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ОглавлениеThose who keep learning, will keep rising in life.
—Charlie Munger
The body is limited in ways that the mind is not. In fact, by the time most people are forty years old, their bodies begin to deteriorate. But the amount of growth and development that the mind can sustain has no limit.
Reading keeps our mind alive and growing. That’s why we should inculcate a healthy reading habit. Reading is also meditative and calming.
Books are truly life changing, particularly once you’ve developed the habit of reading every day while watching your every thought. The neuronal connections that compound through the effort will make you an entirely new person after a few years.
Warren Buffett and Charlie Munger estimate that they spend 80 percent of their day reading or thinking about what they have read.
Therein lies the secret to becoming smarter.
The way to achieve success in life is to learn constantly. And the best way to learn is to read, and to do so effectively.
When someone asked Jim Rogers what was the best advice he ever got, he said it was the advice he received from an old man in an airplane: read everything.
All successful investors have a common habit. They just love to read all the time.
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.”1
Vicarious Learning
The reading of all good books is like a conversation with the finest minds of past centuries.
—René Descartes
There is no better teacher than history in determining the future…. There are answers worth billions of dollars in a $30 history book.
—Bill Gross
Throughout the course of humanity, we have been recording knowledge in books. That means there’s not a lot that’s new; it’s just recycled historical knowledge. Odds are that no matter what you’re working on, somewhere, someone who is smarter than you has probably thought about your problem and put it into a book. Munger says:
I am a biography nut myself. And I think when you’re trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who developed them. I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the eminent dead, but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better in life and work better in education. It’s way better than just being given the basic concepts.2
Making friends with the eminent dead and the great thinkers of the past is a highly rewarding exercise. Morgan Housel writes:
Everything’s been done before. The scenes change but the behaviors and outcomes don’t. Historian Niall Ferguson’s plug for his profession is that “The dead outnumber the living 14 to 1, and we ignore the accumulated experience of such a huge majority of mankind at our peril.” The biggest lesson from the 100 billion people who are no longer alive is that they tried everything we’re trying. The details were different, but they tried to outwit entrenched competition. They swung from optimism to pessimism at the worst times. They battled unsuccessfully against reversion to the mean. They learned that popular things seem safe because so many people are involved, but they’re most dangerous because they’re most competitive. Same stuff that guides today, and will guide tomorrow. History is abused when specific events are used as a guide to the future. It’s way more useful as a benchmark for how people react to risk and incentives, which is pretty stable over time.3
The more you read, the more you build your mental repertoire. Incrementally, the knowledge you add to your stockpile will grow over time as it combines with everything new you put in there. This is compounding in action, and it works with knowledge in much the same way as it does with interest. Eventually, when faced with new, challenging, or ambiguous situations, you will be able to draw on this dynamic inner repository, or what Munger refers to as a “latticework of mental models.”4 (Mental models are an explanation of how things work, what variables matter in a given situation, and how they interact with one another. Mental models are how we make sense of the world.) You will then respond as someone whose instincts and judgment have been honed by the experiences of others, rather than just your own. You will start to see that nothing is truly new, that incredible challenges can and have been overcome, and that there are fundamental truths about how the world works.
So, learn from others. Figure out where you are going and find out who has been there before. Knowledge comes from experience, but it doesn’t have to be your experience.
Creating Time to Read, Learn, and Think
Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life. But we’ve turned that quirk into a positive outcome for ourselves. We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think.
—Charlie Munger
The rich invest in time, the poor invest in money.
—Warren Buffett
The rich have money. The wealthy have control over their time. And time is the scarcest resource, because of its nonrenewability. Time is a universally depleting resource, reduced at the same rate for the wealthy as for the poor. This gives us one way of defining a successful investor, as a person for whom time has become a more binding constraint than money. The ultimate status symbol is time. Time is the new money.
My friends and colleagues often ask me how I manage to find so much time for reading while having a full-time job and managing my household chores.
For starters, I hardly watch television. I don’t even have a cable television connection. I get all my desired content on Netflix, YouTube, and Amazon Prime. I watch only those select few movies, documentaries, and shows that truly pique my interest. I ensure that I don’t spend a lot of time commuting to my workplace. I live in an area where I can walk to the grocery store, finish my purchases, and return home in less than twenty minutes. I have fully automated the monthly payments online for my phone, electricity, Internet, utilities, and meal plan bills.
All these choices are deliberate.
If you assume that the average person spends two hours a day watching television, an hour for commuting, and another two hours a week shopping, that adds up to twenty-three hours a week.
Twenty-three hours. That is 1,380 minutes. That is a lot of time. If you read a page in two minutes, that’s almost seven hundred pages a week. Do seven hundred pages a week sound like too much for you? Well, how about just twenty-five pages a day? Shane Parrish writes:
While most of us don’t have the time to read a whole book in one sitting, we do have the time to read 25 pages a day. Reading the right books, even if it’s a few pages a day, is one of the best ways to ensure that you go to bed a little smarter than you woke up.
Twenty-five pages a day doesn’t sound like much, but this commitment adds up over time. Let’s say that two days out of each month, you probably won’t have time to read. Plus Christmas. That gives you 340 days a year of solid reading time. If you read 25 pages a day for 340 days, that’s 8,500 pages. 8,500. What I have also found is that when I commit to a minimum of 25 pages, I almost always read more. So let’s call the 8,500 pages 10,000. (I only need to extend the daily 25 pages into 30 to get there.)
With 10,000 pages a year, at a general pace of 25/day, what can we get done?
Well, The Power Broker is 1,100 pages. The four LBJ books written by Robert Caro are collectively 3,552 pages. Tolstoy’s two masterpieces—War and Peace, and Anna Karenina—come in at a combined 2,160. Gibbon’s The Decline and Fall of the Roman Empire is six volumes and runs to about 3,660 pages. That’s 10,472 pages.
That means, in about one year, at a modest pace of 25 pages a day, you’d have knocked out 13 masterful works and learned an enormous amount about the history of the world. In one year!
That leaves the following year to read Shirer’s Rise and Fall of the Third Reich (1,280), Carl Sandburg’s Six Volumes on Lincoln (2,000), Adam Smith’s Wealth of Nations unabridged (1,200), and Boswell’s Johnson (1,300), with plenty of pages left to read something else.
This is how the great works get read: day by day, 25 pages at a time. No excuses…
The point of assigning yourself a certain amount of reading every day is to create a deeply held habit. The 25-pages-a-day thing is a habit-former!…
…Read what seems awesome and interesting to you now and let your curiosities grow organically. A lifelong interest in truth, reality, and knowledge will lead you down so many paths, you should never need to force yourself to read anything unless there is a very, very specific reason. (Perhaps to learn a specific skill for a job.)
Not only is this approach way more fun, but it works really, really well. It keeps you reading. It keeps you interested. And in the words of Nassim Taleb, “Curiosity is antifragile, like an addiction; magnified by attempts to satisfy it.”
Thus, paradoxically, as you read more books, your pile of unread books will get larger, not smaller. That’s because your curiosity will grow with every great read.
This is the path of the lifelong learner.5
This is compounding wisdom in action. This is how you become smarter. You must value your time very highly.
You’ve got to keep control of your time, and you can’t unless you say no. You can’t let people set your agenda in life.
—Warren Buffett
A Passion for Reading and Learning
The purpose of reading is not just raw knowledge. It’s that it is part of the human experience. It helps you find meaning, understand yourself, and make your life better.
—Ryan Holiday
I read to increase knowledge. I read to find meaning. I read for a better understanding of others and myself. I read to discover. I read to make my life better. I read to make fewer mistakes.
To paraphrase David Ogilvy, reading and learning is “a priceless opportunity to furnish our mind and enrich the quality of our life.”
Wherever I go, a book is not far behind. It might be on my phone or a physical copy, but a book is always close by. (I love printed books. I just find something so calming and peaceful about reading a paperback or hardcover book.) During my initial years in America, when I had to commute long distances to reach my workplace, I used to read books on my seat in the bus to ensure that not a single minute was wasted during my learning and development phase.
Finding time to read is easier than you might think. Waiting for a bus? Stop staring down the street and read. Waiting for a taxi? Read. On the train? Read. On the plane? Read. Waiting at the airport for your flight? Read.
Reading alone, however, isn’t enough to improve your knowledge. Learning something insightful requires work. You have to read something above your current level. You need to find writers who are more knowledgeable on a particular subject than you are. This is how you become more intelligent. Reach out to and associate with people better than you and you cannot help but improve.
A lot of people confuse knowing the name of something with understanding it.
This is a good heuristic: Anything effortlessly digested means that you are reading for information. For example, the job of the news media is to inform us about day-to-day events, to entertain us, to reflect the public moods and sentiments of the moment, and to print stories that will interest us today and that we will want to read.
But that’s exactly what creates problems for readers, who often succumb to the recency and availability biases that “news” creates. The same applies to social media. The feeds we take in are characterized by recency bias. Most of what we consume is less than twenty-four hours old. Rarely do we stop to ask ourselves questions about what we consume: Is this important? Is this going to stand the test of time for even a year?
As you grow older and become more mature, you realize that not everything deserves a response. This truth applies to most things in life and almost everything in the news.
We’re surrounded by so much information that is of immediate interest to us that we feel overwhelmed by the never-ending pressure of trying to keep up with it all.
—Nicholas Carr
The true scarce commodity of the near future will be human attention.
—Satya Nadella
In an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.
—Herbert Simon
In my view, studying old newspapers is a far more productive exercise than reading today’s newspaper. (Buffett likes to call it “instructive art.”) Morgan Housel writes:
Every piece of financial news you read should be filtered by asking the question, “Will I still care about this in a year? Five years? Ten years?” The goal of information should be to help you make better decisions between now and the end of your ultimate goals. Read old news and you’ll quickly see that the life expectancy of your goals is higher than that of the vast majority of headlines.6
Nassim Nicholas Taleb writes, in his book Fooled by Randomness, “Minimal exposure to the media should be a guiding principle for someone involved in decision making under uncertainty—including all participants in financial markets.”7 His key argument is that what is reported in the media is noise rather than information, but most people do not realize that the media is paid to get our attention.
The key lesson is that, in the pursuit of wisdom, we must read much more of what has endured over time (such as history or biographies) than what is ephemeral (such as daily news, social media trends, and the like). I agree with Andrew Ross, who says, “The smallest bookstore still contains more ideas of worth than have been presented in the entire history of television.”8
All of the history of humankind is a short chapter in the history of biology. And all of biology is a short chapter in the history of the planet. And the planet is a short chapter in the history of the universe.
—Will and Ariel Durant
Will and Ariel Durant’s work compresses five thousand years of history into one hundred pages of conclusions. It focuses on timeless truths, not on today’s trends—the antithesis of social media. The book highlights the lessons of history, not the events that define it. It explains how all of life, from the simplicity of single-celled organisms to the complexity of humans, is governed by the laws and trials of evolution. The laws of biology double as the fundamental lessons of history. All beings are subject to the processes and trials of evolution. Only the fittest survive. Natural selection leads to better qualities being retained and passed along. The result is a constant cycle of improvement for the whole.
Always respect the old. Apply the “Lindy effect” to reading and learning. According to Nassim Taleb, “The Lindy effect is a concept that the future life expectancy of some nonperishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.”9 So, a book that has stood the test of time and survived fifty or one hundred or five hundred years and is still widely read because it contains timeless wisdom is expected to survive another fifty or one hundred or five hundred years for that very reason—that is, its wisdom is timeless.
The man who doesn’t read good books has no advantage over the man who cannot read them.
—Mark Twain
One should read on varied topics, such as health and fitness, personal finance, investing, business, economics, decision making, human behavior, history, philosophy, self-awareness, and, of course, life. Reread the classics in these fields on a regular basis. Use the Lindy effect to your advantage. Also, share your latest book purchases with like-minded friends. It’s a lot of fun to co-read and exchange insights.
Reading for understanding narrows the gap between reader and writer. How can we read better to bridge this gap?
How to Read a Book
The goal of reading determines how you should read. Although many people are proficient in reading for information and entertainment, few improve their ability to read for knowledge.
Mortimer Adler and Charles Van Doren have written the seminal book on reading. Their How to Read a Book provides the necessary skills to read anything. Adler and Van Doren identify four levels of reading: elementary, inspectional, analytical, and syntopical. Before we can improve reading skills, we need to understand the differences among these reading levels. They are discussed as levels because you must master one level before you can move to a higher level. They are cumulative, and each level builds on the preceding one.
Here is how Adler and Van Doren describe these four levels:
1. Elementary reading. This is the most basic level of reading as taught in our elementary schools. It is when we move from illiteracy to literacy.
2. Inspectional reading. This is another name for “scanning” or “superficial reading.” It means giving a piece of writing a quick yet meaningful advance review to evaluate the merits of a deeper reading experience. Whereas the question that is asked at the first level (elementary reading) is “What does the sentence say?” the question typically asked at this level is “What is the book about?”
3. Analytical reading. Analytical reading is a thorough reading. This is the stage at which you make the book your own by conversing with the author and asking many organized questions. Asking a book questions as you read makes you a better reader. But you must do more. You must attempt to answer the questions you are asking. While you could do this in your mind, Adler and Van Doren argue that it’s much easier to do this with a pencil in your hand. “The pencil,” they argue, “becomes the sign of your alertness while you read.”
Adler and Van Doren share the many ways to mark a book. They recommend that we underline or circle the main points; draw vertical lines at the margin to emphasize a passage already underlined or too long to be underlined; place a star, asterisk, or other symbol at the margin for emphasis; place numbers in the margin to indicate a sequence of points made in developing an argument; place page numbers of other pages in the margin to remind ourselves where else in the book the author makes the same points; circle keywords or phrases; and write our questions (and perhaps answers) in the margin (or at the top or bottom of the pages). This is how we remember the best ideas out of the books we read, long after we have read them—by making a book our own through asking questions and seeking answers within it. As Cicero said, “Nothing so much assists learning as writing down what we wish to remember.”
4. Syntopical reading. Thus far, we have been learning about how to read a book. The highest level of reading, syntopical reading, allows you to synthesize knowledge from a comparative reading of several books about the same subject. This is where the real virtue of reading is actualized.
Syntopical reading, also known as comparative reading, involves reading many books on the same subject and then comparing and contrasting the ideas, insights, and arguments within them. In syntopical reading, you create a latticework of the information in those books, along with your own life experiences and personal knowledge, to create mental models and new insights and form an understanding of the world that never quite existed before. This is the step that prepares the way for an original thinker to make a breakthrough.
It’s a lot of fun to do this—to find connections between seemingly unconnected ideas from different disciplines. I cannot overemphasize the importance of this activity, because it has often led to many instances of serendipity and good fortune in my investing journey.
I usually read multiple nonfiction books in tandem. I pick the one that interests me the most at the time and read at least one full chapter. If it keeps my interest, I keep going for another chapter. But if not, I’ll jump to another book and read a full chapter. (It is harder to do this with fiction because you tend to lose the train of the plot and narrative.) I read this way because I start to see patterns across books about different topics. You may be reading one book on economics, one on business strategy, and another one on physics. Then, suddenly, something pops up that represents a common thread among those themes.
The past is not fixed. Yes, it is true. The past is not fixed. Reading can change this because a new book can make you aware of something incredible in an old book that you previously had not recognized. This is how knowledge compounds. Something you perceived to be of low value in an old book transforms into something of significant value, unlocked by another book in the future.
Therefore, no books are necessarily “the best.” Usually, some combination of books, in unison, produce a big, nonlinear impact. Although many books may seem unrelated to one another, in reality they are all connected through some common threads. This realization creates a significant advantage, because it lets your interests pull you along, rather than forcing you to set a self-imposed deadline to finish a book. And if a book doesn’t interest you, you just abandon it to save time and move on to something more interesting. Reading multiple books simultaneously, quitting those that are not engaging, and constantly picking up new ones is the antifragile approach to self-education.
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.
How can we develop the same?
By starting early and taking advantage of the Matthew effect.
The Matthew Effect in Knowledge Acquisition
Imagine that you and Buffett are reading the latest issue of The Economist magazine. Who do you think will end up with greater insight at the end of this reading session?
The answer is obvious, isn’t it? And for good reason.
Buffett is eighty-nine years old and, even at this age, he continues to be a relentless learning machine. He not only started learning early but also has been accumulating knowledge for more than three-quarters of a century.
The Matthew effect, in this context, refers to a person who has more expertise and thus has a larger knowledge base. This larger knowledge base allows that person to acquire greater expertise at a faster rate. So, the amount of useful insight that Buffett can draw from the same reading material would be quite high compared with most any other person, and again, Buffett would end up becoming smarter at a faster rate.
As you read increasingly more, your capacity to read and absorb more knowledge increases rapidly. During the initial days of inculcating my reading habit, I found it difficult to grasp the deep significance of many of the concepts in the books I read. Gradually, over time, I started discovering connections between the ideas that spread across different books. It is these connections that lead to the development of the “tapestry of the psyche,” which in turn deepens our understanding of the big ideas coming from the key disciplines. This deep understanding makes the brain more efficient and smarter and better able to make sense of new information. None of us can know everything, but we can work to understand the big important models at a basic level across a broad range of disciplines so they can collectively add value in the decision-making process. Deep reading of the fundamentals enables us to understand the world for what it is. This is how we learn to reason from first principles.
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
When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles—generally three to twelve of them—that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.
—John Reed
The best way to achieve wisdom is to learn the big ideas that underlie reality…. 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. Boiling things down to their most fundamental truths, that is, to first principles (deconstructing), and then reasoning up from there (reconstructing) enables us to look at the world from the perspective of physics. This type of reasoning removes complexity from the decision-making process so that we can focus on the most important aspects that pertain to the decision at hand. Reasoning from first principles removes the impurity of assumptions and conventions. Instead, what remains is the essential information. 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 a way of saying, “Think like a scientist.” Scientists don’t assume anything. They start with questions like “What are we absolutely sure is true?” or “What has been proven?” When Jeff Bezos started Amazon.com, in 1995, he clearly identified the first principles that would guide his business philosophy—that is, long-term thinking and a relentless focus on the customer rather than on the competition. This led Amazon to focus on things that don’t change, such as customers’ preference for low prices, fast delivery, and wider product selection, rather than on things that can and do change. Bezos has continued to focus relentlessly on these first principles until this date, and this line of thinking has made him one of the richest people in the world.
According to James Clear:
In theory, first principles thinking requires you to dig deeper and deeper until you are left with only the foundational truths of a situation. Rene Descartes, the French philosopher and scientist, embraced this approach with a method now called Cartesian Doubt in which he would “systematically doubt everything he could possibly doubt until he was left with what he saw as purely indubitable truths.”
In practice, you don’t have to simplify every problem down to the atomic level to get the benefits of first principles thinking. You just need to go one or two levels deeper than most people. Different solutions present themselves at different layers of abstraction.11
By focusing on the fundamental questions and then, while answering these questions, going two or three levels deeper by asking at every step “and then what?” we can arrive at the truth. This is the art of “reductionism.” Less is more. When we remove the things that aren’t truly representative of reality, we get closer to the ultimate truth. Michelangelo was once asked by the pope about the secret of his genius, particularly with regards to the statue of David, one of the greatest sculpting masterpieces of all time. Michelangelo responded by saying, “David was always there in the marble. I just took away everything that was not David.”
Nassim Taleb calls this “subtractive epistemology.” He argues that the greatest contribution to knowledge consists of removing what we think is wrong. We know a lot more about what is wrong than what is right. What does not work (i.e., negative knowledge) is more robust than positive knowledge. This is because it is a lot easier for something we know to fail than it is for something we know isn’t so to succeed. Taleb dubs this philosophy “via negativa,” employing a Latin phrase used in Christian theology to explain a way of describing God by focusing on what he is not, rather than on what he is. The absence of evidence doesn’t qualify as the evidence of absence. In other words, just because all of the swans that have been observed to date are white, doesn’t prove that all swans are white. One small observation (i.e., spotting a black swan) can conclusively disprove the statement “all swans are white” but millions of observations can hardly confirm it. Thus, disconfirmation is more rigorous than confirmation.
Elon Musk once referred to knowledge as a semantic tree: “Make sure you understand the fundamental principles, i.e., the trunk and big branches, before you get into the leaves/details or there is nothing for them to hang onto.”12 When you want to learn a new subject, first identify the fundamental principles and learn those in a clear and deep manner. Is there a way for us to do this effectively?
It turns out that, indeed, a simple way to do this exists.
It’s simple but not easy.
The Feynman Technique
The Feynman technique, named after Nobel Prize–winning physicist Richard Feynman, is a great method for learning anything in a clear and deep manner and for improving retention.
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, you have a clear understanding of where you have gaps in knowledge. This is valuable feedback, because you have now discovered the edge of your mental capabilities. Knowing the limits of your knowledge is the dawning of wisdom.
4. Return to the source material, and then reread and relearn it. Repeat step 2 and compile information that will help you fill in those gaps in your understanding that you identified in step 3. Review and simplify further as necessary.
One sentence written by Feynman encapsulates the power of this technique. What started as a question about our existence has been translated into a single sentence that can be understood even by a middle-school student: “All things are made of atoms—little particles that move around in perpetual motion, attracting each other when they are a little distance apart, but repelling upon being squeezed into one another.”13
Basically, Feynman says that if you know nothing about physics, the most essential scientific knowledge to understand is that everything is made up of atoms. In one simple sentence, Feynman conveys the foundational existence of our universe. Little wonder that he is widely regarded as one of the greatest teachers to have ever lived.
In a similar vein, consider Newton’s law of gravity: the force of attraction between two bodies depends on their distance. Newton needed just a few pen strokes to express that thought mathematically. But from it, he showed why the planets move as they do, where comets fly, and even how high the tides flow. Later generations elaborated on this information, until we were able to send rockets, satellites, and humans into space. From Newton’s earliest thought, the vast field of science and engineering grew to its present state.
To apply first principles thinking to the field of value investing, consider several fundamental truths. 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 of the business, which is the discounted value of the cash that can be taken out during its remaining life, adjusted for the uncertainty around receiving those cash flows.
5. Think in terms of opportunity costs when evaluating new ideas and keep a very high hurdle rate for incoming investments. Be unreasonable. When you look at a business and get a strong desire from within saying, “I wish I owned this business,” that is the kind of business in which you should be investing. A great investment idea doesn’t need hours to analyze. More often than not, it is love at first sight.
6. Think probabilistically rather than deterministically, because the future is never certain and it is really a set of branching probability streams. At the same time, avoid the risk of ruin, when making decisions, by focusing on consequences rather than just on raw probabilities in isolation. Some risks are just not worth taking, whatever the potential upside may be.
7. Never underestimate the power of incentives in any given situation.
8. When making decisions, involve both the left side of your brain (logic, analysis, and math) and the right side (intuition, creativity, and emotions).
9. Engage in visual thinking, which helps us to better understand complex information, organize our thoughts, and improve our ability to think and communicate.
10. Invert, always invert. You can avoid a lot of pain by visualizing your life after you have lost a lot of money trading or speculating using derivatives or leverage. If the visuals unnerve you, don’t do anything that could get you remotely close to reaching such a situation.
11. Vicariously learn from others throughout life. Embrace everlasting humility to succeed in this endeavor.
12. Embrace the power of long-term compounding. All the great things in life come from compound interest.
In addition to these fundamental truths, the value investing discipline has certain finer aspects that we come to realize and appreciate only with the passage of time and with experience:
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 of competitive advantage period is underrated.
Categorization of stocks into large cap, mid cap, and small cap is overrated. Categorization of businesses into great, good, and gruesome is underrated.
Being more frequently right than others is overrated. Being less wrong than others is underrated.
Forecasting is overrated. Preparation is underrated.
Confidence is overrated. Humility is underrated.
Conviction is overrated. Pragmatism is underrated.
Complexity is overrated. Simplicity is underrated.
Analytical ability is overrated. Personal behavior is underrated.
Having a high income level is overrated. Inculcating a disciplined saving habit is underrated.
Competition with peers is overrated. Helping our peers is underrated.
Large personal net worth is overrated. Good karma is underrated.
Talent is overrated. Resilience is underrated.
Being the best investor is overrated. Being the most authentic version of yourself is underrated.
