The secret to 'superior performance' in investing; My 'six-pound secret weapon'

1) Today, I'm expanding on a key presentation in yesterday's e-mail on my seminar on "An Introduction to Finance and Investing"...

As I explained yesterday, I don't have any plans to teach another formal seminar on finance and investing like the one I gave to two dozen high school and college students (including one of my own daughters) in 2018.

However, my collection of materials that I assembled has received a lot of nice reader feedback. It's a number of articles, videos, and slide presentations that I've put together over the years to teach the basics of finance and investing.

You can see the full four slide presentations I shared here: The Basics of Economics, Understanding Financial Statements, How to Achieve Superior Performance, and The Best of Value and Growth: Make Money Investing.

For the latter two presentations – the ones more heavily related to investing – I'll share the key slides in this e-mail and my next one... along with my commentary.

(Note that there are two videos of me teaching "Understanding Financial Statements" in yesterday's e-mail. You can watch part 1 here and part 2 here.)

In my "How to Achieve Superior Performance" presentation, I start by addressing the first step: developing a strategy for active investing. Here's the slide:

Your answers to these questions should be rooted in an honest assessment of your "edge" (if you don't have one, that's OK – for many folks getting started with investing, sticking to index funds is easier). When it comes to an edge:

My experience and observation are that successful money managers combine both the right approach and the right person. Regarding the former:

Successful money managers and famed investors also tend to have the following personal characteristics:

Once you've developed a strategy, you need to focus on the tactics. Which of the three ways of beating the market are you going to focus on?

For me, the answer is 90% stock picking and 10% market timing (every five to 10 years, I develop a strong conviction that the market is extremely overvalued or undervalued and adjust my portfolio accordingly).

So let's focus on the former – stock picking.

To pick stocks that beat the market, you need to understand other investors' expectations:

It logically follows, therefore, that to beat the market, you need to occasionally – perhaps as infrequently as once a year – have a viewpoint that is at odds with the consensus view (what legendary hedge-fund manager Michael Steinhardt calls a "variant perception"):

In particular, before buying a stock, you should be able to clearly articulate how and why you think a company will perform better than current expectations – which will therefore lead to its stock outperforming the market.

It's helpful to break this down into three factors that drive most stock prices:

I use a three-step process for evaluating stocks. The first is determining whether I understand the company and industry well enough to develop a variant perception:

Then I analyze the company and industry:

Lastly, I evaluate management:

So let's say you find a company you understand well, determine that it and its industry have attractive and enduring characteristics, and know that it's run by a great management team.

Time to buy the stock, right?

Not so fast...

It's actually easy to find plenty of companies with these characteristics. The problem is that every other investor usually sees exactly what you do... and therefore the stock price reflects this.

So the critical fourth step is to think about valuation.

You're looking for a company that, for some reason, is out of favor enough that its stock is trading below what it's really worth (its "intrinsic value") – and not by a little bit, but by a lot (creating a large "margin of safety"):

According to the legendary Warren Buffett, intrinsic value and margin of safety are the two most important concepts in investing. So here's some background on both in these next two slides:

And in these last two slides, I'll conclude with some thoughts on valuation – the most important (and difficult) part of investing:

In my next e-mail, I'll share the slide highlights of my other presentation on investing: "The Best of Value and Growth: Make Money Investing"... Stay tuned!

2) While I keep politics out of my daily e-mails, I have always shared personal stories about what's going on in my life...

And of course, these days my personal life is dominated by my run for Mayor of New York City (I announced it to readers last month).

So I'll share a brief highlight from last week – deploying for the first time my "six-pound secret weapon": Phoebe the Wonder Pup!

Here's a picture I love of her (she's on the right, with Roise the Wonder Dog on the left):

Phoebe has always been a huge hit with folks on our walks around the city, so I plan to bring her with me to lots of events and dog runs. Everyone wants to come pet her, which makes it easy to strike up a conversation.

And it also helps that I've always been a huge dog lover – and people like it when you show genuine affection toward their dog (and bribe them with a beef-lung treat – like these from Healthybud).

Phoebe only weighs six pounds, so she's easy to carry in the this great dog backpack carrier on the subway, bus, and even my bike (she didn't mind a three-mile bike ride into Midtown Manhattan).

I visited a Christmas party for low-income children in the gym of a public school in Lower Manhattan on Sunday. It was great fun meeting and introducing Phoebe to lots of kids, parents and volunteers – and she loved the affection and attention! Here are some pictures:

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.