The next aspect of using investment advice is understanding your own capabilities.? It comes down to what you understand, and what you have time for.

Some investment advice requires constant attention, even assuming that it is right.? Does your job afford you that flexibility?? If it doesn’t, you need to look to longer-term strategies.

There was a period in my life when I did small company deal arbitrage.? More profitable, more volatility, more blowups.? It took a lot of time to do the daily research.? I really felt I was cheating my family in that era.? Value investing does not take nearly that amount of time.

Do you know enough about the investment advice that you can be an intelligent amateur critic?? You don’t have to be an expert but to follow the strategies of others, you have to be intelligent to the point where you can differentiate between strategies that work and those that don’t.

What, that’s a tall order?? Really, it depends on your time horizon.? Value investing will deliver over a decade-long horizon.? Momentum investing will deliver most of the time, so long as too many people aren’t following it.? Value has the advantage that adjustments are infrequent, that’s not true with momentum.

Beyond those two primal strategies, I’m not sure what else works, aside from indexing.? Indexing has its own issue: as long as money is flowing into indexing, indexing tends to outperform.? This is less obvious with stocks, but if you have ever been a bond manager, index bonds trade special (expensive).? They have lower yields because there is a class of investors that has to own them.? If the money flow ever reverses, indexing will not do well.

You are your own best defender.? No one can protect yourself more than you can.? That is why it pays to be skeptical of unusual claims of investing expertise.? If they were really that good, they would invest for themselves, and not solicit outside investors.

After all, in this modern era, if anyone has an infallible investment method and limited capital, they will do best by setting up a hedge fund.? Those who proclaim to you that they have methods that border on miraculous should be questioned closely, because in investing, there are no miracles — only cash flows, and the market’s anticipation of future cash flows.

Now, there are some things with investment advisors that can give you some comfort.? Smaller managers tend to do better, because they haven’t reached the boundary of how much money their ideas can accommodate.? Beyond that, in my opinion, managers that don’t beg for business do better as well, they aren’t spending time on the marketing; they are managing.? Also, managers with a clean revenue model “fee only” aid investors.? The costs are clear from day one, and there are no conflicts of interest.

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Taking it back a step, can you critique yourself?? Where have your biggest successes and losses come from?? It might be good to keep a journal, so you can see if your successes stemmed from things you foresaw, or were accidental, and if your losses stemmed from neglect of discipline in following your ideas, or whether the idea itself was wrong.

My personal conviction is that most investors lack patience.? That’s why we sell at the bottom, and buy at the top.? But to be a patient investor requires strong balance sheets, because bad things do occur, and we want to avoid a permanent impairment of capital.

Do you know your weaknesses?? It took me 10 years to wash fear out of my system.? Greed wasn’t a problem.

Understand yourself, and learn self-control.? Don’t compare a stock to where it was, compare it to where you estimate it should be, once you are realistic.

More in Part IV