What'sBehindTheNumbers:AChatWithJohnDelVecchio

businessinsider.com/whatsbehindthenumbersachatwithjohndelvecchio201210

WallStreetSectorSelector

Oct.31,2012,5:32PM
2,331

JohnDelVecchio,managerofActiveBearETF,discusseshisnewbook,WhatsBehindThe
Numbers.
JohnNyaradi:Hi,everyone.ImJohnNyaradi,PublisherofWallStreetSectorSelector,afinancialmediasite
specializinginexchangetradedfundsandglobalmarkets,andtodayImreallypleasedtowelcomeourspecialguest,
JohnDelVecchio.John,welcometoWallStreetSectorSelector.
JohnDelVecchio:Thanksforhavingmeback,John.
JohnNyaradi:Greattohaveyouhere,John,likealways.WheneverItalktoyou,Ialwayslearnalot.JohnDel
VecchioisthecofounderandcomanageroftheActiveBearETF.ThatssymbolHDGE.ActiveBear
(NYSEARCA:HDGE)isanETFdedicatedtoshortingindividualstocksthathavefundamentalredflagsaroundthem.
Previously,JohnwasahedgefundmanagerforRangerAlternativeManagement.
HecoadvisesanewsletterforMotleyFoolandisacharteredfinancialanalyst.TodayweregoingtotalkaboutJohns
newbook,WhatsBehindtheNumbers?:AGuidetoExposingFinancialChicaneryandAvoidingHugeLosses
inYourPortfolio.IthasbeenwellreceivedandhasbeennamedBestInvestmentBookof2013byStockTraders
Almanac.
Soletsstartatthetop,John,whydidyouwritethebookandwhatcanpeopleexpecttogetoutofit?
JohnDelVecchio:Wewrotethebookinordertohelppeopleavoidabiglossintheirportfolio.SoeventhoughIma
shortsellerandItrade,itsnotreallyabookaboutshortselling.Itgivesinvestorstoolstoidentifycompaniesthatthey
mayownthatareshowingredflagsthatcouldbeasignoftroubleahead.
ADVERTISING
inReadinventedbyTeads
Ourviewisthatavoidingabiglossisreallymoreimportantthangeneratingalargegain.Ifyoulose50%ofyournet
worth,forinstance,youhavetogain100%justtogetbackevenandwefeellikeanybody,whetheritsadoityourself
investororamoresophisticatedprofessionalassetallocator,woulddowelltolearntoolsandtechniquesthatwillallow
themtoavoidlargelossesintheirportfolioandthatswhatwedowithinthecontextofthebook.
JohnNyaradi:PartOnetalksabouttherealriskofstockinvesting.Whatistherealrisk?
JohnDelVecchio:Moststocksareactuallylosersovertime.Soimagineweweretalkingin1970sandwewere
talkingaboutEastmanKodakandPolaroidandGeneralMotors.Thosewerewidowsandorphanstocksbackthenand
nowfastforwardtheclock30yearsandtheyrealldeadmoney.Theninthe1990s,wehadIntel,Microsoft,Dell,Cisco,
thosewerethefourhorsemenoftheinternet.

Theyvenowbeenessentiallydeadmoneyforthelast12,13,14years.Sothewinnersfromonegenerationare
generallynotthewinnersofthenextandincapitalism,ingeneral,youcanthavealotofwinners.ForeveryWalMart,
youvegot40regionalretailersthatdontexistanymorebecauseWalMartbeatthemintermsofdistribution,
technology,pricing,whateverthecasemaybe.
Sopickinganindividualstockisariskyendeavorbecauseyourebettingonyourabilitytoidentifythatonecompany
thatsgoingtobeamassivesuccesswithinasectororinthatparticularcycleofthemarket.Sothatswhereitsvery
dangerous.
Itsalsoverydangerousinthatitdependsonreallythe20to30yeartimeframeinwhichyouaregeneratingyour
highestincomeandyourhighestsavings.Ifyouwereinvestingfrom1968to1982,chancesareyoudidntmakeany
moneyandyouprobablylostabout70%inrealtermsjustbecauseofinflation.Ifyouwereinvestingduringthebull
marketfrom82to2000,youprobablydidprettywell.Butthelasttenortwelveyearshaventbeenthatgreat.
Sowhilepeopletalkaboutstocksforthelongrun,oftentheyretakingabout100or200yeartimeframes.Idontplan
onliving200yearssothetwentyyearsinwhichImgeneratingmyhighestincomeandsavingsarethemostimportant
formeintermsofsecuringmyfuture.
AndtheoddsarejustagainstyouforbeingabletoidentifythecompaniesthataregoingtobethenextGoogleor
Apple.Sowetalkaboutcertainwarningsignsthatultimatelywillbereflectedinalowerstockprice.Wewalkthrough
incomestatements,balancesheets,cashflowtohelpyouspotthesetroublesignsbeforetheyoccur.AndIthinkthe
bestthingaboutthebookisthatthesearerealtimecasestudiesthatwerewrittenandpublishedinrealtimeandthen
showyouwhatoccurred,youknow,6monthsto2yearsafterwehadidentifiedthesethingsbeforethestockactually
blewup.
JohnNyaradi:Youtalkabouttwocommoninvestingthemes,dollarcostaveragingandbuyandhold,anditsounds
likeyoudontendorseeitherofthosetoomuch.
JohnDelVecchio:No,theproblemwithdollarcostaveraginganindividualstockreallycomesfromBillMiller,the
famousmutualfundmanagerfromLeggMason.HismantrawasLowestaveragecostwins.
Andsowhenstocksgoagainstyou,youbuymore.TheproblemiswhenyouownEnron,AIG,FannieMae,Freddie
Mac,WorldCom,allthesecompaniesthatwerebasicallybankrupt,andheownedthemall,itdestroysyour
performance.Sodollarcostaveragingduringamassivemeltdowninthemarketisessentiallyputtinggoodmoney
afterbad,inourview.Conversely,PaulTudorJonesisprobablythegreatesttraderofourlifetimeandhesaysthatthe
markettellsyoufairlyquicklyifyourerightorwrongandsodontaveragelossesbutactuallybuildonyourwinning
positions.
JohnNyaradi:Part2ofyourbookistitledAvoidHugeLosses.Howdoyoudothat?
JohnDelVecchio:Fromalongperspective,wewanttobevalueinvestors.Wewanttobuyadollarsworthofan
assetforfiftycentsthathasacatalystthatwecanforeseethatsgoingtoallowthatvaluetoberealized.Maybeitsthe
saleofanassetortherealizationthattheassetisworthmorethanitsbeingcarriedforonthebooks.Wealsoshow
theresrealvalueinhavingalong/shortportfoliothatcanofferasmootheroverallreturn.
Havingsomeshortsinyouportfoliotobufferagainsttheinevitabledownturnisreallyvaluable.Itseemslikethe
hundredyearstormoccursabouteverythreeyearsnow.
JohnNyaradi:Howdoyouusechartsandwhatsyourfavoritechart?
JohnDelVecchio:Werelyquiteabitonpriceandvolumeandrelativestrength.Somyviewisthatthetechnical
usuallyleadsthefundamental.Youstarttoseesellinginastockbeforeeverybodycatchesontothefactthatthe
fundamentalsarequestionable.Thatmightbereflectedinhighvolumewhenthecompanyissellingoffandlittle
volumewhenitsrallying.Theremightbedivergencesbetweenthepriceandtherelativestrength.Somaybetheprice

isreachingnewhighsbuttherelativestrengthisnotandthatsbecauseaninstitutionlikeFidelity,forinstance,cant
sellastockinoneday.Theyunloaditoveraperiodoftime.Sothatshowsupinthepatternsofthestockovertime.
Itsnotjustfundamentalandnotjustcharts.Itsthecombinationofboththatgivesyouanoveralladvantage,Ithink,
overmostinvestors.
JohnNyaradi:LetstalkjustforaminuteabouttheActiveBearETF,itissymbolisHDGEor(NYSEARCA:HDGE)
Whatareyoudoingthere?
JohnDelVecchio:Wechooseindividualstocksthatwethinkhaveaggressiveaccountingorsomefundamental
deteriorationintheirbusinessandweshortthemontheexpectationthattheymightmissearningsorhaveanSEC
investigationorotherproblemswhatcouldcausethesestockstogodowninpriceoratleastunderperformthemarket
overtime.Anditsacombinationoffundamentalandtechnicalanalysisthatsrelatedtowhatwediscussinthebook.
Thebookisnotaboutthefundbutitdoesgiveyouaflavorofhowweactuallygoaboutanalyzingcompaniesandthen
tradingthemoncetheyreintheportfolio.
JohnNyaradi:WeretalkinghereinOctober,2012theelectioniscoming,thefiscalcliffisjustahead.Whatsonyour
mindrightnow?Whatshouldinvestorsbewatchingoutfor?Whatdoyouseeasrisksandopportunitieshereaswe
headtowardstheendof2012?
JohnDelVecchio:Theresaveryhighlevelofbullishnessrightnowamongadvisers,about65%,andithasnever
beenpositiveforstockswhenthatsthecase.Volumeisfallingoffacliff.Itsbelowwhereitwasin2007.Thecash
positionofindividualinvestorshasbeenwounddownquiteabit.Sotheresreallynotalotofcashonthesidelines.
TheNationalAssociationofInvestmentManagersisessentiallyfullyinvestedat75%equitytheresneverbeenabull
marketthatstartedatthatlevel.Were43monthsintothismoveoffthelowsinMarch,2009,soitsaveryoldmarket.
AndIthinkthatthebigcatalyst,probablyatthebeginningofnextyear,isgoingtobeEurope.Ijustdontseethem
solvingtheirproblemsin2013.
JohnNyaradi:Folks,wevebeentalkingwithJohnDelVecchioandabouthisnewbookWhatsBehindtheNumbers?
Itisgettingterrificreviewsandhasbeennamedthebestinvestmentbookfor2013byStockTradersAlmanac.
JohniscofounderandthecomanageroftheActiveBearETF(HDGE)andyoucanlearnmoreaboutJohnandhis
book,WhatsbehindtheNumbers?:AGuidetoExposingFinancialChicaneryandAvoidingHugeLossesin
YourPortfolio,justbyfollowingthelinkatthebottomofthisinterview.
John,ithasbeenagreattalkingwithyoutodayandIknowwerealllookingforwardtotalkingwithyouagainreally
soon.
JohnDelVecchio:Great,thankyouverymuchforhavingme.
LearnmoreaboutWhatsbehindtheNumbers?:AGuidetoExposingFinancialChicaneryandAvoiding
HugeLossesinYourPortfolio

(recordedinterview,editedforlengthandclarity)

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