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It’s simple but not easy. It involves a lot of hard work, patience, discipline, and focus.
Self-improvement is the ultimate form of investing in oneself. It requires devoting time, money, attention, and hard effort now for a payoff later, sometimes in the far distant future. A lot of people are unwilling to make this trade-off because they crave instant gratification and desire instant results. These short-term costs,
Formal education will make you a living; self-education will make you a fortune. —Jim Rohn
An hour’s time spent acquiring in-depth knowledge about an important principle pays off in the long run. This current investment is minuscule compared with the significant net present value that results over a lifetime. It is akin to buying a dollar for less than one cent. This is why good books are the most undervalued asset class: the right ideas can be worth millions, if not billions, of dollars over time. Time is a resource that becomes increasingly scarce for everyone with each passing second. Learn to
As Munger says, “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time—none, zero. You’d be amazed at how much Warren reads—at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
The true scarce commodity of the near future will be human attention. —Satya Nadella
The man who doesn’t read good books has no advantage over the man who cannot read them. —Mark Twain
As Cicero said, “Nothing so much assists learning as writing down what we wish to remember.”
In a 2017 interview, AngelList cofounder and CEO Naval Ravikant said, “I don’t know about you, but I have very poor attention. I skim. I speed read. I jump around. I could not tell you specific passages or quotes from books. At some deep level, you do absorb them and they become part of the threads of the tapestry of your psyche [emphasis added].”10 It is this development of the “tapestry of the psyche” that really matters a lot in becoming a wiser person over time.
First Principles Thinking As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble. —Harrington Emerson
Even people who aren’t geniuses can outthink the rest of mankind if they develop certain thinking habits. —Charlie Munger Five words separate the good from the great: flawless execution of the fundamentals.
First principles are the origins or the main concepts that cannot be reduced to anything else. Over two thousand years ago, Aristotle defined a first principle as “the first basis from which a thing is known.” These are the fundamental assumptions that we know are true. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it. —Jeff Bezos First principles thinking is
The Feynman technique has four simple steps: 1. Pick and study a topic. 2. Take out a blank sheet of paper and write at the top the subject you want to learn. Write out what you know about the subject as if you were teaching it to someone who is unfamiliar with the topic—and not your smart adult friend but rather a ten-year-old child who can understand only basic concepts and relationships. 3. When you must use simple language that a child can understand, you force yourself to understand the concept at a deeper level and to simplify relationships and connections among ideas. If you struggle,
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Understand and practice the following if you want to become a good investor: 1. Look at stocks as part ownership of a business. 2. Look at Mr. Market—volatile stock price fluctuations—as your friend rather than your enemy. View risk as the possibility of permanent loss of purchasing power, and uncertainty as the unpredictability regarding the degree of variability in the possible range of outcomes. 3. Remember the three most important words in investing: “margin of safety.” 4. Evaluate any news item or event only in terms of its impact on (a) future interest rates and (b) the intrinsic value
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Knowledge is overrated. Wisdom is underrated. Intellect is overrated. Temperament is underrated. Outcome is overrated. Process is underrated. Short-term outperformance is overrated. Long-term adherence to one’s investment philosophy is underrated. Gross return is overrated. Stress-adjusted return is underrated. Upside potential is overrated. Downside protection is underrated. Maximization of returns is overrated. Avoidance of ruin is underrated. Growth is overrated. Longevity is underrated. Entry multiple is overrated. Exit multiple is underrated. Price-to-earnings ratio is overrated. Duration
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And investing is a liberal art that involves cross-pollination of ideas from multiple disciplines.
Marcel Proust said, “The real voyage of discovery consists not in seeing new sights, but in looking with new eyes.”
Chinese proverb goes, “I forget what I hear; I remember what I see; I know what I do.”
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. A multiple-model approach that is only approximately right will produce a far better outcome in anything that involves people or a social system. —Tren Griffin
Munger talked about the importance of cultivating a broad-based general awareness during his 1995 speech at Harvard University: “Man’s imperfect, limited-capacity brain easily drifts into working with what’s easily available to it, and the brain can’t use what it can’t remember or what it is blocked from recognizing because it’s heavily influenced by one or more psychological tendencies bearing strongly on it.”
Bertrand Russell rightly said, “Most people would rather die than think, and many of them do.” Without great solitude no serious work is possible. —Pablo Picasso
having a purpose in life (figure 4.1). FIGURE 4.1 Ikigai. Source: Thomas Oppong, “Ikigai: The Japanese Secret to a Long and
Fifty years ago, the best investors were the ones with an informational edge. Today, the best investors are the ones with a behavioral edge.
We live in a society in which inactivity is often frowned upon, but part of our focus should be not just on doing but also on deeply understanding the parameters of what we need to do, now and in the future.
Many people would see this as totally unproductive, but many of my best business solutions and money problem answers have come from periods of just sitting and thinking. —Warren Buffett
One of the best hacks in the investment field is learning to be happy doing nothing.
Investing isn’t just a process of wealth creation; it is a source of great happiness and sheer intellectual delight for the truly passionate investor.
Instead of merely trying to live a long life, we should endeavor to infuse life into our lives.
Life is but a pause between the first breath and the last. The only thing you can guarantee at somebody’s birth is his or her death; everything else is unpredictable. They say life is a journey from B to D, that is, from birth to death. But what about the C that comes between B and D? It is choice. Our life is a matter of choices. Choose what makes you happy and your life will never go wrong.
Acknowledging what you don’t know is the dawning of wisdom. —Charlie Munger
A ccording to Confucius, real knowledge is knowing the extent of one’s ignorance,
The wiser we become, the more we realize how little we know. A lesser-known (and one of my all-time favorite) equation from Albert Einstein rings true: “Ego = 1 / Knowledge.
Winning big makes many of us feel invincible, and that feeling entices us to bet big on what worked for us in the recent past. This ends up creating a catastrophic event when the world changes or luck turns against us. Housel writes: It goes like this. The more successful you are at something, the more convinced you become that you’re doing it right. The more convinced you are that you’re doing it right, the less open you are to change. The less open you are to change, the more likely you are to tripping in a world that changes all the time. There are a million ways to get rich. But there’s
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The most fundamental attribute of financial markets is uncertainty.
In science, “I don’t know” is not an indication of a failure but rather is a necessary first step toward enlightenment.
Investors are often too anxious to jump to conclusions that support their original thinking. Confirmation bias is difficult to resist.
Just as Williams only swung at pitches in his sweet spot, Buffett only invests in companies that are within his “circle of competence,” a concept he described for the first time in his 1996 letter to shareholders: “What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital
The key idea behind the circle of competence is not its size—the absolute number of businesses you can understand—but your awareness about its size—the kind of businesses you know you can understand. It is not important how big that circle is. What matters is how well you have defined its perimeter. Investors who are intellectually honest and humble are always willing to admit their limitations and to stay within their area of expertise.
If you can’t find businesses within your circle of competence, don’t hurriedly step outside that circle because of the fear of missing out, which is often the case in a bull market. Instead, spend time studying industries and companies outside your circle before crossing the boundaries. The
No single strategy works all of the time and in every kind of market. That’s why it’s essential to build up one’s investing arsenal to be able to hunt for value from within different areas.
New trends always emerge during a bear market—that’s the period during which most investors are either waiting for their purchase price or are busy committing fresh sins by averaging the winning leader stocks bought during the previous bull market.
As Feynman says, “The first principle is that you must not fool yourself—and you are the easiest person to fool.”
Take a simple idea and take it seriously. —Charlie Munger The simple ideas with intensity of pursuit is what gets you to the promised land. —Mohnish Pabrai
In the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand. —Benjamin Graham
Einstein also recognized the power of simplicity, and it was the key to his breakthroughs in physics. He noted that the five ascending levels of intellect were, “Smart, Intelligent, Brilliant, Genius, Simple.” For Einstein, simplicity was simply the highest level of intellect.
As investors, our job is simply to compound capital over time at the highest possible rate with the minimum amount of risk.
Investing is not about being original or creative; it is about looking for the greatest amount of value (for the price paid) with the least amount of risk.
We should restrict ourselves only to those cases in which the investment decision looks like a no-brainer. As Charlie Munger says, “The goal of investment is to find situations where it is safe not to diversify.”5
The P/E ratio in isolation, however, tells us nothing about the business’s capital intensity, cash flow generation, management quality, or balance sheet strength, or about the expected duration of its competitive advantage period. There’s a lot more to making money in the stock market than just looking at P/E ratios. (Every investor should diligently study the white papers titled “What Does a Price-Earnings Multiple Mean?” and “The P/E Ratio: A User’s Manual” by Michael Mauboussin and Epoch Investment Partners, respectively.
Complexity is about tactics; simplicity is about systems. Tactics come and go but an overarching philosophy about the way the world works can help you make better decisions in multiple scenarios. Simple doesn’t go out of style but complex does. —Ben Carlson
