How to Create Investing Principles
And how they can help guide your investment decisions
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👋🏼 everyone,
How many of you actually have a set of investing principles that you live by - and do you genuinely use them as a checklist when investing?
I'm well aware that for someone like me, who tends to default to the emotional rather than the logical side of things in life, having a set of clear investment principles is crucial for building long-term returns that could eventually give you the option to quit your job or build serious wealth.
I’ve told this story before, but in 2014, I bought a pretty decent chunk of Amazon stock.
It was my first real foray into investing.
I didn't have any clear goals; I was on an emotional rollercoaster every time there was a slight dip or new high, and I didn't really have a solid emergency fund at the time.
Fast forward 18 months later, I sold the stock when it was priced at ~$27. As I write this, Amazon (AMZN) is trading at $206 - an increase of over 663% 🫣
That experience really underscored the importance for me of creating and having a clear set of investing principles.
Investing without principles is like navigating without a map - you're lost before you even start
What is an investment principle ?
An investing principle is a guideline that helps you make smarter, more informed decisions with your money.
It's like a guidebook to keep you on track and avoid making decisions based on emotions or guesswork.
For example, one key principle is "diversification." This means spreading your investments across different areas, like stocks, bonds, or real estate, so that if one investment loses value, you’re not heavily impacted.
Another important principle is "thinking long-term." Instead of reacting to short-term market fluctuations, you focus on the bigger picture and allow your investments to grow over time.
In short, investing principles provide a framework that helps you stay disciplined, make better choices, and avoid common mistakes.
Why principles matter
For the past decade, my investing principles and checklist have kept me grounded, preventing me from getting caught up in the FOMO surrounding every promising stock opportunity.
The greater the investment, the more thoroughly I revisit my principles and checklist, taking the time needed to feel as confident as possible in my decision.
I don’t want to pretend that I don’t use a lot of intuition along the way - I absolutely do. My point is that you’re much (much) better served with a clear set of principles and checklist than not.
I hold Spotify, and I bought a whole lot more in the most recent dip.
Why?
Well, it met every single criteria on my investment checklist, plus I love the product and still believe it hasn't even scratched the surface of its potential.
And consider the S&P 500 crash in 2022. The below chart is not a particularly pleasant sight and you’d forgive the folks who decided to exit.
Yet how many of those who sold were driven purely by emotion? I'd wager quite a substantial number.
Now imagine they held firm, staying aligned with their well-defined principles - they’d likely be quite pleased they did, as the S&P has recently hit record highs, up 64% from its lowest point in 2022.
This is a key point: I'm not suggesting that those who sold their positions in 2022 were necessarily mistaken. My focus is on their reasoning - did they have a well-defined rationale for either remaining invested or choosing to exit?
Strategy vs Principles vs Checklist
It’s easy to mix up investment strategies, principles, and checklists, so here’s a quick overview of the key differences between each of them:
Your strategy is your overall plan and long-term goal. Your principles are rules that guide your investing decisions and your checklist is a practical representation of those principles that you can refer to before investing.
Investing principles from the world’s most successful investors
Warren Buffett: The Principle of Value Investing
Principle: Buy great businesses at fair prices, not fair businesses at great prices.
Key Elements:
Intrinsic Value: Buffett invests in companies with a strong intrinsic value, meaning companies that are fundamentally solid regardless of market fluctuations.
Long-Term Horizon: He stresses the importance of holding investments for the long run. Buffett famously says, "Our favorite holding period is forever."
Moats: Invest in businesses with a "moat"—a competitive advantage that protects them from competitors.
"Price is what you pay; value is what you get."
Charlie Munger: The Principle of Mental Models
Principle: Build a framework for decision-making using mental models from various disciplines.
Key Elements:
Multi-Disciplinary Thinking: Munger emphasizes learning from different fields - psychology, economics, and history - to understand market behavior and make better decisions.
Patience: Just like Buffett, Munger believes in waiting for the right opportunities and not reacting to short-term market noise.
Avoiding Mistakes: A principle he holds dear is to focus more on avoiding mistakes rather than constantly chasing profits. He says, "The big money is not in the buying or the selling, but in the waiting."
"It’s not supposed to be easy. Anyone who finds it easy is stupid."
Peter Lynch: The Principle of Investing in What You Know
Principle: Invest in businesses and industries you understand.
Key Elements:
Personal Knowledge: Lynch advocates for investing in companies or industries you're personally familiar with or have expertise in. His famous saying, "Invest in what you know," encourages people to use their day-to-day experiences to spot potential investment opportunities.
Growth at a Reasonable Price (GARP): Lynch often combined growth investing with value principles—looking for high-growth companies that are priced reasonably.
Don’t Overthink It: He believes you don’t need to be a financial expert to make money in the stock market, just someone who understands a business.
“Know what you own, and know why you own it.”
Get the Investing Principles + Checklist Cheatsheet
Curious about the investing checklist I use to make decisions I feel good about? Join Finbrain, and I’ll give you access to my 'Investing Principles and Checklist' cheatsheet, plus a ton of other useful resources to help you invest confidently.
Thanks for reading. And as always, if you enjoyed today’s edition, hit the like ❤️ button below.
Jason
DISCLAIMER: None of this is financial advice. Concepts of Finance newsletter is strictly for educational purposes.