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One of the hardest things to do in life is to avoid good opportunities so that you have time to devote to great opportunities—and having the wisdom to know the difference.
The difference between successful people and very successful people is that very successful people say no to almost everything. —Warren Buffett When you say no, you are saying no only to one option. When you say yes, you are saying no to every other option. So be careful to what and to whom you say yes.
Every day we have the opportunity to make choices and shape our future; every day is the first day of the rest of our lives.
Let’s be honest. We don’t know for sure what makes us successful. We can’t pinpoint exactly what makes us happy. But we know with certainty what destroys success or happiness. This realization, as simple as it is, is fundamental: Negative knowledge (what not to do) is much more potent than positive knowledge (what to do). —Rolf Dobelli
It is very simple to be happy, but it is very difficult to be simple. —Rabindranath Tagore
Minimalism is basically an extension of simplicity—you not only take things from complex to simple but also try to get rid of anything that is unnecessary.
There is no path to peace. Peace is the path. —Mahatma Gandhi
True wealth is measured in terms of personal liberty and freedom, not monetary currency. Money alone does not signify independence. Control over time does.
I saw that it was the artificial needs of life that made me a slave; the real needs of life were few. —William James Dawson
George Lorimer: “It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure that you haven’t lost the things that money can’t buy
To be yourself in a world that is constantly trying to make you something else is the greatest accomplishment. —Ralph Waldo Emerson
He never forgot his teacher Ben Graham’s words: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
A true contrarian is one who reasons independently, from the ground up, based on factual data, and resists pressure to conform.
Let your life be guided by internal principles, not external validation. Self-respect beats social approval.
People who arbitrage time will almost always outperform. The first order thought of instant gratification is a crowded path, ensuring mediocre results at best. Delayed gratification, which requires second order thinking, is less crowded and more likely to get results. —Shane Parrish
Charlie Munger has always been a big proponent of delayed gratification. He has emphasized the importance of patience and being prepared to act at scale when great opportunities arise. These are rare and fleeting, so we need to be patient, prepared, and decisive to seize them.
It is why Munger has said, “It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities
The businesses that buy commodities and sell brands and have strong pricing power (typically depicted by high gross margins) should always remember that possessing pricing power is like having access to a large amount of credit.
Reducing your desires has the same effect as increasing your wealth, but with no downside risk. Being content in life and having fewer needs enables you to be happy in any situation. And that is real wealth and freedom. It is why Epictetus said, “Self-sufficiency is the greatest of all wealth. Wealth consists not in having great possessions, but in having few wants.”
Buying business ownership on your own terms. This is what Graham was referring to when he talked about an investor’s “basic advantage.” It is important to choose our battles wisely, and we should choose those for which the odds of winning are clearly in our favor. Life often does not give us an opportunity to choose our battles, but the stock market gives us the invaluable flexibility of choosing not only the battle we want to fight but also, in many cases, the battleground and the timing of the fight as well. Human beings are a messy living compilation of a multitude of cognitive and
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Opportunity to shoot rare, fast-moving elephants. That which is rare is considered valuable. In the past, I gained access through the stock market to Bharat Financial Inclusion’s low-cost leadership in India’s microfinance industry, Eicher Motors’s coveted Royal Enfield franchise, Can Fin Homes’s pristine asset quality, HEG’s strongly guarded proprietary technology in graphite electrodes, Bhansali Engineering Polymers’s leadership position in India’s acrylonitrile butadiene styrene (ABS) market, and CCL Products’s deeply entrenched relationships with coffee makers worldwide. Today, the stock
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Par value. The par value of a stock is the book value of its equity. This is an accounting value that approximates the value of a business to its shareholders if it were to stop operations immediately—that is, it does not account for future growth. It is the difference between what a company owns (assets) and what that company owes to others (liabilities). Buffett has cautioned investors not to confuse book value with intrinsic value: “Of course, it’s per-share intrinsic value, not book value, that counts. Book value is an accounting term that measures the capital, including retained earnings,
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Be passionate about the business but dispassionate about the stock. Celebrate the big successes of your businesses and reflect on their failures.
After a success, we become overly optimistic risk takers. After a failure, we become overly pessimistic and risk averse. This happens even in cases in which success or failure was merely a result of chance. We do not improve the man we hang; we improve others by him.
As Demosthenes said, “What a man wishes, he will believe.”
As Buffett has said, “What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.”
As Karl Popper said, “The aim of an argument, or of a discussion, should not be victory, but progress.”
Research studies show that this bias could be due to the fact that challenging mental activities require more of the body’s basic fuel, glucose. When we avoid hard thinking, we save mental energy. We are programmed to be lazy and are naturally inclined to follow the path of least resistance, that is, doing what is easy rather than doing what is required.
Many times, the data refutes the anecdotes, but people still prefer to believe the latter. People’s minds usually don’t change with data when the subject matter is an emotional or political issue for them.
“Better to remain silent and be thought a fool than to speak and remove all doubt.”
Checklists are a systematic way to engage the rational brain, and, for investors, they can be highly effective vaccines against what Guy Spier calls the “cocaine brain”: “You go into the greed mode. … Neuroscientists have found that the prospect of making money stimulates the same primitive reward circuits in the brain that cocaine does.”3
Observe all men; thy self most. —Benjamin Franklin It is wisdom to know others. It is enlightenment to know one’s self. —Lao Tzu If most of us remain ignorant of ourselves, it is because self-knowledge is painful and we prefer the pleasures of illusion. —Aldous Huxley
Memory generally is a product of our preconceived notions and personal biases, that is, what makes sense to us and how that belief fits into our picture of the world. Any information that conflicts with this subjective interpretation is discarded by the brain’s grey matter. In other words, our minds are drawn to what feels true, not to what is necessarily so.
A decision journal helps you collect accurate and honest feedback on what you were thinking when you made decisions. This feedback helps you realize when you were just plain lucky. Sometimes things work out well for very different reasons than we initially envisaged. The key to understanding the limits to our knowledge is to check the results of our decisions against what we thought was going to happen and why we thought it was going to happen. This feedback loop is incredibly important, because the mind won’t provide it on its own. We don’t know as much as we think we know. We are fooled into
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As Robert Heinlein writes, “man is not a rational animal; he is a rationalizing animal.”
The best investors make a habit of putting procedures in place, in advance [emphasis added], that help inhibit the hot reactions of the emotional brain. —Jason Zweig
As legendary Chinese general Sun Tzu aptly put it, “Battles are won [or lost] before they are fought.” A premortem is an investigation of a bad outcome, but before it happens.
The iron rule of life is that you get what you reward for. People follow incentives the way ants follow sugar.
Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage. —Peter Lynch
Not everything that counts can be counted, and not everything that can be counted counts. —Albert Einstein
As Benjamin Graham said, “The combination of precise formulae with highly imprecise assumptions can be used to establish, or rather to justify, practically any value one wishes.”5 Never underestimate the power of incentives. The world cannot be understood without numbers. At the same time, it cannot be understood with numbers alone. Relying solely on complex quantitative analysis can divert our attention away from things that really matter.
Over the years, I have come to appreciate the fact that investing is a field of simplifications and approximations rather than of extreme precision and quantitative wizardry. I also have realized that investing is less a field of finance and more a field of human behavior. The key to investing success is not how much you know but how you behave. Your behavior will matter far more than your fees, your asset allocation, or your analytical abilities. Even low-cost index funds won’t be able to help you if you succumb to behavioral biases. Most of the time, the real risk is not in the markets but
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“You can get in way more trouble with a good idea than a bad idea, because you forget that the good idea has limits.”
expensive is expensive for a reason and cheap is cheap for a reason.
An irrational fall in price makes a stock cheaper. A rational fall in price makes a stock more expensive. Many of the high dividend-yield stocks in expensive markets eventually turn out to be value traps and destroy wealth. When you see a deep value stock suddenly break down on high volumes with no visible explanation, take notice. You are likely observing a value trap. Value traps are businesses that look cheap but actually are expensive. This could happen for a variety of reasons:
Always keep Thomas Phelps’s words in mind: “Remember that a man who will steal for you, will steal from you.”14 Avoid partnering with such forms of management even if it comes at the cost of missing an opportunity. The notional loss from not capitalizing on an opportunity can be made up any time, but the eventual realized loss from partnering with a crook is permanent and irrecoverable.
A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world. —Seth Klarman
It takes a fairly short time to learn how to make money, but it takes a lifetime to learn how to not lose it. A margin of safety in investing is necessary to avoid “compounding in reverse.”
If you plan to hold a share for the long term, the rate of return on capital it generates and can reinvest at is far more important than the rating you buy or sell at. —Terry Smith
Investors are better off with a few solid long-term choices than flitting from one speculation to another, always chasing the latest hot stock in the market. (Better to have a few good, long-term friends rather than changing your friends every week for short-term advantage.) The gap between price and value ultimately will determine our returns, but picking the right business is possibly the most important step in reducing errors.
