This column originally appeared on Real Money Pro at 8:04 a.m. EDT on May 31.NEW YORK ( Real Money) --
Serving on the front lines of this investment discipline for the past forty years with some of the most influential investors of our time, Deemer provides a front-row seat on some fascinating history, rich with insights and anecdotes and, of course, loaded with wisdom. His true gift is making the arcane world of technical analysis accessible and relevant to all investors. If Warren Buffett is the Oracle of Omaha, Deemer is the Prophet of Port St. Lucie. -- Sandra Ward, senior editor, Barron'sIn Port St. Lucie, Florida, lives a longtime friend of mine, Sir Walter Deemer, a technical analyst par excellence who recently authored an excellently written new book, Deemer on Technical Analysis: Expert Insights on Timing the Market and Profiting in the Long Run. I am proud to have endorsed the front cover of Walt's book. But first, some details on how I met Walt. Back in the mid-1970s, I was working for Larry Lasser (who was then director of research) and Jerry "The Chief" Jordan (who ran the aggressive funds) at The Putnam Management Company in Boston. Larry and The Chief were tough to work for, but never in my career did I learn so much as under their tutelage. And I will forever be grateful for that. At that time, Walt Deemer was the technical analyst at Putnam. He was deeply respected, having learned his craft from the best there ever was, Bob Farrell, Merrill Lynch's legendary technical analyst.
"I'm glad General Motors stock didn't go down in vain." --Walt Deemer, technical analyst for The Putnam Management Company (1975)My favorite story about Walt was back in 1975, when General Motors ( GM) cut its dividend, and two of Putnam's portfolio managers in total panic wanted to sell the stock. In fact, they were apoplectic after the announcement. Walt, a man of dry wit and strong technical moorings, remarked in the halls of Putnam that morning (repeatedly so that all could hear), "I'm glad General Motors stock didn't go down in vain." Walt turned out to be very right on General Motors' shares. (He usually turned out right!) After the dividend cut, the shares subsequently doubled in 1975 and added another 47% in 1976. Now back to Walt's new book! To me, Deemer on Technical Analysis is not only an informative tour (of 25 Chapters and 300 pages) through Technical Analysis 101 but it is filled with lively and witty anecdotes and investing lessons that are invaluable, even to the fundamental investor! My favorites include a discussion of Bob Farrell's 10 lessons (plus one!) of investing and the fable of the fishing boat. (Readers will relish the appendix, which lists free Internet sources of information on technical analysis and some valuable and free charting sites.)
Farrell's 10 RulesHere are Bob Farrell's official 10 rules as related by Walt:
1. Markets tend to return to the mean over time.2. Excesses in one direction will lead to an opposite excess in the other direction.3. There are no new eras -- excesses are never permanent.4. Exponentially rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. 5. The public buys the most at a top and the least at a bottom.6. Fear and greed are stronger than long-term resolve.7. Bull markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.8. Bear markets have three stages -- sharp down, reflexive rebound, and a drawn out fundamental downtrend.9. When the experts and forecasts agree, something else is going to happen.10. Bull markets are more fun than bear markets.And Walt offers a new rule from Bob:
11. Though business conditions may change, corporations and securities may change and financial institutions and regulations may change, human nature remains essentially the same.
The Fable of the Fishing BoatThen there was the time in 1978 when the bear market was taking its toll on Putnam's holdings. Walt just couldn't make the portfolio managers understand that bear markets trump even the best fundamentals. So he circulated the following memorandum to Putnam's investment department, which he considers the best thing he ever wrote:
Once upon a time, there was a big fishing boat in the North Atlantic. One day the crew members noticed that the barometer had fallen sharply, but since it was a warm, sunny and peaceful day, they decided to pay it no attention and went on with their fishing.The next day dawned stormy and the barometer had fallen further, so the crew decided to have a meeting and discuss what to do."I think we should keep in mind that we are fishermen," said the first to speak. "Our job is to catch as many fish as we can; that is what everyone on shore expects of us. Let us concentrate on this and leave the worrying about storms to the weathermen.""Not only that," said the next, "but I understand that the weathermen are ALL predicting a storm. Using contrary opinion, we should expect a sunny day and, therefore, should not worry about the weather.""Yes," said a third crew member. "And keep in mind that since this storm got so bad so quickly, it is likely to expand itself soon. It has already become overblown."The crew thus decided to continue with their business as usual.The next morning saw frightful wind and rain following steadily deteriorating conditions all the previous day. The barometer continued to fall. The crew held another meeting."Things are about as bad as they can get," said one. "The only time they were worse was in 1974, and we all know that was due to the unusual pressure systems that were centered over the Middle East that won't be repeated. We should, therefore, expect things to get better." So the crew continued to cast their nets as usual. But a strange thing happened: the storm was carrying unusually large and fine fish into their nets, yet at the same time the violence was ripping the nets loose and washing them away. And the barometer continued to fall.The crew gathered together once more."This storm is distracting us way too much from our regular tasks," complained one person, struggling to keep his feet. "We are letting too many fish get away.""Yes," agreed another as everything slid off the table. "And furthermore, we are wasting entirely too much time in meetings lately. We are missing too much valuable fishing time.""There's only one thing to do," said a crew member. "That's right!""Aye!" they all shouted.So they threw the barometer overboard.(Editor's Note: The above manuscript, now preserved in a museum, was originally discovered washed up on a desolate island above the north coast of Norway, about halfway to Spitsbergen. That island is called Bear Island and is located on the huge black and white world map on the wall in Putnam's "Trustees Room" where weekly investment division meetings took place.)What differentiates Walt's book and sage advice is that he was on the front line -- he walked the walk in leading Putnam Management's technical analysis effort when Putnam was one of the premier money management firms extant. I want to close by repeating what I view as my buddy/friend/pal Walt Deemer's most famous words of wisdom -- these words are always relevant, perhaps even more so in today's markets.
"When the time comes to buy, you won't want to." -- Walt Deemer