Four Key Investment Tenets

Buying stocks is no easy task. There are a myriad number of variables that can and do influence both the decision to buy and the decision to sell. There are also very many different approaches out there and sometimes it’s very tough to distinguish between what is reasonable and realistic, and what is not.

Before I started my investment business, I spent a lot of time reading up on different investment strategies and approaches. I found there to be overwhelming evidence in favor of value investing and the key tenets I list below. More than that, however, I find they just make sense. In the world of markets and high-stakes bets, it’s easy to get drawn in to the crowd and lose sight of your objectives and reasoning. Keeping to an investment strategy can make all the difference.

So, whenever I am looking at a new investment or re-assessing the portfolio, I always bear the following in mind. While different investment styles will work for you, I’ve found almost all approaches with this basis have reduced the risk of permanent loss of capital.

My business follows an investment philosophy revolving around four key tenets:

It is always our aim to buy securities in companies for less than intrinsic value. By working out what a company is worth and comparing it the market price, large long-term gains can be realized at a lower level of risk.

Hence we emphasize margin of safety in all our investments. It is not sufficient for a security to be trading at a small fraction below what we think it is worth. There must be a large enough discount so that if our intrinsic value estimate is over-stated we still face minimal capital loss.

2. We believe investing is most intelligent when it is most business-like:

3. We take no large risks:

We do not sell short, use leverage or trade on margin. There is no risk of capital loss greater than the amount we invest.

The biggest risk any investor faces is the permanent loss of capital. It is almost impossible to recover from this situation, and any investment mechanism that increases the probability of loss is too risky.

4. We believe that price is what you pay; value is what you get:

This is probably the most important investment tenet out there. The best investors can easily distinguish between price and value, and hence pay little attention to short-term market fluctuations.

Markets are not always efficient and present opportunities for conservative long-term investors to profit. While most of the above seem very basic and logical, you’d be surprised how difficult they are to stick to in practice. The best investors always keep things as simple as possible and always keep their strategy in mind in approaching any potential investment. While these rules are not a sure-fire way to gain riches, they are most likely to prevent permanent capital loss, and have worked very well not only for me, but for some of the most famous investors in the world, including Warren Buffett.