I'm often amazed at how short-sighted the pundits on Wall Street can be.
Present them with nearly a century's worth of facts and they still refuse to believe what's right in front of their faces.
Longtime readers might already be familiar with relative-strength investing. We've talked about it before in previous StreetAuthority Daily issues. But for those who need a refresher, allow me to provide a brief recap.
If used correctly, this strategy could be the very thing that helps you land your next 100%-plus return.
I find it funny that when it comes to purchasing material items, people always seem to go with the latest craze or the hottest new products -- yet the same can't be said for buying and selling stocks.
The notion of buying the best-selling new gadget, clothes or automobile seems like common sense to consumers. But here's the ironic part, if you take this same concept and bring it into the investing world, many on Wall Street will simply scoff at you.
Most have long considered the idea of buying the best performing stocks as "thoughtless" or "foolish."
One of the main drivers for this disdain regarding momentum investing is that it's tough to explain, hard to quantify. It's not something you can simply spot on a company's balance sheet or income statement, nor will you hear management talk about their stock's momentum on a conference call.
Even Eugene Fama, "The Father of Finance" and a Nobel laureate, refers to momentum as an "anomaly."If something is tough to explain or hard to prove there's plenty of critics ready to shower you with skepticism.
Yet I can show you 83 years of research that proves momentum based investing -- otherwise known as relative strength -- outperforms nearly all other investing strategies.
One of the best studies on this phenomenon was done by the asset-management firm AQR Capital Management. They looked at U.S. stocks going all the way back to 1927. What they found was that, at any given time, the stocks that were outperforming 80% of the market continued to outperform for at least the next 12 months.
And the stocks that were underperforming -- that bottom 20% that many investors consider "a good deal" -- typically continued to underperform over the same period.
But James O'Shaughnessy -- one of the world's foremost authorities on long term investment strategies -- took it one step further. He compared more than 60 different strategies to identify which ones performed the best over an 83 year period.
Care to guess which one he determined outperformed all others? -- You guessed it, relative strength. From 1927 through 2009, using this indicator returned an average of 14.6% per year.
By comparison, the market returned just 10.4% per year on average.
As you can see in this chart, compounding that 14.6% year over year from 1927 - 2009 (the years O'Shaugnessy studied) would turn every $10,000 invested into more than $572 million.
By comparison the market produced just $38 million -- still impressive, but nowhere near the return investors enjoyed by applying the relative strength indicator.
Now if you're like most investors these days, the idea of relative strength goes against nearly everything you've been told about "successful investing." You've probably had the idea of "buy low, sell high" pounded into your brain for decades and the thought of buying stocks that are already outperforming the market seems "counterintuitive."
I can't stress this enough: That way of thinking is a huge mistake.
You may think stocks with the most potential upside are the ones that are the most undervalued, based on their price-to-earnings (P/E), price-to-book (P/B) or price-to-sales (P/S) valuations.
But buying a stock simply because it's cheap abandoning a luxury yacht in favor of sailing around the world in a leaky old shrimp boat simply because the ticket is half is much. Don't get me wrong, I like saving money, but I'll gladly pay for the yacht if it means I enjoy my vacation and make it home alive.
Even a few Wall Street big-wigs seem to be seeing the light on relative strength. In March, global investment manager Janus Capital Group released a report stating that "momentum is real and persistent."
And last month, well-known capital management firm PIMCO released commentary explaining that relative strength "is among the most well-documented and extensively research market anomalies" and that "time-series momentum strategies have the potential to help investors reduce downside capture and add upside capture."
It's easy to see why Wall Street is finally starting to take the hint. Relative strength is one of the indicators I use for my Maximum Profit system -- a trick that has helped me produce StreetAuthority's highest annual return over the past two years.
What's so special about Maximum Profit is that it triggers both buy and sell signals. Meaning it can tell you exactly when a stock's momentum is starting to take off and when it's coming to an end.
The system helped me earn some pretty incredible returns from the market's best performer. That includes a 71.9% gain on Southwest (NYSE: LUV) in 8 months, an 81% gain on Alcoa (NYSE: AA) in 9 months and even a 181% return on Lannett Company (NYSE: LCI) in 13 months.
Of course, not every stock my system tags will return that much. But one of my current "buys" looks to be on the fast-track to replicating these big gains.
It's one of the nation's largest steel-wire manufacturers, and its shares have soared 23.6% year-to-date. If its momentum holds up, investors could be looking at a 142% gain by the end of 2016.
If you'd like to get the name of this company, as well as every one of my Maximum Profit system's current buy recommendations, I invite you to watch this recent presentation my research team and I put together.
It explains how a small group of amateur investors in Chicago used momentum to earn a combined $175 million in just five years -- and it shows how Maximum Profit has taken their strategy to the next level.
To view the presentation, simply click here.