Editor's note: All investors – from Warren Buffett to the average Joe – have one thing in common...

They make mistakes.

No one is perfect. Even the world's greatest investing minds don't bat a thousand. But the key to building incredible wealth over the long term is learning from your mistakes.

That's why, in this weekend's Masters Series, we're sharing a two-part essay from our friend and Empire Financial Research founder Whitney Tilson. During his long career on Wall Street, Whitney has learned a lot of valuable lessons from the mistakes he made along the way.

In today's installment, he explains why you shouldn't chase "hot" investments... what to do if you're holding a big winner... and how to identify stocks worth backing the truck up for...

The Seven Keys to Long-Term Investment Success, Part I

By Whitney Tilson, founder, Empire Financial Research

For the first dozen years of running my own hedge fund, I crushed the market... nearly tripling my investors' money in a flat market.

Along the way, my assets under management grew from $1 million to $200 million. And I made a lot of money for myself.

I don't tell you this to brag. I'll be the first to admit I made several big mistakes along the way. The biggest was misreading the current decadelong bull market, which led me to trim my winners far too early, hold too much cash, and put on too many short positions.

My experience – both big successes and major mistakes – has taught me exactly what works with investing... and what doesn't.

In this weekend's Masters Series, I'll share seven of the simplest and most important lessons I've learned, and how you can apply them to immediately start to improve your investing results. We'll start with the first three today and close with the last four tomorrow.

First up: Don't speculate, avoid the hottest sectors, and think independently...

Investing and speculating are at different ends of the spectrum.

Investing means looking for the rare "needle in the haystack" – a stock or other asset that can be purchased for far less than its intrinsic value. To find such investments, you generally must do in-depth research to understand a company and its industry, and then develop an investment thesis rooted in knowledge, information, and analysis.

Speculating involves none of that. You have no idea what something is really worth. Instead, you buy something hoping to get lucky by having someone even more foolish buy it from you at a higher price. This is gambling, not investing.

The first key to making big money in the markets is avoiding big losses. And the surest way to lose a lot of money quickly (and permanently) is to get sucked into the hottest sectors, which are invariably bubbles.

That's how folks who bought bitcoin at its peak of nearly $20,000 in late 2017 or marijuana company Tilray (TLRY) at $300 a share last fall ended up losing a fortune.

If you're buying what everyone else is buying, what are the odds that you've found something undervalued? Just about zero.

While piling into whatever is hot can be costly, it doesn't necessarily mean you should limit yourself only to stocks and sectors that are hated. One of the mistakes I made early in my career was avoiding companies unless they were truly out of favor. But some insanely great companies never really fell out of favor. That's how I missed the historic gains in search titan Alphabet (GOOGL), which has risen from a split-adjusted $42.50 a share in mid-2004 to more than $1,200 today.

Investing is neither about being a momentum follower nor a contrarian... It's about thinking independently. Don't worry whether you're standing with the crowd or by yourself on any stock. Do the research, come to your own conclusions, and stick to your guns.

Next, you gotta let your winners run...

There's an old saying on Wall Street, "Pigs get fat, hogs get slaughtered," which cautions against being greedy.

I disagree.

If you're looking in the right places for the right kind of high-quality businesses whose stocks are attractively priced, every once in a while, you're going to invest in a stock that doesn't just double, but goes up five, 10, 50, or even 100 times.

To build a successful long-term track record, you must be greedy when opportunities like this arise! Investing in a moonshot stock only happens maybe once a decade – or even once in a lifetime. So it's critical that you make the maximum amount of money on them.

I owned a handful of them in my nearly two-decade career, including Amazon (AMZN), Apple (AAPL), and most painfully, Netflix (NFLX).

When I bought the stock in 2012, Netflix was deeply out of favor. Investors were worried about rising competition and content costs, as well as the company's plan to spin off its DVD-by-mail business into a new entity called Qwikster (a silly idea that Netflix soon abandoned).

But I saw a business with a product that customers loved that was more than 10 times bigger than its nearest competitor and was growing like a weed. Sure enough, shares soon took off. Two years later, the stock was up 600%.

As the stock took off, all I had to do was sit back and profit from correctly identifying one of the greatest stocks of all time. Instead, I sold half my shares once the stock doubled. And then, I sold some more shares when it doubled again. As the stock was doubling another time, I got out of the position completely.

I thought I was being conservative and managing my risk with the position. But in reality, I was shooting myself in the foot. If I had simply held on to my original position in Netflix, I would have made about 10 times what I ultimately made. It was a costly mistake.

That's not to say you shouldn't ever sell a stock that's working for you. It's important to control position sizes to manage risk, of course. And it's even more important to be attuned to fundamental changes in the story. Kodak was a great company and stock for decades... until digital photography came along. Then the stock turned into a "value trap" that lured in many smart investors, who eventually lost everything when the company went bankrupt in 2012.

Rule No. 3 to your investment success is to tune out the noise and focus on fundamentals...

I've made tens of millions of dollars over the years with my favorite type of investment: A good company with strong fundamentals that encounters difficulties – often accompanied by negative headlines – that crush the stock. But if the company fixes its problems – a big if – then the stock rallies strongly.

A classic example is fast-food chain McDonald's (MCD), which did all sorts of dumb things in the years leading up to 2003. It engaged in a price war with Burger King... built too many stores, which cannibalized its older locations... and focused its marketing on lower-priced, lower-margin Dollar Menu items, rather than the more profitable things on its menu, like Big Macs.

The stock got clobbered, falling 70% from 1999 to 2003. But the company's operating cash flows were only down 15%. That kind of discrepancy is exactly what investors like me look for.

I invested 5% of my fund into MCD shares at the end of 2002. A few months later, when the stock had fallen even further, I backed up the truck and made it a 10% position. The stock soon doubled and has been a 15-bagger since its bottom.

These three keys will help you become a much better long-term investor. But there's more you need to know. Tomorrow, I'll share the next four lessons I've learned in my career.

Regards,

Whitney Tilson

Editor's note: Whitney predicted the dot-com crash... the housing crisis... the bottom of the market in December 2008... the bubbles in bitcoin and 3D printing stocks... and more. But in a FREE online event on Wednesday, April 17, at 8 p.m. Eastern time, he'll share a prediction that could be his biggest one yet. Save your spot right here.