The Greatest Investment Strategy of All Time

A very good friend sent me a book about hedge fund investing. The title is HedgeHogging (by Barton Biggs). And I am absolutely fascinated with the book. When I started it, I got to Chapter 6 in the first sitting.

I am not recommending you to go get the book. That may not be your style or something you enjoy. But I'll let you in on some of the transformative ideas of the book.

Unlike your traditional investing book, this book is not about strategies, theories, or philosophy of investing and numbers. Instead, it deals more with the psychological premise. It is more of what it takes to be a hedge fund manager psychologically.

The book consists of stories of the author - real stories (names changed to protect privacy though). He was a hedge fund manager. He previously worked at Morgan Stanley and then went ahead to start his own fund. He carried a diary for most of the time he transitioned into the hedge fund world and thus a large chunk of his book was the diary entries. It was thrilling to me.

My friend who sent me that book knows me too well. I take that as a sign to go in that direction. Even though I know now more than ever, that it is mostly a game of luck. Yes, you heard me right - luck, especially success in the short term.

I highlighted the 3 rules of hedge funding success if I am ever going to head in that direction:

1. Play for the long term. Be conservative in the first 5 years (and focus on survival) while building long positions

2. Pick a good year to start. Apparently, this is a very important factor. If the first year hits bad, then game over is almost guaranteed

3. Take breaks - lots of breaks. Or have a viable distraction. Having eyes on the market 24/7 isn't a good thing. In fact, it is often counterproductive

But I am talking to you about this because I was reminded of the greatest investment strategy ever.

The Strategy

I believe anyone can beat the market. In fact, you have to do certain things to have a bad year in investing. And this is something that both the biggest hedge funds and average individual investors have in common.

Except for when you are just getting started, you shouldn't do a lot of trades. Investing is more of a waiting and doing nothing game than an action game. Those who are all action often get wild gains but also suffer steep losses.

But the greatest investment strategy of all time is just to buy low and sell high. It is that simple. Buy low, sell high. Most people do the opposite of this. They obviously do the opposite.

They buy high when everything looks rosy. And when things get sour, they jump ship. They abandon their positions. This is the way to become poor in the investing world.

But how do you know you are buying low? What if you buy low and it keeps getting lower? My answer is, that if it is getting lower and you are not excited to buy more, you are probably doing it wrong. And yes, you never plunge your entire money into one trade all at once. For a non-professional investor, that is often a bad move.

If you just buy low and sell high, you have no problems. That is the definition of making a profit. That is the definition of growing your net worth. But there is something even better than this greatest strategy.

Better Than the Best

What could be better than buying low, and selling high? Well, that is buy low, never sell. So, how would you make money if you never sell? You use your stocks as leverage to get more cash. This is the kind of leverage I like.

This is the Warren Buffett strategy. He has no intention to sell. If you buy something you intend to hold on to for the rest of your life, there is a high chance it is something good. And also there is a very good chance it will grow higher with time.

So, short-term thinking is almost destined to be a failure. Meanwhile, long-term thinking is almost destined to make you a champion.

Another thing I would add if I were starting my own hedge fund is that I would not seek outside capital at the onset. I would just take money from a few trusted loyal people who would lock in with me for 5 years or more. Just to survive the early stages and conservative returns. Warren Buffett did almost the same thing.

So, the formula is to either buy low and sell high. Or buy low and never sell. Now, let's talk about shorts.

Short Selling Stocks

This is akin to betting that a stock will go down. And it is a risky move because if you are wrong, your losses are profound. This is why I encourage non-professionals to stay away from it.

There is a major problem with shorting stocks. Knowing that a stock will go down is one thing. That is not so hard to predict. Predicting when it will go down is the real hassle.

Short selling has a timing factor to it. If you get the timing wrong, you will lose money, even though you may be eventually right and the stock goes down. I found a couple of examples in that book my friend gave me.

This year, 2024, (in my opinion) is going to be a bearish year. And not just for the stock market. But it is the start of the year and the economic reports seem to suggest we are in a bullish year.

I know that the fundamentals will break at some point and things will go downhill. However, the question is when will that happen? If you line up your shorts in January, there is no guarantee that it will kick in before June. In fact, there is no guarantee that it will happen in 2024. The central bank and Treasury may come up with some measures that push the downtrend to 2025.

And that means you who are shorting the market will be fried. That would be some steep losses. This is why I discourage shorting. But in my forward guidance analysis of the year (in stocks), I think shorting some small-cap names with a weak balance sheet might be a good move. Especially those who had a fantastic run in the last 2 months of 2023 (but were down for most of the year).

However, for non-professionals, I am still against shorting. Just keep cash on the sidelines instead.

Conclusion

The greatest investment strategy of all time is to buy low and sell high. What's better than that? Buy low and never sell. Time in the market will make you way more money than timing the market. This is how to get richer.

I hope this hits home for you.

Stay rich.

P.S. Read my 2024 investing forward guidance