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Mike has been working on relative strength (RS) strategy research, including the first complete backtest of the RS-IBD screen. Mike has also added a bit of color to the MI board -- he is the first Fool to propose to his girlfriend via our message boards. (It worked.)
To kick off Mike's book tour, we interviewed him and present the following transcript. We haven't heard back from Oprah's people yet.
Q: Who would you recommend this report to and why?
A: It's aimed at the beginning- or intermediate-level mechanical investor. This paper will hopefully answer a lot of the questions that a "newbie" MI investor might have about the relative strength portfolios like RS-26 week and RS-IBD. Questions like "how do we determine RS," "how does RS rank for RS-IBD work," and "how long should I hold and review." Basic stuff like that. I learned that information over a period of years now. Hopefully, someone can get the answers quickly from the data and information provided.
For the intermediate investor this would be a quick study on background, theory, and results-to-date, as well as a look at future research. The intermediate investor might be someone who is familiar with mechanical investing but hasn't yet considered RS portfolios. There are so many topics on the board and ways to invest that examining prior research from the message boards can be a turnoff. This paper should help by summarizing a lot of the things we have discovered without telling all. It is a guide. It is not the gospel and is certainly not all-encompassing, but it should function as a good foundation for questions and research by interested people.
Q: What is it that attracts you to RS investing?
A: To me it is the tool that helps me to go out and invest in "risky" companies like Dell (Nasdaq: Dell), Best Buy (NYSE: BBY), America Online (NYSE: AOL), Schwab (NYSE: SCH), and others. A lot of these companies I would have never considered, like Titan (NYSE: TTN) or Qualcomm (Nasdaq: QCOM), but I have held them as part of relative strength strategies, and I have greatly benefited from renting them. All of these have been major winners, and I could only have done it right by investing mechanically.
Q: In your report you discuss the work of James O'Shaughnessy, William J. O'Neil, and Robert Sheard. Did any one of these people have a special influence on you?
A: Robert Sheard, he started it all for me. I believe it was back in April 1998 that he published a Foolish Workshop article that talked about RS-IBD as a monthly screen, and how it was doing so well compared to the annual version and all the other screens that year. That was the "alpha moment" of my MI research and investing career. I began doing monthly screen performance updates and used the RS-26 week strategy after that.
Sheard used those other authors for his research, and later I read them, too. I have to credit to Sheard, though, for getting the ball rolling in the first place. He converted me, and I am much the richer for it.
Q: If you were to recommend one book for someone to read on RS investing, which one would it be?
A: Tough one. There are so many sources to consider. Probably for a pure book on relative strength investing I'd go with O'Shaughnessy's research in What Works on Wall Street. His mechanical screen and fundamental explanation of why RS works is very enlightening. It's also a good core investing book to own in bad market times. A must-own book.
Q: What do you think is the hardest part of mechanical investing?
A: The self-torture and doubt that people put themselves through. Folks are so emotionally attached to their money that they see it as an end-all (lots of money equals success). It does buy a lot of nice stuff and trips to Belize, but money is not a savior. The fact that humans are not perfect and that we do have emotions causes us to keep second-guessing something even though the proof is right in front of their eyes.
Follow the path, ignore the gains and loses, and have fun with your life! In the long term, you will win and win big.
Q: Why did you decide to publish the report now versus waiting for your RS-IBD backtest to be complete?
A: The RS backtest is a long-term project that will take the rest of the year to complete all the way back to 1969. To wait until then would leave folks in the lurch still asking questions. I am very interested, once the RS backtest is complete, in adding an addendum to the report that covers the RS-IBD facts and anything else that's new out there, like RS use in composite screens and the overlap portfolios.
Q: I was very interested in your plans to have backtested data available with daily pricing. What motivated you to try to get daily pricing?
A: I think the daily data is what folks are demanding. They see the monthly fluctuations in the portfolios, but they watch them daily. To get a true taste of the volatility and the action of these portfolios, you need daily data. I also believe this will kick off a new area of research to try to minimize overall portfolio volatility while maximizing returns for the long term by using fine data.
Q: What influence did the Mechanical Investing message board have on you?
A: Almost complete influence. Both Sheard and the MI board really were the powerful support mechanisms that got me going and kept me there. The hardest part of mechanical investing is getting through the first market drop you experience. It is shocking to watch an RS portfolio plummet 20-40% the first time. You think, "I'm an idiot for doing this." Without the folks on the board I wouldn't have survived and lived to revel in the rebound of 300%. After that, you think, "Man, I'm pretty darn smart." The Foolish Workshop board and later the Mechanical Investing board created a community that can huddle together and feed off one another in good times and bad, and the knowledge that is shared there is better than anything that can be taught in a university. Although there is a lot of clutter on the boards now, there are some serious gemstones constantly being found. I wouldn't want to miss the next revelation!
Mike will be glad to answer additional questions on his special research board, Sux2BeU Research. For the latest on the Sux2BeU RS backtest check out his website.
Until next time, Fool on!
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