Editor’s note: You’ll find a very important theme running through the Dispatch over the next few days…
We’re going to discuss the secrets of Casey Research founder Doug Casey’s wildly successful investment strategy…one that has made him tens of millions of dollars in the markets. This week, you'll learn how this strategy can potentially add tens of thousands of dollars a year to your investment returns…
By Dan Steinhart, executive editor, Casey Research
It's one of the most valuable ideas in finance…
This idea is simple and extremely powerful. It forms the basis of a highly profitable stock-picking system…one that consistently beats the market during both bull and bear markets…with a 104-year track record to prove it.
The system doesn’t give “buy signals” often. But when it does, the results are incredible. Used correctly, you can expect average gains of 30% in one year and 120%–170% in three years.
• Before I tell you about this idea, you should understand one thing…
Most people aren't cut out for this type of investing.
As I mentioned, this idea is profitable…simple to understand…and easy to execute.
However, it has a downside. It forces you to go against the crowd.
That’s the reason why, despite its long-term track record of producing big profits, less than 1 in 10,000 people use it.
To follow this strategy, you must be willing to “hold your nose” and buy stocks that look like “dead money” to folks who don’t understand this idea. Stocks that CNBC and other mainstream media outlets have brainwashed the public into hating.
Used correctly, this strategy will make you money. But it may result in moments of uncomfortableness. Folks at a cocktail party may drift away from you when you admit you own these stocks. If your stock broker doesn’t understand this idea, he might think you’ve lost your mind.
If you can’t handle the uncomfortableness, this strategy isn’t for you.
But if you’re OK with all those things, read on. Think of them as the “costs” of making superior returns in the stock market.
• This idea is based on a financial anomaly called “mean reversion”…
If you're not familiar with this term, it simply means that a stock will eventually move back to its average price.
Most investors know stocks don’t go up forever. When the dot-com bubble crashed after spiking an incredible 238% in less than two years, that was mean reversion. When the U.S. stock market crashed in 1929 after the “Roaring ‘20s” pushed it to crazy heights, that was mean reversion.
But this idea doesn’t require you to short (bet against) anything. Mean reversion works in the other direction, too. Just like stocks can’t rise forever, it’s equally true that they can't fall forever.
Sometimes a stock market gets so cheap…so hated…and drops so far in price…that it’s virtually guaranteed to bounce back strong.
This system identifies those stocks for you. And the data proves, without a doubt, that buying stocks poised to “mean revert” is a very profitable strategy.
• To follow this idea, look for stocks with this rare attribute…
Look for stock markets, industries, and sectors that have declined three years in a row.
Keep in mind, these situations are rare. Three consecutive years of lower prices almost never happens. According to a study by our friend Meb Faber, those instances occurred less than 3% of the time from 1903 to 2007.
Meb's a brilliant researcher and one of the few truly original thinkers in finance.
To test the performance of a “mean reversion” strategy, he studied both whole countries (with an investable stock market) and asset classes (types of investments) to determine if they showed any patterns.
As I mentioned, markets almost never fell three years in a row. But when they did, the following bull market was extremely powerful.
The average return in stocks for whole countries during the fourth year was more than 30%.
That's an incredible result, something that wouldn't happen by chance. This big move higher is caused by reversion to the mean, not chance.
When Meb studied asset classes, he found similar numbers… After three years in a row of falling stock prices, the average return in the fourth year was 34%, almost three times higher than the average return of all the years in the study.
Again, statistical analysis tells us these are significant results, not just chance.
They're proof of mean reversion in stock prices. Buying assets that are down three years in a row is a powerful market strategy.
• And Meb found a way to make the results even better…
Meb also researched the idea that mean reversion would lead to even more powerful stock rallies when the previous destruction of value was the greatest.
He studied countries with stock markets that declined by 80% or more.
On average, these countries saw their indexes rebound by nearly 120% in the three years that followed.
And that's not all…
Meb found the same type of huge rebounds in different industry groups, too.
He studied U.S. industry groups going back to the 1920s.
When a U.S. industry group fell by 80% or more from a peak, the average return three years later was more than 170%.
These statistics are amazing…and proof that investing in depressed markets leads to gigantic returns.
It’s common sense really. When investors get extremely frustrated with an asset class, they abandon it. Prices decline to absurdly cheap levels. And just like the cycle of day and night, extreme bear market turns into extreme bull market.
• To recap…
Remember, this strategy boils down to one simple idea: Look for markets, industry groups, and sectors that have fallen for three years in a row. Buy them. Big average gains will follow.
And to increase your returns even more, look for markets, industry groups, and sectors that have lost 80% or more of their value from a peak. These situations are rare…you won’t find them often. But 104 years of data shows that when they do occur, you can make average gains of 120%-170%.
It’s a wonderfully simple—and profitable—strategy that most investors are too afraid to try. But as you can see, when used correctly, it's a great way to book huge gains.
• This strategy will sound familiar to longtime readers of Doug Casey…
As you may know, Doug wrote New York Times #1 bestseller, Crisis Investing. Many experts consider it to be one of the best investing books of all time. Legendary stock picker Sir John Templeton was known to keep a copy on his bookshelf.
At the core of Crisis Investing is a powerful idea. By investing intelligently in extremely cheap markets and sectors, you can make huge investment returns.
Although Meb’s data wasn’t available to Doug when Doug wrote this book in 1979, it proves that Doug’s strategy not only works…but is one of the most powerful secrets in all of investing.
Using this strategy, Doug has amassed a literal fortune…more wealth than the average person can spend in 20 lifetimes. He once made a 64,000% gain (not a typo) buying into what would become the world’s richest nickel and copper mine. Another time he made 1,000%+ gains investing in a small Alaskan mining business.
That’s why we’re excited to announce Doug is revealing the exact secrets behind his strategy during a free online training event.
You can sign up for the training event right here. In short, Doug and his team will give attendees “basic training” on how to make money using his highly successful method. And you’ll learn the specific areas of the market with huge upside and limited downside that Doug likes today.
And best of all, you don’t have to have millions of dollars or run a hedge fund to use this strategy. You only need a few thousand dollars and an ordinary brokerage account with a company like E-Trade, TD Ameritrade, or Scottrade.
Executive Editor, Casey Research