Commentary | Sep 09, 2020

Channelling Wall Street Legend Marty Zweig

share

Marty Zweig: Pioneer and Market Legend

In recent weeks, we have had many conversations with people who have expressed confusion about the current state of markets. They cannot comprehend how stock markets are making new highs in the face of massive unemployment and uncertainty.

Martin Zweig was an American investor and financial analyst. He was known for his eccentric and lavish lifestyle as well as at one point having had the most expensive residence in the United States, atop The Pierre in Manhattan. He decorated his home with his extensive collection of cultural memorabilia, including the dress Marilyn Monroe wore when she sang “Happy Birthday” to President John F. Kennedy at Madison Square Garden, gold records by the Beatles and a Chicago Bulls jersey worn by Michael Jordan.

Zweig was known for his exhaustive data studies. On Friday, October 16th, 1987, Zweig appeared on Wall Street Week with Louis Rukeyser and warned of an impending market collapse. On the following Monday, known as Black Monday, the Dow Jones Industrial Average collapsed more than 22%. Mark Hulbert, an analyst who tracks the performance of investor newsletters, calculated that over its lifespan, Zweig’s newsletter ranked first for risk-adjusted performance.

Zweig’s philosophy of markets is a powerful reminder that the economy and financial markets can diverge wildly. Importantly, his investment rules serve as a useful guidepost for navigating the current environment.

Buy and Hold: A Fallacious Strategy?

Zweig was strongly opposed to the investment industry’s most popular approach – buy and hold. This strategy involves refraining from making any major changes to your portfolio, regardless of what is happening in markets. By nature, this style of investing necessitates suffering severe losses during bear markets. Zweig wrote:

“I think you should shun the idea of buy and hold. I consider it a fallacious strategy. To lower risk, there will be periods when you should peel back your investments in the stock and bond markets. You can position yourself on the sidelines when conditions are unfavourable. Thus, you can come through relatively unscathed and have the resources to profit when the bear market is over.”

He further stated:

“I consider myself both conservative and aggressive. By nature I’m conservative. I’m very risk averse. I want to protect myself and the people who follow my advice. But there are times when you have to be aggressive. The problem with most people who play the market is that they are not flexible. The conservative person tends to stick with such instruments as utility stocks and Treasury bills. He never makes a lot of money, but he doesn’t get hurt. The aggressive investor buys wild stocks or drills for oil or speculates with high leverage in real estate. During boom times he makes fortunes, only to lose it all in the bad times. I don’t think either approach is sound by itself. If you’re an aggressive trader, that’s okay, but there’s still a time to be conservative. If you’re conservative, that’s fine too, but there’s a time to be aggressive. That moment may not come very often, but when it does, pounce on it and take advantage of it. The rest of the time you can cut back and be your conservative self.”

No Crystal Ball. No Picking Tops Or Bottoms. Be Flexible.

Proponents of buy and hold investing claim that since you can’t predict the future or pick market tops and bottoms, it is both futile and potentially detrimental to alter your portfolio. However, Zweig insisted that you don’t need these skills to achieve superior results over the long-term. He stated,

“I don’t have a crystal ball – and wouldn’t want one. I’ve found that investors who rely on crystal balls frequently wind up with crushed glass. People somehow think you must buy at the bottom and sell at the top to be successful in the market. That’s nonsense. The idea is to buy when the probability is greatest that the market is going to advance. If a bear market were to bottom at 4000 in the Dow, and eventually go to 6000, you don’t have to buy at 4000. You can buy at 4300 if the probability were, say, 90 percent that it would go higher. And you don’t have to sell at the peak. You might sell after the top or maybe a little before. Let’s say you get out at 5700 when the probability is very good that market will decline. There’s nothing wrong with buying at 4300 and selling at 5700 and giving the other guy the last few hundred or so points on either side."

"What you are concerned with is the probability of success or, alternatively, the probability of losing money. You want to avoid loss. So it’s fine to buy above the bottom and to sell below the top. To succeed in the market you must have discipline, flexibility – and patience. You have to wait for the tape to give its message before you buy or sell. That means you must forget about trying to catch the exact tops and bottoms, which no one can consistently do anyhow. But success in the market doesn’t require catching those tops and bottoms. Success means making profits and avoiding losses."

Don’t Fight the Tape: Cut Losses and Run with Profits

Zweig was a strong proponent of a trend following approach to investing. He stated:

“Big money is made in the stock market by being on the right side of major moves. I don’t believe in swimming against the tide. I would like to be fully invested when the market goes up and fully in cash when it goes down. But the market couldn’t care less about what I like. The idea is to get in harmony with the market. It’s suicidal to fight trends. They have a higher probability of continuing than not. I have a cardinal rule: “Never fight the tape”. If you buy aggressively into a bear market or into individual stocks that are performing badly, it is akin to trying to catch a falling safe. Investors are sometimes so eager for its valuable contents that they will ignore the laws of physics and attempt to snatch the safe from the air as if it were a pop fly. You can get hurt doing this: witness the records of the bottom pickers on the Street. Not only is this game dangerous, it is pointless as well. It is easier, safer, and in almost all cases, just as rewarding to wait for the safe to hit the pavement and take a little bounce before grabbing the contents."

"The only consistent way to make money in the market is to cut losses and run with profits. Regrettably, many investors haven’t learned this lesson. Ego prevents them from admitting a mistake. Perhaps there’s something macho about it. A slap in the face, as represented by a 15 percent price decline, is greeted with stubborn persistence to hang around for a severe pummeling. I’m a trend follower, not a trend fighter. I’m smart enough to realize that a slap is easier to recover from than a beating that, in this case, leaves you unable to pursue future gains."

As Relevant As Ever

Recent market developments clearly illustrate that Zweig’s philosophy and approach are just as relevant today as ever. His “don’t fight the tape” mantra would have stood investors in good stead, both during the first quarter’s vicious selloff and in the subsequent recovery.

At Outcome Metric Asset Management, we are firm believers in Zweig’s basic principles. We use statistical analysis and machine learning to dynamically allocate across multiple asset classes in response to changing market conditions. This focus has enabled our clients to participate in rising markets while avoiding large losses during times of market turmoil. We believe that this strategy will continue to achieve superior risk-adjusted returns over the long-term.

Commentary | Aug 06, 2020

Past Is Not Prologue