Mark Ritchie II Unearths the Philosophical Approach to Market Mastery

When philosophy meets the stock market, you get the insightful musings of Mark Ritchie II, a trader whose lineage and passion for strategy games have deeply entrenched him in the unpredictable world of trading. Our conversation meanders through his family's storied history in the markets, the philosophical underpinnings that guide his approach, and how a life of evaluating odds has equipped him for the rollercoaster ride of risk management. Ritchie's narrative is a fascinating tapestry of legacy, logic, and the allure of the trade.

Navigating the choppy waters of market volatility requires a keen eye for trends and a dedication to mastering one's chosen trading strategies. We dissected the volatile nature of markets, sharing personal anecdotes of when to hold back or engage, and the significance of narrowing your focus to excel in specific strategies. The discussion pivots around recognizing warning signals like high volume selling, and understanding the dance between riding out bull markets and weathering bearish downturns. All the while, Ritchie's probabilistic wisdom underscores our exploration of the nuanced art of risk management.

Wrapping up this episode, the virtues of a steadfast investment process are held up to the light, alongside the challenge of staying true to one's trading style in the fast-paced, information-heavy age of social media. Newcomers to the trading scene are implored to understand the distinction between analysts and traders and to recognize the mirage of perfection in the trading world. For those hungry for more insights, the episode extends an open invitation to follow and engage with our analyst from Minervini Private Access. Together, we've charted a course that covers the essence of what it takes to navigate the markets with acumen— a journey as philosophical as it is financial.

Nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. 

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Transcript

Speaker 1: 0:08

My name is Michael Gaiott, publisher of the Lead Lagg Report. It's going to be a fair as Mark Richie. Mark, introduce yourself to the audience to me. Who are you? What's your background? Have you done throughout your career? What are you doing? Growing Sure Good to be on.

Speaker 2: 0:20

Michael, thanks for having me. Yeah, so it's Mark Richie the second. Just to be clear. Yeah, son of, I guess, a former trader and come from trading family. Both my father and number of uncles sort of cut their teeth in old school days in the floors of CBOTCME in Chicago. I never did any of that, to be clear, never traded a pit in my life Was really interested in anything to do with markets or finance.

Speaker 2: 0:48

In terms of growing up, let's see, in terms of I have a non-traditional path, I guess. Didn't do the finance degree or MBA or anything like that. I actually have a philosophy degree, did some nonprofit work for a year or two and then actually went to work for an old associate of my dad's, which didn't end very well, and then just kind of decided at that time, the way I'd describe it has sort of got the bug for markets. I'm trying to figure out. Why does this thing go up? Why is that thing going down? How do these relationships work? For lack of a better word.

Speaker 2: 1:23

I really thought maybe I had some money to manage or an opportunity to use some trading that could be successful, so borrowed a little bit of money from my dad and that was late 2009. And so, yeah, I've been trading ever since and that's full-time manager. We don't manage that outside capital, so please don't DM me with requests for asset management or anything like that. Do last number of years spend an analyst as well at Minervini Private Access, where we focus specifically on stocks that meet our criteria and happy to get into any of those things. You and I have a little bit of a commonality.

Speaker 1: 2:03

Your father was a trader and my father had an investment firm and a hedge fund and I liked you and kind of grew up under that. Unlike me, though, it sounds like you never really kind of wanted to go in that path growing up. I am curious just from those early years, did you find it interesting at all to hear what your dad might have been talking about when it came to markets? Maybe the dinner table or trades he was doing? How did you see that?

Speaker 2: 2:25

growing up yeah, really, that's interesting, by the way, that we have that talent. I would have said, growing up. You don't realize until you're I don't know late teens, or maybe even early 20s, that if your say your childhood was abnormal, because when you're a kid you're just a kid, right you don't realize, like I don't know. Somebody else's dad was a drywaller and someone else's dad goes to an office and your dad goes and yells the screams and people passes around tickets what's the difference? But what I would say is when I was very young, you knew my dad had a busy day when he didn't have much of a voice coming home because he was just doing too much yelling. And then later he did some off the floor, actually had a small off the floor hedge fund as well, and was kind of functionally retired from active trading by kind of the time I was maybe even old enough to understand what it was. So it was sort of one of those where I didn't really know enough to know and wasn't you know 100%. I mean, I knew my dad had done well, but it wasn't yeah, it wasn't really clear what the whole thing was about.

Speaker 2: 3:29

One thing I will say, though and I've mentioned this is. You know, if there was something that we did a lot of sort of like games of strategy, probabilistic thinking that kind of stuff which you know I was not nearly as good at it as, say, some of my brothers and things like that but games where it was sort of a combination of strategy and then figuring out what level of risk you were comfortable taking, it was something you know we just did. You know those type of things. So I don't know if that answers the question, but I would say, you know, really it wasn't until I wasn't looking to get into this, it was sort of I was just looking for a job. How do you know? You know, hey, somebody who used to work for my dad, you know. So they said, hey, I love David, come work for me. You know, you could, with you know probability, that kind of stuff, and then it was just sort of a way we go from there, you know.

Speaker 1: 4:13

Tony, is that when I think somebody has an image of somebody who's a fourth reader to your point losing the voice, yelling and screaming, you're not thinking that they're thinking in terms of probabilities. You're thinking that they're reacting right in the moment to you know a particular tech moving this way or that way. We look back was your father very quick at making probabilistic decisions or was he more reactionary? Because people have different opinions on what makes a good trader? The reaction got stealing pens to be what you often hear among the greats, but among those that said, a more consistent performance is quite the opposite.

Speaker 2: 4:44

Yeah, that's a really good question, and you know, obviously from my so my understanding was, and you know he was a part of had sort of his own operation and then, as also as a partner in Chicago research and trading, which sort of an early options market making firm which really, you know, brought, I think, a level of at least sophistication at the time that didn't exist. So theirs was definitely an arbitrage type deal where making lots of trades and very small profits. So, in terms of wherever the market was going, they were tending to probably fade it, but doing it where they were always hedged. And so his would be yeah, it would be reacting, but reacting to what they thought were prices that were out of line. And I think one of the first things where he sort of really made his mark in the late 70s was just trading soybean crush, in terms of being able to calculate numbers very quickly in terms of where intrinsic value was versus where I don't know beans meal and oil were trading, and just sort of finding a small edge and turning it over again and again and again.

Speaker 2: 5:58

One thing I would say that I'm a big believer in is, though, at least when it comes to trading trading is that idea of if you have an edge, how it becomes a game of how consistently can you turn that edge over, or is that edge something that you can maintain? That's sort of the other thing and that was really yeah, kind of they tended to at least my understanding is thrive in periods of all, because there's just there's more things out of line, more things that sort of profits to extract. My approach or philosophy today would be almost opposite. Where it's, I find sometimes it's in the lower volatility periods where I'm comfortable getting a little bit more aggressive because I think I have an idea or an edge of where prices may be moving or at least have potential positive expectancy. Should I see XYZ set up over and over again?

Speaker 1: 6:49

They had mentioned prices that are out of line, to use the term intrinsic value, which of course has more of a fundamental spin on things. I'm a little bit technical, but I don't know if there's such a thing as intrinsic value in an environment of pure DTE, gamut, squeezes, meme stock and prices that seem to be totally divorced from any reality or reasonable expectations going forward. Am I off in that thinking? Is my cynicism unjustified that we're in this environment where intrinsic value is hard to know but doesn't almost mean anything in terms of when to buy, when to sell?

Speaker 2: 7:23

Well, yeah, we're sort of over the door to a whole different conversation.

Speaker 2: 7:27

Keep in mind I can't speak super intelligently to say how to trade beans, meal and oil against each other, because that's not something I've ever done where those are products that are obviously two or derivative of the other, or take it like, in terms of energy, guys that trade the crack spread and things like that.

Speaker 2: 7:45

I don't know all the different components, but there I think there probably is still some intrinsic value, where, when we're talking about things, though, that just trade on pure perception of value, say like equities or certain other assets, where what I was talking about specifically is very concrete relationships, where, yeah, you at least have a better idea, where intrinsic value is still doesn't mean, though, to your point, that things can't get way out of line. So it isn't as though you throw risk management to the wind because you think your fundamental backdrop is so good. That's a perfect way to go bust. I don't care what you're trading If you don't have some kind of a stop or risk management, you're just dead man walking. So, yeah, I would tend to agree with you in terms of the markets are only the same and they're only unchanged, in the fact that they're always changed.

Speaker 1: 8:35

Yeah, I think it's very well said and I think oftentimes it's a lot easier to argue for some intrinsic value and prices being over or undervalued if you have a dividend attached to a stock, as opposed to a narrative around a future that may or may not play out. I think that's the big point. The volatility dynamic, I think, is interesting because I think across the board it's true that active management, at least in theory, is supposed to do better in periods of high volatility. I always go back to the point that study after study shows it's very hard to beat the market on the long side. But if you get some of these vault wings, you have a chance. I'd argue.

Speaker 1: 9:12

In some ways it's easier to beat the market on the downside than the upside. That's why you tend to see down capture being less, but up capture is often less than 102 as well. How do you think about volatility in the current environment? There is an argument out there that we're due for a vol spike, seasonality, things like that. I've noted some of these intermarket relationships which are maybe a certain sense of warning signs. But the other side of this is low volatility can last for a while and there's this temptation to think that just because markets have low volatility, that it's going to mean avert higher tomorrow.

Speaker 2: 9:42

Yeah, a really good question, and my answer is going to be overly simplistic. What I've found over the years and this is something if anybody finds this hard to believe, that's okay I found it hard to believe for a while as well, because I used to realize that was pretty good in terms of our process of getting out of harm's way ahead of time, and I'm talking equities specifically. You were talking about volatility. I'm assuming you're talking about equity volatility. That's what most people are referring to. And so then I had the idea of well, maybe, as I'm raising cash or stepping to the sidelines based upon what I'm seeing in the stock, in stocks, why not do a little bit more shorting? Why not maybe go along the VIX or find other trades where you can get some of the downside capture? And I don't know if it's just because I'm not as good as either playing, say, volatility or shorting, but I've just found, over at least the last seven or eight years, that it has not really paid me much. I'd be better off just moving the cash and then awaiting, and that has really borne out to be true, sort of repeatedly. I think for me it has more to do with the fact that when I'm then managing, say, larger positions on the short side or that type of thing. I'm not as acutely focused on the long side when things start to turn, and what I often say is listen, it's difficult enough to extract a living. You know, being a good long or a short I know very few who are really good at both. So, rather than trying to be a generalist, I'd rather be a good specialist. So, yeah, we just tend to, rather than try and capture the downside in terms of making money with the market falls, is just get out of the way, you know, or you know, reduce risk to the point when you think things are the most risky and I've been saying this my entire career. I'm still proven to be right. Like markets never crash or have these big, massive down moves without some form of warning. We don't go from new highs to melting down in a day. That's just not the way it works and I can get into that. And in terms of you know what are the things that we potentially look for. But, yeah, I, while I agree with you, I would tend to tell people, you know, focus on one area that you're comfortable with, if you want to. As far as volatility that goes. I will say I don't really have a view at your absolutely right.

Speaker 2: 12:15

We've been in a very low vol regime for a while, the entire bear market of 22,. There were lots of people saying we haven't had a begin of spike in the VIX. When's it going to happen? You know this bear market isn't over until you know, the VIX hits 50. Well, that never happened, which is generally why I don't tend not to dig in with opinions like that, just because you know there are nothing's ever guaranteed like that. And this is where I would tend to say you know, vol selling instruments, things like that, yeah, may have dampened some of the vol, the volatile moves. However, you know things can still unwind quickly. You know a lot of people thought the VIX was broken before COVID and then, you know what did? We hit close to 90 or 100 at you know when things got really crazy. So, as volatility tends to start to rise is when I tend to just raise cash and I use more forced displacement, where usually I'm I'm sort of being forced into cash as trailing stops, and those types of things are being hit as volatility is rising.

Speaker 1: 13:10

Yeah, and I will say I had a I did a space with, I believe it was a fear golly, who brought this point, or no? There was another person who was a hedger in 2022, this was a year plus ago and he was saying that 2022 was the the only year where his hedges didn't work and he was bearish. And that's because you never had that, that real vol spike which, to your point, everyone was looking for, including the VIX. I think it's maybe a little bit more nuanced, because small caps are still below the 2021 high and maybe we're in this weird environment where they're still bear market selectively and lower cap. I know you have a post about small caprication. We'll hit on that, but let's talk about some of the signals, because I agree with you.

Speaker 1: 13:48

I always go back to you know you don't know the exact mile marker that you might crash your car, but you know the conditions, that favorite accident, right, you can identify the weather, right. Which are the signals I think you're referring to? In my case, I've got specific ones utilities lumber to gold treasuries themselves. What are some of the things that you look for that would say, okay, you know what. Now is the time where, even though we are looking like we're pushing you high. I want to start reducing. I want to start fading it.

Speaker 2: 14:11

Well, as I was saying, you know, I wouldn't right as a for lack of a better word, I'm a version of a trend follower. Right, when do we feel like you know, hey, the trend is getting a little long into two. Is that kind of thing? First thing is listen, distribution, or do you have you know? Higher volume selling on down days has happened off the highs. Every single time. We're going to have a larger pullback. Now, it doesn't. This is the old you know.

Speaker 2: 14:39

When you learn in geometry, you know that all squares are rectangles, but not all rectangles are squares. I hope if anyone, I got that right. Not every time. You have you know, distribution does it mean you're going to have a massive pullback? No, of course not, but that would be one of the first things and that's just sort of an obvious one. Then, of course, I like the more a market continues to trend and breath deteriorates.

Speaker 2: 15:02

You mentioned the Russell and I think we can get into that, because there's some sort of nuance things going on right now where I would say, really, 2021 was kind of classic, where if you looked at the NASDAQ, it just kept trending higher that whole year while the small caps peaked earlier in the year. But if you looked at the percentage of stocks, you know, above their 200 day or above their 50 day in the NASDAQ, they started rolling over the whole year while the NASDAQ, well, it sort of peaked there. And then if you just sort of looked, you know, by the end of the year, like there was, you know, probably have the chart, I can bring it up to give you the exact number, but you know it was by just scrolling here by year end, you know we had much lower participation of stocks above their 50 and above their, you know, trending 200s, which we're just telling you. Okay, the herd is dying off while the market looks healthy. Even at the peak, you only had, you know, about 50% this is, you know, toward the November 50% of NASDAQ names, even above their 50 day moving average so, and above the long term. So it was like there's a, there's a bear market starting to happen under the service. Now again, that doesn't mean that the market has to just roll over, it just means that the legs are starting to thin a bit. Look for the same thing on the NYSE.

Speaker 2: 16:18

The small caps, as you said, are often that harbinger of risk. That's sort of the other thing. The more everything is participating, the healthier it is. Now we've had, we've been in a period of for lack of a better word small cap underperformance for quite some time, and I'm actually sort of looking to them as an indicator to say, okay, is this rally, if we're going to continue here in equities and the small caps can get in gear? I think you have to say that not only is the bull market going to have, you know, continued run, but likely the herd is going to expand then. Now, whether that happens remains to be seen.

Speaker 2: 16:53

The small caps actually led, I would get even more constructive, but I just see that as like a harbinger of risk. Think of it in terms of institutions, right, like if you know, if you want to, if you want to put on risk capital in equities, the safest place to go are the bigger cap names. The riskiest place to go is the small caps. So when the Russell is acting well, it just tells you there's a higher risk appetite and even you know in terms of, say, corrections. This is where you want to see does money just go, risk off or does it rotate? Well, right now you know we've had some rotation to a small and mid cap. It looks a little laggity, for sure, I certainly wouldn't say it's leading. But if that dynamic shifts, yeah then I think you have to, you know, be prepared, you know, to see continued, you know continued strong trend in equities.

Speaker 1: 17:41

I know I got a little off track there, but no, no, that's actually something because I speak to a lot of different financial advisors daily, but this is something I've been bringing up to be about being a harbinger of risk, and this is kind of where my skepticism around the environment comes from.

Speaker 1: 17:56

If you were to look at the and I don't have a business relationship with them, but pay-through as an ETF cap, right, which is the hundred small cap stocks in the S&P 600 weighted by free cash flow, right, so that's that new highs, right, and that looks you, you could say like more like a traditional bull market and small caps and it makes sense, right, if they have free cash flow, they can deal with higher for longer rates, whereas the Russell 2000, because of zombie companies, has gone sideways still right, and it's still way below the 2021 peak.

Speaker 1: 18:24

And then you know to your point about liquidity and risk seeking behavior, you look at micro caps. Iwc is a proxy, you know, way off the February levels of 2021. So I look at small caps and I agree with you, right, because there is a scenario where there could be this large rotation into small caps. But the caveat is, I think and we can go back and forth on this it's a relative trade. So you know you look at small caps relative to large caps. Today they're at roughly March of 2000 levels. They both fell during the tech crack from 2002 or 2003. But small caps were down a lot less because they never really sit down the upside right. So you can have a cycle where it's still better to be in small caps than large caps, without necessarily absolute support.

Speaker 2: 19:12

Right, yeah, I would. You haven't said anything that I would tend to disagree with. Yet, michael, you know other than you know. Look, I try to be flexible, always be flexible with your observations, not with your overall philosophy. And you look at your comment. Even I was familiar with the CAF ETF, but you know I'm just bringing it up on my screen.

Speaker 2: 19:30

Yeah, this actually makes perfect sense because it basically saying that, look, the small caps who've managed their bids well and, you know, have some form of earnings, ie, you know cash flow, they seem to be acting well, certainly much better than you know other parts of the Russell. And, look, the Russell is, yeah, it's got a lot of companies that you know, if there weren't easy money forever, would probably already gone bust. And I think if a you know the rate environment that we have persists or continues, we're going to, you know, see elements of that, maybe potentially finally go away. I mean, who really believes that if we had this level of rates forever that a lot of these companies will survive? I don't think anybody fully believes that. But this is also where you know you don't have to. Just, I rarely even trade the indexes themselves. This is where sort of you know I try to be stock agnostic. I was just saying you know more in terms of if more money, if the rally runs out, I would expect some not all of the other small cap names potentially pick up. But the other question you have to ask yourself is, even in a situation like the Russell, everybody has this thesis in the back of their head now that, okay, how long can small caps handle rates at these levels? Well, is that already in the price? Is it possible?

Speaker 2: 20:47

I think I try and constantly be asking myself what is non-consensus. If everybody's saying it not saying it's wrong, but trading on it is probably the timing is wrong. If everybody loves the breakout in XYZ market or stock, I tend to discount the likelihood of it working. If everyone's skeptical, pessimistic, negative, the chart looks good and it's moving higher. That's when I'm most interested, and I'm just. You know how many people have it on their bingo card that the Russell's going to break out this year. You know of a big base and move to new all-time highs. I think a lot of people are more skeptical and if they're bullish, they're sort of you know, for lack of a better word saying we're going to see. You know the Mag7, the Fang names, you know, continue to do. Well. It'll be sort of a highly concentrated narrow rally, you know, as money, you know, just continues to chase. You know the names that have been working.

Speaker 1: 21:37

It's actually really thick. I tend to be contrarious, skeptical in my own thinking and I communicate in a very specific way on X, which some people like, some people don't. But the non-consensus terminology is interesting because I'd argue this we're in a weird environment where it's hard to know what consensus really is.

Speaker 2: 21:53

So okay, I'm going to agree with you 100% there, Right like.

Speaker 1: 21:55

The diverges are really weird, like for me, the real non-consensus divergence which is I can't quite get my head around, but somebody has to be wrong in quotes, I think is if we agree that the Russell 2000 has largely gone sideways exactly to your point, how many of these companies can survive higher for longer rates? That's a headwind on refinancing risk. It can't be in business. That might have implications on employment, so on and so forth. So that side is saying higher for longer is a problem.

Speaker 1: 22:21

Meanwhile the bond market credit spreads are saying there's no problem, there's no de-pulterous right. You're pretty much at cycle lows when you look at credit spread. So you've got the equity side on small caps being worried about credit through the zombie companies of small caps. You've got the differential between junk and AAA not widening, suggesting the stress, which is why the Fed really can't lower rates, at least now. And one of them I would think needs to be wrong in that. Now it's true that the bond market tends to be more right than the stock market, but not always, and I think that's why it's not. To me it's not a layup as far as how to think about anything in this kind of environment.

Speaker 2: 22:57

Yeah, and this is where one of the things we often say is like process trumps everything. So one of our I shouldn't say one our cornerstone of our process is basically just manually going through individual equities that are holding up well and seeing how they're acting. How are stocks well, what stocks are in uptrends and that are look constructive technically. Rather than sort of looking at the macro first, we just want to look to see, okay, what's acting well, where is the strength? One of the key screens I like to run is relative strength. What stocks are holding up best relative to the market? Because that tells you where the money's going and often that's you know when tobacco, alcohol, conservative names are what's holding up. It just it tells you all you need to know. That's that there's no risk appetite. And my whole point would be, rather than focusing on some of these classic relationships to your point earlier, you know that how can we know for sure that things aren't continuing to change in a world where Fed keeps rates? You know at artificially low levels and rather than just following what the stocks are telling me, you know where I was getting constructed.

Speaker 2: 24:46

I tend to be skeptical all the time because I don't want to lose money, but it's when the process tells me get more aggressive, and then I look around and everyone's skeptical, negative, pessimistic. That's when I actually get really excited. So I agree with you, though, too. Even trying to figure out what consensus is, it's more of just different folks I talked to, or you know there's. I would always recommend having a few decent contrarian indicators, even in terms of other market participants Doesn't mean you have to agree with everybody all the time, but when I'm seeing something you know that looks potentially bullish and no one agrees with me, yeah, that's what I'm most likely to be correct, you know. The other thing, though, is you know we try, I always feel like saying a process should insulate you from opinions, meaning, or from even news.

Speaker 2: 25:35

So, whatever your process is, the whole point is that way you don't read somebody else's work and all of a sudden, it's like I got to flip my position. Or you know, michael made a really good point about you know where credit spreads are at, and oh my gosh, I guess I need to sell everything. The idea is to have your own process, sort of vacuum packed and sealed, so that, yeah, there will be times it's absolutely correct, there'll be times it's absolutely wrong. But if you won't stick to your knitting, you'll never be there for the good times, because everybody's going to have their turn, at least if your strategy has positive expectancy at all.

Speaker 2: 26:12

So yeah, I tend to be more reactionary, try and be a caboose with the market rather than arguing saying, well, this doesn't make a whole lot of sense. And I could give different examples of when that's been the case, where certainly the consensus was well, this should happen, didn't happen. And then lots of you know I read all kinds of things about why the market's over or undervalued and I just ignore all that stuff. Stick to my process in knitting, which is sort of following where the strength is, where's the money rotating, and then using good risk management.

Speaker 1: 26:41

To re-pen the room for the remaining 20 minutes here. Everybody, please make sure you follow Mark Ritchie here on X. If anyone have questions, click that bottom left microquest button and, as always, this will be a podcast under lead lag. Live on all of your favorite platforms.

Speaker 1: 26:54

All right, so I'm glad we're in this direction because I'm with you on the process and I'm a huge fan of rules based approaches. If you were to do a momentum type of process or signal on the S&P the last decade, you did great. If you take that exact same signal and apply it to energy markets, good luck left and right. So that's why I always go back to more than just signal. It's also about the opportunity set and the tailwind of the cycle, but on this point, about watching the market.

Speaker 1: 27:18

So I think, like you mentioned tobacco, if you start seeing some of these stocks holding up, that becomes a bit of a tell. Maybe the whites of the eyes are showing how long do those areas need to be leading for? And really, what I'm hitting there is, as part of a process, you have to evaluate what's your look back period, right? Because if it's like we're seeing now, right, utilities are starting to show some signs of life. That's a risk off signal, but it's only been a few days Now. Maybe you want to get in on it now and say, okay, that could be the early signs of risk off to come, but maybe need more time for confirmation. So how do you walk that line right when you see good stocks holding up? Well, they're defensive. They might send you a warning, but it's only happened for a short period.

Speaker 2: 28:00

Yeah. So the first thing people should understand for me is I tend to I shouldn't say tend I favor the growth and momentum areas. So when those aren't trading poorly, I just tend to be more cautious. It doesn't mean that you can't make money other places. 2022 is a good example where some of the cyclical areas still traded well, even though the general market didn't trade very well because growth was just getting killed. Something that had traded well in 2020, 2021 got taken out back and shot in 2022 and, yeah, money rotated other places.

Speaker 2: 28:33

Well, there's to my point before, where I'm going to let other the cyclical players sort of have their turn. I'll make some trades here and there, but I just don't tend to be as aggressive because, you know, one of the other part of our process is examining where do your biggest wins come from. Well, for me, my record in those areas is not as strong, so I'm not going to be as heavily weighted or as aggressive in those names. So the first thing I would be looking at is yeah, when does growth start trading poorly? Or follow the leaders, as William O'Neill, mark Minervady guys I've learned from would say if the leaders are topping, that's your real first sign that, okay, we have a potential problem and look, there's a lot of different ways you can do this. But this is where the other thing I would just say is in general, I tend to be a breakout player, meaning as stocks are moving, they don't have to be just moving in a new highs, but sort of breaking out of consolidations. That kind of thing Do you see follow through, meaning our institutions willing to pay up for names. And if you look at the dynamics, even over the last 16 weeks or so I mean I think when we just closed up 15 to 16 weeks on the SB500, which, by the way, is not sustainable anyone who's ever watched studied markets will tell you that is not sustainable. However, if you look at that type of strength coming into new high ground, historically it tends to have bullish implications, say six to 12 months out, but there will be pullbacks, pauses, corrections along the way. So, yeah, I'm saying, if you looked at dynamics, though, of individual breakouts, prior to, say, the lows in early November, there was not a lot of appetite for names that are saying making new highs, or certainly on average. Yeah, there's a few names the SMCI's, the NVIDIA's but outside of that, are institutions willing to pay up? Well, no, because they didn't have to prior to that period of time, because breakouts were regularly faded, institutions were selling shares into those moves, not accumulating, and this is where the dynamic really started to shift.

Speaker 2: 30:44

And so, yeah, I would say more of a when I run my daily and we do our work every single day, so even talk about processes. We screened between me and my co-portfolio manager, screened between 500 to 1,000 stocks every single day using the same criteria, and that's where you just you start to get to. You get a better intuitive feel. I don't think I rarely, if ever, trust my gut on anything, but you'd be surprised how much better your gut will get when you run through a process or a routine like that Sort of the old 5,000 hour rule, I don't care. If you look at the same 5 minute chart 7 hours a day, you will get a better feel.

Speaker 2: 31:26

For, however, that asset trades, it's just, it's sort of that repetition becomes the mother of success, and that's how we found our process to be most beneficial. Now, so, yeah, for me, michael, it's not going to be. Are the defensive areas perking up versus, like, are the leading areas selling off? And then are we seeing again to the point about distribution I said before, are we seeing those areas really start to make meaningful, like shifts in character and price action?

Speaker 1: 31:54

So on that screening of 500 to 1,000 stocks, that process, is there any kind of new message? That's starting to maybe be told, some new story that's maybe being told that you go through these daily, weekly sort of areas that maybe people are not paying attention to, that you're starting to say, okay, well, this now looks like it could be a thing in a few months.

Speaker 2: 32:14

So what I would say right now is look. The short answer is I don't see anything to be overly concerned about yet in terms of am I going? I'm in this mode. I was just on religion yesterday saying, look, I wouldn't be putting a lot of new capital to work right here, because we're just all the best names are extended and there's not a lot of what looks like attractive merchandise.

Speaker 2: 32:39

One of the analogies we use at Minerini Private Access is you go to the store you want to buy something, but there's nothing on the shelves or nothing really catches your eye. Do you just buy something just to spend money? No, you need to be patient when, yeah that in any new, say, bull market, the best stocks have already well broken out a month to maybe even three months ago. Now you either need to wait for subsequent follow up consolidations or see what names hold up the best. Yeah, I think there's good evidence to say we're a little bit stretched too because of some of the names that are sort of setting up.

Speaker 2: 33:18

We're seeing a lot of laggards or names with lower relative strengths that are kind of trying to join the party, and one of the biggest mistakes I think people can make or they do make, especially when it comes to stock investing trading, is they just buy poor merchandise. So rather than buying a leader, they go I'm going to buy this other one, because it's going to play catch up. Or, instead of buying the name with a 97, 8, 9 relative strengths, which would be top 1, 2, 3% performing names in the market, they're going to buy this thing, this other name. That's a laggard. Now, that's not. I'm not saying that value doesn't have a place and that's not a viable strategy. That's just not the way I do it. I tend to want to be in the names that are the strongest and then, when they get really extended, is when I'm either taking profits, lightening up, embracing myself for a pullback, or just selling the position and then looking to subsequently buy them back if I see, say, low risk entry, to get back on board again.

Speaker 1: 34:13

Have you just applied on the road, when I was presenting in CFH chapters, that your ability to stick to a strategy matters more than the strategy itself? I used to always say that on the road because I really do believe that's often the problem most traders and investors have. They claim to have a process cycle doesn't favor the process. For a moment in time, they abandon the process and just there is when the cycle starts to change, favoring the process. You've been at this for a while. What would be your pieces of advice or words of wisdom for those that believe in their investment process but they're going through a really rough patch and streak? The challenge with having investment processes is that no process works for every single environment.

Speaker 2: 35:21

Yeah, this is a really good point and I think where, especially if you're new, you have to really understand exactly what you were just saying, that nothing will ever work all the time. Now this is also we're making an assumption that whatever it is you're doing works. I want to be clear that I think there are lots of people who think they have a process that don't really have one at all.

Speaker 1: 35:43

Right, they do not even call up the term. They're fooled by randomness.

Speaker 2: 35:47

Yes or thinking they're either fooled by randomness or fooled by the thought that they think they can switch from value to growth, to main reversion, to trend following, all at the right time, which is just nonsense in my opinion.

Speaker 1: 36:03

I hate to interrupt you, but thank you for saying that, because that is one of the things that really worked for me. I mean, oftentimes, when I do these spaces, I'll have a guest on and there are things that I fundamentally disagree with, but I want to be respectful and I let them continue. But that's always bothered me. The idea that somebody says, oh, when things are not working, I switch to something that's working. It's like well then, you have a perfect strategy, you'd never have a drawdown, doesn't make sense.

Speaker 2: 36:24

Yeah, this is where listen unless you know what I'm saying that sounds. It may sound good, but I just don't know anyone who's ever been able to do that. Style drift is one of the number one reasons people are unsuccessful, and exactly to your point, that often when things for your strategy are the most difficult is either, yeah, likely when they're going to turn or when things are going to change, and the key is surviving the tough periods. Anyone, any fool, can make money in a good market for their strategy. The real question is can you keep it? And then can you keep yourself, sort of going sideways or minimally giving back what you made and then compounding in good times. So that's you know by far.

Speaker 2: 37:16

You know, I think one of the most indispensable things would often say, though, even in terms of you know plans, one of the things you know we do at Minervini, private Access, is sort of coaching along those lines. It's telling people because one most people's performance expectations are way too high when they start and then they're way too low, in my view, in the long run if or when they get good. Because you know, everybody thinks, because now the barrier to entry is so low in markets, they think they should just be a superstar in I don't know a week, a month, a year, which is just preposterous in my opinion. What other field in anywhere else would you expect to be doing that? And yet someone opens up a Robinhood account or you know starts. You know trading in E-Trade during COVID makes a few profitable trades and they think they're brilliant. Well, you might be for now. We'll see how that holds up in the long run.

Speaker 2: 38:07

But you know what I often say in terms of strategies or plans, because I think everything you're buying, everything you're selling, any trade you put on, when you put risk capital at work, needs to have a plan. And what I usually say is listen, a bad plan you follow is better than a good one that you don't. And, yeah, even a bad plan is better than no plan. And you know what I often tell especially people if they're new, is just what was your plan. Stick to that first. Don't call any audibles in the middle of the play. Don't change it as you're going. Just see if you can actually do what you said you were going to do before you got in the position, or the trade or the investment, whatever it is, and most people will find that they have a tough time even doing that. So I think this is almost like you know, if there's a 10 commandments, there doesn't even need to be a 10 commandments. You know a few basic rules for success. Yeah, having a process and following it is, you know, absolutely essential.

Speaker 1: 39:02

Right and, to use Mike Tyson's line, everyone has a plan and so they get punched in the mouth. Even if you are punched in the mouth, you still need to have the plan to get back up and keep fighting Right, and I do think that's sort of the. This is sort of the danger of social media for a lot of the newbie traders. They end up following accounts that you don't have to get in the game. They seem to be killing it with every single trade. You can't even verify it and whatever trades and wins, they're telling you. They're not telling you how they got to that conclusion, how they got to that trade. There's no process, it's just here's what's the right of the equal sign? What's the left?

Speaker 2: 39:36

I mean, I couldn't agree more. I'm only laughing because, yeah, just the. I think the percentage of people on X, twitter, social media, you name it that are truly successful and my measure of success this meaning they've actually pulled real money out of the market is a lot lower than people really think. I could be wrong about that, happy to be wrong about that, but generally I, you know, I just feel like anybody who's been doing this long enough has a level of even humility that wouldn't even post some of the things that a lot of these supposed experts and people like that post. And you know, I happen to know a number of. You know folks that sell research and those types of things that don't even trade. I'm not saying you can't listen to their research, and I think sometimes good analysts aren't necessarily good, good traders or speculators, but those are things you should know as well. You know is this does this person have to your point skin in the game or do they have any real money on these ideas when they're telling you I'll stick with a position even though it's going against you? Do they have that position on? So, and look, markets are not easy and I think you know anyone who tells you that, you know, just do this all the time and it always works, is, you know, probably going to bridge to sell you somewhere too? Because that's just, it's nonsense.

Speaker 2: 40:49

And the one point I was going to make before, when you were talking about when strategies don't work and those types of things, really good speculators, really good traders, managers, they actually welcome those times in some regard. They don't enjoy them 100%. Yeah, and what I often say, you know, even in whatever the strategy, if it works all the time, it will eventually work none of the time. The reason there's an edge is because something doesn't work all the time. You know, and this is where we want to come to sort of inefficiencies or edges in the market. You know, the more, the more crowded anyone's strategy gets, you need a period of whether it's underperformance or you know where. You know it sort of tests the metal of the participants or those who are using it and or washes out those less disciplined practitioners. Just makes it that much better.

Speaker 2: 41:43

And I've learned this the hard way, or the right way, which is actually going through it where you know, if you look at periods and you know I tend to I'm right about a little less than 40% of the time. You know, in trades, I make well the, but the distribution of that 40% varies widely. So there are, though, that people think then that means, oh, you're right Every time you make 10, you're right on four and wrong on six wrong. There's periods where you're right on 15 in a row and wrong on 15 in a row. I think I've had periods where I was wrong over 20 times in a row. Well, those are. Those are the periods where the goal is minimize the damage.

Speaker 2: 42:27

This is why we also, you know, preach progressive exposure in a strategy like that, because you've got to be trading smaller when the market is not corroborating that. You know it's your turn to shine. It's your time to shine because it's going to, it's going to use those tails and probability distribution and accentuate the right tail the one we all want in your favor, and reduce the left tail. But you know, the longer I've been doing this, the more I'm convinced precisely by what you just said, is that this is something it's not only a part of doing this for the long term, it's an essential part, and it it really should just solidify, you know, sort of the foundation and mechanics of what you're doing. Again, we're both assuming that the process has positive expectancy and actually works. I do think there are a number of strategies people sort of purport and things like that that you know if they do have good, you know potential returns, you know that they're few and far between, or that you know the maybe returns or things like that aren't nearly as good as potentially advertised.

Speaker 1: 43:35

Yeah, it's every anomaly needs needs periods of doubt for the anomaly to exist. That's the reality.

Speaker 2: 43:41

It's so true. And listen, I haven't even. You know I do a little, I do teaching. You know, on our platform we do a weekly Q and A calls and I a year ago, we were consistently getting questions and things. Like you know, do breakouts work? And is this strategy broken? And because it was in the middle of a period where it just wasn't working very well, I kept telling guys it's like yeah, it works, it's just not working now, so be patient. And lots of people throw in the towel and quit, and I love it when I hear those type of questions. Or years ago, I would be the guy asking the questions when I first starting.

Speaker 2: 44:14

You know, you make a little bit of money and then, all of a sudden, the process strategy is not working anymore. Oh my gosh, it's broken. Yeah, I got to find something else. No, now I tend to look at it completely the opposite, and this is also where I mean there's just no replacing experience, michael. I mean you know this like, but I don't care what you're doing, whether it's you're hosting a podcast, you're making a YouTube channel, like, whatever you're doing, if you commit yourself to continue to doing it.

Speaker 2: 44:37

Most people throw in the towel with whatever they're committing to too early. I don't care if it's a new diet, I don't care if it's an exercise thing. You know you want to read more books. Whatever it is. You should, if your initial goal was to do it for X period of time, take that period of time and double it or, more more accurately, multiply it by 10. And then come back and really, you know, sort of evaluate it and then the changes you'll find that you make are they're very small and nuanced versus these drastic. I got to throw this whole thing out and start over. Does that make sense? 110 and every.

Speaker 1: 45:17

I'm like, nodding as you're, you know, to myself as you're speaking. I think it's just funny. I think in this environment, in some ways, it's easier for anomalies to persist, because the short termism has made everybody think that if it's not working yesterday it's doomed to fail tomorrow. I mean like within a 24 hour time period, and that's a bigger discussion around just attention spans and, in general, just the way that people perceive noise versus signal. Right, but that's not a hearing or there, mark, for those who want to track more of your thoughts, more of your work, we're just going to do it.

Speaker 2: 45:45

Well, I do some occasional tweeting on X. Not a big social media guy, but yeah, you know I'm an analyst at Minervini Private Access. If you want to know more specifically, say how you know how we use our process, you can, you know, check us out at Minervinicom. Yeah, follow me on Twitter. Do some occasional. You know podcasts like this or Real Vision, those type of things as well.

Speaker 1: 46:06

Everybody. Please give Mark a follow. Hopefully you'll enjoy the conversation and I'll see you later in the week. I've got a couple more spaces lined up here.

Speaker 2: 46:12

Thank you, mark. Appreciate it, michael, great to meet you, Great to talk with you. Likewise my pleasure.