smarter than the street by gary kaminsky

SMARTER STREET

KAMINSKY

How do savvy Wall Street investors achieve

high returns even in the worst financial

times? It’s one of the industry’s best-kept secrets—

and now it’s yours for the taking.

Gary Kaminsky, cohost of CNBC’s The Strategy

Session—and one of the best money managers in

Wall Street’s recent history—is ready to share the

secrets that have made his colleagues millions,

even billions, of dollars. These simple but power-

ful techniques are not exclusive to Wall Street’s

high rollers. With Kaminsky’s system, you will make

money even in zero-growth markets. His proven

formula shows you how to:

• Develop the same habits, reflexes,

and practices of top market performers

• Create a proactive buy-and-sell strategy

• Beat the roller-coaster market trends—

and focus on long-term returns

• Make smarter, more informed

decisions—and more money!

Kaminsky brings more than two decades of experi-

ence to his low-risk, high-return system, demystify-

ing Wall Street for novice and seasoned investors

alike. Between 1999 and 2008, Kaminsky’s team

at Neuberger Berman grew record-breaking returns

far above the S&P benchmark. And they didn’t do

it by magic. They did it by constructing a specific

The BooK WAll STreeT DoeSN’T WANT You To reAD

(continued on back flap)

strategy and sticking to it, regardless of the invest-

ing climate. It is a strategy that anyone can learn

and apply, step-by-step, in any market.

With Kaminsky’s expert guidance, you’ll learn how

to be more disciplined and vigilant with your in-

vestments, maximizing your returns in a minimum

amount of time. You’ll not only make money in most

markets, but you’ll lose much less money when those

around you are losing their shirts. And you’ll be able

to strengthen and protect your assets—particu-

larly in the slow-growth decade ahead—with the

confidence and know-how that drives Wall Street’s

smartest investors to the top of their game.

Yes, you can beat the market—

when you’re Smarter Than the Street.

GArY KAMINSKY is the cohost of CNBC’s The

Strategy Session and has been one of Wall Street’s

savviest money managers for the last two decades.

He worked at Neuberger Berman, LLC, where Team

Kaminsky’s assets grew from $2 billion to $13

billion during Wall Street’s lost decade.

In this proactive, game-changing manifesto, the cohost of CNBC’s The Strategy Session pulls back the curtain to show you how Wall Street really works—what

drives the market, how decisions are made, how investments are allocated—so that you, too, can manage your money as wisely and profitably as the biggest names in the industry. Whether the market is high or low, you’ll still come out on top—when you’re Smarter Than the Street.

“Smarter Than the Street should enable almost any reader to become more knowledgeable and disciplined, and ultimately, a more effective investor.”

—from the Foreword by Joseph V. Amato, President, Neuberger Berman

“Gary Kaminsky is one of the top money managers of the last two decades. His book is a must-read for anyone trying to make real money in the stock market!”

—NILS BROUS, Founding Principal, Samson Capital Advisors, LLC; Chairman, Arcoda Capital Management LP; former executive, Kohlberg, Kravis, Roberts and Company (KKR)

“Want to know how the best managers and traders on Wall Street make money?

Read Gary Kaminsky’s down-to-earth, money-making guide and learn the secrets of profiting in any market.”

—MeLISSA Lee, Host, CNBC’s Fast Money

“A must-read! Gary Kaminsky takes the mystery out of the market with his no-nonsense, take-no-prisoners approach.”

—JeFFRey MOSLOw, Managing Director, Investment Banking, Goldman Sachs

ISBN 978-0-07-174922-0MHID 0-07-174922-5

9 7 8 0 0 7 1 7 4 9 2 2 0

5 2 6 0 0 >

USD $26.00

$26.00 USD(continued from front flap)

C N B C M o N e Y e X P e r T G A r Y K A M I N S K Y r e V e A l S T h e W e A l T h - B u I l D I N G S e C r e T S o F W A l l S T r e e T I N S I D e r S

Investing

THAN THE

Jacket design by Ty Nowicki

GArY KAMINSKYC o h o S T , C N B C ’ S T h e S T r AT e G Y S e S S I o N

SMARTERTHAN THE

STREETINVEST AND MAKE MONEY IN ANY MARKET

GARY KAMINSKYwith Jeffrey Krames

New York Chicago San Francisco Lisbon London MadridMexico City Milan New Delhi San Juan Seoul

Singapore Sydney Toronto

Kaminsky 00:A013 9/14/10 4:28 PM Page i

Copyright © 2011 by Gary Kaminsky. All rights reserved. Printed in the UnitedStates of America. Except as permitted under the United States Copyright Act of1976, no part of this publication may be reproduced or distributed in any formor by any means, or stored in a database or retrieval system, without the priorwritten permission of the publisher.

First Edition

1 2 3 4 5 6 7 8 9 10 DOC/DOC 1 5 4 3 2 1 0

ISBN: 978-0-07-174922-0MHID: 0-07-174922-5

This publication is designed to provide accurate and authoritative information inregard to the subject matter covered. It is sold with the understanding that neitherthe author nor the publisher is engaged in rendering legal, accounting, securitiestrading, or other professional services. If legal advice or other expert assistance isrequired, the services of a competent professional person should be sought.

—From a Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations

McGraw-Hill books are available at special quantity discounts to use as premi-ums and sales promotions or for use in corporate training programs. To contacta representative, please e-mail us at [email protected].

This book is printed on acid-free paper.

Library of Congress Cataloging-in-Publication Data

Kaminsky, Gary.Smarter than the Street : how to invest and make money in any market / by

Gary Kaminsky.p. cm.

Includes bibliographical references and index.ISBN 978-0-07-174922-0 (alk. paper)1. Investments. 2. Investment analysis. I. Title.HG4521.K247 2011332.6—dc22 2010029783

Kaminsky 00:A013 9/14/10 4:28 PM Page ii

I dedicate this book to Lori—my wife of 21 years, my best friend, and the only woman I could imagine who

would put up with all the nonsense I bring into our marriageevery day. I also dedicate the book to our three sons, James,

Tommy, and Willy, who are unique, clever, and capable, each destined to accomplish whatever he desires in life.

Kaminsky 00:A013 9/14/10 4:28 PM Page iii

Kaminsky 00:A013 9/14/10 4:28 PM Page iv

C O N T E N T S

Foreword vii

Introduction ix

Part One WALL STREET EXPOSED

1 The Lost Generation of Investors 3

2 The Zero-Growth Decade Ahead 21

3 Wall Street’s Greatest Myths Revealed 37

Part Two STRATEGIES AND DISCIPLINES FOR OUTPERFORMANCE

4 Take the Other Side of the Trade 63

5 Let Change Be Your Compass, Part 1: GE 79

6 Let Change Be Your Compass, Part 2: Disney 91

7 What Has the Company Done for Me Lately? 117

8 Picking Stocks for All Markets 141

v

Kaminsky 00:A013 9/14/10 4:28 PM Page v

9 Do Your Own Due Diligence 159

10 How Many Stocks Should I Own? 175

11 Develop a Strong Sell Discipline and Manage the Downside 191

Source Notes 217

Acknowledgments 221

Index 225

vi Contents

Kaminsky 00:A013 9/14/10 4:28 PM Page vi

and how quickly—you discern these changes that will determineyour ultimate batting average as an investor.

After I left Neuberger Berman in 2008, I was forced to getinformation the same way any retail investor would: via theInternet. As mentioned earlier, I no longer had access to CEOsand company management teams. Nor could I call up any bro-kerage or research firm in the world and request its information.I could not call a firm and ask an analyst to call me back, orrequest an invitation to a company meeting or road show. How-ever, this new reality helped me to learn that there are hundreds,even thousands, of sources of information and data that I coulduse to come up with a wish list of the names I wanted to ana-lyze and buy. This is vastly different from the world of invest-ing that I entered 20 years ago.

Where I Get My Investment Ideas

Being a retail investor has given me the ability to back-test cer-tain ideas and assumptions. All individual investors can back-test their ideas because they have so many tools; they are not atthe disadvantage that so many people perceive themselves to be.What I found is that not having the access to what I did beforehas forced me to impose a certain discipline upon myself in gath-ering information. That’s because it is very easy to expose your-self to too much information, which once again results ingarbage in, garbage out. You can create a situation in whichyou’re reading so many newspapers and Web sites and spend-ing so many hours researching that you start missing the forestfor the trees. The key is to be efficient in sifting through the dataand figuring out the kind of information that will be of most useto you as you manage your own money.

I must confess from the outset that I am a morning guy. I startmy mornings somewhere between 4:30 and 5:00 a.m. I knowmany of you probably like to sleep late. I can’t really help you

162 S M A R T E R T H A N T H E S T R E E T

Kaminsky 09:A013 9/14/10 3:38 PM Page 162

Do Your Own Due Diligence 163

with that. Why I sleep four to five hours a night, I don’t know. Iwish I could sleep more, but I can’t. You will have to developyour own habits and timing for when you do your homework,but developing a winning stock market strategy does not meanthat you have to take caffeine pills. There is no correlationbetween getting up at the crack of dawn and buying winningstocks. However, I think it does help to begin doing your researchbefore the U.S. stock markets open at 9:30 a.m. on the East Coast(those on the West Coast obviously need to be the earliest risers).

The six key sites for you to check out each day are FT.com,CNBC.com, WSJ.com, NYTimes.com, eWallstreeter.com, andYahoo! Finance. Remember that you are trying to identify some-thing that you didn’t know before, so that you can develop amacro view of the economy andthe financial markets while alsodeveloping a micro view of thecompanies that might be the buy(or sell) candidates of the future.I should add a note of caution:Obviously, none of these Websites alone will drive you tomake an investment decision. However, they are a great placeto start and will help you to formulate your overall strategy andto determine if any change is meaningful enough to alter youropinion about a stock.

The Financial Times

The first thing I do when I come down to my office every week-day morning is click on FT.com. The reason I look at the Finan-cial Times is that it’s important to get a broader, globalperspective, and the FT, a newspaper published in the UnitedKingdom, will tell you what has happened in Asia overnight andwhat is happening in Europe every morning.

The six key sites for you to checkout each day are FT.com,CNBC.com, WSJ.com,

NYTimes.com, eWallstreeter.com,and Yahoo! Finance.


So I’ll typically look at the front page first, then click on thecompany section just to see if there’s something that may be ofinterest that hasn’t made it to the front page (however, most ofthese Web sites have matured and grown, so that any substan-tial news is “published” on the front page). You are not typi-cally looking for new ideas on this site, but trying to figure outif something has happened from a macro perspective that mightcause you to sell a stock that is already in your portfolio.

I should also point out that while a limited amount of thecontent on FT.com is free, you’ll need to register in order to getaccess to the free content, and eventually you’ll have to sub-scribe. However, it isn’t much money, and it’s well worth it.

Another feature of the FT site that I look at regularly is the“Lex” column. This is an opinion piece related to some companyor some industry that will usually give you something thought-provoking. Always look out for articles that are forward-look-ing and not just the ones that regurgitate the day’s news.

For example, in the spring of 2010, there was a piece on thefront page of FT.com entitled: “Business Apps Help Sales of AppleDevices.” This was a forward-looking article that predicted thatApple’s new iPad would threaten the BlackBerry in a few shortyears. While one should seldom make a buy or sell decision basedon one article or prediction, that prediction is worth keeping inmind, and combined with other news, it may lead to a valuableinsight. As mentioned earlier, Apple has had an incredible trackrecord with its new products, which is one of the reasons that thestock doubled between April 2009 and April 2010. Apple’s con-sistency in releasing category-killing products (think iPod), alongwith other new things you may learn in the next few days, mightprovide sufficient evidence to help you make a buy or sell decisionregarding either Apple or Research in Motion (RIMM), the makerof the BlackBerry. Why might you buy RIMM in light of thesenew developments? What if Apple’s iPad sends RIMM’s stockdown, say, 10 percent? You might think that this is an overreac-



tion, and decide that RIMM will maintain its huge advantage inthis market because so many companies use BlackBerries for theiremployees’ needs, and therefore the company is a good long-terminvestment. On the other hand, you may feel that Apple is the bet-ter choice given its superb track record of launching new prod-ucts. Once again, I almost never recommend that investors makea buy or sell decision based on one article or event in the market-place. Instead, I suggest that you consistently evaluate the stockinvolved, using the criteria I presented in the last three chapters.

For example, I found one recent article about the companyCaterpillar, the maker of high-end farming equipment and con-struction, mining, and forest machinery. The article included thefollowing: “Caterpillar is considering relocating some heavyequipment overseas productions to a new U.S. plant, part of thegrowing movement among manufacturers to bring manufac-turing back home, a shift that will spark fierce competition . . .[for] manufacturing jobs.”

This move by Caterpillar, which is at least in part politicallymotivated, is all about bringing production back to the UnitedStates and in turn bringing jobs back to America. There are anumber of things happening here. Moving some manufacturingfacilities back to the United States may have a financial impacton the company. However, the financial impact is not immedi-ately clear. Caterpillar will now be manufacturing in U.S. dol-lars, but it’s selling a good percentage of its products overseasand receiving foreign currencies for its products. So, if the dol-lar is strong, Caterpillar may see demand for its goods go downbecause those companies buying in foreign currency will not beable to buy as much. The opposite is true if the dollar getsweaker—demand may go up. That’s the first thing. The secondthing we’re going to talk about is social change.

Here we have Caterpillar getting some nice political/social creditby moving jobs back to the States. So this is a possible change. Perhaps Caterpillar will see a boost in sales from U.S. firms using



stimulus money, since recipients of these funds are required to buyAmerican-made products. This is the kind of thing you want toexplore, but you should also investigate further to see what otherchange(s) might affect the company in the near future.

CNBC.com

The second site we’ll visit is CNBC.com. A must-read is my dailyblog (some shameless self-promotion), Kaminsky’s Call, on theStrategy Session portal. Here you will be able to keep up withmy daily thoughts, opinions, and commentary on the markets.There are many unique and interesting articles featured on theWeb site. One of the other great features of the site is that youcan click on any ticker symbol and see if any portfolio manageror analyst has commented on the stock; you can then read thatcommentary and attempt to determine whether any of it isimportant enough to warrant further analysis.

Let’s take the Caterpillar example mentioned earlier. We justread about Caterpillar’s bringing more jobs onshore and dis-cussed potential consequences of that decision. I then went toCNBC.com and typed in Caterpillar’s ticker symbol (CAT), justto see if there was anything there. In this instance, I did not findanything new in terms of commentary on the stock, just anAssociated Press article that reported much of what I had seenin the first article I read.

We can now formulate an opinion such as the following: thestory on Caterpillar definitely constitutes change. We know itmay be monetary change, we know it may be social change, andin fact it may somehow end up being regulatory change. Howcan it result in regulatory change? There has been much rum-bling in Washington under the Obama administration that theremight be greater taxation of offshore operations and tax subsi-dies for bringing jobs back to the United States. If that everbecomes law, Caterpillar will definitely benefit and will be that



much ahead of the game. So this story warrants future moni-toring to see if these proposed changes ever become law.

However, we must always be sure to keep things in perspec-tive. That story on Caterpillar will probably not move the stocktoday. But since we’re trying to identify change, we now go backto our scorecard and mark this as something that will requirefurther analysis in the future.

WSJ.com

You can get a brief free trial on this site, but after that periodhas expired, you have to pay a fee for full access, although somearticles are still free. I feel this is a good investment. In additionto all of the great articles and information you now have accessto, the Wall Street Journal is also an interactive site that allowsyou to plug in stock symbols and be kept abreast of the newssurrounding specific stocks and companies that you are watch-ing. It also allows you to put in upside and downside priceparameters and be notified via e-mail when the stock hits thosetargets. I have found these features to be extremely helpful.

I go to the Journal site after visiting FT.com. The two siteswill have several articles in common, so I am looking for newthings in the Journal. That’s why I usually jump to Section C(“Money and Investing”). That is the key part of the paperbecause it features company-specific stories. The “Heard on theStreet” column (also in Section C) is very helpful. I also find therating changes on a company’s debt to be very helpful in detect-ing any meaningful changes in that company’s creditworthiness.If time permits, I also play defense by searching for any articlesabout any of the companies I already own to make sure thatthere is nothing there that will require me to rethink my thesisfor holding on to any of these stocks.

I’ll then play offense and go back to Sections A and B to tryto identify some story about a company that I may not have



heard about or a company that is doing something truly differ-ent (so that its actions qualify as authentic change). At each siteyou visit each day, you are looking for new information or moredetailed articles on something that you might have read earlier.

NYTimes.com

After I look at FT.com, CNBC.com, and the Wall Street Journalsite, I’ll go to the New York Times for the same reasons. How-ever, while there’s a lot of duplicative coverage (from the Jour-nal and FT.com), you will occasionally find something that youcan find nowhere else. That is why you are checking multiplesources. At the time of this writing, the content on the Timessite is free if you register on the site, but there has been talk thatit is going to start charging for its content.

Let’s assume that by this time, you have spent about 20 min-utes online. In those 20 minutes, you should have gotten a verygood sense of what’s happened in the capital markets overnight,how the market is setting up in the United States, and the keyevents that are taking place in the macro environment. Youshould also have identified one or two companies that may war-rant further investigation.

eWallstreeter.com

At this point, I’ll be ready to get my second cup of coffee, and I’llstart checking out what I’ll call nonbusiness-dedicated sites forstories. One of my favorite Web sites is called eWallstreeter.com.You may ask yourself, isn’t that a business site? It is not. In fact,eWallstreeter.com is a blog that is compiled each day by a gen-tleman named Mitch Brown. Mitch is a retired capital marketssales trader for Goldman Sachs and Credit Suisse First Boston.This is a free Web site that anybody can access. The great thingabout this site is that it helps you navigate through all the



research and noise that is generated each day on the Net. Mitchhas boiled down the hundreds and thousands of articles andblogs that come out each day and features a few of the pivotalstories on his site. It might be a money manager talking aboutsomething she’s done in her portfolio, or something more tech-nical. The end result is that he does hours of research for youand filters it all down to a few powerful and compelling storiesabout companies, the financial markets, and what is happeningin the marketplace.

So I highly recommend this site, because it lets you try tocome up with new ideas while also highlighting key changes thatcould be significant enough to warrant a change in your port-folio (as long as you do the requisite follow-up research). Mitchis able to do this because he created a program that uses key-words to go through Google Reader, and inputs words that arelikely to trigger the types of change that we talked about. Hegenerates just the kind of unique material that will give non-professional investors the kind of information that they need ifthey are to come up with new investment ideas. He has accessto letters from portfolio managers, quarterly reports, and more.

This is a site I look at every day. And there is a great amountof diversity in the articles that Mitch has on his site. For exam-ple, on one day in 2010, I found a piece by James Surowieckifrom The New Yorker magazine (April 19, 2010) entitled “Tim-ing the Recovery,” in which he cautions investors on calling theend of the recession too soon. There was also a piece that madethe case for an improving stock market. In a piece by Bill Swartsin Smart Money (April 12, 2010) entitled “The Case for HigherStock Prices,” the author quotes Yardeni Research as saying thatas long as the Fed does not raise interest rates, this period of ris-ing stock prices could continue.

There are also articles that are very interesting that fall outsidethe domain of strict business. For example, in a very provocativearticle in Forbes (April 8, 2010), writer John Maeda discusses



“Your Life in 2020” (talk about gaining a macro perspective—this article certainly does that). In the piece, the author makessome very interesting comments about what he expects the worldto look like in 2020. Here is an excerpt from that article:

Rather than be content to accept corporate anonymity, we willrediscover the value of authorship. In 2020 technology will con-tinue to enable individual makers to operate in the same waythat once only large corporations could do. Witness the growthof individuals as “brands-of-one” in the social media space,broadcasting their news in the same fashion as major media out-lets, or in software apps marketplaces, where “Bob Schula” canhawk his wares right next to “Adobe Systems,” and it’s just aseasy to buy hand-stenciled napkins from a seller on Etsy as it isto buy them from Crate & Barrel. You might say it is a returnto learning to trust individuals again, instead of relying on anindirect connection to a product through trust in its brand. Cer-tainly our trust in those brands is already being tested right now.

An article like this may not help you to make an investmentdecision today, but it might get you to see some important thingsfrom a different perspective, or to think about something in anew light. That is why it is so important to at least take a quicklook at all the articles on this site.

Yahoo! Finance

This is another free Web site. What I like about Yahoo! Financeis that to get there, you can go through the Yahoo.com portaland see what is happening outside of the world of business(which, as mentioned earlier, is a good thing). By this time, if youhave followed my advice and visited all the sites I have presentedthus far, you’ve already seen all the top stories. The key to nav-igating this site is to investigate all the companies that are on your



radar screen. If you have an investment in, say, Alcoa, and youhave seen a key story about Alcoa on the Journal and CNBCsites, a story that signifies genuine change, you go to Yahoo!Finance to see how widely that story has been disseminated. Youwant to see if that information has gone global, so to speak.

You’re trying to ascertain or determine whether what youhave already read is now widely known and widely disseminated,or whether it was something that was proprietary to just one orpossibly two of the other sources you’ve already seen. You’ll goto Yahoo! Finance, type in that stock, and look at the headlines,and that will quickly tell you, because Yahoo! Finance takes datafeeds from all sources from all over the world. If you see that bitof information or the same story repeated on Yahoo!, this is aconfirmation that the information that you may think is propri-etary is in fact global (or vice versa). If the story has gone global,you may not have the advantage that you thought you had.

Completing all of this research has taken me between 30 and 45minutes. Because you are not day trading, not looking to makea quick buck, and not unduly influenced by short-term phe-nomena, I suggest that you identify and absorb all of this infor-mation. As I said earlier, I think that it is a good idea to writedown all of the stocks you are considering buying and keep asort of scorecard of change. In the next two chapters, we will dis-cuss portfolio construction and developing a sell discipline, andin those chapters, I will be much more specific as to what you dowith this research and information. What you don’t do with it isread something, call up your stockbroker or go to your computer,and impulsively make a buy or sell decision on a stock.

Your information gathering does not have to end in the morn-ing. Several of these sites will e-mail you for free if a stock thatyou own or are watching reaches a certain target point that you


Kaminsky 09:A013 9/14/10 3:38 PM 1

smarter than the street by gary kaminsky

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