In the November 1987 issue of the MTA Journal, Gail Dudack wrote a short paragraph which may very well be the best description of the Award:
It is written in the constitution that one of MTA’s prime goals is to encourage high standards of professionalism and ethics among technical analysts. In the spirit of this goal, the MTA initiated an Annual Award for Outstanding Contribution to the Field of Technical Analysis in 1974. The Awards Committee, consisting of three past presidents of the MTA, has selected the following technical analysts to receive the engraved silver Revere bowl award…
Gail then listed the first winners, true pioneers in the field. Since the first Award was made in 1974, forty-one technicians have been recognized with this honor. The complete list can be found at http://www.mta.org/eweb/DynamicPage.aspx?webcode=annualawards. This year, the MTA added Robert Peirce to this distinguished list. Bob described his career with characteristic simplicity.
I was employed by the Baltimore & Ohio Railroad, which was part of Chessie Corp., now CSX Corp., when I graduated from Carnegie Tech, now Carnegie Mellon, in 1964 with a BS in Electrical Engineering. I moved to Chessie’s Investment Department around 1968 and was there until 1970.
In 1970 I was hired by C.S. McKee & Co., in Pittsburgh, to provide technical analysis to clients and staff. In 1984 I formed my own company, Cookson, Peirce & Co. I will be retiring at the end of June.
The high point of my career, prior to receiving this Award, was developing and applying my Risk Adjusted Relative Strength Technique to make money for clients. The low point was realizing that it is virtually impossible to sell long term market timing. With stock selection you have 50-75 transactions a year. Any errors get lost in the noise. With long term market timing you have one decision every couple years. Clients fixate on those decisions. Since you can never be perfect, they will never be happy. There are exceptions, but you can’t plan your business around them. That could well be why most money managers have elected to stay fully invested. Nevertheless, I did continue my work in long term timing and I have made it available to those who want to use it.
I had a chance to speak with Bob about the Award and his career. He began by noting that the Award was an unexpected honor, especially since he didn’t consider himself to be a great innovator. His work is built upon the work of others – by reading and studying the literature in the field and talking with other technicians, he has adapted the ideas of others, improving on them and combining them in unique ways. Technical analysis consists of studying price action, and we all look at the same basic data. In a way, we all participate in a discipline that can summed up in the words of W. H. Auden, a twentieth century poet who noted that. “I know nothing, except what everyone knows.” While everyone certainly can know the same things that Bob studied, he has a unique ability to analyze market action and apply the knowledge he acquired through study and see things in different ways than many others do. He also thrives in an environment of uncertainty, and decided to combine multiple indicators to create an overview of the market, reducing the risk of relying on a single tool.
From the founding of Cookson, Peirce in 1984, Bob relied on technical analysis to manage investments. His investors understand his methodology, and he achieved success by applying technical analysis in his business. It is this seemingly simple fact that places him among the list of pioneers in our field of study – Bob doesn’t just write about TA or discreetly use it while relying primarily on fundamental analysis. His very successful business was built on the principles of technical analysis. When he retired, in July 2010, Cookson, Peirce was managing almost half a billion dollars using TA.
It’s interesting for technicians deciding on a career path to note that Bob focused his career on managing money applying technical analysis. He and his partner set up their own firm to accomplish that and individuals have chosen his strategy after understanding that he would not be following the typical methods used in the money management business. Bob’s market has been the individual investor, and he managed some institutional accounts that were referred by the individual clients. This approach could be well suited for institutions, however that was not a target the firm pursued. The firm also manages a mutual fund, allowing those without the means to afford the firm’s $1 million minimum account size to benefit from the management approach.
One problem with attracting institutional investors is the ‘style box’ problem. Often an institution will want to classify a manager by the market cap and investment style. Bob uses more of a ‘go anywhere’ approach and will seek profits where he thinks they are available rather than limiting himself to the confines of a single box. For those unfamiliar with the style box, it is shown in the figure below.
p1 HTTP://NEWS.MORNINGSTAR.COM/PDFS/FACTSHEET_STYLEBOX_FINAL.PDF
Bob’s approach recognizes that leadership changes in the market over time. There will be periods when growth beats value, or when one market cap leads and then lags the others, and his goal is to make money in any environment. This allows him to buy small caps when they look strong, and by following a disciplined sell methodology he may end up in large cap value stocks at a different point in the market cycle.
As he noted, the biggest disappointment of his career has been that the individual investor has not embraced long-term market timing. Bob understands that no one will ever be perfect in this endeavor. At the top, the timer will always be early if the focus is on risk or late if the timer is following the market’s action. These factors dictate the same outcome at bottoms. In addition to being unable to precisely time market turns, long-time timers will rarely take action, usually noting trend changes only every couple of years. Wrong calls are well remembered by clients, and the demand for perfect timing and accuracy make it a losing game to try to sell this service to clients. On the other hand, applying technical analysis to individual stock selection offered a viable business model to Bob. Typical stock portfolios will consist of thirty stocks, and the portfolio may experience an annual turnover rate of more than 100%. After a year or so, Bob finds that most investors will focus on portfolio performance and become less focused on the individual stocks. While an investor may be concerned that a stock is bought while trading at a high P/E ratio, the technician should be watching the market action and have a reason for buying it based on the price behavior and how it is expected to contribute to the portfolio as a whole.
Thinking in terms of the portfolio is an important concept. Trading is a business of probabilities and most of the profits come from a few of the trades. In a thirty stock portfolio, five or six should be expected to develop quick losses and be replaced in the portfolio in a matter of months. Another five or six will develop into large wins over the course of a year, while the majority of the stocks will result in small wins or losses.
There are many examples of Bob thinking in different ways about small details to create a long-term success story. That one year time frame is another case in point. After a year long holding period, the stock qualifies for long-term capital gains tax treatment. At that time, Bob tightens the sell criteria, allowing him to hold onto a larger portion of the gains. Setting sell criteria based upon the length of the holding period has probably been overlooked by almost all portfolio managers. This point deserves some clarification, and Bob was kind enough to expand on this:
The whole idea is that trends have a limited life. If you wait too long to get in you should just look for something that is more timely. If you wait too long to get out, you give up too much of your gain. My work is keyed to a two-year overall period. Sometimes stocks stay strong for years, but mostly they are strong for 12-18 months
Founding a firm requires more than an ability to apply TA to find winning stocks. Performance alone doesn’t always attract investors. Bob teamed up with Jane Cookson to complement his skills. While he was managing money, she pursued sales. This is another example of the general approach Bob has always been known for. He understands his strengths, and recognizes his weaknesses. Bob is able to accept the fact that he won’t be right all the time, and this strong character trait contributed to his success in investing, and in business.
His programming skills allowed him to address many of the back office functions. In 1984, portfolio management software was not ubiquitous as it is today and tasks like quarterly reporting that now take moments once took weeks. The same could be said for software used to evaluate investments. Bob recalls using a programmable calculator and using removable media cards to test his ideas. The hardware limited him to the ability to review only 20 to 30 stocks with this technique, and now we can scan 8,000 or more stocks in only seconds.
Analysis tools are not the only change he has seen in the business. Early in his career, while working at Chessie in the late 1960s, it could take a couple of weeks to buy or sell a million dollar position. In today’s market, the liquidity is now deep enough to move millions of dollars in or out of a position in seconds, and often with little market impact if the market in that security is deep enough. Commissions have also fallen, by more than 95%, and are no longer a consideration to achieving successful results.
The inability to trade large positions quickly may have led to Bob’s realization that he is most comfortable as a long-term trader. This approach gave him the time to do what he really loved doing, which is researching the markets in a never ending pursuit of what forecasting tools work best. For those who are wondering, there is no Holy Grail.
Bob uses a combination of indicators. All together, he follows more than 50 indicators. Each year, he looks at which indicators have worked best over the past twenty years and uses the best 15 in his model but only for the next twelve months. He includes indicators based on cycles, sentiment, breadth, market strength, and monetary indicators. The dynamic approach to indicator selection may be unique to Bob’s analysis. He has tested indicators on 50 years of data or more, and he noticed that sometimes a great test result over that timeframe will be due to performance over a single ten year period. He recognized that markets change, to some degree and adapting his indicators to keep up with those changes would be the best way to use his model.
As an example of market change, we can think about the specialist/public short sale ratio. Bob found this indicator worked well in the 1970s. However, the markets changed. The introduction of exchange-traded options completely changed the underlying logic of this indicator. Bearish trades could then be accomplished with options rather than requiring short trades and specialists had another tool for hedging available to them.
That indicator also offers an insight into how Bob structures his research. An a priori approach requires an understanding of market structure and how the markets trade. First the knowledge is used to develop a logical expectation which is then tested. An a posteriori approach to the markets would be similar to data mining, using the past data to find something that works and may or may not be likely to work in the future. As another precaution to avoid curve fitting, Bob uses parameters that are ‘good enough’ in his indicators, not necessarily the best parameter which would be found by optimization and again, may not work in the future.
Bob cited the Haller Theory as an important early influence on his work. The Haller Theory of Stock Market Trends was published in 1965. Gilbert Haller’s work was solidly based on the use of volume and advancing-declining issues, but limited by techniques developed to fit a specific period. Inspired by this work, and typical of his usual approach, Bob modernized the indicators to track the rise and fall of markets in any time period. This attempt at a universal approach carried over to stock selection.
Another influence on Bob’s work has been Ken Tower, CMT, and now Senior Vice President at Quantitative Analysis Services. As many readers of this newsletter know, Ken is one of the foremost authorities on the use of Point-and-Figure (P&F) charting techniques. Ken’s work led Bob to study the use of percentage change P&F charts to avoid buying stocks on spikes. While Ken is well known for introducing the moving average to P&F charts, he also has highlighted the pitfalls of buying stocks that have moved a great distance from their breakout levels. That is a fairly important point with respect to using relative strength as a stock selection tool. Many traders attempting to apply relative strength analysis learn very quickly that what goes up all too often must come down quickly in the stock market. High relative strength stocks are notorious for delivering large losses when the momentum shifts away from them.
A great description of the basics of his stock selection strategy can be found in “A Practical Application of Alpha and Beta to Portfolio Construction,” an article Bob published in the Summer 1997 issue of the Journal of Technical Analysis. The article is available by clicking here.
In the opening paragraph we again see the central idea that defines Bob’s work, which is to look at things differently:
Alpha and Beta are products of Modern Portfolio Theory, which has been around for forty years or more. Early on, somebody developed a calculation to illustrate Alpha and Beta, and since then, the concept has been so closely associated with the calculation that most people have forgotten that the calculation is no more than a way to illustrate the concept. The calculation is not the concept.
Conceptually, Beta is a measure of how volatile a stock is compared to a universe and Alpha is a measure of how well the stock has performed after removing the effect of Beta. In other words, the Alpha of a stock is a form of volatility adjusted Relative Strength. No matter how you calculate Alpha and Beta, this basic concept remains unchanged.
The paper details the calculation and employment of risk adjusted relative strength (which should not be confused with RSI). Traditionally, relative strength is a strategy suitable for aggressive investors since the volatility of the strongest stocks can often create wide swings in the investor’s equity. By adjusting relative strength for beta, Bob expands the idea in such a way that makes it suitable as a possible investment for more conservative investors. In addition to being a talented technician, Bob demonstrated an expertise in running his own business as well. His retirement plan unfolded over ten years, and he unlocked the value of his firm by selling the business to several key members of his staff. The details offer, once again, an insight into Bob’s detailed thought process. In December 2001, the founding partners of Cookson, Peirce entered into an earnout agreement, a plan that allowed several key employees to use some of their share of the company’s profits to buy all of the stock in the company. To ease into the slower pace of retirement, the original parents cut their work week by one day every two years, giving a larger share of the operating profits to the designated buyers.
Bob’s long and memorable professional life can serve as a model and inspiration for technicians today. Many analysts want a job on Wall Street, being paid to provide opinions. Those jobs have been disappearing in recent years. But it is still possible to start your own firm and manage money with technical analysis. It is certainly not easy to do so, but success is within reach for those willing to study the markets, work hard, and find others to work with who can help them grow a profitable company by sharing the workload. Bob proved it can be done, and this Award recognized his perseverance and contributions to the field of technical analysis. One of his greatest contributions may very well have been to demonstrate the possibilities available to motivated technicians.
In the introduction to Long-Term Secrets to Short-Term Trading, Larry Williams wrote:
This book is not the product of research—it is the culmination of a career that has included a great deal of research, personal introspection, and, along the way, some personal growth.
That sentence sums up a conversation with Bob Peirce. His career represents not a single product as much as a process of developing a model, adapting the model to an ever changing market while remaining true to the basic guiding principles he originally developed, and applying technical analysis to build a career. The Annual Award does not recognize a single accomplishment but rather acknowledges a career that included a great deal of research and undoubtedly some personal growth. This Annual Award should inspire many – Robert Peirce has completed a career which shows that doing the basics very well can lead to extraordinary success in our field.
Letter from the Editor
