In 1975, a young man named Ray Dalio founded, out of his apartment, investment management firm Bridgewater Associates. Today, it is the largest hedge fund in the world with about $150 billion in assets under management (larger than No. 2 and No. 3 combined).
Bridgewater has consistently outperformed its peers. The hedge fund's flagship Pure Alpha fund has reportedly delivered an average annual return of 13% after fees since its inception in 1991. He even made money during the last financial crisis.
Worried about the enormous amount of debt on many of the large institutions' balance sheets, Dalio decided to take his findings -- and warnings -- to the Treasury Department, where he presented his research in December 2007. He later went to the White House after Treasury spurned his theory. He once again explained that he believed the banking system was under great stress and was bound to lose an enormous amount of money, which would, in turn, have a detrimental effect on the economy.
Dalio's warnings were once again ignored. But suffice it to say that while almost all of his peers were losing money hand over fist, Dalio's fund turned a profit in 2008.
Dalio's success secrets are shared in his new book, "Principles" (a sort of revision of his 2011 investing manifesto), which was released September 19.
These "principles" are Dalio's investing guidelines... the rules he's carefully followed that helped him amass enormous wealth for him and his clients. Note that even the world's largest, and arguably most successful, hedge fund abides by some sort of investing rules. Although Dalio doesn't outline his exact "buy" and "sell" signals in the book, he talks considerably about the philosophy that has made him so successful.
What we do know is that Dalio uses a system to scan the world for investment opportunities across numerous asset classes and has buy and sell signals built into his model. If this sounds familiar, that's because it's exactly what we do in my premium newsletter, Maximum Profit.
One of Dalio's top philosophies struck a chord with me concerning not only the market, but the Maximum Profit system in general.
According to Dalio, one of the biggest reasons people aren't successful is due to being close-minded. He believes that in order to be truly successful, you need to be "radically open-minded."
You see, what we do in Maximum Profit isn't the "typical" investment approach. We use a rigorously-tested system to identify stocks, and then it tells us when to buy and when to sell. The two indicators are some of the most thoroughly researched concepts in finance: momentum and cash flow.
Granted, system- and momentum-based investing is beginning to become more common, but for most investors it's still unfamiliar territory. And the fear of the unknown is what keeps people from taking that next step.
It's Time To Step Out Of Your Comfort Zone
I was originally skeptical of "momentum" investing. I started my career in finance learning the typical framework of fundamental analysis, modern portfolio theory and efficient market hypothesis. Of course, these are all things that I needed to learn and understand, but there was always this great divide among the industry between "value investors" and "technical investors."
But over the years of seeing just how successful momentum and rules-based investing can be, I've grown to become quite passionate about this approach. Of course, I haven't dismissed value investing altogether.
In fact, I believe that value investing and momentum investing can work side by side -- and the Maximum Profit system is a testament to that (cash flow is a vital fundamental indicator in the system's algorithm).
This week I was reminded of the power of my system's cash flow algorithm as I was running cash flow equity screens and backtesting the results to update my annual "Cashflow Aristocrats" report. Historically, these stocks have provided some great returns.
For those who are unfamiliar with this report, here's how it works. I maintain an index, which I've dubbed my "Cash Flow Aristocrats Index" that's comprised of the top stocks in the market based solely on cash flow growth. I rebalance the index annually. Again, this index really has nothing to do with momentum or relative strength. This is just a test of cash flow.
And I think the performance of my Cash Flow Aristocrats Index speaks for itself:
I then take the holdings that will make up the index for the upcoming year and run them through my Maximum Profit system to find the very best of the best. I then publish my top recommendations from the index -- along with all of the constituents of the index -- in the report.
These stocks are unique in that my holding period is one year. I don't constantly monitor them like I do the stocks in my regular portfolio. Again, this report is to prove how effective cash flow is, but I still run all of the holdings from the index through my system to find what I believe will be the top performers from the group for the upcoming year.
So far, it hasn't disappointed...
Previous Picks From Cash Flow Report
|Electronic Arts (EA)||91.2%|
|Office Depot (ODP)||25.7%|
|Selective Insurance Group (SIGI)||28.7%|
As I said, I'm currently working on the next edition of this report. As soon as it's ready, my subscribers will be the first to get their hands on it.
My point is that investors should be willing to try new things. The more tools you have at your disposal, the better. Remember Dalio's principle of keeping a "radically open mind."
My advice: Consider stepping out of your comfort zone. Try something different than the routine strategy of "buy and hold" that most investors subscribe to. Once you open your mind to alternative investment strategies, you'll have a leg-up on the average investor.
If you're curious to learn more about a proven system/rules-based investing strategy like Maximum Profit, then I encourage you to check out this report. We've made gains of 82% in 48 days... 118% in 86 days... and 266% in 12 months with this system. And while there are no guarantees when it comes to investing, with the Maximum Profit system working in our favor, I see no reason for us not to continue our winning ways.
This article originally appeared on StreetAuthority.