Beliefs about Markets/Characteristics of Successful Investors

Passive Diversification

Index Funds

Belief: Markets are efficient; even if they are inefficient, the cost of exploiting the inefficiency > returns.

Characteristics: Willingness to accept market returns.

Indexing to broadest possible indices

Passive Value Investing

Ben Graham

John Neff

Warren Buffett

Belief: Markets systematically undervalue firms with identifiable characteristics.

Characteristics: (1) Screens that work (2) Long time horizon (3) Consistency (rather than high rankings) (4) Low turnover and transactions costs


  • Low PE
  • High dividend yield (Dow Dogs)
  • Low PBV (w/ High ROE)
  • Low PS
  • Low Price/Replacement Value
  • Undervalued stocks relative to a model that uses public information (DDM, EVA..)

Activist Value Investing

The Lens Fund

Michael Price

Belief: Value can be created by taking positions in poorly run companies and pushing for changes in policy or management.

Characteristics: (1) Sufficient Capital to take large positions (2) Willingness to have non-diversified portfolio (3) Knowledge of company?s business (4) Understanding of corporate finance (5) Willingness to confront management

  • Poor stock price performance
  • Low return on assets/equity
  • Low leverage
  • Large cash balances
  • Low institutional holdings/ Underfollowed securities.

Contrarian Value Investing

Michael Price

Belief: Markets overreact to bad news about a company by pushing prices below true value.

Characteristics: (1) Strong stomach (2) Willingness to accept short term losses (3) Capacity to ride out bad news (4) Clients who believe

  • Buy losers
  • Buy companies with valuable assets after cumulative bad news
  • Buy high yield securities in companies where default risk is overestimated.
  • Low institutional holdings/ Underfollowed securities.

Passive Growth Investing

Peter Lynch

T. Rowe Price

Belief: Markets sytematically undervalue growth in some companies with identifiable characteristics.

Characteristics: (1) Good at estimating future growth (2) Capacity to price growth (3) Willingness to accept volatility/risk (4) Lower turnover/transactions costs

  • Low PE/growth rate companies
  • Buy companies where PE< growth
  • Small cap investing
  • Earnings Momentum Models
  • Emerging Market Investing (where investing is just based on growth of economies)
Activist Growth Investing

Belief: Invest in growth businesses (which are constrained when it comes to exploiting growth - internally or externally) and try to ease the constraints.

Characteristics: (1) Understanding of business (2) Good at assessing management quality (3) Willingness to take risk (4) Willingness to accept undiversified portfolio.

  • Venture capital investing
  • Private Equity
Information Trading

Belief: Markets make mistakes when reacting to information that can be exploited using observable variables.

Characteristics: (1) Good sources of information (2) Capacity to trade quickly (3) Low transactions costs

  • Trading after significant Earnings or Dividend Announcements
  • Risk Arbitrage (buying target company stock after the announcement of a takeover)
  • Tracking insider trading


Long Term Capital: Merriweather

Belief: Markets make errors in pricing similar assets.

Characteristics: (1) Good pricing models (2) Technical expertise at pricing (3) Access to market prices (4) Capacity to trade quickly (5) Low transactions costs.

  • Index Arbitrage
  • Futures Arbitrage
  • Options Arbitrage

Reversal Investing (Short term contrarian)


Belief: Markets tend to correct themselves; if prices have gone up (down) quickly, they will tend to go down (up). If investors are too bullish (bearish), stocks are more likely to go down (up).

Characteristics: (1) Short time horizons (2) Good indicators of current market mood (3) Willingness to hold unpopular investments

  • Odd lot rules
  • Mutual fund cash positions
  • Specialist short sales
  • Investment advisory opinion

Momentum Investing

Acampora (?)

Belief: Markets tend to stay in trends: if prices have gone up (down) quickly, they will tend to keep going up (down).

Characteristics: (1) Timely indicators of price momentum (2) Short time horizons (3) Know when to sell (4) Speedy execution

  • Relative Strength
  • Charting patterns

Market Timing


Paul Tudor Jones

Belief: It is possible using identified variables to forecast the direction of markets (i.e. to time markets).

Characteristics: (1) Good & Timely market timing models/indicators (2) Know when to sell (3) Willingness to make large bets (in either direction)

  • Tactical Asset Allocation
  • Sector Rotation (sector to sector based on macroeconomic or market forecasts).
  • Hedge funds (selling overvalued and buying undervalued asset classes)