Diogo Gonçalves

My Investment Principles

These are the principles that guide every investment decision I make.

1. I invest in businesses, not stock prices

A share is a fractional interest in a business. This is obvious, but it is easy to forget when prices move quickly.

Before buying, I want to understand how the company makes money, why customers choose it, how much capital it needs, and what could cause its economics to deteriorate. I want to identify the variables that genuinely determine long-term value rather than trying to predict how the market will react to the next quarter.

2. A competitive advantage must appear in the economics

I prefer companies with some protection against competition. This can come from network effects, switching costs, scale, trusted brands, cost advantages, regulation, distribution, data, or simply being difficult to replicate operationally.

However, I do not want to label something a “moat” without explaining how it works.

A real competitive advantage should eventually appear somewhere in the business:

High or improving returns on capital
Pricing power
Customer retention
Low customer-acquisition costs
Recurring revenue
Lower costs than competitors
Resilience during difficult periods
The ability to reinvest without destroying returns

A moat is not a story attached to a company. It is a mechanism that protects the company’s economics.

3. Management matters most when management controls capital

I look for management teams that think and act like owners. I care about operational competence, but I care just as much about what management does with the cash the business generates.

Capital can be reinvested, used for acquisitions, returned through dividends, used to repurchase shares, or retained on the balance sheet. None of these choices is automatically good. The correct choice depends on the available returns and the price being paid.

I am particularly cautious when management:

Pursues acquisitions primarily to increase company size
Repurchases shares regardless of valuation
Uses adjusted figures to obscure ongoing costs
Adds leverage while presenting the decision as being low risk
Changes the performance measures used to judge the business
Promises synergies that are difficult to verify
Rewards growth without considering returns on capital

I prefer conservative communication. I do not need management to be charismatic. I need management to allocate capital rationally, discuss problems honestly, and avoid risks that could permanently impair the business.

4. Buying more requires more than a lower price

A falling price is not, by itself, a reason to increase a position.

Before buying more, I want to ask:

Has the business changed?
Has the balance sheet become more dangerous?
Were my original assumptions wrong?
Is the expected return now higher, or am I trying to avoid admitting a mistake?
Would I buy the company today if I did not already own it?
Is this still the best use of the additional capital?

Averaging down can be rational when the value of the business is intact and the price has become more attractive. It can also magnify a poor initial decision.

The existence of an unrealised loss should not lower the standard required for committing new capital.s

5. I should separate decision quality from outcome quality

A profitable investment is not automatically a good decision. An unprofitable investment is not automatically a bad one.

A decision should be judged using the information available when it was made. The outcome should then be used as additional evidence about the process.

6. My strongest view should include the strongest argument against it

For every meaningful investment, I want to record:

Why I believe the investment is attractive
What the market may be misunderstanding
The strongest credible argument against my view
What evidence would prove me wrong
Which assumption contributes most to the valuation
What I am least certain about

If I cannot present the opposing case fairly, I probably do not understand the investment well enough.