The stock market is full of noise. We all know that. Turn on any financial news TV station or website and there is no shortage of prognosticators attempting to predict the future. Don't listen. No one knows what the future may hold. Like Howard Marks postulated in a recent memo, a million scenarios can play out in the future, but only one will.

To be a successful investor, one must understand there is inherent uncertainty in the future.

So forget about trying to forecast short-term price movements, but focus more on the the long-term value of your stock holdings relative to the current price.

Because I know I can't forecast the future to any reasonable degree of certainty, I focus on things I can control. Those include portfolio construction and position sizing, both of which are dependent on numerous variables which I have enumerated.

To rehash:

  1. A business model that can scale dramatically with little capital investment or increases to working capital. Web platforms and software are my favorite business models.

  2. An owner/operator with a demonstrated track record of success, significant equity ownership and shareholder friendly policies.

  3. High and/or expanding gross, operating and net margins.

  4. A misunderstood or little known company with no or little institutional ownership.

  5. A clean capital structure with less than 30 million shares outstanding, no debt or dilutive securities and net cash. There is scarcity value when limited numbers of shares exist.

  6. A business that is generating cash and can fund growth without issuing additional capital. The share price will almost certainly follow the increases to intrinsic value.

  7. A sexy story developing to drive investor interest in the stock. An industry with tailwinds is also preferable.

These are controllable based on fundamental research in a company and the industry it plays in. After I find a security that matches most of all of those criteria, I wait for a price I'm willing to pay. Price is the key determinant in position sizing. If a stock trades at 25 cents on the dollar [relative to my assessment of value], I'm going to buy more of it than something I think trades at 40 cents on the dollar.

I typically hold only 3 or 4 securities at a time because I don't want to dilute my best ideas with more marginal ideas. Another intangible factor I consider when buying a fractional interest in a company is: do I reasonable foresee the subject company's stock price appreciating more than 50% in 12 months? If I don't think it is possible, I move on. Being a full-time investor and living off of capital gains is the surest way to only invest in your most compelling risk/reward ideas, always remembering you need to eat and have a roof over your head a year from now. This is a mental cue I use which I believe helps keep me out of trouble.

As prices and value converge, I constantly look for new ideas which are more compelling on a risk/reward basis and look to recycle capital into my best ideas.

So forget all the noise. Concentrate on a few high-quality ideas and understand there is uncertainty in the future. To combat the risk of the unknown, stick to buying companies that follow the attributes above and buy at prices that are well below what a private buyer would pay for the entire business.

If you can stick to that strategy, I think a terrific outcome becomes much more likely.