The Secret to Making Money in the Stock Market

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What a year 2020 was! This year has been one of firsts … and extremes.

We plunged into the quickest bear market in history. The Dow Jones Industrial Average lost a third of its value in around 33 days in March … and then soared to all-time highs by August. Now it’s making new highs again.

We had, for the first time ever in the U.S., stay-at-home orders. Global economies were shut down, and a pandemic has killed 1.6 million people worldwide.

Now, thank God, we have a vaccine that hopefully will stop the spread of the virus, but getting it to billions of people will still be a challenge.

There’s much to be optimistic about for 2021. But we are still not over all the hurdles.

While most investors freaked out — sold at the bottom in March and sat out of the bull market — we never wavered. We stayed the course and kept buying great businesses with strong tail winds and great CEOs at bargain prices.

With a few weeks left in 2020, barring anything major, I can say we’ve had a very good year. As of today, nearly every stock in my Alpha Investor portfolio is up on the year.

One stock is up more than 100% in just two years.

We only sold out of one position this year, Delta Air Lines Inc. (NYSE: DAL) — after owning it for a little over two months — at a loss.

And today, I want to show you what happened…

A Pandemic Case Study

I added it right before the COVID-19 shutdowns in March, thinking that the pandemic was not going to be that bad for the airlines.

When the airline industry was ground to a halt, I realized this was more serious than I thought. I closed out the position a few weeks later. I no longer had any clarity on the airline industry and what that business would look like in a post-COVID world.

My screw up. I shouldn’t have been so bold in the face of uncertainty.

After I issued my sell recommendation a subscriber wrote in asking if selling was the right call. He said that even after 9/11, air travel recovered, didn’t it?

But the truth is that’s faulty memory. It took the airline industry six years to recover after 2001.

And in the meantime, companies like Delta went bankrupt and had to restructure.

That tells me this pandemic could have long-lasting impacts beyond the next year. And I should’ve been more careful.

I read — a few years ago — John Barry’s great book, The Great Influenza: The Story of the Deadliest Pandemic in History. Knowing how deadly the Spanish Influenza was in 1917, I shouldn’t have even thought I was smarter than this virus. I should’ve avoided Delta Air Lines.

Once I learned my lesson, the businesses I selected from March 2020 were pretty much pandemic-proof — they can still exist even during a shutdown.

That just goes to show me … I’ve been doing this for close to 40 years, and there’s still so much more I need to learn…

Secret to Making Money: Never Stop Learning 

Learning doesn’t mean just studying businesses. Learning means attaining what Charlie Munger, Warren Buffett’s business partner, calls “elementary, worldly wisdom.”

Here’s how Munger explains it…

“What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.”

One should have a range of knowledge from many disciplines — psychology, history, mathematics, physics, philosophy, biology and so on.

So, when you face a challenge or problem, you can combine them to produce something that is more valuable than the sum of its parts. In a nutshell: If you think broadly and understand different models from different disciplines … you make better decisions.

And for the past 40 or so years, that’s what I’ve been trying to do.

If you try to solve every investment problem with a spreadsheet, you end up like the man with a hammer who thinks every problem is a nail.

That’s why I view businesses differently than most stock jockeys that see them — as wiggles and jiggles on a chart.

I try to understand the factors that drive the business and, more importantly, what can destroy it.

If you don’t have a good idea of those factors, then, to quote Munger again: “You’re like a one-legged man in an ass-kicking contest.”

You’re at a big disadvantage.

Bottom line: The smarter you get, the better your chances are of making money in the market.

Regards,

Charles Mizrahi

Charles Mizrahi

Editor, Alpha Investor Report

P.S. This excerpt was taken from Charles Mizrahi’s flagship newsletter Alpha Investor. Every week, he brings his subscribers his thoughts on the market from individual stocks to timeless wisdom.

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