One of the first things Fred Fern learned about the stock market was how little he actually knew about the market. Around 1960, soon after graduating from college, Fern bought shares in IBM (IBM) on the advice of a friend’s father, who was a broker.
It cost him about $20,000, a king’s ransom for the young man back then. “I did it because I was young and I thought I had all of the answers,” he said.
The hammer dropped in December 1961. In the bear market that mauled investors for six months, shares of Big Blue fell by almost 50%. “I realized how little I knew,” said Fern. “I wanted to learn more.”
That he did, and then some. Fern is now the 78-year-old CEO and chairman of Churchill Management Group and of Chartwell Properties, a business that invests in commercial real estate, both based in Los Angeles. Churchill, a registered investment advisory (RIA) firm, has about 5,000 clients and $3.9 billion in assets under management, plus another $109 million under advisement for clients who execute their own trades or use their own brokers.
Fern founded Churchill in 1963. He has been in the top 10 on Barron’s list of the Top 100 Independent Advisors for six years in a row, including the No. 1 rank this year.
From his office in Los Angeles, Fern discussed his career and approach to investing with IBD.
IBD: How did you get started in the business, Fred?
Fern: Believe it or not, I grew up in L.A. My parents bought a home next door to John Wayne. I don’t know if it cost much money. I had a friend whose father was a broker with one of the big firms. He had me push what little money I had into IBM, which was already a blue chip, in the Dow, a leader in computers and would take over the computer world.
In late 1961, a bear market set in after JFK (President Kennedy) attacked the steel companies. (Kennedy was angry with steel makers that reneged on a wage deal with workers that JFK had helped to broker.) The market dropped and stayed down for six months. I realized I needed to learn more about the market.
IBD: How did you go about doing that?
Fern: I went to a market seminar. The speaker really seemed to know his business. He wasn’t the typical guy just trying to get new business. He talked about how stocks behaved. He had studied Bernard Baruch (a financier and investor who had advised presidents Woodrow Wilson and Franklin D. Roosevelt) and Gerald Loeb (an investor who was a founder of brokerage E.F. Hutton), and he spoke about everything from investing to charity.
IBD: Was the speaker from Texas?
IBD: I think I can guess who he was, Fred. Continue your story, please.
Fern: Of course, it was Bill O’Neil, who founded your newspaper, IBD. At that time, he worked for the brokerage Hayden, Stone. After the seminar, I asked him if he would become my broker, and he said yes. I explained that I didn’t want to just invest, I wanted to understand the market.
IBD: How did O’Neil’s advice work out for you, Fred?
Fern: I did pretty well in the later half of 1962. In the spring of 1963 he called and told me there was a stock with a perfect pattern. It had gone from 15 to 30, built a perfect flag base and was breaking out. It turned out to be the greatest fundamental story of our lives. It was a company called Syntex, and it (was one of the companies that) invented the contraceptive pill. It revolutionized life. The stock went from 30 to 190.
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IBD: And how did you end up as a financial advisor?
Fern: I was in my twenties. Bill was four or five years older. Now that I had made all of this money, I thought I had all of the answers. Long story short, I wanted to set up as an investment advisor. I wanted to do the right thing for clients.
IBD: How did you start your business?
Fern: I was talking with John Wayne’s oldest son, Michael. He was a friend and neighbor. He told me to name the company after Winston Churchill. I asked him why. He said, you’re a history buff now. And Churchill helped save the free world. What could be more reliable? And Chartwell was the name of one of Churchill’s homes.
I set up my office with a card table and two chairs. It was at the corner of Beverly Drive and Wilshire Boulevard in the heart of Beverly Hills. I was on the sixth floor. You know how I sum up the whole story? It’s called America.
IBD: What’s the most important element of your success?
Fern: Bill O’Neil gave me a book that described crowd psychology. It described how the crowd is wrong when it gets too extreme. I did not want to repeat my experience with IBM falling in value for my clients. And I learned from Bill O’Neil that you must have a stop-loss policy. Bill had a guru on the technical side of the market, who recommended that I study the market on a daily basis going back to World War II. I made charts, and I still have those charts in my chart room. I learned from Bill to follow technical, fundamental and sentiment factors.
IBD: I gather you’ve incorporated those lessons into your investment approach, aiming to grow clients’ capital in favorable markets and protecting principal in higher risk environments. Describe your investment approach in more detail, please.
Fern: On weekends I look at charts. We look for the ones with the strongest relative strength, cup with handles (and other basing patterns) and strong fundamentals.
Then on Monday we narrow down our pool to the ones that are best, that look like leaders. We make sure they have a strong business formula. We check for fundamental, technical and sentiment factors.
Every week, we rate our stocks 1 through 10, based on where the market is in a cycle. It takes a rating of 7 through 10 to get into a portfolio, 1 to 3 to be sold. Most are between 4 and 6. We follow CAN SLIM rules quite closely.
IBD: What are some of your top holdings?
Fern: Facebook (FB). We also have a partial position in Amazon (AMZN). That’s a great story, but very overvalued at this point. They lead the world in taking over the retail side of the economy. They’re hurting Macy’s (M) and Nordstrom (JWN).
IBD: What sets your approach apart from what other advisors do?
Fern: So many (other advisors) have a short-term mentality. You must take a longer view. Most firms have a formula that comes from bright guys who are strong on fundamentals, or maybe even on technicals. But you’ve got to put the two pieces together.
IBD: Why are you different?
Fern: I don’t know how good I am, but I sure am lucky. I met a guy named William O’Neil early.
I found his formula and common sense. He studied history. If not for him, I doubt I would have gone into investment advice. Remember, in the 1960s, the business was dominated by full-service brokerages.
IBD: What aspects of Mr. O’Neil’s investment strategy are most important to you?
Fern: Several things. One is how history repeats itself. Another is how you’ve got to have discipline. A third is the importance of keeping your losses small. That sums it up. I know he is in love with this place called America, and I am right behind him.
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