How I Finally Started Making Money Once I Realized I’m Not That Smart

There are a lot of really smart people on Twitter. Traders who can time every zig and zag in the market. Investors who understand AI and who the winners and losers will be. Let me save you some time: I’m not one of those people. The funny thing is that when I realized I’m not that smart is when I started making money in the market. Let me explain….

I used to try to call the top by shorting the hottest stocks in the market because they were overvalued like Michael Burry – and almost always got run over as they became more overvalued. I used to try to pick the bottom with value traps – stocks that are cheap for good reason – and they almost always got cheaper. I used to buy options hoping for a big score – and almost always lost my premium.

It took me a long time to actually log my results in the various sorts of trades to see what worked for me and what didn’t. When I finally did that I realized there were only two types of investments in which I was consistently profitable.

The first type of investing that has worked for me is what I have previously termed The Perennial Philosophy: Buy high quality companies and hold them for the long term. Quality > Valuation: “It’s better to buy a wonderful company at a fair price than a fair company at a wonderful price” – Warren Buffett. The reason this simple strategy works is that high quality businesses compound earnings over long periods of time and the stock price follows earnings over the long term.

Walmart (WMT) is a little too expensive for me right now so I sold my shares. But I’m quite confident that the stock will be significantly higher in 10 years – and I’ll look for a spot to get back in. That’s because WMT is a proven great company that provides tremendous value for customers. As long as that continues to be the case, earnings will compound and the stock will continue to go higher over the long term – though the ride will not be smooth. Pick your own example of a high quality company and the same logic likely applies.

The second type of investing that has worked for me is long macro trades. Let me be very careful here. Macro is often associated with picking the top and the bottom of cycles. I have not been successful doing that.

What I am referring here to primarily is a long term bet on inflation via commodity and precious metals miners. As discussed in my review of Ropke’s The Humane Economy, our money is no longer sound – and the market is starting to price that in as can be seen via the price of gold.

In this type of investing, because my insight is more macro in nature I have played it via ETFs rather than picking individual stocks as I have no expertise in mining. While the precious metals have gotten extended, this trade is far from over IMO.

Another example is defense stocks. It’s been pretty obvious to me since Russia invaded Ukraine and I read Elbridge Colby’s book The Strategy of Denial about the threat from China that the world is becoming an increasingly dangerous place once again. Oct 7 only reinforced that viewpoint.

But I have no knowledge of military things. So I bought the Invesco Aerospace & Defense ETF (PPA) a few years ago and that has worked out just fine. Once again I see no reason to exit this trade which has quite a bit longer to run IMO.

When I first started Top Gun I was confident that I would one day surpass Warren Buffett as the greatest investor of all time. I was filled with hubris and had no clue what I was doing. As long as I persisted in thinking that I was really smart, my investment returns were terrible. When I finally took a hard look in the mirror and realized that I’m not that smart it gave me an opportunity to figure out what had worked for me and what hadn’t.

“Do more of what’s working and less of what’s not” Jack Schwager quoted a famous trader as saying to beginning traders in The Little Book of Market Wizards. Once I cut out all the fancy stuff that came from my belief that I was really smart but that were costing me a lot of money and focused on the simple stuff that actually made money I entered the mature phase of my investment career.