“If you want to be a successful investor over time, and you find a handful of great businesses, doing nothing but owning them is an amazing strategy. It’s underappreciated as a successful way to make money.” – Bill Ackman

I once dated a girl and frequently visited her home, where she lived with her mother. Around the corner from their home was a vacant lot. Through the years that followed, I saw that vacant lot slowly get cleared and construction for a house to be built on.

I would occasionally see one person, who I assume was the property owner, doing all the work in the evening or on the weekends. Nearly 10 years later, the house is vacant because it is still unfinished. I’ve driven past that house in the last couple of years, and progress has yet to be made. What happened to the owner? I have no idea, but the result remains the same: He didn’t finish the work on his home.

As an investor, I asked myself, “Have I finished my work on my portfolio? Have I accomplished everything that I needed to when I began investing?” I didn’t need a long time to come up with my answer, “No.” There is still so much more that needs to be done.

Many investors have abandoned their portfolios like that man who never finished his house. The average total investment in a Robinhood account is under $4,000. For many of us, there is fear, anxiety, and uncertainty. When stocks drop, many sell and never return to the market. Economic times are tough, but if you get food delivered on Uber Eats or DoorDash, you likely have enough spare cash to contribute to your brokerage account.

The reality is investing is a lonely journey. An investor’s road is like an acid trip. Your portfolio must fit your specific risk profile and time horizon. Unfortunately, this is typically an experience we learn the hard way during economic downturns. The market becomes a harsh and expensive place to find yourself.

When people start investing, the world and terminology can appear confusing and daunting. How on earth do you analyze a company’s EV-to-EBITDA ratio?

I have said this several times and will continue to repeat the same message: Investing is a simple game if you have the right temperament and can control your emotions. The game is simple- not necessarily easy, but simple.

Warren Buffett is considered the greatest investor, but I suspect many of his colleagues in private begrudge and dismiss his success. Why? I have said that Buffett isn’t the most brilliant investor or trader. He doesn’t have the highest IQ or work harder than everyone else. Buffet invested in companies like Apple for a long time and just held. Nothing too sophisticated or exotic. While others made impressive returns on more “illuminating” investments, Buffett still beat most of them by holding a well-known big-cap company that smart money said was overvalued.

To better understand investing, it is good to know what prospect theory is, a psychological theory that explains decision-making based on perceived losses and gains. Two central tenets of prospect theory are that humans have loss aversion and put a premium on certainty.

Prioritizing certainty over potential: 5-6% interest-saving accounts are popular for a reason. Needing a form of certainty or waiting to buy after a consensus is formed can be an expensive habit.

Loss aversion: The pain of losing is twice as powerful as the pleasure received from a gain of a similar size.

The problem with investors with little risk tolerance is that they will likely lose or barely beat inflation. If the goal is to build generational wealth or get an excellent return, you need a higher tolerance for risk. As Jeff Bezos famously said: “Given a ten percent chance of a one hundred times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs.”

My message is repetitive, but since I hear the same questions about stocks being asked repeatedly, it is a message that bears repeating. Humans can be very emotional and irrational. Fear and ignorance have led to distorted opinions on investing. Since most people do not have the right temperament to invest, they become scared and may end up taking low-risk decisions like this:

One of my biggest goals for 2023 has been working on the state of my finances — especially what risks I’m taking. Over the past few years, I’ve infused too much risk into my financial portfolio, investing in individual stocks and cryptocurrency, and faced steep losses. I wanted this year to be a time when I rebuilt my overall net worth and grew my finances back to where they were before I made bad trades in the market.

At the start of the year, I asked a financially savvy friend of mine to eyeball my portfolio. One of the biggest pieces of feedback he had was to move ⅔ of the cash I have sitting in my savings account into a 5% APY CD with a 1-year term.

I decided to follow his advice.

Putting 2/3 of your cash into a 5% APY savings account or CD isn’t a wealth-building activity. This is too conservative of a strategy for most people to make financial sense. Even if you are already wealthy, there are more sophisticated ways to protect your funds while gaining a higher return.

If you cannot handle watching your life savings evaporate 5-10% in a day and have severe anxiety when you go to bed worrying about your portfolio, buying individual stocks or concentrated ETFs may not be something you’re built for. I mainly avoid options because I do not have the appetite for this type of investing (it’s more like gambling.)

Long-term investing in Buffett’s style is often considered the “right” way to invest. In practice, though, very few people have the discipline to follow it. Long-term investing requires you to be a contrarian, which is not in the makeup of the average person. The key to successful investing is having the conviction to hold and buy more when the macroeconomics deteriorates. A stock can soar more than 1,000% from your initial purchase price if you do not let the noise from the market allow you to capitulate.

• There is no such thing as a flashing signal to buy or sell.
• A “brilliant” person can be a terrible investor – See Isaac Newton.
• A “dumb” person can produce greater returns than someone who spends hours analyzing balance sheets or plugging numbers into an analyzer tool. Of course, his neighbors and coworkers will call him lucky, but life isn’t fair.
• Hard work, complexity, and active intervention may provide success in many aspects of your life, but this likely won’t translate in the markets.
• Many investors are obsessed with stock prices and price movements; unfortunately, the price tells you very little about what you’re buying.
• Valuation is important but highly subjective, dynamic, and complicated.

Many analysts thought Netflix was insanely overvalued when its P/E ratio hit 70. Taking gains seemed rational. However, its P/E ratio shot past 400 more than once.

When investors sell because the P/E ratio is “too high,” “too expensive,” or “richly valued,” they risk losing a lot of money, perhaps 10-100 times more than what they sold for.

Investors who can use the right side of their brain and see a company beyond its balance sheets will likely be successful. You likely won’t be able to determine good leadership based on the balance sheet alone. You must invest in a company’s executive team based on contextual factors and sometimes even use…. intuition – something really smart people don’t want to hear.

The market is not static. A surgeon has more control in the OR than an investor in managing his portfolio’s performance. As an investor, you have absolutely zero control over the economy or consumer behavior. Let’s consider box office hits. At the time, Titanic was one of the most costly films ever made, but it also became one of the highest-grossing films ever. In this case, the hype was justified. John Carter had a big budget but lost Disney $200 million, an epic flop.

Despite not getting the best reviews, Grumpy Old Men was a sleeper, bringing in double the box office from its $35 million budget. If the Terminator was a stock, it would be considered a 10x, bringing in ten times at the box office from its $6.4 million budget. However, every Terminator movie released since the original has yielded a lower return. Compare that to the Fast and Furious franchise, which is almost guaranteed to print money. One of the biggest sleeper hits was My Big Fat Greek Wedding, which had a budget of $5 million and brought in a whopping $368.7 million, making that a 70-bagger!

The reality is no one can accurately predict with absolute certainty the next big growth company, just like nobody can predict with absolute certainty the next Pretty Woman. Nobody can accurately predict the future, not Michael Burry, Warren Buffett, or Bill Ackman, no one. But successful investing requires a little luck, a lot of patience to ride out the ups and downs, and a bit of critical thinking to increase the probability of success.

I have no idea where Tesla’s stock is headed in the short or near term. Tesla has slashed automobile prices, which kills its margins. Although they remain profitable and are in far better shape than legacy automakers, cutting prices on their Model 3 and Y is a headwind for the stock. What is not being priced into Tesla is its humanoid “Optimus” robot, which I would bet will bring in significantly more revenue than their cars. If that comes to fruition, the stock is likely massively undervalued, just like Amazon was from 2008-2012, where potential revenue from AWS was not fully priced in.

Take a look at global warming. If the temperature continues to rise, companies like Moncler and Canada Goose, who sell luxurious puffy coats, could see their profits deteriorate. In contrast, companies like Revolve, mainly known for their summer wear and dresses, could benefit.

If the earth continues to get warmer, you likely will see an increase in cases of skin cancer, which could benefit a biotech company like Moderna, who, along with Merck, is developing a personalized cancer vaccine to help treat adults with high-risk melanoma. Such a breakthrough vaccine from mRNA-4157 could bring in similar revenue to what they brought from Spikevax in 2021 or 2022. When you add potential income from an RSV, Flu, and CMV vaccine, combining the profits from all these potential drugs would dwarf the revenue from their lone approved drug, giving Moderna the road map for an accelerated growth path. Time will tell, but I do not believe Spikevax will be known as Moderna’s magnum opus.

But as much as we talk about the potential and possibilities of future growers, investors still must use the left side of their brains and invest in boring companies. Putting all your eggs in a few disrupters can sink your entire portfolio, and a simple goal of investing is survivability.

Companies such as Apple, Meta, Alphabet, and Amazon aren’t likely to sink. In some cases, stocks like Microsoft can go nowhere for over a decade. The company was never in danger of going bankrupt, but they were becoming stagnant. Those patient investors were eventually rewarded as Microsoft appointed a new CEO and shifted priorities. Some investors went from being in the red for over a decade to a 10x gain from this sleepy, boring tech company.

In football, teams sign and draft offensive and defensive linemen. These aren’t considered sexy or flashy moves, but a star quarterback won’t have time to throw the ball if his offensive line cannot block. If a quarterback can’t throw, his receivers won’t get the ball, no matter how fast or talented they are. A poor offensive line could sink the entire offense.

The offensive line is equivalent to investing in ballast companies- those that are not likely to grow 10-20x but provide a foundation for your portfolio. Having these companies in your portfolio would give you stability and sanity. Imagine having all your eggs in Chegg, whose 52-week high is 30.05 and 52-week low is 7.32. I have not researched Chegg, but the company appears too speculative to make a core position. Sure, if it does 10-20x, you will look brilliant, but it initially seems like ChatGPT has fundamentally disrupted its core business. It is prudent to diversify into more sure bets.

Real wealth is made in waiting and having the proper discipline and patience for a long-time horizon. The market constantly deals with uncertainty, but how you harness that uncertainty to find asymmetric opportunities is something a successful investor has to get used to. A stock can do nothing for years, and having conviction when the market doesn’t agree with you is a lonely feeling, but that is how this game is played. The better you can go contrary to human nature and find comfort in volatility, the better odds you create a portfolio similar to the house that was untouched amongst the surrounding wreckage caused by the Maui fires.