Like any other industry, the financial world has a language all its own…

Contango, pairs trades, cusips, TIPs, gamma, dark pools…

And in the financial lingo, there’s a term that makes hedge fund managers go wild – ALPHA.

Alpha is defined as the abnormal rate of return on a security in excess of the benchmark. For a stock, this would be outperforming an index such as the S&P 500.

Mathematically, it looks like this:

α = Rp – [Rf + (Rm – Rf) β]

Here’s a breakdown of each symbol…

Rp: the realized return of your portfolio.

Rm: the market return.

Rf: the risk-free rate (think U.S. Treasuries).

β (beta): the risk premium.

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I know that sounds complicated, but in essence, it’s really quite simple…

A stock with an alpha of 1.0 implies that the shares have outperformed the benchmark by 1%.

And a portfolio with an alpha of 125.0 would outperform the market by 125%.

Pretty simple concept…

But what’s missing from virtually every portfolio?

Why do novice investors struggle when it comes to boosting their portfolios’ alpha scores?

What’s the powerful dynamic that could turn a modest $1,000 investment into $57,665… or a $10,000 investment into $576,650, as depicted in the model portfolio below?

It’s the presence of at least one big gainer per year!

I’m talking about a real moonshot!

Seriously… The presence of a single killer stock can boost a portfolio’s alpha to 125.0 – making it worth 4,209% more than a traditionally allocated portfolio – after just five years!

Before I show you exactly what I mean, I need to first explain how True Alpha stocks can fit in your portfolio…

YEAR TRADITIONAL PORTFOLIO ALPHA 125 PORTOFLIO0 $10,000.00 $10,000.001 $10,600.00 $22,500.002 $11,236.00 $50,625.003 $11,910.16 $113,906.254 $12,624.77 $256,289.065 $13,382.26 $576,650.39

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THE BARBELL STRATEGYIn the midst of the financial crisis – bank bailouts, frozen credit markets, and plummeting stocks – a new idea in portfolio theory quietly emerged: the “Barbell Strategy.”

It calls for an investment on both ends of the risk spectrum, with nothing in between.

That means investing in low-risk investments, like government debt, money market instruments and CDs, and defensive income-paying stocks. And then investing in high-risk, speculative investments, like small caps and startups.

The portfolio entirely omits the medium-risk/medium-reward investments that typically dominate most portfolios. Thus, when the portfolio is plotted along the risk spectrum, it looks like a barbell.

Also called the 80/20 strategy, one invests 80% of the portfolio in the low-risk instruments. This is your insurance of a comfortable retirement no matter what markets you have to weather on the way there.

Then you put the remaining 20% to work in fast-growth, high-flying investments.

The idea is that you’ll have a sizeable chunk of change as your nest egg. And since it’s invested in securities with the lowest levels of inherent risk, you can set it and forget it in order to focus all of your attention on that speculative 20%.

IN THE MIDST OF THE FINANCIAL CRISIS – BANK BAILOUTS, FROZEN CREDIT MARKETS, AND PLUMMETING STOCKS – A NEW IDEA IN PORTFOLIO THEORY QUIETLY EMERGED: THE “BARBELL STRATEGY.”

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It’s that 20% of your portfolio where True Alpha recommendations should come into play… And it’s also the part of your portfolio that could make you a multimillionaire as long as you keep maximizing alpha.

Nassim Nicholas Taleb, bestselling author of Fooled By Randomness and The Black Swan, first made noise on Wall Street for his brilliant execution of the Barbell Strategy.

He won’t say exactly how well he did, but estimates have him booking anywhere from $20 million to $45 million in profits in a single day. Taleb is obviously an incredibly gifted investor, but the strategy has merit regardless of one’s investing IQ.

That’s not to say that there aren’t going to be any losers.

Taking a hit is just the nature of the beast when you’re seeking True Alpha. (And that’s why I recommend not investing more than 1% of your total portfolio in any one True Alpha company.)

But as I mentioned, the power of alpha means that you only need at least ONE HUGE GAINER per year to rack up serious gains. As you’re about to see, that can completely wipe out the losses!

THE POWER OF ALPHATo give you an idea of what just ONE big gainer a year can do for your portfolio, let’s take a look at some examples.

Say we have a portfolio with a total initial value of $10,000 and we invest those funds evenly among 10 companies (remember, you receive at least 10 reports a year as a True Alpha member)…

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SCENARIO ONE: NINE SMALL LOSSES AND ONE HUGE WIN. This is the simplest example… Say nine of our stocks trade down slightly while we own them (an average of a 5% loss on each), but the tenth is a thousand-bagger that nets us 1,300%…

Even with those nine positions sucking away at our profits, after five years, we end up with a 5,795.8% gain and a portfolio with an alpha score of 126.0. All with just ONE big gainer.

SCENARIO TWO: FIVE LOSSES, FOUR GAINS, AND ONE MOONSHOT. Now let’s assume that we suffer five losses, but with four medium-sized gains, and one stock that really skyrocketed…

With five losses averaging 25% each… two gains of 50%... one gain of 60%... one gain of 80%... and just one homerun that bags us a 750% return...

If that occurs each year for five years, we’d see a gain of 5,927.4% on a portfolio measuring 127.0 on the alpha scale.

All with just ONE stock reaching a triple-digit gain.

SCENARIO THREE: ONE DEVASTATING LOSS, EIGHT AVERAGE GAINS, AND ONE GRAND SLAM. Let’s say we suffer a shattering 75% loss on one of our 10 stocks… then we see average returns (around 75% - which is pretty reasonable for these innovative companies) on eight picks… and just one stock that catapulted higher at 750% a year.

At the end of five years, even with that one crushing loss, we’ve still got a portfolio that checks in with an alpha score of 127.5… and enviable gains of 5,994.1%.

Now that you’ve seen how the power of alpha – and how just ONE HUGE GAINER – can build your wealth to tremendous levels, let’s break down a few criteria I use to select the perfect alpha-worthy stocks…

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Alpha Criterion #1: Be a Visionary. It’s one thing to create superior products that compete in existing markets. But I track down companies that develop products capable of capturing new markets altogether.

Alpha Criterion #2: Say “No” to the Status Quo. Alpha-worthy companies aren’t a bit concerned with conventional wisdom. Or the standard ways of conducting business. Or even what their competitors are doing. In fact, they reject the status quo – almost defiantly – in every instance, choosing instead to passionately forge new ideas, innovation, and business parameters in which to flourish.

Alpha Criterion #3: Reposition the Bull’s-Eye. These companies all have an innate ability to recognize their market as a moving target. By positioning themselves where the market is headed, rather than where it presently is, such companies enjoy almost every conceivable advantage over competitors. The ultimate winners – in most cases – are the shareholders.

Alpha Criterion #4: Magnets for Fresh Capital. Almost every company gets its start in the private market. It stands to reason that the companies attracting the most private funds (venture capital, private placements, and private equity) hold the most promise. By tracking these pre-IPO money flows, we can ensure that

THE ULTIMATE WINNERS – IN MOST CASES – ARE THE SHARE-HOLDERS.

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we’re among the first to know about the next wave of visionary companies.

Alpha Criterion #5: Must Have a Compelling Catalyst. A coming event can send a tiny stock through the roof. Imagine owning a tiny pharmaceutical ahead of FDA drug approval... Or a little software company before a major takeover. Such events can make investors ridiculously wealthy.

So, now that you’ve got an idea of how we do business here at True Alpha (and how we’ll go about attaining alphas of 125.0 or better), make sure you take full advantage of all of the other resources on our website like the exclusive Alphacasts and web portals.

Thanks for joining us in our quest for market-beating returns.

I look forward to helping you attain True Alpha status.

Onward and Upward,

Robert Williams

Founder, True Alpha

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