Investment Principles


If you’ve read more than a few of my blogs you will no doubt have noticed that I’m a big fan of systems and processes when it comes to investing. I’m partial to putting large amounts of money into investments where I can trust the management. If I buy an undervalued company, then I might have to think about selling it when it reaches (or exceeds) fair value. That can be difficult. But if I can identify some great companies and put my money with them, then I’m happy to leave them alone and get on with the task of being great.

I believe in spending my time preparing myself; preparing my mental state and knowledge, honing myself so that when an opportunity arises, I can take action calmly and decisively. I want to be prepared to take advantage of opportunities. I want to have the discipline to do so. I want to have the patience to wait for them to appear. Finally, I want to be decisive when they do.

When I look at my investing returns, the biggest gains have come from compounding. I don’t generate my returns from constantly buying in and selling out of companies like a cat on a hot tin roof. It’s patience and process that help me generate my returns – not trading. I stick to my principles and when an opportunity arises, I go all in.

So what are these principles?

Risk – All investment decisions should start with measuring risk

  1. Only invest in companies with an appropriate margin of safety.
  2. Only invest in companies with a good track record of growing earnings per share and net asset value.
  3. Ensure all investments have a suitable potential return for the risk I will assume.
  4. Ensure inflation and interest rates will not destroy the value of my investment.
  5. Avoid like the plague, all companies who are likely to permanently destroy capital.

Research – You can get lucky a few times but skill and preparation generate long-term results.

  1. Understand the sector and the business as well as you can.
  2. Consider the possibility of being incorrect and how this will affect my investment hypothesis.
  3. Don’t fall foul of false certainty and overconfidence. You don’t know everything.
  4. Consider value – not just price. Size is no guarantee of anything.
  5. Be a business analyst; not a macroeconomist.

General Principles

  1. Good ideas are rare – when the odds are in your favour, go all in!
  2. Don’t fall in love with a company – always be willing to adapt to the situation.
  3. Just because someone agrees with you doesn’t mean you are right. Mimicking others will get you average results.
  4. Compounding interest is an amazing thing but it takes time.
  5. Enjoy spending the proceeds of investing as much as collecting them. You can’t take it with you!
  6. Don’t overlook the obvious by drowning in the detail.
  7. Face your problems. It’s the only way to resolve them.

If you’ve read more than a few of my blogs you will no doubt have noticed that I’m a big fan of systems and processes when it comes to investing. I’m partial to putting large amounts of money into investments where I can trust the management. If I buy an undervalued company, then I might have to think about selling it when it reaches (or exceeds) fair value. That can be difficult. But if I can identify some great companies and put my money with them, then I’m happy to leave them alone and get on with the task of being great.

 

I believe in spending my time preparing myself; preparing my mental state and knowledge, honing myself so that when an opportunity arises, I can take action calmly and decisively. I want to be prepared to take advantage of opportunities. I want to have the discipline to do so. I want to have the patience to wait for them to appear. Finally, I want to be decisive when they do.

 

When I look at my investing returns, the biggest gains have come from compounders over time. If you remove my bottom 80% of investments, I’ve probably got a slightly worse than average track record. I don’t generate my returns from constantly buying in and selling out of companies like a cat on a hot tin roof. It’s patience and process that help me generate my returns – not trading. I stick to my principles and when an opportunity arises, I go all in.

 

So what are these principles?

 

Risk – All investment decisions should start with measuring risk

  1. Only invest in companies with an appropriate margin of safety.
  2. Only invest in companies with a good track record of growing earnings per share and net asset value.
  3. Ensure all investments have a suitable potential return for the risk I will assume.
  4. Ensure inflation and interest rates will not destroy the value of my investment.
  5. Avoid like the plague, all companies who are likely to permanently destroy capital.

Research – You can get lucky a few times but skill and preparation generate long-term results.

  1. Understand the sector and the business as well as you can
  2. Consider the possibility of being incorrect and how this will affect my investment hypothesis.
  3. Don’t fall foul of false certainty and overconfidence. You don’t know everything.
  4. Consider value – not just price. Size is no guarantee of anything.
  5. Be a business analyst; not a macroeconomist.

General Principles

  1. Good ideas are rare – when the odds are in your favour, go all in!
  2. Don’t fall in love with a company – always be willing to adapt to the situation.
  3. Just because someone agrees with you doesn’t mean you are right. Mimicking others will get you average results.
  4. Compounding interest is an amazing thing but it takes time.
  5. Enjoy spending the proceeds of investing as much as collecting them. You can’t take it with you!
  6. Don’t overlook the obvious by drowning in the detail.
  7. Face your problems. It’s the only way to resolve them.