FROM STANSBERRY RESEARCH

THE PLACE WHERE 500%

RETURNS GROW A Guide to Trading

High-Performance Stocks

Published by Stansberry Research

Copyright 2015 by Stansberry Research. All rights reserved. No part of this book may be reproduced, scanned, or distributed in any printed or electronic form without permission.

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THE PLACE WHERE 500% RETURNS GROW A Guide to Trading High-Performance Stocks

During every bull market in stocks, dozens of companies climb by more than 500%.

Often, these "high performance" stocks become America's greatest corporate success stories. The famous coffee chain, Starbucks, for example gained 1,807% during the bull market of the 1990s. The emerging semiconductor maker Intel gained 6,556% during the same time.

Also consider the bull market of the 1980s. This decade saw the growing retail chain Wal-Mart gain 4,185%. Another growing retail chain, The Gap, gained 5,539%.

As you can see, "high-performance stocks" come in many forms.

Sometimes they are fast-growing retail chains.

Sometimes they are restaurant chains with a great new concept.

Sometimes they are high-tech firms with life-changing innovations.

The forms these winners take are different, but the cash profits reaped by shareholders are the same.

The profit earned from a stock that climbs more than 500% can buy a vacation... a new car... even a new house. It can add an extra $10,000... $100,000... even $1,000,000 to your net worth.

The allure of making huge profits draw millions of people to the stock market. And although many search for stocks with 500%-plus potential,

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few find them. The reason for this failure is simple. Instead of using a planned, systematic process, most people take the amateur's approach. They use gut instincts and follow "hot tips" from other amateur players.

This report shows you how to succeed where others fail.

It shows you how to find high-performance stocks that can make you 500% gains. It shows you how to find stocks that can vastly increase your net worth.

In the pages that follow, you'll find a common-sense method for profiting in the market's fastest growing high-performance stocks.

You'll learn how to find them... how to buy them... and the characteristics they share.

Most importantly, you'll learn a shocking fact about making money in stocks. Unknown to the general public, this fact has been used by professionals for decades to make millions of dollars. It is the professional's "edge." And if you're smart enough to follow the professional's lead, this idea could change the way you view stocks forever.

Where to Find Stocks With 500%+ Potential

Stocks with "home run" potential live in a special place.

But to find them, you need to know how to size-up a stock.

When professional stock traders group public companies according to their size, they use three general terms: Large caps, Mid-caps, and Small caps.

"Cap" is short for "market capitalization." This is the term used to describe the value of a public company... The share price times the number of shares. The group names are common sense. Large caps are large. Small caps are small. Mid-caps are in between.

For example, the well-known oil company ExxonMobil is a large cap. In 2014, its market cap was around $400 billion. Or, take retailer Wal-Mart. It's also a large cap. In 2014, its market cap was around $250 billion.

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Mid-caps are smaller than large caps. Mid-caps are usually said to have market caps in between $2 billion and $10 billion. The difference between a large cap and a mid-cap can be incredible. A mid-cap stock with worth $4 billion can be less than 1% of the size of giant ExxonMobil.

Small caps are stocks under $2 billion in market cap. And while the difference between a mid-cap and a large cap can be incredible, the difference between a small cap and a large cap can be stupendous.

Consider a small cap with a market value of $400 million. This is just 10% of a mid-cap with a value of $4 billon... which means it is just one-tenth of one percent the size of a large cap like ExxonMobil.

Large caps like ExxonMobil can be great investments. They are mature, established companies that often pay steady dividends. They are great for retirement accounts and conservative investors. We own large-cap stocks ourselves.

But if you're looking for stocks with the potential to climb 100%... 500%... even 1,000%, you're best off looking in the small-cap arena. Small caps have much greater potential to register huge gains in a short time than any other kind of stock.

The small-cap market is where 500% potential returns grow.

And the reason is simple...

It's easier for a young, $400-million small cap to grow 10-fold than it is for a mature $400-billion giant to grow 10-fold.

The mature giant's "hyper-growth" days are behind it. This does not mean it's a poor investment, it just means it's not an ideal vehicle for someone looking to make giant returns. Again, keep in mind that a $400 million small cap is just one-tenth of one percent of a $400 billion large cap. That's why a search for stocks with tremendous growth potential should always start in the small-cap market.

And there's a certain kind of small cap that beats all the rest when it comes to "high performance" potential. If you're looking to trade small-

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cap stocks for big profits, you'll want to focus your attention on this type of stock.

Before we reveal what it is, you must understand an important stock trading concept.

Here it is...

A Million Dollar Idea From Babe Ruth

To trade small-cap stocks and profit, it's vital to understand one key idea...

It's vital that you understand how Babe Ruth became of one of the greatest baseball players of all time.

I know that might sound funny.

After all, playing baseball is a lot different than trading stocks.

But trust me... knowing Ruth's secret could help you make hundreds of thousands, even millions, of dollars in the stock market.

Here's why...

Babe Ruth is considered one of the greatest baseball players of all time. Over his career, he collected 2,873 base hits. He was a seven-time World Series champion. He hit an astounding 714 home runs, a league record at the time.

However, Babe Ruth was also known as the "King of Strikeouts."

Ruth led his league in strikeouts five times. When he retired, he was the all-time leader in strikeouts.

In other words, Ruth failed a lot.

Because of his aggressive style, Ruth would often either hit a huge home run or strike out. His home runs could win games instantly. The opposing team could spend hours painstakingly building up a lead... only to see a Ruth home run destroy it in seconds.

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In other words, when Ruth achieved success at the plate, the success was often HUGE.

Ruth was fine with some failures because he knew his successes would more than make up for them. This aggressive style helped Ruth become one of the most productive, most valuable baseball players in history.

To achieve success as a stock speculator, you need the Babe Ruth mindset...

You must make your wins large and impactful... and your losses small and insignificant.

People like Babe Ruth have used the "home run" mindset to achieve extraordinary success for centuries. Entrepreneurs have used it to make billions. Professional gamblers have used it to clean out casinos. Top traders have used it to generate 100%-plus annual returns.

Top performers fail as often as anyone. But top performers ensure their failures are small and limited... while their successes are huge and impactful.

Why is the "home run" mindset so important to your trading success?

Because it allows you to maximize your wins while minimizing your losses.

You're not going to achieve success on 100% your trades, and that's fine.

You probably won't achieve success 75% of the time, that that's fine too.

Heck, if you adopt the "home run" mindset I'm about to describe, you can make huge stock market profits even if you're right just 50% of the time.

It all comes down to the Keep Losses Small (KLS) bet management system...

The Secret Behind the World's Biggest Trading Fortune

Over the past 60 years, George Soros has made more than $20 billion by trading the stock, bond, currency, and commodity markets.

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Twenty billion is a big number. If someone makes $2 million in the market, they are considered extremely successful. George has made more than 10,000 times that.

Whatever your thoughts on Soros' political views, there's no denying Soros is likely the greatest trader of all time.

Soros is a master of knowing how government actions will affect markets. He's exceptional at finding industries poised to enter big uptrends. But there's a simple money-management strategy that's more responsible for Soros' success than any of those things...

Soros once summed up the strategy like this:

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."

Now... think back to Babe Ruth's strategy. Babe didn't focus on how often he succeeded. He focused on making his successes huge and impactful... and making sure his mistakes were limited.

Like Ruth, Soros knows that his winning percentage is relatively insignificant. It's much, much more important to make a lot of money when you're right... and lose just a little when you're wrong.

When you make sure to win a lot when you're right, and lose a little when you are wrong, you can be right just half the time... and still make huge profits in the stock market.

Some simple math shows us how it works...

The Power of Keeping Losses Small (KLS)

To get an idea of how powerful this strategy can be, consider a hypothetical stock trading scenario...

On March 1, you buy ten different stocks. You hold them for six months.

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The return of these ten stocks after the six-month holding period is listed below.

1. 15%2. -80%3. -76%4. 30%5. -55%6. 190%7. 70%8. -99%9. -40%10. 45%

You bought ten different stocks. Five went up. Five went down.

The total percentage gain of the winners is 350%. The total percentage loss of the losers is -350%.

If you purchased those ten stocks and held them through thick and thin, you'd end up flat. You wouldn't lose money... but you wouldn't make money.

Now... let's use that same set of stocks and apply a "Keep Losses Small (KLS)" bet management strategy.

Let's say you sell any stock if it declines 15% from your purchase price. Here are the results:

1. 15%2 -15%3. -15%4. 30%5. -15%6. 190%7. 70%8. -15%9. -15%10. 45%

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Again... you bought ten different stocks. Five went up. Five went down. But you aggressively closed the bets if they declined 15% below your entry price.

Because of this, your winners totaled 350% and your losers totaled just -75%.

This works out to total percentage gain of 275%, or an average win of 27.5% across the ten positions.

Because you hit a few big winners (#6, 190% and #7, 70%) and aggressively cut your losers, you made an excellent average return of 27.5%.

And you made this excellent return while being right just 50% of the time.

This is the power of winning a lot when you are right, and losing just a little when you are wrong.

The Common Sense System That Gets You Into America's Biggest Stock Winners

By now, you can see how a "big winners, small losers" strategy can produce terrific profits... even if you're right just 50% of the time.

This strategy made Babe Ruth a legend.

It made George Soros a multi-billionaire.

When you realize this, the next question to ask is, "What kind of stock selection system can locate stocks with massive home run potential?"

When you use the "big winners, small losers" trading strategy, you need an entry system that gets you into stocks with huge growth potential. You need a system that finds potential "home runs."

Fortunately, there's a common sense method to finding these stocks.

It's very simple... and it gets you into the kind of stocks that can produce 200%... 500%... even 1,000% returns.

This entry system is focused on buying America's fastest-growing small companies.

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When you buy a stock, you buy a partial ownership stake in a real business. You own a small slice of that company's patents, real estate, cash flows, inventory, and equipment. You become financially exposed to both the company's upside and downside.

The major drivers of a stock's prices are revenue and earnings. The more a company grows its revenue and earnings, the more its shares will be worth.

Stock price trends can diverge from revenue and earnings trends for a while, but over the long-term, if a company grows and grows the amount of cash it takes in, its share price is sure to head higher. That's just how the market works.

And that's why if you're looking for stocks with huge upside potential, you should focus on the companies with high revenue and earnings growth.

This is extremely important, so let's go over it again: Stocks are driven by revenues and earnings. If a company takes in more and more money its shares will be worth more and more. That's why traders looking for stocks with huge upside potential should focus on companies with high revenue and earnings growth.

For example, the popular athletic clothing company Under Armour went public in 2005 at $6.32 per share (adjusted for splits and dividends).

At the time, it generated $281 million in sales and $17 million in earnings. Over the next nine years, the public went wild for Under Armour clothing. Under Armour grew its sales to $3.1 billion and its earnings to $208 million. Shares responded to this huge business growth by appreciating from around $6 to $70... a gain of 972%.

Another excellent example is the restaurant chain Chipotle. In 2006, Chipotle went public at $22 per share (although it climbed to $50 within a couple months). At the time, it generated $628 million in sales and $38 million in earnings. Over the next nine years, people fell in love with Chipotle's brand of high-quality fast food. Chipotle grew its revenue to

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$4.1 billion and its earnings to $450 million. Shares responded to this growth by climbing from $50 to $650... an incredible gain of 1,200%.

American corporate history is filled with these success stories...

There's Nike, Google, Disney, Wal-Mart, Starbucks, Microsoft, Home Depot, Cisco, Whole Foods, Amgen, Apple, Charles Schwab, Oracle, Target, Visa, Harley-Davidson, Panera Bread, and CarMax, just to name a few.

As we write this in 2015, these companies are industry-leading giants. But they all started small. And early investors made gains of more than 1,000% on the path of growth.

As Oracle, Amgen, and Microsoft massively grew revenue and earnings, each generated more than 4,000% returns in the 1990s.

A 4,000% gain is a 40-to-1 return on your money.

It can turn a $25,000 investment into $1,000,000.

That's the power of investing in a small company that massively grows its revenue and earnings.

I could provide many more examples of America's greatest corporate success stories and the stock gains they generated. But you get the basic idea: Huge revenue and earnings growth leads to huge share price growth.

That's why, when looking for "High Performance Stocks" (HPS), we screen for companies with those attributes. We identify America's fastest-growing companies and get on board for the ride. We identify potential "home run" stocks.

We have three main requirements of potential home run stocks:

REQUIREMENT ONE: SUPERGROWTH

In order to be considered as a High Performance Stock recommendation in DailyWealth Trader, a company has to have rapid revenue or earnings growth.

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We like to see growth of least 25% a year for three years.

This growth requirement allows us to weed out companies that are not growing. And it keeps us in the fastest-growing companies in America. This is a straightforward, common sense rule that we don't need to dwell on.

REQUIREMENT TWO: NEW INNOVATION

To qualify as a potential buy recommendation, a company must have gone public in the last decade.

Remember, we're looking for new companies with breakthrough products and business models. We don't want to get stuck with old companies in laggard industries.

The mark of almost every big American stock winner is innovation. Apple became a huge success because of innovative new products like the iPhone and the iPad. Whole Foods became a huge success because of its innovative business idea of high-end grocery stores. Chipotle became a huge success because of its innovative twist on fast food.

These are the kinds of innovative businesses we look to buy in our HPS portfolio. We're looking for new companies with unique products and services. We're looking for new companies with innovative twists on existing businesses.

Innovative firms like Apple and Chipotle were the kinds of High Performance Stocks we're looking to buy... before they make their big moves. Year in and year out, these types of firms produce triple-digit, even quadruple-digit returns in the stock market.

Our "gone public less than a decade ago" rule keeps us in the most promising new firms... and out of old laggard businesses.

REQUIREMENT THREE: MARKET RECOGNITION

You can spend weeks studying a company and becoming confident it will be a winner. But if the market doesn't agree with you... and if the

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company's share price treads water or declines, you're wasting your time... and you're missing out on other opportunities.

That's why we only want to buy stocks already showing positive price action. We want to buy companies the market has already started to recognize.

Our rule of thumb is that a stock must have advanced more than 25% over the past twelve months. This ensures we're getting into High Performance Stocks that are already moving... that already have momentum.

To recap, we're looking for new, innovative companies with strong revenue and earnings growth. And before we buy, we like to see the market recognizing this growth.

This simple system will always get you into potential home run stocks, like an early Starbucks or Home Depot.

The Trade-Off With Fast-Growing Small Companies

Rapidly growing small companies offer the opportunity to make huge returns.

But these companies are relatively new and relatively small compared with giant blue-chip stocks like McDonald's and ExxonMobil.

Small companies don't have entrenched business positions. They're often competing with big companies with deep pockets.

Therefore, they carry greater risks and greater volatility.

That's why, with smaller, more speculative companies, you must be willing to cut your losers short... while riding your winners to triple-digit gains.

Not every position you take in America's fastest-growing companies will be a big winner. That's fine. By using our KLS betting system you'll ensure your big winners more than make up for small losers.

To ensure losses stay small, you must use a trading technique called "stop losses."

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A stop loss literally "stops a loss." It's a predetermined point at which you will sell a stock if it declines to a certain level.

Let's focus on the word "predetermined." It's important.

A stop loss is a predetermined point at which you will sell a stock. It is planned in advance.

By having a plan in place to exit a stock, you ensure that you're not trying to come up with your exit plan in the heat of battle... you're not coming up with your plan on the fly. These types of decisions are heavily influenced by emotions. Emotional decisions are almost always of lower quality than decisions you make while you're calm.

Stop losses allow you to plan the trade... and trade the plan.

How Our Stop Losses Work

Some people use stop losses that are calculated with a percentage of the price you pay for a stock.

For example, let's say you buy a stock at $10 per share and use a 15% stop. If the stock declines to $8.50, you'd sell and cut your loss short.

These stops can be useful. But we use "custom" stops on our HPS trades in DWT.

A major factor in our stop-loss determination is a stock's volatility.

Some stocks are more volatile than others. That's why a "one size fits" all stop (like a 25% stop) isn't appropriate for what we're doing here.

Shares in a rapidly-growing restaurant chain will be more volatile than shares in a Big Oil stock like ExxonMobil. Therefore, we should give them more "wiggle room" with our stops.

To determine how much "wiggle room" we give a stock, we study a stock's "Average True Range," or ATR.

Average True Range might sound complicated, but it's not. It's a simple

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indicator that measures how much a stock "wiggles" up and down in its day-to-day trading. If a stock's ATR is increasing, that means its day-to-day trading volatility is increasing.

We often use stops that are three to four times a stock's ATR. This is usually 10% – 20% below our entry price.

Another factor in our exit plan is a stock's recent trading history... like its recent lows.

A stock that has momentum and is in a healthy uptrend forms a series of "higher highs and higher lows" on a chart. Here's an example...

You'll notice each low on the chart is higher than the previous low. When one of these lows is "broken," it's a sign the gains may be slowing... or that it's time for a sharp correction.

Either way, if a recent low is broken, we may want to get our cash to safety. So we'll often consider these price points when deciding on a stop.

Sometimes, we'll also use "trailing stops" on our HPS trades. A trailing stop trails the share price... moving higher as shares climb. It's a great tool for our "big winners, small losers" strategy... because it gives you a

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predetermined point where you'll sell... and it gives your trade room to let your winners ride.

For example, let's say you buy a stock at $10 per share and you use a 15% trailing stop. When you enter the trade, your stop price will be $8.50. But if the stock jumps and hits a high of $20, your new stop price is $17... That's 15% below the highest share price since you purchased the stock.

If the stock falls to $18 after hitting $20, but then rises... you're still in the trade. It didn't fall to your stop.

With these examples, you can see how stops allow you to protect your downside while making sure you profit on the upside.

Why We Don't Publish Our Stops

As a DWT reader, it's very important for you to know that we can't publish our HPS stop prices until they've been triggered.

With High Performance Stocks we're buying and selling small stocks... stocks where not much trading volume could cause significant share price action.

This characteristic of HPS adds to our upside potential... But it would also make it easy for market professionals to take advantage of us if we published stop prices.

It's simply one risk factor that we don't want you to have to deal with.

But this doesn't mean we're flying by the seats of our pants.

We know exactly, down to the penny, where our stop loss is before every trade is opened. We will have it written down... And we'll notify you the morning after the stop is hit. We'll tell you when it's time to sell.

So you'll need to take a quick look at our Trading Notes section daily if you're in a HPS trade.

Again, to make this aspect of DWT as useful to you as possible, we will not publish our stop losses.

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How to Use Our Keep Losses Small (KLS) System

Using pre-planned exit strategies is one of the ultimate tools for managing your stock market operations.

You can make this tool even more powerful when you combine it with something called "position sizing."

In the past, I've called position sizing "the trader's best friend." Ignorance of this vital component of your trading plan will quickly bankrupt you. If you don't get position sizing right, nothing else you can do will possibly help you.

Position sizing is the part of your trading strategy that tells you how much money to put into a given trade.

It is one of the best ways to ensure you never suffer a catastrophic loss that wipes out your capital.

Most great traders will tell you to never risk more than 2% of your trading capital on any one position.

One percent is better for most folks. A half a percent is also good.

Here's how the math works...

Let's say you're a trader with a $50,000 account. And you're thinking about buying ABC Corp. at $20 per share. The stock has tremendous upside potential.

How many shares should you buy?

Buy too many and you could suffer catastrophic damage if an accounting scandal strikes ABC Corp.

Buy too few and you won't profit much if ABC Corp. is a big winner.

Here's where intelligent position sizing and the concept of "R" come into play.

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"R" is the amount of money you're willing to risk losing on any one position.

You can easily calculate R from two other numbers: 1) your total account size and 2) the percentage of your account you'll risk on any given position.

Let's say you want to go "middle of the road" with your risk tolerance. You're going to risk 1% of your $50,000 account on each idea. One percent of $50,000 is $500, so your R is $500.

If you wanted to dial up your risk to 2% of your account, R would be $1,000. But in this example, R is 1% of our account, which is $500.

Let's also say you'll use a 25% protective stop loss on your ABC Corp position.

Now you can work backward and determine how many shares to buy. It's a simple process.

Your first step is always to divide 100 by your stop-loss percentage number.

In this case, our stop-loss percentage number is 25. So, you'd divide 100 by 25 and get 4.

The next step is to take that number and multiply it by your R, which is $500.

This means you multiply 4 by $500 and get $2,000.

That number – $2,000 – is the position size in this case.

You should buy $2,000 worth of ABC Corp.

At $20 per share, you'll buy 100 shares.

If ABC Corp. declines 25%, you'll lose $500 and exit the position.

That's it. That's all it takes to practice intelligent position sizing.

Let's review the steps:

Step 1: Determine your R.

Step 2: Determine your stop-loss percentage.

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Step 3: Divide 100 by your stop-loss percentage.

Step 4: Multiply that number by your R. That gives you your position size.

Step 5: Divide your position size by the current share price. That's how many shares you'll buy.

In our example above, we had a $50,000 account and used an R of 1%, which is $500.

We had a stop loss of 25%, so we divided 100 by 25, which gave us 4.

We multiplied 4 by $500 to get a position size of $2,000.

We divided $2,000 by the share price of $20 per share.

Now... what if you want to use a tighter stop loss, say 10% on your ABC Corp. position? Let's do the math...

100/10 (your stop-loss percentage) = 10

10 x $500 (your R) = $5,000

$5,000/$20 (share price) = 250 shares

Tighter stop loss, same amount of risk, same R of $500.

Now, let's say you'd like to trade ABC Corp. options. You're bullish, so you're going to buy ABC Corp. calls. The options you want to buy are $2. Option contracts are for 100 shares... So one of your option contracts will cost $200.

A straight call-option position is much more volatile than a straight stock position. So you could set a wide stop loss of 50% on your call position. A wider stop will mean a smaller position size. Take a look:

100/50 (your stop-loss percentage) = 2

2 x $500 (your R) = $1,000

$1,000/$200 (price per call option) = 5 option contracts

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Different stop loss, different position size, different kind of asset, same R of $500.

You can use the concept of R to "normalize" risk for any kind of position... from crude oil futures to currencies to small caps to Microsoft.

If you're trading a riskier, more volatile asset, increase your stop-loss percentage, decrease your position size, and keep your R steady. That way, you're risking exactly the same amount of money on each of your ideas.

Our examples put R at 1% of your total portfolio size. Folks new to the trading game would be smart to start with 0.5% of their account. That way, you can be wrong 10 times in a row and lose just 5% of your account.

To have the importance of intelligent position sizing drilled into your head by the best traders ever, read Market Wizards by Jack Schwager.

For a fuller explanation of R and intelligent position sizing, read Trade Your Way to Financial Freedom by Van K. Tharp.

Both are incredibly important books for traders.

Our Three Position Sizing Rules

To make sure you get the most use out of your HPS trades, we'd like you to follow three simple positon sizing rules:

RULE #1: Place no more than 1% of your total investable assets into any single HPS trade.

We're talking position size here, not risk. This means your R will be much less than 1% of your assets... And it ensures that no single trade could possibly cause you to lose more than 1% of your wealth.

RULE #2: Trade High Performance Stocks with no more than 10% of your total investable assets.

We suggest you keep the bulk of your wealth in conservative investments like dividend-paying stocks, real estate, and bonds. Trading small-cap

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growth stocks is speculative... and should only be done with a small portion of your portfolio. We recommend it be done with 10% of your investable assets or less.

RULE #3: Your minimum position size needs to be at least 100 times as big as your trading commissions.

If your broker charges you $5 per trade, your minimum position size should be $500. If your broker charges you $10 per trade, your minimum position size should be $1,000.

In other words, your trading commission should not eat up more than 1% of a trade's capital. Anything over that is too big a handicap.

If you can't follow these three rules, for any reason, don't buy High Performance Stocks. This strategy is not right for you.

Summing Up

By now, you know where the stock market's biggest winners come from. You know the key to success is winning a lot when you're right and losing a little when you're wrong. You also have a common-sense system for sizing your positions, cutting losses, and taking profits.

In other words, you're ready to begin trading High Performance Stocks. Expect your first trade recommendation soon.

Regards,

Brian Hunt and Ben Morris

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APPENDIX 1: TRADING AS A BUSINESS

The goal of any stock market operation should always be to profit. It may sound obvious, but lots of folks just like to play around. They lose money.

If you're not prepared to view your stock market operations as a business that requires planning, rules, and logic, we encourage you to get out of the market immediately.

If you're not willing to look at your operations like a business owner would, you're like an amateur card player that shows up drunk to play poker against a handful of Vegas professionals.

There are plenty of trained, skilled professionals in the market. They have the best computers money can buy. They have decades of experience. They have the best information. They live and breathe the markets. They use their trading ability to put food on the table for their families. They are serious players.

Speculation should be entertaining. But it should also be seen as a business with plans and policies that should be regularly monitored. Otherwise, the pros will take your money.

Speculating vs. Investing

If you're thinking about buying High Performance Stocks, there's an essential point for you to understand...

We are not investing in the stock market.

We are speculating in the stock market.

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We are not looking to hold High Performance Stocks for years and years while collecting dividends.

We're going to take calculated bets on vehicles that have tremendous price momentum. We are buying the fastest growing small companies in America.

If this momentum falters, we sell. If this momentum continues, we ride the position.

We don't fall in love with these stocks, and neither should you. They certainly won't love you back.

The Real Key to Success Isn't What You Think

There's a common myth amongst amateur stock traders. Many traders think if they can just hit upon the right stock picking strategy, they'll easily get rich. They are always looking for the "magic formula" of stock picking.

Don't get me wrong... a good stock picking strategy is valuable.

But it's not nearly as valuable as smart money management.

The best source of proof I can give you is contained in the classic trading books Market Wizards and The New Market Wizards. These books are "bibles" of trading wisdom.

The "Wizards" books are collections of interviews with the world's top traders and investors. The traders interviewed come from all walks of life... and they trade in all kinds of markets.

One of the most frequent things cited in the books is how risk management techniques like position sizing and smart exits are far, far more important than entry strategies.

The world's greatest traders all point out that you can have an excellent entry strategy that gets you into lots of winning trades, but if you don't use smart position sizing and smart exits, you can still blow up your account by placing big chunks of money into losing trades... and then refusing to exit.

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Remember, any trading method is going to produce losses.

What's truly important is how you handle those losses.

We handle our losses the right way. By cutting our losers short and riding our winners for big gains. We make sure to win a lot when we are right, and lose a little when we are wrong.

This is the idea we alluded to at the start of this report. And it's the most important thing in it. If you don't understand it, you're doomed as a trader.

Let's state it another way: Smart money management is 100 times more important to your success than any stock picking method.

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APPENDIX 2: WHEN WE WON'T BUY HIGH PERFORMANCE STOCKS

Our High Performance Stock strategy reliably generates huge winners by investing in America's fastest growing companies.

But it's very much a "bull market approach."

It's an approach that only works well when the broad market is in an uptrend.

You see, when stocks enter big bear markets, most investors lose faith in corporate America. They start to believe the economy will never grow again. They believe consumers will stop spending on entertainment, clothes, eating out, and electronic gadgets.

For those reasons, they often dump their shares in riskier, high-growth companies. Even the best, fastest growing companies can see their share prices fall by more than 50% in a major bear market.

That's why we use a unique strategy with High Performance Stocks. We only want to buy them in a bull market, when investors are optimistic about the future... and are drawn to investing in companies that will shape that future.

Investing in high-growth, speculative companies in a bear market is like trying to swim against a river's current. No matter what you do, there's a huge force fighting against you.

To ensure we only use this strategy in a bull market, we use an indicator called the 200-day moving average. The 200-day moving average is a commonly-used gauge of a market's trend.

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It's a price indicator calculated by taking each closing price of past 200 trading sessions, and then averaging those prices together.

There's nothing magic about a 200-day moving average. It doesn't predict anything. It's simply a standard, objective gauge for determining if a market is in an uptrend or a downtrend.

If a market is trading above its 200-day moving average, it's generally considered to be in an uptrend. If a market is trading below its 200-day moving average, it's generally considered to be in a downtrend.

If the benchmark S&P 500 index is above its 200-day moving average, we consider the market to be in an uptrend... and we'll recommend trades in America's fastest growing small companies. If the benchmark S&P 500 is below its 200-day moving average, we consider it to be in a downtrend... and we'll stop making recommendations. We don't want to try to swim against the current.

If the market declines below its 200-day moving average, we will place this approach on the shelf. We will not waste your time with an approach that doesn't work well in a bear market.