"Daddy, why is it less windy after sunset?" my boy asked. I knew this one. "The wind slows at night because the Earth's surface cools faster than the air above. In daytime, air mixes and makes wind on the ground."
"Hmm." The floodgates then opened: Why did my nail crack? What would happen if there was no moon? Do germs catch germs? Do plants die from old age? Why do fingers shrivel in the bath? Why do birds hop around all the time?
It's natural for kids to ask a lot. Adults often hide this curiosity. Maybe it shows weakness. But one question kept popping up in my head that I think all readers have: How do I make money on stocks?
It's a simple question with a billion answers. Industries and careers exist because of it. Collectively, thousands of years were spent in pursuit of the perfect answer. The good news is I have it – or one of them anyway. I have an answer that has worked for me for years now.
The (maybe frustrating) answer is "buy great stocks." That's it. It's not "buy low, sell high." It's not a hot tip. It's not inside information. It's just "buy the best ones," because the best usually keep going up … for years, even decades. The answer is just to buy great stocks.
How Do I Know Which Ones?
This is a much harder question to answer. But I have that one too: "Look for companies that are unique in their business, grow sales and earnings at high rates, have big profit margins, and are getting bought up by big money."
Because TAGU. That's an acronym we use at my research company – They All Go Up! Stocks with these qualities tend to go up year after year. And if there's a reset, or a deep correction, stocks like these usually bounce back and start screaming again.
All the biggest winners of decades past show this: McDonald's Corporation (MCD), The Home Depot, Inc. (HD), Microsoft Corporation (MSFT), Facebook, Inc. (FB), Apple Inc. (AAPL), and more recently stocks like Chipotle Mexican Grill, Inc. (CMG), Universal Display Corporation (OLED), and The Trade Desk, Inc. (TTD).
How Do You Know?
You want success? Study success.
My friend Louis Navellier knows it. He's one of the best stock pickers in the business. I just wrote a report for him about being a zombie investor. The premise was simple. Buy great stocks then pretend you're dead. You'll likely wake up decades from now very rich. The study's proof included real examples from Navellier's own investing success. Guess what? His biggest wins came over time.
I have another friend who is wildly successful. He made a fortune building then selling businesses. I don't know how much, but it's closer to $1 billion than $500 million. He doesn't trust Wall Street. He thinks it's all crooks and swindlers. When it comes to stocks, he panics and wants to "get out quick."
I want to remind him of his own success. His crazy wealth didn't come from the investments he made without the people he invested in. A close circle of advisors helped him along the way for the past several decades. He picked the best ones and stuck with them – even when some had a "stumble." Sound familiar?
In sports, they know it too. "Moneyball" is the amazing story of the 2002 Oakland Athletics. Manager Billy Beane and Assistant Manager Peter Brand used a sabermetric approach to baseball. They built a roster based on who was statistically likely to get on base and score. They didn't care about stories, tips, or emotion. It worked. They competed with teams with triple their budget like the Yankees. It changed the game as many teams adopted the method.
How Do We Find the Best Stocks?
I start each week by sorting 5,000-plus stocks, filtering for the handful with the best fundamentals and technicals. Then I look for the ones big money is chasing. When big money is buying great stocks, it's a great sign. And look at what I saw last week – big buying.
Those yellow numbers mean that more than 25% of the stocks in that sector made big buy signals in the week. Tech, industrials, discretionary, financials (huge buying), and materials all saw major love last week. Health care and staples too.
When a buy signal happens on a stock in my research, it "goes green" – like this:
Notice how many green signals precede big jumps in the stock price? This stock grew 650% in 16 years. But it doesn't always take decades. I'm currently sitting on five doubles and one triple in two different portfolios. One of these is two years old, and the portfolio with the triple is one year old.
The key is the process. Just like Navellier's stocks for 40 years. Just like my rich friend's inner circle of 50. Just like Billy Beane's A's. Just like my stocks. Find the outliers.
Spending all our energy isolating the best means that we can safely assume winning over time. And even when they falter, outliers likely figure it out, adjust, and rebound.
How do you make money? Here's how: follow a process that's logical and proven. Be patient and enjoy the path to success.
I once asked a multi-billion-dollar hedge fund manager how he could stand so pat waiting for his price on a stock he wanted. He simply replied, "patience and process." I didn't get it then, but I get it now..
The Bottom Line
We (Mapsignals) continue to be bullish on U.S. equities in the long term, and we see any pullback as a buying opportunity. Overheated markets can offer sales on stocks if an investor is patient.
Disclosure: The author holds long positions in Chipotle, Home Depot, Microsoft, and Universal Display at the time of publication.