Book Review: Beat the Market: Invest by Knowing What Stocks to Buy and What Stocks to Sell | stockbee


Book Review: Beat the Market: Invest by Knowing What Stocks to Buy and What Stocks to Sell

Beat the Market: Invest by Knowing What Stocks to Buy and What Stocks to Sell

  • If you would like to learn about a method which beats S&P by over 7.7 times over last 25 years, then this book is for you.
"Over the past 25 years, Charles D. Kirkpatrick's exclusive stock-picking technique has outperformed the S&P 500's performance by a whopping 7.7 times. That's right: If you'd invested $10,000 in the S&P 500, you'd have $130,000 now...but if you'd followed Kirkpatrick's published picks, you'd have $1,000,000! If that's not amazing enough, Kirkpatrick's system is remarkably easy to use.In this book, he teaches you all you need to put it to work in your portfolio! Kirkpatrick reveals why an active strategy based on relative stock rankings is the surest route to profit, and how just a few pieces of publicly available information enable you to create rankings that virtually guarantee exceptional performance."
  • This book by Charles Kirkpatrick was published in September 2008. Charles Kirkpatrick has been studying relative strength for more than 25 years. In this new book he synthesises his many years of research to come up with a very simple relative strength and value based approach to investing. The method he proposes is very simple method which involves weekly data. It at best involves a few hours of work on weekend and is easily replicable. It is a complete turnkey approach detailing what stocks to buy, why, when, how much, where to put stops and when to exit.
  • This book presents data to question some of the most widely held beliefs in market. It has created a buzz amongst knowledgeable traders and the word about the book has spread by by word of mouth and most people who read it are amazed by the simplicity and the profitability of the system.
  • Who is Charles D Kirkpatrick and what makes his system so unique.
Charles D. Kirkpatrick II, CMT is currently president of Kirkpatrick & Company, Inc., Kittery, Maine. This is a private corporation specializing in technical research that publishes the Kirkpatrick Market Strategist advisory newsletter.
In the recent past, Mr. Kirkpatrick has been a director of the Market Technicians Associationan association of professional analystsand served on its Dow Award Committee, Education Committee, and as chairman of the Academic Liaison Committee. He was editor of the Journal of Technical Analysis—the official journal of technical analysis research—and an instructor in finance at the Fort Lewis College School of Business Administration in Durango, Coloradoone of only seven colleges (as opposed to universities) in the U.S. accredited by the Association to Advance Collegiate Schools of Business (AACSB). In 2007, with coauthor, Professor Julie Dahlquist, he published a textbook on technical analysis: Technical AnalysisThe Complete Resource for Financial Market Techniciansnow used in university finance classes and the Market Technicians Association’s professional education programs.
In addition, Mr. Kirkpatrick has received awards from his peers. In 1993 and 2001 he received the Charles H. Dow Award for excellence in technical researchand in 2008, he received the Market Technicians Association Annual Awardan award given once a year to someone for “Outstanding Contributions to the Field of Technical Analysis.” He is a graduate of Phillips Exeter Academy, Harvard College, and the Wharton School of the University of Pennsylvania, and served as a decorated combat officer in the First Cavalry Division in Vietnam. He currently resides on an island in Maine with his wife, Ellie, and various domestic animals.
  • The book advises a reaction technique, dubbed STRACT to beat the market. It involves no prediction, it just reacts to the market and data. STRACT refers to three step reaction: setup, trigger, and the action. It offers STRACT buy and sell setups. So if a stock meets certain scan conditions it qualifies for a buy and when it satisfies certain scan conditions , it triggers a sell.
  • For last 25 years the author has been following a "relative" approach to equity selection. Stocks are ranked either by relative value, relative earnings or relative strength. So when looking for value the author does not look at the value of company but as a relative value compared to all other stocks in the market.
  • For ranking stocks by value the author uses the price to sales ratio. The logic being sales are comparatively difficult to manipulate compared to earnings. He uses price to sales ratio of last four quarters and compares it to previous four quarters a year ago. But instead of looking at absolute value, he looks at relative ranking of stocks using the ratio. The P/S ratio is very easy available information and all finance sites provide this information.
  • For ranking stocks by growth the author uses change in earnings. Again he looks at last 4 quarters of earnings growth compared to previous year 4 quarters. But instead of looking at absolute value, he looks at relative ranking of stocks using the earnings growth rate.
  • For measuring relative strength the author follows a approach similar to the approach outlined by Robert A. Levy in his 1968 article in Journal Of Finance:Relative Strength as Criteria for Investment Selection . Levy proposed using a ratio of closing price/131 day moving average to calculate price relative strength. The author uses 121 days instead of 131.
  • Charles Kirkpatrick key findings about relative value based stock selection are:
    • There is inverse relationship between relative price to sales ratio and relative price performance
    • Stocks with relative value percentile of 17 to 47 have best chance of outperforming the market over the following three months
    • Stocks with ultra low valuation (relative valuation below 7 percentile) have poor performance.
    • Stocks with relative percentile between 87 and 99 are worst buy candidates.
    • In a bear market the best buy candidates based on relative valuation are between 17th and 27 th percentile.
    • The best sell triggers are above 57 percentile or below 7 th percentile during bear markets
  • Charles Kirkpatrick key findings about relative earnings based stock selection are:
    • Relative earnings growth is a poor criteria for selecting stocks ( IBD followers might find this news very disturbing!!!)
    • Stocks with top 10 percentile ranking by relative earnings growth (or in other words stock ranked 90 % plus by EPS raning) perform poorly compared to market
    • The authors research conclusively proves that using relative earnings to select stocks for future performance has no edge.
    • Stocks with relative EPS percentile of 42 to 87 are good selection candidates for 3 to 6 month holding period.
    • During bull market relative earnings is as effective method for selecting stocks
  • Charles Kirkpatrick key findings about relative price strength based stock selection are:
    • The most reliable technique for selecting stocks in both bull and bear market is relative price strength
    • it does not work for short periods (below 3 month holding periods) and periods longer than a year
    • relative price strength breeds more relative price strength and relative weakness breeds further weakness.
    • Stocks with relative price percentile rank above 47 outperform market in next 3 month, but higher the rank the better
  • Neither relative price strength nor reported earnings growth nor relative valuation has any predictive value 12 months in future.
  • By combining relative price strength and relative value ranking the author creates a "bargain list" every week. The Bargain List Model is the heart of this book.
  • Bargain List buy triggers:
    • Relative price strength>=97
    • Relative price to sales percentile>=17 and <=42
    • Market cap>1 Million
    • stock price> 10
  • Bargain List sale triggers:
    • relative price strength <52>
    • relative price to sales percentile <=7 or >=67
  • You can set this up in Telechart very easily. See my post about this:

  • The author offers three methods for creating a portfolio using the above stock selection approach:
    • Fully invested portfolio in bull and bear market
    • Adjusted for market capital risk using max number of stocks
    • Adjusted for market cap risk using simple moving averages
  • So if you want to beat the market this book is a worthwhile investment. It is a small 157 pages book, very well written and above all offers you one of the simplest method to beat the market.

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Do you have a trial?

If you are just looking for trial you are better off trying thousands of other trading site that offer free trial or one month trial and offer you promise of riches.

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Complacent Panda said...

Bought it two days ago through amazon. Hoping to get it by Friday.

Thanks for sharing it.

RJ said...

Hey Pradeep,

you are always so up on momentum topics so you may have already seen this but if not, I thought you might like to check it out. Here is a link a recent paper for LSE on momentum. Cheers! Rhonda

Pradeep Bonde said...


Complacent Panda said...

Excellent book. Thanks again.