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Do Your Homework
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It ALWAYS AMAZES me how few investors—and sometimes, fund managers—can articulate their Investment philosophy. Without an Investing framework, a way of thinking about the world, you're going to have a very tough time doing well in the market.

I realized this some years ago while attending the annual meeting of Berkshire Hathaway, the firm run by billionaire superinvestor Warren Buffett. I overheard another attendee complain that he "wouldn't be attending another Berkshire meeting because "Buffett says the same thing every year." To me, that's the whole point of having an investment philosophy and sticking to it. If you do your homework, stay patient, and insulate yourself from popular opinion, you're likely to do "well. It's when you get frustrated, move outside your circle of competence, and start deviating from your personal investment philosophy that you're likely to get into trouble.

Here are the five rules that we recommend:

•  Do your homework.

•  Find economic moats.

•  Have a margin of safety.

• Hold for the long haul.

• Know when to sell stock.

Do Your Homework

This sounds obvious, but perhaps the most common mistake that investors make is failing to thoroughly investigate the stocks they purchase. Unless you know the business inside and out, you shouldn't buy the stock.

This means that you need to develop an understanding of accounting so that you can decide for yourself what kind of financial shape a company is in. For one thing, you're putting your own money at risk, so you should know what you're buying. More important, investing has many gray areas, so you can't just take someone else's "word that a company is an attractive invest­ment. You have to be able to decide for yourself because one person's hot growth stock is another's disaster waiting to happen. In Chapters 4 through 7, I'll show you what you need to know about accounting and how to boil the analysis process down to a manageable level.

Once you have the tools, you need to take time to put them to use. That means sitting down and reading the annual report cover to cover, checking out Industry competitors, and going through past financial statements. This can be tough to do, especially if you're pressed for time, but taking the time to thor­oughly investigate a company will help you avoid many poor investments.

Think of the time you spend on research as a cooling-off period. It's always tempting when you hear about a great investment idea to think you have to act now, before the stock starts moving—but discretion is almost always the better part of valor. After all, your research process might very well uncover facts that make the investment seem less attractive. But if it is a "winner and if you're truly a long-term investor, missing out on the first couple of points of upside won't make a big difference in the overall performance of your portfolio, especially since the cooling-off period will probably lead you to avoid some investments that would have turned out poorly.

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