It is generally accepted that some of the best traders, investors, and sharpest minds are often associated with running private equity firms. I would like to share the insights I have learned that are applicable to the everyday investor by studying these successful entities.
Maximizing Cash Flows
The singular most common factor I found when analyzing various successful private equity funds was a zealous attachment to maximizing cash flows.
When a private equity fund makes an investment in a company, restructures, reorganizes, changes management or rights the ship in general, this crucial principle is at the heart of all actions.
Individuals should focus on their portfolios as if they are your own mini private equity fund. Look to maximize your personal cash flows on a regular basis by investing in high-yielding equities, preferred stocks or bonds with attractive risk-to-reward profiles.
Outperforming the Competition
You also need to shun the idea of chasing of overly popular, high-growth, and widely held issues. Instead, scan through the wide sea of investments for companies that are simply great cash flow generators. Additionally, make sure that management is zealous about increasing cash flows over time in a responsible and shareholder-friendly manner.
In order to beat the broader market, you can't follow the common strategies used by most investors. You must look to gain an edge by checking out little-known, disliked, temporarily distressed, illiquid, or esoteric investments and make your mind do some heavy lifting.
It is a common folly for the investing public to constantly scan the same pool of stock tickers along with a huge group of other like-minded investors. It serves your personal portfolio much better to take paths less well-traveled, looking for investments that were perhaps forgotten, unspoken of, unheard, unseen, and underappreciated.
For instance, you may believe Johnson & Johnson (NYSE:JNJ) to be a fantastic dividend stock with a strong risk profile. The problem is, so does everyone else in America. Most mutual and pension funds probably own Johnson & Johnson as a top 10 holding. It is supremely unlikely that this stock will be able to supercharge your performance against basic indexes and passive investing strategies.
Private equity companies are constantly searching, analyzing, and studying new ways to profit from inefficiencies in the market. Whether those inefficiencies are related to misinformation, lack of knowledge, or just a general lack of appeal to the broader masses are all valid reasons to do more research. The brightest minds of private equity outperform on a regular basis because they strive to think "outside the box" and are willing to follow esoteric paths to gain alpha over ordinary investors and funds.
Getting an Edge
Individuals must also search through stock screeners, read industry newsletters and articles, invent themes and ideas, and constantly battle for that edge to keep your portfolio ahead of the indexes and broader investing population.
If you become complacent, simply following the ideas of other touts on Seeking Alpha or other websites, you will lose your edge. You must treat your dollars like your own personal soldiers and get them to battle courageously for you by locking down a steady stream of regular cash payments.
Solely zeroing in on dividend aristocrats, dividend champions, or triple-A rated dividend stocks will only serve to close off limitless amounts of investments waiting for their potential to be discovered.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.