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Part 2: How It Works

Some investors believe it is impossible to beat the stock market consistently, so they choose to own index funds designed to mimic the market’s performance. That approach is okay if you are satisfied with merely duplicating the market’s average annual return, which is expected to be in the 4 – 8% range for the next several years as the global economy slowly recovers from decades of reckless borrowing that left in its wake a mountain of excess debt.

But the truth is you can beat the market over the long haul, and many people have done so.

In fact, there is no one way right way to do it as there have been many approaches that have worked with great success over the years.

For example, Peter Lynch became legendary for guiding the Fidelity Magellan Fund to an amazing record of averaging 29% gains annually over fourteen years by using a formula that identified growth stocks trading at a reasonable price. Yet at the exact same time, Warren Buffett was on his way to becoming one of the richest people in the world by owning a very different group of value stocks.

How Algorithmic Investing Works

Regardless of which style you choose, the essential ingredients of any successful algorithmic approach to investing are: (1) using a system that is based on a valid set of assumptions; (2) being able to express and measure those assumptions with a mathematical formula; and, (3) having a methodology for converting those metrics into accurate buy and sell signals.

As simple as that seems, many investors have tried and failed to beat the market using an algorithmic approach because they could not accomplish all three of those critical elements. That’s why we studied the most successful investors of all time, so we could determine exactly what they did that set them apart from everyone else. And what we learned from them we have put into practice for you.

How Systematic Wealth Works

Just as important as having a proven methodology for identifying undervalued companies is also using human judgment in knowing when to activate a buy signal and when to ignore it. No matter how good an algorithm is at finding hidden bargains, not every variable affecting a stock’s value can be converted to a mathematical formula.

For that reason, we use our algorithm as a screening tool to identify stocks that meet our objective requirements, and then evaluate each one of them for subjective criteria that might disqualify it from consideration. For example, even though a stock may score highly based on the strength of its balance sheet, we may discover that it just lost a major contract with a big customer that has not yet impacted its financial results.

Additionally, there are macroeconomic issues that may favor one group of stocks over another, even though there is no way to express them in purely mathematical terms. For instance, early in 2016 the price of oil dropped precariously low, temporarily suppressing earnings for most energy companies. But we believed the price of oil would soon reverse course based on a change in leadership at OPEC, and sure enough within a few months the price of oil had jumped nearly 50%, significantly pushing up share prices of the energy companies that passed all of our other tests.

In that regard it may help to think of the Systematic Wealth process as a funnel with several layers of objective screens – or mathematical formulas – in it, methodically sifting through thousands of stocks until only the fittest make it all the way through. At that point there are only a few dozen to evaluate subjectively, most of which are further eliminated from contention for one reason or another.

What’s left is a small handful of high-performing companies trading at big discounts to their intrinsic value. Even then, not every one of these stocks is going to shoot up in value right away. But since we don’t know exactly when everyone else will wake up and realize how undervalued they are, we are better off buying them while they are still cheap and then waiting for them to take off rather than miss out on the opportunity altogether.

Even then, our typical holding period is less than six months since it usually only takes one or two quarterly reports to reveal each company’s hidden value. Depending on which aspect of a company’s performance profile we are emphasizing, the potential gain can be anywhere from a “modest” 10 – 20% to more than 50% in that period of time. On a time-weighted basis many of our gains work out to annualized returns of greater than 100%, or more than ten times what index investors might expect in a typical year.

In that case, why doesn’t everybody invest this way? Well, as we stated at the opening, many people have allowed themselves to become convinced that it just isn’t possible to beat the market on a consistent basis. However, much of that is due to the self-serving propaganda dished up by the packaged product pushers on Wall Street who make a lot of money selling index funds, annuities, and other forms of passive investment.

But we know better than that and our algorithm has the track record to prove it. That’s why we are proud to help you achieve Systematic Wealth.

Click Here to continue to Part 3: What It Is