6 Powerful Investing Principles That Help You Crush the Market Like the Pros

The following 6 principles come from the Rule #1 tradition.

In 2024, the American Association of Individual Investors (AAII) ranked the Rule #1 Investing model portfolio as the top-performing strategy among its tracked stock screens. ​

This recognition marks a continued trend of excellence for the Rule #1 Investing approach, which was also rated #1 by AAII in 2014.

The best investors in the world use these 6 principles . . .

They are awesome.

They have been around since the 1930’s and they are still practiced today by the best investors in the world. Investors like Warren Buffett, Charlie Munger, David Einhorn, Monish Pabrai and myself all use these 6 principles, and we all get great returns.

In fact, Warren Buffett has continued to affirm the effectiveness of these time-tested principles. In his 2023 Shareholder Letter, Buffett reiterated the importance of staying within your “circle of competence” and making rational decisions—core Rule #1 values. The performance of Berkshire Hathaway over decades is a clear demonstration that these six principles are not only relevant—they’re essential.

Rule #1 states “Don’t lose money,” and these 6 principles are always on my mind to help me avoid violating that critical rule.

1) Radar

This is easier said than done when you are investing real money.  Money you can't afford to lose tends to be 'hot' or emotional.  Pro gamblers try to avoid sitting down with more than they can lose but anyone investing all of their own hard-earned money is always sitting down with more than they can lose.  Fear of losing more than you can afford to lose tends to make the mind go irrational.  You start guessing.

You can't tell the difference between a good idea and a bad idea. Investing decisions are not life and death decisions but still, remaining rational in the face of intense emotions is an art that is learned in the trenches.

Rule #1 Investors develop their “radar” through consistent practice—starting with paper trading. Practicing in a risk-free environment helps train your mind to identify opportunities and maintain discipline under pressure. Paper trading tools like ThinkorSwim by Schwab are great for honing your skill before real money is on the line.

2) Understand The Business

Understand what you’re buying. Stick with what you know and realize what you don’t know.

Focus your attention on industries that you’re already comfortable with. Imagine that you were going to have to own and operate a business. Can you do that in an industry where you’re seriously thinking of making an investment?

You need to be able to understand the business if you want to buy it.

Rule #1 Investors use the 4Ms framework to evaluate a company: Meaning, Moat, Management, and Margin of Safety. Understanding the business includes assessing whether the company’s product or service is meaningful to you, whether it has a durable competitive advantage (Moat), and whether its leadership has integrity and talent. Only after those are satisfied do we look at valuation.

3) Love What You Own

Love what you own. Put your money where your values are. Most of us have the intention to make the world a better place, but seem to forget that the businesses that they invest in have a direct impact on what is going to exist in the world in 20 years.

85% of all of the money in the stock market is “little guy” money. This is money from our 401K’s our retirement plans and our pension plans.

Vote for the future that you want to see, by investing your own money into businesses that you want to see 20 years from now.

Investing in companies that you love transforms it from a chore or obligation into something that you are passionate about, something that is fun.

This is where values-based investing meets profitability. For example, if you're passionate about sustainability, look for companies with transparent environmental practices and long-term goals aligned with renewable innovation. Investing in companies you respect not only increases engagement—it strengthens your conviction to hold through volatility.

4) Wait for an Event

Wait for an event. When you boil it down, we buy fear and we sell greed. Fear creates a lot of selling action.

When stock prices are set by the most fearful or the most greedy investors, those who are fully in the sway of emotion, it's clear that the market prices are often far from rational.  The big players in the market – mutual fund managers, pension fund managers, insurance fund managers and bank fund managers – are not the most cold-blooded rational creatures on the planet.

When the market begins to go down these greedy investors get out quickly to avoid losses. If the company is wonderful, and you understand it, that’s when you take advantage.

A recent example of this was the market panic in early 2020. While many investors sold off, Rule #1 investors saw buying opportunities in strong businesses temporarily discounted by fear. Always ensure the company remains fundamentally strong—then act when the price drops below its true value.

5) Reduce Your Basis

Your basis is the amount of money that you have on the table. All reduce basis means is getting your money off of the table.

This is the unsung hero of the Rule #1 saga: If you can lower your basis with return of capital.

That means cash flow strategies from:

• Dividends

• Buybacks

• Derivatives

• Really safe options trades

When you reduce basis your risk of losing money goes down proportionately.

You lower your risk of losing money by reducing your basis.

When my basis goes to zero, where is my market risk?  If I start spending the money to live on instead of reinvesting it, then the basis stays the same but the return still goes up because you’re getting dividends every year.

In essence, I've created for my retirement a kind of special bond – one that is backed by one of the best companies in the world and yet pays out based on an ever increasing coupon rate, one that within ten years is over 20% a year and rising.

One of the most overlooked Rule #1 tactics is selling cash-secured puts and covered calls on wonderful companies you already own or want to own. These option strategies can generate income while reducing your cost basis over time. If done right, you’re getting paid to wait—collecting cash as you build or hold a position in a business you understand and love.

Example: Let’s say you buy 100 shares of a company you love at $80 and then sell a covered call with a $90 strike for $4/share. You’ve now effectively reduced your basis to $76. Repeat that consistently, and your risk continues to fall while your yield rises.

6) Create a story

Create a story for the company you want to invest by combining all the previous principles into a cohesive idea about why this is a great company. Then once you have that story, invert it by flipping to the opposite point of view. You should try to create the argument that this investment is a dumb idea and if you can't, then that is assign that you don't know enough about the company yet.

This inversion process is straight from Charlie Munger’s playbook:

“Tell me where I’m going to die so I won’t go there.”

By attempting to destroy your thesis, you build a stronger conviction in your investment—if it survives scrutiny. Your investment story should include:

• Why the business aligns with your values (Meaning)

• How it maintains a competitive edge (Moat)

• Why the leadership is trustworthy (Management)

• What the business is worth—and whether you’re buying with a Margin of Safety.

When all 4Ms align, and you’ve tested your story against the bear case, you’re ready to invest with confidence.

Ready to Start Picking Rule #1 Approved Stocks?

Ready to invest with confidence? Download my Free Rule #1 Stock Picking Guide to learn how to find wonderful companies, understand their financials, and determine the right price to buy. Inside, you'll get:

• A breakdown of the 4Ms (Meaning, Moat, Management, Margin of Safety)

• Tips to evaluate the most important financial metrics

• A checklist to avoid costly investing mistakes

👉 [Link to download] Start building your watchlist of Rule #1-approved companies today.

**Editor’s Note (Updated April 2025): This article was originally published in 2015 and has been significantly updated in 2025 to reflect current examples and Rule #1 investing insights.