First Principles in Capital

Capital allocation is simple in theory and hard in practice. The theory is: put money into things that produce more value than they consume. The practice is: everything is uncertain, everyone is biased, and the future is unknowable.

Over the years I have collected a few heuristics that help me think about capital. They are not laws, and they are not original. They are simply reminders that I return to when the noise gets loud.

First, capital is only useful when it has an owner who understands the business. Money without judgment is a liability. Second, the best returns usually come from doing less, not more. Most portfolios are over-diversified. Third, the right holding period is forever, or at least long enough that the current price does not matter. Fourth, the cheapest way to reduce risk is to know what you own.

These ideas are old because they work. The hard part is not understanding them; it is applying them when the world is telling you to do the opposite.