That’s the basic theory that Charles Biderman, who was recently featured in Forbes and is chairman and founder of TrimTabs Investment Research, follows to manage his ETF, TrimTabs Float Shrink (TTFS).
And it works. Since its inception in October 2011, TTFS has beaten the S&P 500 by 15 percentage points. That’s no small feat, especially during a bull market. Most hedge fund managers would sacrifice their firstborns for such stellar performance.
There are, of course, nuances to the strategy, which Charles explains in an interview with Casey Research’s managing editor Dan Steinhart below. For example, companies must use their own money to buy back shares. Borrowing for buybacks is a no no.
It’s also worth mentioning, you can meet and learn all about Charles’ strategy in person. He’ll be available at Casey Research’s Summit: Thriving in a Crisis Economy in San Antonio, TX from September 19-21 where he’ll be working with attendees to teach them how to beat the market using supply and demand analysis.
And Charles is just one of many all stars on the faculty for this summit—click here to browse the others, which include Alex Jones, Jim Rickards, and, of course, Doug Casey.
Also, you can still sign up for this Summit and meet some of the world’s brightest financial minds and receive a special early bird discount. You’ll save $400 if you sign up by July 15th. Click here to register now.
Now for the complete Charles Biderman interview. Enjoy!
Dan: Thanks for joining us today, Charles. Could you start by telling us a little bit about your unique approach to stock market research?
Using Supply and Demand to Beat the Market: An Interview with Fund Manager Charles Biderman
Charles: Sure. I’ve been following the markets for 40 years. Everybody talks about earnings and interest rates and growth rates and what the government is doing. But here’s the thing: the stock market is made up of shares of stock. That’s it. There is nothing else in the stock market.
So my firm tracks the supply and demand of the stock market. The number of shares outstanding is the supply. Money is the demand. We discovered when more money chases fewer shares, the market goes up. Isn’t that shocking?
Dan: [Laughs] Not very, when you put it that way.
Charles: Whenever I talk with individual investors, I tell them that there’s only one reason for them to listen to me: that they think I can help them beat the market. I’ve spent 40 some years looking at markets in a different way than other people. I’ve found that the market is like a casino: it has a house and players. You know the house has an edge, because if it didn’t, the stock market wouldn’t exist.
Who is the house in the stock market? Not brokers, or even high frequency traders. Companies are the house. As investors, we’re playing with their shares, and the companies know more about them than we do.
I’ve discovered that companies buy back their own shares because they think the price is heading higher. So when a company buys back its own shares using its own money, you should buy that stock too. But only if the company uses its own money. Borrowing money to buy shares is a no-no.
Conversely, when companies are growing their shares outstanding by selling stock to raise money, they don’t like where their stock price is headed. If they don’t want to own their own stock, you shouldn’t either.
My basic philosophy is to follow supply and demand of stocks and money, and you can’t go wrong.
Dan: Your theory has worked very well in practice. Your TrimTabs Float Shrink ETF (TTFS) beat the S&P 500 by an impressive 12 percentage points in 2013. And that’s really saying something, considering how well the S&P 500 performed.
Charles: Yes, and we’ve outperformed the S&P 500 over the past year as well.
Dan: What specific investment strategies did you use to generate that return?
Charles: Our fund invests in 100 companies that are growing free cash flow—which is the money left over after taxes, R & D, capital expenditures, and dividends—and using it to buy back their own shares.
We modify our holdings every month because we’ve discovered that the positive effects of buybacks only last for a short time. So when a company stops shrinking its float, we kick it out. Our turnover is about 20 stocks per month.
Dan: The supply side of the equation seems pretty straightforward. What do you use to approximate demand? Money supply numbers?
Charles: Sort of. Institutions own around 80% of the shares of the Russell 1000, so we track the money that flows through them into and out of the stock market.
We also track wage and salary growth. We’re not interested in income generated by government actions, but rather by the wages of the 137 million Americans who have jobs subject to withholding. Money for investment comes from income. People can only invest the money they have left over after they cover expenses.
Income in the U.S. is currently around $7.5 trillion per year. That’s an increase of around $300 million over last year, or a little under 3% after inflation. That’s not sufficient to generate money for investment.
However, the Fed’s zero interest rate policy has showered companies with plenty of cash to improve their operations. As a result, many industries have record high profit margins. But at the same time, most management teams are still afraid to reinvest their profits into expanding their businesses because they don’t see final consumption demand growing. So these companies have been buying back their shares instead. The total number of shares in the market has declined pretty much consistently since 2010.
An investment institution typically targets a specific percentage of cash to hold, say 5%. So when a company buys back its own stock from these institutions, the institutions now have more money and fewer shares. To meet their cash allocation target, they have to go out and buy more shares. So the end result is more money chasing fewer shares.
This is why we’ve been experiencing a “melt-up” in the market. It has nothing to do with the economy—it’s solely due to supply and demand. And as buybacks continue, stock prices will continue to rise.
The caveat is that unless the economy recovers in earnest, the gap between stock prices and the real-world economy will continue to grow. At some point, it will get too wide, and we’ll get a bang moment similar to the housing crisis, when everyone realized that housing prices were too far above their underlying value in 2007.
Dan: Do you monitor macroeconomic issues as well?
Charles: Yes, but as I like to say, all macro issues manifest as supply and demand eventually. Supply and demand is what’s happening right now. All of those other inputs get us to “now.”
Dan: I understand. So you’re more concerned with the effects of supply and demand than the causes.
Charles: Right. Price is a function of the world as it exists right now. If you don’t have cash, it doesn’t matter how fantastic stock market fundamentals look. Without cash, you can’t buy, no matter how compelling the value.
Dan: Could you share a preview of what you’ll be talking about at the Casey Research Summit in San Antonio?
Charles: I’ll be giving specific advice to individual investors on how to beat the market. Outperforming the overall market is very difficult to do, and earnings analysis and graphic analysis has never been proven to do it over a long period. Supply and demand analysis has. So I will work with attendees and show them how to apply those strategies to beat the market going forward.
Dan: Great; I look forward to that. Is there anything else you’d like to add?
Charles: The phrase “disruptive technology” is popular today. I think investing on the basis of supply and demand is a disruptive technology compared with other investing strategies, most of which have never really worked. Cheap, broad-based index funds are so popular because very few investing strategies offer any real edge. I believe supply and demand investing gives me an edge.
Dan: Thanks very much for sharing your insights today. I’m excited to hear what else you’ll have to say at our Thriving in a Crisis Economy Summit in San Antonio.
Charles: I’m looking forward to the Summit as well. I hope the aura of the San Antonio Spurs’ victory will rub off on all of us.
Dan: Me too. Thanks again.
The article Using Supply and Demand to Beat the Market: An Interview with Fund Manager Charles Biderman was originally published at Casey Research
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