Investing is so easy a baby can do it.

At least, that’s what the financial media wants you to think. Remember that eTrade commercial with the all-star trader baby?

But like life, investing and trading often don’t go the way we want them to. Many people find things go wrong more than right. So they give up and lose money.

A few win small frequently… then suddenly lose big. They too give up and lose money.

Fewer still have the right plan and intend to weather any storm. But then a hurricane actually comes and blows away their confidence. So they also give up and lose money.

And it’s not entirely their fault. Winning at stocks is harder than winning Russian Roulette. There’s a 5 out of 6 (80%) win rate in that game… versus just 4% in stocks.

You read that right. Just 4% of stocks accounted for the net gain of the entire stock market above Treasuries. That’s held true since the 1920s, according to a study by Professor Hendrik Bessembinder.

The odds are stacked heavily against us. I don’t mean to sound discouraging.

But only a select few have demonstrated consistent success investing in stocks. And even they must deal with hardship. Warren Buffett is regarded as the greatest investor of all time. Yet all of us have probably seen the headlines bashing him during a rough period.

Yet like clockwork, he soldiers on and earns more headlines touting his genius and success.

So what’s the secret to becoming a successful stock market investor?

How do you beat the odds?

In today’s essay, I’ll show you how…

Beating the Odds

Hi, I’m Jason Bodner, the editor of Outlier Investor. I realized long before I read Professor Bessembinder’s paper that he was right… Only a tiny fraction of stocks is worth my time.

So after a couple of decades on Wall Street, I spent years and hundreds of thousands of dollars developing my own technology software that helps me find potential outlier stocks every day. I spend my life fishing for that 4% of stocks.

These are stocks that have impressive fundamentals… show a promising technical setup… and are seeing unusually large buying from “Big Money” investors like hedge funds and institutional buyers.

That’s the main way I beat the odds over time.

Yet the software I developed to find outlier stocks also tracks what I call the Big Money Index (BMI). This is a money-flows meter. The BMI averages all big money buying over the previous 25 days. This shows whether big investors are moving money in or out of stocks.

My software’s data correlates closer to the Russell 2000 Index than others. That’s why you see the BMI overlaid on the iShares Russell 2000 ETF (IWM).

Take a look…

The BMI is a great “extreme” indicator. When markets go overbought, it signals it’s time to lighten risk and expect lower prices soon. And when markets go oversold, it signals it’s time to load up on stocks at distressed prices.

But sometimes, the BMI just chops along… much like stocks. As seen in the chart above, that’s how both the BMI and IWM have been since February. They have been trading sideways.

So what is an investor to do in that scenario?

Learning From History

To investigate how to read a choppy market, I looked for similarly volatile times for the BMI. And I didn’t have to go back too far…

Look here at 2018:

We see a choppy sideways BMI from July to October of 2018. And as many readers may recall… it was a rough year-end. Markets crashed at the end of the fourth quarter.

But look what happens right after the BMI went oversold in October and touched the line again in December:

The IWM rallied 34% from the trough to 2019’s peak. And the IWM experienced a similarly sharp rally.

And similar action has happened – just like this – many times over the 30 years of history I examined.

The BMI helps us nail overbought and oversold. And when it’s trending up or down, it’s very helpful.

But when things are just chopping along… what then? Well, that’s when we want to be focused on outliers, the secret weapon to weathering ALL markets…

Buying the 4%

The answer to choppy markets lies in the 4% of stocks – the outliers I discussed earlier.

As an illustration, here are the top five outlier stocks that my software said to buy during the 2018 choppiness:

  • Adobe (ADBE)

  • Netflix (NFLX)

  • Lululemon Athletica (LULU)

  • Intuit (INTU)

  • Callaway Golf (ELY)

Hypothetically, if we had bought only those stocks on July 1, 2018, near when the choppiness began, and held for a year, what would have happened?

Well, the portfolio of these five outlier stocks would have beat the SPDR S&P 500 ETF Trust (SPY) by 52%. And that’s including a couple of stocks that didn’t perform well:

Ticker 12 Month Return
ADBE 25.67%
NFLX -4.13%
LULU 46.63%
INTU 32.58%
ELY -8.34%

Source: MAPsignals.com

Moreover, if we’d continued holding those five stocks until now, we would have crushed the market:

We see in January 2019, our hypothetical returns lagged the market briefly. But our five stocks then went on to seriously outperform over time.

THAT is my secret. Outliers account for all the gains! Just like Bessembinder said!

So how do we beat the odds – or better still, flip them in our favor?

  1. Have a process and stick with it. Don’t jump ship when things get a little rocky. It happens to literally the best of them – even Warren Buffett.

  2. Use market indicators at extremes to lighten or add risk. I use the Big Money Index. There are countless others out there, too.

  3. Focus on outlier stocks. Owning just a few of those can help us beat the market. And they give us the best long-term odds of crushing the indexes. If you want to try to find outliers on your own, look for stocks with growing sales, earnings, and profit margins. They should also have low debt and be developing products or services that are in high demand. To approximate my secret sauce of big money buying, you can look for big price moves with big volume.

Investing can be a frustrating game. But by following this advice, we can beat the odds, no matter what kind of market we’re experiencing.

And that’s what my Outlier Investor research service is all about. If you want to learn more about how it works, you can go right here for the full story.

Talk soon,

Jason Bodner
Editor, Outlier Investor

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