The Secrets of Today’s Most Successful Investors

October 21, 2021

The investing markets are in the midst of one of the longest bull runs of all time. Since the lows of 2009 – when the S&P 500 hit a dismal 666 – the market is to date up more than 300%, putting its 10-year trailing return of 15% in the 94th percentile since 1880, according to Goldman Sachs. The typical 10-year trailing return is closer to 9%.

Not only is this one of the best markets in history, but it’s far and away from the best market that anyone alive today has seen in their lifetimes.

Naturally, not everyone has seen all of the upsides from this. Some investors simply do better than others, and the gains that those at the head of the class have seen have been truly impressive.

What’s the difference between these successful investors and the rest of the retail investment crowd? Typically, it comes down to tactics and how they think about and execute their investments. They aren’t smarter than the rest of us, they simply know how to play the game. Here are a few of the ways they do it.

Buying Value

Warren Buffett is one of the best-known value investors out there today, preaching the mantra that any investment is only worth the difference between what you pay for it and its true value. It’s a lesson he learned from his mentor, Benjamin Graham.

That’s the underlying theory behind value investing – it’s all about determining how much an asset is truly worth. Then, with that information in hand, you look at the price being asked for that asset in the market. If it’s below the true value, you invest. If it’s above, you don’t.

Once in, though, you simply sit back and wait for the market to get around to pricing it to true value, and you collect your profits.

Buffett has done this over and over (and over) again in a range of industries, from railroads to insurance, to food & beverage and more, always shopping for value above all else. That’s how he undercovers his big wins.

Concentrate on Winners

For most retail investors, the mantra for years has been focused on diversification. By building a diverse portfolio that’s spread across a number of different asset classes – large-cap stocks, small-cap stocks, international equity, bonds, real estate, cash, etc – investors should be able to spread out their risk of loss while also getting in on most of the potential upside when those holdings appreciate.

But that’s more of a risk management strategy. Professional investors think bigger, knowing that by concentrating their assets in one or two high-potential classes they’ll be more likely to pocket big gains when those holdings grow.

Elon Musk did this when he was still at PayPal. Now best known as the billionaire founder of Tesla (and a number of other companies), Musk didn’t start out wealthy. Rather, he took his earnings as a co-founder of PayPal back in the 1990s and drove much of it back into PayPal’s own stock. His wasn’t a diverse portfolio; it was highly concentrated. Fortunately for him, that turned out to be a good move, as the stock grew exponentially and Musk emerged a billionaire.

This can be a very risky strategy, of course. Had PayPal flopped, Musk would have effectively lost everything.

Investing in Alternatives

Of course, not everything in investing is about the stock and bond markets. Many successful investors these days are also looking beyond the usual suspects and finding value in alternative investments as well.

According to Blackrock, alternatives are “investments in assets other than stocks, bonds and cash, or investments using strategies that go beyond traditional methods, such as long/short or arbitrage strategies. Since alternatives tend to behave differently than typical stock and bond investments, adding them to a portfolio may provide broader diversification, reduce risk and enhance returns.”

Because stocks can be great during periods of economic growth, returning multiple times their original value, but can give up much of that value during times of pullback. Bonds, on the other hand, don’t grow as quickly as stocks but can offer investors a measure of downside protection since they continue to pay reliably even during a recession.

Alternative investments are important for investors who want to grow their investment returns in any market while simultaneously protecting their portfolios. The list of alternative investments can be long, including just about any investable asset, such as: Hedge funds, private equity funds, commodities, real estate, collectibles (such as art and antiques), venture capital, and more.

And these assets can be quite powerful. Yale University famously committed a large portion of its endowment to alternative investments, particularly focused on private equity holdings, in the 1980s, and has to-date seen impressive results. In 2014, for instance, it saw returns greater than  20% from this approach.

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