This book is up there among the best that I have ever read. You won’t find the technical advice or methods to determine whether a stock is a good buy/sell or when. Instead, it’s full of nuggets of wisdom drawn from some of the best investors or thinkers in the world such as Howard Marks, Nick Sleep or Charlie Munger. Whether you are a successful investor has more to do with your patience, your temperament, your thinking and your process than with your IQ, your maths prowess or your ability to build sophisticated financial models. Don’t get me wrong. Those factors definitely help, but if they were the role determinators of success in the investing world, then why would professional traders fail to beat S&P500 all the time and why wouldn’t we have more millionaires?
Because how you approach investing, your patience, your ability to detach emotions from decisions, your character and your thinking affect significantly impact the outcome of your portfolio, they also shape how happy and wise you are in life. On the other hand, learning to be a better investor also helps you understand about yourself better and become wiser & happier. This book is all about that.
Even though the investors interviewed in this book are highly successful and legendary, all the lessons and advice aren’t applicable universally. Everybody’s make-up is different. The audience will have to decide for themselves which lesson works and which doesn’t. Case in point, there are a few investors that are more tolerant of risks and have high concentration of their portfolios in a few stocks, while others consider more diversification acceptable. Some investors feel more comfortable through the volatilities of the markets while others prefer a smooth ride.
I really learned a lot from this book and expect to read it again soon. Really recommend to anyone who is interested in self-improvement or investing. Below are a few of my favorite excerpts. It’s not really easy to pick out these because I literally took note all over the book.
Learn from other people
I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart. —Charlie Munger
“Yet Pabrai’s success both as an investor and a philanthropist is built entirely on smart ideas that he has borrowed from others. “I’m a shameless copycat,” he says. “Everything in my life is cloned.… I have no original ideas.” ”
Luck & humility
“One way that Marks keeps his own ego in check is by reminding himself of the starring role that luck has played in his life. After reading Malcolm Gladwell’s book Outliers, which explores various causes of success, Marks compiled a list of lucky breaks that have helped to propel him to where he is today. His streak began with the “demographic luck” of being born to white, middle-class parents in the United States at the start of a golden era of postwar growth.III Nobody in his family had a college degree, but he was fortunate that his parents valued learning, bought an encyclopedia, and encouraged him to go to college. His high school grades were nothing special, so he thinks he was also lucky that Wharton accepted him. And it was Wharton that exposed him to finance, leading him to jettison his earlier ambition of a career in accounting.”
“I once gave an interview in which I mentioned that Marks has a high IQ, which has no doubt contributed significantly to his success. In response, he sent me a charmingly modest email, remarking, “People who don’t fully acknowledge their luck miss the fact that being intelligent is nothing but luck. No one does anything to ‘deserve’ a high IQ.”
“There’s one other great benefit to acknowledging his luck: it makes him happy. “I walk around with this incredible feeling that I’m a lucky guy,” Marks confides. “If you’re a negative person, you might say, ‘Well, I’ve been lucky in my life and that really sucks because it means that my success is undeserved and may not continue.’ But I say, ‘Gee, what a great thing to be lucky. And, you know, I really owe it to somebody, whether it’s God or chance or whatever.’ ”
“Instead, says Pabrai, they “place many bets, small bets, and frequent bets.” The trouble is, there aren’t enough compelling opportunities to justify all of this activity. So Pabrai, like his two idols, prefers to wait for the most succulent salmon. During a conversation in his office in Irvine, he says, “The number one skill in investing is patience—extreme patience.” When the market crashed in 2008, he made ten investments in two months. In more typical times, he bought just two stocks in 2011, three in 2012, and none in 2013.”
“Fourth, said Templeton, successful investing requires patience. When he bought US stocks at the outbreak of World War II, he knew how cheap they were, but he couldn’t predict how long it would take for the market to agree with him. His edge lay not just in his superior insight, but in his willingness to wait year after painful year for the situation to play out as he’d predicted.”
Margin of safety
“How, then, can individuals reduce their vulnerability and bolster their resilience? Following Buffett’s lead, we should always keep enough cash in reserve so we’ll never be forced to sell stocks (or any other beleaguered asset) in a downturn. We should never borrow to excess because, as Eveillard warns, debt erodes our “staying power.” Like him, we should avoid the temptation to speculate on hot stocks with supposedly glorious growth prospects but no margin of safety. And we should bypass businesses with weak balance sheets or a looming need for external funding, which is liable to disappear in times of distress. None of this is brain surgery. But it requires us to take seriously that oft-forgotten commandment Thou shalt not depend on the kindness of strangers.”
“Kahn became Graham’s teaching assistant at Columbia in the 1920s, and they remained friends for decades. I wanted to know what he’d learned from Graham that had helped him to prosper during his eighty-six years in the financial markets. Kahn’s answer: “Investing is about preserving more than anything. That must be your first thought, not looking for large gains. If you achieve only reasonable returns and suffer minimal losses, you will become a wealthy man and will surpass any gambler friends you may have. This is also a good way to cure your sleeping problems.”
As Kahn put it, the secret of investing could be expressed in one word: “safety.” And the key to making intelligent investment decisions was always to begin by asking, “How much can I lose?” He explained, “Considering the downside is the single most important thing an investor must do. This task must be dealt with before any consideration can be made for gains. The problem is that people nowadays think they’re pretty smart because they can do something quite rapidly. You can make the horse gallop. But are you on the right path? Can you see where you’re going?”
“Second, to achieve resilience, it’s imperative to reduce or eliminate debt, avoid leverage, and beware of excessive expenses, all of which can make us dependent on the kindness of strangers. There are two critical questions to ask: “Where am I fragile? And how can I reduce my fragility?” If, say, all of your money is in one bank, one brokerage, one country, one currency, one asset class, or one fund, you may be playing with a loaded gun. With luck, you can get away with anything in the short term. With time, the odds rise that your vulnerability will be exposed by unforeseen events.
Third, 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. ”
“Second, said Vinik, “There’s another constant through the twelve years, and that’s very, very hard work. The more companies you can analyze, the more cash-flow statements you can go through—and go through every line of—the more good ideas you’re going to find and the better the performance is going to be. There’s no substitute for hard work.”
“The best predictor of success is often nothing more mysterious than the unflagging fervency of a person’s desire”
Incremental yet sustainable improvement
“What’s distinctive is the indomitable consistency of his discipline. Most people get fired up for a few days, then flame out. I own a kettlebell and a skipping rope, neither of which I’ve used more than three times. The primary purpose of their existence is to make me feel guilty. Yet Gayner keeps plugging away, never perfect, but always directionally correct. The key, he says, is that he is “radically moderate” about everything he does. “If I make extreme changes, they’re not sustainable. But moderate, incremental changes—they’re sustainable.”
“Resounding victories tend to be the result of small, incremental advances and improvements sustained over long stretches of time. “If you want the secret to great success, it’s just to make each day a little bit better than the day before,” says Gayner. “There are different ways you can go about doing that, but that’s the story.… Just making progress over and over again is the critical part.”
“In short, there’s nothing flashy or grandiose about Gayner. Yet it would be hard to find a better role model in the investment world. After all, his “satisfying, slow, and steady” method of building wealth relies heavily on common sense and well-chosen habits, not esoteric skills or daredevil risks. When I ask him what regular investors should do to get rich, he offers the least exotic advice imaginable: “Live on less than you make. Invest the difference at a positive rate of return. You cannot fail if you accomplish those two tasks.” He adds, “If you’re living on less than your means, you’re rich right now.”
It’s more important to avoid idiocy than to try to be smart
“I don’t have any wonderful insights that other people don’t have. I just have slightly more consistently than others avoided idiocy. Other people are trying to be smart. All I’m trying to be is non-idiotic. I find that all you have to do to get ahead in life is to be non-idiotic and live a long time. It’s harder to be non-idiotic than most people think.”
“None of this would have happened if Buffett and Munger weren’t so committed to challenging their beliefs. Munger has always disdained “heavy ideology” in everything from investing to politics, denouncing it as “one of the most extreme distorters of human cognition.”
“While other billionaires collect art, vintage cars, and racehorses, Munger describes himself as a collector of “absurdities,” “asininities,” and “inanities.” His daughter Molly recalls listening in her youth to his many cautionary tales “about people doing stupid things,” which often included “a tinge of ingratitude and poor moral judgment.” A typical story would feature the cosseted heir to a fortune who turned with bitter resentment against his father. Molly Munger remarks, “It’s stupid at every level: ungrateful, self-sabotaging, unrealistic, egotistical.”
This habit of actively collecting examples of other people’s foolish behavior is an invaluable antidote to idiocy. In fact, it’s the second great anti-stupidity technique we should learn from Munger. It’s a perverse hobby that provides him with endless entertainment and insight, enabling him to catalog in his head all of the “boneheaded” moves to excise from his playbook. Anyone can benefit from this practice, he tells me, “but I don’t think you get it unless you have a certain temperament. A lot of what I do is not IQ. It’s something else. Temperament. Attitude.”