Being Right or Making Money (Third Edition)

December 31, 2015 01:00 PM

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 that has been developing since 1980.  This 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 in all market conditions.

This seven chapter book is multi-authored by Ned Davis and a three of his associates. The first four chapters totaling 113 pages comprise the meat of the book and are the most valuable.  Davis provides the introductory material focusing on updating his earlier edition (first edition, 2000) chapters on the firm’s research approach, the difficulty in accurate stock market forecasting, and building models for investing with the odds in your favor. Then Loren Flath, senior research analyst, reviews their stock and bond market models in depth.  

Davis uses different types of indicators and combines them into a composite model which then provides a concrete buy or sell signal when the majority move in one direction.  These include economic, trend, monetary, valuation, moving averages and internal market measurements.  One chapter covers the details of the firm’s “Fab Five” stock market model.  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 complex as the stock or bond market.”

Because of the inclusion of preferred stocks and closed-end funds and structured products in the data bases of the NYSE and other exchanges, NDR developed their own indexes excluding these extraneous items, thereby providing 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 only one chart per page for clarity.

Interestingly Davis devotes an entire chapter to his forecast of a potential cyclical bear market (20% he says) that he expects to occur in 2014.  Surprisingly, he mentions how difficult forecasting can be, but then provides one anyway.  There are two problems with this chapter. First, I’m reading this book in February 2015 so the forecast is old, and second there was no bear market in 2014.  Thus, this chapter offers minimal value to most readers. 

According to the author, there are four keys to making money in the stock market that are based upon his evaluation of a handful of successful money managers including Martin Zweig, Peter Lynch, George Soros and Paul Tudor Jones, among others.  The four keys are:  1. Using objective indicators with long-term proven positive historical testing, 2. Discipline to follow your trading system in good and bad times, 3. Flexibility to change your mind when the evidence shifts, and 4. Risk management to control and minimize losses. “Winners make small mistakes, while losers make big mistakes,” says Davis. He also provides readers with a list of nine rules of successful investors.

The first of the last two lengthy chapters covers the prospects for U.S. energy independence written by John LaForge, head of the Commodity Team.  The second reviews the potential demographic changes in an aging world authored by Alejandra Grindal, senior international economist.  Neither chapter provides a tie-in to the NDR models or how to explicitly use the information for investment purposes.

This book will appeal most to two audiences.  The first group is his base of institutional clients who subscribe to his research analysis and reports based on his models.  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 to assess the market situation for timing 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.