After what felt like an endless, painful parade of failures, I decided I needed a well‐thought‐out coordinated system for researching investment ideas, developing strategies, and testing those strategies in the market with my paper trading accounts. It turns out someone had already developed that system. It's called “the scientific method.”
Just in case it's been awhile since you participated in a high school science class, here's a quick refresher on the scientific method:
Scientists ask a question about the nature of the universe;
They conduct research to see what data exists on the subject;
They propose a hypothesis;
They design an experiment to test their hypothesis;
They collect and analyze the data; and then
They draw conclusions and share their results.
Having just rediscovered the scientific method, I began organizing my research and documenting the strategies, and I was eager to start seriously testing my ideas in the market. Because sharing results is part of the scientific process, I decided to write a stock market newsletter, where I would publish my ideas and track my results, pretending that I had $1,000,000 under management (which at the time, I mistakenly thought was all the money in the world). That number seemed inconceivably high to me at the time. If it seems inconceivably high to you right now, keep reading, because that mindset is part of what's keeping you out of the smart money circle (and you can change it!).
As time passed, I started to study which strategies tended to win and which would lose.
At first, I published the newsletter, which I titled The Green Machine, daily, but struggled because—another timeless lesson that I learned years later—most days are meaningless on Wall Street. Then I pivoted and started publishing the newsletter every weekend.
For me, I found that making my buy/sell decisions on a weekly basis gave me much‐needed structure and it best suited my trading style. After several months of maintaining the weekly discipline, I started posting some pretty solid gains. After a few years, by 2007, I had an average annualized return of 21%, and my deepest drawdown was 9%. That wasn't bad for a kid who started out with nothing!
BEATING THE MARKET
It was more than just “not bad”; it was in fact very, very good. At the risk of seeming immodest, the best multi‐million and ‐billion fund managers generate average annual returns of about 20%, and the real legends averaged about 30%, so I felt like I had developed the chops to compete—and win—with the “smart” money.
The big difference, of course, is that the titans of Wall Street were dealing with big money, and I was dealing with small money. Still working my way out of debt, I didn't even have the resources to profit in the market because a 20% return after one year on $10,000 is only $2,000. No one can live on $2,000 a year in the Western world. I knew that I had to keep pushing.
Stephen Klein (who had also learned from our early mistakes and was an up‐and‐comer on The Street) kept up with my newsletter and found value in the information I provided. One day he asked, “Why don't you sell it?” I had never considered profiting off the newsletter—not beyond eventually being able to put some real money behind the paper trades—but it made sense. I had established a decent track record that proved that I could beat the market, and I knew that most people couldn't, so there was definitely value there.
Beating the market—also known as generating alpha—refers to earning annual returns that surpass the performance of the primary indexes such as the S&P 500, the Dow Jones Industrial Average, or the Nasdaq Composite—each of which represents a broad swath of the overall market. When the market does well, most of the time the indexes do well; when the market falls, generally the indexes fall. Here's one extremely valuable fact that I want you to internalize and live by (especially if you are a pessimist or have a bearish leaning): in the United States, over the course of several decades, the market tends to go up!
For example, on average, the benchmark S&P 500 has returned around 8–10% per year since the early 1900s. Keep in mind that some years it is down double digits, some years are really strong and it jumps over 20%, and some years it is flat (up or down a few percentage points). But for the most part, it has averaged a steady gain of about 8–10% per year. In his letters to the shareholders of Berkshire Hathaway, the legendary investor Warren Buffett has described this phenomenon as the “American Tailwind.”
Before I go any further, pause for a second and really digest this fact. The market tends to go up over time, so ask yourself how you are going to profit from the American Tailwind? However you decide to invest or trade in the market, you will be greatly rewarded if you factor in the baseline growth that has propelled the American stock market for centuries and figure out how you can profit from that incredible force, not fight it.
ONE IDEA, PROPERLY EXECUTED
With Klein's help and encouragement, my original newsletter has blossomed into FindLeadingStocks.com (FLS) and GlobalMacroResearch.com (GMR), which service investors of all sizes across the globe—from multibillion‐dollar funds down to small single‐person shops.
Back in 2008, during the peak of the Great Recession, Klein worked for a large multibillion‐dollar family office. He was printing money (putting up big returns) when most were suffering losses. He graciously also became a client of mine, and Stephen would take my ideas and add his secret sauce, and he did a great job making money—even in a very difficult environment. On one spectacular trade, which we will never forget, he helped the firm make more than a half‐billion dollars on one trade! That's more than $500 million from one idea, and in the middle of the 2008 financial crisis!
That lesson resonates with me to this day: one idea, properly executed, can truly change your life.
The revenue I generated by selling my investment ideas soon gave me enough capital to put my strategies to work for myself. Today, in addition to my other businesses, I publish a stock market newsletter at FindLeadingStocks.com where I share educational content and market research, give members a steady flow of new actionable ideas, and let them know when the service enters and exits a position.
PAIN AND PLEASURE
Now let's jump into another timeless lesson I've learned along the way and how you can use it to join the smart money circle. When I was beginning my journey, I mistakenly thought that I had to follow what someone else did to be successful in the market.
In reality, that is not a winning approach on Wall Street. In fact, the exact opposite is true; just about every legendary trader and investor in history has established their own winning approach. The strategies I have developed work for me—based on my trading style. My clients take my work, adapt it to their own trading style, and profit from my ideas. Everything I share with you in this book is designed to open your mind's eye and help you reach a higher level of thinking so you can build on my work and develop your own winning approach.
For most people (folks in the dumb money circle), even if I told them exactly what to do—when to buy, when to sell, and when to hold—they couldn't follow the plan. They might see some minor losses, get scared, and dump a position too soon. Or they might get greedy and buy more of a stock that seems like it's on the rise only to realize they've risked too much when the price suddenly plummets. This is really big with systems traders—people who create algorithms that tell them when to buy and sell. Most systems