Book Reviews

Book Review: TrimTabs Investing by Charles Biderman

Rating: Mama desu.

Background: Got interested in reading this book because of its title TrimTabs Investing: Using Liquidity Theory to Bat the Stock Market with the concept of using supply/demand to help in investing.

Key Points:

  1. Building blocks of liquidity analysis
    • L1 – Change in net trading float of shares
    • L2 – U.S. equity mutual fund flows
    • L3 – Margin Debt
  2. L1 (Change in net trading float of shares)
    • L1 is the net change in trading float of shares (the supply side). If L1 is positive, the trading float of shares is increasing and institutions are a net seller of stock. If L1 is negative, the trading float of shares is shrinking and institutions are a net buyer of stock.
    • L1 = New Offerings + Insider Selling – New Stock Buybacks – 2/3 New Cash Takeovers – 1/3 Completed Cash Takeovers
    • Note: when a cash takeover is announced, 2/3 of the dollar amount is included in the L1 formula. The final 1/3 is included when the takeover is completed. This is because arbitrageurs typically buy 2/3 of the stock of the target company within a week of the deal’s announcement.
    • Data source: Dealogic,, Thomson Financial
  3. L2 (U.S. equity mutual fund flows)
    • L2 measures U.S. equity mutual fund flows (the demand side).
    • L2 = Amount of cash investors are investing in mutual funds that invest in U.S. stocks – Amount of cash investors are withdrawing from mutual funds that invest in U.S. stocks
    • L2 is typically a contrary indicator. Inflows into U.S. equity funds tend to peak around market tops, and outflows tend to peak around market bottoms.
    • Data source: Investment Company Institute (ICI) monthly release @, U.S. Department of Treasury release on foreign purchases and sales of U.S. securities @    
  4. L3 (Margin debt)
    • L3 is the change in the amount of margin debt used to purchase stocks, as reported by the member firms of the NYSE.
    • L3 rises rapidly when investors are very optimistic about the future prospects of the stock market (usually after prolonged period of strong returns). L3 falls significantly after a prolonged period of poor stock returns.
    • Data source: NYSE Member Firms Customers’ Margin Debt @
  5. Anatomy of Bull and Bear markets
    • At the beginning of bull market
      • L1 – strongly negative
      • L2 – negative
      • L3 – negative
    • On the way up
      • L1 – remain negative
      • L2 – increasingly positive
      • L3 – slightly positive
    • At the top
      • L1, L2, L3 – strongly  positive 
    • On the way down
      • L1, L2, L3 – increasingly negative
    • At the bottom
      • L1, L2, L3 – strongly negative
  6. Lower-risk strategies using liquidity theory
    • Strategies vary contributions and holdings according to expected liquidity conditions. Five stances are adopted based on estimates of daily L1.
      •  < -$800 mil = Strongly bullish
      • -$800 mil to -$400 mil = Bullish
      • -$400 mil to $400 mil = Neutral
      • $400 mil to $800 mil = Bearish
      • > $800 mil = Strongly bearish
    • Perform dollar-cost-averaging by splitting the monthly investment into a stock index fund (SIF) and a bond index fund (BIF). The split proportions will range from 100% in SIF when strongly bullish, to 100% in BIF when strongly bearish.
    • Higher risk strategies involve shorting the market when strongly bearish, e.g. investing 100% in Rydex Ursa Fund (RYURX) which is 100% short the S&P500.
  7. Aggressive strategies using liquidity theory
    • More aggressive strategies involve the use of leverage (i.e. margin), and investing in securities such as ETFs and futures, but with similar principles as the lower-risk portfolio strategies.




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