The Compound and Friends - The Secret to Your Survival on Wall Street (with Jeff Saut)

Episode Date: May 30, 2019

Barry Ritholtz and Downtown Josh Brown welcome storied Wall Street veteran Jeff Saut, formerly of Raymond James, to The Compound. Jeff talks about how he uses both fundamentals and technical analysis in his investment selection process, and why he doesn't pay as much attention to the economy as he does to earnings and investment ideas from trusted sources. Jeff spent the last 21 years as a chief strategist for Raymond James and has now gone independent, with both asset management and a new research product coming soon. In this conversation, he relays the number one lesson he's learned in almost fifty years in the investment business - the secret to longevity on Wall Street. 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify   Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here: http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey everybody, welcome to The Compound. We are thrilled to have a longtime friend of ours, Jeff Sout, has been in the markets for just about half a century. He spent the last 21 years at Raymond James as their chief market strategist. Welcome to The Compound. It's always a pleasure to see you. I don't buy stocks just because they break out of a spread triple top. My dad taught me, you know, look at the fundamentals and then use the charts to time it. You know, he used to say, words and music, son, words and music. Which I think is what you're known for on the street. Yeah.

It's your marriage of fundamentals and technicals. It's exactly right. Okay. So when I was one of the directors of research, I used to, when we did reviews on analysts and they would poo-poo technical analysis, I said, what do 95% of the portfolio managers do when you start telling them a fundamental story? They pull up the price chart because that's the world they live in where they can be measured to the second decimal point every morning. Right.

So let's talk a little bit about those technicals. How do you approach looking at broad markets? How do you look at individual sectors? And how do you approach looking at broad markets how do you look at individual sectors and how do you look at stocks i continue to think we're in a secular bull market secular bull markets last 15 to 20 years the 1949 to 1966 the 1982 to 2000 the problem is is my friend ron baron at baron capital said jeff there's not many of us old enough to remember or have seen a secular bull market. You know, are there pullbacks? Yes.

In the Jack Kennedy steel crisis in 62, where the steel companies raised prices and President Kennedy said, no, you've got to put them back down. The equity markets didn't like that. And they lost 30-some-odd percent in a very short period of time. But it didn't stop the secular bull market. And that's, you know, there was a book called Reminiscence of a stock operator that i know you've read for sure and both there was a guy in there uh named mr partridge and they called him old turkey because he was turkeys are very smart birds if you've ever hunted them uh so people would come up to old turkey and ask him what they should do in the market and he would cock his head to one top one side and with a

smile he'd look at him and say it's a bull market you know and that's all you really need to we're in a bull market and I think you know I've passed this parade and you can argue about when it started you know I can make the argument the majority of stocks bottomed in November of 08 and that's where the bull market started you can make the argument that in March of 2009 is where it started. Or you can make the argument that when we finally broke out of the 13-year trading range. We're 2013 truthers. Yeah. We totally, you know, we don't measure the 82-2000 bull market to the lows in 74.

Right. So why would we start this one from March 2009? We're saying the new high is the secular bull. So we're six years in. Yeah. And therefore, there's plenty of runway left. That's what I think. So for the people watching, when you say you wake up at five and look at markets, let's get specific because I think a lot of investors and traders, especially young ones, they just start with whatever pops up in front of them. They don't have a process. So in other words, if they flip their phone open and Wall Street Journal sent out an alert or CNBC.com sent out an alert, that's how they start their day, reading whatever headline is given to them.

Rather than say, here's what I do. First, I look at global markets and I look at weekly charts to get a – or first I look at what are the best 50 performing stocks of the week or whatever. So I would love to hear what your process is, the way you look at markets because doing this for almost five decades, I know you're not randomly just taking the first piece of news that's thrown at you and then starting your morning. So if you could like kind of give the viewers a sense of how you do this, I think it would be really valuable. Jeff launches Twitter. He sees what's trending. Yeah.

I have no social footprint. I do not do social media. Good for you. We'll take care of that for you. So I talk to very smart people, like my new firm I'm with, with Capital Wealth Planning down in Naples, a billion-dollar money manager. They have a unique strategy. But I talk to very smart people, And I hear stocks like Avalar that Amy Zang gave me. We're having lunch

with Mary Lasante, who I've known since she was an I.I. and institutional all-star in tech at EF Hutton, if that tells you how far back that goes. And she runs the Losante Small Cap Growth Fund, and she's a terrific investor. And I hear these ideas. And I was a fundamental analyst. And so I can spend a half an hour on FactSet and decide if I want to start buying this stock and look at the technicals of the stock. I learned from Peter Lynch, this business is not that complicated. I mean, Peter would ask the most simplistic questions, and by doing so, derive these unbelievable insights. In the early 80s, there was a company at Devonshire Street in Boston. We called it Orco.

It was optical radiation. They were the first people with implantable lenses. And there were like five newly minted MBAs, Peter Lynch, Bernie Grenfeld, Bruce Johnstone, Beth Toronto. And the newly minted MBAs were asking all these complicated questions to show everybody how smart they were. And the conversation rolled around to Peter, and he said, I just want to know how it works. And after the CEO got done chuckling a little bit, he said, well, Peter, it's really pretty simple. You take the cataract out, you put Peter it's really pretty simple you take the cataract out you put in the interocular lens and the cataract didn't come back stock went from single digits

to 200 in two years right so you're so your first filter is smart people you know yes and that's and you'll start with the ideas of people that you say this person knows what they're talking about they're they're saying something to me let me start with that well well tom o'halloran right across the river here uh over over in jersey city at lord abbott i said i have no social footprint so but he told me to buy facebook at 24 right and i bought facebook so i don't own it currently but i bought it right so if you get a good idea from somebody that's where you'll begin researching. Yeah, on an individual basis. Now, I have a long-term, an intermediate-term, and a short-term proprietary model that are, they're not right all the time, but they're

right a lot more than they're wrong. I also have a way of measuring the stock market's internal energy. It doesn't tell you which way it's going to be released, regrettably, but it tells you there's enough energy that if a move starts, there's enough energy. So what are some of the variables that go into a short, intermediate, and long-term model? Like without giving away the whole thing. What are you looking at? Volume, trend, price? I'm looking at volume. I'm looking at trends, price trends. There's a couple of proprietary things. Like the energy model is very proprietary.

You used to write about the inner coiled spring of the market. I remember that phrase from you. How do you measure that internal potential energy? That's the proprietary internal. I almost got in a fist fight with Andrew Ross Sorkin one day. Becky saved the day because he kept saying, well, I don't think it's fair that you come on CNBC and talk about your proprietary models

and then not tell us what's in them. Okay, so here's our secret sauce, but don't share anybody. Don't tell anybody. And what motivation could you possibly have to do that? None. Who wins in a fight between Jeff and Sorkin? Sorkin's wily. Yeah.

My money's on, I would have the money on Jeff. He's like me, he's got long arms though, he's got reach. But he's got no power behind it. He's a smart guy. He is. Well, he asked you the right question, but you don't have to answer it. So when you look at markets, are you first looking at things like economic data, or are you starting with technicals, or you're just trying to understand what's going on? What would be the first thing that you'd look at? Fundamentals, earnings. And I think the most important thing you can share with your viewers is the most important number one rule in this business is to manage risk. If you manage risk, you're not going to take big losses. Okay. So manage risk mechanically in what sense?

Know how much you have at stake at all times and modulate it if you do it too much? I don't let anything go against me more than 15% or 20%. Okay. So you stop losses or basically is it just a line of sand? It's a mental stop loss. So you're not giving it to the New York Stock Exchange, but when something you buy at $100 crosses $80, you're out. I'm out.

You get frustrated when you know you're right fundamentally, but the market is in bad condition, so it takes you out of a trade that you would otherwise have stuck with? Or have you learned to rise above that? I rise above that. I learned in 1974, you know, stocks can do anything. That's right. 74, we were down 50% from the high. 74, we were down 50% from the high. 48. 57, from the 73 peak to the low in 74 was, I think, 57. Just about identical to 08 or 09. Yeah, that's right. Yeah, that's right.