3 Secrets for Investing Success

Alpesh Patel|October 1, 2021

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The goal of any investor is to get the best return for their money. There are a lot of ways to try to do that… but most end in disappointment.

These ways usually involve following the headlines and trying to do too much.

Managing other people’s money has taught me three important lessons that all investors should heed in order to be successful.

First, keep an independent mind.

The best investors are not copycats. You have to be an independent thinker. When I see breathless journalists talking about stocks that are popular with billion-dollar hedge funds and mutual funds, I don’t chase those stocks.

Being a hedge fund manager taught me that success comes from independent research into companies’ financials – not trying to guess where the crowd may go next.

So I like to see whether the big funds agree with my analysis… not the other way around.

A recent Goldman Sachs analysis of more than 800 hedge funds and almost 600 mutual funds found nine stocks that both groups viewed favorably.

The majority of those picks were growth stocks such as Adobe (ADBE), Liberty Broadband (LBRDK), Square (SQ) and Twilio (TWLO). Two very familiar faces also made their list: General Motors (GM) and Wells Fargo (WFC).

Some but not all of those stocks also make my list. Adobe, Square and Twilio meet my detailed criteria on valuation, growth, dividends, cash flow and consistency of outperforming the market.

And it’s not just about looking at balance sheets, profit and loss accounts, and cash flow statements – which I do, of course – but also about how the prices move. That means momentum and also statistical analysis.

That leads to my second lesson: Take advice… but filter it through your own analysis.

Independent thinking does not necessarily mean contrarian thinking (not that there’s anything wrong with contrarian thinking!). Many times, I’ve given my team or my students my list of approved stocks, then they’ve added additional filters to narrow it down further and outperformed me. (I don’t mind if their pick does better – it was still from my list!)

So while I am glad these other hedge funds agree with me, I know my analysis is so thorough that I can stand by my choices – whether they’re my own investments, for my fund or for others.

When you do in-depth analysis like this, you may be in a crowd of one. But that’s okay… because you’ll be following my third lesson…

Have one simple process and strategy.

Too many individual investors have lots of strategies – and therefore a hodgepodge of stocks – and often lose track of what they bought or for what reason.

Keep it simple. I have my core strategy. Sometimes, I create a “special situation strategy” for those rare occasions where I expect a 100% return in a year – like when oil companies or banks hit multiyear lows. But in general, I don’t use every strategy under the sun.

Fellow Brit and hedge fund CEO David Harding, who established Winton Capital Management in 1992, laid out some of his funds’ recommended stocks recently. Harding recommended Warren Buffett’s Berkshire Hathaway (BRK-B) as his No. 1 pick.

Now, I respect David, but that’s one fund manager following another fund manager. That’s nuts. You’re not paid the big bucks in my industry for copping out or outsourcing.

But he has one core strategy – trend following. That’s it.

Interestingly, Berkshire Hathaway is huge on Apple (AAPL), with a stake of more than $130 million. So two massive funds (among others) agree on a stock even my 3-year-old son could pick.

And that brings me to a final, bonus lesson.

Big-name stocks are the most significant holdings in the hedge funds that are looking for reliability and liquidity. Apple, Amazon (AMZN), Bank of America (BAC) and Visa (V) are all popular with hedge funds.

But for me, it’s the lesser-known names that are interesting. Find a hidden gem, and you’ll make more money – that’s the goal.

Otherwise, I too would just buy a load of Berkshire Hathaway, which has not outperformed the S&P 500 for many years.

No, thanks.

Keep these lessons in mind as you look to build your portfolio. Don’t blindly jump into the same stocks as everyone else. Be independent… do your research… and stick to a strategy. After all, if you do what everyone else is doing – as Manward likes to say – you’ll get what everyone else does.