The Irrational, Right Thing To Do

In my entire investing career, I’ve never taken my own investment dollars and bet against Amazon.com, eBay, Yahoo!, or Google.

It’s not that I didn’t want to...

You see, I’m a rational guy. And by any rational measure, these stocks have been ridiculously overpriced (as I write, Google is trading near 100 times earnings).

The rational thing to do would have been to bet against them at some point... to bet they would eventually revert back to some version of normal. But one simple rule prevented me from betting against them. I call it Porter’s Rule - as I learned it from Porter Stansberry.

A decade or so ago, Porter and I were talking about selling some stock short, as it was ridiculously overpriced. Porter agreed with all of my logic. But he said he wasn’t interested in the trade.

“It’s not your logic Steve. You’re right. I just have a policy that’s served me well, so I’m sticking with it...I never bet against companies whose products I use.”

At first, this rule makes no sense... What does it matter if you use the product? If the stock is ridiculously overpriced, and you think it’s headed lower, then bet against it.

But Porter is crafty...

Porter’s Rule couldn’t really be tested. I couldn’t crunch any numbers to prove it worked or didn’t work... yet it had paid off for him many times. I thought about it. And I decided to take it on.

Now, a decade later, I’m glad I did. It saved me...

I never could have guessed just how big and important Yahoo! and eBay would become. If I had bet against them, I would have lost a lot of money. The same is true with Google today.

Wrapping up, today’s lesson is very simple:

Never bet against stocks whose products you use... no matter how overvalued the stock may be. The reasons you like the product may be the reasons the stock runs higher.

Although I don’t recommend buying expensive stocks like Yahoo! or Google... I do use their search engines... and an investor betting against those stocks at the wrong time would have lost a pile of money. So no doubt, the rule has saved me many thousands of dollars over the years.

And no doubt, it’ll do the same for you.

Good investing,

Steve