This is the final part of a three-part interview series in which I sat down with Dr. Christian Kacher, former portfolio manager for William O’Neil + Co., managing director of VirtueOfSelfishInvesting.com, and chief investment strategist for MoKa Investors, LLC.
Ward: What were some of the stocks you played in the 90’s when you were at William O’Neil? What were some of your big winners?
Kacher: Well, the science side of me loved looking at companies before they were IPOed, to learn their business model and to see where they stood relative to their competitors. Sometimes, like in the case of eBay (NASDAQ:EBAY), there were no competitors. In fact, I had no idea that such a model even existed at the time and when it ended up on my desk I almost fell off my chair. I immediately thought, “Why didn’t I think of that?” When eBay IPOed in September of ‘98, the market had yet to see its lows for the year. It just wasn’t acting right so I was in cash. I remember eBay proceeded to lose about 50% from its IPO price. It ended up turning around when the weight of the market came off in late October and formed what I called a “U” pattern. It then gapped up to new highs from this “U” pattern in late October. I took my first position there. It formed a very tight two weeks and ran up against the 10 day moving average. I bought again on strength, as it bounced off the 10 day. So I had the two very nice positions in the stock and it proceeded to go up fourfold from there.
It’s very important to know the company’s fundamental backdrop so that you have the confidence to buy a stock that forms, say, a “U” pattern and gaps up. I can remember that eBay looked quite extended, but because I knew what the stock did I went in fearlessly and bought my starting position, which was actually quite sizable. It was a 25% position. For stocks that you plan to pyramid into you have to know exactly what the company does and where it stands in its space to be able to buy a stock in size, not just twice but maybe three, four or five times as it keeps going higher. You also want to be able to hold it when it corrects to the 50 day moving average. For me, if it respects the 50 day I may decide to hold that stock over the long run.
Now, I’ve bought some stocks where the fundamentals were perhaps not A+. I’m buying them for more technical reasons. In that case, I would weigh technicals 60% and fundamentals 40%, knowing full well that this is not going to be a long-term hold. In other words, I think that I can get some bang for my buck, but I’m not willing to hold the stock all the way back to the 50 day. For those trades that I think have the best shot of becoming what Bill would call a “Model Book” stock, however, I would put the fundamentals at 60% and the technicals at 40%.
Ward: What would the minimum criteria be for the more technical trades? I’m thinking about some of the internet stocks back in the 90’s that had no earnings but big sales and large forward earnings estimates.
Kacher: The market is always evolving and one of the things that I respect so much about Bill O’Neil is his ability to change with the times. As his head analyst, one of the things that I noticed was that a lot of these internets didn’t have any earnings but they had a great story. Amazon (NASDAQ:AMZN) is a perfect example. Look at the huge run it had and it never had a positive quarter. So I created a new metric of sales. I guess this was revolutionary thinking at the time. Today it just seems like a no-brainer. But back then I remember thinking, “Okay, Amazon has great sales. It has first-mover advantage in its space and it’s the dominant player. It’s the leader. Let’s watch this very closely.”
You know, Bill’s the kind of guy that if you bring an idea to his attention he might not accept it that first time, but as you show him more and more evidence he’s going to change his mind. I think we’re all like that when we are in our best moments. Most people, however, have a resistance to changing with the times.
The biotechs are a different kind of example because not only did they have no earnings, they had no revenues either. When in late 1999 Celera Genomics made the announcement (sequencing the human genome) and you saw the whole group take off, I was quite interested on a technical level. There was a lot of bang for your buck there, right up into March of 2000. As far as earnings, though, there was really nothing to go on. It was just the story behind the company. So I started isolating those genomic and proteomic stocks that I felt had the best shot at outpacing the market. My ideas were not embraced at the firm, though. All I could say was these stocks have incredibly high relative strength and they’re in the right space.
It was very easy for me to trade these stocks because I’d seen the internet stocks in the late 90’s run up on Wall Street’s perception alone. Even though some of these internets had no earnings and were in some cases light on the revenues, if the pattern was right and there was strong momentum I would take a position if the Street had a positive view of the company. That was part of the reason why I had triple digit returns in 2000. I was able to play these stocks that were involved in genomics very effectively.
Ward: What percentage of your portfolio would you commit to these types of stocks? Was there a limit?
Kacher: Generally speaking, yes. Yet as the momentum increased in the group I started to buy bigger positions, knowing full well that the odds were overwhelmingly in my favor and I could go in fairly aggressively. Actually, with CRA (Celera Genomics) I’d amassed a 45% position, the largest stake in one stock that I’d ever had. See, I’m not a plunger. I don’t like going big in stocks. Typically, I would never buy more than a 25% position. That’s the absolute maximum. With Celera, though, I was up to 45% before the stock even really had a move because I knew I had a winner. When all the ducks are in a row, as they were with Celera, you go and initiate a position. Well, “ducks in a row” isn’t quite the correct expression, as it doesn’t really speak to how perfectly aligned everything was when I bought that 45% position in CRA.
Still, these situations are very rare. I remember in the last quarter of ‘98 I’d been studying the fundamental stories of different groups and I’d isolated the group that I felt simply had everything going for it. I went big into four names, 25% positions, which represented 100% of my 200% buying power. It wasn’t two days from that point that they were all up over 10%. I remember calling Gil and saying, “I’ve nailed the four horsemen!” It was a great feeling because it was as if it had to happen. It was one of the best quarters, in terms of my performance, on record.
Another memorable stock was CMGI (NASDAQ:MLNK). It just kept forming base after base. It’s very rare that a stock will form fifth, sixth and seventh stage bases and just keep on going and going. Yet its model was exceptional. It was diversified in various internet companies and so it had staying power, especially from 1996 to 2000 when the internet really took off. Just a phenomenal stock with very buyable patterns. The market is simply the most challenging analytical puzzle that I’ve ever run up against. It certainly will hold my interest till I drop.
Ward: What inspired you to resurrect Virtue of Selfish Investing (virtueofselfishinvesting.com)?
Kacher: The mission, it’s taken from O’Neil’s view of educating the average person out there in a way that, instead of giving them a fish, teaches them how to fish. Subscribers get access to the minds of two of O’Neil’s former market wizards. People appreciate the dedication that we put in and we’re excited going forward. We want people to always get something substantive out of our reports.
Ward: Well, you’ve certainly provided a lot that is substantive today, Dr. Kacher. Thanks for the talk.
Kacher: It was a real pleasure.
Dr. Christian Kacher, Gil Morales and the author
Disclosure: No positions