The plainspoken founder of York Capital Management, a hedge fund with $21 billion of assets under management, provided his three rules for investing and three of his favorite stocks in a CNBC interview Thursday.
Calling the current environment a "stock pickers market," billionaire James Dinan explained on "Squawk Box" his philosophy of "event-driven investing" and how he looks for companies going through big change. "We're looking to predict what's going to happen tomorrow—is there a value gap, is the market going to close that gap?"
First, we're going to dive into Dinan's stock picks and then look at his three investment rules.
American Airlines
Dinan said he still likes American Airlines, a stock he . "US Airways had just bought American. I was really upbeat on the prospects [with] four major airlines controlling basically 85 percent of the industry."
- Even though shares of American have gone up about 50 percent, he said he'd still be a buyer current levels.
- "We see American's margins continuing to improve. The company could easily earn $6 [a share]-plus next year. Put a 10 multiple on it and we still think it's a $60-plus potential stock."
Men's Wearhouse
Another consolidation play that Dinan likes is Men's Wearhouse, which has been trying to buy rival Jos. A. Bank since November. The rival retailers have entered into talks, after a nasty months-long back-and-forth.
- "The remarkable thing here is the amount of cost-savings that could potentially come from this transaction: $100 million to $150 million are the so-called synergies from this merger," Dinan said. "So putting these together you could almost double the profitability."
- He likes Men's Wearhouse at $55 now, even though the stock is up 10 percent from when this started. "Men's Wearhouse can easily earn $5 to $6 a share over the next two [or] three years. Put a 15 multiple on that [and] you're looking at a $75-$90 type stock."
Hertz Global Holdings
Dinan's third stock is Hertz, which completed its acquisition of Dollar Thrifty in late 2012. York Capital was the largest shareholder in Dollar at the time. Hertz stock has nearly doubled since then.
- "Today we still like Hertz because ... we think the leisure part of the economy still doing well [and] you have three major players, revenue synergies, and cost synergies are still being played out. They have a really good equipment rental business. We think this could be spun off at some point. It would make a lot of sense for United Rentals to own it," he said.
- Saying the overall business is sound, he pointed out that car rental rates for the industry went up in 2013 for the first time in years.
From his actionable advice to his more philosophical approach, Dinan spelled out three investing rules that he lives by.
Diversification is key
His first rule for investors: Always be diversified. "You want to have no one position that can damage you or take you down. You always want to be in business tomorrow."
'How much can I lose'
He said people should not dream about how much money they can make from an investment but think how much they can lose. "It's the losses that are going to hurt you."
Avoid leverage
His third rule speaks to leverage or in his words: "The lack thereof. ... If you have too much of it, you lose control of your destiny. You have to sell."
Dinan said York Capital uses very little leverage and has been able to return about 14 percent—after fees—since it started in 1991, compared with the return of about 9 percent over that same time. "It's one of the things I'm most proud of."
—By CNBC's Matthew J. Belvedere. Follow him on Twitter @Matt_SquawkCNBC.