The Basic Tenets of My Investment Consciousness

Doug Kass published a terrific column — a list of sorts — of his investment tenets.  The concepts that form the basis of his investment process, as he wrote, are "admittedly simple to write about, but more difficult to execute."

Here’s an excerpt from this very instructive list (you can read it in entirety here).

Know Thyself, Work Hard and Don’t Get Emotional

– If you don’t know yourself, Wall Street is a poor place to find yourself.

– The hedge fund biz is survival of the fittest, the smartest and the most practical.

– Do not get emotional in making investments and however eloquent the strategy is, it is the results that count.

The Investment Process Is Methodical

– Write a brief synopsis of each investment analysis/conclusion.

– Keep all your charts, reflect on past mistakes/successes.

– A combination of fundamental and technical input is usually a recipe for investment success.

– Logic of argument and power of dissection are the two most important ingredients in delivering superior investment returns.

Stay Objective and Independent

– Neither be a Cassandra nor a Sunshine Boy!

– Within limits, stay independent in view.

– equilibrium is rarely observed in the stock market.

-"Participants perceptions are inherently flawed"  -George Soros.

Investment Discipline Is Key

– Let your profits run and and press your winners

– Knowing when to seize opportunity is one of the basic principles to investing.

– stop your losses as discipline always should trump conviction.

– Always sell what shows you a loss and keep what shows you a profit." -Edwin Lefevre, Reminiscences of a Stock Operator

The Past Is Not Necessarily Prologue to the Future

– History should be a guide, but not a jailer.

– There is little permanent truth in the financial markets.

– Change is inevitable and change is constant.

– Do not extrapolate the trend in fundamentals in your company analysis nor in the trend in stock prices.

– Be independent of analytical and investment conclusions

– Be greedy when others are fearful and fearful when others are greedy

– Always remember that holding on to a variant view has outsized risk as well as outsized reward.

Risk and Reward Should Be Assessed Properly

– Remember risk/reward is asymmetric.

– Long positons can climb to indefinite heights and only lose 100% of the value.

– Buy value, but only with a catalyst.

– When longs have high short interest ratios, investigate the bear case completely.

– In shorting a stock, remember risk/reward is asymmetric.

– A short can only return 100% (a bankruptcy) but can rise to indefinite heights.

– Never make conceptual shorts without a catalyst.

– Avoid shorts when the outstanding short interest exceeds five days of average trading volume.

– Use leverage wisely — but rarely

– Financial markets are inherently unstable.

– Leverage can deliver superior investment returns, but it can also wipe you out.

– Only the best of the best consistently time the proper use of leverage.

Knowledge of Accounting Is a Must but Meetings with Management Have Little Value

– There is no substitute for a thorough knowledge of financial accounting.

– Accounting can be misleading, opaque and unaccountable, but free cash flow rarely lies.

– "Corporate managers lie like Ministers of Finance on the eve of devaluation."  -Warren Buffet, Berkshire Hathaway letter

Be Open to Others’ Ideas but Rely on Your Own Analysis

– Always be self critical.

– Once your view is formulated, be open to criticism from others that you respect.

– Take criticism and test your thesis (constantly).

– Bullheadedness will get you into trouble in the investment world.

Only Invest/Trade When Distractions Are Limited

– Invest/trade/speculate only if you are not dependent upon the investment profits to maintain your standard of living.

– A stable personal and financial life is a necessary ingredient to investment success.

– Take vacations and smell the roses. When you return you will be rejuvenated and a better investor/trader.

– Be well rested and in good shape physically.

– Keep your investment expectations reasonable

– Expect to make mistakes as perfection is not attainable.

– Chase perfection;  the byproduct will be investment excellence.

Read and Learn From the Best

– Learn from those investors that have excelled

– Read and re-read the classic books on investing.


Terrific advice . . . Thanks, Doug!


The Basic Tenets of My Investment Consciousness
Doug Kass
Street Insight, 4/10/2006 7:54 AM EDT

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  1. Jim Klein commented on Apr 16


    You’ve alluded to in past interviews and also on
    Kudlow that you see America in a similar position
    that Japan was in the 1980’s and that real
    estate was Japan’s last bubble and it is ours.

    I also recall a column by Paul Krugman where he
    said that with real estate Mr. Greenspan had
    “run out of bubbles to inflate”.

    Does that leave us with deflation? I’m not talking
    about Great Depression dust bowls and bread
    lines. But Japan style deflation where our trade
    deficits (or in their case surpluses) are brought
    into equilibrium while consume credit collapses.

    Do you forsee that?

    I’ve heard you say we might be there but haven’t
    really seen you take this to it’s logical conclusion.

    ps, looking forward to your new endevaor. Any
    progress updates?

    Good luck,

    -Jim Klein

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