Trendfund.com

INNERWORTH ARTICLE

Master Interview with Michael Parness
Introduction

Michael J. Parness began his trading career rather humbly, with his own baseball card trading company. But while successfully running that company for a decade, he began to see the potential for even greater financial growth in the stock markets. After various ups (with his account under his own guidance) and downs (with a broker making the trades), Michael adopted what he calls his ’ninja trader’ persona and took permanent control over his trading capital.

As his success grew, he began posting profitable account statements on the E*Trade bulletin board, where he gained a large following. That led to the creation of Trendfund.com, a Web-based service where Michael is both CEO and Founder, and where he guides subscribers through the vagaries of the stock market with detailed predictions of target prices for specific stocks.

If Freud was right when he said that people who think they are talking about others are mostly talking about themselves, then you may want to take Parness himself with a pinch of salt. After all, he was the one who told us: “I think most people who tell you they’re successful in the markets are full of shit, frankly.” But in spite of this small warning sign, it’s obvious that Michael has racked up some significant successes. And his personal history, as told on TrendFund.com, is unusual and extremely interesting.

A trend-trader, Michael’s market knowledge and unconventional approach have earned him both financial success and personal respect within the investment community. “Rule The Freakin’ Markets,” his first book, published by St. Martin’s Press, is due out in early 2002.

HIGHLIGHTS:

·      Michael is intensely aware of the psychological dimension of trading, and of the crowd mentality. He believes that the more emotion you can remove from your trading, the more successful you can be.

·      Michael understands the markets as very psychological activities, and focuses his attention on why people do things, including mass psychology and the herd mentality.

·      He believes the stock market is a very imperfect world, where success is really about being consistent, being deliberate and disciplined, and following rules and structure. If you can do those things, he believes, anybody can be successful.

·      Michael feels that a winning attitude is vital for success in the markets, and more important than great math ability or a terrific sense of which stocks to buy and sell. He goes in with the intention of winning, and that gives him an edge. He thinks that determination to win can be learned.

·      Last but not least is his “black underwear” secret, for the details of which you’ll have to read on.

Tools of the Trade
     Trade Portal and AT financial windows, showing an intraday chart of the DOW
       and the NASDAQ.
    One monitor shows Michael’s chat room, his trading screen, and TrendFund.com’s
       Market Views section, which shows hot stocks and active sectors.
     Two other screens display charts of various indexes, plus a watch list of about
       100 leading stocks in different sectors, as well as some smaller stocks, plus
       a live news feed and the “leader board” of winners and losers on the day.

Innerworth interviewed Michael Parness on December 26, 2001

The Interview

Are you actively trading or investing now?
Yeah, I started in 1999 as a trader after losing the bulk of my nest egg through traditional means, brokers and whatnot. I was determined to figure out how to make money in the market and get my money back, basically. (Laughs)

I felt I had been robbed to a certain extent by the powers that be, and I just put my mind to figuring out how the market worked. I took roughly thirty-three thousand dollars and turned it into many millions.

Is this managing your own money or managing other people’s money?
Right now I have a hedge fund so I manage roughly three million dollars of other people’s money. But it’s private and it’s not open for other people to join. Really what we’re about now is helping other people get the same opportunities that I’ve had. So my primary focus is on helping newbie traders and people who are tired of tradition. Tired of buy and hold and watching everybody else make money. And also mainly watching the institutions make money on them even though they’re not making money.

Since 1998, the DOW is basically flat. And so is the NASDAQ. And yet Goldman Sachs and Morgan Stanley and Lehman Brothers and all these institutions are still making a lot of money. So it’s not investors who are making money. It’s traders. And how does that happen? Because the institutions make money whether you make money or not. As long as you’re trading, or moving, buying and selling your stocks, then they’re making money.

So primarily right now, we’re teaching people how to make money in the market.

So someone might ask, if you’re being so successful with your own investing, why bother starting this website?
Well, it would be great if I just said to you, “I’m so altruistic that the only reason is because I enjoy helping people.” That’s a big part of it. Obviously, I make money. I have twelve employees I feel responsible for. They’ve been with us since the beginning. And we consider ourselves a family. I think that for me, trading is a pretty lonely thing. You sit here in front of your computer and you are doing it yourself in a vacuum. Sure, I believe I could probably make as much money as I want. It’s almost like Name-That-Tune. It’s Name-How-Much-Money-You-Make.

But, I’ve a few million dollars. More than I need to live for the rest of my life, and I really do believe that giving something back. And having a community really enhances my life. I don’t have a good time if I’m alone doing this, and I do have a good time if I’m doing it with a community of people.

I also like to entertain the ten thousand or so clients we have at the moment, including about twelve hundred people who pay us for our services right now. I have a book coming out called, “Rule The Freaking Markets”. Saint Martin’s press is publishing it. It’s going to be released the end of January.

Please describe your trading style.
We’re primarily swing traders. Short-term traders. We’re looking for market movement. There are several levels to what we do. One is day trades. We’re looking for stocks that are going to move one to five points intraday. We play the gaps up and down in the morning, often three to five days a week.

But the bulk of our efforts are put into trends, a trend being any number of variables that historically have worked in the market. Right now we’re concentrating on stocks that may move in the new year. The January effect. We have earnings runs four times a year. Every quarter - and often at the end of the month - we trade in anticipation of window dressing. These are things that have worked time and again in the market, that consistently yield us results. So until they stop working we keep playing them. Obviously, being a trend fund we’ve gotten our reputation playing trends.

Did you work in the business before?
No, I lost money in the business before. (Laughs)

A lot of what we do is help people live their dreams. We get emails from people all the time saying, “I’m taking off a few months because I’m building a house that I’ve always dreamed of.”

We had one guy who was working at Mc Donald’s, literally. This is a true story. He started with fifteen hundred dollars and in six weeks he turned it into a hundred and fifty thousand. Needless to say, he doesn’t work at McDonald’s anymore.

The bull market was good! You make it sound pretty easy to pump out money by trading.
I wouldn’t say it’s easy. But I do feel that if you’re dedicated to doing it and open to trying new things and willing to take losses, which is probably the key, you can make money. I think where investors and traders who aren’t successful get caught is by not being able to take losses. They will make a trade, but not have a plan. We always say, “Plan to trade and trade your plan.”

We’ll call something or they’ll make a trade on their own, and it’ll be wrong. But out of pride, or just not wanting or being willing to take a loss and just move on, they end up becoming “investors”. The DOW and NASDAQ have basically been in ranges for a long time. So anybody who’s just investing, basically you’re sitting there. You’re not going anywhere. You haven’t been able to make money as an investor. The only people who are making money are good traders. And I think that, unless you’re willing to follow the rules of the game and take losses and follow trends, you’re not going to make money. So it’s not easy. But I think it’s a lot easier than people think it is.

I think it’s very possible to put yourself in to a position where you can make money on the majority of your trades or your investments.

What role do you think psychology plays in all of this?
I think the market is ninety-nine percent based on psychology. People ask me all the time, “What books have you read to help you with trading?” I’ve never read a book on the stock market in my life. In fact Tiny, my technical analyst, gave me “The History of the Stock Market” for the holidays and frankly, I’ll never read it. (Laughs)

I’ll probably give it back to him for the next holidays because it doesn’t interest me that much. What does interest me is why people do things. I always tell people, “You should read some Freud. You should learn why people do things. Mass psychology. Herd mentality.” It’s why ‘buy the rumor, sell the news’ is the first documented trend.

Everybody knows people ‘buy the rumor, sell the news’. Why does that work? Because a stock moves up on expectations and, once it happens, the expectation is gone. It’s now the reality. Anybody who wanted to play that reality was already in by the time it happened, because everybody had the expectation. So there are no more buyers left. All you have are sellers. Therefore, unless the news is even better than expected, there’s nothing for the stock to do but go down.

That’s what the market runs on, that kind of mentality. It’s why analysts upgrade stocks and then the stock goes up, in many cases, and why it opens up, up. Often it doesn’t go any further because now the analyst’s upgrade is priced into it.

You see it recently with all these stocks that moved because of the terrorist attacks. All these security stocks. Any stock having to do with bomb security or corporate security or whatnot. Those stocks move as soon as the news comes out, because it’s a herd mentality and people are afraid to miss the boat. It’s why traders rule the market, because usually the market has a few breakouts every year and if you can catch those moves, the move is usually not fifty points on the DOW. It’s a thousand points on the DOW.

Since September 11th and the lows in early October, the DOW has moved over two thousand points. The NASDAQ has moved seven hundred points. Those kinds of moves, if you can catch them, can make you a lot of money. You can catch them on the way down, too. We rode the NASDAQ from forty-nine hundred to below two thousand.

It’s herd mentality. That’s all psychology. People are afraid to miss the boat so they’ll pile in, pile in. Then the last ones holding the bag really get crushed because those are the people who will ultimately buy the DOW and the NASDAQ at the top. When it comes crashing down again, whether it’s just on a pullback for another leg up or it’s for a bigger crash, those people get hurt a lot.

What about for you personally over the years? What sort of psychological or emotional issues have you struggled with in your trading?
I think my Achilles heel has got to be taking profits. One of the things we teach is to be able to take losses. You make a bad call, you make a bad play, you get out. You don’t let it hurt you. Conversely, we teach to take profits and the area I certainly continue to work on is that one. To be successful, you need to know when to take profits. As human beings, by nature we want to capture a whole move. We don’t want to take losses. But when we have winners, we also don’t want to sell too soon. I think that is a constant battle, trying to figure out the right time to sell.

So you have a tendency to sell too soon or to hold too long?
No. We don’t sell too soon. I would say that one of the things I have really worked on and gotten much better at has been getting the move, moving my stops up and capturing those gains. And psychologically working on not caring whether or not you catch the whole move.

I’m a successful trader. But I think you always have a tendency as a human being to think, “I should have done better.” I only made 50% this year. Now, granted, 98% of all funds are down on the year, so if you’re up 50% you’re doing pretty darn good. But I pride myself on being my hardest critic. I’m up 50% on the year, but I think I should be up 100%.

Yet trading is not about perfection. The stock market is a very imperfect world, and it’s not about capturing every move, the whole move. What it’s really about is being consistent, being deliberate and disciplined, and following rules and structure. If you can do those things, I believe anybody can be successful.

Were you easily able to learn discipline and taking your losses quickly? Or did you have to work at this?
You always have to work at them. I learn something new every day, and I hope I continue to do that. It’s like life. It becomes boring and stale if you’re not learning and growing with it.

I think a lot of people don’t get it because they’re not open to something different. We constantly get horror stories from people. They had trusted in a broker or trusted in an institution, which to me is financial suicide. These people have an agenda, often contrary to yours. The broker makes money no matter whether the stock goes up or down. Sure, he wants to keeps his clients happy so he’s got to give them some winners. But it’s easy this year and last year, in particular for most brokers to say, “It was a bad year. We didn’t do that badly.”

Well, you lost money. So you did badly. That’s how I look at it. If you lost money the last two years, you did poorly. I’m in the market to make money. I’m not in the market to lose money. So if I lose my clients’ money then I’m doing poorly.

And I think that mindset, more than anything, harkens back to the psychology of life and of trading. Winners look at everything as an opportunity and mistakes are an opportunity. If I make a mistake, it gives me a chance to reflect back and try to correct it so I don’t do it again. People who go back and do their same mistakes over again, expecting different results, that’s just insane. It doesn’t make any sense. If you’re losing money as an investor, why do you think it’s going to be different next year?

What do you think gives you your edge over other investors and traders?
I tell people all the time, “Don’t love stocks”. Love your family, love your puppy, love your friends. Love your job if you like doing what you do. But don’t love stocks. I don’t care whether a stock goes up or down as long as, whichever way it goes, I’m making money on it.

That’s what gives me an advantage. Bill Gates doesn’t care about me. Why should I care about Microsoft? I am here to use and abuse the stock market. It’s my concubine. (Laughs)

I make it mine. And therefore I make it work for me. Whereas a lot of people, they fall in love. You read it on the message boards all the time. “Oh yeah. I love Microsoft. Microsoft is great.” What do you mean Microsoft is great? What did they do that is so great? Why should you care what IBM does? Do you think IBM cares about you? They’re not living beings.

So I think that’s what gives me an edge. Emotionally, I’m neutral.

Did you have to learn to take that stance?
I had to get pissed off. I had to lose money through a broker and traditional means, to get to the point where I’m saying, “My broker loved all those stocks and they’re all penny stocks now, basically. I don’t love them anymore.”

Sure it’s easy to love that stock when it’s going up. That’s the greatest stock of all time. But we’ve learned in the last couple of years that the market doesn’t always go up. And it won’t always go up. Will it make new highs? Sure, maybe. I don’t know. it doesn’t really matter to me. I don’t need to think that long term.

So, yes. I did start in a place where most investors start, where my broker told me, “This stock is great. They hit their numbers eighteen quarters in a row.” But they missed their nineteenth quarter, and my stock got slashed to a third of where it was. So I got to point where I don’t care anymore.

Please tell us about your learning process? What did you learn, to become successful?
When I first went out on my own it was right after the crash in ’98 and I lost almost my entire nest egg. I was very depressed about it because my business wasn’t going that well. I was struggling financially, and suddenly the money that I counted on, to lean back on, was gone. So I started to research the market with what little I had left and found that certain stocks do certain things at different times of the year. Hence, trends.

The first trend I learned about was what we call the IPO spin off play. That is when a stock is spinning off of one of its components into an IPO. Since we haven’t had IPOs that often in the last year, it hasn’t come into play for us that much. But in ’99, there were a lot of them. And in 2000, there were some of them. The first one I did was Data Broadcast spinning off CBS MarketWatch. I looked at the market cap of Data Broadcast and figured out what the market cap of CBS MarketWatch should be when it came public, given the state of the market and where it was being offered. I found a huge discrepancy between the two pricings. It made logical sense to me that Data Broadcasting would get a move up into the IPO. In doing research, I decided that right after the spin off, the stock would fall pretty dramatically. Hence, ‘buy the rumor, sell the news’ again.

So that was the first trend, and on Data Broadcasting alone I think I made about double my money in three to four days. Then I shorted the stock and made another 30-40% in the matter of a day or two or three after the IPO came out. Those were the kind of things I did initially

Then I found there were also stocks that would run up into earnings. Microsoft would move up pretty dramatically into earnings because the expectation at the time was that Microsoft would beat their earnings, and nobody wanted to miss the boat. So the general public would buy Microsoft ten days or two weeks before earnings came out, and the stock would get a nice run up. That was another trend. Since then we have found about fifty trends and we play them until they don’t work.

A lot of it sounds like observation.
It’s observation, it’s doing research. It’s trial and error. The idea again is that if something doesn’t work, why are you doing it? Maybe you just need to reverse it. If one of the trends stops working, then is there a way I can take advantage of it not working anymore? Maybe that means I have to go short the stock. I think there are so many trends to play in the market. They happen every day. There’s always action. There are always things we can make money on.

Please describe a particularly a successful trade and also one that was not successful.
We had what was called the Grinch list, last year. I was on national television going over them. It was ten stocks I felt were so far overvalued that I felt they were going to fall. We gave them to members and that list netted about 80% [in profits] on average. We called Juniper short at two-sixty and said it would hit thirty. I was wrong, because it hit ten. I called Broadcom short at one-eighty and said it would hit twenty. It did. I called Redback Network short at like one-ten, and it hit ten.
I guess as far as bad trades that emotionally affected me, the worst day I had was in early 2001. It was January, the day Greenspan eased interest rates by fifty basis points intraday, at lunchtime. I nearly chucked my food because we were short the market. I lost a lot of money in a matter of five minutes. I was short some of the stocks on the Grinch list and could not get out.
Juniper, I think, ran twenty-five or thirty points in five minutes. I just sat there trying to finish my lunch and let it go. Frankly, I did pretty good at just watching, because the register was ringing the wrong way. (Laughs) I did lose a lot of money that day. Certainly wasn’t happy about it.

When that happens, do you step back and take a break from trading?
We preach that you should not trade when you’re not emotionally sound. I guess we’re all a little bit crazy, particularly these days, but what I mean by that is something out of the ordinary, God forbid: a death in the family, your wife left you, your husband cheated on you, your dog died. Something that really impacts you. Take off, and get your head back on straight.

One of the things I’ve learned about human nature is that most of us have at least the capacity to be destructive. When I’m in a bad mood and not feeling up to snuff, I get destructive. I don’t care. My attitude goes to: “So what, I’ll lose more money.” On some level, there’s almost a desire for destruction. Freud talked about it. Most of us possess it, either consciously or unconsciously.

So, yes! We do preach that you take some time off. The greatest thing about trading is you don’t have to do it everyday. You get to make your own hours. We have guys who just do it for an hour a day. You don’t have to beat yourself up. You can take off. I can take off anytime I want. I just go to cash. I don’t have to worry. The market goes up or down. I’m always going to have a job. I always have job security because unless there’s no more stock market, then I’ll have a job.

Some traders have a hard time backing away from the markets. They don’t want to take off. It’s their passion. It’s what they love.
That’s true. Or they’re addicted to it. That happens and usually those are people who are not that successful. I find that the more emotion you can take out of it, the more successful you can be at it.

Do you prepare yourself in anyway, mentally, at the beginning of the day?
I have a routine where I dress up in black underwear and a black tee shirt, black socks often, and consider myself a Ninja trader. (Laughs) To me I have to look at it like war. It’s me versus the market and I’m going to win. There’s only one winner and the stocks are going out in body bags. The money is going into my account.

That’s the first indication of the intensity of desire you have as a trader.
Oh yeah. But listen, it all harkens back to remaining market neutral. Not loving stocks. Not being emotionally attached to what you’re doing other than, “I am going to win.” You hear from sports personalities, celebrities. Why are they successful? Sometimes it’s because they’re naturally blessed. But there are a lot of guys who have the same athleticism as Michael Jordan. There’s only one Michael Jordan. And why is that? Because the guy refused to lose.

There are guys who can throw the ball seventy yards in the air on a line in a perfect spiral. And then there are guys like Joe Montana who couldn’t throw seventy yards down field. The criticism you heard about Joe Montana is he didn’t have a great arm. But Joe Montana was a winner, and who do you want on the field? The guy who can throw seventy yards, or Joe Montana, who knows how to come away with a win?

So I think there’s a way to be a winner in the markets, and in life in general.

So is that innate? Or can it be taught?
I think it can be taught. If somebody’s open and willing, it can be taught. Yes. There are reasons why people buy self-help books and whatnot. They have a desire to get better. They just don’t know how. But I think if you are willing to put the work and the effort into it and change your mindset a little bit, then you definitely can learn how.

We have people who have been life-long losers in the stock market. They’ll come and freak out (in a good way) because all of a sudden they made a trade and they won. Now they’re determined to do it again. Give people a little bit of success and teach them a little bit, and amazing things can happen!

How do you feel about the wealth that you’re creating?
I feel great about it. I grew up pretty poor. We often got IOU’s for the holidays. My family was on welfare, on occasion, and we struggled a lot without money. I was determined when I grew up to not share that with my kids.

I also grew up with a chip on my shoulder, in a sense, against corporate America. Nobody reached out to help me and my family, and maybe that’s the way it should be, and that’s fine. But there’s no reason why the Goldman Sachs of the world should be the ones making all the money. The little guy should have the chance to create his own wealth, too. So how do I feel about creating all this wealth? I feel darn good about it.

When I grew up, I was constantly fighting. But I used that in a positive way in the stock market and in my life. I meet people who say, “Oh woe is me. I’ll never make money in the stock market. I’ll always be a loser.” Well, yeah you will. Because you’re defeating yourself before you even give yourself a chance. I can’t live my life that way. I’m going to make money in the market. I’m going to be a success. Why? Because I’m going to choose to do that. Nobody can stop me.

As a trader, you’ve had some down periods. Have you questioned whether you wanted to continue?
Oh, sure. It’s just a matter of not letting yourself be defeated. I pride myself on not being defeated. And what’s the worst thing that happens? You fail. Okay. Well, so what? I’ve failed before. You pick yourself up and say maybe this isn’t for me anymore. So now I’ve got to find something else.

I’ve tried a lot of things in my life. I’ve probably had a hundred different jobs. Literally. And some of them I was successful at and some of them I wasn’t. Some of them I liked. Some of them I didn’t. But when I left each job, it was always because I decided I’m going to move on because I can’t do this anymore, rather than me quitting and saying “I’m a loser because of this.”