MILTON BERG: On a daily basis and a weekly basis, the movements of the market are random. However, there are particular times when the market movement is very far from random. When the market generates data that tells you the market's close to a top or has topped, or the market is close to a bottom and has bottomed.
In their mind, this is a cuckoo. This is nuts. This is impossible. We were taught this can't be done. So you need to have a discipline, you need to have a view, and you need to rely on your data. If you don't rely on your data, you're just lost.
GRANT WILLIAMS: I'm about to sit down for a conversation with a man who is a very quiet Wall Street legend. He's worked for some of the titans of the industry. He's worked for Michael Steinhardt. He's worked with Stan Druckenmiller, with George Soros.
And the work he does is absolutely fascinating. This is going to captivate and entertain a lot of people. There's going to be some questions afterwards. So join me now. We're going to sit down and talk with Milton Berg.
Well, Milton, welcome. Thank you so much for doing this. I have been looking forward to it for a very, very long time.
MILTON BERG: Well, thanks for inviting me. And I'm going to learn more about Real Vision. I skimmed some of the videos this morning, and I feel bad I wasn't on earlier.
GRANT WILLIAMS: Well, I'm glad you finally got this to happen. So just before we get into what you do, which is so fascinating, I just want to give people a quick sense of your background. Because you've been in the markets a long, long time. So if you can just give us a quick potted history, that'd be fantastic.
MILTON BERG: OK. Well, my background was never in finance. I got degrees in Talmudic law in the 1970s. But I didn't feel I'd make a living out of that, make a profession out of it. So I started studying markets on my own. I was exposed to markets as a child. My uncles used to trade in the '60s and somewhat in the '70s.
And then I decided to study the markets. I received a CFA, one of the earliest ones, number 6881. Now there are hundreds and hundreds of thousands, so one of the earliest CFAs. So I studied pure Graham and Dodd fundamental analysis. I thought that's what you have to know to do well in the business. I studied accounting and financial statement analysis, and Graham and Dodd.
But as soon as I got my first job, I realized two things. First I realized that I'm competing with all these other fundamentalists. I have no edge. There are thousands of analysts who follow Graham and Dodd. So that's one thing I realized. Secondly I realized that, on average, the typical analyst just has average performance. And a lot of the analysis doesn't really contribute to their earning money in the market.
So I was exposed initially to Ned Davis. Was then working at JC Bradford, so first technical analyst I was actually exposed to. And I was fascinated because I saw there was more to the market than what I perceived Graham and Dodd was teaching me. And from then on, what I did was really is I spent more than 30 years analyzing markets, until I learned to focus on market tops and market bottoms.
So my background was I started at Talmudic law. I started as an analyst for low grade credits for a mutual fund organization. Then I started managing money for a mutual funds organization. I worked at Oppenheimer Money Management, managing three mutual funds in the 1980s. Actually in '87, I managed the three top funds in the country. At that time already, I already had the discipline of trying to call tops and bottoms. We got to 80% cash before the crash in October, raised the cash in September.
Then I worked as a partner at Steinhardt. I took off for a few years, moved to Israel with my family. I then went to work for George Soros with Stanley Druckenmiller. I worked with Stanley at Duquesne, always did research. In the last six years, I've been doing the same research I've done all the years for other firms, doing it for myself and marketing new research, selling the research to clients.
So currently, my clients really are the titans of the hedge fund industry. The type of work I do is very atypical. People look at it, and they don't understand it. They don't necessarily accept it. But the clients who've been-- people dealing with it for years understand that it's much value added.
GRANT WILLIAMS: Well, let's get into that because it is different. It is something that people won't be familiar with. So just talk about how you built this framework and how you began to kind of assemble the pieces of the jigsaw.
MILTON BERG: OK. Well, one thing I realized in studying Graham and Dodd-- Benjamin Graham was actually a technical analyst.
GRANT WILLIAMS: Right. See, already people are going to be going--
MILTON BERG: Well, people who know Graham know the end of his-- yeah, he said we give up all research. And the rest can look at the numbers. People who know Graham and Warren Buffett will tell you, in the last five years of Benjamin Graham's career, he would no longer do rigorous analysis of balance sheets. He'd just look at numbers, P/E ratios, price to book value, what the price of the stock is relative to its last five-year high, which is really technical analysis.
Later in life, everyone knows he became a technician. But prior to that, even reading Graham and Dodd's security works from the 1920s and the 1960s, he suggests that the only reason he needs a value analyst is, of course, experience shows him that it works. He actually spoke in Congress. He was testifying in Congress in the 1960s with a question of market manipulation.
They asked him, why is it a stock that's trading for $20, and you believe it's worth $60, why doesn't it ever trade at $60? Why does it remain at $20 forever? In other words, the question is, if the stock could be trading-- be undervalued today, why can't it be undervalued forever? Why? Why must the stock ever reach intrinsic value?
And then really, Benjamin Graham's whole theory was the theory of intrinsic value. He said, I have no answer to this question. It's a mystery. All I know from experience is that if you buy a cheap stock, eventually it will trade at fair value. That's his answer. It's a mystery. Once we're dealing in mysteries, I figure there must be many more mysteries strictly valued.
So there are far many things we look at that create the market movements other than the value. And I think intrinsic value is just a technical indicator. In Graham's thought, the more a stock is trading below its intrinsic value, the more likely it is you'll make money because it's going to trade back towards its intrinsic value. But there's no inherent reason for a stock to trade at intrinsic value. Because of course, it's a very valid question. If a stock could be overvalued today, why can't it be overvalued forever? If a stock can be undervalued today, why can't it be undervalued forever?
GRANT WILLIAMS: Yes, exactly right. So taking that into account, how do you then start to build your own framework using that and applying it to tops and bottoms?
MILTON BERG: So what I try to do is say, is the market actually a random movement, which we were taught in the schools? Actually, the CFA program goes with random movements, modern portfolio theory. Or is a market not necessarily random? Is there some edge you can have? Of course, Benjamin Graham did not believe the market's random because there wouldn't be an undervalued stock if the market would be random. It would be efficient. Everything would be traded at intrinsic value.
But the reality is I found that the market generally is random. On a day-to-day basis, you have the talking heads on TV and you have the analysts giving research reports every day, trying to analyze the reason for today's move, the reasons for tomorrow's move, maybe the reason for the next week's move, most likely explaining the reason for last week's moves.
But I found that on a daily basis, on a weekly basis, movements of the market are random. However, there are particular times when the market movement is very far from random. When the market generates data that tells you the market's close to a top or has topped, or the market is close to a bottom and has a bottom. So what we call that is turning point analysis. Turning points at turning points, the data generated by the market is no longer random.
In fact, if you take a bell curve, for example, and it lets you track something simple as five-day volume. You look at the average five-day volume, ascent of the curve. You look at the extremes. You'll find that the extremes of five-day volume are associated with turning points. Now intuitively, it makes a lot of sense because you know at a market low, everyone's selling their stocks. It's at high volume.
But people haven't looked at that as a technical indicator. We say, we're not going to be one of those who panic and create the five-day volume. We're going to wait for five-day volume, greatest in one year, greatest in two years, greatest in six months. We track these kinds of things. And that tells you that an impending turn in the market we see. That's just one indicator, an increase in five-day volume as an example.
GRANT WILLIAMS: So let's just jump back in time to '87 because that was a call you famously got right to the day. It's extraordinary, reading the story of your work around '87. So take us back there and talk about in the days leading up to that. And perhaps the month before September, what did you see, and how did you go about making use of that?
MILTON BERG: Well, we saw a spike in volume on August 11 of 1987, a big spike in the five-day volume that we look at. The market actually peaked a couple of weeks later, less than 2% above that level. So that was the first indication that something was going to change. And the logic of it is that if people are-- why would the volume increase after the market's up 30% of the previous 12 months? Why all of a sudden are people jumping in and volume increasing? There's got to be a reason for it.
And the reason is because people are now comfortable about the market, and they're speculating. If the market went up 30% for the last 12 months, let it go up 30% for the next 12 months. So the volume is not just an indicator which is suggesting a turn of the market. It's telling you something. It's telling you that something in the nation's market has changed. There are more speculative dollars coming into this market. That took place on August 11, 1987.
I wrote many reports saying the top is not yet in. September 4, '87, the Fed raised rates for the first time, and that was all that was lacking from indicators that I look at. Again, to my opinion, raising rates is a technical indicator. They raised rates one-quarter of a point, and that caused the crash. So it's not as if that one-quarter point had a fundamental effect on the economy.
A present corporation borrowing money. It had no effect at all on the economy at all. It had some effect possibly on psychology. Wherever it was, that combined with other things we saw in '87 suggested that the market was very vulnerable. Of course, valuations were the highest in history.
Paul Montgomery, who did a lot of work on bond yield, stock yield ratios, found that the ratio of stock dividend yields to bond yields were also the highest in history. So it wasn't strictly the price of stocks were the highest in history, but actually the ratio, the preference for stock yields over bond yields was the highest in history.
GRANT WILLIAMS: When you think about '87, we had a very different market back then. We had a very different set of inputs. And one big part of the Federal Reserve had a much lesser impact on markets. When you look at these technical indicators that go back so far, how do you adjust for today and the oversized impact of the Federal Reserve?
MILTON BERG: I'm laughing when you say so far. We have indicators going back to the 1900s. I've tracked 30,000 indicators on a daily basis. So '87 is modern history, as far as I'm concerned.
GRANT WILLIAMS: Yeah. No, absolutely.
MILTON BERG: But yes, the story is this. And this is also Benjamin Graham. Benjamin Graham has been misquoted, very much misquoted. They say that Benjamin Graham says that on the short term, the stock market is a voting machine. But in the long term, the stock market is a weighing machine.
Benjamin Graham never said that. And it's very illogical to say that. Let me give you an example. At the 2000 top, there are many, many long term companies not involved in the internet that were very, very undervalued. Now, if stocks are fairly valued over the long term because the market's a weighing machine, why would a stock ever be undervalued if a stock has a 30-year history of earnings? It's long term. If, in the long term, markets are a weighing machine, let General Motors always be weighed, let General Electric always be weighed. It doesn't work that way.
Benjamin actually said that the market is not a weighing machine. It is strictly a voting machine. Because he says-- and it's in the book, Graham and Dodd analysis. He says because although possibly fundamental factors affect stock prices, and possibly monetary factors affect stock prices, and probably psychological factors affect stock prices, the reality was, in order for the stock price to change, you need a buyer and a seller.
So no matter what you're going to say about fundamental analysis, the actuality is that the given change of a price of a stock is based on voting, based on a buyer willing to buy at a certain price, and a seller willing to sell at a certain price. So this is very important. Once you realize that the stock market is a voting machine rather than a selling machine, you also realize that most turns in the market-- nearly I'd say all turns on the market-- are sentiment based and psychologically based, rather than fundamentally based.
If the Federal Reserve makes an announcement-- we're going to raise rates by 400 basis points-- and the market's definitely going to collapse if they ever raise rates -- basis points. It's not because of any effect fundamentally on the economy at all at that time. Because it takes time. If they say they're going to raise rates in six months, the market will collapse today. There was no fundamental change in any company at all. It's just that psychologically, people understood that in the future, it'd be very poor, and it'll sell now. It's a vote.
And someone might argue, oh, there had been so much inflation when Volcker raised rates. In fact, the markets went up. And he made rates far more than 400 basis points. But he didn't do it overnight. But the reality was his raising rates cut inflation, gave greater value to stocks, and psychologically, the vote was going to do better in the future. We're going to buy the stock.
GRANT WILLIAMS: But it is very difficult to quantify human behavior. I mean, markets are essentially the collective representation of human psychology. That's it. There's nothing more than that, really, to your point.
MILTON BERG: Exactly.
GRANT WILLIAMS: So how do you go about building some kind of framework that captures the uncatchable?
MILTON BERG: Yes. Well, let's look at the bottom in December. If you don't mind, I'm going to look at some of my notes if I have it available. Let's look at the bottom in December of this year. Federal has just raised rates. It speeded down 20%. Russell is down 27% in just a matter of less than three months, I believe. The peak in the DOW was in October. The bottom was December. The Russell peaked in August. The market's down nearly 30%.
Now, we called the bottom to the day. We were 100% short on December 24. By the end of the day, the market was up 4%. We were up 3/4 of 1%. We covered a short and went long on that day. Why? What is it? You're asking a very valid question. It is difficult for a psychiatrist to evaluate pyschology. How could a market analyst evaluate psychology?
So just the example I gave earlier when you see a big increase in five-day volume, it's just a number increase in five-day volume. But it's telling you something psychologically. People who were unwilling to sell a week ago are willing to sell today. Or in order to induce the buyers to come in, price had to come down to compensate for the fact that people weren't willing to buy.
So let's look at December. From December 19 till December 24, the day of the low, we saw a five-day volume surge, highest five-day volume in two years. We saw what we call a 10-day reverse thrust, which is the opposite of an advanced decline line surge. The number of stocks down relative to stocks up was also at a great extreme. And that's just a number. It's a data point. But why would all of a sudden people be willing to sell so, so many stocks to cause a 10-day advanced decline line? Although we look at it as data, we look at it-- it's actually psychology. It's actually measured. It's capitulation.
We saw the number of new highs and new lows. On both a one-year basis, two-year basis, and three-year basis, we're also at extremes. We looked at the five-day rate of change of the S&P 500, and so on and so forth. And these are the kinds of things that you look at at the bottom. So to us, it's just data. We calculated the 30,000 indicators. But it's my view-- and I got this from Paul Montgomery-- that all market turns are sentiment-based. There's no such thing as a market turn that's fundamentally based. It's all sentiment-based.
GRANT WILLIAMS: It is interesting because what we seem to have had in recent years are very sharp bottoms and very sharp tops. We don't seem to have these rounding top and rounding bottom patterns that you've had throughout history. Is that something that we need to be prepared to continue, or do you think we will see like a rounding top?
MILTON BERG: OK. Bottoms and stocks are always V bottoms, always. Tops and commodities are always V tops, always. My question is, why?