You can make good money in the stock market. Here's how I did it.

If anyone sends you such a headline, they are likely scamming you. But I'm just a hick from the heartland: I think everyone should be rich. I seek nothing in return. Go figure.

Since retiring from Fortlandia nearly two years ago, I’ve tried my hand at a few things: dad bod modeling, selling my rare photo of Kurt, Courtney, and Frances Bean taken backstage at a Nirvana concert in early 90s Seattle, hawking the domain www.monk.com, rebuilding MonkSpace after the COVID sucker punch and two strikes nearly brought it to its knees, directing “folks” to the relaunched MONK where they can buy rare back issues of the mobile magazine, writing and podcasting for my Crotty Farm Report on Substack, and watching in pained futility as my Creighton Bluejays men’s basketball team routinely break my heart.

I also spend a few hours every morning studying, engaging in, and obsessing over the stock market. If you try to reach me during this hermitic interlude, don’t expect an answer. I need to focus on the market free of the noisy, agenda-driven deceptions that accompany it. I do my errands in a rush from 4-6 PM EST after the markets close.

I have no special knowledge or formal training in stock investing––no Series 7 license either––but I have done better than 98% of investors over the last 15 years. I got started after the 2008 crash and have not looked back. Looking over my portfolio, a board member of a prominent Wall Street investment bank told me recently that my returns were “staggering.” Not that they would hire me. Who needs a guy telling a tony Wall Street firm to fire its quant geeks, M&A bros, and various hedgies, and send staff out in cars, buses, or trains into the hinterlands to visit companies and their communities in person?

If you had to analyze my historic long run of good fortune, I’d attribute it to a few factors:

SINGLE STOCK CONCENTRATION

Your typical steady-as-she-goes family-man financial advisor at Northwestern Mutual, Schwab, or the thousands of other white bread financial consultancies will put you in a risk-adjusted mix of mutual funds, bonds, and ETFs that make you decent enough money to keep you from firing them and plenty of commission for themselves and the boys downtown. One thing all these purveyors of pablum will tell you: avoid single stock concentration. Because of their rejection of it, I embrace it.

Few products merit decades of support. But when you find that product, buy the stock. Since 2009, I’ve continued to build a huge consistent position in one bellwether, Apple (AAPL), which experience has taught me is difficult to dislodge from its prominent must-own perch. Brand loyalty to Apple’s products and services has remained ferocious over dozens of years. Its sly integration into all aspects of human life has been impossible to shake. Even with my sizable AAPL position long in the tooth, I am wary of trimming too much of the Colossus of Cupertino, despite its unwieldy size and paucity of game-changing innovation.

I remind myself in moments of doubt that Apple invariably bats last. It carefully surveys the landscape, slowly builds its superior version of a product or service, and at just the right moment introduces it to a hungry fan base. From Macs to MacBooks, iPhones to iPads, smartwatches to Apple Vision Pro, to an extensive payment, news, and entertainment infrastructure, Apple keeps its customers hooked because it does its homework, focuses on ease of use and design, and makes it hard to stray from its sticky ecosystem. Lately, I’ve been a bit worried that Apple is in the crosshairs of political headwinds out of China and that it might be falling behind in the race for AI dominance. So, I have started to trim. But I am hesitant to dump it for reasons I’ve articulated.

READ… A LOT

Fellow Omahans, investing legends Warren Buffett and Charlie Munger, said that one of the keys to their success was reading over six hours a day. I presume that mostly meant financial-related information such as annual reports, financial statements, expert analyses of companies and sectors, secondary source musings, and sundry compte rendu. Though I read about twenty articles a day, I focus as much reading time on non-stock-specific areas: surveys of consumer sentiment, cultural trends, classic works of philosophy and literature, quality films, sophisticated political analyses, smart TV shows, and anecdotal stock market trades from friends and acquaintances. It all figures into the Crotty mix, as I try to ascertain where the consensus is, so I can bet against it.

In a world where key information about companies and sectors is readily available, and correlations between stocks can be extraordinarily high, the financial news industry has become hyper-obsessed with the smoke signals emanating from the cardinals of high finance, the Federal Reserve. The cost of Fed money has sadly become the main driver of equities of late, followed occasionally by global events, and finally by the performance of individual stocks themselves. If money is cheap, almost everything goes up, even those struggling to make a profit. When money is tight, only companies that can finance their growth do well. The reason that the so-called “Magnificent Seven”––Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla––outperformed most other stocks in 2023 was that they had plenty of cash on hand. Always take note of “free cash flow” when picking a stock.

CHANNEL CHECK

Whenever possible, I regularly visit the companies in which I own large positions. I want to see how they operate, how they treat customers, how they handle screw-ups. If they are a black box, I spend time lurking near their corporate campus. I use my Smiley-sense to gather intel through innocuous encounters at nearby cafes, stores, area pickup basketball games, or from people who have encountered the company and its products. Nothing beats the direct experience of a brand, though it is not always a surefire tell. I visited a disastrously run Chipotle (CMG) outside Pittsburgh. I thought the part reflected the whole and was wrong. CMG continues to churn higher.

EMBRACE FAILURE

In my market navigations, I am helped by a series of investing failures. I’ve sampled many of the vaunted systems and strategies that make headlines: buy and hold, day trading, dogs of the Dow, momentum trading, passive investing, and value investing, though I have eschewed options trading because I am not smart enough to figure it out. I learn from all systems, but, in the end, all systems fail to consistently beat the S&P 500 benchmark, no matter what their proponents tell you.

University of Chicago Professors Fama and French, fathers of the efficient market hypothesis and inspiration for all manner of index investing firms, concluded that no investor over any statistically meaningful period has consistently beaten the S&P 500 benchmark when you factor in commissions and cost of trades. Any outsized, benchmark-beating success, the scholars noted, could be attributed to luck, not any specialized investing prowess. It is why the greatest investor of all time, my late father’s bridge partner Warren Buffett, said most people are best off simply buying the benchmark (best captured, in my opinion, through the ticker SPY).

My initial stock market investments in the first year after the 2008 market crash were in three positions: AAPL, GLD, and SPY. I’d still recommend, if pressed, those three tickers, and only those three tickers, to investors starting-out now.

A part of embracing failure is the ability to see when a stock is not moving your way. Pulling the ripcord is hard. But you have to do it on your losers. And regularly. Look at it like dating. Take a stock on a few dates: see how it behaves when the market is up, when the market is down, and when it is moving sideways. If those first few dates go well, invest a little more, always dollar-cost-averaging along the way. Then see how it behaves in a market correction, a market crash, and a blow-off-top rally. If it performs in an orderly fashion in good times and bad, in sickness and in health, that’s your Apple. Marry it.

DON’T CATCH A FALLING KNIFE, AND DON’T BE A PIG

Investments are different from trades. An investment is that rare best-in-breed stalwart you are going to hold for a while (e.g., Nvidia, Palo Alto Networks). Trades are short-term opportunities that arise from weird mispricing in the market, a major exogenous event from which the company is likely to recover (e.g, a Toyota recall) but for which it has been unjustly punished, or the sudden popularity of a certain sector or micro-sector lifting all boats within it. But remember: most cheap stocks are cheap for a reason (see efficient market hypothesis above). Don’t try to catch a falling knife.

If you’ve made a 30-40% return on a trade, take some off the table. As the investing cliche goes, “bulls make money, bears make money, pigs get slaughtered.” Even if the stock is not at its AOC “tippy-top,” do a Jordan Peele and “Get Out!”

BUY ON MARGIN

Take your brokerage’s money and grow it, especially when money is super cheap as it has been over the last decade. Interactive Brokers give the best margin rates, but others can at times come close.

You will not get rich by saving coupons, eating quinoa and navy beans every night, or driving Uber. You have to use the house’s money to grow big fast. There are inherent risks with margin investing. Read up on them before you start. But if you don’t pick dumb trendy stocks (see below), and if observe the rest of my advice, you should do fairly well.

WAIT FOR YOUR PITCH

To buy cheap and sell high—the mantra of winning investors––you have to let certain markets pass you by without acting. Wait for your pitch––know your price––then pounce when you get it. And remember: sector rotation. You might have the best stock in the world, severely undervalued, and ready to pop. But if it’s in an out-of-favor sector, more often than not there are better sectors for your money or better entry points for your chosen stock. There are prominent exceptions for stocks that rip higher even as their sectors are in the pits––names like Eli Lilly and Novo Nordisk due to the outsized popularity of their weight-loss meds. But those exceptions prove the rule. Don’t hang out long in a losing sector. To learn how each of the eleven sectors is performing over time, use the helpful SPDR sector tracker.

DON’T FIGHT THE TAPE

There are many reasons the stock market let alone an individual stock can go up or down. But in this era of high correlation between stocks, the chances are that the movements have to do with decisions made by larger investors, who have different risk/reward profiles than you. If the market is not going your way, take a powder.

AVOID DUMB TRENDY OVERHYPED STOCKS

For several years, people who know nothing about real wealth, real work, or real investing have asked about crypto. I didn’t get the necessary use case, except that it was a great way for drug cartels, mobsters, and the kind of arrogant little schmucks depicted in The Beekeeper and The Killer to launder ill-gotten gains, not for decent everyday Americans. But the crypto hype was so omnipresent that I decided to risk a little to watch the space. I bought some Ethereum as well as stock in a mortgage bank that was part of the crypto ecosystem. My Ethereum went down 50%, and my crypto-focused bank, Signature, went bankrupt in the 2023 regional bank crisis, leaving me with pennies on the dollar. Crypto stocks like Coinbase and Bitcoin miner Marathon Digital are riding high again after a monster 2023. If I go in now, I am like the last guy joining the Ponzi Scheme. If you made money in crypto, bully for you.

Another horrifically dumb and trendy idea has been electric vehicle charging. Flush with tax and regulatory breaks plus cheap cash from Joe Biden’s Green New boondoggle––the deceptively named Inflation Reduction Act––EV charging companies seemed like a surefire winner. However, an already dominant player, Tesla, run by Asperger’s bad boy Elon Musk, was already circling the competition, building out the best supercharging network on the planet, and setting the supercharging standard for all. So much so that most EV car makers have handed over supercharging to Tesla. I lost a lot of money on dumb EV charging companies like EVGO and Volta (VLTA).

Lesson: never buy a stock based on federal investment in a sector. The Leviathan almost always makes everything it touches worse.

BE WARY OF MARKETS AND COMMODITIES THAT ARE BEING ACTIVELY GAMED BY GOVERNMENTS AND OTHER FORCES MORE POWERFUL THAN YOU

For a short-term trade, sure, dip your toe in shark-infested waters. But for longer-term holds, avoid the following: China, gold miners, natural gas, oil, and Russia, Russia, Russia.

As of this writing, I own Apple (AAPL), Cheniere (LNG), Nvidia (NVDA), Palo Alto Networks (PANW), Palantir (PLTR), Paypal (PYPL), Target (TGT), and Tesla (TSLA). And I just sold completely out of Cameco (CCJ) and Scorpio Tankers (STNG) at a nice profit. I may soon sell out of Target because, after a series of channel checks, I remain unconvinced their weak leadership has what it takes to crack down hard on the brazen theft in their stores. And though I made decent money in Lululemon, I sold out of the yoga retailer well over a year ago. Any company that fires employees for trying to halt a crime in progress, let alone call the cops, is so morally bankrupt it should be avoided by investors.

Fama and French are right: my outperformance is probably just luck. But you also make your luck. The key is to know your strengths and weaknesses. I, for instance, am not technically smart. I almost failed high school physics (admittedly, I never studied). And forget about learning a foreign language, playing the piano, or hundreds of other things that genuinely smart people can do. I have a few skills: I read deeply, ask a lot of questions, and have a relentless nose for grifters and scumbags. As I taught my Crotty’s Kids debaters, I can tell whether a claim has a legitimate warrant. And I can discern your carefully cultivated bias the moment you open your mouth. All this helps me see who is gaming me or the market.

I hope I provided some insight. If so, please consider becoming a subscriber.