Find Winning Stocks by Eliminating the Losers
It's the first, the last, and the most important task of successful investing: finding companies with long-term prospects.
And investors have used every reason known to man to justify their decisions.
"The product is cool."
"The industry is on the rise."
"Profits are up."
"The stock is at record highs."
"The stock is at record lows."
"My neighbor's kid's wife's brother started the company."
Everyone's Got a System
Like I said, every reason imaginable has been rolled out as legitimate justification for buying a stock — from the logical, to the emotional, to the downright bizarre.
One of my uncles (married into the family, not blood-related) once bought a stock because its ticker symbol was an anagram of his daughter's name. Incredibly enough, he actually made a profit on the trade, solidifying the suspicion that he had discovered a "system."
All of these reasons, whether they can be rationally explained or not, all suffer from the same problem: They will never succeed consistently.
No matter how well you vet the positive aspects of any given stock, chaotic forces will almost always throw your well-reasoned, thoroughly calculated (or not so well-reasoned and calculated) stock off the path of your predictive model.
The end result is that no system in existence, no matter how scientific, can ever predict the next winner — not with 100% certainty anyway. It's simply not possible, and anybody who claims that they've found that magic bullet is lying.
So where do we go from here? Do we just throw in the towel, accept that stock investing is nothing but another form of gambling, and open up a lemonade stand?
Well, maybe not.
Science Strikes Again
You see, while picking winning stocks can never be a cut-and-dried input-output transaction, there is something that we, as investors, can do to radically enhance our chances of success.
And it's as simple as it comes. Instead of picking a stock to put your money into, you exclude those that don't fit the bill, based on several tried-and-true criteria filters.
"But isn't that just the same thing as picking a stock?" you might ask.
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Well, not exactly. When you pick a stock, you focus on the positive aspects of a company and make your decision. With a system of elimination, you focus on negative aspects — those chaotic factors which can undermine an otherwise valid vetting process — and exclude those that show any imperfections.
An effective filtration system won't eliminate risk altogether, but it can, if applied effectively, cut out a vast majority of it.
So, what are these filters? Well, I've been working long and hard selecting not just the right filters but the right thresholds.
Detail Is Everything
For example, strong gross margins are important, but do you want your filter to exclude companies with 25% or worse gross margins, or should you go more aggressive to, say, 50%?
These are crucial questions, and, in the end, will affect how many stocks you've excluded and how many you have left in your field of potential winners.
If you do your job right, you should be able to cut the entire stock market down to just a dozen or two powerful candidates. After that, you go back to an organic selection model and look at things like products, news, where the industry is headed... basically anything and everything that you would normally research.
Difference is that now you're only researching a handful of stocks and not the hundreds or thousands that would fall into an unvetted lineup.
I know this can all sound pretty intimidating, but it's actually pretty simple, and it's scientific. Is there a chance that you'll filter out a stock that will rise 50% next week? Of course there is... but there's a much bigger chance that you'll filter out several hundred losers right along with it.
Of course, at the end of the day, the proof is in the results.
If you want to see the process in detail, the results, and the explanation behind it all, click here.
Fortune favors the bold,
His flagship service, Microcap Insider, provides market-beating insights into some of the fastest moving, highest profit-potential companies available for public trading on the U.S. and Canadian exchanges. With more than 5 years of track record to back it up, Microcap Insider is the choice for the growth-minded investor. Alex contributes his thoughts and insights regularly to Wealth Daily. To learn more about Alex, click here.
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