[[Start here]] → what works --- Buy great stocks, hold, repeat. As Warren Buffett says "it's simple but it's not easy". I like to simplify the stock market investing process across three primary dimensions - drivers, diversity and discipline. These three dimensions outline the core elements of any sensible stock market investment process. 1. [[expose to return drivers|Drivers]] (Stock Selection) - it's important to rank the stocks in the market to identify those most likely to drive returns. Whether you do this by assessing stocks individually, or using a more data-driven lens, you want to own [[good stocks beat junk stocks|good]], [[cheap stocks beat expensive stocks|cheap]], [[strong stocks beat weak stocks|strong]] stocks. It also pays to understand how to benefit from smaller sized companies, avoid extreme risk and benefit from country and sector return differences. 2. [[diversify for resilience|Diversity]] (Portfolio Construction) - this is knowing how many positions to own, at what position sizes, and diversified across what groupings. It's important to do this not just to lower risk, but to maximise returns. 3. [[maintain your discipline|Discipline]] (Portfolio Management) - the art of timing your buys and sells, and hedging your portfolio risk through time. Markets are dynamic, there's a need to adapt. Not many realise that rebalancing a portfolio can actually increase returns over time. It's a simple set of principles upon which we can expand. You can explore the links above to learn more. ![[3d-investing-framework-ed-croft.png]] --- The framework above I like to call “3D Portfolio Management”. What’s excellent about this framework is that each principle counteracts one of the key losing behaviours that we tend to exhibit as individual investors. A couple of academics, Barber & Odean[^1], rounded up all the studies they could and summarised these behaviours as: 1. “perverse security selection” - picking low return driver stocks 2. overconcentration - not diversifying enough 3. holding onto losers, selling winners and trading too much - a lack of discipline If you take a look at a few, seemingly very different, “guru” investors, you can see that they each apply the 3D framework in their style. 1. **Warren Buffett** - he picks high Quality, low Volatility shares (drivers), across a range of industries (diversity), and holds them for the very long term so that they compound (discipline). Even Buffett sheds his losers (e.g. Tesco) if he’s made a mistake. 2. **Mark Minervini** - he picks high Growth, high Momentum stocks right at the point of maximum return probability (drivers), he tends to own 5-8 stocks (diversity) which may seem over-concentrated, but he manages his concentration with an extraordinary attention to cutting losers quickly and running winners (discipline). 3. **Joel Greenblatt** - in his Magic Formula he would select the cheapest Value stocks that had the highest Quality without knowing anything about the shares (drivers), own 30 stocks for safety from any individual surprise (diversity) and rebalance the portfolio, with an equal weight, annually (discipline). I could go on, but you get the overall picture. The 3D framework is a solid lens within which to understand “what works” for the great investors, and most solid investment processes. [^1]: [[Barber & Odean - The Behavior of Individual Investors]]