Don't Let This Scary Bull Market Keep You on the Sidelines
Dear subscriber,
Every investor dreams of finding the secret to the market... of discovering that one simple indicator that leads to compounding returns and huge riches.
Such a feat is rare... but not impossible.
Take billionaire investor Cliff Asness...
In the late 1990s, Asness was a graduate student at the University of Chicago working under renowned economist and Nobel Prize winner Eugene Fama.
Fama earned his fame working on the efficient-market hypothesis. The idea is that stock prices already fully reflect all available information. And their ability to fluctuate randomly with new information makes it impossible to actually beat the market.
The theory was so central to the school's fundamental philosophy that it became part of the Chicago School of economic thought.
But Asness ran into real trouble with this theory. His research completely contradicted that of his mentor and dismissed the school's decadeslong reputation.
Asness looked through the data and decided you could beat the market... with momentum.
Of course, the idea behind momentum is simple. Stocks that have been trending upward are likely to keep rising. And those that have been trending downward are likely to keep falling.
Author Scott Patterson described Asness presenting his idea to Fama in his book The Quants...
Asness knew that momentum was a direct challenge to Fama, and he expected a fight. He cleared his throat.
"My paper is going to be pro-momentum," he said with a wince.
Fama rubbed his cheek and nodded. Several seconds passed. He looked up at Asness, his massive forehead wrinkled in concentration.
"If it's in the data," he said, "write the paper."
With his 1994 dissertation, Asness essentially proved that momentum matters greatly in the market.
That simple insight led him to build AQR Capital Management, which now has $121 billion in assets under management. Asness boasts a $3 billion fortune of his own. And while he has added other factors to his quantitative toolkit, momentum investing remains the center of his research.
There are few iron laws in investing. The market is always changing. But you should take it as a given – and build it deep into your investment process – that stocks that are going up tend to keep going up.
In fact, academic research no longer tests whether momentum works... but instead seeks to find out why it persists through the decades.
(Of course, when it comes to making money, the "why" doesn't really matter so much, does it?)
This is why investors shouldn't get scared out of today's hot market, even as it continues to hit new highs.
I know that I often use this letter to point out things that have me worried. We've talked about tariffs... overhyped AI stocks... threats to the U.S. dollar... and the need for defensive positioning.
But we at Stansberry Research have also been recommending stocks the entire way up.
That's the job of a proper active investor... to be driven by optimism tempered with measured skepticism.
You need to be optimistic because markets do tend to go up over time. Economies grow. Businesses expand. Technology gets invented and raises productivity.
But with your capital at risk, you also need to spend your time watching for risks without overreacting to them.
For now, though, you can't ignore the upward momentum in the market.
It Works in the Data... and in Real Life
The history of markets is rich with momentum-focused traders who have gone on to post incredible returns over multiple decades.
Even before Asness published his work to the world, investors were profiting from momentum.
Richard Driehaus – dubbed the "Father of Momentum Investing" by Forbes – was one of the first.
Driehaus started his momentum-based fund in 1980 and returned 30% per year for 12 years straight.
Or look at Ed Seykota... Seykota was an unknown trader working out of Nevada until he was profiled in Jack Schwager's book Market Wizards.
Over 12 years, he turned $5,000 into $15 million.
He describes his strategy as "trend following, with some special pattern recognition and money management algorithms."
There's also the famous example of the "Turtle Traders."
Richard Dennis, a legendary commodities trader, wanted to prove that trading could be distilled down to simple rules.
He recruited regular people with a newspaper classified ad. The group included a kitchen worker, a teacher, a Dungeons & Dragons writer, and blackjack players. (Dennis called them "Turtle Traders" because he believed he could train them faster than a group of turtle farmers he once saw in Singapore could raise turtles.)
Dennis funded their accounts and taught them a simple, momentum-based system with rules like buying at a 20-day high and selling at a 20-day low.
Anyone could do it if they followed the momentum.
And the Turtles earned an 80% average annual rate of return. Collectively, they made more than $175 million between 1983 and 1988.
The Rules of Momentum
That brings us to the obvious next question... how exactly do you measure momentum?
Well... it's not difficult.
Asness' measure of momentum is dead simple: 12-month price change. If the stock is up over the past year, buy it. If it's down, short it. Repeat and become a billionaire.
Even if you're a long-term investor, you need to watch momentum.
At Stansberry Research, we do long-term fundamental research on stocks with high-quality businesses. But when my team and I audit our historical track record for mistakes, we sometimes find that we make missteps when we try to call the bottom and buy stocks that have been beaten down.
They have no momentum – and that prevents them from going up.
The lesson for fundamental investors: Don't try to outsmart the market. Wait until the market starts to agree with you and the trend begins to move in favor of your investment thesis.
On a macro level, as the market continues to hit new highs, sometimes investors – both hobbyists and hedge funds alike – fear they're missing out on a big move. They keep buying so that they don't get left out of this bull market.
That's exactly how momentum carries ahead.
So yes, watch for threats. But the momentum in this market has the power to keep things going higher for much longer than you think.
It remains one of the single best ways to determine where a stock will go next.
That's precisely why our friend and colleague Joel Litman at our corporate affiliate Altimetry just launched a brand-new research service called Breakout Profits.
At Altimetry, instead of using traditional Wall Street analyses, Joel and his team use their "Uniform Accounting" methodology for analyzing companies' financial statements – making dozens of adjustments to uncover a company's true earnings and financial health.
This can help find mispriced companies poised for massive growth... and help you avoid owning shares of businesses that are perhaps overvalued.
Joel's analyses are so useful that he has lectured at the Harvard and Wharton business schools and is a regular consultant for the FBI and the Pentagon... not to mention he has a huge institutional client base.
But now, Joel's expanding his research to momentum.
In his new service Breakout Profits, he and his team dive into the misunderstood world of momentum investing. They focus on quality companies that have already produced impressive results. These stocks have soared 100% or more in today’s hot market – and that simple fact increases the odds that they'll double again.
To hear more about Joel's momentum-based research service – including how you could see gains of 200%, 500%, or even 800% by this time next year – click here. But don't wait... There's a window of opportunity for you to take advantage. And you must position yourself before time runs out.
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What Our Experts Are Reading and Sharing...
- The Federal Reserve made its much-expected 25-basis-point rate cut this week. The Wall Street Journal's Greg Ip has a nice recap of the central bank's recent meeting, hitting everything you need to know... including where the economy is likely to go from here.
- The Fed hasn't shown any specific signs of losing its independence so far, but all bets are off after Chair Jerome Powell's term comes to an end. That's a big reason why foreign investors have increased their hedges against the U.S. dollar to protect their overseas investments.
- Who would listen to a podcast about pollen? Not many people actually... but it's somehow proving profitable. According to Inception Point AI, the firm is making 3,000 podcasts a week on mundane topics like pollen and whales – with completely AI-generated hosts and scripts. Since each episode only costs $1 or less to produce, even just 20 listeners means they're profitable.
New Research in The Stansberry Investor Suite...
Investors are clamoring for defense stocks today.
The defense sectors in the U.S, Europe, and China have all posted banner returns so far this year.
Sadly, that's because global conflicts are on the rise. Nations are gearing up to protect their borders... adding everything from basic ammunition to the most cutting-edge weapons to their arsenals.
Modern battlefields aren't so different now than they were 20 years ago. The strategy is more advanced, but the rule hasn't changed: If you're exposed, you're in danger.
In other words, survival often comes down to who can stay hidden and who gets found first.
In this month's Stansberry Innovations Report, Dave Lashmet, Erica Saint Clair, and John Engel have found a leader in stealth video relay. This company helps keep soldiers in battle in constant communication... without giving away their positions.
It's pioneering a new frequency of secure radio that can punch through rain, snow, and fog and deliver high-quality video to handheld devices to soldiers at the front.
And trust me when I say this company has thought of everything – including portable amplifiers that pick up weak incoming signals from satellites, drones, or nearby troops and strengthen them. So rather than "shouting" and giving away their position, soldiers can "whisper" to each other.
The company already has major inroads with top U.S. defense contractors and the government. And its best-in-class tech puts it at the forefront to win even more contracts and keep growing revenue and earnings.
Stansberry Investor Suite subscribers can read the entire report here.
If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our special package of research – click here.
Until next week,
Matt Weinschenk
Publisher and Director of Research
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