In this section we list the rules for investing success. This page will change as more rules are discovered.
1.Don’t lose money.
This rule is non negotiable. The entire point of investing is get ahead and increase wealth. Say you have accumulated a lot wealth but you lost it all with a few key mistakes. All that work would have gone to waste and you lost precious time, leaving you less time remaining to achieve your financial goals.
2.Diversify to reduce risk.
It’s ok to miss out of the high flyer to reduce risk. Picking one winner is hard and pouring all your assets on one is high risk. The odds of you having picked a winner is not good if all you have is one shot. A company’s success is not guaranteed and and there’s no telling how the future will unfold. Would you know if a country will invade another? Would you have know there’s a pandemic on the horizon? Would you know the transformer AI model would create alter the landscape of AI? By taking positions in several companies, you avoid the single company failure blowing up your wealth to smoke and also expand the odds of finding a gem that can grow 10x. Consider the choice of either shooting one 3 pointer or attempt to six lay ups, shooting 5 two pointers and 5 three pointers. It not hard to imagine that you are more likely to have made a basket and score more with the latter option.
3.Invest in companies run by leaders with proven track record.
The CEO and leadership team of the company matter a great deal. The leadership team needs to have vision and ability to forecast what customers will need in the future and invest for the future. They need to know what to invest in for the long term. Nvidia CEO Jensen Huang invested in compilers and toolchain and silicon real estate to make GPU useful for compute instead of just speeding video game graphics. Their GPUs had extra circuitry to make accelerated compute possible and hurt its margins for years. He was investing in the future and that accelerated compute would be helpful someday. With the explosion of generative AI capability and its huge appetite for compute, that day finally arrived when OpenAI’s chatGPT showed up in November 30, 2022. Leaders need to know what companies to acquire that can improve company success. For example a technology company on the bleeding edge should be run by a person that knows the science. Someone who has been successful in a previous company is more likely to be successful in his next venture. Someone who has bankrupt a company, whose company failed or has never run a business before is high risk and may make mistakes. Mistakes can come from underestimate how long a project will take and under budget and run out of cash. An inexperience team can react too slow to competition and focused too much on the short term. Using sports analogy, the team with the best qualified usually wins. In NFL as well as a NBA there was teams that have won the championship more than once. The Chicago Bulls, LA Lakers, Dallas Mavericks, Kansas Chiefs, San Francisco 49ers, New England Patriots come to mind. These teams know how to win, obtain the talent needed. and make good decisions at critical moments.
4.Invest in companies that generate cash and has plenty of cash
All companies need cash to survive. They need cash to pay talented employees, lease or purchase buildings and factories, purchase services and supplies needed to build their products and acquire companies. Company will cease to exist and file for bankruptcy when it fails to meet its financial obligation like loan payments. When that happens, usually the shareholders lose everything as they are usually the last in line to recover any money in the forced sale of the company’s assets. Companies that generate cash every quarter are less likely to run of it. A company that generate more cash each quarter is even better. In contrast a company whose cash generation ability is decreasing each quarter is a red flag. Besides being stable, the cash rich company can rewards its shareholder in the form of tax efficient share buybacks or pay a dividend. The cash also enables the company to acquire other companies and to invest in new products and reinvent itself. Can you image Google without Youtube? Well Youtube was created by a startup and was acquired by Google. Without cash generation power from its search business, Google would not have owned YouTube. Another similar example is Facebook/ Meta without Instagram? Instagram was also a startup purchased by Facebook. Facebook had the cash and was able to expand its empire by buying Instagram. Without cash a company runs risk of not able to keep pace of the changing competitive landscape. A well run business should have lots of cash and generate cash.