I define Investment Philosophy a bit differently to mainstream. I see it as the core driver behind finding and optimising a dynamic Investment Approach rather than a rigid set of principles/beliefs on how to make decisions regarding the Market. I don't believe there is an ultimate 'correct' approach to investing such as 'growth investing' or 'value investing' which is best for everyone. It really depends on your Edge: the thing you do better than the rest of the Market. For example:
Finding the most neglected mean reversion plays
Correctly assessing the most durable and strongest trends
Executing trades the fastest
Finding frauds
Pushing for corporate change
The process for discovering and maintaining your Edge follows 3 basic steps:
Know Yourself
Improve Yourself
Stay flexible
Know Yourself
I'm an Existentialist. I believe who you are determines the way you think, the way you experience and react to things in life. Becoming self-aware and accepting of the fundamental You is the starting point for working out your relationship with the Market and your base investment strategy.
By knowing your natural tendencies (e.g. risk tolerance), your strengths and weaknesses, you can best understand and develop your Edge whilst being mindful of the pitfalls. Step too far from the fundamental You and subconsciously you'll always be fighting an uphill battle. For example so many investors are self-proclaimed 'Buffet disciples' but lack his Mentality: perspective, time horizon, contrarian mindset; and Structural advantages: cost of capital, connections, fame; to effectively execute his strategy. Their Edge (if any) may be entirely different. By failing to know themselves, they waste energies and capital on a strategy they can only follow skin deep.
Improve Yourself
The process of making mistakes, gaining experience, reflecting and improving is an essential part of building your Edge. A momentum investor who doesn't remember past cycles and control his risk exposures may get wiped out in the turns. Similarly a deep value investor who doubles down into a falling low P/B or P/E stock needs to have a memory of past value traps and an impartial process for checking the facts.
The recursive process of improvement isn't restricted to just investment outcomes, by improving on your understanding of yourself, you are actively evolving and maturing your methods.
Stay Flexible
It's a thin line between Conviction and Stupidity. Even when you are right, Markets can stay irrational longer than you can stay solvent. This is especially true for people trading on margin, holding costs or external constraints (e.g. investor base).
Setting and controlling risk limits, having a check and balance process are all essential. This starts with having a dynamic and flexible mindset. Listening to opposing views impartially is a good skill to cultivate (which also requires overcoming one's own ego and biases).
My Investment Philosophy at its foundations is simply: "stay true to yourself, learn and remain humble'. Sounds cheesy perhaps but it's surprising how many fellow 'investment professionals' are mediocre because they don't understand themselves and these core principles.
Always remember your Edge before making any investment decisions!
*Dec 5, 2018 additional comment:
With the development of AI the finance industry will become increasing automated. I believe to stay relevant as an investor requires constant evolution and investment methods which doesn't compete on brute force. Humans have wisdom and creative spirit which lends magic to our thoughts. We can adapt.
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