From roughly 1975 to 1981 I worked as a money manager in stocks, registered as an Investment Advisor with the SEC. Most of that time I was also registered as a Commodity Trading Advisor (CTA) with the CFTC.
How I Picked Stocks
For picking stocks I used Goodman Wave Theory, seeking setups on weekly range charts. I also used Perry Wysong’s Insider Trader letter and a cash ratio I developed to gauge a company’s financial stability. I managed perhaps $2,000,000 in accounts. Not much, but stocks are like shooting ducks in a kiddie pool compared to commodities, so it was a nice income supplement.
Sidebar on fees. I found it fascinating how the SEC and the CFTC felt about manager fees at the time. The CFTC frowned on a flat percentage-of-assets fee and strongly promoted a percentage-of-profits approach. The SEC, part of the same government, basically forbade percentage-of-profits fees and insisted on a flat percentage of assets. For commodity accounts I charged 2% of assets and 15% of profits. For stocks, where most accounts were relatively small, I charged 4% per annum of assets. I received several warning letters from the SEC that my fee could be considered excessive. None of the clients complained while they were making 50% or more a year in a flat market.
Performance was spectacular, considering the market was mostly in a trading range with a small upward bias between 600 Dow and 900 Dow, after the big bear market of the late 1960s and early 1970s. Accounts that started with me in 1975 or 1976 were up 300% by the time I left for Hawaii.
The ATO Trade
One stock that did very well for me was ATO, the old Automatic Sprinkler company, which also made fire-fighting equipment. The company had recently brought in Mr. Harry S. Figgie as CEO, and he set ATO on a binge-buying, mini-conglomerate path. The stock looked beautiful on the weekly chart per GWT, and insiders were buying in very significant amounts. My proprietary cash ratio was excellent, which let Mr. Figgie indulge in his corporate shopping spree.
I bought the stock for my clients around 5 to 5 1/2, looking for an objective of 12 to 13.
A Letter to the CEO
Being young and a little full of myself, I decided to write to Mr. Figgie and enclose a chart with my Goodman analysis showing the 12 to 13 objective. Like Babe Ruth pointing to left field, I also told him it would happen within two years.
Off went the letter and I pretty much forgot about it. A month or so later came a nice reply from Mr. Figgie saying that “Nothing would make me happier than to see your price objectives met. But they do seem a little optimistic to me at this time!”
Fifteen months later, there was ATO at 12. Of course I felt obliged to remind Mr. Figgie of my earlier projection. I wrote a brief note enclosing the earlier Goodman chart as well as the current ATO weekly chart.
Back came a much longer letter from Harry. He said he was enormously impressed and was going to recommend to the Board that I be given a portion of the company’s pension fund to manage. Alas, it did not happen. I had not been in business long enough to qualify as an ATO manager, and “He is very young to apportion such sums of money.”
You win some, you lose some.
Afterword
The broker who directed most of the stock money to me was not comfortable with my trading from Hawaii and closed most of the accounts. Several clients called to say they would simply re-open directly with me, but I concluded I would let it go, as I would be very busy in Hawaii opening the office for Heinold.
Around 1985, shortly after I returned to Colorado, I was walking in a shopping mall with my wife when one of my old stock clients recognized me and stopped to talk. “Do you still trade stocks? I wish I could have stayed with you. The broker said I could do much better in penny stocks, but all the profit you made for me in three years was lost in a few months.”
I knew well how the penny stock business operated at the time. I did not have the heart to tell her that the money was not really lost so much as moved into someone else’s income.
This post is educational commentary. It is not investment advice. Trading futures and FX involves substantial risk of loss.
Good Trading!
Michael Duane Archer
Related Reading
- Getting Married to a Trade: Position Size and Your Equity Line
- Three Charlie Goodman Stories and the Trading Lessons in Each
- Goodmanisms: Charlie Goodman’s Sayings on Trading, Explained
Keep Learning the Goodman Way
If this article was useful, these are the next steps:
- The Method: propagation, intersection and the 3-C Principle, drawn plate by plate.
- The Goodman Library: the books, from Goodman for Grasshoppers to The Goodman 6 & 6.
- The Trader’s Playbook: the Molokai setup in one printed, numbered volume.
- Mentoring: work one-on-one with the authors.