Market Overview

How To Unlock The Secret Of Superstar Investing

How To Unlock The Secret Of Superstar Investing

Everybody wants to be a superstar.

Everyone wants to be the person who hits the home run in the bottom of the ninth to win the game or the one on stage singing to millions of adoring fans.

This is true when it comes to our investing efforts as well. It seems everyone has the dream of being the superstar trader moving billions through he global currency markets or making option trades that crush the market day after day.

Unfortunately the odds of that happening are about the same as that high school slugger making it to the big leagues. Less than one percent of all high school baseball players will ever make it to the major leagues and something along that same percentage of traders will achieve long term success in the markets.

The traders who do make that success spend years studying the markets, economics and most all advanced mathematical theories.

They work 12 hours a day or more at their craft and are usually totally consumed by the markets. No matter how much the average guy wants to hit home runs like Mickey Mantle or play third base like Brooks Robinson, the simple truth is he can't do it. Traders just don't have the same ability, skill set, discipline and determination it takes to be a major league baseball player. In the same manner, the average investor is not going to be able to become the next Paul Tudor Jones or James Simons.

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However, there is a subset of investors the average person can emulate and they are the ones who have figured out how the real money is made in financial markets. It is not easy to do, but the average investor can use the same approach and techniques that they have used to earn abnormally high returns in their portfolio.

It requires patience and discipline and does not make you rich in the next two days from a magical chart pattern so most people will never use this approach. This is actually good news for those of us who figure out exactly how profitable the techniques used by these investors can be.

Gerald J. Ford is a Texas born investor who has become a billionaire investing in small banks.

Ford looks to buy distressed banks and other financial assets when they are out of favor and available at a very low price. He bought several small Texas banks back in the 1970s and rolled them all up into First United Bank Group and sold them to Norwest in 1994.

During the S&L crisis, he bought troubled savings and loans from the government in 1988 and sold them in 1992 for a $900 million profit. He did it again in the California real estate market in the early 1990s and he bought several banks that were eventually sold to Citigroup for profits in excess of $1 billion for Mr. Ford.

His approach is simple.

He finds cheap banks that he believes can survive, buys them at a huge discount to their intrinsic value and sells them when they are fully valued. This strategy is easily duplicated by the average investor.

The most difficult part of the strategy is that when there is nothing to do, he does nothing. Between 2002 and 2010, Ford didn't buy any banks at all until the financial crisis had pushed bank stocks to very attractive levels.

Andy Beal is a Dallas-based banker who has amassed a fortune of several billion dollars by buying what no one else seems to want and holding the assets for several years.

Beal waits for a crisis to develop that severely depresses asset prices and then he steps in and is a buyer. He got his start buying real estate in hard-hit places like Texas in the 1970s, Newark, New Jersey apartment towers in 1981 and sold them when conditions improved for large profits. 

He bought infrastructure and power bonds after the California blackouts and Enron collapse.

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He was buying bonds backed by aircraft after September 11, 2001 that were sold a few years later for huge profits when it became clear that the airline industry would not, in fact, collapse. He spent billions buying depressed mortgage and bank assets during the credit crises that have worked out very well for Mr. Beal. His main investment vehicle is his bank (Beal Bank USA) and the returns on equity at the bank would make a hedge fund manager blush with ROEs continually in excess of 20 percent.

Like Mr. Ford, when there is nothing to do, he does nothing.

With profits from his investments during the credit crisis, Mr. Beal spends a good deal of his time racing his collection of 800 horsepower race cars and waiting for the next crisis to create an opportunity.

Wilbur Ross has become legendary for his success buying into distressed industries and then waiting for condition to improve so he can cash out with profits of many times his original investment.

He has done this with steel companies, coal companies, banks, textiles and most recently has seen a great deal of success with his foray into shipping companies.
Ross buys assets cheap and sells them at a premium when conditions allow. He has been described as a well-dressed vulture and a bottom feeder, but he has had the last laugh amassing a fortune of about $2.5 billion. He once summed up his approach saying “You get paid for taking risk that people think is risky. You don't particularly get paid for taking actual risks."
The success of these investors is very similar to our pig farmer friend that John Train introduced us to back in the 1970s.

Mr. Womack would leave the farm when all the market and economic news was bleak and drive into the local brokerage and load up on stocks that paid dividends and went down a lot in price. A few years later, when the broadcaster and newspapers were giddy about the market prospects, he would drive back into town and sell them all.

In between, he did nothing.

He never had a losing year in the stock market.

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The secret to stock market success is not trading like a wild person. It is not trying to time the short term movements of market darlings like Apple and Netlix over the next few weeks or even months. It is not buying and selling options in competition with math geniuses with enough computing power to send a man to Mars and back and it is not in guessing the direction of the next move in the Aussie dollar or corn-based trend on a collection of squiggles on a price chart. The secret is simply buying assets when they are cheap and selling them when they are dear. When there is nothing to do, then one must have the discipline to do nothing.

It is easily replicated, but difficult in practice. Most of us cannot resist the siren call of the stock market casino and the lure of quick and easy profits. Asset based value investing works very well but the key is patience, discipline and the ability to do nothing when there is nothing to do.

That's how you become an investing superstar.

Tags: banks Gerald J. Ford private equity

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