The Secret to Lasting Success in the Markets

Today I want to have a conversation about one of the most important topics in all of investing.

It’s so important, and no one ever talks about it out loud.

Wall Street does not want to have this conversation.

Most advisors do not want you to think about this subject.

The so-called “experts” on financial television networks would be out of a job if too many people took this topic seriously.

It’s critical to your investment success, but no one wants you to know about it.

So I think it’s time we shined a light on this subject to help you avoid mistakes and make a lot more money from your investing efforts.

Let’s get started…

Everyone Has a Story

The topic is the idea of separating the narrative from the process.

The narrative is the story.

The story can be incredibly exciting in the world of finance.

There are opportunities to make enormous amounts of money, and we always hear stories about the trader who made a gazillion dollars in one day, and the rocket scientist who has crushed the market for decades.

Wall Street was built on stories like these, but if you aren’t careful, trying to follow those stories can cost you a fortune.

I’ve been doing this for over three decades, and I’ve seen a lot of exciting stories in that time.

When I started in Wall Street, tax shelters and oil and gas schemes were the story of the day.

Investors threw mountains of cash into these deals to capture high yield and tax breaks without bothering to read a word of the offering documents.

Most of them lost money.

Then there was the biggest story of them all in the 1990s – the internet boom.

It was a fantastic story and a lot of people made enormous amounts of money.

What you should remember is that most of them lost it all back when the story came to an unhappy ending at the end of the decade.

I could point out example after example of stories with unhappy ending in the wide world of finance.

The story is what gets you excited, hyped up, and ready to jump into these wonderful opportunities alongside all your friends and neighbors.

It’s critical to get your friends and family excited about the story because when it all goes wrong – as it often does – you will need somebody to drink cheap tequila with and share the pain of the money you lost.

Where the Money is Made

While the story is what drives excitement, process is what makes money in the financial world.

Identifying the characteristics and conditions that consistently lead to favorable outcomes, and repeating these steps over and over is how you make money in the markets.

It’s not necessarily exciting, but as many of the best investors of all-time will tell you: when it’s done right, investing is supposed to be boring.

Even a legendary trader like George Soros, who has pulled off some of the most exciting trades of all time, once suggested, “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

Soros didn’t make the big wins like breaking the Bank of England by looking for exciting stories. He did it by following a process that allowed him to spot opportunities with asymmetric risk-reward potential.

If you expect to make money in the stock market, you have to favor process over narrative.

Story-chasing is much more fun – at least until the end of the story hits with all the ugliness that accompanies losing large chunks of cash – than identifying companies with solid credit ratings that are generating free cash flow and owning them for an extended time.

The point of investing is not to have fun, it’s to make money.

And while the process of making money isn’t usually fun, the end result of following the process and ignoring the narrative is a lot more fun than losing money chasing a story.

When the Stars Align

There will be times when the narrative and the story link up, and that can be pretty exciting and wildly profitable.

There are several narratives out there that I love and think will provide enormous tailwinds for certain sectors.

However, no matter how much I love a good story, I will not act on the story until the process says it makes sense from a valuation and probability point of view.

Bank consolidation is an excellent example of narrative and process linking up to provide huge returns.

Banks have been consolidating since the mid-1980s, and the industry will keep doing so until we get close to 1,000 banks in the United States.

Right now, we still have over 5,000, so there is a lot of consolidating left to do.

I love the narrative, but all the money I have made in bank stock is because I’ve followed the process.

There are criteria that identify the best time to buy bank stocks, and when I couldn’t find banks that fit the criteria, I didn’t buy them.

When I found banks that qualified, I bought them and held them until they got taken over and or traded at valuations that exceed the upper limits as defined by my process.

The consolidation narrative has provided tailwinds, but the discipline and dedication to the process is why I have never lost money in a bank stock and put my two oldest kids through college (along with many booksellers’ and bartenders’ kids) while living a pretty damn good lifestyle surrounded by swamps and beaches down here in South Florida.

Growing Trends

Cannabis is another excellent example of putting process above narrative. I love the cannabis narrative.

I have been an advocate of legalizing marijuana for most of my life.

I want to be invested in the space, but none of the stocks could pass through the process I use to value companies.

I found lots of banks, investment bankers, and service providers that passed the process and had tailwinds from legal cannabis, but it wasn’t until last month that an actual weed business passed my process.

We did very well with the service providers and financiers of the industry, and sidestepped the wild, wild west volatility of the weed stocks themselves by favoring process over narrative no matter how much I like the narrative.

If you’d like to find out more and stay up to date with the wildly competitive environment in the cannabis industry, the National Institute for Cannabis Investors offers a comprehensive look at legal cannabis in the Cannabis Investors Report.

Stories can be exciting, but process is almost always boring.

Sometimes they come together, but when they don’t, you always make more money over time by choosing process over narrative.

To the Max,

Tim Melvin

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