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The Winning Formula in Stocks is Not What You Think...

Dec 15, 2017

Rahul Shah, Editor, Smart Contrarian

Would you try to beat the current world chess champion Magnus Carlsen at his own game? And that too after only training for one month?

Max Deutsch gave it a shot, and as expected, he was comfortably beaten.

Max isn't some random guy who woke up one day and announced that he would take on Carlsen.

He has made a habit out of attempting extreme feats - and even accomplishing them.

For example: He has solved a Rubik's cube in 20 seconds; memorized the order of a deck of cards in less than two minutes; and completed one of the most difficult crossword puzzles in one sitting.

These are not easy goals by any stretch of imagination. They demand extreme levels of skill. And kudos to Max for achieving them.

But even by Max's very high standards, beating Magnus Carlsen with just one month of training was asking for way too much.

Chess is the kind of game where the more time you spend the more you learn. The law of diminishing returns takes a very long time to kick in. There is an insane amount of permutation and combination involved.

In fact, the total number of chess games possible can be considered infinite for all practical purposes. So, one could spend a lifetime and still not be aware of all the moves possible at every step of the way.

Given this, it is easy to see why Carlsen's combined brute, raw brain power and insane hours spent on the chess board, could easily crush a rank amateur like Max Deutsch - no matter how talented - who's spent merely a month honing his chess skills.

I wonder - if his ego is not too bruised from the beating - which challenge Max will take on next?

What would happen, I try to imagine, if he tries his hand at investing? Can he learn to beat the markets over the long term by undergoing one month of training?

Skeptical as I tend to be, I actually think he can. All he needs to do is ask the right question...

When we buy a stock, we end up asking ourselves: Is this stock likely to go up?

But that's the wrong question to ask. There's no way to tell whether the stock will go up or not.

The correct question instead is to ask: Has this stock gone down enough?

The winning formula in stocks is simple: Buy low, sell high.

This isn't rocket science in this. However, the catch is that only one part of the formula is under your control: buying low.

The way to make money in stocks is to buy the losers, the underdogs, the stocks that no one wants to buy...

Not the winners.

To Succeed at Investing, You Have to Ask the Question No One is Asking
To Succeed at Investing, You Have to Ask the Question No One is Asking

This is precisely what I've been doing in my Microcap Millionaires service since 2014... Buying the underdogs. Stocks that no one is interested in.

And what do I have to show for it?

A strike rate of close to 90%.

Yes, that's right. Buying the losers has resulted in 9 stocks ending in the positive out of every 10 positions we have closed.

Overall, this group of losers has outperformed the benchmark by a factor of 3:1.

It isn't that we don't look at other factors. We certainly do. But we never ever compromise on our winning formula and that is to always recommend the losers - the ones that have gone down enough.

Max would do well to pay heed to this formula.

Good investing,

Rahul shah
Rahul Shah (Research Analyst)
Editor, Smart Contrarian

Editor's note: It's the last month of the year and you are that one year closer to retirement - are you ready. Find out by clicking here.

Brain Food for the Day

Warren Buffett's Man Friday

We are going to leave you with a quote from Todd Combs. In case you don't already know, Combs has been handpicked by Warren Buffett as one of the two managers who will potentially manage his huge investment portfolio once Buffett hangs up his boots. Combs doesn't give interviews readily. When he did give one recently, it was not difficult to figure out why he was the chosen one. On being asked what's the most important consideration for investing, here's what he said.

    Howard Marks wrote a book titled "The Most Important Thing," and I think it had 20 lessons. So it's hard to distill into one - but it's really a judgment business at the end of the day. You want to find the best business you can at the cheapest price you can. You can have a wonderful business at a high price resulting in a terrible investment, and conversely you can have a terrible business at a wonderful price yielding a terrific investment. Charlie Munger compares it to the parimutuel system or betting on horses. Everyone may know who the best horse is, but if it's more than reflected in the odds, then it won't pay off. You want to find the great horse that no one else thinks is a great horse.

    You can check out the entire interview here.

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1 Responses to "The Winning Formula in Stocks is Not What You Think..."


Dec 15, 2017

Thanks for writing about Todd Comb.It was interesting to read his full interview.

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