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Archive for May, 2008|Monthly archive page

HOW I BECAME A DISCIPLE OF DOW THEORY

In Uncategorized on May 23, 2008 at 12:57 am

When I was in university my father wanted me to get into business school. You had to choose a “major” after first year and the best way to get into business school, I figured, was to take a “business-like major”. So I majored in Economics. It didn’t hurt that I was pretty good at Economics and first-year was pretty much a repeat of what we studied in my last year of high-school at Malvern Collegiate Institute in the beach area of Toronto. Mrs. Botterill was my Economics teacher and by far my favourite.

The first problem with this type of decision making is that you are deluding yourself if you aren’t true to your beliefs. I didn’t believe I could learn anything useful from a 15 year old text book, taught by someone who didn’t work on Wall Street or Bay Street. The second problem is that Economics is anything but an exact science. When posed with the problem of hyper-inflation, the Economist has a very prosaic solution: “assume zero inflation”.

This didn’t sit well with my sceptical nature, and so I decided that I would switch my “major” to philosophy. In second year I dropped all of my Economics courses and took nothing but Philosophy. After all, some great Economists were also Philosophers. I grew my hair long and spent hours debating the pre-determined cogito, and Aristotle’s Nichomachean ethics with my fraternity brothers. The problem with this, of course, was that dear old dad was footing the bill for what he thought was a business education.

My dad is a very intelligent man. His I.Q. is north of 140 and he has a healthy dose of scepticism. When he found out I was not going to be admitted to the prestigious business school he told his friends I was going to go to, he did what any self respecting father would do. He cut me off.

I decided that the cheapest course of action was to get out of there as fast as I could, with whatever degree they would give me. It turns out I only needed to write 6 more multiple-choice Economics exams to get out of there with a bit of my pride in tact.

Fast forward to my rookie year in the brokerage business. For an entire month we were barraged with experts from every area of the business. It was like taking a sip of water out of a fire hydrant. Each expert wanted to make you a disciple of his or her discipline. In the span of four weeks I had decided to be an expert on bonds, then wrap accounts, then stocks, then Modern Portfolio Theory, then mutual funds etc…

My head was spinning. There was a kid from my hometown who had a fancy DELL laptop and some software called Tradestation. In between classes he showed me a bunch of pretty charts and indicators that seemed to de-mystify the stock market. He showed me the indicators and how they were calculated. It looked a lot like Pascal — a computer programming language I was familiar with. I made extra money writing computer programs in university. I was intrigued. Then on the last day of boot camp they paraded the firm’s top producer in front of us.

He was a diminutive figure impeccably dressed in black Armani (a la page). I remember thinking that this was going to be the speech to ignite us before embarking on our illustrious careers as bond experts, asset allocators and mutual fund salespeople. This was the number one guy in the firm. They had saved the best for last. He walked to the front of the room with a thick black text-book under his arm. He paused forever and then said “I’m a stockbroker. Forget everything they’ve told you the last four weeks. Everything you need to know is in this one book (holding the book in the air). There’s forty one of you in this room, five of you will buy it, three of you will read it and one of you will use it”.

Right then I decided that I was going to be “the one”. I rushed out with three of my buddies to “Books on Business” on Bay Street to find the holy grail. It was $130.00 — not an in-expensive item for someone on a rookie broker salary. The book was “Technical Analysis of Stock Trends” by Edwards and Magee. Three of the first five chapters dealt with Dow Theory and its interpretation. The rest, as they say, is history.

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