by Jason Bodner

December 14, 2021

Investing is “so easy a baby can do it.” At least, that’s what the financial media want you to think.

Remember that commercial with the super-smart trader in diapers?

Money Baby

But life, like investing and trading, doesn’t always go the way you envision it at first. It isn’t that easy.

Many people find that things go wrong more than right, so they lose some money and then give up.

A few win some small bets in small positions, frequently, then they suddenly lose big. They, too, give up.

Fewer still have the right plan and intend to weather any storm, but then a once-in-a-century (or is it once-a-decade?) hurricane comes along and blows away their confidence, so they give up, too.

It’s not entirely their fault. Winning at stocks is harder than winning at Russian Roulette. You will win five out of six times (83%) with a gun to your head… but just 4% of stocks become big winners, outliers.

You read that right. Just 4% of stocks accounted for the net gain of the entire stock market above the return of Treasuries since the 1920s, according to a study by Professor Hendrik Bessembinder.

So the odds are stacked heavily against us.

I don’t mean to burst your bubble, but only a select few investors have demonstrated consistent success investing in stocks. And even they must deal with hardship. Warren Buffett is regarded as the greatest investor of all time, yet most of us have seen the headlines bashing him during a rough period.

Still, like clockwork, the 91-year-old Buffett soldiers on and earns new headlines touting his success.

So, what’s the secret to becoming a successful stock market investor?

My answer is two-fold: We focus on finding outliers and we identify market trends. For both, we track the Big Money Index (BMI). This is essentially a money flow meter. The BMI averages big money buying over the previous 25 days. This shows whether big investors are moving in or out of stocks.Big Money Index vs IWM

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

MAPsignals software’s data correlates closer to the Russell 2000 Index than the other major indexes. That’s why you see the BMI overlaid on the iShares Russell 2000 ETF (IWM). The BMI is a great “extreme” indicator. When markets go overbought, it signals it’s time to lighten risk and expect lower prices soon. And when markets go oversold, it signals it’s time to load up on stocks at distressed prices.

But sometimes, the BMI just chops along without a trend… much like stocks. As seen in the chart above, that’s how both the BMI and IWM have been since February 2021. They have been trading sideways.

What is an investor to do in a sideways scenario? To investigate how to handle a choppy market, I looked for similarly volatile times for the BMI. And I didn’t have to look back too far…

Look here at 2018:Big Money Index vs IWM1

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

We saw a choppy sideways BMI through the middle of 2018. And as many may recall… 2018 delivered a rough December. Markets plummeted at the end of the fourth quarter. But look what happened right after the BMI went oversold in October and again touched the line in December:Big Money Index vs IWM2

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The IWM rallied 34% from trough to 2019’s peak. The BMI experienced a similarly sharp rally. And similar actions have happened – just like this – many times over the 30 years of history I examined.

So how can we beat the odds in a sideways market?

The answer lies in those 4% of stocks – the “outliers” I discussed earlier.

As an illustration, here are the top five outlier stocks that MAPsignals software identified as the most frequently occurring Top 20 stocks January through June of 2018:

  • Adobe (ADBE)
  • Netflix (NFLX)
  • Lululemon Athletica (LULU)
  • Intuit (INTU)
  • Callaway Golf (ELY)

Hypothetically, if we had bought only those stocks on July 1, 2018, near when the choppiness began, and held for a year, what would have happened?

Well, the portfolio of these five outlier stocks would have beaten the SPDR S&P 500 ETF Trust (SPY) by 52% (up 18.5% vs. 12.1% for SPY). And that’s including two stocks that actually declined:Mapsignals Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Moreover, if we’d continued holding those five stocks until now, they would have doubled the returns:

Map Portfolio vs SPY

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

We see that in January 2019, our hypothetical returns lagged the market briefly. But our five stocks then went on to seriously outperform the market over time.

THAT is my secret. Outliers account for all the gains! Just like Bessembinder said!

So how do we beat the odds – or better still, flip them in our favor?

  1. Have a process and stick to it. Don’t jump ship when things get a little rocky. Setbacks happen to literally the best of investors – even Warren Buffett.
  2. Use market barometers at extremes to lighten or add risk. I use the Big Money Index.
  3. Focus on outlier stocks. Owning just a few of those can help beat the market. And

MAPsignals finds outliers by looking for growing earnings, strong gross margins, low debt and Big Money buying. This formula gives us the best long-term odds of crushing the indexes.

Investing can be a frustrating game. But by following this advice, we can beat the odds, no matter what kind of market we’re experiencing. Outlier stocks can bob and weave just like the market when it’s indecisive. But being able to identify them and hold them can be the difference when dust settles.

As Peter Drucker said: “The best way to predict the future is to create it.”

Navellier & Associates does own Adobe (ADBE), Lululemon Athletica (LULU), and Intuit (INTU), in managed accounts.  We do not own Netflix (NFLX), and Callaway Golf (ELY). Jason Bodnder does not personally owns Adobe (ADBE), Netflix (NFLX), Lululemon Athletica (LULU), Intuit (INTU), and Callaway Golf (ELY).

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Jason Bodner

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner

Important Disclosures:

Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.

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