Most investment books aren’t worth the paper they’re written on. Authors who have never experienced real investment success espouse the conventional wisdom: index funds, blue chips, buy and hold, etc…
Every once in a while, however, there is a true gem: Reminisces Of A Stock Operator, My Story by Bernard Baruch, How To Make Money In Stocks by William O’Neil, No Bull by Michael Steinhardt, Beat The Street and One Up On Wall Street by Peter Lynch, the Stock Market Wizards series by Jack Schwager. It’s no coincidence that all were written by or about investors with extraordinary track records. How can we expect to learn extraordinary performance except from those who have actually achieved it?
Add another to the list of investment classics: Trade Like A Stock Market Wizard by Mark Minervini. Minervini is one of the greatest independent traders of our generation. Starting with nothing, he made himself a multimillionaire through trading alone by the time he was 34 years old. In a five and a half year period starting in mid-1994, Minervini achieved a 220% annual compounded return, including winning the US Investment Championship in 1997. This is someone whose track record speaks for itself.
More than a decade ago, in an interview with Jack Schwager for one of his Stock Market Wizards books, Minervini summed up his investment philosophy: “My basic philosophy is: Expose your portfolio to the best stocks the market has to offer and cut your losses very quickly when you’re wrong. That one sentence essentially describes my strategy.” Trade Like A Stock Market Wizard is an extended explication of what that actually means.
This isn’t a get rich quick book. Minervini begins by explaining that learning how to trade in the stock market requires a lengthy education. In his case, it took 6 years of losing before he put it all together: “When I began trading in the early 1980s, I endured a six-year period when I didn’t make any money in stocks. In fact, I had a net loss” (pg. 5).
In Chapter 4, “Value Comes At A Price”, Minervini contradicts the conventional wisdom about buying stocks with a low P/E. According to him, in fact, many of the best performing stocks actually sport high P/E ratios: “Most of the best growth stocks seldom trade at a low P/E ratio. In fact, many of the biggest winning stocks in history traded at more than 30 or 40 times earnings before they experienced their largest advance….. The really exciting, fast growing companies with big potential are not going to be found in the bargain bin. You don’t find top notch merchandise at the dollar store” (pg. 44). Summing up, Minervini concludes: “My suggestion is to forget this metric [P/E ratio] and seek out companies with the greatest potential for earnings growth” (pg. 54).
In Chapter 5, “Trading With The Trend”, Minervini hammers home the primary role technicals play in his stock selection: “When I am screening for superperformance stocks, my initial filter is rooted in strict qualifying criteria that are based purely on a stock’s technical action and is designed to align my purchase with the prevailing primary trend…. Simply put, no matter how good a company looks fundamentally, certain technical standards must be met for it to qualify as a buy candidate” (pg. 63). Amplifying this point later in the chapter he writes: “To compound your capital rapidly, you must be where the action is; you can’t afford to have your money tied up in a stock waiting for what you think is a great fundamental story to get noticed by the rest of the world” (pg. 83).
It’s worth pointing out that this runs contrary to the practice of many great value investors who seek out stocks that are undervalued and misunderstood by the market. They get in early and make their money when the market comes around to their point of view. Unlike Minervini, they are willing to wait when they have conviction in their fundamental analysis.
In Chapter 7, “Fundamentals To Focus On”, Minervini tells you what he’s looking for fundamentally: “[Superperformance stocks] are going strong because of a powerful force behind them: growth – real growth – in earnings and sales” (pg. 118). Later in the chapter: “Really successful companies generally report earnings increases of 30 to 40 percent or more during their superperformance phase” (pg. 127).
Chapter 9, “Follow The Leaders”, sums up the kind of stocks Minervini likes: “I made 99 percent of my profits in the stock market by trading the leading names” (pg. 161). As far as timing: “More than 90 percent of superperformance stocks emerge from bear markets and general market corrections” (pg. 164). In other words, the big money is made buying the leading stocks that emerge first from nasty bear markets. For example, think about hedge fund manager David Tepper who made billions buying the financials coming out of the 2007-09 bear market.
Trade Like A Stock Market Wizard is a great book by a great trader. For those of us interested in the market, it’s one we can’t afford not to read.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More…)