Don't Be a Stock-Pick Junkie

Several times each year, value investors and professional money managers pay big bucks to hear the stock picks from an impressive lineup at the Value Investing Congress. The picks, like crack to a junkie, provide a quick high and a chance at big returns. Not all the investment ideas pan out, of course, and those that don't are the ones that leave their investors lying on the floor, shaking in a cold sweat, with lighter pockets.

Investors who mine the great investing minds for unique business insights or their investing processes, however, can come away with lasting takeaways that can be applied to investing decisions over and over, making their value considerable and lasting. Here are a few (of the many) investing and business insights from this year's Congress that could make you a better thinker, investor, and businessperson.

Bryan Hinmon, CFA, Motley Fool Pro and Motley Fool Options: Guy Gottfried, head of Rational Investment Group and certified value hound, is a man of discipline. Over the years he has simplified his investing process down to four questions:

  1. Do I understand the business?

  2. Is the balance sheet sound?

  3. Am I partnering with great people?

  4. Am I getting a bargain?

The point of making things so simple is that it should be easier to stick to. But Gottfried is continuously appalled at how many investors compromise on their non-negotiables. Want to invest only in businesses with great economics? You'd better not own Jet Blue (Nasdaq: JBLU) no matter how much you like its in-seat entertainment devices or how cheap it looks -- airlines have simply failed to make economic profits over the long term. Don't compromise! Gottfried suggests that investors should treat the purchase of a single share in exactly the same manner they would treat buying 100% of the business. With this mindset, you'll be less likely to compromise and you'll save yourself from countless investing flubs.

Joe Magyer, Inside Value: Macro commentator John Mauldin can feel a little doom-and-gloom sometimes when he says, for example: "Europe is a disaster. They will have a depression." Still, I was surprised and a touch heartened to hear that even the weary Mauldin still burns with optimism for the long-term sake of markets and humanity. "There's value to be found in overlooking our current problems," he said.

It's easy to get swept away in a stream of economic indicators and tears and fears over the eurozone, but it's equally important to keep our eyes on the long-term prize. Seventy-eight countries have defaulted or restructured debt in Warren Buffett's lifetime, yet markets and technology have marched onward, even if haltingly. That's not to say that we should stick our heads in the sand, but we shouldn't let each macro hiccup rattle us out of stocks and into the warm embrace of the fool's gold that is cash. Or gold, for that matter.

Michael Olsen, CFA, Million Dollar Portfolio and Special Ops: Turnarounds are a breed most investors have a difficult time wrapping their heads around. They're the ugliest of ducklings, and we almost reflexively recoil. The idea that a business on the rocks is much harder to pilot than one that's humming along isn't altogether unfounded. What I'll call Einstein's Law of Corporate Inertia applies: Keeping customers is much easier than winning them back.

To this, Lloyd Khaner -- a highly successful turnaround investor -- offered a few useful barometers for assessing and investing in them:

  1. Don't swing at bad pitches. Management without turnaround experience is less likely to get the job done, excessive debt levels (more than 70% debt-to-capital) complicate an already difficult undertaking, and structurally challenged or dying businesses are shaky ships.

  2. Don't swing too early. Also known as the value investor's curse. Turning businesses around is much more like an 18-wheeler making a 15-point turn on a New York City street than a U-turn in a go-kart. These are living, breathing organisms, and they take time to fix.

  3. An error: not swinging at all. This gets to a shortcoming endemic to humans. Past results are not predictive of the future. But being burned just once can powerfully bias our perception. It's important to realize that no two situations are the same. Businesses can turn; it's just not always easy.

I'll add my two cents. Unique assets or capacities, and/or solid competitive advantages, are a lot easier to fix than a cigar butt. Not all cheap stocks are made equal: Betting on Aon (NYSE: AON) 10 years ago, after it was by shaken governance issues and beset by sluggish growth, was a lot easier than betting that Gap (NYSE: GPS) would find its place in the crowded retail industry.