believe in the old Star Trek monologue that states “To
seek out new frontiers, to boldly go where no one has
gone before”. In terms of investment protocol,
it would mean “to boldly go where no one is willing
to go right now”.
In a world that is virtually connected by the internet
24/7, with high powered super computers that can search
and model any conceivable set of variables in seconds,
with the whole world recognizing the benefits of investing
and unprecedented global liquidity, the art of searching
and identifying truly cheap investments has become much
more difficult and time consuming then it ever has before.
You MUST go where others are not if you are going to
have long-term investment success. I call this principle
Be willing to act and think in a way that is unpopular
and unsupported by the herd of consensus opinion.
you need to be emotionally and mentally willing to be
a contrarian. Being a contrarian has been a constant
factor in every single successful investor I know. So
why do most people follow the crowd? Because everyone
is afraid to be wrong. Having to stand alone when the
masses are saying things like, "What were you thinking,"
or "How could you have been so wrong when everyone
else was so right?" is a terrifying prospect for
most. And yet the main reason why most investors achieve
disappointing results is because most investors only
take action when everyone else is taking action. And
yes, there are times when a contrarian eats crow and
stands alone on a hill and takes the shots. That's the
bad news to going against the grain.
news is that a contrarian with a plan rarely finds himself
in that spot for very long. So force yourself to be
different and act differently than most and you will
find that success will come knocking on your door far
more frequently. If you want your financial results
to be better than most, then you must act differently
than most. Sounds simple and it is, if you are not afraid
to be alone and independent with your thoughts.
I also believe in long-term investing. Day trading is
for gamblers not investors. Any short-term benefit to
an investment that one makes is simply luck and should
not be viewed as anything more than what it is. Your
time horizon on an investment should be at minimum 2
to 3 years. If you are unwilling or unable to be a long-term
investor then you will unlikely have consistent investment
success. I know of no successful mutual fund managers,
hedge fund managers or professional investors who have
a short-term time horizon.
Of course, not all these principles can be adhered too
each and every day, but if you wake up aspiring to achieve
this way of thinking consistently, you will undoubtedly
get closer to the level of success you want.
Here is the methodology I use in the stock investment
selection process. I look for the following:
capitalizations under 1 billion dollars.
2) Simple businesses that can be easily
3) Very strong balance sheets and underappreciated
(hidden assets) assets.
4) Long standing businesses that have a
unique brand and reputation in the industries they serve.
5) Ethical long-term management that have
a large insider ownership.
6) Little if any institutional ownership.
7) Little if any analyst coverage.
8) Low price-to-sales ratio.
9) Healthy dividend yield.
10) Excellent long term prospects.
11) Current evaluation at a significant discount to
current rational asset values.
There are many individual balance sheet items and income
statement issues that are analyzed to make the above
conclusions so it is very important that one know what
to look for in a company’s financial statements.
While not every investment selected will achieve all
of these litmus tests, the majority of them will have
most. Very little focus is attached to future earnings
projections in the year ahead in determining the current
fair value of a stock as they are simply too hard to
determine with any degree of reliability. Instead, the
current earnings and current assets of the company are
used in the fundamental analysis to protect downside
risk. A measure of conservative average possibilities
for median earnings 3 years into to the future are used
to asses the possible growth of the company’s
Many people have tried to imitate Warren Buffet using
computer models that replicate his perceived criteria
for making an investment. They have never come close
to matching him. The difference between a computer model
and Warren Buffet is JUDGMENT. At the end of the day,
Warren sits down and looks at everything and makes a
judgment as to whether the investment is worthy or not.
This is where the art of investing comes in to the equation.
Some people have a special ability to see things that
others do not or recognize value where others do not.
In the small capitalization stock arena, I have had
this ability my whole life. It is my hope that I can
help others learn and benefit from this talent. I can
think of no better investment in life then the investment
of helping others become more financially independent.
President, Hackett Financial Advisors, Inc.
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