10 Stocks Beat Perfect

There is a line from Epictetus that I have thought about more times than I can count over thirty years of doing this work. ” Most investors are waiting for perfect. They want every indicator green, every box checked, every tailwind blowing in the right direction before they will touch a position. I understand the impulse.

I had it myself for years. While I was sitting there waiting for perfect, some of the best investments I ever made were sitting right in front of me, waving their arms, wearing two of the four characteristics I was looking for and begging me to pay attention. So let me tell you what I actually learned, rather than what sounds tidy in a framework document. The Four Pillars are real.

Valuation, credit quality, fundamental momentum, and price trend are each independently valid ways to identify stocks with the potential to deliver serious returns. The academic evidence on this goes back decades and holds up across markets, time periods, and geographies. I am not going to argue with Fama and French and Novy-Marx and Asness all at once. They are right.

But in 30 years of actually doing this with real money, I have found all four pillars aligned in a single stock about as often as the Orioles have won the World Series. Which is to say, it has happened, but you should not structure your entire life around waiting for it. What I have found is that two pillars, the right two pillars, is enough. More than enough.

And understanding which two pillars work best together is where the real edge lives. Before we get to the combinations, let me run through each pillar quickly so we are speaking the same language. Valuation is the foundation. It is Benjamin Graham’s margin of safety in modern dress.

I want to buy assets for less than they are worth, whether that is measured by price-to-tangible book, price-to-earnings, EV-to-EBITDA, or net asset value. 90. In other sectors, the metric changes but the principle does not. You do not pay full price for anything.

Ever. Credit quality is the filter. Every value trap in the history of the market looked cheap for a reason, and that reason was usually a balance sheet that was quietly disintegrating. Strong equity ratios, manageable debt loads, non-performing assets under control.

At the macro level, this pillar also tracks the credit environment itself — the ICE BofA High Yield spread, the AA corporate spread, the CCC tier. Credit markets know things before equity markets admit them. Pay attention. Fundamental momentum is the evidence of improvement.

Earnings estimates rising. Revenue accelerating. Margins expanding. Insider buying picking up.

Robert Novy-Marx showed in his research on gross profitability that businesses actively getting better are disproportionately rewarded. We are not interested in what the company was. We are interested in what it is becoming. Price trend is the confirmation.

Fundamental momentum and price momentum operating together — what the academic literature calls twin momentum — produce returns that exceed the sum of the two parts separately. When the market is beginning to agree with what the fundamentals already showed, that is a powerful signal. Four pillars. All real.

All worth having. Now here is the part they do not tell you in the brochure. The Combination That Protects You: Value Plus Credit If I had to build a two-pillar portfolio from scratch and I was primarily concerned with not losing money, the combination I would choose every time is value and credit quality. This pairing is what keeps you out of the graveyard.

The history of value investing is littered with investors who found something genuinely cheap, bought it with conviction, and then watched the cheap get cheaper as the balance sheet quietly crumbled beneath them. Sears was cheap for years. And then it was dead. Cheap is not a catalyst.

Cheap attached to a deteriorating credit profile is a slow disaster with good-looking entry prices. When you combine rigorous valuation discipline with a genuine credit quality screen, something specific happens. The universe of candidates shrinks dramatically, because a lot of things that look cheap are cheap precisely because the balance sheet does not justify a higher price. What remains is a smaller, cleaner group of businesses that are genuinely undervalued relative to the quality of their assets and their ability to survive adversity.

” The investing equivalent is equally plain. Never esteem a cheap stock that is going to make you break your analysis and pretend the leverage does not matter. Value plus credit is a patient strategy. These positions do not always move quickly.

You may hold something at 70 cents on the dollar for 18 months before the market catches on. But the failure rate is dramatically lower than pure value investing, the drawdowns are shallower, and when the acquisition offer arrives or the earnings inflect or the sector gets re-rated, the payoff is real. Strong balance sheet, genuine discount to tangible book value. That is the whole screen.

That is the combination. The Combination That Accelerates You: Fundamental Momentum Plus Trend If the first combination is about not losing money, the second combination is about making a lot of it, relatively quickly. Fundamental momentum plus price trend is the twin momentum framework, and the research on this is genuinely striking. 16%, which exceeded the sum of the two applied separately.

There is something that happens when the underlying business is improving and the price is