The Plain-Sight Secret About Investing

99% of investors have no idea what the bet is that they're making. It's shocking.

"Elon Musk seems super smart, and he's had so much success in the past, and his future plans sound exciting. Tesla seems like an awfully good bet!"

No. Don't do that. The purchase of Tesla stock is not a bet on the company, like betting on a horse in a race. It's one level more sophisticated and abstract: you are betting on the underestimation of Tesla by other investors. That's the bet; the only bet. You're never betting on a company, you're betting against other investors' sentiment about that company. And those people are all aware of Musk's history, too. That's not privileged information.

Have you ever noticed that many people imagine that when they say the same old shit we've all heard a zillion times it has a special ring? "Now it's me saying it!" In everyday life, this daffy mental miscalculation is annoying. In the stock market, it pays for the 1%'s Lear jets.

This is, oddly, terrifically difficult for nearly everyone to grok. Small time "retail" investors misunderstand because they're naive (naïveté is the single greatest impediment to clarity). Day traders, who grok this in theory, lose touch with it amid the bustle of their manic and complicated trading (complexity is the second greatest impediment to clarity). And professional financiers, who understand this better than any of us, are distracted by their smug self-confidence (ego is the third greatest impediment to clarity).

Most of all, it's a framing problem. If you're an addicted gambler (as most investors are, at all three levels), you do not possess a lithe perspective (see this for how addiction is a framing problem). You are rigid and stuck. You are compelled to see things like a horse track, and can't find the calm latitude to reframe to a more sophisticated, subtle, abstract perspective. Your attention remains riveted to "GO TEAM,” in all-caps. 

We all have an opinion as to whether Amazon still has room to grow, or if Tesla can maintain profits with big automakers getting into electric. Opinions are like assholes; we all have one. And yours may even be correct. But that's not enough. Because your bet is not on Amazon or Tesla, but against titans infinitely smarter and better informed than you. They effectively set the price, and that price already reflects their (smart) consensus opinion. And there's not a single thought in your head that's ahead of them. So you will not only not win against them; they will, over time, eat your lunch.

So don't read annual reports. Don't try to be a smarty. All info is already baked in to the price by people way smarter than you (if you assume no one's smarter than you, then I have good news: your impending poverty will divest you of that delusion). Again: You're not betting on a company, you're betting against the market's estimation of that company. It's not a proposition of predicting business success.

So why would anyone bet against billionaire geniuses and their office towers stocked full of MIT educated analysts? Wouldn't that be crazy?

Yes. Yes it would. Which is why people should invest in index mutual funds, which rise (and, alas, sink) with the market, often bringing even better success than the outcomes for individual twitchy billionaire geniuses (because the latter are limited by ego and an addict’s perspective).

The only exception is if you have some sort of an edge. Which 99.9999% of the time you won't.

Patience is a potent edge. The billionaire geniuses need to be constantly hitting home runs. They can't patiently wait stuff out. They're twitchy. That's why my strategy of buying Apple in its downturns has worked. I can park my money for a year, and those guys can't. Neither can day traders, who are equally twitchy. So, often, it's only sad little me buying on downturns and selling on peaks, while everyone else spazzes out, flocks irrationally, and goes foolishly the wrong way. They’re pursuing bazooka home runs this quarter while I’m content with 25% gains next year. I gobble up discarded crumbs.

Specialized knowledge can also be an edge. A friend runs a genetics lab, and told me TXG's technology would one day be ubiquitous. He could hardly wait to have it, himself. I bought at $54, and it's now $188. Of course, it might just as easily have crashed. Maybe the CEO is a dork. An edge is not a superpower, it's just a way to marginally de-shmuck oneself. Billionaire geniuses also know people running genetics labs. Mostly, I got lucky. But a little luckier than if I'd flown blind, trusting my own puny acumen.

Years ago, I wrote breathlessly about SIGA, a company with an entirely effective (and no side-effects) smallpox cure. It’s a bio-terror countermeasure (it works on weaponized versions), and it also works on cowpox and monkey pox, which are both still out there. I'm still hanging on to half my shares, and at $7 I've made out decently with my $2 investment, though it's sat listlessly for so many years that it's no jackpot. This year I expect at least one big foreign government sale, and/or a sale to US gov with a different formulation, which should hopefully pop the stock back to $12-15. At that point, I'll sell (there's time pressure: their patent on the drug actually runs out in a few years - insert bug-eyed/astonished emoji - and soon I'll be so old that I'd only enjoy a jackpot by gold-plating my walker), and it will amount to good profit despite the ridiculous time lag. In this case, my patience was my edge, then my stubbornness was my edge, then my religious faith was my edge, and, at this point, my stupidity is my edge. All these things are unavailable to billionaire geniuses. I stay in my lane.

It’s hard to understand this maxim, and harder still to live by it. And it’s almost impossible to find an edge for yourself, and harder still to maximize that edge without being clouded by ego or by addictive glee over successes. 

I seem to be at that latter stage. I’ve been beating the market (I bought in low to CRIS, PRKR, BCRX, and the aforementioned TXG and SIGA, in addition to cultivating Apple’s periodic lulls). But it’s more than likely a blip, like flipping “heads” a few times more than likely. So I’m keeping my outlay prudently low.