Tobin Smith – ChangeWave Investing 2.0 Picking the Next Monster Stocks While Protecting Your Gains in a Volatile Market

Don’t we all wish we could identify that next big, breakout stock and jump in before everyone else? Investment professional Tobin Smith believes he’s developed a solid means to that end, and he lays it out with contagious confidence in ChangeWave Investing. His intriguing approach begins with a detailed system for identifying the most promising of future highfliers–employing protocols that, Smith writes, “delivered more than 150 percent annualized gains since 1995 and more than 430 percent gain per stock pick in 1999 alone.” Smith then turbocharges this approach with what he calls “open-source investing,” using the same free-flowing method of information exchange that’s proven so successful in the Linux software community. Much in the way ever-tweaking programmers have continually improved Linux, Smith contends, investors can enhance his own aggressive growth-stock model.

Will it work? Investors who support Smith’s contention and play along, combining his advice with their own collective expertise, should be able to upgrade the financial “source code” of New Economy, making it available to all participants.

Some of the jargon-laden process may befuddle casual investors, but serious stock watchers searching for an ambitious and original strategy with high upside (and commensurate risk, to be sure) may just want to strap on a virtual seat belt and see for themselves. —Howard Rothman

FROM PUBLISHERS WEEKLY

All that glitters may not be gold in this stock-picking guide. Although Smith identifies himself as “vice president for Phillips International, one of the largest investment advisory companies in the world,” Phillips International in fact predominantly sells vitamins and nutritional supplements and publishes numerous newsletters. A few of the newsletters do deal with investing, but even if Phillips’s entire revenue came from investment advice, the firm would not be among the 500 largest such companies in the world. The key to Smith’s “ChangeWave” system is in the systemic trends that drive most investment opportunity and that, according to Smith, point to 10 “Supersectors” (groups of industries with explosive growth potential) and five “emerging Supersectors,” along with nine “Superspaces” (thinly populated areas of economic opportunity) and seven categories of profitable companies across industries. Collectively, these areas contain the fast-growing, expensive stocks that momentum investors love (and value investors hate). With 33 different point-based scales, Smith helps readers identify “Gods” (Game Over Dominator Stocks) or “eGods” (Emerging Game Over Dominator Stocks), which, he says, should be bought and sold according to moving average conditions. Some readers will find it slightly fishy that 41 of Smith’s 56 featured stock picks were among the top 56 performers leading up to February 2000, when Smith finished writing, and all but four of the rest were among the top 100 (out of more than 10,500 stocks). Most of his picks are currently down at least 50%, and in many cases much more. However, perhaps this should not discourage ChangeWave believers: the author argues that fundamental technological and human truths (waves) beat temporary market aberrations (storms). Investors beware: the book does not offer sufficient evidence that the system works; it is supported by the author’s personal theorizing about the economy and financial markets. (June)
Copyright 2000 Reed Business Information, Inc.

REVIEW

Very impressive . . . a landmark book! Don’t make another investment in tech stocks without reading ChangeWave Investing. — San Francisco Chronicle, Harry Domash, Online Investing Columnist

FROM THE PUBLISHER

[from the Author’s Preface]

ChangeWave Investing is about your prosperity in the New Economy and two big ideas. First–how you can profit from a New Economy stock-picking model that has delivered 150 percent annual growth since 1996. This model has allowed investors to turn tens of thousands of investment dollars into hundreds of thousands within a very short time (12-18 months). Second–a revolutionary way you can capitalize on the greatest growth stock opportunities in the New Economy before the majority of the investing public. It’s called “open source investing.”

Together these two ideas have allowed ChangeWave investors to catch many of the monster stocks of the New Economy and ride them to fantastic new wealth. We believe this will continue to happen, and we hope after reading this book you’ll want to participate!

I have always been torn between two intellectual loves: the hunt for emerging growth stocks and the hunt for new customers–commonly called marketing. One day about ten years ago, I asked myself, “Isn’t analyzing and creating marketing strategies–figuring out how to dominate/sell more than one’s competitors–the key factor in a company’s success? And wouldn’t figuring out which publicly traded companies had strategies that are likely to dominate or outsell their competitors be a key factor in a company’s stock appreciation?” My answer? “Makes sense.”

From that moment, I was smitten by the notion that picking winning stocks had more to do with analyzing marketing and business strategies than balance sheets. The fact that I was not a trained securities analyst actually turned out to be advantageous–I had no preconceived ideas, so I could make up my rules from scratch.

For years, I researched investment managers and investment strategies, coming to the conclusion that the weakest part of their stock-picking research was their grasp of the markets their companies competed in. (But understandable; it’s the difference between a finance and a marketing perspective.) My new marketing-centered approach seemed like an exploitable investment edge–analyzing companies on their ability to beat competitors rather than by how they looked on a spreadsheet. Little did I know how valuable the approach would be when the Internet came along.

Another observation I was made was not quite so radical. I began looking for companies using radical changes in strategic business design and marketing advantages. In my research, an indisputable pattern emerged: the greater and faster the rate of fundamental change in an industry, the greater the companies leading that change appreciated in value. I did not know it at the time, but this was the beginning of the strategic analysis concepts in the ChangeWave Investing program you are about to learn.

In 1995 I started publishing my “ChangeWave Portfolio” of stock recommendations for friends and colleagues based on the pattern I had observed. In the inaugural ChangeWave Investing e-letter on December 31, 1994, the first five companies I recommended were

– AOL – Orthodontic Centers of America – QUALCOMM – Medicine Shoppe International – Chantal

Chantal went broke. Orthodontic Centers of America rose about 600 percent before giving back about half, where it stands today. Medicine Shoppe International was swallowed by a drug distributor for a 150 percent gain. And you know the success of the other two. Still, my early success was but a glimmer of what the future would hold for ChangeWave Investing.

As I became more and more a student of the emerging New Economy, I watched the stocks of the companies I was doing business with explode in value. I wondered: If the theory that radical change in an industry was the genesis of radical changes in industry-leader stock valuations, what would radical changes WITHIN THE ENTIRE ECONOMY cause? Would the same pattern hold? I really never dreamed the answer would, of course, be yes.

By the beginning of 1999, ChangeWave Investing had grown into a collaborative e-letter to thousands of friends, family, and New Economy professionals. We soon found that the more WaveWatchers (as I called active ChangeWave investors) participated in the discovery and analysis process, the better our results. By the middle of the year, our hardy band was making more money than we ever thought possible. Our strategy was leading us to invest exclusively in New Economy companies and markets–with breathtaking results. Many WaveWatchers had grown six-figure portfolios in less than 18 months. Several became millionaires. I kept testing and improving the strategy, which continued to pass the test with flying colors.

About that time, my research led me to a fascinating book by Eric Raymond, “The Cathedral and the Bazaar.” Eric made a beautiful case for the “open source” software movement embodied by Linus Torvalds and his Linux operating system. I knew I had seen the future: “open source investment research.” My own experience with our crew of WaveWatchers convinced me that virtually all of the principles of open source software development could be applied to investment research.

During the summer of 1999, Phillips International agreed to be my partner in launching ChangeWave.com, which now offers a variety of research decision support tools for free to any and all investors–and which includes constant updates on our investment models central “core investment analysis logic.” The web site is also sponsoring and managing the ChangeWave Alliance–a massive network of credentialed, profiled New Economy professionals–which packages the end results of our investment intelligence-gathering and peer-review analysis into a “buy/sell/hold” advisory service.

But, you say, isn’t open source investing just like a stock message board? No. These come-one-come-all “stock-picking as entertainment” web sites and message boards with God-knows-what basis or professional credentials behind their “posts” have some flaws.

Our track record: In the last 48 months, money invested via the ChangeWave Investing process has grown more than 2,500 percent. This growth rate on a compounded basis exceeds 150 percent annually. In fact, we grew our aggressive growth capital more than 511 percent in 1999 alone. More important, every year our results have been getting BETTER as the power of our open source approach has continuously improved our stock-screening and investing logic.

To help you harness the power of ChangeWave Investing, well take you, in the beginning of this book, on a quick tour of the New Economy so you’ll understand what it means to you and your monster stock picking. Then we’ll make sure you are up to speed in basic aggressive growth investing strategy. Next, we’ll cover the basic philosophical and economic assumptions and rules coded into the ChangeWave Investing application. Finally, we’ll get into core behavioral assumptions and rules we’ve included in ChangeWave Investing to mimic the pattern of institutional investing behavior. At that point, youll be ready to get into the ChangeWave approach to screening and buying aggressive growth stocks–and you’ll soon discover that buying these highly volatile stocks well is easier than owning them well. Well help with that, too.

Our mission for ChangeWave Investing is to

– bring low-cost, high-performance investment research to the masses through the “power of many–focus of one” strength of open source investing. – help ourselves and our colleagues achieve financial security by sharing our brainpower to find the best growth investments in the first decade of the twenty-first century. – have lots of fun and meet great people along the way.

Welcome to ChangeWave Investing!

ABOUT THE AUTHOR

TOBIN SMITH is founder and CEO of ChangeWave.com and vice president at Phillips International. He is also editor of the New Economy Investing newsletter and managing partner and chief investment officer of ChangeWave Capital, L.P., a private hedge fund. Prior to joining Phillips in 1995, he worked as a marketing executive for over 15 years in the investment banking and financial services industries. Toby and his wife Marjorie reside in North Bethesda, Maryland.

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