You might think that stocks with lower risk automatically generate a higher yield.
There is a stock market guru who can prove you otherwise; investment guru Martin Zweig.
In previous articles I have discussed the investment strategies of Benjamin Graham and Warren Buffett. Whereas Graham and Buffett mostly evaded the growth stocks, Martin Zweig is particularly looking for the best growth stocks.
The stock market guru named his strategy “growth, with a conservative twist”. Despite the risk profile of the shares, he managed to limit the risk of his portfolio through a careful analysis of the market. The recommendations from his newsletter achieved an average annual return of 15.9% and his newsletter was number one in the list of risk-adjusted returns from newsletters, published by Hulbert Financial Digest.
A big difference with Mr Buffett and Graham was Zweig’s spending pattern. Whereas Buffett and Graham invested all their money in the market, Zweig had a great love for gadgets and toys. He bought the guitar of Buddy Holly, Michael Jordan’s jersey from his first season and the motorbike from Dirty Harry.
He also bought the most expensive apartment in New York at the time for 70 million dollars on the top floor of the luxury Pierre Hotel. Two things, however, he had in common with Graham and Buffett: his ambition to beat the stock market from an early age, and his tireless efforts to make this happen.
His career as an investor started at the age of thirteen when he recieved six shares General Motors as a gift from his uncle. After completing various studies including a Ph.D. in Finance from Michigan State University, he began writing a newsletter in the Barron’s magazine.
In his first contribution he completely rejected a sales recommendation for AT&T stock. Not much later, the company who had made the buy recommendation filed for bankruptcy. After his boss went bankrupt after a fraud, he continued the newsletter himself, which quickly resulted in many followers.
Besides his newsletter Zweig taught at several universities, started an investment fund in 1986 (The Zweig Fund) and wrote an investment book (Winning on Wall Street) in the same year, founded his own consulting firm (Zweig Consulting) and I can continue for a while …
In short, the motto “work hard, play hard” certainly does apply to Zweig.
Profit development of Growth Stocks
I briefly mentioned Zweig’s vision for finding suitable growth stocks. In finding these growth stocks he focuses especially on the development of a firm’s profits.
If the price / earnings ratio is below 5, he does not even consider it. However, at the same time the price / earnings ratios should not exceed three times the market average.
Perhaps even more important is the acceleration of sales / profit growth, which in any case should not stagnate.
Besides, like many, he does not like debts, but as long as they remain below the industry average, there is nothing to worry about.
Market timing by Martin Zweig
In addition to the screening of these business characteristics, the market timing may be the biggest reason for his success. For example, a few weeks before Black Monday in 1987 he announced in a television interview that tough times were ahead.
Click here to watch the television appearance of Zweig in 1987.
Zweig recognizes market sentiment by looking at certain technical indicators. According to Zweig some technical sentiment indicators turn red even before the stock market turns red.
Some important indicators Zweig kept a close eye on:
- The discount rate and reserve requirements. In short, the monetary policy of the Fed. Famous is his statement “Do not fight the Fed.” If monetary policy gets tighter, this is negative for the market.
- The so-called “prime rate”, which is the interest rate the banks charge their most creditworthy customers. Zweig uses the following strategy: a lowering of the prime rate is a buy signal if the prime rate was below 8% (before it was decreased). A prime rate above 8% requires two cuts for a buy signal.
- Consumer credit – If this rises sharply, we are in the last upward phase of the cycle and interest rates will increase. This is a negative signal. Conversely, a decrease in consumer credit is beneficial because it often indicates the bottom of the business cycle.
In addition to this monetary model, he also used a model based on market momentum indicators. In case of a conflict between these two models the market indicators are preferred.
In the period from 1976 to 1995 Zweig managed to achieve an average return of 25% per year. In total, this amounts to an impressive 6793% in total. His performance during the last years of his life can be derived from his hedge fund Zweig Dimenna Partners.
From 2006 to 2010 Zweig Dimenna Partners achieved managed to make a profit of 90%. The majority of these profits however, were obtained in the early years. In 2008, Zweig reported a loss of 6%. Still a lot better than the market, but he continued to report losses during the stock market recovery of 2009 and 2010 (-3.5% and -3% respectively).
These losses arose from the fact that the hedge fund had both long and short positions.