308: How to Beat the Market 2: Insider Investing
This is the Monday Medley, a newsletter that goes out, you guessed it, every Monday. I republish it here for sharing and referencing, but if you'd like to sign up you can do so right here:
Happy Monday!
Last week, Neil and I released a new Made You Think breaking down "The Structure of Scientific Revolutions" by Thomas Kuhn
I also published an article on my crypto newsletter talking about "When to Sell," including some rules I'm using to force myself to take profits and not get carried away in market euphoria.
Alright, on to the Medley.
How to Beat the Market 2: Insider Investing
If you didn't read last week's newsletter on How to Beat the Market, check that one out first.
In it I talked about how investing in your earning potential and time will often beat the market, especially when you don't have a huge portfolio to invest with.
Another way you can beat the market is insider trading. The legal kind. Let's call it Insider Investing to distinguish it.
Insider trading is when you trade on the stock of a public company based on some insider information you have which is not available to the public. And unless you're Nancy Pelosi, this is generally frowned upon and might land you in jail.
It feels unfair because we like the idea of investing being a free market, where anyone could look at all the information available to them and make savvy investment decisions that would lead to beating the market. If someone is beating the market because they share the steam room at Equinox with the CFO of a major public company, we don't like that.
But insider investing is different. Whereas insider trading is just about making speculative bets on public companies based on privileged information, insider investing is using your information as an insider of some industry to gain a competitive edge with your finances.
In my Medley on "How to Get a Job in Crypto," I mentioned how simply working in the industry would likely expose you to 5-6 figures of additional income per year from the information you get access to. And it's certainly worked out that way for some people who joined the industry in the last year:
When you are deeply immersed in a certain field, you are able to spot opportunities earlier than outsiders. You get a sense of where the energy is going and you can allocate some of your capital accordingly.
This is the next step after you max out the effectiveness of investing in yourself and your time. The next question is: how can you use your skills, knowledge, and access to information, to get market beating returns with your capital?
Crypto is a fantastic example because you can invest in almost anything you're interested in. Private non-Web3 companies don't make it so easy: good luck getting shares in Stripe or SpaceX.
But this strategy doesn't have to be crypto-related. Real estate is another great example. If you deeply know a physical area, you develop a good sense for how future prices are likely to change in different neighborhoods and could make home investments accordingly.
Or if you have an audience, you could focus on investing in things you know that audience will like. One reason I don't like public markets so much is that I'm unlikely to be able to impact the success of Meta or Twitter. But for a company like Mentava (which I invested in) I know many readers of this newsletter will either be interested in it or know someone who's interested in it, so I can help impact the outcome of my investment.
You have to remember the "buy index funds" advice is from before the days when you could invest via AngelList, before you could buy tokens, before you could find information like Bigger Pockets to demystify real estate. If you can develop a deep understanding of an area, you can likely beat the market by investing in the things you know instead of just trusting the S&P 500 with all your money.
I wanna be really clear on this though: I do not recommend throwing money into random AngelList funds or crypto projects! That's a great way to lose money. What I do recommend is building an extremely strong competence in some area where you have a competitive knowledge advantage over everyone else, and then using that knowledge to allocate capital and grow your wealth. It's never been easier to get access to these opportunities, and it's only getting easier every year.
Like I said last week, you can always circle back to the boring stuff when your stack is large enough that you can't comfortably deploy it into the things you know. But until then, concentration creates wealth. Diversification only protects it.
Have a great week,
Nat