The Successful Investor: Embracing Market Trends

I don’t like these cold, precise, perfect people who, in order not to speak wrong, never speak at all, and in order not to do wrong, never do anything.– Henry Ward Beecher 1813-1887, American Preacher, Orator, Writer

The Successful Investor: Going Against The Grain

March 2, 2024

John Neff, the renowned contrarian investor, once said, “It’s not always easy to do what’s not popular, but that’s where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized.” This quote encapsulates the essence of the successful investor – one who is not swayed by the crowd and instead seeks opportunities where others fear to tread.

According to the law of paradoxes, one never gets what one desperately chases or needs; one only gets it by seeking it. Desperation blinds the mind from being able to function optimally, and therefore, failure is all but guaranteed. Everyone enters the markets thinking they will win, yet only 10% or so win in the long run; despite knowing these statistics, there is never a shortage of new entrants.

Charlie Munger, the legendary investor and partner of Warren Buffett, has a different take on this. He believes that the key to investing success is having a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. He says, “The main thing is to keep the main thing the main thing.” Successful investors can navigate the markets with a clear head and a steady hand by focusing on the fundamentals and not getting distracted by short-term noise.

Successful investors do not try to win 100% of the time, as that is a sure-fire way to ensure they lose almost all the time. Perfectionists usually have some deep-rooted psychological fear, which they probably have to deal with some form of rejection earlier on in their lives. They try to compensate for this lack (usually, this is not real but just a false perception) by going overboard and trying to be perfect in everything they do.

John Neff has a great example of this in his investing career. In the early 1980s, he invested heavily in the beaten-down steel industry, facing severe challenges from foreign competition and a weak economy. Many investors thought he was crazy, but Neff saw value, whereas others saw only risk. He held on to his positions for years, even as the market continued to punish steel stocks. Eventually, his patience paid off, and he made a fortune when the industry recovered.

Charlie Munger also has a similar story. In the early 2000s, he and Warren Buffett invested heavily in the struggling textile manufacturer Berkshire Hathaway, facing declining demand and rising competition. Many investors thought they were making a mistake, but Munger and Buffett saw the potential for the company to reinvent itself. They held on to their positions for decades, even as the textile business continued to decline, and eventually transformed Berkshire Hathaway into one of the most successful holding companies in the world.

The lesson here is clear—the successful investor is willing to go against the crowd, seek out opportunities where others see only risk, and hold on to their convictions even in the face of adversity. Charlie Munger once said, “The big money is not in the buying and selling but in the waiting.” By having the patience and discipline to stick to their principles, the successful investor can achieve returns that the average investor can only dream of.

The Winning Playbook: Key Rules for The Successful Investor

Jesse Livermore, a famed early 20th-century trader known for spectacular gains and losses in the market, adhered to a philosophy that might resonate with today’s long-term investors. He understood that the market was a device for transferring money from the impatient to the patient. This principle underpins the notion that the successful investor is generally a long-term trader. It is well-substantiated that long-term traders win more often than short-term traders; they are more relaxed, have more time to analyze their moves, possess the patience, and generally exhibit much more discipline than their short-term trading counterparts.

As Charlie Munger, the legendary investor and partner of Warren Buffett, says, “The big money is not in the buying and selling, but in the waiting.” Let’s delve into some of the critical rules that successful investors tend to follow:

1. Divide your money into 10-15 lots. When adding additional funds to your account, divide the new money by 10 or 15 or create a new lot. This strategy allows the investor to make several comebacks, and that’s what successful investing is all about.

2. Each holding should have the same amount of money assigned to it. Never invest more in any one recommendation; if anything goes wrong, you won’t be blown out of the water. Most investors tend to lose not because of bad choices but because they are found to be lacking in money management.

3. Never dedicate more than 10% of your entire portfolio to options investing. Of this 10%, never invest more than 2-3% per position. If you are an options professional, you could dedicate up to 20% of your portfolio to options (but do not invest more than 2-3% of this 20% per option play).

4. Remember that no one can win all the time. The market operates in cycles. Some quarters, it is very easy to make money, and some quarters, it is a struggle just to stay alive. Do not fight these cycles; the market always goes through these phases. As Livermore once put it, “Markets are never wrong—opinions often are.”

5. Have a goal, 20%, 30%, etc. When your entire portfolio has hit your mark, consider taking a break or, better yet, risking only some of your profits. Just because you are paying for a service or services does not mean you need to try to squeeze the maximum out of it.

6. Try not to let your emotions influence the way you trade. There is no room for emotions when it comes to investing. Emotional traders almost always end up getting buried before their time. As Livermore would advise, “Play the market only when all factors are in your favor. No person can catch all the fluctuations.”

7. The most important law will be discussed last; get a firm grasp of Mass Psychology. It states that one should buy when the masses are panicking and flee when they are euphoric. Don’t confuse Mass Psychology with contrarian investing; they are separated by a wide chasm.

Livermore’s life was a testament to the highs and lows that can come with trading and investing. He recognized the importance of cutting losses quickly and letting winners run, a strategy that is echoed in the approach of many successful investors today. Livermore’s storied career exemplifies the need for discipline, a clear strategy, and an understanding of market psychology.

Charlie Munger would agree with many of Livermore’s principles, especially the importance of patience and recognizing the cyclicality of the markets. Munger’s philosophy of “sit on your ass investing,” where you buy great companies at fair prices and then do nothing, aligns with Livermore’s idea of waiting patiently for the right opportunities.

By studying the principles Livermore and Munger have laid out, the successful investor can navigate the treacherous waters of the market with a seasoned captain’s calm and competence.

Random Thoughts on The Successful Investor Strategy

In the grand tapestry of the markets, the successful long-term investor is akin to a grandmaster in chess, patiently setting up the board, anticipating moves far in advance, and striking decisively only when the conditions are most favourable. This investor, much like the grandmaster, looks for a trend and buys early; they then ride the trend until its conclusion, much as a grandmaster would devise a well-thought-out strategy to achieve checkmate.

Let’s consider the dichotomy of Trading vs. Investing. Short-term traders are like blitz chess players in their quest for rapid gains, making quick moves to outmanoeuvre the market. However, the inherent volatility and the emotional rollercoaster of rapid trading often lead to more losses than wins. In contrast, the long-term investor, or the philosophical grandmaster of the markets, seeks a developing trend, entering at the inception or at the point of capitulation when a market bottoms and begins to trend sideways, signalling a potential reversal.

The error many make is conflating long-term investing with the “buy and hold” mantra. True long-term investing is not about clinging to stocks indefinitely but recognising a trend’s lifecycle. A prime example is the dot-com bubble of the late 1990s. The astute investor entered in the mid-90s and exited when the trend showed signs of exhaustion in 1999 and 2000, avoiding the subsequent crash. Those who adhered to the “buy and hold” philosophy without scrutiny were at a loss.

Finally, the successful investor follows a trend indicator, buying amid the masses’ panic and selling amid their ecstasy. This approach is reminiscent of the contrarian strategies employed by legendary investors, who often stood alone against the tide of popular opinion. They understood, as did the grand master philosophers, that the crowd is frequently guided by the basest of instincts—fear and greed—rather than rational judgment.

In the realm of contrarian investors, we find figures like Sir John Templeton, who famously began buying stocks at the outbreak of World War II, recognizing the point of maximum pessimism as the moment of most fantastic financial opportunity. Similarly, David Dreman, known for his contrarian investment strategies, capitalized on the market’s overreactions, understanding that emotional extremes on either side are often harbingers of a turning tide.

Like these contrarian investors, the philosopher teaches us that wisdom often lies in the path less travelled. It is the ability to see beyond the immediate, to understand the deeper currents that move the market, and to act not on impulse but on insight. This philosophy, applied to investing, requires a stoic resolve to resist the crowd’s siren call, buy when fear is rampant, and sell when the market’s exuberance reaches a fever pitch.

The successful investor strategy is a blend of patience, foresight, and the courage to stand apart from the herd. Like a grand master’s gambit, it may not be immediately understood by the onlookers but is ultimately vindicated by its results.

To be clever enough to get all the money, one must be stupid enough to want it.–Gilbert K. Chesterton 1874-1936, British Author

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