Being Right or Making Money (Third Edition)

April 1, 2015 09:03 AM

Being Right or Making Money (Third Edition)

By Ned Davis
John Wiley & Sons, Inc.
$40; 231 pages

Ned Davis Research (NDR) has a world-renowned reputation and following for its back-tested research on stock market and fundamental data. The research, which was developed beginning in 1980, has resulted in the development of a number of objective, mathematical composite timing models that have performed well over decades. His firm’s goal is to provide his institutional clients with carefully crafted model research to make money regardless of market conditions.

This seven-chapter book is multi-authored by Ned Davis and three of his associates. The first four chapters, totaling 113 pages, are the most valuable.  In them, Davis provides introductory material focusing on updating his chapters from his first edition (2000) on the firm’s research approach, the challenges of accurate stock market forecasting, and methods of building models that allow you to invest with the odds in your favor. Loren Flath, senior research analyst, reviews stock and bond market models in in-depth, back-to-back chapters.  

Davis uses different types of indicators and combines them into a composite model, which then provides a concrete buy or sell signal based on the majority’s moves. These moves include economic, trend, monetary, valuation and internal market measurements as well as moving averages.  The rationale for using multiple indicators in each of his models is because, “no one indicator or data set consistently provides a reliable view of something as complex as the stock or bond market.” 

Because of the inclusion of preferred stocks, closed-end funds and structured products in the databases of the NYSE and other exchanges, NDR developed their own indexes excluding these extraneous items. These indexes thereby provide more accurate readings for his indicator evaluation.  There are numerous color charts throughout the book, but in many cases the type font was too small to easily read, especially in the data boxes.  Hopefully, in the fourth edition, the publisher will place one chart per page to improve clarity.

Interestingly, Davis devotes a full chapter to forecasting a potential cyclical bear market that he expects to occur in 2014.  Surprisingly, he the challenges and fallbacks of forecasting, but rather than shy away, he then provides a forecast of his own. There are two problems with this chapter. First, I’m reading this book in February 2015, so the forecast is old; second, there was no bear market in 2014. This chapter offers minimal value to most readers. 

According to the author, based upon his evaluation of a handful of successful money managers including Martin Zweig, Peter Lynch, George Soros and Paul Tudor Jones, there are four keys to making money in the stock market. Use objective indicators with long-term proven positive historical testing; apply discipline to follow your trading system in good and bad times; exercise flexibility to change your mind when the evidence shifts; consider risk management to control and minimize losses. Davis says, “winners make small mistakes, while losers make big mistakes.”  

The first of his last two lengthy chapters, written by John LaForge, covers the prospects for U.S. energy independence head of the commodity team, while the second, authored by senior international economist Alejandra Grindal, reviews the potential demographic changes in an aging world authored. Neither chapter provides a tie-in to the NDR models nor explains explicitly investment-related uses of the information.

This book will appeal most to two audiences. The first group is institutional clients who know his models and subscribe to his research analysis and reports. They will be able to understand how NDR comes to its market calls based on the model construction and components. The second audience is composed of self-directed investors, traders and advisors who enjoy learning about building models that will help them assess the market and time their investments. For those who like to see how models are built from the ground up, the two model chapters are comprehensive and well worth the time spent.

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.