By Paul H. Christiansen, Founder, BigBet Stocks, LLC

Most of the income for many of the top producers at the nation's leading brokerage firms does not come from commissions generated by specific buy and sell recommendations for stocks. Instead, the income for these leading producers comes from fees associated with wrap accounts - a service that screens and selects investment management firms deemed to be appropriate for their high net worth clients.

These brokers - or financial planners - are not alone in eschewing the art of stock-selection, or actively managing money. Like many other investors today, they have opted for passively managing money - handing over the stock selection process to professional investors. Consider the following:

"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals."

Warren Buffett's 1997 Investment Letter to Shareholders

Other advocates of index funds include investment luminaries such as Peter Lynch, Charles Schwab, James Cramer and - of course, the man who created the index fund concept in the mid-'80s - John Bogle. Interestingly, Charles Schwab has said that roughly 75% of his personal investments are in index funds.

Index funds are an excellent choice for most individual investors. Why, then, are there websites and services whose raison d'etre is to help investors - individual as well as institutional - discover tomorrow's best-performing stocks . . . today?

Selecting the Stocks that Outperform

The answer to that question is both simple and compelling: There always have been - and it can reasonably be expected that there always will be - select stocks that decisively outperform the market averages. Most investors are familiar with the performance of Microsoft and Intel during the '80s and '90s, Dell Computer and Cisco Systems during the '90s and Google during the current decade. The performance of these stocks offers convincing proof that select stocks can and do outperform the market averages.

Further proof can be found during the first quarter of every year when financial publications release a list of the top performing stocks from the preceding year. Invariably every stock on that list will have significantly out-performed most market averages.

Most recently, The Wall Street Journal published a list of the 50-top performing stocks for 2007. All but 9-stocks on this list more than doubled in value. The top performing stock - First Solar - had an incredible 795% return for the year! If an investor had bought 100 shares of each of those stocks at the beginning of 2007 and sold those stocks at the end of 2007, his/her investment would have appreciated more than 150%.

By way of contrast, for all of 2007 an index fund that mirrored the S&P 500 would have gained less than 5%.

You might say, "That's historical data. I can't profit from historical data. How can I discover those stocks before they significantly appreciate in market value?"

Once again the answer is both simple and compelling. Some investors - individual or institutional - necessarily have to be early discoverers of those stocks. The basic premise is that when individual or institutional investors discover a stock with convincing future growth potential they aggressively buy that stock. In the parlance of Wall Street, they make Big Bets.

Two Screens: Unusual Volume, Institutional Investments

There are two systematic screens to discover those Big Bets - Unusual Volume and Institutional Investments. Any investor - individual or institutional - can replicate these screens. The Unusual Volume screen is constructed from data provided by The Wall Street Journal Online. The Institutional Investments screen is constructed from data provided by the Securities and Exchange Commission. Aside from the annual subscription cost to The Wall Street Journal, all of that information is free and - most important - is simultaneously available to everyone.

That makes it sound relatively simple. In fact, there is considerable work and careful analysis that goes into the construction and operation of the screens. We currently track the investments of roughly 40 of the nation's largest investment management firms and an equal number of the nation's leading hedge funds. Collectively those firms have more than $8 trillion in assets under management.

Are the two screens effective? Of the 50-top performing stocks for 2007, our two screens generated Buy signals for 35 of the 50 stocks. If an investor had bought 100-shares of each of the 35 stocks that generated a Buy signal they would have had the potential to increase their investment by 120%. The Buy signals didn't capture all of the gains generated by the best performing list (150%+), but most investors would be pleased with the results generated by the Buy signals.

In addition, one or more of the institutional investors that were tracked had a $100 million or better position in thirteen of the fifteen stocks that did not generate a Buy signal during 2007. That fact simply illustrates the possibility that at some time in previous years their purchases might have generated a Buy signal. Aside from that possibility, those huge ownership positions do lend credibility and comfort.

Not All Buy Signals are Winners

To be sure, not all Buy signals result in above-average performance. In fact, some result in alarming below-average performance. However, as one becomes immersed in the data over a period of time, one becomes more comfortable in analyzing the data. For example, it becomes apparent from their track record that some institutional investment firms and some hedge funds display more skill in picking stocks than others. Similarly, one learns that the Unusual Volume data becomes more meaningful in the absence of current news.

Obviously daily reading of business publications such as The Wall Street Journal helps to generate an intuitive sense relative to the future prospects for a stock that has generated a Buy signal. To illustrate, if a company is involved in solar energy the current energy crisis might stimulate an investor to explore the company's web site or - better yet - their most recent10-K filing which is readily available, either as a reference in the "Investors" section of the company's web site or directly from the company's files with the SEC.

Clearly there are no systematic analyses that will guarantee your participation in every stock that emerges on next year's best performing stock list. There is no force majeure that causes stock values to increase in value. The fundamental laws of economics are always responsible for increases in market value.

To illustrate that point, companies don't conduct their business in a vacuum. When they embark on a path of rapid growth, that growth becomes evident to initially a small - and eventually a larger - group of observers, many of whom become investors. As the conviction and enthusiasm builds, investment demand increases and investment supply decrease. The inevitable result is higher market values.

Confidence in Following Institutional Investors

At some point in time the demand factor becomes very aggressive - and very transparent. The Unusual Volume metric is often the first metric to generate a Buy signal for an emerging growth stock. When the Institutional Investment metric generates a Buy signal it will provide an element of confidence - knowing that some of the largest, most highly-qualified professional investors in the nation have bestowed their imprimatur on a company's potential for future growth.

One cannot always know why individuals or institutions have become aggressive buyers of a particular stock. However, those Buy signals do alert you to the fact that some investors have become convinced that future market values for that stock will climb higher. Usually that provides other investors with sufficient motivation to conduct their own due diligence.