Investors long have considered technical analysis mumbo jumbo compared with fundamental analysis, much as astrology is to astronomy.
But by combining technical analysis, fundamental analysis and a psychological approach to the stock market, Norman L. Yu & Company, a money management firm based in Newport Beach, has earned some hefty returns for its investors over the past 15 years.
“On a long-term batting average, we have done very well,” said Norman Yu, the namesake founder and president of the firm.
He said that over a period of 15 1/4 years, the company has given a 22.94% compounded annual rate of returns to its Long Term Growth Program for investors,well above the 15.57% return on the Standard & Poor’s 500.
It means that if a client gave the firm $1,000 to manage in 1985 and reinvested the entire annual gains, his investment would have risen to roughly $23,000 by March 31, 2000,the most recent period for which audited numbers were available for the company. The returns were net of fees that the firm charges to its clients.
Firm vice president Mark Yu said his company invests mainly in growth stocks using a Six-Key filtering approach. It looks at the growth rate of a company, quality and momentum in earnings, valuations, technical position and buying momentum of the stock before it decides to either buy or sell shares.
By using six different indicators, the firm tries to filter down to a few stocks among the thousands that are publicly traded. After identifying promising issues through the filtering process, it starts tracking those stocks on a day-to-day basis, and uses technical analysis to time the purchase or sale of shares.
“We monitor at least 100 to 200 stocks and we narrow that down to 30 or 40 that we look at very closely and eventually pick 20 to 25 companies for our clients,” said Norman Yu. He said that the fundamental approach tells you the potential of a stock.
“What it does not tell you is when to buy a stock or when to sell it. That is where the technical and psychological approach comes in,” he said.
Unlike mutual funds, money managers such as Yu’s company tailor investments to suit a client’s risk profile.
So while Norman L. Yu saw an average 23% annualized return for long-term investors over the past 15-plus years, some clients received higher returns while others may have realized a lower percentage gain.
And like all money managers, Norman L. Yu & Co. has had its bad times as well as good times in the market. For instance, in 1990, investors got a negative 9.4% return, while in 1997 their investments were down by almost 10%. In five out of the firm’s past 15 complete years, investors saw negative or flat returns.
At the same time, there were periods when the firm beat almost all major indices. In 1991, for instance, the portfolio managed by Norman L. Yu & Co. appreciated by nearly 93%, while in 1999 it went up 98%.
For most clients, the firm manages money on a discretionary basis, investing in stocks it likes. “We are a trader investors,” said Norman Yu. “We like to hold winning stocks as long as we can. It’s only when there is a change in the fundamentals or the way they perform that we get rid of them.”
In their technical analyses, the Yus keep a keen eye on the volume patterns of the markets and of the stocks they’re following to give them some clues to future directions. Most technical analysts focus on price patterns.
Norman Yu has been following the volume patterns for more than 20 years and is also the chief architect of the firm’s Six-Key approach. He says volume is among the best indicators of the stock market’s direction. “Volume and stock prices are almost always in sync,” he said. A divergence in the two, with prices going up but volume coming down or vice versa, could indicate a trend reversal, he said.
Norman L. Yu & Co. was founded in 1969. It was around 1980 that Norman Yu initiated his volume-analysis approach.
“But once in a while volume can throw curve balls at us, too. That is what took me 20 years to figure out: where are the curve balls,” he said.
And in fact “I still haven’t succeeded in finding all the curve balls,” he acknowledged. For instance, the firm was caught looking when the Nasdaq plummeted last year.
“No [money manager] became a hero last year,” said Norman Yu.
He said that, like most money managers, his portfolio was down but he declined to go into details.
“The market was very brutal last year,” he said. n
