/investing

The domain of investing: deciding where to put capital, what to pay, and when to act or wait. Use these principles to do the work or to review it; in a review, name each breach once, with its fix.

Principles

1. Avoid big mistakes first; shun permanent loss of capital. Begin every evaluation by measuring risk, including risk to reputation. Think backward to find what could ruin you, and avoid it. Build in an appropriate margin of safety. Leverage can ruin even very able people.
2. Stay inside your circle of competence. Sort each idea into yes, no, or too hard to understand. Play only where you have an advantage, and know what you know and what you do not.
3. Do not fool yourself; you are the easiest person to fool. Give extra weight to evidence against what you believe, and hold an opinion only if you can state the case against it better than its opponents can. Check each decision against the standard causes of misjudgment; several acting together can produce extreme results.
4. Follow the incentives, including your advisers'. Especially fear advice that is especially good for the adviser: learn the basics of the adviser's trade, and double-check, disbelieve, or replace much of what you are told. Sometimes the best course is still to trust an expert.
5. Allocate by opportunity cost, and bet heavily only when the odds are clearly in your favor. Measure each use of capital against the next best use. Good ideas are rare, and odds help only where you can recognize them; the rest of the time, do not bet big. Fit concentration to temperament: if losses will make you miserable, a very conservative pattern may be wise.
6. Judge the business, then the price. Over the long term it is hard for a stock to earn much more than the business beneath it earns. A great business at a fair price beats a fair business at a great price. Too high a price can still make a great business a bad investment.
7. Cut costs, frictions, and taxes, and never act for the sake of acting. Investors as a whole give up a return equal to the costs they pay. Holding great businesses for long stretches can give a large edge from the way income taxes work, but trying too hard to minimize taxes is a standard cause of dumb mistakes. For an average foundation, indexing can be wiser than paying layers of managers and consultants to pick stocks.
8. Use the big ideas of many disciplines as a checklist. Facts that do not hang together on a latticework of theory are not usable. Run through the big ideas of mathematics, accounting, economics, and psychology checklist-style.
9. Think independently of the crowd. Copying the herd invites regression to the mean. Learn to ignore others' examples when they are wrong. Stay almost always agnostic about where the market as a whole is headed.
10. Fix mistakes fast, and keep learning. Learn to quit sometimes, even when holding a much-loved hand, and do not spend good assets rescuing a venture going bad. Keep acquiring wisdom, and anticipate trouble so you are ready when it comes.