Important Points

• There is no magic formula or easy recipe for instant wealth

Investing Principles Checklist

Risk

• All investment eval 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 beware of inflation and interest rate exposures
• Avoid big mistakes; shun permanent capital loss

Independence

• 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 judgement
• Mimicking the herd invites regression to the mean (merely average performance)
  • wait… but for investing we just want to get to the mean VTI …
  • VTI is not the mean of people

Preparation

• 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?”

Intellectual humility

• 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

Analytic rigor

• 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, mot 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

Allocation

• 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 favor, bet (allocate) heavily
• Don’t “fall in love” with an investment–be situation-dependent and opportunity-driven

Patience

• Resist the nature 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

Decisiveness

• 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 does
• Opportunity meeting the prepared mind: that’s the game

Change

• 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

Focus

• 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 and boredom
• Don’t overlook the obvious by drowning in minutiae
• Be careful to exclude unneeded info or slop: “A small leak can sink a great ship”
• Face your big troubles; don’t sweep them under the rug