I run and help run two portfolios, and over the years I've done this, I've developed an approach that helps me adapt to the market. Below, I share how this style developed, the bigger picture, my seven principles and how my approach, and I, have changed.

At work, I help run a portfolio that is composed entirely of financial stocks. I'm the insurance guy, so I recommend long and short ideas to the team in the insurance industries, and then help out with asset managers, brokers and other companies in the capital markets space. Beyond that, my years as a bond manager allow me to aid the group in interpreting the world of fixed-income investing, which is useful when trying to interpret the strategies that financial companies employ.

I also use this strategy on the stock portion of the two in-house accounts I manage, and I use a variation of it in my insurance investing, which I describe in my insurance investing pieces that I provide at the end of this column.

The Bigger Picture

I came up with this strategy after an email conversation with Ken Fisher. The result is not his strategy, but it stems from his advice. He told me that what was known was no longer valuable; to succeed, you need to come up with a new strategy that works, and so I did. I should note that there are some small accounts internal to our firm that use this strategy as part of a broader balanced strategy.

The main idea was to take an ecological view of investing. I view the markets as an ecosystem, with many players competing for scarce returns, using multiple strategies, some of which work, and some of which don't. This method attempts to adapt to the fickle tastes of investors, selling the market what it unduly loves, and buying what it unduly hates.

The second idea was to view the market from the middle outward. Industry factors are under analyzed; often companies within an industry are overanalyzed relative to each other. Industry factors deliver over half of the returns of an individual stock, so being in the right industries is crucial.

The third idea was to view the most critical part of my job as an analyst as being the effort to figure out which managements were conservative and competent. This is still a challenge, but analyzing the strength of a company's balance sheet today, combined with how the current management did in the last cyclical trough, is a good start.

If you liked this article you might like

Let the Current Bailout Die

Let the Current Bailout Die

Talking to Management, Part 4: Prices and Products

Talking to Management, Part 4: Prices and Products

Talking to Management, Part 1: The Big Questions

Talking to Management, Part 1: The Big Questions

Talking to Management, Part 2: Gleaning Financial Subtleties

Talking to Management, Part 2: Gleaning Financial Subtleties

Talking to Management, Part 3: The Competition

Talking to Management, Part 3: The Competition