Veale: Science background pays off for investment manager
By Brian E. Clark
Tom Veale – creator of a successful investing algorithm and co-founder of the SignalPoint financial services company – spent his first three years in college studying chemistry, math and physics.
During his senior year, however, he jumped to the business department because he realized he didn’t “want to spend the rest of my life washing test tubes.”
After the switch, he found himself exceedingly popular in statistics courses.
“I think I was probably everybody’s favorite friend because the guys in business didn’t have the math background I did from my years in science,” said Veale, who lives in Port Washington and is Springfield, MO-based SignalPoint's chief investment officer.
One of his favorite business classes in college was the investment course and he started investing after college. Unfortunately, it was the early '70s and his timing was a bit off. Back then, during what was a bear market, he said buying any stock “usually guaranteed a loss looking out six months or a year.”
WisBusiness audioBut by 1974, the market bottomed out and some of the equities he’d purchased began to recover.
About the same time, Veale began what has been a life-long study of markets, reading numerous books on investing. Few, however, dealt with management of existing portfolios.
A big part of his strategy was figuring out that “having a little cash on the sideline would make my (stock) purchasing more efficient. I wouldn’t have owned as much of an individual stock, but when that stock’s price fluctuated (downward), I would have an opportunity to buy more of it at a nice discount if I had some cash on hand."
In a nutshell, he fine-tuned that old saw about buying low and selling high, but only on an incremental basis. His formula also stressed keeping cash on hand.
“If you could buy more of your favorite stock at a 15 to 20 percent discount, you could then rebuild your cash reserves when it recovered back to near where it had been normally,” he said. “But the last thing you want to do is buy a $30 shirt on sale for $29.95. You are far better off waiting until it is $22 a shirt.
Veale began to systematize was he was doing in the '80s while also trying to better understand the psychology of the market and when it was best to invest.
“Generally, I don’t feel there are a lot of bad days to be an investor, it just depends on how much of your portfolio is committed and how much of it is in reserve,” he said.
Now, with SignalPoint, which was founded three years ago and has $200 million under management, clients’ portfolios are regulated based on measurements of market risk and equity/cash ratio. The company has worked mostly with individual clients, he said, but is hoping to make the jump to aiding more institutional investors.
By 2000, Veale’s system was gaining notice. He got a call from the Merrill Lynch office in Madison, where the principals were doing private client money management and wanted help devising a plan for their clients during riskier market periods.
“Part of the reason Merrill had me in mind was very much the single stock risk problem," he said. "It’s wonderful if you can pick next year’s winner. But if you pick next year’s biggest loser, it is an awful experience."
He worked with them on a new class of investments called exchange traded funds, which Veale said allow investors to buy into an industry sector and diversify over dozens of companies.
“Chances are that one company going out of business (means) their market share will be picked up by the others. It’s a significant reduction in individual company risk by owning ETFs or other types of mutual funds.”
Veale said he’s also studied what he calls “herd mentality” of investors and how that affects general market risk.
“If the market starts to turn ugly, everybody jumps on the sell side of all the orders and it depresses the market,” he said. “An earthquake and tsunami in Japan can affect the general markets worldwide. “
That’s where his cash buffer plan comes in.
“It’s there to soften the downside of those market events and also to allow us our liquidity to take advantage of the brief periods of inefficiency in market pricing. If Japan has an earthquake and a tsunami and the stock market sells off 10 percent, the net effect of the news event may really only justify a percent or two in the market."
Veale said he began to develop his algorithm 25 years ago, first using spreadsheet formulas and eventually hiring a programmer to turn it into software.
Last year was solid for Signal Point, he said.
The firm’s Signal 10 portfolio earned a net return of 15.96 percent, compared to a return of 12.78 percent for the S&P 500 Index for the year ending Dec. 31. Similarly, the Global Signal portfolio earned a net return of 15.38 percent, which compared favorably to the 8.95 percent return of its custom benchmark (comprised of 60 percent S&P 500 Index and 40 percent Europe, Australasia and Far East (EAFE) Index).
“Last year would be considered almost a perfect example of our system," he said. However, he noted, past performance of SignalPoint’s portfolios is not necessarily an indication of how they will perform in the future.
Veale warned, however, that last year was unusual.
“Rarely do we have a year like 2010, where the markets go up, down and then back up all in a 12-month period. But it was a great year for us and allowed the process ... to protect our portfolios and our buying to replenish our portfolios. And then some profitable selling at the end of the year. It all took place within a relatively short period of time.”
He said 2011 has been a year of “holding” without any significant buying.
“The markets have not been up or down enough this year for us to really get out of our holding pattern. So we are just basically holding this year and averaging around 20 percent cash in our overall portfolios. We’re waiting for an opportunity to use that cash.”
He said the June swoon has made it look like it might be a time to buy.
But Veale stressed that his system is "certainly not set up to try to outguess where the market will bottom or how far it will fall."
“We just know that if it falls X amount, our program will start to generate buy signals. And then we execute them, based on those recommendations,” he said.
As for the overall state of the economy and the markets, he is guardedly optimistic – barring any major natural disasters, new wars or other international economic disruptions.
Since mid-2009, he said the markets have “generally been marching ahead based on very good earnings. They are coming from lower employment and excellent inventory management.
“From here forward, 2011 and beyond, these companies have done about all they can to grow their sales and earnings based on the work they did in 08 and 09,” he said.
That means growth comparisons a year from now won’t look as generous as they do now vs. last year.
“The companies may continue to do fine and the economy may look OK a year from now, but what we will see in the marketplace will be significantly less generous year over year comparisons on earnings,” he said.
“This year vs. a year ago, earnings might be up in earnings by 12 or 15 percent. Going forward they may only be up 5 percent. They will probably be up, but not with the generosity they were the last two years.”
He said he expects companies to hire more workers as they rebuild inventories, which is also good news for the economy.
“Companies are still thinking lean and mean so they are managing their businesses very tightly,” he said.
“I think we can continue to do very well for another 12 months. I think that will be the surprise a year from now. Things are not as bad as some of the doom and gloom guys may think it is.”