Investment U Sits down with Alex Green, Investment Director of The Oxford Club
By Jay Livingston, Investment U Managing Editor
December 28, 2005
Investment U: Alex, what first got you into investing? Alex: What I got interested in at an early age was not working crummy jobs. In high school I worked in my local golf pro shop for a dollar an hour. Then when I was a senior in high school I got a dollar-eighty an hour working at Leggett's. Then when I went to college I came home in the summer and I worked maintenance on a truck terminal and night shift at an auto parts warehouse, etc. And I realized immediately that I didn't want to spend my life working those kinds of jobs. Even though I was going to school the whole time I couldn't understand why anybody would work that hard. That's the ironic thing about life: Generally, when you think about it, the guys doing the hardest, most backbreaking work are getting paid the least. So the old saying "you have to make your money work as hard as you do" made a lot of sense. So I was interested in the financial markets from an intellectual standpoint, but I was also interested in them just from a practical standpoint - you really don't want to be a wage slave. Unless you're uniquely talented in some way to be a doctor or lawyer or artist of some kind, you're driven into business as a way of achieving some kind of financial independence. Investment U: How did you pick up your investing techniques? Alex: It's funny… The way I really learned how to do it right - to the extent that I have - is by watching everybody do it wrong that I worked with on Wall Street. It was unbelievable how nobody - even guys who've been in the business for decades - seemed to have a clue as to what they were doing. I was driven to find an answer of what works and what doesn't work, and… It's really a matter of discarding what doesn't work until you finally get to what does work. At least that's the way it was for me. I certainly feel good for those people who are able to listen right away to Warren Buffett or whatever it was… But for me, I had to watch all the idiots lose all their money, including all the guys I was working with. And then you find there are a whole lot of things that don't work, and only a few things that do. And so you want to concentrate on the things that do and keep refining them. You wouldn't believe how many guys on Wall Street blow their paychecks every week in the market. Just because they don't know what they're doing. They think they know what they're doing. That's how they're able to manage their clients' money: They come across with 100% conviction that they know what they're doing. But they don't. So watching a lot of people do it the wrong way on Wall Street was the beginning, and doing it the wrong way myself for a long time was the furtherance of it. And then you find there are a whole lot of things that don't work, and only a few things that do. And so you want to concentrate on the things that do and keep refining them, and that's what I've done with the Momentum Alert. Investment U: What did you learn at Merrill Lynch that you still use in your investing? Alex: My last firm was Merrill Lynch. The biggest brokerage firm in the world was doing it completely back-asswards. What I found out was, one of the very few people who knew how to identify momentum stocks was William O'Neil. So about ten or twelve years ago, I realized that what William O'Neil was doing was a successful way of picking stocks. He was looking at earnings growth, technical strength, and return-on-equity, and management ownership of the stock, and new products and services and so forth… So it's hard for anybody who's looking for great companies to not in some ways overlap what William O'Neil is doing because he basically has taken all the great things a company can do and he's quantified it. He's even got a numerical system of 1-99 - with 99 being the highest-rated stocks and 1 being the lowest rated stocks. He's centered on exactly what works. And what he did - which is where I picked up on what he's doing - is he went back to 1953 and looked at the best performing stocks during that entire period - all these ones that made these huge moves up - and he isolated what it was these companies had in common before they made these big moves up. Once he identified what they were - sales, earnings, market share, technical strength, institutional support, new products - he quantified it and created a ranking system. So that's really how I first got into momentum stock investing. Investment U: Weren't guys at the big firms you worked at using O'Neil's approach, or what is often called a momentum approach? Alex: God knows the people I knew on Wall Street weren't buying anything but the wrong thing. For starters, they have the novice's approach that if something drops from $50 to $10 it must be a great bargain at $10 before it goes into bankruptcy. So they were all doing it backwards, which is looking for stocks that are dropping, dropping, dropping - instead of going up. Investment U: What's different from O'Neil's approach and a true momentum-investing system like yours? Alex: It's hard for me to say… First of all, I don't have the kind of quantitative system that William O'Neil does. A lot of what I do is just taking my own personal judgment - my own personal experience. The things that I'm doing that I don't really see O'Neil doing include stuff like… I'm looking at whether there are high barriers to entry in the industry. I'm looking at what types of stocks are in favor. One of the reasons we've done well with the Momentum Alert over the last couple of years is I've favored small- and mid-cap stocks - and sure enough, large-cap stocks really haven't gone anywhere. So I'm looking at the right-sized market cap, I'm looking at companies with high barriers to entry. And a lot of times, again, it's highly subjective. I'm looking at companies and I go, Hmm, I don't know. For instance, the homebuilders. I've been out of the homebuilders for over a year, and they've had a good run actually over the last year - but now they've all tanked lately and we don't own a single homebuilding stock. We stopped out of DR Horton, we stopped out of William Lyon Homes - we were out of all the homebuilders before they took their big belly flops. Just because my own sense of what was going on in real estate investing wasn't sustainable - and again, you can't put that in a formula. My own personal expertise and judgment and discretion are certainly part of it, and that means no one else can do exactly what I'm doing. Investment U: Does the success of the momentum approach depend on a certain type of market, a raging bull market, perhaps? Alex: Well, what we do that's so different is, we don't waste people's time trying to forecast the economy's outlook, we don't waste their time trying to time the markets. It's all based on businesses that are doing exceptional things. For example, if you sold a collapsible fishing pole that could fit into your pocket, there's probably a huge market for that. And if someone said, well, you don't want to run a business like that because the Fed's raising rates, or consumers are over-tapped, or foreigners are going to repatriate their assets and the dollar's going to crash, people would laugh - it doesn't make any sense. And that's exactly how the business world works - if you do have a great product, the world will beat a path to your door. You want to invest in those businesses that are doing great things, and remain largely oblivious to what's going on in the economy and the stock market. I can tell you from dealing with thousands of individual investors that virtually nobody thinks this way. The average guy out there thinks: "Well, because the economy's likely to do this, then the stock market is likely to do that, and then maybe I should invest in these kinds of stocks to take advantage of that kind of move in the market that's the result of this thing in the economy." It's just such a joke: They have no clue what they're doing, and everybody's playing this game. I was reading an interview with Bob Doll at Merrill Lynch - their chief strategist - he's saying, "Well we think the economy's going to be good the first three quarters of next year, then it's going to start to soften up a bit, and we expect oil service to do this…" And this is exactly the kind of worthless gibberish that causes billions of dollars to move around the markets and I might as well say: Two weeks from today, it'll be slightly overcast, a little cooler than normal. I mean, it's a joke. I mean, I'm just talking. And that's what most people do. Move on to Part 2 of Investment U's interview with Alex Green, Oxford Club Investment Director. The Investment U Interview Series Investment U Archives
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