Investing 101

To Be a Successful Investor, Go Against the Crowd

There’s an upside to the coronavirus pandemic…

We now have more time to bury our noses in books!

The mandatory stay-at-home orders from this pandemic have given us the opportunity to refine our skills and explore new passions.

Many of us are going to rejoin the post-pandemic society as masters of bread making, Tik-Tok dances and whistling.

But this is also a perfect time to hone our wealth-building skills.

William Thorndike’s The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success wasn’t a runaway bestseller when it was first released. But it has become a must-read for entrepreneurs and investors.

In the decade since it was published, it has earned praise from billionaire investors like Bill Ackman and Warren Buffett (who is in the book and named it his No. 1 read in 2012).

And – for a little foreshadowing – Ackman called itone of the most important investment books I have ever read.”

The eight CEOs covered in the book produced returns that outperformed the S&P 500 by twentyfold.

To put that in monetary terms, that’s akin to turning $10,000 into $1.5 million over the course of 25 years! Not too shabby.

But maybe more importantly, we saw one of the book’s biggest cheerleaders cement his legacy this year.

Waiting for Buffett

The main idea behind The Outsiders is deceptively simple.

Essentially, if you’re doing what everyone else is doing, then it’s going to be hard to be successful.

The book encourages readers to adopt an outsider’s mindset. To go against the crowd.

That’s because independent thinking is critical to long-term success in both business and investing.

Though it can also have enormous short-term rewards as well.

Let me show you…

In mid-February, the markets were at all-time highs.

The Dow Jones Industrial Average closed at 29,551 points on February 12. The S&P 500 ended the session at 3,379.

A week later, the Nasdaq closed at a record 9,817.

We were enjoying a mild winter and a booming stock market.

COVID-19 was a problem only in China. Everything was okay on this side of the globe.

But as we all know, that soon changed.

Near the end of February, Ackman – known for his bullish plays – recognized the coronavirus as a real threat to the U.S. economy.

To protect himself and his Pershing Square fund, he started buying as much portfolio protection as he could get his hands on. He snatched up $27 million in credit short hedges.

The broader markets tanked – the fastest 30% decline in history – as the coronavirus made its way to U.S. shores and brought the economy to a screeching halt.

But Ackman pocketed a mind-blowing hundredfold return during the rout.

He closed $27 million in hedges for $2.6 billion!

That alone is the stuff of legends. But the story doesn’t end there.

With markets at multiyear lows, Ackman forged his own path again.

He quickly changed his tune and dumped $2.5 billion into Agilent (NYSE: A), Berkshire Hathaway (NYSE: BRK), Hilton Worldwide (NYSE: HLT), Lowe’s Companies (NYSE: LOW), Starbucks (Nasdaq: SBUX) and Restaurant Brands (NYSE: QSR).

Since March 18, those holdings have largely raced higher…
Ackmans Longs Since March 18That’s a double-sided win for the hedge fund billionaire. And it came at a time when many on Wall Street were looking elsewhere for guidance.

Most people were waiting on the Oracle of Omaha to swoop in with his hoard of cash and start buying. The return of Buffett gobbling up beaten-down companies would be a sure sign the lows were in. That it was safe to return to the waters.

But Buffett never showed up.

Instead, investors should have taken the lead from Ackman.

Radically Rational

The average investor’s returns are shockingly low.

They’re so low (“How low are they?!“) that their annual returns aren’t even keeping up with inflation
20-Year Annualized Returns by Asset ClassIn the 20-year period from 1999 to 2018, the average investor’s portfolio clocked in at a measly 1.9% per year.

And that was prior to the 2020 crash.

That return underperforms real estate, the S&P 500, bonds, gold and pretty much every other asset out there.

And investors themselves are most often to blame.

They tend to keep their eyes on the rump in front of them. They follow the herd and act accordingly – throwing the babies out with the bathwater at market lows and buying tulip bulbs hand over fist at highs.

“Buy high and sell low” is a surefire strategy for financial ruin.

But professional investors and traders know that success comes from going against the herd (being greedy when others are fearful and vice versa), minimizing risks, making data-driven decisions and adhering to a strategy.

It’s funny to think these are the qualities of a true Outsider.

And just because the crowd doesn’t agree with you doesn’t mean you’re right or wrong. I’m never bothered by a loss if my reasoning was sound and my data was solid.

Being a successful investor is about being radically rational. That’s how you are able to ultimately beat the markets – sometimes with extraordinary results like Ackman’s.

Here’s to high returns,

Matthew