Strategy

"Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so." -- Author Douglas Adams, "Last Chance to See"

People like to do things on their own. Young children attempting difficult tasks stubbornly tell their parents, "I can do it myself!" Grown men refuse to stop and ask for directions even when they are hopelessly lost. There is a feeling of accomplishment and power in doing things on your own, and a sense of weakness in asking for help.

But there are times when going it alone just doesn't work, something that many investors -- including myself -- have found out the hard way. The stock market is an extremely complex machine, and without some guidance it can make even a very smart person's head spin. At the core of my investment strategy is thus a very simple concept: If you want to beat the market, you have to be smart enough to ask for help -- and you have to ask the right people.

Who are the right people? They are those who have the best track records of outperforming the market over the long term -- people like Warren Buffett, Peter Lynch, David Dreman, John Neff, Ben Graham and Martin Zweig. And what a lot of investors either don’t realize (or simply ignore) is that several such Wall Street greats have either written or been the subject of books that detail their stock-picking methodologies.

Many relied on quantitative, stick-to-the-numbers approaches, and I have used these proven and published techniques to develop my "Guru Strategies." Each of these computer models mimics the method of a different investing great. During Strategy Lab, I’ll use these models exclusively to decide when to buy and sell stocks.

Fully invested, guru-based portfolio

As soon as the contest begins, I will use all of my allotted funds to purchase an equal number of shares of 20 stocks that get approval from my guru-based models. Every 28 days, I’ll rebalance the portfolio, removing stocks that no longer score highly on my models and replacing them with other stocks that do get high marks. The rebalancing will also make sure that each holding has equal weighting in the portfolio. I’ll remain fully invested using a 20-stock portfolio throughout the duration of the contest.

Here are a few other key tenets of my investment strategy:

• Avoid emotional investing. Emotion can cloud the minds of even the best investors, particularly today, when we are barraged by so much media-driven stock hype. Using purely quantitative guru-based models and the 28-day rebalancing takes emotion out of both the buying and selling equations. No hunches, no guesswork -- just proven, stick-to-the-numbers methodologies.
• The stocks may change, but the strategy won’t. True long-term investing means you stick with a strategy for the long haul, not necessarily with specific stocks. If you use a strategy that focuses on companies with low debt, for example, and one of your holdings suddenly goes into billions of dollars of debt, you certainly shouldn’t feel obligated to hold on to it. By rebalancing my portfolio every 28 days, I ensure that its holdings remain fundamentally sound and that I’m not hanging on to companies whose fundamentals have eroded significantly. The stocks themselves may thus change, but the strategies I use to select them never waver.
• Multiple strategies minimize risk. Even good strategies will underperform from time to time. But each of my guru models uses a different set of criteria to pick stocks, helping to minimize risk in the event that a particular strategy goes out of favor for a bit. For this round of Strategy Lab, I will be using a unique combination of five value and growth strategies (four stocks will be selected from each strategy to create the 20-stock portfolio) as a way to limit the volatility in the portfolio and to avoid being pigeonholed in one specific investing style. I have found that this approach of blending strategies produces the best risk-adjusted return over time.
• Don't limit yourself. Why limit yourself to a particular style (such as small-cap growth stocks or large-cap value picks), when you will inevitably underperform the market when that style goes out of favor? My guru-based models select their most attractive stocks at any given time, regardless of size or style classification. I expect to have a nice mix of small-, mid- and large-cap stocks that meet a series of fundamental strength and valuation tests.

This systematic and logical approach to investing, which takes advantage of the research and practical experience of some of Wall Street's best, is not just at the core of this Strategy Lab portfolio. It is the same approach I use to manage money for my private clients through my registered investment advisory firm, Validea Capital Management, and it’s what produces the portfolios available on my investment research Web site, Validea.com.

My goal over the next six months is to expose Strategy Lab followers to an investment philosophy, strategy and system that can give you an excellent chance at beating the market.