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My Book Reviews

Category: Investor autobiography, investing strategy
Published: 1986
Read: 1993
Reviewed: May 2010

This book by Martin Zweig is considered to be an investment classic. In the first part of the book Zweig gives an interesting and detailed account of his childhood, high school years, college years, and young professional days. All of these stories either are within the context of investing, or, at the very least, show how his life experiences led to personal growth that contributed to his success.

Next, the bulk of the book is devoted to detailed (yet easy-to-understand) blueprints to his personal market timing model. His model combines his Monetary Indicators (Prime Rate indicator, Fed Indicator, Installment Debt) with his Momentum Indicators (advance/decline line, up volume indicator, 4 percent indicator) to come up with a Total Indicator.

The last part of the book covers other topics outside his model, including:

  • sentiment indicators (mutual funds cash-to-assets ratio, the bullishness of investment advisors, the number of ads in Barron's ads, the number of secondary offerings)
  • seasonal indicators (holidays, days-of-the-week, particular months, end-of-the-month, presidential cycles, year-end tax selling)
  • predicting bear markets (deflation, high P/E, inverted yield curve)
  • how to scan the market for stock picks
  • stop orders and shorting

Zweig, who has a PhD, conducts his fact-based research with detached objectivity. His professor-like style is a refreshing break from the self-promotional style of most investment gurus who are solely concerned with building their personal brand in order to sell more books. Most investment books don't require a follow-up, yet most successful authors shamelessly cash in on their newfound "author equity" to write useless sequels just for the money. The irony is that Zweig's book is one of the few investment books that warrants a sequel, yet didn't get one. I would be interested to know if Zweig still uses this system as before (doubtful), or made refinements (likely), or threw it away (unlikely).

If this were 1993, I would probably rate the book 5 stars. But my rating is based on how much of a useful resource this book is today. Most of those who first read this book back in the early 1990's probably think that it still retains its full value. But I disagree. Zweig's book is not a timeless book in the way that "Reminiscences of a Stock Operator" is. It came out at a time when there were very few good books related to investing, but, as of today, most of the strategies in the book are either now well-known or not as accurate. The two best aspects of the book as of today are his random investing advice (e.g. "the biggest gains in bull markets tend to come in the first 6 months") and his personal biography, which is interesting and inspirational.

My first critique is that one of the premises of the model (that tighter monetary conditions lead to an underperforming market) is now questionable. It has been pointed out that Zweig's market timing model has not performed well since publication. I believe that the markets have adapted since the book's publication, partly because the Fed has become more pre-emptive, so the stock market has become less reactionary and, by definition, more anticipatory to changes in interest rates.

My second critique is that his famous market timing model seems largely irrelevant, even to Zweig himself. It has also been pointed out that Zweig's stock picking screens have performed very well since the book's publication despite his timing model's underperformance. This doesn't surprise me because, with my own trading, I constantly keep an eye on the general market but rarely let the market influence my decisions regarding individual stocks. If I think a stock is a buy then I will buy it - even if I think that the market will go the other way. For me (and apparently Zweig also), the general market is more of a background indicator - something to be constantly monitored but is not a big influence on my trading. If this is indeed the case, then it's apparent that the book's generous attention paid to the timing model was a result of misguided focus. In hindsight, it looks as if his timing model may have been more of an academic exercise, rather than a core piece of his overall investing strategy. Perhaps the mathematics behind the model should have been moved to an appendix and the book should have given more weight to his stock picking criteria. However, the model is still relevant for those who use it to for long-term market timing, like 401k investors.

Another important point to ponder is that the bulk of the book is essentially a trading system. And even though Zweig's system isn't computerized, it has been back-tested and optimized in the same way that a computerized trading system would be. This means that those who are following Zweig's system have now unwittingly become a "systems trader" - more specifically, an inexperienced systems trader who is trading someone else's system. This situation carries a few particular dangers.

First, you are now dependent on someone else's system - someone who is also not updating or supporting the system. Zweig won't be around to give you help if you need it. You should think about whether this is a position you want to be in for the long-term.

Second, many investors have never bothered to learn about the characteristics of the system (i.e. how the system's inputs and assumptions affect the return of the system) because they are blindly following the system simply based on Zweig's reputation. Blindly following a trading system's signals is fine (even recommended), but only when you completely understand how the system works.

Third, because the system's signals are long-term, it will take a long time to tell when the system stops working.

One of the most important lessons that should be learned from reading this book is one that most readers will probably miss. The lesson is that Zweig's system was not the reason for his success. The reason was the recognition by Zweig that, in order to be a successful investor, he had to do first-hand original research and personally develop his own strategy, instead of relying on other people for the answers. Therefore, investors who decide to use Zweig's system instead of coming up with their own research are actually missing the key point of the book. I remember one time around 1996, back in my "search for the Holy Grail" days, I became inspired by Zweig's theory on how interest rates affect the market. So I tested a system in Tradestation going way back (to 1934 or so) that traded the Dow Jones based on a moving average crossover of the Fed Discount Rate. The system impressively beat the buy-and-hold over the first 60 years or so - up until the mid-1990s. But when the Fed raised rates in 1994-1995 after the economy started picked up, the system got caught short even though the Dow went up from 4000 to 8000 or so. I didn't end up using his system, but his experience of building a system based on his own thinking taught me how to do my own thinking.

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