DAN SULLIVAN, Publisher, The Chartist
Dan Sullivan’s investment newsletter, The Chartist, has an envious track record. In the last 10 years, his stock picks have gained nearly 365%, while the overall stock market rose 273.6%. As Sullivan’s 8,500 subscribers know, his method is single-minded. He manages a $75-million investment fund based on a stock’s pattern of rise and fall, even before he knows what the company does. He divulged some of his secrets of success during a recent interview at his Seal Beach office with free-lance writer Anne Michaud.
You say that now is the time to buy stocks. Why do you think that?
It’s based on our momentum readings we had earlier in the year. I am bullish, but I’m cautiously bullish. I think the market is going to go higher, up to 3,300, but it’s getting late. The whole market is mature.
Rather than say now is the time to buy, maybe I would say now is the time to hold the stocks that you bought earlier on. Fresh money coming in should go slow.
What do you mean by going slow?
Well I wouldn’t, if you’re just coming in for the first time, have more than 25% of your capital invested. But if you did, if you were in earlier and you can afford to go through a correction, then I would say remain 100% invested now.
When do you think the market will hit 3,300?
I see it happening within the next six to eight months. But that’s just the numbers I’m throwing out based on my momentum studies. If it starts to go down, then I’ll have to take another look.
Can you explain your charting method?
My approach is basically buy high, sell higher. The time that I like to be looking at stocks to buy is when the market is going down. The stocks at that point that are fighting this (down) trend are your potential leaders when the market finally does turn (back up). They’re the high relative strength stocks.
So when the market finally does turn, the high relative strength stocks will be the first ones to jump to new highs. Those are the stocks to be in. Also, you have to buy them early. I’m not trying to find a bargain. I’m willing to pay up for a stock that has a following and the price is being bid up, because it’s usually being bid up for a reason.
At what point are you buying?
I get in when the market turns (up). I have a couple of momentum indicators, that can tell me a good time to enter.
When do you sell?
I’m not going to be out at the top. But I hope to recognize the top, after the fact, and sell before a lot of damage is is done.
Some say this is a bad time to invest in stocks because there is a danger that the economy could go into another recession. What do you think of that argument?
I believe that the market leads the economy and, like in 1982, the market turned well ahead of the economy. I follow the charts, and the market will tell us whether we’re going into another recession. If it gets weak, then it’s telling us that there is trouble ahead. What is most important to you in evaluating a company?
The stock should be actively traded. But, as far as the company goes, I really don’t evaluate it. I evaluate the performance of its stock.
Does the size of the company matter? Do you follow any companies listed on the pink sheets?
The size of the company matters a lot. I don’t want to become involved with a stock that’s just too thin, that isn’t liquid enough. I’d like to see at least 100,000 shares a day traded.
Are there any Orange County stocks you like?
Not now. But there have been times in the past when I’ve had a lot of stocks from Orange County. I don’t pay attention to location, and I don’t pay attention to what a company does. If I find that the stock is acting well--if its chart pattern has acted well--usually the company will be sound.
What about the small investor who has only $1,000 or so to invest? What’s the smartest move?
I would go into a mutual fund.
Why?
Because with your $1,000 you get diversification. I would go into a no-load mutual fund where you’re not paying someone a commission. A lot of funds will charge 5% or more, but there’s no reason to pay a load.
You advise people to invest for months or years rather than weeks. Why is that?
Because I think that’s the way to make money in the market. I don’t think the individual investor can make money buying and selling on a weekly basis. You have to pay commissions on your transactions, and you’re competing with specialists.
The small investor tends to take short-term profits and let the losses just run indefinitely. People have a reluctance to take a loss. That’s why you find so many portfolios are loaded up with stocks that you know were at $60, and now they’re at $5. It should be the other way around: You should hold your winners, and get rid of your losers.
Do you read the top-performing investment newsletter, the Zweig Forecast?
Oh, definitely. In fact, we’ve been exchanging newsletters since we both started.
He’s had slightly better success than you predicting the market. His stocks rose more than 391% over five years, and your choices gained 365%.
Well, it’s nice to be one of the top two. That’s fine with me.
On getting into the market. . .
“I don’t believe in in-and-out trading. Since the beginning of the year, I’ve recommended only three stocks. I believe in (investing over) months and years, rather than days.”
On picking a company. . .
“I really am not interested in what a company does, whether its earnings are expanding or it’s bringing in new products. I look at the performance of the stock.”
On practicing what he preaches. . .
“I have an account, which I started with my own money. I publish the account in the newsletter, so people can see that I’m not asking them to do anything I’m not willing to do.”
On the difference between the stock market and horse races. . . .
“The stock market is a winning game if you’re a long-term investor, because all the studies show that the market goes up 10% a year when you factor in dividends.”
