Learning How to Spot Turning Points This week on How I Got My Start in Finance, Milton Berg, who has worked alongside financial titans like Stanley Druckenmiller, George Soros, and Michael Steinhardt, joins Grant Williams to talk about his start in finance, and how that contributed to his investment Philosophy. Well, my background was never in finance. I got degrees in Talmudic Law in the 1970s, but I didn't feel I'd make a living out of it, make a profession out of it. So I started studying markets on my own. I was exposed to markets as a child. My uncles used to trade in the 60s and somewhere in 70s. Yeah. Then I decided to stay in the markets. I received the CFA, when the earliest ones number 6881. Now there are hundreds and hundreds of thousands. All right. One of the earliest CFAs. So I studied pure Graham and Dodd's fundamental analysis. I thought that's what you have to know to do well in the business. So I studied accounting and finish statement analysis and Graham and Dodd. But as soon as I got my first job, I realized two things. First, I realized that I'm competing with all these other fundamentalists. Sure. I have no edge. There are thousands of analysts who follow Graham and Dodd. Yeah. So that's one thing I realized. Secondly, I realized that on average, the typical analysts just has average performance, and a lot of the analysis does really contribute to the earning money in the market. So I was exposed initially to Ned Davis , was then working at J.C. Bradford. It was my first technical analysis I was actually exposed to, and I was fascinated. Because there's more to the market to what I perceived Graham and Dodd was teaching me. From then on what I did was really is, I spent more than 30 years analyzing markets until I learned to focus on market tops and market bottoms. My background was, I started Talmudic Law, I started an analyst for low grade credits for mutual fund organization. Then I started managing money for mutual fund organization. I worked at Oppenheimer Money Management. I was managing three mutual funds in the 1980s. Actually in 87, I managed the three top funds in the country. Yeah. At that time already, we had the discipline of trying to call tops and bottoms. We got the 80 percent cash before the crash in October. We got raised the cash in September. Then I worked as partner in Steinhardt. I took off for few years, moved to Israel with my family. I then went to work for George Soros and Stanley Druckenmiller, worked with Stanley at Duquesne. We did research. Over the last six years, I've been doing the same research I've done all the years for other firm, doing it for myself and marketing new research, selling new research to clients. Currently, my clients really are the titans of the hedge fund industry. The type of work I do is very atypical. People look at it and they don't understand it. They don't necessarily accept it. But the clients who've been the people I'm dealing for 50 years understand that it's much value-added. Well, let's get into that because it is different. It is something that people won't be familiar with. So just talk about how you built this framework and how you began to assemble the pieces of the jigsaw? Okay. Well, one thing I realized in studying Graham and Dodd, eventually, Graham was actually a technical analyst. Is he already [inaudible]. Well, people know Graham. At the end of this year, he said we give up all research and was to look at the numbers. People know Graham. A warm bath will tell you. Last five years of Benjamin Graham's career, he would no longer do rigorous analysis of balance sheets. He just look at numbers. Be it ratios, price-to-book value, what the price of the stock is relatives less five-year high, which is really technical analysis. He mentioned himself later in life, there were knows he became a technician. But prior to that, even reading Graham and Dodd's security works from the 1920s and 1960s, he suggest that the only reason he is value analysts is of course he experienced choosing that it works. He actually spoke in Congress. He has testified in Congress in the 1960s with a question of market manipulation. They asked him, "Why is it a stock that's trading for $20 and you believe is worth $60? Why does it have a trade at $60? Why does it remain at $20 forever?" In other words, the question is, if the stock be trade, be undervalued today, why can't it be undervalued forever? Sure. Why? Why must the stock ever reach intrinsic value? Really, Benjamin Graham's whole theory was the theory of intrinsic value. He said, "You know, I have no answer to this question. It's a mystery. All I know from experience is that if you buy a cheap stock, eventually, it will trade at fair value." That's his answer. It's a mystery. Yeah. Once we're dealing with mysteries, I figure there must be many more mystery in intrinsic value. So far many thing we look at that create market movements other than value, and I think intrinsic value is the technical indicator that in Graham's thought, the more stock is trading below it's intrinsic value, the more likely if you'll make money because it's going to trade back to it's intrinsic value. Sure. But there's no inherent reason for stocks to trade intrinsic value. Of course the very valid question, if a stock could be overvalued today, why can't it be overvalued forever? Yeah. If stock could be undervalued today, why can't it be undervalued forever? Yeah. Exactly right. So taking that into account, how do you then start to build your own framework using that and applying it to tops and bottoms? So what I tried to do is say, is a market actually a random movement, which we were taught in the schools. Actually CFA program goes with random movements, modern portfolio theory, or is a market not necessarily random. There's some edge you can have. Of course, Benjamin Graham did not play with markets random, because it wouldn't be an undervalued stock if the market would be random. It would be efficient. Everything will be traded to intrinsic value. But the reality is, I found that the market generally is random. On a day-to-day basis, you have the talking heads on TV, and you have the analyst giving research reports every day, trying to analyze the reasons for today's move, the reasons for tomorrow's move. Maybe the reason for the next week's move will most likely explain the reason for last week's move. But I found that on a daily basis and a weekly basis, movements for the market are random. However, there are particular times when the market movement is very far from random. When the market generates data, that tells you the market is close to a top or has topped or the market is close to bottom and has bottomed. So what we call that is turning point analysis at turning points. The day that [inaudible] is no longer random. In fact, if you take a bell curve, for example, let me track some simple as five-day volume. You look at the average five-day volume. The center of the curve, you look at the extremes. You'll find that the extremes of five-day volume are associated with trading points. Now intuitively, it makes a lot of sense. Because you know that a market lower was selling the stock to high-volume. But people haven't looked at that as a technical indicator. We say, "You know, we're not going to be one of those who panic and create a five-day volume. We're going to wait for five-day volume." The greatest in one year, greatest in three years, greatest in six months. We tracked these things. That tells you that impending turn in the market is just one indicator, an increase in five-day volume as an example. From his degree in Talmudic Law, to being one of the first 1,000 people to earn a CFA, Berg's experience helped him to build an investment framework based on seeing what others did not. His unique perspective on market psychology, the stock market's history, and his rejection of traditional economic assumptions, all helped him build a successful investment philosophy. For Real Vision, I'm Justine Underhill.