This post is the first in a three-part series exploring our complete investment methodology. At Chadwin, we’ve built an AI-powered analyst service that brings institutional-grade research to individual investors. We want to show there is no hidden magic in our approach, but a series of time-tested principles applied with unwavering consistency.

Our service harnesses frontier AI models to replicate the workflow and methods of expert analysts. By maintaining the same analytical process for every investment, regardless of market hype or popular sentiment, we hope to achieve something increasingly rare: true objectivity. Our AI defaults to a skeptical view, asking tough questions and pressure-testing assumptions just as the best human analysts do.

Here’s what we’ll cover in this three-part series:

• Part 1: Our Three Guiding Principles (this post) — The foundational beliefs that shape every investment decision
• Part 2: How We Evaluate Businesses — Our analytical tools for identifying quality companies
• Part 3: How We Make Investment Decisions — Our valuation framework for determining the right price

Today, we’ll focus on the three principles that guide everything we do: thinking like owners, demanding a margin of safety, and staying within our circle of competence.

Our Teaching Method: Two Fictional Companies

Throughout this three-part series, we’ll use two fictional companies to illustrate every principle. These aren’t real businesses, but they represent patterns we see repeatedly in the market:

Precision Manufacturing Corp (PMC) embodies everything we look for in an investment. Imagine a specialized industrial equipment manufacturer with a 40-year track record, producing ultra-precision lithography components essential for semiconductor production. Their machines achieve tolerances measured in nanometers—a level of precision that took decades to perfect. Started by two MIT engineers in a garage, PMC now serves every major semiconductor fabricator globally. Their $2 billion investment in proprietary manufacturing techniques, combined with 500 specialized engineers who understand both physics and fabrication, creates formidable barriers to entry. New competitors would need 5-7 years just to qualify their equipment with cautious chipmakers. Best of all, PMC generates substantial cash flow even during industry downturns, having weathered four semiconductor cycles while gaining market share each time.

TrendyTech Solutions (TTS) represents the cautionary tales we avoid. Picture a three-year-old software company born from a Stanford dorm room, riding high on their viral video-sharing app "TrendVid" that captured 50 million Gen-Z users in 18 months. The charismatic 26-year-old founder graces magazine covers and speaks at conferences about "revolutionizing social connection." But beneath the hype lies troubling reality: they burn $30 million quarterly while spending $50 to acquire users who generate only $30 in lifetime value. Their third pivot in three years—from photo sharing to video to promised "enterprise collaboration"—reveals strategic confusion. Worse, three competing apps with identical features launched last month, backed by tech giants with deeper pockets. When we dig into the numbers, we find a company masquerading growth for progress, confusing users for customers, and mistaking venture capital for revenue.

Characteristic	PMC	TTS
Product	Ultra-precision lithography components	Video-sharing app (TrendVid)
Customer Base	Every major semiconductor fabricator globally	50 million Gen-Z users
Competitive Moat	5-7 years for competitors to qualify equipment	None - 3 identical apps launched recently
Cash Flow	Positive even during downturns	Negative - CAC ($50) exceeds LTV ($30)
Strategic Focus	Consistent for 40 years	3 pivots in 3 years
Track Record	Weathered 4 semiconductor cycles	No proven profitability

By following PMC and TTS through each analytical framework, you’ll see exactly how our principles separate great investments from value traps.

With that, let’s jump into the three principles that guide everything we do.

Our Three Guiding Principles

Owner-Mindset: Thinking Beyond the Ticker

When you buy a share of stock, you’re not purchasing a ticker symbol on a screen, you’re buying a fractional ownership stake in a real business. This fundamental shift in perspective changes everything about how we approach investing. As owners, we think in years and decades, not quarters. We care about sustainable competitive advantages, not next week’s earnings announcement. We focus on cash generation, not accounting metrics.

The owner’s mindset transforms how you evaluate companies. Instead of asking "Will the stock go up?" you ask "Would I want to own this entire business?" Instead of watching price charts, you study competitive dynamics. Rather than following analyst upgrades, you assess management’s capital allocation decisions. This perspective naturally leads to better investment decisions because you’re thinking like a businessperson, not a trader.

Consider how differently you’d view PMC versus TTS through an owner’s lens. With PMC, you’d focus on their decade-long customer relationships, the specialized knowledge of their 500 engineers, and their $2 billion investment in proprietary manufacturing processes. You’d appreciate that their latest facility expansion, while reducing near-term earnings, positions them to capture growing semiconductor demand over the next decade.

With TTS, the owner’s perspective reveals troubling questions. Their user growth depends entirely on marketing spend, with customer acquisition costs exceeding lifetime value. The founder’s focus on user growth rather than sustainable economics would concern you as a part-owner. When TTS announced a pivot to enterprise software—their third strategic shift in three years—an owner would recognize this as a red flag rather than exciting innovation.

This owner’s perspective naturally leads to better questions during analysis. For PMC: How defensible are those customer relationships? What would it take for a competitor to match their manufacturing precision? How does management balance growth investments with current profitability? For TTS: Why do users leave so quickly? What’s the real value proposition beyond buzzwords? How will they monetize users who expect free services?

By thinking like owners rather than speculators, we avoid the market’s emotional swings and focus on business fundamentals. This mindset has guided successful investors from Benjamin Graham to Warren Buffett to countless others who understood a simple truth: in the long run, stock prices follow business value, and business value comes from competitive advantages, capable management, and cash generation, not from ticker symbols and price charts.

Margin of Safety: Building Bridges Stronger Than Necessary

Benjamin Graham’s concept of margin of safety remains one of the most important risk management frameworks for investors. He compared it to building bridges: engineers don’t design a bridge to hold exactly 10 tons if that’s the expected load, they build it to hold 30 tons. This excess capacity isn’t wasteful; it’s prudent protection against the unexpected. Similarly, we only invest when the market price offers at least a 25-30% discount to our calculated intrinsic value.

This principle serves multiple purposes. First, it protects against analytical errors. No matter how thorough our research, we can misjudge competitive dynamics, overestimate growth rates, or miss emerging risks. Second, it cushions against unforeseen events: recessions, technological disruptions, management failures. Third, it enhances returns by allowing us to buy quality assets at attractive prices. The margin of safety isn’t about being cheap, it’s about being smart.

When PMC traded at $80 per share during a semiconductor downturn, our analysis suggested an intrinsic value of $120 based on normalized earnings and conservative growth assumptions. This 33% discount provided our required margin of safety. Even if we overestimated their competitive position or underestimated technology risks, the buffer protected our downside. Two years later, as the cycle turned and PMC traded at $115, our patience was rewarded.

TTS presented the opposite scenario. During peak hype, shares traded at $50 while our most optimistic valuation reached only $15. The market priced in perfection: continued viral growth, successful monetization, and no competitive response. Without any margin of safety (trading at a 233% premium to our estimate) TTS represented speculation, not investment. When user growth slowed and the stock fell 80%, many investors learned an expensive lesson about the importance of valuation discipline.

Metric	PMC (Semiconductor Downturn)	TTS (Peak Hype)
Market Price	$80	$50
Our Intrinsic Value Estimate	$120	$15
Margin of Safety / (Premium)	33% discount	233% premium
Outcome After 2 Years	$115 (+44% return)	$10 (-80% loss)

The contrast illustrates why margin of safety matters. PMC buyers at $80 enjoyed both downside protection and upside participation. Even if our analysis proved partially wrong, the discount provided a cushion. TTS buyers at $50 faced asymmetric risk: massive downside with limited upside even if everything went perfectly. They confused a popular story with a good investment.

Graham understood that the future is uncertain, analysis is imperfect, and markets oscillate between fear and greed. The margin of safety doesn’t eliminate these realities, it acknowledges them. By demanding a meaningful discount, we tilt odds in our favor. We can be wrong about some things and still make money. We can weather unforeseen storms and emerge intact.

This principle requires discipline, especially during bull markets when everyone’s making “easy money” on story stocks. It means passing on exciting companies at unattractive prices. It means waiting patiently for fear to create opportunities. It means selling when rising prices eliminate the discount, even if momentum suggests higher prices ahead.

Circle of Competence: Knowing What You Know (and Don’t Know)

At Chadwin, our AI-powered analyst service dramatically expands our research capabilities, processing vast amounts of data and identifying patterns human analysts might miss. But even with these advanced tools, we maintain a crucial distinction: separating what can be known through diligent research from what amounts to speculation.

Some businesses operate on principles that skilled analysts, whether human or AI, can understand, model, and predict with reasonable accuracy. Others depend on factors that no amount of research or computational power can reliably forecast. This boundary defines our circle of competence, and respecting it is essential for any investor, whether using our service or conducting their own analysis.

PMC exemplifies a knowable business. While semiconductor manufacturing might seem complex, an analyst can systematically evaluate the fundamental business drivers:

• Customer relationships: We can identify their major customers, analyze contract terms, and understand the 5-7 year qualification cycles that create massive switching costs
• Technical specifications: Their equipment’s precision tolerances are documented in specifications, patents, and customer contracts. Measurable advantages we can verify.
• Market dynamics: Semiconductor fab construction follows predictable patterns based on chip demand, technology nodes, and capital cycles
• Competitive position: We can map competitors, compare technical capabilities, and assess relative market positions through industry reports and expert networks

TTS, by contrast, operates in the realm of the unknowable. No amount of research can predict:

• Viral dynamics: Which features will capture Gen-Z attention next month? Will dance videos remain popular, or will something else emerge?
• Platform dependencies: How will Apple’s next iOS update affect user acquisition? What if TikTok changes its algorithm?
• Cultural shifts: When will users abandon TrendVid for the next hot app? What makes content "cool" to teenagers?
• Network effects timing: At what user count does the platform become self-sustaining? When does growth tip from organic to forced?

These aren’t questions that deeper research or more computing power can answer. They’re inherently unpredictable, depending on human psychology, cultural moments, and platform decisions outside anyone’s control. Even TTS’s management can’t predict these factors, hence their constant pivots and strategy changes.

This is why our AI analyst is programmed to be deeply skeptical of businesses operating outside knowable parameters. It won’t try to predict the unpredictable or assign false precision to inherently uncertain outcomes. Instead, it focuses its considerable analytical power on businesses where rigorous research can actually provide an edge.

Whether you’re using our service or developing your own investment approach, the lesson is the same: your circle of competence encompasses what can be known through diligent analysis, not what requires predicting human whims. By respecting this boundary, you make investment decisions based on research and reason, not hope and speculation.

Principles in Practice

These three principles work together to filter opportunities. When evaluating any investment, we ask:

1. Does this fit the owner mindset? Would we want to own this entire business for a decade?
2. Is there sufficient margin of safety? Does the price offer meaningful downside protection?
3. Is this within our circle of competence? Can we understand and analyze the key business drivers?

PMC passed all three tests. We could envision owning the business long-term, the price offered a substantial discount during the semiconductor downturn, and the business model was analyzable through careful research. TTS failed all three. We wouldn’t want to own a cash-burning business with no moat, the sky-high valuation offered no safety margin, and viral social app success was inherently unpredictable.

Looking Ahead

These principles form the foundation of our investment philosophy, but they’re just the beginning. In Part 2, we’ll explore our comprehensive business evaluation framework. These are the specific tools we use to analyze competitive advantages, assess management quality, and identify the rare companies capable of compounding value over decades.

Then in Part 3, we’ll reveal our valuation methodology, showing how we determine what price to pay even for exceptional businesses. You’ll learn our expectations investing approach and see how we build probabilistic scenarios to identify market mispricing.

Whether you choose to use our service or apply these principles on your own, we believe every investor benefits from understanding this time-tested approach. Stay tuned for Part 2, where we’ll dive deep into the analytical tools that bring these principles to life.