A model that maps where the price should be

Take a look at this chart. The black line shows Southwest Airlines' stock price over the last 25 years.

Now look at the red line. This is what my specially devised mathematical 'model' told me that Southwest's price should be.

I'll explain the amazing secret to this in a moment... (I've modelled over 500 shares prices just as successfully)... but for now, just look how closely the actual price and the 'model' price match each other!

Over a quarter of a century, the share price follows my model price like a dog on a short leash.

Now see what would happen if you'd been following a chart like this... and suddenly the lines parted from each other... (Here's a clue... it's an opportunity to make big money.)

You could have quadrupled your money with this chart

Here's another chart, this time of Edison International's share price since 1981.The black line is the share price, the red line is what my model told me the price OUGHT to be.

For three-quarters of the chart, they're the same again.

But look at what happens in the late '90s! A surge of negative sentiment sparks a huge selling spree. Like sheep, investors follow one another in dumping this stock.

The share is beneath $10, but my model price says the share is worth $30. In other words, according to my system, the company is underpriced.

And - hey presto - what does the share price do? It bounces back to the red line... from $10.50 to over $40 within 2 years.

If you'd trusted the model, you'd have been crazy not to buy at $10.50 and nearly quadrupled your money in 2 years.

And yet not even the top investment banks, brokers and fund managers have this model or anything like it. They are all still playing in the financial dark ages...

So why am I revealing all this for free?

I know this system works, because it works for me. So much so that I'm considered rich - even by City standards. So let me get to something right away... the question you should ask yourself before you read a single word more...

If I really had 'cracked the code' of the stock market... why would I tell YOU?

Well, the answer is simple. However much I personally make from my private investments, I can make additional money by offering this service to you and a handful of other investors.

Why do I want this extra revenue?

Well, if I live off my investment returns, my portfolio can never grow. To get really rich from a fund, you have to reinvest your gains. This is why Warren Buffett still lives in a modest house in Nebraska, living the cheap lifestyle that allowed him to reinvest his gains and achieve those historic returns.

To feed my family and school my kids without using up all the returns from my investments, I like to find a source of extra income. Which is why I am offering this service.

There is no hidden agenda. I don't need the money, but I certainly don't mind it.

So let's get down to business...

I believe that by following my recommendations, you could make amazing returns in your spare time, from the comfort of your own home. And I'm prepared prove it to you.

That is, I'm prepared to give you 3 months' worth of my recommendations with a full subscription money-back promise. So for 3 months you can test me out. You needn't follow my recommendations, you needn't buy or sell. You can just watch them and draw your own conclusions. If my advice doesn't work out, you can cancel and receive a full subscription refund - with absolutely no cost and no risk to you.

You'll see how much you could make from a chart like this...

In early 2003 Hanson Plc had dived to a low of 255p. Lord Hanson had died, there was talk of restructuring and Tyco, a similar looking company in the US, was falling apart.

So investors suddenly turned very negative about the company.

My model clearly shows that this negativity was totally unjustified. Again, the red line shows where the price should be - and the black line shows that the actual price has dropped far below.

When the share price began an up-turn towards the red line in mid 2003... that's when you would have bought.

As you can see, it rebounded from its downtrend at 280p, and has more than doubled since.

So what's the secret of this model? I'll explain...

What Tokyo taught me about shares

My name is James Ferguson. I started in The City in '85 and spent the best part of two decades as an institutional stockbroker in London and Tokyo. It was the years I spent working in a Japanese bear market that were the most difficult time of my professional life.

You see, any fool can make money in a bull market. But when stocks have been sliding sideways for 15 years, as they were in Japan, it's another matter...

Unless you can find a systematic way of beating the market, you'll never become rich... or even make much money at all! Instead, you spend your days minimising losses.

Can you imagine how depressing that would have been for me?

So I began a 3-year quest to discover what really drives a share price... an 'obsessive' quest, according to my wife, but one that now keeps us living very nicely indeed.

Twenty years ago, this would have been impossible. But with the computers available to high-level brokers and analysts these days, you can make billions of calculations at the touch of a button.

The secret of the £100,000 super-computer

I began to test dozens of theories and inspired hunches... every day, every night... some based on technical analysis (repeated price patterns)... others on fundamentals (earnings, management, cash-flow).

I plugged all the variables into a computer - worth a whopping £100,000 a year to run - and pored over the results that spewed out the other end.

All these factors and more would undoubtedly affect a share price. But how could I differentiate the important information from all the noise? How could I pare down so many variables into a clear model that would describe what drove share prices?

Then, one night in my Tokyo office on the 14th floor of the Kamiyacho Mori Biru, I had a Eureka moment...

Stock market analysts had got it WRONG!

You see, when analysts sit down to work, they make an incredibly stupid assumption... (I know, I made it myself for many years)... they assume that the current price is 'correct'.

This is because they have a theory called the 'Efficient Market Hypothesis', which tells them that the current price has to be correct... that it reflects all that is known about a company... and that since 'The Market' always has more information than any individual, any investor who thinks the price is too high or too low is wrong.

The very idea that a stock SHOULD be higher or lower makes no sense to these analysts. "It is what it is," they say. Well, guess what?

It's the analysts who are wrong

Yes, the analysts are wrong...

Shares are only at the right price on average. This means that sometimes they climb too high... and sometimes they lag behind their 'correct' values... More importantly, a few can deviate a very long way from their correct values.

You've probably seen it yourself. In the dot.com boom, share prices of wet-behind-the-ears internet companies soared far higher than their true value.

So when analysts set out to figure where a share might go in the future, they build their calculations on a fraud - that the current price is exactly what it ought to be.

That is, they ask themselves: 'how will this share react to tomorrow's news?' But they don't bother to think how it might have reacted to yesterday's news... or how it might have over-reacted... or under-reacted.

They're like sailors plotting a course - without knowing where they were when they started!

The lesson of Tokyo is, you can never know where a stock will go. All you can do is to try to figure out what the correct price for a share really is. And that's exactly what I've done with my model.

I have worked out how to assess a stock's true value, as opposed to its actual price right now.

Discover the true value of every share in your portfolio

Remember the Southwest Airlines chart I showed you at the beginning of this letter? Just to show you my model is no fluke - here are two more examples.

Since 1980 my model matches the share price of United Technologies and Wells Fargo almost exactly.

If you'd started 25 years ago, with just the share price and my model, you'd have been able to track the share price to exactly where it is today... following almost exactly the same route.

No 'luck' required!

I didn't input any guesswork to achieve this. Only market prices, consensus forecasts and very large amounts of historical data. This last point is important because of the mathematical 'Law of Large Numbers', which says that statistical analyses get more and more accurate as the sample size gets bigger and bigger.

Let me quickly explain this...

Say you toss a coin 3 times and they're all heads. These statistics could lead you to think that it's almost 100% likely that the coin will fall on heads each time you flip it.

But toss the coin one hundred times, and the number of heads will be closer to 50%. After a million times, the number of heads will be very, very close to 50%.

Or look at it another way...

If my chickens tend to lay 5 eggs a week each on average, but this week they lay 8, we know it's likely that they'll go back to 5 again soon. It's called 'reversion to the mean'. And the reason I know they lay about 5 eggs each a week... is the fact that they lay about 5 eggs a week!

As you can see it's rather a circular or self-determining argument. But that's why mean reversion is so powerful. It takes away superstition out of the behaviour of seemingly random price movements... just like weather forecasting.

What Hurricane Katrina can teach you about stocks

The hurricane that devastated New Orleans in 2005 was only the second category 5 hurricane to make landfall on that coast in 100 years. So the sensible betting is that there 'probably' won't be another one for the next 50 years or so.

In the same way, most shares will stick closely to where they should be for most of the time.

But in my system I am looking for the Hurricane Katrinas - shares that have strayed exceptionally far from the norm. I then predict that they will return to their mean average price very soon.

So you can see that my theory is not controversial or strange at all! To not believe in 'mean reversion' would be like saying that, now New Orleans has had a hurricane, this will be the normal weather from now on.

The George Soros secret of perfect market timing

When shares do deviate from their correct 'mean value'... they can deviate sometimes by 100% to 200%, like a freak hurricane. This extreme deviation acts like a piece of stretched elastic... eventually it will pull the stock price back into line.

All we need to do to make money from this is to find one of these shares and buy if it has dipped too low, or sell if it has soared too high.

This is where timing is crucial.

You see, even if stocks have deviated a lot... they can still deviate some more before they track back to where they should be. Just think of my Tokyo share that hit stratospheric levels... and then went even higher.

As the economist, John Maynard Keynes, famously said: "the market can stay irrational longer than you can stay solvent."

So to time it right, you not only need to find a share that has deviated in a big way... but you also need to wait until that share begins to return to its proper value.

These trend reversals (where the trend or momentum of the stock changes direction) are what legendary investor, George Soros calls 'inflection points'.

They are the profit trigger of his entire investing technique!

Once you reach an 'inflection point' (the moment when a stock price turns) you have a powerful technical timing signal.

Pull the trigger and you could make money

Look at this chart of pub group Greene King.

Its share price (the black line) has soared from its February 2000 low of 160p to 1124p in February, a gain of 765%... and it's still rising.

So would you have bought shares in Greene King during late 1998?

Absolutely!

Look at the 'correct share price' (red line) according to the model. While the actual share price (black line) dropped in the late '90s, the correct price kept climbing.

This was because, as the dot.com bubble took off, boring pub stocks were exactly the sort of thing investors were selling to raise money to punt on tech stocks. So by the lows of February 2000, the stock was eye-wateringly cheap, according to the model.

But it still wasn't a 'buy' yet.

A 462% gain in 7 years

This is because there are two signs I am looking for.

Firstly, the share price needs to be sufficiently far from its model price to come onto my 'one-to-watch' monitor. And secondly, it has to break its downtrend and show a 'trend reversal' - like an elastic band snapping suddenly backwards.

This is how you get your timing right.

My calculation told me that Greene King shares had reached sufficient deviation by February 2000, at 160p. It was now definitely on my radar as a buy.

In mid-march 2000, the share bounced to 200p.

This is the perfect combination of factors for some big returns. Here was a rising stock price that had deviated hugely from its true value, and was now on the rebound.

Had you bought on this 'trigger' signal, you'd have made a gain of 462% by now.

What's more, according to the model, Greene King could still go higher from here. And this is just one of many examples that crop up every single month. But remember that these charts are examples. Unlike certain other independent analysts, I ensure all my clients know that past performance isn't necessarily a guide to the future.

These are just to show you how my model works...

A 600% gain from TBC

If you'd bought shares in the US stock TBC Corporation (TBCC) when it was at a deep low compared to the modelled price at the beginning of 2001, you'd have made almost 600% gains when it rebounded.

50% gain from XEROX

Xerox took a sharp dive in 1990. According to the model, this was completely unjustified. If you'd bought when the downtrend finished at the end of 1999, you'd have seen the stock rise 50% in less than 2 months.

70% gain from Cisco

Cisco's share price was driven too high by the excesses of the dot.com market. You can see below where it overshoots the model price in the late 90s.

The stock price broke its unjustified uptrend in September 2000 and fell 70% in just 8 months...

That's a potential 70% gain.

29% gain from BG Group

Meanwhile, BG Group in 1992, 1996 and again in 2003 dropped far too low compared to the model. If you'd bought at the beginning of 2003, you'd have seen your shares soar over 150% in the 4 years since.

These are examples, of course, and you should never take the past as a guide to future results. But if you don't want to miss any more opportunities like these...

Put my model to the test right away

Using my enormous software program that crunches 25 years' worth of data across the entire market, I have hundreds of charts for share prices like these and I study them every single day.

Some I am merely tracking for the moment... the black and red lines are still running close together.

But others are showing enormous deviations from their correct price. And it's these that could make you some serious profits over the coming year.

But I don't want you to take my word for it.

I'd like to send you details, right away, of the current shares in my portfolio that have deviated from their true price and are now in the first stages of trend reversal. In each case my model is screaming out 'BUY' or 'SELL'.