If you’re at all serious about studying the market, you must learn at the feet of the masters. The great investors of yesteryear blazed a glorious trail. It’s a trail that anyone can follow, as it begins with simple but profound insights, and it’s a trail that everyone wants to follow, as it leads to princely wealth, fabulous wealth, unimaginable wealth, the power to guide nations to greatness or wipe them out forever with the stroke of a pen.
No doubt you’ve studied Warren Buffet, Benjamin Graham, Peter Lynch, Prince Alwaleed Bin Talal, George Soros, Bill Gross, Carl Icahn, John Templeton, Bill Ackman… well, maybe not him so much. He does seem to lose almost every bet he makes nowadays, and maybe some of the others were great once, but not so much now… aha—tricked you! The truth is, all the past greats blundered more times than can be counted, and none of those still trading are unbeatable. Even Warren Buffet, the sage of sages, has fallen far short, in recent years, of the S&P-500.
Of course, it took decades for the law of averages to catch up with Buffet—to cancel out the last anomaly—and perhaps that’s the first rule of investing: it’s 99% patiently doing nothing.
According to Fortune, more than 60% of money managers failed to keep pace with their market indices in 2016, and that’s not the half of it. As the case of Warren Buffet and Berkshire Hathaway demonstrates, the number gets lower and lower over time. That’s particularly meaningful when you understand that fund managers also get better over time. I’m not suggesting that they learn on the job, although some may, I’m talking about survivorship. Only a small fraction of managers stay in place for more than five years, while only the best of the best last more than ten.
Investing is researching
By now, you surely have many sources for investment ideas. Hopefully, you know how to recognize and are quick to dismiss any idea that is being “sold” to you. When you find an idea that you like, drill down. You need to know how to read a quarterly report, how to read an income statement, how to read a balance sheet, and how to read a cashflow statement. Cashflow is particularly important if you are looking at a startup. You should also study what the CEO has said and written, watch videos, learn his or her reputation, get a feel for the person. Avoid any company where there is fighting among the insiders. Avoid any company where there is any hint that the people in charge are wrongdoers or lawbreakers, either or both. A scammer is always scamming, and if you have any association with one, you are being scammed, whether you know it (yet) or not.
Find a small number of truly great small stocks, and hold them forever
You can make good returns in the market by indexing, but remember, Warren Buffet still beats the market if you go back all the way to 1967. In recent years, he hasn’t done nearly as well, but that may not mean he isn’t still a great stock picker. You get rich in the market by investing in small companies and holding them as they grow into big companies. This is an ability that you have, but those huge investing gurus do not. Even if Warren Buffet were to buy a $2 billion company outright and hold it until it became a $20 billion over, say, five years, his ten bagger would have almost no effect on his total returns. You, on the other hand, would make a return of 900%, so let your profits run.
Sell your losers
On the flip side of having too much money under management, there’s an even more serious problem. If Buffet were ever to try to get out of his big positions, such as Coca-Cola, he would create so much selling pressure that he would crush the stock before he had liquidated even half of his position. Here, you have another way to beat the big guys: when a stock is no longer promising, sell it. Because you can move quickly into and out of your picks, you can clip your losses short. You can also sell for a big profit somewhere down the road without destroying your position by doing so.
You can weigh their opinions against your own
As stated previously, there are always people who want to tell you their own stock ideas. Having done your own research and drawn your own conclusions, you can also read theirs and decide if their conclusions make sense to you. Each guru is barred by convention from following any advice but his own, while you, as a free agent, can weigh their ideas against each other’s and your own. If your picks for a month match Warren Buffet’s, or mine, or some public, private, or secret source of your own, no one has any basis on which to complain. Furthermore, the days when big clients received preferential trading rates are long gone. Today, anyone can trade for little or even nothing. Just don’t let the ability to trade lure you into trading too frequently. All you need to do is position yourself properly, then let time take care of the rest.