Top Manager: Humility, Discipline Are Key

Investor Mark Donovan will never put all his eggs in one basket.

The blue chip investor chooses 80-100 value stocks and sells when he believes a stock becomes a “bad investment,” according to Barron’s. Donovan, and his partner David Pyle, use this strategy in the John Hancock Disciplined Investor Fund which has managed to outperform the S&P 500 by an average of 4% annually over the last 15 years.

Donovan’s strategy is based on his humble attitude. Time and time again, Donovan has found that the market can humble even the best investors. Last year, for example, he expected Delta Airlines to be one of his most profitable investments, only to be proven wrong by the stock’s 17.3% fall. However, because no more than 5% of the fund is held in any one stock, the fall didn’t hurt the fund too much in the end. “The most treacherous element of investing is when you say, ‘I know I’m right and the market is wrong,’ ” he says. “A lot of people fail in our business because they can’t cope with being wrong a meaningful percentage of the time.”

Donovan and his co-manager “look for stocks trading at discounts to their long-term value, and emphasize momentum in earnings and cash flow in an effort to avoid value traps,” according to Barron’s. Donovan said his strategy is about “finding stocks that don’t have exorbitant optimism built in” and generate lots of of cash.

Donovan says finding good values has become challenging in the current market. “This is where you need to be patient,” he says, “and stick with the investment laws of physics that have served us well for many decades.” One area where he is finding value: financial stocks.