Your Only Real Edge Against Wall Street

Editor's note: Every Friday, we showcase a featured topic from our YouTube show, Altimetry Authority.

This week, we follow up with more advice from top investor David Daglio... and explain how to apply his approach to your own portfolio.

Read on below...

Most investors think good ideas will just reveal themselves...

Surely, they reason, they'll recognize a winner when they see one.

That's what our friend David Daglio thought when he first left business school. Dave is a top investor – he oversaw $500 billion when he was chief investment officer of BNY Mellon. And he's currently global investment strategist for a multifamily office.

At first, Dave expected asset managers to identify good opportunities on the fly and act fast. But after sitting across from hundreds of these folks over the course of his career, he realized something important...

The best asset managers weren't reacting to the world. They were acting through a defined, repeatable process.

And that's what we'll teach you to do today.

 The world's top investors all have one thing in common...

They rely on process, not instinct.

Even investing legends don't trust themselves to wing it. They've built and followed systems tailored to their strengths – and designed to trap their worst impulses.

Warren Buffett famously filters every opportunity through a personal four-part test. He buys businesses he understands, with strong moats, high profitability, and trustworthy management.

Stanley Druckenmiller sizes positions according to a strict framework for conviction and risk. And the late Charlie Munger cataloged dozens of mental biases to avoid falling for any of them.

As for Dave, he follows a highly personalized checklist. It's based on everything he knows about himself... and the mistakes he wants to avoid.

 Dave's checklist focuses on a specific set of principles...

The first is valuation discipline... or as Dave likes to say, "price matters most." This tenet echoes Buffett's mantra about buying great businesses at great prices.

The next principle is familiar to longtime Altimetry readers. Incentives dictate behavior is a concept borrowed from Munger. It means people will do what they're paid to do.

Dave studies how management teams are paid. He structures his analysis around that core. It helps him predict whether a company is headed for greatness or doomed from the get-go.

The third, Dave calls "cash on cash" returns. That's his preferred way of referring to Uniform Accounting. By adjusting as-reported financial data, Dave has reshaped how he evaluates a company's profitability.

Last, Dave is aware of his edge. He knows what he understands better than most folks... and what he doesn't. He avoids what he doesn't understand.

 With his checklist in hand, Dave knows he's setting himself up for success...

But it's still missing one key ingredient.

You see, once folks form an opinion, they tend to pay more attention to data that confirms said opinion. And they tend to downplay everything else.

This phenomenon is called "confirmation bias." It's one of the most common biases in investing. And if you're not careful, it can be a portfolio killer.

Dave assigns a rotating list of team members to challenge his positions. He calls them his "critical negatives." Their job is to ensure every idea gets stress-tested by a devil's advocate.

And this extra step helps Dave's team tell the difference between a good story... and a good stock.

Wall Street's checklists like to promise timeless wisdom...

The so-called "pros" sell universals – like Forbes' year-end investment checklist or CNBC's guides to Warren Buffett's "greatest lessons."

In reality, they're often generic, context-free advice that treats every investor the same. That's why a personal checklist is your only real edge.

Your checklist shouldn't be borrowed outright from Buffett or copied from CNBC. We wouldn't even suggest using Dave Daglio's principles and nothing else.

It should be engineered around how you think... what you know... and where you get tripped up.

Your own skillset and list of biases are likely different from anyone else's. Your investing checklist should be, too.

Regards,

Joel Litman
June 6, 2025

P.S. We dove deeper into Dave Daglio's investing lessons in the latest episode of Altimetry Authority. Check it out on our YouTube channel right here... and be sure to click the "Subscribe" button.