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Investing Principles for Aspiring Investors

The Foundations of Long Term Wealth Creation

4,396 words, 23 minutes read time.

If you’re reading this, chances are you’re thinking about getting into investing, and that’s awesome. I know, it can feel like stepping into a whole new world, full of confusing jargon, crazy market swings, and just so much information. But trust me, building wealth over the long term through investing isn’t about being a genius at predicting the next big thing or understanding every single financial indicator out there. For me, it’s really about understanding some timeless investing principles and figuring out an investment approach that truly fits you.

This beginner friendly guide is all about making sense of the investment world. I’m going to share what I’ve learned from some of the greatest investors ever – folks like Warren Buffett, Ben Graham, Charlie Munger, Howard Marks, and Peter Lynch. My goal is to help you understand how to think about investing and wealth creation.

When I talk about investing principles, I’m talking about a patient, disciplined process of putting your money to work over many, many years. This is totally different from trying to get rich quick, which usually comes with super-high risks. Having a solid investment philosophy is like having a compass that guides you through choppy market waters and helps you avoid making emotional mistakes.

core investing principles

Warren Buffett’s Simple Investing Rules

Warren Buffett, often called the “Oracle of Omaha,” has an investment track record that’s just incredible. What’s even more amazing is that his principles are surprisingly simple, yet incredibly powerful. He doesn’t use fancy math; he just uses good old common sense when looking at businesses.

Buy Businesses, Not Just Stocks

One of the biggest things I learned from Warren Buffett and Ben Graham about investing is that when you buy a stock, you’re not just buying a piece of paper or a lottery ticket. You’re actually buying a tiny piece of a real business. This idea really makes you think about companies as if you were buying the whole thing. It makes you focus on how healthy the business is, not just how its stock price is bouncing around today. This mindset helps you think long-term. You ask yourself, “Would I be happy owning this business for decades, even if I couldn’t see its stock price every day?” This naturally steers you away from quick trades and towards really understanding the company you’re investing in.

The “Moat”: Finding Companies with a Special Edge

Buffett is always looking for companies that have a “moat.” Think of a moat around a castle – it protects the castle from invaders. In business, a moat is a strong competitive advantage that protects a company’s profits from rivals. These moats can be things like a super strong brand name, a way to make things cheaper than anyone else, a network effect (like how Instagram gets more valuable as more people join), or special patents and technology. A wide, lasting moat means a business can keep its strong position and pricing power for a long time, which means steady and predictable earnings. This focus on competitive advantage is key for finding businesses that can keep growing and resist being eaten up by competitors.

Intrinsic Value and Margin of Safety: Buying on Sale

Two really important ideas Buffett got from his teacher, Benjamin Graham, are (1) “intrinsic value.” This is what a company is truly worth, regardless of what its stock price is doing on any given day. and (2) the “margin of safety” principle. This means Buffett only buys shares when their market price is significantly lower than what he thinks they’re truly worth. This big discount acts like a safety net, protecting you if things don’t go exactly as planned or if your analysis wasn’t perfect. It’s like getting a really valuable item at a huge discount, which makes it much safer and more likely to give you good returns over time.

Your “Circle of Competence”: Stick to What You Know

Buffett famously advises us to “know your circle of competence, and stick within it.” The size of your circle isn’t what matters; it’s knowing exactly where its edges are. This means you should only invest in industries and businesses that you genuinely understand. If you can’t explain how a company makes money, who its competitors are, or how it actually operates, then it’s probably best to just skip that investment. This discipline helps you avoid making risky bets on things you don’t really get, which significantly lowers your risk. If you want to learn more about Circle of Competence, check out our dedicated article on this topic.

The Magic of Compounding: Let Your Money Snowball

Now, let’s talk about something truly magical: compounding. Buffett likes to call it the “eighth wonder of the world.” It’s basically when your money starts making money, and then that new money also starts making money. It’s like a snowball rolling down a hill – it just gets bigger and bigger over time. A great example of this is Buffett’s own wealth: 99% of his massive fortune was made after he turned 50! This shows us that how long your money stays invested is far more important than trying to guess when to buy or sell. The real secret to compounding is being incredibly patient and disciplined, letting that “snowball” grow even when things seem slow at first or the market gets bumpy. For more details, explore the Magic of Compounding further in this dedicated article.

Don’t Try to Time the Market, Keep Cash Handy

Buffett tells us not to try and predict what the market will do in the short term. He says, “The stock market is designed to transfer money from the Active to the Patient.” For him, focusing on the real value of a business is much more important than trying to forecast market ups and downs. He also believes in keeping a good amount of cash on hand. This isn’t because he’s lazy; it’s so he has “dry powder” ready to go. This cash allows him to jump on great investment opportunities that pop up during market downturns or when everyone else is feeling gloomy and good companies are cheap. This shows that sometimes, doing nothing and being prepared can be more profitable than constantly trying to do something.

Simple Is Always Better

Buffett likes to keep things simple. He avoids complicated businesses that are hard to understand or analyse. This approach minimises unnecessary risks and ensures he truly understands every investment he makes. This preference for simplicity really highlights the importance of staying within your “circle of competence” and avoiding risky ventures that aren’t transparent.

Charlie Munger’s Toolkit

Charlie Munger, Warren Buffett’s long-time partner, was famous for his “multidisciplinary” way of thinking. He believed in building a “latticework of mental models”—a collection of basic ideas from all sorts of fields, not just finance, but also psychology, physics, and economics. This way of thinking helps you see things more clearly and make better decisions.

The “Latticework of Mental Models”: Thinking Outside the Box

Munger’s main idea was that to truly understand the world and make smart decisions, you need to connect “mental models”—simple explanations of how things work—from many different areas. He used to say, “all the wisdom of the world is not to be found in one little academic department.” By using these different models, you avoid the common mistake of trying to fit every problem into just one narrow way of thinking. This broad approach helps you avoid common thinking traps and emotional mistakes that often lead to bad judgments. When you understand how different systems work together, you can think more logically, even when the market makes you feel emotional.

Second-Order Thinking: Look Beyond the Obvious

Most people tend to think in a “first-order” way, meaning they only look at the immediate, obvious results of an action. But Munger pushed for “second-order thinking.” This means asking, “And then what?” It’s about thinking ahead to all the ripple effects and long-term consequences of your decisions. In investing, a decision that looks good in the short term might actually have hidden, bad long-term effects. This is because understanding and navigating complex systems like the stock market is complex, and there are no ‘sure things’ in investing.

Inversion: Avoiding Failure by Thinking Backwards

Inversion is a powerful mental trick where you tackle a problem from the opposite direction. Instead of asking, “How do I succeed?”, you ask, “What would make me fail?” By figuring out and then avoiding common mistakes and disastrous scenarios, you dramatically increase your chances of success. For example, instead of trying to find the next super-hot stock, Munger said you would do better by focus on avoiding businesses with too much debt or shaky business models. This proactive way of managing risk fits perfectly with the idea of protecting your money, which is crucial for long-term compounding.

Your “Circle of Competence” (Again!)

Just like Warren Buffett, Munger really emphasized the “circle of competence.” A key part of this is not just knowing what you understand, but, even more importantly, knowing exactly what you don’t understand. Investing outside this circle, in areas where you don’t have deep knowledge, is a recipe for disaster. This principle encourages you to be humble about what you know and to focus your learning within specific areas, which greatly reduces the chance of losing money on speculative bets. It also suggests that while you should stick to your current circle, you can always make it bigger by continuously learning.

Probabilistic Thinking: Embracing Uncertainty

Munger understood deeply that the future is never certain. Probabilistic thinking means accepting that you can’t be 100% sure about anything and making decisions based on probabilities and odds, rather than trying to predict things perfectly. This means you’re always updating your beliefs as new information comes in and you’re comfortable talking about things in terms of likelihoods, not certainties. This mindset helps you be flexible and adaptable, which is essential for navigating unpredictable and volatile markets.

The Psychology of Misjudgment and Incentives

Munger believed that understanding human psychology, especially the “psychology of misjudgment,” is incredibly important for being “worldly-wise.” Our brains are wired with shortcuts that can lead to various biases, like confirmation bias (only looking for information that proves what you already believe), availability heuristic (thinking something is more likely because you can easily remember an example), and social proof (doing what everyone else is doing). These shortcuts can lead to irrational investment decisions. Munger also stressed how much incentives influence behavior, famously saying, “Show me the incentive and I will show you the outcome.” Understanding what motivates people, including yourself and other investors, is key to predicting behavior and avoiding traps. This understanding of human behavior is a critical part of having emotional discipline in investing.

Howard Marks: The Risk Expert

Howard Marks, a highly respected investor and author, has a unique way of looking at risk that goes beyond the usual definitions. He believes that successful investing isn’t about getting rid of risk (which is impossible), but about smartly understanding, evaluating, and managing it.

Risk vs. Volatility: They’re Not the Same Thing

One big difference Marks points out is that risk isn’t the same as volatility—the ups and downs of a stock’s price. While volatility can be a sign of risk, true risk, according to Marks, is the chance of permanently losing your money. A stock might jump up and down a lot but still be low-risk if you bought it for much less than it’s truly worth. On the flip side, a seemingly stable stock can be very risky if you paid too much for it. This way of thinking shifts your focus from short-term price swings to the possibility of losing your capital for good, pushing you to protect your downside first. This understanding is super important to avoid reacting emotionally to market noise.

Asymmetry: More Upside, Less Downside

Marks talks about “asymmetric risk-taking.” This is a strategy where the potential gains from an investment are much, much bigger than the potential losses. The goal is to set up your investments so that the reward-to-risk ratio is heavily in your favor, allowing for big wins when you’re right and small losses when you’re wrong. This calculated approach to risk is essential for beating the market over the long term without taking on too much danger. It’s a smart way to manage risk that focuses on keeping your money safe while still looking for growth.

Risk Is Hard to Measure: Trust Your Judgment

Marks argues that you can’t precisely measure risk beforehand because the future is always uncertain. Even after an investment plays out, it’s hard to say for sure if its success was due to skill or just luck. So, investors need to rely heavily on their informed judgment, a deep understanding of what’s driving an investment, and probabilistic thinking, rather than just looking at past data or rigid models. Accepting this uncertainty helps you be flexible and adaptable, which is vital for navigating unpredictable markets.

The “Perversity of Risk”: When Safe Feels Risky

One of Marks’s most interesting observations is the “perversity of risk”: risk tends to be highest exactly when it feels lowest. During times when the market is booming and everyone feels confident, investors often get careless, taking on too much risk and creating bubbles. But during market downturns, when fear is everywhere, that’s often when the best and least risky opportunities appear, as good assets become really cheap. This idea highlights why it’s important to think differently from the crowd and be able to act when everyone else is panicking, which takes a lot of emotional discipline.

Price Matters More Than Quality: The Real Risk Factor

Marks challenges the common idea that high-quality assets are always safe and low-quality ones are always risky. He argues that the price you pay for an asset is as important a factor as how good the asset itself is. Even an amazing company can become a super risky investment if you pay an outrageous price for it, leaving no room for error. On the other hand, a less-than-perfect asset can be a solid, low-risk investment if you buy it at a deep enough discount. This principle really emphasizes the importance of valuation and having a “margin of safety,” lining up with the core ideas of smart investing.

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Peter Lynch’s Edge: Investing with Everyday Insights

Peter Lynch, the legendary manager of the Fidelity Magellan Fund, taught me that individual investors like us actually have some unique advantages over the big Wall Street pros. His “Growth at a Reasonable Price” (GARP) strategy smartly combines the best parts of growth and value investing, helping everyday folks find promising companies without overpaying.

Growth at a Reasonable Price (GARP): The Best of Both Worlds

The GARP strategy is a sweet spot between aggressive growth investing (where you often pay top dollar for fast-growing companies) and deep value investing (where you look for super cheap, often struggling, businesses). Lynch looked for companies that were growing their sales and profits faster than average but were still trading at sensible prices. This balanced approach aims to give you good returns while usually being less volatile than strategies that only chase extreme growth. It’s a practical framework to avoid the traps of both speculative growth plays and potential “value traps” (companies that are cheap for a reason).

Invest in What You Know: Use Your Own Insights

Lynch famously advised investors to “invest in what you know.” This practical tip encourages you to find potential investment ideas in your daily life—from the products you use, the services you rely on, to the companies you see at work. By using your own experiences and insights, you, as an average investor, can often spot promising businesses before the professional analysts notice them. This approach is a real-world application of the “Circle of Competence,” making investment research much more approachable and less scary.

The PEG Ratio: A Simple Tool for Finding Opportunities

To help find those GARP stocks, Lynch popularized the Price-to-Earnings Growth (PEG) ratio. This simple number is calculated by taking a company’s Price-to-Earnings (P/E) ratio and dividing it by its expected earnings per share growth rate. GARP investors typically look for companies with a PEG ratio of 1 or less. This means the stock’s price is reasonable compared to how fast its profits are expected to grow. This simple, actionable tool empowers us to do basic company analysis without needing a finance degree, making valuation much more accessible.

Look for Consistent Growth and Financial Strength

Lynch preferred companies that showed steady profit growth, ideally in the 20-30% annual range. He was skeptical of super high growth numbers, knowing they’re often not sustainable. Plus, he really cared about a company’s financial health, preferring those with smart debt management, shown by low debt-to-equity ratios. This focus ensures that businesses are strong enough to handle tough economic times and keep growing, which helps make your portfolio more resilient.

Your Personal Investment Compass: Temperament and Philosophy

While the wisdom from these investment legends is incredibly valuable, the most effective investment strategy is ultimately one that truly fits your unique personality and financial situation. If a strategy doesn’t feel right for you, you probably won’t stick with it, and that’s when things go wrong.

Why Your Personality Matters in Investing

Investing isn’t just about numbers; it’s a lot about psychology. Your personality traits—like how you handle stress, how patient you are, or how comfortable you are with uncertainty—really affect your risk tolerance and your investment decisions. For example, if you’re someone who gets anxious easily, a super volatile portfolio might keep you up at night, possibly leading you to panic sell when the market drops. On the other hand, if you’re overly confident, you might take on too much risk, chasing quick gains without doing your homework. This is why a successful strategy has to be tailored for your psychological makeup.

Understanding Your Risk Tolerance: What You’re Okay With and What You Can Handle

Risk tolerance has two parts: your willingness to take on risk (how comfortable you feel with potentially losing money) and your ability to take on risk (how much financial loss you can actually afford). Your willingness is about your feelings, while your ability is about practical stuff like how soon you’ll need the money, how close you are to your financial goals, and how important those goals are. Generally, if you have a longer time horizon and don’t need your invested money right away, you have a greater ability to take on risk. To really understand your risk tolerance, you need to be honest with yourself about how you react emotionally to market swings and also realistically look at your financial situation. This understanding isn’t fixed; it changes as you go through different life stages and your finances change.

Emotional Discipline: Your Secret Weapon

Emotional discipline is, in my opinion, the secret for successful long term investing. It’s totally normal to feel fear, anxiety, or excitement when the market moves, but letting these emotions control your investment decisions can be disastrous. For example, panic-selling during a market downturn locks in your losses and means you miss out on the recovery that usually follows. Similarly, the “fear of missing out” (FOMO) during a market boom can lead you to chase overpriced stocks and make speculative bets. Learning to control your emotions—recognizing these biases and having strategies to fight them—is probably the biggest competitive advantage you can have as an investor. This self-control allows you to stick to your well-thought-out plan, even when the market is trying to make you emotional.

Getting Started: Practical Steps to get Started with Investing

Now that we’ve covered the core principles, let’s talk about how to actually put them into action. There are tons of great resources out there. If you’re serious about investing, I’ve put together a comprehensive YouTube course on Warren Buffett’s 7 Investing Principles. I hope it gives you insights into his simple but timeless wisdom.

Also, I wrote an article about how to use AI for stock research. It’s pretty cool how Gen AI is changing the game, making research faster, more effective, and more accurate. AI is a helpful assistant, but not a replacement for your own judgment and well-defined personal philosophy. It can definitely boost your “circle of competence” by giving you quick access to tons of information and helping you spot potential risks more efficiently.

Recommended Resources for Aspiring Investors

I truly believe that continuous learning is a must for a successful investment journey. The following resources have really shaped my understanding of investing, and I highly recommend them for anyone starting out:

Books

These foundational books offer deep insights and practical advice that hold true no matter what the market is doing.

  • “The Intelligent Investor” by Benjamin Graham: This book is often called the “bible” of investing, and it’s the one Warren Buffett says fundamentally shaped his own investment philosophy. It gives you essential ways to think about stocks as real businesses and lays out strategies for protecting your money from big losses.
  • “The Warren Buffett Way” by Robert Hagstrom: This book does a great job of explaining Buffett’s investment principles in a clear, easy-to-understand way, with real-world examples. It’s perfect for those who want to get a solid grasp of Buffett’s approach.
  • “The Essays of Warren Buffett: Lessons for Corporate America” by Lawrence Cunningham: This is a collection of Buffett’s famous annual letters to shareholders, organized by topic. It’s a comprehensive and easy-to-read source of his investment wisdom, straight from the man himself.
  • “One Up On Wall Street” by Peter Lynch: Peter Lynch’s book is all about empowering individual investors. He shows you how to use your everyday observations to find promising companies before the pros do. It’s a super practical and inspiring read for anyone looking to develop their own stock-picking skills.
  • “The Most Important Thing” by Howard Marks: This book offers a deep dive into risk and market cycles, giving you “uncommon sense” on topics like “second-level thinking” and why the price you pay is more important than the quality of the asset itself. It’s essential for developing a strong risk management philosophy.
  • “Poor Charlie’s Almanack” by Charlie Munger: This book is packed with Munger’s speeches as well as his wisdom from many different fields. It’s designed to help you build that “latticework of mental models” for better decision-making in all areas of life, including investing. It’s a dense read, but incredibly rewarding.

If you’re interested in more books recommended by investing legends such as Warren Buffett, Charlie Munger, Ray Dalio, Naval Ravikant, Howard Marks and others, I have compiled a list of 125+ books here which you can download for FREE. Check it out if you’re interested.

YouTube Videos

Sometimes, seeing things explained visually can make complex ideas much clearer. These videos are great a starting point to learn investing principles:

Podcasts

Podcasts are a super convenient way to learn about investing while you’re on the go, making continuous financial education easy to fit into your daily life.

  • We Study Billionaires: This podcast features interviews and analyses of the investment strategies used by famous billionaires, including Warren Buffett and Howard Marks. It’s an excellent way to learn directly from the experiences of highly successful investors.
  • The Memo by Howard Marks: This podcast dives into Howard Marks’s famous memos, which are known for their “uncommon sense” views on market cycles, risk, and how investors think.
  • Invest Like the Best by Patrick O’Shaughnessey: I love this podcast, because Patrick is a very inquisitive host and asks a lot of great questions to the top investors in both public and private markets.
  • “Equity Mates”: Offers a variety of podcasts for both new and experienced investors

Wrapping It Up: Your Investment Journey

Starting your investment journey isn’t just about having money; it’s about being curious, being tough emotionally, and always wanting to learn. The ideas from investing giants like Warren Buffett, Charlie Munger, Howard Marks, and Peter Lynch give us a really strong foundation. These principles all point to thinking long-term, truly understanding the businesses you invest in, knowing the real value of something and having a safety net, and letting the magic of compounding work for you.

A big, big takeaway from all these smart investors is how important emotional discipline is. The market will always have its ups and downs, and as humans, we naturally feel fear, anxiety, overconfidence, and that “fear of missing out.” These emotions can totally mess up even the best plans. The ability to “stay the course,” to practise “inactivity” when everyone else is panicking, and to make decisions based on facts rather than fleeting feelings is a competitive advantage. This self-control is what allows compounding to truly flourish over decades, because if you let emotions interrupt your plan, it can really hurt your wealth creation.

Also, understanding that risk is really about the chance of losing your money for good, not just how much prices jump around, and that the price you pay matters, even if you’re buying the ‘highest quality’ asset, gives you a powerful, different way to look at opportunities. This perspective encourages you to find value when others are scared, and to be cautious when everyone else is super optimistic and prices are too high.

Finally, developing your own personal investment philosophy that fits your unique personality, financial goals, and how much risk you’re comfortable with is absolutely essential. There’s no single “best” strategy for everyone; instead, the most effective approach is one that you can stick with consistently, no matter what the market throws at you. By combining these timeless principles with a deep understanding of yourself, an aspiring investor can build a strong portfolio and set themselves on the path to creating generational wealth.

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