The Davis Strategy

Recently finished reading The Davis Discipline, by John Rothchild, with a foreword by Peter S. Lynch. I believe that this is the promotional version of a very similar book, The Davis Dynasty. There are some interesting points towards the end of the book which I wanted to share on this site (pg. 147) :

10 Basic Tenets of The Davis Strategy:

1. Avoid cheap stocks.
2. Avoid expensive stocks.
3. Buy moderately priced stocks in companies that grow moderately fast.
4. Wait until the price is right.
5. Don’t fight progress.
6. Invest in a theme.
7. Let your winners ride.
8. Bet on superior management.
9. Ignore the rear-view mirror.
10. Stay the course.

The Davis Checklist (pg. 153)

"As Shelby and Chris noted in a memo written on May 22, 1997, every company they installed in the New York Venture Fund's portfolio exhibited most, if not all, of the following characteristics" :

1. First-class management with a proven record of keeping its word.
2. Does innovative research and uses technology to maximum advantage.
3. Operates abroad as well as at home.
4. Sells products or services that don’t become obsolete.
5. Insiders own a large chunk of shares and have a personal stake in the company’s success.
6. Company deliver strong returns on investors’ capital, and managers are committed to rewarding investors.
7. Expenses are kept to a minimum, which makes the company a low-cost provider.
8. Company enjoys a dominant or a growing share in a growing market.
9. Company is adept at acquiring competitors and making them more profitable.
10. Company has a strong balance sheet.

Time Travel Investing

Continuing on in some posts about Some Great Financial Reads, just finished reading Dave Barry's Money Secrets. It's hysterical, like all of his books. Albeit not a serious book, you can tell from reading it that Barry does know some stuff financially. I found the most interesting section to be from Chapter 12: How to Get Rich in the Stock Market (pg. 115):

"But getting back to the stock market: It can be a good way to make money, but only if you know what you're doing. You do NOT buy stocks based on the latest fad, or some "hot tip" from your uncle Herb. For one thing, you don't ahve an uncle Herb. For another thing, the only way to make money in the stock market is to use a rational system, based on solid information, not guesswork. The only proven way to make money in the market is to follow this three-step procedure:

Step 1: Gather all available financial data on the top one thousand stocks for the past twenty-five years.
Step 2: By conducting a thorough analysis of each stock - taking into consideration its performance against the overall market, splits, price/earnings ratio, earned-run average, etc. - select the ten stocks that have performed best in this time period.
Step 3: Using a time machine, go back twenty-five years and buy these stocks.

This system is pretty much foolproof except for one teensy flaw, which you may have already detected: You are way too lazy to do the research. Most people are. This is why most people use stockbrokers."

Though this is a funny take on how to find the best 10 stocks over a twenty-five year period, there are some lessons to be learned here. Many of the best investors really do find investments that they feel will outperform the market not over a short period but over a long period. Sometimes with these individuals, their best skill is the ability and patience to wait it out and do nothing.

Mohnish Pabrai discusses this principle in detail in his article Buffett Succeeds at Nothing. Though it's a few years old, it's message is still worth paying heed to.

21 Trading Rules

Finished the Market Wizards series of books up with the last one in the series: Stock Market Wizards. Jack Schwager did a great job with this series of books, it really gives you a feel for the traders' thoughts/emotions and reactions to market events. The very first chapter in the Stock Market Wizards book is an interview with Stuart Walton, titled Back from the Abyss.

Stuart Walton's 21 Trading Rules
Here is a response to an interesting question posted by Schwager near the end of the Walton interview (page 27):

What are the trading rules you have posted on your computer?

1. Be patient - wait for the opportunity.
2. Trade on your own ideas and style.
3. Never trade impulsively, especially on other people's advice.
4. Don’t risk too much on one event or company.
5. Stay focused, especially when the markets are moving.
6. Anticipate, don’t react.
7. Listen to the market, not outside opinions.
8. Think trades through, including profit/loss exit points, before you put them on.
9. If you are unsure about a position, just get out.
10. Force yourself to trade against the consensus.
11. Trade pattern recognition.
12. Look past tomorrow; develop a six-month and one-year outlook.
13. Prices move before fundamentals.
14. It is a warning flag if the market is not responding to data correctly.
15. Be totally flexible; be able to admit when you are wrong.
16. You will be wrong often; recognize winners and losers fast.
17. Start each day from last night’s close, not your original cost.
18. Adding to losers is easy but usually wrong.
19. Force yourself to buy on extreme weakness and sell on extreme strength.
20. Get rid of all distractions.
21. Remain confident – the opportunities never stop.

What about you? What are your essential "trading rules" ?