10 Investing Principles Every Value Investor Should Live By

Are you satisfied with your investing acumen?

I don't know too many people who answer "yes" to that question.

What I do know is that, in order to improve quickly, the best way is to learn from others.

Books are my favorite resources.

The next step is to examine the mistakes and lessons learned by people who have found success.

It's a lot cheaper and quicker this way instead of making the same mistakes on your own.

Applying these lessons to a hands-on approach is crucial. No matter how much theory you soak up, it's worthless if you can't apply it in the murky waters of the markets.

Investing is already such a complex subject. The successful investors focus only on the essentials and simplify.

In sports, you hear a common phrase.

"Slow the game down."

It means to control the game instead of letting it control you.

It's too easy to get swept up with the tempo of the market. Before you realize it, you're sitting on losses exceeding thousands of dollars.

All successful investors have systems in place. All of them also have investing principles to make things easier.

Guy Spier is an investor I follow. He is the fund manager for Aquamarine Fund and author of The Education of a Value Investor which I highly recommend (here's my book review).

But I'll let the numbers talk.

Aquamarine Fund Performance

Aquamarine Fund Performance. 1997 to 2014 and 2000 to 2014.

The above chart is from Guy Spier's 2014 letter I received in the mail.

But what I particularly liked about the letter is that, instead of simply discussing stocks and performance, he lays out his investing principles which everyone should read.

So here are Guy Spier's 10 investing principles.

The 10 investing principles of Guy Spier and Aquamarine Funds

1. The Miracle of Compound Interest

The topic of compound interest is ignored or forgotten in the world of investing.

What I like about Spier's approach is that he places great emphasis on simplifying and filtering out noise.

I highlighted previously the problems with professional money management and five reasons why you have an advantage.

While the investment industry works off daily, quarterly and yearly returns, Spier focuses on increasing net worth by getting the miracle of compounding interest to work in your favor.

2. Don't Lose Money

Gains Required to Offset Losses

Gains Required to Offset Losses

My expensive mistakes all came from trying to make as much money as possible with every investment.

I was the home run hero.

Except I wasn't hitting any home runs.

If I hadn't sold Weight Watchers ( WTW ) for a 30% loss, I'd be sitting on a -80% disaster at the moment.

But swallowing my pride, admitting my mistakes and utilizing the remaining cash into better investments has more than made up for the mistake.

Not losing money helps you invest for another day.

3. Avoid Leverage

This principle refers to personal finance leverage and not companies. Avoiding leveraged stocks is also a good idea, but that's another story.

Taking risks with money you don't own is the most effective way of violating Buffett's rules 1 and 2.

Again, Spier uses a Buffett quote about the implosion of Long-Term Capital Management:

4. Pay Attention to Incentives

Spier believes that his incentives should be properly aligned with that of his shareholders. That's the reason why the majority of his own money is invested in the same fund as shareholders.

It's true for companies too.

If the CEO isn't eating his own cooking, the worst that will happen is that he loses his job and then finds another one with an even fatter paycheck.

Their objective is to maximize short term performance and then letting the next CEO handle the problems it will cause.

5. Play Center Court

Playing as close to the foul line as possible can bring great results and make you look like a genius.

But what happens if things change or things don't go your way?

John Paulson (Trades, Portfolio) made billions by betting correctly on subprime. He couldn't simply go back to "normal" or "simple" investments after that.

Here's what happened in the following years.

  • -52% in 2011
  • lost more than -20% in 2012
  • reports of strong returns in 2013
  • -36% in 2014

6. Buy Better Businesses at Bargain Prices

As cliche as it may sound, the fundamental of making money in the stock market is to buy a mispriced company.

Spier uses the example of the pari-mutuel horse betting system that Charlie Munger (Trades, Portfolio) often talks about.

Everybody knows which horse is the fastest and most likely to win. But to make money with horses or in the stock market, it's important to go beyond just knowing what is the best company. You need to find the mispriced company.

Howard Marks (Trades, Portfolio) has always written about the same thing when he explains how risk comes from the price you pay.

The quality of a stock doesn't reduce risk. Buying a stock when it's mispriced reduces risk.

Jack and Jill could both own Apple ( AAPL ).

Jack bought it at $130.

But Jill bought it at $80.

Guess who will come out better?

When I simplify it like this, it's easy. But in reality, how many people have the guts to buy at $80 when a stock drops from $130?

7. Work With Great Partners

Spier refers to the money management side with principle #7, but it's easily adaptable to investing.

As shareholders and tiny owners of a business, it's important to know what type of manager is running your company.

One of the big wins for me this year wasn't from a company I invested in but one I made a quick decision to ignore. The CEO is simply a person I did not want to be partners with.

This is what a bad partner in a company can do.


8. Use A Checklist

Check out these two books.

  • The Checklist Manifesto
  • The Investment Checklist: The Art of In-Depth Research

Before picking a stock, you should have a checklist to run it through.

It could be as simple as

  • Do I understand the company?
  • Am I buying at a price where I can profit?
  • What is the sell price?

These three points already speak volumes about a stock, and this is what Spier realized as an investor.

He has a much more extensive checklist, of course, and it's prevented him from making a number of bad investments.

The purpose of a checklist is to prevent blowups first and then profit second.

Download a set of value investing checklists and make it easier on yourself. Click the image below to get it via email.

9. Become a Hydra of the Investing World

The mythical hydra generates two heads if its head is cut off.

So what is the investment equivalent?

In Spier's words, it's to profit from all scenarios the world throws at you.

Recessions, bubbles, booms, busts, oil crashes, new presidents and the works.

Don't limit yourself to just one industry, country or strategy. Understand and have the flexibility to implement it all at the appropriate times.

10. Overcoming Adversity: Marcus Aurelius, Shackleton and Edison

This one is better left in Spier's own words.


  • Aquamarine 2014 Letter

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This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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