Joining Tracy and Dan in this episode, is Scott Bennett, founder of Invest with Rules. Scott is a former financial advisor with Fidelity Investments. In this episode he discusses his style of investing and trading that follows the large fund managers. Join us for part 1 of this interview now.
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And welcome back everyone to another RLT PIVOT podcast. My name is Tracy, and once again, I am joined with my amazing co-host, Mr. Dan Janson. How are you, sir? Doing fantastic. So good to be back, as usual, for another episode of the Pivot podcast, we do have a special guest with us today, so we'd like to introduce you guys to Scott Bennett if you're not familiar with him. He is the founder of Invest with Rules So, Scott, how are you? I'm great. Thanks so much for having me. I really enjoy your podcast. So thanks so much. It's good to have you here. It's good to have you here. Why don't. Why don't you introduce yourself like we know a little bit about you, but, you know, tell our audience who who are you and how did you come into this world? Yeah, absolutely. So again, Scott Bennett, founder of Invest with Rules. I live in Denver, Colorado, with my wife, my wife, my three year old son and funny dog. And really, part of my background is for 16 little over 16 years, I worked at Fidelity Investments and part of my major role there was I was a certified financial planner supporting the high net worth investors. So it was really from anyone from a great saver to even professional money managers. So I had an amazing array both in Colorado and Massachusetts of really understanding and learning a lot about Fidelity's clients, which is really a great experience. I'd say one of the biggest things that stuck out to me really applicable to to your show is I work with a lot of traders so I have a I saw a lot of very interesting things over my tenure. Interesting. And what caused you to transition from working there to doing what you're doing now? Yeah, it. Was a bunch of things happen at the same time. One is I uncovered a lot of research that I personally found really helpful to myself. It turns out that other people find it valuable, too. I did have a big family challenge where I'm sure a lot of people know someone with the challenges of cancer. And it was just a time for me after a long tenure with Fidelity, just to focus more on my family support my mother, while she was kind of fighting her battle and I don't regret it for a second, but it was it was a hard decision, but it was really, really good to spend quality time with family a little bit, take a break from work. Gotcha. Because you bring a very unique perspective, which is intriguing. So I think what I'd like to do is, is really I'd like to know some of the investment mistakes that you've personally made that you've also learned from. Yeah, absolutely. So I'm very guilty of this too, at the beginning of my journey. But a lot of the clients that I work with, I'd say there were three primary challenges that I saw with any trader that I encountered. And the very first one was not finding profitable ideas. And a lot of the times their ideas would come from financial TV or maybe some newspapers, but a lot of the time I felt like my clients and myself, we were kind of late to the trade number two. A lot of it was I will call it over trading, but it was a lot of it was a lack of confidence. So and once the position was working, I think Tracy, you said it once really, really elegant, elegantly, where you said you're playing too much defense and not enough offense. Mm hmm. So it was just definitely a lot of extra trading. It's nice now that we live in a world where commissions are free. But when I first started my career, they weren't free. So it was you'd think people would be a little bit more cautious, but they weren't. And then last but not least for this goes for probably any trader is a lack of risk management. So a lot of the times when a trade would go wrong and they'd be down maybe single digits, two even possibly double digits, they would justify it with it's a good company, it'll come back. And then it got even uglier. So those were the biggest challenges that I saw on a frequent basis. Mm hmm. Awesome. Now, now. Tell us a little bit about investment rules. And I'm asking this as a kind of a two part question. So tell us a little bit of what investment rules actually is and what your your mission with with investment rules is absolutely. So Investment Rules is an investment research newsletter, and it's been going for just a few years now. And if I were to say, like the genesis of it is I follow two primary rules. And rule number one is we buy what billion dollar fund managers are buying in Uptrends and the key word is Uptrends. We really want to identify things that are in the right direction. And then rule number two is sell what billion dollar fund managers are selling a downtrend. Now, I'm sure over the course of all of our careers, we've been to a corporate meeting, whether it's an office meeting, and they're usually really, really dry and they're really tough to kind of sit through but there's this one meeting that I had at Fidelity that was just like the most eye opening, amazing dinner I've ever been to from a corporate perspective. And it was a dinner with a $200 billion fund manager, and it was just like the most eye opening, coolest thing I've ever seen. This guy is pushing around him and his team is moving around so much money to get into their best ideas and out of their worst ideas. It was so clear just how remarkable their background is. His analyst team, they're incredibly well-funded to do their research. And I remember just like on the edge of my seat listening, just understanding that the edge that that information is is just kind of is just through the roof. It's just incredible. I mean, he's playing tennis with some of these CEOs that exist. So it's just definitely a different experience than us going through balance sheets. And then I was in this meeting and I remember looking to my left and looking to my right and all of my colleagues there, it was pretty intimate. There's 50 of us. They were all jotting down ticker symbols as fast as they could, like what was going on. And a lot of them are stocks that we we now know a lot of this was kind of at the very beginning of the food delivery trend. So we were asking all these fun questions. And I mean, you're hearing it from someone that's moving around a ton of money. So when I was watching all my colleagues write down all these tickers, I remember just thinking like, oh, how do I know he's buying this? How do or how do I know that he might be even selling into this we have absolutely no idea. But I do know that he needs to buy and sell incredibly slow month after month. Their best ideas because he's going to move the price. And that was the kind of pivotal moment for me. I was like, well, what if I could figure out what other billion dollar fund managers are buying and selling? That will kind of help me with the the finding profitable ideas, finding better set ups. The second is, is having more confidence. So maybe not playing as much defense and worried about losing and knowing that there's other big money going into these trades too, and then applying forms of risk management. So at the core of Invest with rules, it's a lot of billion dollar fund manager research and it's also identifying trends. Now, are you using technical analysis to do this or are you using are you using some kind of fundamental analysis to do this? Great question. So for the billion dollar research, it's just data, no technicals whatsoever. So it's just how many dollars were bought over the previous month. And to kind of put it into context with most people look at something called 13 F reports and those 13 F reports are usually anywhere between two and a half months to four and a half months delayed. My information is very ethical. It's it's one month delayed so this is just simply data of what's these billion dollar fund managers that I can get access to ethically what they're buying and selling. So that's just simply data. And then the trend program is very much technical analysis. It helps me to determine are we in uptrends neutral trends and trends because even in markets like this, you need to play a lot of defense. Yeah I notice the word risk being used a lot, which I love. Real life trading is a big proponent of knowing what your risk actually is, getting into trades, things like that, just getting a little bit away from the stock market and because you have a good job, good career, Fidelity Strong Company, been around forever. You have a good cushion in life. And we have a lot of traders that once you trade full time, they have a career, they're bills, they have all this stuff. How do you what was it for you that said, OK, I could cut the safety net and I want to focus on trading and going forward and I want to build my career around doing my own thing. How how was that for you? How was that transition. You know, it's it's nothing. It's never easy, I imagine, for anyone it was challenging. I mean, the reality is, is I have my entire career was kind of delivered a paycheck. So it wasn't simple in any sense. And then on top of that, during that transition, we we had our son. So then now there's even more of the weight of responsibility. But I do think that part of it was I'm a very diligent saver. I'm not in any sense an over spender that comes to purchasing big ticket items like like a home or even just even small things. It's just I'm innately trained certified financial planner. So I'm a little bit cautious there. But then also, it really was my level of confidence in the set ups that I was investing in I know I actually part of the time where I left was right during COVID. And it was interesting where I started getting really cautious at the end of 2019. Part of it was just I saw an awful lot of, of neutral and down trends. So part of it was just something doesn't look right. Part of it was listening to really lots of podcasts and learning this maybe something this contagion could happen but I would say overall it was not an easy decision. I think Fidelity's a great company. If anyone who works there, they're great with education. I guess there's a part of me that also wished that for a lot of self-directed investors that we do we do have this massive transition happening where I 100% believe in the fiduciary rule and everyone who's managing money should look out in your best interest. But for those who manage their own money, a lot of the time with these big brokerage companies, they'll give you kind of high level education and some research. But the hardest part is there's not a ton of really specific guidance on education. And that's where I think in general, real life trading does. I've been through some of your initial trainings. They're really good and I think, oh, my goodness. Like I there's a part of me that wished a lot of Fidelity clients would go through that are self-directed traders would go through that level of education yeah. I think everybody should, regardless of whether they want to trade or whether they don't want to trade. I think that having some basic understanding of what's happening with your finances is a good place to be in. It protects you. Even if somebody else is taking the fiduciary responsibility of actually managing your money it's still nice to know what to look for and what not to look for. Right. And absolutely, I completely agree. Now, do you you primarily invest? Would you consider yourself an investor or a trader, or how do you label your. Real life trading community? I'm probably more of a swing trader from a definition standpoint. In a perfect world where the Federal Reserve isn't monetarily and fiscally tightening and there's a massive amounts of macroeconomic headwinds. I would love to be more of an investor with risk management. Gotcha. And a little bit of that is, as you guys call, like the percent are the level of risk abiding by the 1% rule. So not letting a trade get out of hand, not letting an investment get out of hand. But I would say especially in a market like we're in today, it's I'm more of a swing trader. Gotcha. Now, you said earlier that your system basically utilizes some data analysis and then also some technical analysis. The data analysis, is that available to everybody in the general public or is this something that you know how to do and it's kind of proprietary or how does that work? I guess I would call it it's it is general information I would consider the process that I go through and the data that I run through a little bit proprietary. So nothing that I have is massively away from the public eye. It's all public data. OK, I've been doing it so long, I can tend to do it faster. I've seen other programs that have something relative least similar, maybe a little bit different, a little bit of a different angle. But I guess for doing it for so long, my process is a little quicker of the delivery of the information right. And how successful have you found that process for your investments? Is there kind of a rate of rate of win rate or win percentage or any type of thing like that? Yeah, I do track a lot of my own personal data as well. Have to pull that up in a minute. But I would just say that from kind of a narrative standpoint, these fund managers, some of them are long only some of them are long, short so there's a lot of different array of what I'm looking at, but I'm looking at it collectively and I'm looking specifically for three things. I'm looking for large dollar accumulation, large share accumulation, and I really want to see what I call a market capitalization impact. So over the course of the month, was the buying big enough where it actually moved the price right now, where the storyline kind of moves is I do notice things. Sometimes they stick out to me and sometimes they don't. So a good example of things that stick out to me is back in 20, 19 at the end of the year into 20, 20. I did see an awful lot of health care buying and it was as if they were looking for kind of who was going to be the vaccine maker is what they were kind of aiming for. It was interesting where they were very cautious on a lot of the kind of going out in the public stocks like the airlines, the energies, they were very early to the game when it comes to the stay at home trade. They were I would say a little bit behind on some of the commodity trade in 2021. So they kind of caught up pretty quick. The the data that I usually run is I mean a little bit over 50% of with risk management really helps my expectancy rate is is typically on the higher end I have one of the joys of running a investing newsletter. I do get some amazing members and some of them are engineers and they go through my scorecard tab and they analyze it along with me so they'll they'll track my my progress as much as I do. That's right. And not service that newsletter that's free. Correct. I do provide a lot of information for free, but I do run a program called the Inner Circle Membership, which is just it's where I deliver the monthly billion dollar fund manager reports it's also where I for both on the stock indexes on ETFs and the billion dollar fund manager stocks is what I call them. I deliver what I call a trend roadmap. So, ah, I look at it from two different time frames from a shorter term perspective, and I consider that more days, two weeks. And then also from more of a longer term perspective, I'll call it maybe more weeks to months. I provide two different analysis of the trend, and that helps me to determine kind of where are we. And there's nothing better than when the trend is just horrific and it starts to rebound. So you saw a little bit of that. So far recently with areas like health care and biotech. And so it does kind of perk up names and information that are interesting. And then there's nothing better when the trends align with the billion dollar research. It provides me another level of confidence. Yeah, for. Sure. Now with this type of information, which I think is very intelligent to follow the money, right? If you're if you're able to to follow kind of where the big the big whales, I guess, are putting their money, it's a good shot. There. They're not going to they don't invest to lose. They you only buy for one reason. You think the price is going up. Right. But with this type of investment for your strategy of how you actually place trades, are you because usually a lot of times when what's on swing trading, they have certain entry prices, they have target prices. Do you have target prices based on the are you using the information that you have to to set certain entry stops or is it a time frame that you're I'm going to be tying up capital for three months on average. Or how does how does that work as far as when, you know, when to use the information that you're actually providing? Good. I, I believe this will hopefully answer it. So I don't have a specific time frame. I'm looking for kind of no different than a swing. So I, the system, the trend roadmap gives me three by alerts almost think of it kind of like when you're coming up the right side of a cup or kind of a base cup base pattern. So it will give me an early entry kind of a midpoint entry. And then typically the the final buy signal is kind of more of your kind of traditional breakout maybe what would that be? Cup and handle or flat base. So that's the trigger that I'm looking for. So it's not specifically time based or how much I'm going to time in money. If the trend continues, which in the most recent few weeks, very few trends have been kind of as the volatility has been really high on the S&P and the Nasdaq, there hasn't been very many consistently long trends, but in times like 20, 20, early, 20, 20, one, 20, 20 there are really extended periods of time where the trend really works. And I want to be there for as long as humanly possible. So I will move my stocks up. I will scale in and out in certain scenarios. And that's, that's kind of how I, how I play the names just so I always am managing the bottom line always managing the risk. Now, I have a question for you regarding the length of time that it takes some of these billion dollar funds to get in and out of a position is it typically a month, two months, three months? Like what is your experience shown you? Gosh, because I'm looking at a large array of them. I'd say some of the larger ones that I do track, I've seen times where they can go seven to ten months straight of accumulation and there will be times where it's heavier accumulation versus not. There'll be times where they pause. I wish I could call them and ask and get more detail but I'm watching kind of whatever I seen. They're telling their trader and how much they want to accumulate. So the biggest thing I always think of, like what can go wrong with these guys and gals because they're they manage so much money that the biggest challenges, I would say, what if their opinion changes which can happen. So when they're position size they kind of reverse course they I have seen times where they go from buying to selling and that happens I try my hardest for members to find at least two to three months of consistent buying. So they're trying to kind of they're not going to probably dip out so quick. Another thing I look for is there's no rhyme or reason to this. It's just something that I've noticed is certain levels of funds and how big these billion dollar funds are. Sometimes they have kind of in my mind, they have targets. So for an enormously large fund, sometimes it could be as high as it could be $100 million or $50, million or even some funds can get up to $1,000,000,000 in a position. So you're always kind of thinking and you're like, OK, well are they going to reverse that position? And if so, it's going to take a really long time. Like a good example of one that they were just unloading for almost the last two years is a stock like PayPal. So you're sitting there, you're just like, Wow, I can't believe like they made it. They they grew it so much, all these funds that now they have to unload and they're just kind of harming themselves. So the short answer is, is I'm looking for consistency. And sometimes there there is and sometimes, unfortunately, there isn't. Gotcha. Yeah. Because a lot of things can change in seven, ten months. I mean, that that can change the entire scope of, of, of the investment field very, very quickly. So reversing that track can be very, very challenging, I would think. Now, I want to know what kind of indicators do you use in the technical aspect of it? Yeah. So some of the engine that runs what I call the trend roadmap, a lot of it's price, some of it's some of it's volume but I'd say a large majority of it is I'm looking for kind of a change in guard of some moving averages. So that that is a really big engine that does move some of the engine. Also, relative strength is one of the bigger items that I look at. What I find really, really interesting is when I look at relative strength on a week to week basis and also on a month to month basis and I, I use this phrase is whenever I see relative strength jump by a large percentage on a week to week basis, I'll call that a relative strength spike. And I'm looking for these spikes and it does sometimes over consistent weeks, it does tell a story. And if it's a large or a percentage large relative strength decline, I'll call that a slam. And I track this every single week, typically midweek. And a good example of this is earlier this year, it identified things like Chinese equities. It identified a lot of the health care names. Strangely, enough, sometimes it even identified solar stocks. And then a couple of days later, you see there's potentially a government bill coming to kind of subsidize more solar. So you're like, well, how does some of these funds know this? And this isn't fund research. This is just looking at relative strength. Yeah. Yeah. So I would say that those are the biggest components beyond a few other ones that I look at because I really don't want members to it's it's so hard in this environment. They don't want members to buy too extended or buy. I guess we'll call it falling nights where there really hasn't been any sort of bottoming pattern whatsoever. I know you mentioned. Exactly. Yeah. Avoid the knife, if you could, with one of the words that you use before is is a trader needs to really have confidence in their trade, in their trading style. And what would attribute in your perspective to to what would give somebody that confidence to either place a trade or be able to hang in there for the for the momentum play and not bail too soon, things like that. What would give the the confidence? Well, if for me again it's that two edge of the of the items. So number one, our billion dollar fund managers buying or selling if I'm going long, I absolutely want to see them buying. I really want to see large share accumulation, large price accumulation I really want to see them move the price. I want to see so many funds going after a name that it's like it's on my radar. So and sometimes it works and sometimes it doesn't. But that's where the risk management comes in. And then from an ETF perspective, I think it's hard, but I'm really relying more on on technicals so that's something where in a normal environment where there's not kind of the Federal Reserve fiscal and monetary tightening these trends should last weeks to months, not days, is sometimes what it feels like. All of a sudden, we we get a week's worth of momentum and then it just rolls over. So for me the to get into an investment, to get into kind of a longer term swing trade where I have a lot more confidence, those are the criteria I have to see I have to see billion dollar fund managers buying. I really want to see a set up that's kind of moving in a positive direction. I call it more of an uptrend on the short term perspective. And that will at least let me enter and then place a tight snap. Now, when you start to see this accumulation or this distribution happening, are you looking to enter your trades just at specific levels, or are you looking for patterns to enter trades like you mentioned earlier and handle that type of thing? Are you are you actually trading candle patterns once these signals start to come into play? Or is it just the level you're going to get off at that level and hopefully the patterns kind of give you some confirmation into the position. I don't rely too much on candle patterns, more of I would call it price momentum. So once I wear, I will kind of place my my first trade, a larger dollar denomination first would be on a buy signal from the trend roadmap, meaning that the short term trend is now in an uptrend. What will help me also to stay in there? Obviously, I need a cushion of gains and then I'm going to be lifting that stock price pretty quickly. The the only other interesting a really fascinating set up that I definitely did not I think whenever you're using more of a momentum play the hardest thing in my mind from a trend roadmap perspective, there's a lot that goes right with it. But there's times where things are really challenged is when you go from kind of the falling knife. You have that V-shaped bottom. It will take time for the buy to arrive. So there are a lot of people out there who want to get in early and to being out of the market for some people, it's refreshing. And for some people, being out of the market is kind of nerve wracking, like when when's the buy signal coming? And there is an interesting trader that I've read several of his books, and his name is Gil Morales. And one thing that he does that I think is really interesting, I think he plays that the computer algorithms really, really well. And he calls it an undercut and rally. And it's one trade set up that I find has been working exceptionally well. And that gives me kind of knowing that probably the trend robots are going to turn pretty soon. So he's looking to the left of the chart, looking for kind of a low in a chart pattern and then what you typically are getting is these kind of like a dunk and then kind of a rise above that low off to the left of your pattern of your chart. And it's almost as if the computer algorithms are ripping it down to that low, sending it a few percentage points lower. And then once you get above that low the previous low and you're now higher, that's now your new stop. And it's almost as if that's when the algorithms kind of switch from selling to buying. So that's the only other pattern that I think is really fascinating. That's working exceptionally well on the long side and on the short side, if you're looking for like a double top breakout and then they just keep failing. So it's an interesting time to say, OK, well, if someone's programing a computer trading algorithm, where would they be entering and exiting? Is that the traditional moving averages or is it these lows? And it's interesting, but they're working quite well. Well, have you ever looked at the volume profile for any of this? I do, but I have to admit I'm not the biggest volume expert in any sense. I do want to see some volume, but I one thing that always challenges me is a good example is you have your options expiration and all of a sudden the volume through the through the roof. And then I have a really hard time of deciphering, is that good, big, normal volume or is that options volume or is that ETF rebalancing volume. And I have an incredibly hard time trying to figure that out. So I tend to rely more on price movement more than volume. So Scott, appreciate you coming on the Pivot podcast with, with myself and Tracy. We'd like to have you back one day in the future. In the future when we get some some new updates and maybe market conditions change and all that stuff as well. So would love to bring it back on. But once again, thank you for listening each and every week to the Real Life Trading Pivot Podcast We will see you again next week.