High Level
- Can you understand the business? Is it in your circle of competence? Avoid industries where you know little.
- Does the business have a moat? Does it have a durable competitive advantage? Avoid perfectly competitive and high fixed cost industries.
- Does it have managers that behave as owners and are wise capital allocators?
- Do insiders own their own stock and are they buying back shares?
- Does the company have a lot of debt? Any long list of numbers multiplied by zero is always zero.
Details
- Risk: 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 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 judgment
- Mimicking the herd invites regression to the mean (merely average performance)
- 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 readings 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, 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
- 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 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
- 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 information or slop: "A small leak can sink a great ship"
- Face your big troubles; don't sweep them under the rug
Other
- The Two-Track Analysis
- What are the factors that really govern the interests involved, rationally considered? (for example, macro and micro-level economic factors).
- What are the subconscious influences, where the brain at a subconscious level is automatically forming conclusions? (influences from instincts, emotions, cravings, and so on).
- Investing and Decision Making Checklist
- Charlie's informal, but extensive, list of factors worthy of consideration.
- Ultra-Simple, General Problem-Solving Notions:
- Decide the big "no-brainer" questions first.
- Apply numerical fluency.
- Invert (think the problem through in reverse).
- Apply elementary multidisciplinary wisdom, never relying entirely upon others.
- Watch for combinations of factors-the Lollapalooza effect.
- Psychology-Based Tendencies
- His famous Twenty-Five Standard Causes of Human Misjudgment