Editor's note: After spending two decades on Wall Street, our friend Whitney Tilson is doing something most hedge-fund managers never do...

He's pulling back the curtain on the secret to his investment success.

In his first decade, Whitney's hedge fund outperformed the benchmark S&P 500 Index by 184%. Today, he's sharing his knowledge and expertise with individual investors in his newest venture, Empire Financial Research.

In this weekend's Masters Series, we're sharing excerpts from an interview between Whitney and anchor Jim Baxter. Today, you'll find out the secret to Whitney's success... the details about a big contrarian call he made nearly 20 years ago... and more...

The Secret to Whitney Tilson's Success

An interview with Whitney Tilson, founder, Empire Financial Research

Jim Baxter: Whitney, you've agreed to step forward today and share your investment strategy. Let me kick things off by asking you upfront... What's your secret?

Whitney Tilson: My secret is that I've made a lot of mistakes. At one point, I lost $5 million on a single trade.

And there's nothing like losing money to focus your mind, and help you figure out what really works in the investment world and what doesn't.

To be clear, I've made a lot of great investments over the last two decades. But to really get ahead in investing, you have to not only do smart things, but also avoid the mistakes that can bring you down.

I'll give you an example. Take Netflix (NFLX)...

Jim: Right, you're known for pitching Netflix on CNBC the day it bottomed under $8 a share back in 2012...

Whitney: I did. And I made seven times my money on Netflix over the next two years. But I also made a big mistake. For a while, before I owned the stock, I bet against Netflix.

Jim: You thought the company was just a fad?

Whitney: Not a fad. But I thought the core business – mailing DVDs – was rapidly declining. And its new business – streaming movies – faced a lot of competition.

But my bet against Netflix is a mistake I'm happy I made, because it led me to what would become the best investment strategy I've ever encountered.

Jim: What happened, exactly?

Whitney: After the stock had more than doubled against me, I was so frustrated that I wrote an 18-page report titled, "Why We're Short Netflix," laying out all of the reasons why I thought the company was going to falter, which would cause the stock to crash.

But to my surprise, the company's CEO – Reed Hastings – publicly responded to my report in an article titled, "Whitney Tilson: Cover Your Netflix Short. Now."

Jim: Was that some kind of personal attack?

Whitney: No, not at all. Reed and I are actually quite friendly. We both sit on the board of a nonprofit, and we'd met each other once before.

In his article, he acknowledged many of my points, while also arguing that Netflix had a better business than I was giving it credit for. And I ended up flying out to California and having brunch with him.

Jim: What did he tell you exactly?

Whitney: He helped me realize I was thinking about Netflix in totally the wrong way.

You see, I'd been trying to value Netflix by looking at how many subscribers it had. But I was asking myself the wrong question...

If Netflix had 30 million subscribers paying $8 a month, the question wasn't just, "How much are those subscribers worth?"

The question was, "What is the additional cost of adding each new subscriber?"

And in this case, the answer was: nothing!

Jim: Explain what you mean by that.

Whitney: Sure. You see, Netflix pays a fixed amount for its streaming content. So each new subscriber is almost pure profit.

Not to mention... after that meeting, I learned about some behind-the-scenes developments – like how Netflix was creating its own original content. And I realized that under no circumstances did I want to bet against the stock. So I did a complete 180.

Jim: And ironically, as I understand it, CNBC's Jim Cramer was pounding the table, calling Netflix a "sell." But you turned bullish.

Whitney: I used a particular strategy. And in this case, it fit perfectly with what I'd learned from the CEO. So I ended up pitching the stock at my investment conference. And I went on CNBC right afterward, saying that Netflix was going to be this decade's Amazon.

I nailed the timing. A year later, the stock was up sixfold.

Jim: A lot of people might be able to value a stock the way you did with Netflix. But what strikes me as unique is how you managed to have brunch with the CEO... Is that rare for you?

Whitney: Well, I'm fortunate to have made a lot of friends and connections in this business.

I believe in giving as much back to the investment community as I receive. So each day, I send e-mails to a wide range of people with ideas I'm thinking about.

I've also organized conferences where I've been lucky to have speakers like Julian Robertson, Bill Ackman, Lee Cooperman, Joel Greenblatt, Seth Klarman, Dan Loeb, David Einhorn – many of whom are real living legends of Wall Street.

Jim: I've heard that you and Warren Buffett know each other. Is that right?

Whitney: We're not personal friends, but we've met and spoken a number of times. I send him articles or ideas once or twice a month that I think he might be interested in.

I bake chocolate cookies for him and Charlie Munger every Christmas. It's the least I can do to repay them in some way for everything they've taught me.

They're my heroes. I mean, they've made such a big difference in my life, both personally and professionally.

Jim: You were the first person to publish detailed notes after each Berkshire Hathaway (BRK) meeting, correct?

Whitney: Yes. In fact, I'll be attending my 22nd consecutive Berkshire Hathaway annual meeting next weekend. I made more than seven times my money on some of the first Berkshire stock I ever bought. And by the way, I think it's still a fantastic investment that every American investor should own right now.

Jim: So clearly, what's important to your strategy isn't just typical stock valuation... but a deeper understanding of companies – and their CEOs – through the behind-the-scenes information you get through your network.

Whitney: Exactly. There's a unique concept behind the strategy I follow, which I've found delivers the best results when I combine it with my network.

I'll give you another example – fast-food giant McDonald's (MCD)...

Nearly 20 years ago, the company was a mess. It had promised Wall Street unrealistic growth targets and had really hurt the brand by trying to meet them.

The stock had fallen more than 70% and investor sentiment was horrible. I even remember Cramer urging the public to avoid the stock.

Jim: So why were you even considering it?

Whitney: I'd read a great book on the history of McDonald's called Behind the Golden Arches that helped me understand what a great business it is.

Strong brand... great franchising model... and frankly, I liked its new CEO.

But what really caught my eye was the real estate... When I analyzed it, I realized that, by itself, it was worth nearly the entire share price.

Jim: So by buying the stock, you were essentially getting all the burgers for nothing.

Whitney: Exactly right. So I bought the stock at $16 at the end of 2002. But frankly, I was early. Over the next few months, the stock continued to decline, falling another 20%.

But I was confident I was right, so if anything, I wanted to take a bigger position. But before doing so, I did the same thing I always do when I need more information.

In this case, one of my investors put me in touch with an old friend of his – someone who'd been a McDonald's franchisee for years.

I remember the day well. It was March 13, 2003. Given what bad shape the business was in, when we sat down, I expected the guy to tell me what a fool I was to own the stock.

But instead, over the next hour, he told me things about McDonald's I'd have otherwise never known unless I were literally running a McDonald's of my own.

Jim: Like what, for example?

Whitney: He explained all about how McDonald's was fixing itself, repairing relationships with franchisees like him, introducing new products, and investing in the business... all under the new CEO. And he told me – I'll never forget this – "If I had $5 million to invest, I'd put every penny in McDonald's stock right now."

That afternoon, I backed up the truck, putting 10% of my entire hedge fund into McDonald's stock. And here, I got lucky. It was the day after the stock bottomed, when it hit a 10-year low. Altogether, it's been a 15-bagger since then – and was one of the few stocks that actually rose in 2008.

Jim: So it's all about who you know.

Whitney: It's all about having an edge. If you're out there just doing analysis that any first-year MBA student could do, you're not going to win.

There are many ways to have an edge, but certainly one of the best is knowing – or at least, getting access to – the right people.

In other words, it's one thing to do what's called "fundamental analysis" of a stock. But it's something else entirely to figure out how to really understand what's going on inside a company or industry.

Then, the last piece of the puzzle is to put my finger on the pulse of the market, or a particular sector, or an individual stock, and gauge the sentiment.

So in other words, it wasn't just random luck that let me to accurately call the top of the booms in Internet stocks, housing, 3D printing stocks, bitcoin, and pot stocks... or to almost nail the bottoms of stocks like McDonald's and Netflix.

I did it by combining good fundamental analysis, an information edge, and the ability to gauge market sentiment.

Jim: Now, speaking of your contrarian calls, you made a big one on Apple back in 2000.

In October of that year, with the stock trading around a split-adjusted $1.50 a share, you wrote an article explaining why you'd recently purchased the stock.

This was before even the first iPod. Then, a month later, you added...

I believe Apple's long-term future might not be as grim as the market currently thinks. The company has a base of fiercely loyal users [and] Apple has consistently developed stylish, innovative products that differentiate it from its competitors and allow it to charge a premium price.

And of Steve Jobs, you wrote...

For all his quirks, he's a genius who deserves the lion's share of the credit for engineering Apple's comeback. I think Apple represents a very high probability bet for investors with a time horizon beyond a quarter or two.

And you took some flak for that. One critic on a popular financial site e-mailed you: "You lost ALL credibility when you stated that you bought Apple. hahaha!!!!!"

Of course, Apple is up more than 100 times since then.

Whitney: Yeah, that's a good example of how sometimes the best companies have the worst sentiment. You have to look at or talk to the right people to get the true story.

In this case, I didn't meet Jobs, but I made it my business to look carefully at what he was doing, and ignore the masses.

Jim: You didn't meet Jobs, but you have met a number of high-profile figures in your career. Back in 2012, for example, you met President Barack Obama at a special White House event. You were the only hedge-fund manager who was invited. And I've read that you once had a career-changing phone call with Charlie Munger, the billionaire VP of Berkshire Hathaway.

Whitney: Yes. He gave me invaluable advice on investing.

Second only to Buffett – and my parents, of course – he's been a hero and mentor to me, which is why I was one of the contributors to the definitive book about him, Poor Charlie's Almanack, and have attended his Wesco and Daily Journal annual meetings for 15 years now.

But for me, it's not about meeting celebrities. The simple fact is: If I want to gauge the sentiment around a stock or get a fresh view on the market, the people I want to talk to are experts who see the world differently... or people with direct knowledge about the opportunity.

Editor's note: Earlier this month, Whitney sat down to share all the details about the powerful strategy he used to grow his hedge fund from $1 million to $200 million. He also made a prediction for 2019... explained what investments you should make now (and which you should avoid)... and discussed why his strategy could change your approach to making money forever. For a limited time, you can watch a free replay of this event right here.