By Guy Spiers
Simply incredible. This is not an investing book, per se; rather, an introduction to value investing in a story telling format.
The premise is simple; Aquamarine Fund Managing Partner Guy Spiers wins a dinner with Warren Buffet and his life is changed after that encounter.
Recommended to anyone who is considering a minimalist explanation of what investing is.
Amazon Page for details
My Rating: 9 / 10
Click Here to Read My Notes
Simply incredible. This is not an investing book, per se; rather, an introduction to value investing in a story telling format.
The premise is simple; Aquamarine Fund Managing Partner Guy Spiers wins a dinner with Warren Buffet and his life is changed after that encounter.
Recommended to anyone who is considering a minimalist explanation of what investing is.
Amazon Page for details
My Rating: 9 / 10
Click Here to Read My Notes
The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment by Guy Spier
My goal in writing this book is to share some of what I’ve learned on my path as an investor. It’s about the education of this investor, not any other investor.
For months, I was focused on the wrong questions, wondering why I was having so much trouble getting deals done and fretting that something must be wrong with me. I didn’t have the experience or the perspective to understand that this whole environment was wrong.
And reputation in business—especially the investing world—is everything.
We like to think that we change our environment, but the truth is that it changes us. So we have to be extraordinarily careful to choose the right environment—to work with, and even socialize with, the right people.
Ideally, we should stick close to people who are better than us so that we can become more like them.
Warren Buffett made one of his bigger mistakes when, in his thirties, he invested in the loss-making Berkshire Hathaway textile mills. This could have been his undoing, but he later transformed Berkshire Hathaway into the towering monument of his life. He did so in part by learning to invest in better businesses instead of betting on the cigar-butt stocks (like Berkshire) that Ben Graham had taught him to buy.
It’s not just a quaint, self-help idea that the people who succeed are those who get up when life knocks them down.
An essential component of our education is to learn from our mistakes—and if we don’t make mistakes, sometimes we may not learn at all.
One of the biggest lessons was that I must never do anything again that could taint my reputation.
As Buffett once warned, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
Did my education fail me? Or, even worse, did I fail my education?
Part of the problem is that a finely trained but rarefied academic mind can be damaging to your long-term success. You can easily end up with the mental equivalent of a Formula 1 Ferrari, when what you need in the real world is a hardy Jeep that can operate adequately in a variety of environments.
There’s an important lesson here: It’s not enough to be in a great program at a great school. You need to be in a program that matches your particular needs at that stage in your life.
I had the same absolute clarity when I discovered value investing: I didn’t think this was the right path for me; I simply knew it.
I was driven in large part by what Warren Buffett calls “the outer scorecard”—that need for public approval and recognition, which can so easily lead us in the wrong direction. This is a dangerous weakness for an investor, since the crowd is governed by irrational fear and greed rather than by calm analysis. I would argue that this kind of privileged academic environment is largely designed to measure people by an external scorecard: winning other people’s approval was what really counted.
Value investors have to be able to go their own way.
The entire pursuit of value investing requires you to see where the crowd is wrong so that you can profit from their misperceptions.
To become a good investor, I would need to come to an acceptance of myself as an outsider. The real goal, perhaps, is not acceptance by others, but acceptance of oneself.
The very institutions that we have established to teach us to think independently often close our minds in potentially damaging ways. Charlie Munger discussed this very problem in a classic talk he gave at Harvard Law School in 1995 on the “Twenty-Four Standard Causes of Human Misjudgment.” He described how B. F. Skinner influenced an entire generation of psychologists to espouse behaviorism in spite of plenty of disconfirming evidence.
At HBS, the curriculum is devoted exclusively to studying real business case studies. Rather than focus on theories of how the world should work, we focused on practical discussions of what had actually happened.
By contrast, part of what makes Warren himself so successful is that he’s never stopped seeking to improve himself and that he continues to be a learning machine.
As Munger has said, “Warren is better in his 70s and 80s, in many ways, than he was when he was younger. If you keep learning all the time, you have a wonderful advantage.”
When I began to understand the principles that Warren Buffett embodied, I realized that there was another way to succeed. This discovery changed my life.
In a sense, what I really needed to do was reeducate myself. Or, for that matter, un-educate myself.
In retrospect, I’ve come to see that this is a smart strategy for life: whenever I have the choice of doing something with an uncertain but potentially high upside, I try to do it.
But in this case, it was brainwashing for the good, designed to help us live a better, more successful life. I’m all for that sort of brainwashing.
Our consciousness changes our reality, and I began to see that the positive statements Robbins got us to repeat were a powerful tool in reconfiguring my consciousness.
Hokey as it might seem, this 20-foot fire walk created a metaphor for how I could break through my limitations and build a better reality.
It was an experiential lesson that allowed me to understand how, as Robbins puts it, “Life can change in a heartbeat.”
A goal that seems impossible in one instant can become entirely possible in the next if only you are willing to devote every ounce of your mind, body, and soul to reach it.
As Theodore Roosevelt told an audience in Paris in 1910, “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood.”
Before attending his seminar, I would have rolled my eyes at a book entitled How to Win Friends and Influence People. But Warren Buffett himself credits the author, Dale Carnegie, with having helped him enormously.
Once again, I felt the sting of rejection. But they were kind enough to give me a copy of Buffett’s classic essay “The Superinvestors of Graham-and-Doddsville.”
In doing so, she showed genuine care for me, and I was really touched. She also taught me a valuable life lesson: it’s so important to show kindness and be helpful to people early in their careers, even when they have done nothing to deserve it.
One way to stay in this orbit was to buy shares in the Sequoia Fund. That would enable me to attend its annual meetings each spring at the New York Athletic Club. But the fund had been closed to new investors for many years. So I found someone on eBay who was willing to sell me a single share for $500 even though the net asset value was only $128. I then added to my position. I expect to keep these shares for the rest of my life.
For me, the goal isn’t to make money, though I’m guessing Sequoia will continue to outperform. It’s really a question of choosing to have certain people in your life (however tangentially) who embody the values you admire.
I’d assumed that the business world was all about shouting louder than the next guy so you could get attention. But Buffett was reaching out to people who weren’t impressed by noise.
What I stumbled upon was this. Desperate to figure out how to lead a life that was more like his, I began constantly to ask myself one simple question: “What would Warren Buffett do if he were in my shoes?”
This might sound peculiar, but the ability to mimic is one of the most powerful ways in which humans advance. Just think about how children learn from their parents. Given that this is a natural human instinct, it’s important to be careful about whom we choose to model.
The truth is, they don’t even need to be alive. As Charlie Munger has explained, it also works “if you go through life making friends with the eminent dead who had the right ideas.”
Imagining that I was Buffett, I also began to study the companies in his portfolio, wanting to see them through his eyes and to understand why he owned them. So I ordered up the annual reports for his major holdings, including Coca-Cola, Capital Cities/ABC, American Express, and Gillette. This again gave me that uncanny feeling that Warren—and perhaps God Himself—was smiling at me.
When I saw the cash-flow statement, I found it hard to believe my eyes. The company was swimming in cash, and the income statement didn’t come close to conveying the might of this cash-generating machine. Most of the companies I’d analyzed as an investment banker were either hemorrhaging cash or grossly overstating their cash-generating ability. It felt as if I were embarking on a second MBA.
Inspired by Robbins and Buffett, I had a growing sense of opportunity. Instead of feeling that every door was closed, I started to realize that it was possible to move forward. I was so obsessed with value investing that I hoped somebody would hire me as a stock analyst. But I still couldn’t get a job.
Warren Buffett, quoting Henry Ford, often talks about the importance of keeping all your eggs in one basket, then watching that basket very carefully.
I consciously modeled Buffett, who has focused all of his investing energy on Berkshire Hathaway for decades.
For example, I should simply have copied the fee structure of his pre-Berkshire investment partnerships. He charged no annual management fee, but took a quarter of the profits above a 6 percent hurdle. This is an extremely unusual structure, but it’s the best alignment I’ve ever seen between an investor and his shareholders. It truly embodies the principle of making money with them, not off them. Unless they do well, the fund manager earns nothing.
Another was a two-bedroom apartment on West 55th, where David Neeleman, the founder of JetBlue, was my neighbor. I’d read that he, like me, had attention deficit disorder (ADD). Yet he’d still managed to build a successful company.
As investors, we all have shortcomings; as I came to see it, the key is to accept who we are, understand our differences and limitations, and figure out ways to work around them.
Buffett: find companies that are cheap, that have an expanding “moat” around them, and that are awash in cash.
Buffett and Munger joke that envy is the only one of the seven deadly sins that isn’t any fun. “Envy is crazy,” remarks Munger. “It’s 100 percent destructive. . . . If you get those things out of your life early, life works a lot better.”
As an ancient rabbinical saying puts it: “Who is strong? He who masters his own passions.”
It turns out that envy and pride are expensive flaws.
As Munger puts it: “I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.”
One way that I look for investments is to study the masters and then explore whether I should buy the same stock or a better one with similar characteristics.
It’s difficult for professional investors, not just for amateurs who are new to the market, to resist this kind of lollapalooza of mind-bending distortions. We like to think we’re immune, but these forces are so powerful that they constantly subvert our judgment.
What affected me most was an extraordinary story Cialdini told about a Chevrolet salesman, Joe Girard, who regularly wrote holiday cards to thousands of his former customers with the words “I like you” printed on each card, along with his name. This personal expression of goodwill had an unbelievable effect: Girard won a place in the Guinness World Records book by selling 13,001 cars in 15 years. As Cialdini writes, “We’re phenomenal suckers for flattery,” and “we tend to believe praise and those who provide it.”
So I decided that I would write three letters per working day, or 15 per week. I began to thank people for giving a great speech, for sending me their investor letter, for providing a great meal in their restaurant, for inviting me to their conference. I would send people cards to wish them a happy birthday. I’d send them research reports or books or articles that I thought would interest them. I’d send them notes saying how much I’d enjoyed meeting them.
I also stumbled upon a book that included many of Ronald Reagan’s letters. He wrote to an amazing range of people, and he seemed to have a genuine interest in every one of them. He shared jokes and advice, addressed their concerns, encouraged kids. It seemed to me that this was part of the secret of his success. He wasn’t the most cerebral American president, but he mastered the art of caring for others, and he expressed his care through letters.
Tony Robbins had taught me that small differences in how we behave can, over time, have a profound impact. And this small action of writing hundreds of letters a year was transformational for me.
My view now is that it can take as long as five years to have a significant effect, so most people give up long before they reap the benefits.
In sending out this cascade of letters, I began to open up to people in a way that I never had before, and I started to see everyone around me as someone I could learn from.
Einstein is often said to have called compounding the eighth wonder of the world. But the narrowly financial application of compounding may be the least valuable and least interesting aspect of this phenomenon.
My letter-writing crusade had begun as a way of marketing my fund, but it ended up giving me a richness of life that I could hardly have imagined.
Rather than becoming a good salesperson, I found myself starting to care about the people I was writing to and to think about how I could help them.
The paradox is that, as I became more authentic and discarded my agenda, people became more interested in investing in the fund.
This was typical of Mohnish. He didn’t bother to conform to people’s standard expectations. He wasn’t fearful of being different, but his unconventional decisions made total sense to me.
The audience, which included about 100 people, wasn’t there to be pitched. They were there to learn.
Mohnish spoke honestly and straightforwardly, unafraid of what anyone might think about him.
By contrast, Mohnish came from a place of personal abundance, which was not merely a matter of financial wealth: he was comfortable with who he was, and he was happy to share his wisdom.
I didn’t understand this at the time, but I now see that every letter I wrote was an invitation for serendipity to strike.
When you have an agenda, people smell it, and this tends to put them on the defensive.
Misalignment is a dangerous thing, not just in relationships but in business and investing.
Charlie Munger points out that it’s always easier to be truthful because you don’t have to remember your lies. This relieves your brain of much unnecessary mental work so that it can focus on something more useful.
Mohnish talked to me during that meal about a book called Power vs. Force: The Hidden Determinants of Human Behavior. The author, David Hawkins, explores the theory that we have a greater capacity to influence others when we’re an authentic version of ourselves since this truthfulness evokes a deep psychological response in others.
Mohnish himself seemed to embody this idea that real power resides with a person who is honest and in touch with himself.
I quickly realized that Mohnish, like me, had been on a quest for worldly wisdom.
We saw what Buffett had done, and we consciously sought to copy him. But Mohnish was a much better cloner than I was, thanks to his relentless attention to detail.
This might sound over the top. But it’s an illustration of something I had learned from Mohnish: some businesses succeed because they get one thing right, but most succeed because they get a lot of small things right.
The people in this group weren’t dressed for success, and they didn’t have the slightest interest in doing business at the Berkshire meeting. They were there to learn, to celebrate friendship, and to drink from the well of wisdom. These were primarily amateurs who had invested their own money in Berkshire. In many cases, they had owned the stock for decades.
They had a different energy from that of my New York colleagues—professional investors and networkers who often wore a standard uniform of khaki pants and blue blazers.
As I had come to realize, if you’re going to do something, it’s best to commit to it with wholehearted gusto.
But when you begin to change yourself internally, the world around you responds.
As I hope you can see from my experience, when your consciousness or mental attitude shifts, remarkable things begin to happen. That shift is the ultimate business tool and life tool.
There’s a joke on Wall Street that a hedge fund is really just a fee structure in search of an investor to fleece.
He seemed glad that I understood how little he cares about personal enrichment and how much he cares about using his wealth to help others.
When we thanked Warren for making this lunch possible, he said that he was excited to do it. For one thing, it gave him a great opportunity to honor Reverend Williams and also his own late wife, Susan. He said that he had known right away, at 18, that she was the person he wanted to marry, and that he would never have gotten where he is today without her.
He told Mohnish’s children that choosing the right person to marry would be the most important decision of their lives.
I’ll never forget Warren’s response: “People will always stop you doing the right thing if it’s unconventional.” I asked if it gets any easier over time to do what’s right. He paused, looked away for a moment, and replied, “A little.”
“It’s very important always to live your life by an inner scorecard, not an outer scorecard,” he said.
“Would you prefer to be considered the best lover in the world and know privately that you’re the worst—or would you prefer to know privately that you’re the best lover in the world, but be considered the worst?”
One of Buffett’s defining characteristics is that he so clearly lives by his own inner scorecard. It isn’t just that he does what’s right, but that he does what’s right for him.
Clearly, he has set up his life so that it suits him and so that he enjoys it. When I asked if he had consciously created Berkshire’s unique decentralized structure, he emphasized that it operates that way because it suits his personality, not because it maximizes returns.
“Charlie and I always knew we would become very wealthy,” he told us, “but we weren’t in a hurry.” After all, he said, “If you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy—if you’re patient.”
He told us that people often try to convince him to meet them so they can pitch investments to him, but he’s comfortable saying “no” far more often than he says “yes”—regardless of their attempts to flatter him.
He also told us that he typically avoids meeting corporate managements, preferring to rely on companies’ financial statements.
As Buffett taught me, it’s not enough to rely on one’s intellect to filter out this noise: you need the right processes and environment to do so. For this reason, I decided to move to Zurich just six months after our lunch, knowing that it would be easier for me to remain clearheaded there, far from the New York vortex.
This became my own goal: not to be Warren Buffett, but to become a more authentic version of myself. As he had taught me, the path to true success is through authenticity.
I let loose an angry tirade. “How many times have I said that one should never buy anything that’s being sold by Wall Street? Never.
Understanding that this is an integral part of my wiring, I knew that I needed to avoid debt since it would interfere with my ability to act rationally.
In the past, he has also said that he never wants to get into serious debt because he doesn’t want to discover how he’s capable of behaving.
As Buffett wrote in his 2001 Letter to Shareholders, “You only find out who is swimming naked when the tide goes out.”
According to Warren, temperament is more important than IQ when it comes to investing.
At night, I read excerpts from his Meditations. He wrote of the need to welcome adversity with gratitude as an opportunity to prove one’s courage, fortitude, and resilience.
We might like to perceive ourselves as potential Isaac Newtons, but it’s perilous to forget that we also have this other aspect of our nature. Indeed, Newton himself would have been better off if he’d recognized this, given that he was an infamously dumb investor who lost his life savings in the South Sea Bubble. As Newton wryly observed: “I can calculate the movement of stars, but not the madness of men.”
Meanwhile, I resolved to spend more time reading books about biology. These studies deepened my sense that it’s helpful to think of the economy as an evolving and infinitely complex biological ecosystem.
Companies, like ant species, must adopt strategies that enable them to thrive or they will be at risk of extinction.
The trouble is, economic theories like these tend to be based on intellectually elegant assumptions about how the world operates, not on the messy reality in which we actually live.
For me at least, it seemed wiser to live in a place where the differences are less extreme. Given my particular set of flaws and vulnerabilities, I figured that I would stand a better chance of operating somewhat rationally in the kind of place that Taleb describes as “Mediocristan,” where life is more mundane.
Warren treats the managers of his companies with considerable trust, granting them the latitude to make their own decisions, and they respond by doing everything they can to live up to his expectations.
Occasionally people ask me, “But isn’t it boring there?” My answer: “Boring is good. As an investor, that’s exactly what I want.” Because distraction is a real problem. What I really need is a plain, unobtrusive background that’s not overly exciting.
The psychologist Roy Baumeister has shown that willpower is a limited resource, so we have to be careful not to deplete it. In fact, his lab discovered that even the simple act of resisting chocolate chip cookies left people with less willpower to perform subsequent tasks.
In my case, I don’t want to waste my limited energy guarding myself against the envy and greed that a place like the Bahnhofstrasse might trigger in me. It’s better simply to construct my environment so that I’m not exposed to these destabilizing forces, which are likely to intensify my irrationality.
The key is to free my mind from any unnecessary mental effort so I can use it for more constructive tasks that are likely to benefit me and my shareholders.
By having images of Munger and Buffett in my office, I’m trying once again to tilt the playing field on a subconscious level, using their presence to influence my thoughts.
About a year after our charity lunch, Warren Buffett generously gave Mohnish and me an impromptu tour of his office in Omaha. I was fascinated to see how he had structured his own environment to enhance his ability to make rational decisions.
Once I’d learned the basics, I quickly realized that bridge was not only a pleasurable diversion but would help to hone my skills in life, not to mention investing.
Indeed, as a preparation for investing, bridge is truly the ultimate game. If I were putting together a curriculum on value investing, bridge would undoubtedly be a part of it.
For investors, the beauty of bridge lies in the fact that it involves elements of chance, probabilistic thinking, and asymmetric information.
also rediscovered the joys of chess, a wonderful game of analysis and pattern recognition.
This attitude has undoubtedly made for a calmer and more joyful life. But I suspect it’s also made me a better investor.
This reminds me of a line that Mohnish often quotes from Blaise Pascal: “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
If ants can use a handful of simple rules to develop an infinitely complex survival strategy, what about investors? Can we create a similarly robust set of rules that will make our investment decisions smarter and less vulnerable to the distortions of our irrational brains?
The rules that I developed encompass a wide-ranging assortment of critical investment processes, including what I read (and in what order) when I’m researching stocks; whom I speak with (and refuse to speak with) about potential investments; how I deal with corporate management; how I trade stocks; and how I communicate (and don’t) with my shareholders.
Pilots internalize an explicit set of rules and procedures that guide their every action and ensure the safety of themselves and their passengers. Investors who are serious about achieving good returns without undue risk should follow their example. Why? Because in investing, as in flying, human error can be a bitch.
1. Stop Checking the Stock Price
As Buffett has said, when we invest in a business, we should be willing to own it even if the stock market were to close the next day and not reopen for five years.
The Rule: Check stock prices as infrequently as possible.
2. If Someone Tries to Sell You Something, Don’t Buy It
At first, these calls seemed a measure of my success, as if all this attention put me on the map. But I soon began to see that I made lousy decisions when I bought things that salespeople were hawking to me.
When people call to pitch me anything at all, I reply in as pleasant a manner as possible, “I’m sorry. But I have a rule that I don’t allow myself to buy anything that’s being sold to me.”
I may miss out in the short term. But over a lifetime I have no doubt that I’ll benefit much more by detaching myself from people with a self-interest in getting me to buy stuff.
For me, if an investment is being sold, that’s a place where I certainly want to avoid going.
As usual, Buffett knew this long before I did. For example, he has a rule never to participate in an open outcry auction. Following his lead, I’ve never invested in an IPO and probably never will.
The Rule: If the seller has a self-interest in me buying, I ain’t buying.
3. Don’t Talk to Management
Many smart investors would disagree with me on this. For them, it’s possible that regular contact with senior executives may be fruitful.
If I have to meet the CEO to understand why I should buy the stock, that’s a serious warning sign. It should be clear enough from all of my other research.
And if I want to assess the quality of the management, I’d rather do it in a detached and impersonal way by studying the annual reports and other public data, along with news stories.
It’s better to observe them indirectly like this instead of venturing into their distortion field by meeting them one-on-one.
The Rule: Beware of CEOs and other top management, no matter how charismatic, persuasive, and amiable they seem.
4. Gather Investment Research in the Right Order
We know from Munger’s speech on the causes of human misjudgment that the first idea to enter the brain tends to be the one that sticks.
As he explained, “the human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can’t get in. The human mind has a big tendency of the same sort.”
If that’s true, I need to be extremely careful about the order in which I gather research and explore investment ideas. I want to evaluate them from a position of strength, not weakness.
In my experience, I’m much better at filtering what I read than what I hear.
In the annual report, the management’s introductory letter is also important. Is it a public relations puff piece, or is there a genuine desire to communicate what’s going on?
Investors looking at Berkshire for the first time would do well to read the books that Roger Lowenstein and Alice Schroeder wrote about Buffett.
I also try (and sometimes fail) to minimize my exposure to the Internet, which can lead me in a thousand different directions. It requires a lot of mental energy to read a web page, with all its links to other information.
So I prefer to read the physical editions of things like the Wall Street Journal, the Financial Times, the Economist, Barron’s, Fortune, Bloomberg Businessweek, and Forbes, along with more abstruse publications like American Banker and the International Railway Journal.
The Rule: Pay attention to the order in which you consume information. And don’t eat your dessert until you’ve finished your meat and vegetables.
5. Discuss Your Investment Ideas Only with People Who Have No Axe to Grind
If I want somebody else’s perspective (and I often do), I find it more useful to seek out the opinion of a trusted peer on the buy side.
First, the conversation must be strictly confidential.
Second, neither person can tell the other what to do as this tends to make people feel judged, so they become defensive.
Third, we can’t have any business relationship because this could skew the conversation by adding a subtle or not-so-subtle financial agenda.
6. Never Buy or Sell Stocks When the Market Is Open
Wall Street is perfectly designed to take advantage of weaknesses in the human brain. For example, unscrupulous brokerages create well-honed scripts that enable their brokers to call their marks—I mean clients—to convince them to buy particular stocks.
The underlying goal is to generate lucrative trading activity for the firm itself.
What I need to do is simply invest in a handful of great but undervalued businesses and then stay put.
Wall Street is rewarded for activity. My shareholders and I are rewarded for inactivity.
When it comes to buying and selling stocks, I need to detach myself from the price action of the market, which can stir up my emotions, stimulate my desire to act, and cloud my judgment.
Instead, I prefer to wait until trading hours have ended. I then email one of my two brokers—preferring not to speak with them directly—and ask to trade the stock at the average price for the upcoming day.
As Ben Graham explained, we have to try to make the market our servant, not our master.
The Rule: Keep the market at a safe distance. Don’t let it invade your office or your brain.
7. If a Stock Tumbles after You Buy It, Don’t Sell It for Two Years
Mohnish developed a rule to deal with the psychological forces aroused in these situations: if he buys a stock and it goes down, he won’t allow himself to sell it for two years.
Once again, it acts as a circuit breaker, a way to slow me down and improve my odds of making rational decisions.
Even more important, it forces me to be more careful before buying a stock since I know that I’ll have to live with my mistakes for at least two years.
As Warren once put it, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it, so that you had 20 punches—representing investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do much better.”
The Rule: Before buying any stock, make sure you like it enough to hold on for at least two years, even if the price halves right after you buy it.
8. Don’t Talk about Your Current Investments
The Rule: Don’t say anything publicly about your investments that you may live to regret.
The complexity of the business and economic world, combined with our irrationality in the face of money-related issues, guarantees that we’ll make plenty of dumb mistakes.
The goal in creating a checklist is to avoid obvious and predictable errors. Before I make the final decision to buy any stock, I turn to my checklist in a last-ditch effort to prevent my unreliable brain from overlooking any potential warning signs that I might have missed.
The checklist is the final circuit breaker in my decision-making process.
I console myself by contemplating a sage observation of Buffett’s: “The key to life is figuring out who to be the batboy for.”
Buffett, with characteristic candor, confessed in his 2007 letter to shareholders: “To date, Dexter is the worst deal I’ve made. But I’ll make more mistakes in the future—you can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions: ‘I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.’”
As I suggested to Gawande, part of the problem might lie in what I described as “cocaine brain”: the intoxicating prospect of making money can arouse the same reward circuits in the brain that are stimulated by drugs, making the rational mind ignore supposedly extraneous details that are actually very relevant.
Needless to say, this mental state is not the best condition in which to conduct a cool and dispassionate analysis of investment risk.
My other caveat is that a checklist is emphatically not a shopping list of the desirable attributes that we’re looking for in a business. I’ve seen investment checklists that ask questions like: “Is this company cheap?” Or: “Does it have a high return on equity?” In my opinion, this is a misguided way to use checklists.
During the early stages of my research, I mentioned EVCI to Whitney Tilson, and we ended up visiting the company together in Yonkers. The business was doing well, but EVCI was hobbled by $2 million in debt that it had issued to acquire Interboro. In June 2003, Whitney and I invested $1 million each in EVCI, which relieved the company of this debt burden and invigorated the business. Meanwhile, the number of students at Interboro grew rapidly, profits surged, and my $1 million investment soared to $7 million in 18 months.
In any event, he must have felt under attack from every side. And, of course, we know how difficult it is to act rationally when money is at stake.
For me, one of the most important was that I needed to be more conscious of the extent to which the life circumstances of top executives can affect their decision making and their ability to manage the business.
Checklist Items: Are any of the key members of the company’s management team going through a difficult personal experience that might radically affect their ability to act for the benefit of their shareholders? Also, has this management team previously done anything self-serving that appears dumb?
As Buffett once remarked, “When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
This misadventure taught me an invaluable lesson: I want to invest only in companies that are a win-win for their entire ecosystem.
What’s important is the idea that a great company makes tons of money while adding real value for its customers.
Everybody in this ecosystem wins: Wal-Mart and its shareholders, its suppliers, and its customers.
In future, I determined to do a better job of analyzing the whole value chain to identify companies that make it more efficient.
Personally, I don’t want to invest in companies that make society worse even if their products are legal.
Checklist Item: Is this company providing a win-win for its entire ecosystem?
There is one other key aspect to the CarMax business model: it provides customers with access to financing. In the United States, a significant portion of cars are leased. Without financing, many CarMax customers wouldn’t be able to buy its cars. In fact, if CarMax were to find that it couldn’t access the debt markets, its whole business model would fall apart. And in 2008 it did fall apart. Sales plummeted because CarMax and its customers could no longer obtain credit amid the global financial crisis. As a result, the stock price crashed. Once again, I discovered the importance of understanding a company’s entire value chain.
The point is that I want to invest in companies that control their own destiny, not in companies that have their destiny determined by forces beyond their control.
Checklist Item: How could this business be affected by changes in other parts of the value chain that lie beyond the company’s control? For example, are its revenues perilously dependent on the credit markets or the price of a particular commodity?
People like me—who pride ourselves on being clever and well educated—are particularly prone to this type of narcissistic hubris. We can easily get caught up in analyzing companies that, like DFS, should really be relegated to what Buffett calls the “too hard” pile. Unfortunately, I wasn’t sufficiently aware of these dangerous tendencies of mine back then. So I bought DFS at around $26 per share in January 2006 despite its analytical complexities. I soon came to regret it.
Checklist Items: Is this stock cheap enough (not just in relative terms)? Am I sure that I’m paying for the business as it is today—not for an excessively rosy expectation of where it might be in the future? Does this investment satisfy me psychologically by meeting some unmet personal need? For example, am I keen to buy it because it makes me feel smart?
By observing Warren and Mohnish—both from a distance and up close—I gradually learned to become a better investor, a better businessman, and (I hope) a better person.
As Warren told Mohnish and me at our charity lunch: “Hang out with people better than you, and you cannot help but improve.”
As Buffett helped me to understand, nothing is more important than getting better people into your life.
To put it another way, relationships are the killer app.
But the relationships that I began to form were so life enriching that my cynical motives gradually receded.
But my deepening bonds with great people became a source of such sincere joy to me that I no longer needed any hidden agenda: these friendships became a wonderful end in themselves, not a means to self-advancement.
“When you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them. If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster. That’s the ultimate test of how you have lived your life.”
“The trouble with love is that you can’t buy it. You can buy sex. You can buy testimonial dinners. You can buy pamphlets that say how wonderful you are. But the only way to get love is to be lovable. It’s very irritating if you have a lot of money. You’d like to think you could write a check: I’ll buy a million dollars’ worth of love. But it doesn’t work that way. The more you give love away, the more you get.”
Warren, like Mohnish, innately understands that this is the way the universe works: the more we give, the more we receive. Warren’s life is one of the great examples of this benevolent cycle.
are a priceless source of wisdom. But people are the ultimate teachers, and there may be lessons that we can only learn from observing them or being in their presence. In many cases, these lessons are never communicated verbally. Yet you feel the guiding spirit of that person when you’re with them.
example, I joined various organizations where I could regularly rub shoulders with people who are better than me in a multitude of ways. This includes two extraordinary business groups that teach leadership qualities: the Entrepreneurs’ Organization and the Young Presidents’ Organization.
also joined Toastmasters, which teaches leadership through public speaking.
There’s a great lesson in this for me: if Warren can take the time to act like this with students (not to mention with investors like me), then I too need to act with real kindness toward the students I meet at business schools, and I should also respond encouragingly to every young graduate who sends me a résumé.
Warren replied that he can survey a room filled with a hundred people and easily identify the ten he’d do business with and the ten he’d avoid.
Mohnish showed me a better way. In his view, life is just too short to deal with people who aren’t straightforward and forthcoming about who they are.
The goal is not to figure them out, but to keep a distance.
Before I have an appointment with a person I don’t already know, I typically provide them with written information about myself—for example, my bio and my fund’s annual report. I want to make it as easy as possible for them to see where I’m coming from and to form an accurate impression of me. Likewise, I routinely ask them to send me some background material about themselves. If people are enigmatic or elusive in any way, I apply Buffett’s “not sure” rule and decide against a closer relationship.
I want to be the same person on the inside as on the outside.
This helps to explain why Buffett has drawn such remarkable people into his orbit: they provide a reflection of who he is.
This simple but robust idea has radiated out into many other areas of my life. To give you just one example, I never try to solicit my friends (or anyone else, for that matter) to invest in my fund. I’m happy for them just to be my friends. There is never any obligation.
The key, in my experience, is to value people as an end in themselves, not as a means to our own ends.
In my early years as a fund manager, I would have mocked the idea of being a servant. I preferred to see myself as a smart manipulator. But at our charity lunch Warren was also a servant of sorts despite being the world’s most famous investor.
Thanks in large part to Mohnish and Warren, I began to realize that I ought to focus more on what others need from me instead of constantly trying to get them to fulfill my own needs.
In my New York vortex days, I would go to a networking event, meet a stranger, and wonder how they could help me. Often, they’d talk at me about whatever product or service they wanted to sell, and I started to see how repulsive this sort of agenda-driven approach to business can be.
So, over time, I developed a different attitude to networking. My simple rule was that, whenever I met someone, I would try to do something for them. It might simply be an introduction to someone else or even just a sincere compliment.
These days, my focus isn’t just on helping individuals but also organizations, such as my Oxford college, Harvard Business School, and the Weizmann Institute. I recently realized that the Entrepreneurs’ Organization doesn’t have a chapter in Israel, so I set one up. I also learned that there was no TEDx event in Zurich, so I cofounded one.
One thing is for sure: I receive way more by giving than I ever did by taking. So, paradoxically, my attempts at selflessness may actually be pretty selfish.
If your goal in life is to get rich, value investing is pretty hard to beat.
Irrational exuberance comes and goes. The quest for value endures.
As Warren Buffett’s life exemplifies, what we are also talking about here is a quest for true value—for some kind of meaning that goes beyond money, professional advancement, or social cachet.
The inner journey is the path to becoming the best version of ourselves that we can be, and this strikes me as the only true path in life. It involves asking questions such as: What is my wealth for? What gives my life meaning? and how can I use my gifts to help others?
Munger has said that, once you’ve made a certain amount (I think it was $100 million), there would have to be something wrong in your head for you to continue dedicating yourself to the accumulation of wealth.
Templeton also devoted much of his life to the inner journey. Indeed, his greatest legacy is his charitable foundation, which explores “the Big Questions of human purpose and ultimate reality,” including complexity, evolution, infinity, creativity, forgiveness, love, gratitude, and free will.
The foundation’s motto is “How little we know, how eager to learn.”
Later, in my New York vortex years, my envy of people with bigger funds and more glamorous homes led me astray again, convincing me that I needed to market myself and try to become something that wasn’t true to who I am.
Knowing that cities like New York and London—the epicenters of Extremistan—had this destabilizing effect on me, it seemed safest to get away.
I never use borrowed money, and all my investments are sober and conservative.
By contrast, Mohnish can buy stocks with a higher level of uncertainty and volatility since, for him, the possibility of loss doesn’t trigger the kind of fears that are hardwired into my system.
I would argue that serious investors need to understand the complexities of their relationship to money, given its capacity to wreak havoc.
Based on that understanding, we can make adjustments—for example, changing our physical environment or adding certain items to our investment checklist.
Similarly, I’ve always invested a hefty portion of my fund in Berkshire Hathaway. Given the company’s enormous size, I could probably get better returns by investing elsewhere. But Berkshire’s presence in my portfolio provides a ballast—both financially and emotionally. It’s psychologically important to have Buffett in my ecosystem. Is this rational? For me, yes. For Mohnish, maybe not.
Temperamentally, I’m not well suited to meditation. But I’m open to pretty much anything as long as I might learn something.
The truth is that it doesn’t matter how you do this inner journey. What matters is that you do it.
The stock market has an uncanny way of finding us out, of exposing weaknesses as diverse as arrogance, jealousy, fear, anger, self-doubt, greed, dishonesty, and the need for social approval.
But the real reward of this inner transformation is not just enduring investment success. It’s the gift of becoming the best person we can be. That, surely, is the ultimate prize.
My goal in writing this book is to share some of what I’ve learned on my path as an investor. It’s about the education of this investor, not any other investor.
For months, I was focused on the wrong questions, wondering why I was having so much trouble getting deals done and fretting that something must be wrong with me. I didn’t have the experience or the perspective to understand that this whole environment was wrong.
And reputation in business—especially the investing world—is everything.
We like to think that we change our environment, but the truth is that it changes us. So we have to be extraordinarily careful to choose the right environment—to work with, and even socialize with, the right people.
Ideally, we should stick close to people who are better than us so that we can become more like them.
Warren Buffett made one of his bigger mistakes when, in his thirties, he invested in the loss-making Berkshire Hathaway textile mills. This could have been his undoing, but he later transformed Berkshire Hathaway into the towering monument of his life. He did so in part by learning to invest in better businesses instead of betting on the cigar-butt stocks (like Berkshire) that Ben Graham had taught him to buy.
It’s not just a quaint, self-help idea that the people who succeed are those who get up when life knocks them down.
An essential component of our education is to learn from our mistakes—and if we don’t make mistakes, sometimes we may not learn at all.
One of the biggest lessons was that I must never do anything again that could taint my reputation.
As Buffett once warned, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
Did my education fail me? Or, even worse, did I fail my education?
Part of the problem is that a finely trained but rarefied academic mind can be damaging to your long-term success. You can easily end up with the mental equivalent of a Formula 1 Ferrari, when what you need in the real world is a hardy Jeep that can operate adequately in a variety of environments.
There’s an important lesson here: It’s not enough to be in a great program at a great school. You need to be in a program that matches your particular needs at that stage in your life.
I had the same absolute clarity when I discovered value investing: I didn’t think this was the right path for me; I simply knew it.
I was driven in large part by what Warren Buffett calls “the outer scorecard”—that need for public approval and recognition, which can so easily lead us in the wrong direction. This is a dangerous weakness for an investor, since the crowd is governed by irrational fear and greed rather than by calm analysis. I would argue that this kind of privileged academic environment is largely designed to measure people by an external scorecard: winning other people’s approval was what really counted.
Value investors have to be able to go their own way.
The entire pursuit of value investing requires you to see where the crowd is wrong so that you can profit from their misperceptions.
To become a good investor, I would need to come to an acceptance of myself as an outsider. The real goal, perhaps, is not acceptance by others, but acceptance of oneself.
The very institutions that we have established to teach us to think independently often close our minds in potentially damaging ways. Charlie Munger discussed this very problem in a classic talk he gave at Harvard Law School in 1995 on the “Twenty-Four Standard Causes of Human Misjudgment.” He described how B. F. Skinner influenced an entire generation of psychologists to espouse behaviorism in spite of plenty of disconfirming evidence.
At HBS, the curriculum is devoted exclusively to studying real business case studies. Rather than focus on theories of how the world should work, we focused on practical discussions of what had actually happened.
By contrast, part of what makes Warren himself so successful is that he’s never stopped seeking to improve himself and that he continues to be a learning machine.
As Munger has said, “Warren is better in his 70s and 80s, in many ways, than he was when he was younger. If you keep learning all the time, you have a wonderful advantage.”
When I began to understand the principles that Warren Buffett embodied, I realized that there was another way to succeed. This discovery changed my life.
In a sense, what I really needed to do was reeducate myself. Or, for that matter, un-educate myself.
In retrospect, I’ve come to see that this is a smart strategy for life: whenever I have the choice of doing something with an uncertain but potentially high upside, I try to do it.
But in this case, it was brainwashing for the good, designed to help us live a better, more successful life. I’m all for that sort of brainwashing.
Our consciousness changes our reality, and I began to see that the positive statements Robbins got us to repeat were a powerful tool in reconfiguring my consciousness.
Hokey as it might seem, this 20-foot fire walk created a metaphor for how I could break through my limitations and build a better reality.
It was an experiential lesson that allowed me to understand how, as Robbins puts it, “Life can change in a heartbeat.”
A goal that seems impossible in one instant can become entirely possible in the next if only you are willing to devote every ounce of your mind, body, and soul to reach it.
As Theodore Roosevelt told an audience in Paris in 1910, “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood.”
Before attending his seminar, I would have rolled my eyes at a book entitled How to Win Friends and Influence People. But Warren Buffett himself credits the author, Dale Carnegie, with having helped him enormously.
Once again, I felt the sting of rejection. But they were kind enough to give me a copy of Buffett’s classic essay “The Superinvestors of Graham-and-Doddsville.”
In doing so, she showed genuine care for me, and I was really touched. She also taught me a valuable life lesson: it’s so important to show kindness and be helpful to people early in their careers, even when they have done nothing to deserve it.
One way to stay in this orbit was to buy shares in the Sequoia Fund. That would enable me to attend its annual meetings each spring at the New York Athletic Club. But the fund had been closed to new investors for many years. So I found someone on eBay who was willing to sell me a single share for $500 even though the net asset value was only $128. I then added to my position. I expect to keep these shares for the rest of my life.
For me, the goal isn’t to make money, though I’m guessing Sequoia will continue to outperform. It’s really a question of choosing to have certain people in your life (however tangentially) who embody the values you admire.
I’d assumed that the business world was all about shouting louder than the next guy so you could get attention. But Buffett was reaching out to people who weren’t impressed by noise.
What I stumbled upon was this. Desperate to figure out how to lead a life that was more like his, I began constantly to ask myself one simple question: “What would Warren Buffett do if he were in my shoes?”
This might sound peculiar, but the ability to mimic is one of the most powerful ways in which humans advance. Just think about how children learn from their parents. Given that this is a natural human instinct, it’s important to be careful about whom we choose to model.
The truth is, they don’t even need to be alive. As Charlie Munger has explained, it also works “if you go through life making friends with the eminent dead who had the right ideas.”
Imagining that I was Buffett, I also began to study the companies in his portfolio, wanting to see them through his eyes and to understand why he owned them. So I ordered up the annual reports for his major holdings, including Coca-Cola, Capital Cities/ABC, American Express, and Gillette. This again gave me that uncanny feeling that Warren—and perhaps God Himself—was smiling at me.
When I saw the cash-flow statement, I found it hard to believe my eyes. The company was swimming in cash, and the income statement didn’t come close to conveying the might of this cash-generating machine. Most of the companies I’d analyzed as an investment banker were either hemorrhaging cash or grossly overstating their cash-generating ability. It felt as if I were embarking on a second MBA.
Inspired by Robbins and Buffett, I had a growing sense of opportunity. Instead of feeling that every door was closed, I started to realize that it was possible to move forward. I was so obsessed with value investing that I hoped somebody would hire me as a stock analyst. But I still couldn’t get a job.
Warren Buffett, quoting Henry Ford, often talks about the importance of keeping all your eggs in one basket, then watching that basket very carefully.
I consciously modeled Buffett, who has focused all of his investing energy on Berkshire Hathaway for decades.
For example, I should simply have copied the fee structure of his pre-Berkshire investment partnerships. He charged no annual management fee, but took a quarter of the profits above a 6 percent hurdle. This is an extremely unusual structure, but it’s the best alignment I’ve ever seen between an investor and his shareholders. It truly embodies the principle of making money with them, not off them. Unless they do well, the fund manager earns nothing.
Another was a two-bedroom apartment on West 55th, where David Neeleman, the founder of JetBlue, was my neighbor. I’d read that he, like me, had attention deficit disorder (ADD). Yet he’d still managed to build a successful company.
As investors, we all have shortcomings; as I came to see it, the key is to accept who we are, understand our differences and limitations, and figure out ways to work around them.
Buffett: find companies that are cheap, that have an expanding “moat” around them, and that are awash in cash.
Buffett and Munger joke that envy is the only one of the seven deadly sins that isn’t any fun. “Envy is crazy,” remarks Munger. “It’s 100 percent destructive. . . . If you get those things out of your life early, life works a lot better.”
As an ancient rabbinical saying puts it: “Who is strong? He who masters his own passions.”
It turns out that envy and pride are expensive flaws.
As Munger puts it: “I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.”
One way that I look for investments is to study the masters and then explore whether I should buy the same stock or a better one with similar characteristics.
It’s difficult for professional investors, not just for amateurs who are new to the market, to resist this kind of lollapalooza of mind-bending distortions. We like to think we’re immune, but these forces are so powerful that they constantly subvert our judgment.
What affected me most was an extraordinary story Cialdini told about a Chevrolet salesman, Joe Girard, who regularly wrote holiday cards to thousands of his former customers with the words “I like you” printed on each card, along with his name. This personal expression of goodwill had an unbelievable effect: Girard won a place in the Guinness World Records book by selling 13,001 cars in 15 years. As Cialdini writes, “We’re phenomenal suckers for flattery,” and “we tend to believe praise and those who provide it.”
So I decided that I would write three letters per working day, or 15 per week. I began to thank people for giving a great speech, for sending me their investor letter, for providing a great meal in their restaurant, for inviting me to their conference. I would send people cards to wish them a happy birthday. I’d send them research reports or books or articles that I thought would interest them. I’d send them notes saying how much I’d enjoyed meeting them.
I also stumbled upon a book that included many of Ronald Reagan’s letters. He wrote to an amazing range of people, and he seemed to have a genuine interest in every one of them. He shared jokes and advice, addressed their concerns, encouraged kids. It seemed to me that this was part of the secret of his success. He wasn’t the most cerebral American president, but he mastered the art of caring for others, and he expressed his care through letters.
Tony Robbins had taught me that small differences in how we behave can, over time, have a profound impact. And this small action of writing hundreds of letters a year was transformational for me.
My view now is that it can take as long as five years to have a significant effect, so most people give up long before they reap the benefits.
In sending out this cascade of letters, I began to open up to people in a way that I never had before, and I started to see everyone around me as someone I could learn from.
Einstein is often said to have called compounding the eighth wonder of the world. But the narrowly financial application of compounding may be the least valuable and least interesting aspect of this phenomenon.
My letter-writing crusade had begun as a way of marketing my fund, but it ended up giving me a richness of life that I could hardly have imagined.
Rather than becoming a good salesperson, I found myself starting to care about the people I was writing to and to think about how I could help them.
The paradox is that, as I became more authentic and discarded my agenda, people became more interested in investing in the fund.
This was typical of Mohnish. He didn’t bother to conform to people’s standard expectations. He wasn’t fearful of being different, but his unconventional decisions made total sense to me.
The audience, which included about 100 people, wasn’t there to be pitched. They were there to learn.
Mohnish spoke honestly and straightforwardly, unafraid of what anyone might think about him.
By contrast, Mohnish came from a place of personal abundance, which was not merely a matter of financial wealth: he was comfortable with who he was, and he was happy to share his wisdom.
I didn’t understand this at the time, but I now see that every letter I wrote was an invitation for serendipity to strike.
When you have an agenda, people smell it, and this tends to put them on the defensive.
Misalignment is a dangerous thing, not just in relationships but in business and investing.
Charlie Munger points out that it’s always easier to be truthful because you don’t have to remember your lies. This relieves your brain of much unnecessary mental work so that it can focus on something more useful.
Mohnish talked to me during that meal about a book called Power vs. Force: The Hidden Determinants of Human Behavior. The author, David Hawkins, explores the theory that we have a greater capacity to influence others when we’re an authentic version of ourselves since this truthfulness evokes a deep psychological response in others.
Mohnish himself seemed to embody this idea that real power resides with a person who is honest and in touch with himself.
I quickly realized that Mohnish, like me, had been on a quest for worldly wisdom.
We saw what Buffett had done, and we consciously sought to copy him. But Mohnish was a much better cloner than I was, thanks to his relentless attention to detail.
This might sound over the top. But it’s an illustration of something I had learned from Mohnish: some businesses succeed because they get one thing right, but most succeed because they get a lot of small things right.
The people in this group weren’t dressed for success, and they didn’t have the slightest interest in doing business at the Berkshire meeting. They were there to learn, to celebrate friendship, and to drink from the well of wisdom. These were primarily amateurs who had invested their own money in Berkshire. In many cases, they had owned the stock for decades.
They had a different energy from that of my New York colleagues—professional investors and networkers who often wore a standard uniform of khaki pants and blue blazers.
As I had come to realize, if you’re going to do something, it’s best to commit to it with wholehearted gusto.
But when you begin to change yourself internally, the world around you responds.
As I hope you can see from my experience, when your consciousness or mental attitude shifts, remarkable things begin to happen. That shift is the ultimate business tool and life tool.
There’s a joke on Wall Street that a hedge fund is really just a fee structure in search of an investor to fleece.
He seemed glad that I understood how little he cares about personal enrichment and how much he cares about using his wealth to help others.
When we thanked Warren for making this lunch possible, he said that he was excited to do it. For one thing, it gave him a great opportunity to honor Reverend Williams and also his own late wife, Susan. He said that he had known right away, at 18, that she was the person he wanted to marry, and that he would never have gotten where he is today without her.
He told Mohnish’s children that choosing the right person to marry would be the most important decision of their lives.
I’ll never forget Warren’s response: “People will always stop you doing the right thing if it’s unconventional.” I asked if it gets any easier over time to do what’s right. He paused, looked away for a moment, and replied, “A little.”
“It’s very important always to live your life by an inner scorecard, not an outer scorecard,” he said.
“Would you prefer to be considered the best lover in the world and know privately that you’re the worst—or would you prefer to know privately that you’re the best lover in the world, but be considered the worst?”
One of Buffett’s defining characteristics is that he so clearly lives by his own inner scorecard. It isn’t just that he does what’s right, but that he does what’s right for him.
Clearly, he has set up his life so that it suits him and so that he enjoys it. When I asked if he had consciously created Berkshire’s unique decentralized structure, he emphasized that it operates that way because it suits his personality, not because it maximizes returns.
“Charlie and I always knew we would become very wealthy,” he told us, “but we weren’t in a hurry.” After all, he said, “If you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy—if you’re patient.”
He told us that people often try to convince him to meet them so they can pitch investments to him, but he’s comfortable saying “no” far more often than he says “yes”—regardless of their attempts to flatter him.
He also told us that he typically avoids meeting corporate managements, preferring to rely on companies’ financial statements.
As Buffett taught me, it’s not enough to rely on one’s intellect to filter out this noise: you need the right processes and environment to do so. For this reason, I decided to move to Zurich just six months after our lunch, knowing that it would be easier for me to remain clearheaded there, far from the New York vortex.
This became my own goal: not to be Warren Buffett, but to become a more authentic version of myself. As he had taught me, the path to true success is through authenticity.
I let loose an angry tirade. “How many times have I said that one should never buy anything that’s being sold by Wall Street? Never.
Understanding that this is an integral part of my wiring, I knew that I needed to avoid debt since it would interfere with my ability to act rationally.
In the past, he has also said that he never wants to get into serious debt because he doesn’t want to discover how he’s capable of behaving.
As Buffett wrote in his 2001 Letter to Shareholders, “You only find out who is swimming naked when the tide goes out.”
According to Warren, temperament is more important than IQ when it comes to investing.
At night, I read excerpts from his Meditations. He wrote of the need to welcome adversity with gratitude as an opportunity to prove one’s courage, fortitude, and resilience.
We might like to perceive ourselves as potential Isaac Newtons, but it’s perilous to forget that we also have this other aspect of our nature. Indeed, Newton himself would have been better off if he’d recognized this, given that he was an infamously dumb investor who lost his life savings in the South Sea Bubble. As Newton wryly observed: “I can calculate the movement of stars, but not the madness of men.”
Meanwhile, I resolved to spend more time reading books about biology. These studies deepened my sense that it’s helpful to think of the economy as an evolving and infinitely complex biological ecosystem.
Companies, like ant species, must adopt strategies that enable them to thrive or they will be at risk of extinction.
The trouble is, economic theories like these tend to be based on intellectually elegant assumptions about how the world operates, not on the messy reality in which we actually live.
For me at least, it seemed wiser to live in a place where the differences are less extreme. Given my particular set of flaws and vulnerabilities, I figured that I would stand a better chance of operating somewhat rationally in the kind of place that Taleb describes as “Mediocristan,” where life is more mundane.
Warren treats the managers of his companies with considerable trust, granting them the latitude to make their own decisions, and they respond by doing everything they can to live up to his expectations.
Occasionally people ask me, “But isn’t it boring there?” My answer: “Boring is good. As an investor, that’s exactly what I want.” Because distraction is a real problem. What I really need is a plain, unobtrusive background that’s not overly exciting.
The psychologist Roy Baumeister has shown that willpower is a limited resource, so we have to be careful not to deplete it. In fact, his lab discovered that even the simple act of resisting chocolate chip cookies left people with less willpower to perform subsequent tasks.
In my case, I don’t want to waste my limited energy guarding myself against the envy and greed that a place like the Bahnhofstrasse might trigger in me. It’s better simply to construct my environment so that I’m not exposed to these destabilizing forces, which are likely to intensify my irrationality.
The key is to free my mind from any unnecessary mental effort so I can use it for more constructive tasks that are likely to benefit me and my shareholders.
By having images of Munger and Buffett in my office, I’m trying once again to tilt the playing field on a subconscious level, using their presence to influence my thoughts.
About a year after our charity lunch, Warren Buffett generously gave Mohnish and me an impromptu tour of his office in Omaha. I was fascinated to see how he had structured his own environment to enhance his ability to make rational decisions.
Once I’d learned the basics, I quickly realized that bridge was not only a pleasurable diversion but would help to hone my skills in life, not to mention investing.
Indeed, as a preparation for investing, bridge is truly the ultimate game. If I were putting together a curriculum on value investing, bridge would undoubtedly be a part of it.
For investors, the beauty of bridge lies in the fact that it involves elements of chance, probabilistic thinking, and asymmetric information.
also rediscovered the joys of chess, a wonderful game of analysis and pattern recognition.
This attitude has undoubtedly made for a calmer and more joyful life. But I suspect it’s also made me a better investor.
This reminds me of a line that Mohnish often quotes from Blaise Pascal: “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
If ants can use a handful of simple rules to develop an infinitely complex survival strategy, what about investors? Can we create a similarly robust set of rules that will make our investment decisions smarter and less vulnerable to the distortions of our irrational brains?
The rules that I developed encompass a wide-ranging assortment of critical investment processes, including what I read (and in what order) when I’m researching stocks; whom I speak with (and refuse to speak with) about potential investments; how I deal with corporate management; how I trade stocks; and how I communicate (and don’t) with my shareholders.
Pilots internalize an explicit set of rules and procedures that guide their every action and ensure the safety of themselves and their passengers. Investors who are serious about achieving good returns without undue risk should follow their example. Why? Because in investing, as in flying, human error can be a bitch.
1. Stop Checking the Stock Price
As Buffett has said, when we invest in a business, we should be willing to own it even if the stock market were to close the next day and not reopen for five years.
The Rule: Check stock prices as infrequently as possible.
2. If Someone Tries to Sell You Something, Don’t Buy It
At first, these calls seemed a measure of my success, as if all this attention put me on the map. But I soon began to see that I made lousy decisions when I bought things that salespeople were hawking to me.
When people call to pitch me anything at all, I reply in as pleasant a manner as possible, “I’m sorry. But I have a rule that I don’t allow myself to buy anything that’s being sold to me.”
I may miss out in the short term. But over a lifetime I have no doubt that I’ll benefit much more by detaching myself from people with a self-interest in getting me to buy stuff.
For me, if an investment is being sold, that’s a place where I certainly want to avoid going.
As usual, Buffett knew this long before I did. For example, he has a rule never to participate in an open outcry auction. Following his lead, I’ve never invested in an IPO and probably never will.
The Rule: If the seller has a self-interest in me buying, I ain’t buying.
3. Don’t Talk to Management
Many smart investors would disagree with me on this. For them, it’s possible that regular contact with senior executives may be fruitful.
If I have to meet the CEO to understand why I should buy the stock, that’s a serious warning sign. It should be clear enough from all of my other research.
And if I want to assess the quality of the management, I’d rather do it in a detached and impersonal way by studying the annual reports and other public data, along with news stories.
It’s better to observe them indirectly like this instead of venturing into their distortion field by meeting them one-on-one.
The Rule: Beware of CEOs and other top management, no matter how charismatic, persuasive, and amiable they seem.
4. Gather Investment Research in the Right Order
We know from Munger’s speech on the causes of human misjudgment that the first idea to enter the brain tends to be the one that sticks.
As he explained, “the human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can’t get in. The human mind has a big tendency of the same sort.”
If that’s true, I need to be extremely careful about the order in which I gather research and explore investment ideas. I want to evaluate them from a position of strength, not weakness.
In my experience, I’m much better at filtering what I read than what I hear.
In the annual report, the management’s introductory letter is also important. Is it a public relations puff piece, or is there a genuine desire to communicate what’s going on?
Investors looking at Berkshire for the first time would do well to read the books that Roger Lowenstein and Alice Schroeder wrote about Buffett.
I also try (and sometimes fail) to minimize my exposure to the Internet, which can lead me in a thousand different directions. It requires a lot of mental energy to read a web page, with all its links to other information.
So I prefer to read the physical editions of things like the Wall Street Journal, the Financial Times, the Economist, Barron’s, Fortune, Bloomberg Businessweek, and Forbes, along with more abstruse publications like American Banker and the International Railway Journal.
The Rule: Pay attention to the order in which you consume information. And don’t eat your dessert until you’ve finished your meat and vegetables.
5. Discuss Your Investment Ideas Only with People Who Have No Axe to Grind
If I want somebody else’s perspective (and I often do), I find it more useful to seek out the opinion of a trusted peer on the buy side.
First, the conversation must be strictly confidential.
Second, neither person can tell the other what to do as this tends to make people feel judged, so they become defensive.
Third, we can’t have any business relationship because this could skew the conversation by adding a subtle or not-so-subtle financial agenda.
6. Never Buy or Sell Stocks When the Market Is Open
Wall Street is perfectly designed to take advantage of weaknesses in the human brain. For example, unscrupulous brokerages create well-honed scripts that enable their brokers to call their marks—I mean clients—to convince them to buy particular stocks.
The underlying goal is to generate lucrative trading activity for the firm itself.
What I need to do is simply invest in a handful of great but undervalued businesses and then stay put.
Wall Street is rewarded for activity. My shareholders and I are rewarded for inactivity.
When it comes to buying and selling stocks, I need to detach myself from the price action of the market, which can stir up my emotions, stimulate my desire to act, and cloud my judgment.
Instead, I prefer to wait until trading hours have ended. I then email one of my two brokers—preferring not to speak with them directly—and ask to trade the stock at the average price for the upcoming day.
As Ben Graham explained, we have to try to make the market our servant, not our master.
The Rule: Keep the market at a safe distance. Don’t let it invade your office or your brain.
7. If a Stock Tumbles after You Buy It, Don’t Sell It for Two Years
Mohnish developed a rule to deal with the psychological forces aroused in these situations: if he buys a stock and it goes down, he won’t allow himself to sell it for two years.
Once again, it acts as a circuit breaker, a way to slow me down and improve my odds of making rational decisions.
Even more important, it forces me to be more careful before buying a stock since I know that I’ll have to live with my mistakes for at least two years.
As Warren once put it, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it, so that you had 20 punches—representing investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do much better.”
The Rule: Before buying any stock, make sure you like it enough to hold on for at least two years, even if the price halves right after you buy it.
8. Don’t Talk about Your Current Investments
The Rule: Don’t say anything publicly about your investments that you may live to regret.
The complexity of the business and economic world, combined with our irrationality in the face of money-related issues, guarantees that we’ll make plenty of dumb mistakes.
The goal in creating a checklist is to avoid obvious and predictable errors. Before I make the final decision to buy any stock, I turn to my checklist in a last-ditch effort to prevent my unreliable brain from overlooking any potential warning signs that I might have missed.
The checklist is the final circuit breaker in my decision-making process.
I console myself by contemplating a sage observation of Buffett’s: “The key to life is figuring out who to be the batboy for.”
Buffett, with characteristic candor, confessed in his 2007 letter to shareholders: “To date, Dexter is the worst deal I’ve made. But I’ll make more mistakes in the future—you can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions: ‘I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.’”
As I suggested to Gawande, part of the problem might lie in what I described as “cocaine brain”: the intoxicating prospect of making money can arouse the same reward circuits in the brain that are stimulated by drugs, making the rational mind ignore supposedly extraneous details that are actually very relevant.
Needless to say, this mental state is not the best condition in which to conduct a cool and dispassionate analysis of investment risk.
My other caveat is that a checklist is emphatically not a shopping list of the desirable attributes that we’re looking for in a business. I’ve seen investment checklists that ask questions like: “Is this company cheap?” Or: “Does it have a high return on equity?” In my opinion, this is a misguided way to use checklists.
During the early stages of my research, I mentioned EVCI to Whitney Tilson, and we ended up visiting the company together in Yonkers. The business was doing well, but EVCI was hobbled by $2 million in debt that it had issued to acquire Interboro. In June 2003, Whitney and I invested $1 million each in EVCI, which relieved the company of this debt burden and invigorated the business. Meanwhile, the number of students at Interboro grew rapidly, profits surged, and my $1 million investment soared to $7 million in 18 months.
In any event, he must have felt under attack from every side. And, of course, we know how difficult it is to act rationally when money is at stake.
For me, one of the most important was that I needed to be more conscious of the extent to which the life circumstances of top executives can affect their decision making and their ability to manage the business.
Checklist Items: Are any of the key members of the company’s management team going through a difficult personal experience that might radically affect their ability to act for the benefit of their shareholders? Also, has this management team previously done anything self-serving that appears dumb?
As Buffett once remarked, “When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
This misadventure taught me an invaluable lesson: I want to invest only in companies that are a win-win for their entire ecosystem.
What’s important is the idea that a great company makes tons of money while adding real value for its customers.
Everybody in this ecosystem wins: Wal-Mart and its shareholders, its suppliers, and its customers.
In future, I determined to do a better job of analyzing the whole value chain to identify companies that make it more efficient.
Personally, I don’t want to invest in companies that make society worse even if their products are legal.
Checklist Item: Is this company providing a win-win for its entire ecosystem?
There is one other key aspect to the CarMax business model: it provides customers with access to financing. In the United States, a significant portion of cars are leased. Without financing, many CarMax customers wouldn’t be able to buy its cars. In fact, if CarMax were to find that it couldn’t access the debt markets, its whole business model would fall apart. And in 2008 it did fall apart. Sales plummeted because CarMax and its customers could no longer obtain credit amid the global financial crisis. As a result, the stock price crashed. Once again, I discovered the importance of understanding a company’s entire value chain.
The point is that I want to invest in companies that control their own destiny, not in companies that have their destiny determined by forces beyond their control.
Checklist Item: How could this business be affected by changes in other parts of the value chain that lie beyond the company’s control? For example, are its revenues perilously dependent on the credit markets or the price of a particular commodity?
People like me—who pride ourselves on being clever and well educated—are particularly prone to this type of narcissistic hubris. We can easily get caught up in analyzing companies that, like DFS, should really be relegated to what Buffett calls the “too hard” pile. Unfortunately, I wasn’t sufficiently aware of these dangerous tendencies of mine back then. So I bought DFS at around $26 per share in January 2006 despite its analytical complexities. I soon came to regret it.
Checklist Items: Is this stock cheap enough (not just in relative terms)? Am I sure that I’m paying for the business as it is today—not for an excessively rosy expectation of where it might be in the future? Does this investment satisfy me psychologically by meeting some unmet personal need? For example, am I keen to buy it because it makes me feel smart?
By observing Warren and Mohnish—both from a distance and up close—I gradually learned to become a better investor, a better businessman, and (I hope) a better person.
As Warren told Mohnish and me at our charity lunch: “Hang out with people better than you, and you cannot help but improve.”
As Buffett helped me to understand, nothing is more important than getting better people into your life.
To put it another way, relationships are the killer app.
But the relationships that I began to form were so life enriching that my cynical motives gradually receded.
But my deepening bonds with great people became a source of such sincere joy to me that I no longer needed any hidden agenda: these friendships became a wonderful end in themselves, not a means to self-advancement.
“When you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them. If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster. That’s the ultimate test of how you have lived your life.”
“The trouble with love is that you can’t buy it. You can buy sex. You can buy testimonial dinners. You can buy pamphlets that say how wonderful you are. But the only way to get love is to be lovable. It’s very irritating if you have a lot of money. You’d like to think you could write a check: I’ll buy a million dollars’ worth of love. But it doesn’t work that way. The more you give love away, the more you get.”
Warren, like Mohnish, innately understands that this is the way the universe works: the more we give, the more we receive. Warren’s life is one of the great examples of this benevolent cycle.
are a priceless source of wisdom. But people are the ultimate teachers, and there may be lessons that we can only learn from observing them or being in their presence. In many cases, these lessons are never communicated verbally. Yet you feel the guiding spirit of that person when you’re with them.
example, I joined various organizations where I could regularly rub shoulders with people who are better than me in a multitude of ways. This includes two extraordinary business groups that teach leadership qualities: the Entrepreneurs’ Organization and the Young Presidents’ Organization.
also joined Toastmasters, which teaches leadership through public speaking.
There’s a great lesson in this for me: if Warren can take the time to act like this with students (not to mention with investors like me), then I too need to act with real kindness toward the students I meet at business schools, and I should also respond encouragingly to every young graduate who sends me a résumé.
Warren replied that he can survey a room filled with a hundred people and easily identify the ten he’d do business with and the ten he’d avoid.
Mohnish showed me a better way. In his view, life is just too short to deal with people who aren’t straightforward and forthcoming about who they are.
The goal is not to figure them out, but to keep a distance.
Before I have an appointment with a person I don’t already know, I typically provide them with written information about myself—for example, my bio and my fund’s annual report. I want to make it as easy as possible for them to see where I’m coming from and to form an accurate impression of me. Likewise, I routinely ask them to send me some background material about themselves. If people are enigmatic or elusive in any way, I apply Buffett’s “not sure” rule and decide against a closer relationship.
I want to be the same person on the inside as on the outside.
This helps to explain why Buffett has drawn such remarkable people into his orbit: they provide a reflection of who he is.
This simple but robust idea has radiated out into many other areas of my life. To give you just one example, I never try to solicit my friends (or anyone else, for that matter) to invest in my fund. I’m happy for them just to be my friends. There is never any obligation.
The key, in my experience, is to value people as an end in themselves, not as a means to our own ends.
In my early years as a fund manager, I would have mocked the idea of being a servant. I preferred to see myself as a smart manipulator. But at our charity lunch Warren was also a servant of sorts despite being the world’s most famous investor.
Thanks in large part to Mohnish and Warren, I began to realize that I ought to focus more on what others need from me instead of constantly trying to get them to fulfill my own needs.
In my New York vortex days, I would go to a networking event, meet a stranger, and wonder how they could help me. Often, they’d talk at me about whatever product or service they wanted to sell, and I started to see how repulsive this sort of agenda-driven approach to business can be.
So, over time, I developed a different attitude to networking. My simple rule was that, whenever I met someone, I would try to do something for them. It might simply be an introduction to someone else or even just a sincere compliment.
These days, my focus isn’t just on helping individuals but also organizations, such as my Oxford college, Harvard Business School, and the Weizmann Institute. I recently realized that the Entrepreneurs’ Organization doesn’t have a chapter in Israel, so I set one up. I also learned that there was no TEDx event in Zurich, so I cofounded one.
One thing is for sure: I receive way more by giving than I ever did by taking. So, paradoxically, my attempts at selflessness may actually be pretty selfish.
If your goal in life is to get rich, value investing is pretty hard to beat.
Irrational exuberance comes and goes. The quest for value endures.
As Warren Buffett’s life exemplifies, what we are also talking about here is a quest for true value—for some kind of meaning that goes beyond money, professional advancement, or social cachet.
The inner journey is the path to becoming the best version of ourselves that we can be, and this strikes me as the only true path in life. It involves asking questions such as: What is my wealth for? What gives my life meaning? and how can I use my gifts to help others?
Munger has said that, once you’ve made a certain amount (I think it was $100 million), there would have to be something wrong in your head for you to continue dedicating yourself to the accumulation of wealth.
Templeton also devoted much of his life to the inner journey. Indeed, his greatest legacy is his charitable foundation, which explores “the Big Questions of human purpose and ultimate reality,” including complexity, evolution, infinity, creativity, forgiveness, love, gratitude, and free will.
The foundation’s motto is “How little we know, how eager to learn.”
Later, in my New York vortex years, my envy of people with bigger funds and more glamorous homes led me astray again, convincing me that I needed to market myself and try to become something that wasn’t true to who I am.
Knowing that cities like New York and London—the epicenters of Extremistan—had this destabilizing effect on me, it seemed safest to get away.
I never use borrowed money, and all my investments are sober and conservative.
By contrast, Mohnish can buy stocks with a higher level of uncertainty and volatility since, for him, the possibility of loss doesn’t trigger the kind of fears that are hardwired into my system.
I would argue that serious investors need to understand the complexities of their relationship to money, given its capacity to wreak havoc.
Based on that understanding, we can make adjustments—for example, changing our physical environment or adding certain items to our investment checklist.
Similarly, I’ve always invested a hefty portion of my fund in Berkshire Hathaway. Given the company’s enormous size, I could probably get better returns by investing elsewhere. But Berkshire’s presence in my portfolio provides a ballast—both financially and emotionally. It’s psychologically important to have Buffett in my ecosystem. Is this rational? For me, yes. For Mohnish, maybe not.
Temperamentally, I’m not well suited to meditation. But I’m open to pretty much anything as long as I might learn something.
The truth is that it doesn’t matter how you do this inner journey. What matters is that you do it.
The stock market has an uncanny way of finding us out, of exposing weaknesses as diverse as arrogance, jealousy, fear, anger, self-doubt, greed, dishonesty, and the need for social approval.
But the real reward of this inner transformation is not just enduring investment success. It’s the gift of becoming the best person we can be. That, surely, is the ultimate prize.