If you've never heard of Bill James, don't feel bad.
Until recently, his name was only reverently whispered among circles of "statheads" -- a small but growing community of baseball fans who sought to more accurately quantify the performance of players beyond traditional measurements.
After leaving the Army, James earned degrees in English, economics and education from the University of Kansas. But he got his start writing about baseball in the 1970s while working the nightshift as a security guard at the Stokely-Van Camp pork and beans cannery.
Rather than following the traditional sports writing narrative, James' curiosity led him to ask questions and research the way baseball statistics informed the decisions teams made about game strategy and roster building. At first, his work was dismissed and considered "unreadable" by major publishers. So James self-published his writings, often accompanied by pages and pages of statistical information.
Over the course of a few years, James' work slowly gained respect and his research led to the pioneering of a field known as "sabermetrics." This form of analysis questions long-held beliefs about the baseball, such as the importance of traditional stats like batting average or runs batted in (RBI).
Instead, James and early sabermetrics proponents argued that stats like runs or on-base percentage were more important. But they took their findings a step further by developing new methods of analysis and coining advanced statistics such as "wins above replacement," "on-base plus slugging percentage" and more.
Over time, as James' theories gained in popularity, Oakland Athletics General Manager Billy Beane took notice. His club had suffered from years of inconsistent, up-and-down seasons. The A's would bring up new prospects from their farm system, develop them, and then wealthy, high-payroll clubs like the New York Yankees would come in and lure the players away in free agency with lavish contracts once they became stars.
So Beane began using sabermetric principles to remake his squad in the late 1990s, finding rising talents and underappreciated players that other GMs weren't noticing in the draft and free agency.
Soon, Beane was able to field successful teams, making the playoffs for four straight years and becoming the first team in a century to win 20 consecutive games in the American League. Michael Lewis (author of "The Blind Side," "The Big Short" and "Flash Boys") would later write a book about Beane's use of sabermetrics. The book, "Moneyball," was later adapted into an Oscar-nominated movie starring Brad Pitt.
As for Bill James, his theories have gained more and more acceptance over the years. Today, he is widely regarded as the father of sabermetrics and currently works as a consultant for the Red Sox. The "old school" doubters still persist to this day, but teams like the Boston Red Sox, Houston Astros, New York Mets -- and yes, even the New York Yankees -- and others have adopted James' sabermetric (or "moneyball") ideas.
Introducing: StreetAuthority's 'Moneyball' System
I bring all of this up because I like to think we have our own "moneyball" system here at StreetAuthority. I've written about this system before, and I was privileged enough to be a part of the team that developed, tested and perfected the system over the years.
It's called the Maximum Profit system.
In the early stages of development, we started off by questioning long-held beliefs about "efficient markets" and traditional buy-and-hold investing.
You see, for years, economists and market pros held the belief that the stock market accurately reflected all of the information available about an asset. Any "edge" that could be gained was only temporary, and wouldn't last once the wider investing public caught on.
I know the idea of efficient markets may sound crazy now, especially in light of what we now know about the market's inability to accurately price things like mortgage-backed securities and the big banks' exposure to the crumbling housing market in 2008. But I should note that Eugene Fama, the economist who coined the "efficient market" hypothesis, is a Nobel Prize winner.
And he's since admitted that there are in fact "anomalies" (read: exceptions) to his hypothesis, most notably the very one that is the foundation of our Maximum Profit system.
I'm talking about momentum.
Longtime readers might already be familiar with momentum investing. We've often referred to it as relative-strength investing, and I've talked about it before in previous StreetAuthority Daily issues. But for those who need a refresher, allow me to provide a brief recap.
Relative-strength investing is simply a type of momentum investing. It involves buying the best-performing stocks (relative to the market) and holding them until their momentum changes course.
To most investors, especially those who consider themselves value investors, this strategy probably sounds ridiculous. After all, most people have heard the phrase "buy low, sell high."
But that's a mistake... and it's one many people make whenever they approach a stock pick.
The Results Speak For Themselves
Momentum is one of the most time-tested, thoroughly researched methods of investing out there. And much to the chagrin of efficient market proponents and buy-and-hold investors, studies show that momentum investing has thoroughly and consistently beat the market (more on that in a moment).
If we were to look for the equivalent of the Bill James in the field of momentum investing, I'd point you to a man named Richard Driehaus. He may not be as well-known as Warren Buffett or George Soros, but he's considered by some to be the father of momentum investing.
Driehaus found early on that simply buying traditional value stocks with low price-to-earnings ratios automatically eliminated many of the market's best performers. Instead, he looked for little-known companies with a history of robust earnings growth, and bought the short-term winners -- i.e., stocks that had gained the most relative to the market. (This is also known as relative-strength investing.)
This "buy high, sell higher" approach is one of the reasons he was named to Barron's All-Century team of the 25 most influential figures of the last 100 years in the mutual fund industry. [You can read more about him here and here.]
And since Driehaus first put forth his ideas about momentum investing, they have slowly and steadily gained acceptance as one of the single most effective ways to beat the market in the long run.
As my colleague Jimmy Butts, who runs our Maximum Profit system, points out:
One of the best studies on this phenomenon was done by the asset-management firm AQR Capital Management. They looked at U.S. stocks going all the way back to 1927. What they found was that at any given time, the stocks that were outperforming 80% of the market continued to outperform for at least the next 12 months.
The same thing goes for the underperforming stocks. The bottom 20% of performers continued to underperform over the same period.
This idea is the central concept underpinning relative-strength investing. Relative-strength investors rank stocks based on performance, buy the best performers and sell that stock when the momentum changes course.
If it sounds too easy, that's because it is. Yet despite its simplicity, this strategy has been executed with staggering results.
For example, AQR found that using a relative-strength strategy, the firm was able to outperform their benchmarks in nearly every investing category (including mid caps, blue chips and small caps).
What's more, James P. O'Shaughnessy, author of "What Works On Wall Street," discovered that using a relative-strength-based system would have beaten the market by an average of 3.7 percentage points per year over the last 83 years.
To put that into perspective, that performance would have turned any $10,000 invested into more than into more than $572 million.
The market would have only turned that $10k into about $38 million -- nearly 15x less than a relative-strength-based system.
Taking It To The Next Level
With that kind of track record, it's hard to argue with the merits of relative-strength investing.
But as powerful as relative strength is, our "moneyball" system, Maximum Profit, takes this a step further. By combining relative strength with another proprietary fundamental indicator we developed in-house, Jimmy and his team assign a "Maximum Profit score" to each and every stock on the market. The higher a stock's "MP score", the better its chance of delivering blockbuster gains.
Take Lannett Company, Inc. (NYSE: LCI) for example. My system originally tagged Lannett as a buy back in July 2013, when the stock was sporting a Maximum Profit score of 87.
Not only did the Maximum Profit system trigger buy signals, but more importantly, it alerted investors exactly when to sell too. And after about 13 months, my system triggered a sell signal, telling us it was time to lock in our 181% gain.
Of course, not every stock with a high Maximum Profit score will jump this much. But in the past, our system has helped turn a stock with a 92 "MP score" into a 32.5% gain in 5 months... an "81 MP score" into a 71.9% gain in 8 months... and a "95 MP score" into an 89.6% gain in 10 months.
Again, I know the idea of "buy high, sell higher" might seem a little foreign for some of you. But at the end of the day, the results speak for themselves. If you're at all curious to learn more about momentum investing, I encourage you to stay tuned over the next few weeks. We'll be diving deeper into the discussion of how relative-strength investing works, as well as explaining how Jimmy has used the Maximum Profit system to deliver some of the best, most consistent gains StreetAuthority readers have seen from any of our premium services over the past two years.
In the meantime, you can also see the names and ticker symbols of several top-rated Maximum Profit stocks that are currently flashing "buy."
This article originally appeared on StreetAuthority.