Back in my freshman year of high school, I embarked on an unusual journey. I had no way of knowing it at the time, but it would forever change my life.
There were lots of special journeys that year: playing high-school football, parent-free parties, sneaking out of my basement at 1 a.m., etc. But my pre-calculus stock market simulation -- of all things -- would ultimately teach me three simple rules about the world and the stock market.
The stock simulation
Every day in math class, I sat next to a kid named George, who appeared to have it all figured out. Despite his dogged insistence that we ditch history class to either water-balloon kids at our rival school or loiter around in the lobby of the all-girls' school next door, George was definitely a smart cookie.
What made George special was not his high GPA or his general intellectual prowess. He had this ability to intuitively know things about subjects that none of us at that age had ever encountered before. He just understood things, and this made his presence extremely useful to the rest of us around him.
Anyway, George and I started this stock market simulation with a group of kids all eager to succeed (things get pretty competitive in all-boys schools). I had my strategy well-designed. I furiously read every article I could from The Wall Street Journal, Financial Times, and The Economist. Then I'd buy companies like Ford (NYSE: F), Aetna (NYSE: AET), and Conoco Phillips (NYSE: COP) based on the advice of authors or analysts who advocated purchases of the stock.
I brought newspapers to school every morning after my Dad was finished reading them. I brushed up on my knowledge before class every day. I was doing everything I was "supposed" to do, and I thought I was going to be the next Gordon Gekko.
What the heck?
A semester of this went by, and guess what? I was getting crushed.
I recall sitting in the third-to-last position in a class of about 17. My returns were garbage -- well in the red -- and far behind the returns of classmates who were literally doing nothing and just picking random tickers.
George, meanwhile, was off the charts. He was way off in first place. The guy didn't read a lot, didn't spend any extra time researching. What the hell was he doing? Was he cheating? Did he hack into the software somehow?
It took me a while to swallow my pride and ask him why his strategy was so much better than mine, but I did, eventually. His response:
Kapur, I just do the exact opposite of what you do.
Not what I wanted to hear
What? How can someone do the opposite of what every newspaper and analyst in the world told me to do and still win? How is that possible?
Well, it was in George's ability to be unlike everyone else that he found a way to thrash the market. It was brilliant.
George broke it down to me like this: Every time the media or the market would hammer a stock that he liked (he was partial to blue chips like Proctor & Gamble (NYSE: PG) and Pfizer (NYSE: PFE)), he would step in and buy. Every time the media or the market started to put a premium on a stock he didn't really feel confident in, like Motorola (NYSE: MOT) or Texas Instruments (NYSE: TXN), he'd short-sell it. He'd buy what went down and short what went up. That's it.
The three rules
He literally was doing the opposite of what I was doing and was crushing everyone in the class at the same time. In his explanation, he revealed to me three simple rules that have since changed my life:
- Ignore everyone's (especially the media's) stock-specific advice.
- Do the exact opposite of what you expect everyone else will do.
- Feel comfortable being the only person doing what you're doing.
How he knew these things I have no idea. But they began to make a whole lot of sense several years later, once I developed an appreciation for how the market really functioned.
This was incredibly prescient advice coming from a 13-year-old kid who'd rather spend his time water-ballooning fellow students than burying his face in an analyst report. Many years later, I realized that these were the hallmarks of some of the world's most famous investors. Names like Buffett, Templeton, Graham, and Soros sound familiar here, yet this advice was being shared between two kids who couldn't even get into an R-rated movie.
It all makes sense
To complete the story, let me say that following high school, George went off to Harvard, where he co-authored a book on behavioral finance at the tender age of 22. After that, he helped run a prop-trading desk at a major investment bank, and today he's finishing up an advanced degree at yet another Ivy League institution. Needless to say, when it comes to the stock market, George is working at an advanced level.
Unfortunately, there are many more thousands of investors who don't see the beauty of a system that asks you to go against the conventional wisdom of the masses. Why? Mostly because it's uncomfortable and it's difficult -- even unnatural -- to do the opposite of what everyone around you is doing. But, as George discovered at an early age, the stock market is not a popularity contest, it's a mechanism for building wealth. And thus, his strategy has some serious merit.
The Foolish bottom line
If you follow the rules set forth by my precocious classmate and begin to push against the grain, you're likely to develop serious market-beating talent.
Because of this, I encourage you to take a look at the Motley Fool Inside Value service, where advisor Philip Durell seeks to unlock the value within stocks that the masses have tossed aside. The strategy works, it's yours to examine free for 30 days, and it's one of the surest paths to a market-beating portfolio. Click here to see for yourself.
This article was originally published on Oct. 24, 2009. It has been updated.
Fool Nick Kapur has no positions in any stock mentioned above. He also suspects he's slowly becoming a better investor than George. Ford is a Motley Fool Stock Advisor recommendation. P&G is a Motley Fool Income Investor pick. The Motley Fool owns shares of Proctor & Gamble and has a disclosure policy.
