This sounds complicated and so it is. But exactly how you do your ranking is less important than having a system for comparing the stocks in your existing portfolio to the alternatives that the market is offering you. Your goal should be to take the emotion out of investing. You don’t want to fall in love with the companies that you already own. To avoid this, I try to pinpoint what companies in my ideas list are better than the median idea in my portfolio.

I also look at the companies in my portfolio that are below the median in desirability, and I ask why I’m keeping them. In many cases, the companies are less desirable because they’ve gone up in price and are no longer as cheap as they once were. In other cases, they’re less desirable for the opposite reason— the company’s business has deteriorated and shows no signs of turning around. Every three to four months, I usually sell two or three companies from my 35-stock list and replace them with more promising companies from the ideas list. I typically hold a stock for three years. Many of my ideas go against me at first, but often turn and make money for me later.

4. Love the unloved.

Most people avoid industries under stress. Who can blame them? The industry outlook is horrible; there can’t be anything good here.

I take a different view. I believe that some of the safest plays consist of buying financially strong names in weak sectors. You can often spot these companies because they’re cheap in comparison to their earnings and to their book values. For more on how to spot undervalued companies, visit the website of Tweedy, Browne, the famous value-investing firm, and read their excellent paper on What Has Worked In Investing (http://www.tweedy.com, then look under Research & Reports). In addition to the standard measures, I look for companies with good bond ratings, which are the best single measure of a company’s creditworthiness. Companies with the best ratings can generate cash well in excess of what is needed to pay all their creditors.

Once I’ve bought a stock, I try to be patient, because the payoff is usually not instantaneous. In mid-2000, when steel stocks looked horrible, I bought Nucor, the soundest company in the industry. I sold it in early 2002 for a gain, because I had better opportunities elsewhere. Steel companies dropped like flies in 2002 and even Nucor slid. In early 2003, it had fallen enough for me to buy back in. When enough steel-making capacity had been closed, steel prices began to rise. Nucor flew, and I made a nice profit—again.

The key to making this contrarian strategy work is to not overdo it. Some industries—newspapers, say—truly do have questionable futures. You have to analyze each situation on its own merits. At present, my favorite industries are insurance, energy, agriculture/food processing, cement, and chemicals.

My value-hunting approach means that most of the stuff I buy is not popular. I veer away from firms that are pioneering new technologies or markets. They are difficult to value because there are so many unknowns.

When I talk about the companies I own, the response is often, “You invest in obscure stuff. What do you think about Google?” I don’t have an opinion on Google. I can’t tell you whether it will produce enough profits over the years to justify its current price or not. So much depends on future tastes and competition. I’d rather own cement companies; they are very difficult to make obsolete.

5. Smart money is slow money.