Warren Buffett

CHAPTER 2Developing an Investment Philosophy

Investing is a thinking game. It is not a physical challenge. It doesn't matter how strong you are or how fast and far you can run. But it does matter—a lot—how you conceptualize the world and your role in it.

Another name for that is your worldview. It is a complex, fascinating mix of your innate temperament, the experiences of your life to this point and your reaction to them, and the ideas you absorbed along the way—from formal education, from reading, from significant people in your life. All these elements go into shaping a mental mosaic that is your personal philosophy of life, something so fundamental it is revealed in countless ways at every turn. But here we are concerned specifically with just one dimension: your philosophy of investing and how it influences your decisions and then in turn is affected by them.

A good working definition of an investment philosophy is “a set of beliefs and insights about how financial markets work and what it takes to exploit those workings in the service of an investment objective.”¹ Like all good definitions, it is compact and succinct; to get its full meaning, we need to break it open and look closely at its parts.

First, let's explore “a set of beliefs and insights.” It asks, What is your personal set of beliefs, your overall view of how the financial markets operate? And where did it come from? What have you learned that shaped your view? For his part, Warren tells us the stock market ...