Dr. Bart DiLiddo, VectorVest and                 the art of stock market investing

Tuesday, Nov 16 2010 by Ben Hobson

www.stockopedia.co.uk

Dr. Bart DiLiddo, Chairman, VectorVest

(EDITOR'S NOTE: This interview was conducted on Tuesday, Nov 16 2010. Since that time, some of the information shared by the interviewee has become outdated. Specifically, the interviewee mentions that VectorVest has products in the UK, South Africa, and Hong Kong. VectorVest is no longer available in the UK, South Africa, and Hong Kong. We have chosen to present the interview in its original, unedited form to preserve the integrity of the conversation. However, we note this change here for accuracy and context.)

Like many private investors, Dr. Bart DiLiddo learned about stock market investing the hard way. But for the affable American chairman of VectorVest Inc, applying strict rules on how and when to back company stocks has turned his own winning strategy into a system shared by tens of thousands of private investors around the world.

Dr. DiLiddo launched the VectorVest system in the form of a small weekly book back in the late 1980s. Since then it has adapted to evolving technology and the increasingly sophisticated requirements of its users to become an internet hit that gives investors market information in an instant. At its heart, VectorVest offers information to investors on when to buy, hold and sell stocks as markets rise and fall. “If you are making a profit in a stock you should never allow it to turn into a loss,” says. DiLiddo. “You have got to protect profits on the way down even if that means selling the stocks.”

After establishing a loyal following in the US, Dr. DiLiddo and his team branched out into Canada before turning their attention to the UK, Europe and other territories. While doing this, he says it became clear that UK companies shared much more commonality with their US counterparts than those in the resource-dominated market of Canada. However, he believes that both investors and companies on this side of the pond are hampered by a lack of available stock information and that investors in particular need much better access to fundamental data, interpretations of market movements and how company performances on a wide range of metrics compare across the market.

In an interview with Stockopedia, Dr. DiLiddo talked over the early days of VectorVest and shared his thoughts on the common mistakes made by investors, the best trades he ever saw and his advice for aspiring stock pickers.

Dr. DiLiddo, when did you first begin investing in the stock market and how did that evolve into VectorVest as we see it today?

Well, it goes back a long way, I have been investing in stocks since the early 1960s. I got into investing because I was an engineer by training and I got to a point where I realised that I would never get rich being an engineer! So in the early 1960s I got involved with a small stock club and became interested in the stock market; we muddled along for a number of years, winning some and losing some. Then in the early 1970s, when the oil embargo hit and a recession struck the US, the market went down, we had a very severe bear market and I became very discouraged. I sold all my stocks, except the company stock I had, and got out of the market. Through sheer brilliance I sold all my stocks at the very bottom of the bear market and shortly thereafter I watched them all go up!

Nevertheless, I stayed out of the market for about four years and only managed to get back in during 1978. At that time, I felt there were three things that I needed to know about stocks to improve my decision making. I had to know what they were worth, how safe they were and when to buy, hold and sell. I went back to my old notes and looked at what I was doing years ago and I developed a formula for calculating the value of stocks. It worked very, very well, and so it should because it was based on the classical relationship between the earnings yield of stocks and the interest yield of bonds – and that is the basis for all valuation formulas.

So I created this valuation formula and all of a sudden investing in the stock market became a lot of fun. I got into developing a system of analysing stocks for safety. In 1978, when I got back into the market, I only bought stocks whose earnings had gone up right through the recession of the early 1970s. If their earnings kept going up through that recession I felt they were very strong companies, and indeed they were. I bought stocks in Coca-Cola, McDonalds, some other really great companies. Then in the early 1980s I got involved in mining, oil Drilling and gold – in fact, exactly what is going on right now and what has been going on for the past couple of years, it is so reminiscent of the early 1980s. Gold spiked at over $800 an ounce and there was a lot of speculation, so we are more or less re-visiting what happened 30 years ago. Nevertheless, my formulas did well for me and I became very much involved in what I was doing; I bought a computer and expanded my database.

At what point did the system become something that you knew would be of real benefit to other investors?

I retired in 1986 at the age of 55 because I was making as much money on the stock market as I was making working for a living. I had been fairly successful in my career; I was the president of the chemical division of the BFGoodrich Company and had done quite well as a former engineer and a newly crowned executive. But still I wasn’t my own boss, I was travelling a lot, I wanted to spend more time with my family and I thought I could do well on the market. So I retired early and was able to spend more time with the VectorVest system and finally decided that I might as well see if I could make the thing fly as a business.

In 1988 we sold our first product. We published a little book once a week called the VectorVest Stock Advisory, including our database of around 3,000 stocks. We felt that it was important that if our system had a ‘buy’ rating that we also gave stocks ‘sell’ ratings to that investors could see whether the stock was rated a buy, hold or sell. That was a key factor. We went from the book to the electronic system in 1991, where we delivered the information electronically over a modem. We thought that was great stuff because you could sort, search and rank electronically and compared to the little book it was fantastic.

In 1995 we released the VectorVest ProGraphics system, which was a Windows programme that allowed us to have historical data in the database so we could produce graphs and this opened up a whole new world for us. I have to admit that the product was overwhelming, it was stunning – at least I thought so. VectorVest ProGraphics really launched the business and to me it is still a great product. It has unbelievable depth and scope. We went through various forms of VectorVest ProGraphics and then created the internet product. About five or six years ago we went into Canada and then into the UK and Europe and now we have VectorVest US, VectorVest Canada, VectorVest Europe, VectorVest UK, VectorVest South Africa, VectorVest Australia and VectorVest Hong Kong. So we have products now that we are selling around the world.

Is VectorVest designed for private investors or do professionals use it as well?

It is predominantly for private investors but we do have money managers, brokers and financial advisers using the product. The bulk of our subscribers are individual investors and most of them are a little higher in age, I would say the average age is above 50. They are folks that have been involved in their own businesses and want to run their own portfolios. They seem to be fairly financially sound and they have experienced giving their money to money managers and brokers without too much success. So they turn to VectorVest and we can help them.

What are the fundamental principles behind the VectorVest system?

VectorVest is an amazing product in several ways. First of all, we are the only system that analyses, sorts and ranks stocks for value, safety and timing. We created an indicator that we call the VST – the value, safety, timing vector – which allows us to rank all these stocks from those that have the best combination of value, safety and timing to the worst. We have an analysis system where we put three indicators – relative value, relative safety and relative timing – on a scale of 0-2, with 1 being the neutral point. If the rating is above 1 it is favourable and if the rating is below 1 it is unfavourable. What this allows our subscribers to do is to take any stock, whether they have ever heard about it or not, find it in the database and look at RV, RS, RT and if that indicator is above 1, they know that is favourable. They can look at that stock and look at those three indicators and all of a sudden they know a whole lot about it. Whether it is a safe, under-valued stock that’s rising in price or whether it is a risky, over-valued stock that is falling in price. So they can analyse stocks faster than anything out there.

The other thing they can do is put their stocks in a Watch List. Say an investor owns 15 or 20 stocks; usually it is a job just to keep track of what each stock is doing. They may have them in a portfolio and they can know whether that portfolio is either gaining or losing money. But with a VectorVest Watch List the stocks are ranked by VST vector so that the best ones are at the top of the list and the worst ones are at the bottom. This takes just a second or two so an investor can immediately see exactly what the stocks in his or her portfolio are doing. VectorVest provides a tremendous amount of information very, very fast.

When we calculate value, we look at earnings, earnings growth rate, profitability, interest and inflation rates and we have a very solid base of fundamentals. We give earnings forecasts, growth rates, we analyse dividends, we give dividend growth rates and we also look at dividend safety. This is one of the things that is so attractive about VectorVest, that you can get fundamental information that is very well defined.

We are doing extraordinarily well in a number of the foreign countries that we are in because we are giving our subscribers information that they cannot get anywhere else. We give fundamentals on every stock – it is right there in the database.

When you set up the systems for VectorVest Canada and VectorVest UK, what differences did you notice between the companies listed in those countries?

We went from the US to developing the Canadian product and Canada is basically a resource country. So they have a lot of resource stocks, mining and minerals stocks that don’t make a lot of money and everything is based on speculation that they will hit a big oil well or find gold or find diamonds. Our system is very harsh on valuation so there were many companies in Canada that did not get good valuation ratings or good safety ratings from VectorVest. On the other hand, they do have a lot of good companies and those companies would show up very, very well. The point I am making is that the system, without alteration, works out very well in Canada because it can easily separate the great stocks from the ones that you don’t want to touch with a 10ft pole.

When we went to do the UK, I found that the UK had a plethora of good, solid companies with good financial track records making money. It was interesting that when we entered the UK the market was in a very strong uptrend and week after week after week there were just solid winners at the top of our ranking list. I didn’t find that the stocks were that different, they were more like American companies than Canadian companies. The UK has a lot of good, solid companies that are well managed so I found more of a commonality in regard to the fundamentals of the companies with the US than I did with Canada.

Do you think there is a disparity between the amount of information available to US and UK investors?

Yes, exactly. Here in the US there is a lot of information available, in fact one of the problems in the US right now is that there is an information overload. Investors can go on the internet and find all kinds of stuff and so what they need to do is to be able to cut through all the noise and get right down to the information they need to make better decisions. In Canada our product is doing sensationally well because we cover so many stocks that nobody else really gives any information on. So Canadians are choosing VectorVest Canada as a complete information base they can’t get anywhere else. It is the same thing with the UK. Our experience of analysing our competitors in the UK is that none of them do what we do.

What mistakes do investors typically make when it comes to picking stocks?

The most frequent mistake they make, and believe me I know because I made them all, is that they listen to the conventional wisdom. The conventional wisdom is that you cannot time the market, that buy and hold is the best strategy, and you should buy stocks going down in price. They say: ‘you can’t know when the market is going to go up or when it is going to go down, so you have to just buy and hold’. The mistake is right there. I agree that you cannot predict the market, nobody can predict the market, I can’t tell you what the market is going to do tomorrow, but I can tell you what it’s doing right now. And that’s what’s really important. I can tell you whether the market is going up or whether it is going down. Our belief is that when the market is going up you should buy safe, under-valued stocks that are rising in price. When the market is going down you should protect your profits, you should put a stop price on every stock you have and if you are making a profit in a stock you should never allow it to turn into a loss. You have to protect profits on the way down even if that means selling the stocks.

Likewise, you should never buy stocks on the way down. Analysts here in the US recommend that you buy stocks going down in price, and there’s hardly a worse thing you could do. The brokers tell you that you can’t time the market, then they tell you that buy and hold is the best way to make money because you can’t time the market. Buy and hold is a fallacious strategy, and then they compound the error by saying that when the market goes down you should continue to buy – and they call that dollar averaging. So they want people to dollar average on the way down, and if you’re dollar averaging on the way down you’re throwing good money after bad. I have seen a lot of stocks go down, down, down and never go back up. Our belief is that you never buy a stock on the way down, you always wait for it to start going up. Our system allows our investors to know when the market is going down – and when a stock is going down you stay away from it – and when the market starts going up, and when a stock starts going up, you buy it.

Our thrust is that we want our subscribers to buy low and sell high and so we track the market very, very carefully. We give an analysis on the direction of the market each and every day. And each day we advise our subscribers as to whether it is okay or not to buy stocks. Once you are on the right side of the market, you are buying on the way up and not buying on the way down, investing becomes so much easier. I like to say that if you don’t know what the market is doing it is like Driving a car at night in London with your eyes closed.

What was the best trade you ever saw?

In late 1999 the market had had a rough summer and it bottomed in October. As it started coming off that bottom – I can tell you the date exactly, it was October 22, 1999 – we advised our investors to jump in and buy stocks we call big Gorillas. These were 10 stocks on the Nasdaq 100 and those stocks took off like birds. One of them was a company called QualComm and that stock just went crazy. Qualcomm is into the electronics that are used in cell phones and at the time an analyst began coverage when it was around $625 a share and predicted it was going to $1100. The day he came out with his recommendation it took off and went to $875, then it started coming down and when I saw it come down I said: ‘I thank the Lord for the money I made and I’m going to keep it’ – and I sold it. We have another investor who invested $100,000 when we said to jump in to the market and by the end of the year he had $1m.

We made two great calls in the last two years. On November 2, 2007 we advised our subscribers that we could be looking at the start of a long bear market and that they should buy contra ETFs – these are exchange traded funds that go up when the market goes down. That was a great call. But the best call we ever made was on March 6, 2009, that was a Friday, and I wrote that I felt the market was itching to rally so we had five bottom fishing strategies for them to use if the market began to rise. On the following Monday the market was wishy-washy so we didn’t jump in but the next day, March 10, news came out that Citi Corp made money in the first quarter. Now you have to go back to think about what the psychology of the moment was. The market had been getting killed and the economy here in the US was crashing and it looked like the world was going to end. Here, news comes out that Citi had made money in the first two months of the year – and the market exploded. So we covered our short positions and we went long. The strategy we went long with is called Jailbreak and it was one of the strategies we listed. I got into the market at 10am – the market opens at 9:30am – the 10 top stocks in that strategy were up 17% in the first half hour. By the end of the day they were up 31% and in four months those stocks were up more than 200%, eventually they were up 400%. It was the buying opportunity of a lifetime and we nailed it exactly on the bottom. It was unbelievable.

Do you have a favoured business sector or investment approach?

I am almost agnostic. We like companies that make money, we like companies with high earnings growth rates and we like companies that are on the move. One of the things that I have learned over the years – and here’s something else that is so contrary to the conventional wisdom – is that bottom fishing is probably the most powerful strategy you have. When I first got into the market I liked high momentum stocks that were taking off and hitting new highs and it worked very well, but there is nothing that beats bottom fishing. We have unbelievable bottom fishing strategies. In fact, on March 6, 9 and 10 those five strategies that I talked about – each and every one of them exploded. We have now perfected our system to the point that we give presentations on how to buy low and sell high, what our market analysis system is, what strategies to use and which bottom fishing strategies work over and over and over again.

What one piece of advice would you give to someone that is considering making investments in stocks?

Learn all you can and take it one step at a time and make paper trades before you use real money – don’t throw real money into the market until you have proven to yourself that you can make money. Another thing that is important is that they have to be patient – a lot of people are very impatient – if they don’t make money on their first trade they give up, they don’t wait for a trade to develop. Subscribe to VectorVest and we’ll teach you how to make money.