The big “secret” about making money in the markets is that there is no big secret.
Making money is simply about three basic actions that everyone should know:
- Manage risk
- Make rationally attractive bets
- Bet big when the time is right
All legendary global macro traders and value investors also do these three things.
But if value investing and high-level speculation are supposedly as different as night and day, what could they possibly have in common? The key investing practices listed above.
Warren Buffett does every single one of those. So does Paul Tudor Jones. So does anyone else you may know who has had prolonged success in the markets.
When you skip one of those steps, you potentially wind up like Bill Miller, who had one of the greatest mutual fund track records of all time before arrogantly evaporating his clients.
Even Poker Players?
I would even go one step further and say that great entrepreneurs, CEOs and successful poker players also follow those same guidelines.
How do I know this?
For starters, I’ve been around long enough to know that market success is not about predicting the future. Let’s examine both poker players and entrepreneurs for a moment.
Poker, by definition, is a game of incomplete information.
You almost never know precisely what your opponent is holding, or what the next card will bring.
Instead, you have to deal with a range of probabilities. You don’t even try to know the future. You simply adhere to the logical probability distribution.
Markets are the same way.
Great entrepreneurs and great CEOs don’t try to magically predict the future — which would be a fool’s errand anyway.
Instead, they get a sense of odds and probabilities. From there, they figure out the most logical course of action based on the ability to carry out three key investment principles:
- Managing risk
- Making rationally attractive bets
- Betting big when the time is right
It seems so simple.
Truth be told, the vast majority of market participants don’t understand it. It’s really mind-blowing in some respects.
Discipline to Apply Risk Control
The path to success is not rocket science. It takes hard work and elbow grease to figure out what an “attractive bet” is.
It also takes discipline to apply risk control and the courage to bet boldly when the situation calls for it.
This isn’t abstract metaphysics I am discussing here. It is extremely straightforward stuff, these three key investment principles.
And yet you still see Barron’s routinely running articles with titles like “Don’t Question the Bull Market for 2016.”
That is not how to go about it. Do you think this is how Buffett operates?
The old adage, “a rising tide lifts all boats,” is true, but by definition, less than half of all investors can beat the baseline, and in some instances the tide sinks.
I continue to marvel at how Wall Street works and the incredible opportunities presented to those who understand, respect and continually follow the three key investment principles.