NEITHER ALAN GREENSPAN'S VERBIAGE

nor the monthly employment numbers make any difference in how I put my clients' money to work. And even if I knew exactly how many Huggies

Wal-Mart Stores

Indeed, most of the fundamental data investors consider market "research" have nothing to do with the market at all. It's for this reason I go out of my way to ignore the subjective punditry that dominates most investment discussion. Because the best indicator of the market is the market itself, I use three simple rules to help filter out the distracting influences that can easily pull investors' eyes off the ball.

Rule No. 1: Ask Not
In my world, investing is like working for the mob: Sometimes it's best not to ask too many questions. Yet investors are naturally inquisitive people, and when allocating assets we're naturally drawn to reading annual reports, research briefs and Internet message boards. If an investment should happen to decline, we can't help but immediately get drawn into finding out why.

Did the company miss earning expectations, or did the new product roll-out fail? Have insiders been dumping shares, or has a big brokerage house recently issued a downgrade? There might be a single reason or a confluence of factors, but the reality is that when it comes to making decisions I don't care and neither should you.

Losses are losses. Just because you have a convenient excuse for why a stock fell shouldn't alter the discipline of how you deal with it. If you like XYZ at 30, then buy it at 30. But if it drops to 20, don't rationalize about how the fundamentals are stellar and you've resigned to hold on for the 50% turnaround that might never come. I don't focus on why a stock moves, only how it moves. Losers are dumped, no matter how temporary the bad news might appear.

Rule No. 2: Position, Not Valuation
I have to chuckle at the pundits who claim XYZ is "underpriced" or the market is "overvalued." While I understand that they believe underpriced assets should be bought and overpriced names sold, the truth is that a stock's price is nothing more that its price. Assets are never cheap or dear; rather, they're worth only what someone is willing to pay.

In fact, referring to stocks as being undervalued or cheap distracts traders, pushing them into making subjective calls on how the market might move instead of objective calls on how it is moving right now. I believe it's a debilitating mistake.

Why? I can give you a long list of so-called underpriced stocks, from Liberty Media to big pharmaceuticals, that have stayed underpriced year after year. And the fact that they were never cheap didn't stop dozens of tech names like Cisco Systems and Sun Microsystems from rising by thousands of percent through most of the late 1990s. They had bids and the wind at their back. That's all you needed to know.

The market price is the market price. It is neither undervalued nor overvalued, expensive nor cheap. So be aware of prices, but not judgmental of them. Instead, focus on trading a position rather than determining a valuation.

As I wrote about a few weeks back, the No. 1 factor I consider when looking at a stock isn't its valuation, but how it's performing in my portfolio. So when analyzing my holdings, I believe even the most undervalued, cheap or fundamentally attractive ideas should get dumped when held as large 25% or more losses in your portfolio. Don't think of stocks as overvalued or undervalued, but as wins or losses. Greedily preserve the winners; mercilessly kick the losers to the curb. Cheap stocks often get cheaper, and "expensive" names often stay that way longer than anyone expected.

Rule No. 3: Assume Nothing
We strategize, plan and prepare, yet what eventually transpires in the market is often what nobody expects. Indeed, as I first confessed more than two years ago, managing money is rarely pretty. Far from precision diving, it's usually more like an improvised belly flop.

Considering that the best-laid plans frequently go horribly awry, I try to make few assumptions about how markets should act, and instead focus on how they're acting in the here and now. Often, trades that conceptually should do well end up falling flat.

For example, it's natural to expect floating-rate funds, also known as bank-loan funds, many of which I've talked about for years, would be strong performers in the current environment or rising short-term interest rates. Surprisingly, the asset class hasn't been holding up. ING Prime Rate Trust and First Trust/Four Corners Senior Floating Rate are among the previously hot names in this sector that have turned ice cold. Considering the loans in these funds float along with higher rates, their weakness defies expectations of how the asset class is supposed to perform.

So even though the investment thesis remains intact, the weakening price action has compelled me to reduce my holdings. I can't stress it enough: The best indicator of the market is the market, and when an investment isn't acting right any preconceived notion of how XYZ should perform is thrown out the door. In my portfolio, every investment gets a fair shot. But when it doesn't perform, no matter how good the idea is, it gets eliminated. End of story.

Current Observations
In trying to avoid being distracted by fundamental news, valuation or subjective assumption, I do my best to be most influenced by the market itself. And recently, I can't help but notice that the momentum in equities, at least for now, has been squelched. Beginning in March, stocks across the world dropped very quickly from near three-year highs. I'm holding tight in my utilities, which are still a favorite play, but ominously, there are few new sectors showing the type of leadership that prods me to put new money to work.

Of course, anything could happen. The market could weaken further, or it could regain the late February highs. It could aimlessly tread water for months or promptly begin a new bull run. But rather than take wild potshots about how stocks might act, I'm sticking to my discipline of cutting losers, letting winners run and listening closely to how the market is acting now. Once you filter out the chatter, it's a heck of a lot easier to hear the tune.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of writing, Hoenig's fund held positions in some of the securities mentioned.