My Investment Philosophy

My investment philosophy rests on these principles:

1. The market for stocks is inefficient and can be beaten.
2. Control of emotions is as important as rational thought.
3. Value-type investing works but there is no such thing as a “margin of safety.”
4. Growth-type investing works but there is no such thing as permanent competitive advantage.
5. Momentum-based trading only works for the lucky and liars.
6. No one can consistently get an informational “edge.” (But it doesn’t matter).
7. Letting winners run and cutting losses is imperative.

In a portfolio of investments, 2 out of 10 will drive almost all of the performance. In 10 investments, 3-4 will be wrong immediately, and sold out quickly for a loss. 2-3 will muddle along, making market-type returns. 1-2 will outperform, doing 5 times better than the market. 1 out of 1 will be a super grandslam homerun, going up 10-fold in 3 years. (Apple, MSFT, Nintendo, HD, WMT, DIS, MCD, history is full of these companies).

The good news is 1 or 2 great stocks out of 10 is enough. In fact, 1 world-class stock out of ten is enough, but the key is that losses must be cut on the “losers.” 1 out of 10 is capable of dropping by 80-90%, like GE, CC, ENE, NYT, GCI, F, etc. And the “rating” of the company has no bearing on it’s ability to drop by 80%. The ratings agencies and major brokerage firms will have their highest ratings on the companies that are currently doing well, and no rating at all on the up and coming stocks.