Investing Principles
My core investment principle is to build as much as possible on the work of Buffett & Munger. The less I have to reinvent the wheel, the better. I aim to apply their approach to the opportunities in front of me—not to create a new one.
Here’s what that means in practice:
1. My goal is to beat the market. If I can’t do that, I will stop trying.
“While I much prefer a five-year test, I feel three years is an absolute minimum for judging performance. It is a certainty that we will have years when the partnership performance is poorer, perhaps substantially so, than the [index]. If any three-year or longer period produces poor results, we all should start looking around for other places to have our money. An exception to the latter statement would be three years covering a speculative explosion in a bull market.” (Buffett Partnership “Ground Rule” Nr. 5).
2. Due to the nature of value investing, I aim to beat the market by matching it on the way up and outperforming it on the way down.
In years when the market is strong, we expect to keep pace, and in years when the market is weak, we expect to lose less." (1961 Buffett Partnership Letter)
I would consider a year in which we declined 15% and the market 30% to be much superior to a year when both we and the market advanced 20%. (1965 Buffett Partnership Letter)
3. With one exception (see 4.) I will only invest in companies I understand. While I do not exclude companies from other countries, most of the businesses I understand will be located in Germany or the United States.
"You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital." (1996 Berkshire Hathaway Shareholder Letter)
4. The only exception to Rule 3 is when a value investor I deeply trust makes a significant bet on a company. If they invest heavily—or even modestly but explain their bet well—I will allocate 10% of my capital to it without further analysis, trusting their judgment over my own.
The only investors in that category are:
The Berkshire investment managers: Warren Buffett, Ted Weschler, Todd Combs
Li Lu
Mohnish Pabrai
Adam Mead
I understand that this approach won’t make me look smart when the bet works - and really stupid when it doesn’t. But I also know that by consistently following these investors when they bet big, the net result will be very good over time.
5. My preference is to buy great companies at a fair price and hold them forever. Such opportunities are rare - so most of my investments will be in fair companies at a great price. I will hold them for at least one year.
The only exception to my minimum holding period of one year will be investments in special situations (spinoffs, merger arbitrage etc.).
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. (1989 Berkshire Hathaway Shareholder Letter)
"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever." (1988 Shareholder Letter)
6. It is not my goal to reduce volatility. Each bet will represent at least 10% of my portfolio at the time of purchase. I will hold no more than 10 bets at any given time.
"We believe that a policy of portfolio concentration may well decrease risk if it raises both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it." (1993 Shareholder Letter)
"Charlie and I operate on the premise that if you can identify six wonderful businesses, that is all the diversification you need." (1996 Shareholder Meeting)
"If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you deserve the mediocre result you’re going to get." (Charlie Munger)
7. I generally avoid leverage. But in exceptional market situations, I might use up to 25% of the portfolio value.
"Leverage is a double-edged sword. If you use it to buy the right business at the right price, it can increase your returns. But if you use it incorrectly, it can destroy you." (1993 Shareholder Letter)
None of these ideas are mine - they are well-established strategies that have consistently outperformed the market. My only edge lies in their disciplined application, particularly when it comes to the psychological aspects of investing.
If you want to find out more about these principles, I recommend the following article: