What would you do if you were rich? The answer for some is "luxury, leisure, yachts, and a carefree existence."
For others, it's extravagance. I just read that someone slapped down $114,000 for a sealed copy of the 1985 video game "Super Mario Brothers" at an auction last week. The game was part of a collection of 1980s and 1990s video games sold to various buyers for nearly $700,000. If that doesn't outrage you – maybe you're rich!
Years ago, I dreamed of wealth like that. I'd get mad with jealousy hearing stories like the one above because I'd never be in that position. Now I know I won't ever be in that position. I'm not jealous of the buyer; I'm mad at him. Imagine the outlier stocks the person could have bought with that money.
At my firm, we just talked of how one of us nabbed our first 10-bagger: a stock that went up 10 times its original value. That's right: $3,800 turned into over $38,000 in only six years.
I bet Mario won't fetch $1.14 million in six years. But hey, playing Mario at 14, I never thought it would net $114 grand either.
After years of wondering how to get rich, now I actually know. It's a simple formula: Don't spend beyond your means, save money, and constantly buy outlier stocks. Reinvest dividends, and eventually, you may earn a quarterly dividend that is multiples of your original investment.
There you go. That’s it. So when I see money squandered, I get mad! All that wealth creation fuel was wasted. I just hope the seller will buy great stocks with his/her loot.
The problem with the formula above is that, while stocks historically make a great long-term investment, some stocks crush the indexes. I'm talking about the biggest winning stocks every year: outliers.
But how do you find them? That's also not hard. First you look at all stocks. You then measure them in order from strongest to weakest. I focus only on the best ones: they make big money and have huge sales and earnings growth, low debt, and awesome businesses. But when you take the best and leave the rest, you end up with only a handful.
Then, to find the outliers, look for when big money investors buy the best quality stocks. That narrows 5,500 stocks to only 20 or so. I'm a snobbish luxury stock collector. Instead of luxury yachts, I aspire to collect luxury stocks.
I built a whole computerized system to do all that work for me because I'm a little lazy. That work is monotonous. So, now my system does it for me.
But a big part of finding out where the big money flows and goes is to look at how sectors perform. It's key because, at times, the best outlier stocks clump together in certain sectors.
Think of the 1950s. Tech companies back then are the industrials of today. Communications companies were thrusting our country forward in innovation. Today they are boring cash cows. But had you plopped $114,000 into a handful of them back then and reinvested dividends, I think you'd have tens of millions of dollars today.
Granted, 70 years is a long time, but the point is, money flowed into the strongest sectors then. It's no different today. We should focus on strong sectors and lean into the big money. Contrarily, we shouldn't catch falling knives in lagging sectors. That strategy may work for the brave, but I prefer bets with great odds. I don't love huge risks with my money.
So let's look where the big money is flowing. That helps us pinpoint outliers.
Big Money Index Still Overbought but Falling
The Big Money Index has been overbought for nearly two months, which is fast becoming the second longest period in our 30-year history. Let's look at Big Money buying on a sector level. A falling green line signals that buying is slowing.
Buying is slowing in those sectors, but as far as which sectors are the strongest, let's look:
Generally, money continues to pour into technology and health care. These sectors have been the true engines of market growth over at least the past year. Logically, technology continues to make lives easier, convenient, and lazy. That's good in the name of progress and profits.
Energy is the spot to avoid. Sellers are starting to show up. It's not visible in the table above, but my research firm's data points to possible future weakness in energy stocks.
While timing the market is a fun game, the real game is making money. My Big Money Index timing indicator still says: we're overbought, so avoid plowing into the market at these heights. Here's the caveat: there's no bad time to buy outlier stocks, just better times to find deals.
By constantly deploying money into outlier stocks over the long run, you never really need to worry about timing the market. You just grow your wealth like a snowball steadily over time.
When you realize this, you want to start as soon as possible. You'll want to put every penny into that program you can. You'll get mad, too, when you see some chump dropping a hundred grand on a 35-year-old plastic game cartridge that won't get played. You'll think of all the future riches that could have been now that you've figured out how to get rich.
"An investment in knowledge pays the best dividends." – Benjamin Franklin
The Bottom Line
We (Mapsignals) are bullish on high-quality U.S. equities in the long term, and we see market pullbacks as areas to pick up great companies.
Disclosure: The author holds no positions in any mentioned securities at the time of publication.