| Editor's note: Over the next two days, we're taking a break from our normal fare to share a conversation between Marc Chaikin – founder of our newest corporate affiliate, Chaikin Analytics – and Stansberry Research managing editor Corey McLaughlin. As regular Empire Financial Daily readers know, decades ago, Marc created a series of proprietary stock indicators that are used by the biggest Wall Street firms and traders all over the world today. For years, Marc used to charge his former hedge-fund clients – multibillionaire investors like Paul Tudor Jones, Steve Cohen, and George Soros – $5,000 per month to access his findings. But these days, he has turned his back on Wall Street... In the first part of the interview, Marc describes what he learned early in his 30-year Wall Street career... explains how he developed his well-known tools... and talks about why he left his "early" retirement 10 years ago to help everyday individual investors on Main Street. Enjoy...
What I Learned From Looking Over Wall Street's Shoulders An interview with Marc Chaikin, founder, Chaikin Analytics Corey McLaughlin: Marc, thanks for taking the time to talk with me today. This is a real treat for me personally, and I think it will be a great introduction to you for our readers. Let's dive in. You spent more than 30 years on Wall Street and were successful enough that you could retire "early" in 1999... Then, you started your own research firm in 2011. Why did you decide to get back into the investment business? What was the motivation? Marc Chaikin: The heart of the story starts in 1989. I was with Drexel Burnham, which was a really high-flying brokerage firm involved with financing lots of companies that weren't creditworthy. I was there until 1989, when – with a partner in Philadelphia – I formed an institutional brokerage firm called Bomar Securities. Bomar was built around a technical analysis workstation for buy-side portfolio managers and trading desks. We had clients ranging from value investors like T. Rowe Price in Baltimore and Delaware Management... to hedge funds in New York... to growth managers in Boston... and everything in between. And pretty quickly, I determined that just having a technical analysis workstation was not enough. So I had our technology team build the first real-time Windows-based market monitoring system. It was really state-of-the-art technology that enabled portfolio managers and traders to monitor the world in real time based on technical patterns and signals. We built up the following to about 50 institutional clients. And in 1992, we sold that business to Instinet, the electronic trading arm of Reuters. We grew that business to 15,000 clients. And along the way, I started Instinet Research, which was a quantitative research department to service its 20,000 institutional clients. Then in 1998, I basically decided to take a sabbatical for a year and move up to my weekend house in Connecticut and play some tennis. And that evolved into a 10-year retirement. So I retired very young from Wall Street, and along the way, Instinet had grown from $40 million in revenue to a billion dollars in revenue. And we were a small part of that. It was a very eye-opening experience. Instinet had some of the first quantitative trading shops for clients and did a lot of what's now known as "dark pool" investments, or trading capabilities. It really wasn't that dark, but everybody loves a buzzword. And here I was in Connecticut with my wife, Sandy, who had her own marketing business. She got so busy that she put her 401(k) plan in the hands of an adviser who had come highly recommended. He had put her into 10 mutual funds, claiming that diversification would be a healthy thing. And then 2008 came along... CM: This is the story you shared with Empire Financial Daily readers last week... MC: Yes. In September of 2008, I saw something that really spooked me. A money market fund called the Reserve Fund was trading under a dollar. As you know, money market funds always maintain that $1 price point, which made people comfortable parking their cash there – whether they were institutions or traders. The Reserve Fund was actually an institutional money market fund... And when I saw this, my wife called her adviser and told him that she was really concerned about the market. He had been telling her to hang in there... And he again said, "Just hang on. We'll be fine." At that point, Sandy hung up the phone and said, "I can't take this anymore. I'm just going to close out my account, but I don't know what to do with the money." For starters, I told her to buy an S&P index fund. And she said, "I really want to do better than the average stock. There's got to be a better way." I told her there is, and that gave me the incentive to come out of retirement – because there have to be millions of people like her who are taking back control of their financial futures, but they don't have the tools or the temperament or the time to effectively manage their own money. CM: It seems you were right about that... MC: It turned out that over two years, more than $1 trillion would end up moving from full-service brokerage firms like Merrill Lynch and Smith Barney to self-directed online accounts. So I said, "I'm going to come out of retirement and basically take my research way beyond technical analysis," which is what I was known for. Back in 1982, I introduced Chaikin Money Flow, which is on the Bloomberg and Reuters terminals, StockCharts.com, and all the online brokerage platforms. But I thought technical analysis wasn't enough for the everyday investor... And many of them weren't going to believe that it worked. I decided I would combine everything I learned from my institutional brokerage clients, value investors, hedge funds, and momentum investors... I was going to take everything I learned looking over their shoulders and create an indicator that is basically a fundamental indicator, based on how these successful investors look at the markets every day. That one-year research project ended up being the Chaikin Power Gauge rating, which has 20 factors and four components. The goal was to level the playing field for individual investors like my wife, Sandy... And it has done a great job of that. CM: That's great... Let's go back again to your early days for just a moment. You were a real pioneer. I have to imagine that back in the 1980s, when you were developing technical indicators, it wasn't nearly as common or as easily accepted to do as it is now. MC: Yes, and this actually goes back into the '60s. I got registered as a stockbroker the day the bear market ended on October 7, 1966. I was with a really good research firm on Wall Street. I got to know the analysts, and I bought into the Kool-Aid that fundamental research was the way to manage clients' money and build a book. And everything was great. Every day, the first two and a half years of my career felt like an uptick. Then 1969 happened... And I experienced the first bear market that I had ever known as a stockbroker – and as an investor. I was investing my own money, too. Pretty quickly, it became apparent that analysts fell in love with their stocks. They'd recommend a stock at $100, and on the way down, they'd say it was an even better buy. At $60, they'd say, "Load up the boat, it doesn't get any better than this." Then at $20, they'd just throw in the towel, which usually was very close to the bottom. But along the way, I was getting calls from brokerage customers. I was only 26, but they were depending on me – and I figured out pretty early on that I needed something else, another tool. There was a bookstore at 14 Wall Street where our offices were headquartered that specialized in financial books. I would go in there every day and talk to the manager. He pointed me to a lot of the books on fundamental analysis. They reminded me of my one college economics course, which was dry as dust. And he told me there was a whole other section on what's called "technical analysis." I started looking at it, and it was all numbers-oriented, and I'm really a numbers guy. That's what led me to charting and technical analysis, because it's really about pattern recognition. I started out with relative price strength, because someone had published a PhD thesis on it. I actually put eight years of prices for 800 stocks on the New York Stock Exchange into a research project to prove what this guy had claimed to have done. That was my start. And then along the way, when PCs came out – the first Apple II – I started doing some programming by hand and using the first technical analysis packages. Basically, in 1969 and 1970, I was able to combine fundamentals with technicals. CM: You were way ahead of your time... MC: It enabled me to navigate the markets, sleep at night, build a career, and then eventually segue to institutional investors. CM: My experience was similar when I got into this business. I was reading fundamental reports or different newsletters. And then, three weeks after the recommendation, the stock could be down whatever percent. I thought, "There needs to be a better way to do this." So pretty quickly I, too, caught on to technical analysis... MC: Absolutely. My whole mantra has been that fundamentals drive the market, but that emotions drive the market to extremes. You use technicals to rein in your emotions and also see when things change. The bottom line is, no matter how good your fundamental research or your qualitative research is – in the case of the Power Gauge, I call it a "quantamental rating" – no matter how good your rating is, if the market disagrees with you, guess who wins? CM: The market doesn't care what you think, right? MC: The market doesn't care, and nobody's bigger than the market. Maybe Elon Musk, but that's a different story. CM: If I understand correctly, when you built your workstation and platform for Wall Street clients, you were then able to see how these firms made trades and used data. And then you were able to use that information to create your own indicators and share those patterns with clients... and now readers. Is that right? That is brilliant. MC: That's right. In 1989, we put the workstation on a client's desk, and then we got to know them really well. And to be successful in that institutional brokerage business, I had to understand what these different market participants were doing and looking at in order to help them integrate technical analysis into their decision-making. What I learned was, they all looked at different things. That's the great thing about the stock market. You've got value investors... You've got momentum investors... dividend investors... and they all look at different factors, but there was a common thread. They all had a disciplined approach. That's big. You have to know what you're doing and why you're doing it. The Power Gauge basically does what no individual could ever do. It does the fundamental heavy lifting on over 4,000 U.S. equities and exchange-traded funds. And it works because it's based on how Wall Street works. This is what the "smart money," the successful institutional investors, are looking at. And I've distilled it down to 20 factors in four components. The magic is, it's not a religious model, either. It can work if you're a Warren Buffett acolyte, and you only do it that way... or if you're a Jim Cramer and you're a growth investor... or a hedge fund that specializes in industry groups, strengths, and so forth. The magic in our model, the Power Gauge, is that it is eclectic. It looks at factors across different styles and time horizons. And that's why I think it has been very successful.
Editor's note: In tomorrow's conclusion of this special conversation, Marc will share more about how his "Power Gauge" works... and run through a few past and real-time examples. In the meantime, be sure to watch the brand-new presentation Marc just published where he details how his system can help everyday individual investors manage their money... and shares his thoughts on the market today. Plus, he gives away the name and ticker symbol of the No. 1 little stock he's bullish on right now as well as which popular stock you should avoid. You can view the presentation right here.
Additionally, please note that our offices are closed on Monday in observance of Memorial Day. Look for your next weekday Empire Financial Daily essay on Tuesday, after tomorrow's conclusion of Marc's interview. If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply sign up here. |
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