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Stock Picks With O'Neil Disciple Dr. Chris Kacher

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A conversation about William O'Neil's strategies, current stock picks, and what QE3 would mean for the markets.

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Josh Lipton sat down with Dr. Chris Kacher, co-founder of online investment advisory service SelfishInvesting.com and co-author of Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market.

Dr. Kacher talks about his experience working with renowned investor William O'Neil, the possibility of QE3, and why he has his eye on ARM Holdings (ARMH) and iPath DJ-UBS Softs TR Sub-Idx ETN (JJS).

Click below to watch the video, or read the transcript below.




Josh Lipton
Hello, Minyans. I'm Josh Lipton. Today we're going to be talking to Dr. Chris Kacher. He is co-founder of SelfishInvesting.com, the online investment advisory service, and co-author of Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market. Chris, thank you for joining us.

Chris Kacher
Good to be here.

Josh Lipton
I thought maybe to begin, Chris, not all the viewers might be familiar with William O'Neil, so maybe we can talk about, just to begin, a little bit about who Bill O'Neil was, his investment process, his strategy, and maybe what it was like to work with him.

Chris Kacher
Well, in '89 he wrote this book How to Make Money in Stocks, and I had read quite a few books by then in my teenage years, and this is the first book that turned around my thinking and put me on track. By 1991, I was making money. I was actually outperforming the major averages. Prior to that, I just had lots of failures. And that was of course the price of learning. I call it tuition, investment tuition.

And then, I took a position at the O'Neil firm in 1996 after I finished my PhD in nuclear physics, and I did a 180-degree switch, just simply because my passion was purely aimed at the stock market and not science. And that was the best decision I ever made because here's a guy with a top track record in equities, in stocks, that dates back to 1962. He's the first guy to computerize stock charts. He's the first guy to do what he calls model book studies, going back well over 20 market cycles to see what stocks have in common that lead the market forward. And I was on board and actually spearheaded a couple of those studies myself because as I started in 1996, I eventually was made fundamental research analyst alongside Bill O'Neil, who was always an avid researcher. He saw that I shared that same passion. So I would speak with him on a regular basis about whatever I would find in the markets.

And so, being at the firm was really a great learning curve for myself. Because every investor I think goes through cycles where they might have a couple good years under their belt and they start to think they've figured it out. And 1995 was my first triple-digit year, being up over 100%, and that was my fifth good year in the market. So I started to think, "Okay, I think I'm at that point." And in 1996, when I started at the firm, I realized I really knew nothing. '96 was my second triple-digit year, but it was close. It was close simply because when your ego starts to get in the way of your trading, that will always derail you. It will affect your performance.

Josh Lipton
Did you find, Chris, after learning from O'Neil, did you find that you tweaked his strategy in any way, changed his process in any way?

Chris Kacher
Yes. Well, through the years, '96 onward, I found some characteristics that were outside of his CAN SLIM strategy. That is the product that he markets to retail investors. It's an excellent product. It allows the average investor to outperform the markets. He talks about it in detail in his book. And in 1998, I noticed there were Internet companies that had no earnings, like Amazon (AMZN), like eBay (EBAY). And his model says don't buy companies with no earnings, but these were companies that were well outperforming the major averages, and I went to him and I said, "Look, these are great companies. You just can't throw them out."

And so, I devised a different way of looking at them. I looked at sales acceleration. So in other words, Amazon and eBay both had incredible sales acceleration, and also you could see institutional sponsorship was growing, which is a very important metric to both Bill's strategy and mine. And so I think it didn't take him very long to be convinced of that. That's the great thing about O'Neil is that despite his decades of experience in the market, he doesn't let something like that harden him. He maintains his flexibility of thought. So if he sees enough evidence, he will change. He will make the adjustment to his strategy.

And that's one of a few examples. And of course, when I left the firm and I went to Europe to start my own company, then I was in a completely different environment, and in a lot of ways that was very good because I could really spread my wings, and that's where some of these concepts like the pocket pivot and the gap-up buying strategies were born.

Josh Lipton
And now, Chris, yourself being an author and investor, you're managing director of Moka Investors, I'd be interested from your perch, are there two or three common mistakes that you see investors make over and over again, a couple that really stand out to you?

Chris Kacher
Well, the classic ones are never average down. It's psychologically easy to want to lower your average cost in a stock that you're losing money in, but that could be a death sentence because some of these stocks, they're down there for a reason. If a stock is not measuring up and not keeping up with the averages, there could be a shoe that's about to drop. And I've seen this many times with stocks that I sell out of my portfolio that, say, violate certain price-volume action. I'm out of the stock, and then maybe two or three weeks later, news hits -- they're going to miss earnings, or something out of left field -- and the stock gaps down. It might lose half its value overnight.

And in my trading -- I'm on my 21st year, actually -- I've had two experiences with gap-downs. These were stocks that gave no warning ahead of time. But out of 21 years of trading, the system works very well because I can tell you, there's been dozens of stocks I have owned that did gap down that I was not in, simply because these stocks will tell you, "You need to sell. You need to sell me. Get out. Don't ask questions." And it saves you a lot of grief because, of course, no one likes to wake up the next day and see their position lost half their value overnight.

Josh Lipton
Right. Let me end, Chris, with some leading stocks you like right now. Let's touch on two. One is JJS. Why is that ETN, in your opinion, a buy right now?

Chris Kacher
Well, it's a basket of commodities, and with all the quantitative easing going on, all this money printing, commodities are on a new bull leg. This means precious metals, cotton, soybeans, coffee, across the board. If you look at the CRB Index, that's been in a nice uptrend for a number of months. And JJS can take full measure of this nice uptrend we're seeing. And this quantitative easing effect is probably not going to slow down any time soon. Bernanke continues to indicate that after June, when QE2 ends, QE3 is waiting in the wings.

Josh Lipton
So you think it's possible -- QE2, as you said, is supposed to end in midyear after the Fed buys these $600 billion of Treasuries, but you think there could be a transition to QE3?

Chris Kacher
Yes. They've already indicated.

Josh Lipton
Even with all that dissent with some of those policymakers?

Chris Kacher
There is growing dissent. Obviously, we're going to keep close track of that. If QE2 ends without QE3 starting, we could have another May on our hands because QE1 ended in April, and that I believe is what triggered the flash crash in early May, and QE2 really didn't get going until September. And my market direction model had a buy signal September 1. It's not coincidental, and it's been a very nice uptrend since then with QE2 supporting the market.

Josh Lipton
Let's talk about our one final pick here, ARMH.

Chris Kacher
They make the chips that go into handhelds, all these little portable devices that we see. And they control 95% of the market, which is massive. And the reason they have such a natural monopoly, if you will, is because they have excellent R&D, which allows them to undercut the pricing of their competition. So I think this is a company that has huge potential. They've already had a big price move, but as we've learned from model book studies, the leading stocks don't just double. They will go up 400, 500, 600 percent before they finally peak.

Josh Lipton
What's the biggest risk that you see on that one?

Chris Kacher
Oh, the biggest risk is market risk, generally. If the market were to take a tumble, it doesn't matter how good the fundamentals are on a company, it's going to fall with the rest of the market. I mean, 80% of the companies move with the general market direction. Inherent risk within ARMH itself, obviously there could be companies that are improving upon its R&D, and somehow could undercut what it's doing. But ARMH has a good first-mover advantage and therefore controls the majority of the market, and when it comes to tech, first-mover advantage is extremely important. And my feeling is that should the market continue higher, it's going to hold its pole position.

Josh Lipton
Great. Listen, Chris, thank you for stopping by, sir. We appreciate it.

Chris Kacher
Thank you. It's been a pleasure.
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