Earning a rate of return that’s two percent higher—12 percent versus 10 percent—per year on a single $100,000 investment means the value of the investment grows to be $1.2 million higher after 30 years.
Small outperformance on your investments can add up significantly over time.
So, what does it take to outperform?
A lot.
It isn’t easy.
I’m going to outline a few table stakes here:
Ten Requirements
First and foremost, when investing in stocks, you need to view them as ownership stakes in businesses. They aren’t just ticker symbols that bounce up and down in price. They are businesses, with real operating results, and real cash flows that will dictate the values of those businesses over time.
Secondly, when investing in stocks you want to invest with a margin of safety. Pay less for them than they’re worth. Leave a margin for error. Because not everything will go as planned.
Thirdly, the stock market is bi-polar. Its mood swings violently from euphoric to depressed. Never let it dictate to you what something is worth. It is there to serve you, not instruct you.
Fourth, be rational—don’t give into the fear and greed of the market. Always keep your head, and keep in mind that it is long-term business results that dictate their values.
Fifth, stay disciplined. Wait for pitches you like. If there are no good pitches, don’t swing.
Sixth, have the courage of your convictions. If the market serves up good pitches, let it rip.
Seventh, superior investing requires second-level thinking. You have to think differently than the crowd.
Eighth, preparation is the key to success. You have to read and think and be prepared to act when opportunity comes knocking.
Ninth, you have to stray from the pack. You have to be comfortable thinking and acting on your own.
And tenth, you have to be flexible in your thinking, and willing to admit mistakes and adjust your thought process when facts change.
Philosophy
Sustainable outperformance requires the right philosophy.
Otherwise, you are upstream without a paddle. The current will carry you where it wants to.
Having the right philosophy and approach in investing your money, in particular when investing in individual stocks, is crucial.
Not doing so is like having the wrong life philosophy and expecting to have a successful life.
Get your philosophy right—then focus on improving it over time.
Endless Process
As James Clear said in Atomic Habits, “Success is not a goal to reach or a finish line to cross. It is a system to improve, an endless process to refine.”
Success is continuous improvement.
Charlie Munger put it like this:
I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading. I don’t think any one book will do it for you.
To be successful at investing you have to be constantly reading and learning. It's a never-ending process. You have to enjoy it.
If you do, you can outperform,
If you don’t, you probably won’t.
Humility
Most importantly, perhaps, in order to outperform you need humility.
You need to recognize what you know, and what you don’t.
And be open and willing to consider differing points of opinion.
Ray Dalio, Founder of Bridgewater Associates, the world’s biggest hedge fund, a type of investment fund, had this to say about his success in investing:
My success is . . . due to how I deal with not knowing . . . How I go look for where I might be wrong . . . I love to find people who could disagree with me . . . I can see it through their eyes and I can consider, is that right, is that wrong? That learning experience helps me learn more and it also helps me make better decisions. So it’s dealing with what one doesn’t know that’s more effective than knowing.
Henry Ford put it like this, “The man who is too set to change is dead already.”
You need to be adaptable to be successful in investing.
Bottom Line
Outperforming on your investments is hard, but it can be done.
The key is having the right philosophy and willingness to put in the time.
If you do, outperformance is possible.
But understand how difficult and rare it is—like many pursuits in life.