Transcription
[Music] Hello and welcome to another episode of Investing with IBD podcast. It's Justin Nielsen, your host, and it's August 30th, 2023. We're taping, uh, you know, for you tomorrow, and, uh, so we're gonna go over what has been going on with the market. And to help me with that, as he does every week, is Arusha Paris. He's a portfolio manager over at O'Neill Global Advisors. How you doing, Arusha?
I'm doing well, Justin. Yeah, so we're right here, uh, ahead of Labor Day. You got any Labor Day plans?
Uh, well, we have our Fantasy Football Draft. Yes, we do. I knew that after that this time, right? I'll show up this time. Uh, so yeah, fantasy football drafts are happening. Um, but before we, you know, even get into the fantasy football, we've got stocks to talk about. And who better to talk about them with than David Ryan, who was a three-time, uh, investing champion back in the 80s. Uh, he was a protege of William O'Neill. He worked with him, uh, ran the new USA fund, uh, ran a number, you know, ran a lot of money for, for Bill back in the day, and then had his own hedge fund. And now you can see him every week on Tuesdays on IBD Live. Uh, welcome back to the show, David. How you doing?
Doing, doing great. It's always great to, uh, to talk the market with you guys.
Yeah, absolutely. I feel so lucky because, um, back in November of 1997, it is the first time I ever saw David Ryan speak. I was just newly graduated from UCLA, uh, an alma mater that I share with, uh, David Ryan. And, uh, there he was speaking with Bill O'Neill. It was actually a UCLA-USC game. So David had told everyone taping it at home, and no one is allowed to tell me the score. And I was right there with him because I was doing the same thing. I had given up my tickets to the UCLA-USC game and was watching David Ryan, Bill O'Neill speak. And that was kind of a, a life-changing moment for me, um, and, and stocks and my own investing career.
Um, before we go too far, I hope that that weekend, yeah, we should look that up. And, yeah, yeah, we will have game and then we'll take that helmet down behind it, replace it with a UCLA helmet. Yeah. Well, UCLA had a nice run because, um, while I was going there, I, not to brag, but UCLA never lost against USC. So I'm just gonna, I'm just gonna throw that out there. And I had a full five years there. So, um, but, uh, I also want to throw up this picture real quick. Uh, this is, um, you know, back in the day when David Ryan was working at the, at the firm. Here he is surrounded by, uh, the chart books, the big, you know, I think those are probably the maroon books over on the left, um, he's got the daily graphs from the New York and the American, it looks like, on the right-hand side there. And, gosh, he's a little, little baby there.
Yeah, I know. Well, that's, that's when they required you to wear ties at work. Maybe they should bring that back for, uh, for IBD. Well, but they also had a lot of smoking in the office back then too. Oh, I can't. Yeah, you did. I was in the front cubicle and there were, let's see, one, two, four going across and about five going back. And and some of those cubicles, all you would see was just smoke rising up from the cubicle. So it was, it wasn't good. Yeah, yeah.
So, well, uh, here we are in the, the current day, and we've got a current market to talk about. One of the things that happened this week, um, on on Tuesday, was a follow-through day. So we had the index, especially the NASDAQ Composite, drifting below the 50-day moving average line. Um, and then, you know, I mean, look, a lot of us were getting bearish. I mean, especially after that Thursday when Nvidia reported its earnings, the market gapped up, got resistance at the 50-day moving average line, turned tail, and it just seemed like, oh, well, how negative can you get? How negative a day can you get? That just was a classic downside reversal. But here we are, back above that. What do you think of, uh, the action here, David?
Well, yeah, very surprising. I mean, I thought it was gonna, it was going to continue on on down, but it, it held. I mean, it got very oversold. So I expected if, you know, it, we've had about three or four days now up. Now, it'll be very interesting to see if it can hold or if we go back down. If we go back down below that, that wouldn't, that wouldn't be good. But if you can just drift off for a few days and then continue on, uh, that would be good. The one thing I'm, I'm seeing though, is, um, not as many, not as much participation. There are, are a few groups that are doing well, but will the market come back as strong as it was back in, you know, June and July? Maybe May, June, and July? So we'll just have to see how it, uh, how it plays out.
So David, you're, you're the the volume expert here. Um, and so when I look at the, the volume down here on the NASDAQ, I know it's lighter volume around here, especially right before Labor Day. Does that bother you here? Does that make maybe take a look that follow-through day a little bit, a little bit more, be a little bit more suspicious about the signal?
Yeah, you would really like to see volume above average daily volume when you are following through. Uh, and, yeah, yes, you do have to take into consideration that we are in a holiday, you know, leading up to a holiday, and so the volume is naturally going to be lighter than it, than it usually, uh, is. And there's always, I've always found in a holiday week like this, this, there seems to be a bias to the upside. There's, I don't know, maybe everybody who would who wants to sell, or it has already sold, or they're going to wait until they come back after Labor Day. So there seems to be a bias to the upside in a week like this. So, but yeah, well, I think the, we'll really see what the market's going to be like when we get back to Tuesday of next week.
Yeah, so now David, you made a, a pretty bold call that you think that the NASDAQ has hit its highs for the year. So your expectation was that, um, you know, we're not gonna, we might go back and forth a little bit, but we're not going to have a roaring bull here, uh, to end the year. But you're also flexible. Um, I mean, sometimes Twitter demands that you make the definitive statement and not be wishy-washy, but then of course, if you're too definitive, then they're, you know, very quick to say, oh, you were wrong, you know, how dare you. Uh, so does this follow-through day change your, your stance at all?
Well, let's say this is that, uh, I have, I have turned around. I covered any shorts that I had and I started adding to some of the positions and, and buying a new, a couple new positions, uh, to that. So I'm not, like, you know, setting my feet in concrete and I'm not moving. Um, if I see the market, I mean, you always have to be flexible. And I was, I wasn't using the NASDAQ Composite. I was using more of the, the triple Qs, looking, looking at, um, you know, this seven, I guess they call them seven or eight magnificent stocks, and what they were doing. And a lot of those have had huge moves for the year, had come off. A number of them went through, were below the 50-day moving average. Now, a few of them have have moved back above that. Um, so they're kind of writing themselves. That I would still be surprised, and we're not that far away, but, um, I would be very surprised if these came on and just had another huge ripping move to the, to the upside after what they've already done. Now.
Okay, well, before you go there, Arusha, I have to interrupt and just say, UCLA did beat USC on November 22nd, 1997. The score was 31 to 24. Thank you so much, Ali, for looking that up in the background while we were talking. So, well, let's go ahead. Quarterback with Troy Aikman. The quarterback at that point, I think it was, I think it was almost 90 seconds before. Okay. What was it? Did it down at that point? Um, I'll have to look that up too. Okay. But go ahead, Arusha.
I don't like that interruption at all. Right. Exactly. See if we can edit it in post. Exactly. Uh, so David, now, during this pullback, or, you know, kind of this correction that that we just had, how did you handle, kind of, the individual positions? Were you lightening up a lot, going a lot to cash, or were you holding on to some of the ones that you might have had some bigger gains?
Um, I, I would lighten up on the ones where I didn't have much of a gain, or if I was even on them, those would be the first ones I would, I would kick out. And then even on ones that I had a big gain, then I would even cut back some of those. And then, uh, and and then it helped and to be short some stocks, uh, as the market came off. That that helped protect. And so, but some of the names I've been with for a long time, I continue to continue to stay with those. Let's talk a little bit because you were, you were pretty big on the TBT trade.
Yeah, of course. Uh, this is one where if you want to be short bonds, uh, and go in the direction of yields, that's something where you can use, uh, TBT, or, uh, there's the, the triple leverage TMB. Um, but you were, you were pretty bullish on the TBT as you saw rates going up, the 10-year treasury going up, a lot of these yields, uh, increasing. But it seems like one of the things that really helped this market was that we see, we saw the yields come down quite a bit.
Is, uh, yeah, and then you use this macro picture. Oh, yeah. I mean, I try to look at, uh, as many things as I possibly can to give me a clue to which way the market's going. And and when that started moving up and out of that, that, uh, that base, I guess it was in the 30s, mid-30s, that, uh, yeah, right there, that that's where I, I started buying that position back because it had based out for a long period of time. Now, it got close to the highs, but then I think a, a week ago, it might have been on us, uh, yeah, last week, this, it actually gapped down, but held above the 21-day moving average. And so I did cut back some on that position, but I held the rest. But then, uh, yesterday, when, when, uh, that JOLTS number on the unemployment came out, then those things really started to break. And so I actually eliminated the rest of the position. Now, today, I guess they were up just fractionally. So we'll see if they can hold in here. Um, but I, I get a, uh, you know, I get a great clue of what the market's going to do by looking at what interest rates are going to do, what, what the in, what the dollar is doing, what commodities are doing. So there's a lot of things that go into, uh, my stance on the market. It's, it's not just the index, it's, it's a lot with of individual stocks, but it's some of these, these other things. And I think on one IBD, uh, live, uh, segment, we showed the relationship between the TBTs and, and growth stocks or the triple Qs. And you'll see that when rates are going up, the Qs are going down, and when rates are coming down, the Qs are moving up. So there, there's a great correlation between, between, or at least inverse correlation between the two.
And you're not worried about looking at too many indicators to create maybe too much noise?
Um, no, I mean, it's there. I mean, there's not that much. I mean, you really should be looking at interest rates because the interest rates of the price, price of money, and every individual, every business in the country is affected by interest rates and, and where they're going. So I think that's an important factor to look at. Uh, but, yeah, you never want to put all your weight into one indicator. But a lot of mine, yeah, again, comes from, can I find enough individual stocks to buy? Uh, and, and can I employ my money at what position can I get in these stocks? So that's where I get a big clue to what's going on.
And, and maybe you just kind of answered this, but I was going to ask a follow-up to Arusha's question, is, you know, when you're looking at a number of different indicators, what do you do when, you know, different indicators are telling you different things? Like, um, or, or sometimes those relationships break down where you expect an inverse relationship, but then all of a sudden they're going together. What do you kind of do in those situations?
Well, they, then it go, it all goes back to the individual stocks. Do, are there enough individual stocks to to be fully invested? Or if not, at what, what percentage invested, uh, am I? One, one indicator that a lot of people always seem to bring up, which I have, I found is good, but it's, it's so inexact, is a sentiment. You know, when everybody says, oh, you know, the sentiment is so bad that the market has got to rally. Well, you just don't know where that level is, where the market really is going to start moving higher. And so some of these things are very, very general, and some of them can be a little bit more precise. I always think of the sentiment as kind of telling me what kind of environment I'm in, and then I use the price to kind of do the timing. You know, in the same way that a lot of times fundamentals on an individual stock will tell me, hey, I'm in a stock that, a good company, and then the chart is that confirmation piece that tells me, you know, again, what the timing is. Um, that's, that's what I do personally.
Um, uh, what about the Russell 2000, uh, small caps? Uh, you know, a lot of times people look at the small cap market and, you know, as a gauge of how much strength we can expect. Certainly, the, you know, the small caps were definitely hit hard by the, the March, um, you know, banking crisis that was going on with Silicon Valley and so on. A lot of regional banks in the Russell 2000. Um, this got support at the 200-day moving average line, but doesn't look nearly as strong as the NASDAQ. How does this factor into your analysis?
Uh, well, it's, it's just one more sector of the, the market, smaller stocks. I mean, I, I can see that the, the relative strength, right, getting on it, it's 59, and it's close to its lows, and even, and it's really been sideways. It's really been sideways for most of this, uh, most of this year. When I, when I look at the chart, yeah, I guess it came down and made a low last June, and it's just been bouncing between about 2016, 170 back and forth, and just, and basically going sideways. And even, even in the last couple of days, it's rallied, but again, on very light volume, right back into its, its 50-day moving average. So, uh, and, and there are a lot of financials that are that make up this index, and you would like to see a little, a stronger strength in the financials because that's, you know, if banks are doing well, usually the, the overall economy is doing well. So, but this is one I, I rarely have ever trade, and it's, it just looks like a big sideways movement, uh, at the moment.
So what are some of the, the sectors that are, are looking more interesting to you right now?
You know, if, uh, if I, you bring up, uh, it's G3533, that's, uh, G3533 is the symbol. It's oil and gas machinery and equipment. And, um, this is formed a nice, it had a move up from its lows in May and June, up, uh, and it's just kind of drifted off for a, about two or three weeks, and now looks like it's starting to go into at least a, that's a, that might be a nine-month high. That's where, uh, I found a number of individual stocks doing well. And then there was also, uh, G1310, which is, uh, U.S. Gas and Exploration. That's, this has been consolidating for the last, uh, over a year, has come up, kind of built a, kind of a handle, and seems to be doing a little bit better. And that's, a lot of this, this will be, you know, uh, influenced by the, the price of, uh, of oil. So, but this is one group that held very well as the other parts of the market came off, and seems to, has come up fairly nicely in the last few days.
And we'll definitely get to some of the stocks that are in the oil and gas space in our third segment, but we're going to take a quick break. And when we come back, we're going to have David Ryan talk to us a little bit about how to do your position sizing properly. Stay tuned. We'll be right back.
The stock market moves quickly. It can be a lot to keep track of. But what if you had a team of experts feeding you research and trade ideas every morning? Market DM by Investors Business Daily is a daily newsletter that boils down everything you need to know about the stock market into a five-minute read. You get actual trade ideas for stocks and options in your inbox every day, plus educational lessons to help you elevate your trading. Subscribe today for only $20 a year. Just go to investors.com/marketdm. That's market d-i-e-m to get started.
Welcome back to the Investing with IBD podcast. It's Justin Nielsen here, your host. And, uh, Arusha Paris, who joins me every week, is here from O'Neill Global Advisors. He's a portfolio manager over there. And then joining us on the show this week is David Ryan, three-time U.S. Investing Champion back in the 80s, a portfolio manager with William O'Neill for, for a number of years, and then also had his own hedge fund and is currently a contributor on IBD Live every week. So, uh, David, let's get into the topic of the, of the week here, and it's position sizing, which can be such a big, it's kind of a personal decision, right? Everyone has their own risk tolerance, but they're certainly, uh, some ways to do it and some ways not to do it. Uh, what can you share about your, kind of, overall outlook on how to position size properly?
Uh, well, first of all, as you said, it is personal. And for, it all, a lot of it depends on where you are in terms of age, where you are in terms of your, just your economic standing, or or how much you're making, or, you know, do you, do you own a home? Are you married? Do you have kids? A lot of that can be influenced, uh, by that. And, and so when I think about when I made my, my greatest gains, uh, it was when I was, I was single and I had no home. And if I, you know, if I took too much risk, or if I, if the, I blew up or had some real downturn, uh, that I had, you know, another 40 years of income, you know, by working in, in jobs and such. So I could afford to take more risk. But then as the years have gone on, and you have five kids and a home and, and such, then you start thinking a little bit more conservatively, and then I'm not that, as nearly as aggressive, uh, as I want it was during that time. But I wanted to bring this, uh, sort of two different topics, concentration and, and margin, borrowing money to buy stocks, of when, uh, you know, how this should work. So if you're in a position, um, where you can take more risk, then I would recommend, and Bill even said this in your, in, um, uh, in his book, uh, that if you have maybe up to two thousand, two hundred thousand dollars in the market or less, you really shouldn't be buying more than four positions, four or five positions. Um, and then maybe if you've got a lot more, go up to ten. But, but once you start getting beyond 10 positions, then, uh, you have to really pick a number of really good stocks to make some huge gains. If you want really, you know, large gains where you can get over a 50% move in your portfolio in a year, or the 100 three years in a row that I had back in the 80s, you really have to bring it down to really four or five positions. And so, so I would say four to five positions, 20 in each one, max. Um, and then, um, and then if one of the positions really takes off and you get another chance to add after it's had a really nice move, let's say a stock goes from 25 to 40, and then pulls back to 35 over four or five weeks, and then starts off again, that that can take you can go from a 20 position, which is probably now 25 because you've gotten some appreciation, and add another 10 or even another 15, where it's like 40% of your portfolio, and then it takes off again and you have another run. Well, that's where you can really make some, some big money. But you have to watch them very, very closely. Um, and, uh, and when I was talking to my son, Sean, who's done well in these U.S. Investing Championships in the last couple of years, what he's doing is he's really concentrating. He's not four and five positions, he's one or two positions. But he says when he takes a huge position in something, he's focused on it so closely that he's watching it almost all day long. And if something starts not working out, he's quick to, uh, to sell it back. But, um, but yeah, don't be afraid of sizing up on even, even larger on subsequent basis. And I, yeah, I know I, I had some of sometimes 40% of my capital in one stock. But that was, that was in a, you know, at a time when most of my stocks were doing well. And I would look to also sell into strength, uh, on some of these stocks, and not wait until they started rolling over. So I would actually take some gains on the way, way up, and then they may even cut the position way back, hold it longer, wait for another base, and then go back into that same stock in, in a big way. So.
And so David, let me interrupt you for one second here. So how would you balance that between, I'm gonna hold this one going from the, the 20 to 25 and, and then pulling back and then eventually building up the 15 to the other one, where I'm gonna sell this one into strength into a smaller position and ride through a base?
Well, I, if, if I have a stock that's made an, a really nice move and it looks to be one of the leaders in the market, and, and everybody is starting to focus on it, um, I will still, even if I've gotten it up to a 40 position or it's a 25 position, it has this great move, I'll still sell it down when I think it's very extended and bring it back down to a 10 position. But I don't want to leave it. I do not want to lose it out of my portfolio because once you take it off the screen, lots of times you're looking the other way and one day the thing takes off and goes without you. So, so I, if, if I find that I, that this is one of the true leaders in the market, I do not want to lose the position. I just want to maybe trade it down a little bit more.
So then the question is, when you are focused, you have four to five positions, when do you use margin?
Now, margin should be only used for very brief periods of time. When I hear somebody says, yeah, I'm on margin all the time, I say, you're crazy because you can lose a lot of money, uh, when you're on margin when the market sells off, especially if you're in growth stocks because, uh, you know, a, a normal pullback in a growth stock can be 20 to 25 percent, and if you're fully margined, that, that's even a larger percentage. So there are, I say, there's weeks or months, uh, that you can be on on margin and really push it. But when should those times be? Well, I would say, you, Justin, you've probably gone over, you know, powertrend rallies. That's a great time when everything is going in the same direction. You've got the 21-day above the 50-day, the 50-day above the 200-day, all three of those are in nice uptrends. That's a time when you can push, you can go on to margin and, uh, and, and use some, uh, some capital that's not, not yours. But, uh, but then also, um, margin can be applied when also when you've really nailed at least one or two of the top leaders in the market. That's when, when you have the confidence that you picked these things up early and you're starting to get gains in them, and the market is taking off, that's when you should have the confidence where you can go ahead and borrow more money and increase those positions appropriately at times when they either pull back or build new bases.
So, do rates come into play here? Because I mean, right now, I think people are maybe a little shell-shocked if they were using margin a few years ago and it was like, oh, you know, the margin rates are 5% and now if they've used this margin lately, they're 13%, you know, and, and higher for the margin rates. Is that a factor for you to maybe not use margin?
If the, no, no, I, no, because you're really only using it for a short period of time. You might be on margin for three weeks and then off you go, or, you know, maybe if it's, it's a great run and for two months you're on margin, boom, you come off. So in two months, you divide that, let's say 12 rates, I mean, you're, you're just paying a few percentage points to these rates to use that money. So it's not like you're there all year round. It's just, it's for very short, brief periods of time when you're in a really nice, a nice move. And, uh, and I was looking up, uh, you know, O'Neill said that you should, uh, use margin in the first two years or you can use margin in the first two years of a bull market. But when you start seeing your individual stock starting to stall or the market starting to stall, then you've got to quickly come off of that margin because it can be, it, it can be great on the upside, but it can kill you on the on the downside. Um, and so during this period of time, during the 80s, that's, that's when, uh, that's when I was using margin. I really haven't used margin in years because I, I have no need for it.
So then do you want to, uh, show those, uh, those numbers?
Yeah, yeah. One more question before we get there. Um, I guess for the concentrated position, one of the biggest, I guess, fears, maybe that people have, is what if the four stocks that I choose, I don't get the winner? You know, if I, you know, that's just not enough to increase my chances of picking that Nvidia. What if I get all the others and I don't get the winner? And so I'm either out of position chasing the, the leader afterwards, or, you know, what, what happens there?
Well, usually, if, if you're in a bull market, it's going to last longer than a couple months. It should last for a year and a half. You're going to have other chances along the way to get those ones that took off without you. Some kind of pullback, some kind of base building along the way, uh, that you can then move out of the ones that, that might just might not be keeping up with the leaders and sell those and move that money into into the leadership. So if you don't nail them right at the first move out, you're going to have, and if you look at any stock that has had a great move, they give you, you know, four or five chances to get get into them on, on another base. Yeah.
So perfect. So where did you want to start with charts?
Um, well, um, well, did you have the, well, we'll start. I mean, you can start right there, right with, uh, with Circuit City. Okay. This was a stock that, that I bought all the way back, I mean, this is, yeah, back in, I think, yeah, 1984. Um, and you can see this stock actually had already made a move. I mean, it came up from five or six dollars a share up to 17, and then it put in this long base for a number.
Yeah, look at them move. That thing is made. Now, see, that has already had a three-for-one split and a three-for-two split. This was a turnaround situation. This was, this, um, it used to be called Wards all the way going back in the 80s, changed the name to Circuit City and was the competitor to Best Buy. And so you can see a beautiful cup and handle that the stock made, and relative strength line going into new high ground, right as the stock was going to new high ground. And the other thing to notice is, is you see the, uh, down in the volume, how the average daily volume was drifting off, coming off. It actually looked like it had dropped in half during that consolidation as the stock was building a base, and that's what you want to see. And then the three tight weeks that it had right before it broke out, that's, I'm always keying off of that. So, and that's that where the, the, well, there, there you can see the buy right there at, uh, right above 16. Um, the first day it looks like it broke out and finished a half range, middle of the range, and even the lower range. But then it continued out, pulled back, and then look at the move that it made. I mean, that's a 16 to 29 move. So you get a 50% move out of that stock. I didn't sell it into strength, but it looks like I, so I sold it right when that thing broke the 50-day moving average. So I still got a, I still got a 16 to 24 move. So that was still a 50, um, uh, 16, yeah, uh, yeah, the 50 move on on that stock.
What about this is not like a 18-month move like for a lot of them? This is, this was very quick. So were you kind of doing these quick, uh, quicker trades and kind of compounding that way for your?
Yeah, because then, then I would take that and I would move it into another stock, or I'd have another one at that, that same time. But when a stock is, is doing this, that's where you want to hit it hard. And you can really have another buy spot there at 1850, where it came, pulled back right down to that 50-day moving average, and the volume was a lot, was lighter. And then look at the volume come into that stock as it started moving back up and out. Now, I mean, that was a pretty big, going from 22 back down to 1815. Maybe, yeah, right, yeah, that's 20% in just a few days, right? Yeah, yeah. People might get shaken out there. What, what would you say to that kind of scenario?
Well, I, I mean, it had one day, one day of volume. And, uh, it was still above the 50-day moving average. You know, to, to have any big winner, you have to give it some room. If you are selling it every, you know, 10% drop in a stock, or even a 15% drop in a stock, you're never going to have a big winner because they're all going to do that at one point or another. Uh, and then it's hard to get to get back into it. And, and is this, um, you know, what was your position size at the time? Do you remember?
Were you dead? Uh, yeah, I know I, I'm pretty sure at least a 20% position, if not, uh, if not bigger. So I would start my position sizes higher. You have to start higher to, uh, to do that. And this is, this is what that looks like on the weekly chart.
You want to discuss a little bit about, uh, Franklin Resources?
Yeah, Franklin Resources. Um, here's another one, uh, where the stock had gone from 10 to 30, built a base. And this was just one of the companies that were the forefront of mutual funds. And, but I, I said this, I've, I think I said this a number of times. Lots of times, I just let the market tell me which, which are the strongest stocks. I let them, I watch to see which stocks can double. I, I look to see them build a new base, and I get the next double out of them if I, if I hadn't gotten them before. But here's a stock that had a really nice move and then actually even split, but then put in a, a nice, that looks like a six-week, five to six-week base. And, uh, all the volume, look at the volume, all along that move. And even, even when it pulled back for just a couple of weeks in the base, that, uh, that I, I bought that, you know, the volume was below average weekly volume on that, on that situation. And I mean, that's just such a telltale sign when you see all of that volume come in when the moving average line, you know, goes up that much on the move up, you know, that institutions are getting in there. Um, so, yeah.
What were you going to say, Arusha?
When when you were trading in the, the U.S. Investing Championship, what were the type of position sizes you were, were taking at that point?
Yeah, it was anywhere, yeah, anywhere from 20, or even for a short period of time, maybe even 40% when a stock was just going through an incredible run. But they were all big. They were all, it wasn't a 5% position. It was starting at 10, quickly going to a 20, and then, and, and then just managing the trade as it got extended, maybe cutting back, waiting for a new base, and then, and then going again. So this is, this is one that, uh, yeah, I actually just took, took the gain after because look at how many days that was, probably eight or nine days that it, that it went from 30 to 40, a 33% move. Went ahead and took that. And I was very fortunate because I think the next day, uh, the Wall Street Journal came out with a "Heard on the Street" column, oh, geez, bashing the stock. And you see what happened. The thing dropped from 40 down to 30. And then I just sat and I waited for it to to to settle down, volume to dry up, and you can see the average daily volume dry it, you know, drops again, and and then starts coming on. Look at the average daily volume during that time, 8,000 shares. I mean, that's, that's when you know, before the market had a big huge, well, that was part of the start of the big bull market. But anyway, you see the downtrend line and the break of the downtrend, and there it is again, going and going up on some really nice volume. So back, back into the stock again. So you can play these things multiple times.
And for those folks that are maybe listening to this, um, and are missing out on the charts, remember you can always go to investors.com/podcast to see the charts that David Ryan is talking about. Unfortunately, these are charts that we can't pull up in Market Smith anymore because these, these companies, you know, no longer exist sometimes. That's why we're using these, these charts from from older, and other areas. Um, but yeah, it looks like, uh, you waited and bought this one again, right? And, and had another, another great move.
Yeah, see, look at, look how it's. So then it goes from 20, and then I guess I added, I added to it again at 30, and now this is split adjusted, I guess, and then it has another move to 50. You know, when you see something going up at that rate, that usually is a, is a blowout, a climactic run. And I think I just, I waited. I st, I waited for the first stalling day to start selling some of the position, and then I s, then I sold the rest of the position later as it, as it started breaking down. Sometimes it's hard when you, you've made so much money on a stock, or, yeah, it starts becoming like you're, you know, a child, and you just can't, you just can't lose it, you can't get rid of it, and you, and you want to hold on to it. And I guess that's why I stayed in until it actually broke that little base, right below 46, I guess.
Um, so, you know, sometimes, uh, it looks like when you're going through your notes, you'll do a little post-analysis. And here's an example of some, some post-analysis notes that you wrote on a couple, uh, charts that you had.
Yeah, this is, you know, this is all we had back then. Everything was a printed copy. And so, you know, so this is where I lost money on a, on Dress Barn, um, back, I guess that's 1986, where I thought I was buying a breakout, and it looks like it broke out for a day or two, and then it pulled right back in. And I, I think what I was doing is that the position sizing, even to this, to this start, was too big. And that's why I said, way too big under market conditions. So the market might not be in the greatest of shape. This stock, really, I mean, that's when I look at that, I go, what was I thinking? That base just is not even, the move up from 20 to 25, it looks like three moves into a top, and then, and then it just quickly rolled over. The same thing on this, World New World Pictures. You're only seeing that you really didn't see the rest of that base, but, um, I guess I bought it as it was coming out of 22, and once it dropped right back into the base, then I'd, I started, I sold the position. But I think I bought that too big right at the beginning. So, um, so just, but these are things that you should be doing. You should be printing out these charts when you're buying them, or when you're selling, do a post-analysis because boy, that will reveal more. You'll learn more about yourself, your trading habits, and your mistakes than anything that that anybody can tell you because you know why you're making these decisions. And it is best to really study your own actions in the market.
Do you remember what position size you were going with?
Uh, no, I don't. Uh, I, I don't know. But I see, you know, 5,000 shares at 20, that's $100,000. Shares. I mean, if my, you know, an '85, I mean, that that sounds like a, that sounds like a 20% position at that time. And, and so, you know, for both of these, you're saying that it was too big under market conditions. So, yeah.
Do you, do you scale back your position size depending on your, your feelings on the markets?
Yeah, if, if the market is, you know, if I'm not, if, if I'm not getting good feedback from maybe other stocks I own, or the market in general, uh, or I just can't find that many names, then I shouldn't be starting out as a, you know, as a 20% position right off the bat. I should start scaling. It should be more 10 than 15, then to 20, but not that, not that big all at once. Right.
Um, and, you know, speaking of kind of getting that big all at once, is this something that, you know, when, when someone's just starting out, should they, should they kind of use this methodology, or is this something that you want to kind of work your way into?
Uh, yeah, that's kind of the best thing for beginners. Yeah, that's a good way. If you're just starting out, you shouldn't be doing this, and you shouldn't be buying in size right off the bat because you're going to make a lot of mistakes in their first two years, your first, first, you know, up market and down market. And so it's best to, I, I've even said, take 90% of your money, put it in T-bills, use the 10% that you've got, because you're going to make a lot of mistakes even on that 10%, and it's better to do it on a small amount of money than your all your capital. Once you get the experience, once you start having success, then you start adding more money to the market. Yeah.
Um, and you kind of mentioned that, you know, when you were younger, you were a little bit of a gunslinger. Now that you, you know, you don't need to use margin, now, you know, it's not like you're, you're trying to, you know, make the big bucks, you've kind of, a lot of times, kind of trying to keep what you have. So have you shifted this to more positions, smaller position sizes, or how have you adjusted?
Yeah, more, more positions. Um, you know, now, what, the capital I'm working with now, I'm going to 10 positions. But even some of those, when they start working and they're doing well, then that's not going to be a 10% position with appreciation and buying additional bases. They can get up to 20 or 25% of the portfolio with something that's, uh, that's been working. And we've got one more thing that as you were doing research, that you came up with that you wanted to share. So go ahead and tell us what we're looking at here.
Yeah, and this, uh, you know, so I had to go back when I, and look at my tax returns for these years when I was, uh, winning these U.S. Investing Championships. And, and I, and I looked at the, what I was being paid at O'Neill and the capital gains I was making. And so you can see in '85, my salary was $25,000, but my capital gains were $52,000 in the market. And then the next year, I guess I got a raise. I was making $34,000, but I had capital gains of $255,000. So that was almost seven times what I was being paid. And then the next year was up to $58,000, and my capital gains were $449,000, which was almost eight times or so. But it's, but this is where I was using margin, I was using concentration, and you can see the power of the compounding when you can do this, you know, a number of years in a row. It's just amazing how, how big the numbers can get.
Yeah, and let's not forget 1987, you know, that, that's when the big crash happens, right? Like you, uh, were able to retain a lot of gains if, uh, at the end of the year, at the end of the tax year, you still have that sizable capital gain.
Yeah, I still remember August of '87. I got married, and during my honeymoon, the market was up. But right as I came back, it looked like the market had topped out. It had one last move in October, but there wasn't anything that was working, and then it just rolled over and died. But I was, I was out long before the crash. The market had topped in August, and it crashed in October.
And were these years, um, your U.S. Investing Championship years too?
Yes, yeah. So, uh, because I know you had a number of back-to-back years where you, you won the investing championship, and were you using the, this position size of, you know, roughly 20, 25%? Oh.
Yeah, yeah. This is where I was really aggressive on the position sizing and also, um, uh, use of margin. Yeah. Well, that's awesome stuff. Uh, thank you so much for kind of opening, opening a little window into your, your U.S. Investing Championship days. Um, what it was like when you were first starting out and how you got that early success that helped, uh, kind of launch your, your whole entire career. So, yeah, thanks a lot for sharing that. And, uh, we'll take a break right now, but when we come back, David Ryan is also going to share some of the stocks that are on his radar right now. Stay tuned. We'll be right back.
The stock market moves quickly. It can be a lot to keep track of, but what if you had a team of experts feeding you research and trade ideas every morning? Market DM by Investors Business Daily is a daily newsletter that boils down everything you need to know about the stock market into a five-minute read. You get actionable trade ideas for stocks and options in your inbox every day, plus educational lessons to help you elevate your trading. Subscribe today for only 20 bucks a year. Just go to investors.com/marketdm. That's Market D-I-E-M to get started.
Welcome back to the Investing with IBD podcast. It's Justin Nielsen here, your host, along with Arusha Paris, who joins me every week from O'Neill Global Advisors. He's a portfolio manager over there. And our special guest this week is David Ryan, three-time U.S. Investing Championship, uh, winner, uh, back in the '80s. And then he was also a, you know, portfolio manager for Bill O'Neill at William O'Neill and Company for a number of years. Uh, was going on the circuit speaking, uh, to Investors Business Daily and Daily Graphs members, uh, back, back in in those days. He was kind of, uh, the sidekick to Bill O'Neill. And then, of course, he had his own hedge fund. And now you can see David Ryan every week on IBD Live on Tuesday mornings. Um, so David, let's talk a little bit about the, the stocks that have been on your radar. And I just want to point out, you're, you've got a number of oil and gas names here, but you were really pointing out on IBD Live the oil and gas shift. I mean, well, first of all, you were really on top of the commodity shift. I mean, this was back with the, with the fertilizers, uh, a couple years ago when the fertilizers were coming back on very strongly. Um, and then the, the commodity play that was happening in a lot of 2022. And now, just a few weeks ago, you were kind of back on oil and gas. Uh, what was it that you were seeing in this area that kind of, uh, made it a little bit more attractive to you?
Well, I mean, going back to, I guess it was even, uh, 2021, where some of those fertilizing stocks, fertilizer stocks, and and other kind of cyclical, uh, type of stocks, commodity type stocks were making their move. It was right when, uh, especially later in the year, when a lot of tech stocks and a lot of growth stocks were topping out. It would, the market was, was shifting. And it's, it's, it's, I've just been through some of these cycles a number of times before. And I just know that sometimes when commodity prices move up, there are companies that really can take advantage of that and make a lot of money. And I've seen it happen a number of times. And so, so when I started seeing these stocks starting to outperform and the relative strength lines starting to move up and and breaking on a basis, that's when I go, hey, I've seen this happen in the '90s or in the '80s, and and it can happen again. And and even, even Bill, in his book, he, he really only dedicates, I think, one page to cyclical stocks, but he said 25% of the 25% of some of the greatest winners are cyclical companies. So they can make some big moves. And a lot of people say, oh, I'm just a growth stock player. But well, there are times where growth won't work and cyclicals will work. But you know, but and and that's and that's fine because you'll get your bigger, longer, more consistent moves out of, uh, out of growth stocks. But so, so again, this year, um, you know, crude oil had been coming down for a number of, uh, really, actually, uh, been coming down for most, most of the year. I guess it topped, uh, I'm looking at USO topped in, uh, six, at really all the way back last year, 6/17 of 2022 and made a low, really, I guess there was a low earlier in the year in March, and then it kind of consolidated and started moving up in June. And it really broke a downtrend line, uh, in June. And so I started looking at some of the names that, um, that were actually outperforming or moving up along with that. And the first one was Tidewater. And you can see Tidewater was actually in in a nice up move from October of last year all the way up into March and made a, it's a 26 to 51, almost doubled in price. And then and got hit. And then started going back and forth, back and forth between 50 and and 40. And then when it started coming out, tightened up, uh, and that looks like at the end of June, June 20, uh, 29th, it, it is really the buy point, broke out and made a nice move from the 50 up to 67. And and then has drifted off, uh, drifted off for the last couple of weeks. And the volume's lightening up. Today was up, it was up nicely. And so it looks like it might be just starting to, uh, to break that downtrend and start another move. But the important thing too, I, I do a lot is when I, I'm interested in the company, I listen to conference calls, I go to their website, I get as much information I can on the stock. And so when that stock, uh, gapped down on earnings, you would have to go to the intraday chart on, uh, when it, when it, uh, opened, uh, or was as high as 65.75 and then was as low as 56. Um, I knew a little bit more about the company. I listened to their conference call, and they said that things, things were actually going very well. And so, um, so I stayed with the stock. I didn't sell it out there. But that's, that's an advantage of of listening to conference calls. When I think, I, I even said this on IBD Live, at that the CEO said, we have never, ever seen conditions as good as they are now. Now, why should you sell a stock when it's, when a company is saying that, and they just reported a huge, a huge number? So that's why I've stayed with it. And, uh, and I still have the position.
And then also in that group is also, um, this is Oceaneering International, which is OII. And here's another one, a little bit lower in the base, but this was also, I started buying it on, on June 30th, as it started coming out of that base at like 18.59 into a little new high ground, moved up for a couple of days, pulled right back down onto where it, it first came out of, and then it took off. And this had a really nice move up to 23.80. And okay, so now here it is. It happened again where the stock reported after the close, and, uh, the conference call. This, what was incredible is this stock closed at 23.80. During the conference call, or, uh, the stock actually hit 17 a share. It dropped that far in after hours. But listening to the conference call, the CEO said, you know, we get, we have some lumpy quarters, and some of the, some of the things that were going to go into the second quarter have actually been shifted into the third quarter. And so I didn't, I didn't sell it. I actually bought some more after it opened, you know, and then, and then traded it. It moved up, and now it's moved back and forth. And it looks like it's starting to come on again. But they're saying the same things. The, the industry is doing very well. Offshore is doing extremely well. And a lot of international offshore has, has been, has been doing great. So that's why I stayed with this, uh, and you can see more of a turnaround situation, some very big quarters coming through, and you got some good volume today as the stock started moving up, moving higher.
You, you mentioned you do a lot of research on the companies. And I guess one of the, one of the problems sometimes is, you know, some of these industries, like, you know, commodity-based ones, it's really hard to know, like the differentiation. Like, oh, this is, this is a midstream company. This is, you know, this is doing, you know, this part of oil. You know, they're all oil-related, but it's kind of like, what is, what is the advantage that this company has over others? So, so, um, I mean, I know, you know, you mentioned conference calls. What other sources do you go to to kind of educate yourself? Um, and how, how expert do you feel like you have to get in the industry before you can make a good decision?
Well, you're using a combination of, you know, I put a heavy, heavy weight on price and volume. But then I'm also looking at the fundamentals of the company. I'm looking at the earnings. I'm also looking, I do this every time I look at a stock. I go from the, the daily to the weekly to the monthly. And so I look at every single time frame of the stock. So if you go to the monthly on Oceaneering International, you can see, look, the stock has made some really nice moves in the past. And that's going all the way back, you know, into the 2000s and and 2009 to 2014. That's a really nice move. So I have the history, a little bit, that these things can really take off when the conditions are right for that specific company and for that industry. So yes, I mean, as much as you can, you can. And I look into some other companies, but I, I let the market tell me which are the ones that are positioned best because those are the ones that are going to be the first ones in new high ground and the ones that are usually going to make, uh, the biggest move. Yes.
So, you know, a quick follow-up question, because you mentioned the fundamentals. Sometimes with the cyclical stocks, they don't have the fundamentals. Right? The fundamentals are kind of lacking. So what do you, what do you kind of use to kind of say, oh, the estimates are looking good, or this is where the turnaround is happening? How do you know?
Yes. Well, you'll usually, usually after one or even two, if you can get two quarters of big turn in earnings, then that will, that will give you a clue. You don't have to wait until you get a growth rate, growth rate after three years or anything like that. But this actually started the move, really, actually started, at least in terms of the earnings, in September of '22, where their sales were up 20% and the earnings were, I guess, you know, 23 versus a loss or 23 versus one. And, and so, so it really, when the, when by the time this gets a growth rate, if it lasts for two years or three years and it has a growth rate and it has all these quarters, that's probably the time to buy them. So you have to think a little bit, uh, opposite. It's probably the time to sell them. Yes. I am trying to sell them. The time to buy them is when the earnings are just starting to turn. And that's, uh, that's what you should be doing on on these cyclical stocks.
So, um, and then I had, yeah, and that's, um, this is just a recent buy. So, and, and you can see this is not as dynamic or it can move really as fast if you, if you look at the, at the past. I mean, it's kind of a, a slower, uh, steadier type of company. In 2003 through 2006, it made a, a really huge move. So I like to see that. And then you can actually see that it's actually, you can draw a downtrend line from 2007 across. It just broke that in the last couple of months. Um, but this is just a recent buy because it's, it's been in a nice uptrend. And I just last week, you see when the market was selling off, this stock got very, very tight. And you can see the relative strength line was holding extremely well, almost looking like it was going into new high ground, even though the stock was consolidating. And then on Monday, that's where I first bought it. And then added it, added to it, uh, yesterday. And now it's starting to get a little bit out of there today. But you got three really nice days. Last two days have been very, on, very, very strong earnings.
So, so you don't consider this a little too extended or anything, right?
Uh, well, now I think it's getting extended. I mean, the buy point, six, it's, you know, I, I guess if you'd say the most of the base has been built under 60. You go 5% from that, then I guess you're talking 63. So if it's, you're sort of getting towards the upper range. You want to be buying it as exact as you possibly can. So, so there's the third one. And then I guess the last one we could talk about is one I've held since I think October of last year. And this is Elf Beauty, ELF. And you can see this is just built a number of great bases along the way. And really since, I mean, you could go all the way back to June of last year, this stock has only spent a couple of days under the 50-day moving average. And those have turned out to be five spots on this stock because it pulls back and then either earnings are announced or the stock just quickly turns and goes and goes up. But you can see, I mean, there's buy spots in the 40s in October and November, in the 50s in, you know, in January, February. Uh, then you had another buy spot there in March. Church, yet another buy spot. Well, that was more on earnings, a little bit harder. But that was, that was in May. And then even recently, you know, stock gapped up on earnings again, came all the way back down, got support on the 50-day moving average. And then they made a great, they made an announcement that they were buying another skincare company. And that's a very small business part of their business, but now it's going to be about 18% of their business. So that is going to be additive to earnings. And the street really liked it. So you've gotten a few big days of of of gains. And I would think here, it's going to have to probably spend a few weeks drifting off or going sideways. But it, it's one that's, that's had a number of bases and continues to, uh, to perform and do well.
And is this one that it just got on the radar back in October because it doubled once?
Well, yeah, it was, yeah, because it had a nice, a nice move out of a, out of a really nice base. I think it was really August where it really started that, that move, the first week in August, and then actually kind of based out. But, you know, a lot of it, I, when I was coming home, when I, when I got, when we come home from church, it's, we drive about 50 minutes to get to the church we like to go to. And on the way home, I had my wife drive and I started going through on my iPad. I gotta start going through charts in the car. And I turned to her and I said, you know, have you ever heard of the stock called Elf Beauty? She goes, oh, oh my gosh, I just, you know, I've been telling some of my friends about how I've been buying this. And I said, what are you doing? You're telling your friends and you're not telling me? You got married in '87. I'm sure that was part of your vows. So, so she, and I said, oh, that's, well, that's great. But even, even at that, I was late by a few weeks on that stock. But look at the move that this thing is made. But you never know where you're gonna get your next great idea. But that's what's so much fun about this business is that it's always this puzzle, trying to fit what, what are you doing? What are your friends talking about? What's the market doing? And trying to find that next great winner. And so this is the way. And and even on IBD Live, I remember there was a woman who who said, he's that she said, my daughter started using these products. I started using these products. The woman said, and then she said, and even the, the her mother was using these products. And so you had three generations all using the product. And you would have to think that if they were doing it, millions of others or hundreds of thousands others were doing the same thing. So that was a great endorsement. And I picked, I picked that up on IBD Live, uh, just by talking about the stock. So.
And, uh, Arusha, maybe if you show the monthly chart, uh, again, just to show how crazy this, this move has been. I mean, it's just, you know, looks, looks straight up. Now, for a lot of people that missed this, there's that kind of urge to like, well, I, I want to own the winner. I want to say I had some of this. Um, but I mean, this thing is sticking straight up. So do you, is this just long gone? And if you don't have it, forget about it? Or is this still in one of those, hey, this was so powerful, wait for another base, longer base, and see if it can come out of it again?
Yeah, I would, I would wait for a longer base. I mean, I wouldn't be buying it here, but I would wait for a new base to form and then, and then go ahead and buy it. But it might have to, it might have to spend a number of months going sideways after the move that it's made. You know, at some point, people are going to get used to them, you know, blowing out the earnings, and it won't be as much of, uh, as a surprise. But so that's why I'm thinking it might have to spend a lot of time going sideways before the next move.
Well, David Ryan, thank you so much for sharing, uh, so much with us today. I mean, between the position sizing and also, uh, how you got into some of these names and, you know, what, what you're looking at, uh, very insightful and, uh, very good stuff for our listeners. So thank you so much for being on the show.
Thanks for having me. It's always fun.
Okay. And, uh, that's gonna wrap it up for us this week. Joining us next week, Mark Minervini is going to be on the show. Of course, David Ryan was actually speaking with Mark Minervini, uh, for some of his workshops that he was doing. So we're gonna have Mark Minervini back on the show and kind of get his take on what's happening with the market, what stocks he's looking at, and, uh, important learning lesson from him. Hope you stay tuned for that, uh, next week. Thanks for watching. Thank you.