Stan Weinstein system does work

Does Stan Weinstein’s system work today? Yes, listen here, if you invested with buy and hold from 1820 you would have earned a real rate of return of 1.4%. If you used Stan Weinstein as a guide you could have earned closer to 10% with a simple application of his stage analysis. I know this real rate of return makes investing look not as attractive but if you know what you are doing you will make a lot more.

The principles of Stanley Weinstein’s system are the same as they were 25 years ago when he wrote the book on stage analysis, that is ‘The secrets of profiting in a bull or bear market’.

However, I would recommend at this point a more simplified version. Not because his technical analysis theory of investing is not valid, rather because I am kind of busy person, and the way I invest is my own style based on my own risk preferences.  I am a cross between buy and hold good companies and moving averages on the index as a whole.

Using Stan Weinstein today

What I do is a look at the twelve month moving average on the S&P index.  Stan recommends the 200 day moving average on the market, then sectors, then companies.  However, I prefer the 12 month moving average on a broad index. This is my basic strategy for market timing. Some call this a fundamental technician.  I do not think so.  I do not like labels.

Moving average convergence-divergence, moving-average envelope, Bollinger bands, etc I do not like it.  It is too much complication and will distract you. If you had used Stan’s basic system of investing, applied to the 12 month moving average on the index you would have participated in every major upswing and gotten out on every major fall.

Many people say you cannot time the stock market, however, if you look at the stock market as the whole, the inflation adjusted real rate of return is about 1.4 percent.  Does this sound incredible?  It’s true.

However, if you are and market timer begin time the market using the twelve month moving average, just investing in the index you will have a rate of return of 10 percent. I personally think much higher but I would rather be conservative in my real rate of return estimates.  You can test this yourself.

Further, if you can pick stocks then you can make a lot of money.  Therefore my philosophy for investing is a combination of looking at the twelve month moving average on the index and picking the stocks that I think are good.

Why Stan Weinstein is not a fundamental or value investor

Stan Weinstein would use further moving average analysis on stocks and sectors.  He feels everything, value and fundamentals of a company are already in the price, because markets are hyper efficient and move faster than you or I.

How I make investment decisions – However, that being said, I still prefer a more basic investment strategy combined with looking at the company. I don’t know if  my investment strategy is a value strategy or a growth strategy, but I feel it works. I look at strong cash flow and low debt in relation to the price. I invest in stocks that I would personally buy products from. Companies, I know and personally buy from. I believe in less than perfect information in the market. I combine this with looking at the moving average as a whole of the market index.

Further, by buying companies I personally use, I know I would be missing out on the best types of new high tech investments and bio-research investments, however, I believe all sectors provide opportunity for a higher than normal. Therefore I focus on the sector’s then I know and understand and the products which I know and understand, rather than just looking at the moving average at Stan Weinstein recommends.

Stan Weinstein even mentions people who invest like me in his book as an good but not optimal investment philosophy.  He thinks it is not optimal because the tape tells all. He believes the price trend tells all and you do not need to look at other factors.   That is the price already includes this information.   I think Stan is more of a Stock trader than I am.

Why use moving averages?

It is a painful thing to be a slave to the news, and get stressed out every time you hear potential bad news in the financial markets. this is why using moving averages are the best way to analyze the market as the whole.  Stan Weinstein’s system does work.

21 Replies to “Stan Weinstein system does work”

  1. Oscar Wilson says:

    You are using a Warren Buffett system of picking stocks and applying a 12-month moving average to buy into or get out of the market. It sounds very rational. You should write a book.

    1. Mark Biernat says:

      I did not know Buffet used it. Interesting, however, it has worked and continues to work for me very well. I have seem one study on this from an Indian professor and he showed huge returns following this simple rule.
      Buffet may use that system now. However, an interesting point about Buffet is he combined his investing plan with a lot of leverage. This amplified the returns.

  2. I am reading Weinstein’s book right now as I am writing this. I re-read ever chapter as I go.

    Do you feel using Weinstein’s stuff is the key to you not having a job?

    1. Mark Biernat says:

      I was free because I always saved and invest. Stan’s book was key to me making money this way. But this is not my only source of income. My investment income is money I do not even touch. It is my insurance policy. I mostly invested my time in creating my own products and sites for day to day expense and investment income for large expense and freedom.

  3. oh ok. Its a gem of a book. After reading this I am going to read the books by Justin Mamis.

    1. Mark Biernat says:

      Yes, and my recommendation is basically sleep with Stan Weinstein’s book under your pillow at night. The idea here is start to see all markets, the stock market, the money market, commodity markets etc. in terms of trend analysis. Not overly complex academic ideas but simple moving averages over the long-term to give you clues about the trend so you can make better informed decisions.
      If you read this book alone, you could almost independently wealthy and not need a job, if you had enough investment capital behind you. Maybe not fully but my point this book is one to master.

  4. Thanks Mark.

    With all the investment/trading books out there, Its hard to decide which to read. However I fee lucky enough to find out about Weinstein and Justin Mamis.

    I will keep the book by my side like a bible.

    With that being said, can you tell me what you took away, learned from the Mamis book?

    1. Mark Biernat says:

      I think maybe I will do a detailed review of Justin Mamis’s book. But I have been so busy with personal life things.

  5. cant wait.

    I will look forward to it.

  6. Larry Adams says:

    Good article. My question is what charts service you use, and do you use a stock screener to identify stocks? I assume you use line charts. Larry

    1. Mark Biernat says:

      As much as I am a fan of Stan Weinstein, I use his idea of moving averages more on the market as a whole and also as a selling strategy. I rely for a buy strategy more on quantitative screens.
      In fact, Stan talks about this in his book, I am one of those guys who combines methods. He is more of a purist. He is retired in Hollywood, Florida (I think he is still involved a little in “Global trend alert” and has done better than I have so you make your own determinations.
      I still think quantitive methods have improved so they have value. But nothing beats the idea of looking at long-term moving averages on broad indexes like the S&P or sectors.
      I back tested this with a statistical program and it works. It also works for me in real life.
      Ok to answer your question I simply use MSN for Moving averages. It is simple and works. You can subscribe to a service and maybe it is worth it.
      The charting service mentioned in his book is still available I think, but I am cheap and rather use free online charting resources like MSN. Nothing fancy I prefer the simple moving average on the 12 month.

  7. Oscar Wilson says:

    Mark,

    What time period do you use on the MSN chart?

    1. Mark Biernat says:

      I like to use the 12 month. However, I am a more intermediate term investor. Stan Weinstein talks about the 50 and 200 day in his book. 50 for trading and 200 for investing. I extend it out to 12 months as it does not get me as many false signals.
      These are simple but effective tools. If for nothing else but a selling strategy. However, of course it has wide applications for all asset classes and types. You can look at housing, or the price of oil. Maybe you can not predict it perfectly, but you can keep a clear head when to sell and even buy when others do not have a plan and are wondering what to do.
      I have ridden many stocks down for emotional reasons, before I started using moving averages.

  8. Oscar Wilson says:

    Mark,

    In Stan’s book he appears to be using a Mansfield weekly chart that covers a three-year period with a 200 day moving average. Do you use a MSN chart that covers a one-year(12 month) period with a one-year moving average?

    I find it hard to see a correction in the direction of a 200 day or one year moving average when I use the MSN three-year or the one-year charts. I find that I can use a shorter time period(six months) and sometimes the 50 day moving average to indicate a change in direction.

    1. Mark Biernat says:

      The 12 month moving average on a three-year time period is the best for me. It take away less noise. I also extend this out to longer time periods if I start to narrow picks. I want to see what the company is about price wise.
      Different stocks will have different price behavior. Tech stocks and IPOs for example are not the same as blue chips, rail companies and utilities obviously.
      About MSN charting, it is mildly irritating since they make their website changes. I am waiting to see that they do with this.
      Yo can also use other charting services like:
      marketwatch.com/tools/quotes/lookup.asp?lookup=s%26p+index&country=us&type=all&x=0&y=0
      to find sectors.
      or
      marketwatch.com/investing/index/SPX/charts to find moving average charts for free.
      But there are many software tools and online technical analysis that are good. It depends on what you have fun with. I like colorful and simple chart.

      Mansfield is an old fashion charting service. Our CIO chief investment officer at a company I worked for swore by these. However, he was an old-timer. I think you can use any tool as long as the theory is correct.
      Let me make an analogy. I work with an artist on a project Krzysztof Chalk. I told him about all these art software programs I use. He said OK I can use any one you want. He is so talented that it does not matter for him. He started before computers.
      The same it is with reading charts. It does not matter, what you use as long as the theory is right.

      Regarding theory, I believe in testing and back testing and statical proof. I use a moving average + Quantitative + my own detective work. When I get settled in my life I might put online quantitative evidence of my system, good bad or only the index in terms of returns. Since I use quantitative methods to screen stocks (valuengine.com or MSN it is has a base anyway) it has a good base.
      What I really need to do is more research on moving averages and performance. I use this mostly on the index as a whole but also individual stocks and do this on an intuition or experience if you will.
      Over many years of looking at charts, I see charts I like and charts I do not like. Time permitting I would like to write more on this.
      I prefer more stable companies, than erratic high flyers. Companies that do not make a lot of moves against the trend like CNI. Once the Moving average turned up, not just the price break out, it formed a nice long-term trend. Now this ride might be over, but from a historical perspective it trends nice. I think a lot of people jump in on price break outs but the simple moving average is still going down. For me it is too risky. The profit is not as much if you play this way but neither do you get as many false starts.
      Also I do not like prices that move too high away from the moving average, they usually are over bought and even though they will not break the trend line they will correct.

  9. Oscar Wilson says:

    Mark,

    I will try the charting sites that you recommend. On the MSN site under the Stocks heading is an area that is about half way down that has sub categories that you can bring up a chart for a stock. It is similar to what was on the old MSN.

    Thanks for the help.

    1. Mark Biernat says:

      Remember with stock, they are a dime a dozen. Only choose the ones you really like. You can find hundreds of stocks that have nice charts, but that does not mean you buy everyone. You have to really be selective, like with relationships. There are plenty of fish in the sea but to find the one for you is the real trick.
      So like Stan Weinstein did, he developed an eye for charts and walked away from many that gave him an uneasy feeling. At least that is the way I read his book.

  10. I have been “trying” to implement this. So basically I use the 200 day and the 50 day moving averages to try to predicate the direction of the stock?

    I have been looking at “ICO” and I am a little baffled about the direction of this stock what do you think? you think maybe you can show me an example of how to use this?

    Or do i have to use this on a specific sector, then narrow than to a few stocks, then apply this again to those stocks?

    1. Mark Biernat says:

      Two things I note about this stock is
      1) http://moneycentral.msn.com/investor/StockRating/srsmain.asp check the stock scouter rating, it is a 4. I generally start with a universe of stocks that are top rated or at least an 8,9 or 10. This narrows the numbers of charts I have to look at. It is not to say that this will not fly. What do I know. But statistically higher rated stocks perform better.
      2) Natura non facit saltum – Nature does not make a leap. This is a quote that the economist Alfred Marshall wrote about. If you look at the 200 day on the three year for ICO it seems to have leap ahead of the moving average a little bit too much for my preference. This is just me.
      I do not know anything about the company and it might be a good company and a good play. But the way I see the quantitative and moving average it is OK but not my first place to put my hard earned money.

  11. Sudip Jha says:

    Hi Mark-

    Excellent article. With regards to y our backtesting, do you find the 10% annualized holds even with stringtent security selection (IE Can Slim), or do you believe that those results can be amplified, even more? Thanks for your thoughts.

    Sudip

  12. Judging from Stan’s rules on shorting a stock, GILD seems to be a perfect stock to short at this point. What are your thoughts on that? The whole bio-technology sector (IBB) has been in negative territory. AAPL has been negative territory on the Relative-Strength Line too. I would like to get some feedback.

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