“There are only three ways a smart person can go broke: Liquor, Ladies and Leverage.”
Charlie Munger
We pulled together the 15 lessons that Compounding Quality summarized on Twitter based on annual reports by Nick Sleep, one of the greatest investors of all time.
1. Start with the business model
Make sure you understand how a company makes money. Invest in companies which have a good business model that have had success in the past. The best business models don’t change much over time.
2. Think on the long term
Would you buy a house if you only wanted to live in it for a few weeks? No. The same goes for stocks. Only buy a stock when you’d be perfectly happy to hold it if the market would shut down for 10 years.
3. Invest in companies with skin in the game
Invest in companies which are run by their founders. When you do this, you automatically increase your chances to outperform the market.
4. Focus on what matters
Good investors ignore the noise. Next quarter’s earnings are worthless. Instead, focus on the moat of the company and its ability to maintain their competitive advantage.
5. Have patience
Compounding works like magic when you let it work long enough for you. Don’t try to get rich quick or use debt to invest in the stock market. Good investing starts with good risk management.
6. Follow a good investment process
Buy good business, don’t overpay, do nothing. So easy in theory, so hard in practice. Your investment process determines the success of you as an investor. Learn from great mentors and become the best investor you possibly can.
Look at other investor’s strategies, like our post on Peter Lynch’s 13 Attributes to Look for in Investments.
7. Learn from your mistakes
When making investment decisions, either you learn or you earn. Consider investment mistakes as learning opportunities.
8. Focus on the number of outstanding shares
Don’t invest in companies which dilute existing shareholders. Take a look at the evolution of the outstanding shares over the past 10 years. You want this number to be constant or deceasing.
9. Never use shorts or leverage
Nick Sleep never uses leverage, shorts, or financial derivatives and neither should you. Good investing is consistently doing above average without taking too much risk.
10. Look for scale economies shared
Invest in companies that provide great benefits for their clients. Economies of scale are crucial to achieve this. It allows the company to drive down costs and pass those savings to their customers.
11. Become a learning machine
The best investors are those who become learning machines. Read as much as you can and become wiser every single day.
12. A crisis offers opportunities
When Nomad Investment Partners lost almost 50% during the financial crisis, Nick Sleep did one crucial thing… he bought more of his favorite stocks. Bear markets offer great opportunities for investors. You just don’t realize it at the time.
13. Let your winners run
The biggest mistake you can make is to sell a stock that goes on to rise tenfold. When you have found a great company, you should stick with it.
14. Create the right environment
To make good decisions, you should be able to think rationally. Always compare an attractive investment opportunity with your current portfolio. Doing nothing and keeping trust in your current positions is also a decision.
15. It’s all about quality
In the end, it’s all about quality. You want to buy great businesses lead by quality managers achieving quality returns.
