Building the 'West Coast Offense' of Investing Success

Fifty years ago, Bob Trumpy made a mistake – and changed pro football forever...

The Cincinnati Bengals were playing the Oakland Raiders in the 1970s. After the huddle, the players approached the line to get into position.

However, there was a small problem...

Trumpy, the Bengals' tight end, lined up on the right side of the offensive line – when their play needed him on the left. The quarterback immediately pointed out the error, so Trumpy scurried into the correct spot just before the ball was snapped. Problem solved.

But then, something unexpected happened...

As Trumpy moved, five Raiders defensive players followed him. And in their haste to make the unexpected adjustment... they all crashed into each other.

The "Three Stooges" act caught the attention of Bengals offensive coordinator Bill Walsh...

Walsh realized he could use this new weapon to his advantage by making similar moves – on purpose – to disrupt the defense. The extensive use of shifts became a hallmark of Walsh's most celebrated innovation, the "West Coast offense."

Almost no one has had more influence on football over the past 50 years than Walsh, who passed away in 2007. He transformed the woeful San Francisco 49ers into one of the most dominant NFL teams of the 1980s – and that was only one of his achievements.

Fortunately for us, his blueprint for excellence also applies to the financial markets...

Nearly 30 years ago, Walsh outlined a simple, three-step formula for success. And as you'll see, following these three steps is a surefire way to become a better investor.

1. Make a thorough game plan... Then, have the nerve to stick with it.

The hard part of any plan is sticking to it when things go wrong. As Walsh told the Harvard Business Review in 1993 (my emphasis added)...

Making judgments under severe stress is the most difficult thing there is. The more preparation you have prior to the conflict, the more you can do in a clinical situation, the better off you will be...

Say it is the last 20 seconds of a game and we're losing... We have already practiced six plays that we can apply in that situation. That way, we know what to do, and we can calmly execute the plays. We'll have no doubt in our minds, we will have more poise, and we can concentrate without falling prey to desperation.

For many investors, deep and sudden market declines are a source of severe stress...

We can't practice for these kinds of situations like a football team can. But we can (and must) consider how we'll respond to them before they arrive. That way, as Walsh eloquently put it, "We can concentrate without falling prey to desperation."

For example, in the March 2020 market freefall, many folks became indiscriminate sellers. They wanted out of everything they owned, no matter the price... They fell prey to desperation.

This is almost never the best course of action. And it certainly wasn't in 2020. Stocks soon rebounded to all-time highs.

Decide ahead of time what you'll do with each position in your portfolio in case of a big downturn. Simply ask yourself this question...

If Stock X declines 40%, will I still want to own it?

If the answer is "no," then think through what you'll do instead. It's the only way to avoid desperation and the bad decisions that go with it.

2. Develop an edge by seeing what others miss.

Trumpy's mistake in the 1970s probably wasn't the first time something similar happened. However, it went on to inspire the West Coast offense because Walsh was predisposed to see opportunity where others didn't.

Investing success also often comes from seeing what others miss. For example, many investors make the mistake of only analyzing what a company has done in the past...

Historical data are readily available from multiple sources. I'm talking about things like how quickly revenue has grown, or how much operating margins have improved. And as an investor, you can use this information to make educated predictions about the future...

However, what happened in the past is still only the starting point. You must also ask questions about what to expect going forward.

Will revenue grow faster or slower than it did in the past? Will profit margins rise or fall?

It takes far more work to ask these kinds of questions, build a case for the answers, then model the likely outcomes. That's where the edge often lies in investing.

Look at what's coming in the next five years... not just the past five. That brings us to the third and final step of Walsh's formula...

3. To enjoy enduring success, rely on a system that generates unique, high-quality results.

Winning the Super Bowl once is an accomplishment most NFL head coaches never experience. Incredibly, Walsh won it three times in eight years.

Walsh built a comprehensive system designed to win championships again and again – no matter who was on the roster. And that system paid off with specific, unique advantages for his team... like learning more plays and getting more value out of practice time.

My colleague Dan Ferris and I use a systematic framework in our Extreme Value newsletter. We look at "Five Financial Clues" for each company we recommend.

Our ideal investment gushes free cash flow... boasts thick margins... has lots of cash with zero debt... rewards shareholders with dividends and share buybacks... and generates a consistently high return on equity.

We also value companies based on forward-looking expectations. Combined, we get a system that helps us make well-informed estimates of real (or "intrinsic") value. And intrinsic value is the most important piece of data we're looking for...

That's because the company's historical performance and forward expectations are both reflected in this one figure. Large gaps between a company's share price and its intrinsic value often mean investors are missing the company's future growth potential.

Having a system like this isn't about winning every time. It's OK if you don't score a touchdown with every single investment. The goal is to build wealth over the long haul.

Investors would do well to follow Walsh's timeless, three-step formula...

Do this, and you should be able to enjoy investing success... year after year.

Good investing,

Mike Barrett

Editor's note: One of our subscribers recently shared an incredible story with us – one of the most surprising in the history of our company. He made all the classic investing mistakes. But with the help of one Stansberry Research strategy, he was able to go from nearly going broke... to making a $54 million fortune. Even better, this technique is most powerful when you begin using it after a major pullback.

With the S&P 500 and the Nasdaq officially in bear market territory, we're finally sharing the details of this reader's journey... Get the full story here.

Further Reading

"It's an extremely tempting time to doctor your portfolio," Sean Michael Cummings writes. Investors have been selling stocks in droves recently. But now more than ever, it's crucial to stick to your investment plan instead of blindly following the crowd... Learn more here: Keep Your Portfolio Out of the Operating Room.

"When times get tough, our intuition tells us to do more," Steve says. But doing more during periods of volatility – like we're seeing today – can ruin your portfolio if you're not careful... Read more here: Now Is Not the Time to Tinker With Your Investment Strategy.

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You can limit your losses by planning ahead and sticking to your game plan. And being aware of this other crucial concept can help you avoid underperformance...