Note: This post was originally published on RuleOneInvesting.com
“If you own your stocks as an investment — just like you’d own an apartment, house or a farm — look at them as a business.” — Warren Buffett
What type of businesses should you buy?
There’s a world of difference with how you feel about your money if you view your investments as fleeting chances to buy a piece of something that you can abandon at any time, versus fully researching and owning a portion of something you believe in.
The 10–10 Rule
To determine whether a business has Meaning to me, I always use the 10–10 Rule. The 10–10 rule is:
“I won’t own this business for 10 minutes unless I’m willing to own it for 10 years.”
If you’re willing to own the business, chances are favorable that you’re confident that business will make you money. If you buy the business with the mindset of a business owner and not as a stock speculator, then it becomes personal.
The 3 Circles Exercise
So what kind of businesses should you own? The ones you understand.
Those businesses tend to be about who you are. To narrow down what kind of businesses to invest in, take out a sheet of paper and follow along with the following 3 Circles Exercise.
Get the done for you version of the 3-circles exercise here.
Watch the video below that explains how to do the three circles exercise:
First draw three sizeable, overlapping circles like the example below. Now label one “passion,” the next “talents,” and the final “money.”
Now fill in the circles with your answers to the following questions:
- Passion — What do you love to do professionally and recreationally?
- Talents — What things are you really good at?
- Money — How do you make money, and what do you spend money on?
Your 3 Circles should look like this:
Look at Your Answers
What patterns do you see in your answers?
The ones that show up in more than one circle will direct you to the best companies for you to invest in. These are the ones you will probably know the most about and be the most passionate in.
Now you have some general categories of businesses that may be good for you to invest in.
What next?
Take a look at your 3 Circles. Where do you see similarities in your circles? You should look into companies in the industries you chose. Remember that your goal here is to find a few companies that you would love to own and that you understand.
Choose a few of those companies and begin digging in and researching them. You’re on your way to becoming a great Rule #1 investor.
Your next steps are to:
- Confirm the business is financially competitive.
- Ensure the business has trustworthy management.
- Determine the right price at which to buy the business.
Get my ultimate investing checklist to ensure all your bases are covered!
