For the fourth interview in the StockTickr Interview Series (RSS feed), I spoke with Gary B. Smith, also known as “The Chartman”. Gary has turned many a trader into a fan of technical analysis. He spent several years writing for theStreet.com and still appears three times a week on the Fox News Channel as a stock market analyst on various financial shows.
I love seeing him on the Bulls and the Bears on Fox News and after another analyst gives a lengthy explanation of the fundamentals of a stock the host will turn to Gary and ask if he agrees. Gary will usually say something like: “I have no idea what the company does, but I like the chart!” A true market technician if there ever was one. 😉
StockTickr Pro subscribers had the opportunity to submit questions for this interview and I combined them with some questions I had for Gary.
Read on to learn how Gary got into technical analysis, how to start a hedge fund, and why he left theStreet.com. If you have other questions for Gary, leave them in the comments and I’ll send them to him and post the answers in a follow up post.
StockTickr: Tell us a little about yourself – something we might not already know.
Gary: From being on TV and writing for so many years at theStreet.com, there’s probably few secrets about my life. I’d like to think I’m a Father first, husband second, and then Trader. I am a homebody, as I hate the hassle of traveling. I’m a devout golfer, and pretty good. But annoyingly I fall just short of being really, really good. Other than the hedge fund, my current pre-occupation is getting my younger daughter into college! Once I do that, I’ll rest a lot easier.
StockTickr: How long have you been trading stocks and how did you get started?
Gary: When I got married about 20 years ago, my wife had about $50K in stocks. All dogs as I recall. I was a true fundamentalist at the time and figured I could do at least a bit better selling those stocks and buying something else. So, I started as a buy-and-hold guy, but evolved over the years to being a trader.
StockTickr: It seems like everyone has a horror story about big losses when they first start trading – what’s yours? What did you learn from it?
Gary: When I first started trading, I was heavily into options and did very well. I thought trading was easy!! Then came one of the mid-90s bear markets and I got creamed having sold covered calls. So much for “easy.” What did I learn? Always plan for and expect the worst!
StockTickr: You’re a well-known champion of TA (technical analysis) – did you start off with that trading style or did you evolve into a strict technician?
Gary: As I mentioned above, I evolved from being a Buffett-wannabe to being a pure technician. That came about first when I saw that if I had bought say WMT when it was above the 50 day MA, I’d have made more than when I had actually bought it. After that, I realized it didn’t have to be just WMT, but any number of stocks. From there, you quickly realize the company doesn’t matter at all. Instead trading is all just data analysis.
StockTickr: How have the markets changed over the past few years? How have you adjusted to maintain your edge?
Gary: Well, they certainly seem choppier, that’s for sure. If I have an edge — and some days I’m not too sure — it’s only because I stick to a methodology and repeat it day after day without fail.
StockTickr: Most traders would be better served to focus on exit points, but they still focus almost all attention on entries. What advice can you offer for exit points on both losing and winning trades?
Gary: Exit points are everything. If all traders focused on having profit target, stop loss, and time stop on all trades — as soon as they enter the trade — they’d be much better off.
StockTickr: What is the most common but easily correctable fault you see in traders?
Gary: There are two: one, they don’t have a rigorous, time-tested method. Two, they don’t stick to their method. Accomplish those two tasks and you’ll be head-and-shoulders above 99.9% of traders out there.
StockTickr: What is your typical R-value per trade? i.e. what percent of your total portfolio is at risk on each trade?
Gary: In the hedge fund, it varies but generally falls between 2 and 15%.
StockTickr: Do you change your game as the overall market changes directions? Are there days where you stay on the sidelines?
Gary: Well, the method stays the same, but market movements dictate if we’re long, short, and what positions we have. As for being on the sidelines, again, that’s dictated by the market. Trading nearly 40 ETFs, though, I don’t believe we’ll ever be completely out of the market. Something’s always moving — up or down — and we hope to be riding those trends.
StockTickr: Which 3 books would you recommend traders read?
Gary: The same as a previous interviewee: Reminiscences of a Stock Operator and the Schwager “Market Wizards” book (first one, second one). For my type of system trading, though, I’d have people read The Predictors and One Jump Ahead. The first is about a group of computer geeks who wrote some trading software. The latter about a college prof who wrote software to beat the world checkers champion. Read those two and you’ll get a feel for the much of what I really do during the day.
StockTickr: Which technical indicator could you not live without?
Gary: Price, volume and time. You have those three, you don’t need anything else. Heck, everything else is based on those three.
StockTickr: What’s your take on backtesting?
Gary: I couldn’t live without it. As long as you’re not optimizing, how can you expect anything that didn’t work in the past to start working in the future?
StockTickr: What do you like best about stock trading?
Gary: I like two things: one, the challenge of trying to solve the great “stock market puzzle.” You never will, of course, but the effort is fun (and, yes, annoying!). I”m also a huge fan of determining my own schedule. Trading allows me to do that.
StockTickr: Do you plan to trade differently in your hedge fund and how will you manage the much larger pool of capital that you’ll be dealing with?
Gary: For my personal trading, I focused primarily on stocks. With the fund, we”ll focus exclusively on ETFs, however, as they provide liquidity, are easy to short, and mitigate “earnings surprises.” The ETFs will span everything from QQQQ to commodities to countries. From presentations we’ve done on Wall Street, we’re definitely on the frontlines of having a long/short ETF basket strategy.
T.C. Pro: Any advice for someone that wants to run their own hedge fund in the future?
Gary: Ask me in a few years and I’ll probably have a better answer! For now, though, I think 3 things are important. First, you have to have a Mr. Inside and a Mr. Outside. The former is in charge of trading strategy. The latter is in charge of fundraising. You see it’s not enough to just have a good strategy. You have to also have enough money under management to pay the overhead and make it worth your while. Fortunately, my partner is one of those great guys who knows everyone and has a rolodex the size of a phone book. Obviously, he’s Mr. Outside!
The second thing is to have a good base of friends and family money. For a new firm with no track record it’s difficult to convince institutions to invest with you.
Finally, you need to treat your fund as a business. You’re not just trading. You’re doing presentations, cultivating clients, and running operations.
T.C. Pro: When would you say that you realized you became a “professional” trader? (Not so much in the sense of what day/time but more along the lines of what mentality/insight hit you that made you wake up one day and realize that you finally “got” this trading stuff?)
Gary: Hmmm, good question. If it’s implied a “professional trader” makes the bulk of his or her income from trading, then I’d say when I was confident I had a methodology that was time tested, could make money in all types of markets, and most importantly, that I could stick with every day. Honestly, though, trading is far too humbling for me to ever think “I got it.” I learn something every day.
N.B. Pro: Lately, I have hit a bit of a rough patch. Although I have had positive returns, my portfolio has experienced a lot of churn due to the market being in a narrow range. What changes, if any, do you make when you run into that inevitable rough patch?
Gary: You always have to determine if it’s you or the market. With that in mind, I first determine how my method has done through similar periods in the past. If it’s acted the same, then I ensure I haven’t deviated from my method. If everything is okay, there, I don’t make any changes.
M.M. Pro: Are you seeing any setups that are tending to outperform others in the current market?
Gary: Sure, but everything runs in cycles, so I’m never searching for “what’s working now.” Instead, I stick to my method and wait for the market to come to me. If I’m patient eventually it does.
C.K. Pro: Why did you leave theStreet.com?
Gary: As usual, it was over money. My contract was up at the end of ’05. I thought I was worth “X” and TSCM wanted to pay me less than “X.” At that point, I decided it was time to move on. No hard feelings and it was just business.
ST: Thanks, Gary!
Stay tuned – there are several interviews on the way. You can subscribe to these interviews via RSS feed.
Previous interviews in the StockTickr Interview Series:
Do you have suggestions for other traders you’d like to see an interview with? Let us know!