I'd like to start off today's issue by sharing an amusing anecdote from one of the books we've been passing around the StreetAuthority offices this year.
By the third day of their honeymoon in Las Vegas, the newlyweds had lost their $1,000 gambling allowance. That night in bed, the groom noticed a glowing object on the dresser. Upon closer inspection, he realized it was a $5 chip they had saved as a souvenir. Strangely, the number 17 was flashing on the chip's face.
Taking this as an omen, he donned his green bathrobe and rushed down to the roulette tables, where he placed the $5 chip on the square marked 17. Sure enough, the ball hit 17 and the 35-1 bet paid $175. He let his winnings ride, and once again the little ball landed on 17, paying $6,125. And so it went, until the lucky groom was about to wager $7.5 million. Unfortunately the floor manager intervened, claiming that the casino didn't have the money to pay should 17 hit again. Undaunted, the groom taxied to a better-financed casino downtown. Once again he bet it all on 17 -- and once again it hit, paying more than $262 million. Ecstatic, he let his millions ride -- only to lose it all when the ball fell on 18. Broke and dejected, the groom walked the several miles back to his hotel.
"Where were you?" asked his bride as he entered their room.
"How did you do?"
"Not bad. I lost five dollars."
This excerpt comes from, "Why Smart People Make Big Money Mistakes And How To Correct Them," by Gary Belsky and Thomas Gilovich.
It's a fascinating book about behavioral economics, a field of study that has long interested me -- and certainly one that pertains to investors.
And while this is almost certainly not a true story, it's meant to illustrate the idea of "mental accounting" -- something we tend to do every day.
You see, whether it's in gambling or investing, when we see a "paper profit" we tend to trick ourselves into thinking we're playing with "house money" -- that it's not real until it's booked, pocketed or in our hand.
And when it comes to investing, this sort of mental accounting can be lethal.
Think you don't do this in your own investing? Then let me ask you this...
How good are you at letting your winners ride? Do you know when to sell and book a profit (or inversely, cut your losses and move on)? The truth is, most investors aren't as foolish as the man in the green bathrobe, but the moral of this story cuts both ways.
In my experience, many investors are actually too conservative when it comes to letting their winners ride. All too often, they feel tempted to take profits immediately when a substantial gain in their portfolio is staring them in the face. And they sell too early.
They think that when a stock makes new highs, it will somehow magically start to go down and then tell themselves they need to turn that "paper profit" or "house money" into real gains.
That's the fastest way to not beat the market and miss out on potential triple-digit gains.
The point is not to view a paper gain as "house" money. It's already yours. And if you can overcome your emotion, which tends to be your greatest enemy when it comes to money and investing, then you'll stand the greatest chance of success.
The best way to do this is with a clear set of rules that tell you when to buy -- and perhaps even more importantly -- when to sell.
You see, if you're like most individual investors, then your track record for timing buys and sells is probably spotty at best.
That statement might not make me the most popular analyst, but I'm here to tell you what you need to hear and not simply what you want to hear.
But the research agrees with me on this one.
According to a report from financial services research organization DALBAR, during the best six months of 2013 for the stock market, there was no evidence that individual investors bought into equity funds any more than usual. And during the past three years, equity fund investors averaged a 10.87% annual return, lagging the S&P 500's average return of 16.18% during the same period.
This isn't just a short-term trend, either. In fact, the report states that the average equity fund investor lagged the market by an average of 4.2% annually over the last 20 years.
The point is, knowing exactly when to buy and sell is something that every investor struggles with. And this is part of the reason why most investors sorely underperform the market in any given year.
Thankfully, it doesn't have to be this way.
Don't Let New Highs Scare You Away
A few weeks ago we unveiled what we called "the best performing system you've never heard of."
In short, we talked about how after 18 months of beta testing with 500 loyal StreetAuthority readers, my colleague Jimmy Butts and I have been able to perfect an investing system that is designed to give subscribers a simple set of rules with clear buy and sell signals. We do this by using two rigorously-tested indicators -- one fundamental, one technical -- to identify when a stock is entering and exiting a "growth window."
We call it the Maximum Profit system.
During that time, it's become the best-performing StreetAuthority service. Our model portfolio has delivered a total return of 31.5%, outpacing the S&P 500's 26.3% return over the same time period. And some of our picks have made readers gains of 17%... 40%... 181%.
One of the ways we've been able to achieve this kind of success is by riding the momentum in stocks that are reaching new highs and sticking to our system's clearly defined rules.
As I mentioned earlier, new highs create uncertainty among investors. But then again, most investors don't have the Maximum Profit system at their fingertips.
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.
Take Southwest Airlines Co. (NYSE: LUV) for example. This stock came roaring right out of the gate in 2014, posting impressive gains all the way through June -- where it reached a new 52-week high. But rather than telling our readers to stay away from this stock, the Maximum Profit system identified it as a "buy."
You can see what happened next...
The result: Southwest Airlines has been one of our best performers this year, giving readers a gain of 61.9% so far.
But this isn't the only case.
When aluminum giant Alcoa (NYSE: AA) reached a new 52-week high in October 2013, we were willing to bet most people thought it was overbought or ready for a correction.
But did our system avoid Alcoa? No, the system flagged it as a "buy."
As it turned out - the Maximum Profit system was spot on. We recently closed the trade for a gain of more than 70% in less than a year.
The point is, just because you see a stock hitting 52-week highs doesn't mean you should sell or stay away. If history is any guide, then there could be even greater profits ahead within the next few months.
That's one of great advantages of having the Maximum Profit system at your fingertips... it takes the guesswork out of when to enter and exit a position.
The ability to ignore human emotion and stick to the system's rules is one of the reasons our portfolio returned 17.3% in 2014, beating the broader market.
To put it simply, we think we've come up with a solution to give investors exactly what they want -- bigger gains in a shorter amount of time -- without risking the pitfalls that come with trading based on emotion. Although we can't make any promises that we'll outperform in 2015, we're already outpacing the S&P 500 and will put in every effort to continue to do so.
I hope you'll take the time to check out the special report we've put together on our system. But even if you don't, I encourage every investor to make a set of rules, so that you'll know when to buy and when to sell. Do that and you'll be far better off than the average investor. To view our special report and give our market-beating system a try, follow this link.