Observations

I learned a lot in my professional life.

A PhD gives you the confidence to look into the unknown. In school you learn a structured process to find what is new. In 1977 I decided to forecast the financial markets. First, though, I had to define “the system”. How everything is related. Then, I wanted to become No.1. I knew what it would take. The same intensity as when I won the Italian tennis championship.[I was ranked No. ! by Hulbert in 1989]

I decided to start with mutual funds. I chose a conservative family such as Vanguard. In 1989, for several months, Hulbert ranked me No. 1 among mutual fund and stock investment advisors.

Finally I realized that mutual funds have considerable limitations when you need to implement a strategy.

Stocks offer more opportunities. But it takes additional analysis and understanding of why the stock price of a company behaves the way it does.

When I began recommending stocks, I liked the idea of momentum. The problem is that momentum does not tell you when to sell. Then I looked at value. But value stocks did not perform well in the late 1990s.

The management of $3 billion in interest rates derivatives and $1 billion in currencies improved my understanding of how the markets work. What are the main forces identifying risk and opportunities?

I used this experience to merge the positive features of momentum, the advantage of buying value stocks, with the forces that drive the fortunes of a company.

For instance, S&L stocks represent a great investment when short-term interest rates decline. But they should be avoided when they rise.

Our current research is now focused on ranking stocks and stock sectors based on their performance during the four phases of the business cycle. As soon as we establish the direction of business activity we immediately know which stocks we should buy or sell. I am very excited about what we are accomplishing. I trust you will be, too.

(This Observations appeared in the 7/12/2004 issue of The Peter Dag Portfolio).