The Irreplaceable Secret to Massive Returns

Apr. 27, 2022

Warren Buffett is not the best trader of all time.

Not by a mile.

Not by three miles. (And it hurts me to write that.)

If you compare Warren Buffett to Jim Simons’ Renaissance Fund, it’s not close. Since the 1980’s Simons’ secretive, algorithmic strategies have tripled what Berkshire Hathaway has done.

Simons is the opposite of Buffett’s value investing mantra, and he’s dominated.

Further, Mark Minervini and David Ryan have won prestigious real-money trading contests multiple times with several 100+% years.

Buffett, on the other hand:

• Hasn’t been above 35% in a year since 2000.
• Hasn’t been over 50% since 1998.
• Has had only one 100% year since 1977 (in 1979).

Other strategies are consistently putting up triple-digit years. Buffett’s days of doing that are over, and they didn’t happen much when he started out and was smaller.

Value investing can go into multi-year slumps, underperform the market consistently, and never put up a big winning year even when everything is perfect.

And yet Buffett is worth $124 billion. In that regard, Buffett is far and away the winner.

So what gives?

How does Buffett have the most when he uses a sub-standard strategy?

Because the strategy isn’t the most important thing. The strategy doesn’t create generational wealth.

What does?

Compounding.

The most important ingredient to massive success is the ability to do something for a long, long time. 

If you study Buffett, you’ll find that he researched many different trading methods when he was starting out. This was a long time ago, but surely he saw the research on how much more profitable trend following was.

Yet he chose value investing. Why?

Because it was the one that made the most sense to him. It was the one he felt comfortable doing. It was the one he was excited to do.

It was the strategy he committed to doing for the rest of his life. 

And that’s why it worked. Not because value investing is the best way to trade. It’s clearly not. Buffett has succeeded because he is happy to trade that way for decades.

Do you know what the best diet is?

The one you like. The one you’ll stick to.

Some diets are clearly better than others. But those diets will never work if we don’t do them.

For example, Penn Gillette lost 100 lbs. eating only potatoes. Losing that amount is extraordinary. And yet a potato-only diet obviously isn’t the best diet out there.

Do you know what the best workout strategy is?

The one you’ll do.

For example, in May 2020, I decided to do 20 pushups on my birthday (and squats and a plank). Then I would increase the push-up amount by 1 every week. I only worked out on Wednesdays. No other days.

Since then I’ve increased my pushups every week for almost two years. I got to 75 pushups and then switched to knuckle pushups and did the same thing. When I hit my goal I switched to Perfect Pushups. No matter what, I went up every week. Is that the best workout plan? No. But it’s worked really well for me.

Which brings us back to a trading strategy.

I couldn’t be a value investor anymore. The results I’ve seen in my personal trading accounts and in my research just aren’t acceptable. I’m no longer a believer. There’s no chance I would stick to it.

But I am a believer in trend following. It’s been around for centuries and I believe will be around for centuries more.

The key for me will be to leave my trend following strategies alone.

Warren Buffett has made 99.7% of his money AFTER age 52. Even though other people’s strategies worked better, they didn’t stick around.

The compounding that occurs in a strategy after you’ve done it for years is where all the amazing things happen.

It’s not the strategy. It’s how long you trade that strategy.

That’s what matters most.

In our next Newsletters, we’ll look at some methods that could possibly be traded for years to come.

Talk to you soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.