Davis - Being Right or Making Money

Cover Design: C. Wallace
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Copyright 2014 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

The first and second editions published by Ned Davis Research, Inc.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Davis, Ned (Nathan E.)
Being right or making money/Ned Davis. Third edition.
pages cm
Includes index.
ISBN 978-1-118-99206-7 (hardback)ISBN 978-1-118-99656-0 (ePDF)
ISBN 978-1-118-99659-1 (ePub) 1. InvestmentsUnited States. 2. Investment analysis. I. Title.
HG4910.D394 2015
332.6dc23

2014023440

The data and analysis contained herein are provided as is and without warranty of any kind, either expressed or implied. Ned Davis Research, Inc. (NDR), d.b.a. Ned Davis Research Group (NDRG), any NDRG affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any NDRG publication. NDRG disclaims any and all express or implied warranties, including, but not limited to, any warranties of merchantability, suitability, or fitness for a particular purpose or use.

NDRG's past recommendations and model results are not a guarantee of future results. Using any graph, chart, formula, or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such device.

S&P 500 index is proprietary to and is calculated, distributed, and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P and S&P 500 are registered trademarks of Standard & Poor's inancial Services LLC, and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. 2014 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. All rights reserved.

For important additional disclaimers, refer to www.ndr.com/invest/public/copyright.html.

TIM HAYES, CMT
JOE KALISH
LANCE STONECYPHER, CFA

We knew nothing about sleepy Venice, Florida, and only one of us knew about the investment research company that Ned Davis started in 1980. Tucked away on a quiet street near a tired strip mall that had been ravaged by a tornado a year earlier, NDR's two small houses appeared sparsely occupied when we started in 1986. The company employed about 15 people.

As we gradually learned about computer-threatening lightning strikes and other surprises of working in southwest Florida, we also started to learn more about the founder's philosophy and approach to investing. Knowing little about market behavior, we listened to Ned carefully as he pored through his chart pile at weekly research meetings, anxious about the inevitable market questions that he would fire our way.

It wasn't long before our minds started filling with phrases that to this day remain crucial to successful investing: Don't fight the tape, don't fight the Fed, and beware of the crowd at extremes. We learned about behavioral finance long before it became a common term in the investment world.

While Ned would employ his red pen to raise questions about our research, he would also use it to circle data points in the past with similarities to market conditions of the present, in the process demonstrating the importance of understanding history. Along with his emphasis on clean data and historical analysis, Ned stressed reliance on indicators and composite models to support an investment approach that's objective, flexible, disciplined, and risk aware. His tenets would come to be known as Ned's Nine Rules of Research, which he discusses in the first two chapters of this book.

Ned has always encouraged independent thinking. Even early on he was open to whatever market calls we wanted to make as long as they were supported by the objective weight of the evidence. As the firm expanded, Ned encouraged and enabled us to expand our respective research areas and develop our strategy teams, all the while producing commentary and research tools based on his research guidelines. These guidelines helped us navigate through three decades of bull and bear markets, economic expansions and recessions, peacetime and war, euphoria and panic, and bubbles and crashes. We learned that market survival requires humility and respect for an entitythe marketthat demonstrates an amazing ability to surprise, time and time again. Ned has often called investing a game of making mistakes, adding that the difference between the winners and the losers is that the losers make the big mistakes while the winners cut their losses short.

In terms of size and global recognition, the NDR of today bears little resemblance to the NDR of 1986. Now in a bigger facility, the Venice office employs more than 100 people, with nearly half in research. Sales offices can now be found in Boston, San Francisco, Atlanta, and London, and service a client base of more than 1,200 client firms in 43 countries around the world. From the early days when the product consisted of a printed chart book and Ned's comments on a recorded call, it has expanded to include a custom research team that builds indicators and models for clients, plus nearly 20 different authors covering macro and market conditions, commodities and currencies, sectors and sub-industries, ETFs, and individual stocks in countries around the world.