Recently, I sat down for an interview with my colleague Jimmy Butts, who runs StreetAuthority's premium advisory, Maximum Profit. Unlike most of the services we offer, Maximum Profit is a system-based newsletter. And simply put, it's been the single most effective tool for delivering bigger profits in less time than anything else in StreetAuthority's history.
This interview originally appeared in StreetAuthority Insider -- a publication reserved exclusively for paid subscribers to one or more of StreetAuthority's newsletters. I hope you enjoy.
Insider: Jimmy, we've featured you a number of times. But for readers who may not be familiar, tell us a little about yourself.
Jimmy: I'm a former financial advisor with seven years of retirement and estate planning experience. A couple of years ago, I decided it was time for a change. After spending years getting schmoozed by some of the biggest fund managers around the country, I wanted to find a new way to help individual investors that didn't require me to charge them outlandish fees. So I packed up and moved 1,600 miles from my home in the Pacific Northwest down to Austin, Texas to begin working at StreetAuthority.
After joining StreetAuthority, I quickly began work with the team that developed the Maximum Profit system. I've been the Chief Investment Strategist of that service for about two years now.
Insider: If I had to give a short elevator pitch describing the system, it'd probably go something like this: It's a powerful stock-picking "algorithm" designed with one goal in mind -- to make everyday investors as much money as possible in the shortest amount of time.
Is that pretty accurate?
Jimmy: Yeah, that's pretty good. But, as you know, there's a lot more to it than that. It's hard to boil down the essence of a stock-picking system that took so many man-hours and so much money to develop over the years into simple terms.
Insider: OK, then give us the longer version...
It may sound obvious, but the Maximum Profit system profits from what's working in the market at any given time.
It blows the roof off of the conventional Wall Street model altogether. In fact, I'm betting that according to most of the theories your readers have ever known or been told regarding successful investing, the system shouldn't work.
But it does... And its goal is simple: uncover what works -- and what doesn't -- so that you can beat the market in any environment.
And after years of research and hundreds of hours of testing it's become one of the best investment strategies out there.
The system combines the two most powerful indicators from the worlds of technical and fundamental analysis to find winning trades. We've tested this system on everything from S&P 500 stocks to high-yield stocks to small-cap stocks.
The results are always the same: The Maximum Profit system beats traditional "buy and hold" investing with less risk.
Insider: Now, if you don't mind, let's pull back the curtain and reveal the mechanics. As you mentioned, the system relies on two powerful, time-tested indicators for its picks. Let's talk about the first one, which is based on momentum.
Jimmy: Absolutely. In its most basic form, momentum investing is simply buying stocks when they go up and selling when they start to go down. But as easy as this sounds, historically many momentum investors -- well, ALL investors really -- have struggled with knowing exactly when to sell. They either hold on for too long and watch their gains disappear, or they cut their winning positions too early and miss out on even bigger gains.
Another problem is not having a clear idea of what to buy next, which would lead to simply chasing the latest hot stock tip (in other words buying high and selling low.)
The Maximum Profit system addresses these common problems with a tool known as relative strength (or RS). With RS we can set clearly defined buy and sell signals, taking the emotion out of the investment process, which has proven to be a bane for most investors.
Think about it this way... Most stocks have a fairly extensive trading history, so selecting a winner is actually like picking a team after the game is already in progress.
Just like in sports, I want to pick the stock that has been winning already because it has a better chance of winning in the future. RS allows me to quantify who the leaders are right now, and studies confirm that those stocks tend to outperform the average stock in the future.
Relative strength is one of the few true "edges" available in the market. In Maximum Profit, I specifically look for stocks with RS above 70. That's the first "buy" trigger. (Conversely, when a stock falls below an RS of 70, I sell. No questions asked.)
An RS above 70 means a stock has outperformed 70% of all other investments during the past six months and ensures I'm holding only the best-performing stocks. Only when a stock aces this test does it then move to the second part of my analysis.
Insider: Which is?
Jimmy: My second rule uses a metric based on cash flow, and I use it to eliminate stocks with weak fundamentals.
Some of your readers might not be familiar with cash flow, but that's OK. It's easy to understand.
Cash flow measures the amount of money coming into a business. It's the lifeblood of any company. It's used to buy new factories, pour into research and development or deliver back to investors through dividends and share buybacks.
Simply put, companies need cash flow far more than they need earnings to survive. Lehman Brothers had fantastic-looking earnings right up until the end, but it lacked cash flow.
Insider: You're absolutely right. And despite Wall Street's perverse focus on earnings, researchers have found that cash flow is a much better indicator of future stock returns. Others have found that companies with more cash flow than earnings tend to perform better over a 12-month period.
Jimmy: Yes, and the Maximum Profit system takes this analysis a step further by applying the idea of relative strength to cash flow. I want to find the companies with the strongest improvement in cash flow during the past 12 months, because those are the ones with the resources to increase earnings, reward shareholders and outperform the market.
Insider: Now let's bring all this together. To sum up, the Maximum Profit system recommends stocks that have been thoroughly vetted by your two proprietary indicators: relative strength and cash flow relative strength. By combining the RS of cash flow with traditional RS, you and your subscribers buy companies that are doing well fundamentally, but only when the shares of those companies are beating the market. And when the trend begins to reverse, the "sell" trigger hits, and you get out and move on.
And let's face it Jimmy, I know you're not one to brag, so allow me to do it for you. Since the inaugural issue of Maximum Profit, it's quickly become StreetAuthority's best-performing investment system. And in my eyes, there's nothing that has been able to deliver so many consistent winners in a variety of market conditions. That's helping subscribers enjoy some phenomenal gains.
Jimmy: Thanks, I knew that was coming... I guess I'll take some of the credit, but the great thing about Maximum Profit is that it's the closest thing I've seen to a stock-picking system for individual investors that is almost completely agnostic to the attitudes and emotions of the person using it.
Provided you exercise discipline and get in and out exactly when the system tells you to, you should be able to rack up some pretty impressive gains. Our picks have boasted gains of 39%... 46%... even 181% -- all in less than 13 months.
Insider: We've covered a lot of ground today, and there's still a lot more we can talk about. But for now, I think we'll have to call it a day. We should do this again soon.
Jimmy: It was my pleasure.
Editor Note: For those who'd like to gain access to Jimmy's latest picks, our publisher has recently opened up access to Maximum Profit at a special discount pricing -- but this offer is only good for the first 500 readers who decide to join. You'll receive a bevy of special reports, along with Jimmy's bi-weekly analysis of the system and its picks. To learn more, click here.
This article originally appeared on Street Authority.