The Three-Step 'Single-Plane Swing' for Investment Success

A U.S. Open golf champion's winning system... Keep it simple (and repeatable)... The three-step 'single-plane swing' for investment success... How to limit your mistakes... The goal of every value-seeking investor... Focus on the two 'Cs' of investing...

For Bryson DeChambeau, 'simple and repeatable' is the key to success...

Last September, the 27-year-old golfer won the U.S. Open by six strokes over second-place finisher Matthew Wolff. He was the only competitor in the tournament to finish under par.

The victory cemented DeChambeau's place in the sport's history... He joined legendary golfers Jack Nicklaus and Tiger Woods as the only men to ever win an individual title at the NCAA Division I golf championships, the U.S. Amateur, and the U.S. Open.

Over the years, DeChambeau has become known for his unique approach to the game. His nickname is "The Mad Scientist" – a nod to how he uses all the available data to his advantage.

But when it comes down to it, the key to DeChambeau's success isn't complicated at all...

In today's Digest, I (Mike Barrett) will explain exactly how DeChambeau does it. He uses an innovative system that gives him an edge over the competition from the first tee box.

And this essay isn't just about golf... I'll also show you how the same basic principles that DeChambeau uses on the course can help you improve your investing game as well.

'Mastery of everything is all about the basics'...

That's one of the core messages from author Matthew Kelly in his 2020 gem, I Heard God Laugh.

I couldn't agree more... If you want to be successful at something in life, you first want to figure out the few things that matter most for that particular skill – the "basics." You want to become proficient at them... and success will surely follow.

That's what golfing instructor Todd Graves stresses with the "single-plane golf swing." And DeChambeau is one of the most successful pupils to put this concept into practice...

The single-plane golf swing has one key difference from a conventional swing...

Most golfers have a lot of movement in their swings. Whether they realize it or not, the club passes through different imaginary planes between when they set up to hit the ball and when they make impact with it.

However, in the single-plane swing, your front arm essentially becomes an extension of the club's drive shaft.

This means your stance sets up farther back from the ball... It basically forces your swing to remain on a single, imaginary plane as it goes back to gather speed, then gets pulled down to strike the ball. Here's how DeChambeau explained it to Golf Magazine in June 2019...

I don't want my hands starting low at the beginning of my swing and then getting high at impact. I just want to start them high and then return to that position.

It takes a little time at first, but once you get used to it, it's the most efficient way to return the clubhead to the ball. Think about it this way...

If you were to design a machine to swing a golf club, how would that machine do it? You wouldn't program the machine to have a bunch of excess movement. You'd build it so it's simple and repeatable. That's what my swing is.

In order to replicate the same (correct) swing over and over, regardless of whether he's using a 4-iron or 9-iron, DeChambeau also switched to "same-length clubs"...

You see, as you move from a conventional 4-iron to a conventional 9-iron, the club length shortens. That means your setup must also adjust to the slight differences in club length. But by using irons that are all the same length, DeChambeau employs the same exact swing and setup every time.

Think of it this way... The single-plane golf swing is perfectly synced with one of the universe's immutable (though mostly underappreciated) laws... "Keep it simple."

But as DeChambeau says, it's also about being 'repeatable' as well...

Think how many times you'll swing a club playing a round of 18 holes...

If you're good, you'll still hit the ball around 70 to 80 times. And let's be honest... Many folks can take more than 100 shots in a round. Plus, you make countless practice swings.

By minimizing the number of things that can go wrong on every swing, it's easier to know what adjustments you need to make.

That's what really intrigued me about the single-plane golf swing... And it's why I adopted it myself months ago.

My greatest golfing frustration is that I never understood why I would hit one tee shot 200 yards straight down the fairway, but couldn't replicate it on the next tee.

Now, I know... Before, I tried too hard to get every little part of the process correct. I didn't focus on the basics. I didn't keep it simple and repeatable like the single-plane swing does.

And the best part is, I didn't have to shell out hundreds of dollars to figure that out... I simply read about DeChambeau's accomplishments and watched a lot of YouTube videos.

Don't just take my word for it, though.

Consider what the single-plane swing's greatest champion has accomplished with one critical metric...

You see, the PGA Tour tracks "strokes gained off the tee" for every golfer.

This metric is exactly what it sounds like... It measures how much better or worse a player's drive is when compared with the average professional golfer.

Last season, DeChambeau ranked first out of 193 qualifying golfers... He was the only competitor with an average greater than one stroke (1.039). And so far this season, he ranks No. 1 out of 236 qualifying golfers – with a 1.181 average through 18 rounds.

In other words, DeChambeau is hitting the ball so much farther and more accurately than his peers – the greatest golfers in the world – that he's essentially a full shot ahead of them when he steps up to the tee.

And of course, like with everything in life, it's always great to gain any edge that you can.

Now, as I alluded to at the outset of today's Digest, I'm not sharing all of this just to improve your golf game...

You see, a "single-plane swing" exists for investors, too.

It's a simple, repeatable system that could potentially help you minimize your mistakes, improve your results, and keep you focused on what matters most.

I use this system with my personal investments. And more important for Digest readers like you, I also use this system as an analyst for Extreme Value. It's how my colleague and editor Dan Ferris and I have uncovered hidden gems on a regular basis year in and year out.

My "single-plane swing" investing system has just three simple, repeatable steps...

1. Limit mistakes by only investing when the odds are in your favor.
2. Use valuation to find and select your best ideas.
3. Stay relentlessly focused on the two most important "Cs" in investing.

No one hits every drive straight down the fairway in investing...

No one.

The key to success is to limit your mistakes. You only want to put your hard-earned capital at risk when you're likely to succeed. This is the crux of my first step.

It sounds simple, but it's a lot harder to do than you might think... When we're in the middle of a seemingly never-ending bull market in stocks, you might feel like you can't make any mistakes. But think about it... Has every stock you bought gone up forever?

In Extreme Value, Dan and I attempt to limit our mistakes by focusing on two attractive setups – broad market sell-offs and underappreciated growth stories.

During big market downturns like what we experienced a year ago, most folks sell first and ask questions later...

They panic out of great businesses, regardless of their underlying fundamentals.

But the thing is... this indiscriminate selling creates a tremendous buying opportunity for those of us who are ready. The odds of success are rarely more stacked in your favor than during a massive sell-off... It's the best time to find great bargains in the stock market.

For instance, with the COVID-19 pandemic suddenly closing bars and restaurants last spring, investors dumped the stock of Constellation Brands (STZ). It was as if they believed its loyal customers would never drink another Corona – the alcoholic-beverage giant's top-selling brand.

Dan and I knew better... So in early April, we recommended that our subscribers buy STZ shares.

By the end of 2020, Constellation had bounced back just as we anticipated. Subscribers who followed our advice after the initial overreaction are sitting on a 58% gain today.

But big sell-offs like what happened last spring are relatively rare...

At most, they occur once or twice each year.

So I spend most of my time looking for something far more common – underappreciated growth stories. These situations involve companies with expected revenue growth of, say, 6%... but shares are priced as if growth will be closer to zero for the next several years.

In July 2020, we recommended an obscure stock that fits this mold...

Due to ongoing pandemic worries, this company's shares were priced for zero revenue growth over the next few years. But through extensive research, Dan and I concluded that its growth prospects were much better... due largely to its long history of successfully acquiring competitors.

Six months later, this company struck once again... In January, it announced a blockbuster acquisition to significantly boost its business. Shares soared roughly 30% on the news. Extreme Value subscribers who followed our advice last July are now up 92%. (Subscribers can get all the details about this transformative deal right here.)

We've placed a temporary "hold" on this stock until the deal closes, which is expected to happen during the second quarter of 2021. But once that happens, we expect that subscribers who previously missed out will be able to get in and ride this opportunity for years to come. We consider this company one of our "crown jewels" and have no intention of closing the position anytime soon.

Of course, buying stocks is always risky... We don't know what tomorrow will bring. Even the best-chosen stocks can still fall if something happens that you can't predict.

To limit your mistakes, though, you can look for situations that make it difficult not to win – like panic-induced sell-offs and underappreciated growth stories.

Moving on to the second step in our 'single-plane swing' investing system...

Using valuation to choose investments.

In a typical month, I evaluate more than 100 investment ideas... I cover a lot of territory quickly because I rely on a proven, proprietary valuation model that's both simple and repeatable – just like DeChambeau's approach to his golf swing.

By now, I've used it thousands of times. It's so effective that I can evaluate a stock I'm not even familiar with... And in a matter of minutes, I can get a high-conviction estimate of its intrinsic, or "real" value – the highest expected price that a knowledgeable buyer would pay for the entire business.

Knowing a lot of intrinsic values also provides me with a great sense for relative value. In other words, I know which stocks offer the most bang for the investment dollar at their current prices.

The over-loved, overhyped stocks of the day offer little or no upside to their real values...

For these stocks to be worth their current prices, everything would have to go perfectly right for them all the time. And as I said earlier, the odds are against that happening.

Instead, the best ideas usually don't register on investors' collective radar for some reason... These are the opportunities I'm diligently looking for month after month.

For example, two of our best 2020 ideas in Extreme Value were smaller-cap Canadian-domiciled companies just starting to trade on a U.S. exchange. They weren't in the spotlight yet for most investors, but Dan and I recognized the "hidden value" in these two stocks.

In his latest essay, titled "Something of Value," investing legend Howard Marks perfectly sums up the thought process of every value-seeking investor. As he writes...

The goal at the end of the day should be to figure out what all kinds of things are worth and buy them when they're available for a lot less.

You simply can't know in advance where the most attractive opportunities will be. But by using a simple and repeatable valuation system to constantly evaluate your pool of potential investments relative to each other, you can uncover the very best ideas.

My final step is the most important...

It doesn't matter if you find the best ideas if you don't also follow this step...

You must always focus on the two most important "Cs" of investing – capital and compounding.

Capital is just a fancy word for savings. To build wealth, you must first accumulate capital. Then, to maximize your return on it, you want to focus on compounding.

Compounding is most often thought of as "earning interest on interest"... For everyday stock investors, we're really talking about earning dividends on dividends. And taking it a step further, it means earning additional unrealized gains on top of your unrealized gains.

Keep this conclusion in mind from a recent study by money manager Hartford Funds...

Going back to 1970, 78% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding.

That's an incredible amount of wealth created by essentially doing nothing.

And as Warren Buffett, one of the greatest long-term investors of all time, once said...

My wealth has come from a combination of living in America, some lucky genes, and compound interest.

Fortunately, you don't need to be Buffett to enjoy these kinds of returns...

Two decades ago, a friend of mine started four dividend-reinvestment plans.

He has made regular contributions over the past 20 years. But more important, thanks to his reinvested dividends and stock splits, he now receives an annual income of $100,000 off these plans alone.

My friend would need to accumulate and invest at least 10 times more capital to generate a comparable amount of annual income today. That's the power of compounding over the long run.

In a recent interview with website ThinkAdvisor about his new book, The Psychology of Money, the Collaborative Fund's Morgan Housel summed up my third step perfectly...

You should be an optimist about the long run, but a pessimist about the short run... because the short run is always a continuous chain of breakages, problems, errors, recessions, [and] pandemics.

In other words, listen to your inner pessimist as its prods you to save every dollar possible. Then, listen to your inner optimist when you put this capital to work.

Make compounding your friend. And never, ever forget its first rule, as espoused by Buffett's right-hand man, Charlie Munger...

The first rule of compounding is to never interrupt it unnecessarily.

Let your well-bought investment ideas keep working year after year... and decade after decade.

Every golfer who steps up to the first tee inherently senses two things...

Adversity awaits... But so does opportunity.

Your success depends on how well you minimize the former and exploit the latter. You set yourself up to succeed with a system that limits your mistakes, improves your accuracy, and helps you focus on the "simple and repeatable" swing mechanics that matter most.

The same is true about investing...

Limit investing mistakes by only putting capital to work when the odds are in your favor... Invest in companies that are undervalued rather than overhyped... And never lose sight of investing's two most important "Cs" – capital and compounding.

In the February issue of Extreme Value, Dan and I posed three questions to subscribers...

Are you investing in companies likely to be around decades from now when you'll need the dividend income?

Are their business models durable enough to continue paying dividends that grow faster than the broader market?

Are the businesses being run by shareholder-friendly management teams that take a "forever" view?

Our portfolio includes 12 "crown jewel" stocks for which the answers are an emphatic "yes."

Of those holdings, six can currently be purchased below our maximum buy prices. And I expect another three to be available under this threshold when the benchmark S&P 500 Index falls back to its 200-day moving average at some point in the future.

If you're looking for a place to compound your own capital, I invite you to join us...

This month, we also added our latest underappreciated growth stock. It's a well-known large-cap business that investors have cast aside. But as we showed our subscribers, the stock has 50% potential upside from here... And it pays a 3.5% dividend yield today.

Plus, Dan just started pounding the table once again about another one of our model portfolio holdings...

But this isn't just any ordinary stock.

He believes it could be the single biggest financial opportunity that we've ever uncovered.

It has very limited downside... It's one of the lowest-risk opportunities anywhere in the markets today. It comes with a significant margin of safety. And yet, it also offers tremendous upside in the years ahead... We believe it has 1,000% long-term potential.

I'll give you one more hint today... It operates in the precious metals space. But it's not a gold miner... explorer... or any other type of business you've likely heard of, either.

Dan simply calls it the "best gold business on Earth."

If you're looking for the type of opportunity that comes around maybe once or twice a decade, you owe it to yourself to hear the rest of the story straight from Dan. Watch his full presentation right here.

New 52-week highs (as of 2/23/21): American Financial (AFG), American Express (AXP), Berkshire Hathaway (BRK-B), CBRE Group (CBRE), Comcast (CMCSA), Disney (DIS), JPMorgan Chase (JPM), SPDR S&P Regional Banking Fund (KRE), LCI Industries (LCII), MasTec (MTZ), Oshkosh (OSK), Invesco High Yield Equity Dividend Achievers Fund (PEY), Trip.com (TCOM), Travelers (TRV), Ulta Beauty (ULTA), and Zebra Technologies (ZBRA).

Today's mailbag includes your feedback on yesterday's Digest about inflation, including plenty of "real world" examples of it. Do you have a comment or question? As always, send us an e-mail at feedback@stansberryresearch.com.

"As I see it, both of these payments are identical to a 2-for-1 stock split. Relatively speaking, twice as many dollars at half the value! After the second round (if the amounts are near the same), those new dollars, along with the rest that are in circulation, will soon be one-fourth of the original value (pre-2020 stimulus payment). Better known as hyper-inflation." – Paid-up subscriber Leslie N.

"I am a general contractor and we have seen prices go out the roof: 2x4 studs are up 100%, 3/4-inch subfloors up 59%, and 7/16 OSB sheeting up 344% ($9.00 to $31.00). Prices change daily making it hard to produce an accurate estimate from one job to the other." – Paid-up subscriber Steve T.

"Building products are up across the board, from electrical and plumbing parts to a single 2x4, from $2.50 to nearly $6." – Paid-up subscriber Sean F.

"A huge inflation that I have seen is building materials. [It] appears to be a perfect storm of people trying to build, repair/upgrade, take advantage of low interest rates and shortages from manufacturing during COVID. Here in Wisconsin, we have Menards as the major DIY center. They are similar to Home Depot but individual stores are larger and have more projects onsite. They appear to me anyway to be trying to price gouge currently.

"A direct example of this is the common cinder block. That is the regular 8"X8"X16" building block used in much construction. A year ago... the block could be found for $1.06 at both Menards and Home Depot. Today Home Depot sells the block for $1.12, which is not a real appreciation by any stretch, but I feel that they just have not repriced the block [yet] to bring it to the more prevalent Menards price of $1.57. This is a 48% increase year over year. Right now it is too early to see if Menards may drop their price. More likely Home Depot will raise their price but with snow on the ground no one is buying block right now so will need to wait and see.

"Lumber/board price are much increased as well going back to this past summer. Know several people that were trying to build and prices went way up that budgets were starting to be blown. Feel this summer will be far worse for several reasons: Texas and much of the south froze this past month and the damage done by burst pipes is going to be immense thus creating building supply need, the amount of people still trying to construct will remain as interest rates still remain low, and now supply companies have tasted that they can charge much greater prices and not immediately affect demand. I believe that inflation is going to spiral in this sector and as always it will blow itself up 'till there will be no demand because who wants/can afford it." – Paid-up subscriber Steve J.

"The price of gas at the pump is up 35 cents." – Paid-up subscriber Sue M.

"Inflation is insane. December 2019 a 40-foot container China to Long Beach, USA was $2,300. December 2020 a 40-foot container China to Long Beach, USA was $3,900. February 2021 a 40-foot container China to Long Beach, USA was $8,250." – Paid-up subscriber Chip M.

"Our local restaurant just raised prices 20%. I like to shoot. Gun powder, I can't buy it. On the black market, it is selling for 50% higher from an average of $200 to now $300. Primers, none available. Black market price is up to $10.00 from $3.00. Diesel up 20% in the last two weeks. I could go on and on. Government figures on inflation are B.S.!" – Paid-up subscriber Dave H.

"My son owns a business that buys parts and products from China. He recently received letters from two different suppliers in China, indicating their prices to his company will increase by 15% because of the devaluation of the U.S. dollar. That is when he decided inflation was real." – Paid-up subscriber Linda K.

Corey McLaughlin comment: Thanks to all for sharing your examples of what's happening in the real world. Please continue to keep us posted on what you see out there... And we'll keep a close eye on inflation in the year ahead.

Regards,

Mike Barrett Orlando, Florida February 24, 2021