How to Beat Wall Street at Its Own Game

Editor's note: Finding the right stocks can go a long way. But as Stansberry's Investment Advisory editor Whitney Tilson explains, long-term success in the market requires more than picking good stocks. In today's issue, last published in DailyWealth in January 2024, Whitney outlines four ways individual investors can get an edge.

Over the past few decades, I've learned some valuable investing lessons...

My journey as an investment professional was unique. In late 1998, I raised $1 million to launch my own hedge fund... without any formal training.

They say it's better to be lucky than good. I'd like to think I was a little of both. Over the next dozen years, I grew my fund's assets under management to $200 million, nearly tripling my investors' money in a flat market.

Toward the end, though, I made some key mistakes. Coming out of the dot-com bust, I was worried about another downturn, so I was too conservative with my portfolio... I took profits too quickly, held too much cash, and shorted too many stocks.

These kinds of missteps are incredibly common, but they destroy your profits over time. That's why I joined Stansberry Research – to share the lessons I've learned over the past few decades on Wall Street with individual investors like you.

So today, I'm going to show you four ways to beat the market over the long run – including one that can help put you ahead of the pros...

Maximize Your Winners, Minimize Your Losers

First up is effective portfolio management.

It was only through experience that I came to learn that stock picking is just half the battle. The other 50% of investing is managing your portfolio. Your behavior can create or destroy as much value as the stocks you choose to own.

To borrow a baseball analogy, your batting average matters a lot less than your slugging percentage. It's not about how many of your picks are right... It's about making more money when you're right than you lose when you're wrong.

If you're sitting on a big winner that runs up 50% or 100%, trimming your position can stunt your returns tremendously. The opposite is true, too. When you hang on to your losers for way too long – or worse yet, add to your position when prices fall – your losses can mount quickly.

It's critical to have the judgment, humility, and fortitude (which all come from experience) to know when to let your winners run and when to cut your losses.

For example, in October 2012, I had nearly 5% of my portfolio in video-streaming company Netflix (NFLX). At the time, it was trading at multiyear lows. And then it took off, becoming one of the greatest stocks of all time.

But even though I had publicly predicted almost exactly what would happen, I only made about a 10th of what I should have – about $10 million on what could have been a $100 million winner. As the stock moved up, I kept selling... and I eventually exited way too early.

Had I simply gone away on a five-year vacation, I would have done far, far better – the stock has been a multibagger since then!

Second, it's critical to give your investments enough time to let your thesis play out...

One of the biggest advantages individual investors have over professional money managers is the lack of short-term performance pressure.

Even the people who manage endowments and pension funds – which, by definition, have multidecade investing horizons – are evaluated on a short-term basis, sometimes even monthly. But sometimes, stocks can remain cheap for years before the tide turns.

It reminds me of something investing legend Warren Buffett once said...

All I want to do is hand in a scorecard when I come off the golf course. I don't want you following me around and watching me shank a three-iron on this hole and leave a putt short on the next one.

Meanwhile, 99% of the money in the world is managed by people who feel like someone's looking over their shoulders.

I don't try to anticipate when investor sentiment will change. It's not the end of the world if a cheap stock remains depressed for a while... as long as you have an appropriate investing timeline.

I'd argue the only money you should be investing in the stock market is money you don't need for three to five years. That sort of time frame gives you the patience to wait for high-quality stocks to go "on sale"... and for your cheap stocks to start moving (assuming you're right that they're cheap!).

Third up is another core tenet of value investing: buying when the odds are in your favor.

In the value-investing community, this goes hand in hand with what the father of value investing, Benjamin Graham, called the "margin of safety."

Imagine you're driving a big truck over a bridge with a lot of other trucks on it that weigh a total of 49 tons. How would you feel if the bridge were engineered to hold only 50 tons?

When it comes to things that your life – or financial future – depends on, you want to give yourself plenty of room to be wrong. Ideally, you want to consistently buy stocks at a valuation where you'll double your money (or more) in two to five years if you're right... and only lose a little if you're wrong.

The fourth and final way you can position yourself to beat the market is by concentrating your portfolio in your best ideas...

Over the past half-century, a handful of folks figured out that Buffett is an investing genius, so they put their entire net worth into his holding company, Berkshire Hathaway (BRK-B). That obviously worked out well for them. But I would never recommend such extreme concentration.

I think most investors should own somewhere between 10 and 20 stocks. This provides reasonable diversification yet also allows you to concentrate on your best ideas.

The idea that any one investor can have real, proprietary insights – what I call "variant perceptions" – across dozens of stocks is hard to imagine.

But by focusing on a handful of situations where you have an edge over the market, you're likely to do far better than you would by owning dozens of stocks.

Best regards,

Whitney Tilson

Editor's note: Whitney has a remarkable track record of staying one step ahead of the market. Thanks to his impressive predictions in 2000 and 2008, CNBC dubbed him "The Prophet." He just shared his latest major forecast... and revealed where to move your money to get upside as high as 1,000% in the next phase of this market. Get all the details here.