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Kindle Notes & Highlights
by
Tren Griffin
Started reading
September 16, 2019
It is common for Graham value investors to say things like, “My goal in buying a financial asset is to buy a dollar for 70 cents.” When they say this, they do not mean “buy a dollar for seventy cents” precisely, but they do seek a significant discount from intrinsic value.
Howard Marks pointed out that “active management has to be seen as the search for mistakes.”12 In his view, it is in less-traded markets and so-called distressed assets where mistakes are most likely to be found.
So similar to poker - you make money when others make mistakes (in the long run)
For the Graham value investor, it is precisely when Mr. Market is depressed that the greatest opportunities to purchase assets exist. Stocks at that time are likely to be mispriced to an extent that generates a significant bargain. As Ben Graham questioned, why turn something like a drop in stock prices—which is fundamentally advantageous—into something disadvantageous?
As long as the fundamentals of the business itself remain in place, a market’s short-term views on the price of the shares can be ignored and will be corrected in the long term. This approach reinforces the importance of a fundamental analysis of the business itself.
There are essentially three steps in the process: analyze the business to determine intrinsic value, buy the assets a...
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I think it’s roughly right that the market is efficient, which makes it very hard to beat merely by being an intelligent investor. But I don’t think it’s totally efficient at all. And the difference between being totally efficient and somewhat efficient leaves an enormous opportunity for people like us to get these unusual records. It’s efficient enough, so it’s hard to have a great investment record. But it’s by no means impossible. Nor is it something that only a very few people can do. The top 3 or 4 percent of the investment management world will do fine.
Anyone who invested through the Internet bubble (as I did) and who still thinks that markets are always efficient (a so-called extreme view of market efficiency) is bonkers.
Mr. Market’s bipolar nature is his gift to Graham value investors. Occasionally he will present them with great bargains. At other times he’ll buy your assets at a premium. Munger’s point on this is simple: do not treat Mr. Market as wise; instead, view him as your servant.
If you are the crowd, then you cannot, by definition, beat the crowd. Munger believes that short-term price movements are not rationally based, based on always-efficient markets, or predictable with certainty.
Over many decades, our usual practice is that if [the stock of] something we like goes down, we buy more and more. Sometimes something happens, you realize you’re wrong, and you get out. But if you develop correct confidence in your judgment, buy more and take advantage of stock prices.
Graham’s value investing system is based on the premise that risk (the possibility of losing) is determined by the price at which you buy an asset. The higher the price you pay for an asset, the greater the risk that you will experience a loss of capital. If the price of a stock drops, risk goes down, not up. For this reason, the Graham value investor will often find that price decrease for a given stock is an opportunity to buy more of that stock. Buffett put it this way: “I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the Hallelujah chorus in the
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Rationality is not just something you do so that you can make more money; it’s a binding principle. Rationality is a really good idea. You must avoid the nonsense that is conventional in one’s own time. It requires developing systems of thought that improve your batting average over time.
[An] increase in rationality is not just something you choose or don’t choose; it’s a moral duty to keep up as much as you reasonably can. It worked so well at Berkshire, not because we were so darned smart to start with—we were massively ignorant. Any of the great successes of Berkshire started with stupidity and failure.
The idea of being objective and dispassionate will never be obsolete.
Huge part of Robert Greene's stuff too - removing emotional reaction, seeing things as they are and acting rationally.
Robert Hagstrom wrote a wonderful book on worldly wisdom entitled Investing: The Last Liberal Art,
He actually has fun when he is learning, and that makes the worldly wisdom investing process enjoyable for him.
In Munger’s view, it is better to be worldly wise than to spend lots of time working with a single model that is precisely wrong.
people who cannot be alone with their own thoughts are terrible candidates to become successful investors.
I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.
Munger believes that by learning to recognize certain dysfunctional decision-making processes, an investor can learn to make fewer mistakes. He also believes that no matter how hard someone works and learns, mistakes cannot be completely eliminated. The best one can hope for is to reduce their frequency and, hopefully, their magnitude.
I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up, and boy, does that help, particularly when you have a long run ahead of you.
Munger believes that by going over your decision-making process and carefully using skills, ideas, and models from many disciplines, you can more consistently not be stupid. You will always make some bone-headed mistakes even if you’re careful, but his process is designed to decrease the probability of those mistakes.
Buffett has said that if you cannot explain why you failed after you have made a mistake, the business was too complex for you. In other words, Munger and Buffett like to understand why they made a mistake so they can learn from the experience. If you cannot understand the business, then you cannot determine what you did wrong. If you cannot determine what you did wrong, then you cannot learn. If you cannot learn, you will not know what you’re doing, which is the real cause of risk.
The most extreme mistakes in Berkshire’s history have been mistakes of omission. We saw it, but didn’t act on it. They’re huge mistakes—we’ve lost billions. And we keep doing it. We’re getting better at it. We never get over it. There are two types of mistakes: 1) doing nothing—what Warren calls “sucking my thumb” and 2) buying with an eyedropper things we should be buying a lot of.
Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect, but that’s what it’s all about.
Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the
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Professor Robert Cialdini has pointed out that, “People will help if they owe you for something you did in the past to advance their goals. That’s the rule of reciprocity.”8
One should recognize reality even when one doesn’t like it.
People tend to vastly overestimate their own capabilities. This is a huge problem for many investors and a major part of the reason why staying within a circle of competence is so important. This book has made the point repeatedly that the most effective way to genuinely reduce risk is to know what you’re doing.
One odd fact of life is that people tend to follow famous investors into deals even though the famous person is not even remotely famous for his or her investing skill. Learning to ignore the crowd and think independently is a trained response.
Investors have a tendency to make decisions based on what they can easily recall. The more vivid and memorable the event, fact, or phenomenon may be, the more likely it will be used by the investor in making a decision—even if what is being recalled is not the best data on which to make a decision.
This tendency is pretty simple to understand; a skill degrades unless it is practiced regularly. For example, flying an airplane is not something you should do once in a while. If you’re not flying often as a pilot, you should not be flying as a pilot. Similarly, investing is not something you want to do once in a while. In the context of investing, it is both a fact of life and a shame that so many people spend more time picking out an appliance than picking an investment or investment fund.
Three things ruin people: drugs, liquor, and leverage. —CHARLIE MUNGER,
His timeless advice in every setting is to avoid situations with a massive downside and a small upside (negative optionality).
It is far better to wear out from work than rust out from inactivity.
It’s obvious that if a company generates high returns on capital and reinvests at high returns, it will do well. But this wouldn’t sell books, so there’s a lot of twaddle and fuzzy concepts that have been introduced that don’t add much.
A scam artist might say, “You should buy this penny gold-mining stock because it is wedding season in India” or “The weather in South Africa has been poor, and that is great news for gold mines in the United States.” Yet another example would be a meaningless pattern in a chart of stock prices that has been given a name, like a “death cross.” Even panhandlers know to put the reason they need money on their cardboard signs. Just because someone gives you a reason for doing something stupid does not make it smart.
Narrative fallacy
you don’t need to have exactly the same attributes as these two longtime partners to marginally improve your skills as an investor. You can improve your ability to read, think, learn, avoid mistakes, and pay attention to the personal attributes that drive success.
Success means being very patient but aggressive when it’s time. —CHARLIE MUNGER, BERKSHIRE ANNUAL MEETING, 2004
Charlie Munger would be a great poker player.
We don’t feel some compulsion to swing. We’re perfectly willing to wait for something decent to come along. In certain periods, we have a hell of a time finding places to invest our money. —CHARLIE MUNGER, BERKSHIRE ANNUAL MEETING, 2001
The probability that you will encounter an asset that can be purchased at a significant discount from private market value is significantly higher when Mr. Market is fearful. However, Munger believes that predicting exactly when this will happen is impossible.
“Don’t just sit there; do something,” is precisely the wrong advice for a Graham value investor.
Buffett has said that the stock market is designed to transfer money “from the active to the patient.”1
the Graham value investing system is a discovery-based process rather than a prediction-based process.
The approach Munger suggested was to patiently “slug it out” day-by-day, preparing for occasional fast spurts. The idea that one can make a lot of money in just a few instances after being patient in other instances is something Munger developed playing poker in the U.S. Army. Munger ascribes no small amount of his financial success in investing to the time he spent playing poker and bridge.
At a fundamental level, investing is just one form of making a bet. It is essential, however, that the bet be made in a way that is investing (net present value positive) rather than gambling (net present value negative).
Bridge requires a continual effort to assess probabilities in at best marginally knowable situations, and players need to make hundreds of decisions in a single session, often balancing expected gains and losses. But players must also continually make peace with good decisions that lead to bad outcomes, both one’s own decisions and those of a partner. Just this peacemaking skill is required if one is to invest wisely in an unknowable world.
If you don’t get elementary probability into your repertoire, you go through a long life like a one-legged man in an ass-kicking contest. —CHARLIE MUNGER, UNIVERSITY OF SOUTHERN CALIFORNIA (USC) SCHOOL OF BUSINESS, 1995
We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. —CHARLIE MUNGER, KIPLINGER, 2005
This is what I'm most jealous about
I think it’s possible for a great many people to live a life like that where there isn’t much risk of disaster and where they’re virtually sure to get ahead a reasonable amount. It takes a lot of judgment, a lot of discipline, and an absence of hyperactivity. By this method, I think most intelligent people can take a lot of risk out of life. —CHARLIE MUNGER, WESCO ANNUAL MEETING, 2002
