johnlux

Trader, investor, reverse merger expert, quantitative analyst (“quant”), former OTC market maker and attorney. Author of “How to Find a Home Run Stock” and “How to Pick Hot Reverse Merger Penny Stocks” and also “How the Shorts Raid Your Stock, Destroy Your Company and What to Do About It” all on Amazon.

Old article on John Lux

John Lux

“Theory without nerve doesn’t lead to action — and in the stock market, it’s action that makes you money.”

There are nearly 47,000 registered stockbrokers in the United States, 10,000 of whom are in New York. That’s a large crowd to stand out in, especially when you realize that the way a stockbroker stands out is by quietly and unobtrusively picking winners.

But some do. John Lux, for one, not just because he is tall — which he is — or because his prematurely white hair is striking — which it is (could it be that John Lux is the “Silver Fox ” of the ’80s?). No, John is outstanding because he is exceptionally adept at picking winners.

“When I was running the trading department for another market-making firm it wasn’t uncommon for us to have one, two or three of the top ten stocks in percentage increase in one day. And we only traded fifty stocks, a very small fraction of the thousands of over-the-counter stocks, so for us to have one or more out of those ten is a pretty good trick.”

Indeed. No false modesty here. He simply knows what he is doing and is aware of his expertise. As a result of John’s knowledge and experience, he doesn’t hesitate to go into a market which looks difficult to buy into. That’s important. He says, “I know how to get in and accumulate position without ‘disturbing’ the market. I’ve quietly acquired nice chunks of stock, watching it go down every day. There was one situation. . . it looked like nobody in his right mind would buy. And no one did — except me. Dealers would call me and plead with me to take unwanted inventory off their hands. The stock was weak, weak. I took in stock from these guys ‘as a favor.’ A few weeks later they started to trying to buy it back, then at two three and four times higher. I generously let them have it back and got out of it.”

In that particular case. the stock ultimately went to twice the price that Lux got for it, but he wasn’t bothered by getting out too soon. He says with a smile, “I don’t mind getting out a little early. I’m satisfied with a four — times return over a three month period. Often I’m righter than I now and get out too early, but that’s OK. I set my objective and I’m prepared to get out after I reach that as soon as the stock starts looking weak at all.

“The time to sell is when things look so good, when everybody in the world is buying. After a certain point, there’s no one left to come in and push it to a higher price. It has to come down. You have to have something that makes you stand there firmly facing your chosen direction when everyone is racing by you the other way. You can’t follow the crowd. When the Wall Street Journal is giving it a big play, don’t be afraid to kiss it goodbye. By the time it gets in those pages, there’s nobody left to buy it.”

That confidence comes out of a wide well of knowledge. Lux’s background, an interesting mix of art, science and law, is not exactly what one would expect.

( He got his law degree after first studying Engineering and English.)

Born in Pittsburgh 35 years ago, Lux has lived in Chicago, Massachusetts, Maryland and Delaware. His father, currently Chairman of the Board of AMETEK, Inc., traveled a lot during John’s youth.

Growing up in a home where your father has a Ph.D. and your mother practices judo and plays drums in a jazz band is bound to have a comprehensive and lasting effect. Between John’s natural curiosity, his studious nature and the influences of his brilliant father and his imaginative and fun-loving mother, he developed a variegated approach to learning and living. His interest were broad:” I read everything I could get my hands on from scientific texts to musical biographies and magazines of all descriptions.”

His memory, particularly for numbers, is phenomenal. Describing his first job (at E.F. Hutton) he says, “After working my way up from clerk to getting quotes to assistant order clerk to order clerk (almost that fast), I’d follow 100 stocks and could tell you the price on them at any time. And I could tell you roughly what the prices were on another 200. We used to make about 100 trades a day and I could remember all the orders I’d made the previous month, who I talked to, what their prices were.”

But more important and valuable than his unique memory is John’s ability to devour mountains of data — descriptions, figures, facts, projections — and perceive their patterns and trends. In describing this ability, Lux uses the analogy: “When a safecracker hears the faint chain of clicks that means he’s arrived at the right number, he knows . . . that’s what it’s like when you pickup a piece of data, have an insight and all of a sudden, things start falling into line.”

Listening to him talk about his is much like listening to a painter or musician explain his art; but that’s not really surprising. After all, what is art but the combination of intuition, logic, imagination, and daring?

As a boy, Lux used to help his father plot commodities charts. In retrospect, John regards that experience as what set him on the road he is on now.

“He [Lux Senior] was behind and gave me about three months back prices to chart. After I’d worked for about a week, and had the chart started, I began guessing which way it was going to go. It turned out that I was very good at guessing that. I became fascinated an asked him for some books to read. He dumped about 20 pounds of books on me, including Granville’s and — after going through them as fast as I could — I decided I wanted to trade commodities.

“I was still underage, so he opened a small account for me at The F.I. duPont and gave his secretary power of attorney. I would sit where I could watch the board and then run out to a pay phone, and call the secretary and tell her, ‘Sell wheat short’; then run back into the office and stand behind the broker — who did not know who I was — and listen while he answered the phone to be sure he got it right. The first week I did this I made $100 on a $500 investment. I thought, ‘this sure beats working for a living.’

Then came the E.F. Hutton job where Lux developed his ‘feel’ for stocks. “They’re like individuals, they each have their own unique personality. some of them are fat and lazy, and some o them are thin and jump around. ” He left Hutton after having moved up to assistant trader.

Laird, Bissel and Meeds was next — as a trader. “But when I started actually trading stocks and doing deals, I realized that I didn’t have enough education. At that point I had a year of engineering and a year of English, but hadn’t studied any accounting, business or law. other than what I’d read, which , although substantial, was not enough.”

Why law; was that essential to a career in investments? “My legal background helps me counsel people who have problems as well as providing some good connections. Also, I know how to work with lawyers. More than that, it tends to get me into more sophisticated projects. I can read a tax shelter prospectus and understand what was on the mind of the person who drafted it. I can tell you what he’s not saying as well as what he is saying. Believe me, that’s a valuable skill.”

Leaning back in his chair, Lux recalls when he decided to become a lawyer: “I was negotiating a deal and a lawyer rewrote my one-page agreement into fourteen-page document. He killed the deal and won my admiration. I went back to the NYU School of Business and took all the basic courses I could get, winding with a major in statistics. Then came law school in Maryland. That was particularly beneficial because I already knew the applications I intended for it. I seem to have real flair for the law. During that period I clerked for a judge who had been on the bench for 13 years and that was a great experience.”

The big question – whatever the background, education, etc., of the broker — is : how do you pick a winner; a sleeper that is going to take off?”

Typically, Lux answered softly and with great confidence. “The picking of good stocks is simple. I could write up the bare rules without explanation on two pieces of paper. But there is something you must understand here. My decisions and choices are based on an enormous amount of research as well as what I feel is my rather unique viewpoint, the outgrowth of my experience as a trader. As you know, a trader’s interest is in making money every day in that stock. to do that, you must trade it many, many times and on a very thin margin; a quarter , an eighth, a sixteenth, a half point — if you can get it. You can’t afford to be very wrong. Otherwise your wife will get very, very angry with you. You have got to know every day where that stock is going. What’s going to be the absolute low; what’s going to be the absolute high; when is too cheap; when is it too high? You wrestle with every move in price the stock makes, large or small. As a broker you must play the big swings.

“As a trader, I was delighted if I could turn my inventory over three or even four times a day. for a broker to turn a client’s inventory four times in a year is outrageous! The point is that my trader viewpoint makes me very sharp on where the stock is all the time. It also means that I am ‘cheaper’ in terms of watching my client’s money than the average broker. I look for cheaper stocks than others are buying. I ‘ll go that extra mile to see if I can find it cheaper. Most other brokers buy retail. I want it wholesale.”

John Lux specializes in low-priced stocks; specifically low-priced technology growth stocks. They type of stocks he likes is “A good solid company that’s been around a long time where something has happened to the business and it’s going to be a very valuable business for a long time to come; or, where they’ve grown enough to be able to make an exponential move.

“What I’m looking for is a company just before it started to make the break. I’m looking of the stock that’s going to go $1 to $2 to $4 to $8 . . . . that means I’m looking for smaller companies. Small companies tend to be the reflection of one man’s shadow. You know. You get a person who’s very dynamic, who can overcome obstacles and really make things happen. This kind o leader can take the company and drive it and the stock into power. A small company with someone like that in charge — a man or woman who can really make it go right NO MATTER WHAT is a good stock to buy. You look at past performance, future intention and present-time ability.”

It almost sounds as if Lux is a CEO handicapper, but he’ll be very quick to tell you that’s not what he does. He puts it this way: “I do not bet on individuals. I bet that if you shoot fish in a barrel you might get some. I’m talking about a situation where, as an outsider, I could run the business and to a reasonably competent job. We’re talking about simple businesses. I don’t like situations where the company has to come up with new products every year; has to outdo the competition and spend its time and energy playing ‘dog eat dog.’ I think that’s a risk you don’t have to take. “

That’s very important to Lux — minimal risk and maximum potential must both be present. That doesn’t mean there are no opportunities just because the economic climate is stormy either. He says “small companies don’t have that much to do with the economy. A small company’s sales could go up 100% and the economy would never know it. I a starfish on the ocean bottom arches its back does he create a wave on the surface of the ocean? Or, to bring it closer to home; if your personal income doubles or even triples does that alter the economic picture of New York City?

Lux likes to use analogous images to make his point. But whether he is talking about undersea starfish, fish in barrels or another of his favorites: “going hunting where the ducks are,” you can be sure he’s still talking about low risk/high gain, which is the essence of his investment philosophy. As for hunting where the ducks are, he says: “There are industries that are really depressed, and others that will be. I don’t want to get involved with them. It may be that one out of a hundred companies in a depressed area is going to do great, but again; I don’t think that’s a risk to be taken.”

We talked at some length about his investment philosophy, but, although he was more than willing to discuss concepts and ideas, when it comes down to the nuts and bolts of exactly what he does, Lux — like the magician who only smiles and shakes his head when asked how to do the trick — is straightforward in his refusal to divulge his techniques.

“I don’t want to tell you everything I do, but I will say this: If you read all the classic books on stock market investing, you’d probably get 80% of what I do — if you could pick the right data out of it.

“My philosophy is based on being a trader and wondering what makes stocks go up or down making decisions about what to do today on every single stock, sometimes five times a day. That’s an awful lot of tests, and a lot of opportunities to learn.

“A few years ago when I returned to Wall Street, I look at everything to be sure I wasn’t missing anything. Now I’ve narrowed it down so I only have to look at a few thousand companies instead of ten thousand. The rules I’ve come up with to make that possible are very workable and simple. None of it is ’secret.’ It’s all in the business branch of the Brooklyn Pubic Library.”

Oversimplification? Probably not. Lux points out that the apparent complexity in the investment field is due to the vast amount of information, misinformation and advice — good and otherwise — that is constantly generated and disseminated. The result is confusion rather than clarity.

“I was very fortunate” he says. “One of the first books I read on the stock market was the old Wyckoff course. Wyckoff was an investment advisor in the thirties who was so successful that when he put out a recommendation, such a buying panic resulted that it destroyed the orderliness of the market. Like Granville (to a lesser extent) is today. Wyckoff published two special volumes in stock market investing: leather bound loose-leaf notebooks which were not for sale; they could only be leased. They were kept locked. In those two volumes he put the great secrets of investing in the market. That gave me my starting idea, an idea which I compared to everything else I read, saw and did. I grasped the overall principle of how stocks moved; then I began to relate other aspects to that.”

Once again, when the conversation led toward specifying these ’simple secret,’ Lux politely but firmly guided ups back onto more general ground. He didn’t refuse to discuss specifics, he merely got a bit vague about details. For instance: “I collect all the stocks with a limited downside risk; they’re already so cheap they’re not likely to get any cheaper. I’m looking fat the area where there are stocks that may have explosive growth — areas where other people can’t bother to look — at companies that don’t receive much attention or publicity, who either can’t afford or haven’t bothered about publicity. Then I look at the upside potential. Here’s the trick: most people are just evaluating the stocks and they see that the company’s going to grow. I care about the business and the earnings, certainly, but what I really care about is what’s going to happen to the price. I don’t care about the company’s size or visibility. I do care that it has a situation where it’s almost guaranteed explosive earnings growth; a company that has a situation where they’re the only ones doing what they do; or they’ve somehow got a lock on the market so that for four or five years (about as long as anyone can reasonably predict) they won’t be effectively hit, impacted or seriously threatened by competition; those companies that are in a little vacuum of time where they can go off like rocket.

“In those companies there are certain factors I look for which will cause that growth, fuel the liftoff so to speak. And I’m looking at the stock. I want to know; how many shares are outstanding; who holds them; what’s the volume; who’s the big buyer, the big seller? In other words, who’s playing the game If the stock rises, is there going to be more for sale and if so, how much, who will bid, what’s going to happen?

“What we’re talking about here is a stock that’s going to go from being a total wallflower to being the most popular girl at the dance — in rapid order. It’s a little like judging a beauty contest by selecting the girl you think other people will pick as the winner.”

To most laymen (and to many brokers) the stock market is a vast gambling game. How it operates is a mystery and the exchange itself more nearly resembles a casino that the hub of one of the businesses that is a major indicator of the economic health of this country. Small wonder, then, that a professional of the caliber of John Lux is so greatly valued by his clients and associates. Like all professionals, Lux never stops learning. “I can’t imaging when Iw would feel that I had all the answers. I never stop trying to find out ‘why.’ But I don’t get hung up on it. I’m just happy to know some things that work.”

He says, “Just knowing isn’t enough. You need to know that you know. Theory without nerve doesn’t lead to action — and in the stock market, it’s action that makes you money. the real quest is to develop confidence. that’s the key.”

When I asked him to comment on the current [August 1982] situation in the market, he said, “Bear markets don’t last much more than a year-and-a-half in my experience. I think this one is pretty old. when the market is down and things look black, I start ordering annual reports like mad. Prices won’t stay cheap too long.” Raising his index finger and gesturing upward he added, “The type of stocks I play are a one-way street and that way is up.”

Too bad there’s no John Lux stock on the market. This would be a great time to buy.