High Level

• Can you understand the business? Is it in your circle of competence? Avoid industries where you know little.
• Does the business have a moat? Does it have a durable competitive advantage? Avoid perfectly competitive and high fixed cost industries.
• Does it have managers that behave as owners and are wise capital allocators?
• Do insiders own their own stock and are they buying back shares?
• Does the company have a lot of debt? Any long list of numbers multiplied by zero is always zero.

Details

• Risk: All investment evaluations should begin by measuring risk, especially reputational
  • Incorporate an appropriate margin of safety
  • Avoid dealing with people of questionable character
  • Insist upon proper compensation for risk assumed
  • Always beware of inflation and interest rate exposures
  • Avoid big mistakes; shun permanent capital loss
• Independence: "Only in fairy tales are emperors told they are naked"
  • Objectivity and rationality require independence of thought
  • Remember that just because other people agree or disagree with you doesn't make you right or wrong-the only thing that matters is the correctness of your analysis and judgment
  • Mimicking the herd invites regression to the mean (merely average performance)
• Preparation: "The only way to win is to work, work, work, work, and hope to have a few insights"
  • Develop into a lifelong self-learner through voracious readings cultivate curiosity and strive to become a little wiser every day
  • More important than the will to win is the will to prepare
  • Develop fluency in mental models from the major academic disciplines
  • If you want to get smart, the question you have to keep asking is “why, why, why!"
• Intellectual Humility: Acknowledging what you don't know is the dawning of wisdom
  • Stay within a well-defined circle of competence
  • Identify and reconcile disconfirming evidence
  • Resist the craving for false precision, false certainties, etc.
  • Above all, never fool yourself, and remember that you are the easiest person to fool
• Analytic Rigor: Use of the scientific method and effective checklists minimizes errors and omissions
  • Determine value apart from price; progress apart from activity; wealth apart from size
  • It is better to remember the obvious than to grasp the esoteric
  • Be a business analyst, not a market, macroeconomic, or security analyst
  • Consider totality of risk and effect; look always at potential second order and higher level impacts
  • Think forwards and backwards-Invert, always invert
• Allocation: Proper allocation of capital is an investor's number one job
  • Remember that highest and best use is always measured by the next best use (opportunity cost)
  • Good ideas are rare-when the odds are greatly in your favor, bet (allocate) heavily
  • Don't "fall in love" with an investment-be situation-dependent and opportunity-driven
• Patience: Resist the natural human bias to act
  • "Compound interest is the eighth wonder of the world" (Einstein); never interrupt it unnecessarily
  • Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
  • Be alert for the arrival of luck
  • Enjoy the process along with the proceeds, because the process is where you live
• Decisiveness: When proper circumstances present themselves, act with decisiveness and conviction
  • Be fearful when others are greedy, and greedy when others are fearful
  • Opportunity doesn't come often, so seize it when it does
  • Opportunity meeting the prepared mind: that's the game
• Change: Live with change and accept unremovable complexity
  • Recognize and adapt to the true nature of the world around you; don't expect it to adapt to you
  • Continually challenge and willingly amend your "best-loved ideas"
  • Recognize reality even when you don't like it - especially when you don't like it
• Focus: Keep things simple and remember what you set out to do
  • Remember that reputation and integrity are your most valuable assets-and can be lost in a heartbeat
  • Guard against the effects of hubris and boredom
  • Don't overlook the obvious by drowning in minutiae
  • Be careful to exclude unneeded information or slop: "A small leak can sink a great ship"
  • Face your big troubles; don't sweep them under the rug

Other