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My Three Value Investing Principles

Investing Principles are important, they act as ballast during squalls that appear periodically on the investing horizon. While we hone in on our techniques, tools and methods, principles rarely change. What is interesting that Investing Principles are different from one investor to another.

I have 3 basic investing principles that I first thought about in 2005, I know them by heart and I have used them as my basic guide in investing.

Principle #1: Always have a Margin of Safety. Also known as "Buy low Sell high", this is the only investing principle that is universally true that everybody understand. To me, this is even more important than "Buy and Hold". Problems usually start when I over pay and think that I can unload the stock at a higher price. The best quote on MoS by Buffett in the 1974 Shareholder Letter, (btw,no truck on bridge analogy):

"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."

Principle #2: Always be Learning. Charlie Munger once observed that all successful people were also avid readers. While it is important to learn from one's mistakes, it will sometimes better to learn from other people's mistake. The good news is that our capactity to absorb and process data is currently quite unlimited. The challenge with investing education is that there is alot of misinformation and false precisions. We have to keep an open mind to what is presented to us. Victor Niderhoffer's two books separated by a financial meltdown makes an interesting education on human hubris and humility. While I am no where near the 30+ books that Mr.Munger reads in a year, I am happy to report that I skim though at least a book a month, sometimes more.

Principle #3: Think Independently. Thinking independently means never having to buy on a tip, it also fosters a healthy skepticism towards things which are hot or the latest fad. It makes me want to verify processes and results myself. For example, when Magic Formula Investing (by Joel Greenblatt) first came about, I didn't want to depend on the MFI website for picks, I learnt about the formulas and recreated the screens myself. Ditto for creating my own DCF calculator, and figuring out a process for discovering the discount rates. On an abstract level, if you think and actindependently, you are betting against the larger crowd, and value investing is very much contrarian in nature.

Lastly, the glue which binds all the three principles is this: Patience Being Patient means I can wait out for a better margin of safety, plan my learning activities, and never act on a hot tip until I do my own due diligence.

Share your Investing Principles.


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