There’s a philosophy that just about everyone knows in the investing world: Buy low, sell high.
This strategy has succeeded brilliantly for decades, if not centuries. But it sounds so simplistic that it feels almost moronic…
Yet few investors manage to achieve this objective consistently. Why is that?
The answer relates to two key traits every investor needs: discipline and patience.
Far too often, we buy too high… and then sell too low.
We know what reason says we should do, but we follow our emotions. We lack the discipline and patience necessary to forego ordinary investment opportunities, while waiting for extraordinary ones.
It’s like when you see a great TV at Best Buy (NYSE:BBY) — 4K, 75 inches, comes with a Smart Remote, fits in that dead space in the basement that your wife hates — for $850. You want to buy it… NOW. You don’t want to wait for a better price, even though you know Black Friday is just one week away.
So, you splurge on it… only to see it selling one week later for just $675… And you could have gotten a free wall-mount as well!
Obviously, we can never know exactly when cheap is cheap enough. But patience and discipline help us say “no” to marginal opportunities, while waiting for better ones.
To outperform the market, an investor must maintain the discipline of saying “no” to bad risks… and then keep on doing that until good risks come along.
Just Say “No”
Marginal opportunities are what I call “bad risks,” or “asymmetrical risks.” That’s when the potential upside is much smaller than the potential downside.
Here’s an extreme example to illustrate the concept…
Riding in a barrel over Niagara Falls for a $20 prize. If everything works out perfectly, you win $20. If not, you perish.
Here’s another example…
Running red lights to get to Disneyland 10 minutes early. If everything works out just right, you make it to the “Happiest Place on Earth” and have to wait 45 minutes instead of an hour for Space Mountain. Or you might get into a horrible accident.
These examples of asymmetrical risk are so obvious that they seem ridiculous.
But many asymmetrical risks are less obvious, like the TV example I gave earlier.
Disciplined investors understand the dangers of these risks; that’s why they begin their analysis by asking “What can go wrong?” rather than “What can go right?”
Disciplined investors understand that investing is optional and that they must be selective.
It’s OK to say “no” to bad risks. Unfortunately, many investors grow impatient. We justify buying richly valued stocks by comparing them to stocks that are even more richly valued. But it is still dangerous to buy stocks that are “less risky.”
It’s no different than camping 40 feet away from a pride of lions because a few other folks are camping only 20 feet away. You might wake up every morning 40 feet away from the lions, just like the morning before. But getting eaten is also possible, if not probable.
Avoiding bad risks is the essential first step toward outperforming the market.
Winning Big Starts Here
You cannot outperform the market by simply “buying the market.”
You must take only the best risks and say “no” to all the others. Sometimes you have to wait a long time for truly superior investment opportunities to come along.
But that’s okay — they’re worth the wait.
Warren Buffett didn’t become one of the world’s richest individuals by making lots of mediocre investments. He waited for the very best opportunities and then pounced on them.
To emphasize how patiently he awaits opportunity, Buffett once remarked, “Lethargy bordering on sloth remains the cornerstone of our investment style.”
It takes patience and discipline to say “no” to bad risks and avoid big losses.
Winning big begins by avoiding big losses.
The stock market isn’t your “buddy;” the stock market doesn’t even know you exist.
It’s more like a great white shark — primal and remorseless. It eats when it’s hungry and never sheds a tear for its prey. The stock market simply does what it does, without caring which investors win or which ones lose.
Right now, we’re navigating a maelstrom of market lows and highs. While the S&P 500 is down 5.5% year to date, it’s also up 16% from where it was a year ago. We’re not in crisis mode — not yet — but now is the time to exercise the utmost caution, go back to basics, and, above all, be smart with your money.
No one is going to do it for you.
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On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.