Meet the Masters Full Transcription:

Alex Mihajlov: Tommy co-founded Dorsey Wright in 1987. Actually in January of 1987, which was probably about the worst time in the world to start an investment business. Sold his business in 2015 to Nasdaq and it is now part of Nasdaq. Tom is the author of Point and Figure Charting: The Essential Application for Forecasting and Tracking Market Prices. He wrote Thriving as a Broker in the 21st Century and Tom Dorsey’s Trading Tips: A Playbook for Stock Market Success. A regular guest on Fox’s on Business and the Bulls and Bears program and frequently speaks to audiences worldwide on topics related to stock market technical analysis and relative strength investing. Tom is a recipient of the Wharton School of Finance Securities Industry Award Distinguished Speaker Award. He was also named Alumni of the Year 2000 to Virginia Commonwealth University and was granted the Citizen’s Community Award from Governor Charles Robb. Tommy, thank you for being with us.

Alex Mihajlov: So let me set the scene. It’s 1987. You’ve been a broker with Merrill Lynch, and then you went to wait for a security where you were running their options department and you had an epiphany. Talk about that.

Tom Dorsey: Well, I’m a big believer in ships that pass in the night. There are probably so many of you who think back to times when you’ve met someone. Or maybe you think 20 years ago I met someone and if I had just listened or gone in that direction, my life might’ve been somewhat different. And these ships have a tendency to crash into me. When I left being a stock broker at Merrill Lynch, I was given the opportunity to come to Wheat First Securities. Some of you may know the name Wheat First Securities, a big regional firm run by Jim Wheat. Great individual.

Tom Dorsey: And they gave me the opportunity to develop and manage their first option strategy department. So I came across the street, it was exactly across the street, and started the business. And the first person I hired, name was Steve Cain. And he was from Charlotte, North Carolina, and I had searched around Wheat First securities for someone who was really good with stocks. And his name kept coming up, and I wanted to hire from within the company.

Tom Dorsey: And when he came to my department, he brought with him a book. It was called the Three-point Reversal Method of Point & Figure Stock Market Trading, not something most people would wrap up in bed at night and read. But he said, “I’d like you to read this because it’s the operating system in my mind. When I come to you with a stock or a sector or the markets or things like that,” he said, “You’ll understand how I think.”

Tom Dorsey: I said, “Okay, I’ll do that.” So I went to Virginia Beach that weekend and began reading the book and got to the third paragraph of the introduction and my life profoundly changed that moment. If anyone of you have ever had the epiphany in your life, you’ll understand what I mean. That all of a sudden you know why God put you here on Earth, what you were supposed to do with that, and what you should do the rest of your life. And I’m only on the introduction of the book, and here’s what I read that so profoundly changed my life.

Tom Dorsey: Understand first that I have a degree in economics and probably the most important class I had at the university was ECON 101. I probably could’ve left with Statistics 101 and ECON 101, give you my degree, and that’s all I need. I can’t remember anything else that I took. But economics stuck in my mind. I used to go to the supermarket without a penny in my pocket, and I would walk around the supermarket and I would be testing myself with what’s called elasticity of demand. And I would go to the drugstore, drug section, and I’d think insulin, perfectly inelastic. A given change in price yields no change in demand. Then I would go over to the meat department and I would think, unitarily elastic. A given change in price will yield a unitary change in demand. And people will go and when steak gets too expensive, they’ll switch to chicken.

Tom Dorsey: And I would continue on through all the elasticity of demand, walk out to my car without buying anything because I had no money, I was on GI bill. I think they paid me $115 a month, something like that, and I drove a car that had no reverse. And I learned something about life driving that car. You always go forward. Wherever you park, make sure you can come out forward or you’re going to get a few people to help you back out.

Tom Dorsey: So I read that introduction, and I got to this piece right here. It’s the third paragraph. It says, “The basic premise of point and figure charting and trading is the law of supply and demand.” And I stopped right there for a second because this is not something that Merrill Lynch ever discussed. You simply got research reports, big, thick research reports, that you were supposed to call customers and tell them how great the stock was, and the management was great, and this is the next greatest product ever since sliced bread. And so I kind of forgot my economics education. And when I read that first sentence, “The basic premise of point and figure charting and trading is that the law of supply and demand and nothing else governs the price of a stock.”

Tom Dorsey: And I thought for a minute, I said, “Oh my God. Let me go further.” He said, “When demand exceeds supply, the price of a stock goes up. When supply exceeds demand, the price of a stock goes down. Supply and demand are contesting for supremacy, the price of a stock moves sideways.” And I stopped for a moment and I said, “Do you know what? This is the only reason that any price changes.” It’s the irrefutable law of supply and demand. And it all comes down to price. It’s not fundamentals. It’s not something some analyst wrote about and said this is a great company.

Tom Dorsey: If their people are not willing to buy the stock, then it’s not going to go higher. If people are willing to buy the stock and whether there are more buyers than sellers willing to sell, the price of the stock will rise. If there are more sellers than buyers willing to buy, the price of the stock will decline. It comes to basic physics. Things in motion will tend to stay in motion until acted upon by an opposite force. And when you think about supply and demand, if a stock is moving higher, demand’s in control and it will continue moving higher until acted upon by an opposite force, which would be supply.

Tom Dorsey: And I thought to myself, if I look at a funnel and I took all the things that you see on television, all the people telling you that this is the way you have to go and this is what you have to do, and you jam it down a funnel. And you come to the end of that, right to the tip of the funnel, what comes out is price. So why bother with all the rest of the things that you’re jamming down the funnel? Why not go directly to price, which is the final answer?

Tom Dorsey: And this was the epiphany to me. And I sat back that moment, when I finished that paragraph, and I knew that this is something I had to, number one, learn, and number two had to teach this to my brothers and sisters in this business for the rest of my life. And it was something that every stock broker that I knew didn’t use. They didn’t have this. They didn’t do this. They didn’t think this way. So I knew that I had to start my own company and I couldn’t go to Wheat First Securities and say, “Okay, I know the epiphany. I know what I have to do, so I’m leaving. I’m only in here for my first week, but I’m quitting.” No way. I ran that department for nine years to build my knowledge, to understand this totally. And I knew I had to start my own company by age 40, so at 39 I put my resignation in and walked down the street to start Dorsey, Wright & Associates.

Tom Dorsey: And my vision at that point was not money at all. It was a little old lady who lived in the country that would have a better life and a better retirement because she dealt with an advisor who was trained and supported by us. That was it. It was nothing more. Money was of no consequence, and that’s why the company was started. And that was the vision that Dorsey, Wright & Associates has had all these years, is to help other people. And that’s what we’re really all about. The business did do well, but it did well because we did the right thing and we did it for the right reasons.

Alex Mihajlov: All right.

Blake Paro: So you talk about the little old lady in the country and doing right for people. One of your first portfolios was called The People’s Portfolio. Can you tell us a little bit about that and how that got started?

Tom Dorsey: The People’s Portfolio actually came a while later. I was looking out the window one day and I saw this Hispanic gentleman driving one of these big grass cutters and he was driving it around. And I thought to myself, who helps this gentleman? If he’s got $3,000 saved in the bank, does he go to Merrill Lynch and open an account? No, no one will take him. How does he get any advice? How does he do anything? And I said to myself, “I’m going to create what’s called a People’s Portfolio.” Kind of a Karl Marx bend on it, but it’s for the people, the people that are kind of downtrodden and don’t have much money.

Tom Dorsey: And I looked at the Standard & Poor’s 500. There are two different Standard & Poor’s 500. Most people don’t realize that. A lot of people want to look at passive investing today and just buy the S&P 500. But I ask them, “Which one do you want to buy?” There are two different ones that trade totally differently. One is capitalization weighted, which is like Congress. The states with the most congressman have the most voice in Congress. California has more voice than Rhode Island. But then there’s also the Senate, which has two senators for every state. It’s equal weighted. There’s a Standard & Poor’s 500 that’s equal weighted. The smallest stock has just as much voice as the largest stock.

Tom Dorsey: Those two S&P 500s, the exact same 500 stocks, trade totally differently. So I said, “Let’s put those together.” Let’s do a relative strength chart on both of those and determine which one we should own, and then let’s add to it money market At Dorsey Wright we have money market, which is MNYMKT. That’s a symbol like IBM or GM for General Motors or AAPL for Apple. This is MNYMKT, and it’s money market. It’s something that’s stable. I’m going to put that in the mix with the three of them.

Tom Dorsey: Whichever one of those has the best relative strength, and the way we calculate is by dividing one thing by another, getting a number, and plotting it on a chart with Xs and Os. That’s it. This is something that fourth graders can do. If they’ve gotten to the point where they can understand what that horizontal line is with a dot on top and a dot on the bottom, they’re home free. They can understand exactly what we do. So we put the three of those together. Whichever one has the best relative strength, 100% of the portfolio goes in it. So it’s simple, it’s straightforward, and has an automatic risk management lever in it, which is the money market.

Tom Dorsey: So that eventually became an exchange traded fund. DWPP is the symbol. It actually trades on an exchange, and it’s available for anyone to own. So it’s simple, straightforward, and the smallest investor can own it. Something grandchildren can own. It’s got risk management built into it. So out of all the things that we have done all these years, I think I’m probably most proud of the People’s Portfolio.

Alex Mihajlov: So you’ve always preached at all your institutes to have a process and follow your instruments. You have a great story about not following your instruments one time and where that led you. Give us the summary on that.

Tom Dorsey: Well Alex, okay, you brought up the story. I used to fly fixed wing planes when I was pretty young. This was back in the 60s. Most of you probably weren’t around by then. It’s a young group here, I see. So I was flying a plane. I went to Palm Springs for lunch and I was coming back to Brown Field outside of San Diego and I was getting lost. This is back before you had GPS. You had a sectional chart on your lap and you were trying to match up the train tracks with where you were. Some of you might be pilots here. You understand what I mean back in the day, and I was lost. And I knew that if I could just get to the coast, if I could just see the ocean, I would be in good shape. When I get to the coast, I’ll make a left turn and I’ll be at Brown Field.

Tom Dorsey: So, as I was going along, I’m looking out the windshield and I see the ocean. No question, I’m going west. I got it made now. I see the ocean. And I looked at my compass and it said you’re flying southeast. I said, “It can’t be southeast, I see the ocean.” This is west. I’m flying west. The compass is wrong. And as I continued flying, the compass kept saying you’re going southeast. And I said, “No, I can’t be because I see the ocean.” And that ocean was sky. It wasn’t ocean at all. Where I ended up was 18 miles south of Tecate, Mexico and I had to put that plane down in a horse pasture. And up comes a pickup truck full of gentlemen who appeared to be Mexican. And I asked the driver, I said, “Am I in Mexico?” And he said, “Si, senor.” And I thought, this is going to be a very bad day for me.

Tom Dorsey: I ended up getting back to Brown Field, thank God, because as they were taking me through these desert roads to get to Tecate, an Army officer or a Navy officer was camping with this family and I saw this California plates. Stopped the car, and he took me back to Brown Field, and that night we flew back in and found the plane. I don’t know how I found it. Another godsend, I think. I paid a guy my last $2 when I landed. I paid him to watch the plane, and it was all I had in my pocket was $2. That was it. And he was standing there when I got back. He was watching the plane that whole day and into the evening, and we put a couple of five gallon cans of gas in the plane and flew it back through San Diego customs.

Tom Dorsey: But the whole idea, what I learned from that, was to follow your instruments. And what we do at Dorsey, Wright & Associates is we have basically resurrected a method of technical analysis that was created Charles Dow in the late 1800s. And Charles Dow was the first editor of The Wall Street Journal and the founder of the Dow Jones Industrial Average. And he was primarily a fundamentalist, but he knew the reasons the movement was the irrefutable law of supply and demand. And he began creating a methodology called figuring in which he would simply right the figures of the stock in the box of a chart. And as a stock went from 20 to 30, he would write 25, 26, 27, 28, to 30, and then as a stock would pull back as they move up and down, he would simply shift columns and reverse the order. 29, 28, 27, 26, 25, and what happened was he noticed that there were some patterns that had a tendency to repeat themselves.

Tom Dorsey: Well, in the early 1900s they look at this and said, “It’s too difficult to see exactly where the stock is rising and declining. Let’s change this around to Xs represent the stock going up, Os represent the stock going down, and it hasn’t changed since then. And it will never change. That’s all it is is Xs and Os, nothing more, nothing less, nothing sophisticated. It’s not artificial intelligence. It’s a concept that we have taught to children in elementary schools. And from that point at Dorsey, Wright & Associates, I resurrected this lost art. No one did this anymore. It was something that was lost back in the 1960s. I resurrected it. It’s nothing I created, but I resurrected this and made it the mainstay of Dorsey, Wright & Associates and began teaching this to advisors. And lo and behold, we made it 30 years before we sold to Nasdaq. But that’s really how it all began.

Blake Paro: So we had a great discussion this afternoon about stuff you’re reading. Why don’t you tell us a couple of your favorite books and what you’re liking? You had some great stories.

Tom Dorsey: Well, one of the books that I’m reading now is Astroball. I’m fascinated with baseball and like, what is that book, Moneyball. Many of you probably read that about statistics in baseball. Incredibly interesting. Astroball takes it even further in what’s going on with how the statistical analysis is helping teams that you never would have thought could ever win a pennant are doing it. And it’s all statistics. And it’s the kind of thing that’s happening in our business also.

Tom Dorsey: Artificial intelligence is being used on a daily basis in our business. Hedge funds will use artificial intelligence to make buys and sells. What we do at Dorsey, Wright & Associates is we use computers extensively, but the computers are not artificial intelligence. They’re simply doing what we tell it to do, and that’s create these charts with Xs and Os. Back 30 years ago when we looked at a relative strength chart if I was going to compare Coca-Cola to Pepsi, if I went to any brokerage firm. Let’s say I went to Merrill Lynch and I said, “Give me a report on Coca-Cola.” It would be fundamentally ranked number one. It’s a great company. It’s a great brand in America. It’s a number one company, solid. And I went to Morgan Stanley and I said, “Give me a report on Pepsi Cola.” And you’ll find Pepsi Cola equally as strong. A brand name, an American brand name. It’s a great company.

Tom Dorsey: So if you were only allowed to buy one or the other, how would you determine on a fundamental basis which one you wanted to own? They’re both equally fundamentally sound. Now it comes to relative strength. Let’s put it through an arm wrestling contest. So what we would do is we would divide one by the other. So let’s say Coca-Cola, we’ll pull a number out of the air, is 100 and Pepsi Cola was 50. I would divide Coke 100 by 50, I’d get the number 2. I add a 0 to make it easier to chart and we then chart it on the Xs and Os. These are very long-term in nature. The signals on a relative strength chart can last two to two and a half years.

Tom Dorsey: But it will tell me, if it’s in a column of Xs and rising, that I should own the numerator. And if it’s in a column of Os and declining, I should own the denominator. And this gives us an edge by finding something that’s fundamentally sound but then determining which one is the stronger of the two in arm wrestling.

Tom Dorsey: So you might say to me then, “Well, that’s interesting. I should own Pepsi Cola right now. Pepsi has beaten Coca-Cola. But I’m interested in the whole beverage sector.” Well, the beverage sector has 70 different stocks in it. So now what do we do? Well, we have to take each one of those stocks and do that same division 70 times. 1, 2, 3, 70 times, and then we add up the ones that have won the wrestling contest, are in Xs, and that’s the strongest. And we’ll buy the top five of that group. So that’s the kind of thing that we do in all of the products that we have created the trade on exchanges is something that simple.

Tom Dorsey: And back 30 years ago, we used to do that by hand. We could do maybe 200 of those stocks a week. We knew it was important, but we had no computers 30 years ago. I mean, to us a fax machine was high technology. Excuse me, was high technology. Now today, instead of being able to do 200 a week, we do 16 million per night. We compare everything to everything. We compare Indonesia to China, China to France, France to Germany, France to United States, United States sectors to everything you can think of in a comparison and contrast way. We do 16 million of those a night. In fact, our models then are created by this.

Tom Dorsey: So let’s say I’m interested in the beverage sector, like I mentioned. We would put that through the paces and the top five out of that sector in relative strength will own those. Now, these will move around, also. So very much like baseball, if you look at a pitcher that throws his first ball in a game and that first pitch is a ball, you you might be sitting in the stands saying, “Get him out.” Apparently his relative strength is bad. He’s going to be a terrible pitcher. He threw a ball. But you can’t do that. You have to give him a few innings, and after four or five innings, he’s walked too many people. He’s hit a few people with the ball. A few home runs were hit off him.

Tom Dorsey: That’s when you see the coach go out to the mound where he’s pitching. And he says, “Joe, it’s not your day. Let’s go into the dugout. Keep your suit on. I’m going to replace you with somebody from the bullpen.” And that bullpen is the rest of the stocks in that list that we’re calculating. So number five in the list that we created for this model may start, relative strength, start to move down, but it hasn’t moved down enough. There isn’t enough home runs hit on him yet. He hasn’t walked enough people yet to take him out. Once he does that, once he gets to a particular level that we have calculated, is the point at which he has to be replaced, then that comes out of those five and the next strongest one goes in.

Tom Dorsey: And it’s that simple. An email goes out to an advisor. Advisor then goes to his accounts, makes the trade, makes the change, and the model continues to run. When I look at this, I think of a Rembrandt painting. I mean, it’s beautiful to me how this works. I even run an account in Indonesia at esamuel.com. I run the account on Indonesian stocks, excuse me, Indonesian stocks. I can’t pronounce the names. They’re in rupiahs, and I’ve run it for 14 years. Whenever a change takes place and I get an email saying, “This needs to be sold,” like I did last night, isatellite in Indonesia needed to be sold from the account. I simply forward the email that I got from Dorsey Wright to Juliana who’s my broker in Indonesia, Jakarta, and she makes the transaction.

Tom Dorsey: So I actually run an Indonesian portfolio in rupiahs in stocks I can’t even pronounce. But the point is it’s all price. It’s all price generated. It’s relative strength. It’s the arm wrestling contest, and it doesn’t matter to me whether it’s a Chinese stock or a French stock. I also run our international portfolios in Portugal at Dif Brokerage. And it’s so beautiful, it’s simple. And when you look at these models, it’s a matter of taking the models and bolting some of them together. You may look at the, let’s say, First Trust sector rotation model, and you want that to be in your account and that’s part of your account. You may also look at the iShares fixed income model. Again, same thing, fixed income. Now we’ve bolted that onto the portfolio. We may even have a commodity that we bolt onto the portfolio.

Tom Dorsey: But everything is run with the same concept, the same strategy, and you’re emailed. It’s not AI. It’s not artificial intelligence. It’s things that we did 30 years ago by hand that we just let the computer do it now. So it’s beautiful where we have come today with technology where years ago, I mean, I had no concept that we could ever get to this point. But we’re here and it takes educated advisors to be able to handle these orders and to handle these models, and each one of you in your accounts, you have a different reason why you might want a different type of thing. But it can be automatically run with the same concepts that we use.

Blake Paro: So you mentioned technology and how far we’ve come in 30 years. What would you say to somebody today who says, “What value do you bring with this methodology when I can just go buy a passive index or a passive ETF?”

Tom Dorsey: Good question. I would have a nice conversation. I would take this person to lunch and say, “Let’s talk about being passive. Number one, do you know which Standard and Poor’s 500 you would want to own?” And they probably would say, “What do you mean which Standard and Poor’s 500? There are two different ones that trade totally differently. Which one is it?” And then also within the confines of the Standard and Poor’s indexes, there is also a Standard and Poor’s 500 growth index in which it has growth stocks. There’s also a Standard and Poor’s 500 value index. It’s a value index. Which one of those would you like to own? There’s a mid-cap growth, mid-cap value. There’s small-cap growth, small-cap value. There’s a number of different indexes within the Standard and Poor’s 500 lineup that makes it much more difficult than just saying, “I want to be passive.”

Tom Dorsey: And if you went back to the year 2000, let’s just say 18 or 19 years ago. And you said, “If I did this and took the relative strength, what would I have owned? What would have given me the best returns for this period of time?” And the answer is the small-cap, symbol SML. These are large companies. They’re billion dollar companies. Because they’re Standard and Poor’s 500 small-cap doesn’t mean they’re little, small companies. These are billion dollar companies. But that has done the absolute companies.

Tom Dorsey: Well, within the small-cap world, which one has done the best? [inaudible 00:28:04] Small-cap growth. What’s been second in that? Second was mid-cap. So you would have wanted to have some mid-cap in there also. But what mid-cap do you want? Value or growth, or equal weighted, or capitalization weighted? If you want the large-caps, which one of those do you want in the mix? So it’s not so easy to say, “I just want to index.” Because if you just buy the Standard and Poor’s 500, what you have done is elevate yourself to the top 2% of all money managers in the world. So because 92% of all money managers in the world never outperform the S&P 500.

Tom Dorsey: But let’s look at it this way. Let’s say the S&P 500 is down 20% this year. We’ve seen this happen. And your money manager’s down 19%. He just outperformed. He just won himself a trip to Bermuda. He’s patted on the back. He’s probably going to be on CNBC. You beat the S&P now, but you just lost 18%. In the next year, the same thing happens and he beats the S&P. He’s in the top 8%, but you just lost 18 more percent. Now you’re down 36%. Is that what you really want? Is that what you’re looking to do to just buy the Standard and Poor’s 500, is to be in that top 8%? Or is it risk management that you want to be involved in?

Tom Dorsey: Things like Guggenheim bullet chairs. Which for me, if you look at my portfolio, 50% of my net worth is in a laddered portfolio of municipal bonds, primarily Virginia because I like it totally state and federal tax free. But it’s laddered. What does laddered mean? Laddered means that every year, some of these bonds are coming due and I get my money back because I buy high quality bonds. These aren’t fly by night things. So I get my money back, and if interest rates have risen, then I’m going to be reinvesting that in higher rates. So it doesn’t matter to me whether rates rise or don’t rise.

Tom Dorsey: I could get stuck in a fund of fixed income where if rates continue to rise for, let’s say years, which could happen, then the value of my bond fund continues to go down. But in a laddered portfolio, that’s not the case. So for me, I want that piece of my portfolio to be laddered and then I’ll take a quarter of my portfolio and I run our models. And these are on a platform where it doesn’t cost me anything to do these trades, and I let the models run themselves. And the other quarter, which I run at Charles Schwab, are much more sophisticated option strategies. And I run that with my son Thomas, who owns a pool hall. He became an expert in options on his own by YouTube and so he runs portfolios for me also. So that’s kind of what I do with my own money along with some private equity investing and angel investing. But that’s … I don’t know if I answered the question or not.

Alex Mihajlov: Last question from us then we’ll open it up to the audience. You tell a great story about a conversation with Hugh McColl. And I’ve spent the day with you, and I guess I want to hear, and I know what the answer is. But I want to hear, what are you grateful for at this point in your life, and what has really been the meaning of it all for you?

Tom Dorsey: Well, Hugh McColl is a good friend of mine and, as you all are aware, he’s the past CEO of Bank of America. Great individual and I used to come down here and have lunch with him every quarter. And one lunch, I’ll never forget this. He said, “Tom,” he said, “I’ve been thinking about something lately.” And I said, “What’s that, Hugh?” He said, “TL.” I said, “What’s TL?” He said, “Time left.” He said, “What are we going to do with time left?” He said, “And then you got to put a Q in front of that, QTL. Quality time left. What are we going to do with that, Tom?”

Tom Dorsey: And I started thinking about that, and I see some of you here that are my age, 71. And I started thinking about that. What am I going to do with QTL and TL? It makes me think about things. I could be running up on statistics here in a few years, and he really made me think about that. And I think about I tall the time. So I try to spend much more time with my grandchildren and do those kinds of things, but that’s pretty much it with Hugh and I. We’re good friends, and I’ll never forget that lunch with him with TL.

Alex Mihajlov: If you’re okay, we’re taking a couple questions from the audience.

Tom Dorsey: All right.

Alex Mihajlov: Has anybody got questions?

Speaker 4: Anybody?

Blake Paro: Any kind of question. [inaudible 00:33:15]

Speaker 4: I don’t know. This could blow up. I don’t know [inaudible 00:33:22].

Speaker 5: Can you hear me? Yeah, okay. Somebody walks into you with $5 million, $10 million, make up the number. And they say, “I don’t know anything about anything.” What do you tell them?

Tom Dorsey: $5 million, you may find that you have another $50 million somewhere else. And that would dictate the aggressiveness that we might have. But if it was the kind of thing that I just won the lottery and here’s I’ve got $5 million, what are we going to do? We’re going to sit down and talk about it. And I would prefer, I would look at doing strategies like the Dogs of the Dow and this forces you, in this strategy, to own Dow Jones stocks that are down and out. You rank once a year the Dow Jones stocks that have the highest yield, and then you select the five lowest price of the highest yield and you hold them for one year.

Tom Dorsey: I would want you to do a laddered bond portfolio, and I would have my bond department handle that because you need inventory and you need people who really understand this. And I would probably want it to be mostly North Carolina bonds. Good state, good, strong state. And then from there I might do some option writing, some covered writing to increase your income. If income wasn’t it, then we may do something else. But I would be more conservative with what you do. I learn the older I get, the more I want to drive a straight line.

Tom Dorsey: I think back when I was a stock broker at Merrill Lynch, if I was driving up I-95 and there was a backup, I would have got off the road on Rural Route 15 and I’d have taken that north and got onto Rural Route 682. Excuse me, and then I would take a left on Rural Route 584, and I’m trying to beat the traffic. And then I would get back on 95 and find out I’m 40 miles less than what I was before. And now, I was telling Jack Bogle who founded Vanguard and he’s the father of index option, index trading. I was at a cocktail party with him in New York City and I went up to him. I said, “Jack?” I said, “Do you know, the older I get, the more I get just like you.” And he said, “What do you mean?” I said, “Drive a straight line.”

Tom Dorsey: That’s the key to success in this business, is there’s no pie in the sky. You’ve just got to be sensible about what you do, take your time, be more conservative with what you do, and let it happen from there on. So I don’t know if that answered your question, but that’d probably be the direction I would take.

Speaker 4: Anyone else?

Speaker 6: You mentioned Wachovia, and I was this weekend in the mountains of North Carolina talking to some people that came up. Can you just give us a little history lesson about what happened to Wachovia and could that have been predicted? Could you have stopped people from losing $20 million and up? Some people from Winston-Salem apparently took a bath. A lot of people did. How did you see it? Did you see that developing, and what could have been done to prevent that for investors?

Tom Dorsey: We did because we watch a lot, and the system forces us to watch a lot. We can put alerts in that, when something happens, we want to know it. And all of a sudden in one of our reports, I can’t remember the exact one, but we could probably find it and pull it out for you. You might be interested in reading it. Wachovia was at 51, the relative strength had turned negative on that stock, and we recommended selling it at that point, at 51. At the same time, Merrill Lynch stock had also turned negative at 70-something, and was one other brokerage firm that had turned negative on its relative strength chart. So in that report we alerted our clients that these things had happened and you’re probably better off being out of the stock than in the stock.

Tom Dorsey: I remember some advisors coming to me at our broker institute when they were in Merrill Lynch stock and Merrill Lynch continued to tell them that there’s nothing wrong with the company. Everything’s fantastic. Well, fundamentally that’s probably the case. However, the relative strength chart changed. Now, I want to read you something here. Let me find this for a second. Because I was going to do a PowerPoint presentation and I want to read you what Anthony Noto said. Here he is. Here is a director at Goldman Sachs, and this comes directly from the New York Times, December 31st, the year 2000.

Tom Dorsey: And it’s entitled, How Did So Many Get it Wrong? Anthony Noto at Goldman Sachs sums the situation up quite [inaudible 00:39:01] is an internet analyst who acquired the article [inaudible 00:39:07] upbeat on shares that were trading at a fraction of their former value. The article goes on to say he lowered his rating on some of those stocks [inaudible 00:39:16] by 98.2% during the previous 52 weeks. They quote him now. He says, “Our research is driven by fundamental analysis and is not influenced by anything else.” And he’s being honest. I take my hat off to him for being honest here. He went on to explain that the companies he follows had their stock prices drop last spring, not because their operations were failing, but because market psychology had changed.

Tom Dorsey: Wait a minute. Market psychology had changed. What does he mean? Why do investors decide to sell rather than buy? Things in motion will stay in motion until acted upon by an opposite force, and what happened here was market psychology changed. Investors decided to sell. [inaudible 00:40:07] Were fundamentally sound. He downgraded the stocks much later because only then had it become clear through his research that the company’s results were deteriorating. “In hindsight,” he said, “We should have lowered our ratings sooner. We regret that,” unquote.

Tom Dorsey: So here is one of the finest fundamental analysts that you’ll find. Goldman Sachs, a director of Goldman Sachs, telling you exactly how it is. That good companies can fall on bad luck simply because investor psychology changes. And if you’re watching the investing psychology, that comes down to price. When price begins to change, that’s the end. That’s the bottom of that funnel. And if you’re watching this, you’ll begin to see it happen.

Tom Dorsey: One of the interesting things that happened to us too, and you don’t often get situations like this where we follow, also, economic indicators. And these are very long-term. They go back to the 1930s. They don’t move around at all. But we set them to point and figure charts, to Xs and Os. And then we told the system, if one of these indicators goes into a column of Os or exceeds a previous O, giving a sell signal, email me.

Tom Dorsey: Well, all of a sudden I got an email from these economic indicators on housing starts. Housing starts had given a buy signal on the chart for the first time in, I can’t tell you how many years. But what it did is it alerted us because the computer system could see it. We told the computer system, “Let us know if it happens.” It happened, and we were able to make a big to-do about buying the housing starts and housing business. Anything that related to it, from nails, screws, wood, lumber, futures, paint, anything that you can think of for the housing industry. That was in 2011, I think. It was November, 2011. That industry did extremely well.

Tom Dorsey: No brilliance on our part. All we told the system was, “If this happens, email us.” If it doesn’t happen, I don’t need to see it. So things like that happen every now and then, and because we use computers so extensively, and again, it’s not artificial intelligence. It’s telling that computer, “Watch for anything that we want you to watch for. If a column of Xs exceeds the previous column of Xs, let us know.” And then we just have the ability to look at it.

Tom Dorsey: Alex and the crew here, they have these alerts set on your portfolios. They have alerts set. They’re going to be notified when something happens and requires his attention. And then if he needs to call you and he’s not on a do it himself basis, then he’ll call you. He’s been notified. But that’s what computers do for us today. It’s not artificial intelligence by any stretch of the imagination. It’s stuff we did by hand. And you know the longest time before we had computers, we used to update 2,500 stocks by hand every day. Every single day, 5 analysts would do 500 stocks, pass that book onto the next analyst. So by the end of the week, each analyst had seen every one of those 2,500 stocks. When we finally got our system where it was computerized, I had to pry those books out of their hands. So we did stuff by hand for the longest time.

Alex Mihajlov: Do we got any other questions?

Speaker 4: One more.

Speaker 7: So this may be a question that may only serve myself, but that’s all right. So I’m just starting trading, getting some money in the stock market. I’m mid-20s and I’m wondering, what …

Speaker 7: Oh, can you hear me now?

Tom Dorsey: I’m getting older.

Speaker 7: No worries. So I’m just getting started in the stock market. I’m mid-20s, and I’m purely trading myself just off technicals. And I wanted to see what kind of advice you had for a younger trader who’s getting started and what kind of things you’d suggest looking out for.

Speaker 4: So … Jeez!

Alex Mihajlov: The problem is we need a…

Speaker 4: Yeah. A young person.

Tom Dorsey: Well, what a young person does, and this is going to sound self-serving and I don’t mean it to be. I want you to get a copy of my book and read it cover to cover. You’ll enjoy the book. It’ll be like I’m sitting with you on the couch talking to you, and it’s the only method of technical analysis that I subscribe to. For portfolio management I don’t believe in any other method. This is the only thing that I have seen that made sense to me, that I could embrace, and that I would teach others for the rest of my life. So I would get a copy of my book, fourth edition. Read it cover to cover, and it will be an awakening for you.

Tom Dorsey: Then what you want to do is begin to maintain some charts by hand. You’ll never get a better feel than doing it by hand, and the beauty about the point and figure chart is it’s not updated every day. It’s only consequential moves. Point and figure chart shouts at your when others simply whisper. When you look at a bar chart, it’s updated every day no matter how inconsequential the move is. The point and figure chart is not. So that’s why we could do 2,500 stocks every single day. But I would suggest that you do that.

Tom Dorsey: And then what you can do, if you want to be a value investor, wonderful. You can get any kind of service that will give you a lists of value stocks and take those stocks and put them through the mix and find the ones with the best relative strength. And that’s where you want to be, is in those stocks. There was a methodology that I use too in my portfolios that I really like. It’s called probe trading, and it’s something that commodity traders did many, many years ago. Because commodity contracts, they’re big contracts and they can be dangerous if you don’t understand them.

Tom Dorsey: What they would do is they would buy one contract, let’s say, of pork bellies back then or shell eggs or soybeans. And they’re looking for a trend, and it’s called probing. They’re probing for a trend. And with the point and figure chart, the commodity would be on a buy signal. You’d see it, plain and simple. It’s above the support line, which is always a 45 degree angle. It’s on I-95 north, and you buy one contract. And then you’d set your stop, if that contract exceeds a previous bottom in a column of Os, you’re out. You wait until it gives another buy signal where a column of Xs exceeds the previous column of Xs, and you’re back in probing again. Each time it subsequently gives another buy signal, you add a contract.

Tom Dorsey: I do this with stock. So I might start with 500 shares of a particular stock. Its relative strength is positive. It’s above the trend line. It’s on I-95 north. I like the market. The offensive team is on the field. And then what I’ll do is the second I buy it, I’ll put a stop in, good till canceled, on the first sell signal. That’s simply a column of Os that exceeds the previous column of Os. That’s it. I mean, a seventh grader can understand that. If that’s not hit and the stock reverses back up and gives a buy signal, column of Xs exceeding a previous column of Xs, I add 500 more shares. If it comes back down again, I raise my stop to the next sell signal. If it doesn’t give the sell signal and gives another buy signal, I add 500 more shares. And I continue doing that until finally that bottom is exceeded. All stock is sold, and I’ll go back in on the next buy signal.

Tom Dorsey: On of the problems that we have in investing, especially when I was a stock broker, back then if you were stopped out of a particular stock or you sold a particular stock, you never went back to it. Because we gave you all the reasons why you didn’t want to own that. So you never went back to that stock again when this might be the exact stock that’s just getting going. So probe trading is another thing that you could do in, let’s say, another account or part of your portfolio. There’s all kinds of interesting things you can do with risk management attached to it. And I’ll tell you what, if you give Alex your address, I’ll have a book sent to you.

Speaker 7: Thank you.

Alex Mihajlov: Tommy, as a gratitude of our appreciation from the Olde Raleigh crowd and our clients, we wanted to give you this to enjoy. It’s been just a phenomenally great day hanging out with you. It’s kind of like hanging out with Yoda and learning from him. I’m going to get you to the airport on time. Deep, heartfelt thank you from all of us. Thank you.

Tom Dorsey: You’re welcome.