I like to give Warren Buffett a hard time.
He says “buy fear.” I say “buy greed”…
He says “buy companies on sale.” I point out nobody has the access he does to figure out what’s a sale and what’s a trap.
But there’s one thing I can’t knock Buffett for: His integrity in the face of exuberant market conditions.
And so, I’ve tried to model my strategies after this approach my entire career.
Here’s what I mean…
How I Countertraded the Dot-Com Mania
My first bubble was in 1999.
I knew internet stocks were overvalued and in a dangerous bubble. But I also knew that a lot of money can be made in bubbles if you know what you’re doing.
In 1999, knowing what you’re doing meant day trading the big daily price moves — not buying every company slapping a “.com” on its name.
This was the golden age of day trading, before the SEC cracked down on it. There were no requirements for larger account balances to day trade. Anyone with $500 could day trade. Honestly, anyone with $50 could probably start day trading.
Exchanges even encouraged this, giving small investors special treatment. Orders of less than 100 shares received priority execution. And not just because the exchanges were being nice.
Each trade generated about an eighth of a dollar per share in commissions. That’s $0.125 per share, per trade. Safe to say, exchanges and market makers made tons of money from day traders during this “golden age.”
I quickly saw a profit opportunity in this system. And I exploited it for as long as that opportunity existed.
Day traders bought the open and sold the close. Most days, we saw big up moves at the open and weakness at the close.
I decided to do the opposite – buy the close and sell the open. That put me on the same side of trades as the market makers.
This was a great idea for a few months. It made me about 10% a month from December 1999 to April 2000. And I had a lot less exposure than most investors when the market turned that spring.
I wondered why everyone else wasn’t doing that at the time. Now I understand why. Most traders were caught up in the bubble.
Now, here’s where Buffett comes back into the story…
“What’s Wrong, Warren?”
It’s a challenge to remain objective and rational when everyone else is irrationally exuberant. Back in 1999, going against the view that dot-com stocks were headed to infinity and beyond often led to ridicule.
I did it myself, though thankfully I was too small at the time to attract attention. Others weren’t so lucky. And not even the world’s greatest investors were safe.
In late 1999, there was a cover story in Barron’s called “What’s Wrong, Warren?” It said Warren Buffett was doomed to mediocrity for not participating in the tech “boom.” The first sentence summarizes the argument, “After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch.”
He was facing his second-worst year of performance since Berkshire Hathaway got started. And it was largely due to his refusal to buy the overpriced tech names.
At the time, I understood Buffett would eventually be proven right. I also knew Buffett would have another time when he would struggle. And still more times when he would shine. Because that’s just the way markets work.
Buffett ignored that story. He’s ignored dozens of others since then. And he’s delivered astounding results in the long run because that’s what Buffett does. He’s not worried about the short run. He knows what his objective is. He works toward that. In doing so, he ignores the noise of exuberant market conditions and continues to provide value to Berkshire Hathaway investors.
He does this by looking strictly at value rather than day-to-day price moves. He believes stocks can be and often are mispriced. And he has the patience for any mispricing to correct itself.
I’m hardly a value investor, but I do understand the appeal of it. If you’re not the type to actively trade the markets, value investing helps you sleep well at night.
Sleeping well at night hasn’t exactly been easy lately, no matter if you’re a value investor or a day trader. But I’d like to introduce you to someone who has an idea to fix that.
Charles Mizrahi’s Big 10-Year Bet
My colleague Charles Mizrahi takes a get-rich-slow approach, like Buffett.
He recently told me he expects three stocks to 10X in the next decade. He’s going to buy them with $1 million tomorrow. And he’s giving everyone bold enough to join him the chance to buy them before he does.
Charles has been investing for almost 40 years now. There’s a high probability he’ll turn that $1 million into $10 million by 2032.
It also helps that he’s done this sort of thing before. Six weeks before the March 2009 bottom, Charles released a portfolio of “Inevitable Stocks” that have so far beaten the S&P 500 and turned every dollar invested into more than five.
If you signed up to watch Charles’ presentation on this investment last night, you already got the chance to find out what’s in his new Inevitable Portfolio.
For the sake of his subscribers, I can’t reveal them here.
But if you didn’t watch the presentation live, you haven’t missed out. You still have the chance to buy these names before Charles does.
Tomorrow, I’ll share a link that will give you one last chance to participate. Don’t miss it.
Michael Carr, CMT, CFTe
Editor, True Options Masters