Tuesday, October 26, 2010

Kaminsky, Smarter Than the Street

Gary Kaminsky’s Smarter Than the Street: Invest and Make Money in Any Market (McGraw-Hill, 2011) proceeds on the assumption that the market will trade in a range for the next decade, essentially doing nothing. One model that supports this thesis is Thomas H. Kee’s
“Investment Rate,” which is grounded in demographics. The idea is that “people put much more money into the markets after they have put their children through college, or at about age 48.” Kee suggests that we are swimming against the demographic tide and hence “are entering a very tough period” in which investment dollars will be shrinking and that it will be “very difficult to achieve any new highs in the market until 2023.” (pp. 34-35)

How can the retail investor shine in a stagnant market? Kaminsky outlines a contrarian strategy of buying or shorting against the crowd, taking advantage of a market dislocation, as long as there is a sound fundamental reason to do so. The person who proceeds in this way will be investing in a two-decision stock; that is, he must know both when to buy (or short) and when to sell (or cover).

In selecting stocks that will outperform, the investor should employ a series of litmus tests to analyze potential candidates: changes in the company itself, how the company uses its cash, and company fundamentals (sustainable competitive advantage, strong financial metrics, long-term free cash flow generation, shareholder focus, and insider ownership). In addition, he should monitor the macro environment in which the company operates.

Kaminsky rounds out his book by revealing Wall Street’s greatest myths, suggesting how many stocks an investor should own, and giving pointers on how to manage the downside of a portfolio.

Smarter Than the Street is a quick read. It is an easy introduction for the investor who uses fundamentals to make decisions and who believes with Kaminsky that buy and hold is a strategy for mighty few stocks. The average investor who follows advice of this book should be able to improve his returns, though whether he can truly outperform is another question.

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