Invested

1. Embrace fear and take control of your financial future

I wanted to vote with my money, but I wouldn't do so blindly.

Confront your fears. Many people avoid investing due to fear, lack of knowledge, or past experiences. However, taking control of your financial future is crucial for achieving freedom and security. Start by acknowledging your fears and preconceptions about money and investing.

Educate yourself. Learn the basics of investing, including key terms, financial statements, and market dynamics. Don't be intimidated by complex jargon or concepts – break them down into manageable pieces. Seek out reliable resources, mentors, or courses to build your knowledge base.

Start small. Begin with a small amount of money to practice investing. This "Practice Shares" approach allows you to experience the emotional aspects of investing without significant risk. As you gain confidence and knowledge, gradually increase your investment amount.

2. Understand the power of compounding and calculate your "Number"

Inflation has a historical average of 3 percent per year, so you do have to get an average of about 3 percent return per year just to offset inflation.

Compounding is key. The power of compounding can significantly impact your wealth over time. By reinvesting your returns, you can exponentially grow your investments. However, it's crucial to start early and be consistent to maximize this effect.

Calculate your Number. Determine the amount of money you need to achieve financial freedom – your "Number." Consider factors such as:

• Desired annual spending in retirement
• Years until retirement
• Current savings and investment amounts
• Expected rate of return on investments

Use online calculators or spreadsheets to model different scenarios and understand how changes in these factors affect your Number. Regularly review and adjust your Number as your circumstances and goals evolve.

3. Invest in companies with strong missions and durable competitive advantages

Moat is not all. Charlie wants us to look at durability, and shorter than ten years is not enough to prove that a company is durable.

Seek companies with strong missions. Invest in businesses whose values align with your own. Look for companies that prioritize ethical practices, sustainability, and positive societal impact. This approach not only supports causes you believe in but can also lead to long-term financial success.

Identify durable competitive advantages. Focus on companies with strong "moats" – sustainable competitive advantages that protect their market position. Types of moats include:

• Brand loyalty
• Network effects
• Cost advantages
• Switching costs
• Intellectual property

Evaluate a company's moat by analyzing its financial statements, market position, and industry trends. Look for consistent growth in key metrics such as revenue, earnings, and return on invested capital (ROIC) over extended periods.

4. Master the art of valuation using multiple methods

The Ten Cap and Payback Time were pricing methods with a Margin of Safety built in. Now I would learn a valuation method with a Margin of Safety built in.

Utilize multiple valuation methods. To determine a company's fair value, employ various valuation techniques:

• Ten Cap: Based on Owner Earnings
• Payback Time: Based on free cash flow
• Margin of Safety: Based on discounted future earnings

Each method provides a different perspective on a company's value, helping you make more informed investment decisions.

Understand financial statements. Develop proficiency in reading and analyzing financial statements, including:

• Income Statement
• Balance Sheet
• Cash Flow Statement

Pay attention to key metrics such as revenue growth, profit margins, debt levels, and cash flow. Look for consistency and positive trends over time.

Apply a margin of safety. Always aim to buy stocks at a significant discount to their intrinsic value. This approach provides a buffer against potential errors in your valuation or unexpected market events.

5. Build an antifragile portfolio through careful stock selection

To be ready with that washtub, that means you have to make sure to have investing funds available when a recession hits.

Create a diversified Wishlist. Develop a list of high-quality companies you'd like to own, along with their fair values. This preparation allows you to act decisively when market opportunities arise.

Maintain cash reserves. Keep a portion of your portfolio in cash to take advantage of market downturns or individual stock price declines. This "dry powder" enables you to buy shares of great companies at discounted prices.

Focus on quality over quantity. Limit your portfolio to 10-15 of your best ideas. This concentrated approach allows you to thoroughly understand each company and monitor their performance effectively.

• Prioritize companies with:
  • Strong financials
  • Excellent management
  • Durable competitive advantages
  • Alignment with your values

6. Practice patience and discipline in buying and selling decisions

Buffett says, 'The right time to sell a company is never.'

Buy with conviction. When you find a great company trading below its intrinsic value, be prepared to invest a meaningful amount. Avoid the temptation to "dip your toe in" with small positions, as this can limit your potential returns.

Use a tranches approach. Instead of investing all at once, consider buying in stages:

1. Initial position when the stock reaches your buy price
2. Add more if the price drops further
3. Final purchase when you believe the price has bottomed out

This method helps manage emotions and takes advantage of potential further price declines.

Hold for the long term. Aim to hold your investments indefinitely, selling only when:

• The company's fundamental story changes significantly
• The stock becomes severely overvalued
• You find a much better investment opportunity

Regularly review your holdings to ensure they still meet your investment criteria.

7. Cultivate gratitude and continuous learning in your investing journey

I'm thankful that you're being so brave about this and for letting me help you. It's not easy.

Practice gratitude. Develop a habit of thankfulness in your investing practice. Acknowledge both successes and challenges as opportunities for growth and learning. This mindset can help manage emotions and maintain a long-term perspective.

Commit to continuous learning. Investing is a lifelong journey of education and self-improvement. Stay curious and open to new ideas, strategies, and market developments. Regularly:

• Read investment books and financial news
• Attend investing seminars or workshops
• Engage with other investors to share ideas and experiences
• Analyze your past decisions to identify areas for improvement

Develop a personal investing checklist. Create and refine a checklist of criteria for evaluating potential investments. This tool helps maintain consistency in your decision-making process and reduces the likelihood of emotional or impulsive choices.

• Include factors such as:
  • Financial health
  • Competitive position
  • Management quality
  • Valuation metrics
  • Alignment with your investment philosophy

Last updated: January 24, 2025