Chapter Four: Apply Common Sense
Revised and updated | Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor
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Chapter Four
Apply Common Sense
To paraphrase American baseball legend Yogi Berra, investing is ‘90 percent half’ common sense. ‘The other half’ is patience and discipline. As much as the institutional way of stock-picking tries to convince you otherwise, it is far from rocket science.
Keep investing super simple, and your portfolio’s beneficiaries will thank you. When Wall Street’s fee-driven approach claims complex strategies are best, remember that simplicity combined with common sense is a key to successful, do-it-yourself portfolio management.
Discover Your Circle of Competence
Be dedicated to a mindful approach to long-term value investing. The mantra involves understanding and accepting the limits of your circle of competence as you avoid the crowd’s bias toward costly investments.
Have you ever noticed that institutional investors often prefer financials over other sectors?
This phenomenon occurs because each person is a full-time member of the financial services industry, and the sector naturally serves as their comfort zone for investment. Whether professional or independent, investors develop a sphere of competence that defines their success in specific market niches.
My circle of competence — built over twenty years of retail investing — is limited to six sectors: communications services, consumer discretionary, consumer staples, health care, industrials, and information technology.
The communications services sector spun off from the consumer discretionary sector, replacing the former telecommunications sector.
Consumer discretionary companies offer straightforward products and services, although they carry higher risk because of the cyclical nature of the stocks that dominate the sector.
The consumer staples sector also encompasses easy-to-understand products or services, and, as non-cyclical businesses, it is at a lower risk.
Health Care is perhaps to twenty-first-century America what the automobile industry was to twentieth-century America: the centerpiece of the domestic economy.
Industrials are manufacturing products that an everyday investor generally understands.
It can be challenging to fully comprehend the products and services of information technology companies; however, their value propositions are often compelling.
By default, I am in contempt of the other five sectors. Here is why I mostly avoid each:
Financials — often excessively leveraged and overinvested by Wall Street.
Real estate or real estate investment trusts (REITs), because a significant portion of our family’s net worth is home equity. I would only include quality REITs in the portfolio if I were a renter or retiree.
Energy stocks tend to fluctuate more in line with energy prices than with the performance of the representative companies.
Materials are volatile, commodity-based stocks. See energy above.
Utilities are often overregulated and frequently indebted, although this may be a wise choice for retirees seeking income diversification.
Staying within your circle of competence is a wise way to help protect your principal. What sectors or industries are part of your sphere of expertise or interest?
Avoid the Crowds
History shows that retail investors’ portfolios, which often follow the crowd — whether it’s popular momentum stocks or the latest Wall Street trend — tend to lose steam at market extremes. The COVID-19 pandemic was a clear example of this stock market megatrend.
After some self-reflection, I realized that market-cap-weighting our family portfolio is similar to following the crowd of investors. Larger market capitalizations — calculated as shares outstanding multiplied by the stock price — may indicate that the market has perhaps overbought the stock.
Some time ago, I changed the structure of The Model Portfolio to an equal-weighted approach; therefore, each holding in the portfolio now represents an equal percentage of the total, instead of a weighted share based on market capitalization. As a result, the overall performance since inception has slightly decreased after rebalancing from market-weight to equal-weight. However, individual performance and its comparison to the benchmark, based on the date of inclusion in the portfolio, remained unchanged.
My goal for tracking the cumulative portfolio performance has always been to present individual holdings and overall outcomes in a straightforward manner, allowing for easy evaluation of investing strategies. The equal-weight methodology continues this tradition for readers and listeners.
The proven way to make money in the market long-term is to stay invested for the unpredictable, but welcome, price jumps, while building a portfolio that is less vulnerable to sudden and unexpected declines, such as those caused by the coronavirus pandemic. To do this, unlike many others, you must have the bravery to stay invested through each market cycle.
My Journey as a Common Stock Investor
I became a bottom-up value investor through trial and error after failing at top-down macro research earlier in my self-managed retail investing career.
At some level, I have explored many of the genres that define the stock market, including momentum growth, trend following, technical analysis, sector investing, fund strategies, and similar macroeconomic approaches to portfolio construction.
I learned a hard lesson in retail investing from this expensive education, as I paid tuition with trading losses. Luckily, the trial-and-error process kept bringing me back to the idea of value.
Long-term value investing has an enduring legacy, marked by inevitable ups and downs, much like every other experience in the stock market and life. When executed with a value bent, do-it-yourself investing leaves us less vulnerable to the traps that sometimes compromise the Wall Street professional manager. These practices include forced quarterly portfolio activities to protect job security, satisfying the institutional or accredited investor’s thirst for quick returns, and charging inflated fees to fund bonuses.
I am humbled and proud that the investment principle of common sense has continued to serve our family and dedicated readers and listeners well, even surpassing the pre-coronavirus thousand-legged bull market that was happening at the time of researching this book.
Since its inception, as the Great Recession became the second-worst economic downturn in American history, the holdings of The Model Portfolio have achieved a cumulative average capital return that has exceeded the performance of the S&P 500. These results (available at davidjwaldron.substack.com) were as of the market close on June 30, 2025, quarter-end, adjusted for splits and dividends, and based on an equal cap-weighted basis. As further discussed in Chapter Ten, although the price reflects what I paid for ownership shares of these excellent companies, over time, the value is what I received.
The market-beating result came after more than ten years of diligent yet enjoyable work, and there is no guarantee that this outperformance will persist. Building wealth through a self-managed investment portfolio over a long-term period is uncommon compared to professional managers, who collect millions of dollars in portfolio fees each quarter.
John Bogle Meets Warren Buffett
Respect the low-cost, lower-risk foundation of index investing, a concept passionately promoted for decades by the late Vanguard Group founder, John Bogle. Aim for the satisfaction and potential benefits of Warren Buffett-style active investing, even with minimal capital.
Despite mitigating some of the smaller risks associated with passive investing, the do-it-yourself investor who enjoys researching and owning businesses through common stocks often prefers active investing, where they achieve higher alpha at a lower cost.
Recognizing that I was leaving too much money on the table with annual investment advisory fees of 1 to 2 percent, the collective wisdom of Buffett and Bogle caught my attention. Learn how to invest with Buffett’s discipline and patience, while enjoying the lower costs and reduced risk promoted by Bogle.
In other words, add a pinch of common sense.
The Wall Street Consensus is Often Senseless
As an individual investor on Main Street, avoid interpreting the Wall Street consensus as a definitive buy or sell signal, and instead, as perhaps a suggestion to move in the other direction.
During celebrated quarterly earnings seasons, after a company comes up short on analyst consensus estimates of earnings or revenue, ask who missed: the senior management of the enterprise or the Wall Street analysts?
Emotional investing more often results in losses than gains. Meanwhile, emotional intelligence (EQ) is more vital to investing success than IQ. Therefore, a thoughtful Main Street investor has the right temperament to outperform the high-IQ Ivy Leaguer on Wall Street. Still, combining a high IQ with a strong EQ creates a top-tier investor. Names like Bogle and Buffett come to mind, along with Benjamin Graham, Seth Klarman, Peter Lynch, and Howard Marks, among other well-known value investors.
Many investors — sometimes for better, but more often for worse — trade based on geopolitical news and other macroeconomic events, fueling passionate feelings rather than rational thought. In contrast, the long-term, buy-and-hold investor on Main Street practices discipline to withstand the highs and lows of the volatile stock market journey in the short-term trading world of Wall Street.
Using common sense, the thoughtful investor recognizes that quarterly earnings, news, and other short-term events create buying opportunities for the stocks of well-established, high-quality companies. Conversely, many investors sell at a loss after a report or event, letting emotions override reason.
Focus on the Rearview and Side Views
Although the life lessons of hindsight also apply to investing, consistently predicting the direction of the market and stock prices is a dubious proposition.
My research and subsequent theses on targeted common stocks tend to focus on rearview and side-view perspectives. This investment approach suggests that the rearview mirror, representing the past, and the side view mirror, representing the present, are both clear. However, the windshield, projecting the future, remains foggy.
As emphasized throughout the book, I place little weight on the forward consensus. It is every bit speculative to me, like a foggy windshield. Many active investors, whether professionals or individuals, tend to underperform the market over time. Each one is buying or selling based on speculation about what will happen in the future, driven by price targets, earnings estimates, forecasted sales volume, potential mergers and acquisitions, or foretold market corrections.
Despite conveying confidence, does any forecaster honestly know what will happen to a market, company, or stock price at any specific future time?
I don’t, and I refuse to pretend at your expense or the account balances in my family’s portfolio. For example, if a targeted stock is down 3 percent the day after initiating a position, the stock trader is second-guessing the decision against waiting one more day to buy. The thoughtful investor, who purchased the same stock at $50, is waiting patiently for a split-adjusted $500 a share years down the road. In contrast, the market-timing trader buys at $48 the next day and sells at $53 — or worse, $43 — after the next earnings release.
Investing based on predicting future events is no different from investing based on hope. Predictive investment analysis is simply hopefulness disguised as intelligent forecasting. I occasionally face criticism from readers and editors of my research for emphasizing the actual makeup of the company and its valuation rather than relying on the forecasted direction of products, markets, and customers.
I am in this game to buy and hold the common stocks of quality companies, rather than to entertain the whims of readers. Again, leave the Magic 8-Ball part of the investment thesis to Wall Street analysts and senior management. Analysts earn more from fees, and management from stock options, than from compounded annual growth in capital gains and dividends, as we do or should on Main Street.
It seems like just yesterday when the investment community supported the movie rental store Blockbuster Video, based on projected global store growth in DVD rentals. The internet was emerging, and optimistic investors believed that Blockbuster would also dominate the online market. Those who analyzed the company and its stock understood it was far from a good investment due to low barriers to entry and other issues at the time. The pessimists ultimately proved correct because of their contrarian investing approach. The investment thesis is often clear and present, making detours into tentative predictions unnecessary.
By focusing on buying shares of quality companies at reasonable prices, the future takes care of itself. Invest based on facts instead of subjective forecasts. That strategy has worked for me for nearly two decades, including during the 2008–2009 financial crisis and the COVID-19 pandemic of 2020.
Since I am neither a stock guru nor a market wunderkind, I believe this common-sense approach to investing in the stock market can work just as well for motivated readers and listeners. Over time, the thoughtful retail investor learns the Yogism of the financial markets.
CHAPTER FOUR SUMMARY
On Common Sense Investing
Identify your circle of competence within the sectors and industries that contain the common shares of your targeted companies.
History shows that retail investors’ portfolios that follow the crowd often lose momentum at market extremes. Stay away from the herd.
The Wall Street consensus is often senseless. Don’t necessarily assume it’s a clear buy or sell signal. Instead, see it as a reason to do the opposite.
Buying and selling common stocks by trying to predict future events is just like investing based on hope. Focus on objective facts and ignore subjective forecasts.
To paraphrase baseball legend Yogi Berra, investing is 90 percent half common sense. The other half — up next in Chapter Five — is patience and discipline.
This chapter is copyrighted 2021 and 2025 by David J. Waldron. All rights are reserved worldwide.
Next in Build Wealth with Common Stocks | Chapter Five: Practice Patience and Discipline
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