'Follow the Fed,' Trade Less, Earn More

Updated from Friday, June 13, 2008.

I am a historian by nature, especially when it comes to the U.S. economy and global economics.

I studied the trail of wealth in this country from the robber barons of the nineteenth century, such as J.P. Morgan (JPM) and Daniel Drew, to their counterparts in the twenty-first century, the hedge fund titans who have made billions over the last several years.

I ate up every bit of information available about the economy from the Crash of 1929 to the boom of the 1990s and everything in between. I devoured every book, article, pamphlet, and cereal box that had anything to do with this subject. For eight years, I tested and tweaked all of my investment theories, using myself as the guinea pig.

As I began my quest to discover how I could build my own personal wealth, I wondered if the wealthy elite I had observed on Wall Street had resources that I could never hope to duplicate. Then, I learned of a group of people from various walks of life who started with modest means but who were able to become multimillionaires with little effort on their part.

These were the "Buffett millionaires," people who made incredible amounts of money by investing in Berkshire Hathaway (BRK.A). The investment made an incredible amount of money for me with surprisingly little effort.

It was as though a light bulb lit up over my head. The answer was to look for opportunities to invest with these Wall Street insiders at attractive prices and then stay on for the ride.

I looked for similar situations to Berkshire and was quite successful. I thought that I had finally discovered the secret to investment success.

Then the technology boom of the late 1990s arrived and the tactic of investing in value stocks stopped working. It was a new world, with rules I did not understand, so I decided to go back to Wall Street to learn more.

I took a position at Sanford C. Bernstein, one of the premier investment research and management firms in New York.

The Incredible Power of the Federal Reserve

During my time at Bernstein, I began to notice the incredible power the United States Federal Reserve had over the availability of money and credit in the financial markets. It seemed as if the then-Fed Chairman Alan Greenspan was in the news almost every day. The Fed seemed to be the 800-pound gorilla, influencing all aspects of the stock market. The importance of corporate performance proved to be minor by comparison. Since my firm focused on individual stocks, my colleagues had little interest in my new research.

I decided to leave and to focus on developing strategies utilizing the powers of the Fed, and testing them with my own money. My own skepticism disappeared as I soon found that the type of stocks favored by Fed policy were in general the true outperformers in my portfolio. Much to my delight, this accomplishment required extremely little trading. Eventually, I discovered that excessive trading activity on my part actually reduced my returns.