| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
I understand that you have several people at your firm trading their own small funds==== Does a stock have to be stronger than the overall market in order for you to buy it? ==== Generally speaking, yes. I like to see the stocks relative strength in the top 10 percent of the market, or at least the top 20 percent. ==== You implied earlier that youll often buy stocks with high P/E ratios. Does this imply that you believe P/E ratios are irrelevant? ==== The P/E ratio might show statistical significance for broad stock groups, but for the type of stocks we buy, its usually not a key variable. Stocks with long-term, high-growth potential often sell at higher multiples, particularly if theyre newer companies. The P/E ratio really measures investors emotions, which swing wildly from fear to greed, and is only significant at extremes. ==== Do you feel theres an advantage to buying stocks that are not too heavily covered by the street? ==== Absolutely! Theres a definite market inefficiency there. Typically, the more the street covers a stock, the less opportunity there is. ==== What are the major misconceptions people have about the stock market? ==== They tend to confuse short-term volatility with long-term risk. The longer the time period, the lower the risk of holding equities. People focus too much on the short term-week-to-week and month-to-month price changes-and dont pay enough attention to the long-term potential. They look at all movement as negative, whereas I look at movement as a constructive element. For many investors, the lack of sufficient exposure to high-returning, more volatile assets is their greatest risk. In my opinion, investment vehicles that provide the least shortterm volatility often embody the greatest long-term risk. Without significant price movement, you cant achieve superior gains. One market paradigm that I take exception to is: Buy low and sell high. I believe that far more money is made buying high and selling at even higher prices. That means buying stocks that have already had good moves and have high relative strength-that is, stocks in demand by other investors. I would much rather invest in a stock thats increasing in price and take the risk that it may begin to decline than invest in a stock thats already in a decline and try to guess when it will turn around. Finally, another major trap people fall into is trying to time me market. Since January 1980, the market has realized an average annual compounded return of 17 percent. If you were out of the market on the forty best days, which represent only 2 percent of the trading days, the return would drop to under 4 percent. The moral is that the penalty for being out of the market on the wrong days is severe-and human nature being what it is, those are exactly the days that most people are likely to be out of the market. ==== What are the traits of the people who are successful in this business? ==== Theyre open-minded and flexible. Theyre also risk takers, because they believe in what theyre doing. ==== I understand that you have several people at your firm trading their own small funds. Did you trainthese people?==== Yes, none of them had any previous experience in the business before starting with us. There are three people involved, and theyre all doing very well. ==== I guess that means that you believe successful trading can be taught? ==== It can be taught as long as the person has an open mind. I like to say that the mind is like a parachute-its only good when its open. Of course, each person must still develop an individual philosophy and tailor basic trading concepts to his or her own personality. ==== How did you fare during the October 1987 crash? ==== We had a very tough month. The Small Cap Fund was down 34 percent. Fortunately, the fund was up 46 percent coming into October. We finished the year down 3 percent. About one week before the crash, I sensed something significantly negative was going to happen in the market. ==== How did you realize that? ==== Buying had dried up, there was a sense of fear in the market, and I was also worried about the burgeoning use of portfolio insurance. Because of my concern about the increased risk exposure in the market, I had a substantial portion of my portfolio up for sale on the Thursday and Friday before the crash. Unfortunately, I wasnt able to liquidate as much stock as I wanted to. ==== You were unable to liquidate your position because the tone of the market was so bad? ==== The atmosphere was horrible. ==== When we were talking about entering orders on extreme price moves, you mentioned the necessity of using market orders instead of limit orders, which are unlikely to get filled in such situations. If you felt that strongly, why did you use limit orders instead of market orders in this case? ==== We were trying to sell the stocks at the market. However, many of the issues we hold are very thin and the size we wanted to sell was just too large relative to what the market could handle. For example, one stock we held was nominally trading at $36 bid/$38 offered, and while we were willing to sell our entire thirty-thousand-share position at $34, there were no bids of any size even well below the market. ==== Did you come in on Monday, October 19, knowing that it was going to be a very bad day? ==== Yes, but I had no idea how extreme it would be. ==== Were you still trying to sell stock that day? ==== We managed to sell some. ==== Did you stop trying to sell as the day wore on? ==== After a while the break was so severe that it didnt seem to make any sense to try to sell unless the financial world was coming to an end. ==== Could you describe your emotions on that day? ==== I was actually very calm. I felt detached-as if I had transcended the situation. I almost had a sense of observing myself and everything that was going on. ==== After the smoke cleared on October 19, you must have realized that you had Just lost one-third of your wealth in one days time. [Driehaus keeps almost all his money in his own funds.] Is there a feeling that goes with that? ==== Yes, get it back! [He laughs loudly.) Actually, I had lost much more than that in 1973-74. ==== Did that help? ==== Yes, it did help. It showed me that you could survive that type of break. I had the confidence that I could make it back and the commitment to do it. As Nietzsche said. What does not destroy me, makes me stronger. ==== I get the impression that you really dont suffer any major market-related stress, even in extreme situations such as the October 1987 crash. Is that because you believe that things will work out in the ==== end? I believe thats exactly right. ==== When did you get that degree of confidence? ==== I believed in my investment philosophy from the very beginning, but I acquired the true confidence when I applied this philosophy to the fund I managed at A. G. Becker and found that I had placed in the top 1 percent of all funds surveyed. I couldnt believe how well the approach worked. My confidence in this trading philosophy has never wavered. ==== Youve been a portfolio nianager for nearly twenty years, during which time you outperformed the industry averages by a wide margin with enviable consistency. What do you consider the key to your sustained success over such a long period? ==== The essential element is having a core philosophy. Without a core philosophy youre not going to be able to hold on to your positions or stick with your trading plan during really difficult times. You must fully understand, strongly believe in, and be totally committed to your trading philosophy. In order to achieve that mental state, you have to do a great deal of independent research. A trading philosophy is something that cannot just be transferred from one person to another; its something that you have to acquire yourself through time and effort. ==== Any final advice? ==== If you reach high, you just might amaze yourself. Driehauss basic philosophy is that price follows growth and that the key to superb performance in the stock market is picking the companies with the best potential earnings growth. Everything else is secondary. Interestingly, the high growth stocks that meet Driehauss criteria often sell at extremely high P/E ratios. Driehaus contends that the so-called prudent approach of buying only stocks with average to below-average P/Es will automatically eliminate many of the best performers. The stocks that Driehaus tends to buy are also often companies that are not followed by, or only lightly followed by, industry analysts, a characteristic that Driehaus believes leads to greater inefficiencies and hence greater profit opportunities. Driehauss stock selection ideas are fundamentally based. However, to confirm his selection and to aid in the timing of purchases, Driehaus is a great believer in technical analysis. With rare exception, before he buys a stock, Driehaus wants to see its price rising and high relative strength (i.e., a stock that is performing significantly stronger than the broad market). These technical characteristics mean that when Driehaus buys a stock, it is frequently near its recent high. He believes that fortunes are made by jumping on board the strongest fundamental and technical performers, not by picking bargains. Most investors would find the typical stock in Driehauss portfolio hard to buy. Think of a broker espousing the same strategy in a telephone solicitation. Hello, Mr. Smith. I have a real interesting stock for you to consider. (Pause) What is the P/E ratio? Well, its 60 to I. (Pause) How far is it from its low? Well, its making new highs. Mr. Smith? Hello? Mr. Smith? Driehauss method provides yet another example of the principle that successful strategies often require doing what most people find instinctively uncomfortable. Quite simply, the natural inclination of most people toward comfortable approaches (e.g., buying stocks that are near their lows, buying stocks with low P/Es) is one of the reasons the vast majority of investors experience such poor results. Another example in which Driehauss ability to do what is uncomfortable enhances his profitability is his willingness to buy a stock on extreme strength following a significant bullish news item. In such situations, most investors will wait for a reaction that never comes, or at the very least will place a price limit on their buy order. Driehaus realizes that if the news is sufficiently significant, the only way to buy the stock is to buy the stock. Any more cautious approach is likely to result in missing the move. In similar fashion, Driehaus is also willing to immediately liquidate a holding, even on a sharp one-day decline, if he feels a negative news item has changed the outlook for the stock. The rule is: **Do what is right, not what is comfortable.** Another important point to emphasize is that a small percentage of huge winners account for the bulk of Driehauss superior performance. You dont have to be right the majority of the time, but you do have to take advantage of the situations when you are right. Achieving this dictate requires two essential elements: taking larger positions when one has a high degree of confidence (e.g., Home Shopping Network was Driehauss largest position ever) and holding such positions long enough to realize most of the potential. The latter condition means avoiding the temptation to take profits after a stock has doubled or even tripled, if the fundamental and technical conditions still point to continued higher prices. The steely patience necessary to hold such positions to fmition is one of the attributes that distinguishes the Market Wizards from less skilled traders. Even though Driehaus and Druckenmiller employ dramatically different approaches, home run trades are an essential ingredient to the success of each. Perhaps Driehauss most fundamental piece of advice is that in order to succeed in the market (any market), you must develop your own philosophy. Carefully researching and rigorously verifying a trading philosophy is essential to developing the confidence necessary to stay the course during the difficult timesand there will always be such times, even for the most successful approaches. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |