The Dhandho Framework (from Mohnish Pabrai, The Dhandho Investor, p. 46)

1.  Invest in existing businesses.

2.  Invest in simple businesses.

3.  Invest in distressed businesses in distressed industries.

4.  Invest in businesses with durable moats.

5.  Few bets, big bets, and infrequent bets.

6.  Fixate on arbitrage.

7.  Margin of safety – always.

8. Invest in low-risk, high-uncertainty businesses.

Invest in the copycats rather than the innovators.

The Kelly Optimization Model (from Robert Hagstrom, The Essential Buffett, p. 143)

The Kelly Optimization Model, often called the optimal growth strategy, is based on the concept that if you know the probability of success, you bet the fraction of your bankroll that maximizes the growth rate.  It is expressed as a formula:

                        2p – 1 = x

where 2 times the probability of winning (p) minus 1 equals the percentage of the total that should be bet (x).  For example, if the probability of beating the house is 55 percent, you should bet 10 percent of your bankroll to achieve the maximum growth of your winnings.

Unconventional Success by David F. Swensen

Unconventional Success: A Fundamental Approach to Personal Investment (Hardcover)
by David F. Swensen (Author) "John Maynard Keynes wrote, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally..." 

Swensen lays out six "core" asset classes that should form the basis of an individual investor's portfolio, each of which should comprise between 5% and 30% of the portfolio. Below is the "generic" target portfolio outlined in the book:
1. Domestic Equity (30%)
2. Foreign Developed Market Equity (15%)
3. Emerging Market Equity (5%)
4. Real Estate (20%)
5. U.S. Treasury Bonds (15%)
6. U.S. Treasury Inflation-Protected Securities (15%)

Swensen also discusses "non-core" asset classes and why each should not be a part of an individual investor's portfolio. These "non-core" asset classes include:
1. Domestic Corporate Bonds, 2. High Yield (Junk) Bonds, 3. Tax Exempt (Municipal) Bonds, 4. Asset-backed securities, 5. Foreign Bonds, 6. Hedge Funds, 7. Leveraged Buyouts, and 8. Venture Capital.

Under Mr. Swensen's 20-year stewardship, Yale University's US$15-billion endowment has earned annual compound returns of 16.1%. Every dollar entrusted to him on June 30, 1984, had, by July 1, 2004, grown into nearly $20.

Bill Ruane’s Rules for investing as adapted from his “Memorandom of Investment Philosophy” by Louis Lowenstein in his working paper number 290.

a.     Buy good businesses.

                                                              i.      The single most important indicator is a superior return on capital, because it means the company enjoys a unique proprietary position.

b.     Buy businesses with pricing flexibility.

                                                              i.      Always true but particularly in the inflationary period in which he wrote.

c.      Buy stocks at modest prices.

                                                              i.      While price risk cannot be eliminated, it can be lessened materially by avoiding high multiples.

d.     Buy strong balance sheets.

                                                              i.      If this rule is violated, none of the others will matter.

e.     Buy cash generating businesses.

                                                              i.      Those businesses where the earnings are truly available to create future growth or for payment to stockholders.

The Focus Investor’s Golden Rules

(from Robert Hagstrom, The Warren Buffett Way, 2005)

§  Concentrate your investments in outstanding companies run by strong management.

§  Limit yourself to the number of companies you can truly understand. Ten to twenty is good, more than twenty is asking for trouble.

§  Pick the very best of your good companies, and put the bulk of your investment there.

§  Think long-term: five to ten years, minimum.

§  Volatility happens. Carry on.

The Warren Buffett Way by Robert G. Hagstrom

Business Tenets

1.      Is the business simple and understandable from your perspective as an investor?

2.      Does the business have a consistent operating history?

3.      Does the business have favorable long-term prospects?

Management Tenets

1.      Is management rational?

2.      Is management candid with its shareholders?

3.      Does management resist the institutional imperative?

Financial Tenets

1.      Focus on return on equity, not earnings per share.

2.      Calculate “Owner Earnings”.

3.      Search for companies with high profit margins.

4.      For every dollar of retained earnings, has the company created at least one dollar’s extra market value?

Value Tenets

1.      What is the value of the business?

2.      Can the business currently be purchased at a significant discount to its value?

(Notice how this follows what was stated by Warren Buffett on CNBC)

Questions to Ask Before Investing from What is Value Investing? By Lawrence A. Cunningham

1.      What products does the company sell or what services does it provide?

2.      How are they used?

3.      Do customers need these things?

4.      How stable is demand, and how well positioned is the company to meet it going forward?

5.      How distinctive is the company’s product compared to possible substitutes?

6.      Do consumers care, and how much?

7.      How likely is it that this company can raise prices without losing sales (called franchise value or economic goodwill)?

8.      Who is the company’s target customer/client base?

9.      Does the company depend on one or a few customers for most of its revenues, or does it have millions of customers?

10.  How much does any dependency matter – how financially solid is a major customer?

11.  How does the company sell its products?

12.  What is the company’s geographic market?

13.  How sensitive is it to economic downturns in that market?

14.  Can the company adapt quickly to changing economic and business conditions?

15.  How strong is the company’s supply chain?

16.  How strong is the company’s employee relations?

17.  Does the company operate in regions subject to ordinary or extraordinary political or economic risks?

18.  Is the company a classic, vintage, or rookie?

19.  What special business and financial risks do common stockholders face?

20.  What are the debt levels?

21.  What is the likelihood that debt investors would be paid before stockholders or that high debt would throw the company into bankruptcy?

22.  What is the company’s financial strength and industry leadership?

23.  Is its market expanding or contracting?

24.  Is there room for growth that will add value?

The Investors Checklist from The Little Book of Value Investing by Christopher Browne (Tweedy, Brown)

1.      For reviewing the income statement trend over 5 or 10 years.

                                                              i.      Are revenues rising or falling?

                                                            ii.      Are expenses staying in-line with revenues?

                                                          iii.      Are profits consistent or uneven?

                                                          iv.      Is there a cyclical pattern to earnings such as would be the case with economically sensitive companies?

                                                            v.      Are profits growing?

                                                          vi.      Are there a lot of one-time charges or gains that indicate that the company may be manufacturing or massaging the bottom line?

                                                        vii.      Are there a rising number of shares outstanding that may indicate that excessive stock options are being issued to executives diluting your share of corporate profits?  (Increasing shares may also indicate that the company is financing itself through stock offerings rather than earnings.)

                                                      viii.      Are shares declining indicating that the company is actively buying back its own shares?  (make sure that if the company says they are buying back shares in shareholder communication or in the press that they do buy them back)  Are shares falling year over year?

2.      Ask the following questions about the prospects on your list.

                                                              i.      What is the outlook for the pricing of the company’s products?  Can the company raise prices?  Each dollar of price increase will increase pre-tax income by a dollar if costs do not increase.

                                                            ii.      Can the company sell more?  If the company can do so without increasing costs, every dollar will go to the bottom line. (increasing sales should not be done through incentives or giveaways)

                                                          iii.      Can the company increase profits on existing sales? 

1.      What is the gross profit margin as a percentage of sales?

2.      How much is gross profit margin expected to increase or decrease as a result in changes of price, mix of business or the specific costs that make up the costs of goods sold?

3.      If it is not possible to sell more is it possible to squeeze more profit out of what is already being sold?

4.      Can the company cut product costs by changing suppliers or shipping methods?

5.      Can the company change its product mix to focus on more profitable lines of business in order to raise its profit margin?

                                                          iv.      Can the company control expenses?

1.      What is the outlook for selling, general and administrative costs margin as a percentage of sales?  Have there been any changes and if so, what are they?

2.      Is there anyway for the company to cut costs not related to making the product?

3.      Are overhead, salaries and other employee expenses out of line?

4.      Can the company close expensive or outdated production facilities?

5.      Is a new technology available that will allow the company to raise its overall profit margin?

6.      Can the company lay off employees to reduce overhead?

7.      Can it refinance debt and lower rates and let the savings accrue to the bottom line?

                                                            v.      If the company does raise sales, how much of it will fall to the bottom line?

                                                          vi.      Can the company remain as profitable as it used to be or at least as profitable as its competitors?

                                                        vii.      Does the company have one-time expenses that will not have to be paid in the future?

                                                      viii.      Does the company have unprofitable operations it can shed?

                                                          ix.      Is the company comfortable with Wall Street earnings estimates?

                                                            x.      How much can the company grow over the next 5 years?

1.      How will the growth be achieved?  New markets?  New locations?  Will it buy companies to grow earnings?

2.      Will the growth come at the expense of profit margins and return on equity (ROE)?

                                                          xi.      What will the company do with the excess cash generated by the business?

1.      Increase dividends?

2.      Invest in new stores or factories?

3.      Acquire other companies?

4.      Buy back stock?

5.      What is the expected return of these investments?  If they cannot invest this excess cash at higher rates of return then a government bond or stock index fund or some other stock you can purchase, they should not retain the earnings but pay the earnings back to you as a dividend.

                                                        xii.      What does the company expect its competitors to do?

                                                      xiii.      How does the company compare financially to other companies in the same business?

                                                      xiv.      What would the company be worth if it were to be sold?  (look for past examples of similar companies that were sold or went private)

                                                        xv.      What are the insiders doing?  (buying, selling – look for patterns)

Investment Principles – From Warren Buffett on CNBC – The Billionaire Next Door

1.      Something he can understand.  Something in his “circle of competence”.

                                           i.      He doesn’t understand what Car Company, software or       chemical company will win 10 years from now.  But he does      understand that Snicker’s Bar will be the number one candy bar in the U.S. 

2.      Durable Competitive Advantage

                                                     i.      A business that will dominate for what appears to be forever.

3.      An Honest and Able management.

4.      A price that he wants to pay.