“I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.” —George Soros
Every successful investor is a trader.
I’m not talking about Bill Gates, or Steve Jobs, or Andrew Carnegie (for you history buffs). They’re inventors or business owners. I’m talking about investors. People like George Soros, Warren Buffett, even Donald Trump to a certain extent. All professional investors trade. Of course, they all like easy trades and what’s easier than buying an undervalued asset and waiting for appreciation to catch up? (Well a lot of things are easier actually, but that was a rhetorical question.)
THIS IS HOW IT WORKS
Trump does this when he buys an underperforming building or invests in a new construction project. Soros does this when he shorts the heck out of the GBP against whatever the Germans used to use for money. And even Mr. Professional, long term, buy and hold himself trades. He buys dips in companies and when he’s wrong, he sells the company. He was wrong when he bought Berkshire Hathaway right?
He wasn’t able to renovate a rundown textile company so instead he changed business plans. He did what Donald Trump does to real estate; he renovated the company and “traded” business plans for something more profitable. In his case, insurance. And, as an ongoing business plan, Mr. Buffett is known as a long term, value investor. He is someone who only invests in things he understands.
But, every so often, we hear about him selling something. We don’t hear about it that much though, because him being wrong, or divesting is hardly as interesting as news about “what’s Warren Buffett buying” headlines. Go ahead, try to Google what Berkshire lost money on. You hear of an occasional stock drop but still get headlines like “Why Berkshire and Buffett never lose.” Yeah right.
TAKE NOTE
But, Berkshire has decreased its investment in Kraft, gotten out of General Dynamics, and a few others I can’t remember and don’t have time to Google. One or two companies he invested in didn’t make it. That’s business and it happens.
And why is that? Because even long term, value investors are fundamentally position traders if they want to be long term investors. When their invested capital isn’t making an acceptable return, and after it shows limited upside potential, it’s time to move on and invest in something else. The reason that Berkshire doesn’t pay dividends is the same reason why they trade um.. I mean sell stocks. In the opinion of their CEO, if your money had a greater long term, upside potential somewhere else, you should probably buy the something else.
FOLLOW THE BIG GUYS
So, as smaller investors, we should do the same thing these guys do. We should look at what kind of return our time and money are giving us, and when we’re wrong or when we see a better opportunity doing something else naturally we should be careful, but we should probably take advantage of it.
MORE FLEXIBLE
Everyone knows we can’t all be Warren Buffett. We hear that all the time. But what we don’t hear is when we’re smaller investors; we can actually make a better return than he does because we are more flexible and able to manage our money more directly.
What’s Berkshire averaged? 19% return since they started. That’s not bad, but it’s a lot easier to make more than that with $50,000 or even a few million than it is with however much money they have. The key is to know when you’re wrong and know when to get out of the market. That’s what the pros do.
