Investing Principals

The Six Principles of Investing

I. Develop a comfortable understanding of the language of business (accounting) and understand the basic investing concepts.
- Study a basic accounting book such as The Interpretation of Financial Statements by Benjamin Graham
- Understand four key investing concepts:
- Compound Interest
- Present/Future Value
- Inflation
- The difference between price and value
- Learn how cash flows through the businesses you are examining
- Learn how companies successfully manage inventory
- Keep a close eye on how fast inventory and accounts receivables are growing. They should not be growing faster than the business’s overall sales growth rate.
II. Purchase High-Quality Companies Selling Below Intrinsic Value
- Look for companies selling below intrinsic value (Margin of Safety)
- Look for a trustworthy, shareholder-oriented, high-quality management team
- Make sure the business has sustainable competitive advantages
- Make sure management makes rational capital allocation decisions
III. Portfolio Concentration
- 10 to 12 stocks allows adequate diversification against company-specific risk
- Over-diversified portfolios will tend to track the performance of the overall stock market
- Make large, concentrated purchases when the perfect opportunity presents itself
IV. Minimize Portfolio Turnover
- Minimizing portfolio turnover will keep the amount of trading commissions and taxes paid at a minimum
V. Understand the Psychology of Investing
- Understand how market and stock volatility affect investment decisions
- Patience and intestinal fortitude are requirements when investing
- Stand by your convictions
- Understand how rules of thumb can affect investment decisions
- Practice delayed gratification
VI. Build a Latticework of Models
- Develop a framework of "mental models" from various disciplines to gain a better understanding of the investment process
- Be able to combine multiple models when making investment decisions