“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”
Warren Buffett
1997 Investment Letter to Shareholders
Other advocates of index funds include investment luminaries Peter Lynch, Charles Schwab, James Cramer and – of course, the man who created the index fund concept in the mid-’80s – John Bogle.
We agree that index funds are an excellent choice for most individual investors. Why, then, do we host a web site whose raison d’etre is to help investors – individual as well as institutional – discover tomorrow’s best-performing stocks . . . today?
The answer to that question is both simple and compelling: There always have been – and it can reasonably be expected that there always will be – select stocks that decisively outperform the market averages. Most investors are familiar with the performance of Microsoft and Intel during the ’80s and ’90s, Dell Computer and Cisco Systems during the ’90s and Google during the current decade. The performance of these stocks offers convincing proof that select stocks can and do outperform the market averages.
In the first quarter of 2008 The Wall Street Journal published a list of the 50-top performing stocks for 2007. All but 9-stocks on this list more than doubled in value. The top performing stock – First Solar – had an incredible 795% return for the year! If an investor had bought 100 shares of each of those stocks at the beginning of 2007 and sold those stocks at the end of 2007, his/her investment would have appreciated more than 150%.
By way of contrast, for all of 2007 an index fund that mirrored the S&P 500 would have gained less than 5%.
You might say, “That’s historical data. I can’t profit from historical data. How can I discover those stocks before they significantly appreciate in market value?”
Once again the answer is both simple and compelling. Some investors – individual or institutional – necessarily have to be early discoverers of those stocks. Our basic premise is that when individual or institutional investors discover a stock with convincing future growth potential they aggressively buy that stock. In the parlance of Wall Street, they make Big Bets.
We use two systematic screens to discover those Big Bets – Institutional Investments and Unusual Volume.
Are the two screens effective? In a word, yes. Our two screens generated Buy signals for 35 of the 50 stocks in the Wall Street Journal’s list 50-top performing stocks for 2007. If an investor had bought 100-shares of each of the 35 stocks that generated a Buy signal they would have had the potential to increase their investment by 120%. The Buy signals didn’t capture all of the gains generated by the best performing list (150%+), but we suspect that most investors would be pleased with the results generated by our Buy signals.
To be sure, not all of our Buy signals result in above-average performance. In fact, some result in alarming below-average performance. For that reason we urge our subscribers to use our data as a beginning point for further due diligence. If you need help with the latter please refer to our Due Diligence Guidance as well as our Performance Tracking Guidance.
We don’t always know why individuals or institutions have become aggressive buyers of specific stocks. However, those Buy signals do alert us to the fact that some investors have become convinced that future market values for those stocks will climb higher.
