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Part 3: What It Is

The Rapids Profits Matrix (“RPM”) is quite complex, but we make it easy for you to use.

RPM employs three complimentary steps to help you profit. The first is a set of expert calculations that have beaten the S&P 500 for decades. The second is a proprietary tool that gets to the essence of what moves a company’s stock price. And the third is good-old-fashioned human skepticism to confirm that the result of the first two components will stand up in the real world.

Step 1: Start with the Experts

Our first set of tools uses Artificial Intelligence (“A.I.”) to think like some of the greatest stock market investors who ever lived. In order to do so, we hired a pioneer in the field of A.I. who read through what each of these experts have written on the subject, and then converted each one of those strategies into a series of mathematical formulas.

That means there is one mathematical formula for Warren Buffett, which is quite different from the equation for Peter Lynch, and so on. That’s because each one of these experts employed a unique set of rules for determining which stocks to buy, and which to avoid. For example, Warren Buffett has a penchant for value stocks that generate a lot of free cash flow, while Peter Lynch was more interested in companies that are able to grow sales at a higher multiple than the market values their earnings.

So, our Warren Buffett formula methodically sorts through every stock that trades on a U.S. exchange to find only those that meet all the requirements for the type of stock that he likes, while at the same time our Peter Lynch formula is sorting through the exact same universe of stocks using an entirely different formula to find the type of companies he prefers. In addition to Buffet and Lynch, there are eight other experts for which we use a formula to identify potential buy candidates. The 10 experts are:

Furthermore, we have also designed the RPM to look for agreement among two or more of our experts to maximize the probability of success. Over time we have learned that when more than one of our expert formulas scores the same stock highly, both the average rate of return and the success rate improve significantly. Think of it this way; if both Warren Buffett and Peter Lynch like the same stock at the same time, then the odds are pretty good that it is going to perform quite well.

However, we have also determined that it matters which two experts agree on the same stock, so the fact that any two of them both like the same company does not by itself result in an automatic buy signal. For that reason the RPM specifically looks for agreement on certain pairs of experts, and not just any two. If a formula that rewards asset values and a formula that likes income growth agree on the same company, then the combined effect of those two elements is more powerful than two separate formulas that focus on traits that are not complementary.

And since most of our formulas have been in use since 2003, we have enough historical data to calculate the average holding period, average rate of return and success rate for each of the combinations that result in a buy signal. For example, one combination may average a 12% return over six months with 64% success rate, while another has an average return of 7% over three months with a 61% success rate.

Step 2: Include an IDEAL Stock Rating System

In addition to our expert formulas, we also utilize our proprietary IDEAL Stock Rating System to look for stocks that are either grossly undervalued or overvalued.

The IDEAL system rates every company in the S&P 500 Index based on three variables – dividend yield, cash flow and relative valuation – and assigns a total score on a scale of 0-10 to each stock.

From a long term perspective, dividends have accounted for over half of the total return of the stock market. So, if you own stocks that pay little or no dividend, you are effectively limiting your potential return to less than half of what it might otherwise be. 

In order to pay dividends and still have enough cash left over to invest in the growth of the business, a company must be able to grow its net operating cash flow on a consistent basis. Without more cash coming in at the top, everything beneath that suffers including CapEx budgets, M&A activity, and the ability to attract and retain the best employees.

In the near term, the single most critical factor is the extent to which a stock is fairly priced given its financial condition. There are many ways to measure that, but we look at the forward estimated 12-month P/E ratio since that reflects what is expected to happen in the future, not what has occurred in the past.

A company that scores highly according to all three of these variables is in a much better position to compete for investor capital, and it usually only takes one or two quarters of earnings reports for that advantage to become apparent to the rest of the market.

Step 3: Add the Human Element

Since our expert formulas tend to zero in on stocks outside of the S&P 500 Index, the combination of our two models allows us to look for opportunities throughout the entire spectrum of companies that trade on every major U.S. stock exchange.

That gives us the flexibility of emphasizing small-cap growth stocks when the stock market is in a particularly bullish mood, but switching over to large-cap value stocks when it pulls in its horns.

We also look at trends in specific sectors to determine if a company our system likes is in an industry that is fighting an uphill battle at the moment – such as the energy sector was in early 2016 – in which case we may skip over that one for another that is currently benefitting from more favorable market conditions.

Of course, if a company has recently experienced a major event that does not yet show up in our formulas, then we would eliminate it from contention as well. It doesn’t happen often, but occasionally a company will be sanctioned by its industry regulators or be accused of some form of corporate malfeasance that drives its share price down to what may appear to be a very attractive level even though the long term financial consequences of those events are not yet known.

In other words, we use the same kind of common sense you would when determining if a company represents a reasonable risk, and avoid those that have an unquantifiable risk we find unacceptable.

Using the Rapid Profits Matrix

Now that you understand how we manage the RPM, there are some things we think you should know about how you can get the most out of it as a user.

First, the RPM isn’t perfect and not every trade results in a positive outcome. Even legendary investors like Buffett and Lynch understand that and strive for a success rate in the 50 – 60% range. But by limiting losses on the unsuccessful trades while taking big gains on the ones that work in their favor they are able to beat the market by a wide margin over time.

Second, we do not recommend that you “cherry pick” only a few of our recommendations, but instead spread your money across most or all of them to maximize the probability of success. We aim to have 10 – 20 open trade positions at any time, so dedicating 5 – 10% of your account balance to each trade should allow for proper diversification.

Third, because all of our buy alerts are intended to have a holding period of no more than six months, we also express our results on an “Annualized Return” basis to make it easier for you to compare them. For the examples in the paragraph above, a 12% return over six months equates to annualized return of 24% while a 7% return over three months works out to an annualized return of 28%.

Finally, you should also know that our buy and sell alerts are very timely, and should be executed immediately. Once we close out a position in a stock we will not issue any further alerts on it, so it is important that you follow along closely to our advice. In addition to sending out every alert via email, we also offer you the option of receiving them by text directly to your cell phone (to receive text alerts, please contact our Customer Service team at 1-800-832-2330).

Historical Performance

Since its inception in 2003 through the launch of Systematic Wealth in August of 2016 the Rapid Profits Matrix trading formula has issued 1,286 buy alerts, of which 787 (61.2%) have resulted in a positive return and 499 (38.8%) lost money. So far in 2016 it is performing a little bit better than that; with 19 out of 29 (65.5) positive, and the other 10 out of 29 (34.5%) negative. The average return for all 1,286 closed trades is 8.8%, compared to 2.7% for the S&P 500 Index for the identical holding periods.