Only The Humble Survive: Jim Whitner — Part II
In TradingMarkets.com’s continuing series of interviews with traders, Eddie Kwong continues his conversation with portfolio manager Jim Whitner. “Only the Humble Survive” comes from Jim’s statement that only the humble survive in the markets, a play off Andy Grove’s “Only the Paranoid Survive.”
Eddie Kwong: Given what you saw in winners like ^MSTR^ and ^ITWO^, what do you like now and what do you think you’re going to like in the near future?
Jim Whitner: We like ^ANAD^. They’re in a really strong industry group. They have broadband data applications for the wireless markets. That’s a hot growth industry that’s benefiting from a strong trend in the economy. Their quarterly numbers were pretty good.
Another one that we like is ^CMTN^ which has DSL technology. Their quarterly numbers are huge and their management owns 48% of this company. They’re breaking out of a very solid base that’s been going for 20 weeks. They’ve got estimates of good futures earnings and are well covered by the institutions. They’re in a very dynamic part of the telecommunications industry–DSL technology has tremendous growth potential. So that’s a classic set of attributes for a winner.
Another one is ^DITC^. They’ve also got DSL technology which fits into the telecom group. They also sell “echo cancellation” products, which fits the wireless market. These guys are also geared for the fiber-optic networks. So here’s a company that caters to some very dynamic markets.
Kwong: Where did you come in on DITC?
Whitner: We came into DITC in the past two days (note: this interview took place on Feb. 24, 2000) so yeah, we’re catching the late part of this breakout which started in early February from that base around 60. But if you draw a line across from the last high back in November, the stock really broke to a new high when it hit above 90. Based on past models that we’ve studied, we felt that this stock should really take off.
Another company we like is ^ENTU^. The have software security applications for e-commerce. We know how important that’s going to be. If you look at their quarterly numbers, you’ll once again find that they’re really strong.
Kwong: What’s an example of a stock you’ve had for a while and done?
Whitner: ^RIMM^. They’ve got wireless broadband applications. You look at those quarterly numbers–they’re huge. We bought the stock when it broke out around 80 and its a good winner for us right now. Their growth was such that they burned right out of our market cap criteria, but, heck, we’re not going sell these guys anytime soon!
Kwong: What industry trends do you see on the horizon that you imagine you might be participating in down the road? Earlier we touched on the subject of “biotech” which is something you want to learn more about. Do you see yourself getting into that?
Whitner: Well, if you just look at what’s happened in the biotech stocks in the past two months and consider how they’ve shown tremendous strength in the recent correction, it just reminds me of the big trend in Internet stocks way back when ^YHOO^ and ^AOL^ came on the scene back in 1996 and 1997. Remember those nasty corrections we had back then? They weren’t beat up much at all! They held their own. You could say they were trading at huge valuations relative to their earnings numbers back then. The biotechs seem to have started to come into their own. They’re starting to gain a lot of recognition on the Street. Technology is rapidly making dynamic changes in the research-and-development process.
Kwong: Realizing that many of the biotechs from an O’Neil point of view are overextended, do you see any there that you’re starting to take a liking to?
Whitner: What I’m waiting for is for some of these guys to get a nice correction so they can build another base. I haven’t seen many of them that have come back. I think the next safe time to step up to the plate will be after they’ve formed another base. I think ^IDPH^ is a great company. It broke out around at 80 and it’s just holding their own right here. Their fundamentals are sounder than some of the biotechs that just have almost no revenues. However, they’re not showing the dramatic big jumps in the quarterly numbers that I like to see. It’s really just a matter of educating myself on this industry. It’s going to take probably a couple of months to really get up to speed. So I’m struggling to catch up with biotechs right now.
Kwong: Now let’s talk about how you go about dumping your losers. . .if there are any.
Whitner: (Laughs) Yeah, there are losers. The thing is, risk management is the most important part of our investment strategy. We’re set a stop 8%-10% below where we bought our first position. We will walk into the position. Let’s say we want to own 8,000 to 10,000 shares of a stock. We might buy 3,000 shares, wait for it jump up two points to buy another 3,000 shares and then another two points to buy another 3,000 shares. So we’ll average in. This way, we’re committing the smallest amount of capital to the position each time we buy some shares in the stock. The idea is that when we initially jump in where committing a small amount of our capital so that when we take a loss, it’s a smaller loss. There are exceptions to the rule, of course. When we feel like the market is starting to turn and we’re getting into a bull market, we’ll just all-of-a-sudden go full margin. We’ll just max out. But even when we do that, we’ll treat each individual position on its own merit. We’re not afraid to sell them (Eddie: I heard Jim snap his fingers quite loudly over the phone) just like that.
The most important thing you can do in managing money is to manage the risk of each position. It’s more important than all your research. If you go back and study some of those guys like Paul Tudor Jones, Dreyfus, Bill O’Neil. . .you’ll find that they were all obsessed with managing the risk of their positions. It all goes back to that very simple concept: If you cut your losses short and let your winners ride, you’re going to make a lot of money in the market.
Kwong: What are your criteria for selling?
Whitner: First it’s the stop. In addition, we’ll use the 10-, 30-, and 50-day moving averages (MA) as additional exit indicators. We’ll look at the stock crossing the 30-day MA. If its starting to hit the 30-day MA and its not very extended, we’ll usually get out. Another significant selling signal is when the 10-day MA starts turn below the 30-day MA. A lot of times when you look at stocks when they climax and they’re just starting to fall apart, you’ll see the stock break below the 30-day MA and then you it maybe bounce back up and then you’ll see the 10-day MA start to break below the 30-day MA. Usually, I find that by the time the 10-day MA drops below the 30-day MA, the stock has lost its institutional support.
Kwong: Where does the 50-day MA come in?
Whitner: If the stock hits the 50-day MA, that’s usually the big warning signal.
Kwong: Can you give a scenario has to how these moving averages work together in order to help you exit a losing trade?
Whitner: The idea is that these stocks we get into are trading above their 30-day MA and they should continue to trend up above the 30-day MA. Say you have a large amount of appreciation in a certain position. Say you’re up 100%. You bought the stock at 80 and it goes to 160. Then you come into this correction and the stock pulls back to 140 and its hitting the 30-day MA. We probably wouldn’t sell it if its holding up better relative to other stocks in the market and its sector. Your big winners will tend to form another base in a correction and trade sideways. They’ll be the first to break out at the next rally. When you start to see stocks fall below the 50-day MA across the board, that’s a pretty negative kind of signal and it’s also a very negative indicator for the health of the market. When the market falls apart like that, you’ll want to go to cash.
Kwong: Do you have any particular indicators you like for market timing?
| “As soon as you think you’re smarter than the market…you’re going to get your head handed to you.” |
Whitner: Well, one of the things I do is to focus on the interest-rate outlook. I’ll try to have a feel for what the Fed is doing and how the market is reacting to their decisions. I’ll just look at the daily charts and look at moving averages for the major indices. I like to look at the indices as a group. We like to look at the Dow, the OEX, S&P 500, the Nasdaq Composite, and the Nasdaq 100 as see how they’re behaving as a group. You obviously would recognize that right now we’re in a two-tier market when the Dow started to fall apart in January. I also look at what the leading industry groups are. If all the leaders start to fall apart, I know it’s time to take my money off the table. At this point, I have seen that happen. The telecoms, biotechs, enterprise software, chipmakers–they’re all showing a lot of strength. The fundamentals in their industries are still very strong and I think there are certain areas in which I think we’re in the early part of a long-term growth process.
Kwong: Did you see anything in the past two months that caused you to lighten up on your positions?
Whitner: We’re in all Nasdaq right now. The Nasdaq has been so strong. Yesterday, when I saw the Nasdaq break out right after the Greenspan finished the Humphrey Hawkins testimony, that was a pretty bullish signal.
Kwong: Let’s talk about your trading psychology. You keep a detailed record of winners you’ve studied which gives you the confidence to enter into new positions when you see stocks that fit that model. You’ve also mentioned that you’re isolated from the rest of the world. You don’t read other people’s opinions and you live way out in the boonies. Tell us a little about your whole thought-process when it comes to trading.
Whitner: Let’s make an important distinction. I read profusely. I read all day long, seven days a week. A lot of the reading I’m doing is on different industries and companies. What I avoid is other people’s opinions. It’s not that I don’t respect their opinions, but they just cloud my judgment. There are a lot of smart people out there and they all have systems that work for them. And I love to sit down and talk to people about the market. But I’ll be the first to say that I don’t know what the market’s going to do tomorrow or over the next two quarters or over the next five to 10 years. I’ve got some pretty good ideas based on the current economic situation and certain fundamental trends in the economy of where I think the growth is. And I’ve got a pretty good idea of where I might want to put my money to work. But it’s very important to keep and open mind, be flexible, and not try to predict anything.
I think it’s important to be humble. To borrow a quote from Andy Grove who said, “only the paranoid survive,” only the humble survive in the stock market. As soon as you think you’re smarter than the market and smarter than everybody else, you’re going to get your head handed to you. As soon as I buy into a position, I totally go on the defense. I’m more concerned about losing money in a position than I am winning it. Like Paul Tudor Jones, I’m obsessed with defense.
Kwong: You’re obsession with risk extends to where you live doesn’t it?
Whitner: Well, actually the reason I moved out here has nothing to do with the stock market. We live in probably some of the most beautiful country in the world. It’s Middleburg, Virginia, which is in the foothills of the Blue Ridge Mountains. It’s actually a very historic area because a lot of Civil War battles were fought here. Probably more Americans died in the surrounding area than in any other place in the world. It’s also big horse country. I love to ride and train.
Kwong: Do you find that isolation helps you?
Whitner: If you were to ask me where I’d move next, I wouldn’t move back to New York. If I did live in New York, I would operate in isolation from the market establishment. The reason is that I want to let my research tell me what to do and not listen to the gossip on the Street. You look at Warren Buffett living out there in Omaha, Nebraska, okay? He achieved all that success living out there. I think that’s a perfect example of how guys are able to get away from the Street and they’re able to do their good quality research and succeed. That’s not to say the Street is a bad place. It’s just that for my particular type of personality, the isolation works for me. I’d say I’ve almost become kind of a hermit over the last five years. A lot of my friends who live in other parts of the country complain because they never hear from me. It’s really because I get so absorbed in my work.
Kwong: I take it that you must put in a lot of hours.
Whitner: One of the great aspects about this current market is that there are always another couple of good ideas coming down the pipe. The only catch is, you’ve got to do your research. If you’re going to invest in these markets, you’ve got to be willing to put in the time and effort to do the research. I probably do 60 or 70 hours a week of mostly research. It’s something I enjoy doing.
Kwong: Thanks, Jim. Best of luck to you.
Whitner: Same to you, Eddie