Q&A with Jason Goepfert

There are very few people or resources I try to read every single day, but Jason Goepfert's research and commentary is the exception.

Many of you are already aware of Mr. Goepfert as I've previously shared some of his unique research with you in the past. He is the leading expert in investor sentiment and mass psychology and his subscription-based website, SentimenTrader, is one of my personal favorites.

Mr. Goepfert's ability to find and identify historical comparisons to the current market is both useful and unique. Over the many years I've read his analysis, I am routinely amazed by his uncanny ability to compare and contrast the current market situation to times in the past in order to obtain an significant edge in the market. While the future is always unknown and uncertain, traders who use historical analysis and who obtain a correct understanding of current market psychology, have a tremendous edge. That's what Mr. Goepfert's daily research and commentary is all about. We hope you enjoy this Q&A!

Kirk:  Thank you so much for taking time out of your very busy schedule to share some thoughts with us. We are happy to have you with us!

Goepfert:  Glad to be here! I've read your blog daily for the past couple of years, and have been constantly impressed with your burning desire to learn as much as you can to stay ahead of the game. It’s a trait we should all nourish.

Kirk:  Thank you. While I've been doing this a long time, I still have a lot more to learn which is why I so much enjoy the opportunity to do these Q&A sessions with people like you!

When did your interest in the stock market begin?

Goepfert:  I grew up quite poor, with extremely hard-working parents (a lumberjack and daycare provider) that did everything they possibly could to provide for us. Even as a small child, my dad told me to not do what he did – that I needed to find something I liked to do, but that also allowed me to not have to struggle every day and that let me spend time with family.

When I was about 10 or so, I discovered a Wall Street Journal in our local library, which I'm convinced nobody ever read. In a rural Wisconsin town of 1200 people, the WSJ isn’t exactly in high demand. I had absolutely no idea what most of it meant, but I would keep going back to try to figure out as much as I could. It became a game and I figured out pretty quickly that the people in those pages were doing very well for themselves. I worked several jobs through high school and helped out my parents as much as possible, so I couldn't get enough saved to try my hand at doing what those folks in the Journal were doing.

During college, I had to work 35 hours a week in addition to a full course load to make ends meet, but after a few years I had finally scraped together a couple thousand dollars, and opened a brokerage account. I read about a company called SCI Systems in the Journal, and it sounded pretty good, so I bet my whole wad on it. Amazingly enough, it doubled over the next couple of months, and I was absolutely hooked. I knew I found something that could make my dad’s words ring true.

Kirk:  There's nothing like striking jackpot, especially early on, to serve as inspiration. What happened then?

Goepfert:  After my little triumph with SCI Systems, I focused even harder on my studies as a Finance major and Economics minor. Towards the end of my senior year, I was approached by a small company that wanted me to be their controller. Even though it wasn’t exactly what I knew I wanted to do, I took the job and it was disastrous. The company made Olympic-quality bicycles, then branched out into something called the “row bike,” where you actually row the bike like a rowing machine. you've probably never heard of such a contraption, and that’s why the company folded. So I was just six months out of college, out of work, and wasn’t sure what I could do. I went to a temp agency and told them to get me into any brokerage firm in town, doing whatever they had available. I would sort mail if I had to – just get me in the door.

I shouldn’t have suggested that, since that’s precisely what they gave me. I ended up in the mail room, earning a ridiculously low salary, but I was in the door. So I worked my tail off, volunteered for every crap assignment they had, and eventually ended up managing the operations. It was a great experience, as I got to do every job in the brokerage firm as I worked my way up. The firm had 20 employees when I started, and over 300 when I left, so I also got a chance to help oversee a rapidly growing company. By that time, though, I wasn’t learning anything new, so I jumped to a hedge fund.

I quickly realized that there wasn’t much different about it and I still wasn’t learning anything, so I made a giant leap and with my wife’s consent, I quit and began trading on my own. Looking back on it now, it was a really brash (i.e. stupid) decision and I still can't believe my wife had such faith that we could make it, but it ended up being the absolute best thing that ever happened to us.

Kirk:  It always begins with believing in yourself and having strong family support through thick or thin. This is a common ingredient of every successful trader I've met.

Can you tell us a little bit about how you learned to become a successful investor? What was instrumental in your development?

Goepfert:  I can point to one moment in particular – a phone conversation with 70 year-old grandmother.

Part of my responsibilities at the brokerage firm was managing the margin department. One day, one of my margin clerks forwarded a call from a customer who was upset about getting a margin call. When I got on the line, she was sobbing, hysterically wailing about how “my Qualcomm (QCOM) let me down.”

She was heavily invested in QCOM and had done quite well, but she kept pyramiding her profits and when the tide turned, she got burned. To cover the margin call, she told me to just sell it all. She never wanted to be hurt by that stock again.

That was like a jolt of lightning to me. It struck me as unbelievable that someone would personalize a company’s stock, and basically form a relationship with it. Her decisions were purely emotional; there was no objective analysis whatsoever.

From that moment, I began looking at other margin accounts and tried to figure out why they were buying or selling, and when. I formed a couple of indicators based on in-house margin and options data, and was surprised to find how often extremes in the data lined up with turning points in the market, almost always in a contrary manner.

So I spent hour after hour looking for every piece of sentiment data I could find or create and have used that methodology ever since.

Kirk:  That is a great story. Indeed, we all have to be very careful not to lose our objectivity based on our positions. When we do that, we set ourselves up to fail.

In the course of trading and managing your excellent website, do you trade other people's money?

Goepfert:  I have traded on my own ever since my experience with SCI Systems. However, last September I put my personal trading on hold and agreed to help form some managed account programs with Roger Kliminski, an established registered investment advisor. While I can't talk about exact performance figures, we have done pretty well navigating the tumultuous markets of the past six months.

I had put off managing money for the past five years, since I was fairly convinced we were in a long-term bull market and given my method of trading, we probably wouldn’t be able to beat buy-and-hold by enough of a margin to justify the fees. Going into the third quarter of last year, though, I felt that a multi-year bear market or trading range at best was most likely, and that’s the kind of environment where trading – as opposed to buy-and-hold – can really add value on both a relative and absolute basis.

Kirk:  Since I read you daily, I have no doubt that you've done well for your managed accounts in a very tough environment. I'm sorry if this is a wee bit personal but I noticed on your website that your wife also participates in the business. What role does she have?

Goepfert:  I met my wife at work, and she had an impact on my trading immediately. I was smitten with her, and like a typical male idiot, I felt like I needed to show off. We were working side-by-side on a trading desk at the time, so one day I leaned over and told her to by 10 OEX calls for my account. About a half-hour later, I asked her to sell them since the market had spiked higher. With a $1000 gain for 30 minutes “work,” she was duly impressed and I felt like a big stud.

That lasted for about, oh, a day. I kept trying to impress her, and over the next three weeks, I proceeded to run my account from $20,000 down to precisely $254.35. So she taught me an extremely important lesson that I remind myself of daily – don't get emotional.

We’ve worked and lived side-by-side, nearly 24 hours a day, for seven years, and we love every minute of it (well, almost every minute). She handles a few different aspects of the business now, from overseeing customer service, to helping maintain relations with some of our institutional customers, to acting as a sounding board for my ideas.

Kirk:  You're very fortunate to have that strong of a partnership. Two minds are usually better than one, especially with both are equally motivated to do well in the market.

Now with the personals out of the way, let's talk business. To start, can you provide a quick down and dirty summation about how you approach the market?

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