The Strategy That Defies “Buy And Hold”
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, we’ve known about it for more than half a century. And savvy 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 “anomaly” 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.
Forget What You Thought You Knew About Investing…
Specifically, I’m talking about momentum investing. This means buying the best-performing stocks (relative to the market) and holding them until their momentum changes course.
To most investors, especially value-minded 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 today, 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 ratios, price-to-book ratios or price-to-sales values, to describe it.
The problem is that this approach leads investors to often 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 can save you half the cost of your trip. 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 vacation 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).
It’s also what causes many investors to miss out on some of the greatest growth stories our lifetime — think Apple, Facebook, Amazon, etc.
How Momentum Investing Works
Research has proven this to be a terrible fallacy.
Some economists will tell you that markets are “efficient.” And because of that, you’re better off buying index funds over your lifetime rather than trying to pick individual stocks. But momentum is one of the few “anomalies” that are proven to defy this theory.
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 “buy” and “sell” signals 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 the 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 their 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 a period of 83 years.
How We Use This Market “Anomaly” To Profit
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 Cardylitics (Nasdaq: CDLX) for example. Our indicator brought it to our attention on October 18, 2019, when the Maximum Profit System told us it was time to buy. During that time, shares rose 120%.
Then, on February 26, our system alerted us that it was time to sell. And as you can see from the chart above, it was a good thing, since the stock took a dive afterwards — along with everything else during the Covid-19 selloff. In fact, if you look up a longer chart of CDLX, you’ll see that the stock took a couple of months to recover some lost ground — then it leveled off before hitting new highs today. But thanks to my system, we didn’t have to wait — there were plenty of other opportunities to put our capital to work and capture new triple-digit opportunities instead.
This one example alone speaks volumes to the power of the Maximum Profit system. And there are dozens more examples just like it…
Of course, not all stocks my system finds will jump this much. But with this system at our disposal, I like our chances than anything else out there. And if you’d like to learn more about how this system works, including how to get simple “buy” and “sell” signals sent straight to your inbox, then I urge you to take a minute to watch my brand-new presentation right here.