3 Lessons From 40 Years Of Investing

by: Steve Reitmeister
Summary

The Benefit of Value Investing (best place to start).

Growth and Value are Not Opposites (leads to bigger winners).

Algos & HFTs Have Changed Everything (learn to counter punch).

It recently dawned on me that I have been investing for 40 years. So I wanted to distill all that knowledge down into a few key lessons that you could use yourself.

Better yet…how could you apply these strategies to navigate a course to outperformance this year.

Start at the Beginning

As the son of a Certified Financial Planner, I got an early start on investing. Even as young as 12 years old I would go to my father’s office to help him with clerical work to make a few extra bucks… but along the way I couldn’t help being curious about all those big books; Value Line, Standard and Poor’s tear sheets and the in-depth research reports from his firm, A.G. Edwards.

Sure you could say it was in the blood as I got hooked right away. In fact, my very first investment was a copper mining stock, Asarco, that went up 30% in 3 months.

That was pure luck. But it set me on course to keep investing and keep learning so that my results weren’t a matter of luck. Rather it was about understanding how to stack the odds in my favor to enjoy greater investment success.

Today, I want to give a preview of these insights by focusing on 3 of the lessons learned.

Lesson #1 = The Benefit of Value Investing

There are many different investment styles. Everything from day trading to buy and hold investing. Or a focus on fundamental vs. technical attributes. And then you have the ideas of value vs. growth vs. income vs. momentum approaches.

I have explored them all. And the one that makes the most sense to me is a focus on value. Meaning to find stocks that are trading at an ample discount to their fair value allowing an investor to enjoy outperformance as they rebound to their proper price. This is the approach favored by investing legends Benjamin Graham, and his famed mentee Warren Buffett.

However, value investing doesn’t mean the same thing to everyone. My twist is to avoid stocks with weak fundamentals like declining earnings. Too often they go from bad to worse. Instead you want a thriving company that has sold off allowing you to pick it up from the discount bin for 20-40% below fair market value. A portfolio of stocks with that spread will enjoy a marked advantage over other portfolios.

Lesson #2 = Growth and Value Are Not Opposites

Too many investors imagine that there is a singular spectrum for stocks with value on one end and growth on the other. That is rubbish!

They are separate concepts that blend incredibly well together. In fact, my two best investments of all time come from this camp.

  • Amazon @ $8.65 back in 2001 after the tech bubble burst
  • Priceline @ $14.62 also in 2001

And yes, I have owned those shares for a long, long time enjoying robust returns. There is simply no way that these stocks, that were originally in the value camp, could keep outpacing others unless they were also incredible growth companies.

Long story short, why settle for boring value stocks when you can enjoy exciting growth companies trading at discount prices?

Lesson #3 = Algos & HFTs Have Changed EVERYTHING!

We all know about the rise of computer based trading. Algos and High Frequency Traders dominate the investment landscape. Some firms have gained such an unfair advantage that they can go an entire year without having a single losing session.

Here is the sad truth: WE CAN’T BEAT THEM!

At least not at their own game. They simply have more money, experience, PhD mathematicians and technological firepower than we ever will. Thus, we need to carve out a different path. And that is to play the role of the counter puncher.

Like in boxing you aggressively respond to overreactions by your opponent. As it applies here, when the best growth stocks get beaten down by the computer traders...then you buy the stock on the cheap to enjoy outsized gains as they bounce back.

Summary

Certainly I learned much more than this over the past 40 years. Things like appreciating how economics sets the paces for market direction. And how not to get scared into a bearish move just because of 1 bad data point here or there.Or appreciating when its time to sell and move on to a better opportunity. However, if you concentrate on these 3 lessons above it will be a step in the right direction.

In the future I will share more of these lessons learned so you can keep stacking the odds in your favor.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.