Money Pro: A stock market sleuth tracks down winners by following the money-flow trail
When reporters Bob Woodward and Cart Bernstein sought to unravel the mystery behind the 1972 Watergate break-in, a key source told them: “Follow the money.’’ The strategy worked for them — and it could work for you too.
At least, that’s the message for investors from Laszló Birinyi, former director of equity analysis at Salomon Bros. He says that small investors who follow money-flow trends can capture profits on stock moves. All you have to do, he says, is zero in on the actual dollars being committed to buying or selling individual stocks. “The single most important indicator of future price performance is the eagerness of major investors to put money into a stock,” explains Birinyi, 46, who left Salomon last year to launch his own New York City investment research firm for institutional clients. “And the most reliable way to gauge that eagerness is to count up the dollars they’re willing to lay on the line.”
Birinyi relies on his own sophisticated computer software system to add up the dollar value of all trades that take place at a higher price than the previous transaction and subtract all those made at a lower price. He says small investors can get the same information, however, from any one of the major brokerages that track money flow electronically. Most will supply money flow data on a few stocks for no charge. Once you have the numbers, interpreting the results doesn’t take much detective work. “If you learn that investors are pouring money into a stock, despite a sagging price, then you know their interest is genuine, and the shares will rebound and continue to head up,” Birinyi says. “But if they’re unloading their shares, even on price rises, you probably should avoid that stock.”
Birinyi first hit upon his money-flow system while he was working as a trader in the mid-1970s for Mitchell Hutchins. “1 learned to look beyond a stock’s closing price, which rarely tells the whole story,” he says. In fact, according to Birinyi’s research, about 20% of all advances and declines registered at the final bell conflict with the dollar amounts of those stocks bought and sold during the day.
Birinyi offers this hypothetical example. Consider, he says, a stock that trades four times in one day. At the opening bell, 100 shares trade up 25¢, followed by a transaction involving 50,000 shares down 25¢. Then in the afternoon, a 200-share trade comes in up a quarter, and just before the close, 10,000 shares change hands down 25¢. Result: the stock price — which is determined by the amount investors are willing to pay for their trades, not the number of shares involved — is unchanged for the day. But money-flow watchers know that the big 10,000- and 50,000-share investors were willing to take small losses to get out — an important sign of impending weakness for the stock price.
What do money-flow indicators say about today’s stock market? Despite January’s sharp slide in stock prices, the big money has not been rushing for the exits, notes Birinyi. He predicts that the market, as measured by the Dow Jones industrial average, will continue to fluctuate between 2500 and 2800 for the next three to six months. But he notes that there are some early signs of strength among capital goods and technology stocks that are not yet reflected in their prices. For instance, big investors sank some $2 million into Fluor (recently traded on the New York Stock Exchange at $41.25), an engineering and construction company, over a four-day period in mid-January. And $21 million poured into Compaq Computer (NYSE, $86.25) during the first three weeks of the year. (For more of Birinyi’s money-flow picks and pans, sec the table on page 171; for a contrary view on two of these stocks, see page 57.)
In addition to tracking money flow. Birinyi also encourages small investors to take advantage of ways in which they have an edge over their institutional counterparts. “In a trendless market, for example, the individual investor can use volatility in a way the big guys can’t,” Birinyi maintains. One strategy is to study the trading range of a company you like over a three-month period. Then, using a discount broker to minimize transaction costs, put in a limit order — an instruction to buy or sell a stock at a specific price — to buy whenever the price nears its recent low. Finally, enter another limit order to sell your issue at its recent high — and let volatility pay off for you.
Moreover, Birinyi says, small investors can often spot opportunities for profit that institutions overlook, particularly in consumer companies that they deal with every day. His favorite example: Woolworth (NYSE. $60.50), whose stock rose 71% between 1983 and 1985. mostly on buying from individual investors who recognized that the discount chain had successfully upgraded its stores. “The average institutional money manager is not likely to shop at Woolworth.” Birinyi notes. “But individual investors did and realized the company’s potential.” A current candidate: Sears (NYSE, $39.25), the world’s largest retailer. Despite the retailer’s flat net income last year, investors funneled $30 million into the stock in January. perhaps in recognition of the stunning success of Sears’ Discover card.
All too often, chides Birinyi, individuals fail to act on the opportunities they understand best — and as a result lose out. He notes, “If the small investors who bought Japanese cars in the early ‘80s had also spent some of their money on the stock of Japanese car makers, they might be driving Rolls-Royces today.”