Zhang Yao is a senior investor whose approach is especially useful for individual investors. The following ten points distill years of his experience.
- Any company held as a major position must be within your circle of competence.
- Set reasonable return expectations—typically 15% annualized, or a doubling every five years.
- Do not let price movements in companies outside your competence influence your emotions or trades.
- Do not start with a prediction. Prepare a response for each plausible outcome.
- When markets are depressed and a company is undervalued, own as many shares as possible. As markets become euphoric, reduce your position gradually.
- Valuation matters. Even a wonderful company must be reasonably priced. Avoid excessive valuations, insist on a margin of safety, and minimize permanent loss.
- Follow the macroeconomy as needed, but do not let macroeconomic fluctuations determine decisions about a target company.
- Study industries and companies over a long horizon, focusing on competitive advantage.
- Think of the number of shares you own multiplied by earnings per share as your profit, and dividends received as your cash flow—think like an owner.
- Make decisions as simple and relaxed as possible. Invest only in familiar companies whose quality you can assess quickly; choosing one or two companies every year or two is enough.