Winning On Wall Street Summary: Martin Zweig

Winning On Wall Street Summary

Winning On Wall Street Summary provides a free book summary, key takeaways, review, best quotes and author biography of Martin Zweig’s famous investment book.

Martin Zweig is among the most successful stock pickers on Wall Street. He admits it without any shame. This book Winning On Wall Street is a detailed saga first about the man himself and then about his investment strategies. Martin delivers one of the best investment guides ever. You may not be an active stock trader, but you will still benefit from his advice. We recommend this classic to all those who have investments and savings. But, most importantly, for stock traders. 

“Big money is made in the stock market by being on the right side of the major moves. The idea is to get in harmony with the market. It’s suicidal to fight trends. They have a higher probability of continuing than not.“

This Summary Will Help You Learn

  • Why market extremes are warning signals;
  • Why hoping that losing stocks may bounce back is a futile try; and
  • How patience and discipline are keys to playing the share market.

Take-Aways

  • Follow some easy rules to beat the market
  • Fiscal environment, especially government policy, influences the stock market
  • The Fed monitors the supply of money via reserve needs and discount rate
  • You cannot fight the Fed, so do not try
  • Increasing rates of interest do not help stocks and vice versa
  • Move with the market, don’t buck the trend
  • Don’t resist the tape
  • Reduce losses
  • Be careful of overly bullish or bearish market opinion

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Winning On Wall Street Summary

The Risk of a Bear Market

The market grew consistently between the 1980s and 1990s. Hence, a buy-and-hold approach was suitable. However, in the long-term, share prices toe with the overall economic growth. Nowadays, the risk of a decline in stock prices during bearish conditions is high. Hence, investors ought to drop the buy-and-hold strategy. Rather, they should only sell some part to defend against the risk. Investors should sell when loss is highly probable. One tends to profit the most when the market is in a bad state. 

How I Made Money From the 1987 Market Crash

In September 1987, Zweig advised investors to invest 1% of their portfolio in November puts, 8% out of the money. Now, if the market had fallen below 8%, if it had fallen before November, the puts would be valueless. However, the risk was extremely high. The market got hammered on October 19. The puts soared in value. They earned a weighted average profit of 2075%. The puts added 20.8% to the portfolio’s value.

The signs of a risky market are easy to decipher. They are: overvalued P/E ratios, the consistent increasing pattern of the stock price, doubling prices in the Dow.

“Monetary conditions exert an enormous influence on stock prices. Indeed, the monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction.“

The Basics

Wall Street traders cannot foretell earnings steadily. Also, in the long run mutual funds cannot surpass the market. Even the well-designed trading systems are no better than sheer luck. Brokerage house reports do not always choose the stocks that beat the market. 

Monetary Factors

Fiscal factors decide the course of the market. Fed’s reserve policy and interest rate movements are two such factors. Zweig has built many easy and reliable indicators to gauge the trends. To succeed, one should not buy at the bottom and sell at the top. It is a very risky proposition to buy when the market is down. Instead, one should move with the market and follow trends. So, buy when the trends suggest that the market will grow. If the scene turns otherwise, cut your losses. Don’t wait for losers expecting a turnaround. Reduce your losses and make maximum profit. This is the only key to success. By being right 60% of the time investors can earn huge money. They can earn solid gains by being right half of the time. Investors can surpass the market if they bet correctly 40% of the time. Think about probability, cut risk and tread aggressively only when conditions allow. 

Knowing how the different stock indices are made is important. It is equally crucial to know their meaning and how inflation swings prices.

Dow Jones and S&P 500

The Dow Jones Industrial Average has 30 big stocks. The average was earlier computed by just averaging the stock prices. However, now the stocks are divided, and the index has changed in composition. Therefore, the average is now computed through a divider. The the average is calculated by adding the stock prices and dividing by a divisor.

In contrast, capitalization is basis for weighing the stocks that Standard & Poor’s 500 uses. The more the capitalization, the more the stock weighs in the index.

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Don’t Fight the Fed

The Zweig Unweighted Price Index (ZUPI) gives equal importance to all companies. Hence, a change in stock of General Electric is weighed same as a change in a smaller firm’s stock. It is a price average like the Dow. But, unlike the Dow, it has a wider selection of stocks. In fact, it is biased toward the smaller fishes in the pond. The ZUPI is a lot different than both S&P and Dow, given its calculation method. Fed’s reserve policy and interest rates are two key facts of stock market. Falling interest rates help investors because they reduce returns on bank deposits and bonds. This results in the investors buying more stocks. By contrast, increasing rates make bank deposits and bonds more attractive. This prompts investors to sell stocks and shift their money toward such investments. 

Investors can deploy three indicators to track fiscal policy:

  • Prime rate indicator
  • Fed indicator, and 
  • Installment debt indicator

a) Prime Rate Indicator

Prime rate is the rate of interest banks charge their best clients. This rate does not change frequently. On average, the frequency of change is once a month. However, when the rate does shift, it makes headlines. Hence, it is easy to track. If the prime rate is less than 8%, has been going up, and is cut, buy at the first cut. But, if the prime rate is over 8%, increasing, and is cut, buying signal is at the second cut. Or when it has reduced by full 1%. If the prime rate is downward, but is 8% or more, sell at the first hike. But, if the rate is less than 8%, falling, then sell at the second hike. Or when there is a full 1% increase in the prime rate. 

b) Fed Indicator

The Federal Reserve governs supply of money via three tools. These are the reserve needs, the rate of discount, and the fed funds rate. Increasing discount rate or reserve requirements is not good for share prices. When there is a hike in either one, give the increase -1 in the indicator. If this marks stays for six months and there is no noticeable change, it becomes stale. If the Fed hikes either of them, mark the other one negative. In contrast, if the Fed decides to ease, give the first easing +2. This is because the initial easing helps the prices more than the initial tightening hurts them. All subsequent easing gets +1.

A Fed indicator of +2 is very bullish. +1 or 0 is neutral. -1 or -2 is somewhat bearish. -3 or lower is very bearish.

c) Installment Debt Indicator

Interest rates rise when the demand for loan goes up. The Federal Reserve publishes monthly data on consumer debt. This is done by the mid of every month. But, there is a gap of nearly six weeks. Hence, the data published in November is that of September. The data is both seasonally adjusted and non-seasonally adjusted. Newspapers broadcast these releases.

Use the non-seasonally adjusted figure. Take the total consumer debt every month. Then divide it by the total for the corresponding period one year ago. After this, subtract 1.00. The result would be the year-to-year percentage change. Buy when a falling indicator goes below 9%. Sell, when an increasing indicator goes to or over 9%.

“Basically, what I do is place a stop, generally 10 to 20 percent below the current price, whenever I buy a stock. The exact level depends on my own analysis of a stock’s trading pattern. If a stock violates this stop, I’m out.“

Monetary Model

This model joins the above indicators. Prime rate: 2 model points for buy signals and 0 for sell signals. Fed Indicator: 4 points for extremely bullish, 2 for neutral, 1 for somewhat bearish and 0 for very bearish. Installment Debt Indicator: 2 model points for buy signals, 0 for sell signals. Now, for using the Monetary Model, add all the points. When the model goes up to 6 points, it is a buy signal. A sell signal is when the model falls to 2.

Momentum Indicators

Volume and price are used for momentum indicators. In fact, price is the more crucial one. 

The Advance/Decline Indicator uses the Advance/Decline ratio. This is the ratio of stocks with increasing price to stocks with falling price- over a period of ten days. It is uncommon for advances to fall by 2-1 over that period. When it does happen, it shows strong market impetus. 

The Up Volume Indicator uses the ratio of the total amount of increasing stocks on any day to the total amount of falling stocks. The newspapers report these figures. Ratios of 9-1 up are powerful signals and have historically preceded every bull market. On the other hand, ratios of 9-1 are not as strong indicators.

Four Percent Model Indicator

Investors should buy when the weekly Value Line Composite Index increases 4%. It is a sell signal when the index falls 4% or more in any given week. Important point here is that it is 4% and not four points on an index. Hence, if one week the index is at 20, the next week it should rise to 208 for a buy signal. This indicator is not tough to compute. It is because newspapers widely report the weekly close of this index. Using this indicator compels people to follow the market trend. It cannot go up too much without investors buying. Similarly, it cannot go down too much without them selling. 

Super Model

This model mixes momentum and monetary indicators. Monetary model gives a sell indicator on hitting 6 points or more. It gives a buy signal until it gets to 2 points or less. Give 2 points to a buy indicator on the Four Percent Model and 0 to a sell signal. Now, add them to Monetary Model’s points. The Super Model’s score can vary from 0 to 10. It is a buy signal when the score is 6 points or above. This signal stays even if the model declines below 6 points. However, it becomes a sell indicator at 3 points. 

Incidental Principles of Investing

Follow the market trends. But, go your own way when the market becomes too bearish or bullish. Investors’ Intelligence of Larchmont, NY monitors advisors’ opinions. It categorizes them as neutral, bullish or bearish. Don’t focus on the neutrals. Divide the amount of bulls with total bulls and bears. If the resulting ratio is below 40%, it’s a good sign for stock prices. When the ratio crosses 75%, it is a red flag. Usually, when advisor opinion is fully one-sided, market moves in contrast. 

The calendar influences market movements. Before holidays, prices tend to go up. Prices also increase more on Fridays. Hence, do not sell until the prices have moved up.

Seek shares that have robust growth in sales and earnings. Plus, its price-to-earning ratio should be suitable to the rate of growth. Insiders should be buying or not selling at least. The stock should be performing strongly. In summary, sell weakness and buy strength. 

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Winning On Wall Street Review

This book is highly motivating and an eye-opener. It is quite distinct to most of the investing guides out there. The section on Fed monetary policy is replete with useful information. The book perfectly compliments learnings from The Intelligent Investor.

The arguments made in the book are really strong. Winning on Wall Street had some distinctive views on investing and the market. While majority of the books talk about stock selection, Zweig explained why and how markets become bears and bulls. He dedicated a huge part of his book to explain that. Zweig supports his findings with a considerable amount of testing and data. He pulls no punches while comparing multiple ideas and results on varied indices, completely looking through all possibilities throughout his book. He displays transparency and integrity and demonstrates his findings with easy-to-understand charts and graphs. 

An avid investment-book reader is likely to be numb to the stories other investing authors make up to prove their point. Essentially, they are all the same. But, in Zweig’s case, he is excellent at not just narrating his best trades, but even his average ones. He spoke about a trade which got stopped, and shot up instantly after he sold. Such instances add credibility more than the regular success stories. All of his stories were great and effective, but they will not blow the readers out of the water. That being said, his stories were well placed in adding to the learning experience. 

This book is meant for advanced investors and not really for beginners. Having said that, it does not take away the strength of this manuscript. However, this book should be read by all those who intend to invest large sum in the stock market. 

In all, this book is a definite page turner. It will catch readers’ attention by aligning their value investing principles right from the beginning.  

Winning On Wall Street Quotes

“Big money is made in the stock market by being on the right side of the major moves. The idea is to get in harmony with the market. It’s suicidal to fight trends. They have a higher probability of continuing than not.“

“Monetary conditions exert an enormous influence on stock prices. Indeed, the monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction.“

“The trend is your friend.“

“Basically, what I do is place a stop, generally 10 to 20 percent below the current price, whenever I buy a stock. The exact level depends on my own analysis of a stock’s trading pattern. If a stock violates this stop, I’m out.“

“Generally, a rising trend in rates is bearish for stocks; a falling trend is bullish.“

“The problem with most people who play the market is that they are not flexible.“

“Success means making profits and avoiding losses.“

“One of the frustrating things for people who miss the first rally in a bull market is that they wait for the big correction, and it never comes. The market just keeps climbing and climbing.“

About the Author

Martin Zweig chairs The Zweig Fund and The Zweig Total Return Fund. He is also the publisher of the Zweig Forecast.

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