The Dangerous Idea Keeping You From Outsized Gains

There’s a dangerous idea in the world of finance that’s been floating around for years.

The man who coined this idea won a Nobel Prize for his work, but even he has stated that there are “threats” to his theory.

#-ad_banner-#Today, I’m going to tell you about one of those “threats,” and why it’s time to put this dangerous idea to bed for good. Because if you buy into it, you could miss out on some of the greatest opportunities the market has to offer.

To frame our discussion, I’d like you to consider one thing: When an investor buys shares of a stock hoping that its value will rise, the person is often betting against the market — that other investors are wrong (about the stock’s value) and that his valuation is correct.

It’s with this idea that theory called the “efficient market hypothesis” becomes important.

The man behind the theory — economist Dr. Eugene Fama — is hailed as one of the fathers of modern finance.

At its most basic, his hypothesis says that because the public has access to every bit of information about a company (financials, forecasts, analyst opinions, etc.), the firm’s stock price will reflect that common knowledge, meaning every security is fairly valued. And if that’s true, he thinks, then there can be no way to systematically identify securities with upside potential on a consistent basis.

In other words, any sort of outperformance by investors over the long run is pure luck, nothing else.

For his work, Fama was awarded the Nobel Prize in economics.

If Fama is right, then we all may be wasting our time. We might as well put every cent of our retirement savings into index funds and the like, letting the chips fall where they may.

But if you’re a long-time reader of StreetAuthority Daily, then you know that we believe there are opportunities for investors to beat the market in a number of ways — provided you do your homework and stick to a system that works.

I am not writing today to suggest that Fama is wrong… He just forgot one important factor: that we’re human.

The reality is most investors are irrational. They operate on two basic emotions: fear and greed. And while there is plenty of information available to aid them in making the “right” buying or selling decision, that certainly does not mean they will.

The greatest testament to this is the career of Warren Buffett.

Buffett has pointed out that, while most investors don’t beat the market in the long run, some do — quite consistently. Buffett himself has proven this time and time again with Berkshire Hathaway.

Here’s how he does it. Buffett looks for stocks discounted so low that there’s no way the true value of the underlying business is being reflected by the market. Buffett has never believed in Fama’s theory, and it’s made him a fortune over the course of his career.

(For the record, he’s pointed to numerous other cases where “value” managers just like him have consistently beaten the market, too.)

My colleague, Jimmy Butts, approaches investing from the other side of the spectrum from Buffett. But just like him, we profit by recognizing the human aspect of the market.

In his premium newsletter, Maximum Profit, Jimmy identifies stocks that are beginning to soar — due largely to investor reaction to positive news, earnings or other developments.

Once he identifies what he calls a “growth window,” he buys. He and his subscribers then ride the momentum, and as exuberance (or greed) sets in, they use the system’s sell signals to get out when the trend loses steam.

Value and momentum may seem diametrically opposed, but when you look at it in this light, it’s clear that both rely on the irrationality of other investors. Value investors and momentum investors are both profiting from the fear and greed of others.

Momentum is such a powerful tool that even Dr. Fama admits it could be the fatal flaw in his theory. “Of all the things that I think are potential embarrassments to market efficiency, [momentum] is the primary one,” he said in an interview in 2012.

To explain his statement, he cited this research paper, which found that when ranked based on their six-month returns, the highest performing stocks tend to continue to outperform.

Think about that…

Momentum investing defies the research of a Nobel Prize-winning economist.

Jimmy wasn’t always a momentum investor. But after years of painstaking research, he’s become a believer. And it’s hard not to once you’ve seen the system in action…

For example, the Maximum Profit system identified American Railcar Industries (Nasdaq: ARII) in November 2013. Jimmy bought it, and over the course of the following year, ARII shares marched steadily higher.

Then, when the stock’s momentum began to slow, the system identified it as a sell.


In November 2014, readers who followed the Maximum Profit system’s advice locked in a 62% gain. And this is just one of many similar trades that the system has provided.

Maximum Profit has been StreetAuthority’s best-performing portfolio during the past two years. And this year, Jimmy expects the system to repeat this amazing feat.

The point is, when you find something that consistently works, you stick to it. That’s exactly what we’ve done with the Maximum Profit system, and it’s leading to fantastic results. If you’re looking for gains like what I’ve shown you today, I invite you to click here and see if Maximum Profit is right for you.