I am slowly developing, over time, an investment method I call 80-20 Investing. Everyone knows the 80-20 rule. For any activity you spend 20% of your time to get 80% of the result. The converse is obviously also true. The last 80% of effort only yields a 20% result. I really don’t want to waste my time, so I am interested in maximum efficiency.

I know we think that more information is better, but it isn’t.  Just read the writings of Malcolm Gladwell to grasp this concept. Here is where the heresy comes into play. That is also true in the investing world. In fact, sometimes more information produces a worse result because we have too much confidence in our decisions, and that over confidence dulls are decision making process. I have been thinking of how specifically 80-20 Investing would work for investing. Perhaps you will have some ideas and would like to add to the conversation. 80-20 Investing will not be an  approach for everyone. It is not the lazy man’s way to riches.  But, it may be ideal for Beginning Investors, small time investors, part time or weekend investors, in short, anyone who doesn’t want to abdicate responsible for their investments, but either doesn’t have the time or the inclination to spend their life (80% at least) making investment decisions.

I have listed a few ideas that are the genesis of 80-20 Investing. This list will be refined, added to, tweaked and finalized in the coming months, and ultimately, I will  set up an 80-20 portfolio distinct from the Chroma Investing portfolio. Since I am putting my own money down, all I am really interested in, is what works.

1. KISS. Keep it Simple Stupid. Yup, I am not above using bumper sticker slogans when it suits the idea.  I am not as smart as Warren Buffett, so 80-20 needs to be simple. This is the gospel. It doesn’t get much easier that buying a Net Net stock at a discount and selling it when it gets to full value.

2. Use Simple proven models. Like Altman Z-score. Dump any model that you cannot easily set up in Excel. I am not kidding. If I can’t understand it, it won’t help me. If there is no evidence for the model, either set up a test real money portfolio to track its performance or dump the model.

3. If an investing approach stops working, switch investing approaches. It is likely when the market gets frothy at some point in the future there won’t be my main stay of investing, NCAV stocks, when that happens I will already have other investment prospects working.

4. If something can be done automatically, do it automatically, If it must be done manually ,do it manually. Investment screens can be set up automatically, and with the right software, alerts can be added, etc.. But the important details, that were set up automtically, must be checked manually.

5. Make sure you cover your ass. Er, backside. The most important thing is preservation of capital. If you are going to take risks with your capital, make sure you understand them, and you are minimizing them. Think Nassim Taleb and the ideas contained in Fooled by Randomness. I read on another blog where someone could not distinguish the risk difference between shorting a stock and buying put options on that stock. Their are risks in both scenarios. A put option has only the risk of the premium paid for the put option. You know the total risk, that is potential loss of capital, from the moment you buy the put option. When you are shorting a stock you have two risks, the theorectial unlimited risk of a stock rising against you. This can be mitigated with smart stop loss triggers. But you cannot control margin calls on short positions, which as we saw in the financial collapse of ’08 forced some investors in to forced sale positions.

I think that is enough for the first edition of 80-20 investing. Please, if you have ideas contribute at chroma@chromainvesting.com or by posting a comment. If you like this blog please use the “share” feature that is at the end of every blog to share Chroma Investing with people on Digg, Facebook, to email etc.

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