1. Stocks represent ownership stakes in businesses and are not just pieces of paper to enable trading. Think like a business owner.
2. If stocks are ownership slices of a business, we should value stocks like we value businesses. A business is worth the discounted value of all future cash flow that it can generate.
3. As Benjamin Graham wrote, in the short term, the market is a voting machine. Popularity rules the day. In the long term, the market is a weighing machine, gravitating toward a company’s true intrinsic value. Buy on the cannons (when stocks are unpopular), sell on the trumpets (when euphoria reigns).
4. There are two ways to make money in the stock market:
1) Own businesses that will grow in value over time.
2) Buy things below intrinsic value, and wait for the market to come around to recognize that value.
Try to do both.
5. Businesses that have strong and sustainable competitive advantages—a wide economic moat—will increase in value at a greater rate than those that do not. Wide-moat firms are also best suited for survival, possessing the high ground that will flood last, if at all, when a downturn hits. Focus on these firms.
6. Gaining an edge via better information is nearly impossible in this day and age. However, humans are fallible, and incentives are aligned with short-term measures for many market participants. Behavioral finance is legitimate, and an edge can still be had via a better long-term perspective.
7. Stay within your circle of competence. Do not be afraid to admit, “I don’t know” and/or that something is “too hard.”
8. Activity for activity’s sake is harmful since frictional trading costs can greatly harm returns. Aim to minimize commissions, taxes, and fees for “helpers.”
9. Focus on the value of the securities just as much as the price. If we know the price but do not know the value, we know nothing. One becomes a better athlete by practicing, not watching the scoreboard.
10. Valuation matters. Paying too high a price for a stock can lead to disappointing returns, even if the underlying company subsequently performs wonderfully. Look for situations where a company has to meet or exceed a low set of expectations priced in by the market.
11. There is a dosage effect regarding portfolio diversity. Diversity is important to have, but too much can also dilute best ideas and excess returns. It can actually be safer to have fewer baskets if it affords a much-closer watching of the eggs.
12. The greater the payoff odds (lower price/fair value ratio), the greater the weight a position should be in a portfolio, all else equal. Likewise, the greater the confidence in one’s projections, the greater the position size should be, all else equal.
13. The future is inherently uncertain, and one should always demand a margin of safety. The more uncertain a situation, the greater the margin of safety should be.
14. Always consider opportunity costs. We should not be afraid to sell a good opportunity to take advantage of a great opportunity. We can generate value by selling dollar bills trading for $0.90 to buy other dollar bills trading for $0.60.
15. Investing is a multidisciplinary exercise. Read widely. Look for wisdom in unconventional places, and always keep an eye out for opportunities.
A version of this article originally appeared in December 2012.