Cruxellaneous

Must-see analysis answers four of the biggest questions in investing

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From The S&A Digest
 
For years, [our colleague] Steve Sjuggerud has been working with a Ph.D. in mathematics, Dr. Richard Smith, to develop a computer program to wrangle an almost unimaginable amount of market data into useful and profitable trading systems. The goal was to provide you, our reader, with the kind of technical, proprietary data analysis large hedge funds use to consistently beat the market.
 
These hedge funds spend millions, even tens of millions, of dollars on the brainpower and data behind their trading systems. And they go to great lengths to ensure nobody outside the firm (in some cases, even employees at the firm) knows the strategies they're using.
 
At S&A… we strive to make this kind of high-quality research and analysis available to everyone. We've spent nearly $1 million to build a sophisticated set of proprietary programs that quantify the strategies Steve developed over his career. (We spend $200,000 a year just on data.) These systems can now scan a vast array of market data and yield buy/sell signals.
 
The result is a service called True Wealth Systems – a high-end trading service based on decades of Steve's financial knowledge and Dr. Smith's mathematical prowess.
 
Steve's computer program takes the human error out of investing. (In fact, he's admitted the system has proven him wrong on several occasions.) It studies decades of data to find dependable and repeatable systems individual investors can use to improve their trading.
 
Because we think this information is so valuable, we're dedicating today's issue to showing you what True Wealth Systems is and the many ways it can help you make money…
 
Over the past week, several of our top analysts and best readers have challenged Steve with a special series of requests. We challenged him to analyze dozens of popular investment ideas. We challenged him to cut through the vague claims and theories you hear in the mainstream press… and simply let the numbers do the talking.
 
The answers that came back will probably shock you…
 
1. Do stocks do well when the economy is doing well?
 
You hear it all the time… but it's completely wrong.
 
"Expert" after "expert" repeats this lie on the financial news… and the "experts" sitting across from them never correct the lie.
 
The simple, innocent lie goes something like this: "Well… the economy is doing better, so the stock market should do better, too."
 
Sounds believable. But it is simply not correct!
 
The truth is, to make the biggest gains going forward, you want to buy into a "bad" economy – one where economic growth is zero or lower. The lesson of history is clear:
 
When the economy is doing great, chances are stocks will underperform over the next year. When the economy is doing badly, chances are you'll do very well in stocks over the next year.
 
This isn't just my opinion, this is a fact…
 
Since 1947, simply buying and holding stocks would have earned you a 7.3% compound annual gain.
 
But when the economic times are great – when the economy has grown at 6% a year or faster over the preceding four quarters – stocks have delivered a compound annual gain of 4.2% over the next 12 months.
 
Meanwhile, when the economy has contracted over the preceding four quarters, stocks have delivered an astounding 18.5% compound annual gain over the next 12 months.
 
 
GDP Below 0%
GDP Above 6%
Buy & Hold
One-Year Return
18.5%
4.2%
7.3%
 
You see, great conditions get "priced in" to the stock market. By the time things are great, stocks are usually too expensive (and due for a big fall). When things are terrible, stocks become very cheap. You want to buy when things seem terrible.
 
You do make money in "normal" times, of course… But the biggest gains come after the economy has been shrinking. And stocks perform their worst after the economy has had a great run of growth.
 
Don't let the "experts" tell you any different!  
 
2. Is the stock market cheap?
 
Many investors see daily headlines on stocks being cheap, fairly valued, or expensive. But what do the numbers say?
 
Our results may surprise you…
 
Since 1950, the stock market's average price-to-earnings (P/E) ratio has been 17.8. Anything higher than that level is traditionally considered expensive. And anything lower is traditionally considered cheap.
 
As I write, the overall market trades at a P/E ratio of around 17… So most folks would consider stocks fairly valued today. But they're wrong…
 
You see, the simple P/E ratio is too simple today… What most people don't know is there is a strong relationship between P/E ratios and interest rates.
 
The numbers are downright crazy. And with interest rates at zero percent today, these numbers REALLY work in our favor…  
 
 
P/E ratio
Average of all periods since 1950
17.8
Average when rates are above 6%
12.0
Average when rates are below 2.5%
21.8
 
You see, when short-term interest rates are punishingly high – above 6% – the average P/E ratio of stocks is low… It's only 12.
 
But when short-term interest rates are low – below 2.5% – the average P/E ratio of stocks is high. It's 21.8.
 
Judging by this table, what should the stock market's P/E ratio be? Today, we have the lowest rates in history – well below 2.5%. The stock market's P/E ratio should be at least 21.8, based on evidence over the last 60 years.
 
The next time you hear someone discuss stocks being expensive or even fairly valued, you'll know the facts… With interest rates this low, history says stocks should be much, much more expensive than they are today.
 
3. With the market reaching new highs, is it dangerous to own stocks?
 
We tested which strategy works better: Buying near 52-week lows… or buying at 52-week highs. We looked at nearly 100 years of weekly data on the S&P 500 Index, not counting dividends.
 
Here's what we found…
 
After the stock market hits a 52-week high, the compound annual gain over the next year is 9.6%. That is a phenomenal outperformance over the long-term "buy and hold" return, which was 5.6% a year.
 
On the flip side, buying when the stock market is at or near new lows leads to terrible performance over the next 12 months… Specifically, buying any time stocks are within 6% of their 52-week lows leads to a compound annual gain of 0%. That's correct, no gain at all 12 months later.
 
1950 to 2012
All periods
7.2%
New Highs
8.5%
New Lows
6.0%
 
You might try to fight this…
 
You might think buying at new highs "feels risky." But when it comes to the broad market, history shows you'll do better than average. Or you might want to "catch a falling knife" and buy when stocks are at new lows. But if you do, realize you are fighting against more than 220 years of historical precedent.
 
Instead of fighting this… embrace it…
 
When the market hits a new high, DON'T sell. Enjoy it. New highs mean you're making money. And with history as your guide, you may have more new highs coming.
 
4. Can simple trend-following beat the stock market?
 
Many investors dismiss the idea of trend-following…
 
They've bought into the thinking – promoted by reams of faulty research from the mutual-fund industry – that it's impossible to time markets… that the best and safest way to make money in stocks is to buy shares of the right companies and hold on, come what may…
 
Our True Wealth Systems computers tested that idea. Our analysis of 40 years of market data shows a clear outcome: Following a simple trend can help you beat the market…
 
We looked at the last 40 years of data on the benchmark S&P 500 stock index. Simply buying an S&P 500 index fund and holding over that period would have returned 6.6% a year (not including dividends).
 
Then, we had the computers test a simple trend-following strategy – buying when the market is above its 10-month simple moving average. Buying shares of the index when it traded for more than its average price over the preceding 10 months returned 9.8% a year – nearly a 50% increased annualized gain.
 
Now, following this strategy would have kept you out of the market about one-third of the time. To ensure we were comparing strategies that were 100% invested at all times… we invested in basic 90-day Treasury bonds during the periods you were out of the market. That dropped the systems' return to 8.4%.
 
 
Buy & Hold (B&H)
Trend-Following System
$10,000 B&H
$10,000 System
S&P 500
6.6%
8.4%
$128,000
$250,000
 
That might not seem like an outsized gain. But it adds up over time…
 
Simply owning the market turned $10,000 into $128,000. Following this simple trend system turned $10,000 into $250,000. That's nearly double the overall gain.
 
I know a lot of investors won't want to believe it. But these results are clear. Following a simple trend beats simply owning the market over the long term.
 
As we said… we spent almost $1 million putting True Wealth Systems together. We've backtested the kind of analysis we've showed you in 48 different sectors… including biotech, steel, gold, and emerging markets.
 
Steve calls True Wealth Systems his "life's work" and "the culmination of everything I've learned in the investing world in the past 19 years." It's a true passion for him… And it's making our readers money. Here's a small sample of the incredible feedback we've received…
 
"I've made close to $100,000." – Paid-up subscriber Daniel Mitchum, Pittsburgh
 
"I'm on my way to doubling my money this year. And I couldn't have done it without your system." – Paid-up subscriber Paul Samuels, Montana
 
"I made around $5,000 just dipping my toe into it." – Paid-up subscriber Bob Millen, Dallas
 
If you'd like to learn more about True Wealth Systems, consider watching the new video we've prepared about the service (in which Steve and Dr. Smith both speak). It explains some of the strategies used and gives an oversight of the product. Plus, we're currently offering the service at a large discount.
 
We realize many folks aren't interested in watching our videos. But this one is considerably different than our others… and it's generating a lot of buzz with our readers.
 
Crux note: Check out the video for yourself by clicking here.
 
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