You Don’t Need to Be a Wall Street Big Shot to Make Big Money in the Stock Market

Just give your portfolio a K.I.S.S.

All bull markets have one common characteristic.

At some point, investors lose all their valuation discipline and recklessly chase “story” stocks.

As a former Wall Street analyst and hedge fund manager, I’ve seen this many times over.

And when Colin and I were working together at MarketWise MKTW 0.00%↑ the publisher wanted us to take advantage of this reality.

That is, investors start buying into companies with sexy growth stories to tell, but that have limited or no profits to show at the time.

And the more these “story” stocks go up in price, the more investors clamor for them.

It's an odd phenomenon.

Because in every other aspect of our lives (like shopping on Black Friday), most people look for bargains before they get really interested in buying.

In the stock market, however, the more expensive stocks get, the more the investing public wants to buy them.

During the early 1970’s, investors became enamored with the high flying “Nifty 50” stocks.

In the late 1990’s, they went wild for any stock with “Dot Com” in their name (which was something novel at the time since the internet was brand new to most people.)

In 2020-2021, speculative investors drove shares of startup electric vehicle companies to dizzying heights.

And now, investors are buying quantum computing stocks at a feverish pace.

IONQ IONQ 0.00%↑ shares, for example, have surged over 300% in just the past 6 months.

The company currently sports a rich valuation of nearly $8 billion.

I say “rich” because the company’s stock valuation is approximately 100x the sales that analysts expect the company to generate… next year.

That means you are paying for 100 years of 2025 sales today for IONQ stock!

By comparison, Google parent Alphabet GOOG 0.00%↑ trades at just over 5x next year’ sales estimates.

Now you might point out that IONQ is expected to grow much faster than Alphabet over the coming years.

That’s true.

But even so, IONQ shares are still pricing in a tremendous amount of future growth.

And IONQ has yet to earn a profit (the company reported a $52 million loss in the third quarter alone).

Now IONQ is leading the pack of publicly-traded quantum computing companies.

And the company is developing some truly cutting edge technology.

So you could make a case for IONQ to trade at a rich valuation.

But IONQ’s stratospheric valuation is not an isolated situation.

Consider also D-Wave Quantum QBTS 0.00%↑

This little company’s shares have surged 400% since the start of November.

Yet if you look at the company’s financials, you might start to scratch your head and wonder why.

Because D-Wave’s revenues for the third quarter of fiscal 2024 were $1.9 million, a decrease of $0.7 million, or 27%, from the fiscal 2023 third quarter. 

D-Wave’s bookings were not any more promising.  In the third quarter, the company’s bookings were just $2.3 million.  

That’s down 22% from the prior year’s third quarter.

D-Wave expects to see an improvement in fourth quarter sales and bookings trends.

But the company has not yet provided investors a clear path to profitability.

Despite this uninspiring financial performance, investors were buying D-Wave shares hand over fist last week.

Which has prompted valuation-sensitive investors to start wondering how long this buying frenzy will last.

But the funny thing about the stock market is that you can’t predict exactly when the bulls will run out of steam.

And this particular round of investor enthusiasm may last through the end of the year.

But history tells us that periods of irrational exuberance in the stock market always end the same way.

As in all of the past boom-bust cycles, most of the current high-flying speculative stocks will likely end up giving back most or all of their short term gains.

And large numbers of undisciplined investors will be left stuck with big losses in shares of companies they know very little about.

Now, I don’t want to suggest that it’s impossible to make money in the current cycle.

Because these stocks can provide rare opportunities for big short term profits before they return back to earth.

However, these profits will only be secured by the most nimble traders who time their entries and exits just right.

So, for most of you reading, I would urge all but the most agile of traders to avoid these “story” stocks.

Instead, follow the advice of the world’s most successful stock market investor - Warren Buffett.

And focus your investing efforts on companies you actually understand.

Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.

Warren Buffett

At Equity Empire, we like to call this process the K.I.S.S.  investing strategy.

Keep

Investing

Simple  

Smarty 

Many small investors overcomplicate the investment process.

They think that complexity is necessary to achieve big returns.

So they invest in companies developing  technologies that they know little about.

Like quantum computing.

Nuclear energy.

And flying taxis.

But if you take the words of Warren Buffett to heart, you will find that simplifying your investment process is often the way to improve your investment returns over time.

“Simplicity has a way of improving performance through enabling us to better understand what we are doing.”

Warren Buffett

Now what does simplicity look like in practice?

Here’s an example of a message I posted on X.com (then Twitter) in 2020:

The message of the post was simple.

Older cars need more parts.

That was the entire investment thesis.

It had nothing to do with the electric vehicle hype that was building at the time.

Simple, right?

Like even ridiculously simple?

Well this is how the stock performed after that simple post:

O’Reilly Automotive ORLY 0.00%↑ shares have risen 850 points, or 209% in less than 5 years.

And I spent less than 5 minutes forming that investment thesis.

Yes, I’m a former Wall Street analyst and hedge fund manager.

But this example shows that you don’t need to be a Wall Street expert to develop a profitable investment thesis.

Or to achieve exceptional returns.

Just follow the guidance of Warren Buffett.

Look to invest in companies you know that have predictable long term growth prospects.

Wait to buy them at a reasonable price.

And give your portfolio a big K.I.S.S.

John

Follow Me On X: https://x.com/satoritrade