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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.
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."
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.
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.
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."
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."