Stick to What We Know

Here is a fantastic posting at Morningstar.com, A Visit with an Investing Legend

Three great learning points for me in that post.

1. Understanding the weak, negative points in any investment!

• Know the "Bear Case"
  
  Simpson repeatedly stressed the importance of understanding the negatives associated with a potential investment or, as he put it, knowing "why not to buy something." This, he felt, was one of the keys to validating a given investment idea, as it confers a much deeper understanding of the underlying businesses concerned.
  
  There's not only a refreshing humility to this approach--demonstrating, as it does, a willingness to consider even the views of those you've trumped in the past--but also more than a whit of common sense in it. Uncertainty, Simpson clearly realizes, is as much a failure of will as imagination or insight. Thus, he forces himself to consider the flaws or holes in his logic like few other investors, scrubbing his investment thesis as he goes. Should an idea withstand such scrutiny, Simpson's process culminates with a high-conviction pick that he can add to the portfolio without reservation.

2. Stick to what we know the best! Understand the business before we invest!

• Stick to What You Know, But Never Stop Learning
  
  Simpson referred numerous times to the prudence of staying within what he called his "circle of competence." For instance, he steers clear of most technology-related stocks for the simple reason that he has trouble understanding these businesses. Similarly, while a number of Geico's holdings operate overseas, Simpson has generally been reluctant to invest directly in companies that are domiciled abroad. The reason? He feels that he doesn't know these firms as well as their domestic counterparts.
  
  Not that he's resting on his laurels. For instance, Simpson recounted a fact-finding trip he'd recently taken to India in order to learn more about that fast-developing economy. In addition, he sits on the board of technology firms SAIC SAI and VeriSign VRSN , positions that no doubt afford him the opportunity to deepen his knowledge of that particular field.
  
  Taken together with Simpson's aforementioned advice to seek opposing points of view, a fuller portrait emerges. Even in his eighth decade, Simpson remains every bit the student of his craft. He seeks out chances to learn (even if they take him halfway across the globe), and probes a diversity of viewpoints in order to arrive at investment decisions in the most circumspect way.

Last but not least, Patience! The big money is always in the waiting! Wait for the opportunity my friend!

• Patience Is a Virtue
  
  Simpson bemoaned the short holding periods of many professional investors, observing that there seems to be a clear link between time horizon and investment outcome; the longer the time horizon, the better performance is likely to be, and vice versa.
  
  This, too, makes good sense. For instance, once Simpson sinks his teeth into a particular stock, it can take him years to let go. Why? Given the sheer amount of legwork that Simpson does to validate an idea, and the voluminous knowledge of the underlying business that he accrues, he need not flee at the first sign of trouble like so many investors (many of whom fixate on the short term). Instead, if his thesis holds, Simpson simply bides his time. Consequently, the Geico portfolio's turnover ratio is a fraction of the typical stock mutual fund's.
  
  The upshot isn't that investors should trade less frequently. It's that they should perform the sort of rigorous, fundamentals-based research needed to foster deep conviction in an idea. In that context, low portfolio turnover is simply the hallmark of a strong process.