4 Lessons I've Learned From Studying Super Investors
And how it has impacted my personal portfolio
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We have covered 12 super investors on the Chit Chat Stocks Podcast:
Dev Kantesaria (released last week)
95% of these episodes are timeless content. If you’ve ever been interested in how these legends invest, give them a listen. We will eventually end this series, but there are still some greats we can build an insightful episode on (George Soros and Chris Hohn coming up later this year).
By doing these episodes we aim to learn from the investing greats, sharing our lessons along with our listeners. I have personally evolved my investing style after recording some of these episodes.
Here are four overlapping lessons from these super investors I have applied and want to apply on my investing journey.
Thinking independently
Every investor on this list invests by thinking for themselves. The goal is to not follow the crowd, but beat the crowd. And you cannot do that by investing like everyone else.
From Michael Burry scouring screeners for obscure securities trading at 0.5x book value to Peter Lynch finding La Quinta after staying a night at one of its hotels to Li Lu embracing investing in China when everyone was afraid of the country, these super investors do not let general consensus dictate their actions.
In fact, when the crowd is against your decision, all the better. That means the stock is probably that much cheaper. Thinking for yourself and ignoring what the financial media (wait, does that mean us?) blares at you on a daily basis will help your investment returns. Chasing the crowd will only lead to disappointment.
Tone down the flood of Twitter, Substack, and finance videos chasing the hot trend of the moment. Find an opportunity you can build conviction in yourself and invest regardless of how stupid everyone says you are.
Be immune to criticism. Don’t borrow conviction. Invest in what Nick Sleep calls the businesses you have a “deep understanding” in, even if nobody else understands.
Sizing up winners (and letting them run)
Proper position sizing is vital. Most investors are overly diversified compared to super investors. If a stock is your #1 idea and a fantastic risk/reward, why should it be just 1% of your portfolio?
It should have a much larger allocation.
Li Lu loaded up on BYD and Kweichow Moutai. Dev Kantesaria has made Fico a 30%+ position. Norbert Lou’s early returns were almost entirely driven by his purchase of NVR.
If you have a can’t-miss idea with low risk, don’t be afraid to size it up to a big position.
And, you need to let your winners ride. This is a theme across every single investor we studied (except maybe Burry and Druckenmiller, they are a bit more quick triggered).
Even if a stock is becoming 10%, 15%, or 20% of your portfolio, that is likely because the business is proving itself to be phenomenal. Why trim or sell off an incredible business?
David Gardner has recommended, bought, and held Netflix as it has turned into a huge winner for the Motley Fool stock picking service (many people have a negative opinion of the Fool, but it’s strategy has been time tested to beat the market). Same can be said for Nvidia and Amazon.
The hardest part of Gardner’s approach is not finding stocks to buy. Using his criteria, an investor may invest in 10 - 15 new stocks a year, getting a lot of shots on goal. That’s easy. It is holding onto the big winners through the ups and downs as they become huge positions in your portfolio that is difficult.
As Gardner says:
“Let your winners run. High.”
Look off the beaten path
Obscurity, special situations, and hidden gems are a hallmark of some of these super investors. Joel Greenblatt has a whole book dedicated to them.
Opportunities can arise off the beaten path because the crowd either:
a) Doesn’t want to spend the time to learn a complicated, one-off situation
b) Has no idea the opportunity exists
c) Is uncomfortable investing in something non-standard
Peter Lynch tells investors to NEVER invest in the hottest trend of the day. Should you really be chasing Nvidia stock at all-time highs? Palantir? Look yourself in the mirror and ask if any of these investors would recommend buying those two stocks right now. If CNBC can’t stop talking about it, you probably shouldn’t be buying.
Joel Greenblatt made his money through mergers/acquisitions, spin-offs, and other special situations. As did others on this list. You can make money by buying assets that others are barred from owning or won’t take the time to understand.
Management AND business models matter
The people who run the businesses in your portfolio matter. Way more than investors give credit for.
A bad executive team can burn you with bad acquisitions, ill-timed buybacks, or undisciplined capital spending. Sharp executives will do the opposite.
The best case studies from these super investors come from a combination of good management and business models. Most of us have learned about competitive advantages, which many of these investors focus on. Fewer of us focus on the combination of a good management team and a competitive moat. That is a super power in the stock market.
How has this impacted my personal investing?
I have made a few changes to my personal investing after studying these super investors. I already had learned (but still need to consistently internalize) the importance of independent thinking and competitive advantages. This is something most even hobbyist investors know.
The largest change I have made is position sizing. Today, 50% of my portfolio is in three stocks: Nelnet, Coupang, and Remitly Global. Three stocks we have covered at length on the podcast and this newsletter. My confidence in these stocks has risen, and I want to size them up properly to reflect this extreme confidence (they have also grown into larger positions over time). Plus, my portfolio is small enough that I will hopefully deposit more money into the account over the next five years then the entire account size today.
I now believe it is more harmful to over-diversify as opposed to over-concentrate as a young investor not using leverage. The upside I am potentially giving up if I am right but not sized correctly vs. the downside if I am wrong is not evenly weighted. A stock can only go down 100%. But if one of these three stocks is a ten bagger, it could be life changing financially for me.
The second lesson I have tried to internalize is betting on management even if other parts of the business make you a bit uncomfortable. This is how I came to invest in Oscar Health, my most recent stock purchase.
In the coming weeks, expect more podcast episodes including stock research reports, personal portfolio updates, and (no spoilers!) an interview with one of these super investors. Of course, our weekly commentary on the Investing Power Hour will continue.
Follow the Chit Chat Stocks Podcast on your podcast player of choice to never miss an episode.
-Brett
I'm highly concentrated as well -- about 10 holdings. I do wonder about the idea you mentioned regarding diversification being more dangerous than concentration. I have theory that's true in bear markets, but not necessarily true in bull markets.
Thanks Brett. Do you think you will be highly concentrated say when you are 50 or 60 years old? Great stuff as always