Editor's note: Today, we're sharing an updated article from our colleague Mike Barrett, originally published in the Stansberry Digest in February 2021. In it, he covers why you'll rarely find better odds of success than in the period after a massive sell-off... Plus, Mike details how one investment approach could help you make great picks more consistently over time.
For Bryson DeChambeau, "simple and repeatable" is the key to success...
In September 2020, the golfer won the U.S. Open by six strokes. He was the only competitor in the tournament to finish under par – and he was only 27 years old.
The victory cemented DeChambeau's place in the sport's history... He joined legendary golfers Jack Nicklaus and Tiger Woods as the only men to ever win an individual title at the NCAA Division I golf championships, the U.S. Amateur, and the U.S. Open.
Over the years, DeChambeau has become known for his unique approach to the game. His nickname is "The Mad Scientist" – a nod to how he uses all the available data to his advantage.
But when it comes down to it, the key to DeChambeau's success isn't complicated at all...
Today, I'll explain exactly how DeChambeau does it. He uses an innovative system that gives him an edge over the competition from the first tee box.
But this essay isn't just about golf... I'll also show you how the same basic principles that DeChambeau uses on the course can help you improve your investing game.
"Mastery of everything is all about the basics"...
That's one of the core messages from author Matthew Kelly in his 2020 gem, I Heard God Laugh.
I couldn't agree more... If you want to be successful at something in life, you first want to figure out, and focus on, the few things that matter most for that particular skill – the "basics." From there, success will surely follow.
That's what golfing instructor Todd Graves stresses with the "single-plane golf swing." And DeChambeau is one of the most successful golfers to put this concept into practice...
The single-plane golf swing differs from a conventional swing in one key aspect...
Most golfers don't swing efficiently. Whether they realize it or not, the club passes through several different planes between when they set up to hit the ball and when they make impact.
However, in the single-plane swing, your front arm essentially becomes an extension of the club's drive shaft.
Your stance sets up farther back from the ball. It basically forces your swing to remain on a single plane as it goes back to gather speed, then gets pulled down to strike the ball. Here's how DeChambeau explained it in Golf Magazine in June 2019...
I don't want my hands starting low at the beginning of my swing and then getting high at impact. I just want to start them high and then return to that position...
Think about it this way... If you were to design a machine to swing a golf club, how would that machine do it? You wouldn't program the machine to have a bunch of excess movement. You'd build it so it's simple and repeatable. That's what my swing is.
In order to repeat the same (correct) swing over and over, DeChambeau also switched to "same-length clubs"...
You see, as you move from a conventional 4-iron to a conventional 9-iron, the club length shortens. That means your setup must also adjust. But by using irons that are all the same length, DeChambeau can employ the same exact swing and setup every time.
In other words, the single-plane golf swing is perfectly synced with one of the universe's immutable (though mostly underappreciated) laws... "Keep it simple."
This simple and repeatable approach has a big advantage...
By minimizing the number of things that can go wrong on every swing, it's easier to know what adjustments you need to make.
That's what really intrigued me about the single-plane golf swing... And it's why I adopted it myself a couple of years ago.
My greatest golfing frustration was that I never understood why I would hit one tee shot 200 yards straight down the fairway, but couldn't replicate it on the next tee. Now, I know why...
Before, I tried too hard to get every little part of the process right. I didn't focus on the basics. The single-plane swing corrects that and helps me stay consistent.
Now, again, I'm not sharing all of this just to improve your golf game...
You see, a "single-plane swing" exists for investors, too.
It's a simple, repeatable system that can help minimize your mistakes, improve your results, and keep you focused on what matters most.
I use this system with my personal investments. And I use it as an analyst, too. It's how I have uncovered hidden gems on a regular basis year in and year out.
My "single-plane swing" investing system has just three simple, repeatable steps...
- Limit mistakes by only investing when the odds are in your favor.
- Use valuations to find and select your best ideas.
- Stay relentlessly focused on the two most important "Cs" in investing.
No one hits every drive straight down the fairway in investing...
No one.
The key to success is to limit your mistakes. You only want to put your hard-earned capital at risk when you're likely to succeed.
It sounds simple, but it's a lot harder to do than you might think. For years, investors enjoyed a seemingly never-ending bull market in stocks. During those periods, you might feel like you can't make any mistakes.
But think about it... Has every stock you bought gone up forever? Of course not.
One way to limit your mistakes is to focus on two attractive setups – broad market sell-offs and underappreciated growth stories.
During big market downturns like what we experienced last year, most folks sell first and ask questions later...
They let panic talk them out of great businesses, regardless of their underlying fundamentals.
But the thing is... this indiscriminate selling creates a buying opportunity for those of us who are ready. The odds of success are rarely more stacked in your favor than they are after a massive sell-off... It's the best time to find great bargains in the stock market.
But big sell-offs like the ones we saw in 2020 and 2022 are relatively rare... At most, they occur once or twice each year.
So I spend most of my time looking for the other type of attractive setup, which is more common – underappreciated growth stories.
These situations involve companies with expected revenue growth of, say, 6%... but whose shares are priced as if growth will be closer to zero for the next several years.
For instance, in the July 2020 issue of Extreme Value, my colleague Dan Ferris and I recommended an obscure stock that fits this mold...
Due to ongoing pandemic worries, this company's shares were priced for zero revenue growth over the next few years. But through extensive research, we concluded that its growth prospects were much better... due largely to its long history of successfully acquiring competitors.
Six months later, the company struck once again... and announced a blockbuster acquisition to significantly boost its business. Shares soared roughly 30% on the news. By now, Extreme Value subscribers who followed our advice are up 267%.
Of course, even the best-chosen stocks can still fall if something unpredictable happens. But capitalizing on panic-induced sell-offs and underappreciated growth stories will help you limit your mistakes... because these situations make it difficult not to win.
Moving on to the second step in my "single-plane swing" investing system...
Use valuations to choose investments. In a typical month, I evaluate more than 100 investment ideas...
I cover a lot of ground quickly because I rely on a proven, proprietary valuation model that's both simple and repeatable – just like DeChambeau's golf swing.
By now, I've used it thousands of times. It's so effective that I can evaluate a stock I'm not even familiar with... And in a matter of minutes, I can get a high-conviction estimate of its intrinsic, or "real," value – the highest expected price that a knowledgeable buyer would pay for the entire business.
Knowing a lot of intrinsic values also provides me with a great sense for relative value. In other words, I know which stocks offer the most bang for the investment dollar at their current prices.
At any given time, the market's most over-loved, overhyped stocks offer little or no upside compared with their real values...
For these stocks to be worth their high valuations, everything would have to go perfectly right for them all the time. That's incredibly rare.
The best ideas usually don't show up on investors' collective radar. These are the opportunities I'm diligently looking for month after month.
In his essay titled "Something of Value," investing legend Howard Marks sums up the thought process of every value-seeking investor...
The goal at the end of the day should be to figure out what all kinds of things are worth and buy them when they're available for a lot less.
You simply can't know in advance where the most attractive opportunities will be. But you can use a simple and repeatable system to constantly evaluate your pool of potential investments relative to each other...
By developing this sense of value, you can uncover the very best ideas.
But it doesn't matter if you find the best ideas if you don't also follow this final step...
You must always focus on the two most important "Cs" of investing – capital and compounding.
Capital is just a fancy word for savings. To build wealth, you must first accumulate capital. Then, to maximize your return on it, you want to focus on compounding.
Compounding is most often thought of as "earning interest on interest"... For everyday stock investors, we're really talking about earning dividends on dividends. And taking it a step further, it means earning additional unrealized gains on top of your unrealized gains.
Just consider this finding from a recent study by money manager Hartford Funds...
Going back to 1960, 69% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding.
That's an incredible amount of wealth created by essentially doing nothing.
And as Warren Buffett, one of the greatest long-term investors of all time, once said...
My wealth has come from a combination of living in America, some lucky genes, and compound interest.
Fortunately, you don't need to be Buffett to enjoy these kinds of returns...
About two decades ago, a friend of mine started four dividend-reinvestment plans.
He has made regular contributions over the past 20 years. But more important, thanks to his reinvested dividends and stock splits, he now receives an annual income of $100,000 off these plans alone.
My friend would need to accumulate and invest at least 10 times more capital to generate a comparable amount of annual income today. That's the power of compounding over the long run.
So make compounding your friend. And never, ever forget its first rule, as espoused by Buffett's right-hand man, Charlie Munger...
The first rule of compounding is to never interrupt it unnecessarily.
Let your well-bought investment ideas keep working year after year... and decade after decade.
Every golfer who steps up to the first tee inherently senses two things...
Adversity awaits... But so does opportunity.
Your success depends on how well you minimize the former and exploit the latter. You set yourself up to succeed with a system that limits your mistakes, improves your accuracy, and helps you focus on the "simple and repeatable" swing mechanics that matter most.
The same is true about investing...
Limit your mistakes by only putting capital to work when the odds are in your favor... Invest in companies that are undervalued rather than overhyped... And never lose sight of investing's two most important "Cs" – capital and compounding.
Good investing,
Mike Barrett
Editor's note: Mike recommended one stock to his subscribers that's already up more than 130% in just four months... And he has pinpointed two different 10-baggers, all thanks to a systematic approach he's putting to work now – and a new type of investment we've never fully covered. Now, we're finally in the ideal market to start using this specific strategy. Learn all the details – including why we might never see another opportunity to get in at prices like these – by clicking here.
