Using this newsletter

While Upside has delivered strong returns for subscribers, things don't always go our way. We take our recommendations seriously, and our goal is to limit our Buy List to only the best year-ahead performers. But the truth is there will be more losers, more stocks sold at a loss so that money can be redeployed in better names.

As the chart below makes clear, our Best Buy List and Buy List have delivered attractive returns, including year-to-date gains exceeding 25%. While we do not get every stock right, our disciplined and quantitative approach can deliver superior returns without much additional risk — if some basic principles are followed:

• Stay disciplined. Since your editor took charge of this newsletter in 1999, Upside’s approach has not varied: (1) use our Quadrix^® stock-rating system to screen for high-potential stocks; (2) investigate companies rigorously; (3) examine company and industry prospects; (4) reconsider valuations; (5) look for a catalyst; and (6) sell stocks no longer among our top picks. This straightforward approach has done well, and we see no reason to mess with success.

• Spread your bets. The truth is we don’t know which of our recommendations will do best, nor do we pretend to know the precise fair value for each of our stocks. We do know that all stocks on our Buy List have superior year-ahead potential — and that by diversifying among our recommendations you can put the odds in your favor. Spreading your bets is especially crucial in the small-company sector, where more stocks are required to take full advantage of the free lunch provided by diversification.

• If a stock is not a buy, it is a sell. Many subscribers have a hard time with this principle, believing it is somehow wrong to sell a quality company. But one strength of our system is that we are always looking for the best year-ahead performers — and your portfolio can’t be in our best ideas unless you sell those that no longer qualify as top picks.

• Make a commitment to small and midcap stocks. According to Ibbotson Associates, small-capitalization U.S. stocks provided an annualized return of 11.7% from 1926 to 2003, versus 11.3% for midcaps and 10.1% for large stocks. Microcaps, currently stocks with stock-market capitalizations below $500 million, returned 12.7% annually. Over the long term, an extra 1% to 3% of annualized return has huge implications for your wealth.

• Look for opportunities in all corners of the market. More important than the historical returns of small stocks are their abundance. With more than 70% of U.S. stocks considered small-caps, it stands to reason that most of today’s best opportunities will not be household names. Because Quadrix is not influenced by the greed, fear, and biases that impact all investors, it is a great tool for highlighting potential buys.

• Be prepared for daily volatility. Small-company stocks can move 5% in a day on no news. When news breaks, 10% to 15% moves are not uncommon. Diversification is the best way to prepare your portfolio for such moves, but you also need to prepare your psyche. While sustained underperformance from a stock is a yellow flag, don’t panic because of a sharp one- or two-day decline.

• Don’t worry about your portfolio’s correlation with the market averages. Whether your portfolio tracks the market is irrelevant. What matters is whether returns are attractive — and how much risk you are taking. Our Buy List and Best Buy List are diversified by sector to limit risk. But they are not designed to mimic the S&P 500 or any other index.