Learning from the success and failure of others is the fastest way to get smarter and wiser without a lot of pain.

Part of the benefit of creating a checklist is the process of writing down your ideas.

1. Treat a share of stock as a proportional ownership of the business. 2. Buy at a significant discount to intrinsic value to create a margin of safety. 3. Make a bipolar Mr. Market your servant rather than your master. 4. Be rational, objective, and dispassionate.

Because investing is a probabilistic activity, decisions made in ways that are fundamentally sound may sometimes produce bad results.

three baskets: in, out, and too tough. … We have to have a special insight, or we’ll put it in the “too tough” basket.value investing system is intentionally designed to underperform an index in a bull market;borrowed from algebra is that many problems are best addressed backward. For example, by avoiding stupidity, a person can often discover what he or she wants through subtraction. By eliminating the stupid paths that one can take in life, a person can find the best way forward, even given inevitable risk, uncertainty, and ignorance.The average performance of all investors has to be the average performance of all assets. It’s a zero-sum game if you judge it relative to the market.value investors spend most of their time reading and thinking, waiting for significant folly to inevitably raise its head.Can you understand and implement the principles to make the required choices about value investing variables?Munger believes the place to start is at the bottom, with business fundamentals, and work up. What does the company sell and who are its customers and competitors? What are the key numbers that represent the value the business generates? The list of important questions that an investor must answer is extensive.stay away from making predictions about how cash flows will change in the future based on projections and forecasts. What Munger looks for is a business that has a significant track record of generating high, sustained, and consistent financial returns. If valuing the business requires understanding how cash flows will change in the future based on factors like rapid technological change, Munger puts that business in the too hard pile and moves on to value other companies.

valued like baseball cards is a loser’s game because it requires that you predict the behavior of often irrational and emotional herds of human beings. A Graham value investor puts short-term predictions about mass psychology in the too hard

you do not follow the business to value the stock approach, in the view of Graham value investors, you are a speculator and not an investor..

do not spend any time looking at technical charts of stock price movements,

John Maynard Keynes defined speculation as “the activity of forecasting the psychology of the market.” 5

your data about the present is extensive while your data about the future will always be zero.

best way to determine the value of a business is based on the price a private investor would pay for the entire business. For example, Seth Klarman determines the price he would pay for the asset in question and calls that the private market value. private market intrinsic valuation for a Graham value investor requires that the asset generate free cash flow.

Munger does not own gold as an investment because it is impossible to do a bottom-up fundamental valuation, because gold is not an income-producing asset.

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Intrinsic value is the present value of future cash flows. Margin of safety reflects the difference between the intrinsic value and the current market price.objective as a Graham value investor is to buy a share of stock at a sufficiently large bargain that you do not need to predict short-term price movements in the stock market.margin of safety principle is the simple idea that having a cushion in terms of excess value can protect you against making an error.
believes in a mostly efficient hypothesis. He believes that the difference between mostly and always efficient is a huge opportunity for a Graham value investor. Stocks are sometimes underpriced and sometimes overpriced. Anyone who invested through the Internet bubble (as I did) and who still thinks that markets are always efficient (a so-called extreme view of market efficiency) is bonkers.

Mr. Market’s bipolar nature is his gift to Graham value investors. Occasionally he will present them with great bargains. At other times he’ll buy your assets at a premium. Munger’s point on this is simple: do not treat Mr. Market as wise; instead, view him as your servant. It is certain that the prices of investment assets will wiggle above and below intrinsic value.

Groucho Marx joke: you do not want to hire an investment manager that would take you for a client!

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building blocks in a step-by-step process and employ techniques like checklists, which reinforce the Graham value investing system, you can avoid making most mistakes—or at least making new mistakes.

Worldly Wisdom
you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.

Multiple models needed to avoid seeing the world in one way "when all you have is a hammer" come from psychology, history, mathematics, physics, philosophy, biology...

People weigh models with numbers higher because of stats, but a single model that is precisely wrong, is worse than many partially correct harder to measure models.

Because life is related, so are models.

Learn from others, makes no sense to sit down and dream it all up ourselves. “Munger reads hundreds of biographies, to see how people think”

Have dysfunctional decision-making heuristics from psychology caused an error? Are there approaches one can use to find those mistakes? use a model from algebra and invert problems to find a solution. Double-check on decision, match result against many different models, be consistently less stupid.

Capitalism means that people will try to replicate any profitable business, this is why moats are important, you have an advantage.

If you cannot explain why you failed after making a mistake, it was too complex of a (business | project | etc)

Psychology of Human Misjudgment
Investing is less than a zero sum game. Dysfunctional decision making and emotional errors can be an opportunity
Reward and Punishment Superresponse Tendency - Incentives are everything. “Skin in the game”
Liking/ Loving Tendency - One check is to seek out people who disagree with you. Should change one idea per year.
Disliking/ Hating Tendency - separate how you feel about one thing from the other. I.e. not liking someone because of the school they went to.
Doubt-Avoidance Tendency - don’t let history cloud having doubt about something, doubt is a healthy check.
Inconsistency-Avoidance Tendency - get’s worse as you’ve invested more, even worse with doubt-avoidance.
Curiousity Tendency - too much info, or too many products, all about tradeoffs
Kantian Fairness Tendency - unfair for individual but fair for group, investors can be irrational here, Navy if captain runs ship aground still his fault even if it isn't fair
Envy/ Jealousy Tendency - someone will always be getting richer than you, who cares?
Reciprocation Tendency - reciprocation sometimes results in unequal exchange of value. Offering a “free” weekend for time-shares to sign up
Influence-from-Mere-Association Tendency - Two ways, actor selling X advice, other way “shoot the messenger”
Simple, Pain-Avoiding Psychological Denial - Happens in projects a lot (interest in misleading). Easy to tell stories in retrospect. Sometimes fewer facts are more believable. Math built on faulty assumptions.
Excessive Self-regard Tendency - Genuine expert is to know your limits. Story == Confidence != Truth
Over-Optimism Tendency - “One of our biases is that we can ignore the lessons of experience.” - Kahneman.
Deprival Super-Reaction Tendency - Loss aversion, too conservative for gains, too risky for losses. “empirical evidence suggests we feel losses about two to two-and-a-half times more than we feel gains.” Mauboussin
Social-Proof Tendency - Good ideas cause more mischief than bad ideas, push good idea to retched excess. We need to copy others since we don’t have complete information. Weigh correctness by # of people. Falling in with the crowd means it’s mathematically impossible to out-perform the market. Independent thinking is arbitrage on this.
Contrast-Misreaction Tendency - Opportunity-Cost Lens averts this. Small scale, 10k add on to 65k car. Large scale bad husband because bad parents. Never comparison buy because you saw something worse first.
Stress-Influence Tendency - Avoid it.
Availability-Misweighing Tendency - availability | recency != value. I.e. buying after a crash. Or lottery tickets.
Use-It-or-Lose-It Tendency -
Drug-Misinfluence Tendency -
Senescence-Misinfluence Tendency - Far better to wear out from work rust out from inactivity.
Authority-Misinfluence Tendency - Risk, uncertainty of Ignorance exacerbates authority tendency. Flashy suits or degrees do to.
Twaddle Tendency - Or Prattle, Don’t confidently answer questions if I don’t know. Answers are not value, truth and correctness is. Easiest person to fool is myself.
Reason-Respecting Tendency - people will defer to reason, it's why boiler rooms work, hustle on fake reasons penny stocks will go up
Lollapalooza Tendency - Interactions of previous tendencies create sum greater than parts. Either creates critical mass or doesn’t at all, “black swan event” confluence of causes, a happens in complex systems, 2007 financial crisis. “Well, the open-outcry auction is just made to turn the brain into mush: you’ve got social proof, the other guy is bidding, you get reciprocation tendency, you get deprival super-reaction syndrome, and the thing is going away. … I mean, it just absolutely is designed to manipulate people into idiotic behavior.”

The Right Stuff

Don’t try to mimick exactly what someone else does. You can improve your ability to read, think, learn, avoid mistakes, and pay attention to the personal attributes that drive success. The focus on learning is key. No one is perfect, focus on continual improvement.

Patient
Success comes from patience and then aggressively moving when it makes sense.
Level of activity is not correlated with value.
Focus on discovery, not prediction, can’t ever know the future.

Disciplined
Following crowd is the easiest approach, being contrarian is a benefit. No bonus for activity in investing.

Calm but courageous and decisive
Market returns will always be lumpy, to profit from courage you have to have cash on hand. Don’t fall into the “urge of missing out”. Move aggressively when opportunity arises.

Reasonable Intelligent but not mislead by high IQs
Passionate interest in what is happening. High IQ can lead to overconfidence, proxy fort thinking you know things you don’t. Know your circle of competence.

Honest
“How nice it is to have a tyrant’s strength and how wrong it is to use it like a tyrant.” What kind of things would you not do, even if it was legal?

Confident and non-ideological
Aware of own limitations, stay away from decisions that are too hard. Heavy ideology sways decision making, forces your hand on hard decisions.

Long-term oriented
Pain today, gain tomorrow. Compounding interest is hard to fully understand. Many things that are not directly financial will compound. Skills, relationships, and other aspects of life can compound and benefit a person who invests time and money wisely to cultivate these things.

Passion
Passionate people tend to have an informational edge over others who are not as passionate.

Studious
Read a lot. Best approach to investing is to be businesslike. Talk to users of the business, suppliers, ex-employees, everybody (user research on the company!) Life is a lot more pleasant when you let other people make most of the big mistakes.

Collegial
Surround yourself with people you can learn from - have someone trusted to talk to. Everyone needs somebody to talk to, helps refine your thoughts

Sound Temperament
Avoid emotional (fear, greed). Keep a record of investment decisions to review. If you don’t have this, you may not be a value investor, that’s fine, better to learn than to be an active investor with the wrong temperament.

Frugal
Way to wealth, waste neither time nor money.

Risk Adverse
Volatility is just one risk and you can weigh how important it is - primary a risk for money managers as people flee funds. Risk of permanent loss, or Risk of inadequate returns are others. Risk can’t be fully expressed as a number.

Seven Variables in the Graham Value Investing System

Variable 1: intrinsic value of business, is a range. too hard to value, Munger passes, should be able to do it in his head. Berkshire looks at value as it relates to ‘owners earnings’, if growth costs too much, it ‘hurts’ the investor

Variable 2: Margin of safety, value investor have ridiculously large one where errors in calculation don’t really matter. Quality isn’t worth infinite price (FB, Nike, etc), Elevated popular opinion can be risky. Just because an expensive stock is now cheap, doesn’t necessarily create a margin of safety. No investment is so good, irrespective of price.

Variable 3: Scope of circle of competence. circle of competence approach is a form of opportunity cost analysis, it's not a competency if you don’t know the edge of it. Emotional intelligence fights against urge to be ‘sold’ to by good stories. Don’t conflate familiarity with competence, just because you use a product doesn’t mean you know the business.

Variable 4: How much of each security to buy. Hard to go deep in many businesses, for active investors, company diversification means you likely can’t know more than the market. Goal for value investor is not to just find a quality company but a mis-priced bet. Diversification is a hedge against not knowing, low-fee index funds is the most diversified approach.

Variable 5: When to sell a security.

Variable 6: how much to bet on mis priced asset. Big.

Variable 7: quality of business. Important, find ones that are good, either command purchase control

8: what businesses. Durable most,

Right Stuff in Business

1 Capital allocation skills. Institutional imperative - funds soak up, resist change, justify existence, peers will follow.
2 compensation systems.
3 moat widening skills - moats win over managers, over anything.
Skin in the game.
“And in a bureaucracy, you think the work is done when it goes out of your in-basket into somebody else’s in-basket. But, of course, it isn’t.”
4 integrity in management is utmost.

Berkshire Math
Intelligent people make decisions based on opportunity costs—in other words, it’s your alternatives that matter. That’s how we make all of our decisions.

Moats

1. Supply-Side Economies of Scale and Scope. economies of scope, a business must share resources across markets while keeping the amount of those resources largely fixed. Businesses that desire to benefit from economies of scope must avoid running as isolated units.
2. Demand-Side Economies of Scale (Network Effects). result when a product or service becomes more valuable as more people use it.
3. Brand. Brands, of course, can fail over time. determining the strength of a brand-based moat is whether a competitor can replicate or weaken the moat with a massive checkbook. Usually only the company can mess up a brand.
4. Regulation. Regulations can often end up protecting existing entrenched producers rather than helping consumers. For example, some people believe banks have created such a powerful layer of regulatory expertise that the regulators have become captured by the industry they regulate. Similarly, there are a number of professional guilds, like lawyers, that have been able to use regulation to limit supply.
5. Patents and Intellectual Property.

Berkshires moats. Tax efficient, doesn't pay yearly taxes on profit. Low overhead, trust managers, skin in the game. Permanent capital. Win during down cycles. Float on insurance. High quality share holders.

capitalism works is because moats are hard to create and usually deteriorate over time. What happens over time is that so-called producer surplus is transferred into consumer surplus.

"Companies generating high economic returns will attract competitors willing to take a lesser, albeit still attractive, return which will drive down aggregate industry returns to the opportunity cost of capital. —MICHAEL MAUBOUSSIN, “MEASURING THE MOAT,” 2002"

company that has a return on capital significantly greater than its opportunity cost over time has a moat, whether they know it or not.

Venture capitalists harvest something called optionality,Moats that emerge from complex adaptive systems like an economy are hard to spot. This is because a moat is something that is greater than the sum of its parts,

Factor / Value Investing

value as a statistical factor (Fama/ French) and value as an analytical style or goal (Ben Graham). “Factor” is based on the premise that markets are efficient and use a top down approaches such as “book-to-market” used as a proxy metric for intrinsic value, another way of index investing. Grahams are bottom up based on the business, using return on equity (return / total equity) and return on capital (return / equity + debts).