[00:02:03] Rebecca Hotsko: I’ve been really looking forward to this discussion, and I wanted to begin by talking about your background as an investor, because as I understand it, you initially focused on fundamental, inspired by the teachings of Graham and Dodd, but then you later shifted to technical analysis and worked with some legendary investors in the hedge fund world before starting your own research and advisory firm.

[00:02:30] Rebecca Hotsko: So, I was hoping you could share with us what motivated your transition to become a technical analyst, just what drew you to this strategy.

[00:02:40] Milton Berg: Great. Well, there are some misconceptions about Graham and Dodd. Maybe I can discuss a little bit about Benjamin Graham’s investment philosophy, how it worked, whether it worked or not. I originally got into this business. I was taking analysis, and it looked to me like, you know, voodoo people looking at charts and longs and crossing things – one kind of crazy stuff which made no sense. You’re buying a company, you’re buying a stock. Of course, you are important.

[00:03:11] Milton Berg: I really spent my college days and things early in the field. You congregated as a professional Benjamin breeding type. In rigorous security analysis, analyzing balance sheets, very fighting good companies. I went to a meeting of New York Society Security Analysts, both back to 1979, and a fellow named Ned Davis, who at that time was a Chief Market strategist at JC Bradford. He made his presentation and he basically made a simple presentation about the house. Some senti in the genius worked far better in calling market turns than fundamental valuation.

[00:03:49] Milton Berg: And that sort of struck me. I mean, how can this market data, there’s nothing to do with the particular company, how could that have some sort of predictive ability in what the market’s going to do? And that really was my first initiation to tick analysis. But then I started realizing and reading Graham and Dodd, the book itself said that his rigorous valuation analysis did not really work. For example, as you know, in the Great Depression, his value announcements did not help him.

[00:04:23] Milton Berg: His portfolio, he had a partnership. His partnership lost 80 to 85% during the Great Depression. So what he did didn’t protect him from that great market decline. And then he realized that not only did his approach not help him during the Great Depression, but the Great Depression got him very scared and he spent the rest of his career worrying about the next Great Depression, and that’s why he came up with this valuation analysis.

[00:04:53] Milton Berg: He talked about buying stocks below the net asset value, and he looked at fine stocks that are so, so cheap that even if he had a great depression, there’s a good chance to be able to get out of it somehow in the future at the price he paid for it.

[00:05:14] Milton Berg: His system really was a system of protecting us from a kind of a depression or a kind of market crash. He never expected, he never anticipated he couldn’t protect himself from. However, the last Great Depression was in the late 1920s and early 1930s, and Graham was in the business from the 1930s through the 1970s. And his evaluations didn’t work because the market kept going up, even above his evaluation parameters. Tobin himself had to revise his evaluation formulas multiple times. He revised them in the 1940s, in the 1960s, and finally, in 1978, Benjamin Graham publicly said that rigorous security analysis no longer works and is no longer necessary. He advised using other formulas for buying stocks based on P ratio, historical price action, and so on.

[00:06:06] Milton Berg: So, Benjamin Graham’s idea of buying value was an idea that makes sense and maybe works somewhat. Himself was very confused by market action and he couldn’t prove that value investing is the greatest thing to be involved in, and his greed changed his mind. Now, why does value investing work? What logic is there for value investing? For example, if a stock is cheap today, obviously a stock could be cheap. So why must it be similar sometime in the future? The stock will get back to fair value. Is this a magic formula? Why is it so? This is really a question directed to Benji Graham in front of Congress in 1954.

[00:06:52] Milton Berg: And this is very important to understand how value investing works. There was a Senate hearing with Fulbright in 1954, where the stock market got back to where it was in 1929, 25 years later. The market was back at its peak. So people were wondering or Congress was wondering, “Hey, the market is back to its price in ’29. Maybe there’ll be another market crash.” You know, Congress always worries about the wrong thing, so they worry there’ll be another market crash 25 years later as the market reaches the same level. And they brought Benjamin Graham, who was considered the expert of market valuation, a professor at Columbia Business School, and he was running a very large investment partnership. They called him into Congress on March 11th, 1955, roughly 68 years ago. And the following question was asked by Senator Fulbright to Benjamin Graham, “According to reading, when you find a special situation and you decide just for illustration that you can buy it for $10 and it’s actually worth $30, and you take your position, but you cannot realize again until other people decide it’s worth $30.

[00:08:08] Milton Berg: How is that process board about? Is it by advertising? What happens? The basic agreement asked the question, why does allowing investing work if the stock can be cheap today, why can’t it be cheap forever? The stock can be overpriced today. Why can’t it be overpriced forever?

[00:08:27] Milton Berg: Now, Benjamin Graham’s answers are unworried to quote, and he says to this question, “that is one of the mysteries of our business and is a mystery to me as well to everybody else, what we know from history and experience. But eventually the market catches up with value.”

[00:08:47] Milton Berg: There was no great fundamental understanding of value investing. He looked at history, he said, “well, why is stock cheap and then should be able to get out of it?” He really was looking at value investing as enforced technical analysis, and since he called it a mystery, I said to myself, “well, why should I get involved in the mystery of value in analysis? Let me be involved in the mysteries of technical analysis. Let’s broaden the mystery and history of the stock market and try to find other methods of picking stocks and other methods of trying to understand whether to be in a market or not to be in a market and so forth.”

[00:09:34] Milton Berg: Now, I must stress that Ben Graham’s works are published. He really never got it right. He was always behind the curve. He’s always suggesting the market is undervalued. The market didn’t go up and then he’d raise his parameters, but he never raised his parameters where the market actually was. That’s what got me to look at the technical now.

[00:09:58] Milton Berg: So now, the approach that I use is a sort of unique type of. I don’t really look at squiggly lines. I don’t really look at breakouts and breakdowns and moving averages. And we have our own type of indicators that we use. But the background is basic here, I began to be a real fundamentalist. I believe fundamental analysis fundamentals make a lot of sense.

[00:10:23] Milton Berg: If you want to buy a bond, you wonder whether the company’s going to go bankrupt, go bankrupt, or pay off their interest and so on. When it comes to the stock market, there are so many more factors under evaluation. That’s what we got involved in, using what we call market analysis and indicators. If you correct it, we’ve indicated we’ve discovered

[00:10:49] Rebecca Hotsko: Yeah, that was such a great backstory. Thanks for sharing that. I wanna dive into your strategy a little bit later in the discussion. I’m super curious to dig into your perspective on markets a bit, cuz you just outlined the perspective of markets from a traditional value investor, such as Benjamin Graham, but how do you view markets and particularly the randomness in markets, or if they’re not random at all?

[00:11:14] Milton Berg: Yeah, well, let’s look at that. Unfortunately, you would know about Direct Sinfield and Roger Emon. They put out a book basically called Stock Bond Bill of Inflation, and it looks at the history of the stock market, the history of the bond market way back to the early 1900s, and they actually made predictions based on it.

[00:11:37] Milton Berg: They looked at the stock market into some sort of a physical system. They published this in, I think in 1980. So look at the Volatil Tell market the last 80 years. Look at the rates of change in the market the last 80 years. Look at the standard innovation of return over the last 80 years. And what we saw the last 80 years is what you could expect over the oil’s future.

[00:12:07] Milton Berg: Now that wouldn’t make sense. Doesn’t really make sense because the stock market is in dynamic force. Why must we assume that the rates of return that we had over the last 80 years will continue in the future? And many things can change. Our country could change from capitalist to communist.

[00:12:28] Milton Berg: You know, you could have a run on banks. You could have the currency devalued through inflation. Many things can happen in the future that did not happen in the past. So one of the mistakes many analysts make is to look at the stock market of the past and analyze it here. Here’s what happened in the future.

[00:12:51] Milton Berg: Now, exactly what happened in 1987, a great crash. The hundred declined over 20% in one. And somebody asked Roger Emon the following question. I read your book about statistical analysis of the stock market based on your book. It never, in the history of the stock market, declined 20% in one day. Because it never declined 20% in one day in the past 80 years.

[00:13:18] Milton Berg: And he actually puts his question in his book and he says, well, let’s look at the monthly returns. We didn’t create an outlier in the monthly returns. Basically, he was basically fudging the stock market is not a physical system by virtue of the facts that in order to understand stock price movements, he rattles the history.

[00:13:42] Milton Berg: God suggests that is not something that to be analyzed because you take a pair of dice and you want to analyze statistically, why are the chances of getting the 12, why aren’t chances of getting your snake eyes and so on? You don’t have to look at the history , look at numbers. I need statistical analysis, but by virtue of the fact that you have to look at the history of the stock market in order to understand how it’ll perform in the future.

[00:14:17] Milton Berg: Data shows telling you that the stock market is really not analyzable. It’s really random, basically. Because who says what happened in the past happened in the chase show, there’s nothing inherent in the system of stocks to tell you that the future will be like the past. So right away I look at the stock market a little differently than the statisticians do.

[00:14:42] Milton Berg: When I say we really can’t use rigorous statistical analysis on the stock market, once you enter history and experience, it’s no longer a system because the system is now dynamic. However, what do we look at? Well, what we do look at are rarities. We believe, like the modern portfolio theory, that on a daily basis the stock market movement is random. Random. I don’t know what’s happening tomorrow. What is the market gonna do a week from now? I can’t predict it. On a general basis, market movements are random. However, at turning points, the action of the market is not random.

[00:15:24] Milton Berg: Now, when you say the asset market is not random, only the daily movement of the stock prices, I mean the underlying indicators that occur at market turning points are not random. They’re very rare, and they occur at turning points with a great probability of whether the market’s gonna rally or the market is going to decline. And it’s these kinds of information that we look at, always realizing, always recognizing, that the stock market is not some sort of machine, and they’re only working on probabilities.

[00:15:59] Milton Berg: And some things that happened in the past won’t happen in the future. Sure. But we do believe that although the stock market on a general basis is random, at major turning points, sometimes at minor turning points, the market gives you information that allows you to make a high probability-called prediction, called projection, to trade based on the information the market is generating.

[00:16:25] Rebecca Hotsko: So I just wanna tie this together because we have quite a big community of value investors who follow strategies. 

[00:16:33] Milton Berg: Value investing is terrible; it’s suicidal. Value investing, I mean, unfortunately, as you know, I don’t want to mention any names, but one of the world-famous value investors managed over 22 billion of mutual funds because he was a value guy. When the markets weren’t cheap, he wouldn’t buy stocks, and he only bought them when they were cheap. He did very well for a number of years. Unfortunately, he committed suicide because the market was overvalued from basically the late 1990s until now; it’s basically overvalued. And he wasn’t invested in; people were pulling money out of his funds, and he went down from 22 billion to less than 2 billion, and he decided to take his life, which is very, very sad. But the point is you can’t invest in the market being only a value investor. You’ll never own an Apple, you’ll never own a Microsoft, never own many of these great growth stocks that were never really streaming with Benjamin Graham’s value investing. So, as I say, value investing is suicidal because I’ve seen people lose their careers because they stuck to value. When I started in the business, we talked about how value might transition. I wrote an article in Barron’s; this was in 1980. I tried to write a Barron’s article pointing out using Graham and Dodd’s Security Analysis book, you know, in the book for the market. And I proved that the stock market was way, way overvalued, and we should not have any bull markets ahead; the market must decline. I basically did what Benjamin Graham was doing to better understand the market value, but I realized fortunately early in my career then value, if you rely strictly on value, you will not be successful. I really challenge you to find someone who relies strictly on value and has been successful. And don’t mention Warren Buffet. As you read Warren Buffet’s biography, he switched sometime in the early eighties from following rigorous statistical analysis and buying stocks that are very, very, very, very cheap based on value analysis. He decided, from the advice of Charlie Munger, to buy stocks that are not necessarily very, very cheap, but they’re good companies that are growing. That’s how Warren Buffet became the great investor he is. He started to buy companies and buy stocks. I remember back in the 1980s, Warren Buffet has invested in stocks like the F Corp and candy and Harmon because they were deep, deep undervalued stocks. But subsequent to that, he started investing in companies, and he invested in Coca-Cola, one of the famous investments. Coca-Cola wasn’t a deep value stock; it was basically a growth stock that was trading at their sheer value. So even the ideas that Benjamin Graham puts forth in his books are no longer followed by successful value investors.

[00:19:42] Milton Berg: Successful value investors themselves have graduated from Benjamin Graham’s type of investing analysis. Those who stick to Benjamin Graham’s type of investment of value analysis really have not done well in the business. I can’t find any. That’s the Sequoia fund. If he once agreed to follow Benjamin Graham, so you really don’t see it.

[00:20:04] Milton Berg: There’s a great market analyst who’s been out of the market for about 12 years now. He is on Twitter and he has some mutual funds and they haven’t done anything because he’s suggesting based on Benjamin Green’s analysis of markets, we gotta go down another 60%. That might happen maybe without 60%, but if you’re gonna sit waiting 12 years for that to happen, there’s no way you’re gonna maintain a business and get good.

[00:20:35] Milton Berg: So that’s why I say that the value analysis really doesn’t work. It’s never been proven to work pure value analysis. And everybody used to leave more than just value analysis to do their market research. Even though this fellow John Temple did when he was interviewed by Forbes 20 years ago, 30 years ago, he said that right by two stocks that are equally undervalued by the one that is starting to move.

[00:21:06] Milton Berg: Now, what does that mean? That’s technical analysis. The end two starts equally under. But why is the one that is starting to move, if you reveal the value investor by the one that hasn’t started to move, because it’s a little bit cheaper. So people realize it’s far more to the market than value analysis. And to be honest, Benjamin Graham, people don’t realize this, but Benjamin Graham himself was under the impression that there’s far more to the market than value analysis.

[00:21:38] Milton Berg: And I’ll just quote from the book again if that’s okay. He says, “The influence of what we call value factors over the market price is partial and indirect. Partially because it frequently competes with purely speculative factors which influence the price in the opposite direction and indirectly because it is actually intermediary of people’s sentiments and decisions.”

[00:22:01] Milton Berg: He says basically that the market doesn’t move strictly on value. The market has many other factors, including sentiment, psychology, technical factors, and speculative factors, and what we try to do is not focus on value, but focus on these other factors that move stocks. It’s here we can do to get sort of an edge of investing in the stock market.

[00:22:26] Rebecca Hotsko: I want to dive into one more Benjamin Graham quote that is often quoted. I think Buffet said it while paraphrasing Benjamin Graham in 1987. “In the short run, the market is a voting machine, but in the long run, it’s a weighing machine.” I wanted to get your interpretation of this and your perspective on what this means for market performance in the short run versus long run. Is it more based on psychology, or is it fundamentals?

[00:22:58] Milton Berg: I am so glad you asked me this question because BA got it wrong. His great teacher, Benjamin, never said, or Warren Buffet said, he said, never said it. I’ll read the words of Benjamin Graham from The Intelligent Investor, published in the 1920s and 1930s.

[00:23:16] Milton Berg: He says the following, ‘In other words, the market is not a weighing machine, it is not a weighing machine over the short term. The market is not a weighing machine on which the value of each issue is recorded by an exact and personal mechanism in accordance with specific qualities,’ as Benjamin Graham said.

[00:23:38] Milton Berg: The market is a voting machine where we account for individuals’ registered choices, which are the products partly of reason, partly of emotion. What Benjamin Graham was saying is the market is always an ever-voting machine. In order for the price of the stock to change, someone has to decide to buy, and some have to decide to sell.

[00:24:01] Milton Berg: So in any given transaction, it’s a voting machine. Now, if it’s true that long-term, a stock is a weighing machine, let’s look at Warren Buffett’s own stock. His stock has been around for over 50 years already, and it waves up and down pointlessly. It has fluctuated up to 20% and down 20% in the last year, although the value hasn’t. Isn’t Warren Buffett’s stock a long-term stock? If it’s true that in the long term, the market is a weighing machine, about now, in the year 2022, shouldn’t Warren Buffett’s stock be valued as a weighing machine? Should it not fluctuate? Of course not. The market is always an ever-voting machine. The market is never ever a weighing machine. Occasionally, the weight of the weighing machine and the voting machine coincide.

[00:24:54] Milton Berg: Benjamin Graham said if you buy a stock that is cheap, eventually your stock will get back to its value, but that’s not because the market becomes a weighing machine. That’s because the typical fluctuation of a stock takes it back to its true value

[00:25:12] Milton Berg: We don’t know why that happens, but it happens through voting. It doesn’t happen through weighing. So Warren Buffet’s quote is incorrect. People, I’ve heard this quote repeated many, many times and it’s not the way markets work. Markets are totally illogical, always more than ever voting machines. They are based on psychology, sentiment, based on speculation, never ever based on the true fundamentals of a company. There’s no mechanism that allows the true fundamentals of a company to sharpen a stock price. The only method is the voting of blind and installing plenty of years of that question. I get too passionate about this.

[00:25:53] Rebecca Hotsko: I’m glad to hear your answer on that. I have never heard that corrected before, so I’m glad that you were here today on this show to give us the meaning behind that quote, because I have heard that so often. And so in a sense then, if someone’s, I guess philosophy as an investor is that they pick stocks because they believe they are undervalued.

[00:26:14] Rebecca Hotsko: I just wanna clear this up for listeners. You are saying with your views of the market, The only way that it reaches its intrinsic value is because of randomness. This voting in the market. It’s not because some catalyst will make it go to its intrinsic value. 

[00:26:30] Milton Berg: Well, there is a catalyst. If there’s a, it’ll be a takeover, but even a takeover.

[00:26:36] Milton Berg: How many takeovers have you had above intrinsic value? How many companies? The takeovers. And they pay too much for a stock, right? So even a takeover has nothing to do with value. It’s a sentiment to the company that’s buying the stock. The market. There’s no meth value at all for a market stock. Stock to trade in, a market to trade its value.

[00:27:02] Milton Berg: The only mechanism is people buying and people selling, which shouldn’t affect the only voting. So yes, I disagree. I don’t wanna say it’s random, but when wearing such, historically it’s found. He said it’s a mystery. But historically, you’re buying cheap stock. It’s gonna get back to mal wo stark when you buy your stock because the five day volume is greater than 14 years, and the ST down 60% of its high history.

[00:27:32] Milton Berg: Most of those stocks, let’s go back and gain 40, 30, 40%. So are you gonna say that now the market’s a technical machine? Now many stock is going to the market. But ultimately Ultimately, it all has to do with voting and psychology, voting and sentiment. Of course, people vote because of fundamentals.

[00:27:54] Milton Berg: If they’re in an economic, career or recession, and people think they need money to pay for their mortgage, they need money to get a Futu table. They’ll sell their stocks to get them. That is also a voting decision. Might be based on some fundamentals, Maybe they sell the gold Avenue of safe.

[00:28:18] Milton Berg: Maybe they shouldn’t, should sell the house if they’re paying a mortgage on it. It’s all a decision based on personal factors. Nothing to do with the intrinsic value of a company. I’m adamant about this and that people say, and I say, people who have followed the true value of investment have never been very successful, never been very successful.

[00:28:42] Milton Berg: Ben Graham has not followed true value investing. I mean, the crime of Benjamin Graham spoke about it. He’s very good. He’s a very good market timer. Excuse me, Warren Buffet, excellent market timer. When stocks are expensive, he builds up his cash and he buys when stop starts, when the market comes down.

[00:29:04] Milton Berg: He claims he’s buying because stocks are cheap. That could be true in many other fashions that take place at a market low, other than stocks being cheap. So it might be a coincidence that what he buys his stocks is cheap, but that is not necessarily the factor that gets his stocks moving up. As you know, his stocks are cheap and getting cheaper.

Berkshire High is a great example, not from the fact that Warren Buffet used Berkshire after the way as it means of buying other stocks. That company went bankrupt, even his interviewer read about his position in the Washington Poll. So one of the others, I’m not sure exactly which newspaper he bought.

He said it’s only by chance, by the luck of God that he was able to come out of it. Okay? One of his competitors went bankrupt. He didn’t know when he bought that cheap that competitor would go bankrupt. There’s a lot more involved with strict values. And again, there’s no mechanism, no mechanism of value to be reflected in the stock.

There is a mechanism for sentiment. If there’s a bump in the stock, even if you’re gonna say a stock is cheap based on dividends, the only mechanism for the stock to remain at this level is because people want those dividends. Now, that could change, they may decide they don’t need the high-income needle, lower income, everything is in.

Everything is based on psychology. Everything is based on a decision. Everything is based on buying and selling, which is all a voting machine and is never, never, ever a wing machine.

[00:30:54] Rebecca Hotsko: I wanna dive into your investment strategy, though now because your strategy is centered around identifying market tops and bottoms, a skill that you’ve honed over the three decades of market analysis.

[00:31:06] Rebecca Hotsko: So could you talk a little bit about your framework, including how you developed it and the methods you used to identify significant turning points in the market? 

[00:31:16] Milton Berg: Well, first I have to point out that what I do, ’em, we never deal with uncertainties. We admit we’re only dealing in probabilities. Maybe some people ought to think they’re dealing in certainties, but we always, and we understand that whatever we do, you’re dealing in probabilities.

[00:31:35] Milton Berg: I mean, you know, in the market today there will be a recession. Let’s assume if you can pound the table that there’ll be a recession. Are they willing to bet on life? To have a hundred percent certainty? Of course, not every decision that people make in the stock market is a decision based on probabilities.

[00:31:58] Milton Berg: So, the first thing we recognize is that many indicators that we use to have a 100% track record, and they only have a 70% track record or percent track record, but you can only really can’t expect more than that because even if they have a 100% track record from a buy indicator that she goes 14 times in the last a hundred years, and each time the market held its low by never, then it declined more than 2% and had a bull market follow.

[00:32:33] Milton Berg: Right. It happened 14 times in a row. That doesn’t tell me it’s gonna happen next time, because as I say, in theory, there’s an infinite number of days to the stock market. The stock market can continue forever, and we only have a short period of a hundred years of maybe those 14 years were an outlier. 14 signals were an outlier, and everything else will be the proper signal.

[00:33:01] Milton Berg: I’m trying to point out that it’s very important for people who are watching the show to know that we only deal in probabilities. There are no certainties. Great investors may have made many mistakes. He didn’t really make a mistake; he made the right decision. It’s just that the decision was based on probability. They probably don’t always go in his favor.

[00:33:26] Milton Berg: There are mistakes people make when they don’t follow the proper judgment and/or don’t follow the proper discipline. That’s a mistake. The stock goes against you and your market projection goes against you. That doesn’t mean you made a mistake. That just means that if the probability was 80%, that hit the 20% probability where it’s not gonna work out.

[00:33:50] Milton Berg: That’s the first thing you want to say. Number two, what I want to say is, we did already discuss that we believe that on a daily basis, on a weekly basis, on a monthly basis, stock market fluctuations generally are random. It can’t be predicted. But we do believe that at turning points, there are factors that show for the stock market that are no longer random and have a high probability trait.

[00:34:20] Milton Berg: And I can compare this somewhat to in the modern day, if someone wants to analyze his heart, but the doctor wants to analyze Helman’s. I guess they use MRIs nowadays, CAT scans, or when someone’s brain, they have MRIs in CAT scan, they can see the brain. But years ago you needed an EKG and a doctor would make a probabilistic decision on the health of this patient based on the data that came on an EKG.

[00:34:52] Milton Berg: Now, when an EKG tells you nothing about the physical nature of the heart, in other words, probabilistically, it’s telling you some sort of ways coming from the beach, coming from the heart, and it gives the physician some sort of idea of the health of that heart in that, that they could be.

[00:35:13] Milton Berg: We’re analyzing other diseases like cancer, so it’s just probability. Now, of course, nowadays they’re able to see objects through modern technology, but you don’t have that kind of technology in the stock market. Just don’t have it. All you have is its EKG. All you have is data being transmitted by the market, and that’s what we look at.

[00:35:38] Milton Berg: We look at data and again, we look at data. That’s not random data that takes place every day and not going to give us any markers at 5%, at 2% today, down 2% tomorrow, up 1%. These are just random fluctuations on the bell curve. So sometimes you’re up 2%, sometimes you’re up a quarter of a percent in the day. Sometimes you have the market go up three days in a row, somebody goes down for three days in a row; it’s just random.

[00:36:12] Milton Berg: But we look for the tails, things that are not random and generally things you’re looking at now. They’re random; they’re reflective of some sort of euphoria or panic on the part of the market participants, those voting. We welcome something that’s reflective of the euphoria panic because that’s usually when turning points take place. This is, we have many, many disciplines, many, many kinds of indicators. But this is basically the idea.

[00:36:41] Milton Berg: The idea is that if the market bottoms on October 12th, 2022, there are many, many indicators we saw around that period late September, early October that were rare and that were reflective of panic and suggested that basically, there was enough selling pressure in the market that the market will have to bottom. But that doesn’t tell you necessarily exactly the pattern that the mark will follow on the way up. It tells you that was a good low. Once you know there’s a good low, you know the next one is going to be up because that low will hold. And that’s basically the framework for what we do.

[00:37:25] Rebecca Hotsko: I wanna dive into that a bit more because some investors might be wondering how this works in more detail. Because if you are thinking about a turning point in the market, many people are wondering where’s going to be the bottom of the market in our current situation, but what would suggest that we have seen a market bottom here, and then things are better?

[00:37:47] Rebecca Hotsko: Would you just have to see volume increase? 

[00:37:51] Milton Berg: Let me give you some ideas about a framework exactly where we’re looking. Of rare fractions, we don’t necessarily look at one rare factor in the market. We look at combinations, which factors that take place at the turning point. We also do something called day counts.

[00:38:10] Milton Berg: For example, the S&P and the Rust declined from 13% February high and it’s held its low for us, a four or five, six held low curve, maybe not four or five days since then. And we look at certainly old digital lows and we count at market turning points. In other words, the market makes a low, we count four days, five days, six days from the last corrective low and having a lower, you see, what kind of data did the market generate?

[00:38:44] Milton Berg: And this data consists of the type of data that are generated at previous market lows that have held. So, for example, why we look at, I’ll give you a historical example, a great example because it’s nothing to do with the current market, but you an example of somebody. Maybe some other viewers are familiar.

[00:39:06] Milton Berg: The word with the indicator called trend trend was an, an indicator, I guess it was discovered or publicized by a felon, Richard Arms, that those called the orange in there. But the trend measures two things combined measures the ratio of advances to declines in the markets in the New York Stock Exchange.

[00:39:28] Milton Berg: The ratio of advances to declines is a founder of the coin, is the found new stock. Stock on 500 stocks down. It’s a two-to-one ratio. It also measures the volume of stocks that are moving up and the volume of stocks are moving down. So, a thousand million shares trading on the upside and half a million shares trading on the downside on the same day. That is a thousand shares trading up and farmers just trading down. It’s the same ratio, two to one. The tree will be 1.00.

[00:40:04] Milton Berg: There’s a balance. Volume is balanced with the breadth, the number of stocks up and down. Balances with the volume of volume in those stocks drop down. That’s a trend of one TRIN.

[00:40:17] Milton Berg: One is a neutral marine, but sometimes not very often. Sometimes you get extremes. Extremes in tri rather than being at one, the two or three or at four, at five.

[00:40:28] Milton Berg: Now, the highest trend in history of the stock market’s biggest trend ever was shift 15 point 50 on January 8th, 1988. Never in the history of the stock market is an easy trend that’s telling you. Basically, there’s 15 times as much volume on the downside, and it should have been based on the ratio of Stockdale moving up and Stockdale moving down.

[00:40:49] Milton Berg: Now, why did you see a trend on 15 January 8th? Because January 1980 was really just a little bit more than a month after the final low after the collision of 1987, I lived through that crash. I lived through that period. And then people were still worried about the questions right to continue, and you got a little pullback in the early January of 19 eight, people suddenly panicked and panicked and sold stocks. The market didn’t go down that much that day.

[00:41:09] Milton Berg: Well, the market actually didn’t go down a lot. That day was more than 5%, but there was heavy volume of the stocks trading down. Now in January of 1988, the market never declined below that level. Market gained thousands of percent since then. So that was a turning point indicator. 

[00:41:23] Milton Berg: Well, other people would suggest, “Wow, so much volume on the downside, that suddenly is terrible. People must know something, right?” People must know something in the market about the crash. The reality was that it was the final test of the 1987 crash, so that was a positive sign. Now, the second artist, Trinity History, also took place. Maybe more people who were watching were trading socks. Over October 10th, 2011, Joe says 2011, same thing. You had a financial crisis in 2008, 2009. Then you had a European banking crisis in 2011, and many, many of us thought that the European banks were going to collapse. The marketing German tax declined over 30% in the two-month period. The SPF 500 declined some 19% of the two-month period at bottom. I believe in early October, and then at the bottom took place with this reading of trend of 12 point 52nd. Again, the market never got below those levels.

[00:42:27] Milton Berg: This is an extreme example of the kind of trending point analysis we do when we see a trend of 12 point 50. We don’t say, “Wow, everybody’s saying this is negative.” We know historically that where you see a high trend and meet, people are panicking. And when people panic, usually they make the wrong decisions. When people panic, their voting is usually incorrect. So that’s really a sign that the market is not going to continue lower, but the market is higher. And you may ask, “What does that do with fundamentals?” And the answer is two things. A) It has nothing to do with fundamentals. Zero. Who says, who says Mark A? Do fundamentals. But two, if people panic, if the stock market people panic, it means businesses panic.

[00:43:20] Milton Berg: If businesses panicked, it means the Federal Reserve panicked. So liquidity hasn’t been built up, but we’re not analyzing the liquidity. We’re not analyzing the business and value of the Fed. But the market is telling you there’s panic, and there’s panic in the market. There’s panic in the streets, there’s panic all around. And with this panic, not only did people sell the stocks on high volume, people were liquidating the companies and the federal. There was lowering of grains and so on and so forth. Many of the factors that we can’t even measure took place on that date of January 8th, 1988, or that period that allowed the market to go up and allowed the economy to continue trading higher.

[00:44:10] Milton Berg: That’s one example. Another great example about volume, as you know, the great declines from April 1930 to July 1932 took place. It was a low volume decline market, and did not show much volume at all during the decline. You know when you saw the volume? The volume in July 1932 at the low, at the final low. So whenever we finally realized that the market was rated down for 80% and they decided to, that’s when you know that’s where the actual low took place.

[00:44:44] Milton Berg: Now, we don’t only look at long-term turning points, we look at short-term turning points, short-term indicators, and we have built a number of indicators. I can review some of them with you if that would make any sense.

[00:45:00] Rebecca Hotsko: Yeah. I think that for our listeners who are typically. Long-term investors, what do you think would be the most useful takeaways to help them, I guess, better time, their investments? Because on one hand we are taught in finance that there is no way to time the market, that is you are often worse off.

[00:45:17] Rebecca Hotsko: So maybe even talk about why you think it’s possible to time the market and how that could benefit a long-term investor. 

[00:45:25] Milton Berg: Okay, well first of all, most people should not be involved in trading. They cannot be involved in the kind of things you’re talking about. It’s professional and it’s not easy to do it. You know, professionals should do it very well or financially because they’re doing things that most people cannot do.

[00:45:46] Milton Berg: But I would say, first of all, my advice to people watching this show is to really invest in a good company community. Understand the company that they recognize and they can get a sense of whether the stock is overvalued or not. If they look at the dividend, one way to recognize it is they can just see if the stock is moving up and make sure the manager of the company is getting in the game.

[00:46:17] Milton Berg: That’s a general investment. As far as what we’ve been talking about, which is what kind of things I’m looking at, trading points, you know, when you’re ready to panic and everyone you know is panicking and you’re ready to panic as well, that’s probably a time that you don’t want to panic. That’s one thing I can say, but I really can’t give specific advice for retail investors.

[00:46:44] Milton Berg: I can just give a framework for people who are interested in understanding markets. I hope I can do that, but I really can’t give any specific, specific advice on when a person should decide to buy stock, when a person should decide to get into the market. I can only say that the markets are always going to fluctuate. They’re always going to rally, they’re going to decline. And you’re better off knowing where to get out based on the fact that the stock has done well and knowing where to get in, the fact that the stock has declined is not a reason not to get in if its fundamentals are strong. But as far as what I do, which.

[00:47:33] Milton Berg: All I can really talk about is what I do. It kind of indicates I look at a five-day volume. Historically, market turning points occur when five-day volume is at an extreme. Well, we just had a big extreme of five-day volume last week after this 13% correction. Russell left and the 17% correction.

[00:47:56] Milton Berg: Yes. Hundred. That adds a positive weight to what we’re looking at. We look at net upside volume on a five-day basis and 10-day basis, 12-day basis. Now we look at the amount of volume that is actually moving up and starting to move down. We average it out over five days and 12 days and look for extremes. We listen, see what’s important as a day count.

[00:48:23] Milton Berg: Cause the market bottom, for example, the market bottom on October 12th, 2022. We count the next 10 days and see what took place over the next 10 days relative to what took place historically at market lows. And that gives you seven-hour. Again, we have proprietary work. I can’t give any, but this is just a framework.

[00:48:46] Milton Berg: We wanna count the days from a market low, go count the days from a market top, and the market made a top. Now on February 2nd, we actually were great heavily long into February 2nd, we’ll leverage long for our clients on February 2nd, but a few days later during the counts. From those days, we found certain unique characteristics that could be placed in market tops.

[00:49:13] Milton Berg: We found gaps to the upside and gaps to the downside and spiked days and volume reversals and so on. So we got out. We actually went back in, were long again because it now looked like it was just a regular correction within the bull market, rather than the beginning of a major. It’s hard to know everything.

[00:49:36] Milton Berg: These probabilities we look at – the VIX, we look at the one-day rate of change, the three-day rate of change, rather than the level of VIX most people focus on, which is now the VIX is at 28 and at 25 or 40, the VIX is at 18. We look at the rate of changes in VIX on a one-day, two-day, and three-day basis. We also look at deviation from trend in order to take an eight-day average of VIX versus let’s say the previous 50 days, and see how it deviated even to the downside.

[00:50:15] Milton Berg: You look at the market high, look at the 52-week high in the market. We look at three-year highs in the market as an indication. We look at the five-day – very important thing is the five-day rate of change. Let me tell you why that’s important because one thing is last year from this bull market that I believe began on October 12th. I believe a bull market began on October 12th, But most bull markets begin with the five day rate change of the S&P 500 greater than 7.4%. Most bull markets begin where the market had a strong concentrated five day gain, a minimum of 7.4%, has gone outside 11-12% at the market turning points. We did not get that this time. Our highest five year rate change was 6% and change in June.

[00:51:09] Milton Berg: Off June lows, we got a lower return than the October lows. That’s something that’s lacking. But in any event, it’s a good question what retail investors should look at. I’m sorry, can you give a framework of the kind of things that we do? I really can’t. I wish I could give some good information other than to say be disciplined.

[00:51:34] Milton Berg: And you get a sense, you know, how many stocks over the last three years are highly speculative and way overvalued. Overvaluation is good because you can catch a stock that’s trending up and overvalued, but for a long-term investor, they never want to hold it. An undervalued stock with Benjamin Graham as history shows that an undervalued stock eventually becomes overvalued. So that alone is a reason to be careful when stocks are trading up and overvalued. But you’re gonna miss some of the big moves.

[00:52:09] Milton Berg: So I really can’t give any more information than I’ve given. I know it’s such a difficult game being involved in the stock market and finding a good company with good management and their skin in the game.

[00:52:24] Milton Berg: You know, everybody, any stock they see in the stock market, somebody’s owning. So they’re either owning it for the right reason, they’re owning it for the wrong reason. You find a company that management is owning the stock and can imagine they’re owning it for the right reason. You find a company, the manager is just managing the company, but they don’t own stock in the company.

[00:52:52] Milton Berg: They’re all in you for the wrong reason. They want to get their salary, they want to get their stock options wherever, and then immediately liquidate to cash. But you find a company that’s built by something like, you know, Amazon was once a great example. Apple was a great example. You find a company that is very well managed, has a good product, makes good money, and the owners have the skin in the game, not strictly, and you know they’re going to see the stock move up and sell the shares if they actually have the other option and sell the shares.

[00:53:33] Milton Berg: Even Tesla was a great example. Elon Musk took the bulk of his worth into that company and they managed it. So these are the products you ought to look at if you want to be a bit safe. Make sure that the managers are scheduling the game as well, not just you.

[00:53:54] Rebecca Hotsko: Yeah, I think that was very helpful.

[00:53:56] Rebecca Hotsko: And I guess two questions for you quick. So you kind of touched on it already. So with your indicators, everything that’s telling you, do you think that we, we haven’t seen a turning point yet, then you’re suggesting, and I guess the follow up would be, do you think we’ve already seen a bottom or the worse is still potentially yet to come?

[00:54:18] Milton Berg: Well, I’ll give you the good news and the bad news, okay? Yes, first, I’ll give you the bad news. Believe lock bottoms in October, bottom in October. Now the market’s fighting the Fed. Normally, when the market bombs, it coincides with the Federal Reserve being in credit. It was a very rare pre-market low when the Federal Reserve was aggressively tightening credit. But yet the market bottomed on October 12th, started at 10 days since then and the SPS of 10.07%. So the market is held a little despite the statute, you’ve had tremendous monetary tightening. In fact, the S&P made its first low in June on June 16th, and the S&P is above its level on June 16th. June 16th is when they first started getting aggressive. They raised rates 0.75% in July, 0.75% in September, 0.75% in November. So the market is higher than it was when they first started raising rates. Very, very strange. Very non-typical. So the good news is the market’s doing well despite the fact that the Fed has been raising rates. That’s good news.

[00:55:31] Milton Berg: The bad news is that, I understand there are reasons for it, but what the market is telling us is that the Fed really hasn’t tightened. Even after the latest tightening a couple of days ago, the Fed funds rate is still below the inflation rate. When Paul Volcker got a handle on inflation, he raised the Fed funds rate 10% above the inflation rate. We’re now 1% below the inflation rate, so the good news is that the market is telling us they’re not tight enough. The bad news is that they’re eventually going to have to tighten if they want to fight inflation, and that will lead to a really good bear market. How do we know that the Fed wants to fight inflation? This won’t be the first country that didn’t fight inflation. Maybe the Fed will decide, maybe there’ll be some political pressure on them to keep the economy going and ignore inflation. Maybe they’ll raise the inflation target from 2% to 4%. We don’t know. We’re bullish right now, despite the fact that the Fed is so-called tightening, largely because they really haven’t been tightening. So the good news is that the market’s doing well. The bad news is that there may be tightening ahead. Another piece of bad news is that the S&P has gained 10.07% in 110 days since its low, which is not as much as the 16.65% it had gained before, but now it just finished close.

[00:57:09] Milton Berg: We’re 110 days past the lower 10.07%. Now let’s assume a bull mark on October 12th, 2022. That will be the 24th bull market in 1957. Of those 24 bull markets in 1957, 22 of them saw greater returns than 10.07%. We were second to the last, with the worst return by day 110 being in 1957, which only gained 8%. However, ultimately, it gained 32% in the first year off the low. We’ve gained 10% in 110 days, and no one likes to be second from last out of 24 opportunities. That’s a sign that maybe the market isn’t acting as well as it should, but that doesn’t faze us as long as we’re consistent with our bull thesis. Especially since we have buy signals from our indicators suggesting the bull thesis is better.

[00:58:03] Milton Berg: Now, the good news in the Nasdaq is that the NASDAQ’s closing low was on December 28th. NASDAQ has gained 14.26% in 57 days since then, and of the previous 12 bull markets in the NASDAQ since 1974, the 1974 Bull market took 6% by day 50. The 1984 market only gained 9.93%. In 1978, it only gained 12.11%, and in 1990, it only gained 10.31%. So there were many instances in the NASDAQ where the returns were weaker than they are currently. In each of those instances, returns were phenomenal. The median return of those 12 historical bull markets was 66% within one year of the low.

[00:58:47] Milton Berg: So another thing is still in line based on history. Now, we were negative until a few days ago. We went long based on our indicators, and yesterday’s decline didn’t, in fact, end some bullish weight to the indicators because there was some panic-like action just in the coin.

[00:59:06] Milton Berg: But we’ll be flexible to change our minds. But right now, we’re bullish. We still think of Beaumont in October. And it won’t be the greatest bull market because the Fed is raising rates. You may struggle with the bull market because the Federal Reserve is not as tight as they should be, but once it becomes as tight as they should be, you know, there’ll be trouble ahead.

[00:59:33] Milton Berg: So, just gotta monitor the market in the economy, exceed the Federal Reserve day by day and washer indicators, basically. That’s where we extend. We like gold light, the action in gold. We like the action gold stock. And it’s also suggesting probability. Is inflation ahead? It was, I mean, gold stocks rallying over 50% from their total lows until the highs sep. In late January, they corrected 20%, but now they’re back on the tier backing up again.

[01:00:05] Milton Berg: And so, to have gold, gold main tier within a few percentage points, it was all-time high just a few weeks ago and now it pulled back sharply, but then it started to rally again. So, I think golden gold stocks are a good place to be on the trading basis.

[01:00:25] Rebecca Hotsko: And last thing before I let you go, what advice would you give our listeners from your many years of experience as an investor?

[01:00:33] Rebecca Hotsko: What’s the best piece of advice you have for them? 

[01:00:37] Milton Berg: Well, I know that Kahneman and Tversky, in the book about their prize-winning work on more heuristics in decision-making, said that the worst decision investors make is selling the good stocks and holding on to a losing stock. So I would say, and a piece of advice based on scientific study, you don’t want to hold onto your losing stock but you want to hold onto your winning stocks. Now, how you define a winning stock versus a losing stock, you have to get into statistics on that. But very often, I have a gain or a loss, and I can’t tell you how many times I’ve seen someone say, “Let me get even, and then I’ll sell.” How foolish. That’s a loss, and the chance of that loss coming back is very slim. That’s exactly the opposite. That’s one piece of advice. Another piece of advice that I gave earlier is to buy good companies with good management who have a stake in the game. And I invest that way. And maybe, you know, use common sense and be logical, and don’t chase stocks that are doing poorly unless you have some good technical or database reason to do it. And use our methodology to open, any of us aware of how to trade stocks or how to invest in stock? It’s not an easy game. It will never be an easy game. If there’s inflation ahead of us in the economy, you definitely want to be in stocks for the long term because even in places like Venezuela, Argentina, and Germany in the 1920s, although you didn’t keep up with inflation, you came close to keeping up with inflation by investing in stocks. Of course, you had to get out before the final line was the ultimate goal.

[01:02:36] Milton Berg: Lots of history, a lot of information. I really, wish it would be easy, you know, people get up to buy Bitcoin, buy growth stocks, buy Apple. I can’t say that. I just use common sense. Be flexible. You have to buy a company, buy a company whose management is on your side, and then many, many companies out there manage that.

[01:02:51] Milton Berg: Totally not on your side. And people have to be aware of that. 

[01:02:54] Rebecca Hotsko: I think that was a great piece of advice to end things off today. Before I let you go though, where can the audience go to learn more about you and everything that you do? 

[01:03:03] Milton Berg: Okay. I’d like to thank you, Rebecca, for this interview. Well, I’m resting. I enjoyed it. It was great. We have a website, www.miltonberg.com, and there is information there on how to follow what we do. Also, I occasionally tweet on Twitter, and my Twitter handle is @BergMilton (BERG Milton). There are some phonies that use a similar series, so be very careful. Forget the one with the blue check. They don’t belong to me. Thank you so much, Rebecca.

[01:03:35] Rebecca Hotsko: I’ll make sure to add all of those in the show notes. Thank you so much for coming on again, Milton. 

[01:03:40] Milton Berg: Thank you. 

[01:03:41] Rebecca Hotsko: All right. I hope you enjoyed today’s episode. Make sure to follow the show on your favorite podcast app so that you never miss a new episode. And if you’ve been enjoying the podcast, I would really appreciate it if you left a rating or review. This really helps support us and is the best way to help new people discover the show. And if you haven’t already, make sure to sign up for our free newsletter, We Study Markets which goes out daily and will help you understand what’s going on in the markets in just a few minutes. So, with that all said, I will see you again next time. 

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