My 8 word investing philosophy: Be patient, think independently and protect the downside

Morgan Housel from Motley Fool (one of the best financial writers in my opinion) had a great post on short investing philosophies. Boiling down rather complex “animals” like a whole philosophy on the one hand is a little bit dangerous, on the other hand, a good philosophy like a good red wine based gravy gets better and better the more you reduce it. I did write down my general investment rules here but it is much more a description than a (short )philosophy. Before moving to my own short version, I liked those 3 statements best:

Eddy Elfenbein, blogger, Crossing Wall Street: “Be patient and ignore fads. Focus on value. Never panic.”

Barry Ritholtz, Bloomberg: “Keep it simple, do less, and manage your stupidity.”

Bryan Hinmon, Motley Fool Asset Management: “Own compounders. Buy smart. Be patient.”

So my own statement doesn’t look that innovative: Be patient, think independently and protect the downside Actually this statement is the combination of 3 very basic principles: 1. Be patient The most important of all: Think long-term, invest long-term and let the “Magic of compounding” work for you. Cancel out the noise like quarterly earnings, monthly macro statistics or weekly employment figures. Don’t trade in and out of stocks frequently, this will save costs and nerves. Don’t market time. Make sure you don’t need the money you invest elsewhere. I am still in the learning phase which regard to this but achieving true patience is maybe the ultimate “black belt” of investing. 2. Think independently I would say that trying to think independently is the fundamental character trait which then helps to prevent of falling for fads, manias and panics. The hard thing is to actually to do it. For me it helps enormously NOT to read broker research but focus on original information first (annual reports, balance sheets, original press releases) and then read comments etc. later when researching an investment. Also reducing the amount of input can help. Don’t look at real-time price changes and ignore “real-time news”. Twitter is not a good investment advisor. Do read financial news with a time lag. I read the FT for instance more often than not with a 1 week time lag and annual report often several month after they were released. Avoid “Hot stocks” and “crowded trades” as a matter of principle. 3. Protect the downside No one can avoid losses, even Warren Buffett makes the occasional mistake (Tesco). However you can try to minimize this risk by doing a good Due diligence and focus on what can go wrong first. Try to “kill the investment” first and then look at the potential upside. If there is any doubt on the validity of the business model or of the industry make sure you understand it better than everyone else before investing. If there is any doubt with regard to the financials and/or integrity of management, stay away. As Charlie Munger said it “Stay out of trouble”. If you estimate the upside, stay conservative. For me this also means not being to concentrated on single positions. Anyway, I can only recommend any reader trying to come up with a short “philosophy statement” as well, it is definitely a very god exercise.

8 comments

  • I think you are spot on with Charlie’s quote to ‘Stay out of trouble’. He also refers to it as ‘avoiding stupidity’.

    Thinking independently is a great point as well. Avoiding herd mentality can make all the difference.

    Great post! I need to go work on my own statement now 🙂

  • This is a bit like an investment Haiku or the “For sale: baby shoes, never worn” line.

    I guess my first stab at this would be: Be systematic. Ignore the noise. Own quality bargains.

  • Just 4 words for my philosophy: Contrarian, Value, Concentration, Rotation (Acronym: CoVaCoRo), but it is not engraved in stone, instead further developing and adding color, details and new knowledge, as we all keep learning.

  • mmi,

    Helmuth Graf v. Moltke said, “Vier G dürfen einem Feldherrn nicht fehlen: Geld, Geduld, Genie und Glück.” Success depends on money, patience, genius – in finance independent thinking – and luck.

    Regards

    milud

  • This is really good advice for an up and coming investor! Thank you so much for writing this because it really helped me out 🙂

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