Editor's note: This is your advantage over the "smart money"... Investors have been searching for ways to get a leg up on Wall Street over the past few months as a potential recession looms over the economy. But according to Stansberry's Investment Advisory editor Whitney Tilson, you don't have to look over Wall Street's shoulders to find an edge in today's turbulent market... That's why Whitney believes it's critical for investors to remain focused on refining their investment strategies in order to stay ahead of the pros. In today's Masters Series, adapted from the November 4, 2023 issue of the Empire Financial Daily e-letter, Whitney details how individual investors can get an edge on Wall Street... discusses several key aspects of value investing... and explains how you can apply those concepts to your investment decisions...
Here's How to Beat Wall Street at Its Own Game By Whitney Tilson, editor, Stansberry's Investment Advisory In the past two-plus decades, I have learned some valuable investing lessons... As some of you know, my journey to launch Empire Financial Research – which is now integrated with Stansberry Research – was unique. In late 1998, I raised $1 million to launch my own hedge fund... without any formal training. 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 $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. These kinds of missteps are incredibly common, but they destroy your profits over time. That's why I started Empire Financial Research in the first place – to share the lessons I've learned over the past few decades on Wall Street with individual investors like you. So in today's essay, I'm going to show you the four steps that individual investors can take to beat the market over the long run – including one that can help put you ahead of the pros... The first step is the most important: effective portfolio management... It was only through hard experience that I came to learn that stock-picking is only half the battle. The other 50% of investing 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 sitting on a big winner that runs up 50% or 100%, trimming your position can stunt your returns tremendously. The opposite is true, too. When you hang on to your losers for 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 all come from experience) to know when to let your winners run and cut your losses. In October 2012, I had nearly 5% of my portfolio in video-streaming company Netflix (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 – about $10 million on what could have been a $100 million winner. 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 – the stock has been a multibagger since then!
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It's also critical to give your investments enough time 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 before the tide turns. It reminds me of something 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% 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 don't try to anticipate when other investors' sentiment will change. 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 the "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. The last way you can put yourself in the position to beat the market is by 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 (BRK-B). 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. 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. Best regards, Whitney Tilson
Editor's note: With the pros always a step ahead of individual investors, you're probably looking for every edge you can find as 2024 plays out. That's why Whitney recently sounded the alarm with an urgent new warning about where stocks are headed this year – and what to do with your cash moving forward... Plus, he revealed a powerful new investment strategy that will help you see which stocks will double your money – one that has been entirely off-limits to all but the wealthiest investors until now. Click here to catch up on the full details...
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