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Fidelity Fund Manager: 6 Keys for Picking Winning Stocks

Fidelity Fund Manager: 6 Keys for Picking Winning Stocks

By    |   Tuesday, 08 March 2016 08:00 AM

##LINKTEXT##Chuck Myers has overseen the Fidelity Small-Cap Discovery Fund for the past 10 years, managing investor money through the depths of the last bear market to its record-setting highs.

His fund has outperformed the Russell 2000 Index, a benchmark for small-cap companies that came under pressure as energy stocks sold off with the collapse in oil prices.

Myers, who placed second in a national stock-picking competition while still in high school, credits much of his success to the influences of legendary investors like Warren Buffett, Benjamin Graham and Seth Klarman.

He provided some of the lessons he learned about picking winning stocks, according to a report by the CFA Institute:

6 Tips for Picking Winning Stocks

  1. Learn from the best, but think independently. There are many paths to investing success, and the best investors are the ones who have learned from others but gone on to chart their own courses based on their unique skill sets. Myers has done just that in developing his own brand of “low expectations” value investing, whereby he seeks out-of-favor stocks that are ripe for a turnaround.
  2. Stay within your “circle of competence.” Early on in his career, Myers had a six-month stretch during which his fund underperformed its benchmark by over 1,000 basis points. While his strength had always been stock picking, his portfolio contained significant sector bets and a big overweight in international stocks. It was these ill-timed factor bets outside his circle of competence, and not his stock selection, that dragged down his performance.
  3. Aim for the “middle of the fairway.” Prudent golfers will sacrifice a little bit of distance off the tee to ensure that they keep the ball in the middle of the fairway, increasing their odds of success. Having to hit your ball out of the rough or a fairway bunker is likely to cost you strokes. If your strength is stock selection, avoid making significant bets on factors like sectors, style, and market capitalization.
  4. Relative valuation matters. Hedge fund investors will typically focus on absolute returns, and mutual fund managers usually talk in terms of relative returns, but Myers pays close attention to both. In 2008, his fund was defensively positioned and this served him well when stocks plunged. However, as Myers’s portfolio of stocks still looked attractively valued on an absolute basis, its defensive nature would likely cause it to underperform as the market rebounded. As a result, he turned over his portfolio by over 100%, positioning it in beaten down stocks, including home builders and REITs, which went on to lead the market’s recovery.
  5. When it comes to turnover, patience is a virtue. Citing Morningstar data, Myers noted that across market-cap segments and style, the top performing funds over long periods have lower turnover than the poorest performers. Sell a stock in your portfolio, he said, only if you’ve found one “orders of magnitude better to replace it.”
  6. Focus on a margin of safety. A true test of an investment’s margin of safety is found on the balance sheet. Investors should consider whether a company can weather a severe financial crisis like 2008 without having to raise money and dilute its shareholders at an inopportune time.

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Chuck Myers has overseen the Fidelity Small-Cap Discovery Fund for the past 10 years, managing investor money through the depths of the last bear market to its record-setting highs.
small-cap, stocks, market, investing
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2016-00-08
Tuesday, 08 March 2016 08:00 AM
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