The following 8 investment principles can be useful guideposts for those who want to actively invest based on Warren Buffet’s investing style.
1. Specialization in the business world often produced very good business economics.
2. Advantages of scale are important. When Jack Welch says he is going to be number one or number two in a business or out, he is not crazy, just tough. Too many incompetent CEOs do not understand this. But bigger is not better if it creates bureaucracy, eg. the federal government or AT&T
3. Technology can either help you or kill you. The difference is whether the customer gets all the savings or if some of the savings goes to the shareholders
4. Investors should find out where they have an edge and stay there. Stay in your circle of competence. Remember this question: “How do you beat Bobby Fischer?” Reply: “Get him to play with you any game except chess.”
5. Winners bet big when they have the odds – otherwise, they do not bet at all. Those who make a few well-calculated bets have a much greater chance. Very few investors or investment funds operate this way. So, load up on a good idea; it is hard to find a good business at a great discount.
6. A significant discount means more upside and greater margin of safety. Buy shares of a good business at a significant discount to what a private buyer would pay.
7. Buy quality businesses even if you have to pay up. Warren Buffett claims that this is the most important thing he learned from Charlie Munger.
8. Low turnover reduces taxes and increases your return. Two investors earn the same compound annual return of 15% for 30 years. If the first pays a 35% tax at the end of 30 years and the second pays a 35% tax each year, the first investor will have over two and a half times as much money as the second.