I 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 Fundamental Contrarianism.

Be willing to act and think in a way that is unpopular and unsupported by the herd of consensus opinion.

Meaning, 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.

The good 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:

1)   Market capitalizations under 1 billion dollars.
2)   Simple businesses that can be easily understood.
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 asset base.

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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