Why Some Investors Succeed… But Most Don’t
Have you ever wondered why some investors have tremendous success with their portfolios – meeting or exceeding their financial goals – while so many others struggle, earning low returns or actually losing money over the years?
Well, you shouldn’t.
Investing is essentially the transfer of wealth to those who have a process and can execute it from those who do not or cannot.
Put differently, investors fail because they either aren’t using a proven strategy or can’t adhere to it, instead buying giddily when prices are high and selling despondently when they are low.
Of course, any investment recommendation is meaningless if it’s divorced from a battle-tested strategy, including specific buy and sell criteria.
This strategy, in turn, should be based on a proven investment philosophy.
And that philosophy should reflect a particular sensibility, a way of seeing the world.
If this seems complicated, it really isn’t. Let’s walk through an example…
On March 23, amid roller-coaster market volatility, I recommended a new pick to the subscribers of my Insider Alert trading service.
This real estate investment trust owns or has an interest in 233 properties comprising 191 million square feet. It is an S&P 100 company with the highest investment-grade credit rating and the lowest cost of capital in the industry.
But that’s not why I recommended it.
I recommended it, in part, because the chairman, CEO and president purchased 150,000 shares, an investment of $9.12 million. The director and chairman emeritus also purchased 189,000 shares for an investment of $9.93 million.
And since my recommendation, it’s already up 21%.
This strategy is called riding the coattails of knowledgeable insiders.
Both academic studies and practical experience show that when a company’s shares are under heavy accumulation by its officers and directors, they generally outperform the market by a significant margin.
The strategy requires some due diligence – an investigation of the number of insiders buying, their tenure with the company, the size of their purchases, their track records and so on – but you get the picture.
These corporate insiders have material, nonpublic information about the future prospects of the business – and that gives them an unfair advantage when they go into the market to trade.
Insiders, of course, are not omniscient.
They could not see the coronavirus coming any more than President Trump or Federal Reserve Chairman Jerome Powell or Surgeon General Jerome Adams could.
Some insiders bought a few months ago and then saw their business outlooks change dramatically, in ways they could not possibly have foreseen.
The same cannot be said of insiders who loaded up over the last few weeks.
They were fully aware of the existence of the coronavirus, its impact on the economy and its likely effects on their business.
This insider buying strategy is undergirded by an investment philosophy used by all-time investment greats like Warren Buffett, Peter Lynch and John Templeton.
And it’s this…
No one can tell you with any certainty what the economy or the stock market will do from day to day, week to week, month to month or year to year.
People who say they know these things are either fooling you or kidding themselves… or both.
History shows that investment outperformance comes from evaluating businesses, not outguessing the market.
Of course, knowing when to buy or sell a stock can take a lifetime of study, action and reflection. It also requires an optimistic, real-world sensibility.
What is that sensibility?
It’s that democracies are superior to autocracies. Limited government is better than interventionist meddling. Capitalist societies are more prosperous than socialist or communist ones. And property rights and freedom are preferable to confiscation and coercion.
It requires an appreciation that human beings, machines and capital markets drive innovation, solve problems, raise living standards and create prosperity.
The sensibility tells you when to invest and where. (In mostly free markets in mostly free countries.)
This philosophy demands that you avoid market timers and other soothsayers and concentrate on identifying undervalued businesses.
The strategy of monitoring insider activity presents attractive investment opportunities.
And this allows you to put together a portfolio of winning recommendations.
Compare this approach – careful, logical and rational – with that of the typical punter who day-trades or buys hot tips, not knowing what they own, why they own it or whether they should sell.
These folks are like newbies in a poker tournament. No way are they taking the chips home at the end of the night. They’re just fattening the pot for the rest of us.
Don’t be one of them. Before you invest in any recommendation, make sure it’s based on a dedicated system, a proven philosophy and a valid sensibility.
That way only one further step is required: the discipline to follow through.