Why You Can Beat Wall Street's Best

What if some of the advantages you think Wall Street has over you are not as important as you believe?

Michael Burry famously predicted the US housing crisis, yet he has made major market calls since that proved wrong. Stanley Druckenmiller recognised the excesses of the technology boom, only to succumb to FOMO and buy near the top. Warren Buffett did not start buying Apple until nine years after the first iPhone was released.

These are some of the world's most respected investors. They have access to enormous resources, research and information, yet they still get things wrong. That's encouraging because it challenges the belief that you need to know more than everyone else to become a good trader.

In this week's Talking Wealth Podcast, we look at the mistakes made by some of Wall Street's best investors and what retail traders can learn from them. Their experiences reveal why being right matters less than knowing when to act, how much to risk and what to do when you are wrong.

Wall Street's best investors don't always get it right

It is easy to place successful investors on a pedestal.

When someone, such as Michael Burry, makes one of the greatest market calls of his generation, every prediction that follows attracts attention. When Warren Buffett speaks, investors listen because of the extraordinary record he has built over decades.

Pedro believes this can put retail traders at a disadvantage. You can start believing these people know something you don't and look to them for answers rather than developing a process you can follow.

Yet trading is a game of probabilities.

You don't need to be right on every trade. You can be wrong a percentage of the time and still make money if your trades are structured correctly.

The danger comes when being right becomes so important that you refuse to accept when a trade moves against you. Instead of cutting the loss, you freeze and hope the market will turn around.

That is why having a trading plan matters. You need to know why you are entering, how much you are prepared to risk and what will cause you to exit.

As Pedro explains, your wins and losses are data within your overall system. Being wrong is part of trading. Refusing to accept it is where the damage can occur.

Michael Burry shows why timing matters

Michael Burry provides one of the clearest examples of the difference between predicting an outcome and knowing when to act.

His reputation was built on identifying the problems developing in the US housing market before the Global Financial Crisis. But as Filip points out, Burry began uncovering those problems around 2005. The housing market continued rising through 2006 and 2007 before the crisis unfolded.

Since then, Burry has also made bearish calls that did not play out as expected.

The lesson isn't that Burry lacks skill. His success shows otherwise.

Filip's point is that the problem starts when somebody else's conviction replaces your process.

If you had followed Burry's concerns years before the GFC and stayed out of the market, you could have missed a substantial part of the rise before the eventual crash.

A retail trader has an advantage here. You don't have billions of dollars to move. You can remain in the market while your strategy tells you the trend is intact and exit when conditions change.

Being right about what eventually happens is one thing. Knowing when it is happening allows you to act.

You don't need to predict the economy

Ray Dalio has spent decades studying economic cycles and explaining how different parts of the economy interact.

Yet even one of the world's best-known macro investors cannot predict every recession, change in inflation or movement in interest rates correctly.

Filip refers to Dalio's prediction of a US recession before the 2020 election. A normal cyclical recession did not occur, although COVID subsequently caused one for entirely different reasons.

This raises a simple question: if one of the world's leading macro investors cannot consistently predict what the economy will do next, why should a retail trader believe they need to?

Pedro's approach is to let the market tell you what is happening.

Large institutions conduct enormous amounts of research before deciding where to invest. When they act, you can eventually see the effect through price, volume and patterns on the chart.

You don't need to predict where interest rates will be in 12 months. You need rules that tell you when conditions are right to enter and when it is time to get out.

Even Stanley Druckenmiller fell victim to FOMO

Experience doesn't make somebody immune to emotion.

During the dot-com boom, Stanley Druckenmiller recognised that technology stocks had become overheated and initially stayed away.

Then he watched them continue rising.

Eventually, he could no longer stand the fear of missing out and bought around $6 billion in technology stocks near the peak. Druckenmiller later recounted that he lost around $3 billion in six weeks.

It is the same behaviour we see when a retail trader watches a stock rise for months before finally deciding they cannot miss out any longer.

One of the important lessons from Druckenmiller's experience is that knowledge alone does not remove emotion.

This is why Filip places so much importance on price and trading rules. The aim is to let profitable trades run while cutting losing trades short.

Your rules also help manage trading psychology when fear or FOMO starts influencing your decisions.

Warren Buffett proves you don't need to pick the bottom

Warren Buffett provides a very different lesson.

Apple launched the iPhone in 2007, yet Berkshire Hathaway did not begin buying Apple until late 2016. Buffett later confirmed that timing in Berkshire's shareholder letter. Berkshire Hathaway shareholder letter

By then, Apple was already one of the world's largest companies.

Buffett was late, but that didn't stop Apple from becoming an enormously important Berkshire investment.

For traders, the lesson is that you don't need to buy at the absolute bottom to make money from a substantial move.

Filip argues that trying to pick the exact bottom or sell at the exact top can get you into trouble. There can be plenty of opportunity in capturing the meaningful part of a trend.

Pedro also makes an important distinction: Buffett is an investor, not a trader.

Buffett is interested in owning businesses and analysing their underlying value. A trader has a different objective and is primarily interested in capturing movements in price.

Following Buffett simply because of his reputation makes little sense if your timeframe and strategy are completely different.

Being wrong isn't the problem

Bill Ackman, Jeremy Grantham and Peter Lynch provide three different examples of the same underlying lesson.

Ackman changed his mind after investments moved against him. In 2022, Ackman sold a $1.1 billion Netflix position only months after buying it, taking a loss of more than $400 million. At the time, he explained that new information had changed the original investment thesis. 

For Pedro, there is nothing embarrassing admitting you were wrong.

The real problem is refusing to act because you don't want to accept the loss. This is why risk and position sizing need to be considered before you enter a trade.

Jeremy Grantham demonstrates a different problem.

He has repeatedly warned about bubbles in US equities. In 2022, he described the US market as the fourth "superbubble" of the previous 100 years and later argued that the bubble had entered its final act.

But as Filip asks, what can you actually do with a prediction that a bubble will burst if you don't know whether it will happen next month or years from now?

Pedro sums it up well: analysis isn't a trading signal.

Peter Lynch provides the opposite lesson. Despite his extraordinary record as a fund manager, he has acknowledged missing exceptional companies.

You are going to miss trades. You will sometimes sell too early or enter at the wrong time.

Rather than beating yourself up, Filip suggests approaching these mistakes like a scientist. Work out what happened, determine whether your rules need adjusting and use the experience to improve your strategy.

How can you beat Wall Street's best?

Wall Street has advantages you cannot match. Major funds have analysts, information, resources and billions of dollars at their disposal. But size also creates limitations.

A fund managing billions cannot move in and out of positions as easily as you can. Michael Burry's experience before the GFC illustrates why this matters. As a retail trader, you can respond much faster when market conditions change.

That advantage is only useful if you have a process.

Before entering a trade, Filip says you should know:

• Why am I buying?
• Where am I buying?
• What is my risk?
• What is the opportunity?
• Where do I get out if I'm wrong?
• How do I stay in long enough to capture the meaningful part of the trend?
• How do I repeat the process?

These questions shift your attention away from predicting the future and towards decisions you can control.

Wrap Up

Wall Street's best investors make mistakes. They change their minds, buy too early, sell too soon and miss exceptional opportunities.

Yet they can still make money.

You don't need to know what the market will do next to trade better. You need to understand when to act, manage the risk when you're wrong and have a process you can repeat.

Once you understand that, Wall Street starts to look a little less intimidating.

Learn more about Wealth Within

If you’re looking to build your knowledge first, Dale Gillham’s award-winning book, Accelerate Your Wealth, provides practical insights into understanding the share market, managing risk and building wealth over time.

If you want to develop the skills to become consistently profitable, Wealth Within’s Short Course in Share Trading teaches the skills and knowledge contained in the first three modules of the government-accredited Diploma of Share Trading and Investment.

Within a structured framework, you’ll learn how to analyse the market, manage risk and develop trading rules that help you make more informed decisions. You’ll also be supported by the Wealth Within team, who have more than 80 years of combined market experience.