On Investing

• To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don't, see things differently or do a better job of analyzing them—ideally, all three.
• Your view of value has to be based on a solid factual and analytical foundation, and it has to be held firmly. Only then will you know when to buy and sell. Only a strong sense of value will give you the discipline needed to take profits on a highly appreciated asset that everyone thinks will rise nonstop, or the guts to hold and average down in a crisis even as prices go lower every day. Of course, for your efforts in these regards to be profitable, your estimate of value has to be on target.
• The relationship between price and value holds the ultimate key to investment success. Buying below value is the most dependable route to profit. Paying above value rarely works out as well.
• What causes an asset to sell below its value? Outstanding buying opportunities exist primarily because perception understates reality. Whereas high quality can be readily apparent, it takes keen insight to detect cheapness. For this reason, investors often mistake objective merit for investment opportunity. The superior investor never forgets that the goal is to find good buys, not good assets.
• In addition to giving rise to profit potential, buying when price is below value is a key element in limiting risk. Neither paying up for high growth nor participating in a "hot" momentum market can do the same.
• The relationship between price and value is influenced by psychology and technicals, forces that can dominate fundamentals in the short run. Extreme swings in price due to those two factors provide opportunities for big profits or big mistakes. To have it be the former rather than the latter, you must stick with the concept of value and cope with psychology and technicals.
• Economies and markets cycle up and down. Whichever direction they're going at the moment, most people come to believe that they'll go that way forever. This thinking is a source of great danger since it poisons the markets, sends valuations to extremes, and ignites bubbles and panics that most investors find hard to resist.
• Likewise, the psychology of the investing herd moves in a regular, pendulum like pattern from optimism to pessimism; from credulousness to skepticism; from fear of missing opportunity to fear of losing money, and thus from eagerness to buy to urgency to sell. The swing of the pendulum causes the herd to buy at high prices and sell at low prices. Thus, being part of the herd is a formula for disaster, whereas contrarianism at the extremes will help to avert losses and lead eventually to success.
• In particular, risk aversion- an appropriate amount of which is the essential ingredient in a rational market is sometimes in short supply and sometimes excessive. The fluctuation of investor psychology in this regard plays a very important part in the creation of market bubbles and crashes.
• The power of psychological influences must never be underestimated. Greed, fear, suspension of disbelief, conformism, envy, ego and capitulation are all part of human nature, and their ability to compel action is profound, especially when they're at extremes and shared by the herd. They'll influence others, and the thoughtful investor will feel them as well. None of us should expect to be immune and insulated from them. Although we will feel them, we must not succumb; rather, we must recognize them for what they are and stand against them. Reason must overcome emotion.
• Most trends—both bullish and bearish—eventually become overdone, profiting those who recognize them early but penalizing the last to join. That's the reasoning behind my number one investment adage: "What the Wise man does in the beginning, the fool does in the end." The ability to resist excesses is rare, but it's an important attribute of the most successful investors.
• It's impossible to know when an overheated market will turn down, or when a downturn will cease and appreciation will lake its place. But while we never know where we're going, we ought to know where we are. We can infer where markets stand in their cycle from the behavior of those around us. When other investors are unworried, we should be cautious; when investors are panicked, we should turn aggressive.
• Not even contrarianism, however, will produce profits all the time. The great opportunities to buy and sell are associated with valuation extremes, and by definition they don't occur every day. Were bound to also buy and sell at less compelling points in the cycle, since few of us can be content to act only once every few years. We must recognize when the odds are less in our favor and tread more carefully.
• Buying based on strong value, low price relative to value, and depressed general psychology is likely to provide the best results. Even then, however, things can go against us for a long time before turning as we think they should. Underpriced is far from synonymous with going up soon. Thus the importance of my second key adage: "Being too far ahead of your time is indistinguishable from being wrong." It can require patience and fortitude to hold positions long enough to be proved right.
• In addition to being able to quantify value and pursue it when it's priced right, successful investors must have a sound approach to the subject of risk. They have to go well beyond the academics' singular definition of risk as volatility and understand that the risk that matters most is the risk of permanent loss. They have to reject increased risk bearing as a surefire formula for investment success and know that riskier investments entail a wider range of possible outcomes and a higher probability of loss. They have to have a sense for the loss potential that's present in each investment and be willing to bear it only when the reward is more than adequate.
• Most investors are simplistic, preoccupied with the chance for return. Some gain further insight and learn that it's as important to understand risk as it is return. But it's the rare investor who achieves the sophistication required to appreciate correlation, a key element in controlling the riskiness of an overall portfolio. Because of differences in correlation, individual investments of the same absolute riskiness can be combined in different ways to form portfolios with widely varying total risk levels. Most investors think diversification consists of holding many different things; few understand that diversification is effective only if portfolio holdings can be counted on to respond differently to a given development in the environment.
• While aggressive investing can produce exciting results when it goes right—especially in good times—it's unlikely to generate gains as reliably as defensive investing. Thus, a low incidence and severity of loss is part of most outstanding investment records. Oaktree's motto, "If we avoid the losers, the winners will take care of themselves," has served well over the years. A diversified portfolio of investments, each of which is unlikely to produce significant loss, is a good start toward investment success.
• Risk control lies at the core of defensive investing. Rather than just trying to do the right thing, the defensive investor places a heavy emphasis on not doing the wrong thing. Because ensuring the ability to survive under ad- verse circumstances is incompatible with maximizing returns in good times, investors must decide what balance to strike between the two. The defensive investor chooses to emphasize the former.
• Margin for error is a critical element in defensive investing. Whereas most investments will be successful if the future unfolds as hoped, it takes margin for error to render outcomes tolerable when the future doesn't oblige. An investor can obtain margin for error by insisting on tangible, lasting value in the here and now, buying only when price is well below value; eschewing leverage; and diversifying. Emphasizing these elements can limit your gains in good times, but it will also maximize your chances of coming through intact when things don't go well. My third favorite adage is "Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average. * Margin for error gives you staying power and gets you through the low spots.
• Risk control and margin for error should be present in your portfolio at all times. But you must remember that they're "hidden assets. " Most years in the markets are good years, but it's only in the bad years—when the tide goes out—that the value of defense becomes evident. Thus, in the good years, defensive investors have to be content with the knowledge that their gains, although perhaps less than maximal, were achieved with risk protection in place...even though it turned out not to be needed.
• One of the essential requirements for investment success- and thus part of most great investors' psychological equipment- is the realization that we don't know what lies ahead in terms of the macro future. Few people if any know more than the consensus about what's going to happen to the economy, interest rates and market aggregates. Thus, the investor's time is better spent trying to gain a knowledge advantage regarding "the know- able": industries, companies and securities. The more micro your focus, the greater the likelihood you can learn things others don't.
• Many more investors assume they have knowledge of the future direction of economies and markets- and act that way—than actually do. They take aggressive actions predicated on knowing what's coming, and that rarely produces the desired results. Investing on the basis of strongly held but incorrect forecasts is a source of significant potential loss. Many investors, amateurs and professionals alike- assume the world runs on orderly processes that can be mastered and predicted. They ignore the randomness of things and the probability distribution that underlies future developments. Thus, they opt to base their actions on the one scenario they predict will unfold. This works sometimes—winning kudos for the investor—but not consistently enough to produce long term success. In both economic forecasting and investment management, it's worth noting that there's usually someone who gets it exactly right...but it's rarely the same person twice. The most successful investors get things "about right" most of the time, and that's much better than the rest.
• An important part of getting it right consists of avoiding the pitfalls that are frequently presented by economic fluctuations, companies' travails, the markets' manic swings, and other investors' gullibility. There's no surefire way to accomplish this, but awareness of these potential dangers certainly represents the best starting point for an effort to avoid being victimized by them.
• Neither defensive investors who limit their losses in a decline nor aggressive investors with substantial gains in a rising market have proved they possess skill. For us to conclude that investors truly add value, we have to see how they perform in environments to which their style isn't particularly well suited. Can the aggressive investor keep from giving back gains when the market turns down? Will the defensive investor participate substantially when the market rises? This kind of asymmetry is the expression of real skill. Does an investor have more winners than losers? Are the gains on the winners bigger than the losses on the losers? Are the good years more beneficial than the bad years are painful? And are the long- term results better than the investor's style alone would suggest? These things are the mark of the superior investor. Without them, returns may be the result of little more than market movement and beta.
• Only investors with unusual insight can regularly divine the probability distribution that governs future events and sense when the potential re. turns compensate for the risks that lurk in the distribution's negative left-hand tail. This simple description of the requirements for successful investing-based on understanding the range of possible gains and the risk of untoward developments—captures the elements that should receive your attention. I commend the task to you. It'll take you on a challenging, exciting and thought-provoking journey.
• I like to say, “Experience is what you got when you didn’t get what you wanted.
• There are old investors, and there are bold investors, but there are no old bold investors.
• Prices are too high” is far from synonymous with “the next move will be downward.” Things can be overpriced and stay that way for a long time...or become far more so.
• Investment success doesn’t come from “buying good things,” but rather from “buying things well.”
• There’s a big difference between probability and outcome. Probable things fail to happen—and improbable things happen—all the time.” That’s one of the most important things you can know about investment risk.
• We have to practice defensive investing, since many of the outcomes are likely to go against us. It’s more important to ensure survival under negative outcomes than it is to guarantee maximum returns under favorable ones.
• Here’s the key to understanding risk: it’s largely a matter of opinion.
• Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.
• Every once in a while, an up-or-down-leg goes on for a long time and/or to a great extreme and people start to say "this time it's different." They cite the changes in geopolitics, institutions, technology or behavior that have rendered the "old rules" obsolete. They make investment decisions that extrapolate the recent trend. And then it turns out that the old rules still apply and the cycle resumes. In the end, trees don't grow to the sky, and few things go to zero.
• There’s only one way to describe most investors: trend followers. Superior investors are the exact opposite. Superior investing, as I hope I’ve convinced you by now, requires second-level thinking—a way of thinking that’s different from that of others, more complex and more insightful.
• Selling for more than your asset’s worth. Everyone hopes a buyer will come along who’s willing to overpay for what they have for sale. But certainly the hoped-for arrival of this sucker can’t be counted on. Unlike having an underpriced asset move to its fair value, expecting appreciation on the part of a fairly priced or overpriced asset requires irrationality on the part of buyers that absolutely cannot be considered dependable.
• The most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price and no new buyers are left to emerge.
• Once in a while, however, the future turns out to be very different from the past. It’s at these times that accurate forecasts would be of great value. It’s also at these times that forecasts are least likely to be correct. Some forecasters may turn out to be correct at these pivotal moments, suggesting that it’s possible to correctly.
• People should like something less when its price rises, but in investing they often like it more.
• The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.
• Risk means uncertainty about which outcome will occur and about the possibility of loss when the unfavorable ones do.
• Everything you needed to know in the years leading up to the crash could be discerned through awareness of what was going on in the present.
• If everyone likes it, it's probably because it has been doing well. Most people seem to think that outstanding performance to dates presages outstanding future performance. Actually, it's more likely that outstanding future performance to date has borrowed from the future and thus presages subpar performance from her on out.
• Buying something for less than its value. In my opinion, this is what it’s all about—the most dependable way to make money. Buying at a discount from intrinsic value and having the asset’s price move toward its value doesn’t require serendipity; it just requires that market participants wake up to reality. When the market’s functioning properly, value exerts a magnetic pull on price.
• An accurate estimate of intrinsic value is the essential foundation for steady, unemotional and potentially profitable investing.
• Most people strive to adjust their portfolios based on what they think lies ahead. At the same time, however, most people would admit forward visibility just isn't that great. That's why I make the case for responding to the current realities and their implications, as opposed to expecting the future to be made clear.
• Charlie Munger gave me a great quotation on this subject, from Demosthenes: “Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.” The belief that some fundamental limiter is no longer valid—and thus historic notions of fair value no longer matter—is invariably at the core of every bubble and consequent crash. In fiction, willing suspension of disbelief adds to our enjoyment.
• Skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.
• Prosperity brings expanded lending, which leads to unwise lending, which produces large losses, which makes lenders stop lending, which ends prosperity, and on and on. Look around the next time there’s a crisis; you’ll probably find a lender.
• When risk bearing doesn’t work, it really doesn’t work, and people are reminded what risk’s all about.
• The correctness of a decision can’t be judged from the outcome. Nevertheless, that's how people assess it. A good decision is one that’s optimal at the time it’s made, when the future is by definition unknown. Thus, correct decisions are often unsuccessful, and vice versa.
• If your behavior is conventional, you’re likely to get conventional results—either good or bad. Only if your behavior is unconventional is your performance likely to be unconventional, and only if your judgments are superior is your performance likely to be above average.
• It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
• If you've settled on the value approach to investing and come up with an intrinsic value for a security or asset, the next important thing is to hold it firmly. That's because in the world of investing, being correct about something isn't at all synonymous with being proved correct right away.
• The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing—these factors are near universal. Thus they have a profound collective impact on most investors and most markets. The result is mistakes, and those mistakes are frequent, widespread and recurring.
• This paradox exists because most investors think quality, as opposed to price, is the determinant of whether something's risky. But high quality assets can be risky, and low quality assets can be safe. It's just a matter of the price paid for them... Elevated popular opinion, then, isn't just the source of low return potential, but also of high risk.
• In good years, defensive investors have to be content with the knowledge that their gains, although perhaps less than maximal, were achieved with risk protection in place, even though it turned out not to be needed.
• Patient opportunism, buttressed by a contrarian attitude and a strong balance sheet, can yield amazing profits during meltdowns.
• It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.
• Good builder is able to avoid construction flaws, while a poor builder incorporates construction flaws. When there are no earthquakes, you can’t tell the difference.
• The market can remain irrational longer than you can remain solvent.
• The physicist Richard Feynman once said that physics would be much harder if electrons had feelings. That is to say, you turn on the light switch, the light always goes on because the electrons always flow from the light switch to the fixture. They never forget their assignment and swim in the opposite direction. They never go on strike and fail to flow or forget what they're supposed to do. They always flow in the right direction. But investing is made up of people.
• Unconventionality is required for superior investment results, especially in asset allocation. As I mentioned above, you can’t do the same things others do and expect to outperform. Unconventionality shouldn’t be a goal in itself, but rather a way of thinking. In order to distinguish yourself from others, it helps to have ideas that are different and to process those ideas differently...Only if the behavior is unconventional is your performance going to be unconventional…and only if the judgments are superior is your performance likely to be above average.

Think for yourself, be skeptical and be aware of the good ideas that are overdone.

• Non-consensus ideas have to be lonely. By definition, non-consensus ideas that are popular, widely held or intuitively obvious are an oxymoron. Thus, such ideas are uncomfortable; non-conformists don’t enjoy the warmth that comes with being at the center of the herd.
• The truth is, discord sells (how often does your daily newspaper lead with a positive headline?).
• What’s the word for that? My answer is “politics,” which is, in part, defined by Oxford as “the debate or conflict among individuals or parties having or hoping to achieve power.”
• While my examples describe extreme hypothetical outcomes, these are not imaginary concerns.
• I was struck 30-40 years ago to learn that whereas a million dollars is $10 a second for 28 hours, a billion

dollars is $10 a second for 38 months. Now let’s think about a trillion: $10 a second for more than 3,000 years. As I said, almost incomprehensible.

• All I have to add to that is my usual observation regarding the future: We’ll see.
• The willing suspension of disbelief. “Contributing to euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten. In further consequence, when the same or closely similar circumstances occur again, sometimes in only a few years, they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery in the financial and larger economic world. There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.” (John Kenneth Galbraith, A Short History of Financial Euphoria, 1990 emphasis added)—I've shared that quote with readers many times over the last 30 years - since I think it so beautifully sums up a number of important points - but I haven't previously shared my explanation for the behavior it describes. I don't think investors are actually forgetful. Rather, knowledge of history and the appropriateness of prudence sit on one side of the balance, and the dream of getting rich sits on the other. The latter always wins. Memory, prudence, realism, and risk aversion would only get in the way of that dream. For this reason, reasonable concerns are regularly dismissed when bull markets get going.
• Knowing what we don't know is better than thinking we know what we don't. It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.
• Don’t believe in forecasting but believe in cycles. Taking temperature of the market (optimism and pessimism). People raising money for whatever at whatever price and terms is a signal for trouble. You can’t analyze the future because future is unknown, but you look to past for analogies.
• If you have something new, you get flight to an imagination. Internet will change the world so it’s worth infinity. But not all companies survived because they had bad business models. This cycle repeats every time: SPAC, Bitcoin, SASS, Bitcoin, NFTs. With everything new, there is no history to look at, so you look at narrative around you.
• It’s not what you buy, but how well you pay. If you don’t understand this, you are in the wrong business. It’s a combination of excellent company with fair price or declining business with a bargain price. There are tradeoffs need to be made.
• The news is same for all of us to in order to outperform but you have to depart from the crowd. You have to have resolve to do it but it can’t be easy. Emotions are universal.
• A warrior is someone who is afraid on a battlefield but still does his job. Uncomfortable idiosyncratic has always been relevant to investment professional. Dare to be great can only be done when you dare to be different. You have to dare to be wrong. It’s really easy to be an average go buy an index fund, but to be above average, you have to dare to be willing to be wrong.
• What is risk? It is a probability of negative event in the future. What does past tell us about that? The past has relevance but it is not absolute. Risk cannot be quantified that is why I don’t believe in models. And what is quantification, it is a measurement. And future events cannot be measured.
• Risk cannot be quantified. Was it lucky that you doubled your dollar? The possibility of future cannot be synthesized as an input to quantify.
• Experience is what you get when you get something you don’t want. The best way to learn lessons is inexpensively.
• One of the important part of investing is being a skeptic. If someone comes tell you, you made 11% for the last 25 years and never had a bad year, you say, it is too good to be true, Mr. Madoff. But very few people did.
• It is hard for most people to be humble. There are these defenses, overlook their flaws and their limitations. When you look at human endeavor, I believe strongly that success carries within itself with seeds of failure and failure carries the seeds of success. What do you learn from success? I can do it, I can do it again, it’s easy, I can do it in other fields, I can do it with more money, I can do it alone, it was me, it wasn’t a team. these are horrible lessons, success teaches terrible lessons because it plays to our ego. You learn more from failures which allows you to learn humility. When do you balance incomplete of knowledge? An investor needs to balance incomplete of knowledge with confidence with overconfidence. Humility vs non-humility.
• Relevant information about the present will not make you a superior investor or it is not sufficient. Everyone has it, the quantitative information is not the key to be a successful investor. So what can it be?
• Fixed income is a negative art.
• In order to produce something useful—be it in manufacturing, academia, or even the arts–you must have a reliable process capable of converting the required inputs into the desired output.
• Forecasters have no choice but to base their judgments on models, be they complex or informal, mathematical or intuitive. Models, by definition, consist of assumptions: “If A happens, then B will happen.”  In other words, relationships and responses.  But for us to willingly employ a model’s output, we have to believe the model is reliable.  When I think about modeling an economy, my first reaction is to think about how incredibly complicated it is...this level of complexity necessitates the frequent use of simplifying assumptions. How can a model of an economy be comprehensive enough to deal with things that haven’t been seen before, or haven’t been seen in modern times (meaning under comparable circumstances)? This is yet another example of why a model simply can’t replicate something as complex as an economy. Of course, a prime example of this is the Covid-19 pandemic. It caused much of the world’s economy to be shut down, turned consumer behavior on its head, and inspired massive government largesse.  What aspect of a pre-existing model would have enabled it to anticipate the pandemic’s impact?  Yes, we had a pandemic in 1918, but the circumstances were so different (no iPhones, Zoom calls, etc. ad infinitum) as to render economic events during that time of little or no relevance to 2020. The unpredictability of behavior is a favorite topic of mine.  Noted physicist Richard Feynman once said, “Imagine how much harder physics would be if electrons had feelings.”  The rules of physics are reliable precisely because electrons always do what they’re supposed to do.  They never forget to perform.  They never rebel.  They never go on strike.  They never innovate.  They never behave in a contrary manner.  But none of these things is true of the participants in an economy, and for that reason their behavior is unpredictable.  And if the participants’ behavior is unpredictable, how can the workings of an economy be modeled? Thus, for me, the bottom line is that the output from a model may point in the right direction much of the time, when the assumptions aren’t violated.  But it can’t always be accurate, especially at critical moments such as inflection points...and that’s when accurate predictions would be most valuable. No one can invest intelligently without considering (a) the other possible outcomes for each element, (b) the likelihood of these alternative scenarios, (c) what would have to happen for one of them to be the actual outcome, and (d) what the impact on E would be. Doesn’t this question indicate an insoluble feedback loop: To predict the overall performance of the economy, we need to make assumptions about, for example, consumer behavior.  But to predict consumer behavior, don’t we need to make assumptions regarding the overall economic environment? We can’t consider the reasonableness of forecasting without first deciding whether we think our world is one of order or of randomness. Put simply, is it entirely predictable, entirely unpredictable, or something in between?  The bottom line for me is that it’s in between, but unpredictable enough that most forecasts are unhelpful.
• Are you a consumer of forecasts? The rule in this case is that macro forecasts rarely lead to exceptional performance.  For me, the exceptionalness of the success stories proves the general truth of that assertion. As Buffett said—forecasts usually tell us more of the forecaster than of the future. The mechanisms that people generally employ when responding to evidence that throws their beliefs into doubt include these (paraphrasing the authors’ words):
  • an unwillingness to heed dissonant information;
  • selectively remembering parts of their lives, focusing on those parts that support their own points of view; and
  • operating under cognitive biases that ensure people see what they want to see and seek confirmation of what they already believe.
  • Most people–even honest people with good intentions–take positions or actions that are in their own interests, sometimes at the expense of others or of objective truth. They don’t know they’re doing it; they think it’s the right thing; and they have tons of justification. As Charlie Munger often says, quoting Demosthenes, “Nothing is easier than self-deceit. For what every man wishes, that he also believes to be true.”
  • I don’t think of forecasters as crooks or charlatans.  Most are bright, educated people who think they’re doing something useful. But self-interest causes them to act in a certain way, and self-justification enables them to stick with it in the face of evidence to the contrary.
  • It’s easy to identify members of the “I know” school:
    • They think knowledge of the future direction of economies, interest rates, markets and widely followed mainstream stocks is essential for investment success.
    • They’re confident it can be achieved.
    • They know they can do it.
    • They are aware that lots of other people are trying to do it too, but they figure either (a) everyone can be successful at the same time, or (b) only a few can be, but they’re among them.
    • They are comfortable investing based on their opinions regarding the future.
    • They are also glad to share their views with others, even though correct forecasts should be of such great value that no one would give them away gratis.
    • They rarely look back to rigorously assess their record as forecasters.
  • “Confident” is the key word for describing members of this school.  For the “I don’t know” school, on the other hand, the word – especially when dealing with the macro-future – is “guarded.”  Its adherents generally believe you can’t know the future; you don’t have to know the future; and the proper goal is to do the best possible job of investing in the absence of that knowledge.
• First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in “The outlook for the company is favorable, meaning the stock will go up.” Second-level thinking is deep, complex and convoluted.

• On Bogle: I think they were pivotal. I think a couple of things maybe later were equally as pivotal. But obviously, your childhood is major. First of all, he was always working. He was a scholarship kid. He had a taste or a sniff of the Great Depression. I always tell people, like especially my mom and my family, I would say, “Visiting Jack Bogle was like hanging out with my grandfather, not my father.” He was not a boomer. He was a World War II-type guy. He had the same sense of humor. The office had like pictures of warships and stuff, just like my grandfather. And that generation was very thrifty generally. They had just seen things that the rest of us haven't. And I think he had enough of that that was a nice core for him. And obviously, working off of scholarships, he had to work, doing all kinds of jobs, including setting bowling pins. And in my life, as I've met people who had to work through college, they tend to be the most successful people. That's a really good ethic to begin with. So, I think thriftiness was important. Obviously, that paid dividends later. And in fact, I do think there was some genetics at work though. His great grandfather was a populist fighter of insurance companies. And Bogle lists some of his great grandfather's speeches in one of his books. And it's fascinating how similar their language is. His great grandfather was the one who said, “Gentlemen, cut your costs.” He just copied it. So, there was some genetics at play, I believe, and of course, obviously, the environmental aspects that I said as well. And I think his father was not a great achiever; he didn't achieve a lot and had trouble holding down a job. And I think that also probably sparked Bogle to want to make something of himself.
• Investing is simple, but not easy. Bogle, the creator of Vanguard which created the first index mutual fund in 1974 was lonely in the fight at first. But as time passed on, the idea caught on fire.
  • Paul A Samuelson, Nobel laureate in economic sciences and professor at MIT once said: Bogle's reasoned percepts can enable a few millions of us savers to become in twenty years the envy of our suburban neighbors—while at the same time we have slept well in these eventful times.
  • The record of an investor in the first index mutual fund: $15,000 invested in 1976 would be valued at $913,000 in 2016.
• In the book, Bogle shares commentary provided by legendary investors and industry experts on the value of investing in low cost index funds. To my surprise, I was baffled, but not surprised on the spirit of investing in these funds. Even the great investors and market commentors such as Jim Cramer have bowed down to Bogle's wisdom.
  • “It’s bad enough that you have to take market risk. Only a fool takes on the additional risk of doing yet more damage by failing to diversify properly with his or her nest egg. Avoid the problem-buy a well-run index fund and own the whole market.” — William Bernstein
• Investing in low cost, broad index funds eliminates the risk of picking individual stocks, the risk of emphasizing certain market sectors, and the risk of manager selection.
• Long-term investing serves you far better than short-term speculation, about the value of diversification, about the powerful role of investments costs, about the perils of relying on a fund's past performance and ignoring the principle of reversion (or regression) to the mean (RTM) in investing. Wall Street will never teach you this or want you to learn these things.
• The average annual total return on stocks was 9.5 percent from 1900 to 2016. The investment return alone was 9.0 percent (actual returns made by corporate America)—4.4 percent from dividend yield and 4.6 percent from earnings growth. That difference of 0.5 percentage points per year was from speculative return. Each dollar initially invested in stocks in 1900 grew to $43,650 by 2015. Combining investment return and speculative return yields to total stock market returns.
  • An astounding revelation on dividends. Excluding dividend income, an initial investment of $10,000 in the S&P 500 on January 1 1036, would have grown to more than $1.7 million as 2017 began. But dividends reinvested, that investment would've grown to some $59.1 million. This is the magic of free compounding—an astounding gap of $57.5 million.
    • Dividends per share on the 500 Index fell from $28.39 in 2008 to $22.41 in 2009, but reached a new high of $45.70 in 2016 (60% above the 2008 peak).
• In the long run, stock returns depend almost entirely on the reality of the investment returns earned by corporations. It is economics that controls long-term equity returns; the impact of emotions, so dominant in the short term, dissolves.
• The arithmetic of investment return is so basic: earnings and dividends generated by American businesses that are responsible for the returns in the long-term. While the price illusion in short-term loses touch. It is reality that rules in the long run.
  • “One game is the real market, where giant publicly held companies compete. Where real companies spend real money to make and sell real products and services, and, if they play with skill, earn real profits and pay real dividends. This game also requires real strategy, determination, and expertise; real innovation and real foresight. Another game is expectations market. Here prices are not set by real things like sales margins or profits. In the short-term stock prices go up only when the expectations of investors rise, not necessarily when sales, margins, or profits rise.” — Roger Martin, dean of the Rotman School of Management of the University of Toronto.
• Past returns do not foretell the future.
  • “It is dangerous to apply to the future inductive arguments based on past experience, unless one can distinguish the broad reasons why past experience was what it was.” — John Maynard Keynes
• Occam's razor: when there are multiple solutions to a problem, choose the simplest one. As applicable to investing as to the scientific world.
  • Choose the simplest of all solutions—buy and hold a diversified, low-cost portfolio that tracks the stock market.
• On average, an astonishing 90 percent of actively managed mutual funds underperformed their benchmark indexes over the preceding 15 years. Why? After subtracting all costs, an average investor is left with disappointing returns that does not meet the low-cost provider returns. Those costs are the relentless rules/factors of humble arithmetic. Following costs make the difference between investment success and failure:
  • Investment expenses:
    • Management fees
    • Portfolio turnover
    • Brokerage commissions (ask/bid spread)
    • Sales loads
    • Advertising costs
    • Operating costs
    • Legal fees
  • Inflation
  • Counterproductive investor behavior
    • Bad timing (investing at peak or vice-versa)
    • Adverse fund selections
    • Factor investing
    • Tax liabilities on high turnover
  • Taxes
    • Federal
    • State
    • Local
• Wall Street is in the business of generating revenue for itself so as long as something is making money, they will sell you. And if a fund that has failed to meet its success, they will merge it into a larger fund eliminating historical track records or liquidate. Morgan Stanley is a great example of that.
• As they say it, ETFs are a great substitution of traditional index funds. Then there are factor funds, smart beta and so on. Wall Street will continue to create alternative products that will want the piece of your pie by interrupting your compounding. But the best returns lie when you are not interrupting compounding. The more the managers and brokers take, the less the investors take.
• Money flows into most funds after good performance, and goes out when bad performance follows. The dual penalty of faulty timing and adverse selection is very costly. These penalties add up. And don't forget inflation. The value of all those dollars take a huge tumble.
• The beauty of index fund lies not only in its low expenses, but in its elimination of all those tempting fund choices that promises so much and deliver so little. Emotions need never enter the equation.
• Past returns do not signal future returns. Last few decades have been exceptionally great in generating market returns, but the good times will not roll forever. Investors need to readjust their expectations for future returns.
  • Reversion to the mean impacts mutual fund performance
  • Yesterday's winners are tomorrow's losers.
• Risk tolerance = risk capacity + risk willingness
• Your index fund should not be your manager's cash cow. It should be your own cash cow.
• Low cost also applies to bonds. Three types of bond funds:
  • Short-term
  • Intermediate
  • Long-term
• The magic of compounding investment returns. The tyranny of compounding investment costs.
• Before the deduction of the costs of investing, beating the stock market is a zero-sum game. After the deduction of the costs of investing beating the stock market is a loser's game.
• Weak managements ultimately fall victim to the creative destruction that is the hallmark of competitive capitalism.
• Simply buy a Standard & Poor's 500 Index fun or a total stock market index fund. Then, once you have bought your stocks, get out of the casino and stay out.
• You don't need to participate in its expensive foolishness.
• Get rid of all your Helpers. Then your family will again reap 100 percent of the pie that corporate America bakes for you.
• When greed hold sway, very high P/Es are likely. When hope prevails, P/Es are moderate. When fear is in the saddle, P/Es are typically very low.
• Stock returns are so volatile is largely because of the emotions of investing, reflected in those changing P/E ratios.
• The stock market is a giant distraction to the business of investing.
• It is a take told by an idiot, full of sound and fury, signifying nothing. — William Shakespeare
• Owning the stock market over the long term is a winner's game, but attempting to beat the stock market is a loser's game.
• We investors as a group get precisely what we don't pay for. If we pay nothing, we get everything.
• Where returns are concerned, time is your friend. But whose costs are concerned, time is your enemy.
• Fund performance comes and goes. Costs go on forever.
• The average fund owner is designed not for precision, but for direction.
• Inflamed by heady optimism and greed, and enticed by wiles of mutual fund marketers, investors poured their savings into equity funds at the bull market peak.
• When counterproductive investor emotions are magnified by counterproductive fund industry promotions, little good is apt to result.
• Fund investors have been chasing past performance since time immemorial, allowing their emotions, perhaps, even their greed, to overwhelm their reason.
• Investor emotions plus fund industry promotions equals trouble.
• The beauty of passive low-cost broad market index fund is if the managers take nothing, the investors receive everything (market's return).
• Don't look for the needle, buy the haystack.
• Whatever you decide, please don't ignore one of the least understood factors that shape mutual fund performance: reversion to the mean (RTM).
• Picking winning funds based on past performance is hazardous duty.
• The old saying that “past performance is no guide to the future” is not a piece of compliance jargon. It is the math. — Buttonwood
• Buying funds based purely on their past performance is on the of the stupidest things an investor can do.
• The temptation to chase past returns.
• ETFs are a dream come true for entrepreneurs and brokers.
• Simplicity beats complexity.
• The greatest enemy of a good plan is the dream of a perfect plan. Stick to a good plan.
• Investors should be satisfied with the reasonably good return obtainable from a defensive portfolio.
• I was selling nutritious bagels, but everybody wanted donuts.

• Everyone has their own unique experiences with how the world works. Risk and reward is quite different for a child in poverty than a child of a wealthy banker. Those who were scarred during the Great Recession of 2008 would not look at the stock market the same as someone who started investing in 2012 (investment returns have been enormous since then). Both of these are unique experiences led by random events, but no one is crazy. It is just we make decisions based on our own unique experiences.
• Luck and risk are siblings. There is effort and then there is risk and luck that an outcome should be attributed to. The latter two are hard to measure and hard to accept. Someone else's failure is usually attributed to bad decisions, while your own failures are usually attributed to risk. Take for example, Facebook turned down Yahoo's offer to acquire Facebook and we credit Mark Zuckerberg for a wise decision. But we criticize Yahoo with passion to reject Microsoft's offer. Luck and risk are indeed siblings! Let's recognize them as well when crediting or criticizing an outcome. There is more to than just efforts and IQ.
• There is no reason to risk what you have and need for what you don’t have and don’t need. Americans often get in trouble for having too many houses by stretching out their debt limits. That is what happened in 2008. The hardest financial skill is getting the goalpost to stop moving. After achieving financial success, money has no utility. With rise in income, expectations rises, but striving for more money has no utility. In that case one step forward pushes the goalpost two steps ahead that the ceiling of social comparison is so high that virtually no one will ever hit it. Which means it’s a battle that can never be won, or that the only way to win is to not fight to begin with—to accept that you might have enough, even if it’s less than those around you.
• A small starting base can yield to little growth which then fuels for future growth. This can lead to results so extraordinary they seem to defy logic. Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came in his mid-60s. His skill is investing, but his secret is time. We call that compounding.
• There’s only one way to stay wealthy—combination of frugality and paranoia. Getting money is one thing. Keeping it is another. Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. Not “growth” or “brains” or “insight.” The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career or a business you own.
• Anything that is huge, profitable, famous, or influential is the result of a tail event—an outlying one-in-thousands or millions event. Most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are. Apple was responsible for almost 7% of the S&P 500 index’s returns in 2018. And it is driven overwhelmingly by the iPhone, which is another tail event amongst the technology products. Tails drive everything.
• Freedom is the highest form of capital return. Control over doing what you want, when you want to, with the people you want to, is what makes people happy. Money's greatest intrinsic value is time. Six months’ emergency expenses means not being terrified of your boss, short commute, taking on a satisfying job with lower salary, and on, and on. Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with. United States is the richest nation in the world, but when we look at time for 99% of the population, it tells you a different story. People lose their time due to jobs and upgrading their lifestyle.
• People don't want expensive car; they want respect and admiration from other people. People think expensive stuff will bring that admiration which it almost never does.
• We should be careful to define the difference between wealthy and rich. Rich means having expensive stuff financed by debt. We rely on outward appearances to gauge financial success. But the truth is that wealth is what you don’t see. The only way to be wealthy is to not spend the money that you do have. It’s not just the only way to accumulate wealth; it’s the very definition of wealth. It’s not hard to spot rich people. They often go out of their way to make themselves known. But wealth is hidden. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.
• Save. Period. Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you. Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment. Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms. What is the return on cash in the bank that gives you the option of changing careers, or retiring early, or freedom from worry? I’d say it’s incalculable. When you don’t have control over your time, you’re forced to accept whatever bad luck is thrown your way. But if you have flexibility you have the time to wait for no-brainer opportunities to fall in your lap. This is a hidden return on your savings. Savings in the bank that earn 0% interest might actually generate an extraordinary return if they give you the flexibility to take a job with a lower salary but more purpose, or wait for investment opportunities that come when those without flexibility turn desperate. Having more control over your time and options is becoming one of the most valuable currencies in the world.
• Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money. Academic finance is devoted to finding the mathematically optimal investment strategies.
• History is mostly the study of surprising events. But it is often used by investors and economists as an unassailable guide to the future. It is not a map of the future. If you view investing as a hard science, history should be a perfect guide to the future but finance is not like studying geology or medicine. Investing is not a hard science. It’s a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their wellbeing, which can make even smart people nervous, greedy and paranoid. The most important events in historical data are the big outliers, the record-breaking events. They are what move the needle in the economy and the stock market. The Great Depression. World War II. The dot-com bubble. September 11th. The housing crash of the mid-2000s. That doesn’t mean we should ignore history when thinking about money. The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. The history of money is useful for that kind of stuff.
• The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance—“unknowns”—are an ever-present part of life. Margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties. The best we can do is think about odds. Room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor. So the person with enough room for error in part of their strategy (cash) to let them endure hardship in another (stocks) has an edge over the person who gets wiped out, game over, insert more tokens, when they’re wrong. Leverage—taking on debt to make your money go further—pushes routine risks into something capable of producing ruin.
• An underpinning of psychology is that people are poor forecasters of their future selves. Imagining a goal is easy and fun, but goals evolve and change with age, which makes those goals irrelevant. Keep this in mind when planning for long-term financial goals.
• We’re not good at identifying what the price of success is, which prevents us from being able to pay it. Every job looks easy when you’re not the one doing it because the challenges faced by someone in the arena are often invisible to those in the crowd. Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real time. Netflix stock returned more than 35,000% from 2002 to 2018, but traded below its previous all-time high on 94% of days. The price of investing success is not immediately obvious. It’s not a price tag you can see, so when the bill comes due it doesn’t feel like a fee for getting something good. It feels like a fine for doing something wrong. It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor.
• Understand which game you are playing. An idea exists in finance that seems innocent but has done incalculable damage. It’s the notion that assets have one rational price in a world where investors have different goals and time horizons. When investors have different goals and time horizons—and they do in every asset class—prices that look ridiculous to one person can make sense to another, because the factors those investors pay attention to are different. You can say a lot about these investors. You can call them speculators. You can call them irresponsible. The formation of bubbles isn’t so much about people irrationally participating in long-term investing. They’re about people somewhat rationally moving toward short-term trading to capture momentum that had been feeding on itself. Identifying which game you are playing is critical.
• Pessimism holds a special place in our hearts than its sibling optimism. Kahneman says the asymmetric aversion to loss is an evolutionary shield. It’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent. Optimistic narratives require looking at a long stretch of history and developments, which people tend to forget and take more effort to piece together. Pessimism sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk. Real optimists don’t believe that everything will be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way. The simple idea that most people wake up in the morning trying to make things a little better and more productive than wake up looking to cause trouble is the foundation of optimism. It’s not complicated. It’s not guaranteed, either. It’s just the most reasonable bet for most people, most of the time. Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention. When you realize how much progress humans can make during a lifetime in everything from economic growth to medical breakthroughs to stock market gains to social equality, you would think optimism would gain more attention than pessimism.
• We are storytellers and we control the narrative based on what we want to hear. If you want a certain stock to rise 10-fold, that’s your tribe. If you think a certain economic policy will spark hyperinflation, that’s your side. Or take Bernie Madoff. In hindsight his Ponzi scheme should have been obvious. He told a good story, and people wanted to believe it. The bigger the gap between what you want to be true and what you need to be true to have an acceptable outcome, the more you are protecting yourself from falling victim to an appealing financial fiction. But the biggest risk is that you want something to be true so badly that the range of your forecast isn’t even in the same ballpark as reality.
• American culture stretches itself thin by consuming more than what it needs. How did we get here? What gave rise to consumerism? Morgan does a great job by taking us back to WWII. A must read chapter.
• “A genius is the man who can do the average thing when everyone else around him is losing his mind.” — Napoleon
• “The world is full of obvious things which nobody by any chance ever observes.” — Sherlock Holmes
• A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.
• Most of the reason why, I believe, is that we think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance).
• To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism.
• “Our findings suggest that individual investors’ willingness to bear risk depends on personal history.”
• When judging others, attributing success to luck makes you look jealous and mean, even if we know it exists. And when judging yourself, attributing success to luck can be too demoralizing to accept.
• Failure can be a lousy teacher, because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk.
• But more important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures.
• “Yes, but I have something he will never have … enough.” — Joseph Heller
• The only way to know how much food you can eat is to eat until you’re sick. Few try this because vomiting hurts more than any meal is good. For some reason the same logic doesn’t translate to business and investing, and many will only stop reaching for more when they break and are forced to.
• If I had to summarize money success in a single word it would be “survival.”
• Capitalism is hard. But part of the reason this happens is because getting money and keeping money are two different skills.
• Compounding only works if you can give an asset years and years to grow. It’s like planting oak trees: A year of growth will never show much progress, 10 years can make a meaningful difference, and 50 years can create something absolutely extraordinary.
• way: “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.” — Nassim Taleb
• A mindset that can be paranoid and optimistic at the same time is hard to maintain, because seeing things as black or white takes less effort than accepting nuance. But you need short-term paranoia to keep you alive long enough to exploit long-term optimism.
• “I’ve been banging away at this thing for 30 years. I think the simple math is, some projects work and some don’t. There’s no reason to belabor either one. Just get on to the next.” — Brad Pitt
• Stock goes to zero, have a nice day.
• There are 100 billion planets in our galaxy and only one, as far as we know, with intelligent life. The fact that you are reading this book is the result of the longest tail you can imagine.
• It was my dream to have one of these cars of my own, because (I thought) they sent such a strong signal to others that you made it. You’re smart. You’re rich. You have taste. You’re important. Look at me. When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.” Subconscious or not, this is how people think.
• When material appearance took precedence over everything but oxygen.
• People are good at learning by imitation. But the hidden nature of wealth makes it hard to imitate others and learn from their ways.
• Learning to be happy with less money creates a gap between what you have and what you want—similar to the gap you get from growing your paycheck, but easier and more in your control.
• People with enduring personal finance success—not necessarily those with high incomes—tend to have a propensity to not give a damn what others think about them.
• You’re not a spreadsheet. You’re a person. A screwed up, emotional person.
• History is the study of change, ironically used as a map of the future.
• This is not a failure of analysis. It’s a failure of imagination.
• The correct lesson to learn from surprises is that the world is surprising.
• The most important economic events of the future—things that will move the needle the most—are things that history gives us little to no guide about.
• History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.
• The Intelligent Investor is one of the greatest investing books of all time. But I don’t know a single investor who has done well implementing Graham’s published formulas. The book is full of wisdom—perhaps more than any other investment book ever published. But as a how-to guide, it’s questionable at best.
• Historians are not prophets.
• The most important part of every plan is

planning on your plan not going according to the plan.

• A good rule of thumb for a lot of things in life is that everything that can break will eventually break.
• The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.
• ... the hardest-working guy I knew. These people have a lot to teach because they have an unfiltered understanding of every inch of the road to success.
• Compounding works best when you can give a plan years or decades to grow. This is true for not only savings but careers and relationships. Endurance is key.
• Sunk costs—anchoring decisions to past efforts that can’t be refunded—are a devil in a world where people change over time. They make our future selves prisoners to our past, different, selves. It’s the equivalent of a stranger making major life decisions for you.
• “Every job looks easy when you’re not the one doing it.” — Jeff Immelt
• Pessimism just sounds smarter and more plausible than optimism.
• Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.
• In 2007, we told a story about the stability of housing prices, the prudence of bankers, and the ability of financial markets to accurately price risk. In 2009 we stopped believing that story. In 2009 we inflicted narrative damage on ourselves, and it was vicious. It’s one of the most potent economic forces that exists.
• The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.
• Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.
• Incentives are a powerful motivator, and we should always remember how they influence our own financial goals and outlooks. It can’t be overstated: there is no greater force in finance than room for error, and the higher the stakes, the wider it should be.
• Coming to terms with how much you don’t know means coming to terms with how much of what happens in the world is out of your control. And that can be hard to accept.
• Risk is what's left over when you think you've thought of everything. — Carl Richards
• Investing has a social component that’s often ignored when viewed through a strictly financial lens.
• The reason surprises occur is not because our models are wrong or our intelligence is low. It’s because the odds that Adolf Hitler’s parents argued on the evening nine months before he was born were the same as them conceiving a child.
• The world is never that nice. There’s a price tag, a bill that must be paid. This is the price of market returns. The fee. It is the cost of admission.
• Keeping money is harder than making money, because you can get rich by luck, but staying rich is almost always due to a series a good, hard decisions. The skills needed for getting rich and staying rich are often opposites—be bold and brave, then diversify and remain paranoid. Then there’s the mental momentum that getting rich creates that staying rich has to step in and try to block. It goes like this: The more successful you are at something, the more convinced you become that you’re doing it right. The more convinced you are that you’re doing it right, the less open you are to change. The less open you are to change, the more likely you are to trip in a world that changes all the time. I’d be more impressed with a Forbes list of billionaires ranked by longevity vs amount.
• Why Americans get into financial trouble? Americans get into financial trouble because we buy more house than we need or should. The American dream of owning house is pushed buy both the political parties to support U.S. economy and jobs, especially since the manufacturing jobs have been outsourced. With nearly 48% of Americans in the service industry. The average yearly wage for Service Occupations was $27,602 in 2016. Based on wage index published by The Social Security Index, about 67.5 percent of wage earners had net compensation less than or equal to the $51,916.27. 50 percent of wage earners had net compensation less than or equal to the median wage, which is estimated to be $34,248.45 for 2019. However, the real estate tax deduction and incentives have lured Americans to over invest in housing leaving them cash poor as large portions of their net worth is tied up in home leaving little to support children’s education and retirement savings. The real estate industry has enjoyed the most lucrative tax breaks for decades enticing Americans to overindulge in home ownership leaving them financially vulnerable in their retirement. 3 in 10 Americans haven’t recovered from 2008 housing bust. The current boom in the housing is definitely a precursor to the future bust!
• There’s an art and a science to investing. Part of good investing is just arbitraging other peoples’ future behaviors, and those people—all people—make decisions with some facts and some dopamine. Figuring out what’s likely to happen next, to the extent it can be done, is the intersection of, “X is factually true, but people pay more attention to Y and respond by doing Z.” It’s a mix of the science of finance (earnings, discount rates, credit spreads) and the art of how people behave with that science (FOMO, extrapolation, embarrassment, career risk). If you think the world is all art, you’ll miss how much stuff is too complicated to think about intuitively. But if you think the world is all science, you’ll miss how much people like to take shortcuts, believe only what they want to believe, and have to deal with stuff that is too complicated for them to summarize in a statistic. Another way to think about this: Investing is not physics, which is guided by cold, immutable laws. It’s like biology, guided by the messy mutations and accidents of evolution, constantly adapting and sometimes defying logic.
• The noted fund manager and author Ralph Wagner once described the relationship between the economy and the stock market thusly. There's an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog's owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he's heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the dog watchers, big and small, seem to have their eye on the dog, and not the owner. I use this analogy all the time to help people understand how the economy and stock market play off of each other. One of the hardest things to do as an investor is to entertain two opposing thoughts in our minds at once, and find a way to keep them despite the cognitive dissonance this can produce. One of the most ironic aspects of investing is that the greatest gains lie ahead at times when things are bad, but not quite as bad as everyone suspects, and slowly, almost imperceptibly getting better. This is the moment when assets are selling at discounted values and the opportunities are laying at our feet, there for the taking. Conversely, the worst time to invest is once everyone agrees that the environment is terrific and that the gains will continue as far as the eye can see. It is at this moment we find ourselves paying up for assets and competing with lots of other buyers.

• Some thoughts on recent results in the stock market. If you are an investor (as opposed to a speculator) remember that you are buying partial stakes in businesses. Would you be comfortable owning the business for years to come if there were no stock price?
• Being a thoughtful business analyst requires understanding the basic unit of analysis. You want the operations to create value, which means that investments (tangible or intangible) earn a return > the cost of capital. Profits per se are not the key, it's unit economics.
• Be mindful to separate fundamentals (how the business is likely to perform) from expectations (what's priced into the stock). This is very hard to do when stocks move up or down a lot in a short period. Assess where expectations are mispriced.
• Recognize that lower asset prices, all things being equal, imply higher expected returns. Real yields are up. Important for the marginal dollar to invest.
• It's easy to get drawn into focusing intently on macro. And there is no shortage of pundits telling you what will happen next. But there's a large literature that shows that experts are poor predictors. Be macro aware and macro agnostic. Think probabilistically. No one knows.
• COVID was an exogenous shock that made it really hard to manage companies and investment portfolios. We are now seeing the impact of management actions during COVID, some of it good and some of it not so good. But the shock was a real management challenge.
• Warren Buffett recommends reading 3 chapters on investing, and this is not a bad time to revisit them. Chapter 8 (Mr. Market metaphor) and Chapter 20 (Margin of Safety) in Graham's The Intelligent Investor, and Chapter 20 (Expectations/behavioral) in Keynes's General Theory.
• Robert Sapolsky is one of the world's experts on stress. He notes that the stress response is "generally shortsighted, inefficient, and penny-wise and dollar-foolish." Stress shortens your time horizon, which can be deleterious to long-term thinking.

• Previous "all-time" highs are completely irrelevant. It's not "cheap" because it is down 70%. Forget those prices happened.
• Valuation multiples are always a hack proxy. Dangerous to use. If you insist, 10X should be considered AMAZING and an upper limit. Over that silly.
• You may be shocked to learn that people want to value your company on FCF and earnings. Facebook trades at 14X GAAP EPS, & is growing 23%. What earnings multiple are you assuming?
• Revenue & earnings QUALITY matter.
• P/E is still my favorite metric...the only problem is that few growth companies have an "E" that is useful, so you're forced to go up the income statement to find a useful number.
  • P/S
  • P/GP
  • P/EBITDA
  • P/EBIT
  • P/EBT
  • P/E

• Earnings don't move the overall market; it's the Federal Reserve Board, focus on the central banks, and focus on the movement of liquidity, most people in the market are looking for earnings and conventional measures. It's liquidity that moves markets.
• Druckenmiller's 3 signals:
  • Oil
  • Dollar
  • Interest rates
• Oil is up, dollar is up, interest rates are up—this is a recipe for a market disaster. It happened in dot com bubble, happening now (2022).
• I wouldn’t short Dogecoin because I don’t like putting campfires out with my face.
• There are a lot of bull market geniuses around, it's not that they love the game or love winning, but they were surfing with hurricane behind their back that was giving them nice waves, but they might be discouraged soon. I don't embrace this. It's not going to end well (2022).
• No Hedge, only Edge! I don't really like hedging. To me, if something needs to be hedged, you shouldn't have a position in it.
• The way to build superior long-term returns is through preservation of capital and home runs... When you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig.
• The best way to understand an industry is to look at every company in it.
• We are 6 months into a bear market that has more room to run. It’s highly probable that the bear market has a ways to run.
• On Economy:
  • Probability of a soft landing are pretty remote, you are going against decades of history.
  • Once inflation gets above 5%, it’s never come down without Fed Funds got above the CPI (note: today Fed Funds is 83bps and priced to peak at 3.3% Q2 2023). Don’t think fed funds gets there, but tells you something.
  • Once inflation is above 5%, it’s never been tamed without a recession. If you are predicting a soft landing, you are going against decades of history. Could happen, anything is possible, but odds stacked against you.
  • Depending on who you listen to, we have $1.5T-$2T of excess savings now, it may take some times to work through those savings, but given the extent of the asset bubble, destruction of markets, what’s going on in Ukraine, China 0 Covid, I don’t take a lot of comfort from that.
  • I assume we have a recession in 2023, I just don’t know if it’s in the 1H or 2H, but again this is a guess, not a fact.
• On inflation:
  • Fed says food and energy inflation don’t count since they aren’t core. Well go tell that to a labor union. You think the labor union won’t negotiate higher wages (which in turn drive further inflation)?
  • Every deflation has followed an asset bubble bursting. Since the Fed has created an asset bubble, even with a lot of air let out, it’s so big, have to be open minded to the consequences.
  On positioning:
  • Was net short equities until 2-3 weeks ago. My anticipation is I will be going back to the short equity position if the market affords me. If not, I will just sidestep a decline, not the worst thing in the world.
  • A lot of very good companies have derated 60-70% without a whole lot of change in fundamentals. Not yet ready to buy though, I’m too bearish on the world to go there yet. Some of these may be too cheap to be my shorts anymore though.
  • I’ve lived through so many bears markets where if you get aggressive on the short side, you can get your head ripped off on rallies.
  • If market rallies 15-20% from here, I will take a short equities because 6 month bear markets preceded by asset bubbles don’t exist, and I still think we have a lot of wood to chop.
  • My go to recession hedge (long treasuries) is more complicated because inflation is 8% (bonds don’t do as well in a high inflationary environment).
  • Things are a lot harder now. We are now getting definitive signals that the economy is weakening, particularly at the front end. While I’m not comfortable owning bonds, I’m much less comfortable being short fixed income vs. 3-6 months ago when it looked like a much better risk reward.
  • If you think we will have irresponsible monetary policy with too high inflation going forward, if it’s in a bull phase you want to own bitcoin, but if it’s in a bear phase, you want to own gold.
  • In a bear market stagflation type of thing, I would want to own gold.
• On process:
  • Best economist is inside of the stock market (cyclicals vs. defensives), it’s allowed us to outperform Fed economic forecasts for 20-30 years. Second best economist is the bond market, though this has been distorted by QE last 10 years.
  • Stocks tend to lead the fundamentals by somewhere between 6-12 months, and certain industries tend to lead the economy. The obvious one everyone knows about is housing. Housing is traditionally looked as a leading indicator. Retail has a slight lead, capital goods has a lag.
  • Today homebuilders are down 50% despite supposedly good fundamentals, trucking down 40% despite record earnings, retailers down – there are signs that there is economic trouble ahead.
  On stocks:
  • Last 1 year was one of best short selling period. There was never more obvious over-earners, particularly in brick & mortar retail. You see companies that don’t grow for 15 years, and then all of a sudden stocks have quadrupled. It didn’t take a rocket science to figure out 2-3 years from now people will start traveling again, companies will overspend, all the stuff that typically happens.
  • Today’s over-earners are the shipping companies that have massive margins. Can envision a world where world trade isn’t booming in 2 years.
• On energy/energy stocks:
  • Still there, very nervous, no longer a unique thesis.
  • Reason we are still there is we think this thing is more sustainable because of ESG and that doesn’t seem priced into stocks. But not a classic play because it is widely recognized. But we don’t sell things just because it is widely recognized, still cheap, I don’t care about pain trades.
  • The risk is if you get a worldwide recession. We are looking for demand destruction in energy, but don’t yet see it.
• 45 years as a CIO, I’ve never seen such a constellation where there is no historic analogue. Right now I have more humility in terms of my views going forward than maybe ever. Very important to be open minded – the ending is not predictable. 2008 was a no brainer. This isn’t.
• Will be surprised if I’m not short the dollar in the next 6 months as $14T has come into the US as we were the first to tighten and a story of American exceptionalism
• Best advice from my mentor: he made me focus on what moves the stock price. You can’t just say Stan this is a great company, tell me how people will think differently in 18-24 months from what they think now. Do not invest in the present. The present does not move stock prices, change does.

He is a master in decision-making and critical thinking which are critical in investment management business.

• Knowing what you don’t know is more useful than being brilliant.
• A majority of life’s errors are caused by forgetting what one is really trying to do.
• Mimicking the herd invites regression to the mean.
• To get what you want, you have to deserve what you want.
• The fundamental algorithm of life–repeat what works.
• Those who keep learning, will keep rising.
• You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long time.
• The best thing a human being can do is help another human being know more.
• We insist on a lot of time being available almost every day to just sit and think.
• You must know the big ideas in the big disciplines and use them routinely.

Books

• The Little Book Of Common Sense Investing | The Only Way To Guarantee Your Fair Share of Stock Market Returns by John C Bogle
• The Most Important Thing | Uncommon Sense For The Thoughtful Investing by Howard Marks
• The Psychology of Money | Timeless lessons On wealth, Greed, And Happiness by Morgan Housel

Articles

• How Does The Stock Market Work? by Oliver Elfenbaum
• All Revenue is Not Created Equal: The Keys to the 10X Revenue Club
• John Collison in conversation with Stanley Druckenmiller

Memos

• Howard Marks