Page 381 - How to Make Money in Stocks Trilogy

256 BE SMART FROM THE START

Jack Dreyfus Was a Chartist

Jack Dreyfus was a chartist and a tape reader. He bought all his stocks based
on market action, and only when the price broke to new highs off sound
chart patterns. He was also beating the pants off every competitor who
ignored the real-world facts of market behavior (supply and demand) and
depended only on fundamental, analytical personal opinions.
Jack’s research department in those early, big-performance days con-
sisted of three young Turks who posted the day’s price and volume action of
hundreds of listed stocks to very oversized charts. I saw these charts one day
when I visited Dreyfus’s headquarters in New York.
Shortly thereafter, two small funds run by Fidelity in Boston started
doing the same thing. They, too, produced superior results. One was man-
aged by Ned Johnson, Jr., and the other by Jerry Tsai. Almost all the stocks
that the Dreyfus and Fidelity funds bought also had strong increases in their
quarterly earnings reports.
So the first buy rules I made in 1960 were as follows:
1. Concentrate on listed stocks that sell for more than $20 a share with at
least some institutional acceptance.
2. Insist that the company show increases in earnings per share in each of
the past five years and that the current quarterly earnings are up at least
20%.
3. Buy when the stock is making or about to make a new high in price after
emerging from a sound correction and price consolidation period. This
breakout should be accompanied by a volume increase to at least 50%
above the stock’s average daily volume.

The first stock I bought under my new set of buy rules was Universal
Match in February 1960. It doubled in 16 weeks, but I failed to make much
money because I didn’t have much money to invest. I was just getting
started as a stockbroker, and I didn’t have many customers. I also got ner-
vous and sold it too quickly. Later that year, sticking with my well-defined
game plan, I selected Procter & Gamble, Reynolds Tobacco, and MGM.
They, too, made outstanding price moves, but I still didn’t make much
money because the money I had to invest was limited.
About this time, I was accepted to Harvard Business School’s first Pro-
gram for Management Development (PMD). In what little extra time I had
at Harvard, I read a number of business and investment books in the library.
The best was How to Trade in Stocks, by Jesse Livermore. From this book,
I learned that your objective in the market was not to be right, but
to make big money when you were right.