Benzinga's Exclusive Interview With VectorVest Founder: Second of Three Part Series (SPY)

Benzinga's Exclusive Interview With VectorVest Chairman And Founder Dr. Bart DiLiddo: Part 2 of 3

Benzinga’s own Shane Edmund had the chance to sit down with VectorVest Inc’s Chairman Bart DiLiddo at the New York Traders Expo. DiLiddo provided a wealth of information; from a breakdown of what makes VectorVest unique, to his lighthearted view of Cleveland's athletics.

In the second of the three part series, DiLiddo discusses his investment strategy and the principals he founded his company on.

S: What are your thoughts on stock options? Are there any capabilities in the software with options: sell, cover, calls...

B: If someone wants to be a complete investor, they should know how to trade options. In particular, they should know when and how to buy puts. Puts are like an insurance policy. If you have a portfolio with several millions of dollars, that money is hanging out to dry. Fortunately, in Sept 2001, VectorVest had signaled a down-wave. So when 9/11 came along and the market crashed-I hate to say this- we made money during that period of time. We were playing the market to the down side, but you’re not always going to be that lucky. It could have happened when we were in an up-wave. If you got a good part of your net worth tied up in your portfolio, you want to learn how to protect it with puts. You also got to know how to sell calls to get money to pay for your insurance policy. Those are the things you’ve got to learn.

S: Some like to do “in the money” calls, some don’t. What are your thoughts?

B: There’s a variety of strategies, but knowing how to trade options in very important if you’re dealing with a good part of your net worth. We teach an options course, and we teach it from the ground up. People who come to our options course don’t have to know a thing. We start from the very beginning and by the end of the day they’re going to know how to trade options, and which options to trade, when, and with what stocks or indexes. I’m an engineer by training, and everything is quantitative and mathematical with me. I keep my emotions out of it. I think that’s the best way to go.

S: I agree. If you look at people who blow out their accounts, or call the wrong side of the market, they’re usually acting on intuition...

B: We, at VectorVest, are trend followers. For example, right now our data tells us the market peaked in early January. We got a down signal on January the 20th. We’ve been in the down wave since January the 20th. Our data tells us this down turn is essentially complete. And that the market has started working its way higher. Our guidance to our subscribers is “If the market goes up tomorrow, and if the Dow, the Nasdaq and the S+P are all going up, you can go in there and start buying stocks.” We want our subscribers to have the market direction be in their favor. If they’re buying long, we want the market to be going up. And if they’re going to sell or go into cash, we want to see the market going down. But we don’t want them to get in there and buy if the market is going down. The instant they make that trade, we want the market to be going up. We take our analysis and implement that information. The market has to be going in a direction that our analysis indicated they should make the trade. That technique, of making certain that if you buy long the market should be going up and if you want to sell short the market should be going down the instant you make that trade, has saved so much money for people.

S: Do you think with a platform like VectorVest you are going to put investment banks out of business?

B: Oh no, we’re not competitors really.

S: Right, but now individuals can do it on their own… Are you seeing a push more towards retail people never having to go to investment banks…

B: The people still have to make their trades through brokers, services. We don’t make the trades. People will still keep their money in their 401K and money market accounts. We don’t feel like we’re competitors in that regard. We are, however, competitors in the realm of providing investment guidance. That’s where our expertise is: investment guidance. Like I was saying before, the conventional wisdom is wrong and we focus on the key things:

-Conventional wisdom says you can’t time the market. We believe you cannot forecast the market but you can certainly identify a trend and manage your portfolio in accordance with that trend.

-We think buy and hold is not a viable strategy. You buy stocks when the market goes long, you take profits when it’s going down, and you can go into cash or sell short when it’s going down. Buy and hold is not a wise strategy. We think that dollar averaging on the way down is idiotic. The time to dollar average is after it went down, and you know its done going down when it starts going up. It sounds silly, but you’ve always got to see it start going up.

-You have the theory of the professors at the business schools that you can’t beat the market. Every heard of the perfect market theory? What’s crazy is this: They say, you can’t beat the market but send your money to us because we know how to do it. They’ve got a bunch of professors at the University of Chicago that talk about the perfect market theory and all of that stuff, but they also run a money management firm where you can send your money to them. It’s very contradictory.

Click here to read the first part of the interview

Click here to read the final part of the interview