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As the founder and chief architect of the TurnerTrends investment theory, Mike Turner has established quite a name for himself in the financial industry. His story is even more intriguing when considering the fact that Turner’s background is primarily in software development. However, after years of investing in the market through a “major” Wall Street firm, and absorbing heavy losses, Turner decided that he could probably do a better job managing his own portfolio.

After trying out many systems and many months of research, Turner could not find anything that fit his requirements from a fundamental and a technical analysis standpoint. So armed with his background in software development, he set out to create a system that worked for him. After many thousands of man-hours, along with exhaustive backtesting, the rules and programs that he developed began producing substantial profits.

As word spread about the system he created, investors began coming to Turner to manage their money using his system. This led to the creation of Sabinal Capital Investments LLC, which is a fully licensed registered investment advisory. The firm has grown over the years with clients from all across the United States.

Through his TurnerTrends newsletter, he tells subscribers what he intends to buy and provides a play-by-play on his investment strategies. Investors can also get his insight each month in his EQUITIES column.

So we caught up with Turner to pick his brain on the current economy, what investors need to know, and the rules he lives by when playing the market.

EM: I understand that you do not come out of the financial world. Your background is in engineering and computer science. Why do you think this gives your approach to investing an advantage over others?

Turner: My professional background is, primarily, software-systems development. I founded and built a software company that provided enterprise-level management software for the pharmaceutical research industry. After 17 years, I sold that company. This put me in a position where I had money and needed to get it intelligently invested. I hired one of the top financial firms on Wall Street to invest my money in the stock market, whereupon they promptly lost 45%.

I fired the firm and began looking for tools that I could buy that would help me manage my money. This was back in 1999. I assumed I couldn’t do any worse at losing money than what I had just experienced with the big Wall Street firm. After trying out many systems and doing many months of research, I could not find anything that met my requirements for a fundamental and a technical analysis of a large universe of stocks.

Since I had the software-systems development background and access to programming staff, I decided to build my own system to manage my money. After many thousands of man-hours, along with exhaustive backtesting, the rules and programs that I developed began producing substantial profits.

As word spread about my system, investors began coming to me to manage their money using this system. This demand grew to a point that I was compelled to open a money-management firm, Sabinal Capital Investments LLC.

EM: You are a portfolio manager, but would you elaborate on how you approach the market with regard to risk versus reward?

Turner: Our primary responsibility to our clients is to protect their money from loss. This means we will not take undue risk just for the sake of potential profit. I manage five different portfolios. These portfolios have unique profiles and slightly different risk tolerances. However, capital preservation is our No. 1 goal.

Our No. 2 goal is to outperform the market, and to do so significantly. Our quantitative-analysis software systems provide us with unique insights into the market. These software programs are continually scouring the universe of high-quality stocks, looking for the best combination of fundamental and technical signals. When a stock reaches the ideal position of price and market action, our system flashes a buy, sell, short or cover alert.

My 10 rules that are used by every employee in the firm are designed not only to find the best stocks to own at the best time but, more important, [also to determine] the best time to sell or exit a trade. Buying is easy; selling is the hard part, for most investors. Our system uses a sophisticated computational algorithm to determine the best price and the right timing for exiting a position.

Risk, however, is not just measured by what stocks are bought but, even more important, by how well-diversified our clients’ portfolios are diversified. I have developed a rule for diversification, as well. No more than 30% in any one sector and no more than 20% in any one industry.

And, finally, I believe in using cash as an investment strategy. Regardless of the interest that can be generated from cash, many times the best investment strategy is to be sitting on cash instead of holding equities. If we believe the market is becoming overbought or if the fundamentals of the market are too weak to support a bullish trend, we will take profits and move to cash. We would rather be a little late to the party than come in too early and find ourselves in a losing situation.

EM: You mentioned that you are a rules-based investor. What are your rules, and how do you apply those rules to making money in the market?

Turner: I have 10 core rules that govern what I buy, when I buy, when I sell, what price to sell at, and how to stay properly diversified. These rules include what fundamentals to consider, how much weight to put on each fundamental, and how a stock measures up with its peers. Just as important, these rules also govern what technicals should be analyzed and used to explicitly time when to get in to a stock and when to get out.

All these rules are discussed, in detail, in my book, 10: The Essential Rules for Beating the Market.

EM: From your monthly article, it is apparent that you do not like what is going on in Washington, D.C. Are you just anti-Obama or an ideologue?

Turner: I am a fiscal and political conservative. I believe our country is being pushed into socialism at best and fascism at worst. I am against the bailouts and the too-big-to-fail mindset in Washington. Both political parties are to blame. I am not a fan of either party. Washington is building up such an enormous mountain of debt that it appears virtually impossible to ever repay. I blame the Obama administration for ignoring fiscal responsibility, but I blame the Bush administration for opening the door for a complete takeover of our country by people who believe in redistribution of wealth and the Constitution is nothing more than a minor reference document. The policies and out-of-control spending of the current administration and the one-sided Congress punish achievers. Our government is fundamentally changing the American way of life, and instead of providing equal opportunity for success, it is providing equal misery for all except themselves. As an investor, we have to continually try to make investment decisions based on what the government will or won’t do next. We don’t need government to solve our problems; government is the problem (attribution to President Ronald Regan).

EM: Why do you think our readers care about mixing politics with investing? Shouldn’t you keep those two topics separated?

Turner: Unfortunately, we investors have ignored politics too long and just assumed politics and investing in the stock market were unrelated topics. Ignoring Congress has emboldened them into thinking that we agree with their far-left agenda. As Americans, we need to stand up for our Constitution even if Congress and our president do not. But, even more than that, we need to realize that the too-big-to-fail policies; the piling on of trillions of dollars of debt; the takeover of banks, insurance companies and automobile companies; the army of uncontrolled czars in the White House; and the massive coup of the health industry by the U.S. government has a direct, lasting impact on how we go about finding stocks to buy, sell or short. It is truly unfortunate that we must mix politics and investing. The actions of this government require our diligence and consideration of the actions out of Washington if we expect to make consistent profits in the stock market. Finally, it is critical that we let Washington know that capitalism is a far better choice than socialism. It is time to overturn the socialistic, politically correct professional politicians with honest, God-fearing patriots, if any of them will run for office. Hopefully, our country will survive the next 12 months to give us time to replace the rats (Democrats and Republicans) in Congress with men and women who believe that our Constitution is not a footnote in history.

EM: You have written a book on your rules. Can you tell us a little about the book and why our readers should read it?

Turner: John Wiley & Sons, one of the premier publishers in the world, sat in on one of my presentations at an investment conference. Afterward, they approached me to write a book about my rules for investing. That book, 10: The Essential Rules for Beating the Market, was the outcome of that request. Many stock-market investors become far better at generating consistent losses than consistent profits. I believe that the single biggest reason so many stock-market investors lose money is they become swayed by emotion, talking heads on television and analysts. More times than not, investors want to rely on gut feelings or the persuasive opinion of an analyst or pundit to make a trading or investing decision.

It is far better to let a solid set of investment rules govern when to buy, what to buy and when to sell than anything driven by opinion or emotion. I would rather see investors spend their energy on developing a set of rules that they can believe in than a set of pundits they can believe in.

My book is about helping investors build a lifetime set of trading rules and then how to let those rules make trading decisions instead of opinion and emotion. The book is a common-sense approach to making consistent profits in the stock market. It should be an important part of every individual investor’s reference library.

EM: When it comes to managing other people’s money, do you apply those same management rules to your own money? What percent of your own investable net worth is invested in the same portfolios that you manage for your clients?

Turner: I have five portfolios that I manage. One hundred percent of my investable net worth is invested in these portfolios. I get the same trades at the same prices. I have all my skin in this game. My clients know that I am motivated to make money for them and just as motivated to make money for my family because my money and my clients’ money are being traded exactly the same.

EM: You stated above that you manage five portfolios. What are the profiles of those five portfolios?

Turner: All my clients are in one or more of these five portfolios. We do not provide financial advice outside the investments we make in these portfolios. We do not get into succession planning, insurance, debt management, etc. We are focused 100% on investing our clients’ money so that risk is minimized and gain is maximized.

The names of these five managed-account portfolios are EQUITY I, EQUITY II, EQUITY III, EQUITY IV and EQUITY IV (Plus). EQUITY I is a portfolio of stocks and ETFs. We do not use margin, nor do we use options or futures, and we do not short in the portfolio. EQUITY II is much like EQUITY I, except it is for smaller account sizes. EQUITY III is a covered-call portfolio, which means we only make covered call type of trades. EQUITY IV and EQUITY IV (Plus) are my most aggressively managed portfolios. I will keep these two portfolios in the market much longer than I will the other three portfolios. EQUITY IV uses margin, and we will short in this portfolio. EQUITY IV (Plus) does not use margin and will not have short positions. In both portfolios, we will trade stocks, ETFs and options.

All but EQUITY IV can be followed with tax-deferred money. We use a flat-fee structure. Our clients do not pay trading commissions. Before a client is accepted into any of our portfolios, we must interview the client and determine if the client’s financial situation is compatible with the trading strategies of our portfolios.

EM: What do you think about the current market? Do you believe the market is headed much higher? What are the odds that the market will revisit this year’s March lows?

Turner: I do think the U.S. market could certainly revisit the March lows in 2009 in 2010 or 2011. There are signs that we are far from out of this recession. It is now widely believed that unemployment will move above 10% (in real terms, I believe the unemployment percentage is already well above 14%) before the end of this year and stay above 9% for all of 2010. As for odds of revisiting the March lows of 2009… My forecasting models predict the odds are high… very high.

It is impossible to ignore the trillions of dollars in debt that our country is accumulating. The problem is this debt is growing at an almost exponential rate. Factor in the costs of a new health-care system, Medicare, Social Security and the billions of dollars in unfunded mandates on states and it is not inconceivable that our country is on a track to bankruptcy.

The way to get out of this mess is to grow our way out with new business, expanding operations and hiring, but our government continues to do more to stifle growth than to promote it. We cannot tax our way out of this financial black hole, but that is what appears to be coming our way.

But the real question is: “Are we headed back to the March lows and, if so, when will that happen?”

My technical staff is working with one of the premier research institutions in the world on a new and exciting forecasting model. This predictive model is predicated on the assumption that every market, index and stock is impacted by a multitude of distinct, differentiated and interdependent cycles or waves that move through time. This not a new concept, but the application and mathematical formulae that we are using is advancing this predictive model to an entirely new and very exciting level.

Some of the early results of these studies indicate that there is a high degree of probability that the markets could fall well below the March lows we saw earlier this year. The timing of this event is not in the too distant future, but I am waiting until we have the final testing completed before releasing the likely date or even if that forecast holds up. We hope to have our new predictive model integrated into our quantitative trading tools within the next few months.

EM: Do you believe the U.S. dollar is in jeopardy, or will it continue to rally and maintain its reserve status in the world?

Turner: I do believe the dollar is in serious jeopardy of falling dramatically, but I suspect that crash in the dollar will not occur for at least a year or two. In the meantime, I would not be surprised to see the dollar rally, then fall back, erasing the gain, lose a little ground and then rally again, only to lose and back as it stair-steps its way lower and lower.

Our government keeps saying it is for a strong dollar. That is a lie. If they were for a strong dollar, they would be doing things to strengthen the dollar—like putting on fiscal spending restraints, raising interest rates or opening the U.S. to serious energy growth in oil exploration. There are many policies that our government could put into place that would have the effect of strengthening the dollar. The Treasury head talks a good talk but is doing nothing to back the talk up with dollar-support policies.

In the end, the problem is the overwhelming mountain of debt. The only way our country will be able to pay off the mushrooming and out-of-control level of debt is to let inflation run away so that the debt can be paid down with highly inflated dollars. When the world realizes that the U.S. is going to monetize its own debt (something [Ben] Bernanke has already started) and will pay off debt with highly inflated dollars, the value of the dollar will most likely collapse.

EM: How about gold? Are you buying gold in this market? Why or why not?

Turner: As the U.S. dollar begins to collapse, gold will soar, as will oil. I am not a gold bug that believes the world is coming to an end and the only currency that will survive is gold. But, at the same time, when the USD starts a serious decline, there will be a flight to safety and gold will be one of those safe havens.

I am an owner of gold in my portfolios. Having a small portion of our total investments in gold makes a lot of sense.

EM: We know you have many clients who are scattered throughout the United States. When you have many clients in a single portfolio, how do you go about insuring that each client gets the same trade at the same price going into a trade or coming out?

Turner: We have a strong business partnership with the best brokerage firm in the country, thinkorswim—now TD Ameritrade. Through that partnership, we have developed a portfolio-management tool that allows our firm to be infinitely scalable with regard to a number of clients in any of our portfolios.

Think of it this way, each portfolio is a hub in a wheel. Each client account is a spoke in the wheel. Each wheel can have unlimited spokes, and each client account can be a completely different investment amount.

When we get ready to make a trade, the portfolio tool tells us exactly how many dollars are available from all the client accounts in the portfolio. If I want to put 5% of the portfolio into a particular equity, we can make a block trade for all the shares, using the 5% of the total investable net-liquidated value of all accounts in the portfolio. Once the trade is made, the tool allows us to allocate the shares to each account according to the net liquidated value of the account.

This means each client gets exactly the same price per share regardless of whether that client has $100,000 with us or $10 million. The same thing happens when we sell or close out a trade.

This is only possible because of the effort and ingenuity of the thinkorswim programming team.

EM: Do you believe that markets outside the United States are better places to be investing right now? How do you invest in international markets?

Turner: The answer is certainly yes … and no. There are some U.S. companies that are excellent choices. However, there are many non-U.S. companies that are extremely attractive. Since I believe the USD is in some jeopardy of moving lower—perhaps a lot lower—I like the opportunities in Australia, Canada, Brazil and even Russia. China continues to look good, as well.

I use American depositary receipts and American depositary notes to invest in stocks of companies domiciled outside the U.S. I also like to use ETFs for broad market plays in countries outside the U.S. I find ETFs are an excellent way to play foreign currencies against the USD.

EM: Could you explain exactly what a “managed account” is and how investors place money with you to manage?

Turner: We believe transparency is extremely important. We want our clients to know what trades we make and how we are managing their money at all times. Here is how it works.

A client opens a brokerage account with thinkorswim. This account is in the client’s name. Its username and password is secured by the client. We do not want nor do we accept this personal access information.

The client’s money stays in the client’s account. It is available to the client at any time and is always in complete control of the client.

As the portfolio manager, we are given very limited trading authority only. We cannot remove the money or transfer the client’s money. We can only do two things: make trades in the name of the client and deduct our annual management fees.

The beauty of this is the client has 24/7 access to the account. The client’s money never comes under our control. And the client can start or stop our trading capability at any time on a moment’s notice and can do so directly with their broker. The client does not even have to go through us if they do not want to.

EM: In your book, you make it clear that you are not a fan of index investing. Why?

Turner: I absolutely do not believe investors should blindly buy shares in any equity, including index ETFs, and then just hold on, hoping for growth in share price. To prove this, just look at the Dow since January 2000. In nearly 10 years, a dollar invested in a Dow index has lost 15%, even with the Dow flirting with 10,000. How many years should an investor be willing to wait to see a decent return by following an index? Twenty years? Thirty years? A hundred years?

To me, the argument for blind index investing is silly and costly. Plus, the risk of a major loss is paramount. Just a few months ago, instead of a 15% loss, that loss was nearly 50%.

I believe a rules-based active investment strategy is far better than any buy-and-hold strategy, unless your time horizon is infinite and you just happen to know when to get out at the top. But that is the single biggest problem most investors have—knowing when to sell.

EM: You make a big deal about having a defined selling strategy. Why is this so important for investors?

Turner: I like to say, “Buying is easy … Selling is hard.” Most investors would agree with that statement. It is all too common for an investor to buy the right stock at the right time and then watch with much satisfaction as the stock’s price moves higher and higher. Then they watch as the stock’s price starts to move lower and lower. They hang on, hoping it will return to its recent highs. After all, nothing but the price has changed. It’s still a great stock with strong fundamentals.

Eventually, the stock’s price falls back below where they bought it. Still, they hang on. Finally, after the stock has plummeted to where it is trading down a third or half of their basis, they sell in desperation and in a panic. They fall in to the all-to-often cycle of buying high and selling low.

I have developed a formula for knowing when to sell that is tied to the stock’s volatility “personality.” When a stock violates its “normal” volatility as it moves lower, my formula’s stop loss is triggered and we exit the trade.

This formula is based on a derivation of the Black-Scholes formula and uses time and volatility to calculate a standard deviation of pricing movement for each stock. When a stock moves more than that standard deviation, against me, I know it is likely that the stock has moved from an uptrend to a downtrend and I want out of the trade.

My stop-loss calculation always gets me out before experiencing too much loss.

EM: In your weekly Market Report, you say that you “have a long-term investment strategy, one week at a time.” How does that work?

Turner: Very simply, this means that I believe the best way for an individual to increase his or her net worth is in the stock market. I am in the market for the “long haul.” I believe money can be made in bull markets, bear markets and flat markets.

However, I reserve the right to change my investment strategy from bullish to bearish or vice versa every week. No one knows exactly what the market will do next month, next year or five years from now. But most of us have a pretty good idea of where the market is headed in the next few hours or next few days.

So I invest in the market, hoping that my trades are good for months or even years, but I continually review those trades and will change my strategy as the market changes. I like to look at data on a week-over-week comparison and to gage how bullish or bearish I will be on a week-to-week basis.

EM: We understand that you have created an “oscillator” that has accurately predicted every major market correction for the past three years. What is this indicator, and how can people get it?

Turner: Yes, my quantitative-analysis programs produce a chart that shows me a comparison of the overbought to oversold condition of the market. When I chart this over time and compare it to the number of new short-sell signals generated by my programs each week, the result has proved to be uncanny in how it predicts market corrections.

This chart is produced weekly and is included in my free weekly newsletter. To get on the mailing list, just e-mail me at sabinal@sabinalcapitalinvestments.com.