we're client driven, and uh, some of the best ideas I've had, we're client ideas. Give us an example of some typical client client requests or some unusual client requests. Well, you know a lot of times that we'll have a chart and they'll want to see it back further or they'll want to see a different version of it. Uh um. But you know, we had a lot of crisis events when I got into the business, and people said, what did the market do after there's a major crisis event? So we went back and you know, we tried to study history, and you know, there was Pearl Harbor and there was JFK's assassination. I got in the business. You know, Martin Luther King and Robert Kennedy died the first assassinated the first year, and then you had Penn Central and and and on and on. So we put all this together and I saw what the market did, and and uh, it was fascinating. Generally there was a a sell off, as you would expect on the news, but very short term and almost you know, six months to a year later, the market was almost always higher. So we had we had put this study together, and uh we had shown it a couple of times in publications, and then uh, on nine eleven, um, we got a call from We put it out again and we got a call from Barns and they wanted to use it. And uh, you know it as terrible as that tragedy was, the study was very timely and that you know, there was a week cell often it was a very scary time. But uh, the market did recover after that pretty well. So in response to unexpected geopolitical events, markets wobble and then go about resuming the prior trends exactly. Sometimes sometimes you know, they do better. Uh, it's it's it's the logic's a little difficult to understand. But if you're a nervous holder of stock and some bad news comes, uh, you panic out, and uh, then who's left or are strongholders of stock? So you know, it's at that point it's it's hard to get people to sell. After you've gotten the nervous people out, you've got good strongholders of stock. Counterintuitive, but you get a wash out and then you're only left with with people who are not likely to to jump out at any given moment. When the exception to this, of course really and they're not many, but the exception was Lehman, which was a panic event that uh there was systemic and I think that that is a key when you're looking at crisis events. If if if it's going to uh take down the financial system, then and the study is not gonna work. But pretty much anything else, wars, bombings, terror attacks, uh you know, the worst things you can think of, assassination of a president. Uh, these things pretty much all fit the same pattern. Even Lehman Brothers was September eight. Markets had peaked October oh seven, so it had been practically a year of downtrend that wouldn't the only real difference between the trend is Lehman just precipitated in an acceleration. That's partly true, but I think the systemic part to the banking systems critical. Let's talk a little bit about um technical analysis. So you were an early adopter not only of technical analysis, it of technology as well. Tell us how that changed the way you looked at markets. Well, you know, you start off you read Edwards and McGee, a technical analysis book or a lot of other really well written books on chart patterns, and uh, then you start applying that and you, uh you see a head and shoulders bottom, and you say, oh, my goodness, is stuck is turning up? And then you're reading another report and somebody's looking at the same chart and they say, oh, no, that's that's a head and shoulders top, and uh it was almost like, uh, you made your own reality. You looked at a chart and you saw what you wanted to see. So uh, I said that I can't do this. I have to uh have it more quantitative. I've got to test these things and see whether they work or not. So that that was the idea really of going to technology. I also at that point had gotten interested in other people that seemed very successful in the business. One of my mentors was a guy named Edson Gould and Uh. He was a technician, UM, but he also really believed that the stock market and the economy were driven by crowd psychology, and he was also a study or of the Federal Reserve Board. Also became good friends with Marty's why. He started out as a sentiment guy too, and he ended up like me, don't fight the Fed, don't fight the tape. So so Marty's wage is always my answer to the question how come there are no rich technicians? And the answer is there are a ton of very successful people who use technicals as a fundamental basis of their trading and their investment strategy. Did you get a lot of pushback from your work from the fundamental community? I think originally, uh, there were only a handful Alan Shaw Feral. They were really only a handful of technicians that that were UH in high regard, and so it was difficult at first. But you know, again, once you go through a bear market, people look around and say, you know, I need to Uh, I can't just buy and hold all the time without concern over anything. I have to, you know, manage my risks, and so it's gotten obviously a lot more popular. How did technicals differ at the institutional level and the retail level. Well, I think retail was, you know, more interested in just you know, short term movements and stocks, and uh, institutionals are more interested in a big picture, uh, maybe tying it in with the macro and and and the FED and sentiment and a lot longer term things. And I had also gotten interested uh you know in the in the FED, Federal Reserve boards. Uh, you know, emphasis on in the stock market, and so trying to put things in perspective. Guy named Hamilton's Bolton with the bike credit analysts had put together a monetary thermometer which was really one of the first models that they had timing model using a Federal Reserve statistics and I was really fascinated by that. So these days there's a near infinite amount of charting software. You could pretty much access a ton of really highly detailed um technical studies, some of which are are free, some of which are fairly modest modestly priced. What has the ubiquity of computing power and all the software done to the world of trading and investing. Well, it's a it's a it's a good question, and the answers complicated. Uh, there's a lot of good ideas. You know, this happens to be one that fits my psyche on how to invest. But there's a lot of good ideas about how to invest and how to make money. The one key problem is if something gets too popular, it's gonna hurt its effectiveness. So um, but this is true of anything. I remember in the nineteen eighties, which was a big period because it was the start of my company, and uh it was it was a bullmarket period and people didn't need risk advisors for a while, and and uh we got into seven and uh I got really, uh really worried about derivatives and what they could do to the market. But anyway, that are your friends of portfolio insurance or something broad portfolio insurance, which was part of part of using derivatives to do portfolio insurance. And actually I thought portfolio insurance is one of the coolest ideas I've ever heard of it and actually fit exactly what I want to do with my heads work. I want, you know, I want to protect my portfolio and a downtrend and so it was a great idea and it was widely sold on Wall Street and then uh, you know, the mark it started down and unfortunately I was able to to sort to sort of see this one. So anyway that we had, we had a crash that I think was calls really by a great idea that got too popular. So, um, this is the thing when technical analysis gets so popular. Everybody's looking at the same patterns and the same breakouts and acting on them. It's not going to act as well as if you could find something that nobody's looking at. Let's talk a little bit about the stock market and what separates good investors from not so good investors. Uh, you wrote something not too long ago in one of your books, or maybe it was a little while ago. Good investors, successful investors have four basic traits. Their objective, their disciplines, they're flexible, and their risk averse. Is it that simple, It's just those four things. You do that and you're good to be a good investor. Yes, it's complicated when you say those things together because people think, well, discipline is the opposite of flexible. But when we use the term flexible really really thinking about open mindedness and and This is one of the curses in my life, or one of the gifts in my life, is that if there's a debate, I could pretty well take both sides, uh and do a pretty good job. That means you're objective. I have a gift of being able to see both sides. The negative is it's it's hard to be a hundred percent black or white when you can see the world's actually gray. What about what about risk of verse because we're taught that risk aversion often leads people to be too quick to jump out of equities when they should be a little more risk embracing. Yes, well, that's a good question because it happens to be the one piece of my philosophy that it has changed over the years because there's a lot of risk takers that have made a lot of money. But what they do is they manage their risks. So they'll they'll take a big position, but if it if it goes hour or the news changes that they get out. So it's still a matter. It's still a matter of risk management. But I think the term risk averse was came from being in the market from two frankly so, speaking of which those who study history are contemned to repeat its mistakes. How difficult is it for investors to learn the lessons that history presents to us? Well, it's tricky because you want to learn the correct lessons and you don't want to learn the bad lessons, and it's a little hard to know, uh, which it is. So what happens is there will be a period of time and there was a mistake during that period of time, and everybody learns and says, well, I won't make that mistake again. And then times change and periods change in areas change, and uh, everybody's learned that the lesson of that period, but not the next period. So again, I think the real lesson is studying, Uh, studying history is seeing Mania's bubbles saying, uh, you know extremes from extreme pessimism to extreme optimism, and uh, how these end up? How how they end up? And uh, that's the lesson. It's not just put oh portfolio insurances is something I'll never do again. That that's not really the lesson. The lesson is it got too popular, the market got too high, there was too much optimism, and that that that is a terrible combination. That's the lesson to learn. So so between the extremes of of too much pessimism like we saw in eighty seven and seventy three, seventy four and oh three and oh nine, and too much optimism with sixty six, and go through the list sixty six and two thousand and then again in in oh seven, although I don't know if that was as much too much optimism as as you mentioned a systemic problem. Where are we in that spectrum between too much negativity and too much enthusiasm? Yes, I mean it was Templeton that said, uh, bull markets are born and pessimism. They rise on skepticism, they mature on optimism, and they die on euphoria. And uh, I think that's pretty much what we've seen. Uh since two thousand nine, we've gone through those phases. And I think after the election, for for whatever reason, we got we went into the euphoric stage. And you can see this, uh in all kinds of consumer confidence, business confidence, UH CEO confidence, UH soft sentiment data got way way higher than it was for it. But we just this isn't this is an early phase of euphoria. So I don't I don't necessarily think this is the end, but I think you can certainly seem see euphour you and that that's uh, that's a high risk phase. So so what should investors do to manage their risk? What's what's the best approach for someone's listening to this, they have a couple of million dollars in the four oh one K and their investment portfolios, how should they manage that? Well, you know, as if if you're a chartist and that's your your background, you can see formations, you see demand on a chart, or you see trend lines and UM or you just use stop losses below important lows and uh, if the market turns down, you you just get stopped out. Other people might want to right now, the protection the insurance portfolio insurance for portfolios, the vix is very low. Vix is how much it costs to buy options. The vix is very low. You can buy some puts to protect your portfolio, uh, some hedge fund short stocks, you can use, put some money in cash and wait for pullback. So there's a lot lots of things you can do. So is an interesting um question that comes up with the eyes of technical technical analysis, which is thanks to computers, we could pretty much put anything on a chart. How how advisable is it to chart everything you possibly can make? You look at earnings, you could look at everything from GDP to what have you. There really isn't any data series that can't be put on a chart. Now, and that's what we do. I mean, that's what my business does pretty much. And we we actually analyze the economy pretty much the same way we do the stock market, and we use centimon indicators, we use trend indicators. Uh. In the economy, there's a lot of indicators that tend to lead the economy, So we put most of our emphasis on the leading and leading economic indicators. And when they're turning up and are strong, then that's a good sign. So we I do this somewhat. In the stock market, there's certain groups and sectors that tend to lead the market, uh, and so we put our main emphasis on those the trend of those all. So we look for the economy or the stock market, we look for the Federal Reserve Board and what are they doing? Because they control the cost of money and the availability of money, And if you're looking at supplying demand, which is what technical analysis is all about, how can you ignore the Federal Reserve Board? You really can't talk to me about big MO. It's one of my favorite charts of yours. How did how did the idea come about? And what tell us what it actually depicts? Okay, Big MO is just the trend of a hundred hundred industry groups, hundreds of industry groups, and it's the cyclical trends. So we're talking, you know, a year or two kind of trends. Uh, But I called it and put the MO in there. We also look at rates of change, how fast a group is rising or falling in the momentum indicators UM are trends sensitive, but they're not exactly trend indicators, so they can be early. So when you put the trend following indicators and uh, the momentum indicators together, I think you can get a little closer to tops and bottoms, and big motto right now shows about of those industry groups are still in strong uptrends and and that that's a decent figure. It's high neutral, I would say, mili bullish, and we we use below fifty as as a warning sign. So you mentioned UM the rising sentiment indicators earlier. H Someone did a study not too long ago that showed the largest gap ever between soft survey sentiment information and hard actual data. What do you what do you think of that gap between between the two. Well, I think clearly the soft tends to be leading UH leads the hard. So the fact that the soft is strong in the heart is weak UH is not necessarily a bad sign. However, this works much better depending on where you are in a cycle. If you're coming out of a recession and there's a lot of unused labor, unused capital, there's a lot of savings around UH, and then sentiment source will people have the ability to go out and and spend. And we saw this in two thousand nine, two thousand ten. Now we're getting the same kind of sentiment readings now, but we've had nine years of an expansion and and people have very little savings. They're up to their teeth. Uh. You got over a treeon dollars in student debt. You know, I've got a tree in dollars a credit card debt, and you've got a tree in dollars in auto debt. Uh. So it's a lot different things. So, yes, I think the hard we think the hard debt is going to come on, but not by much so since we're talking about sentiment. How noisy is the series of sentiment data. It seems that there's a lot of fairly wild swings over short periods of time. Well, it just depends on who you're you know, what your survey is. If it's futures traders, they're gonna be pretty quick. Uh. You know a C e O s don't change their opinion that often. So it depends. But there there are small surveys and uh, if Trump proved anything, he proved that you know that polls aren't always right. So what we do, Uh, we look at a lot of polls. We also look at what people are doing in terms of option trading, Uh, how optimistic people are, upside volume versus downside volume, a lot of measures of activity. And we put all these together in a composite model. I think we Uh, one of the ones we use as twenty eight indicators in it. So if some of them are are fake news, then you hope the majority picks up the correct picture. What's what's the name of that particular charter And well we have the indie our crowd sentiment poll. We have been speaking with Nid Davis, co founder of nid Davis Research. If you enjoy this conversation, be sure as stick around for the podcast extras, where we keep the digital tape rolling and continue to talk about all things technical. Be sure and check out my daily column at Bloomberg View dot com. Follow me on Twitter at rid Holts. I'm Barry rid Holts. You're listening to Masters in Business on Bloomberg Radio. What could your future hold more than you think because at Merrill Lynch we work with you to create a strategy built around your priorities. Visit mL dot com and learn more about Merrill Lynch. An affiliated Bank of America. Merrill Lynch makes available products and services offered by Merrill Lynch. Pierce, Feder and Smith Incorporated, a registered broker dealer. Remember s I PC. Welcome to the podcast. Thank you so much, ned for doing this. I have to share the funny story. When I first started writing for Bloomberg about three or four years ago, they came to me and said, what would you like to do? There was a whole long story, and the takeaway was I want to sit down with accomplished, intelligent people and have a conversation about their career and their impact on markets and business and what have you. You were one of, if not the first interview I had done, and so I said, like this, like this Ned Davis interview. Here, here's a SoundCloud in bed. Take a look at it. And in hindsight, it's very rough. It's on the phone. The old um the reference from Malcolm Gladwell in Outliers. You do something for ten thousand hours, you eventually get good at it. I haven't quite done a full ten thousand hours, but you're about a hundred and fifty something. We've been doing this now for three years. And when I listened to that interview in preparation for this interview, I have to say you were very patient, very kind, because I was just got awful then. UM, but I really appreciate you coming back and and letting, uh, someone improved version of me have this conversation. UM. So thank you very much for for flying up for this. I've been a fan of your work for forever. We didn't get to talk about the books during the broadcast portion, but I have to ask you a few questions about these because these are really very significant books in the world of investing. The first one that I have to talk about is this one being right, we're making money now collector's edition, you can't find that. I've I've had this for I don't know how long underlined and highlighted. What was the thinking behind writing that book? Well, again, I was, you know, trying to outline my philosophy mainly for clients. But uh that spending time on trying to forecast and be right is interesting. I certainly continue to do that, but really the focus should be on how to make money and so uh and again we use the tape, the trend, the sentiment, and the Federal Reserve Board uh to make money. But I think the one of the big things is, as I mentioned it early, is the magic of compound interest and and this is just a simple math thing that every kid should learn in school. But again, if you have a draw down like twenty nine to thirty two in stocks was eight percent, you have to you have to uh go up five hundred to get back to even. And it took many, many years. So uh, I don't want we didn't want big drawdowns. That's that's the key to making money. And one of the things that I've been thinking about since I read this book so long ago was when people make forecasts, there's a tendency to marry those forecasts, meaning despite evidence coming their way that they're wrong, they stick with the forecast regardless and don't adjust their portfolio appropriately. In other words, they're willing to lose money in order to hang around long enough for their forecast to eventually come true. How dangerous is that? Well, you know, we have another expression that we'd like to use in my shop is we all make our own reality. And this this was shocking the first time I heard it, because I figured reality's reality. But sometimes when I'll be before an audience, I'll say, how many of you are sports fans? Let's say, are you Knicks fans? And I'm in New York And they'll say yes, And I'll say, well, how many of you have ever gone to a game and thought the referee favored the other team? And of course nobody, nobody raises their hand because we see what we want to see. Uh, you know, we want the Knicks or whoever our team is, to win, so we always go to the game and think the referees, uh were for the other team. When the NBA's NBA's actually done studies that show, if anything, it's very slight, but there is a small favor Uh, there's a small advantage for the home team and the calls in an average game. So this is something we see with our own eyes. So it's very easy. You have a position, you want it to work. You tend to read things that confirm your opinion and you don't read things that may not. So this again goes back to that flexibility thing. This is is important. Uh, or or even just say hey, I'm gonna put a stop loss there. If i made a mistake, I made a mistake, I'm done. The sports metaphor is so perfect. I'm a basketball fan. I'm a Knicks fan, and of course Patrick Ewing would never got the call, but Shack and Jordan, No, he's did. I'm not a big college basketball fan. But Joe Besseker of Emerald Asset Management is a huge fan and doing the n I T. I think it was the finals that are played at the Garden. He I get a call one day, Hey, I'm I got courtside seats. You want to come see this. I'm not a basketball fan. If you I'm not a college hoops fan, he goes. If you've never watched the game in the garden courtside, you have to come see this. Okay, So we go watch this really exciting game pretty close. Um, only he's a fan of his alma mater who actually made it. And I'm watching the game and Joe is just distraught because every call is absolutely the worst call ever made to mankind. And RALF, come on, the guy took six steps. He's walking. I have no dog in the fight. I could care less. And I'm like, hey, Joe, that was a step and a half. It's a layup. You're allowed to And it was a moment of clarity that, oh, your subjectivity really affects the way you perceived the wall. It was. It was amazing going to a game where you didn't care who won and watching people's reaction. Yes, I think it was extraordinary. Population Madness of Crowds McKay wrote it, and he said, Uh, an individual taken by themselves is rational. When you put the individual on a crowd, it becomes a blockhead. Uh you know, it's it's just totally Crowd psychology is really really strong. It's overwhelming, it takes all of us over and uh, it's it's really a very different than than an individual psychology. So another book I wanted to ask you about was the triumph of contrarian investing crowds man is and beating the market by going against the grain. So a question I always have about contraining investing investing is, well, Mark's markets have a tendency to go up over the long haul, and we have a tendency to see these long trends. Can you be a contrarian in the midst of a ten or twenty year bull market? Yes, well, that that you know, we like to say we go with the flow. In other ways, we go with the crowd until they reach an extreme and begin to reverse. And it's at that that small moment of time where it pays to be a contrarian. So it's it's a it's a bad mistake to say I'm just gonna go against the crowd. That that will not get you anywhere. You've got to really wait for extremes. And a question I didn't get to during the broadcast portion was about competitors you launched in. Were there any real technicians doing the sort of work you were doing? Then? Who were your competitors as a research firm? I don't think there were really any uh competitors doing technical research. Uh I mentioned earlier, Hamilton Bolton and the bank credit analysts. They did a little bit of technical, a lot of monetary. Uh. And certainly they're they're one of our competitors. You know, I'd like to compete with I s I uh ed Hyman because it's just a champion. Uh And uh there's now Cornerstone Macro Research, there's Rin Maak, Jeff de Grafs, a friend of mine, and uh so I would say that those all now have a technical element to them. So it's broadened out. Given the change in the commission structure that's out there and the shrinking of institutional sales desks. Is this end of the industry getting smaller and less competitive or is it just consolidating with a handful of firms that seems to have figured out how to add value to the process. Uh. You know, it was concentrated by Wall Street banks and now there's there's a lot of independent firms that are doing a great job. So, uh, I don't know it. It has changed. Certainly, commissions have changed. They were fixed when I got into the business. And uh. Uh so it's gotten harder, but the business has changed. It's always changing. So let's talk a little it's always changing. That's that's pretty sage advice. Let's talk about the rise of quantitative and indexing. What what does the rise of low cost passive index in mean to the world of active investing And what does that mean to a firm that sells its research to to money managers. Well, you know, if if everybody's an active manager and they're competing with each other, then um, it's gonna be a horror. It's gonna be very difficult to beat the averages. So they're charging high fees to be active managers, and some of them are very successful, but on average they're they're not doing any better than the market averages. So I think John Bogel had a great idea that to put these index together and uh, low fees and uh this would be a better investment for most people over the long run. And I think I think that's that's true. However, I noticed today I just up and to see a Bloomberg thing where there was a chart and they said there's more index funds now than there are stocks, and uh. So again this is a popular idea. It's a good idea, there's nothing wrong with it, but if it gets too popular, it will blow up, just like all the other big ideas. When does this get too popular? What do we Vanguard is four trillion, three trillion of which is passive, black Rock is five trillion, most of that is passive. At what point, or much of that, I should say, is passive? At what point does this get to be too big? Well, you know, after Al Gore invented the internet, uh no, and we had all the dot com stocks, I I thought, gosh, this has got to be a bubble, certainly, and and of course it continued for for for a number of years, and it's even bigger today. Uh But uh So, I think you can't just say, uh, it's extremely popular. You have to wait till the trends give up a little bit. You have to wait till the FED becomes a little more hostile. And at that point, I think you make the bet passive investing it is done. And I think it's a late phase, lead phase. Okay, nothing nothing nothing wrong with passive investing, nothing wrong with portfolio insurance. There's nothing wrong with growth stocks. It's just when they get too too popular and and we're still not there yet, you're saying we're getting there, which raises which raises the question, and you've written about this a lot, is the role of emotions in investing? How First, how important is it to keep emotions out? And then second what can investor do to to maintain that? Yes, well, that's that's why we put together these sentiment composites. And they ask go Warren Buffett one time the secret of success? And you know he's a fundamental individual value investor, and he said, Oh, our secret is we we try to buy when everybody's fearful, and we try to sell when everybody is greedy. Uh and U. Which is not a fundamental It's not a fundamental thing at all. In fact, to me, it's a very technical thing because when everybody's optimistic, they've already bought, and so who's left to buy? And when everybody's pessimistic again, you've run off all the nervous sellers, so you've got strong sellers of stock. So that's the idea is actually the same thing that Buffett did. Uh. We we try to put these sentiment polls together to see when there's fear and greed, and we try to tell ourselves, oh, I know the news is terrible, but you know, you know, sometimes cloud's part and uh, you know, it's a good time to buy. And by the way, our poll got very very cautious before the election, and uh it uh marks done pretty will since before the election. Is um So you really essentially saying one Buffet is a closet technician? Is that one? Absolutely? Absolutely? And John Templeton I mentioned earlier he was also supposed to be a on a menalist and he described the market and and another one uh uh Buffett said that has really struck home with me. He said, you know, it's not that I like pessimism. I just like the values that pessimism produces. So there you've measure, You've put together now fundamentals, which are values, and you've put together sentiment, which I think is technical. So you do when there's a lot of pessimism, you tend to get better values, and when there's a lot of euphoria, you tend to get an overvalued market. So it's really there's not really a struggle here in the long run between the technician and a fundamentalist. All right, so let's shift over to my ten favorite questions. I asked these of all my guests, UM tell us about the most important thing people don't know about your background. Uh, they probably don't know that I speak French. Do you still speak French? I speak French and so so what what don't they know about you? You once spoke French, but pretty much that's uh, that's faded, you know. I I'm really uh very uh persistent in my work, have been doing this for fifty years. I'm very focused on my work. But uh, I try to have some balance in my life. And uh I have four kids and two grandkids, and uh I don't know exactly what what role I had except being there, but uh, I'm very proud of them, So I think that gives my life some balance. Tell us about some of your early mentors. Well, I mentioned UH Hamilton Bolton, I mentioned UH Edson Gould. UH to really outstanding pioneers. UH named Marty's Waga talked about and we did some research in conjunction with each other. UH. Norman FoST Back UH another guy that did a lot of to try to put technicals into studies and test them historically. Stock Market Logic was the name of his book. And U right now people still doing technical analysis that I do like I do successfully. Jim Stack, who's invest tech and and there's guy Dan Sullivan who does the charters service that has a real time track record that's terrific. And uh so you mentioned Jeff Dera, Um any other technicians We've We've spoken to Jeff de Graf, We've spoken to John Roke. Who else? Who else do you think is an interesting you know? I really, Um, well, I I read a lot. I I try not to. Uh again, it's it's the thing about being at the game, the crowd psychology. Uh. I try to let my charts talk to me, and so I try not to read to too many competitors. Were So you mentioned a number of people who influenced your roach to technical analysis. Any other technicians that were formative to you in your early days. Um, I really like Bob Farrell and Merrill Lynch he uh, you know, Bob Farrell had an opinion, but he uh he would give both sides. Uh, he would give a balanced view and and uh sort of lean one way or the other. And that really appealed to me. I I just did not like the approach that the world's all black or all white. It's a bullish or you know, sell everything. And I just don't think the world worked that way and he was able to pull it off. And uh he he had a lot of good, good rules and uh the ten rules of market investing man, and they're excellent. And you mentioned Alan Shaw earlier, right some people. I believe he was the co founder of the Market Technicians Association and very much an influential UM technico analyst. Um. What what's your relationship with Alan? Uh? I know him and I used to you know, I get I used to read his work and uh again he's a he's a level headed uh and he's a nice guy. He's an honest guy. And uh he helped a lot of people in the business to get into it and taught him stuff. And uh so let's talk a little bit about books. What you mentioned, um, Uh Edwards and McGee Edwards and McGee, Yes, and uh, Charles McKay had the extraordinary popular delusions in the Madness of Crowd. There's been some other books written about manias. I think these are all very very useful books. Uh. A guy named Sobel wrote a book on the Big Board, which is a history of the New York Stock Exchange. Uh So, he's gone over a lot a lot of periods. I like history books. Uh. And then Marty's Way Head, Winning on All Street and Norman Foss pat Market Logic and would be some of my favorites. Uh. What do you what do you read to relax? Do you read anything that's not technical analysis, markets or history? You know? I read like sports. I read about sports. Uh. I don't like to discuss politics, but I like politics. I really liked it. It's gotten more and more fascinating. And um some other fiction I really don't read a lot. Uh. I read just recently my kids maybe read A Boys in the Boat which is a story of rowing and uh uh Washington State that went on and won the Olympics. Uh and uh it's a fascinating book, quite quite interesting. Um So tell us what's changed since you joined the industry. What do you think are the most significant shifts that we've witnessed over the past few decades. Well, it's it's the same thing any anybody would know that we've gone from, you know, uh, drawing with paper and pen and and uh absolutely everybody has about Alan Shaw, uh, Ralph Alkumpora. They all talk tell about charting by hands. What does that do for? Not only that I had a big I had a big wall in my office. Basically my wallpaper were charts that I put up and and mark by hand. And now, of course everything is technology, and uh so I'd say that's that's the biggest change. And there were a lot of I think there were a lot more inefficiencies when I started in the business. If you wanted to study market inefficiencies, you could you could find them. And uh, with algorithms and computers, uh, and all these bright guys doing this stuff, I think there's a there's a lot less of that. So from that standpoint, I think that the business has gotten a lot tougher, and you have to be flexible and you have to adjust because it's changing all the time. When when you were charting by hands versus doing it today where you just push a button on a computer, do you lose anything in the process of not day by day spending forty five minutes putting together however many hundred charts you were doing by hand each day. What's lost when you when that goes away? I gets I thin guess there's some kind of feel, But if you go through enough charts, I think you get the same kind of field. So no, I don't think I don't think I've lost much from that. Um So, given that technology has been the prime driver of changes in the past, what do you think the next major shifts are going to be in the industry. Well, here's the thing. You know, in every age, there's something that comes along that catches people's narrative. And uh, what you wanna do is be in a position that when that, when that changes, that you can take advantage of it. And and you'll read rules. I have rules, and I teach rules and philosophy. But again, if they get too popular, they quit working. And so that's what makes us a fascinating business. It makes it so difficult to forecast. Alan Abelson had this line one time, and I loved it. He said, just just about the time you you learn how to play the game, they change the rules. And uh, so I think there's a lot of truth in that. And so I think that you know what we need to do is is stay flexible, uh, disciplined and um and go against whatever gets overly done. Professor Andrew Low and m I t called it adaptive markets. No matter what the circumstances are, eventually markets adapt to it, and those rules stopped working. Um tell us about a time you uh you failed and what you learned from it? What what was something where gee that didn't work out is expected? What was the takeaway? Well, you know again, uh, I said, one of my rules is don't don't fight the Fed. Well, uh, you know, the FED was tightening right into to thousand and into two thousand seven, and and as soon as uh, well as bear Stearns blew up, they started easing. So you said, well, the market can't go down because the Fed's gonna, you know, gonna protect it. And that's that's one of my key rules. Well, the FED kept easy and the market kept going down. So I didn't This is not a mistake because I saw the trend turning down and I saw the sentiment where it was with with the housing bubble, and uh so that didn't throw me off. But in the late nineteen nineties, uh one of Ghoul's indicators was the dividend yield on the doll and he said, when it gets down below you know, three percent, the markets in trouble. Well it did that in late nine and that I think that's one of the reasons. Uh, you know, the Greenspan said irrational exuberance. But the market kept going up. So uh, that was an indicator that I think it never failed and it felt in that case and it got me too ushes too soon. So what do you do outside of the office to keep either mentally or physically fit? What do you what do you do to relax? Well, I try to work out. We actually have a gym at our at our office, and so I try to do that. I play a little golf and then uh, you know, we we live on the west coast of Florida, and uh, we do quite a bit of boating. My my younger boys are both big fisherman, so I pretty much have to have to get out on the water. You don't fish, you're on the gulf. So I was so, I was gonna say, they're looking for tarpon and bone fish and what else? Do you ever go with them fishing? Well? Sometimes, yeah, what what what are they? What do they take? Tarpan is one of the favorites. But we're a grouper and snapper area. We got some really good fish, full edible. You catch and release the rest we release everything that's not good eating. Yeah, for sure. What sort of advice would you give to a millennial or a recent college graduate who's just beginning their career in markets or interested in technico analysis, how would you advise them? Well, you know, I got into this business, uh, at the at the beginning of an incredible bull market. So I would say, you know, I've had a lot of luck from from a timing standpoint, but I could have quit this business a long time ago, and I continue to work. Uh. And the reason is because I love it and and what I love about it is that one year it's energy that's driving the stock market, and the next year it's housing, so I gotta be a housing expert, and the next year it's geopolitical and and it's just always changing. So I'm a person that loves to learn the world's changing and and it's fascinating. I can get an education, a new education every year, and I get paid paid well to do it. And the markets are fascinating, and uh, you know, to go into an industry, let's say you go into the ill industry and you're stuck there for fourty or fifty years. I mean, I'm in a different industry or there's a different industry, technology, whatever that's driving the market every year. So I think it's a fascinating business. I think people should go in it and uh um, you know I love it. And our final question, what do you know about technical analysis and markets today that you wish you knew back in the early seventies when you when you first started Well, as I said earlier, I I started out as a forecaster, and I think that's uh that's a good way to lose money and be wrong. So uh uh so I I that's one thing I would have gotten into that earlier obviously, And uh, I do think when you look at charts just is the pure technician. A lot of times you see what you want to see, and so I think you've got to try to quantify it, uh as much as possible. So how closely have you followed the field of behavioral economics as it's developed of the past let's call it thirty thirty five years, Because a lot of what you reference on the technical side very much tracks what what the guys like Danny Kahneman and Bob Shiller and Richard Thaller have been saying for for quite a while. You know, there's a lot, like I said, there's a lot of good ideas out there. I think though, if you don't put it in a big macro con context. If you just take one area and you focus on it, then, uh, that's a mistake. So you gotta put it in context. Uh. For example, right now, I'm I'm a I was a huge well I'm a huge fan of the Laugher curve. And Kennedy did it and it worked wonderfully. Cut rates from one to seventy. Reagan came in, he cut them from seventy to fifty. Then he cut them from fifty eight. We had a boom in the sixties, we had a boom in the eighties. Great idea, right, Well, then George Bush tried it in two thousand. Didn't work and because we were in a different phase of the cycle. So when you have a rule and everybody's got a rule, a Kinesian rule, Yes, there was a good, good, good reason for deficits and bailots at one point, right, but it doesn't work at another point in time. So I think this is the problem with this kind of thing, just getting focused on one area. You've got to put it in context. Let me push back on the Laugher rule for a second. When you have very high taxes and you cut them significantly. You get a huge impact. Exactly when when you make minor changes. What did Bush do? Exactly what Trump wants to do thirty five exactly? Nobody remember when when Reagan came in, they were all manner of um, tax shelters and deferments. His tax change immediately led to a whole range of behavioral changes. Accountants, lawyers, investors, Hey, this real estate shell do you have? It's done? You better move your money elsewhere. And a lot of it finds its way into but three or four percent nobody is doing a wholesale revision of it. It's an incentive, but it's very small. It's I you ask pump people, if you drop your next dollar from nine to seventy, what would that make you want to work hard? Yeah? And then you say, wait, what about if you went from thirty nine to thirty five? They went, really, yeah, I'll take the extra cash, but I'm certainly not changing my entire Kennedy did it after two recessions eight and sixty, and Reagan did it after two recessions eighty and eighty two. And now we've had a nine year expansion and we're gonna now we're gonna stimulate cutting taxes. So I just say, there's nothing wrong with the rule, there's nothing wrong with the incentives, but it depends on when it happens, what error went, what the cyclists. That's the problem with having a set mindset. You you referenced your following politics from Afar. Who else do you think has some interesting political theories as to what's going on these days? Uh? You know, I there was a commission that and I think this was Obama's really biggest mistake. But anyway, he had a commission to to look at the fiscal monetary structure Simpson bowls. And it was bipartisan, last bipartisan commission we've had, and uh almost I mean nobody liked it because somebody was getting gored somewhere, was getting something taken away. But uh, I personally felt like that that was a great idea, and uh they just neither the Democrats nor Republicans would do it. But I think essentially that was a lot of the things we needed to do. We have been speaking to Ned Davis of ned Davis Research. If you enjoy this conversation, be sure and check out our other past three years. I don't even know how many we've had of conversations. I would be remiss if I did not think Taylor Riggs, my book of producer, and Michael Batnick, our head of research. Be sure and check out all our other conversations. You can find them on SoundCloud, Bloomberg dot com, Apple iTunes. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. I'm Barry Ridholts. You've been listening to Masters in Business on Bloomberg Radio. 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