Think Like Super Rich Investors


  • The very wealthy didn’t get that way by chasing stocks and forcing themselves to buy pretty good stuff.
  • Most owned a business, but, once their money moves into the public markets, they wait for cheap prices on great companies and companies with massive upside.
  • Stop buying the middle of market and chasing the 20% move of the month.
  • Buy low means buy low. Get it tattooed on the back of your clicker hand.

There are a few new people here that need to hear this, but a couple hundred long timers can hear it too. 

Stop trading the middle of the market and being a chaser. FOMO is for lemmings who usually die before getting rich. 

If you want to beat the markets and take less risk, use the same method that Warren Buffett and Peter Lynch use. Look for very cheap prices on great companies (there aren’t many) and companies with massive upside (there aren’t many). 

The rest of your asset allocation can be a handful of ETFs that skew your portfolio toward the big positive secular trends and the highly cyclical industries (like mining) coming off of bottoms. 

Own 12-30 stocks, however many you can truly handle keeping up with (with my help I think you can do up to 30), and several ETFs. That’s it. There’s nothing else that needs to be bought. Ever. 

My 60/20/20 Asset Allocation Approach

As much as we like hard and fast rules, and set it and forget it approaches, in investing, there’s no such thing. The best we can do are guidelines that we understand and can use effectively. 

So, in my head, my asset allocation for my own money and most client accounts is a 60/20/20 model. Now, this is for six and seven figure accounts, I’ll go through the adjustments for five figure accounts in a minute. 

You’ve heard of the 60/40 portfolio of 60% equities and 40% fixed income. It’s been around forever. And, while interest rates drifted down for 40 years, it was a fine model for retirees. It made them sleep better and think there was some magic formula. 

With interest rates no longer falling, and likely to rise a bit before settling into a long-term choppy trading range, 60/40 is like saying you only want to make about 70% of what the stock market makes (because bond returns are that low) and are still willing to take about 90% of the stock market risk (again, because interest rates are that low). 

Why on earth would anyone want to make around 70% of the stock market return with around 90% of the risk???

The 80/20 portfolio, 80% equities and 20% fixed income became a thing during my career. It was a way to get more into higher earning equities. The beauty was you’d earn over 90% of what the market earned and take just a hair less risk than the stock market. So, let’s say both numbers were in the 90% of return and risk. Clearly better than the 60/40. Still, leaves something to be desired.

The way I make 100% or more of what the stock market makes and still take a bit less risk, is to break my portfolio into 3 pieces. 

Piece 1: 40%-60Position Trading component (intended to be long-term holdings) equities and equity like investments (occasional junk bond or broken convertible). For the most part this is equity ETFs and stocks. Almost all holdings are position trades, that is, I’ll hold them for a few quarters to many years. This is essentially the same 60% that’s in the 60/40 portfolios.

When a holding gets overbought short-term, I’ll sell covered calls to generate extra income. If something gets overvalued against my 3-5 year outlook, I’ll sell outright. It’s actually great when that happens because we made a lot of money quicker than I thought we would.

Piece 2: 20%-40% cash or fixed income. Given I have a visceral dislike of most bonds, like Buffett, this is generally cash for me. I use this cash to sell cash-secured puts and generate giant incomes. Sometimes stocks get put to me. They then get cycled up to the Position Trading component where I’ll sell covered calls when stocks get overbought.

Piece 3: 10-20Swing Trading equities, mainly ETFs. I don’t swing trade much. The recent trades were in ARKK. I use ETFs for the liquidity and they are more purely technical set-ups, which means not much chance of an accounting problem blowing up my trade.

I manage OPM, Other People’s Money, so I’m usually down at 10% swing trades. Regulators you know. Recently, it’s been closer to 20%, again, see the ARKK trades, because of the volatility and the high cash percentage I’m holding (around 40% per the cash asset allocation grid in Plug & Play Stocks and Global Trends ETF monthly reports).

As an individual investor you have an advantage over advisors in that you are not regulated, so, if you are technically adept, then swing trading can make sense for 10-20% of your money. You have to have good organization skills and be able to sell on your own based on your risk tolerance and goals. I haven’t covered these much, but will going forward. I’d expect 1 or 2 swing trades per month. 

Those Rich Folks

Among the family office money managers I know, most use the approach I just outlined above. I wish I could say it was all my idea, but, like most of my structure and management techniques, largely borrowed (much nicer word than stolen). 

You’ll hear me talk about family offices from time to time. They are very important to keep track of, along with the private equity firms and certain hedge funds (like Renaissance, Point72, Citadel…). All are big money and are bottom fishers, though the hedge funds do a bit of momentum too.

What they all do though is wait for very cherry opportunities to buy stocks, i.e. buy low.

They do almost never have FOMO or trade in the middle of the market. The exception again is some hedge funds that trade everything.

If you trade much, keep in mind who you’re competing with, hedge funds, supercomputers and former finance pros who trade their own accounts in semi-retirement (where I was from 2016 to 2019). That’s why so little of my portfolio is swing trading and I do no day trading. I look for easier set-ups and that’s it. There aren’t many. But, sometimes I recognize it with a little help from my semi-super computer and Shooter (who is a rare top day and swing trader).

When I show the volume studies on the left side of my charts, that’s to show you where the big money comes in. It’s super important. They have great information and a lot of discipline. They are maybe the best signal out there.

If the rich are buying it after a decline, then you should be too.

When we see a stock like Aemetis (AMTX) go from like 20% institutional holdings to 60% in a few months, that’s a signal. It’s especially relevant when we look at the insider buyers and it’s executives with their own cash. Or, it’s someone you haven’t heard of but they invested millions. That’s some rich person who probably knows something.

When we see satellite-as-a-service stocks jump 20-30% in a day, that’s a sign there’s almost no room left to sell and any buying pressure drives the price up. Go back and look at the volume on those in recent weeks and remember, there’s always a buyer and a seller. If retail is selling, who is buying? Some rich dudes or dudettes. 

What the super rich can’t do much of is trade options. The look for very specific spots because of their asset allocation structure, the fact they can move the market and tax implications.

It really has to be a good deal to see giant options activity. But, that’s where the “unusual options activity” alerts come from. I watch those too for clues where the “big money” is going. I actually had a very lengthy discussion in 2020 at CES with John Najarian about options.

Ultimately, and this has been true forever, go back and read Reminiscences of a Stock Operator, we know that retail investors chronically and repeatedly buy high and sell low. They panic sell when things are bad and panic buy near the end of rallies for fear of missing out (hint: they already did). Buy high and sell low!!!! The complete opposite of what we are supposed to do. 

The rich are patient for the most part (on money anyway) and make a point to buy low and scale out as prices rise past what you’ve heard me call “the easy money.”

Remember when I said to sell Exact Sciences (EXAS) around $70 after I had been invested for a decade with single digit cost basis. Remember, I got ridiculed because it got into the lower $100s and I “missed it.” Ummm, yeah, I made 10x on that stock twice, the second time on a weird circumstance I knew to be an opportunity because I knew the company inside and out. It’s the multi-bagger that allowed me to close my office, semi-retire, travel a lot and play a lot of poker. Exact is about $50 today by the way.

Knowing your investments inside and out, and being patient enough to scale into low prices slowly, is how you will get rich or stay rich in the “great divergence” that is coming.

Chasing won’t work for 99% of us. It’s too hard to be right that many times in a row before getting blown up – a lesson many are learning now. 

Investment Quick Thoughts

At the end of the cycle (always respect market cycles), my effective income yield is almost always double or triple a pure dividend income portfolio’s income. It’s pretty rare our annual income is under 10%. I can’t remember the last time actually, probably 2000 and 2001 would be my guess because I was sitting on my hands a lot then. 

The cash-secured puts and covered calls really add up. So, despite having a slug of non-dividend paying growth stocks or your Alphabet’s (GOOG), Amazon’s (AMZN) and Nvidia’s (NVDA) of the world, income screams when we sell puts on small and mid caps plus covered calls on everything. This is how you put volatility on your side. 

Over my nearly 3 decades in the markets now, I’ve averaged in the low 20%s on total return annualized. I don’t know exactly because of the long ago record keeping, but I do know I’ve invested a shade over $170,000 in IRAs since 2001 and it’s worth about $5 million now. That wasn’t frequent trading. It was looking for small and mid caps with giant upside and buying the few great stocks cheap when the whole market fell. 

Right now, you can buy small and mid caps cheap. Maybe a little cheaper as summer progresses, but most of the froth is already gone in those. We saw some of our satellite stocks jump yesterday. More moves like that are coming as the surprises will be good now, since we just had a year of bad. 

The large and mega caps, some I mentioned above, aren’t quite ready to buy, but will be soon. I think this summer for at least the first bites of the Apple, maybe a second bite in December. We’ll see. 

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