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.

He said, “Make the best use of what is in your power, and take the rest as it happens.” 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.

In community banking, where I have spent most of my career, that means price-to-tangible book below 0.90.

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.