1. There are four steps to investing: (i) find the right company to invest in, (ii) buy it at the right price, maximize upside potential, and (iv) manage risk: 

If someone knocked on your door today and asked you, “would you want to buy my family business from me?” how would you approach that decision?

Well, first you’d want to make sure that it was a good business. Then you might want to know if they were selling the business to you at a fair price. You would also probably care about the risk-reward trade off of buying the business.

Sounds logical, right?

That’s because it is.

We can use the same approach we can use to invest in stocks. (After all, stocks are just pieces of businesses). Thus, The Take Stock In This system has four steps to figure out if a company is worth investing in:

 

1. Find the right company to invest in.

2. Decide if it trades at the right price.

3. Maximize upside potential.

4. Manage risk.

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2. Outperforming the market requires you to concentrate your portfolio in the top 2% of stocks in the market

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In 2016, a business professor at Arizona State University published a research paper with a bold question: “Do stocks outperform Treasury bills?” 

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The idea sounded absurd to everyone. “Of course stocks outperform Treasury bills!” The notion of it being a question at all was so asinine that The New York Times ran an article about his research paper. 

 

But it wasn’t as absurd a question to ask as you might think.

 

People say that “stocks” generally go up over the long term.

 

That isn’t exactly true.

 

Consider that more than half of companies in the S&P 500 have delivered negative returns within the past 100 years . . .

. . . or that nearly three quarters of stocks underperformed the S&P 500 between 1997-2017.

. . . or that 58% of stocks underperformed three-month Treasury bills between 1926–2016.

 

You might be wondering, “What the heck? How can so many companies underperform the market? How can the overall market go up, but almost all the companies in the market go down?”

 

It turns out that returns are skewed. In other words, a small minority of stocks perform exceptionally well and drive the majority of overall stock market returns. 

 

A striking example of this is that only five stocks (Apple, Exxon Mobil, Microsoft, General Electric, and IBM) accounted for 10% of all the wealth created by the entire stock market from 1926–2016. Similarly, only 4% of stocks accounted for all the wealth created by the entire stock market over the same period.

 

There are two important implications.

 

First, you have to start assuming that each company within the S&P 500 is a bad investment—rather than a good one. Most people assume that most companies in the S&P 500 will perform well over the long term. Hey, these are some of the strongest companies in America! Why wouldn’t most of them do well over the long term? But the truth is that less than 5% of those companies will earn strong returns over the long term.

 

Second, you have to be picky as a small minority of stocks drive a majority of returns. You must only invest in the top 2-4% of companies that you research if you want to get into the small minority of stocks that outperform.Never pull the trigger on an investment unless you are certain it’s among the top 2-4% of companies in the market.

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Two variables matter for deciding whether a stock trades at the right price: 1) how much it costs to invest in the company and 2) how much profit it earns

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Imagine your friend runs an automotive dealership. He is trying to sell his company for $1 million so that he can work on other projects. You look at the financial statements of the dealership, and you notice something interesting. For the past five years, it’s constantly earned $500,000 in profits.

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Should you buy the company for $1 million? 

 

Heck, yeah!

 

You’ll earn a 50% return on investment every single year! You are paying $1 million up front and getting back $500,000 every single year! That’s 50% per year—much higher than the S&P 500’s 8-12% returns per year.

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Notice how you made that decision.

 

It was based on profits. 

 

Since you expected the business to make lots of profit relative to its purchase price, you concluded that it was a good idea to buy.

That’s how you make every financial decision.

 

When someone buys a rental property, real estate investors ask themselves, “How much does it cost to buy this property? How much rental income will this property help me earn?”

 

When a student pursues a degree, they ask themselves, “How much is tuition? How much additional income will this degree help me earn?”

 

When an entrepreneur starts a business, they ask themselves, “how much money does it cost to start the business? “how much profit can I make from this business? 

 

You want to follow that same approach in the stock market. Ask yourself, “how much does it cost to invest in this company? How much profit will this business make?” 

 

But people rarely make investment decisions like that in the stock market.

 

Do you?

 

Chances are you don’t.

 

In Take Stock In This, we discuss how to know when it’s the right time to buy a stock based on two variables: (1) how much it costs to invest in the company and (2) how much profit it earns.

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Don’t make it your goal to outperform the market by 1-2%. Make it your goal to build a seven-, eight-, or nine-figure net worth through the stock market.

 

Back in the early 1900s, there was a retiree by the name of Mr. Garrett. He was perhaps someone who was considered unqualified to manage his own money. As the former VP of Public Relations at General Motors and a former editor for the New York Post, he didn’t come from a background related to finance or investments.

 

But he had a unique strategy. 

 

Unlike the typical individual who aimed to outperform the market by 1-2% per year, he aimed to crush the overall market and build massive wealth in it. In the following years, he found two companies he believed had the potential to deliver massive returns: Haloid and Telepromopter. He bought 133,000 shares of Haloid at $1 per share and 50,800 shares of Teleprompter at $0.75 per share. 

 

Both investments turned out very well. Teleprompter went on to grow over 30 times, and Haloid eventually became a company called Xerox. The success of both investments (and others as well) pushed his net worth to just over $63 million in today’s money.

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You can become really rich in the stock market.

 

Like, you can become a multi-millionaire if you have particularly good stock picks.

 

Not many people realize that.

 

People think that the best they can achieve is outperforming the market by 1-2%.

 

But the truth is that you can become a multi-millionaire if you play your cards right.

 

Warren Buffett was once a regular person like yourself, but he became a billionaire by investing in stocks.

 

Bill Ackman was once a regular person like yourself, but he became a billionaire by investing in stocks.

 

Charlie Munger was once a regular person like yourself, but he became a billionaire by investing in stocks.

 

Why can’t you get rich as well? Don’t make it your goal to outperform the market by 1-2%. Make it your goal to build a seven-, eight-, or nine-figure net worth through the stock market.

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Don't try to pick winners - just avoid the losers:

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There are two ways to make money in the stock market: 

1. Pick winning companies.

2. Avoid loser companies. 

 

You would expect each of those to be equally important. But that isn’t the case. To beat the market, it’s more important to avoid losers than to pick winners . .

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In the mid-1980s, Howard Marks joined TCW Group. He was in charge of running the firm’s distressed debt fund. It was one of the first distressed debt funds from any major financial institution at the time.

 

Just one issue.

 

It’s hard to pick which distressed companies to invest in. After all, it’s not easy to predict the near-bankrupt ones that will recover.

 

But Marks had an interesting strategy: don’t try to predict which distressed companies will succeed—just avoid investing in the ones that will fail. In other words, prioritize avoiding losers over picking winners.

His strategy performed so well that the firm promoted him to Chief Investment Officer. He later went on to become one of the best distressed debt investors in the world. 

 

All that success came from avoiding losers, rather than trying to predict winners. 

 

Have you ever heard of the concepts known as “a winner’s game” and “a loser’s game”?

 

A winner’s game is when someone wins from “hitting winners.” For example, in a tennis match between two expert tennis players, the player who places the best shots that the opponent can’t return will win.

 

A loser’s game is when is someone wins by avoiding losers. A tennis match between two amateurs is an example. The amateur who wins isn’t the one who places the best shots. It’s the one who avoids screwing up and just gets the ball back over the net.

 

It turns out that the investing is actually a loser’s game rather than a winner’s game. The way you make money isn’t by finding the next hot stock. It’s by avoiding the duds.

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Buy companies so good that no one else can compete against

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In the early 2000s, Warren Buffett didn’t want to invest in a single tech stock. He didn’t invest in Yahoo. He didn’t invest in Pets.com. He didn’t invest in ebay.com. And he ignored many other tech companies as well. He just said that he “didn’t understand” those kinds of businesses.

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To a certain extent, that decision made sense.

 

At the time, tech stocks were going bankrupt left and right. Myspace lost to Facebook. Yahoo lost to Google. Nokia lost to Apple. When researching the next technology company, Buffett wondered, “what if [insert tech company name] becomes the next Yahoo? What if a new company enters the industry and overthrows it?” 

 

This was the heyday of the dotcom bubble. So it was probably a good thing he steered clear of tech. That simple decision—saying no to every single tech stock he saw—saved him billions of dollars and made him look like a genius on Wall Street.

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But then something surprising happened.

 

In 2016, Warren Buffett started building a $30 billion position in Apple. 

 

Everyone was shocked. 

 

“Why invest in a technology company?” they asked. Thousands of articles were published with titles along the lines of “Warren Buffett Used to Avoid Tech Stocks. Now He Loves Them. What’s changed?” 

 

In a CNBC interview, Buffett provided answers to the public. Apple, he said, was different than other tech companies. Its customers were “very, very, very locked in, at least psychologically and mentally” to the “product ecosystem,” Buffett said. Put another way, no one could compete against it.

 

That was a characteristic that other tech companies didn’t have. 

 

Not Yahoo.

 

Not Nokia.

 

Not Pets.com.

 

Apple’s ecosystem was so good that no one could really compete against it.

 

In the end, Buffett’s investment in Apple soared more than 500%, making it one of the “best investment decisions he ever made,” according to the Wall Street Journal. 

 

Warren Buffett didn’t feel comfortable owning any technology because they were easy to compete against. But as soon as he found one technology company that couldn’t be competed with—Apple—he pulled the trigger. The lesson? The best investors like Warren Buffett only invest in companies that are so good that the competition can’t displace them.

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Never assume big companies are safe companies​​

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In 1994, Jim Collins wrote a book called Built to Last. It had a list of 18 companies that he believed would stand the test of time. 

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Those 18 companies were the Amazons and Apples of the 1990s. They were the best of the best companies within the major index funds. Everyone expected these companies to perform well.

 

But here’s the interesting thing. 

 

Half of his 18 companies performed terribly:
 

1. 3M – Has lagged the S&P 500 by more than 600% between the time Collin’s book was published and now.

2. Citicorp – Has been the second-worst performing stock in the S&P 500 Index over the past 25 years as of April [2023],” according to Investopedia.

3. Ford – Hasn’t gone up one penny in the 30 years since Built To Last came out.

4. General Electric – Produced virtually no share gains between 1994 and 2018 due to internal company struggles. 

5. Hewlett-Packard – Has underperformed the S&P 500 by about 400% from 1994 to 2024 .

6. IBM – Has underperformed the S&P 500 by about 600% from 1990 to 2024.

7. Motorola –  Was down 20 years after Built To Last was published, where the market was up several hundred percent. 

8. Nordstrom – Fell 70% over the past 9 years.

9. Sony – Has earned only 4% returns since 1994, massively underperforming the broader market.

 

These were the “Amazons and Apples of the 90s.” But none of these companies are successful today.

 

This illustrates an important truth about the business world.

 

Even the very best fall. If history repeats itself, many companies that are market leaders today won’t be market leaders tomorrow. That could include companies like Amazon and Google.

 

Have you ever thought about that?

 

Most people think that big companies are safe companies.

 

They assume that Apple is a safe company because it’s a leading phone company.

 

They assume that Walgreens is a safe company because it’s a pharmacy chain.

 

They assume that Netflix is a safe company because it’s a streaming service.

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But the truth is that history tells us that big companies aren’t safe investments. 

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Let me share two personal examples.

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Back in 2016, General Electric was known as one of America’s great companies. Run for many years by the legendary Jack Welch, it was one of the leading manufacturers across the United States. 

 

I didn’t think anything could go wrong with the company. Every house I went in to was filled with their appliances. It felt like they’d practically invented electricity. “It’s General Electric!” I thought. “What the heck could possibly go wrong with General Electric?”

 

Fast forward a few years. The company is struggling with a restructuring effort, and its stock price is down more than 70%. Even worse, it was dropped out the S&P 500 due to the decline in its market capitalization.

 

It seemed like a perfect investment. It was “the Amazon of the manufacturing” industry. 

 

But it turned out to be a horrible investment opportunity.

 

During the bottom of the Covid-19 pandemic, Walgreens seemed like a good investment opportunity. Its stock was at a five-year low price, making it seem like a cheap opportunity. In addition, it was a market leader in the pharmacy industry. If anything, it was the “Coca-Cola of the pharmacy industry.”

 

“What could go wrong?” I again thought. 

 

Fast forward to today. The stock has fallen more than 75% from its Covid-19 lows as the company faces internal restructuring challenges. Apparently, things can get worse after a pandemic.

 

Both General Electric and Walgreens appeared like perfectly good companies. Most people would have considered these as some of the best companies in the world. Yet, they’ve turned out to be sour investments.

 

You shouldn’t assume Walmart is a safe investment even though it’s one of the best companies in America. 

 

You shouldn’t assume Netflix is a safe investment even though it’s one of the best companies in America. 

 

You shouldn’t assume Walgreens is a safe investment even though it’s one of the leading pharmacy chains in America.

 

Jeff Bezos once said that “If you look at large companies, their life spans tend to be 30-plus years, not a hundred-plus years.” Generally speaking, that’s true. The life span of large companies tends to be pretty short in the grand scheme of things. Statistically speaking, most of the leading companies today won’t remain market leaders tomorrow. 

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First pick the right industry. Then pick the right company - not the other way around 

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The year was 1946. Walter Schloss had just returned from the war. Unlike millions of his comrades who passed away in combat, he had an opportunity to live a normal life. Specifically, his dream was to get a job on Wall Street as a stock picker.

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But that dream seemed far-fetched to many. 

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For starters, he didn’t have a college education. In addition, he didn’t have a network to break into the industry. As one person said, he “had no connections, and practically no one on Wall Street knew [about] him.”

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Most people would have given up.

 

But he did something unusual.

 

He took a course taught by Benjamin Graham that touted a simple investment strategy: buy stocks below their liquidation value. In other words, buy a company that has $200 million of cash in its bank account when it trades at a $100 million purchase price. It was a way to buy stocks for 50 cents on the dollar.

 

When Walter Schloss implemented that strategy, he performed very well. He built a portfolio of more than one hundred companies that traded for 50 cents on the dollar. From 1956 to 1984, his investment fund earned 21.3% returns, putting him on the levels of Warren Buffett. 

 

You might assume that Walter Schloss was some kind of investment genius. He must have had some special unique investment ability that allowed him to be successful. 

 

But that isn’t really the case. 

 

There was a whole class of people in Benjamin Graham’s course who had the same type of success as Walter. Just to name a few:

• Tom Knapp, the founder of Tweedy Brown, which earned 20.0% returns from 1968-1983

• Bill Ruane, the founder of Sequoia Fund, which earned 18.2% returns from 1970-1984

• Warren Buffett, the founder of Buffett Partnerships, which earned 23.8% returns from 1957-1969

 

These people weren’t savants. 

 

It just became easier to pick stocks after learning the right strategy. After all, if you have a repeatable formula to beat the market, it’s not difficult to implement it year after year to make money. 

 

During the 1950s, it wasn’t difficult to succeed at investing if you had the right strategy.

 

Now contrast the finance industry to the steel industry.

 

In the 1950s, there was a very smart MBA student at Columbia University. He was the president of several major clubs on campus. He had a reputation among the student body for being a “type A workaholic.” Everyone expected him to become successful after college. 

 

But he made a grave mistake.

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He got a job running a steel plant after college. The work was dangerous, dirty, and difficult. Profits were unpredictable due to volatile commodity prices. And worst of all, it was almost impossible to find a winning strategy to undercut other steel plants.

 

So he never became successful in the steel industry. 

 

Even the best and the brightest people would have failed here simply because the industry’s conditions were too difficult. By contrast, it was easy for even someone without a college education to get rich in the finance industry with the right strategy.

 

So, sometimes becoming successful is about being in an industry where it’s easy to succeed in the first place. 

 

The same is true for companies.

 

If you’re trying to get rich in the stock market, you need to start in the industries that support you making money. 

 

Imagine it’s 2004. You’re picking between investing in the four major U.S. airlines: Southwest, United, American, and Delta. 

 

How would you decide which airline to invest in?

 

Perhaps the one poised to experience lots of sales growth. In that case, you might want to bet on Delta, which will triple sales.

 

Perhaps the one with the strongest competitive advantage. In that case, you would want to bet on Southwest, which is known for having a low-cost advantage.

 

Or perhaps the one with the highest gross margin by the end of the period. In that case, you would want to bet on United, which will earn gross margins of 34%.

 

Or maybe even a diversified portfolio of all four airlines. Why not? You have each of their financial statements for the next 15 years, so you know that each of them will at least double or triple their sales volumes.

 

But here’s the catch.

 

None of them actually made sense to invest in. 

 

If you invested in any of the major airlines over a 15-year-period from 2004 to 2019, you would have underperformed the market. American Airlines only grew 23% over the period, compared to 189% for the S&P 500. Delta Airlines and United Airlines underperformed the S&P 500 by 16% and 34%. The only airline that outperformed was Southwest Airlines, but by just a couple percent annually.

 

In addition, virtually every single one of the hundreds of airlines in all of America have performed poorly throughout history, according to several studies. 

 

Contrast the airline industry with the credit card industry.

 

Not long ago, I was researching the major credit card companies: American Express, Discover Financial Services, and Visa. My initial feeling was that it wouldn’t make sense to invest in any of the major credit card companies. 

 

None of them had an edge over the competition. No one says, “American Express is much better than Discover Financial Services.” No one says, “Visa charges much lower fees than Mastercard.” If none of the credit card companies have an edge, how can they be a worthy investment? I asked.

 

But my conclusion couldn’t have been farther from the truth.

 

The reality is that nearly every single credit card company has performed well throughout history. In fact, many of them have even been some of the best investments in the entire stock market over the past decades.

 

If you bought Visa and Mastercard at the end of the financial crisis, you would have outperformed the S&P 500 by 9% and 7% per year, respectively.

 

If you invested in American Express at the same time Buffett bought it during the 90s, your investment would have grown more than 30x times to date.

 

Even if you invested in Discover Financial Services right before it crashed 70% during 2008, you would have still outperformed the market. 

 

The airline and credit card industries illustrate an important lesson: industry matters.

 

You can be right about the company, but you’ll still lose money if you’re wrong about the industry (airlines).But you also can be wrong about the company and right about the industry, and still make a fortune (credit cards). 

 

A study once looked at the performance of more than 3,000 companies. They wanted to understand what factors drive a company’s level of profitability. Does having a smart CEO drive a company’s success? Does company culture drive success? Or something else? What they found is that that industry matters more than anything else.

 

In fact, the study pointed out that the average software company outperforms the leading construction companies because the software industry is so attractive. As the study concluded, “it’s better to be an average company is a great industry than a great company in an industry.”

 

If someone found an investment vehicle that they knew would earn just 2% more than the S&P 500 every year, they would be excited to invest in it. 

 

But getting into the right industry can make as much as a 17% difference in returns per annum. (If you invested across the major airlines for the past decade, you would have earned -2.9% per year. By contrast, you would have earned 14.1% per year by investing across the major credit card companies. That’s a 17% difference. Every. Single. Year).

 

People get excited if a mutual fund can improve performance by 2% per year.

 

Yet no one gets excited if getting in the right industry can improve performance by 17% returns per year.

 

That doesn’t make sense. 

 

Don’t be the typical investor. Be different. Be smarter. Be better.

 

First make sure you’re in the right industry. Second, try to find the right company in that industry. Not the other way around. Never research a company without first asking yourself, “is this company even within an attractive industry in the first place?”

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Never buy a stock because its price will go up. Buy stocks for cash flow. 

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Let me tell you one of the greatest rags-to-riches stories of the 2010s.

 

There was a child who didn’t have the best upbringing. His father passed away when he was 10 years old. When he was in community college, his drug dealer jammed a pistol against his forehead, leaving him with a fractured skull and thousands of dollars in medical bills. Eventually, his mom kicked him out due to his drug addiction.

 

Slowly, he rebuilt his life. 

 

He entered drug rehab.

 

He got a job.

 

He married a beautiful actor.

 

And eventually he had enough money to become a real estate investor.

 

But there was no reason for him to become successful at real estate. He didn’t study real estate investing in college. He didn’t have a

mentor. He didn’t have any prior experience in the real estate industry. He didn’t have a lot of money. He didn’t know how to negotiate loan terms with the banks.

 

But he always followed the same exact formula for deciding whether a potential investment was cheap enough. Rather than asking himself, “will the value of this investment appreciate over time?” he asked himself, “will this investment produce lots of cash flow relative to its purchase price?”

 

He followed that approach for every single real estate property.

 

He would approach one property and ask himself, “will this property produce lots of cash flow relative to its purchase price?”

 

He would approach a second property and ask himself, “will this property produce lots of cash flow relative to its purchase price?”

 

He would approach a third property and ask himself, “will this property produce lots of cash flow relative to its purchase price?”

 

Each time he found a property that earned lots of cash flow relative to its purchase price, he purchased it and held it for the long term.

By repeating that approach for over a decade, he was able to build an investment firm that manages more than $4 billion dollars in assets. Today, Grant Cardone is a real-estate celebrity with more than 4.7 million followers on Instagram. And most importantly, his mother accepted him back into the family.

 

Cardone’s story illustrates an important lesson on investing: rather than making investment decisions based on price appreciation, make your investment decisions based on cash flow. As Grant says, “I never invest for appreciation . . . [I] do it for the cash flow.”

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Have you ever heard someone talk about “flipping real estate?” It’s when someone buys a piece of real estate to resell it at a higher price. Generally, it’s considered speculative because you never know what will happen in the markets tomorrow.

 

Interest rates could go up.

 

Fewer people might want to own real estate.

 

Another town might become more popular.

 

In fact, that’s how famous financial expert Dave Ramsey went bankrupt during 1988. He was buying real estate at a low price to resell it at a higher price. Initially, his speculations were profitable. But one day, his properties didn’t go up in value. That left him unable to pay his debts, forcing him to declare bankruptcy.

 

Conversely, investing in real estate involves buying a property for rental income or cash flow. The goal is to buy a property that will earn lots of rental income compared to its purchase price. That’s how Grant Cardone became successful. He bought properties that earned lots of cash flow relative to their purchase price.

 

It turns out that the way you become successful in the financial markets is by investing rather than flipping.

 

You can’t know whether any particular stock will be up or down tomorrow. 

 

Interest rates could go up.

 

A disruptive technology could be released.

 

The banking system could collapse.

 

A pandemic might occur.

 

The economy might enter a recession.

Inflation might cause costs to spike.

 

A terrorist attack could happen. 

 

So, you shouldn’t try to buy a stock because you think its stock price will go up. That would be speculative. What you should do instead is buy stocks for cash flow—just like you would when buying real estate.

 

In fact, real life financial decisions aren’t made by asking, “can this or that be sold at a higher price?” Instead, they are made by asking yourself, “will this asset earn lots of cash flow?” 

 

When a student decides to pursue a degree, they don’t focus on whether they’ll be able to sell a finance degree or an accounting degree for more. They focus on which degree will help them earn the most income.

 

When a McDonald’s franchisee opens a new location, their primary concern isn’t whether they can resell their location to another franchisee. Instead, it’s how much profit their restaurant will earn. 

 

But here’s the interesting thing.

 

No one seems to take that smart, simple approach, the one we apply to so many financial decisions in our lives—whether it’s going to college, buying a house—with them when they go visit the stock market. 

 

People hit the stock market, and suddenly all their thinking is driven by price appreciation.

 

People buy Nvidia stock because they think its stock price will go up. 

 

People buy Tesla stock because they think its stock price will go up. 

 

People buy Amazon stock because they think its stock price will go up. 

 

People say, “I should invest in Apple at its 52-week low since its price is most likely to go up from here.” Or they say, “I shouldn’t invest in Amazon because it’s at its 52-week high, so the price is unlikely to continue to go up.”

 

That’s called speculation, not investing. 

 

Change your approach. Don’t ask yourself, “will [insert company name]’s stock price go up over the long term?” Instead, focus on profits. Ask yourself, “how much money does it cost to buy this company? How much in profits will this company earn relative to its purchase price?”

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That’s what all successful investors do.

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Never buy a stock people expect to do well...

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Benjamin Stein and Zachary Sternberg were two college students with an interesting background. They founded a hedge fund in college called Spruce House Investment Management. It managed billions of dollars for prestigious clients, including Massachusetts Institute of Technology. 

 

As people who spent all their time “devouring Warren Buffett’s annual letters,” they wanted to become the next Warren Buffett.

In their first few years, they were very successful. They generated 18% returns after fees, compared to about 8% for the S&P 500. Their success was so unprecedented that they were even asked to contribute to an updated version of Security Analysis, a book written by Warren Buffett’s mentor Benjamin Graham.

 

But in 2019, they shifted their portfolio into several growth stocks, including Carvana and Wayfair, each of which they owned millions of shares in.

 

Initially, the stocks did very well.

 

Carvana went from $80 in 2019 to as high as $360 by 2022.

 

Wayfair went from $150 in 2019 to $340 in 2022.

 

“By mid-2021, [their portfolio] was compounding at 20% per year now, nearly twice as fast as the S&P 500,” according to the Wall Street Journal. As Benjamin and Zachary wrote: “In very short order we have been able to put Spruce House in the flow of some of the highest quality venture and growth equity opportunities.”

 

But then things changed.

 

Wall Street had ridiculously high growth expectations for each of these stocks. They believed Carvana would consistently hit triple-digit growth rates, and Wayfair would hit 40-50% growth every year. 

 

It’s almost impossible for any company to live up to such high expectations. 

 

Guess what happened?

 

One day, both of those companies failed to meet those high expectations.

 

When that happened, both stocks crashed. Carvana and Wayfair fell 98% and 90%, respectively. 

 

Those stocks—and other growth stocks as well—fell so much that Benjamin and Zackary lost two-thirds of their clients’ money by the end of the year, resulting in their fund being ranked as among the “Ten Worst Performing Hedge Funds,” according to Value Walk.

Benjamin and Zackary’s story illustrates a valuable lesson: never buy stocks that everybody expects to do well.

 

In the workplace, employees under-promise and overdeliver. Why? If an employee sets expectations unrealistically high, it becomes hard to surpass expectations (and hence make the boss happy). 

 

The same concept applies to stocks. The higher the expectations rise, the bigger the fall becomes when a company fails to meet them. If Wall Street has high expectations for a stock, it’s almost impossible for management to please investors. In other words, if a stock has high expectations, it’s hard for the company to overdeliver. The result is that the stock almost always underperforms.

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...Instead, buy stocks that nobody wants

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There was an investor who had a poor upbringing. His family lived on food stamps. He didn’t get accepted anywhere better than community college. His job was nothing glamorous. He was working as a manager for a retailer.

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But he had a unique interest in becoming rich through the stock market. He visited the library every week to watch videos of Warren Buffett giving speeches. He spent his nights reading books on investing to teach himself how to pick stocks.

 

Eventually, he felt comfortable in his own stock picking skills, and he opened a brokerage account to begin trading whatever money he had. The strategy he implemented was simple: buy companies that nobody else wanted.

 

He invested in Facebook when people sold off the stock due to regulatory headwinds that surfaced.

 

He invested in a soft drink company when nobody wanted to own because it was competing against Coca-Cola. 

 

And he invested in several semiconductor companies when nobody wanted to own them due to rising geopolitical tensions.

In the following decade, his stocks performed very well. A handful of his stocks climbed several hundred percent. He even had a couple stocks that climbed more than 1,000%. In short, his portfolio was full of winners. 

 

All that success came from buying companies when nobody wanted them. So if you want to get rich in the stock market, buy companies when nobody wants them. 

 

As Carl Ichan, who has a net worth of more than $4 billion, once said: “You got to buy [stocks] when nobody wants them. That’s the real secret [to investing]. It sounds very simple, but it’s very hard to do. When everybody hates it, you buy it. When everybody wants it, you sell it to them.” 

 

If the street has low expectations for a company, management doesn’t have to work very hard to beat them. So a stock has the highest chances of outperforming when expectations are at their lowest. 

 

Look for companies that people are avoiding like a fire alarm. Chances are they have very low expectations. Once you start digging deeper into them, you might find they’re at a bargain price with a significant chance of going up . . . a lot. What you’re looking for here is that “favorable surprise” that Howard Marks spoke of. 

 

Just look at some investments made by Warren Buffett. You’ll notice that many of his best trades were made when nobody else wanted to own the company. 

 

Buffett bought $5 billion of Goldman Sachs when no one wanted to own banks during 2008.

 

Buffett bought $38 billion of Apple when no one wanted to own the company due to slowing iPhone sales, but it became one of his best

investments of recent years.

 

Buffett bought $24.5 million of Geico in the late 1970s when no one wanted to own auto insurers because the industry’s profitability evaporated, but it became one of his best investments of all time.

 

When nobody wants to own a company for whatever reason—pandemics, bankruptcy risk, collapsing economic conditions—expectations will be at their lowest. 

 

These are the moments when you can make easy money. These are the moments when it’s time to buy.

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