I have read and greatly benefitted from Guy Spier’s wonderful book “The Education of a Value Investor” and have just received William’s highly praised “Richer, Wiser, Happier”, which is next on my reading list.
Here are my takeaways from the webinar: 7 Key principles for investing and life
Mohnish Pabrai: “Everything in my life is cloned - I have no original ideas”. No need to reinvent the wheel. There are smarter, wiser people who have already figured out the rules of this game. Cloning is a super power in life. Mohnish clones with glee, intensity, intelligence and ferocity. He’s not just dabbling. He’s making it a guiding principle in his life.
Three rules in the investing game:
- you’re buying a share in an on-going business
- market is bipolar, not rational
- you want to buy at a tremendous discount (margin of safety)
It doesn’t matter whether you believe in gravity or not, it’s gonna pull you down.
Charlie Munger: “Take a simple idea - and take it seriously”
When you discover a profound truth like cloning, you want to go a 1000% on it.
Caveat: when you’re cloning, you have to do it in a way that suits your temperament and personality (e.g. you could need to diversify more).
When Guy Spier started asking “What would Warren Buffett do in my shoes?”, good things started happening for him in a way he didn’t expect.
Bcs he did NOT clone the partnership structure of Buffett’s partnership, it cost him.
Mohnish on Buffett’s partnership structure: “I don’t know exactly why Buffett did it this way, but I don’t have a compelling reason not to copy it”
Cloning requires humility: I don’t need to assert myself and show that I’m the smartest/wisest etc.
Why don’t other ppl do this? There’s someth in human DNA that prevents us from cloning. We want to be original. We don’t want to be derivatives. It takes humility to set aside your ego and say: “I don’t want to be original. Study ppl who have figured stuff out and reverse engineer what they understood.
Note: Mohnish has improved on things that he has cloned (e.g. his charity initiative). Clone but improve & apply to your own circumstances.
And by the way, don’t worry about not being original - you will be without trying, because you are unique.
Useful both in markets and life. Like cloning, the deeper you go into it, the more you realize it’s one of the foundations of a successful life.
Joel Greenblatt: this is a guy who just won the game, while everyone else is sweating. So what’s the secret?
Simple: you figure out what a business is worth, and you buy it for less. Everything else is a variation of that.
Greenblatt is a codebreaker. Because he teaches and writes books, he’s had to synthesize and condense and distill what he’s learned, and in doing so, he came to this incredibly simple essence.
Implication: if you’re not interested in valuing businesses, then investing is not a game you’re equipped to win. So leave it to someone else.
Particularly in tumultuous times (underperformance vs the market, everyone else making money, etc.), it’s incredibly important to have a few beliefs who are approximately true and approximately correct over time and that you can adhere to.
Aside on awareness: The investor themself tends to be their own worst enemy. Therefore we need tremendous self-awareness. Am I being too fearful, impetuous, do I worry too much, do I follow crowds too much? Ask yourself: am I built for this game? Is this a game I can win? If you don’t have the right temperament, there are work-arounds (e.g. indexing). But first you need to know.
3. The art of subtraction
- what you’re good at
- what is important to you
Everything else is noise and complexity. Substractit.
Guy Spier: my office is my thinking tool. So I want to set it up in a way that makes it easier for me to think. You can go very granular (what books are placed where, what pops up when you turn on the computer, etc.). In a certain way, Warren has set up his entire life as a thinking tool. All the mini-elements are important (what town you live in, how far from the office, location of the office, etc.). It’s not just in terms of stage sets (i.e. this is my office where I “think”, this is where I do busy work <– that’s too simplistic).
It’s also not just about your physical environment. Example: Laura Geritz. She studies one subject a year. Travel is ultra important for her as she invests globally. Her areas of focus compound, based on what matters most to her. There isn’t much space for everything else.
Again: what am I best at? What matters most to me?
Where do I want to be 20 years from now (the destination), and what are the inputs needed to get there? –> streamline your life for that.
If it doesn’t help you get where you to your desirable destination, substract it.
4. Avoid Standard Stupidities
C. Munger: “Applaud yourself whenever you succeed in removing one of your entrenched beliefs so that ‘ignorance removal’ becomes a source of satisfaction, not of shame.”
What’s most important about Charlie: even though he is a genius, yet he spends most of his time trying to reduce standard stupidities. Why? Because it’s hard to get smarter, but it’s incredibly easy to reduce standard stupidities.
Reverse the goal: take all the inanities and idiotic actions that cause catastrophic outcomes and avoid them! Instead of trying to be a great investor, think of what would make you a terrible investor (e.g. trading too often, selling winners too soon, trying to predict direction of market, etc.) and avoid those behaviors. Just reduce stupidities.
Munger is so obsessed about this that he made a list of all sources of human misjudgment. And Guy is so obsessed that at one point he was listening non-stop and everywhere to Charlie talk about them. Here’s the full clip.
Are you pushing the limits too far? Are you too exposed to the dangers that this period and the next will bring? Position yourself in a prudent and skeptical way that will protect you from catastrophe. Don’t try to maximize.
If you want to have a happy life, stop doing the things that are guaranteed to result in a miserable life (e.g. drugs & addiction, staying caught up in envy, etc).
5. The willingness to defer gratification
Nick Sleep: “When you look at all the mistakes in life, private and professional, it’s almost always because you reached for some short-term fix or some short-term high…And that’s the overwhelming habit of people in the stock market”
Most people play the short-term game. Bombarded by daily stimuli and call-to-actions.
Nick and his partners play the game in the absolute opposite way. They focus on information with “long shelf life” vs “perishable information”.
Destination analysis: let me think about what a desirable destination is for this business in 10,20,30 years. And then ask: are they making the right inputs to reach that destination?
Example: Costco; here’s a company that treats everyone incredibly well. It shares those scale economies with customers, employees, shareholders. So size is not an anchor => they’re acting in a way that ensures they will reach the desired destination.
You want to take care of your entire ecosystem. If one of those things gets out of whack, the inputs aren’t right anymore. Most people focus on the short-term: how the economy is doing, where inflation is going, etc.
Own stocks that have the right culture because they will do better in the long run.
Can you find a company that’s deferring gratification? (giving better deals to their customers instead of stuffing their pockets in the short-term)
6. The willingness to go “all in” (and knowing when)
Joel Greenblatt: “I don’t buy more of the ones I can make the most money on. I buy more of the ones I can’t lose money on.”
The ability to have contrarian courage, go against the crowd and take opportunities in moments of dislocation.
Two caveats: you’ve got to be right. And it has to suit your temperament.
How can you avoid getting so carried away that if you’re wrong, you’re not wiped out?
Guy’s answer: assume that God is watching you; if you don’t go all-in it will go straight to the moon; if you do…he’s gonna challenge you. Do you really believe in this? Are you really setup to take the pressure?
The ability to go all-in does not apply all the time. You can have a wonderful life without ever going all-in, ever. Hedge against your own fallibility and temperament…Some people are stressed and ultra-fearful, some other see a market downturn as “orgasmic”.
In the end, it’s about longevity. The last man standing wins.
Irving Kahn: “Plan to withstand the slings and arrows of outrageous fortune”. Always maintain a hefty cash reserve. Don’t over-reach, so you can take advantage of other people’s discomfort by buying cheap. You have to survive the dips. Position yourself knowing that multiple things can go wrong at the same time.
Guy: when people talk about their portfolio, you don’t know their personal situation (debt, mortgage, on-going expenses, other assets, etc.). They might even be talking about one of their portfolio. So “going all-in” can mean very different things for different people. [my interpretation: going “all-in” when you have no backup is a very, very dangerous thing]. You don’t know what is going on in the financial of psychological lives of other (even super) investors. Your relationship to your pertfolio has to be a personal and positive one.
7. The aggregation of marginal gains
Tom Gayner: “I don’t need to be optimal. I don’t need the best strategy. I don’t need to take extreme risks. I just need to be directionally correct.”
“People get themselves into trouble with extremes. Forget about perfection - what we need is a selection of sensible habits that are directionally correct and sustainable.”
Example of with habits: “I’m just gonna lose 1lb a year.” That’s sustainable. But the rewards of good habits compound over time.
Nick Sleep about the coach of the British cycling team and Japanese principles of Kaizen: it’s not about one secret sauce. It’s all of those little things that give you a marginal advantage. When you add them up and compound them over time, it becomes a massive advantage.
So just find directionally correct habits and accumulate small gains.
The power in the short-term doesn’t seem that great. But over 10-20-30 years, it’s overwhelming.
Likewise for bad habits (living above your means, doing stupid things in the market, acting meanly, etc.). You can get away with them short-term. But time is the enemy of bad habits.
Over time, you can change your wiring with small sustained habits and find yourself acting and reacting very differently.
Build a directionally correct habit, maintain and sustain it. No need to aim too high.
8. Bonus: compounding of good will
Just treat people well and put out good will in the universe. This entire webcast only happened out of a gesture of goodwill and kindness. There’s tremendous benefit to this different kind of system: a positive-sum game. Pure acts of kindness. Life is better when you life this way.
Use the power of reciprocation. Example: Warren does things that make others think “My Gosh, there’s no way I can repay him”. It’s just a habit for him. It’s a better way of operating. Figure out how to help others. How to behave honorably.
Until next time, stay cool & stay invested!