Rules based investing with Methodical Investment's David Kaiser

Summary

• David Kaiser of Methodical Investments runs a fundamentally driven, data-focused, rules-based value book of roughly 50–80 companies, built from a qualitative research background at Robotti & Company rather than a scientific one. Core tenets: only net-income-profitable companies, excluding one-time items; decisions made at the portfolio level; and an aggregate book that seeks to be more discounted and have better metrics than its benchmark.
• His load-bearing empirical claim is that, comparatively, profitable-company indexes outperform. He points to the S&P 600’s roughly 30-year edge over the Russell 2000 and says the main difference is the S&P 600’s profitability requirement: “if you’re buying an index and you’re buying profitable companies comparatively, you will outperform in the last 30 years that I’ve seen.”
• Kaiser refuses to change the core approach merely because growth has beaten value for 15 years, while acknowledging that the portfolio evolves under the same rules and that he has no defined breaking point: “What is my breaking point?… I don’t know. I’m certainly not there yet.” He has “more confidence today than I probably did three years ago” because of valuations, concentration and FOMO — “right now, safety isn’t where it’s at. It’s FOMO.”
• Hard-coded overrides exist where the screen predictably fails: biotech is excluded outright (“too much variability in earnings”), financials are limited through a second portfolio run that removes them for comparison, and outliers are removed because the absolute cheapest names “probably are for a reason.” There is no specific corporate-governance failsafe; diversification and combined metrics are the main mitigants.
• Mechanics: one big rebalance each January after tax-loss selling, quarterly profitability checks that eject any name turning unprofitable, and a risk rule that produces substantially higher cash if the portfolio becomes more expensive than its benchmark. Current tilts: heavy consumer discretionary, plus energy, financials and industrials. Taping on February 3, 2026, payments and software had not materially surfaced; Kaiser said the portfolio had very little IT exposure and that the prior month’s moves had not much affected the process.
• Walker’s sharpest stress tests — melting ice cubes (post-2016 ESPN/Disney, regional sports networks, AMC Networks) and cyclical tops (gold miners at 5x earnings with gold at 5,000) — draw process answers, not screen answers: substantial turnover at rebalance, a combination of quality and discount metrics, and a baseball frame: “we’re consistently looking for fastballs… if we get a curve we’re going to hold off.”
• On AI, Kaiser is not really using it at this point: “AI helps you evolve a process… I have the risk of being a dinosaur, but I also have the risk of really being differentiated.” Walker’s daily-fantasy-sports analogy supports the fringe thesis — once everyone ran optimizers, “the edge actually went to people who didn’t use the optimizers.”

Deep dive

1. From Robotti stock-picking to rules: “do what you’re comfortable with”

• Kaiser’s one-line self-description: “fundamentally driven, data focused and rules-based value investors.” His path runs through Robotti & Company, where he is still affiliated, learning “what causes stocks to go up, what are the important drivers,” then choosing to exploit those drivers in a rules-based arena: “do what you’re comfortable with… I like structure, I like organization, I like process.”
• His headline lesson for concentrated fundamental investors: rules deliver comfort in an if-then world — “if X happens you’re doing Y” — rather than re-deriving the next step company by company, and let you tell clients exactly “what happens if.”

2. Walker’s dinosaur question: rules are exactly what AI automates

• The host’s opening worry: “if you have a rule that can be followed, eventually a computer will automate that” — so why doesn’t a rules-based shop become a dinosaur in “six months, two years, whenever you want”? Kaiser’s honest reply: “I don’t have an answer as to how it won’t turn us into a dinosaur.” His understanding is that AI learns and adapts, but his discipline is not to chase what is working today: “I’m not adapting in terms of trying to figure out what’s working today. I’m working on what has worked over time.”
• He’d even argue the AI wave helps him: those inputs “probably feed into more opportunities and more inequity in stock pricing” — the inefficiencies Methodical exists to exploit.
• Walker’s adapt-or-die pushback via sports: NBA coaches who dismissed the three-point ball “are out of the league now,” and Ben Graham’s two-thirds-of-net-current-asset-value screen would have bought “nothing but Chinese frauds in the past 40 years” if followed literally. Walker says Buffett adapted the approach toward intrinsic value. So is Kaiser Lindy, or “the guy who refuses to shoot three-pointers”?
• Kaiser’s resolution: separate adapting the rules from the portfolio evolving. “We’re using the same techniques and we’re getting different results… in the complexion of the portfolio.” His counter-analogy: “the rules of the NBA haven’t changed… the court’s the same size, the rims are the same height” — offenses evolved within them. Graham, he adds, “kind of was a quant” whose criteria were simply too strict to survive.

3. The rules: profitable-only, portfolio-level, discount before quality

• Core tenets as stated: “pretty much everything is done on a portfolio level,” seeking “a balance of quality and discount… probably not in that order — discount and quality,” with the aggregate book targeted to have lower P/E, lower price-to-book, lower EV/EBITDA and higher ROE than its benchmarks. There’s no hard cutoff like five times earnings — “we’re taking what the market gives us at any given point.”
• Profitability is the gatekeeper: net income with one-time items excluded, partly for data reliability. A Russell benchmark can show an 18 P/E even though some constituents are unprofitable and therefore do not enter that calculation. The evidence he leans on: the S&P 600 has “noticeably outperformed the Russell 2000” over 30-some years, and “the main difference between the two benchmarks is profitability.”
• Walker uses Gotham’s implementation of The Little Book That Beats the Market as an example, describing a two-metric combination of quality and valuation. Kaiser says Gotham was “an impetus for my thinking,” but insists the system “has to be simple but also more complex than just two metrics” — and the cheapest outliers get removed because “they probably are for a reason.”

4. Where Kaiser imposes overrides: biotech out, financials limited, governance unguarded

• Two explicit overrides: biotech is excluded entirely — “too much variability in earnings… you can have a drug that hit and it’s going to go away in two months” — and financials are limited, not eliminated, because low P/B and high ROE “are not necessarily the companies that are going to drive performance over time.” The process allows financials in an initial portfolio run and then runs the portfolio with them removed to assess and limit the exposure.
• On Walker’s corporate-governance challenge — how does a screen avoid “15 different controlled companies… and the CEO is going to pay themselves $50 million per year” — Kaiser concedes: “we don’t have a specific failsafe for corporate governance.” The defense is diversification and the law of large numbers; he frames governance as especially important when an investor has a 15–20% position in one company.
• The philosophical anchor — worth keeping as told: “I’m Jewish and… [the Hebrew word] means missing the mark… you’re human, you’re fallible.” Applied to portfolios: “If I try to create a perfect portfolio, I’m going to miss things too” — so he puts “faith” in the data over his own expertise, noting past winners he might have rejected qualitatively.
• Current tilts, off the top of his head: heavy consumer discretionary, “pretty heavy in energy” this year, financials and industrials up there. Taping February 3, 2026 — what Walker called “a borderline Black Monday for payments and software” — Kaiser said the portfolio had very little IT exposure and that the recent market moves had not materially changed the process.

5. Mechanics and data: January rebalance, quarterly ejections, a cash tripwire

• One big rebalance annually in January, after tax-loss selling adds “an added bump in terms of cheap things getting cheaper.” Why not monthly or daily? More frequent rebalancing “doesn’t give companies enough time to come to fruition”; holding for three years would risk the portfolio’s valuation no longer being advantageous. Quarterly reviews eject any name that turns unprofitable, and a risk tenet produces “significantly higher cash” if the portfolio becomes more expensive than its benchmark.
• Data integrity rests on Capital IQ, after testing its validity and reliability, plus checks such as excluding companies involved in announced M&A transactions. Kaiser says “Capital IQ feeds into Yahoo, I believe.” Bad-data apples are contained by diversification and, when relevant, the profitability check.
• On Walker’s off-balance-sheet examples — retailers’ old operating-lease distortion, Facebook’s data-center JVs he calls “honestly reminiscent of Enron,” and Intel, Verizon and T-Mobile fiber JVs — Kaiser says the system is “not immune” but relies on not trusting any single metric and on spreading exposure.

6. Melting ice cubes and the 15-year value drought

• Walker’s best stress test: he recalls Disney disclosing around 2016 that it was losing ESPN subscribers, after which regional sports networks went “bankrupt left and right.” A trailing-numbers screen could have bought “melting ice cube, melting ice cube, melting ice cube” like AMC Networks all the way down. Kaiser’s answer: substantial turnover at the annual rebalance means companies failing on quality metrics should not linger, and “we’re consistently looking for fastballs… if we get a curve we’re going to hold off.”
• On 15 years of growth beating value, Walker invokes the Simpsons — at what point is it “no, it must be the kids”? Kaiser: “I don’t have a clear answer… what is my breaking point? I don’t know. I’m certainly not there yet.” He claims “more confidence today than I probably did three years ago” given valuations, concentration and how much “people are betting on the future” — “right now, safety isn’t where it’s at. It’s FOMO… Can I tell you when [it reverts]? No. But I banked on it.”
• Similarly on Walker’s Buffett-indicator trap — a rule that only signaled a buy at the depths of the GFC — Kaiser avoids an absolute cutoff: Methodical seeks relative opportunity in every market, taking what the market offers at each January rebalance.

7. AI abstention, the tiptoes problem, and how far back to test

• Methodical is not really using AI at this point. Kaiser’s framing: “AI helps you evolve a process. And if everyone else is using AI and they evolve, I have the risk of being a dinosaur, but I also have the risk of really being differentiated and sticking with something that will continue to work.”
• Walker’s supporting evidence: Buffett’s “standing on your tiptoes at the parade,” and daily fantasy sports, where once everyone used lineup optimizers “the edge actually went to people who didn’t use the optimizers.” Walker says there may be alpha on the edges of an old systematic process, but he is “not 100% sure.” Kaiser says the opportunity exists “on the fringes” and adds, “I guess I’m on the fringe now.”
• On back-testing horizons: Kaiser wants “several market cycles” spanning regimes where value and growth have excelled, not merely market ups and downs. Walker questions the relevance of 1940–1960 markets and their pink sheets. Kaiser suggests the 1990s period when companies had to report digitally as “a fairly good period” to start, because “the data would be whole, so to speak.”