Let’s face it: Much of what we’re told about investing 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.
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I like to think that several of our newsletters take unique approaches to investing that really work for our readers. But at the end of the day, that’s up to you to decide.
For example, last week my colleague Jimmy Butts talked about how he uses his unique MP Score system to rack up some pretty impressive gains. This system flies in the face of everything I thought I knew about investing a few years ago.
Is it perfect? Hardly. And it’s certainly not for everyone.
And 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 this week 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 (and if I’m honest, myself included).
#1 Don’t Worry About “Beating The Market”
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. But every time the mainstream financial media crows about “beating the street,” it just fuels the worst instincts of investors.
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 — know what I mean?
Our income investors seem to understand this best. I can’t tell you how many emails I’ve read from High-Yield Investing or Daily Paycheck subscribers who say they couldn’t give a damn about beating the market. They’re in it for the INCOME. End of story. But some are surprised by the fact that it just so happens that many of our longtime picks in High-Yield Investing have absolutely crushed the market. (Hint: the real beauties have been in the portfolio for close to 10 years, not 10 months.)
#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. That’s because you probably own too many stocks already.
Diversification is overrated. I don’t care what portfolio theory says. I don’t care what your financial advisor says. 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.
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.
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. Super conservative, right? (The Vanguard perhaps a little less so, but you can’t beat that 0.14% expense ratio.) Now take the rest and shoot for the moon. I’m serious. (Andy Obermueller’s work in Fast-Track Millionaire is a good place to find these sorts of high-upside picks.)
Nassim Taleb, options trader and author of The Black Swan (among other highly-acclaimed works) advocates for this. Part of his argument is that most people (including academics) don’t understand the true nature of risk. He calls this sort of approach a “barbell” strategy.
Either way, you should check your investment account right now. Are those 27 positions (or whatever) you own really your best ideas? Buffett says he and his team can really manage only one or two really good ideas every year, if that.
Instead, if you shrink your portfolio down to a manageable size, you’ll find that it’s a lot easier to keep up with. I know, you’re paying us for picks and analysis. I get it. But this is your financial future we’re talking about. Do you really want to just take our word for it? We certainly mean well, but your retirement is just too important to leave it at that.
#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. We have a finite pool of cash to work with, and hopefully we’re adding to it gradually along the way.
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, not matter how favorable the odds may be.
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.
With all this in mind, it’s easy to engage in a little self-validation and think “OK, I’ve got this.” And maybe you do. That being said, I’d be remiss if I didn’t give credit for these ideas where it’s due…
Many of these ideas were developed during my time creating the MP Score with my colleague Jimmy Butts. Like me, Jimmy took a look at the way most people were investing, including what the so-called experts have said for years, and concluded that it’s just not working.
After carefully studying what actually does work in the market, including poring over countless academic studies and backtesting our theories, Jimmy and his team came up with the MP Score.
The result: A proven system that identifies the absolute highest-probability trades based on two thoroughly vetted indicators, telling investors exactly when to buy and sell.
I know investing isn’t easy. But with gains like 181% on Lannett, 135% on Westmoreland Coal, and 242% from Bitauto, it doesn’t have to be overly complex. I strongly recommend you give the MP Score a risk-free trial. You’ll no longer have to worry about what to buy, when to buy, or when to sell. Simply let the MP Score do the work for you.
To learn more, simply follow this link.