Fundamental Investment Principles
A personal collection of insights from Graham, Buffet, Munger, and Bruce Greenwald
10 minute read
Overview
I hope this list empowers you to become a better investor. The contents that follow are derived from the writings of some of the best investors in history: Benjamin Graham, Warren Buffett, Charlie Munger, and Bruce Greenwald.
Think of buying a stock as if you were buying a part of a business.
Fundamentally one does not buy a stock, one buys a piece of a business. If the business was liquidated, you would be compensated accordingly.
When buying a business, know the business.
Helps to remove speculation and improve rational
Ex. If the market suddenly asks for less than what the business you own is worth you can capitalize on that opportunity.
Think of the stock market as Mr.Market, who comes each day and tries to sell you a piece of his business at different prices.
He can get moody (Euphoric or Pessimistic) because of psychological human errors. Most of the time he is right, but not always.
When making an investment, always have a margin of safety.
Buy businesses with a sustainable competitive advantage for less than they are worth.
Stock prices are not always rational because of tendencies that often mislead people.
Price is what you pay, value is what you get.
A primary source of risk for the fundamental investor is the risk of paying too much for an investment.
In most cases, other than a firm with a clear, protected franchise, growth will be competed away. Growth is risky. The intelligent investor will not pay for sales growth, asset growth, or earnings growth, but only for residual earnings growth (growth coupled with high returns on capital), for these add value.
Understand what you don’t know, and don’t mix what you don’t know with speculation.
You don’t have to have an opinion on everything, only the actions that you undertake. Knowing what you don't know is more useful than being brilliant.
Look for no-brainer decisions.
If you wait for big opportunities and have the courage and vigor to grasp them firmly when they arrive, you don’t need a lot of them. 10 great investment decisions are more than enough.
Judge the staying quality of the business in terms of its competitive advantage.
Diversification is a protection against ignorance and makes very little sense if you know how to value businesses.
“To suppose that safety first consists in having a small gamble in a large number of different companies where I have no information to reach a good judgment, as compared with a substantial stake in a company where one’s information is adequate, strikes me as a travesty of investment policy.”
John Mayer Keynes
Beware of using leverage to invest
Leverage can make you less rational. Example: if a stock you own suddenly drops 50% it's easier to stay rational if you didn’t buy it with debt.
It's better to depend on compound interest than on market timing.
A great business at a fair price is superior to a fair business at a great price.
Always measure investments against their opportunity cost.
Don’t buy a bad business because it's selling cheaply.
Time is the friend of the wonderful business and the enemy of the lousy business. If you are in a lousy business for a long time you will get bad results, even if you bought it cheaply.
When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
It is the absence of change that is often the friend of the investor.
It is easier for companies to develop a strong competitive advantage if they are in an industry with no change.
Forming macro opinions or listening to the macro or market predictions of others is a waste of time.
History does not tell you the probability of financial things happening. Forget about what is not knowable.
The great lesson in microeconomics is to discriminate between when technology is going to help you and when it’s going to kill you.
Ex. Textile business, the increase in productivity due to machinery killed profit margins