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A Moneychanger
Interview:
AL THOMAS SAYS,
IF IT DOESN'T GO UP, DON'T BUY IT!
Albert W. Thomas has spent most of his life in
the field of finance. After he became interested in commodities he
bought a seat for his personal trading on the Chicago Open Board of
Trade, now known as the MidAmerica Commodity Exchange. Later he
became a full time trader and commodity broker for a few select
clients.
In 1981 he sold his membership on the Exchange
and with his wife, Carolyn, lived full time aboard their 41' ketch,
the Aumakua (which means guardian angel in Hawaiian). They sailed in
Florida and the Bahamas for two years.
In 1984 he founded World Trading Group which grew
to be the seventh largest introducing commodity brokerage firm in
the U.S. with 35 offices from coast to coast, Alaska and Canada. It
was sold in 1992.
He is a graduate of Northwestern University with
a degree in Commerce and a member of Mensa. He is now president of
Williamsburg Investment Company, a factoring firm, and also trades
stocks, options and mutual funds.
It was Mr. Thomas ’ book that caught my
attention: If It Doesn’t Go Up, Don’t Buy It! Subscribers
often ask me what they should do with their 401(k) plan, etc. which
is invested in stocks. Should they just pay the penalty and get
out, rather than ride their stocks down? I didn’t have a better
answer for most of them. However, in his book Al Thomas outlines a
trading strategy that can protect investors trapped in these plans.
He also offers a wealth of trading wisdom that anybody can use at
any time in any market. Mr. Thomas kindly made time for this
interview on September 16, 2003.
Moneychanger
Tell me about your trading experience.
Thomas
My experience comes from real time, so it's
not theoretical. Way back in dinosaur times -- I hate to tell you
how long ago it was cause then you’ll really think I'm an old guy &
throw me away -- I worked for somebody. It was the only time I
ever had a job, and I got fired. We got in a big argument and he
fired me and I sued him and I won. So I got some money and that's
when I went into the market.
I knew a gentleman who was a stockbroker. He
said, “Awww, I'll help you make some money.”
And I started trading. I gave him discretion and
Boy! He sure gave me a lot of action, but I didn't make any
money. Still, he was a very good broker because he kept me even
with the commissions, which is better than most brokers do.
At his offices one day and I saw a chart from a
company called Mansfield -- I don't even know if they're in business
anymore. I said to myself, Wow! That's the way you trade.
That started my quest for technical analysis and understanding the
markets. The first book I ever found at the University of Chicago
library was written by Richard Wyckoff, under the name, Rollo Tape.
I read that book, and back then you didn’t have any copy machines so
I copied it all by hand. It wasn't that big, but I copied it and
wrote all the charts in, and that started me on my quest to learn
how to trade. It took me a long time, because I guess I'm not that
bright.
Eventually I bought a seat on the Chicago Open
Board of Trade; just for my own personal trading. Over a few years
I learned how to trade, because I traded with my own money,
not other people's money, as most of these mutual fund
managers do. If you don't trade with your own money, you will never
learn how to trade.
All your readers ought to know (it's so simple,
but you will never hear this from a broker) that the Great Secret of
the Market is selling, not buying. Any idiot can buy
but if you don't know when or how to sell, you will never
make money. As a floor trader, when I took a position in anything,
whatever it was, I immediately put an open stop loss order on that
position. That way I knew exactly how much I was willing to lose,
rather than how much I was going to make.
Everybody thinks when he buys something, he
thinks he's gonna make a fortune with it. I'll tell you this: nine
times out of ten you're not, and probably higher than that. But if
you say to yourself, I'll buy this stock at $40 a share, you ought
to know immediately how much you're willing to lose if you're wrong
-- and you're going to be wrong a lot. When I was a floor
trader I was wrong 40% of the time, even 20% of the time, and 40% of
the time I made money. But you have to be willing to lose money in
small amounts if you're planning to make any big money.
Don’t worry about each individual trade, think about the long-term
aspect of your positions.
Moneychanger
I've heard the proverb, "Learn to love
small losses."
Thomas
That's correct. Learn to love small losses,
and let your winners run. Many, many times I would have winners
bring in 300%, 400% even one trade that was a 1200% winner. In one
trade I started out with a $200 total risk and in four days I made
$10,000. That's a pretty nice risk/reward ratio, and it doesn’t
happen very often.
And in my book, If It Doesn't Go Up, Don't Buy
It, I tell people to trade in mutual funds. I have chapters on
stocks, commodities, options, bonds, gold, all those things. At the
end of those chapters on stocks, commodities, and options, I have
one sentence: "Don't trade options. Don't trade stocks. Don't
trade commodities.” People are not qualified to tade. They don't
know how to disciplined themselves enough to limit their losses, and
that's the whole secret.
I tell people to trade mutual funds, and only the
funds that are going up. Unfortunately, most of the mutual
fund managers either don't know how to trade, or the charter of the
mutual fund limits them, usually requiring them to remain always
100% or 95% invested.
How can you be invested in a market that's going
down? In the year 2000, people who followed the directions
in my book made money-- and you can follow them, because if you can
count from one to two, you can do what I. They made money in 2001,
and in 2002, and we're ahead this year. We have not had a losing
year, and over the past five years I have averaged a 30% return on
investment. That's cash on cash, not the hogwash of annualized
return, because I don't go for that stuff. I want to know what my
real money in the bank is, based on what I had when I
started.
Moneychanger
Let's talk just a minute about
trading. I don't think that most people are constitutionally
equipped to trade.
Thomas Correct. People are not disciplined. They
become emotionally tied to whatever investment they’ve bought. You
can't get tied to these things. Whether its 100 shares of stock or
whatever, you have to think of it like it's just a potato that you
stuck in the oven. Maybe it'll get done and be edible, and maybe it
won't.
Moneychanger
That emotional tie to investments
makes bull and bear markets work, doesn't it? Take stocks, for
instance. A fellow buys some stocks, the stocks go up. That's
great. Then the stocks double or triple and he begins to think that
he’s an investment genius. And then, the primary trend turns, as it
did in 2000, but he still holds on to the stocks, because, after
all, he made money with them once. Even though they're down
a little, he’s going to stick with them. Stocks have been good to
him, so he’ll be good to them.
At last the stocks drop far enough to eat up all
his profit, and now he’s at even money. Once again he’ll say to
himself, “Naww, I can’t sell. I've already made money with these
stocks before, and I'm going to stick with them.” He’ll ride them
down until they lose 95% of peak value because he fell in love with
them.
Thomas
I’ll give you a perfect example of that. PMC
Sierra started out at $18 and went to $256. It was featured on the
front page of Investor’s Business Daily. I read the article,
then I turned the page and looked at the chart. I said to my wife,
"This is a dead bang short." But I'm a very cautious trader, so
unless this thing breaks 165 I'm not going to sell it. Three
days later it went to 160. I got short, but finally I couldn't
stand the prosperity, so I covered my short at 65 -- in a very, very
short period of time.
You can't believe all of this stuff that they
write, because they are constantly pumping up stocks. People think
the only thing you do in the market is buy. If you don't learn how
to sell, you will never make money.
Moneychanger
So far you've laid out two secrets of
trading. The first is to limit losses.
Thomas
Absolutely
Moneychanger
And the other is that you must always
know when and how to sell, whether you sell at a loss,
that is with a stop loss order, or at a gain.
How do you protect your gain? Do you follow it
up with a trailing stop order?
Thomas
Yes. You can put in an open stop loss
order. I recommend that every Friday or Saturday you look at the
paper to see where your positions are, and whether you want to raise
your stop. You never lower a stop loss order. When you
raise your stop, you place the stop as of the close on Friday.
Moneychanger
"Never lower a stop" belongs to
the discipline of trading. When you fall in love with an investment
, you start thinking in terms of human loyalty. "I think that
stuff's going to come back," you say to yourself, "That stop looks
too close, I think I’ll drop that stop a little bit." I've never
traded stocks, just gold and silver and commodities, and so I know
it from that standpoint, but trading is trading.
Thomas
When you look at the charts you can't tell
the difference between stocks or bonds or commodities, because
charts are diagrams of the thinking of the group of traders.
Moneychanger
The title of your book is, If It
Doesn't Go Up, Don't Buy It. [Laughing] Why did you pick that
title?
Thomas
Because it's true. There are two major things
that I explain in that book. My rules are, (1) You must be in
the market when it is going up and (2) You must be out
of the market when it is going down.
And I show you exactly how to do this. It is so
easy, brutally easy, but no broker will ever tell you this. The
book teaches three or four different timing methods, any one of
which will work. When it is going up, then you have to ask
yourself, “What am I going to buy?”
I say buy mutual funds, not individual stocks,
because people are not stock pickers. Leave that to the
professionals. Leave it to the mutual fund manager, but you only
want to stick with the mutual manager who is the smartest guy on the
block, not the other dummies. There are about 12,000 mutual funds
out there and probably about less than one-tenth of 1 percent of
them are worth buying at any time. I show you exactly how to find
the best performing mutual funds. Buy only no load mutual funds
and only funds that have no redemption fees. Why would
you buy a mutual fund that has a 5%-8% load on the front? You are
immediately standing in a hole and it is not necessary. When you
are digging a hole and you want to get out of it, you stop digging.
Then you want to climb out of it and buy your
funds at a discount broker. Your big service oriented brokerage
companies do not sell no load mutual funds, or they have another
little cutesy, such as pay us 1½% of your account every year and we
will let trade as many things as you want. Again they don’t always
offer the no load funds. You have to be very careful. Buy only no
load funds and buy only those funds that are going up. You can find
them very easily. I have a whole list of them in the book or you
can subscribe to one of the services that I do. That is another
good way to do it, because I let them do all the work.
Basically I teach the simplest way to invest for
the long-term investor (and I mean the long-term investor, because
this is not a get rich quick scheme). He follows the 200 day moving
average: for example. You can go to Investors Business Daily’s
first section, where they have a mutual fund index with a 200
day moving average line. When that index number goes above the 200
day moving average line, that is when you buy mutual funds. That’s
when you find the best performers on the block, the ones that are
going up. As long as that index number is above the 200 day moving
average line you stay long. When it turns down, you get out and you
go into cash or bonds or something else that I mention in the book
and sit. Do not give your money back. That is
absolutely prime rule number one.
Moneychanger
We are talking about a signal where
the fund rises above its 200-day moving average.
Thomas
Yes, that is the simple one.
Moneychanger
Do you follow the 200 day moving
average for the fund alone, or do you also add the 200 day
moving average for market indexes, say, the Dow Industrials plus the
S & P, or what?
Thomas
Both. First of all, the general market must
rise above its 200 day moving average whether it’s the S&P 500
index, or the SIBD mutual fund index, whatever it is. When you go
to find the good funds, every single one of them that I recommend
will be well above its 200 day line, I know that. However, as your
fund moves up, you want to put in a maximum 10% stop loss limit. Do
not ever give back more than 10% of any position that you own.
That’s too much. These brokers and advisers that let you lose
10-30% of your money in the last three years ought to be shot. That
is absolutely not the way to build a fortune.
Moneychanger
You are looking for a rising mutual
fund in a rising market?
Thomas
Yes
Moneychanger
I understand “If It Doesn’t Go Up,
Don’t Buy It”, but what about the opposite? If it doesn’t go down,
don’t short it. Is that true, too?
Thomas
If the market’s going down you can buy it,
too, but you have to know which funds to buy. In my book I have a
whole section on buying mutual funds that always rise while
the market is falling. They are called bear funds. There
are at least a half a dozen really good ones and you will make just
much money while the market is going down as when it goes up.
Moneychanger
In fact, usually more.
Thomas
Well, the old saying is that the bear market
goes down three times faster than the bull market goes up.
Moneychanger
Right. What is your view of the
overall direction of the market? That is, what is the primary
trend of stocks.
Thomas
I am a long, long term bear. I got that way
in 2000. I am a short-term bull, intermediate term. We bought
really strong mutual funds for this rally and we are up between
20-30% at this time. We have stops in, though. If we got stopped
out today, we would have a 20% profit locked in. That’s better than
a poke in the eye any day.
Moneychanger
Why are you a long term bear on
stocks?
Thomas
Go back in history as far as your want to go
(I have a hundred-year study on this) and every 16 or 18 years there
is either bull market or a bear market. We had an 18 year bull
market from 1982 to 2000. A bear market of equal length has
followed every bull market. So we are a long way from the bottom.
I don’t like to talk about fundamentals because
you don’t need to know all that garbage that they pour on you from
Wall Street. That’s nonsense. I don’t believe in doing research at
all. The only research I want to do, is I want to look and see if
the fund I am buying is going up. The rest of it is total hogwash.
You don’t need to know any of that stuff.
Moneychanger
So you don’t have a long term target
for the Dow Jones Industrial Index?…
Thomas
No, the market tells me what it is going to
do. I don’t tell it
Moneychanger
So when starts going up, you buy it
and when it stops going up, you sell it, as measured by its position
above or below the 200 day moving average?
Thomas
Yes. That’s the long term one for the
investor who’s working and doesn’t have time to go trading around
and can’t watch the market everyday. He just needs to look at it at
least once a month and when he sees it going against him, get out of
there. Do not stay with a loser. Getting into a bad stock or a bad
mutual fund it is worse than being in a bad marriage -- you are
losing all your money.
Moneychanger
What do you tell people who have
Keoghs or IRAs that they are locked into? Often times the choices
that are presented to them are not good.
Thomas
Well, I know that, and I cover that also in
my book. When you have a 401K, for example, and you are allowed to
trade six mutual funds, you’ve got to pick the best of the six. At
least one of them that has to be half way decent. Sometimes they
have a dozen or a choice of one of the fund families, such as
Fidelity or Invesco or somebody like that. They usually try to
limit you, but you can switch from one fund to another with no
penalty or commission charge at all. You will have to do some
work. You’ll have to put up the individual charts right on the
screen and the chart source that I use the most is
www.bigcharts.com. If you go to their interactive section, you
can put in the 200 day average moving line right on that chart on
the screen in front of you. When it goes above it, you buy it and
when it goes below it you sell it. And you follow that mutual fund
up with your 10% stop loss.
Moneychanger
What is the logic behind using a
200-day moving average as opposed to a 300-day or 100 day?
Thomas
I have looked at a lot of different moving
averages, in fact in my book I discuss three. I discuss the long
term one, which is the 200-day, which is for Mr. Average Investor
and he should follow that one. I have a 50 day one, for people who
want to trade a little more frequently, and then there is a 20 day
moving average I use that for trading for myself and for a trading
stop loss order.
I didn’t write my book to teach people to be
traders. I wrote it to keep from losing their money. That’s the
problem.
Moneychanger
Why did you write your book?
You told me you got mad at Wall Street. What happened?
Thomas
I used to own a brokerage company. I had one
of the biggest brokerage companies in the country. When I sold my
company in 1992, World Trading Group, I had 35 branch offices,
brokers all over the country, two offices in Alaska, one in Canada.
Then I went back to trading again and I used to watch these guys on
CNBC, and every once in a while they would say something even
dumber than usual and I’d holler at them. Finally my wife said,
“Since you're so smart, why don’t you write a book and tell people
how to do it? I thought about it for a while and put the book
together.
But I really got mad because I have yet to hear
anybody on CNBC talk about stop loss orders. Nobody talks about
them because the mutual fund managers would get mad at them, so they
would lose their advertisers. The stock companies would get mad at
them. But all this garbage that they tell you everyday about what a
great stock this is -- forget it!! When they have the CEOs
onscreen talking about their companys, good gosh, you don’t
need two brain cells to rub together to know that this guy is not
going to tell you anything bad about his company. All I have
to do is look at the chart. I don’t have to listen to him. I can
tell you right away if it’s worth buying or not buying.
Moneychanger
And there is a difference between a
company as an operating company and a company as a stock.
Thomas
Oh, absolutely
Moneychanger
The reason one prospers and the other
one doesn’t are not necessarily the same
Thomas
Correct. For example you can go to Morning
Star, the great be-all and end-all of information for stocks and
mutual funds. There almost every mutual funds rates either 4 stars
or 5 stars, even those who have lost money every year. How they
ever get to that is beyond me. Don’t pay any attention to 5 star
funds from Morning Star. They don’t know what they are talking
about.
Moneychanger
How can my readers buy your book?
Thomas
My book is listed on the best sellers at
Amazon.com and sells for $29.95. However, if you want to save 20%,
order it on my website at
www.mutualfundmagic.com and I’ll give you 20% off and throw in a
free three-month subscription to my newsletter. This is an email
subscription only. It goes out all over the world.
Moneychanger
I truly appreciate the information for
my subscribers who find themselves trapped in stock investments
because of their pension plans they can’t get out of.
Thomas
No, but they can. Even if you are in an IRA
or 401(k) you can sell and put your money in a money market
account. When the market starts down, do that. Don’t sit
with some piece of garbage that is going to smell worse every single
day and is going to make it sick to your stomach because you have to
hold onto it. Don’t do that.
Moneychanger
Back to the secret that you opened up
with: You have to limit losses.
Thomas
Absolutely
10% loss you can live with. If you’ve got 5 positions
and you have a 10% loss, it isn’t going to hurt you because it isn’t
going to make that much difference in your overall portfolio. But
brokers allow you to lose 30%-40%-50% and they never even call you.
The average broker has 300 customers and unless you are in the high
six or seven figures you are never going to get a call.
Moneychanger
What you think about gold and silver?
Thomas
Oh, I am a great big bull on gold and
silver. In my book that was just published in March I say that this
is the only bull market that we will see for several years. And I
am very much in favor of establishing a long term position here.
Moneychanger
How would you establish that position?
Thomas
You can do it any number of ways. You can
buy gold stocks, but again, I don’t like people to be stock pickers.
You can buy gold mutual funds and gold coins. Or you can go on the
commodity futures market and buy bullion, but you’ve got to take
delivery or keep rolling over your position. I think mutual funds
are the easiest way to do it. Every time that London gold fix or the
gold index for London settlement gets anywhere near the 200 day
moving average up, that’s when I buy some more. I am looking 3-5
years down the road. I am sure you know Richard Russell. He thinks
that gold and the DOW will sell at the same price sometime down the
line.
Moneychanger
Well, it has done that several times
the past. It was 1:1 in 1980 and 2:1 in 1932 and in 2:1 in 1896
when the Dow began. That’s a reasonable target and it doesn’t have
anything to do with the absolute level of either the gold or the
DOW. They because they might cross at 1,000 or at 3,000.
Do you have a favourite gold mutual fund right
now?
Thomas
Well, the one I happen to own at the moment
is called Rydex Precious Metals, but there are several of them that
are good. US Global Investments, UNWPX, SCGDX, USAGX, PNPIX, but I
think that’s leveraged. Those are no load with no redemption fee.
Moneychanger
You would change the mix of the ones
you bought to their performance in the market?
Thomas
Well, I don’t trade around a lot. You don’t
do lot of trading with my method. I want you to get into something
and sit with it. However, if the fund that you’re in isn’t
performing right, then you change to a different fund. That would
be the only time you would do that.
Moneychanger
Thank you for your time and I very
much appreciate your help for my subscribers.
Thomas
Read what the customer reviews are on
Amazon.com about my book. I like helping people. I read what you
write in The Moneychanger and it’s right on target. Keep up the
good work.
Moneychanger
Thank you, Al, very much.
Readers can order Al Thomas’ If It Doesn’t Go
Up, Don’t Buy It and get 20% off by ordering online at
www.mutualfundmagic.com or sending a check for $28.90 total to
Williamsburg Investment Company
830 Waikiki Drive
Merritt Island, Florida 32953
321-453-5300
You can order by phone with a credit card at 1
(800) 783-7870. Al’s Internet Specail includes three months of his
e-mail (only) newsletter, Over My Shoulder, for free.
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