How to finish 2019 richer than you started
We're almost halfway through 2019... and many of us have given up on the self-improvement goals we made at the start of the year. But there's one goal you can> READ MORE
We're almost halfway through 2019... and many of us have given up on the self-improvement goals we made at the start of the year. But there's one goal you can> READ MORE
Let's say next week you make a profit of $1,000 in the market. And the following week, you lose $1,000. Of course, making money was better than losing money.> READ MORE
It was one of the most important investment lessons I ever learned... About a decade ago, I became the manager of a US$125 million hedge fund. The fund had> READ MORE
Stock markets, currencies and commodities all rise and then they fall, and then they do it all again… and again. Despite this predictability, most investors> READ MORE
We all make investing mistakes. I’ve written about some of mine before. But as I’ll show today, investing in two types of stocks could blow up your> READ MORE
Editor's note: In today’s essay, we're sharing more timeless advice from our friend and Empire Financial Research founder Whitney Tilson. Today, Whitney tackles> READ MORE
Editor's note: Today, we’re introducing you to our friend Whitney Tilson... Whitney has spent decades in the trenches of Wall Street, learning everything it> READ MORE
We all make mistakes. But the more you can learn from others' mistakes, the fewer (hopefully) mistakes you'll make. So here are four mistakes I've made - or> READ MORE
We’re almost halfway through 2019… and many of us have given up on the self-improvement goals we made at the start of the year.
But there’s one goal you can still achieve this year: Making yourself richer. Here are five (near) mid-year investment resolutions that will still make you wealthier through the last half of the year.
Resolution 1: Learn to love money
If you want to be richer, you need to like money. If you think having a lot of money makes you selfish or greedy, then you’ll probably never become rich. The less you like money, the less money you will likely have.
An aversion to money – whether conscious or unconscious – will stop you from getting rich. The biggest hurdle to becoming wealthy is that voice in your head saying money is bad.
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Ask yourself the following questions, to find out what you really think of money:
If you answer “yes” to any of these questions, your notions about money could be stopping you from getting rich. Wealthy people don’t think twice about money. They like it. They wouldn’t be rich if they didn’t.
So stop and consider your feelings about money. Getting more of it will be a lot easier, if you believe that “money is good.”
Resolution 2: Learn more about investing
There are a lot of ways your brain prevents you from being a successful investor.
A large number of books describe investment pitfalls, or cognitive biases, that can affect investment decisions.
These self-inflicted investment pitfalls include the status quo bias (feeling that “this time it’s different”), the confirmation bias (only paying attention to information that supports your viewpoint) and the Dunning-Kruger Effect (overestimating your knowledge). Bad and expensive investment decisions can stem from these cognitive biases.
Education is the best way to avoid these investment pitfalls.
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Resolution 3: Learn from other investors’ mistakes
Experience is a great teacher. But as an investor, learning the hard way can turn out to be a very expensive lesson. (I’ve certainly done my fair share of learning, as I wrote here, when I lost US$50 million of other people’s money.) Instead of learning from your own mistakes, look to generally successful investors who’ve made some mistakes already, and learn from them.
One legendary investor, who has made his share of mistakes, is Jim Rogers. He’s a guy worth paying attention to if you want to learn something about investing. Jim is a friend of Stansberry Pacific Research, and we’ve had the privilege of speaking with him a few times over the past few years. In our discussions, he’s shared invaluable investment insight.
Resolution 4: Sit down with your financial advisor
I firmly believe that most people can take care of their own investments and do not need a financial advisor. But if you have a financial advisor, you should schedule a meeting to ask a few questions. Most importantly, you should learn how they earn their money, if you don’t know already.
Specifically, figure out whether your financial advisor gets paid through commission, a flat annual fee, or charges an annual percentage based on the value of the assets she or he manages.
Then you need to weigh the fees you’ve paid in the past year against the services that you’ve received. Do you think your financial advisor’s services are worth the amount of money charged? If not, it’s time to re-evaluate the relationship.
Resolution 5: Take stock of your winners and losers
Despite a cloud of gloom and uncertainty hanging over global markets, many of the world’s major stock markets have moved up. This means you might have some investments that have done well, too.
Now is a good time to evaluate your high performers. You might want to sell or trim your winners, if you see big returns or they’ve reached your target price. You should also ditch your winners if the fundamentals of the company have changed and the big gains are done. This will secure profits and give you cash to play with.
It’s also a good time to sell losers. This will help you dodge the return-killing demon of the value trap and avoid losing money to opportunity cost. And selling these poor performing investments frees up some cash for more promising opportunities.
Following these five resolutions will help you make better, more informed investment decisions. And possibly help you keep more of your money.
Publisher, Stansberry Pacific Research
Let’s say next week you make a profit of $1,000 in the market. And the following week, you lose $1,000.
Of course, making money was better than losing money. But was the joy of winning greater than the pain of losing?
For most people, it isn’t – losing feels worse. The thrill of victory pales next to the agony of defeat. The fish that got away looms larger in the fisherman’s mind than the one that landed in the frying pan.
The human reaction for the pain of defeat to sting more than the delight of victory messes with our emotions. And that can lead to bad investment decisions.
The way our brains perceive loss (“giving back” to the market) is crooked. Research suggests that our minds experience actual physical pain when losing money. And studies have shown that the pain we feel while losing, is greater than the pleasure that we feel when we’re winning or gaining an equal amount.
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This is “loss aversion”
This is called loss aversion. In investment terms, it means that people over-exaggerate the risks of a particular investment, even if the odds are in their favour, and decide to play it safe. So even if the chances of making $1,000 are better than losing $1,000 in an investment, many investors will avoid the opportunity altogether. Most people exaggerate the smaller possibility of a worst-case scenario, and as a result do not participate in what is, statistically, a good opportunity.
An experiment involving $50 and a coin toss demonstrated this. Scientists handed subjects a $50 bill and gave them two options: Keep (or “win”) $30, or toss a coin to make, or lose, $50. In the experiment, 43 percent of the subjects chose to gamble, and the rest “won” (or kept) the $30.
Then the experiment was repeated, and participants were again handed $50 and again were given two options: “Lose” $20, or toss a coin to make or lose $50. Note that the actual outcomes of the two different experiments were identical – “winning” $30 of the original $50, or “losing” $20 of the original $50. The difference was in how the outcomes were framed: “Losing” $20, or “winning” $30.
When the option was framed as “losing” $20 rather than “winning” $30, 61 percent of the group chose to gamble. The desire to avoid a loss, rather than go with the easy profit, pushed participants to make a poor choice.
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Two ways to fight risk aversion
What can you do to avoid making a bad decision because of loss aversion? Two things.
First: Try the overnight test.
Let’s say you invested in a stock (or any other asset) that has declined in value. Now you’re faced with a decision to sell at a loss, or continue to hold. It’s painful admitting you were wrong, of course.
But imagine you went to sleep, and overnight the asset was replaced with cash. Ask yourself: In the morning when the markets open, would you now buy the stock (or whatever asset) at the current market price – or invest that money somewhere else?
If you wouldn’t buy the stock even at this lower price… you should probably sell.
Second: Use trailing stop losses. I talk about this all the time. It’s when an order “trails” a rising stock by always resting a pre-determined amount (either a percentage or an absolute figure) below the stock’s most recent high (that is, since you’ve owned it). It’s one of the most basic ways to limit your losses and take the emotion out of investing. But like a lot of the best advice (“get enough sleep,” “exercise every day,” “eat less”), it’s not easy to follow – precisely because emotions take over.
And that… would be your loss.
Publisher, Stansberry Pacific Research
It was one of the most important investment lessons I ever learned…
About a decade ago, I became the manager of a US$125 million hedge fund. The fund had been around for three years. The portfolio manager I was taking over from had put together a diverse portfolio of stocks, bonds, currencies and options across a dozen different markets and twice as many countries.
There were 70 stock positions total. Each position had a history… a narrative, and a reason that it was there. It might have been because a stock was cheap, or the company’s management was fantastic, or a big dividend was coming up, or that it was an unloved and beaten up stock that was coming back into favour. And I had no clue what most of those stories were.
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On my first day on the job, my boss told me, “I’d like you to look at every position in the portfolio. Learn the story, assess the valuation and understand why it’s in the portfolio. And then ask yourself if you would buy it today, right now. Because by having it in the portfolio, that’s what you’re doing.”
At first, I didn’t understand what he meant. A stock in the portfolio was a holding… so the portfolio was, well, holding it. It had already been bought at some point in the past. I told myself I wasn’t the person responsible for the stock “being bought” now – someone else already had.
But he was right. Every position was taking up capital – actual cash – of the fund. If that cash wasn’t being used for that position, it could be available to buy a different security. There was an opportunity cost associated with every holding. And by holding a position I was really “buying” that position – each and every day that it was in my portfolio.
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This also makes sense outside of a stock portfolio
Think of what you own – all of your assets – and ask yourself: “If I had the cash in my hand to buy this right now, instead of the thing itself (whether it’s a stock, a bond, a house, or a car), would I still buy it right now?”
Sometimes you don’t have a choice. You need a place to live, so dreaming of what you’d do with the cash you’d receive from selling your house right now might be irrelevant. And your old car might not be worth much, and you can’t compare its current value to what you bought it for when it was new.
But you may own other assets that, if you could do it again, you wouldn’t buy. You might be able to get something that works better, suits your needs better, or something that’s just a better colour or style. In the case of stocks or bonds, you might be able to put the money towards a different stock that has a better return potential or that pays a bigger dividend.
Every day that you’re holding onto a loser – whether it’s a stock that’s down, or an item that you don’t use or don’t need anymore – you’re using valuable capital that you could put to better use. Each day you own that asset – boat or stock or wheelbarrow or ring – you’re using money to own it, money that could be used for something else.
That’s why every day you are “buying” whatever you already own.
I learned the stories of the 70 securities in the portfolio. I ended up selling about half of them to free up capital to buy other assets that I felt good about “buying” every day.
Publisher, Stansberry Pacific Research
Stock markets, currencies and commodities all rise and then they fall, and then they do it all again… and again.
Despite this predictability, most investors are caught off guard by these market cycles. A market was moving in one direction… and then the cycle moves on to the next phase and everyone is surprised. It’s such a surprise because of “status quo bias”.
The status quo bias
We tend to think that things are likely to remain the same – because our most recent memory is of them being a certain way.
For example, a few years ago, I started going to a sushi restaurant a few blocks away that offered an all-you-can-eat buffet. It was my go-to venue for a great lunch deal – lots of sushi for a very reasonable flat price. So every few weeks, I’d settle in to my favourite table, gleefully ignore the (woefully overpriced) a la carte menu, and happily inform the waiter that I’d be having the buffet.
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But one day, when I went in expecting cheap sushi for lunch, the waiter told me: Sorry, sir, we no longer have that promotion. And he nodded to the menu on the table.
I felt a wave of shock peppered with disappointment wash over me. Past experience had led me to expect that this time – like previous visits – I’d get the buffet. Why wasn’t it available? What was different now?
I assumed that what happened before… would continue to happen.
It’s the same in investing.
Investors buy a stock that’s been steadily rising in price because they expect it to continue going up. Investors expect a bull market to continue because, well, the market has recently been rising. Status quo (which means “the state in which” in Latin) bias helps them forget about cycles.
Investors fall victim to status quo bias because they believe the four most dangerous words in investing: “This time it’s different.” This time, the market will continue going up… and this time the hot stock will continue to rise.
Of course, nothing is different. The cycle always prevails.
Imagine a stock that pays you 100% income on your money every year… and continues to do so for the rest of your life. $1,000 in savings would pay you $1,000. $10,000 would pay you an extra $10,000. $100,000 would pay you $100,000. And again, that’s every year. We never thought an investment like that would be possible…
How you can protect yourself against status quo bias
It’s one thing to intellectually recognise that a cycle will end at some point. It’s another thing to do something about it.
It turns out that the best way to beat status quo bias is to procrastinate.
Studies on behavioural economics have shown that if asked to make a particular decision about something by the end of the day, people are more likely to decide to leave things unchanged. Change is hard, and the status quo is easy. And when you don’t allow yourself time to make a decision, it’s easier to keep things the same.
But when people are asked to make a decision by the end of the week, they’re more likely to think carefully – and make a decision based on facts, rather than the comfort of the status quo. This suggests change comes more easily if you have time to get used to it.
So the next time you think that this time is different… wait a bit. You might realise that, in fact, it’s never different. That can be difficult to accept when markets are going up. But it’s a relief if markets are going down.
Publisher, Stansberry Pacific Research
We all make investing mistakes.
I’ve written about some of mine before.
But as I’ll show today, investing in two types of stocks could blow up your portfolio.
Maybe you’ve made the mistake of investing in stocks like this before… and hopefully you won’t again.
Or hopefully, by reading today’s essay, you won’t make the mistake of investing in these companies at all…
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In late 2014, the United States and Cuba – an island 177 kilometres off the coast of Florida that (according to some) posed a grave and existential threat to American sovereignty – re-opened relations after a 54-year freeze.
Eager stock investors raced to invest in Cuba – even though it had (and has) no stock market. But a conveniently named closed-end fund with the ticker symbol CUBA had a ready answer.
CUBA invests in the shares of companies that stand to benefit from the economic opening and growth in Cuba. With Cuba all over the news in 2014, investors piled into the lightly traded CUBA fund, doubling its share price in two weeks. The premium of the shares (relative to the underlying value of the portfolio) peaked at an incredible 71 percent. So investors were paying US$1.71 for every US$1 of assets. (Needless to say, the forecast earnings of the stocks in CUBA did not double during those two weeks.)
I visited Cuba a few months later. It was clear to me that Cuba’s economy faced (and still faces) a very long and difficult road to prosperity. And contrary to what the CUBA share price suggested, the country’s opening wouldn’t help the financial performance of companies in the fund’s portfolio.
At the time, I told readers of my investment newsletter to stay away from CUBA.
Sure enough… after a brief continued surge (expensive shares that are riding a wave of irrational optimism can always get more expensive), CUBA shares fell 32 percent in the next five weeks. And they’re down 48 percent since 2014 highs.
Cuba is a wonderful place, and its re-entry into the global economy was a great story. But CUBA was a terrible stock.
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Russia’s Gazprom is the world’s largest gas company, based on total reserves (of an enormous 36.4 trillion cubic metres). It supplies one-third of the natural gas consumed by Europe. Back in Soviet times, Gazprom was big enough to be an entire government ministry on its own. It has supported remote cities in Siberia and sponsored football teams.
And the stock? It’s impossibly cheap… it trades at a price-to-earnings (P/E) ratio of 2.5. Other gas companies trade at multiples three to 10 times higher. Gazprom shares are also a fraction of the price of global oil producers… ExxonMobil shares, for example, trade at a P/E of 17. Chinese producer China Petroleum & Chemical Corp. trades at a P/E of 10. On an assets basis – that is, market capitalisation compared to total reserves, or total production, Gazprom shares are even cheaper. And even better, the shares offer a dividend yield of 4.8 percent.
But there are a few problems with Gazprom.
First… it’s been that cheap for years. And I don’t mean a few years… I mean decades (except when earnings collapsed, which is the worst reason for a P/E ratio to rise).
Worse… it’s been a terrible stock to own. It’s down 77 percent from its 2008 highs, when its market capitalisation reached a high of US$366 billion (compared to US$59 billion today). The shares have fallen 17 percent over the past five years.
Why the underperformance?
Gazprom – which is controlled by the Russian government – accounts for around 8 percent of Russia’s GDP, and a large chunk of Russian government revenues. When the Russian government needs money to plug a budget deficit, it turns to Gazprom.
Also, the company is as much a geopolitical hammer – used to threaten its customers from Europe to China (twist a few taps, and no more gas for, say, Ukraine) – as it is a gas company. And Gazprom is also a convenient source of cash to top up well-placed government ministers’ retirement plans.
This means that Gazprom isn’t run like a company… it’s managed like a cross between a government piggy bank and a big ATM for the Russian government and friends. Minority investors, like you and me, will never benefit from higher profits.
Gazprom is a classic value trap. It’s a stock that looks cheap on a valuation basis (that is, using the P/E ratio or a similar measure)… but it isn’t that cheap at all (and will likely remain “cheap” indefinitely).
What could change that? A value trap can stop being a value trap – and become an attractive, under-valued investment – if there’s a trigger for change. A change in management, a big change in the industry, higher commodity prices, a regulatory change – all of these things can turn a value trap into a great investment.
That may happen someday for Gazprom. But you could have said the same thing in 1996, when I started looking at Gazprom during my first job with a brokerage house in Moscow. And nothing’s really changed. Holding those perma-cheap stocks is hugely expensive in terms of opportunity cost.
Story stocks are everywhere… great concepts that may change the world. But for every great story, there are hundreds of stocks that went nowhere because the path from “story” to “make investors money” proved to be too bumpy. Or maybe (like CUBA) the story’s time just hasn’t come… yet.
And value traps? Also… everywhere. But too often there aren’t enough reasons for it to stop being cheap. Stay away from them, too.
Publisher, Stansberry Pacific Research
Editor’s note: In today’s essay, we’re sharing more timeless advice from our friend and Empire Financial Research founder Whitney Tilson. Today, Whitney tackles one of the biggest mistakes you can make – and shares three simple steps to help you overcome it.
When you buy a stock, one of two things will inevitably happen…
It will go up. Or it will go down.
In the beginning, it’s really that simple. You buy a stock with just two possible outcomes.
But the truth is, things can get complicated really fast. And as that happens, it often leads to one of the biggest mistakes an investor can make… letting your emotions get in the way.
When you let your emotions take over, you often rush into decisions that you’ll regret later… That’s the case no matter which way a stock is moving.
One common and costly mistake is selling a big winner too early.
As I explained yesterday, that happened to me with video-streaming giant Netflix (Nasdaq; ticker: NFLX)…
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On the day Netflix’s stock bottomed in October 2012, I pitched it to a crowd of 500 at my Value Investing Congress and then went on national television on CNBC. I said Netflix was going to be this decade’s Amazon (Nasdaq; ticker: AMZN), a stock that had risen 20 times in the previous 10 years. And as it turns out, my analysis was spot on…
Over the next two years, the stock rose sevenfold as Netflix’s streaming business grew. But as the stock kept moving higher, I made a terrible mistake… I started to let my emotions take over.
After the stock doubled, I sold half my shares. And when it doubled again, I sold some more. As the stock was doubling a third time, I exited the position altogether.
My analysis revealed that Netflix was trading at a 90 percent discount to its intrinsic value – in other words, a “10-cent dollar.” So as the story played out even better than I could have hoped for, why was I selling it after it doubled? It was still a “20-cent dollar.”
I thought I was conservatively managing risk and didn’t want to be greedy. But I had it backward… To build a successful long-term track record, you must be greedy when the opportunity arises. Finding a monster stock like Netflix only happens maybe once a decade – or even once in a lifetime. So it’s critical that you make the maximum amount of money on such moonshots.
I should’ve made more than US$100 million on Netflix for myself and my investors. Instead, I made less than US$10 million. Of course, that’s not terrible… But it was a costly mistake.
It’s equally important to harness your emotions when a stock is running against you…
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Take SodaStream, for example. Its machines help you turn regular tap water into sparking water with the touch of a button.
I knew SodaStream had a great business model. The company sells something that people use over and over. And the carbon dioxide bottles in its machines need to be replaced regularly. So SodaStream made something like an 80 percent profit margin doing so.
But the company had botched its marketing in the U.S. and was also relocating its main factory in Israel, so its sales and earnings were down. I patiently waited until the stock had been cut in half and bought a small position in 2014.
It turns out that I was much too early. The company continued to struggle and the stock kept drifting lower and lower… for nearly two years!
Making the right decision in these situations is critical. Had I stumbled into a “value trap” that would never turn around – in which case I needed to sell? Or was the company still strong, with fixable problems – in which case I should buy more?
It was very painful losing so much money for so long. Emotionally, I wanted to sell and never think about this terrible investment again.
But I was able to set aside my emotions and focus my analysis on the fundamentals, which remained strong. I added to my position all the way to the bottom – and was well rewarded.
In early 2016, SodaStream’s stock took off as I expected…
By the time I closed my funds in late 2017, it was up five times. And then PepsiCo (Nasdaq; ticker: PEP) bought the company last year for 12 times the price only two years earlier.
It can be challenging to figure out whether a stock is just hitting a few speedbumps (like SodaStream) or if it’s doomed for good (like old-school film company Kodak). But by following a simple three-step process, I realized that I should hold on to SodaStream…
First, assume the market is right and you’re wrong.
You must begin with this mindset because it helps overcome the natural bias we all have to not want to admit a mistake.
You must respect the market. The hard truth is that most of the time it’s right… and you’re wrong. My experience with SodaStream is the exception, not the rule.
Then, you must figure out what you’ve missed and actively seek out disconfirming information.
Redo your work… But don’t just rehash what you already did. That won’t lead to any new conclusions. Instead, you must ask – and honestly and correctly answer – a series of key questions.
Have you made a research error? Are you possibly missing anything? Have you openly and carefully considered contrary arguments? Have you invented new reasons to own the stock (so-called “thesis drift”)?
Many smart investors lost a lot of money owning film company Kodak’s stock in the decade before it filed for bankruptcy in January 2012. It wasn’t an unreasonable investment initially… The company had one of the strongest brands in the world, it generated robust cash flows, and its stock traded at a low multiple of earnings. Sure, digital photography was a threat to Kodak’s film business, but it seemed far off – and the company was making investments to compete in this space.
For most investors who lost money with Kodak, the mistake wasn’t so much the initial purchase. Rather, it was failing to recognize that the film industry was rapidly being obliterated and that Kodak was getting no traction in the digital arena. So its profits were destined to disappear.
The key is to tune out the noise and think clearly and rationally. Focus on the fundamentals… If the company’s earnings rebound, its stock will as well.
Lastly, to make the right decision, you must pretend like you don’t already own the stock.
It’s so hard to make the right decision about a stock you’ve lost money on. The emotions are so powerful!
On one hand, you’re probably telling yourself that if you liked it at the price you bought it, you should like it more now that it’s cheaper. That may be true – but it could also be a value trap. No matter what, you must resist the temptation to double down again and again to try to make back your losses. Remember the old saying… “You don’t have to make it back the same way you lost it.”
On the other hand, your emotions are likely telling you to sell, so that you don’t have to suffer any more pain and never have to think about this terrible stock ever again.
There’s also a powerful feeling of wanting to wait until it gets back to the price you bought it before selling.
You must resist all of these feelings! Emotions are deadly when it comes to investing…
I’ve found that it helps my thinking to pretend like I don’t own the stock. I ask myself, “If I were 100 percent in cash today and building a portfolio from scratch, would I own this stock? And if so, what size of a position would I have?”
Doing nothing may be the best option, but you also must have the courage to admit a mistake and get out – or know that you haven’t made a mistake and buy more.
If a stock is going against you, follow this simple three-step process. And if you wouldn’t buy the stock if you were starting a portfolio from scratch, then you should sell it immediately.
Editor’s note: On April 17, at 8 p.m. Eastern time, Whitney will join Stansberry Research founder Porter Stansberry for a special investing event. He’ll reveal the secret to his investing success… and announce the biggest prediction of his career. Folks who tune in will even get the name and ticker of the company he calls the “No. 1 retirement stock in America”… just for showing up. Sign up for this free event right here.
Editor’s note: Today, we’re introducing you to our friend Whitney Tilson… Whitney has spent decades in the trenches of Wall Street, learning everything it takes to build tremendous wealth in the markets. And now, his newest venture – Empire Financial Research – aims to educate individual investors and help them make better decisions.
In today’s essay, we’re sharing some of Whitney’s most valuable insights. Today, you’ll learn more about his background, as well as four tips for beating the market over the long run…
In the past two decades, I have learned some valuable investing lessons…
My journey to launch Empire Financial Research has been unique. So please bear with me while I tell you a little about myself and my personal background…
My parents met in the Peace Corps in 1962. I was born four years later and spent much of my childhood in Tanzania and Nicaragua. In between, we lived in California, where my father earned his doctorate in education at Stanford University.
While we were there, I was one of 600 children who took part in the now-famous Stanford Marshmallow Experiment to study delayed gratification. (To this day, they still won’t tell any of us if we waited for the second marshmallow!)
Later, we moved to New England, where my father was the academic dean of an elite boarding school in western Massachusetts. I stayed in the area, attending Harvard University and later Harvard Business School, graduating with high honors at both. (Before graduate school, I helped my friend Wendy Kopp launch the Teach for America nonprofit educational program.)
Then, in late 1998, I raised US$1 million to launch my own hedge fund…
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They say it’s better to be lucky than good. I’d like to think I was a little of both. Over the next dozen years, I grew assets under management to US$200 million, nearly tripling my investors’ money in a flat market.
Toward the end, though, I made some key mistakes. I worried about another downturn, so I was too conservative with my portfolio… I took profits too quickly, held too much cash, and shorted too many stocks. After trailing this historic bull market for a number of years, I decided to close my funds and give my investors their money back.
I’m incredibly proud of my time in the hedge fund world. But when Porter Stansberry approached me with the idea of starting my own publishing company, I jumped at the chance.
I’ve long admired Porter for his business prowess. (After all, how many of us can say we launched what has become one of the world’s largest newsletter publishing businesses at 26 years old with a borrowed laptop at his kitchen table?!)
My new venture – Empire Financial Research – will allow me to share what I’ve learned over the past few decades on Wall Street with individual investors like you.
Anyway, that’s enough about me.
For the rest of today’s essay, I’m going to share what you’re actually here for: to learn the four steps that individual investors can take to beat the market over the long run…
The first step is the most important, and one: effective portfolio management.
This is such an important skill for investors to have, but I didn’t fully appreciate this early in my career. When I got into the business, I thought all I had to do was find cheap stocks and be a good stock picker.
It was only through hard experience that I came to learn that stock-picking is only half the battle. The other 50 percent is managing your portfolio, which can create or destroy as much value as the stocks you own.
To borrow a baseball analogy, your batting average matters a lot less than your slugging percentage. It’s not how many of your picks are right… it’s how much money you make when you’re right versus how much you lose when you’re wrong.
If you’re consistently sizing your best ideas too small, you’re hurting yourself just as much as if the stocks you buy go against you.
Another huge mistake many individual investors make is not being greedy enough. If you’re sitting on a big winner that runs up 50 percent or 100 percent, trimming your position can stunt your returns tremendously. The opposite is true, too. When you hang on to your losers way too long – or worse yet, average down on your position – your losses can mount quickly.
It’s critical to have the judgment, humility, and fortitude (which come from experience) to know when to let your winners run and cut your losses.
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Let’s say you’re a great stock picker and you assemble a portfolio of 10 companies… Over the next five years, seven of them are up big and the other three are down. Had you not touched your portfolio, your portfolio would have been in great shape.
But if you’re a poor portfolio manager, things can really start to go haywire.
In October 2012, I had nearly 5 percent of my portfolio in video-streaming company Netflix (Nasdaq; ticker: NFLX), right at its multiyear lows. And then it took off, becoming one of the greatest stocks of all time. But even though I had publicly predicted almost exactly what would happen, I only made about a tenth of what I should have. Because as the stock moved up, I kept selling and eventually exited far too early.
Had I simply gone away on a five-year vacation, I would have done far, far better – it’s up almost 50 times since then! It’s painful for me to see (and admit) that my management of the portfolio left a lot of money on the table. I ended up taking a portfolio that would have crushed the market and significantly trailed it instead.
In effect, my portfolio-management strategy was to pull my flowers and water my weeds… a deadly combination.
It’s also critical to give your investments long enough to let your thesis play out.
One of the biggest advantages individual investors have over professional money managers is the lack of short-term performance pressure.
Even the people who manage endowments and pension funds – which by definition have multidecade investing horizons – are evaluated on a short-term basis, sometimes even monthly.
But sometimes, stocks can remain cheap for years. It reminds me of an anecdote that investing legend Warren Buffett once said…
All I want to do is hand in a scorecard when I come off the golf course. I don’t want you following me around and watching me shank a three-iron on this hole and leave a putt short on the next one.
Meanwhile, 99 percent of the money in the world is managed by people who feel someone looking over their shoulders, ready to scold them for any mistake.
Sometimes stocks are cheap because they have no short-term catalyst to push shares higher. This means that they can languish for a while… But I’ve found that trying to anticipate when other investors’ sentiment will change is a mug’s game. It’s not the end of the world if a cheap stock remains depressed for a while… as long as you have an appropriate investing horizon.
I’d argue the only money you should be investing in the stock market is money you don’t need for three to five years. That sort of time frame gives you the patience to wait for high-quality stocks to go “on sale” and for your cheap stocks to start to move (assuming you’re right that they’re cheap!).
Next up is another core tenet of value investing: buying when the odds are in your favor.
In the value investing community, this goes hand in hand with what the father of value investing Benjamin Graham called “margin of safety.”
Imagine you’re driving a big truck over a bridge with a lot of other trucks on it that weigh a collective 49 tons. How would you feel if the bridge were engineered to hold only 50 tons?
When it comes to important things that your life – or financial future – depend on, you want to give yourself plenty of room to be wrong. Ideally, you want to consistently buy stocks where if you’re right, you double your money (or more) in two to five years, and if you’re wrong, you only lose a little.
That brings me to the last way you can put yourself in the position to beat the market: concentrating your portfolio in your best ideas.
Over the last half-century, a handful of folks figured out that Buffett is an investing genius, so they put their entire net worth into his holding company, Berkshire Hathaway (NYSE; ticker: BRK). That has obviously worked out well for them, but I highly recommend against such extreme concentration.
I think most investors should own somewhere between 10 and 20 stocks. This provides reasonable diversification, yet also allows you to concentrate on your best ideas.
These days, it’s becoming harder and harder to find stocks that the market has badly mispriced and undervalued… especially a decade into a complacent bull market like the one we’re in today.
The idea that any one investor can have real, proprietary insights – what I call “variant perceptions” – across dozens of stocks is hard to imagine. But by focusing on a handful of situations where you have an edge over the market, you’re likely to do far better than you would by owning dozens of stocks.
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We all make mistakes. But the more you can learn from others’ mistakes, the fewer (hopefully) mistakes you’ll make.
So here are four mistakes I’ve made – or I’ve seen other people make – that (if I’m smart) I’ll never make again… and (perhaps?) you won’t either…
1. Thinking I know more than the market
The market – stocks, real estate, and any other market you can think of – is an instant and ever-changing referendum on how trillions of dollars and millions of investors think about a particular asset. A lot of very smart people are paid a lot of money to interpret what it all means. And people with a whole lot more money than you or me have a lot more at stake than us… so they’re very focused. They know a lot about what their money is doing right now.
So the day that you feel like you know more than that incredible weight of insight – even if it’s about a single stock or obscure market – think again… because you probably don’t. You might have an angle, or a temporary edge, but it isn’t much, and it’s probably not going to last.
Even you can tell yourself that, and you still feel comfortable with buying that stock, go ahead. But do it with the full recognition that you’re probably missing out on something… and you’re probably more ignorant than you think you are. You might make money anyway, but that will probably be thanks to luck – not your brilliant insight.
How in the *[email protected]$ Did the CEO of a $3 Stock Do This??He made a $450 million deal with Nokia… a $395 million deal with Microsoft… an $828 million deal with Cisco… and a $29.26 BILLION deal with Apple. How did the CEO of a stock trading for just $3 do it? And just how high will the stock go as a result?
2. Mistaking industry expertise for stock insight
Last year, I wrote about my college friend Simon, who was a big-time IT whiz. So naturally, 22-year-old me asked Simon what he thought about computer stocks.
Simon recommended a company called Zeos International, an up-and-coming computer maker in the early 1990s. It was growing fast and offered round-the-clock customer service (an innovation at the time). The clincher for me was that Zeos was a big advertiser in the many computer magazines that Simon read.
So I bought shares of Zeos, instead of, say, Dell. It was my first million-dollar mistake.
But buying a lot of ad space and being an industry darling didn’t translate into corporate success… or a rising share price. It turned out that Zeos made lousy computers. And Zeos went to zero with a few years.
Simon had good insight on the dynamics of the computer industry. But he didn’t have any insight about stocks. They’re two very different things… and sometimes, too much expertise can hurt actual insight on stocks.
3. Thinking that someone else has my best financial interests in mind
Recently, a guy I had just met was talking about money: “Oh, I have a personal banker… and I get all the information I need about markets and investing from him, and he helps me invest.”
So I asked him what his returns were last year.
The guy answered, “I don’t know. But I know that he’s doing everything he can and giving me the best advice out there.”
It amazes me that there is anyone who doesn’t understand that the only person you should rely on to look after your money, and your financial future, is yourself. (This is one of the reasons I started Stansberry Pacific Research.)
The financial-industrial complex – the financial media, private bankers, so-called trading gurus and all the rest of them – wants to “help” you take care of your money.
But their “help” often enriches them, far more than it enriches you. And if you let them, they might leave you completely ignorant… and poorer.
So if you want to make sure your finances are well looked after, then by all means do get input from a professional. But remember that it’s you who is accountable for your own money – and you should be overseeing everything about your own money.
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4. Feeling badly about money
The world is made up of people with nothing – people who are desperately poor and sick and suffering. Like many others, I try to help people in need where and how I can. I hate the inequality of it all… and I feel badly for the billions of people on earth who have almost nothing.
But that doesn’t mean that I don’t like money… or that I feel that money, or having money, is bad.
You see, if you believe on some level that money – and being rich – is “bad,” there’s a voice in your head that’s going to stand in your way of ever having much money.
Of course, for a lot of people, money isn’t important. They have other goals in life – finding the perfect wave or eating their way across Asia – that don’t require much cash. And that’s fine.
But if you’re not like that, and if you want money, don’t get in your own way.
We’ve written a lot about how your emotions can get in the way of making good investment decisions. But not liking or being afraid of money is probably the biggest barrier to wealth of all. And it’s one you might not even recognise.
Publisher, Stansberry Pacific Research
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Legal disclaimer: The insight, recommendations and analysis presented here are based on corporate filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. They are presented for the purposes of general information only. These may contain errors and we make no promises as to the accuracy or usefulness of the information we present. You should not make any investment decision based solely on what you read here.