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Kindle Notes & Highlights
by
Gautam Baid
Read between
August 16, 2023 - January 13, 2024
When in doubt about a stock after a sudden sharp move on either side, look at the volumes. The collective wisdom of the market will guide you in the right direction most of the time.
Wat bedoelt hij? Als er veel volume is, is het geen uitschieter?
how can investors determine the optimal size of the individual bet? The Kelly criterion gives us the answer.
Risk management should take a higher precedence in the investment process, and risk-adjusted returns are a far superior indicator of performance than absolute returns. This is especially true during bull markets, when aggressive risk taking often is mistaken for intelligence.
The best long-term performers in any probabilistic field, including investing, always emphasize process over outcome.
There are old investors, and there are bold investors, but there are no old bold investors.
Cash is a call option on opportunity.
Cash is a much-underappreciated asset. It’s one of the only price-stable assets that is simultaneously highly value-elastic: cash increases in value as other asset prices drop. The more they drop, the more valuable cash becomes.
“The most important question to ask when thinking about risk isn’t how much volatility or upside you’re looking for, but how much time your emotions and goals need for that volatility to play out
Life, business, and investing are games of probabilities, and almost all probabilities are less than 100 percent. So you are going to be wrong and lose sometimes, even when the odds are in your favor. As Peter Bernstein says, “You just have to be prepared to be wrong and understand that your ego had better not depend on being proven right. Being wrong is part of the process. Survival is the only road to riches.”
The key to a lifetime of investment success is not to make brilliant or complex decisions but to avoid doing foolish things.
Reverse, always reverse
Emotions cannot be back-tested; that’s why all previous bear markets and the accompanying cheap stock valuations prevailing at those times look like cinch opportunities only in hindsight.
The stock market is the only market in which things go on a fire sale and people run out of the store.
Investors should not obsess over high-frequency macro indicators. Simply focus on individual businesses and their industry developments. That’s the best one can do. Nothing more. Always remain humble and be intellectually honest.
Quite often, we are surprised by something that hasn’t happened yet in our lifetime, even though the so-called unprecedented event may have taken place many times before in history. Instead of engaging in futile attempts to predict the future, we should try to diligently learn as much as possible from the past. Study history and obtain relevant base rates, that is, historical data on relevant statistical groups over longer time horizons.
During the usual periodic sharp corrections and the occasional recessions, keep Paul Harvey’s words in mind: “In times like these, it helps to recall that there have always been times like these.”
In many of these cases, investors believed they were taking part in an adventure that would reinvent the world. (When it comes to investments, the romantic appeal of being a party to a technological revolution or an entirely new industry or invention often dominates profit considerations in investors’ minds.)
The big picture is that software is eating the world—that is, many of the products and services developed over the past 150 years are transforming into, or being disrupted by software…. The implications are enormous; software is infinitely replicable and, through the internet, can be delivered at zero marginal cost. When a major input to business—distribution cost—goes to zero, entire industries get disrupted [emphasis added]. When one can build a business model from the ground up with entirely new assumptions, one can attack incumbents in a way that is very difficult to defend. —Marcelo Lima
Andersom gesteld: zodra de software die daadwerkelijk waarde toevoegt aan een bedrijf minder schaars wordt verdwijnt ook een deel van de meerwaarde van de bedrijven die op deze asset gebouwd waren.
One of the surest ways to go broke is to keep getting an increasing share of a shrinking market. This is a slow but sure death. It is gradual, then sudden.
The balance between confidence and humility is best learned through extensive experience and mistakes. Always respect the person on the other side of the trade and ask yourself, Why does he or she want to buy or sell? What does he or she know that I don’t? You must be intellectually honest with yourself at all times.
For many years, Buffett called himself an “aeroholic” and expressed serious reservations about investing in airline stocks. Then, in 2016, Berkshire Hathaway revealed holdings in not one but four airline stocks. Observe the remarkable flexibility in Buffett’s thinking. When the industry dynamics of the airline sector changed, Buffett promptly changed his mind, after an objective and dispassionate consideration of the new facts.
Before paying an exorbitantly high price-to-earnings (P/E) multiple for a business, one should study the historical averaged-out experience of paying such prices.
It’s natural to be drawn to the inside view. It’s usually concrete and filled with engaging detail we can use to craft a story about what’s going on. The outside view is typically abstract, bare, and doesn’t lend itself so readily to storytelling. So even smart, accomplished people routinely fail to consider the outside view
Harvey Firestone describes such individuals in his book Men and Rubber: “The test of a business man is not whether he can make money in one or two boom years, or can make money through the luck of getting into the field first, but whether in a highly competitive field, without having any initial advantage over his competitors, he can outdistance them in a perfectly honorable way and keep the respect of himself and of his community.”22
More data do not result in more insights. Often, they just lead to bad judgment. The scarcest resource for successful investors is not money but attention—how to manage the trade-off between time and rationality to best effect.
you must understand the opposite side of the argument better than the person holding that side does. Your opinion is more credible when you also can clearly articulate the contrary view.
Investors often talk about risk-adjusted returns but rarely about stress-adjusted returns. In my view, the latter matters more.
Capital is finite and always carries an opportunity cost, which is what you can do with the next best alternative. If your next best alternative is 1 percent, your opportunity cost is 1 percent, and if it is 10 percent, the cost is 10 percent, no matter what some formula created in academia might say. Always remember: the highest and best use of capital should always be measured by the next best possible use.
Investors need to regularly review their estimate of the expected long-term return from a stock based on the current market price. If it falls below the return available on existing passive income instruments, then it is time to replace that stock with a superior one.
If I am going to add a new position to my portfolio, it needs to be “significantly better” than what I already own.
Don’t diversify just for the sake of it. Avoid adding anything to your life, your investment portfolio, or your business unless it makes them better.
The process for me has always been to ask the question Why? and wait. Because the mind will tend to jump to a certain answer, and that’s not the only answer. So the way I think about it is, wherever there is a complex question I am trying to answer, I always start with the words “Part of the reason is this”—which means there must be other parts too. I’d like to think about what those parts might be. There don’t have to be twenty of them—even if there are three or four of them, that’s better than one.
The wording “advances from customers” in an annual report is a good cue to start digging.
“intangible investments have surpassed property, plant, and equipment as the main avenue of capital creation for U.S. companies.”4 Yet all these intangible assets are absent from the balance sheet, and thus analysts cannot form accurate opinions about firms’ earning potential.
most investors fail to distinguish between risk and uncertainty. When they encounter uncertainty, they equate it with risk and shun the stock in question. This creates great buying opportunities for value investors who shun risk (permanent loss of capital) but seek uncertainty on highly favorable terms (a large margin of safety).
According to Adam Parker, former U.S. equity strategist at Morgan Stanley, the impact of sector-specific factors on a typical stock’s annual return accounts for more than half of a stock’s performance.
Use screening tools to short-list companies with a large recent increase in capital work in progress on their balance sheet.
In a nonlinear world, we all think linearly. Promoters. Managements. Investors. Analysts. But Munger looks for lollapalooza effects. George Soros seeks to profit from reflexivity. Nassim Taleb emphasizes the presence of fat tails. Peter Thiel talks about power laws. All of them are looking to arbitrage between the linear environment in which we evolved and the nonlinear environment that we have created.
You can borrow someone’s idea, but you will never be able to borrow their conviction.
Choose the right people, then clone their behavior, thinking, process, and orientation—and never blindly their ideas—and you will become like them over time
I should have noted that a stock that is down 95 percent first falls 90 percent and then goes down 50 percent more. (One of the worst ways to identify undervalued stocks is using the distance from the fifty-two-week high price. But it is also one of the easiest and, hence, most frequently used methods among investors.)
After buying a stock, forget what you paid, or this knowledge will forever affect your judgment.
Successful investing is investing that lets you sleep peacefully at night. Success is not about who makes the highest returns or who makes the most money. It is about achieving our financial goals in a timely manner with the lowest possible risk.
Investors should learn the big lesson from Buffett’s insurance underwriting practices: always think in terms of expected value. Be risk averse but do not be loss averse, that is, do not be afraid to take calculated risks. Investing is not a business in which every investment is profitable.
We spend a lot of time focusing on compounding our financial capital, but we overlook the fact that social and intellectual capital also compound.
Our mind automatically generates thoughts related to the information we consume. Even if we’re adept at avoiding negativity and have trained ourselves to be relentlessly positive, when it comes to sensationalism, our basic nature can’t resist.
Inhale blessings. Exhale gratitude. Gratitude is the most effective path to find contentment. If you need to wake up early as a parent, you should feel grateful for having children to love. If you need to clean or repair your home, you should feel grateful for having a place to live. If you have laundry chores to take care of, you should feel grateful for having clothes to wear. If you have dishes to clean, you should feel grateful for having food to eat. If you feel tired in bed, you should feel grateful for being alive in this beautiful world.
Persistence is more important than knowledge. You must persevere if you wish to succeed. Knowledge and skill can be acquired through study and practice, but nothing great comes to those who quit.
The real question isn’t “Who am I?” The real question is “Who am I becoming?” We are constantly evolving, but the person you will be in the next five to ten years is feeding on the habits and decisions you make today.
“What Does a Price-Earnings Multiple Mean? An Analytical Bridge between P/Es and Solid Economics,”
“Was Warren Buffet Right: Do Wonderful Companies Remain Wonderful?”HOLT Wealth Creation Principles, June 2013,
