Advanced Micro Devices closed just under $10 at the end of November, 2007. This was the high-water mark for the next 9 years. In 2017, AMD finally broke through $10 to trade as high as $13 before falling back under $10 in April 2018. On the next upswing, many quants, momentum investors, and swing traders sold when the stock ran up to $13 expecting that it would quickly fall back to $10 again. But one of my best managers, Wayne Himelsein bought AMD in June at $16 and is up about 20% in just a couple of months. Here's why AMD at $16 was a better investment in June than at $10 in April.
Ken Kam: Wayne, you paid $16 in June when you could have bought in April for under $10. Do you consider that a mistake?
Wayne Himelsein: You don't profit by paying the lowest price. You profit by buying a stock that is going to move up after you buy it. You could have paid $10 in 2007, but the ROI on that trade would not have been that good. The best investments are the ones that rise quickly after you make the purchase regardless of what that purchase price was relative to the stock's history. Buying at the low is sometimes the greatest mistake because lows very often beget new lows. I’d rather pay more for a stock that is appreciating, than pay a lower price but have to wait a long time to see a return.
Kam: What makes you think that this time the breakout is real and has some legs when AMD has had so many false starts in the past?
Himelsein: The market price is decided by people, all of whom have opinions and biases. Some people will only buy stocks that are dirt cheap; these are often the same people that love to buy things on sale – they love value. Some are willing to pay up for stocks that are growing; these are often optimists or visionaries who see a delightful future for a new widget. When I look at a stock, I try to quantify the levels of these biases and capture consensus opinion of other investors to get a sense for where the stock is most likely going. You might call it, the wisdom of crowds. Same way one would read and evaluate Yelp reviews for a restaurant you’re considering.
Kam: You analyze the other investors that make up the market for the stock rather than the company. Is that right?
Himelsein: Yes, that's exactly right. In poker many people play the cards they have been dealt. But the really good players say that the secret to winning is actually to play the other players. They win because they are good at identifying other player’s "tells" so they can better gauge when to be aggressive and when to hang back.
I believe the same is true of investing.
The big players in the market all have "tells." My analysis revealed that AMD's detractors gave up in June and that is why I bought the stock at that time.
Kam: Can you be more specific? What market "tells" did you see with respect to AMD?
Himelsein: High level, you can think of a stock’s current price as the outcome of a battle between buyers and sellers. For almost 1.5 years (Jan 2017 to end of May 2018), AMD moved between $10 and $15, in big swings from tops to bottoms, except that with each cycle the sellers came in sooner and were able to push the buyers a little further back.
To continue the battle analogy, the allies advanced, the enemies pushed back, and the allies retreated back to their home base before trying again. But with each advance the enemy pushed back quicker and harder.
This went on for 17 months, until the allies finally pushed through the enemy line (the 15-ish top in May 2018). This is the roaring straight up move in early June that ripped through 1.5 years of previous tops/stopping points to reach the new 16-17 level.
When the allies pushed through, the enemy went RUNNING, fearing for their lives. By the way things had been going, they thought they were winning this long stand-off but they just now learned, in May of 2018, that the allies had a new weapon that enables them to push through with gusto.
After this big advance, the allies were in brand new territory (the 16-17 level), more so, they now had an even better shot at advancing. Why? Because having misread the situation, the enemy is now humbled and so will be quicker to run away going forward.
So in June, at 16-ish, is the time that I personally was more prepared to join the battle on the side of the allies. I was hesitant in the prior 17 months as the fight dragged on without gaining ground, and even losing ground. But now we’re in a new world – we’re literally dancing on the enemy stronghold -- and I'm excited to be there as we advance forward.
Kam: The battle analogy is colorful and makes sense in hindsight. But, how do you see these battles in real-time?
Himelsein: I have devoted decades to studying ways to assess the nuances in these battles as they are happening. When humans make decisions, they can’t help but to infuse their “humanity”. We are not robots, we are people. Value investors wait for the right low level, swing traders come in only after confirmation of the turnaround, and momentum buyers need to see the moving train. The point is, you see a different pattern of trades as the market equilibrium moves. I use an array of mathematical tools to identify the distinctive trading behavior that reveals the dominant party. Simply put, there are "tells" in the varying intensity of buyers and sellers.
Kam: How much upside do you see in AMD?
Himelsein: I don’t set target prices. I will be in this stock as long as it is one of my 10 best ideas, which means, as long as it continues to exhibit the same "tells". Interestingly, one of the most common mistakes investors make is selling too soon. “But it’s up 50% since I bought it,” says the investor, when the market has absolutely no idea, or care, when it is that you bought it. More so, when you do go sell it, somebody else just buys it from you, and at that second, they are flat, so your 50% just evaporated.
Kam: There are times in your 17 year history with Marketocracy where your performance hasn’t been as good as it is now. What do you look at to tell you whether your investment analysis needs tweaking?
Himelsein: I ask myself that very question all the time; in fact, it sometimes keeps me up at night! The bane of investors is that the world keeps changing. When you find a good investment strategy you have to expect that its profitability will decline as you and others put more and more capital into it. Especially since there are millions chasing the same thing.
If Warren Buffett were still investing the way Benjamin Graham taught him, he would still be looking for stocks trading below their cash value. There were lots of stocks like that when Graham and Dodd first published Securities Analysis in 1934. But Buffett has had to adjust his investment style over time. So do I, and so should every good investment manager.
Kam: How do you know when it’s time to make a tweak?
Himelsein: Well, when your returns go down, you know you’ve waited too long. I constantly check the results of my work by looking at how many of each year’s top performing stocks I was in (within the S&P 500, my constituent universe), and just as importantly, how many of the year’s worst performing stocks I avoided.
Kam: What does that analysis say for last year?
Himelsein: In 2017, I invested in 36 stocks, 8 of which made the list of 50 best performing stocks in the S&P 500 and zero of the 50 worst performing stocks. These results tell me that my approach is keeping us in the stocks that are performing far better than average. It also supports my thesis that the market offers "tells" about the best stocks to own and the worst stocks to avoid. That’s the key reason why my portfolio has outperformed the market for more than 17 years.
My Take: If this was the first time Wayne bought a stock just before a big jump, I would say he got lucky. But I’ve seen him do this very thing over and over again for 17 years with many other stocks. It is no longer believable, or reasobable to say it is just luck.
Wayne’s Logica Focus Fund (LFF) has a 17+ year track record at Marketocracy. Over that period, Wayne's model averaged 12.83% a year which more than doubles the S&P 500's 5.90% return for the same period. In August 2012, LFF was made available as an investment option for clients in our separately managed account program. Since then, the composite of our client returns has exceeded the return on the model portfolio and far outpaced the S&P 500.
There are 7,138 U.S. equity mutual funds in Morningstar’s database, but only 23 managers have outperformed an S&P 500 index fund and their category benchmark for the past 10 years by enough to make a difference for investors. Wayne has outperformed the S&P 500 for longer and by a bigger margin than even the best mutual fund managers.
Since Wayne selects stocks from those that comprise the S&P 500, the S&P 500 is an appropriate benchmark. For those who aim for the lowest fees, an S&P 500 index fund is hard to beat. But for those who aim for the highest return after all fees, LFF has been a better choice for many years.
For the full Forbes.com article, please click here.