Stan Weinstein – the trend is your friend

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.
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.

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.

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.

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.

17 Replies to “Stan Weinstein – the trend is your friend”

  1. Oscar Wilson says:

    Mark,

    Stan Weinstein stated several times in his book to never purchase a stock if it was selling for under it’s 30 day moving average and was adamant about using stop losses. Do you agree with him?

    Oscar

    1. Mark Biernat says:

      I agree about never buying a stock selling below its 12 month moving average. Stan focused on the 50 day and 200 day moving average, the first for trading and the second, the 30 week moving average for longer investing. I do not touch stocks trading below their 12 month moving average. Never ever buy a stock below its moving average (the one you choose to be your trading period). No matter how tempting it is, I do not buy it. Further I do not buy a stocks when the S&P is below the 12 month moving average. I should exit the market but, in recent months when it has been flirting with it, I am holding off buying.
      About stop losses, I do not trade so tight, and put mental stops in, but should put real stops.
      Although Stan talks about it in his book I combine an quantitative approach with Stan Weinstein. Stan says do this if you like but the tape tells all. I use MSN top ten and valuengine.com to narrow the universe of stocks and then look at the moving averages.
      In my opinion moving average are a good selling strategy. Many people can buy, but when to sell. So in the end, yes I agree with Stan about the stop losses and the 50 day and 200 day (30 week, but I use the 52 week).

  2. Oscar Wilson says:

    Mark,

    I think I saw at the end of one of your articles a place to make a donation. Please provide me with this info. I feel that I should compensate you for your opinion/advice.

    Thank you.

    Oscar

    1. Mark Biernat says:

      Oscar, thank you very much for your kind words. If you would like you can paypal me a donation at mbiernat@hotmail.com but that is up to you. Thank you either way.

  3. Lily Liou says:

    I am a novice in stock market. I just finished reading your book “profiting in bull and bear market”.
    I am using Scottrade as my trading service. I tried to put 30weeks sma(150days)in the chart, but it comes out straight line with a little curve. (not like all the drawings in your book). Thanks.

    1. Mark Biernat says:

      Hi I did not write the book, it was written by Stan Weinsten an old timer in stock trading. I am not him. Stan is retired in Hollywood, Florida, I am writing about him, someone who I base a lot but not all my investment strategy on. I have a lot of experience in the market professionally and personally but I am not him. I have thought of writing a book, but I would want to first quantify my results so people can see what I am talking about.

      I would use a 12 month moving average for the market as a whole, it take out a lot of the noise for the general signal or trend in the market.
      The problem now is we are really in crazy times. In fact in all the years of investing the market is giving the most unclear signals. This is because despite short term reasons for improvement there are still some dark clouds that are hanging over the economy in the long-term which may or not clear with ease.
      This is why I recommend two things.
      1) Really start looking into quantitative screens. For example, I bought Apple computer on a quantitative screen a while back and it did very well despite the crazy market.
      2) Consider looking at industry groups that have a trend, including foreign markets.
      I will write an article on investing strategy soon and this will give you a high level idea about what is happening.

  4. Mark,

    What do you mean with : “Really start looking into quantitative screens”

    I’m not English native and don’t understand the term Quantitative screens. Could you give me a reference or example?

    Thanks

    David

    1. Mark Biernat says:

      Dave, These are two examples:
      valuengine.com
      moneycentral.msn.com/investor/StockRating/srstopstocksresults.aspx?sco=49
      This first one is a pay site and the second is free. I think both are good. You can start exploring the msn one, it is not by msn but there is a quantitative firm that supports it.
      valuengine.com is more in depth and robust. But it is a few bucks a month.
      So start playing around with the free screener. Now when you use msn look at “top rated stocks” rather than ‘stock screener’ or ‘power searches’. The reason is ‘top rated stocks’ is the quantitative firsts best picks. You do not need to reinvent the wheel. Start with this universe of stocks and then from there start narrowing your selection based on your own criteria.
      But if you start with these, even if your own trading techniques might not be good, at least you are selecting from a pool of equities that will have a good chance to out perform.

  5. Mark,

    Do you know something similar based on the Eurostock?

    Thanks

    1. Mark Biernat says:

      David, when you refer to Eurostock, you mean the European stock exchanges. What stock exchange in Europe do you want to trade in? I think you are talking about Euronext which is based in Paris but is really a pan-European stock exchange. Go to euronext.com they have basic charts. Now for quantitative information, that is the hard part. I do not know any right now. It is something that I should research as I live in Europe. I know valuengine.com as I know someone who studied under the professor at Yale who designed it. But in Europe, I do not know quantitative value screeners even like msn (which is free) that I can recommend. I think there are several, I just need to research it a little more. I like to look at models that have been back tested and over lets say 20 years shows 20+ % return on average per year. If you are working with those pool of assets to start with, when it comes down to making your own choice based on those assets, you will be in better shape than most.
      I like academic type quantitative valuation firms that sell or give free only information, rather than salesy investment firms that have a fund etc.

  6. can i run this analysis on any market? like india? europe?

    1. Mark Biernat says:

      Yes the same applies to any market. For example, you can run this on home prices in Paris or the price of cotton in India. It does not matter the idea is the same. The idea that people move in trends is such a fundamental idea. Humans are like pack animals that move in packs. We really do, and if the herd is going in one direction it often stays in that same direction. The key is to be able to be above the herd in a helicopter observing the movements rather than in the thick of it.
      If you are flying in a helicopter above the herd by using moving averages you have the advantage.
      The other thing about moving averages is statistically they have been shown to work.
      But do not take other people’s words on it. I bought some statistical software in Eastern Europe where I live. I ran hundreds of test on different methods and I do not know if if moving averages are the summum bonum of stock trading but they did in my personal analysis work.

  7. Didn’t Justin Mamis talking about this? Isn’t this something about psychology cycles?

    1. Mark Biernat says:

      Yes, I will write something about that. Just saving it or a review. I think from a philosophical perspective trends are as interesting as from a practical perspective. Maybe I will never get to the review so do not hold your breath as I have a lot going on in my life right now.
      You can read my post about moving to America.

    2. Mark Biernat says:

      I would say do not get too complex in your investment strategy. You should be like a fat cat. That is making high level picks from a pool of potential picks that are automatically generated.

  8. How have things been with your investing?

    I know I asked you about Justin Mamis, but I would also like to know what other books are out there that one could learn about money in the world in general. I was reading a book called “rich dad poor dad” and it suggested I read some books by John Bogle and Richard Duncan which are based on capitalism. I would like to learn more and I would like to be able to take great control of my financial destiny, not work like a slave!

    Can you suggest anything? There are so many books at the library right now that I do not know where to start.

    1. Mark Biernat says:

      Hi Maurice, I have to be honest, I am trying to move myself and family from Europe to the USA and have not had my head into investing right now until we are settled on where we will be.
      So I am behind on my reading. However, all books are good because they convey experiences, which are mortal lives are too short to have in aggregate. Hence read as many people as you can that convey personal experiences, such as “Market Wizards” and the follow-up books. Also “Reminiscence of a stock operator” was good for an old book.
      These give you ideas and inspiration. Book no one has all the secrets because the market rules are changing, with each new crisis and boom.
      I like Stan Weinstein the best of course, but there the “Market Wizard” series is great.
      Also Friedrich Nietzsche said to be a great think you need to spend eight hours a day just thinking. It is a little extreme of course but the idea is you are smarter than you think when it comes to investing even if you have little experience if you can trust your own powers of observation. Your brain’s ability to process information about the market based on your own consumption choices, such as the products you use and the trends you see are your best ally in investing. This is not a trival point, trust me.
      I will have to update my reading as I think there are a lot of good new books out there. I also wrote a post on investment books.

Leave a Reply