Know thyself - the zeroth rule of investing

Warren Buffett says the first rule of investing is never lose money. But I think you need a rule before that one. And I'm a computer science engineer, so I count from zero. I wrote before about the five pieces of an investment process. I also wrote that you have many choices on how to design your process for each piece. But how do you make those choices? You need to start with understanding yourself.

Who are you?

I'm not interested in a philosophical answer to the question. Although, if that's what moves you, it might have some bearing on your investment process as well. No. I'm looking for more prosaic stuff here. Are you someone looking to manage money full time? Will you be investing your own money or other people's money? What are your investment goals? Things like that.

The first question you'll want to answer is about time. What sort of time do you have to devote to investing? Could you do it full time. By full-time, I don't mean you have to watch the markets all day. But you have to be thinking about it, and reading, and learning all the time. If you cannot afford to do that, if simply because you have a remunerative full-time job, that's okay. But then your goals from investing should be more modest as well. And your process design choices have to be such that they are not time consuming.

The second question is about your source of capital and your risk appetite. Is it permanent capital, i.e. can you be sure it will not be withdrawn at the worst possible times? Even if it is your own money, you might have to draw it down for life emergencies. Risk appetite in this context does not mean your ability to accept losses. It is about whether you might ever have to dip into your capital against your wishes. If you're investing all or a substantial part of your savings, do not consider it permanent capital. If it is other people's money, it is almost never permanent capital. Then you're constrained to deliver at least somewhat consistent performance. That will necessarily have an impact on your investment process.

A related question is whether you have a constant source of new capital. If you are in a job that let's you save meaningful amounts of money, then how you think about which companies to buy would be different than if you were constrained to only invest a fixed amount of money. Similarly, it will also affect how you think about portfolio construction and about exits. Ditto if you're investing the cash flows of a business that generates cash that it cannot redeploy.

Then there is the question of what is your investing goal. You might be looking to multiply a small some of money and might be willing to take meaningful risks with it. This might sound bad to some but isn't necessarily so. Taking risks does not mean gambling. You might be happy to just earn a reasonable return instead of leaving it idle in a bank. You might even think of investing as a means for keeping yourself sharp and learning. Whatever it is, the answer to this question has a meaningful impact on your design choices.

And finally, the big one. What drives you. You may not necessarily have an answer to this on day one. You're more likely to discover this as you invest. Here are some possible answers to keep in mind.

You love finding great companies that are doing good work. And by investing in them, you derive a thrill for being a part of that good work. You love being the contrarian - finding value in what the market shuns. And then getting rewarded for being smarter than the others. You're the analytical kind, who loves numbers and statistics. And you like to bring that skill to work making you money. Or you derive pleasure in finding the worst run companies, and frauds, and shorting them to make money as they crash and burn. This is a process of self-discovery. The more your process aligns with what drives you, the more you're likely to do well.

Good design is context specific

When we something is designed well, it is always in the context of a specific task or problem. This is as true of a teapot as it for a software application. And so it is for an investment process. It is easy to think that the point of an investment process is to generate returns. But there is a heavy context of the person, his circumstances, and his goals.

So before you sit down to design your investment process, know thyself.