Review

Summer
2001

It was never my thinking that made me money, it was my

sitting. Always my sitting.
Reminiscences

In this issue

Letter from the President

Jim Forte, CMT

FEATURED ARTICLES
Letter from the President, 1
The Rules of 3: Risk Control
and Money Management
The Wyckoff Way, 3
Men and Women Trade
Differently, 6

EDUCATION
CMT I Now Available Through
FI 352 at GGU, 9

RAVE REVIEWS
Irrational Exuberance, 10

Bull, Bear or Nowhere?

And you can still prosper...
With a little help from your friends.
While greed and fear reigned in 1999 and 2000, the emotion that appears
most evident as I talk with traders this year is frustration. Most traders are calling the markets choppy and sloppy. Im hearing: just when I think Im catching a move, the darn thing reverses on me.
Clearly the Dow has been stuck in a sideways pattern for over two years.
The NASDAQ and S&P are measurably lower so far this year, but have traveled
there quite erratically, making it unprofitable for the majority of bulls while
especially challenging and frustrating for many bears.
The bulls are placing their faith in the historical precedence of the impact of
a series of interest rate cuts. Also in tax rebates, lower energy prices and a belief
in the force of underlying favorable demographics. The bears are pointing to the
longer-term implications of the bursting of the Nasdaq bubble, with its still skyhigh valuations. They are also pointing to the historically high valuations in the
broader market, the worldwide economic slow down, and the lack of economic
and corporate viability.
While the market always challenges us with what the future holds, the
quandary this time around appears broader and deeper. So this year, the annual
seminar-planning group has put together a program that will try to address the
bigger picture question of Bull, Bear or Nowhere?
Harry S. Dent, Jr., best selling author of the The Great Boom Ahead and the
Roaring 2000s, will make his very bullish long term case using demographics
and technical analysis.
Peter G. Eliades, author and publisher of the well-known and respected
Stock Market Cycles newsletter will make the Bear case. In May of this year,
Eliades received the Charles H. Dow Award for Excellence in Technical Analysis
for his article Sign of the Bear.
Sherman and Tom McClellan are originators of the McClellan Oscillator and
Summation Index, and publishers of the McClellan Market Report. In 2000, they
were awarded Timer Digests Bond Timer of the Year. Using their well respected proprietary indicators and finely tuned approach to the financial markets, you
may be led to conclude that this market is going nowhere.
However, if the machinations of the market over the past few years is getting the best of you emotionally and/or financially, then you will want to hear
master trading psychologist, coach and neuro-linguistic programmer Adrienne
Toghraie. She may be able to help you become master of your own trading
domain.
Our own Harvey Baraban, a 40-year veteran of the stock market, will be the
moderator. His wit, perspective and charm will add flavor to the affair and help
make the afternoon and evening more enjoyable for all.

TSAA Review, Summer 2001

Page 2

Included in your ticket price will be a deli luncheon buffet available on your
arrival, and in the evening hors doeuvres will be served. There will also be a nohost cocktail hour to help you celebrate your best fish stories or to help you drown
your sorrows and woulda-coulda-shouldas.
In addition to our seminar, the TSAA, as a nonprofit technical analysts and
traders organization, seeks to offer aide, support and guidance to individual
traders and financial professionals. We do this through:
Teaching classes at Golden Gate University.
Presenting knowledgeable and accomplished speakers at monthly meetings.
Publishing a quarterly newsletter filled with insightful articles and information
useful to technicians and traders.
Offering a substantial library of books on technical analysis available to our
members at GGU.
Providing a web site which serves as a bulletin board for organizational activities
and as a resource for items of interest to technical analysts and traders.
As a nonprofit organization of investment professionals and individual traders,
our members share their special knowledge and talents with other members and in
so doing, enhance and refine their analytical talents and move ever closer to their
own market mastery.
The TSAA seeks input and involvement from individual traders, and from professionals accomplished in technical analysis. Whether you wish to further your
financial career or move closer to your own mastery of the markets, I believe you
will be enriched through your involvement with the TSAA.
For more information about the TSAA and what we offer, visit our web site at
www.tsaasf.org. If you have questions, suggestions or information that you believe
might be of value to our members, please email our staff@tsaasf.org.
If you would like to explore opportunities within the TSAA, feel free to email
me at president@tsaasf.org.

TSAA Review, Summer 2001

Page 3

FEATURED ARTICLES

The Rules of 3:
3
Risk Control and Money Management
The Wyckoff Way
By Henry O. (Hank) Pruden, Ph.D., Golden Gate University

TSAA Review
The TSAA Review is a quarterly periodical published by
and for members of the
Technical Securities Analysts
Association of San Francisco.
Its purpose is to facilitate
communication of informative
and useful information to
members. Articles of interest
to members are welcome and
are subject to acceptance
after editorial review. All articles are the viewpoint and the
sole responsibility of the
author. Publication of an article does not necessarily reflect
the opinions of the TSAA.
All copy for publication
should be submitted to Editor,
TSAA Review, via email at the
addresses below.
Henry O. Pruden, Co-Editor
Golden Gate University
hpruden@ggu.edu

Mayor Browns Fiasco

Money management is one of the three key disciplines for successful investing
and trading. Money management ranks alongside methodology of technical analysis
and mental discipline as one of the three key dimensions needed to make a complete and successful investor or trader. Without money management and risk control an investors performance is susceptible to catastrophic loss. Take for example
the portfolio performance of Mayor Willie Brown of San Francisco, California (San
Francisco Chronicle, April 4, 2001). Mayor Brown was heavily invested in high-flying technology issues that according to the popular momentum investment strategies prevailing in 2000 were the place where he should have had his money.
However, when the market for technology issues collapsed in 2000-2001, Mayor
Brown, fully exposed to both the risk in the fortunes of the individual companies
that he held and also to the risk of the overall NASDAQ market, suffered severely
when the downturn arrived. Mayor Brown, like millions of other investors simply
did not have an insurance policy or seat belts for his protection when the market crash came.
Nevertheless, with the most rudimentary of protective devices the results for
Mayor Brown could have been dramatically different. As reported in the San
Francisco Chronicle, Mayor Browns portfolio suffered an 80% collapse from
$1,000,000 to $200,000. On the other hand, if Mayor Brown had in place a 20%
stop-loss seat belt, trailing behind each of his holdings then the damage should
have been limited to something on the order of $300,000 (allowing for slippage after
the protective sell stops were triggered). Thus, Mayor Brown could be three-andone-half times richer at the date of the report of the article in April 2001 than he
actually was holding his portfolio of former glamour stocks in the technology
sphere. Furthermore, by converting his stock sale proceeds to money market instruments his further downside risk exposure would have been reduced to almost nil as
compared to his remaining in equities. Moreover, once freed from the vice of a losing equity positions, Mayor Brown would most likely have been in a much better
mental state to take advantage of the next buying juncture. With proper money
management in place, Mayor Brown would be financially able and mentally poised
to invest in the leading stocks of the next bull market.

Wyckoff Money Management

The remainder if this article is devoted to bringing together and spelling out
the elements of the Wyckoff Method of risk control and money management. Within
the Wyckoff elements of risk control and money management can be found the rudiments of bet sizing or the amount of capital to invest in any given stock and of
portfolio protection via a stop-loss order policy, as illustrated above is the case of
Mayor Brown.
The Wyckoff Method champions active money management. Yet at all times the
use of passive risk control via the stop-loss order is a key component of the
Wyckoff way. However, rather than waiting for stop-loss orders to be elected by the
market, the follower of the Wyckoff Method is counseled to monitor the market and
monitor her/his stock positions to detect signals that call for an exit strategy. Then
when such a signal is detected, the investor/trader should take responsibility for his

TSAA Review, Summer 2001

Page 4

portfolio and initiate the order to exit the market. These active money management
approaches were spelled out under the headings of Exit Strategy 1 and Exit
Strategy 2 which will appear in the ATAA Journal (July-August 2001).
The 3-1 Rule and the 1/3, 1/3, 1/3 Rule inform the Wyckoff oriented trader or
investor about how to approach entering a position. Applying these rules requires
active participation by the trader or investor.

The Rules of 3
Two critical ratios revolve around the use of the number 3: these are the 3-1
Reward to Risk Rule and the 1/3, 1/3, 1/3 Commitment of Capital Rule. One Rule
of 3 is the 3-1 Rule designed for controlling risk. The ratio measures a reward-torisk threshold that must be met before any capital can be invested in a stock. The
reward numerator part of the ratio is calculated by measuring the extent of the
potential built up in a base of accumulation. According to the Wyckoff Method this
measurement of potential is best done with a point-and-figure chart. The risk
denominator in the 3-1 Reward to Risk Rule ratio is measured by the distance
between the entry price and the proposed stop-out exit price. Hence, a base count of
30 points could justify a stop order10 points away from entry. Over repeated trials a
ratio of less than 3-1 was observed by Wyckoff and his associates as being too risky.
The other Rule of 3 is the 1/3, 1/3, 1/3 Rule for money management. This is a
rule for allocating capital in tranches. When a desirable 3-1 Reward to Risk ratio
has been identified, the trader should commit 1/3 of her/his available capital in a
first purchase. Consequently, should this initial position be stopped out, the expected loss would be minimized. The stop-loss would limit the loss and the capital risk
exposure would truncate the loss because no more than 1/3 of capital would have
been exposed.
If and when the first 1/3 of capital committed showed a profit and another
Wyckoff buying juncture appeared, then a second 1/3 of capital could be invested.
Concurrently the initial stop order would be raised to the level of the stop on the
second position so that the total risk exposure on two-thirds capital would not be
much more than the risk exposure that existed on the original one-third investment.
After the first two positions had shown a profit, the third and final position
could be added and the stop on the first two positions raised to a high enough level
that even if the total position were stopped out a profit would still result.
Afterward, as the trend evolved stops would be adjusted upward (downward)
behind the entire 3/3 position.
Active monitoring of the position would be required by the trader. A rhythm of
detached overview-monitoring to allow the trend to run its course should alternate
with more intense detailed-monitoring as the trader periodically zoomed in to look
more closely at the market for an appraisal of the quality of the trend.
Finally, the Wyckoff Method calls for active money management by the
trader/investor as signals to take profits or abort a losing position occur (Exit
Strategies 1 and 2). A passive stop-loss strategy always exists as a backup (Exit
Strategy 3). But as a priority under the Wyckoff Method, the investor or trader is
responsible for actively executing orders to take profits or cut losses.

Willie Brown Revisited

Rudimentary, yet sound, the Wyckoff Method of risk control and money management are things valuable and reliable that could have been employed by Mayor
Brown to his great advantage: (1) first the 1/3, 1/3, 1/3 Rule would have prevented
Mayor Brown from becoming so deeply committed in the first place. He would have
started by investing 1/3 of a million dollars rather than the entire 1 million and
then he would have added to that position when and only when that initial position
had shown him a profit; (2) secondly, the 3-1 Reward to Risk Rule would have
forced Mayor Brown to enter stop-loss orders to protect his position. Even if only a
simple-to-calculate 20% below the entry or last price stop-order rule were invoked,
Mayor Brown would have escaped the calamity of a market collapse by taking a

TSAA Review, Summer 2001

Page 5

30% loss as opposed to the 80% loss that his portfolio had suffered by April 2001.
These stop-out risk control steps, which would have protected Mayor Brown, utilizes only the passive, fall-back money management methods available through
with the Wyckoff Way.

Epilogue: The San Francisco Company Case Study

1. Vertical Chart, Daily.

San Francisco Company.

2. Point & Figure.

San Francisco Company

A good illustration of the 3-to-1 Reward to Risk Ratio Rule in operation was
presented in the Spring-Summer 2001 issue of the MTA Journal. One of the classic
nine buying tests of the Wyckoff Method is Estimated upside profit potential is at
least three times the loss if protective stop is hit. Thus risk control via the 3-1
Rule is built into the basic Wyckoff decision checklist. However, the money management angle of the 1/3, 1/3, 1/3 Rule for investing capital, subsequently developed by Mr. Robert G. Evans of Wyckoff Associates did not become part of the 9
Wyckoff Tests. Since this Rule of 3 was not made part of the classic Wyckoff
Tests, it was not used by the Wyckoff-oriented trader operating in the SF Company
case at the time of the case study. Nonetheless, we can return to the SF Company
case to illustrate how the 1/3, 1/3, 1/3 Rule for money management could have
been employed for the SF Company. Charts 1 and 2 if the San Francisco Company
are reprinted and attached to this article for your convenience, in showing the
Rules of 3 in operation.
According to the case study, point 16 was a legitimate backup which followed
a sign-of-strength jump to point 15. Hence 16 was a juncture at which an initial
1/3 of the capital earmarked for the SF Company could
have been invested (1/3, 1/3, 1/3 Rule). Also the figure
chart count at 10 was large enough to exceed the stop-loss
risk by more than the required minimum of 3-1, thus an
example of the 3-1 Rule.
Following the successful further advance to point 17,
another 1/3 of capital could have been committed at point
18, with the protective stop order on both this purchase
and the initial purchase raised to slightly under point 16.
The final one-third of capital could have been invested
upon the completion of either of two subsequent re-accumulation formations. As noted in the case, Point 20 was a
less convincing juncture than point 31. Nevertheless, had
the final 1/3 of capital been invested on the basis of the
spring action the trader observed at Point 20, a floating
or open air stop could have been placed around $26.00 on
all three positions. Such a stop placement would have
adhered to the 3-1 Reward to Risk Rule. However, setting a stop at $26 would
have gone against the risk-control rule of Wyckoff which calls for setting stops
below prior support levels.
Alternatively, the final one-third of capital could have been invested after the
passage of all nine of the new re-accumulation tests at Point 31 with the stops for
all 3/3 of the position set around $30 or $31. All of the
preceding active money management steps would have
required judgment and emotional discipline by the trader.
But the availability of the 3-1 Rule of Wyckoff and the
1/3, 1/3, 1/3 Rule of Wyckoff for risk control and money
management would have helped the trader to retain his
mental equilibrium while using his judgment to take
maximum advantage of the buying junctures, revealed to
him through the application of the Wyckoff Method. In
sum, the San Francisco Company case study illustrates
how the Wyckoff Rules of 3 operating together give the
trader an elementary yet sound start on the road to effective money management
and risk control.

TSAA Review, Summer 2001

Page 6

Men and Women Trade Differently

By Louise Bedford, The Australian Technical Analysts Association Journal,
May/June 2001 (reprinted courtesy of ATAA)

TSAA Officers
President
James J. Forte, CMT
Charles Schwab & Co., Inc.
Vice Presidents
Brent L. Leonard, CMT
Adjunct Professor
Golden Gate University
Marc Lichtenfeld
ON24
Sean Phelan
Headwaters Capital
Treasurer
Daniel K. Beatty
John W. Brooker & Company,
CPAs
Secretary
Audrey P. Lewak
Merrill Lynch
Membership
Henry O. Pruden
Golden Gate University
Newsletter
Michiel Hurley
SoundView Technology
Group
Brent L. Leonard
Golden Gate University
Henry O. Pruden
Golden Gate University
IFTA Representative
Gerald P. Butrimovitz
Gerald Butrimovitz and
Associates
Board Chairman
Robert L. Bergey
Investor

Up until the 1080s it was believed that males and females brains operated in
much the same way. Technological advances produced scanning techniques that
revealed significant physiological differences between the male and female brain.
Differences that are present from the time we are born. It is important to be aware
how this can enhance or detract from your performance as a trader.

A Brief History Lesson

In ancient times men and women lived in harmony. They knew their roles and
respected each other for their unique differences. According to Alan and Barbara
Pease, authors of Why Men Dont Listen and Women Cant Read Mapsmales were
the lunch chasers, and females were the nest defenders.
Lunch-chasers developed superior goal focus, excellent navigational skills, and
amazing physical strength. By excelling in these areas, male Neanderthals could
reinforce their superiority over other males. This enhanced their chances of breeding success. They rarely showed outward signs of fear or uncertainty. Language
skills were not heavily valued. (Thug just needed to kill the wildebeest, not sing it a
lullaby.)
The nest-defenders chief role was to look after her brood and form relationships. This ensured that the community would pull together in an emergency situation. Womens thicker corpus callosum (the nerve cord connecting the left brain
with the right brain) meant that she could juggle several tasks simultaneously. She
could watch the kids, have a meaningful conversation, trim her neighbours hair
and plan how to create the wheel, all at the same time. The presence of oestrogen
enhanced womens language skills. Nest-defenders gathered fruit and nuts. They
were not expected to hunt or fight.
Many of these ancient skills have translated into the propensity for good trading habits. For example, men have the ability to focus when trading, and women
always manage to fit trading around their busy schedules. However, the vast majority of these hard-wired behaviours propel us towards ineffective trading habits.

Over-Trading
Using account data for over 35,000 households, Barer and Odean analysed the
common stock investments of men and women from February 1991 through
January 1997. Men traded 45% more but earned 1.4% per annum less in comparison to females. These differences are more pronounced between single men and single women. Single men traded 67% more than single women and earned 2.3% per
annum less.
Over-trading leads to underperformance. The 20% of investors who traded most
actively earned an average net annual return 5.5% lower than that of the least
active investors. In a study of 78,000 households, women turned over their portfolios about 53% annually and men turned their portfolios over 77% annually.

The Need to Be Right

Men like to be right. They often consider themselves a failure when they are
wrong. They consider it to be a sign that they have not been able to do their job
properly. In extreme situations you will even hear a trader declare, the market is
wrong.
The market is never wrong. Your misinterpretation of the market dynamics is
the only logical explanation for why you have lost money.

Chemistry
When a mans brain is in a resting state, 70% of its activity is shut down.
Continual brain stimulation is an uncomfortable state for a man. This implies that
men can mentally index their problems and put them on hold. To obtain peak effec-

TSAA Review, Summer 2001

Page 7

tiveness, guys need time to be master of the TV remote and become one with the
couch. Men; take a break from trading from time to time to give your brain a
chance to shut down. Youll trade much more effectively using this method, instead
of subjecting yourself to the constant stimulation of the sharemarket.
In a relaxed state, a womans brain still functions at 90% of its usual activity
level. This shows that women are more likely to be processing information continually. Females have difficulty putting their problems on hold and often need to talk
through a situation in order to find a solution. Female traders may have a greater
requirement to discuss their wins and losses with a friend.

Confidence in Decisions
About TSAA
As a nonprofit, independent
association, the Technical
Securities Analysts Association
of San Francisco is committed
to the principles of fellowship,
education, and development
of its members. TSAA believes
that individual growth and
excellence can best be created
in an environment of encouragement and support. As a
dynamic organization, the
Association embraces all concepts of technical market
analysis, encourages its members to pursue their own
unique approach to the market, and provides for the
exchange of ideas and
methodologies. TSAA provides
leadership opportunities and
educational pathways for the
beginning and advanced member alike to achieve effective
market mastery.

The research suggests that when feedback is unequivocal and immediately

available, women are just as confident in their own abilities as men. Odean says,
when feedback is absent or ambiguous, women seem to have lower opinions of
their abilities and often underestimate (their share market performance) relative to
men. Feedback in the stock market is ambiguous. For this reason, women may be
more inclined to await the perfect set-up before investing. This could account for
their more moderate trading levels in comparison to males, yet their higher levels
of success.

Is Trading a Male Domain

Around 90% of women in the general population have limited spatial functioning. Navigation, maths and 3-dimensional visualization are not skills that come
naturally. Trading, especially from a fundamental perspective, is built largely on
mathematics. Perhaps for this reason, as well as the huge impact of social conditioning, some women may feel that the sharemarket is a largely male domain.
Technical analysis relies on pattern recognition skills and the ability to think
laterally. An understanding of your own psychology is required, in addition to the
psychology of the group behaviour that forms the tides of bullish or bearish emotion. If you are a woman, use your strengths to interpret these patterns. Make a
decision to silence any nagging voice in your head that says that only men can excel
in this field. It is simply not true.

Reaction to Stress
Under pressure, women eat chocolate and go shopping. Upset women will talk
about their problems. This has the effect of allowing the physiological signs of
stress to dissipatepossibly partially explaining why, statistically, women outlive
men.
When dealing with a distressed woman, it is important to listen in order to validate her feelings. Offering solutions at this stage is not necessary or productive. If
you are the spouse of a female, please remember this.
When feeling stressed, men drink alcohol and invade other countries. They
react aggressively and are more likely to lash out. Negative emotions can be sublimated to reappear at a later datepossibly disguised as a heart attack. If you are
the spouse of a male trader, remember that men do not like unsolicited advice.
They need to feel that their spouse has confidence in their ability to sort out their
own problems.

Testosterone
There is a correlation between heightened testosterone levels and signs of
aggression. Professor James Dabbs of Georgia State University found that superior
achievers in any endeavour had higher testosterone levels than lower achievers.
The thrill of achievement actually causes more testosterone to be produced.
Based on these findings, high achieving males in the trading field, presumably,
have heightened testosterone levels. However, to maintain terrific results high
achievers probably need to find a way to alleviate their hostility. Its very difficult to
punch the living heck out of the sharemarket, so youll need to find another method
of dissipating your aggression levels. Physical exercise is a great alternative.
Taking revenge on your computer screen is not.

TSAA Review, Summer 2001

Page 8

Top 3 Gender-Specific Trading Solutions

Problem

Solution

Men
Over-trading

If you trade more often, this does not necessarily mean

that you are trading more effectively. Quality, not quantity,
is essential. Define your entry and exit rules explicitly and
refuse to trade unless these rules are met.

Over-Confidence

Over-confidence is correlated with underperformance in the

sharemarket. Experienced traders have a healthy fear of
the markets. You are pitching yourself at a superior opponent. The market has infinite resources, more strength and
more power than you. Remind yourself of this. Measure
your results meticulously to add reality to your trading.

Aggression

Dont seek revenge if you have made a loss. Fight your battles with an opponent that you can make eye contact with.
Physical activity may assist. Following a written trading
plan will help you avoid taking unnecessary risks when
you feel like you could strut into a boxing ring like Rocky.

TSAA Membership
Membership in the TSAA is
open to individuals who are
interested in technical analysis as part of their investment
strategy. Annual dues provide
members with member-rate
admission to seminars, meetings, and luncheons as well as
a subscription to the TSAA
Review.
For membership information contact us at one of the
addresses below. Please
include your postal delivery
address, and our membership
information packet will be
mailed to you.
Technical Securities Analysts
Association
5 Third Street, Suite 724
San Francisco, CA 94103-3200
415-957-1202
Fax 415-543-2112
staff@tsaasf.org

Women
Lack of Confidence

Start small and then increase your position size as your

confidence grows. Research the topic to gain knowledge
about all aspects of an investment/trading plan: entry, exit
and position sizing.

The Need to Talk

about Results

Find an appropriate person with whom to discuss your

trading. Choose carefully.

Concerns that
investing/trading is
a male domain

Look at the statistical track record of other female traders

and realize that you have the essence of a good trader
within you.

Louise Bedford is a full-time private trader and author of The Secret of Writing Options and
The Secret of Candlestick Charting. This is an extract from her book Trading Secrets, due for
release in the second half of 2001. For information on her seminars and workshops, visit
www.tradingsecrets.com.au.

TSAA Review, Summer 2001

Page 9

EDUCATION
CMT I Now Available Through FI 352 at GGU
Frustrated by the stock market? Intrigued? Want to understand whats really
happening? Whether your goal is amateur investing or a professional career as a
broker, Golden Gate Universitys pioneering program in technical market analysis
(TMA) will give you important insights and tools. This fall, GGU offers two courses
taught by experts in the field.
The first course, FI 352 Technical Analysis of Securities, will be taught by Hank
Pruden, executive director of the Institute for Technical Market Analysis and director of GGUs TMA graduate certificate program. Students who take this course at
GGU will be eligible to take in class the first level of the three exams required to be
certified as a Chartered market Technician (CMT). The CMT is a professional designation, comparable to the CPA or the CFA. For the prospective student, the CMT
I Exam option is a very attractive feature, says Pruden. Students can kill two
birds with one stone, so to speak: for the same tuition to GGU, they can earn both
credit for the course and the option of completing their CMT I Exam requirements.
GGU is the only school in the Bay Area to offer this opportunity.
In the second course, FI 498 Online Investing, students will learn how to do
research and trading on the internet with one of the most well-known members of
GGUs outstanding adjunct faculty. Harvey Baraban, the Malcolm S.M. Watts III
Adjunct Professor, has been employed in every aspect of the securities business during his long career in the field. In the 1970s, Baraban formed Baraban Securities,
the largest independent broker dealer in California, which he sold a decade later.
Over the years, he has trained more than 30,000 people to be licensed as stockbrokers. Baraban appears regularly on local television and is widely quoted on the
financial pages of the San Jose Mercury News and the San Francisco Chronicle.
The bulk of the online investing course deals with pattern recognition and
fundamental technical tools, says Baraban. Students will learn where to find technical market analysis on the Internet and how to use it so they can develop an
investment or trading plan for themselves. Its a very topical course, because we
talk about what is currently affecting the market. Students will learn the various
aspects of the financial-services markets. The course will help them decide if they
want to be involved in working in the stock markets. The course will be taught in
the computer lab.
For further information on GGUs courses and graduate certificate in Technical
Market Analysis, contact Hank Pruden at 415-442-6583 or hpruden@ggu.edu.
FI 352TECHNICAL ANALYSIS OF SECURITIES
SF1-San Francisco 3 9/4-12/11 T(4:00-6:40) Pruden Materials fee: $20
Examines empirical evidence concerning non-efficient markets in which technical
analysis is thought to apply. Topics include trend analysis, turning-point analysis,
charting techniques, volume and open interest indicators, contrary opinion theories,
and technical theories such as Dow theory and Elliott waves. Prerequisites: FI 203
(or FI 100) or FI 300A.
FI 498AONLINE INVESTING: USING THE INTERNET FOR STOCK MARKET RESEARCH AND
INVESTING
SF1 San Francisco 3 9/5-12/12 W(4:00-6:40) Baraban Lab Required; Room 460 only
An intensive study of the rich variety of sources on the Internet that provide information to help the investor make appropriate stock selections, and the techniques
of day trading on the Internet. Prerequisite: FI 352.
For more information, visit www.ggu.org, or contact Hank Pruden at
hpruden@ggu.edu, 415-442-6583, or Tracy Weed at 415-442-6585.

TSAA Review, Summer 2001

Page 10

RAVE REVIEWS

Irrational Exuberance
By Robert Shiller; Professor, Yale University
March 2000, Princeton University PressISBN 0-691-05062-7
Synopsis by Brent L. Leonard, CMT

TSAA eGroup
You are invited to join this
TSAA-beta group, an email
group that is free and easy to
use. By joining this group,
youll be able to send messages easily to fellow group
members using just one email
address. eGroup also makes it
easy to store photos and files,
coordinate events and more.
To join, go to www.
egroups.com/invite/TSAA-beta
and click the Join button.
Well see you there!

One of the most current topics of Technical Analysis, both nationally and at
Golden Gate University, is the field of Behavioral Finance (Economics); and one of
the leading thinkers in that fieldalong with locals like Terence Odean, Richard
Thaler, Hersch Shefrin, et.al., is Robert Shiller, the author of the this book who
named it after Alan Greenspans 1996 utterance about the American stock market.
What is so prescient about the book is that it was actually written well before
the beginning of the recent Bear market, but anticipated it perfectly. He had a
paperback version of it come out last April in bookstores. What is also exceptional is
his extensive research as shown in copious notes at the end of the book. He, and
others he cites, have been doing questionnaire surveys for decades on investors
(both individual and institutional) opinions on various subjects that are taken for
granted, but not necessarily true.
One example of this is the commercial by Peter Lynch about stock prices
always following earnings in lockstep. In Shillers chart he shows the Prices of the
Dow Industrials rising from 3500 to 11,000 in 5 years, while earnings were only up
in the teens. Another meaningful chart shows the markets P/Es before and after
various Crashes:
Year

P/E

Low after crash

1901
1929
1966
2000

25
34
24
45

5
6
7-8
??

Addressing the Buy and Hold theory of always getting ones money back shortly
after a Crash, he cites Real (Inflation-adjusted) returns for time periods after 1929:
5-year, 1.3%; 10-year, 1.4%; 15-year, .5%; and 20-years, +.4%. About the same
for 1974 similar periods. His findings also show that after 44 P/Es, a scattergram
suggests negative real earnings for the next 10-year period; and periods of low
Dividend Yields (1.2%) always result in bad returns for the next few years.
He then proceeds to list the 12 reasons for the recent ballistic Bull market:
1. The Internet improving productivity, earnings.
2. Lack of global competition-our lock on technology allowed for massive exports
3. Baby Boomers, 1946-1966. Spending more and investing more through 401ks
4. Expanded media coverageCNN, CNBC, Internet sites, etc. TVs on at brokerages and other businesses.
5. Analysts optimism; Sell recommendations dropped from 9% to 1% from 1989 to
1999.
6. Beginning in 1981Defined Contribution replaced Defined Benefits, making
the individual responsible for the investment choice.
7. Explosive growth in number of mutual funds enticing investors with expert
management, low-risk and low-cost investing. Funds in 1982 numbered 340; in
1998 3513 (5300 today, added to closed-end and ETFs would number 8500,
per Barronsthats more than 3 funds for each listed stock). In the same timeframe, number of shareholders accounts grew from 6 million to 120 million, 2
per family.
8 Decline in Inflation2% growth in the CPI since 1982.

TSAA Review, Summer 2001

Page 11

9. Expansion of trading volume and Discount brokers. Cheaper commissions made

trading easierMerrills old $300-400 commissions were more like buying a car
or house.
10. Rise of gamblingas late as 1970 only Nevada and Atlantic City had gambling,
now its never been easier (Indian reservations, riverboats, offshore Internet).
In the 1920s when Prohibition was in effect, so also was gambling in the
speakeasies.
11. CNBC, brokers advertisements, books and magazine articles promote the get
rich quick systems, inciting the irresistible Bandwagon Bubble.
12. Finally, the Ego was a big factorall ones co-workers were making a killing in
the tech stocks. Playing with House Money raises ones Risk tolerance to losses.

20% Book Discount

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some go over 50%visit
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To receive the TSAA discount call 800-927-8222
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Shiller then goes on to explain some of the Behavioral Finance terms, such as
non-linear feedback loops, selective listening (hearing only what agrees with your
position), amplification mechanisms 96% of people surveyed believe that stocks
always have the best overall return. Not so, according to Shillere.g., in the 70s it
was real estate. 91% somewhat agree that a market will rebound totally within 2
years, wile post-Crash declines (Nikkei, gold, 1929, Tulips) refute that.
Other BF principles include Psychological AnchorsQuantitative, such as how
Interview questions are frameddo you earn $30,000 or $40,000 a year, watch out
for 10,000 level on the Dow, etc. The other anchor is Moraldo I deserve to have
this much money, asks the Microsoft millionaire with Fantasy wealth on paper? If
they all believe, they may all sell, dropping their price and net worth.
Overconfidence and hindsight make great armchair quarterbacks out of investors.
(Whats Greenspan thinking?) As all good chess players do, investors should consider all possible outcomes and react accordingly, tactically and strategically.
One other principle is the Herd Instinct, or Epidemiczeitgeistwhich is partially caused by everyone listening to the same information sourceCNBC, WSJ,
et.al., at the same time. News that everyone knows is no longer news! Shiller cites
studies that show that people will react illogically to large groups or high authority
figures (knowingly giving a wrong answer to a question in order to conform). As an
example, they did studies where a person was put in a room with several persons
who intentionally gave wrong answers; the person was eventually persuaded to
agree with them on the wrong answer.
People tend to like storytelling in stock selectionthis company just invented
a new; studies show that most stock choices are made from person-to-person recommendations, face to face preferable, or phone conversations (cold calls); television
bridges the gap from the previous twoface to face but not interactive. Finally, contributing to our Bubblechat rooms, websites from experts, voice trading, e-mail,
all contributed to the seduction of the investor.
Lastly, Shiller relates some very interesting historical data going back to 1900,
and exhibits more numerical studies that explode a lot of myths that we take for
granted. He ends with some radical suggestions, like a transaction tax, proposed by
Larry Summers and fellow Prof. James Tobin, to curb speculation. Abolish trading
curbsour worst Crashes occurred on Monday, after a long weekend. Shiller also
advocates Macro Marketssecurities to hedge real estate (ones own home), even
claims on income flows.
Altogether a very worthwhile read, lots of facts and studies, and a good look
into Behavioral Finance.