In 10 words: Margin of safety. Circle of competence. Preparation. Discipline. Judgement. Patience.
I read a lot for the last couple of years (approaching 10,000 hours) and mainly value investing literature and various investor market commentaries. Below is the list of tenets stayed on in my mind and keep on coming back.
Not ranked, numbered for future reference:
1. Model – Mr. Market metaphor is simple and powerful. You are dealing with an ever evolving crowd system. (HT Ben Graham)
2. Circle of competence - lean towards simple, expand and know it. (HT Buffett)
3. 50c dollars - you need margin of safety because you do not really know much. Value and price are different things and opportunity arises when they diverge. (HT Buffett, Klarman)
4. Activity bias - you must be a gentleman of leisure as you do not have to do anything on any given day and feel great about that. (HT Buffett, Pabrai)
5. Duration (long term) - synchronize expectations with pace of life - business does not change in a day or even in a month. Three years is enough but not universal. Patience is a great, unappreciated and unrecognized edge. (HT Pabrai)
6. Duration (short term) - nobody went bankrupt by taking quick 30% gains, especially when you have offsetting short term losses. This depends on your conviction, though, and is a good test.
7. Volatility is your friend because provides opportunity to enter and exit. (HT Buffett)
8. Beta is nonsense because 50% down stock is twice cheaper, i.e. less risky also twice. (HT Buffett)
9. 52 week highs and buy & hold are for Buffett because he has too much money and lack of time. He was much much more active 60 years ago and he admitted publicly that he would behave differently with only $1m in capital.
10. Macro - follow the macro situation and FMV of the market, which consists of a set of micro.
11. Discounting - think what market knows (discounts) (HT Ken Fisher)
12. Big is VERY rarely mispriced. (HT Buffett)
13. Mispricing - it always depends on supply and demand - forced sellers is a good sign but how to know that. Why security is cheap? What is a bear story? (HT Klarman)
14. Risks - try to kill the business and first discuss bad things rather than merits. (HT Berkowitz)
15. Shorting - yes, it is an asymmetrical bet but index short is safer. You can profit on both ways: up and down, which is the essence of absolute returns but always remember that Mr. Market can remain irrational a lot longer than you can stay solvent.
16. News - beware the writer's bias to attract audience. (HT Mark Sellers)
16. News - beware the writer's bias to attract audience. (HT Mark Sellers)
17. Get a sense of proportions and context in any numbers - billion is not always huge, a 5% miss may not justify EV drop of 25%. (HT Ken Fisher)
18. Diversification - size of bets is proportional to your edge, conviction and expertise. Normal position is 10% of investable assets and do not expect to initiate more than 1 or 2 in a normal year (vs. market crash year).
19. Cash - I always feel better with 20-30% of investable assets in cash. Index shorts are also future cash for cheap stocks when markets are reasonably priced (as if that would be so easy – this topic probably deserves a separate post).
20. Sustainable competitive advantage - study moats and look for lollapaloozas, identify headwinds and tailwinds, invert. (HT Munger)
21. Know yourself well (misjudgments and mental capacity). Psychological awareness and stability can be your edge. Maintain stock lists and document your process - it is guaranteed that you will forget important things. (HT Munger)
22. Reading
23. Numbers – you have to love numbers, which is another easy test.
24. Gold – silver is better because it has more practical uses. If India
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