The Science of Making Money in Stocks


Shutterstock photo

Why do some people succeed spectacularly in the market while others fail?

The market is the same for one person as it is the next.

Yet there are plenty of investors underperforming the market even while it's making new all-time highs like now.

So why the big difference in performance between one person and another?

It all boils down two things:

1) Knowing what works, and...
2) Doing what works

While the stock market isn't a perfect science, the fact remains that if you concentrate on what works and stop doing what doesn't, you will most surely succeed in the market.


Knowledge Is Power

We've all heard the old adage: 'knowledge is power'.

It's a great saying because it's true.

And that saying couldn't be truer than when it comes to investing.

Take a look at your last big loser for example. After analyzing what went wrong, you soon discover some piece of information that -- 'had you known beforehand, you never would have gotten into it in the first place'.

I'm not talking about things that are unknowable, like inside information or surprise announcements that can catch even the most professional of professionals off guard. I'm talking about things that you could have known about or SHOULD have known about before you got in.

More . . .


------------------------------------------------------------------------------------------------------

Free Book: Finding #1 Stocks

Did you know that today you can claim a copy of Finding #1 Stocks by Kevin Matras (a $49.95 value) free of charge? This 300-page hardbound book unfolds almost every stock-picking secret from the Zacks Rank system that has more than doubled the S&P 500 with an average gain of +25% per year.

Now you can claim the book (while copies last) and learn how to take full advantage of the system without attending a single class or seminar. Opportunity ends Tuesday, June 20.

Learn more >>

------------------------------------------------------------------------------------------------------


This is part of 'knowing what works'.

• Did you know that roughly half of a stock's price movement can be attributed to the group that it's in?

• Did you also know that oftentimes a mediocre stock in a top performing group will outperform a 'great' stock in a poor performing group?

• And did you know that the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1?

• And did you also know that the top 10% of industries outperformed the most?

Was your last loser in one of the top industries or in one of the bottom industries?

If it was in one of the bottom industries, you should have known to not take a chance on something with a reduced probability of success.

That part is the 'doing what works'. (And not doing what doesn't work.)

That's not to say that stocks in crummy industries won't go up -- they do. And that's not to say that stocks in good industries won't go down -- because they do too.

But more stocks go up in the top industries, and more stocks go down in the bottom industries.

And that's part of the science of making money in stocks.

If you follow a set of proven profitable rules, you'll have a higher probability of succeeding.


Know What Works

• Did you know that stocks with 'just' double-digit growth rates typically outperform stocks with triple-digit growth rates?

• Did you also know that stocks with crazy high growth rates test nearly as poorly as those with the lowest growth rates?

Did your last loser have a spectacular growth rate?

If so, and it got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?

It seems logical to think that the companies with the highest growth rates would do the best. But it doesn't always turn out to be the case.

One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.

For example, a company earning 1 cent a share that is now expected to earn 6 cents, has a 500% growth rate. But, if it receives a downward revision to 5 cents, that's a significant drop. Even though it still has a 400% growth rate, the estimates were just reduced by -16.7% and the price is likely to follow.

If you've ever wondered how a stock with a triple-digit growth rate could possibly go down -- that's how.

Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint. And there are growth rate ranges that have proven to work the best.


Did You Know?...

• Did you know that stocks receiving broker rating upgrades have historically outperformed those with no rating change by more than 1.5 times? And did you know they outperformed stocks receiving downgrades by more than 10 x as much? The next time one of your stocks is upgraded or downgraded, be sure to remember these statistics so you know how the odds stack up and whether they're for you or against you.

• Did you know that stocks with a Price to Sales ratio of less than 1 have produced significantly superior results over companies with a Price to Sales ratio greater than those levels? And did you know that those with a Price to Sales ratio of greater than 4 have typically shown to lose money? That doesn't mean that all stocks with a P/S ratio of less than one will go up and those over four will go down, but you can greatly increase your odds of success by following these valuations.

• Did you know that two simple filters added to the Zacks #1 Rank significantly increases its returns? What if you did? We have a screen that utilizes these two additional items. Over the last 17 years (2000 thru 2016), it's produced an average annual return of 55.6% per year, while only holding five stocks in its portfolio at a time. It was up 70.7% in 2016. And so far this year (thru 6/2/17), this strategy is already up 33.3% (more than 3.2 x the market). That screen is aptly called the Filtered Zacks Rank 5 screen. That screen is aptly called the Filtered Zacks Rank 5 screen.

Do you know how well your stock picking strategies have performed?

Whether good or bad -- do you know why?

Do you know if your favorite item to look for is helping you or hurting you?


Where to Find the Answers

There's a simple way to discover what works and what doesn't before your next trade. Learn how to take advantage of today's market, and how you can start beating it no matter where it heads.

It starts with our fun, interactive Zacks Method for Trading: Home Study Course.

Without attending a single class or seminar, you'll be guided to better trading step by step. You'll quickly see how to identify what kind of trader you are, how to find stocks with the highest probability of success and how to trade them so you can consistently outperform the market, whether it goes up, down, or sideways. Don't miss our best performing strategies from all of the different trading styles, and discover how to create and test your own.

In fact, one of our strategies gained +153.0% in 2016. You'll see today's live picks from that screen along with several others that have been almost as sensational.

This is the perfect time to get in. While our inventory holds out, I'm also giving participants free hardbound copies of my hardbound book, Finding #1 Stocks, a $49.95 value. Its 300 pages unfold virtually every insider secret I know about the stock-picking system that has more than doubled the S&P 500 for more than a quarter century.

This opportunity ends Tuesday, June 20, so please don't wait to look into it.

Find out more about the Zacks Method for Trading: Home Study Course >>

Thanks and good trading,

Kevin

Zacks VP Kevin Matras is our chart patterns and stock screening expert. He developed many of Zacks' most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course.


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Investing Ideas , Stocks


More from Zacks.com

Subscribe






Zacks.com
Contributor:

Zacks.com

Equity Research
Follow on:








Research Brokers before you trade

Want to trade FX?





Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com