Quill's 'Simple Simon' Method

Quillnpenn’s ‘Simple Simon’ method depends on ‘mean-reversion’. Using Technical Analysis, it tries to “Buy low and sell high” the same way that Ben Graham and his fundamentally-based method tries to buy “at a sufficient discount to intrinsic value to create a margin of safety”. Quill tries to buy ‘over-sold’. Graham tries to buy ‘under-valued’, and both exit the trade when the opposite conditions obtain.

The opposite of ‘mean-reversion’ investing is ‘momentum’ investing’, the best advocate of which is Wm O’Neil of Investor Business Daily fame. He argues that buying down-beaten stocks is a waste of time, and he wants to buy those making new highs, because those are the ones that have proven they can go even higher. Hence, his motto/mandate/mantra is “Buy high and sell higher”.

I’ve got a lot of respect for O’Neil and his method. I own and have benefited from his books. I’ve attended seminars put on by his company and came away convinced that ‘growth’ investing might be the way to go. But then reality sunk. I don’t buy my bell peppers or broccoli because the price has already gone up, nor do I want to buy my stocks or bonds that way. Hence, I’m a ‘value investor’, just as Graham described, with this small difference. I make more use of ‘price-volume’ charts than he seems to have.

To repeat, the essence of Quill’s 'Simple Simon method (or Graham’s discount method, or Stan Weinstein’s 'Stage Analysis method) is the belief --based on observation-- that stock prices are NOT random, but fluctuate in patterned, semi-predictable ways that can be explained by the psychology of buyers and sellers and/or by the fundamental facts that underlie an exchange-traded derivative, which is what a stock is.

Aside: A stock isn’t a “fractional ownership share” in any meaningful sense unless one is a 5% owner or better. Instead, a stock is just a derivative that has an often tangential relationship to its underlying and whose pricing is often determined by factors exogenous to the underlying business. This isn’t to say that facts about the company don’t matter, but that financial statement analysis and such is only a part of the whole picture and can --on occasion-- be an unnecessary part if one wants to keep oneself out of trouble, because “the market” --in its collective wisdom-- generally gets things right and faster than the financial press ever does.

However, as Graham noted long, long ago, “Mr. Market” is also a manic-depressive who can go crazy to the upside, or the downside, and push prices higher/lower than they should be, and it is these inefficiencies that would-be value investors try to capture by buying when stocks are at the ‘starting gates’ of their breakout and then selling them when they have crossed the ‘finish line’ of their upward moves. (Further note: selling short might seem to be just the opposite of going long, but the guys who do it well are the best stock analysts you’d ever want to follow. They know the fundamentals backwards and forwards, which is why they’re willing to declare BS on a company’s financials or prospects and to sell it short.)

The trends one might look for could be as brief as a couple of seconds, or they could be decades long, or they could be something in between, depending on whether one is focusing on the ripples, the waves, or the tides of price moves (to borrow a metaphor from Dow Theory). But let’s make the assumption that our would-be investor intends holding-periods of weeks or months, instead of hours or days, and let’s chart the six stocks Andy provided and attempt to see how the Simple Simon method might have been applied.

(To be con’t)

Spoiler Alert: He pulled off some pretty impressive moves.

4 Likes