ne plus ultra (nothing more beyond)
The intelligent investor is a realist who sells to optimists and buys from pessimists. - Benjamin Graham, The Intelligent Investor
The best investors are worth studying as they are practical philosophers, those seeking worldly wisdom that can be transmuted to wealth creation. Their influence and practices can help one become a better thinker and decision maker. The purpose of this essay is to share ideas worth adopting.
Studying investing is not only about learning how to make money, but learning how to think and make decisions. Learning how to think by probability will do one more good than any book on investing. A dispassionate analysis of the facts and probabilities is one of the best mental habits one can build. They key lies in understanding how to optimize the odds for success.
Game selection is key. If one doesn’t have an edge, don’t play. There are many ways to make money, but they all require an edge. Clone the best ideas and habits of the giants (Buffet, Icahn, Dalio, Simon etc). People have a bug in their DNA where they feel shameful stealing the best ideas of others, this is ridiculaous - steal what is necessary to WIN. Clone the best ideas but be open to personalizing it to personality and context. Whenever one comes across a principle that is correct, but that most of humanity doesn’t understand or isn’t willing to follow, make the most of it. It’s an enormous competitive advantage.
To get different results, one must act differently than the crowd. One has to have the inner calm, willingness, and disregard of what other people think. One has to be ok with being lonely, different, and misunderstood for long periods of time. These investors favor winning and being right rather than sticking with the crowd. Beware one’s own emotions and aim to take advantage of others.
Beware of one’s own ignorance, diversify broadly, have great patience, study the abysmally performing companies and industries, don’t chase fads, focus on value and not outlook. Value investing is a time-tested and proven investment methodology which focuses on determining the intrinsic value of a company based on its current and historical financial statements. An investment is worthwhile only if there is a strong set of competitive advantages within the business and if a significant margin of safety exists between the company’s intrinsic value and its current market price. Mastering oneself is of supreme importance.
The future is ever changing and it is one’s job as an investor to prepare as well as one can, knowing what one knows and does not know, making the best decisions possible. Be humble and know that one is never immune from forces greater than oneself. Control the controllable and forget the rest.
Aim to master in risk, cyclicality, probabilities, playing the odds, seeking ideas in unloved areas. Understand how big of a role luck plays in one’s success.
I have always believed, and I still believe, that whatever good or bad fortune may come our way we can always give it meaning and transform it into something of value. - Hermann Hesse, Siddhartha
The question to ask is “how cheap is this asset given what I think it’s value is?” Don’t worry if it’s sexy or not, just look at value. Everything that is important about investing is counterintuitive and everything that is obvious is wrong. Beware the pendulum of history. Know history but don’t expect it to exactly repeat.
Never rely on things that cannot last. Be ready for change, for it will come. Structure life, portfolio, and relationships to be robust. Don’t maximize. Be ready for change. Adapt and evolve. See reality as it is and adapt to it. Don’t fight it. If things are frothy, pare back. When there is opportunity, seize it.
Don’t be in a rush to get rich. The key is safety, capping losses. The gains will take care of themselves. This is resilient wealth creation. It is all about surviving the dips. That’s the first step, even better is the ability to take advantage of them. This is why it is prudent to have a certain percentage of one’s portfolio in cash.
Simplicity is the master key. Figure out what it is worth, and pay less for it. Stocks follow earnings (eventually). Take a simple idea and take it seriously. Seek to reduce the complex to its essence. Only true understanding allows for this to happen. Don’t make the biggest investments in the companies that can make the most, but in those one is most confident to not lose. Cheap + good business is the holy grail. For most people, the ideal strategy is not the one day of the highest returns, but the one’s that one is most likely to stick with in bad times.
Destination analysis is a system that aims to understand where a company is, where it can go in 10 years, and what would help it get there or veer it off course. This type of inversion or reverse engineering is wildly helpful in all areas of life. Where does one want to be at the end of one’s life and what can one do today to help oneself get there?
Take a simple idea seriously. Intensively research companies that one thinks will do well over 5-10 years and spend time reading annual reports and talking to companies. Consider “scale economics shared.” Amazon and Costco perfectly follow this playbook. As they get bigger, they use their scale to get lower prices and pass those savings onto consumers, fueling the cycle even further.
Make quality the pursuit – in one’s investing, decision making, and life. Investing is not about raking in money, but a metaphysical experiment to see if pursuing quality works. It does.
Focus on the things with the longest shelf life, not the ephemeral. One must look long term and have the capacity to suffer. This is another principle that applies far beyond investing. Sacrifice today so that one can have more tomorrow.
The best investors build habits that compound over time. Seek small marginal gains that are relentlessly followed. Time is the enemy of bad habits, the friend of good habits. Don’t let perfect be the enemy of the good. A good enough habit one follows is far superior than the perfect habit one doesn’t.
Directionally correct, moderate efforts demonstrably work. Find good things that last and stay the course. Don’t be caught up in the frenzy and fads. The name of the game is longevity, not perfect maximization. One doesn’t have to be extreme to get extreme results. Consider oneself a node in a massive neural network. Cultivate relationships and ask for help when needed to succeed and give it back in return – the compounding of goodwill
Forget about perfection, instead focus on continuous improvement that can compound over time. This is the aggregation of marginal gains. Write down good habits as well as a list of things to not do.
The crowning fortune of a man is to be born to some pursuit which finds him employment and happiness, whether it be to make baskets, or broadswords, or canals, or statues, or songs.― Ralph Waldo Emerson
As the great Charlie Munger once said, “aim to be consistently not stupid”. Inversion is a really powerful thinking habit. Before trying to help, first ask how one might harm. Must have great clarity on what not to do. Collect stupidities and learn vicariously through the mistakes of others. Rub one’s nose in one’s mistakes and learn from them. Rely on first principles, don’t try to be perfect, be patient, adopt some guidelines and restraints to handicap massive mistakes.
Gain self awareness and beware psychological biases, hubris, the desire to get rich quick. Learn to destroy one’s best loved ideas. Pre-mortems and devils advocate reviews are excellent ways to mitigate biases. Be aware of emotions and physical state before making a decision. A question as simple as “are you hungry or tired?” Can help decision making. Expect one’s portfolio to hit 50% drawdowns at some point. The point is to be ready and to be able to act rationally on the hard times. One has to instill good habits before one needs them.
Be proud not only of results, but also how they were attained. Life is a series of opportunities to learn how to behave well in difficult circumstances. Nothing is more essential than simply surviving. Build up wealth to be independent, to live the life one wants without having to compromise or answer to others. Being rich consists of money, happiness, and peace of mind. Use wealth to help and serve others.
One should note the best aspects eminent investors so that the genius becomes clear across myriad domains. The things one learns from investing can be applied to other aspects of one’s life.