3 Contrarian Ways To Be A Better Investor
Let’s face it: Much of what we’re told about investing (at least by the mainstream financial media) is just noise.
It’s useless or unhelpful at best, and downright harmful at worst.
Only on rare occasions will you come across a unique idea or approach that stands out above the rest. I like to think that several of our premium newsletters take unique approaches to investing that really work for our readers.
For example, my colleague Jimmy Butts over at Maximum Profit utilizes a system that’s racked up some pretty impressive gains — like 181% on Lannett, 135% on Westmoreland Coal, and 242% from Bitauto, among others. And that system pretty much flies in the face of everything I thought I knew about investing a few years ago.
But here’s the thing: once you understand that the things we’re told (like: “buy low, sell high” or “buy and hold”) are either oversimplifications or just flat out wrong, then it begins to change your perspective.
That’s because every investor not only has different goals… They have different mindsets, risk tolerances, preconceived assumptions… I could go on and on.
With this in mind, I spent some time thinking about some of the counterintuitive things I’ve learned about investing over the years. None of these are by any means the final word on anything. And they might not all apply to you. But they do address some of the flaws in thinking I’ve seen many investors take in their approach to the market. How do I know? Because I used to do the same thing…
With this in mind, here are three contrarian things I’ve learned about investing over the yeas that have served me well…
#1 Don’t Worry About “Beating The Market”
Every time the mainstream financial media crows about “beating the street,” it just fuels the worst instincts of investors. It makes us think that there’s always someone out there doing better than you. It’s not healthy for your mind, and it’s not healthy for your portfolio, either.
The research firm Dalbar shows that the average equity fund investor consistently underperforms the market. The latest data I could find said the average individual investor earned 5.19% a year over the last 20 years, compared to 9.85% for the S&P 500. While it’s true that trading fees account for some of the underperformance, the truth is most of it is attributable to investor behavior — lack of patience, poor timing, etc.
Look, there’s a reason why the pros call individual investors “dumb money”. In fact, they even track individual investor sentiment when looking for a top in market cycles. If most of the folks reading our newsletters stopped worrying about beating the market and instead relied on sticking to a proven strategy year after year, they’d find themselves in much better shape than the crowd. Hell, you may even find yourself beating the market by not worrying about beating the market.
Our income investors seem to understand this best. I can’t tell you how many emails I’ve read from High-Yield Investing subscribers who say they couldn’t give a damn about beating the market. They’re in it for the income. End of story. But it just so happens that many of our longtime income readers have absolutely crushed the market.
Can you guess why? While I can’t peek into their personal brokerage statements, I’m willing to bet it’s for the same reasons why our income portfolios look so appealing (hint: the real beauties have been in the portfolio for close to 10 years, not 10 months.)
My advice: Instead of worrying about keeping up with the Jones’s, spend your time finding high-quality companies to own. I’m talking about companies that gush enough cash flow to grow their business and handsomely reward investors with rising dividends year after year.
#2 You Probably Own Too Many Stocks
This one might get me in trouble with my publisher… But you probably shouldn’t buy every single stock our analysts recommend.
The truth is, I don’t think a single one of our analysts has ever recommended that. Yes, our premium subscribers are paying us for picks and analysis. In fact, chances are you probably already own too many stocks.
Why? Let’s just say you choose to ignore point #1 and you really, really want to beat the market. Well, I hate to tell you this, but you probably ARE the market, buddy.
Diversification is overrated. I don’t care what “portfolio theory” says. I don’t care what your financial advisor says. Simple mathematics bears this out. I won’t get too much into the weeds on this, but the truth is the more you own, the more your portfolio’s performance will look like the market. And part of the problem is that there are just too many choices out there for investors. As a colleague of mine once said, it’s like trying to drink from a fire hose.
Have money in Apple, Microsoft, Amazon and Facebook? That’s 10% of the entire S&P 500 right there. Add a few more stocks, and suddenly your portfolio will start to look like the market — but probably with even more volatility.
My advice: Assuming you have your 401k in some sort of target-date allocation or in an index fund, focus the rest of your investing on no more than a dozen really good ideas.
Here’s another radical approach you might want to consider… Take 80% of your funds and stash it in T-bills or the Vanguard 500 Index Fund. Pretty conservative, right? Now take the rest and shoot for the moon. I’m talking about only picks that have the potential to deliver a triple-digit return minimum. I’m dead serious.
This sort of “barbell” strategy, when done properly, will likely insulate you from the worst of what the market can throw at you while still offering the chance to harvest the benefits of “high-upside” investments.
Either way, you should check your investment account right now. Can you honestly say that those 27 positions (or whatever) you own really represent your best ideas? Buffett says he and his team can really manage a couple of really good ideas every year, if that. Can you do better?
Instead, if you shrink your portfolio down to a manageable size, you’ll find that it’s a lot easier to keep up with. And you’ll have more cash invested in your best ideas.
#3 Learn To Love Cash
There’s nothing quite like good, old fashioned, cash. Yet for some reason, many investors think they need to be all in, especially when the market is on a bullish run.
I get it. Cash brings down portfolio performance. That’s another reason why you should stop worrying about beating the market. (See where I’m going with this? It just fuels the incentive for poor investor behavior.)
An index is fully invested at all times. You and I do not have that luxury. An index does not own a house that needs a new roof. It doesn’t have a kid in college that decides they want to pursue a Master’s. An index doesn’t need to pay for a wedding. Or a funeral. You get the idea.
We have a finite pool of cash to work with, and hopefully we’re adding to it gradually along the way. But then life happens and you need to access that cash.
What’s really bizarre is that the best gamblers seem to understand this better than most investors. Any card shark worth his salt will tell you that you NEVER have your entire bank roll in play, no matter how favorable the odds may be. That’s because you always need to be able to live to fight another day.
The reality is that cash is not the enemy of a portfolio. It’s your friend. You should be raising cash by selling positions here and there when things are going well — not when the market is tanking. That way, if a selloff happens, you’ll be ready to strike. Instead of worrying whether or not you have enough cash at work in the market, be thinking about how to add to your cash pile.
A Special Invitation
Look, I know investing isn’t always easy. But hopefully these tips will get you thinking about your own approach to the market. And of course, we’re here to help. If you ever have any questions or comments, feel free to drop me a line.
In the meantime, there’s something really exciting I want to tell you about that can take your portfolio to the next level…
It’s been a rough year for a lot of us. But this market has offered plenty of opportunities for investors to cash in big-time. And if you’re like most of us, you’re probably on pins and needles waiting for the outcome of the election on November 3rd.
That’s where my colleague Jim Fink comes in. You see, he says he’s found an “election-proof” trade that has an extremely high probability of delivering gains no matter who wins…
How does he know? Well, you’ll have to find that out for yourself — and fortunately, he spilled the beans in his brand-new special presentation earlier this week.
And if you weren’t able to tune in to watch it love, you’re in luck — because the replay will be available for a limited time starting on Saturday, October 31.