How To Beat Buffett, Icahn, Soros At Their Own Game

Cast your net where the big fish swim. -- Anonymous

Who hasn't dreamed of buying and selling stocks alongside the most successful investors of all time?

I'm talking about big fish like Warren Buffett, hedge fund manager George Soros and activist investor Carl Icahn.

(Let the record show that the per-share book value of Buffett's financial holding company has grown by a mind-numbing 586,817% since 1965, trouncing the S&P 500 by an equally mind-numbing factor of 78.9 times. As for Soros, Forbes this month estimated his net worth at $20 billion. That puts him in the same neighborhood as Icahn, whose latest investment fund has delivered an average annual return of 41.3% since 2004, trouncing the broader market by a factor of seven.)
 

I'm also talking about lesser-known but remarkably successful investors such as Jim Simons of Renaissance Technologies and Steve Cohen of SAC Capital, who have delivered investment gains of more than 30% a year for a decade or more.

Thanks to a new advisory from a StreetAuthority sister company, Profitable Trading, it's now not only possible to ride the coattails of these Wall Street icons, there's a good chance you can beat them at their own game in the process.

You see, Michael J. Carr -- the Chief Trading Strategist for Guru Investing -- casts his net where the big fish swim.

Let me explain...

Each quarter, Michael scours the files at the Securities and Exchange Commission to determine which stocks are being favored by the top investors in the country -- those who've proven they can deliver market-beating returns under any market conditions. Investors like Buffett, Soros, Icahn, Simons and Cohen.

At the moment Michael is tracking 400 stocks that 20 of these investing gurus expect will be big winners. In other words, Michael utilizes the research from the best investment minds on the planet to create his watch list.

But that's just the beginning.

Michael himself is a Chartered Market Technician, of which there are only about 1,400 in the world. And he's got 26 years of trading experience under his belt, during which time he's written two books on the subject.

The primary stock-ranking tool Michael utilizes in his own research is relative strength, a measure of the price trend of a stock compared to another stock, or to the market as a whole.

Among the hundreds of "guru" stocks he identifies, Michael will consider only those that are rising faster than 70% of the market during the prior six months.

From the stocks that pass this part of the test, Michael looks at the strength of the companies' cash flow -- the amount of money coming into the business, a barometer he regards as the very lifeblood of a company. Here, again, Michael considers only those holdings whose cash flow per share is rising faster than 70% of all available stocks.

What's left is the best of the best -- the stocks that have the most potential for capital appreciation in the current climate, not to mention the implicit endorsement of the world's top investors.

The best way to get to know Michael and learn more about his system is to watch an online presentation I hosted with him last week. You can get a taste of the webinar -- including the name of one of his top-rated guru picks -- from the excerpts that follow. In the following remarks from last week's webinar, Michael talks about some of the tools he uses to zero in on those guru stocks with the greatest potential. Here's a sample of what you'll hear.

On using relative strength to pick winning stocks...

To my knowledge, relative strength is the only investment strategy that's been proven to work by academic research, by analytical back-testing, and through real-world trading experience.

Here's a sports analogy to illustrate why relative strength is a reliable indicator of success. In any game, the winner plays in a way that is relatively stronger than the loser. If you were trying to select the winner before the game started, you would probably pick the team you thought was the stronger of the two. That might be the team with more wins or the one that has an edge in some way for the upcoming games.

Researchers have found that the team that is ahead after three innings in a baseball game wins about 80% of the time. In hockey, the team ahead after the first period wins nearly 70% of the time. Teams up by 8 points or more at halftime in college basketball win about 80% of the time. In each case, the team that has the stronger start is likely to win in the end.

Just like in sports, I want to pick the stock that is leading at halftime because it has a better chance of winning. Relative strength lets us quantify who the leaders are right now, and studies confirm that those stocks tend to outperform the average stock in the future.

Cash flow analysis: the ultimate value-add...

Companies need cash flow more than earnings to survive and thrive. Not only that, strong cash flow allows a company to reward investors with dividends and reinvest in growth.

Risk is lowered when a company has strong and reliable cash flow. The improvement I made to cash flow analysis is to apply the idea of relative strength to it. Specifically, I home in on the companies with the strongest improvement in cash flow over the past 12 months. These are the companies that have the resources to increase their dividends or earnings now.

Combining the relative strength of cash flow with traditional relative strength, we own the companies that are doing well fundamentally -- but only when their stock is beating the market. This simple strategy, which I call my Guru Investing system, combines the best technical and fundamental indicators I know of into a single system.

A guru stock that's flashing 'buy'...

U.S. Bancorp (NYSE: USB) shares are owned by two value-investing legends, Warren Buffett and Donald Yacktman. Combined, Buffett and Yacktman own 5.6% of the company.

U.S. Bancorp is the sixth-largest bank in the nation ranked by assets, fifth when ranked by total deposits and fifth when ranked by market value. Among large banks, the company was number one when ranked by return on common equity and efficiency ratio, a measure of a bank's management effectiveness, in the second quarter of 2013 and for the full 2012 year.

USB's relative strength (RS) rating of 83 means it has outperformed 83% of the market the past six months.

Like other large banks, USB cut its dividend during the financial crisis. But the company was among the first to obtain government approval to begin raising its dividend after the crisis had passed. The current annual dividend payment is $0.92, offering a 2.5% yield at recent prices. That might not sound like much right now, but I expect USB to grow its dividend over time.

The stock has been a market leader throughout the summer, even as the broader stock market struggled in the wake of the Federal Reserve's public debate about tapering its bond buying program.

USB has a relative strength rank of 83, meaning it has outperformed 83% of the market in the past six months. In addition, USB has grown cash flow faster than 94% of companies in the past 12 months. In other words, USB is a 'buy' right now according to my Guru Investing system.

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