Test Everything

When it comes to the markets and finance, many beautiful ideas and theories can be dredged from price movements and historical patterns. They are elegant and hold the promise of untold riches -- right up to the point where you actually test and track them. I have seen just about every version of every system ever developed -- in fact, I have dreamed up more than a few of my own. Some worked; most did not. I try to always practice what I learned from hedge-fund manager Victor Niederhoffer years ago: Test everything. Some added a slight edge to my investing but most were just intellectual exercises that added to my knowledge of what does not work.

One book that never strays far from my desk is Investment Fables: Exposing the Myths of "Can't Miss" Investment Strategies by Professor of Finance Aswath Damodaran of NYU's Stern School of Business. In it, he explores many of the investment theories and approaches that have been developed over the years and exposes the flaws of each. One chapter breaks down the concept of buying stocks below book value, which is my favorite approach to investing. He finds that results are vastly improved by focusing on companies that trade below book value, have manageable debt levels and returns on equity of at least 8%. I have often set screens using these criteria, and they have provided some very successful ideas over the years....329 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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