We’ve had questions about this ad pitch from John Del Vecchio over the past few days, and our accounts received a few copies of the ad directly from various sources as well in the past week or so… so I thought we’d look into these “hidden stocks” for you today.
But I also looked back in our email archives, and it turns out that we actually started seeing this email back in February — so although they’re still sending it now, unchanged, and presumably it still represents stocks that Del Vecchio likes, it is not “hot and fresh” today and I’m guessing the clues will be a little bit dated. In this context that may be an OK thing, I guess we’ll find out — despite the “screaming buy!” language, everything in Del Vecchio’s pitch indicates that these are chosen for their multi-year potential.
I’ve not written about Del Vecchio or his Hidden Profits very often, but we did post a teaser solution from that newsletter last fall — back then, he was using similar “hidden in plain sight” language to describe his favorite stock as a “genesis code” idea, and it turned out to be a pitch for Overstock.com (OSTK), which has lost about 60% of its value since then. I don’t know if Hidden Profits still recommends that one, or if they use stop losses or other “risk mitigation” tools.
Today, the tease that got my attention was for his special report, “Ten Times Your Money from the Billionaire Leaving Buffett in the Dust” … though he leads into that with a long spiel about the merits of his “FAST System” for sifting through stocks and winnowing out those who have “good” earnings and don’t try to hide ugliness or otherwise perk up his forensic-accountant ears.
Which means a lot of what he’s doing is probably screening stocks that meet various criteria, and then filtering those results to find the companies he finds most appealing. As with lots of newsletters that don’t have much of a track record (I think this letter is less than a year old, but not sure), most of his claims of brilliance are based not on stock picks he has made, but on older stocks he thinks he would have found that did well.
Del Vecchio says he found these great performers like AutoZone and The Gap by applying his “FAST” criteria and his multi-point screening to historical markets, thereby proving that this system works… but with all such cases, of course, you don’t know whether the chicken or the egg came first. The way you find the criteria that “work” is by either searching for stocks that did well and identifying the quantitative triggers that stand out, or testing different quantitative methodologies and seeing which ones identify the best-performing stocks from the time period you’re searching… either way, the only purpose for searching and screening is to identify stocks that did well or to test a theory on which indicators accompany a strong-performer. So of course any “system” that you have settled on, using reported data and some quantitative screening criteria, is going to “find” you the best stocks. Otherwise you wouldn’t have settled on it.
Sadly, if there is a quantitative indicator or collection of indicators that identify stocks that will consistently outperform, and those stocks can be identified in some mechanical way through screening or searching for specific trends or data points… you can kiss it away in about ten minutes.
That’s an exaggeration, but quantitative systems are still all the rage on Wall Street, thanks partly to Jim Simon’s massive math-driven success. If there is computer-readable data that exists, and in which patterns can be read, thousands of computers are doing exactly that right now, with the goal of identifying a trading or investing edge. You might use screening to identify companies that you think are worth more research, but don’t imagine that any newsletter is going to consistently beat the market with an automated system of data-driven recommendations — there’s so much volume in quantitative trading systems now, and so much competition to identify “edge” for the quants, that any edge they can find pretty quickly gets competed away. If you can find a stock using screening that shows potential to outperform like similar stocks have done historically, a half-dozen quants with supercomputer already found it and traded it and the price no longer reflects that “edge.”
But probably that “system” is an exaggeration of the way Del Vecchio finds stocks. I suspect he finds appealing ideas in lots of ways and uses what he says is his expertise, in forensic accounting, to identify those that have “cleaner” income statements and prospects. I think he was around as a short-seller before this newsletter, and maybe he still does that, but this is kind of like the opposite of that forensic “short” research —