The Master Trader: Birinyi’s Secrets to Understanding the Market

December 14, 2014 07:02 PM

The Master Trader: Birinyi’s Secrets to Understanding the Market
By Laszlo Birinyi
John Wiley & Sons, Inc.
$60; 327 pages

During the reign of Wall Street Week with Louis Rukeyser each Friday night on PBS, I eagerly awaited Birinyi’s appearance. He was always forthright, prescient and compiled the best investment track of any other guest. It was therefore momentous to see him publish a book about his decades of work and his market perspective. Overall, this book provides fascinating insights into the workings of Wall Street’s players and their practices from the perspective of a 40-year market veteran. 

The author devotes many pages to debunk many of Wall Street conventions and rules as myths, as well as to demean the usefulness of technical analysis, even though it has achieved increasing global acceptance in the past decade. Moreover, his firm is not impressed with professional money managers, specifically mutual fund managers. He says that professionals do not practice investing and that fund managers are arrogant and closed minded. Birinyi takes to task and is critical of most commentators and providers of financial guidance who use such words as could, may, average, usual and typical as they are of little value to the trader. 

Technical analysis takes a big hit. He points out, “We contend after years of analysis and experience that technical analysis (TA) does not work.” In a section labeled “Technical Analysis Fails Rigorous Test” Birinyi fails to provide the vital details necessary to backup this statement. He did provide the performance percentage of eleven popular technical indicators during the bullish test period 3/9/2009 (the day of the low of the last bear market) through 4/23/2010 for the S&P 500 Index, as well as for Dow Jones Industrial Average. He concluded that all the indicators reviewed had worse performance than buy-and-hold. Astonishingly, he provided neither the criteria for each indicator’s buy and sell criteria, nor the typical backtest statistics on number of winning losing trades, etc. Moreover, to test any indicator over a bit more than one year’s time horizon is ludicrous. 

His investment process consists of three elements: data, analysis and strategy. Clearly, Birinyi is a big proponent of money flows which he feels is the ultimate indicator for stock selection. He states: “By analyzing every single trade in every stock, money flows are able to determine the amount and degree of interest in as stock, group or index.” Furthermore, he believes that money flows are useful when they lead prices, not when they are coincidental.

He urges traders to spend time analyzing stocks that act well. In particular, he says to look for stocks with a short-term development or incident, which is being viewed as long-term significant problem. That’s where the opportunity lies. Additionally, he stresses that important market bottoms and turning points can be identified by extremely lengthy and negative reports. Additional useful information on trading is provided on his website, and on a special website tab provided in the book. 

Birinyi believes that each trader should be involved with his or her financial decisions. However, actually implementing his pearls of wisdom will be challenging as they are generalizations rather than hard rules. Nonetheless, his exhaustive and consequential take on the markets and his firm’s investing success are clearly exceptional. According to the author, “There are no shortcuts, magic pills, or secret sauces.”

Leslie N. Masonson is a trader, as well as the author of Buy DON’T Hold and All About Market Timing, (Second Edition). Reach him at lesmasonson@yahoo.com.

About the Author

Leslie N. Masonson is the author of Buy DON’T Hold and All About Market Timing, (Second Edition).  Reach him at lesmasonson@yahoo.com.