Editor's note: You can't win every investing "game"...

Often, it's easy to get bogged down in the results of each individual trade... and lose sight of the big picture. But according to our colleague and Stansberry Research senior analyst Mike Barrett, investing is a lot like a football season. You don't need to bring home a victory every time – you only need to win more games than you lose...

In today's Masters Series, originally from the July 29 Digest, Mike relays a legendary NFL head coach's three-step formula for a winning team... applies it to the world of investing... and explains how he used it to uncover two undervalued trading opportunities...

Bill Walsh's Three Steps for Football (and Investing) Success

By Mike Barrett, senior analyst, Stansberry Research

Half a century ago, Bob Trumpy went to the wrong spot – and changed pro football forever...

The Cincinnati Bengals were playing the Oakland Raiders in the 1970s. After the Bengals called a play in the offensive huddle, the players approached the line of scrimmage to get into their respective positions.

However, there was a small problem...

Trumpy, the Bengals' tight end, lined up on the right side of the offensive line – not the left side, as the play was designed. Cincinnati's quarterback immediately pointed out Trumpy's error, so he scurried into the correct spot just before the ball was snapped. Problem solved.

But then, something unexpected happened...

As Trumpy moved from one side to the other, five Raiders defensive players followed him. And in their haste to make the unexpected adjustment... they all crashed into each other.

The impromptu "Three Stooges" imitation caught the attention of Bengals offensive coordinator Bill Walsh... In his autobiography, written many years later, Walsh remembered that "all hell broke loose" on the defensive side when Trumpy changed his positioning.

Walsh soon realized he could use this new weapon to his advantage... He could send the tight end in motion on purpose before the ball was snapped to disrupt the defense.

That was just the start... The extensive use of shifts and sending players in motion became one of the hallmarks of Walsh's most celebrated innovation – the "West Coast offense."

As I'll discuss in today's Masters Series, almost no one has had a greater influence on football over the past 50 years than Walsh, who passed away in 2007. And fortunately for us, his blueprint for excellence can carry over into the financial markets as well...

Nearly 30 years ago, Walsh outlined a simple, three-step formula during an interview. And as you'll see, following these three steps is a surefire way to become a better investor.

But before we get to all the details, let's learn a little bit more about Walsh's success...

If you like the NFL's current fast-paced, pass-first approach, you can thank Walsh. His West Coast offense emphasized passing instead of running the ball, as most teams did at that time. More specifically, it focused on misdirection and short, high-percentage passes.

In 1979, the woeful San Francisco 49ers hired Walsh as their head coach. The franchise had won just 31 of its last 86 games – and only two during the previous 1978 season.

But it didn't take the innovative Walsh long to turn things around...

Using the West Coast offense to bedevil defenses (and with the right players running it), after just three seasons, the 49ers won Super Bowl XVI – the franchise's first football title. Walsh and the 49ers went on to win two more Super Bowls following the 1984 and 1988 seasons. And overall, the 49ers are regarded as one of the NFL's most dominant teams of the 1980s.

Walsh retired days after the 49ers' third title, but his influence didn't stop then...

George Seifert, his former defensive coordinator, took over as 49ers head coach and won two more Super Bowls. Mike Holmgren, his former offensive coordinator, won another with the Green Bay Packers. And several other assistants found similar success in the NFL.

In short... it's no surprise that he was elected to the Pro Football Hall of Fame in 1993.

That same year, Walsh explained to the Harvard Business Review exactly how he built the 49ers dynasty...

The entire interview is a treasure. (You can read it in full right here.) But right now, I want to focus on Walsh's three-step formula for success. We'll begin with the first step...

Make a thorough game plan... Then, have the nerve to stick with it.

Everyone knows it makes sense to start something important by developing a game plan. The hard part is sticking to the plan when things go wrong...

After retiring as 49ers head coach, Walsh took the same position at Stanford University from 1992 to 1994. (He had previously coached the college team in 1977 and 1978.)

One of the biggest games of his Stanford tenure occurred in October 1992, when the 18th-ranked Cardinal visited sixth-ranked Notre Dame. For the first time ever, both teams were nationally ranked. And Walsh's team got off to a terrible start...

Notre Dame led 16-0 at halftime, and the Fighting Irish were playing in front of a raucous home crowd in South Bend, Indiana. The odds seemed bleak that Stanford would stage a dramatic comeback and somehow win the game.

Yet Keena Turner, a former 49ers linebacker for Walsh who later became a Stanford assistant coach, remembered the locker room at halftime being a lot calmer than anyone could've imagined. As he told the Harvard Business Review in the 1993 article...

I'm sure everyone watching had written us off. But in the locker room, there was no sense of panic. We had a calm, thoughtful discussion on how to get it done. The players handled it because Bill had laid the groundwork. He had prepared us to be 16 points down. All he had to ask was, "Do you pack it up or figure out how to win?"

The importance of what you just read can't be overstated... Walsh had fully prepared his team in advance for how they would respond to one of the greatest challenges in sports – coming back from a massive deficit.

In other words... digging out of a deep hole was part of the game plan they had practiced all week. That gave Walsh the nerve to stick with it. In his words (my emphasis added)...

Making judgments under severe stress is the most difficult thing there is. The more preparation you have prior to the conflict, the more you can do in a clinical situation, the better off you will be.

For that reason, in practice, I want to make certain that we have accounted for every critical situation, including the desperate ones at the end of a game when we may have only one chance to pull out a victory. Even in that circumstance, I want us to have a play prepared and rehearsed.

Say it is the last 20 seconds of a game and we're losing... We have already practiced six plays that we can apply in that situation. That way, we know what to do, and we can calmly execute the plays. We'll have no doubt in our minds, we will have more poise, and we can concentrate without falling prey to desperation.

Notre Dame never scored another point, and Stanford cruised to a 33-16 victory.

Walsh was absolutely correct... Making quick judgments under severe stress is one of the most difficult things we must do.

Fortunately, most of us don't get into high-stress situations very often... But when we do, the way we handle them usually has big consequences.

For many investors, deep and sudden market declines are a source of severe stress...

We can't practice for these kinds of situations like a football team can. But we can (and must) consider how we'll respond to them before they arrive.

That way, as Walsh eloquently put it, "We can concentrate without falling prey to desperation." Said another way, we'll have the nerve to stick with our long-term financial plans.

The March 2020 market freefall occurred because many folks became indiscriminate sellers. They wanted out of everything they owned, no matter the price... They had fallen prey to desperation.

This is almost never the best course of action – and it certainly wasn't last year... As we all know, stocks soon rebounded and have since gone on to all-time highs.

In our Extreme Value advisory, my colleague Dan Ferris and I have helped our subscribers prepare for these "desperation" moments by establishing in advance whether we'll recommend continuing to hold a position indefinitely through any market freefalls or not.

For instance, we consider cash, precious metals, and bitcoin to be core portfolio positions... No matter what happens with the markets, we're in those assets for the long term.

We've also divided the stocks in the Extreme Value model portfolio into two categories – "Crown Jewels" and "Other."

The first category is made up of elite businesses with special assets and capabilities. We don't intend to ever sell these stocks... They're the cornerstones of our long-term wealth-accumulation strategy in Extreme Value.

And beyond that, we normally advise subscribers that when a big market decline also pulls these stocks down... seize the opportunity to increase your positions at lower costs. Or if you don't already own these Crown Jewels, consider adding them if they're in "buy" range.

The "Other" category includes stocks that aren't quite "Crown Jewels" yet... but could be at some point. Depending on how a big decline unfolds, we're prepared to sell all of these stocks. We're also not opposed to switching to hard stop losses to protect our subscribers' gains and minimize their losses... We make those decisions on a case-by-case basis.

Everyone's situation is different... so what works for us may not work for you. That's OK.

The point here is just to prepare for big downturns by deciding well ahead of time what you'll do with each position in your portfolio. Simply ask yourself this question...

If Stock X declines 40%, will I still want to own it?

If the answer is "no," then think through what you'll do instead. It's the only way to avoid falling prey to desperation and the bad decisions that inevitably accompany it.

Next, let's move on to the second step of Walsh's formula for success...

Develop an edge by seeing what others miss.

Before the Bengals' Trumpy went to the wrong side of the line against the Raiders in the 1970s, I wonder how many times something similar happened across the NFL. Many other tight ends likely also lined up incorrectly and caused confusion for the opposing defense.

However, the Trumpy play stands out because Walsh was naturally predisposed to seeing opportunity when others weren't.

Walsh's biggest edge was seeing what the Wall Street Journal's Allen Barra once called "hidden greatness." And again, this is why Walsh is enshrined in the Hall of Fame.

Michael Lombardi, a former NFL general manager who worked as a 49ers scout in the mid-1980s, recalled the best example of Walsh's edge in his book Gridiron Genius. As he explained...

In Walsh's first season as the head coach and [general manager] of the 49ers, in 1979, he took a trip to UCLA to work out Olympic hurdler turned wide receiver James Owens.

Owens was incredibly fast, but Walsh wanted to see if he had the other skills necessary to be an NFL receiver. He forgot one small thing, though: He needed an arm to throw to the guy.

As luck would have it Notre Dame's quarterback, Joe Montana, was working out nearby, preparing for the draft, too. Walsh asked him to stop by. I'm not exactly sure what Walsh zeroed in on that day with Montana, but after a few throws he was so focused on the quarterback that he practically forgot Owens was there.

Keep in mind that most NFL teams didn't think highly of Montana at the time. Some coaches and scouts considered his passing ability to be below average. Others thought he lacked the toughness to be a starting NFL quarterback.

Boy, were they wrong...

Montana put together one of the most illustrious NFL careers ever. He won four Super Bowls and earned the Most Valuable Player award in three of them. He also was named the NFL's Most Valuable Player twice – in 1989 and 1990. He continues to hold the record for the highest career Super Bowl passer rating (127.8), and he went into the Hall of Fame in 2000.

But Walsh's edge didn't just stop with Montana... He also found other diamonds in the rough over the years, including Hall of Famers Jerry Rice and Steve Young.

Some scouts considered Rice too slow to be a successful receiver in the NFL. To this day, he holds Super Bowl records for the most touchdowns and most points scored.

And in 1987, when Walsh decided to pursue Young as his next franchise quarterback after Montana, not one of his assistant coaches thought it was a good idea... He did it anyway. Like Rice and Montana, Young also holds Super Bowl records that still stand decades later.

Investing success also often comes from having an edge – or being able to see what others miss...

Many investors make the mistake of only analyzing what a company has done in the past.

Historical data are readily available from multiple sources. And as an investor, you can use this information to make educated predictions about the future... I'm talking about things like how quickly revenue has grown or how much operating margins have improved.

In Extreme Value, we've even built a comprehensive "Five Financial Clues" framework to help us make the most of this data... And we use it to discover the best opportunities.

However, what happened in the past only constitutes the starting point for how you should think about the future. You must also ask questions about what to expect going forward...

Will revenue grow faster or slower than it did in the past? Will profit margins rise or fall?

It takes far more work to ask these kinds of questions, build a case for the answers, then model the likely outcomes. That's where the edge often lies in investing.

To exploit this edge, Dan and I have developed a process that emphasizes how a story is likely to change over the next five years... not how it played out over the past five years.

Consider our July 2020 recommendation of TFI International (TFII)...

Back then, this small Canada-based trucking company with a growing e-commerce business had just begun trading on U.S. exchanges. Many investors – including big U.S. institutions – didn't even know it existed.

As Dan and I began to study the company, our Five Clues framework helped us spot the high quality of its business. Then, as we started thinking about how the story would play out in the years ahead, our expectations-based valuation model alerted us to a key anomaly...

Despite a history of revenue growth, the current price implied no growth going forward.

That made no sense for two reasons. First, as we noted in the July 2020 issue...

TFI has figured out a way to provide the same level of service (at a fraction of the investment and ongoing expense) to the 60% of e-commerce sales that Amazon doesn't control.

And second, TFI is consolidating the trucking industry... It has completed nearly 100 acquisitions since 2008.

In short, given TFI's ongoing acquisition of other trucking companies (and their revenue streams) and its strong presence in the fast-growing e-commerce sector, we were able to project mid-single-digit revenue growth... That's a sharp contrast to the near-zero growth that TFI's share price implied at the time.

And the edge from our research has proved to be spot-on...

We added TFI to our model portfolio in July 2020 at $38.06 per share. Today, it's trading for around $102 per share. After adding $1.11 in dividends, it's good for a 172% total return. And while we've since raised our maximum buy price, shares currently trade well above it.

That brings us to the third and final step of Walsh's formula for success...

To enjoy enduring success, rely on a system that generates unique, high-quality results.

Walsh believed strongly that his primary job as head coach was to design a "system of football that is not simplistic," as he told the Harvard Business Review during the 1993 interview. And as Walsh explained...

The head coach's system should never reduce the game to the point where he can blame his players for success or failure simply because they did not physically overwhelm the opponents.

Successful coaches realize that winning teams are not run by single individuals who dominate the scene and reduce the rest of the group to marionettes. Winning teams are more like open forums in which everyone participates in the decision-making process, coaches and players alike, until the decision is made.

Others must know who is in command, but a head coach must behave democratically. Then, once a decision is made, the team must be motivated to go ahead and execute it.

So Walsh personally wrote the team's operating and personnel manuals... He developed a unique practice program... And he devoted considerable effort to evaluating personnel.

Together, these individual pieces formed a comprehensive system designed to accomplish one thing... win championships again and again, regardless of who was on the roster.

To win the Super Bowl once is an accomplishment that most NFL head coaches never experience. Incredibly, Walsh won it three times in eight years. Even more impressive, only a handful of players were on all three title-winning squads. That means Walsh basically won it each time with a new roster of players who quickly adapted to his winning system.

Walsh's system consistently generated unique, high-quality results by emphasizing things that other coaches often didn't...

For instance, Walsh expected his players to learn five or six techniques for assignments – like getting open to catch short passes or blocking defensive backs downfield. According to Walsh, many opponents usually learned one or two.

And all teams are generally permitted an equal amount of practice time... Aware of this, Walsh figured out how to get far more out of his team's time by instituting extremely precise, minute-by-minute sessions.

Doing so enabled Walsh to squeeze in the instruction time needed for those extra techniques. And highly orchestrated practices also enabled the team's least-talented players – the ones Walsh believed were often the difference between winning and losing – to greatly improve their skills, and thereby make greater contributions.

Earlier, I briefly mentioned our "Five Financial Clues" framework in Extreme Value...

This system provides Dan and me with important hints about how a company will perform in the future. When combined with our valuation model of forward-looking expectations, the result is a system that generates well-informed estimates of real (or "intrinsic") value.

It's our system to consistently generate unique, high-quality results...

We run dozens of companies through this system month after month – everything from microcaps to mega-caps – in search of the market's best risk-to-reward setups. And as far as I know, this system is unique to Extreme Value.

Intrinsic value is the piece of data that we focus on most. That's because the company's historical performance and forward expectations are both reflected in this one figure.

Large gaps between a company's share price and its intrinsic value are often a reflection of one thing... investors not fully appreciating a company's future growth story.

Since the onset of the COVID-19 pandemic, we've uncovered several of these situations...

Back in May, we "unlocked" the Extreme Value issue about Costco Wholesale (COST) for Digest readers. Investors believed this pandemic winner was turning into a pandemic loser. But as we detailed, that's nonsense. Shares are up 61% since our original March 2021 recommendation... and continue climbing toward our revised $550 intrinsic value estimate.

Over time, intrinsic value changes... It often rises as a business grows and becomes more profitable. Linking maximum buy prices to intrinsic value allows us to raise them dynamically as a company's value rises. It's another key component of our system.

Ultimately, Walsh's formula for success was about winning football games – but with the proper perspective...

It isn't about winning every game. In Walsh's own words to the Harvard Business Review...

We have to remind ourselves that it's not just a single game that we are trying to win. It is a season and a series of seasons in which the team wins more games than it loses and each team member plays up to his potential. If you are continually developing your skills and refining your approach, then winning will be the final result.

This is an excellent reminder for investors, too...

Investing success is ultimately measured by how much wealth you accumulate over a long period. It's OK if you don't score a touchdown with every single investment... You're bound to have some losers along the way. The key is building success over the long haul.

To maximize the value of your capital, consider a system that consistently helps you spot the best risk-to-reward ideas in the market... We believe our Extreme Value system does that.

As we've discussed today, Walsh enjoyed legendary success in one of the most competitive businesses on the planet – professional football. Here's how he did it...

1. Walsh made a thorough game plan... and had the nerve to stick with it. He prepared his team week in and week out for all kinds of negative scenarios. This intense preparation helped him stick with his game plan when things went awry.

2. Walsh developed an edge by seeing what others missed. He created a never-before-used offensive scheme designed to exploit speed, precision, and movement.

3. Walsh designed a system that generated unique, high-quality results. His system made the most of every minute, and it helped every player reach his full potential. In the end, he won three Super Bowls in an eight-year span.

Investors would do well to emulate Walsh's timeless, three-step formula for success...

Make a game plan with your portfolio. Then, have the nerve to stick with your decisions by considering how you'll react to stressful situations – like deep market declines.

Develop an edge by learning to see what others don't. Spend more time thinking about how the future will play out for the stocks you own – and less time on what already happened.

Finally, rely on a system that generates unique, high-quality insights (like intrinsic value) that give you an edge in any kind of market.

Do this and you should be able to enjoy investing success... year after year.

Good investing,

Mike Barrett

Editor's note: In their Extreme Value advisory, Mike and editor Dan Ferris look for underappreciated growth stories in well-known stocks with big upside potential. But with the market at its highest valuation in history, Mike says there's a way to take this idea to a completely new level...

In short, Mike has developed a strategy for earning massive gains through little-known companies – the kind that he says nobody knows how to correctly value. It's a new type of business with almost no revenue... no product... and no employees... but it could make you up to "10x" your money if you know what to look for. It all starts with a $9 opportunity that Mike believes could become the most lucrative stock we ever share. Get the details here.