10 Investing Principles Every Value Investor Should Live By


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Jae Jun

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Are you satisfied with your investing acumen?

I don’t know too many people who answers yes to that question.

What I do know is that in order to improve quickly, the best way is learn from others.

Books are my favorite resources.

Next is to examine the mistakes and lessons learned by people who have found success.

It’s a lot cheaper and quicker this way instead of waiting to make the same mistakes yourself.

Then applying these lessons into a hands on approach is crucial. No matter how much theory you soak up, it’s worthless if you can’t apply it in the murky waters of the markets.

Investing is already such a complex subject. The successful investors focus only on the essentials and simplify.

In sports, you hear a common phrase.

“Slow the game down”.

It means to control the game instead of letting it control you.

Yet in the markets, it’s too easy to get swept up with the tempo of the market and before you realize, you’re sitting on losses exceeding thousands of dollars.

“There seems to be some perverse human characteristic that likes to make easy things difficult.” – Warren Buffett

All successful investors have systems in place. All of them also have investing principles to make things easier.

Guy Spier is another investor I follow.

The fund manager for Aquamarine Fund, and author of The Education of a Value Investor which I highly recommend (here’s my book review).

But I’ll let the numbers talk.

Aquamarine Fund Performance

Aquamarine Fund Performance. 1997 to 2014 and 2000 to 2014.

The above chart is from Guy Spier’s 2014 letter I received in the mail.

But what I particularly liked about the letter is that instead of simply discussing stocks and performance, he lays out his investing principles which everyone should read.

So here are Guy Spier’s 10 investing principles.

The 10 Investing Principles of Guy Spier and Aquamarine Funds

1. The Miracle of Compound Interest

The topic of compound interest is ignored or forgotten in the world of investing.

What I like about Spier’s approach is that he places great emphasis on simplifying and filtering out noise.

I highlighted previously the problems with professional money management and 5 reasons why you have an advantage.

While the investment industry works off daily, quarterly and yearly returns, Spier focuses on increasing net worth by getting the miracle of compounding interest to work in your favor.

2. Don’t Lose Money

Rule number one: DO NOT LOSE MONEY.
Rule number two: DO NOT FORGET RULE NUMBER ONE.
– Warren Buffett

Gains Required to Offset Losses

Gains Required to Offset Losses

My expensive mistakes all came from trying to make as much money as possible with every investment.

I was the home run hero.

Except I wasn’t hitting any home runs.

If I hadn’t sold Weight Watchers (WTW) for a 30% loss, I’d be sitting on an -80% disaster at the moment.

But swallowing my pride, admitting my mistakes and utilizing the remaining cash into better investments has more than made up for the mistake.

Not losing money helps you invest for another day.

3. Avoid Leverage

This principle refers to personal finance leverage and not companies. Avoiding leveraged stocks is also a good idea, but that’s another story.

Taking risks with money you don’t own is the most effective way of violating Buffett’s rules 1 and 2.

Again, Spier uses a Buffett quote about the implosion of Long-Term Capital Management:

Whenever a really bright person who has a lot of money goes broke, it’s because of leverage… It’s almost impossible to go broke without borrowed money being in the equation. – Warren Buffett

4. Pay Attention to Incentives

Spier believes that his incentives should be properly aligned with that of his shareholders. That’s the reason why the majority of his own money is invested in the same fund as shareholders.

It’s true for companies too.

If the CEO isn’t eating his own cooking, the worst that will happen is that he loses his job and then finds another one with an even fatter paycheck.

Their objective is to maximize short term performance and then letting the next CEO handle the problems it will cause.

5. Play Center Court

Playing as close to the foul line as possible can bring great results and make you look like a genius.

But what happens if things change or things don’t go your way?

John Paulson made billions by betting correctly on subprime. He couldn’t simply go back to “normal” or “simple” investments after that.

Here’s what happened in the following years.

  • -52% in 2011
  • lost more than -20% in 2012
  • reports of strong returns in 2013
  • -36% in 2014

If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. – Warren Buffett

6. Buy Better Businesses at Bargain Prices

As cliche as it may sound, the fundamentals of making money in the stock market is to buy a mispriced company.

Spier uses the example of the pari-mutuel system, horse betting system that Charlie Munger often talks about.

Everybody knows which horse is the fastest and most likely to win. But to make money with horses or in the stock market, it’s important to go beyond just knowing what is the best company. You need to find the mispriced company.

Howard Marks has always written about the same thing where he explains how risk comes from the price you pay.

The quality of a stock doesn’t reduce risk. Buying a stock when it’s mispriced reduces risk.

Jack and Jill could both own Apple (AAPL).

Jack bought it at $130.

But Jill bought it at $80.

Guess who will come out better?

When I simplify it like this, it’s easy. But in reality, how many people have the guts to buy at $80 when a stock drops from $130?

7. Work With Great Partners

Spier refers to the money management side with principle #7, but it’s easily adaptable to investing.

As shareholders and tiny owners of a business, it’s important to know what type of manager is running your company.

One of the big wins for me this year wasn’t from a company I invested in, but one I made a quick decision to ignore. The CEO is simply a person I did want want to be partners with.

This is what a bad partner in a company can do.

SFXE-chart

8. Use A Checklist

Check out these two books.

Before picking a stock, you should have a checklist to run it through.

It could be as simple as

  • Do I understand the company?
  • Am I buying at a price where I can profit?
  • What is the sell price?

These three points already speak volumes about a stock and this is what Spier realized as an investor.

He has a much more extensive checklist of course, and it’s prevented him from making a number of bad investments.

The purpose of a checklist is to prevent blowups first and then profit second.

Download a set of value investing checklists and make it easier on yourself. Click the image below to get it via email.

download investing checklists

9. Become a Hydra of the Investing World

The mythical hydra generates two heads if its head is cut off.

So what is the investment equivalent?

In Spier’s words, it’s to profit from all scenarios the world throws at you.

Recessions, bubbles, booms, busts, oil crashes, new presidents and the works.

Don’t limit yourself to just one industry, country or strategy. Understand and have the flexibility to implement it all at the appropriate times.

10. Overcoming Adversity: Marcus Aurelius, Shackleton, and Edison

This one is better left in Spier’s own words.

Adversity in investing, as in life, is a certainty. The writings of Marcus Aurelius — who was also the subject of the popular movie Gladiator — taught me that the real question is how we will handle this adversity when we eventually encounter it. Amid the turmoil of the financial crisis, his writings were a constant companion, teaching me that until adversity comes along, our virtues are theoretical. It is only when we actually have to act courageously, honestly and with forthrightness that we get to prove that we have those virtues in reality, instead of merely aspiring to have them. We would all prefer not to deal with adversity. But if and when it comes, it’s an important opportunity.

For his part, Sir Ernest Shackleton succeeded in getting all of his men home safely from the Antarctic — despite horrendous conditions and his own grievous misjudgments and mistakes. Misjudgments and mistakes, like adversity, are
inevitable. If I handle them the way Shackleton did on his great voyage, we will be much better off. Likewise, Thomas Edison made a virtue of his failures, famously stating that he would continue to fail to make an electric light bulb until he eventually succeeded.

Nobody likes to fail, any more than they like to be tested by adversity. But people who learn their lessons, pick themselves up and keep going, have earned the right to consider themselves truly successful. I very much intend to be a part of that group.

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