The Indicator That Defies Everything You Know About Value Investing



To most investors, especially those considered value investors, this probably sounds ludicrous. We have all been taught we need to "buy low, sell high." So how can buying "high" possibly make for a sound investing strategy?

Well, I've never been a big gambler, but I do know a thing or two about odds. And I'd like to explain my strategy using a horse racing analogy. 


In fact, you get to place your bet when there's already a clear leader who looks likely to win the race. After all, experienced bettors know horses that get an early lead are horses worth betting on.

So, while the other bettors place their wagers here...

You get to place your bet here…



RS is a pure measure of the price trend. It's not interested in undiscovered or low P/E stocks. It doesn't care if the company behind the stock has made a big gold or biotech discovery. And it's not interested in whether anyone is endorsing the stock on TV or in your email spam box.

All it cares about is finding stocks that are already on the move. If a stock is languishing -- no matter how "cheap" it is or how interesting its story may be -- RS is not going to signal a buy. 



While RS has been proven again and again to be one of the most effective ways to find profitable stocks, most investors continue to ignore it, secure in the myth that they're better off buying stocks at "low" prices, i.e., those that have underperformed.

But study after study has shown that outperforming stocks are a far more profitable place for your money -- just like the horse that's leading on the final turn of the race.

For example, economist Eugene Fama won a Nobel Prize for his research that proves beyond a shadow of a doubt that outperforming stocks are more likely to keep moving higher than those that are underperforming. And at least two studies in the Journal of Finance -- published more than 20 years apart -- reached similar conclusions.

Even more surprising, a recent study reveals that the closer a stock's current price is to its 52-week high, the stronger its performance will be in the following months -- the exact opposite of what most investors have been led to believe.

Popular investment advice continues to insist that individual investors are best served avoiding outperforming stocks. It's no wonder so few investors make money in the stock market. They're selling the very stocks they should be buying!



Now, with everything I've said about the profit power of relative strength, you might think I'd be tempted to stop right there and just start buying the stocks it identifies as the best.

But stocks often soar for no good reason -- a positive article in the financial media, rumors about a product that's about to take the world by storm, etc. -- and the ones that do can come crashing down just as quickly.


I plan to cover this fundamental indicator in another article. But if you'd like to learn about it immediately or find out more about how you can put RS to work in your portfolio, I've put together a free presentation you can access here.

Premium Content  | Amber Hestla | February 12, 2019
