The Simple Question That Can Save Your Portfolio

A single question has saved me from more bad investment decisions than anything else in my 20-plus years on Wall Street...

It's a deceptively simple question. But it separates good investors from great ones... "Why do I own this stock?"

If you can't explain your investment thesis in simple terms in the length of a short elevator ride, you probably shouldn't own it.

You don't need to use jargon. In fact, if you are using too many big words, it's a sign you probably don't understand the business well enough yourself.

On the other hand, if you can explain it to a 10-year-old, you've simplified it enough to know what matters.

When you can do that, the market noise and hype will disappear. And you'll be left with a clear plan for why your money is where it is – and what will make it grow.

Let me explain...

About two years ago, I told my colleagues that I was bullish on nuclear energy. It's one of the world's most powerful, reliable, and cleanest energy sources.

A tiny amount of uranium – the world's most efficient energy source – produces the same power as millions of pounds of coal. Countries like Sweden have already proved nuclear can deliver cheap, steady power while cutting pollution and boosting their economies.

Despite past fears, nuclear is statistically the safest form of power generation. In 2023, governments around the world started pouring billions of dollars into building new nuclear plants.

With rising demand for clean energy, nuclear was finally gaining recognition as a cornerstone of the future global power grid. My favorite way to play it was through Constellation Energy (CEG).

Why? Well, I had an answer to that. But other Wall Street professionals weren't so clear. Here's how one investment bank explained its thesis on Constellation...

We are decreasing our 2022-24 [earnings before interest, taxes, depreciation, and amortization] estimates to update our forecast model for hedge disclosures at the end of 1Q22, commodity forward prices at the end of June 2022, and the PJM capacity auction results for planning year 2023-24.

The reduction in our estimates reflects increased hedging at below-market prices and lower capacity prices, partly offset by a continued rise in forward power prices.

Over the past three months, power prices are up roughly 30% at both NiHub and PJM East. We remain Neutral-rated on CEG shares and update our [price target] to $54 (from $46) based on current market multiples.

I covered companies like this for more than two decades as a professional investor on Wall Street. And this is complete gibberish, even for me.

Here's how I would pitch Constellation to a 10-year-old...

Constellation Energy runs a bunch of America's nuclear power plants, which make clean energy without pollution. Thanks to new government rules, these plants make money, even when prices fall. The company makes a ton of money, spends some of it to grow, and rewards investors with dividends and buybacks of its own stock. With rising demand for clean energy, Constellation looks like a smart bet.

In short, as long as electricity prices stayed high – which we could monitor – investors would make money on Constellation.

I had a strong, clear thesis. I explained it in simple terms. Because of that, I knew exactly how we'd make money – and how to tell if our idea wasn't working out.

Invest Smarter by Mastering What You Know

Now, I had an inkling that artificial intelligence ("AI") could cause energy demand to rise. But that was just the cherry on top of my investment thesis. I didn't expect AI to create insatiable electricity demand.

In this case, that cherry on top helped send Constellation's stock soaring. It's up more than 230% since my initial recommendation...

Now, there are other ways to fall short of a clear explanation. If your reason for owning a stock is, "I think it's going up" or "My buddy told me about it," you aren't positioned to make real, sustainable returns in the market.

I learned this lesson the hard way early on in my investing career, working under Wall Street legends like Leon Cooperman, Steve Cohen, and David Einhorn.

We were managing hundreds of millions of dollars' worth of capital. We didn't have time for cute narratives or "hot" stock stories.

In short, fortunes aren't built by knowing a little bit about a lot of things... And they aren't built by knowing everything. You build a fortune by knowing something well and acting on it with discipline.

So if you're serious about improving your results, here's a challenge for you...

Test the Strength of Your Holdings

For every stock you own, write out a few sentences on why you own it. Ask yourself, "Could I explain this to a friend in 30 seconds or less?"

If the answer is "yes," you're on the right path.

If the answer is "no," don't worry. You don't have to sell the position immediately... But you do have some homework to do.

Remember, markets will always be noisy. You'll always want more certainty. And there will always be a shiny new toy around the corner – like meme stocks, cryptocurrencies, and lately, AI stocks.

In the long run, the edge goes to those who stay focused, patient, and simplify their lives by knowing why they own what they own.

And never forget to ask yourself, "Why do I own this stock?"

Because in a world full of noise, clarity isn't just an advantage – it's your edge.

Regards,

Gabe Marshank

Editor's note: For years, a reclusive hedge-fund veteran has stayed behind the scenes, helping deliver triple-digit gains – as high as 899% – for top investors. But he's finally ready to step into the spotlight and reveal his next stock idea with 25-fold potential, centered on a technology set to be more disruptive than AI. On October 29, we'll reveal the new hedge-fund-style model portfolio from our firm's "secret weapon."