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 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
- Only invest in companies with an appropriate margin of safety.
- Only invest in companies with a good track record of growing earnings per share and net asset value.
- Ensure all investments have a suitable potential return for the risk I will assume.
- Ensure inflation and interest rates will not destroy the value of my investment.
- 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.
- Understand the sector and the business as well as you can
- Consider the possibility of being incorrect and how this will affect my investment hypothesis.
- Don’t fall foul of false certainty and overconfidence. You don’t know everything.
- Consider value – not just price. Size is no guarantee of anything.
- Be a business analyst; not a macroeconomist.
General Principles
- Good ideas are rare – when the odds are in your favour, go all in!
- Don’t fall in love with a company – always be willing to adapt to the situation.
- Just because someone agrees with you doesn’t mean you are right. Mimicking others will get you average results.
- Compounding interest is an amazing thing but it takes time.
- Enjoy spending the proceeds of investing as much as collecting them. You can’t take it with you!
- Don’t overlook the obvious by drowning in the detail.
- Face your problems. It’s the only way to resolve them.