Rock star of the investment world

Opinion

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This article was published 18/10/2009 (5830 days ago), so information in it may no longer be current.

If there were such a thing as rock stars of the investment world, Dennis Gartman would be the enfant terrible, punk rocker. Except, instead of a Mohawk, studded-leather jacket and piercings, his getup looks a lot like that of a high school principal —- a finely trimmed beard, grey, horseshoe-patterned hair and gold-rimmed glasses. But don’t be fooled by the scholarly appearance.

Among traders, Gartman is a rock star. His daily newsletter, the Gartman Letter, is widely followed by traders and investment managers at the world’s leading banks and brokerage firms. You might even say knowledgeable investors would pay concert scalper ticket prices for the opportunity to chat with him for an hour.

And, while he’s admired for his success as a trader and incisive understanding of market dynamics, he is equally renowned for his outspoken, against-the-grain commentary. He makes regular appearances on Fast Money on CNBC in the United States and the Business News Network in Canada. But he is likely known best for calling probably the world’s most respected investor, Warren Buffett — a.k.a. the Oracle of Omaha — an idiot.

While in town recently to speak to investors with MGI Securities, Gartman sat down with the Free Press to discuss everything from investment tips to pointers for buying fine art.

Here are some of the highlights:

 

On hedge funds…

Gartman is a hedge fund manager and believes the term hedge fund has received a bad rap because of Bernie Madoff’s Ponzi fund and Bear Stearns’ leveraged subprime real estate fund, which were hedge funds only in name. "(People) should understand the word hedge," Gartman says. "What are you doing to ameliorate risk?"

Basically, hedge funds should hedge your bets. They have been made out to be exotic, but real hedge funds are more conservative than we think. "Somebody walked up to me at my club and says, ‘Dennis, I understand you are a trader and manage a hedge fund.’ I said, ‘I do, but I like to keep it quiet.’ He said, ‘You must be fearless when it comes to the market.’ "

To that, Gartman replied, "Fearless? I’m afraid of everything!"

 

On trading…

Gartman trades just about everything, but because he’s a hedger, he will often trade long (expecting an increase in price) on one investment, and short (expecting a decrease in price) on another related investment. "In the last several months, we’ve traded cotton, corn, soybeans, pharmaceutical stocks, the Canadian dollar, the Aussie dollar, British pound sterling, Japanese yen, German stocks — you name it," he says.

"I am always looking for ideas. I am always looking for trades and I try to keep it simple." (By the way, Gartman says he loves anything Canadian right now: the currency, the banks, the government policy and the fact Canada is rich in commodities.)

 

On sleep…

While his appearance doesn’t betray sleep deprivation, Gartman claims he barely rests his head on the pillow at night. "I work literally 21 hours a day. I only sleep three hours a day. I have for 40 years," he says. "I find sleep to be a useless enterprise."

 

On his intelligence…

Gartman adds he foregoes sleep because he doesn’t have the big brain to match his peers. "You have to remember that I have an IQ of 60, so in order to bring myself back to par with everybody else, I have to do away with sleep," he says. "Of course, it’s not 60, but you ask my daughters and they’ll say it’s 60 on a good day. I know that there are so many people out there who are smarter than me."

 

On being too smart…

But the problem with smart people, he says, is they are often too smart for their own good. Gartman says he believes his lack of smarts has been what has sustained him as a successful trader. "I’ve watched Nobel laureates in economics fail at this all the time," he says. He cites the case of Long-Term Capital Management, the famed hedge fund of the ’90s that employed Myron Scholes and Robert C. Merton, both Nobel Prize winners for economics. They created a mathematical model to predict bond markets, exploiting miniscule differences in government bond prices. In order to make money — lots of it — the firm leveraged itself several times the assets it actually held. "I would be awestruck at the abject wisdom that existed in the rooms of Long-Term Capital Management, and yet they totally and completely blew up," he says. "They believed their own bulls ." Their models were allegedly foolproof, but they couldn’t predict events such as the Asian Crisis in 1997 or that Russia would default on its loans in 1998. Suddenly, the company was billions in the red and out of business. "What I’ve learned is the market’s job is to test everyone all the time," he says. "It wants to see if you are humble; it wants to understand if you can understand that it’s smarter than all of us."

 

On being wrong…

Gartman knows he’s wrong most of the time — which he says is another reason for his longevity in the business. "My win-loss percentage is just horrible," he says. "I lose at least 80 per cent of the time, but the more losses I take, the better off my performance is." What’s his secret? It’s very simple. He keeps his losses small. "If there is one secret to the business, that is the only secret to the business," he says. "In my office we have this very simple mantra, and it has served me well: ‘Let’s try our best to do more of the things that have been working, and let’s try even harder to do less of the things that have not.’ "

 

On collecting art…

While in Winnipeg, he and his wife visited the Loch Gallery and purchased two pieces by Toronto-based painter Philip Craig. "I am an art history buff so I know a little bit about painting," he says. "The closest thing I could relate (Craig) to would be a modern impressionist. He does wonderful, bold brush strokes." As for advice on collecting art, Gartman’s strategy is the opposite of the big-picture, broad strategies he espouses for trading. "The only way to do it is to be parochial (narrow-minded) rather than catholic (wide-ranging)."

 

Biggest mistakes investors make…

"Averaging down — that’s what kills everybody," he says. "It’s the carcinogen of most investors." Traders average down by buying more of the same stock when its price drops. By purchasing more at a lower price, it lowers the average cost of the investment. "People start buying some stock at $40 because the fundamentals are good. It goes to $35. The fundamentals are still good so they buy more. Then at $30, the fundamentals are still good so they buy more," he says, adding this strategy crushed some investors in Nortel and Enron, both of which looked good on paper on the way down. "You’re digging your hole deeper. Why would you do that?"

 

Best advice for investors…

They should average up. "If you buy a stock at $20, and it goes to $25, the market is telling you you’re right," he says. "Why don’t you do more? The average person always hears the line, ‘You never go broke taking a profit.’ That’s garbage." (These dos and don’ts are at the centre of Gartman’s investment philosophy. He increases his positions when they go up in value; he sells an investment when it drops in value. To do this, he puts a stop-loss order on an investment to sell it when it drops more than five per cent. The strategy can involve a lot of trading, and because Gartman trades in larger volumes, it’s cost-effective. But it may not be for average investors whose trading costs are higher, says Bernie Plett, investment adviser with MGI. Still, all traders — regardless of size — can benefit from stop-loss orders to limit losses.)

 

On reading financial statements…

Income, cash flow and balance sheets can tell you a lot about a company’s financial health, but they don’t tell you much about its stock price, Gartman says. "For example, the best trade I have on right now is long on newspaper stocks. They’re projecting losses as far as the eye can see. They have balance sheets that look like crap. The print news model is obviously broken, but the stocks have rallied several hundred per cent. Then, why in God’s name would I look at a balance sheet?"

 

Been down so long, it looks like up to Gartman…

So just how does he find good investments? "The best ideas are the ones that have been beaten up badly and are not going down anymore when the news is bad. That’s the most important thing that I’ve learned. After something has been going down for a long period of time and it stops going down, I start to put it on my radar screen. And then, if all of a sudden some really horrific news comes out, like a shockingly bad earnings announcement, and the stock goes higher, I’m buyin’ it."

 

On the meltdown…

Last year was a horrible year for most traders and Gartman says he was no exception. "I lost 1.1 per cent. I couldn’t believe that I was that stupid. Everybody else lost 35 or 40 per cent, but I don’t care," he says. "I’m not paid to lose 1.1 per cent; I’m paid to grind out eight or nine per cent."

 

On Warren Buffett (at last)…

In a follow-up email, Gartman addresses the so-called "idiot" comment about Buffett. "What I said about Mr. Buffett was that it was idiotic that he allowed his fund to lose more than 40 per cent in value during the bear run; that was and is inexcusable. Did I say that Mr. Buffett was an idiot? No. I said that I’m an idiot, but that what he did was idiotic," he writes. "Further, nothing is more important in the business of investing than recognizing when one is wrong and taking action to make certain that one does not become even more wrong. You are wrong when you are losing money; it is that simple, so avoid losing money by cutting your losses as swiftly as possible, while adding to your few good ideas. The losing ideas are myriad; the winning trades are few."

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