INVEST IN EXISTING BUSINESSES
There are advantages that stock market offers vs. the buying & selling of entire businesses: no heavy lifting required, bargain buying opportunities, ultra-low capital requirements, ultra-large selection, and ultra-low frictional costs. Having an ownership stake in a few businesses is the best path to building wealth.
INVEST IN SIMPLE BUSINESSES
Only invest in businesses that are simple - ones where conservative assumptions about future cash flows are easy to figure out.
INVEST IN DISTRESSED BUSINESSES IN DISTRESSED INDUSTRIES
The market is Mostly Efficient. However, there is a huge difference between Mostly & Fully efficient. Markets aren't fully efficient because Human Controls its Auction-Driven Pricing mechanism. Humans are subject to vacillating between extreme Fear and extreme Greed. Hence, stock prices move around quite a bit more than the movement in underlying intrinsic value.
INVEST IN BUSINESSES WITH DURABLE MOATS
How do we know when a business has a hidden moat and what that moat is? The answer usually visible from looking at its Financial Statements. Good businesses with good moats generate High Returns on Invested Capital. There is no such thing as a permanent moat. Some moats are more durable than others.
FEW BIG INFREQUENT BETS
The wise ones bet heavily when the world offers them that opportunity. They Bet Big when they have the Odds. And the rest of the time, they don't. - Charlie Munger
To be a good capital allocator, you have to think Probabilistically. In investing, there is no such thing as a sure bet. Investing is all about the Odds. If the odds are overwhelmingly in your favor, bet heavily.
FIXATE ON ARBITRAGE
MARGIN OF SAFETY
1. The bigger the discount to intrinsic value, the lower the risk
2. The bigger the discount to intrinsic value, the higher the return
INVEST IN LOW RISK, HIGH UNCERTAINTY BUSINESSES
INVEST IN THE COPYCATS RATHER THAN THE INNOVATORS
Independence of thought is fundamental to sound investing.
Value investing is fundamentally Contrarian in nature. The best opportunities lie in investing in businesses that have been hit hard by negativity.
Always seek out businesses run by people who have demonstrated their ability to repeatedly Lift and Scale.
THE ART OF SELLING
The only time a stock can be Sold at a Loss Within 2-3 years of buying it is When Both of the following Conditions are satisfied:
1. We are able to estimate its present and future intrinsic value, 2-3 years out, with a very high degree of certainty
2. The price offered is higher than present and future estimated intrinsic value
My conclusion is that 2-3 years is just about the right amount of Patience for losers to fix themselves. Real business change does take time.
If you have a very high degree of conviction on underlying intrinsic value, feel free to hold on to losers for longer than 2-3 years, but always be cognizant of the time value of money.
We must remain squarely in our circle of competence and not even be aware of all the noise outside the circle. Do not make the fatal mistake of looking at 5 businesses at once. Learn all you can about the business that jumps out for whatever reason and fixate solely on it.
"A lot of great fortunes in the world have been made by owning a Single Wonderful Business. If you understand the business, you do not need to own very many of them." - Warren Buffet