If it doesn’t go up, don’t buy it !

Albert W. Thomas has spent most of his life in the field of finance. After he became interested in commodities he bought a seat for his personal trading on the Chicago Open Board of Trade, now known as the MidAmerica Commodity Exchange. Later he became a full time trader and commodity broker for a few select clients.

In 1981 he sold his membership on the Exchange and with his wife, Carolyn, lived full time aboard their 41' ketch, the Aumakua (which means guardian angel in Hawaiian). They sailed in Florida and the Bahamas for two years.

In 1984 he founded World Trading Group which grew to be the seventh largest introducing commodity brokerage firm in the U.S. with 35 offices from coast to coast, Alaska and Canada. It was sold in 1992.

He is a graduate of Northwestern University with a degree in Commerce and a member of Mensa. He is now president of Williamsburg Investment Company, a factoring firm, and also trades stocks, options and mutual funds. 

It was Mr. Thomas  ’ book that caught my attention:  If It Doesn’t Go Up, Don’t Buy It!  Subscribers often ask me what they should do with their 401(k) plan, etc.  which is invested in stocks.  Should they just pay the penalty and get out, rather than ride their stocks down?  I didn’t have a better answer for most of them.  However, in his book Al Thomas outlines a trading strategy that can protect investors trapped in these plans.  He also offers a wealth of trading wisdom that anybody can use at any time in any market. Mr. Thomas kindly made time for this interview on September 16, 2003.

 Moneychanger  Tell me about your trading experience.

Thomas  My experience comes from real time, so it's not theoretical.  Way back in dinosaur times -- I hate to tell you how long ago it was cause then you’ll really think I'm an old guy & throw me away -- I worked for somebody.  It was  the only time I ever had a job, and I got fired.  We got in a big argument and he fired me and I sued him and I won.  So I got some money and that's when I went into the market.

I knew a gentleman who was a stockbroker.  He said, “Awww, I'll help you make some money.” 

And I started trading.  I gave him discretion and Boy!  He sure gave me a lot of action, but I didn't make any money.  Still, he was a very good broker because he kept me even with the commissions, which is better than most brokers do. 

At his offices one day and I saw a chart from a company called Mansfield -- I don't even know if they're in business anymore.  I said to myself, Wow!  That's the way you trade.  That started my quest for technical analysis and understanding the markets.  The first book I ever found at the University of Chicago library was written by Richard Wyckoff, under the name, Rollo Tape.  I read that book, and back then you didn’t have any copy machines so I copied it all by hand.  It wasn't that big, but I copied it and wrote all the charts in, and that started me on my quest to learn how to trade.  It took me a long time, because I guess I'm not that bright. 

Eventually I bought a seat on the Chicago Open Board of Trade; just for my own personal trading.  Over a few years I learned how to trade, because I traded with my own money, not other people's money, as most of these mutual fund managers do.  If you don't trade with your own money, you will never learn how to trade. 

All your readers ought to know (it's so simple, but you will never hear this from a broker) that the Great Secret of the Market is selling, not buying.  Any idiot can buy but if you don't know when or how  to sell, you will never make money.  As a floor trader, when I took a position in anything, whatever it was, I immediately put an open stop loss order on that position.  That way I knew exactly how much I was willing to lose, rather than how much I was going to make. 

Everybody thinks when he buys something, he thinks he's gonna make a fortune with it. I'll tell you this:  nine times out of ten you're not, and probably higher than that.  But if you say to yourself, I'll buy this stock at $40 a share, you ought to know immediately how much you're willing to lose if you're wrong -- and you're going to be wrong a lot.  When I was a floor trader I was wrong 40% of the time, even 20% of the time, and 40% of the time I made money.  But you have to be willing to lose money in small amounts if you're planning to make any  big money.  Don’t worry about each individual trade, think about the long-term aspect of your positions.

Moneychanger  I've heard the proverb, "Learn to love small losses."

Thomas  That's correct.  Learn to love small losses, and let your winners run.  Many, many times I would have winners bring in 300%, 400% even one trade that was a 1200% winner.  In one trade I started out with a $200 total risk and in four days I made $10,000.  That's a pretty nice risk/reward ratio, and it doesn’t happen very often.

And in my book, If It Doesn't Go Up, Don't Buy It, I tell people to trade in mutual funds.  I have chapters on stocks, commodities, options, bonds, gold, all those things.  At the end of those chapters on stocks, commodities, and options, I have one sentence:  "Don't trade options.  Don't trade stocks.  Don't trade commodities.” People are not qualified to tade.  They don't know how to disciplined themselves enough to limit their losses, and that's the whole secret.

I tell people to trade mutual funds, and only the funds that are going up.  Unfortunately, most of the mutual fund managers either don't know how to trade, or the charter of the mutual fund limits them, usually requiring them to remain always 100% or 95% invested. 

How can you be invested in a market that's going down?  In the year 2000, people who followed the directions in my book made money-- and you can follow them, because if you can count from one to two, you can do what I.  They made money in 2001, and in 2002, and we're ahead this year.  We have not had a losing year, and over the past five years I have averaged a 30% return on investment.  That's cash on cash, not the hogwash of annualized return, because I don't go for that stuff.  I want to know what my real money in the bank is, based on what I had when I started.

Moneychanger  Let's talk just a minute about trading.  I don't think that most people are constitutionally equipped to trade.

 Thomas  Correct.  People are not disciplined.  They become emotionally tied to whatever investment they’ve bought.  You can't get tied to these things.  Whether its 100 shares of stock or whatever, you have to think of it like it's just a potato that you stuck in the oven.  Maybe it'll get done and be edible, and maybe it won't.

Moneychanger  That emotional tie to investments makes bull and bear markets work, doesn't it?  Take stocks, for instance.  A fellow buys some stocks, the stocks go up.  That's great.  Then the stocks double or triple and he begins to think that he’s an investment genius.  And then, the primary trend turns, as it did in 2000, but he still holds on to the stocks, because, after all, he made money with them once.  Even though they're down a little, he’s going to stick with them.  Stocks have been good to him, so he’ll be good to them. 

At last the stocks drop far enough to eat up all his profit, and now he’s at even money.  Once again he’ll say to himself, “Naww, I can’t sell.  I've already made money with these stocks before, and I'm going to stick with them.”  He’ll ride them down until they lose 95% of peak value because he fell in love with them.

Thomas  I’ll give you a perfect example of that.  PMC Sierra started out at $18 and went to $256.  It was featured on the front page of Investor’s Business Daily.  I read the article, then I turned the page and looked at the chart.  I said to my wife, "This is a dead bang short."  But I'm a very cautious trader, so unless this thing breaks 165 I'm not going to sell it.  Three days later it went to 160.  I got short, but finally I couldn't stand the prosperity, so I covered my short at 65 -- in a very, very short period of time.

You can't believe all of this stuff that they write, because they are constantly pumping up stocks.  People think the only thing you do in the market is buy.  If you don't learn how to sell, you will never make money.

Moneychanger  So far you've laid out two secrets of trading.  The first is to limit losses. 

Thomas  Absolutely

Moneychanger  And the other is that you must always know when and how to sell, whether you sell at a loss, that is with a stop loss order, or at a gain.

How do you protect your gain?  Do you follow it up with a trailing stop order?

Thomas  Yes.  You can put in an open stop loss order.  I recommend that every Friday or Saturday you look at the paper to see where your positions are, and whether you want to raise your stop.  You never lower a stop loss order.  When you raise your stop, you place the stop as of the close on Friday. 

Moneychanger  "Never lower a stop" belongs to the discipline of trading.  When you fall in love with an investment , you start thinking in terms of human loyalty.  "I think that stuff's going to come back," you say to yourself, "That stop looks too close, I think I’ll drop that stop a little bit."  I've never traded stocks, just gold and silver and commodities, and so I know it from that standpoint, but trading is trading.

Thomas  When you look at the charts you can't tell the difference between stocks or bonds or commodities, because charts are diagrams of the thinking of the group of traders.

Moneychanger The title of your book is, If It Doesn't Go Up, Don't Buy It.  [Laughing]  Why did you pick that title?

Thomas  Because it's true. There are two major things that I explain in that book.  My rules are,  (1) You must be in the market when it is going up and (2) You must be out of the market when it is going down. 

And I show you exactly how to do this.  It is so easy, brutally easy, but no broker will ever tell you this.  The book teaches three or four different timing methods, any one of which will work.  When it is going up, then you have to ask yourself, “What am I going to buy?” 

I say buy mutual funds, not individual stocks, because people are not stock pickers. Leave that to the professionals.  Leave it to the mutual fund manager, but you only want to stick with the mutual manager who is the smartest guy on the block, not the other dummies.  There are about 12,000 mutual funds out there and probably about less than one-tenth of 1 percent of them are worth buying at any time.  I show you exactly how to find the best performing mutual funds.  Buy only no load mutual funds and only funds that have no redemption fees.  Why would you buy a mutual fund that has a 5%-8% load on the front?  You are immediately standing in a hole and it is not necessary.  When you are digging a hole and you want to get out of it, you stop digging. 

Then you want to climb out of it and buy your funds at a discount broker.  Your big service oriented brokerage companies do not sell no load mutual funds, or they have another little cutesy,  such as pay us 1½% of your account every year and we will let trade as many things as you want.  Again they don’t always offer the no load funds.  You have to be very careful.  Buy only no load funds and buy only those funds that are going up.  You can find them very easily.  I have a whole list of them in the book or you can subscribe to one of the services that I do.  That is another good way to do it, because I let them do all the work.

Basically I teach the simplest way to invest for the long-term investor (and I mean the long-term investor, because this is not a get rich quick scheme).  He follows the 200 day moving average: for example.  You can go to Investors Business Daily’s first section, where they have a mutual fund index with a 200 day moving average line.  When that index number goes above the 200 day moving average line, that is when you buy mutual funds.  That’s when you find the best performers on the block, the ones that are going up. As long as that index number is above the 200 day moving average line you stay long.  When it turns down, you get out and you go into cash or bonds or something else that I mention in the book and sit.  Do not give your money back. That is absolutely prime rule number one.

Moneychanger  We are talking about a signal where the fund rises above its 200-day moving average.

Thomas  Yes, that is the simple one.

Moneychanger  Do you follow the 200 day moving average for the fund alone, or do you also add the 200 day moving average for market indexes, say, the Dow Industrials plus the S & P, or what?

Thomas  Both.  First of all, the general market must rise above its 200 day moving average whether it’s the S&P 500 index, or the SIBD mutual fund index, whatever it is.  When you go to find the good funds, every single one of them that I recommend will be well above its  200 day line, I know that.  However, as your fund moves up, you want to put in a maximum 10% stop loss limit.  Do not ever give back more than 10% of  any position that you own.  That’s too much.  These brokers and advisers that let you lose 10-30% of your money in the last three years ought to be shot.  That is absolutely not the way to build a fortune. 

Moneychanger  You are looking for a rising mutual fund in a rising market? 

Thomas  Yes

Moneychanger  I understand “If It Doesn’t Go Up, Don’t Buy It”, but what about the opposite?  If it doesn’t go down, don’t short it.  Is that true, too?

Thomas If the market’s going down you can buy it, too, but you have to know which funds to buy.  In my book I have a whole section on buying mutual funds that always rise while the market is falling.  They are called bear funds.  There are at least a half a dozen really good ones and you will make just much money while the market is going down as when it goes up. 

Moneychanger  In fact, usually more.

Thomas  Well, the old saying is that the bear market goes down three times faster than the bull market goes up.

Moneychanger  Right.  What is your view of the overall direction of the market?  That is, what is the primary trend of stocks.

Thomas  I am a long, long term bear.  I got that way in 2000.  I am a short-term bull, intermediate term.  We bought really strong mutual funds for this rally and we are up between 20-30% at this time.  We have stops in, though.  If we got stopped out today, we would have a 20% profit locked in.  That’s better than a poke in the eye any day.

Moneychanger  Why are you a long term bear on stocks?

Thomas  Go  back in history as far as your want to go (I have a hundred-year study on this) and every 16 or 18 years there is either bull market or a bear market.  We had an 18 year bull market from 1982 to 2000.  A bear market of equal length has followed every bull market.  So we are a long way from the bottom.

I don’t like to talk about fundamentals because you don’t need to know all that garbage that they pour on you from Wall Street. That’s nonsense.  I don’t believe in doing research at all.  The only research I want to do, is I want to look and see if the fund I am buying is going up.  The rest of it is total hogwash.  You don’t need to know any of that stuff.

Moneychanger  So you don’t have a long term target for the Dow Jones Industrial Index?…

Thomas  No, the market tells me what it is going to do.  I don’t tell it

Moneychanger  So when starts going up, you buy it and when it stops going up, you sell it, as measured by its position above or below the 200 day moving average?

Thomas  Yes.  That’s the long term one for the investor who’s working and doesn’t have time to go trading around and can’t watch the market everyday. He just needs to look at it at least once a month and when he sees it going against him, get out of there.  Do not stay with a loser.  Getting into a bad stock or a bad mutual fund it is worse than being in a bad marriage -- you are losing all your money.

Moneychanger  What do you tell people who have Keoghs or IRAs that they are locked into?  Often times the choices that are presented to them are not good.

Thomas  Well, I know that, and I cover that also in my book.  When you have a 401K, for example, and you are allowed to trade six mutual funds,  you’ve got to pick the best of the six.  At least one of them that has to be half way decent.  Sometimes they have a dozen or a choice of one of the fund families, such as Fidelity or Invesco or somebody like that.  They usually try to limit you, but you can switch from one fund to another with no penalty or commission charge at all.  You will have to do some work.  You’ll have to put up the individual charts right on the screen and the chart source that I use the most is www.bigcharts.com.  If you go to their interactive section, you can put in the 200 day average moving line right on that chart on the screen in front of you.  When it goes above it, you buy it and when it goes below it you sell it. And you follow that mutual fund up with your 10% stop loss.

Moneychanger  What is the logic behind using a 200-day moving average as opposed to a 300-day or 100 day?

Thomas  I have looked at a lot of different moving averages, in fact in my book I discuss three.  I discuss the long term one, which is the 200-day, which is for Mr. Average Investor and he should follow that one.  I have a 50 day one, for people who want to trade a little more frequently, and then there is a 20 day moving average  I use that for trading for myself and for a trading stop loss order.

I didn’t write my book to teach people to be traders. I wrote it to keep from losing their money.  That’s the problem.

Moneychanger  Why did you write your book?  You told me you got mad at Wall Street. What happened?

Thomas  I used to own a brokerage company.  I had one of the biggest brokerage companies in the country.  When I sold my company in 1992, World Trading Group, I had 35 branch offices, brokers all over the country, two offices in Alaska, one in Canada.  Then I went back to trading again and I used to watch these guys on CNBC,  and every once in a while they would say something even dumber than usual and I’d holler at them.  Finally my wife said, “Since you're so smart, why don’t you write a book and tell people how to do it?  I thought about it for a while and put the book together.

But I really got mad because I have yet to hear anybody on CNBC talk about stop loss orders.  Nobody talks about them because the mutual fund managers would get mad at them, so they would lose their advertisers.  The stock companies would get mad at them.  But all this garbage that they tell you everyday about what a great stock this is -- forget it!!  When they have the CEOs onscreen talking about their companys, good gosh, you don’t need two brain cells to rub together to know that this guy is not going to tell you anything bad about his company.  All I have to do is look at the chart.  I don’t have to listen to him.  I can tell you right away if it’s worth buying or not buying.

Moneychanger  And there is a difference between a company as an operating company and a company as a stock.

Thomas  Oh, absolutely

Moneychanger  The reason one prospers and the other one doesn’t are not necessarily the same

Thomas  Correct.  For example you can go to Morning Star, the great be-all and end-all of information for stocks and mutual funds.  There almost every  mutual funds rates either 4 stars or 5 stars, even those who have lost money every year.  How they ever get to that is beyond me. Don’t pay any attention to 5 star funds from Morning Star.  They don’t know what they are talking about.

Moneychanger  How can my readers buy your book? 

Thomas  My book is listed on the best sellers at Amazon.com and sells for $29.95.  However, if you want to save 20%, order it on my website at www.mutualfundmagic.com and I’ll give you 20% off and throw in a free three-month subscription to my newsletter.  This is an email subscription only.  It goes out all over the world.

Moneychanger  I truly appreciate the information for my subscribers who find themselves trapped in stock investments because of their pension plans they can’t get out of.

Thomas  No, but they can.  Even if you are in an IRA or 401(k) you can sell and put your money in a money market account.  When the market starts down, do that.  Don’t sit with some piece of garbage that is going to smell worse every single day and is going to make it sick to your stomach because you have to hold onto it.  Don’t do that.

Moneychanger  Back to the secret that you opened up with:  You have to limit losses.

Thomas  Absolutely 10% loss you can live with.  If you’ve got 5 positions and you have a 10% loss, it isn’t going to hurt you because it isn’t going to make that much difference in your overall portfolio.  But brokers allow you to lose 30%-40%-50% and they never even call you.  The average broker has 300 customers and unless you are in the high six or seven figures you are never going to get a call.

Moneychanger  What you think about gold and silver?

Thomas  Oh, I am a great big bull on gold and silver.  In my book that was just published in March I say that this is the only bull market that we will see for several years.  And I am very much in favor of establishing a long term position here.

Moneychanger  How would you establish that position?

Thomas  You can do it any number of ways.  You can buy gold stocks, but again, I don’t like people to be stock pickers. You can buy gold mutual funds and gold coins.  Or you can go on the commodity futures market and buy bullion, but you’ve got to take delivery or keep rolling over your position.  I think mutual funds are the easiest way to do it. Every time that London gold fix or the gold index for London settlement gets anywhere near the 200 day moving average up, that’s when I buy some more.  I am looking 3-5 years down the road.  I am sure you know Richard Russell. He thinks that gold and the DOW will sell at the same price sometime down the line.

Moneychanger  Well, it has done that several times the past.  It  was 1:1 in 1980 and 2:1 in 1932 and in 2:1 in 1896 when the Dow began.  That’s a reasonable target and it doesn’t have anything to do with the absolute level of either the gold or the DOW.  They because they might cross at 1,000 or at 3,000. 

Do you have a favourite gold mutual fund right now?

Thomas  Well, the one I happen to own at the moment is called Rydex Precious Metals, but there are several of them that are good.  US Global Investments, UNWPX, SCGDX, USAGX, PNPIX, but I think that’s leveraged.  Those are no load with no redemption fee.

Moneychanger  You would change the mix of the ones you bought to their performance in the market?

Thomas  Well, I don’t trade around a lot.  You don’t do lot of trading with my  method.  I want you to get into something and sit with it.  However, if the fund that you’re in isn’t performing right, then you change to a different fund.  That would be the only time you would do that.

Moneychanger  Thank you for your time and I very much appreciate your help for my subscribers.

Thomas  Read what the customer reviews are on Amazon.com about my book.  I like helping people.  I read what you write in The Moneychanger and it’s right on target.  Keep up the good work.

Moneychanger  Thank you, Al, very much.

 Readers can order Al Thomas’ If It Doesn’t Go Up, Don’t Buy It and get 20% off by ordering online at www.mutualfundmagic.com or sending a check for $28.90 total to

Williamsburg Investment Company

830 Waikiki Drive

Merritt Island, Florida 32953

321-453-5300

You can order by phone with a credit card at  1 (800)  783-7870.  Al’s Internet Specail includes three months of his e-mail (only) newsletter, Over My Shoulder, for free. 

Franklin Sanders

www.the-moneychanger.com

Reprinted with permission from The Moneychanger. Franklin Sanders lives on a farm in Middle Tennessee by choice, deals in physical gold & silver, and has been writing and publishing The Moneychanger for nearly 26 years. In 1993 he wrote Silver Bonanza for Jim Blanchard. Last year he published "Why Silver Will Outperform Gold 400% and & The Professional Trading Secrets That Will Make the Most of Your Silver & Gold Investments," still available at www.the-moneychanger.com/order/publications.html.

You can sign up for Mr. Sanders' free daily e-mail commentary on gold & silver at www.the-moneychanger.com, and download your free portfolio calculator to keep up with your gold and silver investments.

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