Investment Principles

All investment evaluations should begin by measuring risk, especially reputational.

• Incorporate an appropriate margin of safety.
• Avoid dealing with people of questionable character.
• Insist upon proper compensation for risk assumed.
• Always be aware of inflation and interest rate exposures.
• Avoid big mistakes; shun permanent capital loss.

“Only in fairy tales are emperors told they are naked."

• Objectivity and rationality require independence of thought.
• Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment.
• Mimicking the herd invites regression to the mean (merely average performance).

“The only way to win is to work, work, work, work, and hope to have a few insights."

• Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.
• More important than the will to win is the will to prepare.
• Develop fluency in mental models from the major academic disciplines.
• If you want to get smart, the question you have to keep asking is “why, why, why?”

Acknowledging what you don’t know is the dawning of wisdom.

• Stay within a well-defined circle of competence.
• Identify and reconcile disconfirming evidence.
• Resist the craving for false precision, false certainties, etc.
• Above all, never fool yourself, and remember that you are the easiest person to fool.
• "Understanding both the powercompound interest and the difficulty of getting it is the heart and soul of understanding a lot of things."

Use of the scientific method and effective checklists minimizes errors and omissions.

• Determine value apart from price; progress apart from activity; wealth apart from size.
• It is better to remember the obvious than to grasp the esoteric.
• Be a business analyst, not a market, macroeconomic, or security analyst.
• Consider totality of risk and effect; look always at potential second order and higher level impacts.
• Think forwards and backwards – Invert, always invert.

Proper allocation of capital is an investor’s number one job.

• Remember that highest and best use is always measured by the next best use (opportunity cost).
• Good ideas are rare – when the odds are greatly in your favour, bet (allocate) heavily.
• Don’t “fall in love” with an investment – be situation-dependent and opportunity-driven.

Resist the natural human bias to act.

• “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily.
• Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake.
• Be alert for the arrival of luck.
• Enjoy the process along with the proceeds, because the process is where you live.

When proper circumstances present themselves, act with decisiveness and conviction.

• Be fearful when others are greedy, and greedy when others are fearful.
• Opportunity doesn’t come often, so seize it when it comes.
• Opportunity meets the prepared mind; that’s the game.

Live with change and accept unremovable complexity.

• Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you.
• Continually challenge and willingly amend your “best-loved ideas.”
• Recognize reality even when you don’t like it – especially when you don’t like it.

Keep things simple and remember what you set out to do.

• Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat.
• Guard against the effects of hubris (arrogance) and boredom.
• Don’t overlook the obvious by drowning in minutiae (the small details).
• Be careful to exclude unneeded information or slop: “A small leak can sink a great ship."
• Face your big troubles; don’t sweep them under the rug.