Joining Tracy and Dan in this episode, is Scott Bennett, founder of Invest with Rules. Scott is a former financial advisor with Fidelity Investments. In this episode he discusses his style of investing and trading that follows the large fund managers. Join us for part 2 of this interview now.
For more information about Scott you can find him here:
For more information on where and how we trade check us out at Real Life Trading. Follow us on Twitter @RLTPivot. Watch the full episode on YouTube here https://youtu.be/K0-8WhvxOx8
And welcome back everyone to another RLT PIVOT podcast. My name is Tracy, and once again, I am joined with my amazing co-host, Mr. Dan Janson. How are you, sir? Doing fantastic. So good to be back, as usual, for another episode of the Pivot podcast, With with the service you provide. Because again, if you're a technical trader, a lot of times I think a lot of times people get blindsided, right? So they see a certain gap up in their gap trader. They're trading on specifically just volume or just a certain candle pattern or something like that. I think it is important to understand the full picture because I think by having honestly, I think by having and following the money and kind of kind of the the reports that you're providing, having that information will give you an inherent whether whether you're using it to do swing trade or day trade or just do a position build or something like that. I think all of that information could be extremely valuable going into going into a trade. We were just talking about confidence, having that that ability to know, OK, at least I know I'm not the only one thinking that this stock is going along and knowing that there's a big hedge fund that that is also placing trades. I think that would help give some of that confidence no matter what technicals that you use. But I also see that information you could have the most bullish hedge fund out there in the world and there that day that you want to trade. It's a it's a bear day and the market goes down. So I do think that valuable that information could be more valuable for a longer term move or swing. The question I think that the traders will have is really how what's the best way to interpret that information for them? Yeah. So a really great example is I had a really quick introductory call with with Jeremy of Real-Life Trader and we were just kind of having just a general conversation about just I was learning a lot, asking lots of questions about real life trading so I could learn more about both of you and your service. You provide so I could just learn more about it. And we talked a little bit about investing and trading really quickly. And one example he gave me, he said he gave me a screenshot of a Slack channel and he said, Here's today's trade. And it was back in June, it was shorting AMD Advanced Micro Devices, and I think it was made 1.4% on a day trade risk, 1%. That's my kind of trade. It was something to that effect and I was like, That's awesome. And my response back to him was when I went back a month, so I was looking at Advanced Micro Devices that when I was looking at my research and then analyzing it, in the month of June, billion dollar fund managers were selling Advanced Micro Devices. So I was looking at this data and OK, well, will this work every single time? Definitely not. But there's another level of confidence knowing that, OK, well, AMD was a short in your community AMD was a $1,000,000,000 fund manager kind of a dump. They sold pretty hard on that report that I was looking at from a month prior. And then from my trend roadmap the short term trend and the long term trend were both down. So it was almost like any sort of like any sort of bounce. It's being sold into so now you have this other level of confidence to say, OK, well, I'm following my risk. I'm following the set ups that I'm comfortable with from real life trading. But then also OK, well, I know $1,000,000,000 fund managers are also selling AMD this month. And let's say hypothetically, this is the second month in a row they've been collectively selling AMD. Then to me, that would be something where I could have a just a slight edge that would give me the confidence to click the button. Now, how do you know if if they're buying to close or buying to enter or selling to enter or selling to close a position. Well, the I do have a slight social life. It's very small, but I do track an awful lot of the month to month accumulation and the selling in the volume. So I watch exactly what's going on. So I won't usually report on it unless it's enormous, but I want to see that consist ency. So I think it's the consistency that's really important. So as an example, like, I mean, we've all come so accustomed to these behemoths of large cap tech, but it's also it's hard because you listen to the news and in one instance it's so easy to sell because they're so liquid. And then in the other instances, maybe this is where people go to hide because I mean, how many Apple products can they sell us and keep selling us the exact same phone over and over again? So you start to question, OK, well, you have this story in your head. You have this story on the news. But then for me, the other level of the differentiation is, OK, well, what does the what are the billion dollar fund managers doing collectively? Because they're they they know valuations way better than I will. They'll they'll have modeling way better than I will and then secondly, what does the chart say? Because that's just kind of the pulse of everybody. So the short answer is, I think it's always going to be hard but I think managing your risk and just trying to find that consistency is really important. Right. Right now, I love it. I think it's really cool. Now, what are some of the most common investing mistakes that people might make. Common mistakes I would just simply say are kind of winging it. A lot of the time when I was working with a lot of high net worth investors, they're portfolios became just like a collection. They were investors, a lot of them, some of them weren't traders. So they had these positions for forever and they're never going to unload. So when it is time to risk manage. So it's like they would always wait for the market to be down 20%, no different than right now. And then say What do I do? And then you're like, Oh boy. And you're like, Well, tell me a little about your strategy. And I would say the biggest they were kind of winging it the when I worked in Massachusetts, I had some of the legacy clients that have been with the company for 30, 40 years and there were just like so nice, but they are not budging. Some of them were in the Fidelity Funds for 20, 30 years. So it's like, what should I do? Probably stay the course and for a lot of the long term investors, but for some of the traders they, some of their processes were more around like, well how did you get to this idea? And then with a fun Boston accent, I can make fun of it because I'm from there. They would say, well, Cramer likes it. It's like, well, is that really is that really your whole thesis? When's Jim going to call you and tell you to get out? And the answer is, I guess you have to watch Mad Money to figure it out, and you might not ever figure it out. So I'd say winging it was a huge one. I would say that most people don't really have a buttoned up financial plan, and I think that's really hard. So it could be just as simple as having beneficiaries on your accounts, too, is more complex to having an estate plan. So these were some of the kind of the the pitfalls I saw no plan no financial plan, very lack of risk management plan. Fair enough that that winging it. It's you you're amazed at how many times somebody can look at them at a market or they're looking at their investment going, no worries. I can hold, I can hold, I can hold. It's long term. I need this. In 20 years, everything goes up, et cetera, et cetera, until the you actually experience that and it does go down that 20, 30, 40, 50% pullback and all of a sudden that emotion kicks in and takes over. And that's when you start to forget all of the things that you had before and that's why we teach. It's so important to have a plan in place no matter what. And that includes the risk management. You know what your risk is it all the time, all times and and going forward that because when you're faced with that emotion of that pullback, that great big pullback that was so easy for you to analyze when you were in a positive trade. But now that you have it there, it's so much more difficult. So having that plan keeps you from becoming that deer in a headlight and it's it's incredible. And it's no different than having people say, well, I'm going to wait until it drops 50% before I get in. And then when it drops 50%, they don't want to get in because it's the psychology. Just it blows my mind at times. It really, really does. Well, you guys, you guys don't think Lehman Brothers are coming back I'm still I'm still holding Lehman one day. I think they're coming back. So I don't know. That's a good strategy. Just buy whole forever. What how often if we talk about long term investing, considering you have the fidelity background and stuff like that? Because I think a lot of ignorance is bliss when it comes to to investing in general. I think that strategy of everything goes up is a is a prop is a true, absolutely true concept, except for the ones that don't ever come back. How often should people be relooking at their long term investments and re analyzing the strategy of how they buy or if they're selling? How how frequent, how hands on does the long term have to be for you? Great question. When I was working with a lot of just a huge array of investors and Fidelity has its roots in mutual funds. And when it comes to long term investing in a mutual fund, what I would share based upon my training is you're hiring that professional manager and his or her role is to find you the next Apple Facebook at Google. That's their job. And knowing that that's you don't have to worry about stock selection, but you do need to understand that there's going to be multiple times in your life that the mutual funds probably going to lose half its value. And it's your job as hard as it may be, to not sell once it's down 50% because there will be the next generation of amazing companies that will come up and most likely they're going to be in that portfolio at some point. And I think. So how often should you analyze that? I think that I mean, it's almost like writing down on a piece of paper. I promised myself I will not sell when this mutual fund is down 50%. So but for more of a trader, it's just a lot different. I, I firmly believe that. I think I listen to one of your shows, Dan, where you're like my percent I can handle a two my, my two risk units in one day or it was like five risky units in one week. So having a written plan of what you're willing to stomach when the market's pretty sour, I think just reverting back every quarter for a trader is incredibly important to look at your rules. And then I personally take the three stocks or ETFs that did really well and the three stocks or ETF that did pretty lousy. And I try my best to say, OK, well, what can I possibly learn from this? Did I follow my rules? Did I let the stock get a little bit too loose? Did it gapped down so and I share this with with clients where a lot of long term investors really minus the the one stock makes up an enormous part of your portfolio. You're probably somewhat diversified already just managing kind of negative earnings negative sales. But for the trader, I think it's going back and having a kind of a playback where you post, post analyze your best stuff. And I would share that with clients and I know probably most of them didn't do it. But I think it's incredibly important. Now being a financial planner because I know a few of them. The education that you have is very different than, say, the education that Dan and I have and that we teach. And even the way that you approach stocks ETFs, all that type of thing, the way you approach the market is very different. And I'm just curious, how long did it take you to kind of do that transition or into the swing trading aspect of it? So going in, switching that brain from being a financial planner to a to an actual trader, and then are there any similarities that you can take with it that have helped you or inhibited your ability to successfully be a swing trader great question. So for me personally, I was trained by Fidelity. They're primarily an asset allocation model, portfolio type of an investment firm. And then they also offer an array of kind of everything from mutual funds to kind of anything but from I would say for those that need more help, it's a diversified pie chart type portfolio, and that goes for the majority of wealth planners in kind of or maybe globally. So where that was also years later stamped through my certified financial planner education during the investment phase. So you learn a lot about risk that you primarily learn more about just kind of what asset allocation is and why it's so important. In my opinion, for a large majority of investors, that is a good strategy. And primarily the reason it's a good strategy is because most people don't dedicate the time or the effort to outpace that. And they'll make their biggest mental mistakes at the absolute worst time. So that strategy that was kind of brought to me by my company, brought to me by the CFP, was I long term, mathematically throughout history, it should work. There will be decades where it is the most frustrating, painful experience you've ever experienced in your life as you've seen your portfolio contract. Ten to 20% this year. But if I were to wind back, I was young and I was in my late twenties, early thirties in the year 2007 rolled around and then 2008 rolled around. And I'll never forget it was September timeframe. The market was down 20%. And then later in the fall, which there's a lot of similarities to maybe not from a contagion standpoint yet. There's a lot of if you look at a chart from 27, you look at a chart to 20, 21 in 2022, you had these four waves down which happened in 2007 and 2008. And then over the course of the summer in July and August it kind of bounced around a little bit higher and then holy smokes, starting in the September, October timeframe, it was just horrific where every single day the volatility spiked, the market pulled back. And for me personally, I was sitting across the table from investors and clients and it was so painful. So people were saying kind of get me out. And you're like, I have to revert back to the financial plan. And the financial plan data was changing so frequently. So it was just so hard that I was like how there's got to be a better way, but there has to I have to figure out something where whether they take a quarter or half or something of their portfolio and do something different just to not experience this, I mean, losing 50% of your net worth is just devastating. I mean, 100% just to get back to even. So, for me, that was the moment where I was like, I have to figure out, I have to educate myself, which turned into multiple sets of books of like, where else can I learn this and will these clients come back and how many years will it take these clients to come back? And luckily it was only a three and a half years after 28 in 20, 20 it was just a few months, so no big deal. But I think the big challenges like what if we're in a long term downtrend, no one's experienced that. Gosh, in decades. So that's where everything for me was like maybe I should question a little bit of the traditional thinking. Right? So so in regards to the traditional thinking, how, what, what approaches are you implementing that or what strategies would you implement that would protect the capital that you have or, or somebody might be managing as opposed to the traditional? Because I think that is common common knowledge at this point where they go just it doesn't matter how much you're down, don't freak out. That depends on how old you are or how close you are to retirement, what your lifestyle is. There's you know, how overall somebody is in a position, how much margin somebody might be. There's a lot of factors that that I don't think go into the common phrasing of of a certain sentiment where, yeah, maybe, maybe the next ten years. But like you said, if this let's say we are about you not saying it is, but let's say we are about to go into a long term five, six, seven year downturn, it's possible anything is possible but how does those clients now prepare themselves for that situation when buying and holding doesn't work. Yet so yes, like what what do they do? So I run a live spreadsheet that's in the member's area and there's three levels. And level one is just primarily stocks and hedges, which I'll cover the most on level two is just other ETFs. So even during a tough market, there's as long as the volatility is not incredibly high, you've seen things like staples and health care held up quite well and utilities held up. And then tab number three is these billion dollar fund manager stocks. And when you're in a crashing like environment that supersedes the trend roadmap, supersedes all the billion dollar fund manager research that says be cautious. So if I focus on stock indexes and hedging, so in a retirement account where there's no taxes and there's no real impact, where if you just sold there's no big deal, I would encourage building levels of cash and where when the trend roadmap, when the short term trend starts to peel over and it starts to turn to a negative trend or a downtrend. And then you also have the long term trend slowly kind of rolls over as well. It's time to be building cash. The Fed the Federal Reserve is not on our side right now. They're getting high inflationary data. And the reality is, is that their focus was on employment and now it's on inflation and inflation. Based on a month lag of data is it's lingering early high. So they're not going to come to the rescue yet. So because of that, in a retirement account you can just for an investor building cash, there's nothing wrong with it and there's nothing wrong with just playing a lot of defense through cash in a non retirement account. Again, not direct tax advice in any sense, but a lot of clients that I mean, the last decade has been really fruitful. So you're holding a lot of embedded capital gains. So there's a lot of names that maybe you just don't want to sell because you're not ready to pay a huge just celebrity across the board and times are short. So what I encourage is taking mathematically figuring out and I help whether you use just very simply an inverse ETF. Some clients prefer to use less capital, so maybe they're using some leverage you have to. That's very much a trade. It is not meant to be held for long periods of time, but I found that from some of my members, that's a big even though it's so identical to placing any ordinary trade by using an inverse ETF. It's it's just it's so you don't have to figure out the options market. And you don't think at the time perfectly right. And deal with a ton of decay if you're using a non leveraged inverse fund, but you can add a hedge or an inverse ETF to your existing portfolio that you were the case where you've loosened up some of the cash and that way at least you're minimizing some of the blow of the down market and that's some areas of where I give signals on when it is time to add a hedge and really when it is time to take it off because it's hard because these these downturns are so much faster than the long term Uptrends. Now what are some of your favorite moving averages that you would be using for a trend analysis. I focus primarily on exponential moving averages because I want to see the short term data more pronounced than some of the longer term exponential moving averages. Um, I don't have any ones that I adore, but in the system we look at multiple, so we're looking at lots of different moving averages where we're looking at different time frames of those moving averages. Um, daily, weekly. We're also looking at different time frames of the relative strength. So we're looking at this I'm looking at this religiously and I do have a couple other ones that I do look for from extension. I think now nothing's perfect, but I do think looking at something like a Bollinger band is really sound for figuring out when something is wildly extended to the upside or downside, when maybe it is time to go from buying to holding or taking some off the top and taking some profits off the table. Well, you're without making making this financial advice or suggestion to even get into it, but what's your favorite stock right now? Like, what are you looking at that that you're really curious about? Yeah, I'd say so. A couple of names that are my favorite stock. Um, based upon when kind of the stars align it's kind of sad. We're in such a defensive environment. That's where it's kind of sad when you're playing with large cap defensives. It'd be so different if this was like a better environment, a name like a I'll give a bunch of health care names like UnitedHealth Group or Vertex Pharmaceuticals. These are more larger cap names with sales and earnings. I'll probably leaning more towards United Health Care because it just reported and it I mean, it does not have the world's most exciting earnings and sales numbers. They're double digits, but they're not like explosive growth numbers. But that's the type of names were huge billion dollar fund managers side. So those are the types of names I see on the small cap side last week was a flashed a buy on. There's a bunch of staples. Constellation Brands was in there I can't really recommend because I barely have any hair but like all plex which is a small cap for I mean it's just people keep buying shampoos and game designers. And and again I want to see more consistency with some of these names. I'm trying to think of any other ones that were interesting Harmony Bioscience. This was probably the most growth name that I saw, which is that h.R. And why it showed up for a few months in a row. And then now they start breaking out and it's exciting, but just tighten tighten stops is where we're at right now. Have you seen a shift to going from, say, tech into health care? Is that kind of what you're seeing in the analysis that you're looking at? I saw a shift away from tech a while ago, so that happened a bit ago. I'd say the biggest shift by far was a lot of these funds were late to the energy trade and for the last call it like five, six, seven months. It's just been deploying more and more capital to energy stocks. So you've had this kind of very vicious sell off in commodities. So my what I'd be patiently I'm waiting for is the turn. So based upon billion dollar fund managers, I don't think the energy trade is is totally off the table at this moment. So I don't most of them are on sell signals from the trend roadmap, but based upon the consistency of buying, it went from more tech to more commodity and commodity. I've seen more defensive so it's been more staples. And health care is where most of the flows have been going. I wish it was more exciting, but it's definitely a defensive time for a lot of these funds. It's a great opportunity for learnings. I mean, this is a a market that not a lot of people have experienced before us. And it's good. I mean, because that's how you learn. You learn you get better. And having this conversation with you has been very enlightening. And it definitely got me curious about looking at a few things and taking a peek at it, how I can implement some of the things that you're talking about into what I do. I did sign up for your your newsletter, so I'm waiting to see what happens if I, I get that. I just did that today, so I'm looking forward to, to reading it. But anyway, it has been an absolute pleasure talking with you. Do you have any last minute tips or suggestions for our, our clientele or for our viewers? No, I think you guys preach it incredibly well, so I would just say just to write down some of your rules and abide by them would be my biggest tip. If you're looking to learn a lot more about trading, I think where I come in is more idea generation. And I really think that some of the products and like the free content I mentioned this to Jeremy and to both of you, that this the level and the amount of free content that real life trading delivers is so fascinating. I wished for all of those clients that would sit in that hour long meeting and kind of watch this, like what is a trend line breakout? And they'd be on the edge of their seats like they would have gone bananas for your content. I mean, they would have they would have actually had more actionable items because they don't know where to find a trend line breaker. They have no idea so. So I think that your education content is definitely a great stop. For first, I highly encourage signing up and going through some of that education content and then I hope I can be helpful. But thank you so much for having me. No, that's great. We will put all of your contact information in the description below. So anyone that wants to reach out to Scott will be able to find all of his information down below. So yeah. I think I think the information you're providing is phenomenal and will help a lot of traders just kind of own the craft of of being able to successfully navigate the market and give them more suggestions as far as ideas of maybe where they should focus attention to, which is, which is outstanding. So Scott, appreciate you coming on the Pivot podcast with, with myself and Tracy. We'd like to have you back one day in the future. In the future when we get some some new updates and maybe market conditions change and all that stuff as well. So would love to bring it back on. But once again, thank you for listening each and every week to the Real Life Trading Pivot Podcast We will see you again next week.