Editor's note: Learning from your mistakes is easier said than done...

Sometimes, those lessons can be costly – even for Whitney Tilson, the founder of Empire Financial Research, who previously made a name for himself as one of the world's most successful hedge-fund managers.

Today, we're sharing the second part of an interview between Whitney and anchor Jim Baxter. In it, you'll discover what Whitney learned from his $5 million mistake... the concept that's crucial to his success... and the steps he takes to uncover his biggest winners...

'What I Learned From My $5 Million Mistake'

An interview with Whitney Tilson, founder, Empire Financial Research

Jim Baxter: Your ability to judge sentiment of a stock – or even of an entire market – has led CNBC to call you "The Prophet." For example, as you briefly mentioned yesterday, you've accurately called the tops in bitcoin, pot stocks, and 3D printing. Correct me if I'm wrong... but your ability to do this didn't come cheaply, from what I've read.

Whitney Tilson: Yes. I said yesterday that making – and learning from – mistakes is what's helped me land so many of the big predictions and gains that I've become known for.

The reality is, you'll never make any real money in the investment world if you're not willing to learn from what went wrong... either with your own investments or, even better, someone else's. And that's why I love telling the story of the biggest mistake of my career: electric-car maker Tesla (TSLA).

Back in 2012, I was absolutely confident that the company, which was hemorrhaging cash, would soon file for bankruptcy. So I bet against the stock... with a big position of my hedge fund.

Jim: 2012... So that was right about the time Tesla was releasing the Model S.

Whitney: Correct. The company rushed it into production and I was sure this would lead to all sorts of quality problems.

Boy, was I wrong! The Model S was a hit, and the stock rose more than six times in a year.

Now, at that point – I should have recognized that CEO Elon Musk had pulled off a remarkable feat of engineering and entrepreneurship. But instead, I dug in my heels, refused to admit that I'd made a mistake, and lost $5 million continuing to bet against the stock.

I was arrogant and stubborn, but more important, I had failed to do exactly what I've been talking about here this weekend: doing in-depth research to gain an edge and also putting my finger on the pulse of the stock.

In other words, gauging the sentiment.

Jim: What ultimately changed your mind?

Whitney: I finally did what I should have done in the first place... I tapped my network of contacts and got behind-the-scenes information and insights.

I reached out to my cousin, an engineer in Silicon Valley, who put me in touch with two of his friends who were engineers at Tesla. Both of them told me about the incredible technologies Tesla had developed. In some cases, the company was six years ahead of any other car company in the world. And they warned me, "There's nothing that Elon Musk can't do."

I realized I had made a terrible mistake, closed my position that afternoon, and walked away.

Jim: How exactly did this mistake help shape the strategy you've been using ever since?

Whitney: Well, this and similar mistakes I've made are what I call "lessons from the trenches."

Running a hedge fund for nearly 20 years taught me – often, the hard way – how markets and investing really work.

You can't be arrogant. You have to keep an open mind, accept disconfirming information, and be willing to admit a mistake.

But more important, you have to have a good feel for investor sentiment.

Jim: And of course, it helps to have a wide network of contacts – as you do – who can give you those proprietary insights into stocks and industries.

Whitney: Exactly. Not everyone has the network I do. What I learned from Tesla is that fundamental analysis alone isn't enough. You have to also gather information from folks who truly know the situation inside and out.

Take low-cost airline JetBlue Airways (JBLU)... When it first launched in February 2000, I started flying it and grew to love it as a customer.

Then, in June 2003, I wrote an article about it called, "The Amazing JetBlue," which led to all sorts of feedback from the company's management and employees, as well as customers. So I ended up writing four more articles over the next three months, which helped me to better understand the company on a deeper level.

Jim: Did you buy the stock?

Whitney: No, because it was expensive. But I never forgot about the airline. I flew it every chance I got, kept in touch with a friend who worked there, and followed the stock.

And then I got my opportunity more than a decade later in 2014, when the company made big improvements. It started charging bag fees, squeezing more seats on the planes, and launching a first-class cabin on transcontinental flights.

Plus, a new CEO was taking over. And my friend there told me he was the real deal.

My analysis suggested that the company's operating profit was set to triple, which wasn't yet reflected in the stock price.

So the fundamentals were there. But I also went behind-the-scenes to gauge the sentiment... at both the company and on Wall Street. It was exactly what I wanted to see...

Employees loved the company's improvements, but investors either had no idea or didn't care. And as a result, we tripled our money in just a single year!

And I have Elon Musk and Tesla to thank for teaching me to do that before you enter a position.

Jim: So if you had to lose $5 million on Tesla all over again, you would do it.

Whitney: Well, there's a quote by Otto von Bismarck that I love.

He was known as the "Iron Chancellor of Germany" and once said: "Only a fool learns from his own mistakes. The wise man learns from the mistakes of others."

In other words, I wouldn't want to lose $5 million on Tesla again... But I sure wish someone else had made that mistake before me and shown me how to avoid that trap before I launched my hedge fund.

The problem is, throughout this industry and even when I studied at Harvard Business School, people only focus on the victories. They almost never teach case studies on what went wrong and what they've learned from it.

That's why today, I'm committed to not only finding the next great investments, but teaching the lessons from the trenches I've learned – and applying those lessons to each new opportunity.

Jim: But let me ask you this... Even if you gauge the sentiment correctly, a lot of people simply don't have the stomach to constantly bet against the crowd the way you do, am I right?

For example, I came across something you predicted way back in 2000, about Ross Stores (ROST)... the discount retail chain.

Back then, people hated the company. The stock was only trading for about $1.80 a share.

You bought it and publicly wrote... "I believe [the] concerns are priced into the stock, and any positive news whatsoever could send the stock soaring. This remains a solid, well-managed company."

And once again, you got some nasty feedback.

Whitney: Well, anyone who appears on CNBC or CNN or Forbes TV as often as I do will always have critics.

In this case, I shared my bullish prediction about Ross Stores on a popular financial website. One woman disagreed with me and said, "Take it from a 'professional shopper,' Ross is going downhill very fast."

But in fact, Ross Stores became one of the world's best-performing stocks over the next 20 years – soaring more than 50 times.

Jim: But you admit most people would have been uncomfortable buying a retail chain that was considered one of the worst-managed in America, right?

Whitney: Well, if you're not willing to go against the crowd, you'll never be a great investor. But more important, you'll miss out on essentially the entire secret of my strategy. It's a concept known as "inflection points."

Everything I do – fundamental analysis, tapping my network and going behind the scenes, gauging sentiment – it all adds up to spotting a particular point in the life of a stock.

If you look carefully through history, every big-winning stock experiences a unique moment when all of a sudden it just "turns"... and skyrockets.

This is known as the inflection point, which is something you see again and again among the best-performing stocks.

For example, take a company called CKE Restaurants...

It owns an excellent burger chain, Carl's Jr., and another fast-food chain, Hardee's, which was performing poorly back in 2002. Management thought it could fix it, but instead it nearly took down the whole company.

The stock had plunged from over $12 to around $4 in early 2003 when it caught my eye. So I did a fundamental analysis of the company.

Jim: So you sat down and tried to figure out exactly how much the company was really worth.

Whitney: Right. I valued Carl's Jr. and Hardee's completely separately based on their cash flows, as well as their real estate. And I found something interesting...

It turns out that Carl's Jr. alone was worth at least $4 a share. That meant by buying the stock, I was essentially getting the entire Hardee's restaurant chain for free. So I bought in.

But then I did something else... I flew out to the company's headquarters in California and met with the CEO. And he told me that he was really excited about the new angus beef burgers they called "Thickburgers" that they'd just introduced at Hardee's. The Thickburgers sounded promising, but that still wasn't enough for me to buy more stock.

Jim: So you didn't completely trust the CEO.

Whitney: As Ronald Reagan was known to say, "Trust, but verify." I trusted him, but I wanted to be absolutely sure about the new product. I needed to know how customers were reacting...

So I picked up the phone and started calling dozens of Hardee's restaurants all over the country. Usually I was able to speak to the manager or assistant manager, but sometimes it was literally teenage kids flipping patties for the summer.

And no matter who I spoke with, the story was the same: Customers were going nuts for the Thickburger – which had a higher profit margin.

The fundamentals, namely the value of Carl's Jr., provided a floor for the stock... My behind-the-scenes research revealed huge upside from the new Thickburgers that Wall Street wasn't aware of... And sentiment was just what I wanted to see: Investors hated this stock.

Jim: And when those three things line up, you often find the inflection point.

Whitney: Yes. In this case, once I'd applied all three parts of my strategy, I loaded up on the stock at $3 a share. About a year later, I started selling above $13. A year after that, I got out above $15... More than five times my money.

Finding these inflection points is really hard, but keep in mind that you don't have to be exactly right... If you get in anywhere close to an inflection point, you're going to make an absolute fortune.

Jim: Thank you so much for your time, Whitney.

Whitney: My pleasure.

Editor's note: Whitney's market calls have been so prescient, CNBC once dubbed him "The Prophet." He predicted the dot-com crash... the housing crisis... the bubbles in bitcoin and 3D printing stocks... and more. In a special event earlier this month, Whitney revealed the secrets behind his success... and shared the name of the No. 1 retirement stock in America. For the next few days, you can watch the replay right here.