5) Understand opportunity cost
An investment opportunity looked at in isolation can often look attractive, according to Douglass.
He says a proper assessment of opportunity cost takes into account both the expected return and risk in comparison to the next best alternative.
"In assessing an investment opportunity we look at what the investment will do to the portfolio's expected return, quality attributes, volatility risk, and currency exposure, and if it shares underlying business risks with other portfolio holdings," he says.
"Often, the best course of action is to invest in what you already own."
Douglass draws on the analogy of a football team to describe how Magellan assesses the opportunity cost of each stock in its portfolio.
"Our portfolio consists of around 25 players and each player has a role to play in winning the game. Some stocks play a defensive role and some play an offensive role. We seek to place the best players in each position and when considering a new investment we ask ourselves which player (or stock) we are prepared to replace it with. By doing so, we are actively assessing the opportunity cost of new investments," he says.
Finally, Douglass ends with a quote from Charlie Munger which he believes summarises the qualities of a good investor: "Preparation. Discipline. Patience. Decisiveness."