The Capitalist Investor - Episode 62

What should you implement in your day-to-day investing? What are some key things you can do to improve your probability of successful investing? In this episode of The Capitalist Investor, we share six actionable lessons investors can take and implement now. Don’t miss it!

Outline of This Episode

  • [1:42] 6 Actionable Lessons for Investors
  • [2:28] Lesson #1: Nobody ever went broke taking a profit
  • [5:05] Lesson #2: Take calculated risks
  • [7:15] Lesson #3: Play with the house’s money
  • [9:05] Lesson #4: Excesses are never permanent
  • [10:48] Lesson #5: Know your exit strategy
  • [12:33] Lesson #6: Above all—stay disciplined

Lesson #1: Nobody ever went broke taking a profit

If you were fortunate enough to get into GameStop at $20—but watched it hit $400 AND come back down—you left a lot of money on the table. You should have set a point to take out some profit. Taking a profit is a great way to close out a trade in the green.

When GameStop was around $350 a share, the guy running the Reddit thread was worth $45 million. Do we think he sold any along the way? It boils down to a question of loyalty. The group believes if everyone holds, things will work out just fine. But the only ones making money are those that are double-crossing the ones they’re pretending to be loyal to! We hope people took profits along the way.

Lesson #2: Take calculated risks

What do we mean by calculated risks? Buy when others are fearful. When has that not worked? The word calculated is the most important in that statement. Buying something—like GameStop—when everyone else is isn’t a calculated risk. You did no calculation at all. That’s where a lot of people will lose their shirts. Do your homework. The people that will get hurt are those that didn’t do their homework and showed up late to the party.

Lesson #3: Play with the house’s money

If I invest $50,000 into a specific security and it goes to $150,000—that’s a great return. When you see a runup like this, take your $50,000 out and only play with the $100,000. That way it’s only your gains at risk. If you lose 20% in a day, you can stomach it because you already got all of your investment back.

Derek points out that the most overlooked aspect of investing is opportunity cost. Let’s say you only have $100,000 to invest and $50,000 is in one stock you’re emotionally attached to. What happens with the rest of the market while you’re waiting for one stock to go up? You’ll miss out on numerous opportunities.

Lesson #4: Excesses are never permanent

In 2001—when the tech stock valuations didn’t make sense—the excess disappeared pretty quickly. The stock price and its true intrinsic value will only vary for a short period of time. The market will correct. We hope GameStop survives, but it’s not how video games are purchased anymore. It’s not a $10 or $20 billion company. It’s valuation will not stay that high and it’s only a matter of time.

Lesson #5: Know your exit strategy

You need to begin with the end in mind and know your exit strategy. Price matters. For us to buy a stock, we have to love their growth story. We need to love the fundamentals of the company and make sure they’re priced properly. We are not going to overpay for a stock. So we wait. It either falls into our lap, or we miss it. But if we enter into that position, we have a hard and fast rule for when we exit. What is your rule? Your rule informs you when to execute a sell order. Reddit investors should be doing this. You shouldn’t blindly go in.

Lesson #6: Above all—stay disciplined

Set price targets. There are always great companies out there. It doesn’t have to be an all-or-nothing position. You can take profits and play with the house’s money. Stocks never used to double in two weeks. 2020 was a weird year. 2021 might be the same. If you show up late to the game, you might still win. It’s momentum on steroids. But eventually, it will end, so you must stay disciplined.

Stay invested and don’t time the market. Timing the market is a fool’s game. Eventually, it won’t work and you could be starting over. If you were fully invested in the S&P 500 from January 1st, 1995 to the end of 2020, you got an 8.4% return. If you missed the five best days over those 25 years, you’d only see a 6.5% return, If you missed the 10 best days, you’d see a 5.2% return. If you missed 40 days over that time, you’d be -0.3%. It’s a strategy that does not pay.

Take these six actionable steps and implement them now. Then build a more robust plan for your investing strategy.

Resources & People Mentioned

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Show Notes by

Keep Listening to The Capitalist Investor:
Episode 15:
Spending Strategies in a Bear Market, Ep #15
Episode 31:
Handicapping the 2020 Election, Ep #31
Episode 47:
11 Investments in Your Home That Pay Off, Ep #47
Episode 63:
Jeff Bezos and Amazon: Past, Present, and Future Ep #63
Episode 79:
7 Ways Biden Plans to Tax American Families (Part II), Ep #79
Episode 95:
5 Beaten Down Stocks to Buy on the Dip, Ep #95
Episode 111:
Special Episode – Talking Energy with Daniel Turner, Ep. #111
Episode 127:
Retail Earnings Tank & What The Heck is Greenflation? Ep. #127