Investors love bragging about their big gains.
The triple-digit returns and quick surges where they locked in profits are great stories for friends and family.
But, much like gamblers, they are likely only bragging about their winners and ignoring their overall portfolio performance.
The truth is that they are likely underperforming.
Just 5% of actively managed funds beat the market.
That’s where the conversation should be focused.
Because an investor’s No. 1 goal is to create “positive alpha” — or gains going above a benchmark.
And the most common benchmark is the S&P 500 Index.
This index holds 500 of the largest U.S.-listed stocks. It’s essentially “the market” that everyone refers to in commentary.
And while everyone’s trying to outperform this benchmark, few actually compare their results to it.
That’s because outperforming the market is tough to do.
Think about it — the market is up 20% in 2020, even with all of the volatility. And your goal is to be doing better. Are you?
Whether you are investing on your own, following an expert’s advice or paying someone to manage your money, outperforming the S&P 500 Index is the minimum objective. And while it’s tough to do, it’s possible if you’re willing to put in the work.
Today, I’ll show you a simple method I follow that delivers positive alpha consistently by simply trading stocks.
Why Buy-and-Hold Investors Are Leaving Money on the Table
Most investors hold dozens of stocks for years at a time.
To figure out your returns for the year, they’d have to average their returns to get their gains for the year.
That’s the number to compare to the S&P 500 Index.
The approach I use flips this strategy upside-down.
Instead of averaging our gains at the end of the year, we get to add up two to four stocks to get our total returns.
Again, for most investors, this isn’t possible because they hold the same stocks all year.
This is possible for us because we only hold a stock for a few months, at most.
By holding a trade for just a few months, during what I call a prime season, we can to stack our profits to outperform the stock market.
For example, if we made three trades that worked out to 10%, 15% and 20% gains, our total return would be 45% for the year.
Meanwhile, an investor who held these same three stocks for the whole year would have ended up with the same 10%, 15% and 20% returns. But they would’ve had an average gain of just 15% for the year.
That’s a huge difference and it’s the power in my “Profit Stacking” strategy.
Real Example of Creating Alpha
Take a look at this chart of a recent trade, from October 19 to March 3, compared to the sector and the overall market:
You can see that the performance for the benchmark was basically 0%, or flat.
In October, I explained to readers of Winning Investor Daily how the biotech sector was set to outperform. And it did.
Now, I don’t trade sectors in the market. I factor them into my system to find the prime seasons to make trades.
My system identified Paratek Pharmaceuticals (Nasdaq: PRTK) as a breakout stock, and we jumped right in.
You can see it wasn’t a straight shot higher but shares of Paratek managed to climb more than 40% over this time.
The S&P 500 Index, our key benchmark, was flat. That means we netted 40% in alpha — that’s incredible.
We didn’t double the markets performance, or triple it… We absolutely crushed it.
This came in just five months, which means we can put that gain to work in more trades right away and continue creating alpha.
I revealed all of the details of my Profit Stacking strategy in a recent interview. You can read the transcript here to get the details.
Chad Shoop, CMT
Editor, Automatic Profits Alert