A genius is the man who can do average the thing when everyone else around him is losing his mind – Napoleon Hill
Personal Experiences / Investment:
In theory people should make investment decisions based on their goals and the characteristics of the investment options available to them at the time
But that’s not what people do.
The economist found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation – especially experiences in their adult life.
If you grew up when inflation was high, you invested less of your money in bond/fixed deposit market, compared to those who grew up when inflation was low.
If you grew up when stock market was performing well, you invested more money in stock market, compared to people who grew up when it was performing weak.
The economist wrote – “our findings suggest that individual investors’ willingness to bear risk depends on personal history”
Not intelligence, or education, etc, but just the dumb luck of when and where you were born.
Most of the people still struggle with investment because it is still a fairly new topic (people started talking about savings and retirement plans after 1980s)
Luck & Risk:
Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort.
But both are hard to measure, and hard to accept, that they too often go overlook.
If you give luck and risk their proper respect, you realize that when judging people’s financial success – both your own’s and other’s – it’s never as good or as bad as it seems.
You’ll get closer to actionable takeaways by looking for more broader patters for success and failure. The more common the pattern, the more applicable it might be to your life. Trying to emulate Warren Buffet would be hard, but identifying a common pattern among all the successful investors and trying that can make you a successful investor.
Compounding:
$81.5 Billion from a total a total net worth of $84 Billion, came after his 65th birthday.
Warren Buffet is a phenomenal investor. But you miss a key point if you attach all his success to his investing acumen. The real key to his success is his continuous investment since he was 10 years old (i.e. the longevity he maintained in his geriatric years.)
His skill is investing but his secret is time.
That’s how compounding works!
Thing of this another way. Buffet is the richest investor of all time. But he is not actually the greatest – at least not when measured by average annual returns.
Jim Simons, head of the hedge fund, had compounded money at 66% annually since 1988. No one comes close to this record. As we just saw, buffet has compounded at 22% annually.
Simon’s net worth is $22 billion, (75% less richer than buffet)
Why the difference? Simon started investing after he was 50 years old, If Simon had earned 66% returns through his 70 years of life, he would have been world’s richest man.
Getting Wealthy vs Staying Wealthy
There are millions of becoming wealthy but there’s only one way to stay wealthy – some combination of frugality and paranoia.
10 years can make a meaningful difference, and 50 years can create something absolutely extraordinary.
But getting and keeping that extraordinary growth requires surviving all the unpredictable ups and downs that everyone inevitably experiences over the time.
We can spend years trying to figure out how Buffet achieved his investment returns; how he found best companies, cheapest stocks, the best managers. That’s hard. Less hard but equally important is pointing out what he didn’t do.
He didn’t get carried away with debt
He didn’t panic and sell during the 14 recessions
He didn’t sully his business reputation
He didn’t rely on other’s money (i.e leverage)
BUT:
He Survived! Survival gave him longevity. And longevity – investing consistently from age 10 to atleast age 89 -is what made compounding work wonders. That single point is what matters most when describing his success.
Getting Money and Keeping Money are two different skills.
Keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that atleast some of what you made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.
Micheal Mortiz, the billionaire head of Sequoia capital, was asked by Charlie Rose why Sequoia was so successful. Mortiz mentioned longevity, noting that some VC firms succeed for five or ten years, but sequoia prospered for four decades. Rosed asked why that was:
Mortiz: I think we’ve always been afraid of going out of business.
Rose: Really? so it’s fear? only the paranoid survive?
Moritz: There’s a lot of truth to that…
(He didn’t mentioned growth, brains or anything like that). The ability to stick around for a long time without wiping out or being forced to give up, is what makes the biggest difference. THIS should be the corner stone of your strategy, whether it’s investing or your career or business you own.
Survival Mindset:
More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable, I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.
Planning is important but most important of the plan is to plan on the plan not going according to the plan (i.e foreseeing something can go wrong and if you have the band with for it)
A barbelled personality – optimistic about the future but paranoid about what will prevent you from getting to the future (i.e. concerned about what could go wrong)
Tails, You Win
You can be wrong half the time and still make a fortune
I’ve been banging away at this thing for 30 years. I think the simple math is, some projects work and some don’t. There’s no reason to belabor either one. Just get on to the next. – Brad Pitt.
Warren Buffet said he’s owned 400 to 500 stocks during his life and made most of his money on 10 of them. Charlie Munger followed up: “If you remove just a few of Berkshire’s top investment, it long term track record is pretty average.”
That one person collected huge quantities of masterpiece is astounding. Art is subjective as it gets. How could anyone have foresee, early in life, what were to become the most sought after works of the century?
You could say “Skill”
you could say “luck”
The investment firm Horizon research has a third explanation. And it’s very relevant to investors.
The greatest investors bought vast quantities of art, the firm writes. A subset of the collections turned out to be the great investments, and they were held for a sufficiently long period of time to allow the portfolio return to converge upon the return of the best elements in the portfolio. That’s all that happens.
The great art dealers operated like Index Funds. They bought everything they could. And they bought it in portfolios, not individual pieces they happened to like. Then they sat and waited for a few winners to emerge.
That’s all that happens.
Perhaps 99% of the works someone like Berggruen acquired in his life turned out to be of little value. BUT that does not particularly matter if the other 1% turn out to be the work of someone like Picasso.
A lot of things in business and investing work this way. Long tails – the farthest ends of a distribution of outcomes – have tremendous influence in finance, where a small number of events can account for the majority of the outcomes.
FREEDOM
Controlling your time is the highest dividend money pays
The highest form of wealth is the ability to wake up every morning and say “I can do whatever I want today”
The ability to do what you want, when you want, with who you want, for as long as you want, is priceless.
It is the highest dividend money pays.
The most powerful denominator of happiness was simple. Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered. More than your salary, house, job, Control over doing what you want, when you want, is the broadest lifestyle variable that makes people happy.
Money’s greatest intrinsic value – and this can’t be overstated – is it’s ability to give you control over your time.
SAVE MONEY:
Building wealth has little do to with your income or investment returns, and lots to do with your savings rate.
Money in your bank account gives you flexibility!
If you have the flexibility you can wait for good opportunities.
Having more control over your time and options is becoming one of the most valuable currencies in the world.
That’s why more people can, and more people should, save money.
Surprise:
Do not rely too much on past and extrapolate it to future. Most of things in the past happened for the first time. Likewise, what’s going to happen in the future is also going to happen for the first time and hence relying on past data isn’t much helpful.
Room for Error:
The most important part of every plan is planning on your plan not going according to the plan
You can call it margin of safety!
The solution is simple: Use room for error when estimating your future returns. This is more art than science. For my own investments, I assume that future returns I’ll earn in my lifetime will be 1/3rd than the historic average. So I save more than I would if I assumed the future will resemble the past. It’s my margin of safety.
If there’s one way to guard against their damage, it’s avoiding single point of failure.
A good rule of thumb for a long of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and the thing breaks you are counting the days to catastrophe. That’s a single point of failure.
Some people are remarkably good at avoiding single point of failure. Most critical systems on airplanes have backups, and the backups often have backups. Mordern jets have found redundant electrical systems. You can fly with one engine and technically land with none, as every jet must be capable of stopping on a runway with its break alone, without the thrust reverse from it’s engines.
Charlie Munger says the first rule of compounding is to never interrupt it unnecessarily.
Compounding works best when you can give a plan years or decades to grow.
