Occasionally one comes across a sleeper in markets — a man of great practical and systematic wisdom who has written a book that is widely overlooked and should be read by all market people for great profit. Such is the case with The Master Trader by Laszlo Birinyi. He is well known as a Hall of Fame Market elf from Wall Street Week, and winner of the outstanding elf of the 1990-1999 decade in performance and analysis. He is the inventor of the money flow method of investing, based on counting the market value of upticks and downticks. When you walk with him on the street, people are likely to come up to him and thank him profusely— You recommended apple in 1994 when it was four and I bought it and now I am a wealthy man. He has a number of great calls like this including catching the market bottom in 2008 with a 850 S&P call, catching the bottom of the bond market in 1994, and maintaining a bullish mien throughout the great expansion of 2012 and 2013.

His approach is somewhat diametrically opposed to mine, so I was particularly interested in interviewing him for an upcoming book review. He loves anecdotes. He publishes a market letter, and runs a money management service. He doesn't deign to compute the proximity of his results to randomness, and he trades mainly individual stocks. Here are some of the things I learned from him.

1. Look for stocks showing a sprained ankle, i.e. a drop of 5 to 10% on such things as a trading loss, an earnings loss. Sprained ankles coming from ratings changes by inferior analysts is particularly poignant of future appreciation.

2. Do things physically. Enter all your trades yourself, and read the newspapers in original form so you can see the placement on the page, the size of the type and headline.

3. Pay attention to divergences in the performance of individual stocks from the consensus about the importance of external events. For example, the housing stocks have been strong throughout all the talk about tapering. How could interest rates be going way up if housing stocks so strong. He likes to look at NVR, Whirlpool, and Sherwin Williams for clues to the real effect of things. These stocks have the virtue of being high priced enough so as not to have high frequency trading interfere with it.

4. Little changes in the institutional structure can have tremendous effects on markets. The importance of big blocks and money flows has been negated by the black pools, multiple market makers, and payments for order flows.

5. Making money in the markets is as hard as making money as a architect or accountant. It requires constant study, practical experience, and openness to new ideas. The best traders are frequently art history majors.

6. The records of markets are frequently faulty. Particularly egregious are the industry performance figures and p/e ratios which are computed retrospectively, for most historical periods before 1940. Big problems occurred when the Dow was reconstituted without adjustment after the first world war.

7. Certain forecasters besides Abelson are particularly bad. Shiller and Prechter have been bearish since 1960.

8. Wall Street is a business where the top feeders always win, and all activities and recommendations must be considered in that context.

9. The relation of individual stock moves and market moves is not linear. For many things like the performance of individual stocks after gaps a 10% move is bearish, a 10-20% move is bullish and a 25 % move is bearish. Similarly he believes for market moves.

10. The public is a very poor consumer of market products. They believe everything they hear on the media. They don't stop to think what the agenda of the person transmitting the information is, or what their expertise is.

Laszlo started out as an immigrant who couldn't speak English. He rose to be head market analyst at Salomon Brothers working next to Mike Bloomberg for 10 years. He now runs a big business in money management, and market letter that affords him the opportunity to own the only grass tennis court in Westport which I have had the pleasure of playing on.

Gary Phillips writes: 

 Thinking about point number 5 about how the best traders are usually Art History majors, add to that…Hungarian, i.e, Birinyi, Soros, and Peterffy. I say this with tongue planted firmly in cheek, but as a first generation child of Hungarian immigrants, I can't help but feel a selfish and chauvinistic sense of pride. My father emigrated to this country in 1938, and not unlike Mr. Birinyi, couldn't speak a word of English. Like most Jewish Eastern European immigrants, he became a merchant and eventually a business owner. Unfortunately, it wasn't until after he passed away 28 years ago, that I realized what a fiercely intelligent, knowledgeable, and perceptive man he was. I cut my trading teeth working on the floor of the CME during my off-time from school, and educated myself reading Hieronymous, and Edwards and Magee. At 18, I naively took everything I read, literally. I remember explaining to my dad about how the commodity markets worked — it was simple; supply and demand. And I'll never forget the (boy, have you got a lot to learn) look on his face, when in his thick Hungarian accent, he informed me how easily and how often, the laws of supply and demand were manipulated and distorted. I was not only surprised by this revelation, but couldn't help but wonder how my dad, who was never a participant in the futures or securities markets, was aware of this esoteric bit of news. This inevitably led me to a couple very salient revelations. Never underestimate the wisdom of your father, and never take for granted the Magyar mentality.


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