The Science Of Beating The Markets
Why do some people succeed spectacularly in the market while others fail?
The market is the same for one person as it is the next.
Yet there are plenty of investors underperforming the market even while it’s making new all-time highs like now.
So why the big difference in performance between one person and another?
It all boils down to two things:
1) Knowing what works, and
2) Doing what works
While the stock market isn’t a perfect science, the fact remains that if you concentrate on what works and stop doing what doesn’t, you will most surely succeed in the market.
Knowledge Is Power
We’ve all heard the old adage, ‘knowledge is power’.
It’s a great saying because it’s true.
And that saying couldn’t be truer than when it comes to investing.
Take a look at your last big loser for example. After analyzing what went wrong, you soon discover some piece of information that – ‘had you known that, you never would have gotten into it in the first place’.
I’m not talking about things that are unknowable, like surprise announcements that can catch even the most professional of professionals off guard. I’m talking about things that you could have known about or should have known about before you got in.
This is part of ‘knowing what works’.
• Did you know that roughly half of a stock’s price movement can be attributed to the group that it’s in?
• Did you also know that oftentimes a mediocre stock in a top performing group will outperform a ‘great’ stock in a poor performing group?
• And did you know that the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1?
• And did you also know that the top 10% of industries outperformed the most?
Was your last loser in one of the top industries or in one of the bottom industries?
If it was in one of the bottom industries, you should have known to not take a chance on something with a reduced probability of success.
That part is the ‘doing what works’. (And not doing what doesn’t work.)
That’s not to say that stocks in crummy industries won’t go up — they do. And that’s not to say that stocks in good industries won’t go down — because they do too.
But more stocks go up in the top industries, and more stocks go down in the bottom industries.
If you follow a set of proven profitable rules, you’ll have a higher probability of succeeding.
Know What Works
• Did you know that stocks with ‘just’ double-digit growth rates typically outperform stocks with triple-digit growth rates?
• Did you also know that stocks with crazy high growth rates test nearly as poorly as those with the lowest growth rates?
Did your last loser have a spectacular growth rate?
If so, and it got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?
Once again, this is the ‘know what works’ part.
It seems logical to think that the companies with the highest growth rates would do the best. But it doesn’t always turn out to be the case.
One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.
Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint. And there are growth rate ranges that have proven to work the best.
Did You Know?…
• Did you know that stocks receiving broker rating upgrades have historically outperformed those with no rating change by more than 1.5 times? And did you know they outperformed stocks receiving downgrades by more than 10 times as much? The next time one of your stocks is upgraded or downgraded, be sure to remember these statistics so you know how the odds stack up and whether they’re for you or against you.
• Did you know that stocks with a Price to Sales ratio of less than 1 have produced significantly superior results over companies with a Price to Sales ratio greater than those levels? And did you know that those with a Price to Sales ratio of greater than 4 have typically shown to lose money? That doesn’t mean that all stocks with a P/S ratio of less than one will go up and those over four will go down, but you can greatly increase your odds of success by following these valuations.
• Did you know that by adding two additional filters to the Zacks #1 Rank stocks, it narrows that list down from 200+ stocks to a more manageable 5 stocks? That’s what we did with our Filtered Zacks Rank 5 screen that is up 38.4% so far this year vs. the market’s 7.4%.
Do you know how well your stock picking strategies have performed?
Whether good or bad – do you know why?
Do you know if your favorite item to look for is helping you or hurting you?
Get the answers to these questions and more. And discover what works and what doesn’t before your next trade. Learn how to take advantage of today’s market and how you can start beating it no matter what it does.
I discovered all the above with the Research Wizard, including a strategy that has averaged gains of +62.3% per year over the last 10 years. And you can too. If you have a question, just plug it in and get your answer. Pick and choose from our profitable, time-tested strategies. Or create and test your own. And start consistently outperforming the market.
Starting today, you are invited to build new strategies and access my personal all-time favorites (along with their latest stock picks) for two weeks free.
Click here to learn more >>
Thanks and good trading,
Zacks VP Kevin Matras is our chart patterns and stock screening expert. He also personally developed many of the built-in market-beating strategies that come with the Research Wizard.