⭐ Key Notes

⭕ Circle of Competence

• Focus on what to avoid
  • Focus on what not to do, before considering affirmative steps.
  • Pay attention to mistakes of omission.
  • Pay attention to the micro to get the macro.
  • The keys to becoming an investor are discipline, hard work, and practice.
  • A lot of success comes from knowing what you want to avoid – early death, a bad marriage etc.

• Beware of envy
  • If someone else is getting richer faster – who cares?
  • Spend each day trying to be a little wiser.
  • Build your discipline by preparing for fast spurts.

• Disasters to avoid
  • Envy.
  • Resentment.
  • Revenge.
  • Self-pity.
  • Being unreliable.
  • Debt.
  • Chemicals in an effort to alter mood or perception.

• Avoid physics envy
  • The tendency to want to reduce enormously complex systems into one-size-fits-all Newtonian formulas.
  • A scientific theory should be as simple as possible, but no simpler.

• Cash flows
  • Where can you find the money in a business?
  • Where is the free cash being generated?
  • How will they repay loand

• What to look for in a partner
  • Someone smarter and wiser than you.
  • Someone who will never second-guess you, nor sulk when you make expensive mistakes.
  • A generous soul who will put up his own money and work for peanuts.
  • Someone who will constantly add to the run as you travel a long road together.

• Lessons from children
  • Do the job right the first time.
  • Be responsible.
  • Admit your mistakes.
  • Endless practice and determination will allow you to succeed.
  • Going along with normal social customs allows harmonisation.
  • Durability is a first-rate virtue.

🎤 Lollapalooza

• Critical mass of success
  • Extreme maximisation or minimisation of a variable – Costco vs Luxury
  • Extreme performance over many factors – Toyota or Les Schwab
  • Catching and riding a big wave – Oracle.

🎓 Learn From Other People’s Success

• Lifelong learner
  • The acquisition of knowledge is a moral duty.
  • Better to be roughly right than precisely wrong.
  • Once you have the ideas, countinuously practice their use.
  • Consider second-order and higher-order events.
  • You can cause enormous offence by being right in a way that causes someone else to lose face in his own discipline or hierarchy.

• Two-track analysis
  • What factors govern the interests? Macro and micro-level factors.
  • What are the subconscious influences? Instincts, emotions, cravings.

• Career rules
  • Do not sell anything you would not buy yourself.
  • Do not work for anyone you don’t respect and admire.
  • Work only with people you enjoy.

• Problem-solving notions
  • Decide the big no-brainer questions first.
  • Apply numerical fluency.
  • Invert the problem – think in reverse.
  • Apply multi-disciplinary wisdom.
  • Watch for combinations of factors – the lollapalooza effect.

🛠 Become a Swiss Army Knife

☑ Investing and Decision Making Checklist

• Risk
  • All investment evaluations should begin by measuring risk.
  • Especially reputational risk.

• Margin of safety
  • Avoid dealing with people of questionable character.
  • Insist upon proper compensation for risk assumed.
  • Always beware of inflation and interest rate exposures.
  • Avoid big mistakes.
  • Shun permanent capital loss.

• Objectivity and rationality
  • Use independent thoughts.
  • Whether others agree or disagree does not make you right or wrong.
  • The only thing that matters is the correctness of analysis and judgement.
  • Mimicking the herd invites regression to the mean, average performance.

• Preparation
  • The only way to win is to work, work, work, and hope to have a few insights.

• Lifelong learning
  • Read voraciously.
  • Cultivate curiousity and strive to become a little wiser every day.
  • The will to prepare is more important than the will to win.
  • Develop fluency in mental models.
  • To get smart, keep asking why?

• Intellectual humilty
  • Acknowledge what you do not know.

• Determine value from price
  • It is better to remember the obvious, than to grasp the esoteric.
  • Consider the totality of risk and effect – always look at the second-order and higher-order impacts.
  • Always invrt – think forward and backwards.

• Opportunity cost
  • The highest and best use is measured by the next best ues.
  • Good ideas are rare.
  • When the odds are greatly in your favour, bet heavily.
  • Do not fall in love with an investment.
  • Be situation-dependent and opportunity-driven.

• Patience
  • Resist the natural human bias to act.

• Compound interest
  • Never interrupt compounding unnecessarily.
  • Avoid unnecessary transactional taxes and frictional costs.
  • Do not take action for it’s own sake.
  • Be alert for the arrival of luck.

• Decisiveness
  • Whe circumstances present themselves, act with decisiveness and conviction.

• Be fearful when others are greedy
  • Opportunity does not come often, so seize it when it does.
  • Let the opportunity meet a prepared mind.

• Adapt
  • Live with change and accept unremovable complexity.
  • Continually challenge and willingly amend your most loved ideas.
  • Recognise reality, especially when you don’t like it.

• Focus
  • Keep things simple.
  • Remember what you set out to do.

• Reputation is your most valuable asset
  • Reputation can be lost in a heartbeat.
  • Guard against hubris and boredom.
  • Do not overlook the obvious by drowning in the minute.
  • Be careful to exclude unneeded information – a small leak can sink a great ship.
  • Face your biggest troubles – don’t sweep them under a rug.

📈 Investing Notes

Trade infrequently

• If you could only make 20 trades in your lifetime, how would that change your approach?
• Find your fat pitch and swing hard.
• Look for opportunities where you have a big advantage.
• Must be prepared and have capital available.
• There are three buckets: yes, no, and too hard to understand.

First cut

• Too difficult or complicated to understand
  • Eg pharmaceuticals or technology.

• Heavily promoted
  • Eg IPOs or great deals.

Second cut

• Financial reports
  • Examine company accounts with skepticism.

• Recast financial figures
  • Free cash flow.
  • Inventory.
  • Working capital.
  • Fixed and intangible assets.
  • Stock options.
  • Pension plans.
  • Retiree medical benefits.

• Additional factors
  • Current and prospective regulatory climate.
  • Labour.
  • Customer and supplier relations.
  • Technology changes.
  • Competitive strengths and vulnerabilities.
  • Pricing power.
  • Scalability.
  • Environmental issues.
  • Presence of hidden exposures.

• Management
  • Are they able, trust worthy, and owner-oriented?
  • Do they deploy cash?
  • Do they allocate cash intelligently on behalf of the owners?
  • Do they overcompensate themselves?
  • Do they pursue ego-oriented growth for growth’s sake?

• Competitive advantage
  • Products.
  • Markets.
  • Trademarks.
  • Employees.
  • Distribution channels.
  • Social change.
  • What is the durability of the advantage?
  • What competitive forces may deteriorate the advantage?

Final checklist

• Trading considerations
  • Current price.
  • Volume.
  • Disclosure timing or other sensitivities.
  • Are better uses of capital available?
  • Is sufficient liquidity available, or must it be borrowed?
  • What is the opportunity cost of capital?

💡 Problem Solving Notions

🧠 25 Psychology Based Tendencies

• Reward and punishment
  • If you want to persuade – appeal to interest and not reason.
  • Incentives have huge power.
  • Fear professional advice, when it benefits the advisor.
  • Incentives can cause poor behaviour when checks are not in place.
  • People will game human systems.
  • Anti-gaming features are necessary.
  • You must first do the unpleasant thing before receiving your reward.

• Loving
  • People will ignore the faults and comply with the object of affection.
  • Facts are distorted to facilitate love.
  • We favour people, products, and actions merely associated with the object of affection.
  • This also applies in reverse – the admiration itself can intesify the love.

• Hating
  • Haters will ignore the virtues in the object of dislike.
  • Facts become distorted to facilitate the hatred.

• Doubt avoidance
  • We are programmed to quickly remove doubt by reaching a decision.
  • Puzzlement and stress will trigger doubt avoidance.

• Inconsistency avoidance
  • We are reluctant to change.
  • Few people can list bad habits that they have eliminated.
  • A life wisely lived consists of many good habits maintained, and many bad habits avoided or cured.
  • Confirmation bias – we ignore or discount evidence to maintain our previously held belief.
  • Darwin trained himself to intensively consider all counter-evidence.
  • To achieve a particular state – pretend to have already done it.
  • Smiling makes you happier, just as being happier makes you smile.

• Curiosity
  • Humans possess an innate curiosity.

• Kantian fairness
  • Humans follow behaviour patterns that make the overall system better, if followed by others.
  • For example, queing and being courteous.

• Envy
  • We have a strong tendency to compare ourselves to others.
  • It is not greed that drives the world, but envy.

• Reciprocation
  • We tend to reciprocate favours and disfavours.
  • Train yourself to delay reaction.

• Influence from association
  • Actions and objects become associated with rewards previously bestowed.
  • Carefully examine past success.
  • Look for accidental and non-causative factors that tend to mislead.
  • Look for dangerous aspects of a new venture that were not present when past success occured.
  • Strong emotions, such as hating or loving, can distort the facts.
  • Develop a habit of welcoming bad news.

• Pain avoiding denial
  • When the reality is too painful to bear – facts become distorted.
  • Eg death and drug addiction.

• Excessive self-regard
  • We regard ourselves more highly than others perceive us.
  • We prefer people who are similar to ourselves.
  • We overestimate our talents in comparison to others.
  • Fixable yet unfixed bad performance is bad character that creates more of itself. Each tolerated instance causes greater damage.
  • Force yourself to be more objective when thinking about yourself ot your loved ones.
  • Pride in a job well done and a life well lived is a good force.

• Overoptimism
  • Understand probability theory and expected value.
  • Even successful people display excess optimism.

• Deprival
  • Loss avoidance – we overvalue losses compared to an equivalent gain.
  • We frame problems differently when dealing with loss.
  • Many will persist when they should be cutting their losses.

• Social proof
  • We automatically think and do what we observe to be done or not done around us.
  • Triggering most often occurs in the presence of puzzlement or stress.
  • Stop bad behaviour before it spreads.
  • Foster and display good behaviour.
  • Learn to ignore the examples of others when they are wrong.

• Anchoring
  • We judge things in relation to what is immediately available.
  • Anchoring causes drift.
  • Drift occurs when a small step in the wring direction is unrecognisable, because it is so small. However, a large number of these steps lead to ruin.

• Stress influence
  • Small amounts of stress can influence performance.
  • Heavy stress can destructuvely change behaviour and lead to depression.
  • Reversing a breakdown only happens when stress is re-imposed.

• Availability misweghting
  • Use checklists.
  • Emphasise factors that do not produce large amounts of easily available numbers.
  • Hire skeptical and articulate people to play devils advocate.
  • Exceptionally vivid evidence should be underweighed.
  • Attach vivid imagery to persudade others to reach a conclusion.
  • An idea or fact should not be worth more just because it is easily available.

• Use it or lose it
  • All skills diminish with disuse.
  • Engage in the practice of all useful, yet rarely used skills.
  • Assemble skills into a checklist that is routinely used.
  • Skill of a high order can only be maintained through regular practice.

• Drug misinfluence
  • Do not use drugs.

• Senescence misinfluence
  • The cognitive decline is inevitable.
  • Continuous thinking and learning can delay the inevitable.

• Authority misinfluence
  • We overweigh the instructions or actions set by people of authority.

• Illusion of busy
  • Beware of distraction from serious work.
  • We fill time with work or communication that is not useful.

• Reason
  • We possess a love of accurate cognition.
  • We are more prone to learning when there is a good reason for it.
  • Communicate clearly the who, what, where, why.

• Lollapalooza
  • Combining multiple tendencies or mental models is likely to produce more extreme outcomes.

🤯 Other Mental Models

• To the man with a hammer, the world looks like a nail.
• Redundancy / backup system model (engineering).
• Compound interest (math).
• Breakpoint/tipping-point/autocatalysis (physics/chemistry).
• Darwinian synthesis (biology).
• Cognitive misjudgments (psychology).
• Permutations and combinations (math); Fermat/Pascal system.
• Decision-tree theory.
• Accounting (double-entry bookkeeping).
• Breakpoints (engineering).
• Advantages of scale (microeconomics).
• Specialization (biology/microeconomics).
• Surfing (finding a wave and staying there for a long time).
• Tragedy of the commons (economics).
• Invisible hand (economics).
• Invisible foot (biology/economics).
• Comparative advantage in trade (economics).
• Pin factory (economics).

📹 Video Summary