Two Investing Lessons I Had To Learn The Hard Way
Unfortunately in life sometimes we have to learn lessons the hard way through painful experience and failure. It would be nice if we could learn from other people’s experiences and books and not make the same mistakes that others before us have made – but frequently we do. At the same time, nothing will teach you a lesson like failure.
In this blog, I’m going to elaborate two investing lessons I had to learn the hard way over the course of my now almost 20 years as a professional investor. If you can learn these lessons, I believe you will have a solid foundation for becoming an excellent investor and making a lot of money in the market. While I wish I would have learned them earlier, I’m grateful to understand them now.
1 – Bears don’t make money: While it’s great to fantasize about making money when everybody else is getting slaughtered – like Jesse Livermore in 1929 or John Paulson in 2008 – the reality is that bears generally don’t make money in the market.
One reason bears don’t make money is that everybody else wants the market to do well. Politicians want the market to do well so they can take credit and get reelected. Entrepreneurs and management want the market to do well so they can make money and their companies be successful. Wall Street wants the market to do well so they can sell securities and make money from the fees. All these people are doing everything they can to support the market. The only person who wants the market to do poorly is the lonely bear. Whatever reasons he may have for being bearish – and there are always plenty of good ones – the institutional imperative for everybody else is to support the market.
Another reason bears don’t make money is that they’re betting against the best business people in the world. When you’re short Tesla, you’re short Elon Musk. When you’re short Amazon, you’re short Jeff Bezos. You don’t want to short Elon Musk or Jeff Bezos. These guys are brilliant, often maniacally driven and they surround themselves with other similar types of people. These people are working hard to make their businesses successful which means they’re working against you.
Bears frequently talk about overvaluation and bad government policies. What about the Federal Debt? What about the unfunded liabilities of Social Security and Medicare? What about the Fed blowing bubbles by keeping interest rates too low for too long? While I sympathize with these valid points, the history of The United States at least demonstrates that the productive power of business trumps the incompetence of government. As long as entrepreneurs and business men and women are mostly free to provide great products and services to consumers at a marketable price for a profit, they will do what it takes to get it done.
As far as overvaluation goes, the market can stay irrational longer than you can stay solvent (Keynes) and great companies will usually grow into their valuations. Shorting a great company because it’s trading at 30x earnings is a loser’s strategy.
2 – Buy great companies – The second lesson I had to learn the hard way was to buy great companies – even if you have to pay up a bit for them. That’s because great companies are juggernauts that grow revenues, expand margins, develop new products, and create value over the long term. Even if you have to pay up a bit for one of them, if you hold on you will still frequently make a lot of money because these companies will grow into their valuations – and well beyond.
Trading in out of stocks for small profits is extremely hard to do. There are people who can do it – but not many.
You can always draw a line on a chart that looks like it means something but it doesn’t. Price action is history. That’s it. It doesn’t tell you anything about what the market is going to do going forward. Technicians who make money are doing so because they’re bullish not because of their technical analysis.
The other failed strategy is to buy cheap stocks. You look for bargains and expect that the market will follow you at some point. Unfortunately, many cheap stocks are cheap for a reason: they’re low quality businesses. These companies are in decline as competitors take away their market share and inefficiencies shrink their margins. Instead of getting high returns on capital that results in compounding over time, these companies are incinerating money and destroying value. It’s trading at 8x earnings for a reason.
For more on the perennial investment philosophy see “The Enduring Investment Principles of Warren Buffett” (Top Gun Financial, January 14, 2025).
If you can check your bearish inclinations and stop looking for shortcuts in the market, you can focus your time and energy on what really matters for producing excellent returns over time: Buying great companies and holding them for extended periods of time. It’s simple but not easy. It’s amazing how few people do it given how well it works.