TRIMTABS INVESTING: Using Liquidity Theory to Beat the Stock Market
By Charles Biderman, with David Santschi

AN OVERVIEW
This book begins by describing how Charles Biderman developed the basic principles of liquidity theory in the wake of his own personal bankruptcy. We argue that the stock market is basically a casino in which the house-public companies and the insiders who run them-buys and sells shares with the players-institutional and individual investors. Stock prices in the stock market casino are primarily a function of liquidity-the supply of stock and the demand for it-rather than fundamental value. Then we outline the building blocks of liquidity theory and show how they can be used to predict the direction of the stock market.

The second section demolishes the conventional Wall Street wisdom that earnings growth drives stock prices. It demonstrates that liquidity carries far more predictive power in the stock market casino than value investing. In further chapters, we show how investors can track the components of liquidity theory using readily-available sources, including Internet sites and financial newspapers. Drawing on years of experience in analyzing stock market liquidity, we explain how investors can use these components to beat the stock market casino.

The third section takes a look back at the past ten years of stock market history. During this period, investors experienced an astonishing range of market conditions, from a secular bull market to a bubble to a brutal bear market to a tentative recovery. This section focuses on liquidity conditions during these tumultuous years and how they influenced the direction of the stock market.

It does not simply dwell upon how followers of liquidity theory should have invested during this period. After all, hindsight is always 20/20. Instead, it discusses the actual calls that we made in our model futures portfolio. For example, we explain how we achieved a 74 percent return in our model portfolio during 2002 even as most investors were being mauled by the bear market.

The fourth section explains how investors of all levels of wealth and experience-from individual investors just beginning an investment program to seasoned institutional investors-can put the power of liquidity theory to work in their portfolios. We detail a series of strategies, which range from highly conservative to extremely aggressive, that use liquidity theory to beat the stock market casino.

The fifth section points to the future. It discusses the difficulties that followers of liquidity theory face and offers practical advice on how to manage them. It also explores how new applications in income and employment analysis can forecast the amount of cash available for investment in the stock and bond markets. We conclude with a discussion of proposals that would not only improve the transparency of financial markets but mitigate the boom-bust tendencies of the stock market. We argue that if more near real time liquidity data were available to investors, U.S. financial markets and the U.S. economy would be much healthier.

As we write this book, no one expects another bubble as massive as the technology bubble of 1999-2000 to emerge any time soon. Some may even laugh off the excesses of the late 1990s as the foolishness of a bygone era. Yet it would take only a handful of technological breakthroughs to inflate other bubbles in the future. As Warren Buffett quipped at the shareholder meeting of Berkshire Hathaway on May 1, 2004, "What we learn from history is that people don't learn from history."

A financial press starved for new trends would be more than willing to trumpet the next "big thing," and the resulting bubble would be no laughing matter after it popped. When it comes along-and it will eventually-liquidity theory will help investors ignore the madness of the crowd and beat the stock market casino.