Investment U Sits down with Alex Green, Investment Director of The Oxford ClubPart 2
By Jay Livingston, Investment U Managing Editor
January 4, 2006
See part 1 of the Investment U interview with Alex Green
Investment U: How do you do things differently with your momentum-based approach? Alex: So what the Momentum Alert does that's different is we focus on fabulous companies that are doing all the right things. But what we're doing is a disregard for economic forecasting and market timing - which people inevitably get wrong anyway - so we're market neutral. We're not telling you to be bullish, and we're not telling you to be bearish. What we're doing is reporting on companies that are likely to see their share prices move dramatically higher because their business is so good right now and it's going to get even better in the near future. And we expect the shares to react to that news. Investment U: What part of the portfolio would these companies - momentum stocks - go into? Alex: This certainly wouldn't be what you'd call "risk capital." These stocks aren't necessarily risky, per se. When you own the best companies in the world - the fastest-growing companies, the best performing stocks - it's actually a lot less risky than owning companies that are struggling or mediocre or in mature industries or what have you. Why? Because share prices follow earnings, and if earnings are going through the roof, then what's the stock going to do? Investment U: Why weren't the other guys at the big firm you worked for using an approach like this? It's seems so common-sense… Alex: The fact of the matter is, at Merrill Lynch, nobody thinks for themselves. It's amazing. I had guys who actually laughed at the fact that every day I came in and I read the Wall Street Journal and Investor's Business Daily before I started working. They're actually spoon fed in little - they call the "research meetings" or "sales meetings" - what the firm wants to tell them, either at the meeting or on the squawk box. Or worse, some wholesaler comes in from some mutual fund company or an annuity and tells them, "This is the time to be buying small caps, this is the time to be buying value - here's why." And those guys will come out of a 15-minute meeting and immediately get on the phone and start parroting to their clients what they heard in a 15-minute meeting with a wholesaler. You know, it's ridiculous. We spend so much time beating up on Wall Street that people really don't understand what a total carnival atmosphere it is… You would think is someone's giving you investment advice that this is stuff that's been considered and coming from some kind of battle-tested strategy… It's just, whatever turns on the broker that given day a lot of times. I hated Merrill Lynch. I felt like a fish out of water at that place. And I came over there at the peak of the Internet bubble thinking, "My God. I can't believe it." They were bringing out new Internet funds, and technology offerings, trusts and so one. It was just crazy. And why were they selling that stuff? Was it because they thought it was a great value? No, they were selling it because they knew people would buy it. It's a big sales organization. So when you say, why was the typical Merrill Lynch broker buying this stuff? Because it's on the Merrill Lynch buy list. And besides, rather than buying the individual stocks, nowadays the Merrill Lynch guy wants you to buy the Merrill Lynch fund, the Merrill Lynch insurance policy, the Merrill Lynch managed accounts, with your Merrill Lynch Visa card and your Merrill Lynch mortgage… It's about going out and capturing somebody's assets - every bit of them. Investment U: So you're saying that typical big-firm brokers are basically paid to do as they're told, and recommend as they're told… Alex: If they were doing independent research, they'd probably get fired. When you go to Merrill Lynch, Merrill Lynch has a research department. If you're buying things that are not on the Merrill Lynch recommended list, you've got a lot of explaining to do. That's why the guys at Merrill Lynch are not buying these types of momentum stocks. The main thing is, they want to manage everybody's money - and by "everybody" I mean public corporations. They don't want to have a negative opinion on anybody's stock because they want to manage their pension plan, they want to do their bond issue, they want to handle the secondary issue of their stock. I mean, they can't possibly give objective opinions on the very same companies they're trying to woo for business - that's just common sense. They don't want to have a negative opinion on anybody's stock because they want to manage their pension plan, they want to do their bond issue, they want to handle the secondary issue of their stock. So yeah, their integrity is totally compromised by their investment banking divisions, and it's up to the broker if he gets any kind of a cut from a certain stock. But he doesn't have objective information, he doesn't have good research. All those stocks like WorldCom, Enron, JDS Uniphase, that dropped 99% or went out of business, Merrill Lynch had every one of them on their buy list. Every one of them. Not only did they have them on their buy list, they bought them all the way down. They might move them to a hold or a neutral, you know, after something drops 50 or 60% - but they still don't say, "Sell it." They may eventually put a "sell" on a company that looks like it's headed for bankruptcy, but by the time they say sell it, believe me, you're going to wish you already sold it. Investment U: In terms of momentum investing stocks, what makes them unique? Alex: Imagine that you're a jockey in a horse race, and obviously, if you want to win, you want the best horse - the best trained, the best fed, the fastest - whatever. But imagine if, once the race begins, as a jockey, you could move off the horse you're on and onto any horse that's passing you. And if that horse starts to lag, you can jump off of it and get onto any horse that's passing you. And if that horse starts to lag, you can get off that horse and onto another one. That's exactly what we're doing with the Momentum Alert. If one of these companies plateaus, we're out of them. So if someone agrees with the premise that if you have a great company that's doing all the right things, you're going to see their shares go up, and then at some point that's going to come to an end, but there will be other companies that are hitting their stride, that's what we're going to do with the Momentum Alert. You want to buy the stocks that are moving, because those are the ones that have the potential to give you the biggest gains in the shortest period of time. We're going to ride the companies that are doing well, and eventually, we're going to jump off and ride the companies that are doing even better. So the idea is, if you're a short-term trader, what should you be doing? Should you be buying deep value? No, because that deep value's going to become an even deeper value in six months, probably. You want to buy the stocks that are moving, because those are the ones that have the potential to give you the biggest gains in the shortest period of time. So that's what we're doing with the Momentum Alert that's different. Return to Part 1 of the Investment U interview with Alex Green. Investment U Archives | 
