ETFs are not the answer (do this instead)

If you're an investor, you want three things from the stock market, consistent returns and outperformance to save time and not to waste it. And third, you want a system that actually works. But the problem is that 99% of YouTube channels out there are either talking about day trading or passive investing. And what works for them isn't going to help you get that consistent return and outperformance that you're looking for. I know this because I spent my career in the financial markets for over a decade managing people's pensions. So I've seen which strategies ultimately work, but also the many that don't. So in this video, I'm going to show you the exact system that I've developed, break everything down and show you how day trading is folly, ETF investing is complacent at best, and ultimately how you can get ahead by picking stocks with the help of AI. So before we go any further, let's just take a look at the situation that a lot of people are facing. A study of 20,000 day traders found that just 3% made money after fees. And in the case of financial advisors, only 1 in 20 advisors actually delivered a return in excess of their fees over a 20 year period. Your odds are frankly better loading a revolver with three bullets rather than one spinning and pulling the trigger not once, not twice, not even three times, but four times. That is how slim your probability of making money after fees with an advisor is over a 20 year horizon. And if you thought that was bad, then the probability of you making money trading is like having five out of the six chambers loaded, spinning the barrel, pulling the trigger not once, but twice. It's absolutely astonishing. So the advice that you'll hear on YouTube with a lot of these channels focused on passive investing is that you should just put a few hundred pounds a month into either an S&P 500 or an MSCI World ETF. But when you begin to look into it, you'll see just how flawed ETFs really are. So let me explain before I show you the system that I've used to pick stocks without having to resort to passive investing. So when you invest in AN S&P 500 ETF, 40% of your money is in just 10 stocks. So this whole idea of diversification is a complete myth. If you were to strip away the 490 other companies, you would have outperformed the market by nearly 7% per year. And whilst you shouldn't be rushing to just buy the top 10, a lot of the names in the top 10 are meritorious businesses that I do personally own. But the people that have YouTube channels and they talk about passive investing using ETFs, they'll be quick to say, buy an MSCI World ETF instead. That'll give you the diversification. As things stand, 72% of the MSCI World ETF is weighted towards US stocks. And within that, nearly all of them are tech stocks. So a quarter of your portfolio remains in US tech. So you haven't got diversification even while you think that you own like a thousand odd companies. So let me tell you a little story about Japan. For decades it was the strongest economy and the strongest stock market in the world, very much like the US in recent years. But after that bubble burst, it took 34 years for the Nikkei to recover its peak. You're taking on all of this risk without any upside potential, by which I mean any ability to beat the market. So let's get into it with a Buffet quote. One of the first things that you're taught as a professional trader is that there's no such thing as cheap or expensive, only the price that the market is willing to pay. So if a company looks cheap because it has a low PE ratio is cheap for a reason. So people go wrong because they're looking at the market the wrong way. Value has underperformed the general market as a strategy massively over the last 10 years or so. The difference is about 3% per year, which if you compound that in a calculator like I'll include a link to below, you could be talking about millions of pounds in performance that you've otherwise missed out on. Value investing does not work. So if you then flip to the complete opposite end of the spectrum, you go from focusing on value to just buying pure growth. Here you can see the ARK Innovation ETF. A lot of these companies, 70% of the top 10 holdings in fact, are either losing money, so pre profit, or aren't even real businesses yet they don't have any sales. When the market was rising and there was a lot of speculation, these of course did very well. But as the market began to correct, as interest rates tightened, they absolutely collapsed and gave back all of their gains. Fundamentals matter. To quote Warren Buffett's mentor, Benjamin Graham. In the short run, the market is a voting machine, but in the long run, it's a weighing machine. So that means that it reflects fundamentals. Now this is the factor that underpins all of my strategy. It's different to value, it's different to growth. It's known as quality, it produced lower risk and higher returns across the board. This is just a starting point. Unlike other styles or strategies which might come and go at different points of the cycle, quality endures by the very nature of the business as being dominant, being durable, being established. And it makes sense, it's logical. So here you can see the performance with the S&P 500. It's returned multiples of that. The outperformance is consistent across the uk. And finally, a chart here which might look a little bit complicated, but basically explains how the top firms were still in a similar position after 10 years and the middle firms also remained there or thereabouts in 80% of cases 10 years later. So, provided that you're not investing in the lowest quality quality stocks, if that makes sense, the chances are that these firms will be in roughly the same position. Truly exceptional names by default don't come around very often and that means that you're not having to be constantly reassessing your portfolio and it tends to remain the same. So you can just sit back and let it do its thing. So here's my model that I've programmed using AI to track seven factors which I'm going to break down in the next few slides. So compared to the S&P 500, you can see that meta is a far superior business and this is just how quick and simple it is to find the world's best companies. So the three principles that I follow are this. Do they make large profits fairly self explanatory? Can they reinvest those profits to scale faster? We'll go into the metric in a minute. If the answer is yes to 1 and 2, I don't want them to pay out a big dividend for the reasons that we'll get onto in a moment. So in terms of profitability, you can look at something called free cash flow. Many investors will look at earnings per share, but that's more easily manipulated. You can see this index that shows the so called aristocrats or leaders in free cash flow generation compared to the broad S&P 500 and also the S&P 500 value. And it's absolutely destroyed both of them. So being the mad scientist that I am, I want to show you some of the data behind each of the factors as evidence and reliable proof that this works. These are the quality stocks according to my model that have consistently high free cash flow growth. They return nearly five times as much as the S and P over the same period. Now the name that I want to highlight to you is actually A company that I own currently, Fortinet, not only has it reached a very high level, but it's done so with consistency. And this is exactly what we should be looking for as a quality investor. The performance is self explanatory. This is an updated chart going back over the last 10 years and you can see how it's absolutely crushed the S&P 500. Even with the recent correction, it's still miles ahead of where you would be with an index etf. Moving on to the second of the three questions. This is looking at a measure known as the return on invested capital. And what this means is that for every dollar of profit that the company chooses to reinvest, rather than spinning off as a dividend or giving back to shareholders as a pseudo dividend in the form of buybacks, it's able to generate $0.40 of additional growth. So here you can see with MasterCard the return on capital has been not only high at 40 odd percent but also very consistent. And this is the best of both worlds. For reference, a typical company, the S and P might have a return on invested capital of about 60, 16, 18, 20%. So MasterCards double that. And that's one of the key things that of course has enabled it to scale and not surprisingly, it shows up in the price. You don't need to necessarily understand the narrative when you use a system like this, which focuses objectively on the data, crunches the numbers and using AI gives you a simple output to generate ideas and build your portfolio. So finally to the third part around reinvestment. These companies again are quality stocks that have consistent dividend growth but don't pay out too much. So in other words, have low payout ratios. And a good example of this would be Costco dividend growth consistency to rival pretty much any company. But the key thing here is that the payout ratio has been falling whilst the dividends per share have continued to rise. So this is the equivalent of having your cake and eating it too. One of the key reasons why Costco has outperformed the S and P and it's been so popular amongst many of the hedge funds over the last few years. Now, if you want to get your hands on my free report of the top stocks according to each of the seven criteria that I've just laid out in Investor Intelligence, my AI model here I'll leave a link in the description where you can get this for free. Of course this is not a guarantee of future results, but for illustrative purposes and educational purposes, investing with a fundamental edge focused around quality has hugely outperformed the S&P 500 historically. And this is just the first source of edge. There are two others which I'm going to share with you just before we wrap up. The difference that this could make to somebody investing with just 10 grand at say age 30. So with 37 years until retirement, could be literally hundreds of thousands of pounds. At the market return of 10.5%, that would compound to roughly 200K. Assuming a modest 2% edge here, that would increase to 343 grand. And when you consider that the typical Investor at age 30 should have about 40 grand saved and be contributing about half their age in percentage terms each month, these numbers end up being a lot bigger. So we've covered stock selection, but what I want to show you now is the next one that will make this even more powerful. Portfolio construction. Legendary investors that I looked up to, like Stan Druckenmiller, will tell you that being concentrated in a relatively small number of positions is actually how you generate outperformance. I wouldn't invest typically in more than about 15 to 20 stocks at any given time. Frankly, there aren't many more opportunities, truly exceptional investment opportunities, than this at any given time anyway. But the majority of the benefit of diversification is captured within the first 20, certainly within the first 30 investments. So all that happens is that people diversify into incrementally shitter ideas. This study by the Journal of Economics concludes that quality focused investors outperform by 2% per year. So if you add this up on top of where we were with stock selection and we add on another 2% for portfolio construction, this now takes that 10 grand investment up to 581,000 pounds. So you can see how this is beginning to stack up now. It's worth noting that these numbers don't take inflation into account. But given that we're starting with a relatively modest sum, way below the typical average for somebody with about 40k at 30 years old, adding £500amonth, it gives you a question of what's going on. We'll get into a real world example before we wrap up. So to the third pillar and the final source of edge that I stack inside of my process, which is really the cherry on the icing on the cake is your time horizon. And the good news is that the longer your investment horizon, the greater your edge. The market rewards patience. As the pendulum has swung so far to the short term, that in itself has created a huge opportunity that's being overlooked now in patient investing. And the Beauty of this is that it allows you to step back and have this hands off approach which actually is aligned more so with ETF investing. With passive investing, this is patient. We went from 10 grand, been investing in an ETF otherwise growing to 200k with stock selection, portfolio construction and now time horizon. Seeing that grow to nearly a million quid. And this is the part of the video you're probably expecting me to begin reeling off all these client testimonials and success stories where so and so turned £500 into 20 million quid and whatever else. I built a calculator on my website. Again, there's a link to this in the description where you can see what the payoff might be for you compared to going alone with ETFs or outsourcing things to an advisor and paying all of the fees compared to an investment in my program using numbers that you can customize yourself. If it doesn't work for you, I'll give you your money back, no questions asked. That is how much I stand by these methods that I've talked to hundreds of people over the course of my career. I've managed millions with as a professional and about my entire life savings with since I left the city, sold my house and all the rest a couple of years ago, I felt so many people overcome very similar fears. Whether it was guys like Lucas, for example, who was only investing in ETFs, he didn't fully believe that he had the confidence to pick stocks and that it would actually work out. Chris, actually, a friend of mine, had been punting around in things like crypto. He'd been doing a little bit of day trading, but he was looking ultimately at the wrong stocks and trading without a system. As he was about to become a father, he wanted to ensure that it had something where he could contribute to it regularly and know that his family's future was taken care of longer term. And that for me, particularly as a mate, was one of the most rewarding things I've been able to do for him. And now he's set and he's about to become a dad. If you're feeling fearful about investing on your own, whether you've tried to go alone in the past or you've been screwed over by advisors or charlatans on the Internet, then rest assured that everything that I've shown you here and everything I teach will give you that confidence and that clarity and ultimately that control over your investing. As a seasoned pro with a system that stacks evidence, you have every reason to have conviction in what I've shown you. Send me a message on Instagram. You can see if there's a slot open for us to have a call. And let's get on top of this. I hope that I can help you with this, too. And if you enjoyed this video, then check out this one next, which I also think you're going to love.