Lessons from a Trader...

Lessons From Irwin T. Yamamoto

Be a consistent contrarian: Being contrarian was Irwin's nature. Whenever possible he took the unpopular view and found ways to make money from it. While some people love to think they are a contrarian as far as the market is concerned, when the heat is on and everyone (including the market itself) thinks you are dead wrong, they always run back to the herd. Irwin never did. Not once. No matter what. And, trust me, he was tested many times throughout his career.

Have courage: Every call Irwin made was a bold call. If it wasn't bold, he simply didn't make it. He refused to hedge his bets by trying to take the middle road or offering up so many contradicting opinions so he could later say he was right no matter what happened as so many "experts" do. To do well in the market, we all have to have the courage to make and stick with our convictions. Often the investment decisions that will work out the best are the ones that simply require the most courage to make.

Believe in yourself: Irwin had an unshakeable belief in himself. That's so very important when you have your hard-earned money in the market. Through thick and thin, Irwin always expected to win and he did more than most. Every winner I've met has possessed this important characteristic. However, what made Irwin truly special was that he also had the humility to keep his confidence in check.

Focus on quality not quantity: Irwin told me often that he was a happy man if he could just one good opportunity in the market every year. Yes, that's right - just one opportunity. In fact, subscribers to his newsletter will testify to the fact that Irwin rarely had more than just a handful of positions on at any given time and was not afraid to be in cash for extremely long periods when he found no excellent opportunities to share.

Patience: When taking the unpopular and contrarian view, Irwin understood that time was on his side. Although he would admit that it was "not easy to be alone in the crowd and swim continuously against the tide," by maintaining a long-term perspective, Irwin was not tempted by the seduction of the short-term market swings. His focus was instead to concentrate on the big picture trends and profiting from them.

Ignore short-term noise: Irwin had the ability to ignore the short-term noise and concentrate on what really matters over the long haul. Yamamoto believed that the real-time coverage of the markets were severely detrimental to investors and he refused to watch the market during the day. Irwin told me that he would stay up late enough (Hawaiian time) to watch the premarket futures and premarket headlines, but then would go to bed once the market opened no matter what was going on. By doing this, the daily ups and downs didn't phase him which is why he was able to be so consistent in his approach. In a day and age where everything is coming at us fast and in real-time, this was Yamamoto's edge and he used it well.

Let your track record speak for itself: There's a lot of puffery out there in the investment world as people try to sell newsletters, tips, advice and tools on the backs of people's hopes and fears. Irwin never did. He simply did his job, produced the best results he could, and let the cards fall where they may. In both good times and bad, he never sought out public exposure or engaged in aggressive marketing techniques that is so very common today. However, Yamamoto was successful because he simply produced excellent results. He didn't waste time creating hype or seeking attention by telling others "how right he has been" in the past. Instead his focus was on finding the next opportunity. Always.

Be in control of your destiny: Irwin understood both his strengths and weaknesses and created a business model that he loved. He started his newsletter back in 1977, found a format he liked (a typed newsletter usually no greater than a couple of pages sent out once per month) and he stuck with it all of those years. Although he was under pressure by his subscribers to make more frequent updates, go online, etc., he never did because he saw it as overkill and unhelpful to his clients. Say what you want, his outperformance among his peers over a long period of time shows he was ultimately right.

Know yourself: Irwin's strategy was reflective of who he was and took advantage of his unique skills and personality. Irwin didn't use indicators, sophisticated timing strategies or mess around with investments he didn't know much about. Rest assure he never even considered daytrading stocks or adopting strategies of others that didn't match his own personality. He knew who he was and aligned his strategy accordingly.

Be happy: The market and the performance of his investments never impacted his mood. In fact, some of the happiest conversations I had with Yamamoto was when he should have been the most frustrated and disappointed in his recent performance. When times were bad, he simply kept doing what he always had been doing and refused to let the market get the upper hand over his emotions. A skill many of us so desperately need.

Keep learning: Yamamoto was always in a learning mode and displayed a child-like enthusiasm for learning new things. It was my impression based on our conversations that he never felt like he knew everything or that there wasn't so much more to learn. He was an avid reader and spent the vast majority of his free time reading and, more importantly, thinking about the market. Like many great students, Irwin sought out the ideas from people who he disagreed with the most so that he could "know his enemy."

Think like a businessman: He told me often that he viewed himself as a businessman. A successful one "simply looks to purchase wholesale and sell retail." His goal was to know the worth of a company and then acquire it below its true value. After finding an interesting opportunity, he would then scour the balance sheet and read all of the footnotes focusing primarily on the company's cash position and relative cash flow. If those things looked good, he was especially encouraged if he saw insider buying. A simple, but effective strategy. To my knowledge, Irwin had only one stock screen in his toolbox - the new 52-week low list.

Play make believe: Irwin was insistent that most people shouldn't be in the market until after they acquired the skills and strategies to consistently succeed. He often urged people to play "make believe" by mentally selecting a few stocks and tracking them for some time to see how they react to news and events. Only after doing that for long periods of time and after showing success should a person ever be in the market with their own money.

Don't lose your values: We would often talk about how subscribers often wanted us to sway bullish or bearish, especially at the sentiment extremes. Like offering short sells after a major correction or buys after a rally, versus the exact opposite and how that often was the wrong approach. Irwin would often lose subscribers because of it, but he didn't care. He stayed true to his own views through thick or thin even if it cost him money and lost subscription revenue.

Go out on top: If you're going to go out - go out on top. As investors, we all have ups and downs throughout our careers, but it is important to close strong. Irwin did that as we know from his significant outperformance both in the short and long-term. Over the past 12 months, Yamamoto was up +20.4 against negative -26.4% for the total return Wilshire 5000. In addition, over the seven-plus years that the HFD was following Yamamoto, the letter achieved a +13.7% annualized gain, versus +0.2% annualized for the total return Wilshire. If there is anything good to be said about his early departure, is that he knew how to go out on top!