WEBVTT - Interview With Tom Dorsey: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.560 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:08.000 --> 0:00:11.440 Hey this week on the podcast, I have a special guest, 0:00:11.480 --> 0:00:14.280 and I should say that less often, but I have 0:00:14.320 --> 0:00:17.840 a special guest. He's somebody who I have been reading 0:00:18.160 --> 0:00:21.800 for a very long time. Very early in my career, 0:00:21.840 --> 0:00:25.560 I started out reading Tom Dorsey. He's the co founder 0:00:25.600 --> 0:00:30.440 and CEO of Dorsey Wright, which runs a few billions 0:00:30.840 --> 0:00:34.839 of dollars in ETFs and was recently bought by NASDAC 0:00:34.920 --> 0:00:37.760 for a couple of hundred million dollars. If you are 0:00:37.880 --> 0:00:41.879 technically oriented, if you are a technician, chartist, plant anything 0:00:41.880 --> 0:00:45.839 along those lines, you will find this conversation quite fascinating. 0:00:45.960 --> 0:00:48.840 Dorsey Wright is not the sort of technical newsletter that's 0:00:48.880 --> 0:00:52.040 read by the lay person or the investing public. It 0:00:52.280 --> 0:00:56.680 really has been a how to guide for some of 0:00:56.720 --> 0:01:00.480 the savvier people in the brokerage world and sells ID. 0:01:00.840 --> 0:01:04.560 I recall visiting other people's offices and laughing saying, hey, 0:01:04.560 --> 0:01:07.399 this Dorsey right on the desk. Anyway, we spoke to 0:01:07.680 --> 0:01:11.080 almost two hours. Uh. It ranged far and wide. If 0:01:11.120 --> 0:01:16.319 you're at all interested in in relative strength, portfolio management, 0:01:16.360 --> 0:01:19.920 technical analysis, port and figure charting, you will find this 0:01:20.160 --> 0:01:23.240 UH conversation to be a tour to force. So, without 0:01:23.319 --> 0:01:30.680 any further delay, my conversation with Tom Dorsey. This is 0:01:30.760 --> 0:01:35.720 Masters in Business with Barry Ridholts on Bloomberg Radio this week. 0:01:35.800 --> 0:01:39.440 My guest is Tom Dorsey. He is the founder and 0:01:39.600 --> 0:01:44.200 former CEO of Dorsey Wright and Associates, a technical research 0:01:44.440 --> 0:01:48.280 and advisory daily read that I recall spending lots and 0:01:48.360 --> 0:01:51.040 lots of time with the early part of my career. 0:01:51.400 --> 0:01:54.680 It pretty much was a regular on my desk. Last 0:01:54.760 --> 0:01:57.520 year this was sold to the NASDAC for almost a 0:01:57.600 --> 0:02:01.880 quarterbillion dollars. Dorsey Wright is based on an idea called 0:02:01.920 --> 0:02:05.880 point and figure charting, which will get into but the 0:02:05.960 --> 0:02:09.720 underlying concept is you must have a clear strategy based 0:02:09.760 --> 0:02:15.000 on objective, unemotional data. Welcome to bloom Bark. It's pleasure 0:02:15.040 --> 0:02:17.400 to have you, Thanks Barry. So I want to start 0:02:17.400 --> 0:02:19.920 out with a quote of yours and and have you 0:02:19.960 --> 0:02:23.880 respond to that. Strict modern portfolio theory has driven a 0:02:24.000 --> 0:02:30.120 commoditization of financial analysis to the detriment of analysts and investors. 0:02:30.200 --> 0:02:32.840 What does that mean? Well, when you're thinking about modern 0:02:32.880 --> 0:02:36.840 portfolio theory, it's something that goes back. UH. Probably thirty 0:02:36.880 --> 0:02:44.840 forty years ago, and it's it's it's it's fundamental buy 0:02:44.880 --> 0:02:48.680 and hold. A person comes into an office, takes a test, 0:02:49.120 --> 0:02:53.160 determines that he's a moderate investor, immediate goes into a 0:02:53.280 --> 0:02:56.760 into a moderate pie and uh, that's rebalanced twice a 0:02:56.840 --> 0:02:59.160 year and you stay that way as long as your 0:02:59.240 --> 0:03:01.000 risk level doesn't change. So you've got to come in 0:03:01.200 --> 0:03:03.520 and retake a test to make your risk level change 0:03:03.600 --> 0:03:05.480 before anything will change there. So it can miss a 0:03:05.480 --> 0:03:08.280 lot of changes in the overall market. But it's something 0:03:08.320 --> 0:03:11.280 that you'll probably find that nine percent of advisors use. 0:03:12.000 --> 0:03:15.080 Makes a lot of sense. So we talked earlier. I 0:03:15.160 --> 0:03:19.320 mentioned objective on emotional data is key to a strategy, 0:03:19.520 --> 0:03:21.720 but you have noted that a lot of people don't 0:03:21.720 --> 0:03:24.120 really have much of a strategy. No, that's the thing. 0:03:24.160 --> 0:03:27.920 People are human, you know. Well, it's like Mike Tyson said, 0:03:28.120 --> 0:03:30.120 you walk into a ring with it with all all 0:03:30.200 --> 0:03:32.000 kind of plans and a strategy until you get hit 0:03:32.040 --> 0:03:33.880 one time. Right, everybody has a plan until the're hit 0:03:33.919 --> 0:03:35.520 in the face, until they're hit in the phase it 0:03:35.680 --> 0:03:38.640 And that's exactly what happens here. The strategy is great 0:03:38.680 --> 0:03:40.760 until all of a sudden you feel sick to your stomach. 0:03:40.800 --> 0:03:43.119 The market is going down and it's let's get out, 0:03:43.320 --> 0:03:45.280 and it's getting out exactly at the wrong time. So 0:03:45.360 --> 0:03:48.000 that's the hard part. Is what we have done at 0:03:48.000 --> 0:03:50.200 Dorsey right is we've taken the emotion out of it 0:03:50.360 --> 0:03:53.480 and made everything rules based. So when it feels the 0:03:53.880 --> 0:03:57.480 feels the worst, you have to understand that the systematic 0:03:57.520 --> 0:04:01.680 approach is going to do it job. Sometimes it doesn't 0:04:01.720 --> 0:04:04.680 feel so good, like right now, but most of the 0:04:04.720 --> 0:04:07.520 time it works fine. So one of the things you 0:04:07.520 --> 0:04:11.360 would send along these lines, um studies have shown investors 0:04:11.400 --> 0:04:15.520 tend to achieve subpart performance when they allow those emotions 0:04:15.560 --> 0:04:18.680 to take over and when they fail to adhere to 0:04:18.720 --> 0:04:22.039 a consistent said a rules. So if you have these 0:04:22.120 --> 0:04:26.719 rules that will prevent you from engaging in emotional behavior, 0:04:26.760 --> 0:04:30.120 how does an investor find the discipline to stick to 0:04:30.160 --> 0:04:32.600 those rules. Well, that's a good question, Barry. How do 0:04:32.680 --> 0:04:34.800 you know, because again, like I said, you're dealing with 0:04:34.880 --> 0:04:37.960 human emotion. When you embrace. When you sit down with 0:04:38.000 --> 0:04:40.719 your advisor and he's using a rules based system and 0:04:40.760 --> 0:04:43.880 explains the rules to you and you embrace those rules, 0:04:44.120 --> 0:04:46.120 that's where you need to step back and just let 0:04:46.160 --> 0:04:49.800 it happen. When things feel bad, that's the time typically 0:04:49.839 --> 0:04:52.560 in that type of a program, to add money to 0:04:52.640 --> 0:04:56.240 the to the portfolio, not take money out. Take for instance, 0:04:56.279 --> 0:05:00.600 what we do is probably gonna underperform maybe once every 0:05:00.600 --> 0:05:04.360 four quarters somewhere in that nature. You'll feel bad. You're 0:05:04.400 --> 0:05:06.560 gonna a position one way in the market's going the 0:05:06.560 --> 0:05:10.520 other way, precisely exactly, And typically what happens there Really, 0:05:10.520 --> 0:05:12.440 when you're looking at a rules based program like ours, 0:05:12.440 --> 0:05:16.440 which is relative strength, the it's like shifting a car. 0:05:16.880 --> 0:05:19.960 It's trying to find traction. So you go from first 0:05:19.960 --> 0:05:23.000 gear to second gear, you let off the gas, you 0:05:23.080 --> 0:05:25.440 push in the clutch, you change it from first to 0:05:25.480 --> 0:05:28.120 second gear, you put let the clutch back out, you 0:05:28.200 --> 0:05:31.080 put the gas back on. You've lost momentum. And then 0:05:31.120 --> 0:05:34.040 once you catch second gear, that's when you found the direction. 0:05:34.279 --> 0:05:37.680 But when nothing's when there's no direction whatsoever, like like 0:05:37.760 --> 0:05:41.520 lately exactly, that's when it underperforms. So how did you 0:05:41.560 --> 0:05:44.000 become a technician? How did you find your way to 0:05:44.680 --> 0:05:48.880 looking at price as opposed to looking at the fundamentals? Well, Barry, 0:05:48.880 --> 0:05:52.920 it was absolutely accidental because I was a stockbroker Maryland's 0:05:52.960 --> 0:05:55.800 first back in the mid seventies. Um had to be 0:05:55.800 --> 0:05:58.600 a rough period. Oh it wasn't rough because I started 0:05:58.720 --> 0:06:01.279 exactly at the boy him of the market when people 0:06:01.320 --> 0:06:04.720 had been wiped out. Between nineteen seventy four. I got 0:06:04.760 --> 0:06:08.400 the distinct pleasure of graduating from Maryland Sales School, coming 0:06:08.440 --> 0:06:11.279 back to to mary Lynch and Richmond, Virginia, picking up 0:06:11.279 --> 0:06:13.000 the phone and now I'm on the white Horse and 0:06:13.000 --> 0:06:15.560 I'm gonna help everyone, and they've just been lost. They 0:06:15.600 --> 0:06:18.520 just lost about six point market was more than sm 0:06:18.760 --> 0:06:21.320 was more than cut and half over that period exactly, 0:06:21.360 --> 0:06:23.719 So no one was really interested in the twenty some 0:06:23.839 --> 0:06:26.479 year old kid coming in to help them. But I 0:06:26.560 --> 0:06:28.440 realized if I'm going to be successful, I had to 0:06:28.440 --> 0:06:31.159 become an expert at something. So I chose the option market, 0:06:31.360 --> 0:06:35.280 which had just debuted the year before in April of 0:06:35.360 --> 0:06:38.560 nineteen seventy four. So I became an expert in options 0:06:38.640 --> 0:06:42.680 by studying weekends and whatnot. Ultimately that led to Wheat 0:06:42.720 --> 0:06:46.080 First Securities, which was a large regional firm, hiring me 0:06:46.120 --> 0:06:48.839 to come across and develop and manage their first option 0:06:48.920 --> 0:06:52.080 strategy department. That's funny, I mentioned I read you when 0:06:52.080 --> 0:06:56.000 I was early in my career. Similarly, from Wheat first, 0:06:56.040 --> 0:06:59.800 I read Don Hayes. His office was right next to mine. 0:07:00.200 --> 0:07:02.840 So in the last minute, we have and we're gonna 0:07:02.839 --> 0:07:05.560 spend a lot more time on point and figure next segment. 0:07:06.120 --> 0:07:10.040 What makes point and figure different from traditional charting, Well, 0:07:10.080 --> 0:07:13.760 because point and figure charts are not updated every day. Uh, 0:07:13.800 --> 0:07:16.320 there are certain things that have to happen before chart 0:07:16.440 --> 0:07:18.840 is updated. It's made out of xs and o's and 0:07:18.880 --> 0:07:21.400 looks kind of funny to people, but there is a 0:07:21.520 --> 0:07:24.160 learning process that you have to go through when you 0:07:24.360 --> 0:07:27.840 to understand the buy signals and sell signals in in uh, 0:07:27.840 --> 0:07:29.760 in point and figure. What has to happen for a 0:07:29.760 --> 0:07:32.520 point and figure chart to be updated, Well, what has 0:07:32.560 --> 0:07:35.240 to happen is the stock either has to reverse columns 0:07:35.240 --> 0:07:37.800 by three boxes or more, meaning the price has to 0:07:37.840 --> 0:07:41.119 come down to come down by three typically a certain 0:07:41.120 --> 0:07:44.880 amount exactly. So it's really that doesn't happen, it's not 0:07:44.920 --> 0:07:47.760 gonna be updated. I'm Barry rid Helts. You're listening to 0:07:47.880 --> 0:07:51.080 Masters in Business on Bloomberg Radio. My guest this week 0:07:51.200 --> 0:07:55.400 is Tom Dorsey. He is the founder of Dorsey Wright Associates, 0:07:55.440 --> 0:07:59.400 which is a research and newsletter firm that was sold 0:07:59.440 --> 0:08:01.600 to the nast Act for a couple hundred million dollars 0:08:02.080 --> 0:08:06.080 last year. Before we get into the specific of point 0:08:06.120 --> 0:08:09.520 and figure charting, you come out of the Mary Merrill 0:08:09.600 --> 0:08:13.280 Lynch sales program, uh, which I know is a fairly 0:08:13.400 --> 0:08:16.920 fundamental approach to looking at stocks. How did somebody like 0:08:17.040 --> 0:08:21.120 you in the early seventies find your way into technical analysts? Well, 0:08:21.120 --> 0:08:23.160 it was totally by accident, Barry, because when Wheat First 0:08:23.160 --> 0:08:26.000 Security hired me to to leave Mery Lynch and come 0:08:26.040 --> 0:08:29.120 across and develop and manage their first option department, I 0:08:29.160 --> 0:08:32.320 realized I need to hire somebody who really understood the markets. 0:08:32.559 --> 0:08:34.760 And I hired this guy from Charlotte, North Carolina. Name 0:08:34.800 --> 0:08:37.520 was Steve Kane, and he brought with him a little 0:08:37.520 --> 0:08:40.920 book written in nineteen forty seven called the three point 0:08:41.000 --> 0:08:44.839 Reversal Method of Point and Figure Stock Market Trading by A. W. Cohen. 0:08:45.080 --> 0:08:47.120 And he said, would you read this so you'll understand 0:08:47.160 --> 0:08:49.480 the operating system in my mind when I come to 0:08:49.480 --> 0:08:51.160 you with a stock or the sector, or the market 0:08:51.240 --> 0:08:52.440 or that type of thing. I said, I do it, 0:08:52.840 --> 0:08:54.920 and I took it to a Virginia beach that weekend 0:08:54.960 --> 0:08:57.400 with my wife. Read the first paragraph of the introduction 0:08:57.840 --> 0:09:00.719 brought me back to my economics education in the university, 0:09:00.760 --> 0:09:03.120 and I had the epiphany right then that I knew 0:09:03.120 --> 0:09:05.200 I had to teach this to my brothers and sisters 0:09:05.240 --> 0:09:07.480 for the rest of my life because it brought me 0:09:07.559 --> 0:09:09.840 back to econ one on one, which was the most 0:09:09.880 --> 0:09:13.280 important course I ever had in the university. Supply and demand. Absolutely, 0:09:13.440 --> 0:09:15.720 that's the key to all of the irrefutable law of 0:09:15.800 --> 0:09:19.720 supply and demand. And this methodology was created simply as 0:09:19.760 --> 0:09:23.920 a logical, organized way of recording the imbalance between supply 0:09:23.960 --> 0:09:27.319 and demand. So we we talked earlier about xs and o's. 0:09:27.360 --> 0:09:29.280 In other words, you know, it's not so much that 0:09:29.280 --> 0:09:32.640 you're looking at a line chartum on a screen, but 0:09:32.800 --> 0:09:35.520 you're essentially looking at x's when the stock is rising, 0:09:35.520 --> 0:09:40.880 oh's when the stock is falling. Um. Why didn't this 0:09:40.960 --> 0:09:44.840 method ever go mainstream? If it's if it's so successful, well, 0:09:45.040 --> 0:09:48.120 I'm actually glad it never did go mainstream because it's 0:09:48.160 --> 0:09:51.640 because for you, it takes it takes uh an education 0:09:52.120 --> 0:09:54.480 to do this. You've got to want to learn point 0:09:54.520 --> 0:09:56.560 and figure charge. Anyone could look at a regular charge 0:09:56.600 --> 0:09:58.800 in Bloomberg or yeah, but this real. You need to 0:09:58.840 --> 0:10:01.240 have some background. You've got you need to have some background, 0:10:01.240 --> 0:10:03.800 and not that much background. I mean, I'm not selling 0:10:03.840 --> 0:10:05.240 a book, but you could read my book in your 0:10:05.280 --> 0:10:08.640 and you've got enough. So the one of the key 0:10:08.720 --> 0:10:11.720 questions anytime I mentioned point and figure charting to people, 0:10:12.160 --> 0:10:14.800 well why should I use that method as opposed to 0:10:15.080 --> 0:10:19.360 regular technical analysis. Well, one of the things is it's 0:10:19.720 --> 0:10:23.480 number one easily programmable because the computer already understands ones 0:10:23.480 --> 0:10:29.000 and zeros, It understands xs and ohs like you can't imagine. Um, 0:10:29.040 --> 0:10:31.600 there are relative strength things that we can do with 0:10:31.840 --> 0:10:34.080 the point and figure charting that you really can't do 0:10:34.360 --> 0:10:37.000 with bar charts. Bar charts are updated every day, no 0:10:37.040 --> 0:10:41.079 matter how inconsequential, the more minute by minute, as often 0:10:41.120 --> 0:10:42.360 as you want to be in the thick of it, 0:10:42.480 --> 0:10:45.360 so they only whisper when a particular signal is given 0:10:45.440 --> 0:10:47.000 ers or something should be done with a point and 0:10:47.040 --> 0:10:50.560 figure charts yells at you. You see a stock rise 0:10:50.600 --> 0:10:53.360 to a particular point four times and it can't get 0:10:53.400 --> 0:10:55.840 through that level, and the fifth time it finally gets 0:10:55.880 --> 0:10:58.080 through that level, it's yelling at you and says, you know, 0:10:58.160 --> 0:11:00.920 that supply that was at that level all this time 0:11:01.040 --> 0:11:03.160 could be even a few years. In the case of 0:11:03.160 --> 0:11:06.720 Coca Cola, back could be a few years. And finally 0:11:06.760 --> 0:11:10.200 it's it's it's sopped up all that selling pressure and 0:11:10.280 --> 0:11:12.760 this breakout suggests is going much much higher. I like, 0:11:12.880 --> 0:11:17.839 I like that explanation. Regular charts whisper point and figures. Yeah, 0:11:18.040 --> 0:11:21.360 they shout that that's that's really quite quite interesting. So 0:11:21.440 --> 0:11:23.640 one of the things, and again I was a reader 0:11:23.679 --> 0:11:27.320 of Dorsey Wright for many many people should realize that 0:11:27.960 --> 0:11:30.199 for those of those folks who might not have been 0:11:30.240 --> 0:11:32.240 on the cell side, on the brokeren side at any 0:11:32.240 --> 0:11:35.840 part of their career, this was pretty much a staple 0:11:36.280 --> 0:11:41.439 across broker's desks and strategist desks all over Wall Street. 0:11:41.559 --> 0:11:45.280 Lots and lots of people were reading Dorsey Wright. And 0:11:45.320 --> 0:11:48.720 one of the things that I very vividly remember was 0:11:48.760 --> 0:11:52.960 your concept of is the offensive team or the decent 0:11:53.000 --> 0:11:56.800 offensive team on the field, Please explain that for for 0:11:56.840 --> 0:12:00.400 the average lay person, that's a concept that day's back 0:12:00.440 --> 0:12:05.600 to nineteen and Earnest Staby began thinking about what we 0:12:05.679 --> 0:12:07.520 needed in the market, and he's basically said, we need 0:12:07.559 --> 0:12:11.280 a soulless barometer that will begin becoming negative when the 0:12:11.320 --> 0:12:14.280 markets at at the top, and positive when the markets 0:12:14.320 --> 0:12:18.520 at the bottom. Something totally confounding two investors that when 0:12:18.559 --> 0:12:20.600 things look the best, we need to start getting negative. 0:12:21.040 --> 0:12:24.480 So in N. W. Cohen created what's called the bullish 0:12:24.520 --> 0:12:27.160 percent index. Now, the beauty about a point in figure 0:12:27.240 --> 0:12:29.760 chart is a buy or sells signal by singing will 0:12:29.840 --> 0:12:32.920 simply a column of excess that exceeds the previous column 0:12:32.920 --> 0:12:34.920 of excess. That's simple. Just think in your mind, that's 0:12:34.920 --> 0:12:37.480 all excess that exceed a previous contents. So a a 0:12:37.640 --> 0:12:40.640 higher price right on a certain range, that's right, and 0:12:40.679 --> 0:12:43.439 you can see it's it's so visual, it's unbelievable. The 0:12:43.480 --> 0:12:45.800 computer can see this easily. When you look at the 0:12:45.840 --> 0:12:48.520 New York Stock Exchange, which has about two thousand stocks 0:12:48.520 --> 0:12:51.360 on it somewhere in that area, and we calculate the 0:12:51.360 --> 0:12:54.960 percentage of stocks that are on by signals, that that 0:12:55.040 --> 0:12:57.800 means if we went through, if I gave a seventh 0:12:57.800 --> 0:13:00.720 grader every chart on the New York Stock Exchange and 0:13:00.760 --> 0:13:03.400 said look to the far right hand side, and every 0:13:03.440 --> 0:13:05.520 stock you see that has a column of excess that 0:13:05.600 --> 0:13:09.160 exceeded a previous column of excess counted as counted over here. 0:13:09.280 --> 0:13:11.400 Set it in a pile. Then we'll divide by the 0:13:11.440 --> 0:13:14.320 total and we get a percentage from zero to a hundred. 0:13:15.120 --> 0:13:19.120 So there are different risk levels, but in general, when 0:13:19.160 --> 0:13:21.600 it's in a column of x's and rising, you have 0:13:21.640 --> 0:13:24.640 the football. So when you have the football, you should 0:13:24.640 --> 0:13:28.319 be playing offense. Now, field position is a different story. 0:13:28.360 --> 0:13:31.280 If you're near the seventy level, that would suggest that 0:13:31.320 --> 0:13:33.440 everyone is in that wants to be in, and you 0:13:33.480 --> 0:13:35.960 may have the football, but your field position is terrible. 0:13:36.120 --> 0:13:38.280 That tells you what plays you probably should run. If 0:13:38.320 --> 0:13:42.160 you're down at the line level and you have the football, 0:13:42.360 --> 0:13:46.720 then you can be gonna run much more aggressive plays. Conversely, 0:13:46.760 --> 0:13:48.960 when it's in a column of OS and declining, in 0:13:48.960 --> 0:13:52.120 other words, more stocks going on cell signals, which is 0:13:52.120 --> 0:13:54.880 a column of OS exceeding a previous column of OS, 0:13:54.880 --> 0:13:57.160 it suggests to you that the defensive team is on 0:13:57.200 --> 0:14:00.920 the field. Play it that way, play defense. And that's 0:14:00.920 --> 0:14:04.000 probably the most important market indicator that we have ever 0:14:04.080 --> 0:14:09.000 had created back in and I could effectively manage the 0:14:09.040 --> 0:14:13.640 market just with that. So you mentioned that's your favorite indicator. 0:14:13.640 --> 0:14:17.640 What other indicators do you pay attention to, and perhaps 0:14:17.720 --> 0:14:22.400 more importantly, what other indicators do you completely ignore? Well, 0:14:22.520 --> 0:14:24.560 the other ones that we pay attention to, our bullish 0:14:24.560 --> 0:14:28.080 percents on other types of indexes, like the NASTAC. We 0:14:28.160 --> 0:14:31.000 do bullish percents on all the sectors. We look at 0:14:31.040 --> 0:14:34.520 the percentage of stocks that have positive relative strength in 0:14:34.600 --> 0:14:37.640 a particular industry, sector or the market, and it's the 0:14:37.680 --> 0:14:39.720 same zero to a hundred grid. You look at that 0:14:39.800 --> 0:14:43.480 like a football field zero to a hundred uh hundred 0:14:43.560 --> 0:14:46.720 yards exactly, and when you're above seventy you have bad 0:14:46.760 --> 0:14:50.800 field position. Below you have good field position column of X, 0:14:50.840 --> 0:14:52.800 as you have the ball column of o's you don't 0:14:52.840 --> 0:14:55.120 have the ball. And then we look at all kinds 0:14:55.160 --> 0:14:58.040 of things like that relative percent of stocks. So in 0:14:58.040 --> 0:15:03.120 in the last minute we have define what relative strength is. 0:15:03.160 --> 0:15:04.920 And again for the lay person who may not be 0:15:05.000 --> 0:15:08.960 familiar with this, relative strength is like an arm wrestling contest. 0:15:09.480 --> 0:15:11.480 You might have two people and everyone's see an arm 0:15:11.520 --> 0:15:14.720 wrestling contest, and you see two people on television arm wrestling, 0:15:14.760 --> 0:15:17.080 and one guy summarily beats the other guy. He has 0:15:17.160 --> 0:15:20.360 better relative strength than the person. He just two strong guys, 0:15:20.440 --> 0:15:22.200 one of them is just a little stronger than the 0:15:22.400 --> 0:15:24.600 precisely and you can do that for different stocks in 0:15:24.600 --> 0:15:27.320 different sectors. Yeah. Absolutely, I mean it's something that we did, 0:15:27.520 --> 0:15:30.760 we did nine years ago. We should do that by 0:15:30.800 --> 0:15:33.400 hand because we didn't have computer systems to do it. 0:15:33.560 --> 0:15:36.800 I'm Barry Ridholtz. You're listening to Masters in Business on 0:15:36.880 --> 0:15:40.920 Bloomberg Radio. My guest this week is Tom Dorsey. He 0:15:41.080 --> 0:15:45.920 is the founder and FORMACYEO of a technical research firm. 0:15:46.000 --> 0:15:49.680 Dorsey Wright sold last year to the NASDAC for two 0:15:49.760 --> 0:15:54.360 hundred and something million dollars uh and now Tom is 0:15:54.520 --> 0:15:58.720 the CEO and c i O of his own family office, 0:15:58.960 --> 0:16:03.760 running money for his own account and and the family's account. 0:16:04.520 --> 0:16:06.960 I want to talk a little bit about power shares, 0:16:07.040 --> 0:16:09.840 e t F and some of the strategies you developed. 0:16:09.880 --> 0:16:14.160 But before we get into that, not technicals, but let's 0:16:14.200 --> 0:16:19.120 talk about technology. How has technology changed what you do 0:16:19.200 --> 0:16:22.640 every day? Barry. That's a great question because you know, 0:16:22.760 --> 0:16:26.720 technology has had such a major effect on our whole industry. 0:16:27.040 --> 0:16:31.760 Anything that can be automated will be automated. And you've 0:16:31.760 --> 0:16:36.040 got to understand that with technology, our relative strength work 0:16:36.080 --> 0:16:37.720 that we do for our E t F and and 0:16:37.840 --> 0:16:40.200 the comparisons and contrast we do. We used to do 0:16:40.240 --> 0:16:43.520 by hand. Back twenty eight years ago, I started charting. 0:16:43.680 --> 0:16:46.960 I'm early in my career. I worked with a gentleman 0:16:47.000 --> 0:16:49.880 named Guy Ortmann, who introduced me to both Don Hayes 0:16:49.960 --> 0:16:53.359 and you. He's now I believe that um Scarsdale Equities, 0:16:53.560 --> 0:16:56.440 but at the time it was Prime Charter, which was 0:16:56.480 --> 0:16:59.600 ultimately sold to Oppenheimer. Hard to keep track of, remember 0:16:59.640 --> 0:17:03.920 account and easy. He used to do charting by hand. 0:17:04.119 --> 0:17:06.480 He would show me here's where this was, and you 0:17:06.520 --> 0:17:07.919 could look at the screen, and you can look at 0:17:07.960 --> 0:17:11.359 a computer, but it's not the same thing as actually 0:17:11.880 --> 0:17:14.120 writing it down by hands. That's exactly right. We used 0:17:14.119 --> 0:17:17.919 to day before we had the computer capacity to do it. 0:17:18.000 --> 0:17:22.199 So many people And do you do five hundred stocks 0:17:22.200 --> 0:17:24.640 a day past the book to the next person? They 0:17:24.680 --> 0:17:26.240 did that by the by the end of the week, 0:17:26.480 --> 0:17:31.000 each persons seen. That's unbelievable. It's amazing. But boy, you like, 0:17:31.119 --> 0:17:33.080 just like you said, how do you get a better 0:17:33.119 --> 0:17:35.720 feel than doing it that way? But you can't do there. 0:17:35.760 --> 0:17:37.520 You know, there's only a certain amount of things you 0:17:37.520 --> 0:17:39.600 can do. Take for instance, if we wanted to create 0:17:39.600 --> 0:17:42.200 a matrix on the standard pours five. In other words, 0:17:42.240 --> 0:17:44.040 I want to create the way we do a relative 0:17:44.040 --> 0:17:46.480 strength charters, divide one thing by another. If I wanted 0:17:46.520 --> 0:17:48.879 to compare coca cola to pepsi, I would divide the 0:17:48.880 --> 0:17:51.040 price of coke by pepsi. That gives me a number. 0:17:51.080 --> 0:17:53.320 I take that number. I plotted on a chart. It 0:17:53.400 --> 0:17:55.439 looks like a regular trend chart, but it's not. It's 0:17:55.480 --> 0:17:58.600 a relative strength chart between the two. When it's rising, 0:17:58.600 --> 0:18:01.560 the first one is doing better what it fall Precisely, 0:18:01.560 --> 0:18:04.399 it's just spread between the two exactly. And if I 0:18:04.400 --> 0:18:06.159 did that on the SMP five hundred, we have to 0:18:06.200 --> 0:18:10.120 create two fifty charts. In other words, each one relative 0:18:10.119 --> 0:18:14.199 to a number, two, relative to the number three, relative 0:18:14.240 --> 0:18:17.200 to all five hundred. So two fifty charts. You've gotta 0:18:17.240 --> 0:18:21.480 have a lot of employees or good computer exactly. Now, 0:18:21.520 --> 0:18:24.840 we do overnight seven and a half million relative strength 0:18:24.880 --> 0:18:29.400 charts every single night, comparing the world, Malaysia, Indonesia, Indonesia 0:18:29.440 --> 0:18:32.000 to France, France to the United States, everything you can 0:18:32.000 --> 0:18:35.800 think of. That that's an incredible number of permutations, which 0:18:35.840 --> 0:18:38.200 actually leads me to my next question. So you run 0:18:38.240 --> 0:18:41.440 a lot of different strategies. How do you develop these 0:18:41.480 --> 0:18:43.840 new strategies? How do you come up with these ideas? Well, 0:18:43.840 --> 0:18:46.639 you come up with the ideas. We sat in a 0:18:46.720 --> 0:18:49.280 circle for twenty eight years. Nobody's ever had an office 0:18:49.280 --> 0:18:51.719 at Dorsey Wright. I never had an office of doors. Right, 0:18:51.760 --> 0:18:55.080 we sit together. So there's a constant hum in the 0:18:55.160 --> 0:18:59.000 office of discussing things and talking about different things. And 0:18:59.040 --> 0:19:01.320 they all come from that type of thing. Person will 0:19:01.480 --> 0:19:03.720 a company will call us and say, hey, we're interested 0:19:03.840 --> 0:19:07.080 in X, y Z, can you create that forest? Then 0:19:07.119 --> 0:19:09.920 the ideas start to float around, and and they come 0:19:09.960 --> 0:19:12.639 in the most unusual ways. I was looking at I 0:19:12.720 --> 0:19:14.320 was looking one day out the window and I saw 0:19:14.359 --> 0:19:16.359 a guy cutting the grass with one of these big moors, 0:19:16.720 --> 0:19:19.119 And I thought to myself, who helps him? Does he 0:19:19.160 --> 0:19:21.480 go to a major wirehouse and open an account with 0:19:21.520 --> 0:19:24.160 two thousand dollars? No, they don't let him in the door. 0:19:24.600 --> 0:19:28.040 So who helps him? So I created a model called 0:19:28.080 --> 0:19:32.120 the People's Portfolio, and I compared in contrasted three things 0:19:32.160 --> 0:19:34.960 on a relative strength basis, the standard ports cap weight 0:19:35.240 --> 0:19:37.960 against the standard ports equal weight. Both trade. They trade 0:19:37.960 --> 0:19:42.600 totally differently against cash. Cash was in there as the 0:19:42.720 --> 0:19:46.320 risk management tool of the piece, and whichever one won 0:19:46.400 --> 0:19:49.920 the arm wrestling contest against the three of the portfolio 0:19:50.000 --> 0:19:55.280 went in over what time period is that just continuous? 0:19:55.359 --> 0:19:58.359 How often does that readjust maybe once every three years? 0:19:58.640 --> 0:20:02.119 Oh yes, I was gonna say, that's a longer term cycle, 0:20:02.240 --> 0:20:04.880 very long term cycle. But I define many money managers 0:20:04.920 --> 0:20:08.720 to outperform it. It's a challenge because sim typically the 0:20:08.880 --> 0:20:11.880 cap weighted does great at the end of his cycle, right, 0:20:11.960 --> 0:20:13.760 and then when it rolls over, it's the eagle weight 0:20:13.800 --> 0:20:16.960 that does much precisely. But instead of trying to call 0:20:17.080 --> 0:20:19.280 the point that that you're at the end of the cycle, 0:20:19.760 --> 0:20:22.000 let the work do it. Let the relative strain do it. 0:20:22.040 --> 0:20:24.359 And when that changes and it points to another direction, 0:20:24.440 --> 0:20:27.480 that's where you go. And So instead of sitting back saying, gee, whiz, 0:20:27.520 --> 0:20:29.439 you know, I've got all I've I've got a PhD 0:20:29.480 --> 0:20:31.639 in and this and that and mathematics, and I'm going 0:20:31.720 --> 0:20:33.520 to figure out when that end is No, wait for 0:20:33.560 --> 0:20:36.199 the wait for the rules based program to do it. 0:20:36.480 --> 0:20:39.119 I'm Barry rid Halts. You're listening to Masters in Business 0:20:39.160 --> 0:20:43.040 on Bloomberg Radio. My special guest today is Tom Dorsey. 0:20:43.119 --> 0:20:46.920 He is the founder of Technical analyst firm Dorsey Wright 0:20:47.400 --> 0:20:51.359 and basically a fixture on Wall Street for many years. 0:20:51.359 --> 0:20:54.119 Dorsey Wright is now part of NASDAC, having been sold 0:20:54.600 --> 0:20:57.440 last year. Let's talk a little bit about momentum and 0:20:57.520 --> 0:21:02.560 what it means. What's the significant momentum to either a market, 0:21:02.760 --> 0:21:06.840 a sector, or a specific stock. Simply this berry. Everyone 0:21:06.920 --> 0:21:10.320 understands things in motion and to stay in motion until 0:21:10.359 --> 0:21:13.040 acted upon by an opposite force. That's the same thing 0:21:13.080 --> 0:21:16.560 that happens in the market. People are trying to catch 0:21:16.640 --> 0:21:18.439 a knife, so often they want to buy things that 0:21:18.480 --> 0:21:20.439 are down or going down, and they think that the 0:21:20.480 --> 0:21:22.080 lower I buy it, the better I'm going to be 0:21:22.119 --> 0:21:24.640