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The game inventor requested one grain of rice for the first square of his chess board, two grains for the second square, four for the third, and so on, all the way to the sixty-fourth square. The king, who was arithmetically challenged, granted the request. Pabrai, who is not arithmetically challenged, says the king owed 18,446,744,073,709,551,615 grains of rice, now worth around $300 trillion.
As Buffett observed, “The only reason that one may not understand a financial statement is because the writer does not want you to understand it.”
“Take up one idea. Make that one idea your life. Think of it, dream of it, live on that idea. Let the brain, muscles, nerves, every part of your body, be full of that idea and just leave every other idea alone. This is the way to success.”
The strength of this philanthropic model is that it costs so little to change so many lives. In 2008, Dakshana’s total cost per scholar was $3,913, and 34 percent of its students won places at IIT. By 2016, Dakshana had become so efficient that its cost per student had dropped to $2,649, and its success rate hit an astonishing 85 percent. Even better, the government heavily subsidizes both the boarding schools and IIT: Pabrai figures that for every dollar Dakshana spends on a student, the government spends more than $1,000. So he’s effectively making a leveraged bet with an enormous social
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Templeton had a spectacular investment record. The Templeton Growth Fund, which he’d founded in 1954, racked up an average annual return of 14.5 percent over thirty-eight years. A $100,000 stake would have grown to more than $17 million in that time.
Templeton’s affection for math reinforced his conviction that patience pays. To illustrate this, he mentioned the tale of Dutch immigrants buying Manhattan for $24 in 1626.* If the Native American sellers had invested this derisory sum at 8 percent a year, he said, they would have “enormously more than the total value of Manhattan today, including all the buildings.”
the best way to find bargains is to study whichever assets have performed most dismally in the past five years, then to assess whether the cause of those woes is temporary or permanent.
The Wall Street sales machine moved into overdrive, hyping and hawking any half-credible rubbish that naive, greedy, or reckless investors might be willing to buy. It was a classic outbreak of investment insanity—loads of fun until someone loses an eye. Templeton knew that this tragicomedy would end in tears. After all, he had often cautioned that the four most expensive words in the English language are “This time is different.”
the average annual return for stocks from 1926 to 1987 was 9.44 percent, but “if you had gone to cash and missed the best 50 of those 744 months, you have would have missed all of the return. This tells me that attempts at market timing are a source of risk, not protection.”
“Will the financial system melt down or is this merely the greatest down cycle we’ve ever seen? My answer is simple: we have no choice but to assume that this isn’t the end, but just another cycle to take advantage of.” With characteristic dry humor, he added, “Most of the time, the end of the world doesn’t happen.”
“I always look at things in terms of ‘Where’s the mistake? Is the mistake in buying or not buying?’” says Marks.
“Financial independence doesn’t come from making or having a lot of money,” says Marks. “You know what it comes from? Spending less than you make. Living within your means. It’s important to know that your anti-fragility comes from the extent to which you are not at the limit.” The trouble is, we tend to forget this when we’re thriving—or when we’re watching others thrive while we lag behind. So we edge closer to our limits and eventually stray beyond them.
“It’s much warmer inside the herd.”
From January 1997 to March 2000, the tech-heavy Nasdaq index rose 290 percent, fueled by a mania for internet and telecom stocks. To appreciate the thrilling absurdity of those times, consider the rise and fall of theGlobe.com: the social media site went public in 1998, saw its stock price surge 606 percent on its first day of trading, and was delisted by Nasdaq in 2001 when the stock was languishing below $1. Or consider the fate of eToys: the online retailer went public in May 1999 at $20 per share, peaked at $84 that October, and went bankrupt eighteen months later. Or consider Cisco
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The mutual fund business can be marvelously profitable. It’s not capital intensive, and it boasts unusually high operating margins.
Thou shalt not depend on the kindness of strangers.
if you lose 50 percent on an ill-considered bet, you’ll need a 100 percent gain just to get back to where you started.
The future is so “intrinsically uncertain” that investors should focus heavily on avoiding permanent losses and building “a portfolio that can endure various states of the world.”
an investor surveying the world in, say, 1908–11, had every reason to feel confident about the future. The global economy had enjoyed a long period of unprecedented growth. Asset values seemed reasonable. And it was widely believed that inflation had been vanquished. Why worry? Then all hell broke loose. The unsinkable Titanic sank on its maiden voyage in 1912—a reminder that man cannot tame nature. An assassination by a Bosnian revolutionary triggered a chain reaction that precipitated the outbreak of World War I in 1914. The New York Stock Exchange closed for four months during the war, and
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“You want to be structured to participate in the march of mankind, but to survive the dips along the way.” That’s a useful maxim for investing and life.
“Success carries within it the seeds of failure.”
when it comes to investing, beauty often lies in mundanity, not glamour.
instead of fixating on short-term gains or beating benchmarks, we should place greater emphasis on becoming shock resistant, avoiding ruin, and staying in the game.
Nietzsche warned, “Stare too long into the abyss and you become the abyss.”
In practical terms, the ability to reduce complexity is immensely valuable. Just think for a moment about the Old Testament, which contains no fewer than 613 commandments. Who can remember so many rules, let alone obey them all? Maybe that’s why we needed a top ten list.
if a company doubles its earnings per share in the next five years, he believes the stock price is also likely to double (more or less). This generalization is easy to dismiss because it sounds suspiciously simplistic. But remember: investing isn’t like Olympic diving, where the judges award extra points for difficulty.
“For every company, there are a few key investment variables,” he says, “and the rest of the stuff is noise.” The pattern is clear. In their own ways, Greenblatt, Buffett, Bogle, Danoff, and Miller have all been seekers of simplicity.
As proponents of the efficient-market theory, they claimed that stock prices incorporate all of the information that’s publicly available. As they saw it, the interaction between knowledgeable buyers and sellers results in stocks being priced efficiently at their fair value, which means that it’s futile to hunt for bargains.
self-delusion is a costly habit in extreme sports such as skydiving and stock picking.
“Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.”
“That was luck,” he says. “But we set ourselves up to get lucky.”
Cheap + Good = The Holy Grail
“If you’re very cheap in buying, it’s hard to be as comfortable when something has doubled or tripled, even if it’s still good.”
Greenblatt needed a shorthand measure of cheapness and quality. So he chose two metrics as a rough gauge of these essential traits. First, the company should have a high earnings yield—an indication that it generates lots of earnings relative to its price. Second, it should have a high return on tangible capital—an indication that it’s a quality business that effectively converts fixed assets and working capital into earnings.
After The Little Book was published in 2005, Greenblatt began to realize how difficult it was to execute the plan he’d recommended to his readers. He and his kids tried doing it, but found it tricky to keep track of so many trades. He adds, “I got literally hundreds of emails from people saying, ‘Hey, thanks for the book. Can you just do this for me?’” He also worried that some readers might harm themselves by using unreliable corporate data pulled from the internet or by messing up the calculations when they tried to apply his formula.
“They made all the faux pas that investors do,” says Greenblatt. “When the market went up, they piled in. When it went down, they piled out. When the strategy was outperforming, they piled in. When the strategy was underperforming, they stopped doing it.”
As Greenblatt puts it, “One of the beauties of the pain that people have to take in underperformance is that, if it did not exist, everyone would do what we do.”
