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Today, I want to tell you about an investing strategy that defies logic. It shouldn't work based on everything we've learned about the stock market.
Yet it does. In fact, for more than half a century, investors and traders have used this strategy to produce unparalleled results.
And no, for those of you who may be wondering, this strategy doesn't involve options, derivatives or any other complex financial product. In fact, all this strategy relies on is a simple two-digit code that helps you identify the strongest stocks in the market.
What's more, what I'm about to show you can be used as part of any general investing strategy -- regardless of whether you're focusing on income, growth, blue chips, small caps or even commodities.
I'm talking about momentum investing.
Momentum investing involves buying the best-performing stocks (relative to the market) and holding them until their momentum changes course.
To most investors, especially those considered value investors, this strategy probably sounds ridiculous. After all, most people have heard the phrase "buy low, sell high." Since momentum investors buy stocks that are already outperforming, many view this style of investing as counterintuitive.
But that's a mistake... and it's one many people make whenever they approach a stock pick.
That's because most investors have been trained to think that "undervalued" stocks have the most upside potential. The definition of undervalued varies by investor, but normally people use metrics like low price-to-earnings, price-to-book or price-to-sales ratio to describe it.
The problem is that this approach often leads investors to overlook the market's best-performing stocks in favor of the ones doing the worst. Since underperforming investments usually sport the lower valuations, investors tend to think these stocks are the more attractive buys.
Metaphorically speaking, this is like abandoning a luxury yacht in favor of sailing around the world in a leaky shrimp boat because buying a ticket on the shrimp boat costs less money. Don't get me wrong, I like saving money, but I'll gladly take the yacht if it means I'm going to enjoy my trip and get back home alive.
Unfortunately, when it comes to investing, most people don't look at stocks that way. They see a great performing company with an average or premium valuation (the yacht) as riskier than a stock that is underperforming and has a low valuation (the leaky shrimp boat).
Research has proven this to be a terrible fallacy. It turns out that the best-performing stocks, the ones already beating the market today, are the best investments to own, at least in the medium term.
One of the best studies on this phenomenon was done by AQR Capital Management. They looked at U.S. stocks going all the way back to 1927. What they found was that at any given time, the stocks that were outperforming 80% of the market continued to outperform for at least the next 12 months. The same thing goes for the underperforming stocks. The bottom 20% of performers continued to underperform over the same period.
This idea is essentially the central concept underpinning momentum investing. And by using the simple two-digit code my team and I have designed, we'll know exactly when to buy the stocks that are performing the best. We'll also know exactly when to sell that stock when momentum changes course.
If it sounds too easy, that's because it is. Yet, despite its simplicity, this strategy has been executed with staggering results.
For example, AQR found that using a momentum-based strategy, the asset-management firm was able to outperform its benchmarks in nearly every investing category (including mid-cap, blue-chip and small-cap stocks).
What's more, James P. O'Shaughnessy, author of What Works on Wall Street, discovered that using a momentum-based system would have beaten the market by an average of 3.7 percentage points per year over the past 83 years.
With that kind of track record, it's hard to deny the benefits of momentum investing. Yet, as good as it is by itself, my team and I have taken it to another level in my premium newsletter Maximum Profit.
Our Maximum Profit system uses a unique investment system to leverage the powerful forces behind momentum. We do this by combining a stock's momentum with a proprietary fundamental indicator. The combined values of these two numbers yield a stock's "Maximum Profit Score." From what we've seen, the higher a stock's Maximum Profit Score, the better its chance of delivering blockbuster gains.
Take Micron Technology (NASDAQ: MU), for example. On Oct. 18, 2013, the Maximum Profit system told us it was time to buy. Between then and the time it told us to sell, MU rose from roughly $17 a share to $32 -- a gain of more than 88%.
Specifically, our system alerted us that it was time to sell on Jan. 7, 2015. And as you can see from the chart above, it was a good thing, since the stock leveled off afterwards. In fact, if you look up MU today you'll see that the stock has fallen back to below $20.
This one example alone speaks volumes to the power of the Maximum Profit system's two-digit code. And there are dozens more examples just like it...
Of course, not all stocks with a high Maximum Profit Score will jump this much. But if you follow this link, I'll show you how over the past three years, you would have had a chance to capture, on average, one or two double-digit winners every month... with a triple-digit winner twice a year. And all you needed to do was follow this indicator -- get into an opportunity when it told you to and get out when the system signaled the ride was over.
If you'd like to learn more about the simple, two-digit code behind the Maximum Profit Score, I urge you to take a minute to watch my brand-new presentation. It shows exactly how all of this works. This presentation is coming down soon, so follow this link now if you have any interest in learning more.
This week, my system pinpointed the ripest trade out of a database of 6,129 stocks — a perfect "needle in a haystack" trade.