Today, I’d like to focus on how a common way of thinking every investor runs into can impact your investing portfolio’s performance in a big way.
Now, if you’ve ever watched sports, you’ve undoubtedly seen reports or interviews with players — both the winners and losers.
When a team wins, they attribute their success to their efforts as individuals and as a team. You’ll hear all about how special the group is and how individuals worked harder than anyone else and were destined for success.
If, on the other hand, a team fails, it’s often the fault of the officials.
We see this type of thinking a lot in investing. We also have a tendency to congratulate ourselves for our brilliance when we succeed — but blame outside influences for our failures.
When a stock we picked goes up, it is because we are clever and made the right choice. When a stock we picked goes down, it is the economy, the Federal Reserve, the stupid broker, or those gosh-darned hedge funds that made things go wrong. We could not have possibly made such a bad choice.
In my office, we refer to this as “confusing a bull market for brains.” A potentially fatal side effect of this all-too-human trait is what happens when we get good results from bad decisions: We do the same thing again, usually to a bad outcome. Not only do we lose money; we lose the time we might have spent making improvements in our portfolio.
This tendency to attribute success to our efforts and abilities — and failure to outside circumstances — is known as Self-Attribution Bias.
The human brain is a marvelous tool for creating art, music, language, and engineering feats, but it’s a terrible tool for investing.
The more you know about the workings of your own mind, the “bugs” inside it, and how they work against our investment performance, the more you can develop strategies to mitigate the negative effects of those bugs.
That’s why I’d like to talk today about the challenge of Self-Attribution Bias, how it works, and how you can neutralize its negative effects.
Why Stocks Rise and Fall
“In the short term, the market is a popularity contest; in the long term it is a weighing machine.”
That’s a quote from one of the greatest investors of all time, Warren Buffett.
His method of investing focuses on choosing stocks solely based on their overall potential as a company; he looks at each as a whole and holds them as a long-term play.
He’s not chasing capital gain but seeks to own quality companies that can generate earnings.
I share Buffett’s dedication to fundamentals. In fact, fundamentals are one of two critical characteristics at the center of my stock analysis.
By fundamentals, I mean sales growth, earnings growth and the like. Growing companies are ones that are healthy and thriving. They have smart leaders who know how to run and manage a smart business.
If a company is struggling to sell its products or is spending more than it makes, it’s not a company that you want to own for growth.
The second characteristic I look for in any great stock is strong buying pressure. Think of this as “following the money.” The more money that floods into a stock, the more momentum a stock has to rise. And there’s no doubt about it, we all like stocks that rise!
I call this my Quantitative Grade.
These two factors, more than any others, determine whether a stock will rise or fall. And the great thing is that my system can spot laggards that are about to become winners.
Finding a Sporting Winner
Let’s look at Big 5 Sporting Goods Corporation (NASDAQ:BGFV) as an example.
The company is a leading sporting goods store in the U.S., with about 430 locations across 11 states. Its retail stores offer traditional sporting goods and accessories, as well as indoor and outdoor athletic equipment; hunting, camping and fishing gear; winter and summer recreation products; and tennis, golf and roller sports gear.
But the stock was flat for 18 years. Most folks probably dismissed it. But not my Project Mastermind. It is a computer system. It doesn’t have biases. It just looks at the numbers. Sure enough, if you’d had Project Mastermind in your corner in late 2020, you’d have known something almost no one else did. The stock was about to break out.
Below you see a chart from before I recommended buying the stock in November 2020 to when I recommended selling it a year later. The stock had achieved a top score of “A” for its Quantitative Grade, and as expected, the flood of major institutional cash kept shares moving higher and higher.
I recommended BGFV when it was trading for $6.32 per share. A year later, it was benefiting from a surge in demand for its products with more folks turning to outdoor recreation and home fitness programs during the pandemic. The stock had surged over 433% to trade at about $33.72 per share.
However, on November 4, 2021, I told my subscribers it was time to lock in our profits.
But why did I recommend selling? Well, in the third quarter of 2021, BGFV revealed slowing earnings and sales momentum.
BGFV reported third-quarter earnings of $24.1 million, or $1.07 per share, on $289.6 million in sales. That was down from earnings of $28.4 million, or $1.31 per share, and sales of $305 million in the third quarter of 2020. The consensus estimate had called for earnings of $1.13 per share and revenue of $314.6 million.
And it was a good thing I recommended selling, as the stock has dropped over 50% since…
You see, my Project Mastermind uses these data points to signal when it’s time to get out. If you bought BGFV at the time of my original recommendation and sold when I recommended, you achieved a 433% gain, including dividends.
It can be difficult to let this kind of stock go. A pick going up 433% makes you feel awfully smart.
But we didn’t let our biases control us. We used cold, hard facts to tell us when it was time to get out. And as you saw, the stock didn’t do much after we sold. So, it was nice to have that capital freed up. Now we’re deploying this system for even better gains in less time with my Project Mastermind.
Through hundreds of hours of research, I discovered how an elite type of stock consistently outperformed the broad market, year in and year out. After extensive analysis, I isolated the eight key qualities that these super-performing stocks shared… and I developed a system for riding them.
On Tuesday, I hosted a special event where I unveiled my latest research from Project Mastermind and revealed the stock I rated number-one based on insights from Project Mastermind — ticker symbol and all. I’m really excited about the project, and I made sure to record the kickoff for you to review, if you couldn’t make it. Click here to watch now.
P.S. Besides the stock you’ll hear about in my presentation… My Project Mastermind research system just uncovered another explosive stock that could hand you 100% gains in no time. And I’ll be adding it to my recommendation list on Monday. To learn how to access my new recommendation — and all of Project Mastermind’s recommendations for the next year — click here.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below: