Investment principles according to Warren Buffett

• Rule No 1: Never lose money. Rule No 2: Never forget rule No 1.

• The less you know, the more stocks you have to own – because diversification is protection against ignorance.

• Risk comes from not knowing what you are doing.

• Our method is very simple. We just try to buy businesses with good to superb underlying economics, run by honest and able people, and buy them at sensible prices.

• We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying.

• It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

• You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

• Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful".

• You don't have to be right about every company. You just have to make a few good decisions in a lifetime.

• If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes.

• Never invest in a business you cannot understand.

The above investment principles have been sourced from many different websites.

For direct share investing, I use an investment method similar to that used by Warren Buffet as detailed on a previous Blog Update: Direct Share Investing - Warren Buffet Investment Method. As the chart shows, my investment method has slightly underperformed the All Ordinaries index during 2011. Why?

A recent article from the Weekend Australian Financial Review summarised below helps explain.

Bianco Research on US sharemarket behaviour found:

• During the 12 years ending 2008, there were only 12 days when more than 490 of the S&P500 index shares moved in the same direction on a trading day. That's an average of 1 day each year.

• During the 12 month period ending 2011, there were 15 such days or 15 times more often.

In other words, macro-economic or political effects overwhelmed the fundamentals of individual shares.

My thoughts: There were many more days during 2011 as compared to the past, where good shares (that increase earnings) and bad shares (that decrease earnings) moved together. I believe this scenario will not continue during 2012 and that good shares will be rewarded with outperformance.