To most investors, what we do here at Maximum Profit doesn’t make sense…

That’s because our investing strategy goes against nearly everything you’ve been told about becoming a successful investor: diversify your portfolio and buy low, sell high.

That strategy simply doesn’t work for the vast majority of investors. How do I know?

Market research from Dalbar — a company that’s been looking into investors’ buy and sell decisions since 1994 — found that investors have averaged a paltry 2.1% annualized return over the last 20 years… greatly lagging the broader market’s 8.2% return over that same time period.

So it’s clear that beating the same old investing drum hasn’t worked for investors. So what does work?

Buy high and sell higher…

That’s the basic premise of momentum investing. Contrary to conventional wisdom, we want to be buying stocks that are near their 52-week highs, and selling them when the upward momentum runs out of steam. As I told my subscribers in an past issue:

Often, new highs create uncertainty among investors. They tend to think that when a stock or the overall market reaches new highs, it’s time to take money off the table.

Similarly, most investors would scoff at the idea of buying a stock that’s reached a new 52-week high…

But then again, most investors don’t have the Maximum Profit system at their fingertips. If they did, they’d know that based on history, future gains are possible after new, long-term highs are hit. In fact, many of the stocks in our portfolio were flagged after hitting new 52-week highs — and they’ve gone on to post impressive gains since.

In that issue, I used Southwest Airlines as a perfect illustration of buying a stock that was hitting new 52-week highs and what it did afterwards… Spoiler alert: it kept making new highs:

This isn’t the only case either…

In October 2013, aluminum giant Alcoa (NYSE: AA) was hitting new 52-week highs and instead of shying away as most investors likely did… my system told us to “buy.” Just over a year later we sold the stock for a 72% gain.

The bottom line is that to the average investor our strategy may not make sense… but it works.

As the stock market continues to march higher, I’ve been getting quite a few questions from readers about some of the details behind my Maximum Profit system. So I wanted to take some time to answer some of those.

First, we need to start off with the foundation of my system, which is relative strength (RS). Relative strength is designed to show how a stock has performed relative to all other stocks. A high value of RS is a buy signal, whereas a low signal means we should ignore the stock. Simply put, in order to calculate RS you need to have at your disposal the price history of all publicly traded stocks before figuring out which ones are performing the best.
Don’t confuse this with the Relative Strength Index (RSI) — there’s a large difference between these two indicators. RSI is probably the more familiar indicator, and refers to a technical indicator that purports to show when prices are overbought or oversold. A high value of RSI is traditionally interpreted as a sell signal that compares the price history of just one stock or index to its current prices.

In other words, the traditional signal (RSI) compares the price action of a single stock to its historical movements, where my signal (RS) compares one stock’s movements to the price action of all stocks.

Think about it this way… in order to beat the market we need to own stocks that are gaining more than average. Relative strength allows us to identify which stocks are currently performing the best and are likely to continue performing the best. We don’t want to try to catch the proverbial “falling knife,” meaning finding beaten-down stocks and hoping for a rebound.

We want to make money… fast. And the quickest way to do that is to buy stocks that are already on their way up. This is like the difference between waiting at a bus stop and hopping on a moving train (we want to board the moving train to get to our destination the fastest.)

To keep with the moving train metaphor, we then need to know when to hop off. For us at Maximum Profit, our “buy” signal is when a stock’s relative strength is 70 or higher. My “sell” signal occurs when a stock’s relative strength rating falls below 70.

Part Two Of My Maximum Profit System
Now let’s talk about my second component: cash flow relative strength (CFRS).

Cash flow is the lifeblood of any business. Without it, the company can’t pay its bills or reinvest in its business, and will likely close its doors. It’s been called the most “honest” number in accounting, since it’s the hardest number to fudge. In short, cash flow brings a fundamental aspect to my system.

Just relying on momentum can give you a lot of fly-by-night companies — ones that will come crashing down just as quickly as they ascended to new heights.

We want to identify companies that are also growing cash flow… quickly. This will help ensure we are investing in solid companies whose momentum will likely continue, even after its cash flow begins to taper off.

Now, please understand that I can’t give you the calculation to my cash flow relative strength formula. This is a proprietary formula that separates Maximum Profit from other momentum newsletters. You may have heard about how Coca-Cola keeps its secret recipe in a Sun Trust Bank vault in downtown Atlanta. Or how fried chicken magnate Colonel Harlan Sanders’ 11 herbs and spices are inscribed on a faded piece of paper in a Louisville safe.

I don’t go that far, but the objective is the same.

Just know that my system pulls in the financial data for all the stocks in my database and finds the ones that are growing cash flow the fastest.

We’ve tweaked the formula so it ranks stocks similar to our RS rankings. So a stock won’t make it into the final stages of my system if its cash flow relative strength isn’t 70 or greater.

The Maximum Profit score is a combination of RS and cash flow relative strength. Just because a stock’s MP score falls below 70 doesn’t mean it’s a sell. The reason for this is because the price momentum can continue long after a company’s cash flow relative strength has dipped. But a high Maximum Profit score means the stock is running on all cylinders. The tailwinds are strong for continued stock price appreciation.

I trust this brings some clarity to some of the details of my system. But the picks that it has singled out as “buys” this week are reserved for my subscribers. If you want to learn how you can access these picks — and others I’m holding on to in my Maximum Profit portfolio — I invite you to click here.