Want To Make Big-Time Gains? Here’s Your Solution

There’s a growing concern percolating beneath the surface of the stock market. And, no, I’m not talking about a looming correction or anything like that. It’s a problem that’s making it even tougher for individual investors to find market-beating stocks.

It’s a problem that will require investors to have a system, like Maximum Profit, to have any hope…

This predicament became even more glaring on April 19 when the world’s largest asset manager, BlackRock (NYSE: BLK) reported quarterly earnings.

#-ad_banner-#BlackRock’s report included an astonishing achievement, even by its own standards. The company’s assets under management (AUM) reached an all-time record of $5.4 trillion. That’s bigger than JPMorgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC) combined.

They accomplished this impressive feat, in large part, by leading a trend that’s radically changing the investment world. You see, fewer and fewer investors are picking individual stocks. Instead, they are opting for index funds, and BlackRock has become a leader in low-cost index funds and exchange-traded funds (ETFs), as opposed to actively managed funds.

Now, index funds can play a vital role in portfolio management, and I like the fact that they allow investors easy access to a broad basket of stocks for cheap. This is a great improvement over high-cost mutual funds that rarely beat the market. For instance, investors who want to invest in the S&P 500 can do so for an expense ratio of only 0.05% through Vanguard’s S&P 500 ETF (NYSE: VOO), whereas most funds charge in excess of 1%.

But there are a couple of problems with this sort of “passive” investing that you need to be aware of.

First and foremost is the fact that this passive investing style has become so popular that it’s destroying price discovery — finding companies that are priced well below their valuation. This is vital in keeping valuations and fundamentals in sync. Think of it as a sort of checks and balances.

But when investors are blindly investing at such a feverish pace — that’s what they are essentially doing when investing in these passive index funds — these index funds become the sole driver of stock prices, when it should be the other way around.

Michael Lebowitz, co-founder of 720 Global Research, illustrated the implications of this through a simple example using toilet paper.

“Imagine walking down the paper goods aisle in your local grocery store in search of toilet paper. Instead of picking out your preferred choice you just blindly take the first one you see. This act on its own would not be meaningful, but imagine if most shoppers chose toilet paper in a similar manner. Manufacturers that produced higher quality product could lose the advantage of differentiation and their additional cost of providing a higher quality product would be wasted. In fact, the quality of the product would be irrelevant to the shopper as compared to the ease in which the product can be grabbed from shelf. Without consumers making thoughtful trade-offs between price and value, the price of all brands of toilet paper would converge, rising and falling depending only on how easy it is to grab off the shelf!”

In short, the rise in popularity of passive investing has pushed the prices of many stocks up without the fundamental backdrop.

Now, don’t get me wrong: There are still stocks that are improving their fundamentals, which is why my cash flow relative strength algorithm is so vital to my Maximum Profit system.

The attractiveness of passive investing has been compounded by the fact that many active funds have greatly underperformed their benchmarks. You’ve likely seen headlines about how some of the largest pension funds have pulled money out of hedge funds and other actively managed funds because of their underperformance and high fees, and piled them into low-cost index funds.

But what you must realize is that some of the greatest investment managers — David Tepper, Seth Klarman, George Soros, Ray Dalio — tend to earn their fees when it matters most: by protecting wealth during market declines. Passive investing offers no sympathy when the day of reckoning arrives.

And when things do turn south, you can be sure that investors will just as quickly flee these passive indexes, pushing the prices of the largest holdings in those funds even lower.

That’s when having a proven system like Maximum Profit at your fingertips is so important. For those who are unfamiliar, the system hinges on two indicators — one based on price momentum, and the other on fundamentals like cash flow — to identify stocks with the highest probability to deliver returns quickly. What’s more, thanks to these indicators, the Maximum Profit system has an uncanny ability to get us out of stocks before things get completely out of hand… and, in turn, identify where the next trend is.

My bet is that when that day of reckoning does arrive folks will be looking for a better way to invest. They’ll want a proven system, like Maximum Profit, which delivers winners again and again — while avoiding painful losses.

Don’t get me wrong… index funds do have their place. But if you’re solely relying on these low-cost funds in your portfolio, you’re essentially flying blind. Instead, why not supplement your portfolio with picks like the one I added to our Maximum Profit portfolio recently. It’s a household name that’s dramatically changing the way we buy things. It rewarded us with a nice 33% gain in nine months last year, compared with the S&P’s 12% return over the same time period. And best of all, the system is telling us it’s a “buy” once again.

If you’d like to learn more about the system and get your hands on my latest pick, check out this special report here.