Outsmarting The Smart Money

1. Don't be the patsy. If you cannot invest with disciplined intelligence, the best way to own stocks is through an index fund that charges minimal fees. Those doing so will beat the net results (after fees and expenses) enjoyed by the great majority of investment professionals. As they say in poker, "If you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy."
2. Operate as a business analyst. Do not pay attention to daily excitement in the market, macroeconomic forecasts, or securities movements. Concentrate on evaluating businesses.
3. Look for a big moat. The "moat" is a metaphor for a protective belt surrounding a business that will secure favorable long-term prospects, those whose earnings are virtually certain to be materially higher 5 and 10 years later.
4. Exploit Mr Market. Market prices gyrate around business value, much as a manic-depressive swings from euphoria to gloom when things are neither that good nor that bad. The market gives a price, which is what you pay, while the business gives value, and that is what you own. Take advantage of market mispricings, but don't let them take advantage of you.
5. Buy at a reasonable price. Bargain hunting can lead to purchases that don't give long-lasting value; buying at frenzied prices results in purchases that give no value. Still it is better to buy a great business at a fair price than a fair business at a great price.
6. Insist on a margin of safety. The difference between the price you pay and the value you get is the margin of safety. The thicker, the better.
7. Know your limits. Avoid investment targets that are outside your circle of competence. You don't have to be an expert on every company, or even many - only those within your circle of competence. A large circle is not necessarily better; knowing its boundaries, however, is vital.
8. Invest with "sons-in-law." Invest only with people you like, trust and admire - men you'd be happy to have your daughter marry, or women you'd be happy to have your son marry.
9. Only a few will meet these standards. When you see one, buy a meaningful amount of its stock. Don't worry so much about diversification among stock holdings, so long as your assets are diversified in other ways, as among home equity, bank savings, and other asset classes. If you find one outstanding business, that is better than a dozen mediocre ones.
10. Avoid gin-rummy behavior. This metaphor from the card game cautions against the short-term, quick-flipping strategy, akin to the action of picking and discarding cards each turn in the game. It is the opposite of possibly the most foolish of the Wall Street maxims: "You can't go broke taking a profit." Imagine as a stockholder that you own the business and hold the investment as you would if you owned and ran the whole thing. If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes.