The Three Most Important Ideas Every Investor Needs To Know
Here at Porter & Co., we take the holidays seriously. We’ll be celebrating the “12 Days of Christmas” (plus a few extra!) from December 23 through January 6. During the holiday season, we won’t be sending our regularly scheduled research and insight.
Instead, we’ve asked members of the Porter & Co. team – editorial staff, analysts, marketers, and others – to select a favorite (generally investment-related) essay, article, speech, book excerpt, or other text, and to share their reflections on how it inspired them. Expect each one daily at our usual publication time: 4 pm ET. We hope they’ll help you get to know the family at Porter & Co. a little better – and perhaps offer some fresh perspective from voices you don’t usually hear.
Today, analyst Justin Brill shares a classic essay from Porter himself – written nearly a decade ago – that distills a critical investing lesson as only Porter can. Thanks to our friends at Porter’s old firm, Stansberry Research, for sharing this essay.
We wish you a warm and happy holiday season, from all of us here at Porter & Co… and we’ll be back with our usual program on January 6.
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I (Justin Brill) have had the privilege of working alongside Porter for the better part of 20 years now. Naturally, I’ve learned a great deal from him about investing and business in that time… but still, Porter’s greatest impact on my life arguably occurred long before I ever met him. You see, years before I joined his previous firm, Stansberry Research, I was a subscriber.
Like many people, I initially began reading investment newsletters in search of the next “hot” stock tip. And early on, I subscribed to literally dozens of different services in that pursuit. But I quickly noticed that Porter’s company was different.
Unlike most financial publishers in those days, it was clear that he cared about the well-being of his subscribers. The quality and depth of his research was head and shoulders above anything else I was reading. And his writing was always filled with interesting stories and anecdotes that actually made it a pleasure to read.
I soon looked forward to Porter’s weekly essays and monthly research reports hitting my inbox. And it’s not an exaggeration to say I gained more practical knowledge from his writing over the next few years than I did earning my high-priced finance degree.
So when an opportunity eventually arose to join Porter’s team, I left my former career in the healthcare industry and never looked back.
I would find it difficult to choose a favorite piece of Porter’s writing, but the following essay – originally written in 2015 in the Stansberry Digest, detailing the three most important ideas every investor needs to know to be successful – is certainly near the top of the list. I hope you enjoy it as much as I did.
Let’s start here… in the desert…
Imagine you had to walk across the Rub’ al Khali – the “Empty Quarter” – of the Arabian Peninsula.
This 250,000-square-mile desert is the largest sand desert in the world. Sand dunes there reach as high as 800 feet. It rains less than two inches a year. The surface temperatures reach 125 degrees.
Think about the three most important pieces of equipment you’d need, beyond the most basic stuff like shoes, clothes, food, water, etc.
This isn’t hypothetical. In 2013, South Africans Dave Joyce, Marco Broccardo, and Alex Harris became the first humans to walk completely unassisted through the Empty Quarter. They plotted a 1,000-kilometer course from Salalah, Oman, to Dubai. Their story is completely nuts… but fascinating.
The most obvious piece of advanced equipment you’d need? A GPS, right? Nope. What they needed most wasn’t a GPS… or even a map. What they had to have to make it across 1,000 kilometers of desert in 40 days (after which they would have quickly starved to death) was Google Earth.
They needed to know their precise position in the desert relative to the giant sand dunes, which you can only see using Google Earth’s satellite photos. Before the advent of publicly available satellite photos, walking across this desert would have been impossible. GPS alone wouldn’t have been enough.
The second item Joyce, Broccardo, and Harris needed was a strong, lightweight, easy-to-pull cart, so they could carry enough water for the journey. Obviously, they needed food, too. But the water was far more critical and heavy to carry. (You can survive for up to three weeks without food. But most people would only make it three days without water.)
They spent about three years testing various designs for carrying enough water. The key to success was using mountain bike tires on their cart, rather than wide full tires, which were too difficult to pull through the sand.
And finally… to make sure they had continuous access to Google Earth, they needed to use a solar-based charger to power up a satellite phone. They lost the charger on the 10th day of the trip. So one of them had to turn around and follow their tracks for 25 kilometers to find the charger before it got dark. Without it, they probably would have died. Imagine trying to find that charger… before dark… in the desert… by yourself… knowing that if you couldn’t find it, you and your friends would probably die.
So what the heck do three crazy South Africans hiking across a giant desert have to do with investing? It’s obvious (to me).
For most individual investors, the process of trying to manage their savings in the stock market is a lot like trying to cross the Rub’ al Khali desert on foot. You have few landmarks to guide your way. And there are lots of ways to die. Most people don’t make it.
Learning the story about the guys crossing the desert, I started thinking about the most important things investors need to understand if they’re going to be successful in the stock market.
I’m not talking about the obvious stuff… like the way dividends compound returns or the time-value-money formula (which explains that your returns will be driven by how much time your investments have to compound and how much money you save).
I’m not talking about the more advanced, but still simple, concepts like position sizing, trailing stop losses, and avoiding taxes (where possible).
It’s not that these things are unnecessary. They’re critical. But they’re like shoes, hats, and sunglasses when you’re crossing a desert. Nobody would go without them, and they really don’t require much foresight or wisdom. Instead, I wanted to answer two more difficult questions…
What are the three things every investor in common stocks must know to succeed, but that you believe most people don’t know how to do? Where is the greatest gap between the value of knowledge and the inexperience of most individual investors?
I thought about these questions for a long time. Here’s my list…
The No. 1 Thing Every Investor Must Know To Succeed
The most important thing for investors to understand about investing in stocks is simply what kinds of businesses make for great investments and how to properly value these kinds of businesses.
You can think of this knowledge as your personal Google Earth for crossing “the desert” of investing. Knowing how to recognize great businesses and what they’re worth is like knowing where the sand dunes are and how to get past them.
Here’s an example of what I mean: Do you think coffee giant Starbucks (SBUX) is an expensive stock at around $100 per share today? Why or why not?
If you can answer this question within 30 seconds by looking at a few key statistics, you’re ready to cross the desert. If you can’t… you’re not ready. You have to power up your satellite phone and spend more time studying your maps.
If you have no idea whether Starbucks is expensive or cheap, don’t worry. You’re not alone. Judging by my experiences with wealthy and business-savvy subscribers, I estimate that fewer than 10% of our readers really understand these concepts.
Without this knowledge, you can’t be successful as an investor. Not for long, at least. But that’s why I’m writing to you today.
The No. 2 Thing Every Investor Must Know To Succeed
The second thing I know you must have to “cross the desert” successfully is a strategy that will continue to make you money even when you’re wrong about the big picture.
When we grow worried about a serious crash in stocks, we close some of our long positions. And we hedge our exposure to the market by selling short (betting against) some stocks.
But we don’t sell everything. And we don’t move to a 100% short portfolio. (In other words, we aren’t “all in” on betting that the market will fall.) As a result, we’ll do well even when the market defies our expectations.
The lesson is… you don’t ever want to bet the farm on any particular outlook (or any particular investment recommendation). That’s a hard idea for most investors to understand and implement…
When events in the world spook individual investors, they tend to pull out of stocks completely. They generally do so at the worst possible time. You have to learn how to make money even when you’re wrong about the market as a whole. And you have to follow your strategy… even when it’s scary.
The No. 3 Thing Every Investor Must Know To Succeed
The last thing I think most individual investors either never learn or only learn the hard way after several big beatings is to never, ever chase what’s “hot.“
Investment “mirages” will cost you almost every time. It takes a lot of discipline to stick with great businesses that you can personally understand. It takes discipline to buy them when you can get them at a reasonable price. It takes discipline to follow your position-size limits.
When a great new business comes along – like online auctioneer eBay (EBAY) in the early 2000s – learn to be patient. Follow it for years, and buy it when it comes into your range.
If you had bought eBay back in December 2004, you’d have done great. Factoring in shares of PayPal (eBay spun off PayPal to its shareholders in 2015), you could have pocketed hundreds-of-percent gains on your investment. Sure, eBay was a great business with a huge “moat.”
Nevertheless, investors who chased after eBay while it was “hot” saw their investments decline as much as 80% by early 2009. It was far better to have bought it for less than $5 a share once it was trading for a reasonable price.
So again, I believe there are three things every investor in common stocks must know to succeed. If you can follow these ideas, you’ll be well on your way to crossing the desert…
1. Know what kind of businesses make for great investments and how to properly value these kinds of businesses.
2. Use strategies that will continue to make you money even when you’re wrong about the big picture.
3. Never, ever chase what’s “hot.”
Porter & Co.
Stevenson, MD
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