Chris Kacher speaks with YTE’s Ben Power about how he delivered his amazing returns, his raft of market research discoveries, and the influence of William O’Neil.

Chris Kacher is amazingly talented. He was a child piano prodigy and then worked as a scientist helping produce major breakthroughs in nuclear physics. But his passion is trading. Like his colleague Gil Morales, interviewed by YTE in the Jul/Aug 2009 issue of YTE, Chris is a protégé of William O’Neil, the legendary investor and author of ‘How to Make Money in Stocks’. Along with Morales, Chris is one of the few to have traded O’Neil’s own funds as an in-house money manager. Chris now runs his own money management operation, but he also teaches traders through his Internet site, www.virtueofselfishinvesting.com.

You’ve had an interesting and diverse career, including music and nuclear physics, so how did you become a trader?

I always tell people to find your bliss, to find your passion. My first love was music and I composed my first song when I was five years old. I had exposure to the market through my mother, a top broker from Merrill Lynch, and had read about stocks. I bought my first stock when I was 11 years old. While I wasn’t actively trading at that age, I was dabbling, learning, and reading.

I went to grad school – science always came easily to me – where I had an interest in nuclear physics. But half way through my degree I started spending more time in the business library than the particle accelerator, and I realised that my passion was not in science.

At grad school I was reading books, trading the market and building strategies. In 1989 I read William O’Neil’s book (‘How to Make Money in Stocks’), and in 1991 I put everything together and had my first good year in the market; prior to that I was fumbling around.

By 1993 I had my third good year in the stock market and I wanted to switch and go into portfolio management. In 1995, I started one of the first stock investment advisory websites on the internet. The site shared the same URL as the site I run today, www.VirtueOfSelfishInvesting.com, taken from Ayn Rand's classic book, ‘The Virtue of Selfishness’.

You are one of the rare people who have traded William O’Neil’s money. Can you describe him as a person?

He is very intense, very driven and has what we call ‘insane focus’. We all – Bill, myself and Gil Morales – have it. After I shared some results with him, Bill told me that since I was doing so many research studies I could call him morning, noon or night if I had made an interesting finding. It showed how passionate Bill was about the stock market.

I also really appreciated that, despite all his success in the market, he always maintained a humble demeanor. He was always listening to what you had to say. Even if there was a difference of opinion there was a lot of respect. And sometimes we wouldn’t agree.

For example, in the late 90s some internet companies such as Amazon had no earnings. The ‘CA’ in CANSLIM has to do with earnings. Bill wouldn’t look at a company if it didn’t have earnings. But the price appreciation of these companies was huge. I said to him, ‘I think we have to revise CANSLIM or make an exception.’ The first couple of times he wasn’t convinced; the third time he started to change his views. He could see the evidence; it was his flexibility of thinking.

While you were with O’Neil, you generated amazing returns of 18,241 per cent on your personal account. Were you essentially trading O’Neil’s CANSLIM system, or had you tailored it to yourself?

I always say trading is like a finger print – everybody trades a little differently. My trading, in its inherent logic, shares much with the CANSLIM philosophy. But Bill O’Neil himself doesn’t trade CANSLIM to a tee. CANSLIM is for the retail investor who will read his book and who will benefit enormously from it. But in practice we all have our slight variations.

For example, everybody’s got their own risk management levels and risk tolerance levels. I prefer to hold more than a handful of names; Bill O’Neil and Gil Morales prefer to hold just a handful of stocks and pyramid up. I prefer the lower volatility. I find that even when I traded a small account, I preferred to have 12 to 18 names; and with much larger accounts, I still preferred to hold 12 to 18 names.

You said Bill O’Neil doesn’t trade CANSLIM to a tee. What are some of the things he does differently from what he teaches?

He will sometimes buy a stock that is not breaking out, but will still take a position. Such circumstances are rare, but it often sets him apart from the rest, as he will see divine opportunity to buy where others see chaos or are wholly pessimistic about market conditions.

What is one trade you made during you time with O’Neil that stands out in your mind?

Ebay is a big symbolic trade for a number of reasons. One thing I love about trading is it allows me to keep an eye on changing technology and on the cutting edge of evolution. If there’s a company that’s pushing that evolutionary edge I want to know about it.

Ebay had the first mover advantage in peer-to-peer auctions. I knew they were around, but when I read their pre-IPO of what the company actually did I got very excited about it. I told Bill immediately. But when it IPOed it promptly lost half its value, dragged down in October 98 by the markets that were spiraling downwards when the NASDAQ lost a third of its value.

When the market headed back, eBay was the first equity to turn higher and move aggressively back to its IPO price, forming what I call a ‘U’ pattern. It then gapped up and that was my first buy point. From that point on it went up five times in value before basing again. It was an amazing company with amazing price action.

The market has changed significantly since those heady days: it’s choppier and dominated by high-frequency trading. How has that affected the way you trade?

In 2004 the markets got sloppy. If you look at a chart of the NASDAQ from 2004 to 2005 you see a grinding rally. A lot of base breakouts didn’t work. I realised there was a danger I was going to get ‘nickel and dimed’. That’s when I developed the ‘pocket pivot’ trade. That worked so beautifully that in late 2005 I more than made up for losses. In 2006 I had my seventh triple-digit year.

Do you trade the market timing model as a standalone, or do you use it to guide buys and sells of stocks (ETFs)?

I use the timing model to keep me on the right side of the market. When it issues a buy signal, I look to aggressively accumulate leading stocks in leading industry groups. I buy stocks rather than ETFs because I can make more money buying stocks. That said, with the advent of 2-times and 3-times ETFs, big money can be made going long 100 per cent a 3-times ETF such as TYH which moves 3-times the Russell Technology 1000 and is a relatively good proxy for 3-times the NASDAQ Composite.

What is your view on mechanised trading? Is it something you’re doing?

In 1998 I worked with Rashneesh Gupta, the head programmer at O’Neil. We wanted a computer to identify the quality of a base and act accordingly. But what we found was it’s virtually impossible to tell a computer what Bill O’Neil is seeing or what I'm seeing. There are too many exceptions. There’s no substitute for monitoring a market daily, running screens, looking at charts and hand picking the best of the bunch.

Finally, what is one thing that a trader can start doing now to improve?

Go back through all your trades for the last two to three years. Print out the charts and take out a red pen and mark where you bought and where you sold. Then make a list of the mistakes you have made. Write out a list of how not to make those mistakes and paste that list up on a wall. Carry the charts with you so you can review them frequently. This reinforces what you did right, and what you did wrong.

This article was originally published in the Nov/Dec 2010 issue of YourTradingEdge magazine. All rights reserved. © Copyright 2011, Your Media Edge Pty Ltd. 
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