Stan Weinstein wrote the book How to Make Money in a Bull or Bear Market.  It is a classic. Maybe people may discount it or say its out dated or there are more advanced techniques for making money, but in my mind it is one of the best books on investing on the stock market.

Stan Weinstein is teacher of stock technical analysis for the everyday investor. You do not need a PhD in mathematics from MIT nor do you need to work at an investment bank with super computers behind you, to use and understand technical analysis by employing a simple moving average layered over a stock price. The power of his techniques is just that, in its unpretentious easy to use system.

  • Stan Weinstein’s system – The trend is your friend.   Build into the price of any stock is expectations, insider information, knowledge that is not perfectly distributed to the public. Stan Weinstein says use this to help determine turning points. He looks first at the market as a whole, then the sectors, then the individual stock at using a 50 or 200 day simple moving average.
Buying stocks with moving averages

Initially this stock has false starts then falls into a nice pattern. Wait for the pattern to be clear.

The logic embedded in trend analysis is, stock prices move more on expectations that spread through the investor community, than current earnings. That is why you see companies that have no earnings or little earnings trading at multiples of their true valuations. Expectations are a social phenomenon. If you want to make money in stocks you have to understand that point. If stocks are a social activity, then trend analysis is relevant. People are social beings that in aggregate operate in trends.

Investing as a social science

Stan Weinstein wants to know, where are investors going? Where is the heard moving, what is the direction and pattern of the movers behind the market, rather, than lose yourself in equations or complex analysis. Even though is is a figure from the past, in investing history his underlying premise is correct. People not numbers make stocks move. The crowd does the heavy lifting to move the stock like a rock, one way or another, and once it is rolling, it has momentum, it keeps moving until the crowd starts pushing the other way. This is where he looks for turning points with cross overs between the stock price and the moving average.

Economic model assumptions

Economics and investing in the stock market is a social science, not physics or math, or computer science, like some people try to equate it to be. Some assumptions of investing and economic models is in aggregate:

  1. People are rational (Debatable but in aggregate yes).
  2. People are motivated by economic incentives (In aggregate a strong motivator)
  3. People have perfect information ( This is a weak assumption)
  4. Optimal descriptions are made at the margin (Yes, marginal cost equals marginal revenue at the price point)

If you meditate on these assumptions you find weaknesses in each. The weakest being perfect information. Despite the computer age, information about companies is discriminated slowly as there are laws and restrictions about insider trading. Further the market is so large and complex not every investor is can possible look at the relevant variables, and variables do change in weight. Because information is not perfect in the market the small investor as a chance to out play professional investors. This is particularly true on smaller local companies that trade on the market, that are off the big investors radar or threshold criteria.

Therefore, if stocks are a social activity then you can profit by looking at places that information is imperfect in society. This is done by looking at the trend at an early stage of take off, when others are buying but not to the full extent.

Cycle of a stock

Buy in stage 2 or 3 depending on your risk preference. Never ever buy a stock trading below its moving average.

Investments and other social actives follow a trend

That being said any type of investment big or small, stocks, metals, real estate follows the basic principle of trend analysis as does other social trends like music videos or fashion. Like Pareto principle (invoked more in contrarian analysis) stocks move in trends because people move this way. It is a group mentality. The real trick with a moving average is, you try to use it as a predictive indicator of expectations rather than just an observation ex post.

Stan Weinstein looks at the trend as the summum bonum which trumps fundamental analysis, contrarian analysis, or intricate technical models. If market price is the ultimate weighing machine, then expectations are the ultimate predictor, an expectation based on past history. The way you buy and sell stocks on expectations,  look at people and society. Therefore, my point is Stan Weinstein is a social investor more than a technical.

How does Stan Weinstein’s system stand up to quantitative analysis?

Contrary to a few websites that publish anecdotal evidence or fictitious evidence, I have not seen any rigorous academic studies that show results either way that would prove his system or any moving average system definitely deviates from the average.

Based on my personal experience it using a moving average system has worked for be personally. It has worked for me as a way to put parameters around my picks that I base on other determinate criteria. I look at the stock’s 50 day moving average and 200 day moving agage after I have looked at other factors.

200 day MA as a sell signal

People get emotionally attached to stocks. It is like a relationship, they know they should leave. With a MA  exit strategy, you stay objective. I wish dating was that easy.

What about computer trading?

Metaphorically, super computers have not yet solved the game of chess. Chess is an infinitively more limited game then investing as the market has social variables and exogenous variables that might not ever be calculated.  Chess does not have exogenous variables, unless you factor in the psychology of the players. Therefore, there is no need to be intimidated by computerized training in the stock market, nor expects with math degrees. The market is largely a social experience, rather than an equation to be solved.

That being said, Stan Weinstein’s analysis is to look at the social trend by using charting. You might say would it not be easy to have a super computer use a moving average system like Stan Weinstein. Yes, and that is why I do not use it as my only criteria to by and sell stocks. On the other hand, I think people do use it moving averages daily to trade stocks and commodities with success including with computers.

What about the experts

Only 10% of mutual fund managers earn a higher return than the average market index for two consecutive years. If you go out further it becomes less. That means, high paid professionals do not beat the average index constantly. These are professionals that have super computers behind them. I have worked in investment houses packed with CFAs and experts and I do not know any that really use a SMA, I do not know why.

To further illustrate that point, if the market could be beat systematically then why has not a big bank exploited that and made infinitesimally high profits constantly on their investing side? In fact, the opposite is seen. That does not mean you can not beat the market. I believe you can. My message is do not be intimidated by super computerizes or MIT graduate whiz kids, as evidence sheds light on the truth.

If you want to examine this debate at an academic level, please see this paper:

Simple Technical Trading Rules and the Stochastic Properties of Stock Returns
Authors: William Brock, Blake Le Baron, Josef Lakonishok
The Journal of Finance December 1992

However, until I see papers with academic rigor or models that prove or disprove Stan Weinstein’s system either way, or if someone can show me a good real study, I think the jury is not out yet.

Technical analysis that does not give a clear signal

Stay away from stocks that do not give a clear signal. It is like a date that gives you mixed signals, you are asking for trouble in the long-run.

I believe you can beat the market, at least long enough to make your money and get out. New studies are coming out are saying a small minority of people (not computers) can beat the market. It is not a random walk as people do not walk in random patterns. It is based crowd behavior and expectations.

What Stan Weinstein’s system does is give you an edge used in conjunction with other systems.

It give you the ability to pick your stocks and have a system to of your own, while doing a sanity check. This is how I use Stan Weinstein’s moving average system. I know I should use Bollinger bands EMA and more complex technical indicators, but the simple moving average works for me. Perhaps Stan Weinstein was right, I should look at all these factors. However, I use simply the 1 year moving average, a broader indicator of the index as a whole.  Then I choose stocks I fancy for my own reasons, and glance at the 200 day SMA.  I know he would not approve and even writes about this in his book, however, for me its a system that works.

On a personal note, Stan Weinstein is retired down in Hollywood, Florida, and a very personal and friendly guy.  His book is entertaining.  He is a man I respect both in terms of stock market investment theory and character.