Mark Minervini: Lessons from a stock market wizard

When you’re trying to interview a man with a deadline to write a book, finding a convenient time isn’t easy. When that man is Mark Minervini, whose hectic days were split between trading and finishing his hotly-awaited investing guide – Think and Trade Like a Champion – the pressure’s even worse. When I finally managed to catch him - after the market close in New York - he was generous with both his time and his views.

For more than three decades, books have played an important part in cementing Minervini’s reputation as one of America’s most closely-watched traders. 2017 saw the follow up to his popular guide, Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market^[1]. That was written 10 years after he was profiled in Jack Schwager’s hugely popular Stock Market Wizards.

So what’s his appeal? Minervini started trading with very little capital in the early 1980s. After several years of losses, he took his strategy back to basics and got scientific with what was working, and what wasn’t. It was a turning point that transformed his results.

In 1997 he was named U.S. Investing Champion after smashing the contest with a gain of 155 percent. It served to prove the effectiveness of his strategy even under the most competitive conditions. Since then, he’s won a huge following and built an education business on the back of it.

In essence, Minervini is a growth investor. He made his name shooting for big gains in fast moving stocks with a strategy that blends fundamentals, technicals and strict risk management. The process is carefully laid out in his first book, with a particular focus on getting the timing of trades absolutely right.

But what comes across when speaking to him is that the precise strategy is very much a personal decision. What’s more important is the belief and mindset to stick with it, and an unswerving discipline to avoid big losses.

Mark, tell me about how you’ve evolved and developed your strategy over time?

My strategy developed very simply because I had a small amount of money and I wanted to turn it into a large amount of money. So I had to find a way to trade the markets and be able to very rapidly compound my capital.

In the beginning I couldn’t do short-term trading or swing trading like you can nowadays. Back then, commissions were more than $175 per trade. With a small account back in the early 1980s, with a few thousand dollars, I couldn’t pay that much commission trading in and out. You had to pick up the phone and call your broker, and he called someone that called someone else on the floor, and it was a much lengthier process to make a trade.

Back then we would look for big moves in stocks. But now you can trade for pennies and have instant liquidity so there is a lot more in-and-out trading, swing trading and day trading. Over the years I’ve refined it more and more to the point where I’ve got down to pretty much a science. It’s still an art, but the science takes out as much guesswork as possible.

Your strategy is very much focused on growth companies. In terms of fundamentals, what sort of profile are you looking for in a stock?

My books spell everything out much better than I can explain in a brief interview, but from the fundamentals side, if you’re investing in growth companies you’re obviously looking for signs of growth. It doesn’t necessarily mean that just because a company is showing decent earnings, say earnings are up 30 percent over the past few quarters, it’s attractive. It’s really a matter of asking whether it’s doing better than it was previously.

For instance, if you have a company that’s growing at 30 percent annually, but prior to that it was growing at 80 percent or 90 percent, that’s not very good because the growth has slowed. That’s what you saw at Dell Computer in the 1990s. Dell was growing at a rapid rate but it decelerated towards the end of the decade and the stock topped.

But if you take a stock that was previously losing money but is now growing at 10 percent or 15 percent, that’s a big improvement from where it was. That could actually do better than a stock with a higher growth rate that’s actually slowing down.

Sometimes that confuses people, but it’s really the change in growth rate that you’re looking for. Wall Street likes it when things are going better than expected, and when a company suddenly shows that its growth is accelerating faster than anticipated.

So I’m looking for big quarterly earnings growth. But sometimes you’ll get big fundamental changes that aren’t apparent in the earnings. Maybe you’ll have a company that has got approval for a new drug and you might not see it in the earnings. So it depends on the situation and the category a company falls in to.

I treat various industries and different types of companies differently. That’s why I break it down into four or five basic categories. You have Market Leaders, Top Competitors, Institutional Favorites and Turnaround situations. Those are the four that I usually concentrate mostly on. Then you have Cyclical stocks, which I tend to avoid, and anything involving mergers I tend to avoid most of the time as well.

What advice do you have for investors when it comes to honing a strategy and developing a trading style?

One of the problems for the average investor, particularly for those that are new to trading, is that there is so much information out there; information overload is common. There is more than one way to skin a cat, and my way isn’t the only way. It just happens to be the way that I know really well, and I’ve focused on for so many years that I’m good at it.

You can have a value player buying stocks that I wouldn’t touch, and they do very well. Whereas I’m buying growth stocks with P/E ratios that are higher than a value investor would ever think of buying, but we can both do well. The key is to really know your strategy.

But you have to narrow it down and come up with something that makes sense to you and then commit to it. You’re not going to be good at a lot of different strategies. You have to make a commitment to one area and spend time learning it so you become really good at it, rather than just dabbling with different styles. You want to be a specialist, not a jack-of-all-trades.

If you’re going to day trade, that’s a lot different from being a long-term investor. There are going to be different rules to follow - but it’s important to have a set of rules and a process.

It took me a lot of years of course, being successful didn’t happen overnight. I didn’t do very well for almost six years but over time it started to click for me. Nowadays you have access to information that can help shorten the learning curve. When I first started trading, I had to go to the library. I was reading books that were old and outdated, and it wasn’t as easy to get access to good information like it is today.

The investment environment has changed a lot since you started trading. Do you still believe that individual investors have an edge despite new developments like algorithm-driven, high-speed trading?

Absolutely! If you’d asked the average investor in 1930 if it was too complicated and whether the big, rich investors and institutions had the edge, they’d have said yes. If you’d asked them in 1950, 1980, 1990 it would always be the case. It’s always the case that people feel it’s a rigged game and that the big guys have the edge. Actually, it’s quite the opposite; the big guys don’t have the edge. They have a handicap because they have to move big amounts of money and their process is very slow and lethargic.

The individual investor can move very quickly and has a huge advantage. The smaller you are and the smaller your portfolio, the bigger advantage you have. Nowadays, you also have the exact same tools as almost any professional. You have access to the same information, and laws have been changed to level the playing field as far as the information flow. All your tools, your quotes, your execution are as good as anybody else’s. So it’s a great time to be a stock trader and it’s going to just get better and better.

Your approach has some of the hallmarks of other trading legends like Jesse Livermore and Stan Weinstein. Who have been the big inspirations in your trading, and what have you learned from them?

I met Stan Weinstein back in 1990 at a big investment event in New York City. He was a very colorful, fun guy and he really impressed me with his passion for the market. That’s when I began to fold-in the trend work. It really got crystallized for me after I met Stan.

One of my biggest influences early on was Richard Love. He wrote a book called Superperformance Stocks. Richard Love and William Jiler are the two who really are the backbone of the fundamentals side and the technicals side. Jesse Livermore would also be one of my big influences. I would say that I am a modern version of those four traders and I’ve combined and refined the best of each.

Paul Tudor Jones is also someone who I modelled a lot of my trading after, particularly on the risk management side. As commissions came down and I was able to trade quicker and cheaper, I started applying the types of rules that futures traders were using. That meant being much more aggressive with trading stocks, and taking a more mathematical approach and mitigating the risk quickly like if I were a highly-leveraged futures speculator.

Risk management is clearly a major part of your strategy, and particularly cutting losses early. Where do most traders go wrong with this, and why?

Most traders go wrong because they usually don’t have a good strategy to begin with. For most, their egos are more important than making money, and they don’t figure out how to differentiate the two. When a stock goes down, they don’t want to be wrong so they wait until it comes back. The loss gets worse and before you know it, a big chunk of your capital is gone. They hit what we call the ‘uncle point’ where your arm is twisted so far that you can’t take the pain any more. Do that enough times and you start thinking about throwing in the towel; and when your confidence is damaged, then you’re doomed.

Maybe then they’ll read a book like mine and decide that cutting losses sounds like a good idea. They try it, the stock goes down and they sell it and then it turns around and goes back up and takes off and they think: “my god, I’ll never do that again, that was stupid”.

So you have to realise that you’re not going to be right all the time, in fact you’ll likely be correct only about 50 percent of the time. You have to manage the risk, that’s the most important thing. There is a lot of risk in trading stocks. All stocks are risky and that has to be managed. The goal of stock trading is to make more money on your winners than you lose on your losers - it’s not to be right all the time.

For some, it takes a while to shift their thinking, but you have to focus on avoiding big losses by embracing smaller losses.

Selling at a small loss is one challenge, but knowing when to sell for a profit is another difficult subject. What’s your advice on how to run winners and how and when to exit a successful trade?

In my new book what I’ve done is to try and cover all the things I didn’t cover in the first book because I ran out of room! It covers all my rules and the types of things that you should look for when it comes to deciding whether you should hold the stock longer for a larger move. But also when you should reduce or sell the stock even before it hits your stop loss. There’s a whole chapter on selling and a chapter on what I call “violations”.

The main thing is that you have to have rules. Without them you’re just going to be operating from your emotions, your hunches and the seat of your pants. It’s never going to turn out good when you do it that way. So those rules should be based on a sound philosophy, which means sacrificing. Let’s say you are going to be a swing trader for instance, and you buy a stock at 20 and it goes to 30 and you sell it. If the stock takes off and triples you can’t be upset that you weren’t in it because you already accomplished your goal.

Take day trading as another example. A day trader goes flat to cash every night and is out of the market. They’ll go in there and scalp the stock for sometimes a few pennies, or a nickel or a dime or half a dollar. They’re not getting upset when they sell the stock and take 50 cents profit on it if the next day it gaps up 5 points. It’s not part of their business plan.

It’s the same thing if you’re a long-term investor and you buy a stock at 20 and it goes up to 25. You’re trying to play it for a much bigger move and it comes back down and stops you out at 18 or 19 dollars. Now you’re a Monday morning quarterback and thinking you should have sold it at 25. Again, if you’re playing for a larger move, you’re going to have to sacrifice the shorter move. If you’re going to play for the shorter move, you’re going to sacrifice the larger move.

You must define your trading. You have to learn to sacrifice and focus on a particular style, which is all based on having a framework that you operate in. The whole idea of this scientific approach is to remove as much of the emotion and as much of the luck factor.

There are still going to be intuitive decisions to be made: What to buy? When to buy? How much to buy? When to sell? There are always decisions to be made and you’re never going to be truly scientific, it’s still going to be an art. But that’s the beauty of it. If it was purely scientific then you’d be able to put it into an Excel spreadsheet or computer program and let it run, and humans wouldn’t be needed and the edge would be gone. But that’s the beauty about trading, there’s an art to it. That’s the challenging part but it’s also what makes it so rewarding.

What was your best trading year, and what was your performance?

One standout year was 1995, when I was up 412 percent, the 1990s were good, of course. I was out in 2000 and came back in 2004 and had some big triple digit years. Since then I’ve done very well and been very consistent. I haven’t had any down years in perhaps 20 years. Early on, I had a lot of volatile periods when I’d do well and then blow myself up in a few months of bad trading. These days I trade more conservatively and without my whole net worth on the line as I did in my initial years when I was trying to build my capital.

When you look back, is there anything the stands out as being a key moment in your trading?

As far as any one trade, not really, because I’ve traded hundreds and hundreds of thousands of stocks and it’s not like I had one big winner that accounted for my success. My returns have really been produced through consistency and a lot of trading year after year.

When I look back in time, back in the 1980s and early 1990s I was more of an investor holding for larger moves out of pure necessity. As a result, I got some really big movers. The names that I was buying back then, if you look at them today you’d say “oh, of course” - Amgen, Dell Computer, Microsoft, Costco, Home Depot, Gap Stores, etc. But at the time few investors had even heard of those companies, they were all small-cap, underfollowed names. After that, it became sort of a blur because it was a lot of trading and the stocks just became symbols that I was trading on a daily or weekly basis.

Over time, how have your ambitions and the focus in your life changed?

I’ve come to realize that my calling hasn’t just been trading but it is also helping others. My editor told me I was a natural born teacher. I didn’t realize it was something I was good at and it wasn’t really something I planned on doing.

Back in the late 1990s I got in the public eye after winning the U.S. Investing Championship and I was on TV a lot. As a result, I was offered a lot of money by publishers to write a book, but I didn’t because I didn’t want to give away the “secret”. I was advising some very big institutions and I never saw myself dealing with individual investors or having a retail product or doing seminars. To me, I was a just a trader and I wanted to avoid all that. The reasons why I started trading in the first place was that I could be in a room by myself and be responsible for my own success.

But that all changed as I started thinking about passing the torch. When I wrote my first book I was not sure if anyone would even like it. Then I did a seminar and that turned into a big success and I’ve been doing it ever since. So it feels like my ultimate calling is to be an educator; it feels really good when people tell me that I’ve helped them improve their lives.

One of the things that I always tell stock traders is that while you can read about the mechanics behind the big returns from superstars, it’s probably not going to get you the same sort of success unless you feel that you can do it and it’s possible and you believe in your own abilities.

A big part of me writing a book and doing workshops is to empower people to help them understand that not only can they do what I have done, but with the benefit of my knowledge, they can do even bigger and better than what I’ve done. Ultimately, a belief in your own abilities is more important than the strategy.

Build a strategy like Mark Minervini

Mark Minervini is focused on fast growing companies. Before looking at technical analysis, he screens the market for companies with recent earnings accelerations and that are beating expectations.

You can find stocks hitting Minervini's requirements in our Earnings Upgrade Momentum Screen