Focus Investing - Thanks Rich!
I. Develop a comfortable understanding of the language of investing, accounting.
- Study a basic accounting book like The Interpretation of Financial Statements by Benjamin Graham
- Understand four concepts, Compound Interest, Present Value/Future Value, Inflation, and the difference between price and value.
- Start your search at the company website and while your there order the company's annual report (Usually at the Investor Relations section of the website).
- Use Edgar-Online (www.edgar-online.com), or a similar service, to get the companies 10K's, 10Q's, and proxy statements
- Learn how cash flows through an organization
- Learn how companies manage their inventory
- Make especially sure that growth in Inventory and Accounts Receivable are not much faster than the rate the companies sales are growing
II. Portfolio Concentration
- You should have no more than 10-12 stocks in your portfolio; this should allow plenty of diversification against company specific risk.
- Over diversified portfolios tend to track the performance of the overall market
- When you see the perfect opportunity, mark a large investment
III. Minimize Portfolio Turnover
- This will keep your expenses low, which in turn will improve your portfolio returns (maximizing compound interest potential)
IV. Purchase High-Quality Companies
- Look for companies with leadership you trust, selling products you understand, selling for below their intrinsic value (i.e., have a Margin of Safety)
- Look for large insider ownership (owners who "eat" their cooking)
- Look for Net Margins over 10%
- Look for high ROE and ROIC
- Look for companies that have a significant competitive advantages
- Look for managers who make rational decisions (Especially when making capital allocation decisions)
V. Purchase shares below the company's intrinsic value
- Buy shares at a fraction of the price that reflects the firms value (i.e., what the firm would sell for if sold outright, liquidated, or if shares are selling for less than the present value of its future cash flows)
VI. Patience & Fortitude are requirements
- Do not sell your ownership of a company based on short-term problems.
- You must be able to withstand periods of volatility without abandoning the focused investing strategy
- Have the fortitude to stand by your convictions, even if Mr. Market is telling you otherwise
- Embrace volatility, it allows investors to purchase parts of great businesses at prices below their respective intrinsic values.
- Understand (and practice) the concept of delayed gratification. |
