But in 1995, I found myself with a bit of cash to invest—my half of the proceeds from the sale of an apartment that I owned with my brother. (Location 41)
My interest in horse racing was fueled not by the romance of the sport or the majesty of the equine form, but by a desire to make money without working. I took it seriously, jotting down elaborate notes about horses and courses, using multicolored ink pens to highlight my wins and losses. (Location 46)
A decade later, when I began to read about investing, I discovered that the stock market offered similar thrills. But the odds of success were much higher. Stocks struck me as the perfect way to cash in merely by outthinking other people. (Location 51)
I interviewed Michael Price, a polo-playing centimillionaire who terrorized underperforming CEOs and came to be known as “the scariest SOB on Wall Street.” (Location 63)
Peter Lynch, Fidelity’s most famous fund manager, talked to me about how he’d won by outworking everybody else. But he also spoke about the wild unpredictability of markets and the need for humility: “You get a lot of A’s and B’s in school. In the stock market, you get a lot of F’s. And if you’re right six or seven times out of ten, you’re very good.” (Location 70)
I headed to Baltimore to visit Bill Miller, who was in the midst of an unprecedented streak of beating the S&P 500 index for fifteen years running. We spent a few days together and traveled in his Learjet, which he’d bought in part so that his 110-pound Irish wolfhound could fly with him. (Location 76)
As he explained to me, investing is a constant process of calculating the odds: “It’s all probabilities. There is no certainty.” (Location 83)
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And then there was Bill Ruane, one of the most successful stock pickers of his generation. When Warren Buffett closed his investment partnership in 1969, he recommended Ruane as a replacement for himself. Until his death in 2005, Ruane’s Sequoia Fund generated stunning returns. (Location 84)
Third, ignore market predictions: “I firmly believe that nobody knows what the market will do.… The important thing is to find an attractive idea and invest in a company that’s cheap.” (Location 93)
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The rewards for investing intelligently are so extravagant that the business attracts many brilliant minds. But there can also be a devastating price to pay for being wrong, which is rarely the case for professors, politicians, and pundits. The stakes involved may explain why the best investors tend to be open-minded pragmatists who search relentlessly for ways to improve their thinking. (Location 105)
Rather, they are seekers of what the economist John Maynard Keynes called “worldly wisdom,” which they deploy to attack more pressing problems, such as “How can I make smart decisions about the future if the future is unknowable?” (Location 114)
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as games in which we must consciously and consistently seek to maximize our odds of success (Location 125)
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kindly upon me despite my delusions. As Jeffrey Gundlach, a coldly rational billionaire who oversees about $140 billion in bonds, remarked to me, “Hope (Location 151)
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It’s 7:00 a.m. on Christmas Day. Mohnish Pabrai steps into a minivan in Mumbai as the sun rises in the smoggy sky. We drive for hours along the western coast of India toward a territory called Dadra and Nagar Haveli. (Location 209)
Pabrai, one of the preeminent investors of his generation, has traveled here from his home in Irvine, California, to visit forty teenage girls. They are part of a program run by his charitable foundation, Dakshana, which educates gifted children from disadvantaged families across India. (Location 216)
“I watched my parents losing everything multiple times,” says Pabrai. “And when I say losing everything, I mean not having enough money to buy groceries tomorrow, not having money to pay the rent.… I never want to go through that again, but what I saw is that it didn’t bother them. (Location 258)
“I completely ignored his advice,” says Pabrai. “My perspective at that time was that all these fuckers in finance are dumbasses. They don’t know shit. (Location 267)
After college, Pabrai took a job at Tellabs. Then, in 1990, he launched a technology consulting company, TransTech, bankrolling it with $70,000 in credit card debt and $30,000 from his 401(k). Most people couldn’t stomach that level of risk, but he’s always had a gambling streak. (Location 270)
He was astonished to learn that Berkshire Hathaway’s chairman and CEO had racked up investment returns of 31 percent annually over forty-four years, starting at the age of twenty. (Location 276)
This set Pabrai thinking. What if he could figure out how Buffett picked stocks and could mimic his winning approach? Thus began what Pabrai describes as a “thirty-year game” to turn his $1 million into $1 billion. (Location 284)
Pabrai’s approach to the challenge of becoming a billionaire holds important lessons for us all, not just as investors but in every area of life. He didn’t attempt to reinvent the wheel by, say, devising a new algorithm to exploit subtle pricing anomalies in the markets. Instead, he identified the most skillful player of this particular game, analyzed why he was so successful, then copied his approach with scrupulous attention to detail. Pabrai’s term for this process is cloning. (Location 288)
“Everything in my life is cloned.… I have no original ideas.” Consciously, systematically, and with irrepressible delight, he has mined the minds of Buffett, Munger, and others not only for investment wisdom but for insights on how to manage his business, avoid mistakes, build his brand, give away money, approach relationships, structure his time, and construct a happy life. (Location 298)
Along the way, I’ve come to appreciate the tremendous power of his method of reverse engineering, replicating, and often improving on other people’s successful strategies. Pabrai, the most relentless cloner I’ve ever encountered, has taken the art of appropriation to such an extreme that, paradoxically, it seems oddly original. (Location 306)
Buffett’s style of investing seemed “so simple” and “so powerful” that Pabrai considered it the only way to invest. But when he studied other money managers, he was perplexed to find that almost none lived by Buffett’s laws. It was like meeting “an entire set of physicists who don’t believe in gravity.… Whether you believe in gravity or not, it’s fucking gonna pull you down!” (Location 317)
Even if he missed by a mile, he expected to do fine; if, say, he averaged 16 percent a year, his $1 million would turn into $85.85 million in thirty years. Such is the glory of compounding. (Location 332)
First, whenever you buy a stock, you’re purchasing a portion of an ongoing business with an underlying value, not just a piece of paper for speculators to trade. (Location 339)
Second, Graham viewed the market as a “voting machine,” not a “weighing machine,” which means that stock prices frequently fail to reflect the true value of these businesses. (Location 340)
Third, you should buy a stock only when it’s selling for much less than your conservative estimate of its worth. The gap between a company’s intrinsic value and its stock price provides what Graham called a “margin of safety.” (Location 343)
Munger, a nonagenarian whom Pabrai considers “the brightest human” he’s ever met, embodies this approach. Munger once observed, “You have to be like a man standing with a spear next to a stream. Most of the time he’s doing nothing. When a fat juicy salmon swims by, the man spears it. Then he goes back to doing nothing. It may be six months before the next salmon goes by.” (Location 357)
The trouble is, there aren’t enough compelling opportunities to justify all of this activity. So Pabrai, like his two idols, prefers to wait for the most succulent salmon. (Location 361)
In 2018, Pabrai’s offshore hedge fund owned no US stocks at all because nothing seemed cheap enough. (Location 365)
Buffett, Munger, and Pabrai are not alone in pursuing this strategy of extreme patience and extreme selectivity. Their elite cohort includes great investors such as Francis Chou, one of Canada’s most prominent fund managers. (Location 374)
One technique that he uses to distance himself emotionally from the day-to-day drama of the market is to think of himself in the third person instead of the first person. (Location 380)
He looked less like an adrenaline-fueled stock jockey than a vacationer contemplating a lazy stroll on the beach. Cloning Buffett, who once showed him the blank pages of his little black diary, Pabrai keeps his calendar virtually empty so he can spend most of his time reading and studying companies. (Location 383)
One of his favorite quotes is from the philosopher Blaise Pascal: “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” (Location 386)
Pabrai plays online bridge, too, and he burns off energy by biking and playing racquetball. When there’s nothing to buy and no reason to sell, he can also direct more attention to his charitable foundation. (Location 389)
“The moment you have people on your team, they’re going to want to act and do things, and then you’re hosed.” In most fields, a hunger for action is a virtue. But as Buffett said at Berkshire’s 1998 annual meeting, “We don’t get paid for activity, just for being right.” (Location 391)
One of Pabrai’s first stock picks was a tiny Indian technology company, Satyam Computer Services, which he bought in 1995. (Location 398)
He sold in 2000, when it was outrageously overvalued, and pocketed a $1.5 million profit. (Location 400)
Through a combination of luck and smarts, Pabrai turned his $1 million into $10 million in less than five years. (Location 402)
In 1999, he launched an investment partnership with $900,000 from eight people and $100,000 of his own. A year or so later, he sold his technology consulting company, TransTech, for $6 million so that he could focus exclusively on investing. (Location 405)
For example, Buffett charged no annual management fee but collected a performance fee of 25 percent of any profits over an annual “hurdle” of 6 percent. (Location 408)
Following Buffett’s lead, Pabrai constructed an unusually concentrated portfolio. He figured that ten stocks would give him all the diversification he needed. When you’re buying so few stocks, you can afford to be choosy. Pabrai glances at hundreds of stocks and rapidly rejects almost all of them, often in less than a minute.VI (Location 416)
Buffett provided Pabrai with several simple filters that helped him to streamline the sifting. First, says Pabrai, one of Buffett’s “core commandments” is that you can invest in a company only if it falls within your “circle of competence.” (Location 422)
“I have very simple criteria: if something is not going to be an obvious double in a short period of time—you know, two or three years—I have no interest.” (Location 428)
For Pabrai, one of the secrets of successful investing is to avoid anything that’s too hard. He automatically passes on investments in countries such as Russia and Zimbabwe, given their contempt for shareholder rights. (Location 438)
Similarly, in 2002, he invested in a Scandinavian shipping firm, Frontline Ltd., after the price for leasing oil tankers collapsed. The stock had plunged to $5.90, but he calculated that Frontline’s liquidation value was more than $11 per share. (Location 460)
But Pabrai, thanks to Buffett and Munger, had found a formula for outperformance. As we’ve seen, the key principles were not that difficult to identify and clone. (Location 470)
For Pabrai, the lunch yielded two unforgettable lessons—one about how to invest, one about how to live. The first came when he asked Buffett, “Whatever happened to Rick Guerin?” Buffett had mentioned Guerin’s superb investment record in “The Superinvestors of Graham-and-Doddsville.” But Buffett told Pabrai and Spier that Guerin used margin loans to leverage his investments because he was “in a hurry to get rich.” (Location 485)
By contrast, Buffett said that he and Munger were never in a hurry because they always knew they’d become enormously rich if they kept compounding over decades without too many catastrophic mistakes. (Location 490)
Over lunch, Buffett explained that he and Munger always measure themselves by “an inner scorecard.” Instead of worrying how others judge them, they focus on living up to their own exacting standards. (Location 496)
Buffett manages every aspect of his life in ways that mesh with his own nature—from his childish diet (which consists largely of burgers, candy, and Coca-Cola) to how he runs his business. (Location 499)
it simply suited his character to oversee Berkshire’s many businesses in a hands-off manner, trusting his CEOs to use their freedom wisely. Likewise, he pointed out that he handles his own daily schedule and keeps it blissfully uncluttered by rebuffing almost any request that might distract him from reading and contemplation. (Location 501)
Nobody I’ve ever met lives more determinedly by his own rules than Pabrai. Buffett’s example strengthened his commitment to construct a life congruent with his personality. On a typical day, Pabrai sleeps late and arrives at his office after 10:00 a.m. with no agenda. (Location 512)
As much as possible, Pabrai remains inside this cocoon. He avoids meeting the CEOs of companies that he’s analyzing because he thinks their talent for selling makes them an unreliable source of information—a policy he cloned from Ben Graham.X (Location 516)
“Munger says he doesn’t care about being rich. What he really cares about is having independence. I fully endorse that. What the money gives you is the ability to do what you want to do in the way you want to do it.… And that’s a tremendous benefit.” (Location 521)
Hawkins argues that “true power” stems from traits such as honesty, compassion, and a dedication to enhancing other people’s lives. These powerful “attractors” have an unconscious effect on people, making them “go strong,” whereas traits such as dishonesty, fear, and shame make them “go weak.” (Location 530)
During the financial crisis of 2008-09, Pabrai’s highly concentrated funds fell about 67 percent before staging a rapid recovery. At his 2009 annual meeting, he told his shareholders, “Most of the mistakes in the funds occurred because I was stupid. They didn’t happen because of market issues.” (Location 533)
Pabrai is not exactly ascetic. He once spent thousands of dollars on a pair of bespoke shoes, and he drives a blue convertible Ferrari—a fitting reward for a huge home run on Ferrari stock. (Location 556)
He began by asking, “If I were to die today, what cause or organization would I want most of my assets to go to?” He wanted a charity managed like a cost-efficient business, with precise metrics tracking how much good it did for every dollar spent. (Location 560)
Finally, quoting a line of Munger’s that Pabrai often cites, I wrote, “Take a simple idea and take it seriously.” Of all these lessons, that last one might just be the most important. Too often, we encounter a powerful principle or habit and we contemplate it, take it for a quick spin, and then forget about it. Pabrai becomes consumed by it. He lives by it. That’s a habit I have to clone. (Location 626)
But Spier’s position sizes are significantly smaller because he’s more cautious and less self-confident than Pabrai. As he puts it, “I don’t have balls of steel like Mohnish.” (Location 635)
Psychologically, it also helps that Pabrai doesn’t take anything too seriously. He once told me, “On my gravestone, I want them to write, ‘He loved to play games, especially games he knew he could win.’ Cloning is a game. Blackjack is a game. Bridge is a game. Dakshana is a game. And, of course, the stock market is a game. It’s just a bunch of games. It’s all about the odds.” (Location 646)
The old man was Sir John Templeton, probably the greatest international investor of the twentieth century. I’d traveled from New York to the Bahamas to interview him in his home at the Lyford Cay Club, a gated idyll whose residents have included Prince Rainier III of Monaco, (Location 661)
One famed investor who asked not to be quoted by name on this subject told me that many of his most successful peers are “kind of Aspergerish” and that almost all are “unemotional.” (Location 688)
Finally, at the age of thirty-nine, he was set free. The bank made him the manager of SoGen International, a mutual fund so small and obscure that nobody cared what he did with it. When Eveillard took charge in 1979, the fund had only $15 million in assets. Based in Manhattan, he worked alone for years, relishing the lack of interference from his corporate overlords back in France. (Location 1509)
His new investment strategy was built on one all-important insight that he drew from The Intelligent Investor. “Because the future is uncertain, you want to minimize your risk,” says Eveillard. Like most great truths, it is so simple that it’s easy to miss its significance, to gloss over its surface without internalizing its far-reaching implications. (Location 1512)
After making a fortune as a money manager in the 1920s bull market, he lost 70 percent from 1929 to 1932. These experiences led him to a disturbing realization: “The future of security prices is never predictable.” (Location 1521)
One hundred miles away, Joel Greenblatt has taken refuge from the city and is working at his beach house in the Hamptons today. We’re seated in the shade of his elegantly furnished patio, savoring the cool breeze and his magnificent view of the Atlantic. (Location 1899)
Suntanned and relaxed, Greenblatt is dressed in jeans and black leather loafers without socks. His sleeves are rolled up. A keen tennis player, he looks trim and fit on the brink of his sixtieth birthday. (Location 1902)
In 1985, at the tender age of twenty-seven, he founded Gotham Capital and launched a hedge fund with assets of about $7 million. In 1989, he was joined by Robert Goldstein, who remains his partner three decades later. In its first ten years, the fund scored returns of 50 percent a year (after expenses but before fees). Over twenty years, it averaged an astonishing 40 percent a year. At that rate, $1 million grows to $836 million—a nifty trick. (Location 1908)
His first book, You Can Be a Stock Market Genius (Even If You’re Not Too Smart!) was intended for a general audience, but became a bible for hedge fund managers in search of an edge. His second, The Little Book That Beats the Market, was designed to demystify investing for his children, but sold more than three hundred thousand copies and was hailed by Michael Price as “one of the most important investment books of the last fifty years.” His third book, The Big Secret for the Small Investor, fared less well. Greenblatt jokes that “it’s still a secret” because “no one read it.” (Location 1919)
Writing and teaching have provided Greenblatt with two rewarding ways of giving back. In a field that’s rife with self-serving and misguided advice that may be hazardous to your financial health, he has followed in the grand tradition of Ben Graham, Warren Buffett, and Howard Marks by sharing investment wisdom that has demonstrably worked. (Location 1927)
In recent years, Greenblatt has also returned to managing outside money. He and Goldstein have created a family of long/short mutual funds, which represent an intriguing and unexpected departure from the strategy that propelled them to stardom. Greenblatt, who has a strong entrepreneurial streak, loves starting new ventures. But his underlying ambition isn’t to maximize his own wealth by building a financial empire. “I have nothing against making money,” he says. “But it’s not really what drives me. I have enough.” (Location 1932)
In fact, what makes Greenblatt such an illuminating guide to investing is his gift for reducing this complex game to its purest essence. For example, during a conversation at his office in midtown Manhattan, he tells me that the entire secret of successful stock picking comes down to this: “Figure out what something is worth and pay a lot less.” Is it really that straightforward? Well, we shall see. (Location 1940)
We often assume that additional choices will make us happier. Up to a point, it may even be true. But I’m hardly alone in finding all of this added complexity overwhelming. The psychologist Barry Schwartz argues in The Paradox of Choice: Why More Is Less that many shoppers become paralyzed by the first world problem of supermarket shelves heaving under the weight of twenty-four types of gourmet jam. (Location 1951)
In practical terms, the ability to reduce complexity is immensely valuable. Just think for a moment about the Old Testament, which contains no fewer than 613 commandments. Who can remember so many rules, let alone obey them all? Maybe that’s why we needed a top ten list. But when I tried to jot down the Ten Commandments just now, I got only six of them right—and that was with the assistance of some dishonest grading. (Location 1958)
a sage named Hillel was asked to teach the entire Old Testament while standing on one leg. He replied, “What is hateful to you, do not do to your neighbor. All the rest is commentary.” The Old Testament requires just three words to convey this overriding rule: Veahavta lereacha kamocha, which is translated from the Hebrew as “And you shall love your neighbor as yourself.” (Location 1962)
Simplification is an equally important strategy in more worldly realms such as science and business. For example, scientists often invoke the Occam’s razor principle, which is attributed to a fourteenth-century English friar and philosopher named William of Occam. (Location 1970)
Simplicity also plays an important role in many of the most successful businesses. Take the Google home page, which consists primarily of a logo and a pill-shaped space in which to type your search words. Or consider the sleek, uncluttered elegance that Steve Jobs—inspired by the minimalist esthetic of Zen Buddhism—brought to Apple’s products. As Jobs often explained, his devotion to simplicity went far beyond design: “The way we’re running the company, the product design, the advertising, it all comes down to this: ‘Let’s make it simple. Really simple.’ ” (Location 1977)
The financial services industry tends not to favor simplicity—hence the rise of mind-boggling “innovations” such as collateralized debt obligations, structured investment vehicles, and credit default swaps, which came close to destroying the global economy in 2008. (Location 1983)
One of the most thoughtful proponents of simplicity is Josh Waitzkin, an expert on peak performance in fields as diverse as chess, martial arts, and investing. (Location 1993)
Based on his own experience as a world-class performer, Waitzkin stresses the importance of breaking down complicated challenges into simple components. When teaching chess, he would remove all but three pieces (two kings and one pawn) as a way of exploring the game’s essential principles in a context of reduced complexity. (Location 1997)
They were rewarded at school for solving complex problems, so it’s no surprise if they are drawn to complicated solutions when confronted by the puzzle of investing. But in financial markets, as in martial arts, victory doesn’t depend on dazzling displays of esoteric techniques. It depends on a firm grasp of the principles of the game and a deep mastery of basic skills. (Location 2004)
I’ve been struck again and again by the ability of the best investors to condense many years of learning into a few key principles. This isn’t a matter of dumbing things down or pretending that complications and contradictions don’t exist. It’s about synthesizing the details of an endlessly rich and nuanced subject, then crunching it down into an irreducible essence. (Location 2011)
Why is it so valuable to reduce investing to a few core principles? For a start, it forces us to think through what we truly believe. These convictions are especially useful in tempestuous times when we’re barraged by uncertainty, doubt, and fear. (Location 2017)
The best investors have the discipline not to be swayed by such distractions. As Greenblatt says, “I have a simple way of looking at things that makes sense to me and that I’m going to stick with through thick and thin. That’s it.” (Location 2023)
With that principle in mind, he searches with relentless drive for “best-of-breed businesses” that he thinks will “grow to be bigger in five years.” Why? Because if a company doubles its earnings per share in the next five years, he believes the stock price is also likely to double (more or less). This generalization is easy to dismiss because it sounds suspiciously simplistic. But remember: investing isn’t like Olympic diving, where the judges award extra points for difficulty. (Location 2032)
This mindset has led him to amass enormous, long-held positions in dominant, well-managed businesses such as Berkshire Hathaway (a major holding since 1996), Microsoft, Alphabet (he was one of the largest investors in Google’s 2004 IPO and has held it ever since), Amazon (his biggest position), and Facebook (he was among the biggest buyers in the IPO). “This is pretty basic stuff,” he says. “My attitude with investing is, Why not invest with the best?” (Location 2039)
Along the way, the company would provide the perfect illustration of why it’s so valuable to invest for the long run in great businesses that sustain an unusually high growth rate. Danoff points to a chart that tracks the company’s stupendous performance over two decades: its earnings per share grew by 27.45 percent annually for twenty years, while the stock soared by 21.32 percent a year. (Location 2052)
“Will once said to me, falsely, ‘Look, I’m not that smart and there’s a lot of information out there. So when I look at a company, I just ask myself: “Are things getting better or are they getting worse?” If they’re getting better, then I want to understand what’s going on.’ ” (Location 2060)
For example, he used to build elaborate financial models in an attempt to grasp the complexities of each company he was analyzing. “I don’t build models anymore. It’s just stupid. It doesn’t make any sense.” Instead, he concentrates on three or four critical issues that he believes will drive the business. “For every company, there are a few key investment variables,” he says, “and the rest of the stuff is noise.” (Location 2063)
We each need a simple and consistent investment strategy that works well over time—one that we understand and believe in strongly enough that we’ll adhere to it faithfully through good (Location 2067)
Once you realize that your entire mission is to value businesses and pay much less for them than they’re worth, it’s incredibly liberating. (Location 2097)
Depending on the business, Greenblatt uses some combination of four standard valuation techniques. Method 1: he performs a discounted cash flow analysis, calculating the net present value of the company’s estimated future earnings. Method 2: he assesses the company’s relative value, comparing it to the price of similar businesses. Method 3: he estimates the company’s acquisition value, figuring out what an informed buyer might pay for it. Method 4: he calculates the company’s liquidation value, analyzing what it would be worth if it closed and sold its assets. (Location 2135)
After leaving Wharton, Greenblatt headed to Stanford Law School, mostly to avoid getting an actual job. He dropped out after a year. Many of his peers followed well-trodden paths to become corporate lawyers or investment bankers. (Location 2153)
Greenblatt spent the next three years as an analyst at a start-up investment firm, making “risk arbitrage” bets on companies involved in mergers. It didn’t take him long to realize that this was a game with odious odds. If a merger went ahead as planned, “you could make a dollar or two,” he says. But if the deal unexpectedly fell apart, “you could lose ten or twenty.” This was “the exact opposite” of Graham’s strategy of buying dirt cheap stocks, “where you can lose a dollar or two and make ten or twenty. That’s a good risk/reward.” (Location 2164)
Unfair bets are rare, but Greenblatt didn’t need that many. He typically had 80 percent of his fund riding on six to eight investments—an extraordinary level of concentration. “There aren’t that many great opportunities,” he explains. “I was looking for low hurdles—things that other people would have bought, too, if they’d done the work.” (Location 2175)
Indeed, when I ask him to explain Gotham’s success, the first factor he cites is that “we remained small.” The second is that his portfolio was exceptionally concentrated, so “you only have to find a few ideas.” The third? “We got a little lucky.” (Location 2184)
Greenblatt studied the company in depth and discovered a surprising amount of value. Sure, there was plenty of “lousy real estate,” including some unfinished hotels. But there were also some valuable assets, such as airport restaurant concessions and several debt-free properties. (Location 2211)
So Greenblatt loaded up, staking almost 40 percent of his fund’s assets on Host Marriott. It was a breathtakingly bold move. Here was a struggling business that was leveraged to the hilt. Yet Greenblatt saw what everyone else missed: an irresistibly unfair bet. (Location 2216)
“You size your positions based on how much risk you’re taking,” he says. “I don’t buy more of the ones I can make the most money on. I buy more of the ones that I can’t lose money on.” (Location 2221)
Buying cheap is great—and if I can buy good businesses cheap, even better.” (Location 2232)
As a professor and a writer, Greenblatt kept pushing himself to articulate more clearly what he’d figured out about how to invest. This process “was incredibly helpful to me in trying to boil down in a very simple way exactly what I had been trying to do,” he says. “It boiled down simpler and simpler.” And what he came to realize is that it all boiled down to this: Buy good businesses at bargain prices. This combines the purified essence of Graham and Buffett. (Location 2251)
Greenblatt drew on this research to write his miniature gem, The Little Book That Beats the Market. In between the jokes, he laid out how to “beat the pants off even the best investment professionals” by using “just two simple tools.” If you want to become “a stock market master,” he explained, “stick to buying good companies (ones that have a high return on capital) and to buying those companies only at bargain prices (at prices that give you a high earnings yield).” (Location 2269)
It helps immeasurably, says Greenblatt, “if you have simple principles that you can just stick to… simple principles that make sense, that are unshakable.” Why is this so critical? Because you need this clarity of thought to withstand all of the psychological pressures, setbacks, and temptations that can destabilize or derail you along the way. (Location 2302)
When I think about everything that I’ve learned from Greenblatt, I’m struck above all by four simple lessons. First, you don’t need the optimal strategy. You need a sensible strategy that’s good enough to achieve your financial goals. (Location 2339)
Second, your strategy should be so simple and logical that you understand it, believe in it to your core, and can stick with it even in the difficult times when it no longer seems to work. (Location 2343)
Third, you need to ask yourself whether you truly have the skills and temperament to beat the market. (Location 2347)
Fourth, it’s important to remember that you can be a rich and successful investor without attempting to beat the market. (Location 2352)
Sleep landed a job as a trainee investment analyst at a small Scottish fund company. He was not abundantly qualified for the job. At college, he had studied geology and then switched to geography—hardly the standard preparation for a stock-picking career. His employment history offered no evidence that he had yearned since birth for a career in finance. He had worked in the Harrods department store, temped at an IT firm, and secured a sponsorship deal for windsurfing. (Location 2381)
In 2001, Sleep and his friend Qais “Zak” Zakaria created a fund called the Nomad Investment Partnership, which they viewed as a laboratory test for how to invest, think, and behave in the most “high-quality” way. In one of his eloquent and amusing letters to shareholders, Sleep would muse, “Nomad means far more to us than simply managing a fund.… Nomad is a rational, metaphysical, almost spiritual journey (without the sand and camels, although Zak may be happier with them).” (Location 2402)
In 2014, Sleep and Zakaria returned their shareholders’ money and retired as fund managers at the ripe old age of forty-five. Since then, they’ve managed their own money with equally striking success, approximately tripling their wealth in their first five years of retirement. Sleep, with characteristic indifference to conventional opinion, invested almost all of his fortune in just three stocks. At times, he and Zakaria have had as much as 70 percent of their money in a single stock. (Location 2409)
Indeed, part of their mystique lies in the fact that Sleep and Zakaria have always flown under the radar. They had minimal interest in marketing their fund and even less interest in self-promotion. (Location 2417)
It turned out that he’d speculated in the stock market using borrowed money. He had traded hot stocks touted in dubious tip sheets and had fallen for pyramid schemes pitched by sleazy salesmen. (Location 2437)
For Zakaria, it was a sickening introduction to the investment business. “My father had made his money on things he understood and lost it on things he didn’t understand, and he was taken to the cleaners by very unscrupulous people.” (Location 2441)
After graduating from Cambridge in 1990, Zakaria entered the investing game largely by default. The family business was no longer an option. Unlike his siblings, he couldn’t become a doctor because he faints at the sight of blood. And meteorology is stupid. So he took a job in Hong Kong as an equity analyst at Jardine Fleming, one of Asia’s leading asset managers. (Location 2444)
After three years in his first investing job back in Edinburgh, Sleep had become an investment analyst at Sun Life of Canada, a financial services giant with tens of thousands of employees. “I was almost allergic to working there,” he says. “Once you’ve worked for a feisty company, it’s quite difficult to go work for something big, dull, and boring.” (Location 2458)
Everyone else seemed to be running for cover as Asia’s economic miracle turned to disaster. But the Marathon Men found an unlikely ally in an Asia-based broker who wasn’t like everyone else: Zakaria. (Location 2465)
During the miracle years, investors had been so bullish about Asia that they had bet on stocks trading at three times the replacement cost of their assets. During the crisis, you could buy those same stocks for one-quarter of the replacement cost of their assets. (Location 2471)
Deutsche and its rivals profited handsomely by taking half-baked companies public at inflated valuations, ignoring whatever doubts they may have harbored about whether these businesses would endure. (Location 2480)
Lo and behold, GigaMedia’s stock shot up from $27 to $88 on the day of the IPO, giving this money-losing minnow a valuation of more than $4 billion. But it was all an illusion. When the dot-com bubble burst a few weeks later, GigaMedia lost 98 percent of its value. (Location 2490)
Warren Buffett and Charlie Munger spoke about companies they expected to own for decades. They weren’t rolling the dice on the latest idiotic IPO or scheming to line their pockets at other people’s expense. “Oh, my God,” thought Zakaria. “This is nothing to do with a casino! This is about real businesses!” (Location 2499)
Sleep kept nagging his bosses to let him launch a concentrated fund within Marathon, with Buffett serving as his model. Buffett struck him as the embodiment of quality. It wasn’t just the depth of his thinking about businesses, but the honorable way in which he treated Berkshire’s shareholders, beginning with his modest salary of $100,000 a year. (Location 2501)
Sleep and Zakaria had no interest in building a colossal fund that would shower them with fees. They didn’t fantasize about appearing as market gurus on CNBC or being fetishized on the cover of Forbes. They had no desire to buy themselves castles, airplanes, or yachts. Their ambition was simple. They wanted to generate superb long-term returns. (Location 2511)
Sleep cites a line from the philosopher William James: “The art of being wise is the art of knowing what to overlook.” He and Zakaria rejected a slew of standard practices. “We were just getting rid of all the things we didn’t like,” says Sleep. “We were signed-up members of the awkward squad.” (Location 2517)
To Sleep and Zakaria, this fleeting news coverage was all part of the daily “soap opera” of the market—too superficial, short-lived, and unreliable to hold their attention. They couldn’t predict how the economic news would unfold. So why waste mental energy on the unknowable? (Location 2524)
Pat Dorsey, a Chicago-based hedge fund manager, expresses a similar view. “The single best thing any investor can do is to not have a TV and a Bloomberg terminal in their office,” he once told me. “That I have to walk fifty feet down the hall to look at stock prices or check the news on our portfolio is great. (Location 2540)
“Stop listening to it and you’ll be fine.” So how did they spend their time? “We just read annual reports until we were blue in the face and visited every company we possibly could until we were sick of it.” Sleep traveled so much that he filled every page of a supersize passport and had to order another. (Location 2548)
When they analyzed companies and interviewed CEOs, Sleep and Zakaria probed for insights with a long shelf life. They sought to answer such questions as What is the intended destination for this business in ten or twenty years? What must management be doing today to raise the probability of arriving at that destination? And what could prevent this company from reaching such a favorable destination? They referred to this way of thinking as “destination analysis.” (Location 2550)
For example, they wanted to know, Is this company strengthening its relationship with customers by providing superior products, low prices, and efficient service? Is the CEO allocating capital in a rational way that will enhance the company’s long-term value? Is the company underpaying its employees, (Location 2556)
A few years later, they stacked the deck even more heavily against themselves by deciding to place their performance fees in a holding bucket for several years. If Nomad subsequently fell short of its 6 percent annual hurdle, they would refund a portion of those previously earned fees to their shareholders. (Location 2570)
The book reinforced their determination to resist any low-quality behavior that seemed self-serving or deceitful. “The very rapid rejection of things made life very straightforward,” says Zakaria. “It was all about quality.… Money was secondary. It was much more about doing a good job, a quality job, doing the right thing. I don’t think we ever took a decision which was driven by—” (Location 2575)
They also place an overwhelming emphasis on increasing their assets under management, since this generates bounteous fees with which to bankroll lavish salaries and bonuses. (Location 2581)
If you’re wanting to compound and have really good investment performance, you don’t need any of that crap.… We just concentrated on picking good stocks and thought everything else was peripheral.” (Location 2587)
They also made it clear that they’d return money to their existing shareholders and turn away new investors if Nomad’s size ever became a hindrance to its performance. They repeatedly closed the fund to new subscriptions, starting in 2004 when they managed about $100 million—a paltry sum by industry standards. (Location 2590)
They also took delight in turning away investors who seemed unsuitable or irritating, regardless of how rich they were. Zakaria chuckles at the memory of a comically awful meeting with a team that managed billions for heirs to the food-packaging company Tetra Pak. (Location 2594)
Potential investors were also required to sign a document acknowledging that Nomad was inappropriate for anyone with less than a five-year time horizon. (Location 2598)
For example, Nomad never used leverage, never shorted a stock, never speculated with options or futures, never made a macroeconomic bet, never traded hyperactively in response to the latest news, never dabbled in exotic financial instruments with macho names such as LYONs and PRIDEs. Instead, Sleep and Zakaria played what they viewed as “a long, simple game,” which involved buying a few intensively researched stocks and holding them for years. (Location 2602)
Writing to Nomad’s investors about the perverse appeal of this detested market, Sleep remarked, “The clients will hate it. Compliance will hate it. The consultants will hate it. Marketing will hate it. The size of the investment opportunity is tiny. It is not part of the benchmark.… It’s perfect.” (Location 2632)
Nomad’s appetite for reasonable businesses selling at unreasonably low prices made sense, given the opportunities available at the time. But this strategy had one drawback. When stocks like these rebounded and were no longer that cheap, they had to sell them and hunt for new bargains. (Location 2637)
reinvestment risk was to buy and hold higher-quality businesses that were more likely to continue compounding for many years. (Location 2640)
Sleep and Zakaria started searching for other businesses run by farsighted managers whom they could trust to keep building wealth over time. “If they’re thinking rationally and thinking about the long term,” says Sleep, “you can subcontract the capital allocation decisions to them. You don’t have to be buying and selling shares.” (Location 2648)
To the skeptics on Wall Street, this generosity seemed soft and uncompetitive—the corporate equivalent of collectivism. But Sleep and Zakaria saw the long-term logic of Costco’s largesse. Satisfied customers kept returning and spending more money in its stores, thereby generating enormous revenues. (Location 2659)
When Sleep first encountered Amazon in 1997, it was an upstart bookseller preparing to go public. Its founder, Jeff Bezos, gave a presentation in London, explaining how his profitless start-up would offer an almost infinite selection of books, how it would gain a cost advantage by avoiding the expense of physical stores, and how it would reinvest its cash flow in other businesses. Sleep raced back to his office at Marathon and told his boss, “This is absolutely fantastic. It could be huge. And he says, ‘Yeah, okay, Nick, but what are they doing that nobody else can do?’ ” (Location 2699)
They bet 20 percent of the fund’s assets on Amazon and secured permission from their shareholders to go beyond that limit. A quarter of their clients yanked their money from Nomad, fearful of its overexposure to one stock. (Location 2720)
Over lunch that day, Sleep caught up with Bill Miller, whose mutual funds owned the largest outside stake in Amazon. Miller had recognized Amazon’s strengths earlier than anyone else and had bought 15 percent of the company. (Location 2724)
Amazon lost almost half of its market value in 2008, while Nomad fell 45.3 percent. Sleep and Zakaria held an emergency meeting in an appropriately posh location—McDonald’s—to discuss the possibility that Nomad’s future might be in peril if the market continued to crash. (Location 2729)
In less than thirteen years, Nomad had gained a staggering 921 percent before fees—just short of their target of turning £1 into £10. Amazon, which had risen tenfold since 2005, had played a pivotal role. At one point, it had grown to about 40 percent of the fund’s assets. (Location 2743)
As for Sleep, he invested almost all of his money in just three stocks: Amazon, Costco, and Berkshire. “There are very few businesses that are investing in the future the way they are,” he says. “They don’t care about Wall Street. They don’t care about the trends and the fads. They’re just doing the right thing long term.” The volatility of a three-stock portfolio (Location 2750)
didn’t bother him, given the high probability that all three businesses would reach a desirable destination. (Location 2752)
As I see it, there are five key lessons to be learned from Sleep and Zakaria. First, they provide a compelling example of what it means to pursue quality as a guiding principle in business, investing, and life—a moral and intellectual commitment inspired by Zen and the Art of Motorcycle (Location 2760)
Second, there is the idea of focusing on whatever has the longest shelf life, while always downplaying the ephemeral. (Location 2765)
Third, there is the realization that one particular business model—scale economies shared—creates a virtuous cycle that can generate sustainable wealth over long periods. (Location 2767)
Fourth, it’s not necessary to behave unethically or unscrupulously to achieve spectacular success, even in a voraciously capitalistic business where self-serving behavior is the norm. (Location 2776)
Fifth, in a world that’s increasingly geared toward short-termism and instant gratification, a tremendous advantage can be gained by (Location 2793)
those who move consistently in the opposite direction. This applies not only to business and investing, but to our relationships, health, careers, and everything else that matters. (Location 2794)
“It’s all about deferred gratification,” says Sleep. “When you look at all the mistakes you make in life, private and professional, it’s almost always because you reached for some short-term fix or some short-term high.… And that’s the overwhelming habit of people in the stock market.” (Location 2802)
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Sleep and Zakaria are titans of impulse control. How else could they have held Costco for eighteen years and Amazon for sixteen years while it has soared from $30 to more than $3,000 per share? They understood the fundamental truth that we benefit by deferring gratification and prioritizing long-term outcomes. (Location 2809)
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Nomad also invested in businesses run by fellow nonconformists, such as Bezos and Buffett, who took an exceptionally long view. (Location 2814)
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If you and I hope to achieve long-lasting success as investors, we need to follow their example by systematically resisting the external and internal forces that push us to act impetuously. (Location 2818)
investors I admire most tend to be heroically inactive, not because they’re lazy but because they recognize the benefits of patience. (Location 2825)
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“Our performance doesn’t come from what we buy or sell. It comes from what we hold. So the main activity is holding, not buying and selling. (Location 2826)
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Nobody personifies this slow-motion mindset better than Thomas Russo, who has generated market-beating returns over more than three decades at Gardner Russo & Gardner, which is based in Lancaster, Pennsylvania. “I call myself a farmer,” (Location 2828)
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All of the businesses he owns share one trait, which he describes as “the capacity to suffer.” That’s to say, they invest for “the very long haul,” even when this expense requires them to stomach years of painful upfront losses. (Location 2835)
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Thousands of years later, we’re presented over and over with this same choice between the present and the future, the instant and the deferred. (Location 2847)
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One practical trick, says Sleep, is to “reward yourself in the short term” by relishing the prospect of all the wonderful benefits you will enjoy because you chose to override your desire for instant gratification. (Location 2854)
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Nutritionally, as in other areas of life, Gayner’s strategy is to be “directionally correct,” not perfect. (Location 2880)
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Gayner, who is now the co-CEO of Markel, a financial holding company with insurance and investment operations around the world, may not set any records for the 100-meter dash. (Location 2889)
“If you’re an executive or a money manager who has these kinds of responsibilities, you’re playing the game twenty-four hours a day, seven days a week. There’s no off-season. There are no days off,” (Location 2893)
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Yet Gayner keeps plugging away, never perfect, but always directionally correct. The key, he says, is that he is “radically moderate” about everything he does. “If I make extreme changes, they’re not sustainable. (Location 2899)
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Gayner has applied the same philosophy to investing. Many investors lurch erratically from one short-term bet or promising strategy to the next, much like yo-yo dieters who bounce between fad diets without entrenching a sustainable solution. (Location 2913)
Still, the stock has since soared from about $15 to $330,000 as he’s reinvested the company’s assets in greener pastures. (Location 2923)
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Gayner’s portfolio is dominated by dependable compounding machines such as Brookfield Asset Management, the Walt Disney Company, Diageo, Visa, and Home Depot—businesses that he expects to prosper for a long time, despite the threat of creative destruction. (Location 2931)
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But two-thirds of his assets are in his top twenty positions, which is moderately aggressive. (Location 2938)
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This emphasis on disaster avoidance reminds me of a marvelous insight from Jeffrey Gundlach, who oversees about $140 billion as the CEO of DoubleLine Capital. (Location 2942)
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“Make your mistakes nonfatal,” Gundlach tells me. “It’s so fundamental to longevity. And ultimately, that’s what success is in this business: longevity.” (Location 2945)
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When it went public in 1986, it was an obscure specialty insurer with a market value of about $40 million. (Location 2964)
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Gayner took premiums from Markel’s insurance operation and used that “float” to buy stocks and, since 2005, whole companies—much as Buffett invested premiums from his insurance operations. (Location 2966)
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Still, Gayner dislikes the term cloning as it might imply that he merely copied Buffett, instead of observing what worked and “recombining” it to suit his own circumstances. (Location 2968)
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What Gayner’s record shows is that you don’t need to be extreme to achieve exceptional long-term results. On the contrary, he says, “People get themselves into trouble with extremes.” (Location 2975)
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says Gayner. “You can only control the effort and the dedication and the giving of one hundred percent of yourself to the task at hand. And then whatever happens, happens.” (Location 3010)
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He reads voraciously—everything from scientific books on habit formation to biographies to novels by his favorite author, Mark Twain. (Location 3015)
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Guy Spier, who runs the Aquamarine Fund, invests so much of his energy in helping others that he is similarly surrounded by people who wish to help him. (Location 3026)
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None of these practices is earth-shattering in isolation. But remember: it’s the aggregation of marginal gains that’s so powerful. Moreover, the modest benefits generated by smart habits continue to compound over many years. (Location 3050)
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sensible habits that are directionally correct and sustainable—habits that give us a marginal advantage that will compound over time. (Location 3055)
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When we spoke, his company, Vinik Asset Management, was about to return billions to his investors, so he could manage his own riches and spend more time with his family. (Location 3062)
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For example, he’d recently made a fortune on “little, mundane restaurant stocks that will grow earnings twenty percent [a year] but are selling at twelve times earnings. (Location 3066)
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always thought that if you looked at ten ideas in a day, you might find one good one,” he told me. “If you looked at twenty, you might find two.” Recalling one of his best investments, Lynch added, “If a hundred people had visited Chrysler in 1982 with an open mind, ninety-nine would have bought it.” (Location 3105)
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“The only way you can beat them is to outwork them,” said Lynch, “because nobody is just so much smarter than the next person.” Lynch told Miller that he stayed ahead of the pack by reading investment research while he carpooled to the office at 6:30 a.m., working after dinner and on weekends, and taking no vacations for years. (Location 3112)
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should have sold all my housing-related stocks.… It doesn’t reflect on the investment techniques. You’ve got to be diligent and careful, and in 2008, I wasn’t.” (Location 3118)
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To surpass so many smart competitors, it’s not enough merely to outwork them. You also have to outthink them. (Location 3125)
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As Munger often remarks, one of Buffett’s most valuable traits is that, even in old age, he remains “a continuous learning machine.” On a typical day, Buffett might read for five or six hours, frequently isolating himself in his office with the door shut. (Location 3127)
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He started out by investing in cheap stocks, then embraced better businesses, then bought whole companies, then ventured into foreign markets such as China and Israel, then invested in two industries he’d famously avoided: railroads and technology. (Location 3131)
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stayed by his side for almost forty years. But his life is built almost entirely around his compulsive craving for any knowledge that could make him a better investor. “I try to read four, five, six, seven hours a day, seven days a week,” he says. “I have no hobbies. I have never golfed in my life.… It’s just my personality—always trying to get smarter, to learn.” (Location 3146)
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“You need a maniacal focus to really be great at anything. Anyone who tells you that you can have everything all at once, you can’t. I mean, you don’t become Roger Federer by not playing tennis. It has to be consuming.” (Location 3152)
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“What am I missing? Who’s doing something that no one else is doing? How can I get better?” His aim is never to replicate other investors’ behavior. “You can’t mimic them because you’re not them,” he says. “Learn it and adapt it and modify it into your own process.” (Location 3162)
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“If you’re daring to be different, to be great, you have to go against the grain.” (Location 3207)
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For Geritz, that gap between reality and perception offered an ideal opportunity to invest for the long haul in three of Turkey’s best businesses: its largest grocery chain, its leading defense company, and its dominant maker of candy. (Location 3218)
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“I’m really investing in survivors,” she says. “I buy great companies, but I like to buy them in countries that have been hit.” (Location 3222)
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Geritz, who reads two or three books a week, seldom bothers with newspapers and ignores the minute-by-minute news on her Bloomberg terminal: “I’d rather read the Rise of the Robots and think about what the world might look like ten years from now than think about what the world looked like ten minutes ago.” (Location 3241)
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But Geritz also wanders farther afield to other places that are conducive to contemplation. Among them, she visits an island off the Australian coast with only eight houses: (Location 3251)
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They focus almost exclusively on what they’re best at and what matters most to them. Their success derives from this fierce insistence on concentrating deeply in a relatively narrow area while disregarding countless distractions that could interfere with their pursuit of excellence. (Location 3290)
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The art of subtraction is incalculably important, particularly in an age of information overload when our minds can so easily become scattered. (Location 3301)
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Spier’s office, which is a short tram-ride from his home, has a library in which he doesn’t permit himself a phone or a computer. (Location 3310)
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As the head of an investment team with more than $100 billion to manage, Matthew McLennan could fill every hour of every day with meetings and calls. “You can make yourself very busy,” he says. “But you have to remove unproductive busyness.… And I think creating windows for sustained reflection is very important.” (Location 3311)
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The more distracted others become, the more of an advantage it is to subtract mental clutter, technological intrusions, and overstimulation. (Location 3316)
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When attendees enter the building, they sign in to a book that asks how many shares they own. For almost all, the answer is zero. Like me, they have come from far and wide to bask in the caustic wit and wisdom of this ninety-three-year-old icon. (Location 3357)
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Buffett once declared, “Charlie can analyze and evaluate any kind of deal faster and more accurately than any man alive. He sees any valid weakness in sixty seconds.” Buffett has also said that Munger boasts “the best thirty-second mind in the world.… He sees the essence of everything before you can even finish the sentence.” (Location 3360)
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Chou laughs as he tells me the tale of a fellow money manager who traveled regularly to Omaha and California to hear Munger speak. (Location 3370)
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He strives consistently to reduce his capacity for “foolish thinking,” “idiotic behavior,” “unoriginal error,” and “standard stupidities.” (Location 3384)
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“never believed there was a talking snake in the Garden of Eden. I had a gift for recognizing twaddle. I don’t have any wonderful insights that other people don’t have. I just have slightly more consistently than others avoided idiocy. (Location 3387)
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It’s a curious paradox that one of the smartest people on earth focuses primarily on avoiding stupidity. (Location 3390)
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“It works. It’s counterintuitive that you go at the problem backward. If (Location 3397)
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you try and be smart, it’s difficult. If you just go around and identify all of the disasters and say, ‘What caused that?’ and try to avoid it, it turns out to be a very simple way to find opportunities and avoid troubles.” (Location 3398)
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“Hardin’s basic idea was, if somebody asks you how to help India, just say, ‘What could I do to really ruin India?’ And you think through all of the things you could do to ruin India, and then you reverse it and say, ‘Now, I won’t do those.’ (Location 3402)
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he recommends asking, “ ‘Is this going to be a disaster?’ instead of asking, ‘Is it going to be wonderful?’ Finding out what’s wrong and trying to avoid it is different from finding out what’s good and trying to get it. You have to do both, of course, in life. (Location 3412)
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This, then, is the first mental trick we should learn from Munger as a safeguard against stupidity: imagine a dreadful outcome; work backward by asking yourself what misguided actions might lead you to that sorry fate; and then scrupulously avoid that self-destructive behavior. (Location 3418)
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For example, he steers clear of development-stage biotech stocks, knowing that they’re likely to bring out the worst in him. He can’t make a valid earnings forecast because their “future is so murky.” Plus, biotech stocks are so volatile that they could trigger him to react emotionally. “I’m going to be crazy if I deal with biotech stocks,” he says. “So I’m not going to do biotech stocks.” (Location 3431)
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For a start, he says, “Don’t pay too much. Don’t go for businesses that are prone to obsolescence and destruction. Don’t invest with crooks and idiots. Don’t invest in things you don’t understand.” (Location 3435)
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While other billionaires collect art, vintage cars, and racehorses, Munger describes himself as a collector of “absurdities,” “asininities,” and “inanities.” (Location 3454)
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This habit of actively collecting examples of other people’s foolish behavior is an invaluable antidote to idiocy. In fact, it’s the second great anti-stupidity technique we should learn from Munger. (Location 3458)
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For example, he derides the tendency to listen to market predictions, comparing these feeble attempts at financial divination to the ancient art of inspecting sheep’s entrails to foretell the future. (Location 3463)
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These naive investors fail to realize that “the old cyclicality is going to come back,” trusting instead that the company’s upsurge “will keep going just because it’s been going. That’s a standard stupidity.” (Location 3466)
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He once told Berkshire’s shareholders, “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.” Indeed, it’s the third trick we must learn from him in our campaign to constrain our own stupidity. (Location 3472)
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No investor I’ve met has internalized the importance of avoiding catastrophe more deeply than Fred Martin, the founder of a Minneapolis-based firm called Disciplined Growth Investors. (Location 3479)
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Nothing matters more than averting obvious errors with the potential for catastrophic consequences. (Location 3514)
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Oelschlager ran narrowly focused funds filled with overpriced highfliers such as Cisco Systems. When the bubble burst in 2000, Cisco lost $400 billion in market value. (Location 3518)
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“If people can’t tell you how they do it” and “you can’t understand what they do,” says Martin, “that’s probably not the best spot to be in.” His “golden rule for risk management” is simple: “Know what you own.” (Location 3523)
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But they should always be “considered risks.” Martin, who manages $6 billion and requires a minimum of $15 million to open a separate account, specializes in a racy niche: small and midsize companies growing at a rapid rate. (Location 3530)
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“One is the growth in intrinsic value. The other is the truing up” between the stock price and the “real value” of the underlying business. He has no idea when that truing up will occur. But his average holding period is a decade. (Location 3534)
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As Martin learned in the navy, “adherence to process” is an indispensable safeguard: “Always honor it because that’s going to keep you out of trouble.”I This idea of adopting a few standard practices and unbendable rules is our fourth technique for reducing stupidity. (Location 3538)
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Goldfarb, who had more than 30 percent of the Sequoia Fund riding on Valeant, retired ignominiously, his illustrious record ruined by one mistake. (Location 3547)
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This guarded attitude toward risk extends beyond the realm of investing. Munger often preaches about the importance of avoiding behavior with marginal upside and devastating downside. (Location 3551)
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They have one “ironclad rule” that’s kept them out of trouble for many years: If either of them doesn’t have “a warm and fuzzy feeling” in his stomach during a trip, “he speaks up and we don’t keep going. (Location 3558)
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“I was unwilling to violate the margin of safety.… Being late for a meeting is one thing. Crashing the plane and dying is something completely different.” (Location 3561)
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Martin swooped in and bought $500,000 worth of “gorgeous” office furniture from the defunct firm for $25,000. “Let’s never forget,” he says, “the value of being the last man standing.”II (Location 3566)
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Munger’s compilation of “standard thinking errors” provides him—and us—with a practical checklist of pitfalls to avoid. “The trick here is to first understand them and then train yourself out of them,” says Sleep. “Articulating this stuff is easy. Internalizing it is not. That’s the hard work.” (Location 3579)
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Incentives are pivotal in every area of life, whether it’s motivating employees or cajoling the most recalcitrant of adversaries: your children. Munger notes that the Soviet Union suffered from its Communist leaders’ “foolish and willful ignorance of the superpower of rewards,” which led them to disincentivize much productive (Location 3585)
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The financial world is so riddled with conflicts of interest that we should always be wary of the mind-warping influence of incentives on anyone peddling products or advice. (Location 3590)
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By contrast, Martin accepted long ago that he’s incapable of investing large sums in small stocks without hurting his shareholders’ returns. (Location 3599)
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Another cognitive danger that Munger highlights in his speech is the “tendency to quickly remove doubt” by rushing to make a decision—a habit that’s often triggered by stress. (Location 3609)
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The reluctance to reexamine our views and change our minds is one of the greatest impediments to rational thinking. Instead of keeping an open mind, we tend consciously and unconsciously to prioritize information that reinforces what we believe. (Location 3615)
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As Ben Graham wrote, “The investor’s chief problem—and even his worst enemy—is likely to be himself.” (Location 3624)
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That willingness to welcome the discovery of our own errors is an inestimable advantage. Munger nurtures (Location 3639)
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Another psychologically astute strategy is to perform a “premortem” before making any significant investment decision. That’s to say, you project into the future and ask yourself a hypothetical question: “Why did this decision prove to be such a disaster?” (Location 3681)
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That means adopting “a mindset of falsification,” always striving to “disprove” your hypothesis, and seeing “if it stands up to the assault.” One of Shubin Stein’s favorite questions is, “Why might I be wrong?” (Location 3705)
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Devil’s advocate reviews. Premortems. Conversations with a skeptical discussion partner. A cognitive checklist that reminds us of our biggest biases and our past mistakes. (Location 3713)
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This emphasis on adopting systematic analytical procedures is the sixth strategy in our epic quest to be non-idiotic. Finally, we need a pragmatic way (Location 3718)
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For example, researchers who studied gambling decisions found that “sadness increased tendencies to favor high-risk, high-reward options, whereas anxiety increased tendencies to favor low-risk, low-reward options.” (Location 3727)
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The scientific literature shows that hunger, anger, loneliness, tiredness, pain, and stress are common “preconditions for poor decision making.” So Shubin Stein uses an acronym, HALT-PS, as a reminder to pause when those factors might be impairing his judgment and postpone important decisions until he’s in a state in which his brain is more likely to function well.IV This is our seventh technique for reducing avoidable stupidity. (Location 3732)
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At the same time, two of his closest friends lost their daughter in a boating accident. It was such a traumatic period that it “catalyzed” him to build a healthier lifestyle that would help him to maintain his emotional equilibrium and think more clearly even under the most stressful conditions. (Location 3738)
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“There are four things that we know improve brain health and brain function,” says Shubin Stein. “Meditation, exercise, sleep, and nutrition.” (Location 3740)
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“The reason you meditate is not because it’s important on a specific day. The regular practice of meditation will help you handle the hard setbacks and will keep you constantly prepared for them.… (Location 3745)
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“The more intense things get, the less I do, both personally and professionally,” he says. “I try to slow things down. I try to simplify life.… I look at my calendar and withdraw from a lot of activities to make sure that I’m eating well, meditating, and have structured time to think and reflect.” (Location 3752)
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More broadly, we also need to construct a lifestyle that’s conducive to calm resilience. Munger, for one, has spent inordinate amounts of time engaged in activities that instill a sense of balance and well-being, whether it’s reading books in his library at home, playing bridge with friends, golfing, or fishing. (Location 3767)
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Munger has also learned to control certain toxic emotions that would corrode his enjoyment of life. “Crazy anger. Crazy resentment. Avoid all that stuff,” he tells me. “I don’t let it run. I don’t let it start.” The same goes for envy, which he considers the dumbest of the seven deadly sins because it’s not even fun. (Location 3777)
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More people are here than in previous years, he comments wryly, because “they think it’s their last chance.” (Location 3786)
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“You have to play in a game where you’ve got some unusual talents. If you’re five foot one, you don’t want to play basketball against some guy who’s eight foot three. It’s just too hard. So you’ve got to figure out a game where you have an advantage, and it has to be something that you’re deeply interested in.” (Location 3790)
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Asked about diversification, he describes it as a fine “rule for those who don’t know anything.” But his preferred strategy is to wait for rare opportunities where the probability of gain vastly outweighs the probability of loss. (Location 3799)
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As Munger looks back on his financial adventures, it becomes clear that what he cherishes most is not the scale of his victory, but the manner in which he has won (Location 3812)
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For Munger, the goal has never been to win at all costs. “Money was very important to him,” says his daughter Molly. “But to win it by cheating or win it and lose the battle for life, that was never what he was about.” (Location 3817)
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Munger embodies an enlightened form of capitalism that is infused with old-fashioned values. For example, he disapproves of mean-spirited tactics such as “brutalizing” suppliers by paying them late. “My theory of life is win-win,” he says. “I want suppliers that trust me and I trust them. (Location 3821)
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“The idea that life is a series of adversities and each one is an opportunity to behave well instead of badly is a very, very good idea,” says Munger. (Location 3836)
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“Material assets bring comfort, but help little toward happiness or usefulness.… One of the real fallacies is the popular notion that happiness depends on external circumstances and surroundings.” (Location 3857)
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Still, I would note that Templeton himself chose to live in a beautiful house in the sun-kissed Bahamas, surrounded by the superrich. (Location 3860)
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One of his most life-enriching decisions was to buy a waterfront house in Newport Beach, California, with sublime views of sunsets over the Pacific Ocean. (Location 3863)
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“Who you spend your time with is probably the most important thing in life,” says Thorp, who was widowed after fifty-five years of marriage and has since remarried. (Location 3871)
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As Thorp suggests, problems tend to arise when we become so consumed by the pursuit of money and possessions that we lose sight of what matters more. (Location 3873)
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Instead, he asked himself what he’d consider “fair and reasonable” if he were the client. He then designed his incentives so he’d earn nothing unless his clients made a profit. (Location 3875)
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Benjamin Graham had been his mentor and friend, and had shared with him the secrets of intelligent investing. Kahn had drawn on that wisdom to build a respected investment firm, Kahn Brothers Group, where he worked alongside his son Thomas and grandson Andrew. (Location 3887)
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“It’s very hard to answer this question,” said Kahn. “Everyone will have a different answer. But for me, family has been very important.” And what gave him the most pride and pleasure when he looked back on his life? “Having a family, healthy children, seeing what we’ve achieved at the firm. (Location 3892)
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For Kahn, much of the day-to-day pleasure of life came from intellectual discovery. He delighted in studying companies and reading about business, economics, politics, technology, and history. (Location 3899)
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When I visited his office, I was struck by how nondescript it was. His utilitarian furniture looked tired and worn; his scuffed walls needed a coat of paint; and his most notable decoration was a bulletin board filled with dozens of family snapshots and an old picture of his teacher Graham. (Location 3903)
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Yet in some ways, money mattered immensely: it allowed Kahn to live and work precisely as he pleased. As Thomas Kahn puts it, “You build capital and then you can do whatever you want because you’re independent.” (Location 3909)
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Bill Ackman, a billionaire known for his bold and controversial bets, once told me, “The most important personal driver for me very early on was independence. I wanted to be financially independent. I wanted to be independent enough to say what I thought. And I wanted to be independent enough to do what I thought was right.” (Location 3911)
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Equally important, Kahn’s wealth gave him peace of mind. His priority was never to maximize his returns, but to preserve his capital and make sustainable progress over many decades. (Location 3916)
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Their fortunes also depend heavily on the vagaries of the financial markets, which can be fickle and cruel, dashing their dreams, punishing their hubris, and exposing their flawed thinking for all to see and mock. (Location 3934)
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Mohnish Pabrai remarks that all of the best investors share one indispensable trait: “the ability to take pain.” (Location 3935)
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As an active trader in a violently volatile and irrational market, he had come to identify with those unfortunate creatures. (Location 3959)
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“It requires a certain type of masochistic, weirdly wired human to do this [job] for a very long period of time.… It’s almost akin to subjecting yourself to torture over and over and over again. Because when you get it right, it feels great. But you get it wrong often. And you have to keep coming back.” (Location 3961)
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As a trader racing endlessly from one short-term bet to the next, he also sensed that his job had become an addiction. “It was just this compulsive game of winning at pushing prices around.… I wasn’t actually building anything.” (Location 3975)
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Determined to create something of “enduring value,” he recently unveiled his new venture—a private holding company called HumanCo, which will back and nurture businesses that “help people to live healthier lives.” (Location 3979)
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After all, the financial markets are a microcosm of life: infinitely complex and wildly unpredictable. When Joel Greenblatt launched his investment firm in 1985, the first merger deal in which he invested involved Florida Cypress Gardens, which operated a tourist attraction with exotic gardens, flamingos, and aquatic shows featuring Santa Claus on water (Location 3987)
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challenging times, Pabrai attempts to clone the mindset of Marcus Aurelius, a second-century Roman emperor and Stoic philosopher whose notes to himself are preserved in Meditations, a book that he never intended to publish. (Location 3995)
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Half of Miller’s net worth had already been vaporized in his recent divorce, and he lost 80 percent of the remaining half when the market imploded, thanks to his incorrigible habit of investing on margin. (Location 4013)
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“You can control your attitude towards it. Whether it’s good, bad, indifferent, fair, unfair, you can choose the attitude you take to it.” (Location 4024)
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“To the Stoic, the greatest injury that can be inflicted on a person is administered by himself when he destroys the good man within him,” (Location 4035)
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But as he’d learned from the Stoics, “you can’t control what other people are going to say about you or think about you. You just control your reactions.” His reaction was to “try to be straightforward, honest, admit mistakes,” (Location 4038)
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So he kept plugging away, first at Legg Mason, and then at a new firm of his own, Miller Value Partners. Still, he had the humility to recognize that he needed to diversify his mutual funds more broadly than he’d previously realized. “I’m much more sensitive to risk and being wrong than I was before,” (Location 4043)
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He added aggressively to his Amazon position after the dot-com bubble burst in 2001, and he then supercharged his bet by investing in options when the stock tanked again during the financial crisis. Miller believes that he’s now the single-largest individual shareholder of Amazon who was never a member of the Bezos family. (Location 4051)
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He prefers to work with a handful of trusted allies, including his son. As the owner of the firm, Miller has “a huge amount of freedom,” which he lacked at Legg Mason, a large public company where “the scrutiny became very intense.” (Location 4064)
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For Miller, nothing beats being able to live and invest his own way—unconstrained, independent, beholden to nobody. “Oh, yeah,” he says. “That’s the best.” (Location 4070)
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I wrote to Pabrai during a painful period when he was beset with challenges on multiple fronts, including the bankruptcy of one of his largest investments, Horsehead Holdings. He replied, “Marcus Aurelius is my hero here. We cannot see it when it is happening, but facing adversity is a blessing. It eventually leads to higher highs.” (Location 4079)
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“I just wanted to be financially independent and not take any shit off anybody.… The luxury is not having to worry about money or a bill or a financial setback.” (Location 4210)
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He becomes irrepressibly excited as he recalls various highlights of his adventures in hypnotism, including a time when his son, Scott, won a shot-put championship under hypnosis, despite having a sprained ankle in a cast. (Location 4233)
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