» Interview: Market Wizard and trading legend Mark Minervini | Global Growth Investor

Monday, January 9th, 2012

Interview: Market Wizard and trading legend Mark Minervini

Mark Minervini is one of Wall Street’s most remarkable success stories. A former musician, Minervini began trading stocks in 1983 and weathered a number of losing years. But he persisted and his breakthrough came when he read Richard Love’s little-known book Superperformance Stocks, which outlined the characteristics of the market’s biggest winners.

Minervini honed his strategy and – as highlighted in Jack Schwager’s Stock Market Wizards – in a five-and-a-half-year period generated an average annual compound return of 220 per cent. To put that in perspective, a $10,000 account would explode to $3.3 million under those returns. Even more impressive was his risk – Minervini had only one losing quarter when he was down just a fraction of one per cent.

Minervini also took out the 1997 US investing Championship with a 155 per cent return, and went on to run a successful investment advisor firm, Quantech, which worked with some of Wall Street’s leading hedge funds and investors.

But it has just been spectacular returns that has marked Minervini out. He has also made a series of prescient market calls and protected his account with defensive moves. In August 1998 he publically said the market was showing similarities to the 1987 crash. The next day the market slumped 508 points. He then turned bullish a month later and rode several stocks to huge gains. In May 2000 Minervini successfully called the bear market in internet stocks and put most of his account in cash.

The core of Minervini’s strategy is SEPA (Specific Entry Point Analysis), a proprietary computer-driven technology based on the models of historic winners. SEPA combines quantitative screening, fundamental research and qualitative analysis as part of its core selection criteria to identify stocks with the potential for significant price appreciation.

In addition to his own trading, Minervini has turned to educating traders with Minervini Private Access, with members gaining access to live stock selections and even a live trading room where a live moderator reviews and explains rational and analysis on Minervini’s trades.

Mark spoke with YTE’s Ben Power

You started your career as a drummer, how did you shift into trading?

I simply opened a brokerage account and started trading my own money. I saw the stock market as the ultimate financial opportunity without prejudice. That’s the beauty of the stock market, it’s just you and the market; you don’t need anyone’s permission. The market doesn’t care about pedigree, it treats everyone equally. It doesn’t care if you’re a drummer or a plumber. It gives you pure, instant feedback, and it never lies to you. Each night, you get an honest assessment or “report card”, your account balance. I began investing in stocks in 1983. I started with a small amount of capital that I earned working as musician. For about five or six years I didn’t make any money. In fact, I lost money. It wasn’t easy to stick with it through those difficult years, but my love of speculation kept me going. Eventually, I acquired the necessary skill to succeed. Over time, I grew my trading account. The rest is history.

How did being profiled in Stock Market Wizards change your career?

It didn’t really change my career very much. My career had consisted mainly of trading my own money. Although I sold research to institutional clients for a period of time, 95 per cent of my wealth has been created trading my own account. By the time I was interviewed in Stock Market Wizards, I had pretty much already accomplished my financial goals. I have never really been too interested in managing other people’s money, so I didn’t really leverage the book nearly as much as I could have.

In your Market Wizards interview you cited Richard Love’s book Superperformance Stocks as a major influence. His book is long out of print. How exactly did Love define a ‘Superperformance stock’?

A stock that advances 300 per cent or more within a two-year period.

Believers in the efficient markets hypothesis, who say it’s almost impossible to beat the market, concede that momentum stocks are one strategy that can deliver above-market gains. Would you describe your trading as momentum?

I don’t really like labels, but I guess I fall into the trend following/momentum camp. I definitely have a bias toward growth.

You call your strategy Specific Entry Point Analysis (SEPA). Can you explain it a little?

SEPA® is s strategy of precision. Timing is a key component. The objective of SEPA® is to take all the pertinent information available, and pinpoint the precise spot at which to enter a high-probability trade in terms of reward versus risk. This is achieved by taking into account what we know influences institutional buyers.

The key is convergence. SEPA® employs a method of stacking supporting probabilities. For example, if one variable is present, you may have a certain theoretical probability of a particular outcome. While a separate variable may have a certain probability; and so forth, the probability of combining the variables is not as simple as just an average. By stacking supporting probabilities, the cumulative probability can increase exponentially as each variable is added to the equation.

We take into account all sorts of data including fundamental and technical. Once the supporting criteria are met, we look for a low risk entry point.

What fundamentals are you looking for in a stock?

Optimally, I want to own companies that are delivering the goods; strong earnings, sales and margin growth. I’m looking for the ones that have something really great going on, which translates into bottom line success. Not much different than what any good growth manager would look for.

You’ve said you enter when a stock breaks out of a constructive consolidation. How do you define a constructive consolidation?

A constructive consolidation is one that has gone through the proper supply/demand dynamics that then sets the stock up for a line of least resistance. If the stock is under accumulation, the consolidation will represent a period of time where strong holders ultimately absorb the weaker ones. Once the “weak hands” have been eliminated, the lack of supply allows the stock to move higher because even a small amount of demand will overwhelm the small supply. Stocks that are under institutional accumulation will rest and consolidate within the context of a long-term uptrend and then continue higher. Most of these situations will show tell tale signs.

You’ve said you stick to your system even when it’s not performing well. Does your system perform best in a trending market?

Yes. As defined by our Trend Template qualifier, I require a stock to be in a confirmed uptrend prior to my purchase. So, by definition, a trending market is the best environment for my style.

How did your system perform during the recent bear market?

With the exception of some short positions, I was in cash during the grand majority of the decline. I’m not likely to be caught in a major decline because our stop-loss discipline gets us out fairly early. You won’t get too far off track, if you allow the market to guide you. However, if you argue with the market, eventually you will suffer a major setback.

For a strategy like the one I employ, a back and forth volatile market is actually riskier and potentially more destructive than a declining market. If the market breaks down and trends, I’m out and that’s the end of it. However, in a whipsaw environment, the risk of using relatively tight stops is getting repeatedly stopped-out and suffering a large loss as a result of a bunch of small losses.

We’ve seen big gains lately in the US stock market particularly, but it was led by a lot of stocks with poor fundamentals. Is that changing? And how have you played this bull market?

I don’t think I would necessarily categorize this bull market as being led by stocks with poor fundamentals. Many of the leaders during this bull run sported excellent fundamentals. NFLX, AAPL, BIDU, CMG, FFIV, RVBD, PAY, LULU, TIBX, GMCR are all examples of leaders that had great fundamentals.

Do you have an example of a recent winning trade?

Body Central Corp. (BODY) – Stock went IPO in October 2010. I bought it on January 5, 2011 and sold it just 5 days later on January 11, 2011. The stock rallied almost 50% in 6 days. This is the type of situation I look for.

You’ve said you often sell too early. What would trigger your exit from a winner?

I may simply sell when I have a big gain that I’m satisfied with. I’m not really concerned with getting the highest price, I’m concerned with making more than I risk and doing it over and over again consistently.

The five or ten-bagger is not something I need to achieve to make big returns. When I make a really good gain, generally when it reaches a multiple of my risk, I then look to protect what I’ve made, and at some point sell the stock. If the stock is really strong, I may stay with it, unless I think it’s gotten too far ahead of itself and it appears vulnerable. The key is to make more than you risk, do it consistently, and avoid large losses. Once you can do that, then you can work on optimizing your trading.

Where do you set your stop-loss points?

Depending upon my position size and the liquidity of the stock, my stops generally range between low-to-mid single-digit. My “Uncle Point” is 10 per cent maximum. I never want to lose more than that on any one trade. I will also sell if I think the trade has technically or fundamentally gone sour, often before my stop is hit. I back into risk; position size is based on where the stop-loss is.

SEPA looks for trades with high potential reward/risk ratio. How do you determine reward/risk?

After trading tens of thousands of stocks, I have a pretty good idea of what I can expect from my trades on average; intuitively and scientifically. That’s because the buys are made under very consistent, reliable conditions (the set-up). I also rely upon our Leadership Profile® of past stock market winners for models as a guide. This is in addition to in-depth post-analysis of my own trades.

The estimated profit is a very important consideration when deciding the amount of risk I’m going to take. I back into risk according to what expect I can gain. From that perspective, the stop is a mathematical calculation. However, the price action of the stock is also very important and telling. I enter trades at very specific points using charts. So, it’s a balancing act between math and technical analysis.

How long do you tend to hold stocks for?

On average, maybe 20 trading days, however, much of that is due to high turnover as a result of loss cutting, which generally occurs quickly within the first 5-10 days on average. It’s not uncommon to hold a winner for several quarters. However, I rarely hold for long-term capital gains (a year or more).

Are you still shorting stocks?

Yes, but I do relatively less shorting in a bull market than a bear market.

Many traders say the biggest challenge is when markets change and their system starts underperforming. Do you thing markets change, and have changed? Or do you think they cycle? (The former implies the need to reinvent new systems constantly; the latter implies sitting out rough patches)

Not really. Stocks today rise and fall for the same basic reasons as before: people drive stock prices, and people stay basically the same. Fads come and go. Businesses grow by doing things better, cheaper, and more effectively. Has the way you throw a baseball, a football or a basketball changed very much? Has the way you throw a punch in boxing changed much over time? I certainly strive to improve my techniques, but there are certain fundamentals that, for the most part, are timeless.

Very little has changed in the market except more information moves faster than before. I try to approach trading through timeless truths. If you base your approach on timeless principles, you will have the best chance for longevity, and you won’t have to constantly reinvent your method. I’m doing the same things I’ve done for several decades, and the results are quite consistent.

You’ve recommended new traders get a mentor. Do you have one yourself?

I never had the luxury to have a personal mentor other than reading books. Back in the day, during my first six or seven years trading, I spent most of my time in libraries because I didn’t have much money to buy books. However, you don’t have to go it alone these days. Today, we have access to all sorts of information and talent via the internet and technology. Take advantage of it. The learning curve is shorter than ever. Minervini Private Access was created to help traders not only learn and profit from our SEPA® approach, but more importantly, to become a self reliant, successful trader. Shameless plug… LOL!

In Stock Market Wizards you said you rarely took a holiday from the market. Does trading success require that kind of obsession and focus?

I think to be really outstanding at anything it requires a major commitment. In order to be great at something, you must be focused and somewhat unbalanced and maybe even obsessed. Champions don’t have balanced lives; they are laser-focused and obsessed with winning. Passion is unbridled.

Finally, what is one thing traders can start doing now to improve their performance?

Know the truth about your trading. Find out where you’re going wrong and what areas need improvement. Look for common denominators and your emotional tendencies. Understand why you do what you do. Improve your weaknesses until you have no weaknesses.

Believe it or not, few traders really take the time to analyze their results and truly understand their trading. It takes time and attention to detail; big success is not going to happen overnight, and it’s definitely not going to be easy. However, the rewards are it well worth the effort.

Bottom line: Those who can weather the learning curve and those who can handle the truth about their trading make it, and those who can’t find another line of work. And then, there are those who are oblivious; they eventually self destruct. As Gordon Gekko put it: “A fool and his money are lucky enough to get together in the first place.”

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