As a Rule #1 investor, the ultimate goal is to build a portfolio of wonderful businesses you can hold for the long term—companies so strong and resilient that you wouldn’t lose sleep even if the stock market shut down for a decade. But how do you ensure your portfolio remains robust and aligned with your financial goals?
In this post, we’ll explore how to assess your portfolio using time-tested principles from investing legends like Warren Buffett and Charlie Munger. You’ll learn how to evaluate businesses, spot potential red flags, and decide when to hold or sell.
Why Rule #1 Investing Prioritizes Long-Term Confidence
Imagine owning a business that you’re so confident in, you’d never worry about its stock price. That’s the essence of Rule #1 investing: focusing on companies with a strong competitive moat and trustworthy management, capable of thriving for decades.
To illustrate, consider a personal example. I own a farm, and my wealthy neighbor Larry occasionally shouts prices at me, hoping to buy it. If I have no intention of selling, why would I care about his offers—whether they’re outrageously low or surprisingly high? The same principle applies to owning stocks.
When you invest in a company with a long-term perspective, the daily ups and downs of the stock market become irrelevant. The focus shifts from short-term price fluctuations to the fundamentals of the business itself.
Building and Monitoring a Rule #1 Portfolio
To build a portfolio that can withstand market uncertainty, follow these principles:
1. Own a Small Number of Wonderful Businesses
A Rule #1 portfolio typically consists of 5 to 10 companies. Why so few? Because owning fewer businesses allows you to deeply understand each one and stay informed about their performance. Think of yourself as the sole owner of each company—just as the Walton family views Walmart.
When you own fewer companies, you can:
Pay close attention to quarterly earnings reports.
Read the CEO’s letters to shareholders.
Monitor industry trends that might affect your businesses.
2. Understand the “Story” of Each Business
Every company in your portfolio should have a compelling “story.” This concept, introduced by investor Julian Robertson, involves identifying the key reasons a business is worth owning.
The story should clearly explain:
Why the company has a competitive moat.
How it generates value for shareholders.
The strengths of its management team.
Its long-term growth potential.
When you buy a stock, you’re essentially buying the entire business. If you were the sole owner, you’d want to know every detail about what makes it successful.
The Four M's For Successful Investing
How to invest with certainty in the right business at the right price
Spotting Changes: When the Story Shifts
While wonderful businesses rarely change, the “vicissitudes of life,” as Charlie Munger puts it, can disrupt even the most stable companies. To protect your portfolio, keep an eye out for the following signs that a company’s story is changing:
1. Shifts in Key Metrics
Rule #1 investors focus on three critical metrics:
Revenue growth: Is the company’s top-line growth slowing down?
Profit margins: Are margins shrinking due to rising costs or poor management?
Debt levels: Is the company taking on excessive debt?
If these metrics start to move in the wrong direction, it’s a signal to dig deeper.
2. Management Decisions
Trustworthy management is a cornerstone of any Rule #1 investment. If you notice the leadership team making decisions that don’t align with shareholder interests—such as pursuing reckless acquisitions or prioritizing short-term gains—it might be time to reassess.
3. External Industry Changes
New competitors, disruptive technologies, or regulatory shifts can erode a company’s moat. Staying informed about industry developments helps you recognize threats early.
What to Do When a Story Changes
If you detect a fundamental shift in a company’s story, follow these steps:
Seek Clarity: Review the latest quarterly report and earnings call. Many companies allow shareholders to submit questions, so take advantage of this opportunity to get answers.
Evaluate the Long-Term Impact: Determine whether the change is temporary or indicative of a declining business.
Make a Decision: If the story no longer aligns with your investment thesis and you can’t see a path forward, it’s time to sell.
Selling isn’t a failure—it’s a disciplined decision to reallocate capital to better opportunities.
Why Stock Prices Don’t Dictate Portfolio Decisions
Coming into 2025, many wonderful businesses may experience price declines, but that doesn’t mean they’re no longer worth owning. As a Rule #1 investor, you must separate stock price movements from the intrinsic value of the business.
Just like Larry’s offers for my farm, a stock’s market price doesn’t determine its worth. What matters is the company’s ability to grow and create value over time.
The Rule #1 Approach: A Proven Strategy
Warren Buffett and Charlie Munger have successfully applied these principles for over 60 years. They rarely sell businesses, but when they do, it’s because the story has changed.
By focusing on owning a small number of great companies, understanding their stories, and staying disciplined, you can build a portfolio that weathers market fluctuations and grows your wealth over the long term.
Final Thoughts
Assessing your portfolio is about more than tracking stock prices—it’s about understanding the businesses you own. By treating your portfolio as if you’re the sole owner of each company, you’ll develop the confidence and clarity to make informed decisions.
Want to learn more? Subscribe to our channel and follow us on social media for weekly insights into Rule #1 investing. For more hands-on training, join us at an upcoming workshop! Remember, successful investing is simple, but it requires patience, discipline, and the willingness to think differently from the crowd.
