My three rules of investing

My three rules.jpg
For intermediaries only

A friend of mine recently described his “self-inflicted” investment experience as like being on the ocean in a storm bouncing left, right, up down… from growth to value to international to domestic… advice coming from all sides… all of it conflicting with other reasonable-sounding advice. Caught in a storm of labels, his results were terrible, and his head was spinning trying to reconcile all of the different investment styles out there. Sound familiar?

Everyone that has met me over the past 20 years that I’ve been in the financial industry knows what I think of labels when it comes to investing. Labels are your enemy, and I strongly recommend you forget as many of them as possible. Growth, value, core, small, large, balanced, international, emerging, domestic… all of these narrow your thinking and limit your opportunity. Investing is about making money with money in a risk sensible, repeatable way. That’s the only label you need remember.

Having developed this integrated, global approach over two decades of investing, there are only a few things that matter to getting a great outcome. Get these right and you can change your outcomes for the better – it’s that simple.

Buy only advantaged companies

The world is very competitive and dynamic. The only way to thrive as a business over long periods of time is to have a massive advantage whether it be intellectual property, engineering know-how, scale etc. Why is this important? Compounding of returns over a long period of time is the only way to get a sustainable, repeatably strong return. Compounding like this requires investments to have an underlying advantage. Great investing is all about understanding the nature of advantage and learning to recognize it.

Pay the right price for what you buy

Every great investment ever made whether it was considered value, growth or any other label you can come up with had one thing in common: buying something for less than it was worth. You must know how to value a business, or you will fail as an investor.

Know the people involved

Businesses are living, breathing things that can change based on the decisions made by the people running them. Good decisions can enhance advantage. Bad decisions can destroy anything. You have to make sure the management team of the businesses you invest in believe the right things and will make the right decisions on behalf of shareholders.

The only other thing you have to do well is recognize risk. Not an easy thing to do, but crucial for long-term success. Many in the industry are focused on what I call “relative risk” – typically measured as some difference relative to the index. Those differences, whether they are relative volatility or relative sector weights or any other “relative” difference are a waste of your time.

If risk could be measured this way and known so easily, everyone you know would be rich. Risk doesn’t wear a nametag, walk right up to you and introduce itself. It lurks in various industries, business models, countries, actions, etc. It takes many forms, none of which can be reduced to a number. Learning to recognize risk is a key skill that investors need to master to have sustainable success. It takes time.



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