Last December’s release of In the Trading Cockpit with the O’Neil Disciples marked renowned portfolio managers Dr. Chris Kacher and Gil Morales’ second full-length book on the subject of investing in growth stocks.
Coming from disparate backgrounds, the two met as acolytes of Investor’s Business Daily founder William O’Neil while working for William O’Neil & Company Inc., and have since gone on to establish the investment advisory firm Virtue of Selfish Investing LLC, a Los Angeles-based operation that manages assets for individuals, families, trusts, and pensions.
Virtue of Selfish Investing has also become a website that serves as an investment and trading resource. The site offers services to investors based on trading techniques that were developed from William O’Neil’s CAN SLIM evaluation process for buying and selling growth stocks, such as Dr. Kacher’s Market Direction Model, or the Pocket Pivot Review.
Their best-selling first book, Trade like an O’Neil Disciple, was released alongside the launch of the website in 2010, and was an elaboration on the time the pair spent with their mentor, as well as the trading methodologies they learned and refined as a result of that experience.
In the Trading Cockpit, however, is written more like a textbook or a manual, as it seeks to provide an in-depth exposition of these methods in a way that makes them more tangible and comprehensible to investors and traders. Equities.com had a chance to speak with Mr. Morales and Dr. Kacher about their most recent endeavor, and what makes it different from the original O’Neil methodology from which it was derived, as well as the success of the book and their future publishing plans.
EQ: Your new book In the Trading Cockpit with the O’Neil Disciples has been out since December. In your estimation, how has the book so far been received?
Morales: Well, we were told by John Wiley & Sons that they’ve been very pleased with the sales to the point where they’re now already pushing us to write our third book for them, and the Chinese have gotten permission from Wiley to do a translated version for their publishing house, I think it’s Shanghai Press.
EQ: So it’s selling well then so far?
Morales: You would assume so. They probably would not want us to be writing our next book was it not.
Kacher: We were pleased with the Amazon reviews, mostly all five stars, and the sales rankings were pretty good. We’re pleased with all of that so, so far so good.
EQ: Many of the reviews of the book mention your first book, Trade Like an O’Neil Disciple, which was released back in 2010 and has since become a best-seller. In what way is In the Trading Cockpit a departure from that work?
Morales: Basically the second book is ancillary to the first book as well as to our website, because at the same time in August 2010 when the first book came out, we also launched thevirtueofselfishinvesting.com website, also selfishinvesting.com for short. Since then we’ve come into contact with a lot of investors that use, or at least try to use O’Neil-based methodology, and we’ve had to take into account what people have a difficult time learning or understanding. The second book was designed to address a lot of these questions that have come up since we launched the website and published the first book, as well as provide a more hands-on, workbook-style tool to reinforce the material in the first book.
We found that some people had trouble really grasping some of the concepts. We felt that the workbook format would be ideal for forcing people to get their hands dirty and roll up their sleeves and do some exercises and work through some of the stuff, and the thought process itself. Really the second book is an offshoot of the first one, and mainly is really like a workbook sort of companion, though we do have a couple of new topics that we touch on.
EQ: So it’s a logical continuation. That leads into the next question I had for your: you have said that your book tries to bring readers/investors as close as possible to the experience of trading according to your methodology, prior to risking real money in the markets. How do you accomplish this, and based on the response you have received so far, do you feel as though you have been successful?
Morales: I think the workbook format is specifically what that is referring to. So by working through some of these problems in the workbook, you’re put in this position of having to make trading decisions, and decisions with respect to interpreting what you’re seeing in the price-volume action of a particular stock, or of the market in order to come up with the answer. Essentially that’s what the book is designed to do is allow people to utilize their own ability to employ the technique, the pocket pivots, the buyable gap ups, and so on for themselves. The book enables that by allowing people to engage in the exercises and techniques themselves.
Chris and I were in Las Vegas last November, I guess it was, and we went to have dinner at Robuchon, which is a three-Michelin star restaurant, that’s the highest Michelin star that you can get. It seems like very few, only three–you’d think they’d at least have five. But anyway, we had a $1200 dinner for the two of us, and as it turned out our waiter was a selfishinvestor.com subscriber. He had read our book, and he had done well enough that he basically said that it had changed his life, and so he was going to take up the tab for $1200 dinner for two, which was one of the most expensive dinners either of us ever had.
We’ve run into a number of people who have had trouble with the O’Neil methodology, or with implementing any particular methodology, and they’ve been able to grasp on to our work as result of this new format in the second book that reinforces the material, and people have then gone on to do pretty well, as far as we know. It doesn’t work for everybody, and I think that is typical of most trading methods. Everybody has to make sure that is meshes with their own psychology.
EQ: What other advantages does this book offer over its peers in the enormous amount of literature that purports to help individuals with trading and investing?
Kacher: The section on developing one’s chart eye is immensely important. When I started at O’Neil & Co. back in January of 1996, I spent a considerable amount of time with WONDA (William O’Neil Direct Access), which is a comprehensive charting program which tracks technical and fundamentals going back decades. I spent much time looking over charts on WONDA, changing the x- and y- axis, insuring that my own personal biases would not distort my view of the chart.
For example, if you shrink the y- axis such that the chart is compressed, many defective wide and loose bases start to look constructively tight. So I had to look at many charts over a period of time, a period of years really, in order to eliminate this sort of bias in my chart interpretation. So in our latest book, we provide an intensive section on developing one’s chart eye so one is aware of the pitfalls and personal biases that one may encounter when looking at charts.
EQ: In a sense you’re teaching investors a certain amount of objectivity in looking at data?
Morales: William Eckhart in his Jack Schwager interview had a very good point about just that. People tend to bring their own subjectivity into something that must be objective, and that includes the analysis of chart patterns and chart formations.
EQ: Books are always written within a specific time and a specific context. The market context over the past few years has increasingly been the Fed’s quantitative easing program, about which you’ve written on your website. What gives your methodology the flexibility to be relevant at once to the present climate, as well as to what new turns the market may take in the future?
Kacher: I’ll answer the question in reference to the market direction model. Basically the market direction model on selfishinvesting.com is not a black box. It accounts for material changes that may stay with the market for more than a few months, so one could say that this is the discretionary part of the model, though I do need to see material change that has endured for at least a few months, and that looks to stay for fundamental reasons if I’m going to introduce a new systematic rule into the model.
Now, in recent times it’s been quantitative easing. In early 2009, that was a material change in the markets. But there have been other material changes such as in the late ‘90s, when there were high-performing internet stocks with no earnings. Prior to this, we would never consider a stock that didn’t have earnings, but with all these semi-brilliant or brilliant internet companies with models that were unprecedented, we found that if the company had substantially accelerating sales, then you could forgive the company for having no earnings. A great example would be Amazon.com ($AMZN), who didn’t have earnings for a number of years, yet the stock price went up of thousands of percents.
Of course, in part the market direction model was tracking the price-performance of leading stocks, so the universe of what could qualify as a leading stock greatly expanded in the late ‘90s when we realized we couldn’t penalize certain stocks just because they didn’t have earnings. The same goes for the present. In this decade, there are a handful of biotech stocks that may not have earnings for a while, or even sales, but they’ve got great products in their pipelines, so then they qualify as potential leading stocks as well.
EQ: So the model is more or less designed to absorb changes as they come.
Kacher: Exactly. It means that we have to stay ahead of the curb. It also means that there is no consistently easy way to set up a trading system and let it run indefinitely. As much as people want to find the holy grail, there is really no holy grail except hard work and focus and dedication.
EQ: Indeed, the work is never done. In what way does this new book innovate on the trading tools, such as the CAN SLIM method developed by your mentor, William O’Neil?
Kacher: Well, you have a couple of things. There’s the pocket-pivot as a new buy point, which is something that contrasts with the standard O’Neil-style breakout, where you’re buying a breakout through the top of a base or a consolidation, and that’s going to occur frequently within the base. It’s a tool that allows one to get a head start on buying a stock before the rest of the crowd comes in on the obvious breakout. So that’s one particular buy point.
There’s also buyable gap up as a way to buy a gap up move, and if you look at the environment currently where you have a lot of gap moves occurring on earnings, both upside and downside, that creates a treacherous environment for investors and also a lot of times you’ll see a stock gapping up hugely after an earnings announcement and people will be looking at that almost forlornly wondering why they couldn’t have gotten on that move. So buy the gap up actually provides a very concrete method for buying these gap up moves and profiting, and you can see some recent stocks that we’ve mentioned on our website like Tesla ($TSLA) for example, and LinkedIn ($LNKD) in January, which had a gap-up. These things look like they’re gone, like they’ve had their move and that they’re just too high to buy, but the buyable gap up provides a specific method for buying them, and in fact we find them to be one of the more low-risk buy points among most stocks. If you can buy very close to the intraday low of the gap up day, which is part of the technique of buying buyable gap ups, and O’Neil doesn’t really address that at all. O’Neil would say well, the stock is extended at that point at the base and you can’t buy it, and that’s not the case with buyable gap-ups.
Finally, the seven week rule provides a very concrete way to deal with the way you handle positions and cut your losses and take profits on the way up, and handle the position according to the price-volume action and the use of the 10 day and 50 day moving averages, which is what the rule is designed to do. A lot of people have trouble with knowing when to take profits, and when a stock is streaking to the upside and its going crazy, knowing when to sell it. The seven week rule provides very concrete systems for doing this, and I don’t think there’s anything in the O’Neil methodology other than some general rules that are not that quantifiable, and rely on a lot of exogenous judgment I think.
EQ: I suppose you answered the next question, because you previously mentioned that you are working on another book already.
Kacher: It’s a work in progress actually. The book is going to be on short-selling, and also what we call “trading your DNA.” The aspect of trading one’s DNA, in other words it’s about trading on a cellular level. That is, optimizing one’s inner self through various techniques. As Ed Sekota is fond of saying, “right livelihood, and right trading.” The first thing he asked me when I actually got him on the phone way back when was if I had a significant other and if I cheat on them. I thought that was a really odd question and it caught me off guard, but his point was that if you live right by yourself and you’re not cheating other people, especially someone you love, then that’s going to obviously reflect in your trading. So the optimization of one’s inner self can be expressed through various techniques, including what you eat, how you exercise, how you sleep, various forms of meditation, neurolinguistic programming, which Ed Sekota is a fan of. Therefore, not just your trading is optimized but so are the bonds you make with friends and family, for maximum results in living your life.
EQ: Essentially, you’re talking about a holistic approach to investing, and extending it beyond that. You’re erasing the boundaries between the different categories.
Kacher: Exactly, that’s a good way to put it. And since we’ve talked about the long side so much in our first two books, this book will be focused on the short-selling side. There’s a lot of profit opportunity on that side especially as QE winds down, or even if it continues to wind up and then the market has another explosive bubble.