I aim to reduce the number of decisions that I have to make in my daily life to focus my energy on important tasks. My life is pretty much on an automated routine now—write for 4 hours, read, workout, journal, so on and so forth.

Tons of psychology research shows that making small decisions, around what you wear or what you eat for breakfast (I eliminated breakfast) for example, drains your energy and reduces the quality of your decision-making for other matters.

Reducing the number of decisions you make daily often requires you to set rules in your life. By forcing yourself to work within a set of limitations, you reduce the number of variables you have to think about.

When it comes to investing, the importance of making good decisions amplifies. This is where carefully calibrated rules become key. This is why my goal is to fill great companies into my forever portfolio, companies that have the potential to eliminate the sell decision for me.

While many people speak of long-term investing, few understand that it is more than just the duration of your holding period, it is the quest of looking for companies that are able to take over the responsibility of compounding your wealth for you.

For that to happen, there must be several rules investors have to gripe with.

Rule 1: Look For Positive Feedback Loops

Most companies’ life cycle follows an S-curve, they start out small, grow rapidly, and after hitting maturity, they slowly decline to the valley of death. Take for example, GAP, General Electric, 

However, there are groups of companies that seemingly defy their fate, companies that seem to evade the decline altogether. 

Sustainable growth requires positive feedback loops, where growth begets even more growth. 

One example would be scaled economics shared, enjoyed by businesses like Costco and Amazon, by growing their sales volume, it leads to higher bargaining power over suppliers to lower prices, which leads to increased sales, so on and so forth.

Another example would be network effect, enjoyed by businesses such as Facebook and Youtube because the strength of the platforms increases with the number of users, which will, in turn, attract content creators and advertisers, and with an increase in content, it will lead to more users, so on and so forth.

For your wealth to compound long-term, it is important to select companies that naturally become stronger as they grow in size.

Rule 2: Look For High-Quality Management

When you invest in a company for the long-term, you are effectively handing over the responsibility of capital allocation to the management.

You want to look for competent management who thinks in a 5 to 10 years horizon and seeks to grow shareholders’ wealth.

Here is a checklist on how to evaluate management:

Rule 3: Focus on high signal, low noise information

You have to be intentional about the information you absorb. As a rule-of-thumb, I ignore forecasts of any sort, especially on macroeconomics events (e.g. interest rates or inflation). After all, if they are accurate, the forecasters would probably be the richest folks in the world.

Another good litmus test would be to ask ourselves, “how does this information impact my company in 5 to 10 years?” Most information values decay rapidly and when most of a company’s intrinsic value is tied to its terminal value, it’s more important that investors focus on what will happen in the long run as opposed to the next couple of quarters.

Conclusion

Investing is simple but not easy. The decision to be a long-term investor starts with the sort of companies you choose to invest in. Adhering to these 3 rules helps in reducing the amount of information you need to consume and the number of decisions you need to make. In turn, this will increase the quality of decision-making, especially when the market is pulling back aggressively.