Identifying scalable businesses run by a dependable management team. Estimate a fair business value that can be realised in the near future of about 3 to 5 years. Buy stocks that are trading below this estimated fair value.
Ignoring the general market and stay invested until: (a) the market value of the business far exceeds the business value; (b) the business economics change so as to make it less attractive; (c) a significantly better investment opportunity appears; or (d) a fault is found with the original investment thesis.
Buy a very few of such investments, avoid wasteful diversification, and have a long term investment time horizon.
Broad principles for investing I believe in:
I consider stocks to be part-ownership in businesses and I prefer a concentrated portfolio approach to capital allocation. I am deeply focused on what not to do, I prioritise capital protection over returns, and am mindful of sources of risk in the portfolio.
Don't over-diversify: Holding more than 15 stocks at any given time is going to deteriorate the quality of research without providing any more benefits of diversification.
Don't follow other investing strategies: In order to hold such a small portfolio, it becomes necessary to look for scalable businesses. It leaves out many seemingly good opportunities. There are special situations, arbitrage opportunities, momentum trades, technical analysis-based trades, factor investing, quantitative investing, etc - that are all redundant to my approach.
Avoid low growth and low return businesses: Business that can growth their earnings at high rates usually have high sales growth and earn high returns on capital. Focusing on scale helps avoid a lot of opportunity cost or losses. Scale is also a focus area where knowledge and expertise is add up over time - making one a much superior investor than competition.
Search for opportunities in unpopular stocks: Stock markets tend to have an auction-driven nature - businesses that have done well recently (due to internal or external reasons) tend to see their stock prices rise up irrationally high and those that have not done well (due to internal or external reasons) tend to fall irrationally low. Due to this, one can find reasonably priced opportunities in businesses that are unpopular at any given time.
Don't rely on intuition alone: Many times decisions are made in uncertainty, because a lot of businesses that I am looking at would be having some sort of temporary trouble. Knowledge and experience built over time can seem like intuition at play, which is a good things, but also needs to be tamed. I try to use the Bayes Formula and Kelly Criterion to force myself to filter the noise and make a clearly definable judgement call about why a certain business could be a good opportunity. To that end I also try to plug in probability numbers to force myself to quantify my learning about the business.
Don't get involved in low confidence opportunities: Allocating more on a relatively lower return opportunity is far better than allocating less on a high return opportunity. Thus I have rough minimum allocation thresholds in my mind that force me to make sure that the opportunity is attractive enough and that I am not wasting time and capital in seemingly good opportunities I don't have enough confidence in. Additionally, with higher conviction, there is a better ability to remain rational through bad times or when comparing investment options.