Cover Image for Investing with Purpose: The Essence of Rule #1
Chapter 1

Investing with Purpose: The Essence of Rule #1

Rule #1 investing is a strategy centered on confident and informed investment decisions. At its core, Rule #1 aims to shield your investments from uncertainty and potential loss. But how do we accomplish this? The answer lies in understanding the businesses we invest in.

The Foundation: Understanding the Business

In the world of Rule #1 investing, knowledge is power. Imagine owning the entire business you're considering investing in. What would you need to know to make sound decisions? This level of understanding is pivotal. We must grasp the context in which the business operates, not just the industry it's a part of, but the ethics it upholds. A business is like a farm – the seeds you sow dictate what you reap. Beyond the product, you're shaping the world and impacting lives. Embrace the concept of Karma – the idea that your actions come back to you. With this understanding, you'll naturally make more informed and ethical choices.

Owning the Whole Business

Even if you're purchasing just one share, think as if you're acquiring the entire business. The Rule #1 approach encourages you to consider the bigger picture. What kind of impact does the business have on the world? This mindset guides your decisions, making you more conscious of where you invest your money. Investing in businesses that align with your values and contribute positively to the world becomes a priority.

The Three Circles Exercise: Your Path to Informed Investing

Embarking on the journey of Rule #1 investing begins with introspection. Enter the Three Circles exercise. The Three Circles exercise comes from Jim Collins, a business professor at Stanford University. In his mega-bestseller, Good To Great, Jim writes that he used this exercise to help companies figure out what line of business they should be in. It's a powerful tool. We like it because it can help our students find the areas of the market they already are comfortable with and experienced in.

Image of the three circle exercise
  • The Three Circle Exercise

    • Draw three circles on a page. (Big ones.)

    • Label the first one "Passion."

    • Label the second one "Talent."

    • Label the third one "Money."

    • Inside the "Passion" circle, list everything you are passionate about.

    • Inside the "Talent" circle, list everything you are good at.

    • Inside the "Money" circle list how you make money and what products you love to spend it on.

    • Write down in a list outside the circles of anything that comes up three times.

    • Write down in another list outside the circles anything that comes up twice.

Discover overlaps among these circles, identifying the industries that hold personal meaning. Investing in businesses that align with your passions and talents not only enhances your experience but also makes you a more informed investor. By choosing meaningful industries, you set the stage for success on both financial and ethical fronts.


Rule #1 investing isn't just about financial gains – it's a philosophy that intertwines prosperity with purpose. By comprehending the businesses you invest in, embracing the concept of Karma, and utilizing tools like the Three Circles exercise, you craft a more deliberate investment journey. With each decision, you contribute to a better world while securing your financial future. This harmonious blend of ethics and economics creates a path to not only wealth but also personal fulfillment. Begin your journey today and pave the way for meaningful and successful investing.

In the next sections, we'll explore the 'Four M's' – a framework that enhances your ability to identify wonderful businesses at attractive prices, bringing you closer to the essence of Rule #1 investing.