One of the goals of any investor should be beating the market over the long term. We want to outperform the S&P 500 or Dow Jones Industrial Average (DJINDICES:^DJI), which are the standards mutual funds, hedge funds, and individual investors are judged against.
But market-crushing returns are hard to generate, and they're harder to sustain long term. I think a few important habits can be key to outsized returns. I've been lucky enough to beat the market long term, and here are my keys to market crushing returns.
Make a decision and bet big
It'll be nearly impossible to beat the market unless you overweight your portfolio with stocks you think have the highest potential. Putting 1% or 2% of your portfolio into each stock simply isn't going to generate market-beating returns very often. In that case, it may be a better strategy to invest in an S&P 500 or Dow Jones Industrial Average index fund. I think a key is to do the research to find great stocks and invest big.
At the depths of the financial crisis, I made one of my riskiest and most profitable bets on Las Vegas Sands (NYSE:LVS). The company had recently opened its second resort in Macau and had an established presence in Las Vegas, but it was a highly leveraged business, which was exactly the opposite of what investors wanted in 2009. The result was a crashing stock that at one point sank below $2 per share.
My analysis showed that the upside for Las Vegas Sands was incredible, more than 10 times what the stock was trading at in early 2009. I also thought Sheldon Adelson wasn't going to let his company fail, something he said repeatedly on conference calls. So I bet big and as a result had great returns in 2009 and 2010, when I sold most of my shares (too early).
More recently, I made a big bet that SunPower (NASDAQ:SPWR) would return to profitability and emerge as a solar industry leader. You can see my logic in late 2012 and my calculations that showed upside of $168 per share in February, when the stock was $11.45. Today, shares trade around $32, but I still think there's upside. That's why I continue to have a large bet on SunPower, a stock that's allowed me to crush the market this year.
If you're going to bet big on companies like Las Vegas Sands and SunPower, or any other for that matter, you'd better know the downside. For every buyer of a stock there has to be a seller. So while you're taking a long position, someone else is taking a short position or getting out altogether. If you don't know why they would do that, then you don't have the complete picture of your investment.
Investors should always know both the bull and bear argument for an investment. We don't need to agree with the opposite side, but challenging our position is the only way to know when our thesis might change or when the opposite position is proved right about an investment.
The downside risk for both Las Vegas Sands and SunPower was bankruptcy, and I continually made sure they were making progress toward profits and toward a better balance sheet. If they didn't, it might have been time to sell.
The back and forth between bulls and bears can take a very high-profile space as well. Let's take the recent surge in Tesla Motors (NASDAQ:TSLA) as an example. Before the company released earnings on May 8, there were 15.8 million shares sold short, or about 10% of the shares outstanding. A lot of investors were betting big that Tesla was just another clean-energy fad.
That's when Tesla reported a profit for the first quarter and panic hit the streets. Short investors bought back 8.9 million shares during May, and the charge higher was on.
Long term, we don't know where Tesla's shares will end, but the short thesis has been demolished in 2013 -- at least the one that had short-sellers betting big in May.
Always challenge your investment thesis, whether you're long or short a stock. It's the only way to know whether your companies are making progress toward your goals or if your thesis is falling apart.
Check your portfolio ... almost never
If you're a long-term investor, what good does it do to check your portfolio every day?
I check up on my portfolio a couple of times a month, just to make sure it's still there. If I'm not buying or selling a stock, which I rarely do, I don't see the point of checking on it more often than that.
Far too many people outthink themselves by checking the stock market every day. The stock is up, so they think it's time to take a profit, or the stock is down, and they think there must be something wrong.
Sign up for the press releases for companies you own and be sure to read quarterly earnings reports to make sure your investment thesis is intact. Other than that, most of the daily moves of the stock market are noise. You can ignore them along with the crazy moves your stocks take on a daily basis.
Remember, we're here to make money long term. Checking your portfolio more than every few weeks won't help you do that.
Fool contributor Travis Hoium manages an account that owns shares of SunPower. He also owns shares of SunPower and has long January 2015 $5, $7, $15, $25, and $40 calls on SunPower. The Motley Fool recommends and owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.