The Beauty (and Money) in 'Bad to Less Bad' Ideas

Efficient markets are a lie... How I came to love investment systems... The three-pronged system I've used for decades... The beauty (and money) in 'bad to less bad' ideas... The culmination of my life's work...

Editor's note: Today we're pleased to feature a special guest essay from True Wealth editor Dr. Steve Sjuggerud. Steve, as longtime readers know, helped start Stansberry Research alongside our founder Porter Stansberry more than 20 years ago.

Recently, Steve has become most known for popularizing the concept of the "Melt Up," but as anyone who has been around him for any length of time knows, Steve's investing prowess goes way deeper than that wide-reaching idea.

In today's essay, Steve gives rare insight into his core beliefs as an investor... how he has used them to spot market-changing trends before anyone else... and how you can do the same to grow your wealth today. We hope you enjoy...

'If my professors are so smart, why aren't they rich?'

It's a question I (Steve Sjuggerud) asked myself over and over as I worked through school.

My undergraduate degree was in finance. Then I got an MBA. And I finished my PhD in finance while working as a broker.

I spent plenty of time in classrooms, learning about the world of finance. My professors always seemed to make things simple. They explained the world of finance and how people got rich in a regimented, simple way.

It never made sense to me, considering how messy the world actually is... and seemed to me, even back then. Plus, I kept asking myself that question...

If things really were this simple, why were these folks teaching? Why weren't they out there getting rich themselves?

They weren't, because at the time the 'efficient markets theory' was all the rage...

The theory was that you can't predict future stock prices because all the information known about stocks today is already baked into the current price.

I understood what they meant when they said this. But I'd also been studying the history of finance. And I knew there were plenty of guys who were beating the market... year after year.

So I decided that if I wanted to make money in the markets, I needed to learn from the right people. Not my professors who said it couldn't be done... but the guys who had actually and consistently succeeded.

What I found is that while many of the best traders use different strategies, there's something that unifies almost all of them. In today's Digest, I'll share what it is and how I've used this knowledge myself for decades with great success.

It all started in 1990...

That's when I read Martin Zweig's book Winning on Wall Street. The book's subtitle is How to Spot Market Trends Early, Which Stocks to Pick, and When to Buy and Sell for Peak Profits and Minimum Risk.

He built many simple systems that either beat the market or (more typically) equaled the market's return – but with a lot lower risk.

Zweig wasn't the first to do this... But he found me at the right time. And I started building systems, too.

As longtime readers know, I have a math mind. And the math that Zweig outlined made sense to me...

He showed that you could consistently outperform using plenty of different strategies... from buying cheap, to focusing on return on equity, to simply following the trend. The key was finding what worked for you... and sticking with it.

All I had to do was keep it simple. (Don't "curve fit," as they say.) And keep it logical. (Does this make sense intuitively?) The goal was to beat – or at least tie – the markets while taking a lot less risk.

Basically, what I found was Zweig was right and my professors were wrong...

My professors said you couldn't beat the markets... that they were so efficient nobody could generate above-average returns... But I've spent decades building an investment system that does just that.

Study any successful investor and you'll find something similar... an investment system that helps them sort through mountains of information to make decisions. There are plenty of different ways the best investors do it. But in all cases, a system is in place, guiding them through.

I've personally used a three-pronged approach that longtime readers of my work will know well. But more than what it is, we're interested in why it works. And here's the reality of it...

The key to successful investing isn't what you'd expect...

You don't need to understand everything. You don't have to look at every number. And you can certainly know too much – which often leads to your ego getting in the way of common sense.

Instead, the key is finding the right things to study.

You simply need to figure out what really matters... what works... and then forget everything else. Everything else is just noise. And focusing on it will distract you from what's important.

I've spent thousands of hours researching what works in investing. And I've come up with a simple concept that has proven to be incredibly successful for making money.

My investing mantra is buying things that are... 1) cheap, 2) hated, and 3) in an uptrend...

That might seem simple. But finding investments that are cheap, hated, and in an uptrend is hard. They don't come around often. And when they do, it certainly doesn't feel good buying them.

But these are the pieces that matter if you really want to succeed when investing. And to me, they're all that matters when making any investment.

First, you've got to understand value. You want to understand what you're buying and how much you're paying for it. The exact valuation measure isn't what's important. But getting a feel for value – including relative to other assets – is crucial.

Then, you want to buy something when others aren't interested... when it seems like the world hates your idea. When that happens, the worst of a decline is likely over. After all, who's left to sell if everyone hates an investment?

Now, here's a very important detail...

Neither of the above pieces matter if prices of what you're considering buying are still falling...

If there's one thing I've learned in nearly 30 years of investing, it's that prices can always fall farther than you'd imagine. And that means you must wait for prices to begin moving higher. That's the market's way of telling you that things have turned a corner.

When this all works, you end up buying at a great price at the perfect time. And it's often at the beginning of a multiyear move higher... That's how you have a chance to rack up triple-digit profits.

You see, when the timing is right, my strategy gets you into what I call 'bad to less bad' trading...

From my experience, using this strategy is the best way to find triple-digit opportunities. And it's much safer than you might think.

At its core, "bad to less bad" trading is simple. The idea is to find beaten-down assets. Ideally, they should have fallen 50% or more recently...

This happened last fall in the oil sector. Let me provide an example...

Oil demand fell in dramatic fashion thanks to COVID-19. Oil prices and oil-related companies crashed. Most investors wanted nothing to do with energy stocks. But I saw an opportunity.

So in November 2020 – during the height of COVID-19, when the economy was at a standstill – I traveled to Abilene, Texas, to size up the situation in the oil markets. I discovered that oil was as hated as it gets... which is exactly what I want to see in an investment.

At the time, the U.S. economy had slowed to a halt. The price of oil had fallen below the cost of production. So the oil industry had effectively shut down... At its worst point in 2020, the number of active oil rigs in the entire state of Texas dropped to just 100.

When I got home, I strongly recommended buying two relatively safe oil plays to my True Wealth readers. One of them is up 44% today, and the other is up 14%.

Oil was hated. And absolutely nobody was paying attention. We bought a cheap, hated asset in the start of an uptrend. And it was exactly a "bad to less bad" situation.

It was the same situation in 2010, when I started pounding the table on real estate...

The whole world had given up on real estate after the housing crash and the financial crisis it sparked.

But for me, the crash was the most obvious buying opportunity I'd ever seen. Real estate was dirt-cheap and completely hated, but the worst was behind us. Things were already getting "less bad." But no one could see it.

I spent the next few years buying up as many properties as I could. Many of which I still own, and several I sold for hefty profits along the way.

Again, the opportunity was obvious to me. But the rest of the world missed it.

When things are bad, most folks expect them to stay bad. But that's not typically what happens...

In reality, things go from "bad to less bad." A little bit of good news comes out. People realize that doomsday isn't here. And prices begin to rise. That's when we want to step in and buy.

The biggest gains happen during the initial stages of a rally. Think of stocks in general coming out of the March 2020 bottom... By the time things get "good" – months and years down the road – most folks have already missed the majority of the rally.

That's how I've learned to make big money while investing. It's about having a system and making sure you always follow it.

A decade ago, I formalized my investment systems like I had never done before...

I put everything I'd learned in my investing career through rigorous testing. Stansberry Research gave me $2 million for this unique project.

The end result was a combination of several dozen investment systems with a long-term history of beating the market. They cover everything from U.S. stocks and sectors, commodities, and foreign markets.

I track them all, each month, in my True Wealth Systems service. And I'm happy to report that in the decade since the launch, these systems have performed exactly as advertised.

On average, our recommendations have performed roughly 50% better than if you'd invested only in stocks. My professors told me that would be impossible. But I've made a career out of proving them wrong.

Building investment systems has always been my passion. And that's why I consider True Wealth Systems to be the culmination of my life's work.

Importantly, it works because at its core, it's simple. And it's a systematic approach. That's what every successful investor needs... a plan no matter what comes their way.

This is how the best investors earned their reputations. And it's why True Wealth Systems' 10-year track record is as good as any you'll find.

If you're interested in learning more and finding the next big winners, I recently went on camera to discuss True Wealth Systems in great detail and revealed more about the secrets to my long-term success.

Simply put, I'm at the point in my career where I want to share this information with as many folks as I can.

I urge you to check out my presentation here and, if you do nothing else, consider a systems-based approach to your own investing. Doing so can help you spot and pull the trigger on investments that everyone else "hates" or is simply overlooking...

I'm certain your returns will be better for it.

New 52-week highs (as of 8/4/21): ABB (ABB), Analog Devices (ADI), CBOE Global Markets (CBOE), CBRE Group (CBRE), Quest Diagnostics (DGX), ICICI Bank (IBN), Intuit (INTU), Nuveen Municipal Value Fund (NUV), Novo Nordisk (NVO), Palo Alto Networks (PANW), ResMed (RMD), ProShares Ultra Technology Fund (ROM), S&P Global (SPGI), Stamps.com (STMP), ProShares Ultra Semiconductors Fund (USD), and Zebra Technologies (ZBRA).

In today's mailbag, feedback on yesterday's Digest and continued regulatory fears in China… Do you have a comment or question? As always, email us at feedback@stansberryresearch.com.

"I laugh when I read all this commentary about Chinese stocks and markets. Anyone with a little intelligence knows that China is a total communist, socialistic society and its leaders have absolute control over all aspects of China's economy and population. There is no free market in China. It's only a matter of time until the Chinese government takes over all its companies and their stockholders will be left holding nothing. Xi [Chinese president Xi Jinping] wants to be Mao [Chinese Communist Party co-founder Mao Zedong] and if you look at history, then you know what China will become." – Paid-up subscriber Linden W.

Good investing,

Steve Sjuggerud
Jacksonville, Florida
August 5, 2021