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4 Investing Rules that the TOP 1% Investors Follow Religiously

How can you tell what is actually good investing advice?

To answer this question, I compiled the lessons of 4 of the most famous investors of all time: Warren Buffett, Peter Lynch, Bill Ackman, and John Bogle from hours of their interviews and lectures.

They certainly do not agree on everything, but I was able to find 4 core investing principles that they do all agree on. And at the end, I’ll share one bonus principle that is perhaps the most important.

Investing is overwhelming. There is a vast amount of information, uncertainty, fear of loss, and losing money on an investment is like losing a chunk of my time. 

So what is the first core principle?

On the go? Watch the video HERE.

4 Lessons From the Top 1% Investors

Trait 1. Have a Long Term Mindset 

“Have the mindset of buying businesses.” 43:03–43:18

Warren Buffett is the Oracle of Omaha and the CEO of Berkshire Hathaway, one of the largest conglomerates in the world. 

He does not mind technical analysis. He doesn’t care about the ups and downs of the stock market in the short term. He is not looking at lines of resistance or lines of support. He’s not looking at call options or put options. He’s looking at the fundamentals of the business.

“The stock market is a voting machine…” 1:52–2:04

Bill Ackman, billionaire hedge fund manager, is expanding on what Warren Buffett is saying. 

In the short term, the stock market is noisy and unpredictable. A voting machine is the perfect analogy. On any given day, stock could be overbought or oversold based on what’s in the news and how people feel. But, over the long term, the stock market is weighing businesses for their true value. If it’s growing, it’s going to go up in value.

“Think of the value of compounding.” 36:01–36:12

John Bogle is the father of the Index Fund, founder and chief executive of the Vanguard Group, one of the world’s largest investment funds.

He points out the power of compounding. When we combine this with the previous investors, you invest in a solid business, which in the long term will be accurately weighed by the stock market. Experiencing compounding interest over the long term will result in huge gains.

“My best stocks were the 5th, 6h, 7th, year not day.” 19:58–20:10

Peter Lynch, legendary fund manager at Fidelity, averaged a ridiculous 29.2% annual return over 13 years. He achieved these insane returns because he invested over many years, not swing trades over days or weeks. 

The first takeaway that I have from these four legendary investors is that I need to have a long-term mindset when it comes to investing. 

The short-term, rare, swing trade is exciting, but it’s not the way that these guys built generational wealth.

I know first-hand this is easier said than done. 

When the stock price of META dropped, I jumped on it. I was so excited about the direction of the company, its use of AI, and the untapped potential in the Metaverse for the field of productivity.

When the stock price quickly recovered to 30% or 40%, I took my gains and ran. Today, I would be more than doubling my initial investment. 

So I understand that in theory, this sounds good but in practice, having a long-term mindset is a continual practice.

That’s where the second principle of investing comes in. 

Trait 2. Have Patience and Discipline

This one is 100% necessary to be successful in having a long-term mindset.

“Stay the course!” 45:41–45:49

John Bogle says to do less and don’t get emotional when there is a stock market downturn. 

I’m reminded of what Bill Ackman said about the short-term stock market being a voting machine. When there is bad news out there and people are voting down, the stock will drop but that doesn’t mean that the fundamental business is worse.

Now, that being said, staying the course is much easier said than done when your portfolio is red and the numbers are dropping and dropping.

“Being financially secure is key to being disciplined.” 37:55–38:01

According to Bill Ackman, it is much easier for me to have discipline when I’m not on the edge of a financial cliff. 

Stock market crashes are heavily correlated with increased unemployment. There would be nothing worse than having my portfolio shit the bed at the same time I lose my job, and I would be forced to sell my losing investments just to afford rent.

Bill Ackman reminds me of the importance of having a solid emergency fund, home insurance, car insurance, whatever it takes to weather the storm and not sell my investments at the worst time. 

However, having discipline does not only apply to selling stock, it also applies to buying stock.

“You don’t have to swing! You might not swing for years.” 0:35–0:53

And Peter Lynch Agrees.

“People are out of breath when they call in.” 11:16–11:26

Buffett and Lynch remind me that nothing is forcing me to invest my money right now. 

I can be patient, do my due diligence, and wait for a good pitch that I can hit out of the park. Rushing into a bad investment is much worse than being late on a great investment.

My second takeaway is to have discipline on both the buy and the sell of stocks. 

Discipline to not make emotional decisions. Discipline to make sure that I’m only investing in something that I’m truly confident in.

However, the next question is, how do I know what to be confident in? How do I know what to buy? 

The next two principles of investing answer this question.

Trait 3. Invest in What You Know

Warren Buffett: “Invest in your circle of competence.” 14:06–14:16

Warren Buffett talks about companies in his circle of competence and Ackman expands on that.

“You want businesses you can easily understand.” 45:12–45:18

The message is loud and clear: I have to invest in companies that I understand and companies that I know. 

Simple and predictable long-term performance will give me the benefit of the previous lessons. 

If I can easily analyze a simple and predictable business, then I can be confident that the business is still strong even in a market downturn, no matter what the short-term price says. 

If I’m successful in holding it long-term, then compounding interest will give me the benefit of huge gains.

The question now is how do I narrow down the list of thousands of publicly traded stocks to find the short list of companies that I can understand and take to the next level? 

“Stay in your industry.” 1:01–1:19

According to Peter Lynch, I’ve got to take advantage of my natural advantages. 

I work in the field of construction so maybe I could research a company like Caterpillar. But it also doesn’t have to be where you work.

It could be anything, any sector or industry that you spend a lot of time with. Maybe you’re really into travel, or cars, or food, or some kind of service. Anything that you have a lot of experience with could be an unfair advantage for you.

Whenever I was renovating my house, I spent a lot of time at Home Depot, Lowe’s, and Ace Hardware. During that time, I eventually got to a point where I kind of knew which company I preferred. If only I had this mindset at the time, I might have done some research and made an investment which brings me to my next point.

You don’t always have time to do a ton of research.

If I have a sum of money that I want to invest and I don’t want to wait up to 2 years for the next good pitch to swing at, what do I do?

“VTSAX, baby.” 45:57–46:11

The third lesson is to invest in what I know. 

But, when there’s nothing out there that is screaming my name, nothing in my circle of competence, I can always invest in a low-cost index fund.

The U. S. economy is growing and I can have faith that over the long term, the stock market will accurately weigh that growth. The S&P 500 averages an annual return of just over 10%. Over the long term, this will outperform a high-yield savings account which is about 5% at this time.

Until we get into a nuclear war with Russia, and then maybe I will invest in a New Zealand total market index fund. 

But seriously, there is one other thing in common that all 4 of these behemoth investors have.

Trait 4. Wait for a Good Price

“Understand the difference between price and value.” 1:22–1:29

These guys look for value, but they are only able to determine value because of the previous principle. 

Looking at simple and predictable companies allows them to correctly predict roughly what the company will be worth in the future, thus allowing them to determine what a fair price would be today.

“I would rather buy wonderful businesses at a fair price than fair businesses at a wonderful price.” 27:01–27:06

Warren Buffett takes this one step further on the quality side of things. 

Warren Buffett is not just looking for any company that is trading at a lower value than what it is really worth. He wants a wonderful company. A crappy company that is on sale is less likely to work out in the long term.

“Start with a company you like at a fair price.” 6:11–6:33

Going back to META, the haircut strategy worked perfectly for me. I waited until META dropped below its intrinsic value before I jumped in. 

Starting with a wonderful company at a fair price and then waiting for a haircut gives me a margin of safety.

I always want a margin of safety in any investment because unpredictable things happen. It could change its leadership. It could get a lawsuit. You never know what’s going to happen. 

“Mean reversion to intrinsic value.” 2:25–2:33

My cat has intrinsic value. I’m going to get a certain amount of enjoyment out of my cat over its life. And it doesn’t matter what someone is willing to pay me for my cat. Somebody might be willing to pay me $10 today. Somebody might be willing to pay me $100 tomorrow. That’s not going to change how much enjoyment I’m gonna get out of my cat.

The fourth lesson is finding a quality company and then wait for a haircut.

Similar to my cat, a company’s intrinsic value is independent of what the market thinks at any given time and reflects the future cash flows. Profits, dividends, and acquisitions add up to calculate a company’s intrinsic value. Periods of overperformance will be followed by periods of underperformance as a company will always return to that intrinsic value.

So, I have all these big ideas now. I’m ready to put the rubber to the road and calculate the intrinsic value for some of these companies that are in my circle of competence.

The next question is what information do I need to calculate intrinsic value? 

Trait 5. Stick to a System

The fifth bonus principle of investing that I talked about in the beginning can be found in this book.

Bill Ackman — The Intelligent Investor 35:26–35:30

Warren Buffett — The Intelligent Investor 0:14–0:17

Jack Bogle — The Intelligent Investor 8:48–8:50

The Intelligent Investor by Ben Graham is perhaps the most iconic investing book of all time. Lucky for me, all four of these Titan investors all use principles from the same book.

I have to have a system of calculating the intrinsic value of a company: the discounted future cash flows. If I cannot calculate the intrinsic value of a company now, then I cannot determine if it’s trading at a fair price.

Using a concrete system will help me keep my emotions in check as I can be confident in the trajectory of a company and not be swayed by the fear, uncertainty, or doubt of the news or the people around me.

So What Now?

Calculating the intrinsic value of a company is something that I find incredibly interesting and plan to write about in the future. If that’s something that you’re interested in, let me know.

Earlier, I alluded to having an emergency fund as a valuable tool in maintaining discipline not to sell your long-term investments during a market downturn. That being said, you do not want to put too much money in your emergency fund as that can cost you tens of thousands of dollars in opportunity cost over the lifetime of your investing. 

I shared my method for calculating the optimal amount of money to put in my emergency fund. Check it out HERE.

Catch you on the flip side.

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