Doug Kass’ Unabridged User’s Guide to Investing

“You’ve got to be very careful if you don’t know where you are going because you might not get there.” – Yogi Berra

Too many traders and investors are less thoughtful and more impulsive with regard to buying and selling securities than when they purchase a refrigerator or a television.

Too many want an easy path to investment riches -- ideas coming forth from business television, or books that purport to explain “how to make millions” in the market. Even stock ideas from friends, relatives or on Twitter are often seen as pathways to investment success.

But there is no easy path for consistently profitable investing. It requires a lot of hard work.

The investment and asset-allocation processes can hold more weight and is more complex than nearly any other business decision. A host of variables, known and unknown, contribute to the investment alchemy. As well, subtle and unconscious influences and personal biases affect the process as we all seek Mr. Market’s metaphorical green jacket (like the one won by Jordan Spieth in this year’s Masters golf tournament).

What follows are some basic tenets that form my investment consciousness, which are admittedly simple to write about but far more difficult to execute.

Know Thyself, Work Hard, and Don’t Get Emotional

• If you don’t know yourself, Wall Street is a poor place to find yourself. There is a reason why there was a church on one side of the old New York Stock Exchange building and a cemetery on the other.

• If you enter the hedge fund biz, remember Darwin. It is survival of the fittest, the smartest and the most practical. The hedge fund industry is populated by some of the most obsessive and idiosyncratic practitioners extant, most of whom are highly educated and possessive of a greater-than-normal cerebellum.

Differentiate yourself by your process and by routinely working harder than anyone

Originally Published 8/18/15

Doug Kass’ Unabridged User’s Guide to Investing

else (e.g., my day routinely starts at 5:00 a.m.). As John Maxwell wrote, “Successful and unsuccessful people do not vary greatly in their abilities; they vary in their desires to reach their potential.”

• Do not get emotional in making investments, and however eloquent the strategy is, it is the results that count. The ecstasy of getting investment performance right is always eclipsed by the agony of getting it wrong. If you are uncertain or temporarily lack confidence, raise your cash positions and reduce your risk profile.

The Investment Process Is Methodical

• If you are a fundamentalist, write a brief synopsis of each investment analysis/conclusion. It will serve to crystallize your investment analysis, and it is an excellent personal and investment discipline. (It is the principle reason why I write my diary.) Moreover, an ex post facto reflection on why one achieved past success or failures is usually illuminating, instructive and often leads to fewer mistakes. After all, as philosopher Benjamin Disraeli once wrote, “What we have learned from history is that we haven’t learned from history.”

• If you are a technician, keep all your charts, just as the fundamentalist should write up a summary of each investment. Reflecting on past mistakes/successes is as important to a technician as it is to a fundamentalist.

• A combination of mostly fundamental and a dose of technical input is usually a recipe for investment success.

• Regardless of one’s modus operandi (fundamental, technical or a combination of both), logic of argument and power of dissection are the two most important ingredients in delivering superior investment returns. Common sense, which is not so common, runs a close third!

Stay Objective and Independent

• Neither be a Cassandra nor a Sunshine Boy! It is much easier to be critical than to be correct, as financial disasters are always impending by the ursine crowd.

Doug Kass’ Unabridged User’s Guide to Investing

Conversely, the outlook is never as perfect or clear as it is seen by the bullish cabal.

• Within limits, stay independent in view. Above all, remember equilibrium is rarely observed in the stock market. To quote George Soros, “Participants’ perceptions are inherently flawed” (at least to varying degrees).

Investment Discipline Is Key

• Let your profits run and press your winners, as knowing when to seize opportunity is one of the basic principles to investing. But stop your losses, as discipline always should trump conviction.

In “Reminiscences of a Stock Operator,” Edwin Lefevre wrote, “I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.”

Woody Allen put it even better: “I don’t want to achieve immortality through my work. I want to achieve it through not dying.”

The Past Is Not Necessarily Prologue to the Future

• History should be a guide but not a jailer. There is little permanent truth in the financial markets as change is as inevitable as it is constant. Do not extrapolate the trend in fundamentals in your company analysis nor in the trend in stock prices. Be independent of analytical and investment conclusions, greedy when others are fearful and

Doug Kass is the president of Seabreeze Partners Management Inc. and a contributor to Real Money Pro.

Until 1996, he was senior portfolio manager at Omega Advisors, a $6 billion investment partnership. Before that, he was executive senior vice president and director of institutional equities of First Albany Corporation and JW Charles/CSG. He also was a General Partner of Glickenhaus &

Doug Kass’ Unabridged User’s Guide to Investing

fearful when others are greedy, but always remember that possessing a variant view has outsized risk as well as outsized reward.

Risk and Reward Should Be Assessed Properly

• In buying a stock remember risk/reward is asymmetric. A long can climb to indefinite heights and one can only lose 100% of the value of each investment. Buy value, but only with a catalyst. When longs have high short interest ratios, investigate the bear case completely.

• In shorting a stock, remember risk/reward is asymmetric. A short can only return 100% (a bankruptcy) but can rise to indefinite heights. Never make conceptual shorts without a catalyst. Avoid shorts when the outstanding short interest exceeds five days of average trading volume.

• Use leverage wisely but rarely as financial markets are inherently unstable. While the use of leverage can deliver superior investment returns when the wind is at your investments’ back, it can also wipe you out when events fail to conform to your expectations. Only the best of the best consistently time the proper use of leverage.

Knowledge of Accounting Is a Must, but Meetings with Management Have Little Value

• There is no substitute for a thorough knowledge of financial accounting. Accounting can be misleading, opaque, and unaccountable, but free cash flow rarely lies.

• If you must meet with management, do so to understand a company’s core business

Co., and held various positions with Putnam Management and Kidder, Peabody.

Kass received his bachelor’s from Alfred University, and received a master’s of business administration in finance from the University of Pennsylvania’s Wharton School in 1972. He co-authored “Citibank: The Ralph Nader Report” with Nader and the Center for the Study of Responsive Law and currently serves as a guest host on CNBC’s “Squawk Box.”

Doug Kass’ Unabridged User’s Guide to Investing

but remember that managements infrequently, if ever, view their secular prospects with suspicion. In the late 1980s Warren Buffett wrote in his letter to Berkshire Hathaway’s shareholders that “corporate managers lie like Ministers of Finance on the eve of devaluation.”

Be Open to Others’ Ideas, but Rely on Your Own Analysis

• Always be self-critical, and once your view is formulated, be open to criticism from others that you respect. Take their criticism and test your thesis (constantly). Avoid what G.K. Chesterton once mused, “I owe my success to having listened respectfully to the very best advice, and then going away and doing the exact opposite.” Bullheadedness will get you into trouble in the investment world.

Only Invest/Trade When Distractions Are Limited

• Invest/trade/speculate only if you are not dependent upon the investment profits to maintain your standard of living.

• A stable personal and financial life, outside of investing, is typically a necessary ingredient to investment success.

• Take vacations and smell the roses. When you return you will be rejuvenated and a better investor/trader.

• Be well-rested and in good shape physically. “Investing is 90% mental; the other half is physical” (another Yogi-ism).

• Keep your investment expectations reasonable and expect to make mistakes as perfection is not attainable. Nevertheless, by all means, try to chase perfection as the byproduct will be investment excellence.

Read As Much as Possible

• Learn from those investors who have excelled by reading and re-reading the classic books on investing.

Doug Kass’ Unabridged User’s Guide to Investing

In terms of my own contribution to your knowledge base, let me reiterate the objectives and goals of my Daily Diary:

To begin with, never lose sight that I “eat my own cooking.” I trade and invest actively, sometimes in size, with real money from my investors. When I screw up and make trading and investment mistakes, it is financially painful to me. These are not paper trades like many other services provide. When my ideas go awry, I can’t help but also be affected emotionally with regard to subscribers who have embraced my ideas. You should all know, I take this to heart.

Secondly, I work hard in delivering my Diary to you, starting my day at about 5 a.m. and often staying after 6 p.m. Maybe I don’t work quite as hard as Jim “El Capitan” Cramer (who has a remarkable work ethic), but I work damn hard for subscribers.

Here is what I try to achieve every day in delivering a value-added view:

• Above all, to keep subscribers engaged by providing profitable short-term trading and thoughtful investment ideas on both the long and short side.

• Deliver (an often) variant and non-consensus view based on hard-hitting analysis of individual stock ideas, sector work, and market views.

• In doing so, at times I intentionally want to make you uncomfortable with some of your investments and with consensus notions -- playing devil’s advocate -- for the purpose of having you often question your holdings. That’s a healthy process!

• When appropriate, my individual analysis will be extensive. Other times I will highlight an investment case more briefly with bullet points and in summary form.

• Actively share insights and observations I gain from individual company management visits, telephone and conference calls.

• Communicate transparently what, why, and when I implement trading and investment ideas.

Doug Kass’ Unabridged User’s Guide to Investing

• I try to deliver both fast money ideas and slow money ideas, depending on market conditions. I indicate the size (small, medium, large) of all my trades and investments so subscribers can recognize my relative commitment, conviction, and weighting.

• Communicate, sometimes in detail, an analysis of macroeconomic events that might influence the capital markets.

• Pass on breaking business news that can impact markets/sectors/stocks.

• Write in an easy and even fun manner through the intersection of serious research and pop culture. I want to keep you informed AND entertained.

• Communicate special, one-off ideas -- for example, The Trade of the Week, Best Ideas list, Tell Me Something I Don’t Know, The Most Important Thing, etc. (There will be additional different ideas and new columns in the near term).

• I endeavor to be objective and try not to be self-confident in view as I have learned over a couple of decades that Mr. Market is here to embarrass the most people, most of the time. Mr. Market doesn’t exist to make us money -- that is our job.

• Interact respectfully with our subscribers in the Comments section and with other contributors in the Columnist Conversation area. In doing so, I encourage you all to challenge my/our views and theses. The only thing I ask is for you to be respectful, as I will be with opposing views.

• I will qualify my views, as the only certainty in this business is the lack of certainty.

• I will always admit my mistakes. More importantly, I will write about why I made boners, hopefully learning from each experience.

Finally, my Diary, Jim Cramer, and the contributions of others should not be taken in isolation. Our contributions should be used in conjunction with doing your own homework.

You hold the responsibility and pull the trigger to your own investment decisions -- we do not.

Doug Kass’ Unabridged User’s Guide to Investing

As stated above in the opening missive, our ideas are simply jumping-off points and investment input upon which more primary research should be performed by all of you.

I hope this outline of my core investment tenets and objectives and goals of my Diary are useful to all of you.

No content published herein constitutes a recommendation that any particular investment, security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. None of the creators or providers of our services or their affiliates will advise you personally concerning the nature, potential, value, or suitability of any particular investment, security, portfolio of securities, transaction, investment strategy, or other matter. Accordingly, do not attempt to contact them seeking personalized investment advice, which they cannot provide. To the extent any of the content published herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. No part of this publication may be reproduced, republished, or retransmitted in any form or by any means without the prior written permission of TheStreet, Inc.