As I embark on my life as a “money manager”, it is important for me to codify my investment philosophy, which will be the guiding principle for all my investment decision making. Its practice will reflect the ways in which my investment portfolio is constructed and managed. It will also serve as a guide for me to return to should my investment strategy need reevaluation!

What is Investment Philosophy? A cogent answer to this question can be found on first slide of the deck put together by the “Dean of Valuation”, Ashwath Damodaran. As he puts it, “An investment philosophy is a coherent way of thinking about markets, how they work (and sometimes do not) and the types of mistakes that you believe consistently underlie investor behavior“.

My investment guiding principles are outlined below. I have worked on developing and practicing a subset of these (see here) over several years of real-world investing experience and learning through both my failures and successes and studying those of the masters in the business of investment!

Stay the Course

I believe in compounding as a single most important engine of wealth creation and time to be the driver of this engine! My goal is to stay in the game for the long haul. I will make mistakes but my focus will be on making sure these mistakes are not fatal such that I am unable to stand up to fight yet another day! A key principle underlying the framework of “stay the course” investing is the concept of laziness arbitrage or as Charlie Munger calls it — “sit on your ass” investing! I will strive to be on the look out for opportunities to buy a few outstanding businesses and let compounding do the magic!

Keep it Simple

In the investing game, there are no extra points to owning difficult businesses. Here I am reminded of Munger inversion principle– smart people solve problems and wise people avoid problems– Beauty of keeping it simple lies in problem avoidance. I want to find opportunities to invest in businesses with clear visibility and simple to understand high upside with limited downside.

 Follow the Cash

Look out for investing in businesses that are consistently cash flow positive and are able to reinvest the generated cash back into business to continue generating above average returns.

Disavow Macro Forecasting

Focus on bottom up investing in businesses that are simple, cash flow positive, are run by management with skin in the game with long-term owners frame of mind and are on sale in the market at reasonable valuation. Have a complete disregard for macro factors influencing investment decision. Wars, inflation, fed action, interest rates, currency fluctuations, climate change– are but some examples of macro factors that are complicated societal problems beyond the ability of any single individual to influence or benefit from.

Be Cheap Within Reason

I prefer owning businesses on sale at lower multiples than not. However, I am willing to pay fair price for a chance at owning wonderful businesses as opposed to owning fair businesses at cheap price.

Loath Originality

Both in ideas generation and mistakes! I will always lean on masters to dictate the path I take.

Risk Minimization through Portfolio Sizing

Sooner or later markets will humble all great players. I want to survive and portfolio sizing will be my anchor. I am aware that even the best of ideas can spur unwarranted surprises leading to permanent loss of capital! I will therefore adhere to 1-2-5-10 principle of portfolio sizing– 1% allocation limit to speculative ideas; 2 % allocation limit to high risk with clear upside visibility ideas; 5 % limit to growth at reasonable price and 10 % to holdings that are truly one time buy decisions.

Disavow Market Timing 

I will strive to remain fully invested through purchase of long-only securities bought at attractive pricing through all market cycles. No investment decisions will be made conditional on identifying “correct” entry or exit points for equities in the portfolio.

Sell Discipline

I will focus on maximizing absolute returns through the process of decision minimization. All successful investments and wealth generation involve atleast two correct decisions: buy decision and sell decision. Buy decision is solely based on expectation for future wealth compounding. On the other hand, there are myriad of reasons to sell a security which are therefore prone to error of judgement. My sell decision will be limited to (a) my failure in evaluating business prospects or my investment thesis suffering a significant pivot and (b) the security getting egregiously overpriced in the market place.

Strive to Maximize Luck

At the end of the day, investing is a game of calculated risk! Because future is unpredictable, there is no guarantee of 100 % success no matter how much due-diligence is put into investment decision. I want to therefore optimize for luck, i.e., increase the odds of success, through the process of life-long learning.