2018

101 Investing Lessons

Compilation of 101 Investing lessons by John Garret. No editing has been done.
Source: http://mastersinvest.com/tutorialnavigation/

Compiled by Venkatesh Jayaraman

@VenkateshJayar2
 NOTES FROM MASTERINVEST.COM

Contents
INTRODUCTION ................................................................................................................................................... 4
1. PRESERVE CAPITAL .......................................................................................................................................... 5
2. COMPOUNDING ............................................................................................................................................ 11
4. ART OR SCIENCE?........................................................................................................................................... 21
5. STOCK MARKET MAGIC FORMULA? .............................................................................................................. 24

Tutorial 1-5 Recap.......................................................................................................................................... 27

6. HARD WORK .................................................................................................................................................. 28

7. READ .............................................................................................................................................................. 31
8. LEARNING ...................................................................................................................................................... 35
9. AN EDGE?....................................................................................................................................................... 38
10. LOVE ............................................................................................................................................................ 40

Tutorial 6-10 Recap........................................................................................................................................ 42

12. STUDY HISTORY ........................................................................................................................................... 46

13. INVESTING MISTAKES .................................................................................................................................. 50
14. INVESTING GENERALIST............................................................................................................................... 58
15. UNDERSTAND .............................................................................................................................................. 61

Tutorial 11-15 Recap...................................................................................................................................... 64

16. VALUE INVESTING ........................................................................................................................................ 65

17. STOCK PRICES .............................................................................................................................................. 69
18. RISK .............................................................................................................................................................. 72
20. THE VALUE OF CASH .................................................................................................................................... 79

Tutorial 16-20 Recap...................................................................................................................................... 82

21. FORECASTS .................................................................................................................................................. 83

22. TURNING ON A DIME................................................................................................................................... 88
23. PESSIMISM ................................................................................................................................................... 90
24. WEAK MARKETS........................................................................................................................................... 93
25. TIPS .............................................................................................................................................................. 96

Tutorial 21-25 Recap...................................................................................................................................... 97

26. CIRCLE OF COMPETENCE ............................................................................................................................. 97

27. PERFORMANCE IN DOWN MARKETS ......................................................................................................... 100
28. INDEXING - HUGGING ................................................................................................................................ 102
29. ABSOLUTE RETURN .................................................................................................................................... 104
30. HOME-RUNS .............................................................................................................................................. 106

Tutorial 26-30 Recap.................................................................................................................................... 108

31. KEEPING STOCK VALUATIONS SIMPLE....................................................................................................... 109

32. MARGIN OF SAFETY ................................................................................................................................... 115
33. PRIVATE MARKET VALUE ........................................................................................................................... 118
34. TIME ARB ................................................................................................................................................... 122
35. LOW RATES ................................................................................................................................................ 125

Tutorial 31-35 Recap.................................................................................................................................... 127

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36. COMPOUNDING MACHINES ...................................................................................................................... 128
37. FOCUS ON THE CASH ................................................................................................................................. 130
38. BUYING THE BOTTOM? ............................................................................................................................. 133
39. TESTING INVESTMENT IDEAS .................................................................................................................... 135
40. THE DAILY REVIEW..................................................................................................................................... 138

Tutorial 36-40 Recap.................................................................................................................................... 139

41. CHANGE ..................................................................................................................................................... 140

42. CORRELATION ............................................................................................................................................ 145
43. INVESTING INSTINCT ................................................................................................................................. 148
44. EFFICIENT MARKETS .................................................................................................................................. 150
45. SHORTS ...................................................................................................................................................... 156

Tutorial 41-45 Recap.................................................................................................................................... 162

46. DIVERSIFICATION ....................................................................................................................................... 163

47. INVESTMENT FACTORS .............................................................................................................................. 168
48. POSITION SIZING........................................................................................................................................ 172
49. PORTFOLIO MANAGEMENT....................................................................................................................... 175
50. THINKING ABOUT MANAGEMENT? ........................................................................................................... 177

Tutorial 46-50 Recap.................................................................................................................................... 184

51. INVESTOR PSYCHOLOGY ............................................................................................................................ 185

52. EMOTIONS ................................................................................................................................................. 189
53. HUBRIS & HUMILITY .................................................................................................................................. 192
54. PATIENCE ................................................................................................................................................... 195
55. FEELINGS .................................................................................................................................................... 199

Tutorial 51-55 Recap.................................................................................................................................... 201

56. MR. MARKET .............................................................................................................................................. 203

57. INVESTMENT COMMITTEES....................................................................................................................... 205
58. HUMAN NATURE ....................................................................................................................................... 208
59. WHAT YOU KNOW? ................................................................................................................................... 211
60. HATE .......................................................................................................................................................... 213

Tutorial 56-60 Recap.................................................................................................................................... 215

61. LEVERAGE .................................................................................................................................................. 216

62. CORPORATE DEBT...................................................................................................................................... 218
63. VALUE TRAPS ............................................................................................................................................. 222
64. HIGH FLYERS .............................................................................................................................................. 225
65. BUBBLES .................................................................................................................................................... 231

Tutorial 61-65 Recap.................................................................................................................................... 234

66. HERDS CROWDS CONTRARIANS ................................................................................................................ 235

67. VAR LECTURE - VALUE AT RISK .................................................................................................................. 241
68. REAR VIEW MIRROR INVESTING ................................................................................................................ 245
69. NEW ERA THINKING................................................................................................................................... 248
70. MACRO MATTERS ...................................................................................................................................... 251

Tutorial 66-70 Recap.................................................................................................................................... 253

71. PERMANENT CAPITAL LOSS ....................................................................................................................... 254

72. THE UNEXPECTED ...................................................................................................................................... 257
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73. LIQUIDITY ................................................................................................................................................... 260
74. CAPITAL ALLOCATION ................................................................................................................................ 262
75. MERGERS & ACQUISITIONS ....................................................................................................................... 265

Tutorial 71-75 Recap.................................................................................................................................... 268

76. ASYMMETRIC TRADES ............................................................................................................................... 270

77. NEW LOWS ................................................................................................................................................ 272
78. THE IMITATION GAME ............................................................................................................................... 273
79. SPIN-OFFS .................................................................................................................................................. 276
80. CATALYSTS ................................................................................................................................................. 279

Tutorial 76-80 Recap.................................................................................................................................... 280

81. INVERT, ALWAYS INVERT ........................................................................................................................... 281

82. QUALITY BUSINESSES ................................................................................................................................ 283
83. WIN-WIN.................................................................................................................................................... 287
84. GONNA CHANGE THE WORLD ................................................................................................................... 289
85. THINKING ABOUT COMMODITY COMPANIES? ......................................................................................... 291

Tutorial 81-85 Recap.................................................................................................................................... 295

86. OWN COOKING .......................................................................................................................................... 296

87. BUY GOLD? ................................................................................................................................................ 298
88. AGE ............................................................................................................................................................ 300
89. CHARTS ...................................................................................................................................................... 302
90. ALTERNATIVE INVESTMENT SCENARIOS ................................................................................................... 304

Tutorial 86-90 Recap.................................................................................................................................... 305

91. STOCK MARKET GENIUS ............................................................................................................................ 306

92. JOB IS TO MAKE MONEY ............................................................................................................................ 309
93. PROFIT IS IN THE BUYING .......................................................................................................................... 311
94. GET OUT..................................................................................................................................................... 312
95. UNCONVENTIONAL? .................................................................................................................................. 314
96. PROJECT OVERRUNS? ................................................................................................................................ 317
97. BUYBACKS .................................................................................................................................................. 319
98. COMMITMENT-CONFIRMATION-CONSISTENCY BIAS ............................................................................... 321
99. BULL MARKETS .......................................................................................................................................... 324
100. TECH INVEST? .......................................................................................................................................... 326
101. THINKING ABOUT LOSSES? ...................................................................................................................... 329

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INTRODUCTION
"It is a good thing for an uneducated man to read books of quotations." Winston Churchill

"I decided also early on that I would file away any good quotes I came across in my reading and
share them with my investor family at appropriate moments" Ralph Wanger

Welcome to the Investment Masters Class.

I started the Investment Masters Class with the intention that should my children wish to
become investors, here they can learn from the Investment Masters.

I have been in the investment advisory business for over 20 years working for a global
Investment Bank advising hedge funds and institutional long only accounts. I've lived through
the tech boom, the Asian crisis and the Global Financial Crisis.

My father was a stockbroker and my grandfather was a proprietary trader. I love this business.

What differentiates the Investment Masters Class from most other finance courses is both the
structure of the learning and the different topics covered. The tutorials cover topics and ways
of thinking that are common to the world's greatest investors for they actually are their words
and wisdom.

The Investment Masters Class tutorials use quotations I have collected over the years reading
annual letters, books and interviews with the Investment Masters.

You will learn what really matters to world-renowned investors with solid track records. It's
amazing that few finance courses [Columbia Business School is the key exception] actually study
Warren Buffett/Charlie Munger et al, human psychology or financial history.

The Investment Masters Class is more liberal arts and psychology than academic finance.

Whether you are just starting your journey in the investment world or you run a billion dollar
fund [as many of my clients do], I'm certain you'll find the tutorials a useful aid in thinking
about and managing money.

You can contact me at contactus@mastersinvest.com.

Let’s start learning.

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1. PRESERVE CAPITAL

“The first rule of investment is don’t lose money. And the second rule of investment is don’t
forget the first rule. And that’s all the rules there are” Warren Buffett

“As Warren Buffett has advised, the first rule of investing is, don’t lose money. The second rule
is, don’t forget rule number one” Christopher Browne

“Avoiding loss is the most important prerequisite to investment success” Seth Klarman

"Avoiding permanent loss of capital is the number one rule" Bruce Berkowitz

“The possibility of permanent loss is the risk I worry about, Oaktree worry about and every
practical investor I know worries about” Howard Marks

“The trick in investing is not to lose money. That’s the most important thing. If you compound
your money at 9% a year, you’re better off than investors whose results jump up and down,
who have some great years and horrible losses in others. The losses will kill you. They ruin the
compounding rate and compounding is the magic of investing” Jim Rogers

“My goal was to keep losses down, and if I could catch a few stocks going up, compound returns
would work their magic” Walter Schloss

"Greedy, short-term orientated investors may lose sight of a sound mathematical reason for
avoiding loss; the effects of compounding even moderate returns over many years are
compelling, if not downright mind boggling" Seth Klarman

"Return of capital is more important than return on capital" Mohnish Pabrai

"Most investors focus on how much they're going to make rather than how much they could
lose. Our focus is on the downside" Marc Lasry

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"Safety. Considering the downside is the single most important thing an investor must do. This
task must be dealt with before any consideration can be made for gains" Irving Kahn

“Avoid big losses. That’s the way to really make money over the years.” Julian Robertson

“The trick is to avoid losers. Losers are terrible because it takes a success to offset them just to
get back to break-even. We strive to preserve capital on each investment. It does not always
work out that way, but that is the goal” David Einhorn

“The definition of a great investor is someone who starts by understanding the downside. You
must make the judgement in advance as to how much downside risk you are willing to take”
Sam Zell

“When it comes to compounding, I’m not sure everyone understands that percentage
losses and gains are not equal. I’ve always managed to avoid the large losses. Imagine
something as simple as that being one of your secret sauces” Frank Martin

“The chance of gains means very little to us until we have attempted to rule out the probability
of permanent loss” Chris Begg

"We believe in the power of compounding and the simple math is that you can't compound
very well if you suffer too much on the downside.” Tom Perkins

“Makes sure that the probability of the unacceptable (ie the risk of ruin) is nil” Ray Dalio

“It’s our clear belief that one of the most effective ways to compound wealth is to minimize
drawdowns” Charles de Vaulx

“Don’t focus on making money, focus on protecting what you have” Paul Tudor Jones

“Remember, winning in the investment game means not losing” Christopher Browne

“A market downturn is the true test of an investment philosophy” Seth Klarman

“People find insuring their house a necessity, not something to be judged against a financial
strategy, but when it comes to their portfolios, because of the ways things are framed in the
press, they don’t look at them in the same way.” Nassim Taleb

“When I buy or sell something, I always try to make sure I’m not going to lose any money first. If
there is good value, then I’m probably not going to lose much money even if I am wrong” James
Rogers

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“I have no appetite for losses” Michael Platt

“An investor is more likely to do well by achieving consistently good returns with limited
downside risk than by achieving volatile and sometimes spectacular gains but with considerable
risk of principal. An investor who earns 16% annual returns over a decade, will perhaps
surprisingly, end up with more money than an investor who earns 20% a year for nine years and
then loses 15% the tenth year” Seth Klarman

“The power of compounding is so great that our first job as investors is to avoid anything that
might short circuit it” Ira Rothberg

“An investor needs to do very few things right as long as he avoids big mistakes” Warren Buffett

“In my book, trying to avoid losses is more important than striving for great investment
success” Howard Marks

“Most equity investors are optimists and focus on what can go right, but big drawdowns are the
primary enemy of long term compound returns” Kevin O’Brien

“First off, we operate out of fear of losing. We institutionalise a lot of processes, especially risk
management, and the risk function is framed by how much we can lose” Kyle Bass

"Preservation of capital is key to survival in this business" Christopher Parvese

“What we care about is avoiding the permanent loss of capital and, increasingly relevant today,
the permanent loss of purchasing power” David Iben

“Investing is a probabilistic business. For every commitment of capital we make, we compare

our estimation of the likelihood of success with the probability of failure. We then assess how
much we can make in a successful outcome with our best estimate of what we can lose in an
unsuccessful outcome. We are willing to take more risk in a situation that offers more reward”
Bill Ackman

“The most important rule of trading is to play great defence, not great offense” Paul Tudor
Jones

“Never set yourself up for the knockout punch” Kyle Bass

“Risk control is invisible in good times but still essential, since good times can so easily turn
onto bad times” Howard Marks

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“Thoughtful investors can toil in obscurity, achieving sold gains in good years and losing
less than others in the bad. They avoid sharing in the riskiest behaviour because they’re so
aware of how much they don’t know and because they have their egos in check. This, in my
opinion, is the greatest formula for long term wealth creation – but it doesn’t provide much ego
gratification in the short run” Howard Marks

“I learned that if I can simply survive in the market, just like surviving in the war, and not lose
money, eventually I will make something” Walter Schloss

“If you’re not thinking about how much capital you have at risk i.e. the downside, then I think
you’re leaving out a very important part of the equation” Daniel Krueger

“The core tenets defining out trading philosophy – total focus on absolute return, risk control,
liquidity and drawdown – will remain constant. These tenets have served us well through the
financial convulsions of the past four years” Andrew Law

“The speculator has to be his own insurance broker, and the only way he can continue in
business is to guard his capital account and never permit himself to lose enough to jeopardise
his operations at some future date when his market judgement is correct” Jesse Livermore

“To paraphrase Ben Graham, the dean of fundamental securities analysis, the return of one’s
capital is just as important as the return on one’s capital” Larry Pitkowsky

“What we learned at Drexel underpins our investment philosophy: Protect your downside and
don’t lose money” Jon Sokoloff

“Your first thought must be how to protect your capital and make your trading as safe as
possible” William D Gann

“The notion of understanding the first rule of life is important: don’t lose money” Mario Gabelli

"We have two principles. The first is : Don't lose money. The second is: Don't forget principle
No. 1" Albert Nicholas

“Risk management is the most important thing to be well understood” Bruce Kovner

“Preserving private capital for long periods of time is the exception, not the rule, in history”
Paul Singer

"We think if we stick to our philosophy and protect people on the downside, we can produce a
pretty good record. The past 40 years has proved that" Albert Nicholas

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"We truly believe the key to investment success is losing less than the market during declines -
losing small is more important than winning big. The math works and it keeps you in the game
when you should be" Brian Krawez

"Much of investing is about not losing just as much of life is about not dying. It is avoiding those
places where you can die. That's why I'm not a really big fan of parachuting" B ruce Berkowitz

"What I believe in is compounding and not losing money" Colm O'Shea

"I have an intense dislike for losing money" Phil Fisher

"Once we know that our downside is protected, then we look at the upside potential." Marc
Lasry

"When I was in my early 30s at Bear Stearns, I’d have drinks after work with a friend of my
father’s who was an entrepreneur and owned a bunch of companies. “Never worry about what
you might earn on the upside,” he’d say. “Always worry about what you might lose on the
downside.” And it was a great lesson for me, because I was young. All I worried about was
trying to get a deal done, for my investors and hopefully for myself. But you know, when you’re
young, oftentimes you don’t worry about something going wrong. I guess as you get older you
worry about that, because you’ve had a lot of things go wrong." Henry Kravis

"Always understand your downside before you focus on your upside" Steve Major

"One of the things I think has really made us good is that we have not just done very well
picking stocks, but we've done a great job of avoiding losers." Jamie Dinan

“Consistency is the key. It is close to impossible to get a good, long-term, rate of return if you
suffer serious negative numbers en route. It’s the math. A single year that is down 30% means
you have to get 30% per year positive returns for the next four years to get back on track for
15% annual average. Or, if you score 20% annually for four years, and then suffer a 30%
decline, your five year average return is only 7%” Ken Fisher

“One of the tricks of this business is, keep your losses down and then, if you have a few good
breaks, the compounding works well for you” Walter Schloss

"When selecting securities, it's important that investors underwrite defensively to h elp protect
capital" Matthew McLennon

"A very important data point for me is to try to avoid permanent loss of capital" Mohnish Pabrai

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"Look down, not up, when making your initial investment decision. If you don’t lose money,
most of the remaining alternatives are good ones."Joel Greenblatt

"Watch out for the downside. Don't worry about the upside" Jim Tisch

"We believe in focussing on the preservation of capital before considering the return on it"
Steven Romick

"I am more concerned with preserving the Fund's capital than its recent profits, so that I tend to
become more liberal with self-imposed limits when my investment concepts seem to be
working" Geroge Soros

"Since you don't get advance warning about what kind of environment is coming next, you
should always be concerned about preserving your money" Seth Klarman

"The most important thing for me is that defence is ten times more important than offence.
The wealth you have can be so ephemeral; you have to be very focussed on the downside at all
times" Paul Tudor Jones

"Making capital preservation our first order of business is the best way to grow capital over
time. To most effectively compound returns you have to mitigate your downside - that's just
basic math." Mark Thompson

"We truly believe that preservation of capital comes before all other aspirations. In other words,
'To win, first you must not lose'" Frank Martin

"In general, survival is the only road to riches. Let me say that again: Survival is the only road to
riches. You should try to maximise return only if losses would not threaten your survival" Peter
Bernstein

"My whole perspective on investing has been, and hopefully will continue to be, not to lose"
Craig Effron

"We prioritize the avoidance of catastrophic loss first and foremost and focus on potential gains
second" Zeke Ashton

“Capital preservation is always far more important than capital enhancement” Seth Klarman

"I emphasize that our first goal is to control the risks of permanent loss. When we analyse a
security, we first look for the attributes that will protect us against incurring a loss that cannot
be recovered within a reasonable period of time. We will not commence analysing the positive

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attributes of a security until we are convinced that the risks of permanent loss in the security
are relatively low" Ed Wachenheim

2. COMPOUNDING

“The following is an immutable, and what should be perceived as sobering, law of

compounding. A single 100 percent loss can wipe out an entire lifetime of cumulative
gains. Compounding is not an equal-opportunity mechanism. Its rewards and penalties are
asymmetrical” Frank Martin

“It is obvious that a variation of merely a few percentage points has an enormous effect on the
success of a compounding (investment) program. It is also obvious that this effect mushrooms
as the period lengthens. If over a meaningful period of time, Buffett Partnership can achieve an
edge of even a modest number of percentage points over the major investment media, its
function will be fulfilled” Warren Buffett, Partnership Letter 1964

“Over time, a two-percentage-point advantage makes a huge difference to returns.” Ralph

Wanger

“Compounding is the magic of investing” Jim Rogers

“The effects of compounding even moderate returns over many years are compelling, if not
downright mind boggling” Seth Klarman

“Understanding both the power of compound interest and the difficulty of getting it is the heart
and soul of understanding a lot of things” Charlie Munger

“Long-term compounding is an investor’s best friend, so why get in its way” Guy Spier

“The sooner you start, the more compounding can do for you. If, beginning at the age of
twenty, you sock away just $100 a month in stocks, and your portfolio compounds at 10%,

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which is what stocks have provided historically, you will be a millionaire when you retire at
sixty-five” Ralph Wanger

“Remember the power of compounding. You don’t need to stretch for returns to grow your
capital over the course of your life.” Walter Schloss

“Compounding is one of my favorite words. Compounding is powerful. Warren Buffett did not
become one of the wealthiest men in the world by suddenly striking gold in a single highly
successful investment, but rather by compounding the value of Berkshire Hathaway at a 20
percent or so rate for 45 years. If an investor can achieve an average annual return of 20
percent, then, after 45 years, an initial investment of $1 million will appreciate to $3.6 billion.
Wow! “ Ed Wachenheim

“All I know is that if you can end up with a 20% track record over a longer period of time, the
compound rates of return are such that the amounts are staggering” Peter Cundill

“Einstein called compounding the eighth wonder of the world and our mission is to harness this
dynamic for our investors benefit.” Christopher Begg

“The tyranny of negative compounding returns maybe the hardest lesson that far too many
investors never master” David Rolfe

“Underlying our investment values is the principle that the mathematics of

compounding demands putting a high priority on avoiding substantial permanent losses. That’s
why we’re committed to owning high-quality businesses in industries we understand and can
underwrite. It’s also why we put the emphasis we do on risk management.” Adam Weiss

“When it comes to compounding, I’m not sure everyone understands that percentage losses
and gains are not equal. I’ve always managed to avoid the large losses. Imagine something as
simple as that being one of your secret sauces” Frank Martin

“The power of compounding is so great that our first job as investors is to avoid anything that
might short circuit it” Ira Rothberg

“Striving for sustained, uninterrupted compounding over long periods of time is smart investing,
and that’s precisely our goal. Many people think of us as a “value investor” and others ask
whether we are a value or a growth investor. We’ve started to say, we’re neither, we are a
compounding investor.” Chuck Akre

“It’s hard to believe that over the last 100 years the S&P 500 rose 273-fold, but adjusted for
dividends it rose 18,520-fold.” Morgan Housel

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“The great thing about compounding is that in order for it to be a thousand bagger it was only a
five hundred bagger just halfway before there, and a 250 bagger and so on” Chuck Akre

“Investing is simply maximizing the rate of compounding for as long as capital can be employed
net of fees and taxes. What strikes us as strange is how little we hear about compounding with
regard to investing. We find the short-term perspective affecting the collective market psyche
is focused on direction and immediate results that often limit the ability to truly accomplish
outstanding rates of compounding” Christopher Begg

“Compounding matters and does so far more than people expect. The human brain thinks in a
linear way which means that if we were asked to estimate what 10.22% compounded over 100
years would be then our answer is likely to be closer to 1,022% than 1,679,600%, something
economists call exponential growth bias. This means that compounding is often
underestimated and should be at the heart of long-term investing” Marathon Asset
Management

“I usually ask my friends this question: Which would you rather have, $750,000 today or the
outcome of doubling a penny a day for 30 days. What do I hear? Penny. So that’s the question.
Compounding our capital is what we’re after, that’s what makes it a great investment for us.
What’s the value of compounding? Well the answer in this case is simply astounding. Double a
penny a day for 30 days gets you, who knows, $10 million, $737,000 change” Chuck Akre

“Compounding should be the overarching mission of investing activities for capital with a multi -
year time horizon” Christopher Begg

“Consider the Indians of Manhattan, who in 1626 sold all their real estate to a group of
immigrants for $24 in trinkets and beads. For 362 years the Indians have been the subjects of
cruel jokes because of it – but it turns out they may have made a better deal than the buyers
who got the island. At 8 percent interest on $24 (note: let’s suspend our disbelief and assume
they converted the trinkets to cash) compounded over all those years, the Indians would have
built up a net worth just short of $30 trillion, while the latest tax records from t he Borough of
Manhattan show the real estate to be worth only $28.1 billion. Give Manhattan the benefit of
the doubt: that $28.1 billion is the assessed value, and for all anybody knows it may be worth
twice that on the open market. Either way, the Indians could be ahead by $29 trillion and
change.. What a difference a couple of percentage point can make, compounded over three
centuries” Peter Lynch

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3. EDUCATION AND SMARTS

“We start with some good news about your education: simply put, if your goal is to beat the
market, an MBA or a PhD from a top business school will be of virtually no help. Well, it’s good
news, that is, if you havn’t squandered tons of money and time at a business school in the
single-minded quest for stock market success.” Joel Greenblatt

“I am not putting down the study of economics, business cycles, and even security analysis. But
knowing them does not guarantee success, and if you haven’t a clue about them, there may be
hope for you yet” Adam Smith, The Money Game

“Just as many smart people fail in the investment business as stupid ones. Intellectually active
people are particularly attracted to elegant concepts, which can have the effect of distracting
them from simpler, more fundamental truths.” Peter Cundill

“If calculus were required, I’d have to go back to delivering papers” Warren Buffett

“Neither my father or my grandfather believed that a degree was necessary, or even useful, in
the investment business” Chris Davis

“I spent 10 minutes with the Harvard alumnus who was doing the interview, and he assessed
my capabilities and turned me down.” Warren Buffett

“I don’t think those people who have very special records in the stock markets are necessarily
brighter or have more cerebral abilities than the next person. I think it’s a matter of
competitive intensities, understanding one’s role, understanding it wasn’t a matter of building a
business and having an ealized zed but achieving the best return on your investors capital. It’s
an ealized zed drive that’s both competitive and to some degree intellectual that combines all
that with the ability to take risk and be comforted by risk. I used to kiddingly say, I liked to
watch the moving parts and the moving parts were the stocks that went up and down” Michael
Steinhardt

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“To this day, I have never taken any course, anywhere, in chemistry, economics, psychology, or
business” Charlie Munger

“I never received a college diploma or a business school degree, but in my youth, in my years in
Paris, and ever since, I have been studying constantly. I study people, I study life, I look and
listen and read, I have never found learning about anything a waste of time. Everything I ever
learned has helped me on Wall Street” Roy Neuberger

“I was convinced picking stocks was something any kid could do, and I tried to make it fun and
keep it simple. The math part – accounting and spreadsheets – I figured that I could learn
later” Shelby Davis Jnr

“The business schools reward difficult complex ealized more than simple ealized, but simple
ealized is more effective” Warren Buffett

“The first thing I’d say very clearly, I’m no genius. I was not in the top 10 precent of my high
school class. My SATs were so mediocre I went to Bowdoin because it was the only good
school that didn’t require SAT’s and it turned out to be a very fortunate event for me” Stanley
Druckenmiller

“I did not do particularly well in school, I am easily distracted, and I have always been forgetful
– not the list of personality traits likely to appear in a help-wanted ad for any profession” Leon
Levy

“I was a very ordinary kid, and a less than ordinary student” Ray Dalio

“I think people who go straight to college where they major in business and then rush out to the
trading world often lack the needed judgement and intellectual curiosity. Sometimes people
who have studied more broadly end up being terrific investors with a lot more perspective and
ideally a value system that reinforces that” Josh Friedman

“A history degree is far more useful than a CFA [Chartered Financial Analyst].” Crispin Odey

“Current finance classes can help you do average” Warren Buffett

“You may have noticed students who just try to remember and pound back what is
remembered. Well, they fail in school and in life. You’ve got to hang experience on a
latticework of models in your head.” Charlie Munger

“Most of the top-ranked business schools around the world do not understand the
fundamentals of margin of safety” Mohnish Pabrai

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“I think diversification and all that stuff they’re teaching at business school today is probably
the most misguided concept anywhere” Stanley Druckenmiller

“Unlike most people on Wall Street, I never went to business school, and I didn’t study
business in college [I majored in psychology at the City College of New York and was turned
down when I attempted to get into the course on advanced securities analysis]”. Leon Levy

“Everyone has the idea of owning good companies. The problem is that they have high prices in
relations to assets and earnings, and that takes all of the fun out of the game. If all you needed
to do is to figure out what company is better than others, everyone would make a lot of money.
But that is not the case. They keep raising the prices to the point when the odds change. I
always knew that, but they were teaching my colleagues that the market is so efficient that no
one can beat it. I knew people in Omaha who beat the pari-mutuel system. I never went near a
business school, so my mind wasn’t polluted by this craziness. People are trying to be smart—all
I am trying to do is not to be idiotic, but it’s harder than most people think.” Charlie Munger

“Everyone has the brainpower to follow the stock market. If you made it through fifth-grade
math, you can do it.” Peter Lynch

“Being open-minded is far more important than being bright or smart” Ray Dalio

“I sometimes ask myself, ‘If you had the choice between either Oxford/HBS and the
education that you get around Warren Buffett, Charlie Munger, Ben Graham, etc.’ I think
hands down Charlie Munger, Ben Graham and all of that is much better, for me at least.” Guy
Spier

“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ
beats the guy with a 130 IQ. Rationality is essential” Warren Buffett

“Investing is not rocket science. Temperament and understanding predictably irrational human
nature is likely more important than raw intelligence. It’s a great relief to know I don’t have to
be a Stephen Hawking to rise above the tyranny of the crowd. The lone wolf can accomplish the
unexpected if he keeps his wits while those around him are losing theirs.” Frank Martin

“Despite the number of actual “rocket scientists” who have flocked to the investment business,
securities prices aren’t subject to Newtonian principles, only behavioural ones” Set h Klarman

“Investing certainly requires that we ‘do math’ .. but’s its not rocket science” Christopher
Parvese

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“At the end of the day, investing is not rocket science. Productivity and dedication can be much
more important differentiators than raw brain power. Intelligence helps, but whether your
driving a Porsche or Ferrari doesn’t matter too much if the speed limit is 65MPH” Lee Ainslee

“Value investing requires more effort than brains, and a lot of patience. It is more grunt work
than rocket science.. It merely requires understanding a few sound principles that anyone with
an average IQ can master” Chris Browne

“I don’t even know how to calculate beta, and one of my unfortunate trajectories in life is that I
never got to go to business school. I never got to learn how to calculate all the Greek letters,
beta included” Mohnish Pabrai

“I hated, hated school. I really hated school. I hated school generally, because it was this
instruction-following thing. No. I bet you it’s probably also because I wasn’t good at it. I mean I
suspect I wasn’t good at it.” Ray Dalio

“A lot of people with high Iqs are terrible investors because they’ve got terrible temperaments.
That is why we say that having a certain kind of temperament is more important than brains.
You need to keep raw irrational emotion under control.” Charlie Munger

“In terms of IQ, probably the best investors fall somewhere above the bottom ten percent but
also below the top three percent. The true geniuses, it seems to me, get too enamoured of
theoretical cogitations and are forever betrayed by the actual ealized of stocks, which is more
simple minded than they can imagine” Peter Lynch

“There is convincing evidence that a PhD in economics or finance causes people to build vastly
more fragile portfolios” Nassim Nicholas Taleb

“The conformist is not born. He is made. I believe the brainwashing process begins in the
schools and colleges” J P Getty

“I believe that our society’s “mistakephobia” is crippling, a problem that begins in most
elementary schools, where we learn to learn what we are taught rather than to form our own
goals and to figure out how to achieve them. We are fed with facts and tested and those who
make the fewest mistakes are considered to be the smart ones, so we learn it is embarrassing
to not know and to make mistakes. Our education system spends virtually no time on how to
learn from mistakes, yet this is critical to real learning. As a result, school typically doesn’t
prepare young people for real life – unless their lives are spent following instructions and
pleasing others. In my opinion, that’s why so many students who succeed in school fail in life”
Ray Dalio

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“I went to public schools and knew that I was unlikely ever to be able to get into an Ivy League
college” Marty Whitman

“I returned to Wharton for my second year of graduate school more skeptical than ever about
the value of academic stock-market theory. It seemed to me that most of what I learned at
Wharton, which was supposed to help you succeed in the investment business, could only help
you fail. I studied statistics, advanced calculus, and quantitative analysis. Quantitative analysts
taught me that the things I saw happening at Fidelity couldn’t really be happening” Peter Lynch

“Our experience with newly-minted MBA’s has not been that great. Their academic records
always look terrific and the candidates always know just what to say; but too often they are
short on personal commitment to the company and general business savvy. It’s difficult to
teach a new dog old tricks” Warren Buffett

“This skill is not something that they teach in business school.” Paul Tudor Jones

“At a lot of business schools they teach a lot of nonsense called risk-adjusted returns and
diversification” Stanley Druckenmiller

“I wasn’t the best student in college, and I don’t have an MBA” Dan Loeb

“I hated school because I liked to daydream and the system tried to stop me from that” Nassim
Nicholas Taleb

“We’re not talking about brain surgery here. This is finance – add, subtract, multiply, and
divide” Stephen Shwarzman

“In my life there are not that many questions I can’t properly deal with using my $40 adding
machine and dog-eared compound interest table” Charlie Munger

“Unencumbered by the received wisdom of a business education, I had to figure things out for
myself. If you think things through for yourself, you may waste some time, you also may
stumble onto something that has been ignored or disregarded. Doing so has enabled me to
look at the financial world with fresh eyes” Leon Levy

“In this business, it’s not about sheer brain power, SAT scores, or an MBA from a leading
business school. Those factors help and of course are nice to have, but they do not guarantee
success by any stretch” Alex Sacerdote

“To invest successfully, you need not understand beta, efficient markets, modern portfolio
theory, option pricing, or emerging markets. You may, in fact, be better off knowing nothing of

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these. That, of course is not the prevailing view at most business schools, whose finance
curriculum tends to be dominated by such subjects. In out view, though, investment students
need only know two well-taught courses – How to Value a Business, and How to Think About
Markets” Warren Buffett

“With no disrespect to your school or mine, it probably mattered less about which school we
chose and more about what we did when we got there. Whether someone goes to Columbia,
Harvard, Chicago or wherever, is not the most important factor. If you go to a good school, you
will get out of it what you put into it.” Larry Robbins

“Would-be investors can take courses in finance and accounting, read widely and, if they are
fortunate, receive mentoring from someone with a deep understanding of the investment
process. But only a few of them will achieve the superior insight, intuition, sense of value and
awareness of psychology that are required for consistently above-average results. Doing so
requires second level thinking” Howard Marks

“I think to some extent, before you’re going to be a great stock picker, you need some general
education” Charlie Munger

“I always think emotional control during periods of extreme is really the most important thing.
If it was all about IQ points, then every Mensa member would be a billionaire, but it doesn’t
work that way. The ability to separate out market price volatility from a conclusion about the
underlying company is fairly rare, even for professionals who have been in the game for a long,
long time.” Larry Pitkowsky

“I used to think being great at investing long-term was about genius...Genius is still good, but
more and more I think it’s about doing something reasonable, that makes sense, and then
sticking to it with incredible fortitude through the tough times.” Cliff Asness

“The good news is that you don’t need to be a genius to do well in the stock market” Francois
Rochon

“I get flack for saying [when I visit a college and give a speech], “This is a nice college, but the
really great educator is McDonald’s.” They hate me for saying this and think I’m a slimy
creature. But McDonald’s hires people with bad work habits, trains them, and teaches them to
come to work on time and have good work habits. I think a lot of what goes on there is better
than at Harvard.” Charlie Munger

“You can make a lot more money by making more phone calls than everyone else than you can
by just being brilliant” Josh Friedman

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“I would say that journalism was the single most important element of my development as a
trader and as a businessman, more so than any of the economics classes I took at the University
of Virginia. Newspaper journalism teaches you how to fact find, analyse, and condense a story
down to its most essential points and then to communicate those in a series of paragraphs that
read from the most important to the least important” Paul Tudor Jones

“The most useful and practical part of psychology—which I personally think can be taught to
any intelligent person in a week—is ungodly important. And nobody taught it to me by the way.
I had to learn it later in life, one piece at a time. And it was fairly laborious. It’s so elementary
though that, when it was all over, I felt like a fool. And yeah, I’d been educated at Cal Tech and
the Harvard Law School and so forth. So very eminent places miseducated people like you and
me.” Charlie Munger

“I’m definitely not a financial genius, my mathematics are really poor. I hardly know how to
multiply. What I did best, which was a sort of surprise to me, was putting teams of great
people together. Finding great people, incentivizing them, working together with them, giving
them a chance to shine and enabling them. That’s the most important thing, and dreaming big
with them. It wasn’t something I knew, I was basically a tennis player and a surfer” Jorge Paulo
Lehman, 3G

“You need to have a passionate interest in why things are happening. That cast of mind, kept
over long periods, gradually improves your ability to focus on reality. If you don’t have that
cast of mind, you’re destined for failure even if you have a high I.Q” Charlie Munger

“At City College, the only course in which I ever got an A+ was abnormal psychology. What
better preparation could there be to tackle the role of psychology in markets? ” Leon Levy

“My situation was, I did terribly in high school. I hated high school. I just wouldn’t study. I
would remember that my mother would send me to my room and say, “You have to study,” and
I wouldn’t study. I would do anything, I would be alone in the room. I would find something to
think about or do and I wouldn’t study, and I did terrible in high school. I barely got into
college” Ray Dalio

“I think business schools have taught students a lot of nonsense about investments” Warren
Buffett

“Now I’m sure I learned plenty at Oxford and Harvard Business School, but I don’t think they
helped me much professionally. I’m sure I’m a better human being but they did not help me
with investing” Guy Spier

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“This is ostensibly coming from a guy who ostensibly went to a trade school….. I’m a big
believer in liberal arts education. I find it’s those English courses, sociology courses, those art-
history classes, that if you were lucky enough to have taken they stay with you more. That’s
more universal knowledge. You want to be a master of many talents. ” James Dinan

“I don’t look at people’s resume – whether they went to the best college or not. That doesn’t
really tell you. It’s [about], does the person have the conviction that they’re going to stick
through thick and thin, that they will stick with it no matter what happens and never give up?
Period. You got that, you’re on” Arnold Van Den Berg

“I myself would prefer PHD’s working for me, but that would stand for poor, hungry and driven.
Because I did not learn my drive from Columbia or Hunter College, it’s something innate” Leon
Cooperman

“You need a certain level of intelligence, but you don’t need to be very bright. I don’t consider
myself very bright. I never did well on intelligence tests. My mother took me to one of the best
child psychologists after the war because I had a lot of problems, and he felt that I was
permanently damaged in the brain because of malnutrition. I always had this image of myself
that I wasn’t very smart, and the way I did in school proved that I wasn’t. But: Once I ealized
that if you dedicate yourself and you commit yourself, you can learn anything” Arnold Van Den
Berg

4. ART OR SCIENCE?

"After a certain high level of technical skill is achieved, science and art tend to coalesce in
esthetics, plasticity, and form. The great scientists are always artists as well" Albert Einstein

"I have been absorbed and immersed since 1924 and I know this is no science. It is an art. Now
we have computers and all sorts of statistics but the market is still the same and understanding
the market is still no easier. It is personal intuition, sensing patterns of behaviour. There is
always something unknown, undiscerned." Adam Smith, The Money Game 1968.

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"View investing not as a science, but an art form. Constantly keep in mind that it is better to be
generally correct than precisely wrong" Bennett Goodspeed 1978

“Success in finance remains an art rather than a science, if only because of the vagaries of
human nature. Therein lies the good news, if investing is an art, it can be mastered. “ Leon Levy

“Is investing an art or a science or a craft? …. I would say art first and foremost, craft second,
science third" Seth Klarman

"Investing, like economics, is more art than science" Howard Marks

"Investing in stocks is an art, not a science, and people who've been trained to rigidly quantify
everything have a big disadvantage" Peter Lynch

"Value investing is an art, not a science.” Irving Kahn

“Often, investing is more liberal arts than it is business science.” Bruce Berkowitz

"It's not easy and it's not precise or science at all" Li Lu

“Construction of a financial-asset portfolio involves full measures of science and art” David
Swenson

"Because investing is at least as much art as it is science, it's never my goal to suggest it can be
routinized. In fact, one of the things I most want to emphasize is how essential it is that one's
investment approach be intuitive and adaptive rather than fixed and mechanistic" Howard
Marks

“I think investing is an art, and we tried to be as logical and unemotional as possible. Because
we understood that investors are usually affected by the market, we could take advantage of
the market by being rational” Walter Schloss

"People make more of a science out of it than I think is necessary - for me it's really a much
more intuitive process" Shad Rowe

“Stock picking is both an art and a science, but too much of either is a dangerous thing” Peter
Lynch

“Markets can be overvalued and still keep on getting more expensive for quite a while, or they
can be undervalued and keep getting cheaper, which is why investing is an art form, not an
exact science” Peter Cundill

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“You are never going to be completely right; there is no formula that will ever get you there on
its own. Osmosis is about intuition and about discipline and about all the other things that are
not quantifiable. So can you learn it? Yes, you can learn it, but it’s not a science it’s an art form.
The portfolio is a canvas to be painted and filled in” Peter Cundill

"Valuing a business is part art and part science" Warren Buffett

"I have learned that successful investing is more art than science" Thomas Kahn

"Investing is more art than science" Christopher Parvese

"Playing the market is not a science, and the market is not characterized by causal
relationships" Leon Levy

"Investing is an art, more so than a science. And for me, what I get paid for is managing the
‘dark art,’ if you will, of risk management and trying to be a visionary and having a dark vision at
all times about what can go wrong." Paul Singer

"One of the most important things to bear in mind is that economics isn't an exact science. It
may not even be much of a science at all, in the sense that in science, controlled experiments
can be conducted, past results can be replicated with confidence and cause and effect
relationships can be depended on to hold" Howard Marks

"Academia has found a gold mine in transmuting the art of investment (that, at heart, is based
on common sense) into the science of finance, manifested in textbooks filled with pages and
pages of undecipherable equations. The idea that the intricacy of the symbolic logic necessary
to solve problems is proportional to the results achieved is woefully misapplied in the world of
Main Street investment" Frank Martin

"[Value investing] is an art in the sense that you never saw a great painter that didn't learn as a
protege of some master painter and also that as great a man might be he could paint some bad
pictures too. It's no science, and all the kids that believe in the equations or the rules that
would make for perfect markets will learn better as they get older" Irving Kahn

"If it [value investing] were a science it would be replicable, you could put certain algorithms in
the machine and you could pop out the answer. It doesn't work that way. So it's got to be an
art" Thomas Khan

"Putting "the investment as a science genie" back in the bottle threatens the tenured
professors who teach the mathematics of finance, and who greatly outnumber those who teach
investment management in psychology and sociology departments" Frank Martin

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"It's also important to be able to make decisions without complete or perfect information.
Things are almost never clear on Wall Street, or when they are, then it's too late to profit from
them. The scientific mind that needs to know all the data will be thwarted here" Peter Lynch

5. STOCK MARKET MAGIC FORMULA?

"Books sell with titles like How I Made a Million or You Can Make Millions, with very little
content at all. They are the most dangerous things because inevitably there is some mechanical
formula somewhere within" Adam Smith, The Money Game

"Nothing works all the time and in all kinds of markets. That is what is wrong with systems and
the books that tell you You Can Make a Million Dollars" Adam Smith, The Money Game

"I wish I had a magic bullet! My God, wouldn't life be easy" Jim Rogers

“The financial markets are far too complex to be incorporated into a formula. Moreover, if any
successful investment formula could be devised, it would be exploited by those who possessed
it until competition eliminated the excess profits” Seth Klarman

"If there were any infallible mechanical method of forecasting the major swings of the stock
market, there could be no major swings. If every trader knew or could discover by a half-hour's
investigation that the stock market was about to go down, there would be no buyers" Philip
Carret

"We haven't succeeded because we have some great, complicated systems or magic formulas
we apply or anything of the sort. What we have is just simplicity itself" Warren Buffett

“Anyone who thinks he can formulate success in this racket is deluding himself, because it
changes too quickly. As soon as a formula is right for any length of time, its own success carries
the weight of its inevitable failure” Michael Steinhardt

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“There is no perfect strategy. People flocked in droves to growth stock investing, real estate,
portfolio insurance, Japanese stocks, emerging market stocks, tech stocks, dot -coms and
venture capital. Each worked for a while and sucked in more and more investors. But in each
case, success eventually pulled in enough money to guarantee failure” Howard Marks

“Modern economies are too complex to be reliably modelled; their connections and
correlations to loose and imprecise, the second-and third-order effects largely immeasurable,
the fickle vagaries of individual and aggregate human behaviour utterly unknowable” Seth
Klarman

“Markets and the course of the economy are not model-able scientific phenomena but rather
are examples of mass human behavior, which are never predictable with anything like
precision" Paul Singer

“If successful investing was as simple as a mathematical formula, everyone would have nothing
but winners in their portfolio” Christopher Browne

“If you could tell the future from a balance sheet, then mathematicians and accountants would
be the richest people in the world by now” Peter Lynch

"It has been said that, if anyone thinks he has a formula for analysing common stocks, he does
not understand how to analyse common stocks" Ed Wachenheim

“If the investment game were all about numbers and calculations, then, in theory, given the
computer programs available these days, you should be able to punch in the right criteria and
make money all the time. It doesn’t work that way.“ Thomas Kahn

“The point is that no mechanical tools can enable investors to prosper under all circumstances.
They can provide tilts or reduce exposures, but the tool that promises a mix of good results and
great results without the possibility of bad results is too good to be true” Howard Marks

“In my opinion, investment success will not be produced by arcane formulae, computer
programs or signals flashed by the price behaviour of stocks and markets. Rather an investor
will succeed by coupling good business judgement with an ability to insulate his thoughts and
behaviour from the super-contagious emotions that swirl about the marketplace” Warren
Buffett

"I've always been suspicious of theories about the nature of markets and my experience as an
investor has only served to harden this bias. It is highly unlikely that any of us will encounter a
unified theory of markets - some equation with variables into which an investor can plug

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numbers and derive an answer as to where to invest. To the degree that markets are governed
by psychology, they resist reduction to some neat theory or system" Leon Levy

"There is no one, unlike e equals mc squared, there is no one formula to investing. There's no
easy way. The success comes through really thinking about things, looking at the underlying
economics, trying to understand those economics, and then looking at where you can buy those
economics in the market". David Abrams

"The problem with developing expert systems for trading is that the "rules" of trading and
investment game keep changing. I have spent some time working with expert system
developers, and we concluded that trading was a poor candidate for this approach, because
trading decisions encompass too many types of knowledge, and the rules for interpreting the
information keep changing" Bruce Kovner

"Those formulas that gain adherents and importance do so because they have worked well over
a period, or sometimes merely because thay have been plausibly adapted to the statistical
record of the past. But as their acceptance increases, their reliability tends to diminish. This
happens for two reasons; First the passage of time brings new conditions which the old
formula no longer fits. Second, in stock-market affairs the popularity of a trading theory has
itself an influence on the market's behaviour which detracts in the long run from its profit-
making possibilities" Benjamin Graham

"If this was easy, if there was one formula, one way to do it, we'd all be zillionaires" Paul Tudor
Jones

"We don’t have any magic black-box program that generates our returns; I wish we did." Lee
Ainslee

"If you believe that you or anyone else has a system that can predict the future of the stock
market, the joke is on you" Ralph Wanger

"I would like to convince young businesspeople that a magic formula which is infallible and
leads to sure success in business does not exist… that there is no automatic set of rules that will
make a person a millionaire." J P Getty

"It is unlikely that, in this ever-changing world any formula will ever successfully replace the
study and objective analysis of individual securities." Irving Kahn

"No computer could be programmed to automate the work of our craftspeople. Investing for
us is a highly creative and unpredictable process, not the formulaic one that some might
imagine." Seth Klarman
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"If there were a book that could teach you how to make money, you would be at the end of a
long line down the street from any bookstore" Mark Spitznagel

"We don't use numeric formulas and take into account many factors, like a bridge hand. There
never will be a formula that will make you rich. If that were true, every person who got A's in
algebra would be rich" Charlie Munger

"There is no system to beat the market. The future is never a simple replay of the past" Leon
Levy

"We don't have any kind of magic screen" Alex Magaro

"Unskeptical belief that the silver bullet is at hand eventually leads to capital punishment"
Howard Marks

"It is said that if investing could be reduced to formulas, the richest people in the world would
all be mathematicians" Ed Wachenheim

Tutorial 1-5 Recap

1) PRESERVE CAPITAL - You will notice that all of the Investment Masters focus on the downside
first. The reasons are two fold. Firstly losses impede the function of compounding which is the
key to investment success. Secondly, profits and losses are not symmetrical. If you lose 50% it
takes a gain of 100% to get you back to square. Despite this, the majority of investment funds
available today are attempting to beat an index and do not contain an object ive to preserve
capital.

2) COMPOUNDING - The secret to long term investment success is compounding. It is

imperative that you spend the time to understand the sheer power of compounding and the
impact a few extra percentage points of annual return can have over a lifetime. An investor
must make sure they do not detract from this power. The key detractor to compounding is
losing capital and that is why preserving capital is such a focus of the Investment Masters.
Understanding compounding shows why the notion of doubling your money every year for
example is an absurdity.

3) ART OR SCIENCE? - Investment Masters typically consider investing an Art rather than a
Science. Very few Business Schools study great investors yet all Arts schools study the Great
Masters [Picasso, Monet, Leonardo Da Dinci, Raphael etc] and History. If Investing was a
science, results would be able to be replicated and taught in a textbook. All of the great
investors would be PHD’s in finance or CFA’s. They are not.

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4) EDUCATION AND SMARTS - Many of the great investors don’t believe you need to be a rocket
scientist to succeed in investing. In fact many believe the traditional schooling methods are
detrimental to investment success. The skills to succeed in investing are not taught in most
business schools [We will quickly discredit the Efficient Market Thesis in a future tutorial].

5) MAGIC FORMULAS - There are no magic formulas for investment success. Don’t waste your
time buying books that promise to do so. Despite this, the track record of the Investment
Masters highlights it is possible to compound capital at high rates of return over time with
astonishing results. There is a common thread that runs through many of the great investors
thoughts and processes which will become even more evident as you progress through the
tutorials.

6. HARD WORK

"It doesn't matter whether you are a lion or a gazelle; when the sun comes up you'd better be
running." Leon Cooperman

"It is difficult to find creative investment ideas. Thinking is hard work. I have hundreds of
thoughts and I study hundreds of companies but good investment ideas are few and far
between. Maybe only 1 percent or so of the companies we study ends up being part of our
portfolios" Ed Wachenheim

“The main reason why money is lost in stock speculations is not because Wall Street is
dishonest, but because so many people persist in thinking that you can make money without
working for it and that the stock exchange is the place where this miracle can be performed”
Jessie Livermore

“Many unsuccessful investors regard the stock market as a way to make money without working
rather than as a way to invest capital in order to earn a decent return” Seth Klarman

"In handling common stocks, as in most other fields of human activity, success depends on a
combination of hard work, intelligence and honesty" Phil Fisher
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“Recognise that this is a very competitive business, and that when you decide to buy or sell a
stock, you are competing with people who have devoted a good portion of their lives to this
same endeavour. In many instances, these professionals are on the opposite side of your
trades, and on balance, they are going to beat you” Michael Steinhardt

"Number one, passion. I mentioned earlier I was passionate about the business. The problem
with this business if you're not passionate, it is so invigorating to certain individuals, they're
going to work 24/7, and you're competing against them. So every time you buy something, one
of them is selling it. So, if you're with one of the lazy people that are just doing it for the
money, you're going to get run over by those people" Stanley Druckenmiller

"I learned at a very early age how important it is to work hard and be honest." Warren Buffett

“It cannot be said too often that in speculation and investment, success comes only to those
who work for it. No one is going to hand you a lot of easy money” Jessie Livermore

“I would attribute my success to hard work, surrounding myself with good people and a fair
amount of luck” Leon Cooperman

“Investing is fun, exciting and dangerous if you don’t do any work” Peter Lynch

“If you’re going to come to the poker table, you’re going to have to beat me. … We have 1500
people who work at Bridgewater. We spend hundreds of millions of dollars on research and so
on, we’ve been doing this for 37 years.” Ray Dalio

“The way to win is to work, work, work, work and hope to have a few insights…. And you’re
probably not going to be smart enough to find thousands in a lifetime. And when you get a few,
you really load up. It’s just that simple.” Charlie Munger

“Success in speculation requires as much specialised knowledge as success in law or medicine

or any other profession. It never would occur to anyone to open a department store in
competition with Macy’s or Gimbel’s or to make motor cars against Ford and General Motors
without prior training or preparation. Yet the same man will cheerfully toss his savings into a
market dominated by men who are as expert in their line as Macy’s and the auto makers are in
theirs” Bernard Baruch

"Speculation is no simple business. The amateur cannot take a few thousand dollars' capital,
fifteen minutes a day of time, treat it as a side-line and be any more successful than he would
in any other business" Philip Carrett

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"The investors work is so specialised and so intricate that there is no more reason why an
individual should handle his own investments than that he should be his own lawyer, doctor,
architect, or automobile mechanic. He should perform these functions if he has a special
interest in and skill at the particular field. Otherwise he should go to the expert" Phil Fisher

"Most individuals should not try to compete against talented professional investors any more
than most weekend tennis players should try to play matches against world -ranked professional
tennis players. They will lose, usually badly" Ed Wachenheim

"I think the two biggest mistakes traders make is that they don't do enough homework, and
they are a bit too casual about risk" Michael Platt

"You better do your homework. Markets know more than you" Jim Rogers

"Alpha is personal. It's an art form. It's superior insight; some people just "get it" better than
others. Some of them are mechanistic quants; others are entirely intuitive. But all those I've
met are extremely hard working" Howard Marks

"The person who is better prepared, the person who has done the most work, has a huge edge
because most people are lazy" Marc Lasry

"Hard work, honesty, if you keep at it, will get you almost anything." Charlie Munger

“At Baupost, we constantly ask: 'What should we work on today?' We keep calling and talking.
We keep gathering information. You never have perfect information. So you work, work and
work. Sometimes we thumb through ValuLine. How you fill your inbox is very important.” Seth
Klarman

"Make no mistake, you have to work really, really hard in this business" Mark Unferth

"When beggars and shoeshine boys, barbers and beauticians can tell you how to get rich it is
time to remind yourself that there is no more dangerous illusion than the belief that one can
get something for nothing" Bernard Baruch

"If you don't work very hard, it is extremely unlikely that you will be a good trader" Bruce
Kovner

"If you aren't working hard at this terribly competitive business, you aren't going to do very
well" Ralph Wanger

"The only way to gain an edge is through long and hard work" Li Lu

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"Achieving a good record takes much study and work, and it is a lot harder than most people
think" Sir John Templeton

"Did we ever mention that investing is hard work - painstaking, relentless, and at times
confounding?" Seth Klarman

"When you start working there is no substitute for hard work. Be that person who is trying to
learn everything, because many things tend to repeat themselves over time" Marc Lasry

"The people who are coming into the casinos to have excitement and thrills are transferring
their money to people who are following laborious, boring routines. That's my metaphor for
security analysis. Most of it is just plain, hard detail work. It's like doing low-order police work,
if you will - making phone calls, checking sources, trying to figure out what's going on" Ralph
Wanger

"It's hard to do this job if you want to do it well as you have to be so vigilant and monitor and
pay attention to so many things" John Burbank

“The harder I worked the luckier I got. I would say that hard work has never killed anybody. I
think to be successful in your chosen field of endeavour, be prepared to give of your bind, your
body, your soul to achieve that success.” Leon Cooperman

7. READ

"I just sit in my office and read all day." Warren Buffett

"I spend the bulk of my day reading the work of others whom I respect" Frank Martin

“Never stop reading. History doesn’t repeat but it does rhyme” Seth Klarman

"I have learned more from reading than from formal education" Roy Neuberger

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"Read as many investment books as you can get your hands on. I've been able to learn
something from almost every book I have read" Lee Ainslie

"I don’t think you can get to be a really good investor over a broad range without doing a
massive amount of reading." Charlie Munger

"Investing is one of the few things you can learn on your own. You can learn i nvesting by
reading books. I went to business school to learn how to be a good investor. When I got to
Harvard, I discovered there wasn't a course on investing. I decided to open my first self -study
program" Bill Ackman

“a voracious reader, Kahn devours everything except fiction, which adds little value to his
search for investment ideas. A close follower of the latest news and trends – he
has read thousands of non-fiction books – most of which are heavily marked with his apt
comments”

"Frank Betz, who was Carret’s personal assistant in the Eighties, recalled that he read
voraciously – not just corporate reports and newspapers but also books on philosophy, history,
economics and biographies"

"I am obsessed with stocks and investing — I read everything." Ted Weschler

“Ideas come to me from all sources, principally from reading and talking. I don’t discriminate
how they come, as long as they are good ideas. You can recognise good ideas by reading a great
deal and also by studying a lot of companies and constantly learning from intelligent people –
hopefully more intelligent than you are, especially in their field. I try to read as much as I can” Li
Lu

“Read 500 pages like this every day... That's how knowledge works. It builds up, like compound
interest. All of you can do it, but I guarantee not many of you will do it.” Warren Buffett

“I’ve found no substitution for constant reading to immerse myself in the flow of information
that eventually results in ideas” Thomas Gaynor

"You should be a voracious reader and a sponge of information from other investors. With all
the ideas out there, you do not have to agree with them or adopt them, but you should
consider them" Larry Robbins

"I don't know of any successful investors who come up with good ideas without reading"
Thomas Kahn

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"First and foremost, I read a lot, and we never use screens to generate any ideas whatsoever.
Our ideas come from reading newspapers, books, magazines, analysts' reports, and even our
competitors' investment holdings" Francisco Garcia Parames

“If it is wisdom you’re after, you’re going to spend a lot of time on your ass reading.” Charlie
Munger

"Read voraciously. Learn more broadly about behaviour, philosophy of thinking, biographies
and history. Get a sense of the possible. Look at the repeating cycles in human history.
There's an abundance of material out there, so you can build your own invisible board of
directors, if you will. That's incredibly important" Matthew McLennan

“I’m a passionate reader. That’s why being an investor is the perfect job for me.” Irving Kahn

"Read voraciously and wait patiently, and from time to time these amazing bets will present
themselves" Mohnish Pabrai

"If you want to get good at investing, read a lot and practice a lot" Joel Greenblatt

"There are no short cuts to mental fitness. Much like compound interest, reading has
compounding benefits" Christopher Begg

“I try to read at least five to eight hours a day.” Lou Simpson

"I can think of no better way to become more intelligent than sit down and read. In fact, that’s
what Charlie and I mostly do." Warren Buffett

"I think its helps to read broadly, what good does it do to know everything about one little thing
if you don't know how it fits into the world, and how the world is going to effect it" Howard
Marks

"I’ve mainly learned by reading myself. So I don’t think I have any original ideas. Certainly, I talk
about reading [Benjamin] Graham. I’ve read Phil Fisher. So I’ve gotten a lot of ideas myself from
reading." Warren Buffett

"Read as much as you can about the markets, economy, and financial history. Never stop
reading" Seth Klarman

"I read and read and read. I probably read 5 to 6 hours per day. I read five daily newspapers, I
read a fair number of magazines, I read 1ok's, I read annual reports, and I read a lot of other
things too. I've always enjoyed reading. I love reading biographies for example" Warren Buffett

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"Curiosity is the engine of civilization. If I were to elaborate it would be to say read, read, read
and don't forget to talk to people, really talk, listening with attention and have conversations,
on whatever topic, that are an exchange of thoughts. Keep the reading broad, beyond just the
professional. This helps to develop one's sense of perspective in all matters" Peter Cundill

“If you can set your life up in a manner which gives you large chunks of time to do reading, but
reading not from the context of 'I’m going to do an investment’, but reading from the context
of getting better at knowing how the world works. You get to wisdom which is different from
just being smart. You can build up an advantage over your peers” Mohnish Pabrai

"Being a successful investor you need to be hungry, intellectually curious, interested, read all
the time. Read a lot of newspapers. You need a certain level of randomness in order to connect
things that might give you an insight into where a business is going in five years that somebody
else might not see." Ted Weschler

"Successful investors are vociferous readers" Scott Fearon

"If you read widely, you can learn from people whose ideas merit publishing. Some of the most
important for me were Charley Ellis's great article "The Losers Game", A Short History of
Financial Euphoria, by John Kenneth Galbraith and Nassim Nicholas Taleb's Fooled by
Randomness. Each did a great deal to shape my thinking" Howard Marks

"Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to
become a little wiser every day" Charlie Munger

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8. LEARNING

"Live as if you were to die tomorrow but learn as if you were to live forever" Mahatma Gandhi

"An investment in knowledge pays the best interest" Benjamin Franklin

"The turtles who outrun the hares are learning machines" Charlie Munger

“Learning is a lifetime endeavour. Upon graduation you need to keep studying and keep
reading. Look for patterns because you’re going to be building this mental database, a
framework of your experience that you’ll be able to rely upon to help guide your decision
making” Jim Brilliant

“In investing, all knowledge is cumulative” Monhish Pabrai

“This business requires constant learning, even sometimes abandoning precepts about
industries and geographies that no longer apply. If you’re not willing or able to do that, I think
the environment ahead means you’re in for a very tough time.” John Burbank

"If you really want to learn how to hit a baseball, don't start by asking a rookie. In fact, avoid a
rookie even if you have no alternative. Bad advice is worse than no advice at all. On the
practical side, unlike any others to follow, Buffett doesn't sell advice but rather takes his own,
for which he is in every sense accountable" Frank Martin

“The beauty of this business is that you can always be learning – from the markets and from
each other.” Larry Robbins

“Even Ben Graham had a lot to learn as an investor.” Charlie Munger

“I still learn something new every day, which is why I like my job so much” Daniel Kruger

"Warren Buffet is a learning machine" Charlie Munger

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"Go to places where you can learn. You can learn from every experience, but just provide
yourself with the best opportunities to work with people who you think are smart and who you
respect" Barry Rosenstein

"If a week goes by that I haven't learned something new, then that is really a wasted week.
Sometimes, I'll discover another way of evaluating a particular stock or hear about a decision by
a management team that could be interesting" Lee Ainslie

“I'm not Warren Buffett and neither are you. You have to think for yourself, be original, use
your particular talents and learn." Lisa Rapuano

“The game of life is the game of everlasting learning. At least it is if you want to win.” Charlie
Munger

"The markets are a classroom where lessons are taught everyday. The keys to investment
success lie in observing and learning" Howard Marks

“Every day provides tactile learning experiences” Ray Dalio

"I always try to learn something new from every investment conversation I have" Peter Lynch

“Those who keep learning, will keep rising in life” Charlie Munger

“The secret to being successful from a trading perspective is to have an indefatigable and an
undying and unquenchable thirst for information and knowledge.” Paul Tudor Jones

“To be a successful investor learning is essential.” Irving Kahn

“I learn from every experience. When you get your fingers mashed in the door, you don’t go
back to the door” Boone Pickens

"Start by learning from the best - listening, studying and reading" Li Lu

"People who are curious are going to be better investors and better stewards of others’ money"
Henry Kravis

"One thing nice about the investment business is that, even though I am 68, I continue to
learn. You learn something every month and every quarter" Leon Cooperman

"We never stop learning about businesses. School is in session every day but exams tend to
come in a cluster, which brings to mind a Bill Parcells quote: “This is what you work all season

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for. This is why you lift all them weights.” Similar preparation allows us to be ready when the
inevitable opportunities present themselves." Steven Romick

"If life ever ceased to be an educational experience, I probably wouldn’t get out of bed." Paul
Tudor Jones

"I'd stop living if I didn't have the opportunity to learn something every day" Roy Neuberger

"Nothing has served me better in my long life than continuous learning" Charlie Munger

"I never stop learning from those who never stop teaching. It's no more the application of
common sense: If I wanted to learn how to hit baseballs, I'd buy a copy of Ted Williams' The
Science of Hitting long before I picked up a bat" Frank Martin

"You should learn a bit more every cycle - if you don't your business isn't vibrant" Jeffrey Ubben

"The only one thing one can do is to try to be what Munger would call a "continuous learning
machine" You try to keep learning to find evidence that shows your accepted practices could
be better or different" Mohnish Pabrai

“I have always wanted to improve what I do, even if it reduces my income in any given year. And
I always set aside time so I can play my own self-amusement and improvement game.” Charlie
Munger

"George and I, every day, try to get better—we try to make ourselves better and try to make
this firm better. You build your reputation a brick at a time." Henry Kravis

“There is an optionality that people don’t understand. Optionality means to pursue things you
are interested in because the optionality is really high. You need to pay some premium, time,
expense to learn. Often getting to the right place is not saying I know its going to happen, its
saying this looks like a place I should be going towards” John Burbank

"I constantly see people rise in life who are not the smartest, sometimes not even the most
diligent, but they are learning machines. They go to bed every night a little wiser than they
were when they got up and boy does that help, particularly when you have a long run ahead of
you.…so if civilization can progress only with an advanced method of invention, you can
progress only when you learn the method of learning." Charlie Munger

"If I am correct in the premise that speculation is a business in itself, those engaging in that
business should determine to learn and understand it to the best of their ability with
informative data available. In the forty years I have devoted to making speculation a successful

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business venture, I have discovered and still am discovering new rules that apply to that
business" Jesse Livermore

9. AN EDGE?

“Investors operate with limited funds and limited intelligence; they do not need to know
everything. As long as they understand something better than others, they have an edge”
George Soros

"I was recently on a panel that was asked what gave our firms their edge. One panellist
responded “we have 160 analysts around the world”. To me, that response demonstrated a
total lack of insight. Unless those 160 analysts are more astute than the average investor,
they’ll contribute nothing. Certainly another 160 wouldn’t double the managers ability to add
value (if they could everyone would be an analyst)” Howard Marks

“Every investor should be in a position where they can identify what their edge is” Seth
Klarman,

“The person who is better prepared, the person who has done the most work, has a
huge edge because most people are lazy.” Marc Lasry

“Both poker and investing are games of incomplete information. You have a certain set of facts
and you are looking for situations where you have an edge, whether the edge is psychological
or statistical.” David Einhorn

"You have to figure out what your own aptitudes are. If you play ga mes where other people
have the aptitudes and you don't, you're going to lose. And that's as close to certain as any
prediction that you can make. You have to figure out where you have an edge. And you've got
to play within your circle of competence." Charlie Munger

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“Your investor’s edge is not something you get from Wall Street experts. It’s something you
already have. You can outperform the experts if you use your edge by investing in companies or
industries you already understand” Peter Lynch

“Given the competitiveness of the investment business, we believe it is important in every

investment to have an edge, an advantage over the herd. This edge could be a willingness to
take a long-term perspective in a short-term-orientated market, a tolerance of complexity
when others crave simplicity, or the absence of constraints which either impede the ability of
others to act or force them to act in uneconomic ways” Seth Klarman

“If you’re going to come to the poker table, you’re going to have to beat me. … We have 1500
people who work at Bridgewater. We spend hundreds of millions of dollars on research and so
on, we’ve been doing this for 37 years.” Ray Dalio

"In order to invest, we need to understand why the opportunity exists and believe we have a
sizeable analytical edge over the person on the other side of the trade" David Einhorn

"Our equity focus will remain on those situations where we have an identifiable edge. The
edge may come from superior insight derived from deep research, but it can and often does,
come from the ability to take advantage of market dislocations and investments others don't
want to or, for a variety of reasons, can't" Jim Mooney

"Always try to find an edge…" Israel Englander

"There are a lot of trends going on now that make the business very tough. You've had a lot of
smart people come into it, making it much harder to find opportunities. You need to determine
what your real competitive advantage is" John Phelan

"Having an edge will help you make money in stocks" Peter Lynch

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10. LOVE

“I knew I wanted to work on Wall Street and, once I made up my mind, I never though about
any other career. It was not work, it was joy. I came to love the risk taking associated with
trading and the rush that comes when the risk pays off” Michael Steinhardt

“I have had two loves in my life; one is the stock market, the other psychology” Leon Levy

“The most successful students are those that truly love what they are doing. Don’t go into this
to make money.” Joel Greenblatt

“Good investors are data driven and enjoy the game. These are people doing what they
love doing. It really is a game, a game they love.” Warren Buffett

"I love what I do. I love the investing process - the problems and the puzzle-solving and testing
my wits" Dan Loeb

"I love what I do. I do it because it's fun" Stanley Druckenmiller

“I like it, I love the big picture. It’s what I love, it’s exciting” Ray Dalio

"I am at an age where I don’t have to work. I work because I love the business and I love the
business because when you do get a creative idea, it’s really exciting." Ed Wachenheim

“I’ve been doing this for thirteen years. And I love it. I’m lucky to have the kind of life where the
differentiation between work and play is absolutely zilch. I have no idea whether I’m working or
whether I’m playing” Peter Cundill

"To me, making money is an interesting game. The reason I continue is similar to why top
golfers keep playing. They're not doing it for the money; it's for the love of the sport" Warren
Buffett

"What motivates me first is my love for the business" Mark Kingdon

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“I love what I do. Follow the advice of Henry Ford .. ‘the best way to make money is not to
think about making money” Do what you love, love what you do. Because If you do what you
love and love what you do, with a little bit of luck you’re bound to be successful.” Leon
Cooperman

“It isn’t work at all. I love it. I don’t want to acquire knowledge for knowledge sake, rather for
wisdom’s sake” Frank Martin

"I love what I do. I'm in the cockpit managing information, coming in from all over the world. I
can hire people who help me understand it. I have friends and associates all over the world in
every major financial capital. How many people are willing to take calls at 3am" Bruce Kovner

“I get to do what I love to do every day” Warren Buffett

"The reason I gravitated towards running Pabrai Funds is that I love understanding businesses. I
love understanding how the jockeys who are running these businesses, how they think about
them and what they are doing with them." Mohnish Pabrai

"I love what I do and it's good to have the discipline of outside investors" David Tepper

"I love the mental stimulation of investing and reading newspapers with investment ideas in
mind.. I'm just enjoying myself while studying things, trying to look for a bargain, playing the
game" John Spears

"I don't work to collect money. I work because I love what I'm doing" Warren Buffett

"I think you have to be in the business for the right reasons. It's really important to be very
curious and have a passion for investing because there are so many people out there
competing with you. It's really important to love what you are doing" Alex Sacerdote

"Don't look for the money. Look for something you love, and if you're good, the money will
come" Warren Buffett

"Frankly, if you don't love it, there are much better things to do with your life. You can't trade
because you think it is a way to make a lot of money. That won't cut it. No one who trades for
the money is going to be any good" Colm O'Shea

"I simply love the markets. Ever since I was a kid, I liked playing games whether it is chess,
bridge, backgammon, poker, or sports. I don't know a single great trader who doesn't share the
same trait. If doing this was about the money, I would have quit a long time ago" " Paul Tudor
Jones

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"Being a contrary investor - thinking and being ahead of the pack - is intellectually exciting and
keeps me in love with the business" Ed Wachenheim

Tutorial 6-10 Recap

1) HARD WORK - Investing is hard work. If you expect to be successful you are going to have to
put in a lot of effort to succeed. Just like you wouldn't expect to be a good lawyer, accountant,
architect or doctor for example without hard work, the same applies to investing.

2) READ - The Investment Masters are typically voracious readers and they read widely.
Reading history, investment books, investor newsletters, daily/technical journals and multi -
disciplinary topics will help you gain an edge over other participants in the market. The world's
greatest investor spends 80% of his day reading. A study of 1,200 wealthy people found that
they all have reading as a pastime in common.

3) LEARNING - The key to investment success is continued learning. The stock market is a
classroom and lessons are taught every day. It's important to be open-minded when it comes
to learning. Markets are dynamic and are always changing. Mistakes are one of the best ways
to learn. The Investment Masters seeks to improve their knowledge base every day. Knowledge
compounds. The world's greatest investor is a learning machine.

4) AN EDGE - Investment Masters seek an edge in their investments given the competitive
nature of investing. This requires focussing on where you have a solid understanding.
Investment Masters develops their own edge, be it a longer time frame, a superior insight,
psychological, a multi-disciplinary angle or an intuitive understanding etc.

5) LOVE - you must have the right priorities. Like any endeavour in life, to be successful, you
will need to love it.

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11. CHECKLIST ANYONE?

"Checklists seem able to defend anyone, even the experienced, against failure in many more
tasks than we realised" Atul Gawande

"A checklist is no substitute for thinking" Warren Buffett

"Charlie [Munger] is possibly without peer when it comes to the checklist of atypical investment
factors he considers and his deep fluency in the diverse disciplines from which they are drawn"
Peter Kaufman

“It is also essential for a thinking man to assemble his skills into a checklist that he routinely
uses. Any other mode of operation will cause him to miss much that is important” Charlie
Munger

“Before I make the final decision to buy any stock, I turn to my checklist in a last-ditch effort to
prevent my unreliable brain from overlooking any potential warning sign that I might have
missed” Guy Spier

"Boeing just doesn't sit around in a room and come up with the checklist for take-offs. That has
been created over 60-70 years of failures that have caused things to make the checklist. Our
investment checklist was designed the same way. I looked at mistakes I made since the time I
invested and I looked at mistakes that other people made that I respect like Warren Buffett and
Charlie Munger, LongLeaf Partners and so on. When I look at mistakes, I would figure out what
was the reason the investment lost money and was that reason visible at the outset? Was it
visible before the investment was made. And, in most cases it's extremely obvious" Mohnish
Pabrai

“The only antidote for being an absolute klutz due to the presence of a man with a hammer
syndrome is to have a full kit of tools. You don’t have just a hammer. You’ve got all the tools.
And you’ve got to have one more trick. You’ve got to use those tools checklist-style, because
you’ll miss a lot if you just hope that the right tool is going to pop up unaided whenever you
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need it. But if you’ve got a full list of tools, and go through them in your mind, checklist-style,
you will find a lot of answers that you won’t find any other way.” Charlie Munger

"Why are checklists so effective? We think we're very smart; we take shortcuts, especially in
investing. We get euphoric about all the money we're going to make, and we are just a mix of
rationality and emotions. We see a great undervalued business, we ask ourselves a bunch of
questions, but we don't go through a systematic process of looking at every nook and cranny to
figure out whether we got it right or not" Mohnish Pabrai

“We’re just starting a process now, it’s funny I have it in my hand. This is a pilot’s checklist for a
certain type of plane. And what we’re starting to institute at our firm is for every function,
including the investment function, to have a daily checklist” Bruce Berkowitz

“Investing and the checklist. Not Rocket Science. Pretty obvious. Start with the stuff we’ve
learned from Graham, Buffet, Munger, Klarman, Fisher, Templeton etc .. margin of safety,
moats, simple businesses .. make a real Checklist. Examine all your mistakes that led to
permanent loss of capital – the plane crashed. Add to the checklist” Mohnish Pabrai

“In investing too, the real purpose of a checklist is to serve as a survival tool, based on the
haunting rememberance of things past” Guy Spier

“My checklist is.. is it cheap?, is it a good business?, who is running it?, and what did I miss?. I
go through all the checklist. When I go to ‘what did I miss?’ .. it is hugely important to
understand psychology and human cognition” Li Lu

“We believe there are questions to which every responsible capital allocator should know the
answer, so we’ve developed an investment committee memo framed to address all of our core
investment values. It’s not a brainless exercise of box checking, but meant to ensure that the
analysis gets done in the way that we’ve learned over time should produce high quality results”
James Chrichton

"No wise pilot, no matter how great his talent and experience, fails to use a checklist." Charlie
Munger

"Any student of value investing is well aware of the various behavioural biases to which
investors are subject, but the sad reality is that awareness doesn't preclude you from
succumbing to them. Every item on our checklist is meant to remind us of previous lessons
learned and expose any biases we may have on a particular investment" Christopher Begg

"The power of simple checklists should not be under estimated" James Montier

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"One of my key investing tools is a checklist of 98 or so items that help me avoid bad stock picks
(most gleaned from mistakes the very best investors on the planet have made). My list was
copied from the famed checklist the Federal Aviation Administration mandates to keep airline
crashes to a minimum" Monish Pabrai

"If you're trying to analyze a company without using an adequate checklist, you may make a
very bad investment" Charlie Munger

"We have multiple checklists and processes in place to improve how we think and make
decisions" Ken Shubin Stein

"We're big believers in checklists, which are the best tools available to reduce preventable
human errors" Joel Hirsch

"The checklist has prevented many investments that may not have been prevented otherwise.
It is one of those things where it doesn't take much effort, but delivers a huge r eward, and I like
that" Mohnish Pabrai

"...all investors can benefit by keeping an investment journal and using checklists in doing their
research. These two very simple tools not only will help keep people focused on their goals and
sticking with their strategy, but they will also help them avoid mistakes out of impulse. They will
also protect investors from some of the cognitive biases to which we are all subject. In
the checklist, it’s possible to put not only the steps necessary to do the research as well as lists
of mistakes or problems that occurred in the past and should be avoided, but also a list of
cognitive biases. This allows the investor to check with him or herself and to think about
whether there are forces at play that may be activating some cognitive biases, and if so, to
consider those." Ken Shubin Stein

“My good friend, Guy Spier, observed that both of us have a pre-investment checklist, but no
in-flight checklist. The pre-investment checklist has proven invaluable. However, it is not
enough to just keep up with ongoings in existing investments in an ad hoc manner. It is
important to periodically run and re-run the in-flight checklist.” Mohnish Pabrai

“I’m a great believer in solving hard problems by using a checklist. You need to get all the likely
and unlikely answers before you; otherwise it’s easy to miss something important.” Charlie
Munger

"The checklist we have got created in a very holistic manner in the sense that I did not just add
questions on the checklist on a blue sky basis. I looked at the mistakes either I made or other
great investors made and I asked if it was obvious before the investment was made that it
would not work. In many cases it was obvious. Then I asked what is the question that should
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have been asked before this investment was made? For example, when Warren Buffett bought
Dexter Shoes the question is, "Can it be impacted by cheap labour in China?," or for US Airways,
"Can unions have an impact" or "Does the structure of the airline industry ... ?

These questions were ad hoc, but later when I created all the questions and I started to
categorize them into different buckets, what surprised me is that they fell very nicely into
about five different categories. There's quite a few questions related to leverage that cause
problems for companies. There's a number of questions related to moats, sustainable
advantage, brands, etc., so that was another category. There was whole category on
management ownership which has a bunch of questions. When we looked at the managem ent
and ownership section there's a number of questions, some related to the size of the
ownership stake how are they compensated, are interests aligned, what's the past track record,
how long has the team been together, those kinds of things. There's a number of questions that
come up in that section that are absolutely fundamental. In fact, many times that is the section
where I end up having to go back and do more research because I end up not knowing the
answer to many of those questions the first time I run it. Usually those are the ones that I tend
to naturally miss and go back and figure out after the fact. Capital allocation is fundamental -
there's a whole bunch of checklist questions on that as well" Mohnish Pabrai

"You need a different checklist and different mental models for different companies. I can
never make it easy by saying, 'Here are three things'. You have to derive it yourself to ingrain it
in your head for the rest of your life" Charlie Munger

"I'm a prolific maker of lists, and the more trouble I had in the early 1990s, the more I attacked
it and dealt with it by makinglists and checking off items as we accomplished them" Sam Zell

12. STUDY HISTORY

“History does not repeat itself but it does rhyme” Mark Twain

"What we learn from history is that people don't learn from history" Warren Buffett

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“The truth is, history can be one of our greatest aids, in investing as in life” Howard Marks

“I learned to study history better" Ray Dalio

"In order to do well, you must learn from the past" Roy Neuberger

"I read a lot of financial history and studied human nature" Thomas Gayner

"As I look back on it now, it's obvious that studying history and philosophy was much better
preparation for the stock market than, say, studying statistics" Peter Lynch

"History may not repeat itself, but some of its lessons are inescapable. One is that in the world
of high and confident finance little is ever really new. The controlling fact is not the tendency
to brilliant invention; the controlling fact is the shortness of the public memory, especially
when it contends with a euphoric desire to forget" John Kenneth Gailbraith

“A history degree is far more useful than a CFA [Chartered Financial Analyst].” Crispin Odey

"I think an investor today could learn a lot by seeing what the environment was like when there
was less competition and when securities were of different kinds of companies, and to
understand the cycles of history. The eras pass and change but the fundamental principles
don't" Seth Klarman

“You can’t understand economics without understanding philosophy and history” Leon Levy

"You can always learn accounting on the side, but you've got to study history. History gives you
a broad perspective and teaches that exceptional people can make a difference" Shelby Davis

"There are a lot of people in the financial markets who do not even know there is such a thing
as history. They think financial markets were invented the day they showed up at Merrill Lynch
or Deutsche Bank of wherever, and these people make fortunes.. For me history is important.
To be a long term success in financial markets you must understand history" Jim Rogers

“Prudence suggests that he [the investor] have an adequate idea of stock market history, in
terms, particularly, of the major fluctuations in its price level and of the varying relationships
between stock prices as a whole and their earnings and dividends. With this background he may
be in a position to form some worthwhile judgment of the attractiveness or dangers of the
market.” Benjamin Graham

"My advice to young people, if they really want to be successful in this business, is to learn
financial history. Learn history in general and then dig deeper into financial history and you will
not be in such awe of everything that's going on. I see the same problem in my office. People
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just don't know any financial history and they think everything that is happening is unusual.
Everything else can be learned on the job" Joe Rosenberg

“Never stop reading. History doesn’t repeat but it does rhyme” Seth Klarman

"Knowing market history is hugely important not because events repeat themselves exactly but
because patterns of events and the way people who make up the market react can be typical
and predictable" Frank Martin

"You have to have a liberal arts education and a sense of history and biology" Bruce Berkowitz

"Failing to understand the lessons of history more than anything is what dooms investors to be
victimized repeatedly cycle by cycle." Howard Marks

"Nowhere is an appreciation of history more important than in understanding bubbles" James

Montier

"[knowing] History and political science are valuable" Ralph Wanger

"Study the past. Become your own historian" Roy Neuberger

“It’s extremely important to know history, but the trouble is that the big events in financial
history occur only once every few generations. The latest global financial crisis began in 2008
and the one before that in 1929. That’s a gap of 79 years. So, while memory has the potential
to restrain action and induce prudence by reminding us of tough periods, over time as memory
fades the lessons fade as well.” Howard Marks

"To the open-minded and clear-headed student of history, it is a truism that defining moments
in finance have a cyclical tendency and, in their essence at least, are rarely without a
conceptual precedent" Frank Martin

“I went back in history and I saw these things happening before, for the same cause/effect
relationships. And then I realized that everything, everything that happens is just "another one
of those." Right. The same thing happens. It may be, I don't know, if you're skiing and you make
a turn, that's called skiing, and make a turn and there is "one of those" and they repeat. How
does reality work? What's the cause/effect relationship? So that if you're encountering "one of
those" -- a learning experience, anything, a birth, a marriage, an economic downturn -- if you
encounter any of those, they have all happened before. A deleveraging. So that's why we
anticipated the deleveraging before the 2008 downturn in the economy. It's a very good
example of what we're talking about.” Ray Dalio

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"My theory and practical application have proved to my satisfaction that nothing new ever
occurs in the business of speculating or investing in securities or commodities" Jesse Livermore

"I hate that they don’t teach financial history in business schools. If it was up to me, I would
make financial history and all history a number one requirement for business schools.
Understanding how a spreadsheet works can be learned on the job pretty easily, but
understanding the continuum of history requires certain intellect. I cannot for the life of me
understand why business schools are not teaching financial history." Jim Tisch

"Contributing to . . . euphoria are two further factors little noted in our time or in past times.
The first is the extreme brevity of the financial memory. . . . There can be few fields of human
endeavor in which history counts for so little as in the world of finance. Past experience, to the
extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not
have the insight to appreciate the incredible wonders of the present." John Kenneth Galbraith

"I think to take the next step and be a portfolio manager you need both a sense of history and a
vivid sense of risk" Seth Klarman

"We surely need not be reminded that history is a tool, relevant apart from the classroom
setting, that actually has practical utility - like a head is more than just a hat rack. History is a
teacher in the abstract for those who want to apply it to the future" Frank Martin

"The amazing thing is that people just don't seem to learn from history" Bruce Berkowitz

"I believe that awareness of history, in particular, economic history, financial history, history of
how technological improvements and technological breakthroughs have impacted the world,
and history of geography are important, so I think some history books are a must." Charles de
Vaulx

"Where I got a lot of my education from was reading history. I'd go back and read about
Edison, Ford, Rockefeller, J.P. Morgan. The period between 1870-1920 is really interesting."
Marc Andreessen

"It is my belief that one constant in the stock market is human nature. For this reason, while I
do not believe history provides a precise blueprint for the future, I also do not believe that
those who blithely ignore history will have much success understanding the present" Michael
Burry

“What I believe is everything happens over and over again through history. [The] World
operates like a machine and happens over and over again. If you can sort of go above yourself
and your circumstances and look down at yourself within your circumstances, within a historical
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perspective, and then have agreed upon principles, principals are how to handle things that
happen over and over again. By having that it’s helpful, it allows you to have an independent
point of view, while not being 100% certain but to be defensive” Ray Dalio

"My passion for ancient history and archaeology also gives me perspective. My interests in the
ancient world have given me insights into the modern world. Investigations into antiquity
reveal the extraordinary degree to which politicians and financiers are repeatedly able to fleece
civilians when things go wrong" Leon Levy

"Everybody always stresses the importance of learning from history: "Those who don't learn
from the mistakes of the past are doomed to repeat them," the saying goes. In my experience,
most people heed this advice, but only up to a point. They study the past quite closely and
glean as many lessons from it as they can. But they almost never look back far enough. They
confine themselves to the history of the previous few years or perhaps a decade or two. In
other words, it's not that people don't learn from the past. They do- but only the recent past.
And that can be a deadly error. " Scott Fearon

13. INVESTING MISTAKES

“The only man who never makes mistakes is the man who never does anything.” Theodore
Roosevelt

"I have a criterion that I can use to identify my mistakes; the behaviour of the market" George
Soros

“We all know when we are wrong. The market will tell the speculator when he is wrong,
because he is losing money. When he first realises he is wrong is the time to clear out, take his
losses, try to keep smiling, study the record to determine the cause of his error, and await the
next big opportunity. It is the net result over a period of time in which he is interested” Jessie
Livermore

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"With the good men, you can see the learning juices churning around every mistake. You learn
from mistakes. When I look back, my life seems to be an endless chain of mistakes" Adam
Smith, The Money Game

"I have found that failure is a far better teacher than success" Bernard Baruch

"A man who has committed a mistake and doesn't correct it, is committing another mistake"
Confucius

"In business or out of it, there’s nothing unusual or shameful about making a mistake – once.
But… to stumble twice against the same stone is a proverbial disgrace." J Paul Getty

"Everyone makes mistakes" Warren Buffett

“I am a professional mistake maker. One third of my trades are probably wrong” Ray Dalio

“The only way to avoid mistakes is not to invest — which is the biggest mistake of all” John
Templeton

“You never get totally over making silly mistakes” Charlie Munger

"While we will inevitably make some mistakes, we are determined to learn from each one" Seth
Klarman

"Our Vice Chairman, Charlie Munger, has always emphasized the study of mistakes rather than
successes, both in business and other aspects of life." Warren Buffett

“One of the reasons Warren’s so successful is that he is brutal in appraising his own past. He
wants to identify mis-thinkings and avoid them in the future” Charlie Munger

"It is mistakes that are more noteworthy. Each brought its own new lesson" Phil Fisher

"By properly handling the earnings shortfalls, unexpected competitive developments, or

adverse market performance, you will enhance your reputation. Avoiding or denying
your mistakes is a sign of weakness in your character" Leon Cooperman

“To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of
pride. Once we realize that imperfect understanding is the human condition there is no shame
in being wrong, only in failing to correct our mistakes” George Soros

“In investing it is never wrong to change your mind. It is only wrong to change your mind and do
nothing about it” Seth Klarman
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"There's an old saying in the investment game: "It's okay to be wrong: it's not okay to
stay wrong" Scott Fearon

“Quickly identify mistakes and take action.” Charlie Munger

"Recognize a mistake early, and take immediate action" Roy Neuberger

"If you make a mistake, sell as fast as you can" Li Lu

“If you have made a mistake, deal with the mistake, don’t compound it” Michael Steinhardt

"I'm leery of compounding a mistake with inertia and more optimism" Allan Mecham

"I learned that there is an incredible beauty to mistakes, because embedded in each mistake is a
puzzle, and a gem that I could get if I solved it, i.e a principle that I could use to reduce
my mistakes in the future" Ray Dalio

“There is a very good investor I speak to frequently who said “All I bring to the party is twenty -
eight years of mistakes”. I really believe he is right.” Michael Steinhardt

“It is really useful to be reminded of your errors. I think we’re [Warren Buffett and I] pretty
good at that. We do kind of mentally rub our own noses in our own mistakes. And that is a very
good mental habit.” Charlie Munger

“I don’t think anybody can do this for a career without having made some important mistakes.
You can’t win all the time” Michael Steinhardt

"I've done well enough to survive with honour, but I've made my share of mistakes along the
way. I think you learn at least as much from screw-ups as you do from successes" Ralph
Wanger

“When something goes wrong, I like to think about the bad decisions and learn from them so
that hopefully I don’t repeat the same mistake” David Einhorn

“Part of what you must learn is how to handle mistakes and new facts that change the odds.
Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a
much–loved hand.” Charlie Munger

“No investment philosophy, unless it is just a carbon copy of someone else’s approach,
develops in its complete form in any one day or year. In my own case, it grew over a
considerable period of time, partly as a result of what perhaps may be called

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logical reasoning, and partly from observing the successes and failure of others, but much of it
through the more painful method of learning from my own mistakes” Phil Fisher

“While most others seem to believe that mistakes are bad things, I believe mistakes are good
things because I believe that most learning comes via making mistakes and reflecting on them”
Ray Dalio

“I want to be able to explain my mistakes. This means I do only things I completely understand”
Warren Buffett

"I have long since learned, as all should learn, not to make excuses when wrong. Just admit it
and try to profit from it" Jessie Livermore

“I’m only rich because I know when I’m wrong” George Soros

".. one other thing that is absolutely critical: You have to be willing to make mistakes regularly:
there is nothing wrong with it" Bruce Kovner

“There’s no way that you can live an adequate life without many mistakes. In fact, one trick in
life is to get so you can handle mistakes. Failure to handle psychological denial is a common way
for people to go broke.” Charlie Munger

"Great investors become great by objectively examining their mistakes and weaknesses and
consciously reflecting on them" Christopher Pavese

"Even the best of speculators must be prepared to be wrong in a certain percentage of his
operations. In such cases he must be able to strike his tent on the instant and conduct a swift,
skillful, and silent retreat" Bernard Baruch

".. you have got to make decisions even though you know you may be wrong. You can't avoid
being wrong, but by being aware of the uncertainties, you're more likely to correct
your mistakes than the traditional investor" George Soros

“Replaying losses in your head is the only way you learn from your mistakes.” David Tepper

"We are going to make mistakes" Bill Ackman

"It is not a crime to make a mistake in the investment business, but you have to recognize
your mistakes early and take decisive action to reverse the decision" Pierre Lagrange

"We learn by trial and error, not by trial and rightness" Joe Ross

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"We work hard to create an environment where mistakes aren't swept under the rug but are
surfaced and examined right away. Part of working as a team is trying to help each other, not
tear each other down when things go wrong. Address the issue, learn from it and move on"
John Fox

"This is a very stressful business. We are all human, and we all make mistakes. How one
responds to those mistakes and whether someone can keep a level head and make thoughtful
decision is critical. Conversely, how does one respond to a few big wins? With some folks, early
success leads to inflated confidence that may slow the recognition of a mistake." Lee Ainslie

"Every great money manager I've ever met, all they want to talk about it their mistakes. There's
a great humility there" Stanley Druckenmiller

"I usually prefer talking more about the things I have gotten wrong, because I learned from
them" Jim Rogers

"When I am wrong, the only instinct I have is to get out. If I was thinking one way and now I can
see it was a mistake, then I am probably not the only person in shock, so I better be the first
one to sell. I don't care what the price is. In this game, you have an option to keep 20% of your
P&L this year, but you want to own the serial option of being able to do that every year. You
can't be blowing up" Michael Platt

"I have also made some bad investments. There is no question that you are going to
make mistakes in your life. I've made a lot, and I'm going to make more. You just have to make
sure your blunders are never fatal, and you don't want to make them on the really big
decisions. For example, choosing the person you are going to marry. I may try to minimise my
errors, but I'm not one to dwell on them. It isn't worth it. You have to put mistakes behind you
and not look back. Tomorrow is another day. Just go on to the next thing and strive to do your
best." Warren Buffett

"I think one of my strengths is that I view anything that has happened up to the present point in
time as history. I really don’t care about the mistake I made three seconds ago in the market.
What I care about is what I am going to do from the next moment on. I try to avoid any
emotional attachment to the market. I avoid letting my trading opinions be influenced by
comments I may have made on the record about a market." Paul Tudor Jones

“Since actual perfection and 100% satisfaction with a position are impossible, we must learn
from results and not dwell on past outcomes, either good or bad. Moving forward, even
from large errors, is required.” Paul Singer

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"I began a habit I was never to forsake - of analyzing my losses to determine where I had made
my mistakes." Bernard Baruch

"The people I have seen succeed in this business have stuck to it and have been obsessive
about learning from their mistakes" Matthew McLennan

"I've made so many mistakes I can't even think about it" Barry Rosenstein

"All investors make mistakes (even the great ones), but what separates the great ones from the
rest is the ability to learn from those mistakes and change their behaviour" Mark Yusko

"Mistakes are the best teachers. One does not learn from success. It is desirable to learn
vicariously from other people's failures, but it gets much more firmly seared in when they are
your own." Mohnish Pabrai

"Observe how you react to mistakes, so that you can respond more constructively the next time
things go wrong" Jim Rogers

".. you cannot live life without making a mistake. Every time I make a mistake I learn
something" Li Lu

"One learns the most from mistakes, not successes" Paul Tudor Jones

"It's very very helpful to have mistakes that you notice. I would value them. The natural
tendency when you make a mistake is to forget it as quickly as possible. What you should do is
do the opposite. You should study it. The best mistakes are the ones you can practice
theoretically. But the ones you really really learn are the ones you feel in your stomach or your
wallet, or some combination of the two." Bill Ackman

"We lose lots of money on hundred of trades each day. We want to prevent losses that arise
from making the same mistake twice" Ken Griffin

"We actually believe an ability to identify mistakes early and act on them is as or even more
important in a portfolio than being right in the first place" Eric Marshall

"I am wrong a lot. While the analogy may be pushing it, you can think of a painter painting
many brush strokes. He can be wrong a lot. No one brush stroke is right or wrong. We are
constantly painting a picture" Bruce Kovner

"I have lost enough money being wrong that I have gotten better at it I guess. If I've gotten
better at it, it's because I've made enough mistakes" Jim Rogers

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"The times I normally learn my biggest lessons are when we lose money. When we make
money, we don't learn much. I don't like to learn lessons after spending $55m. I'd much rather
learn lessons after spending $15 on a book. It's a very expensive lesson. I don't think I will be
forgetting it anytime soon" Mohnish Pabrai

“When we make mistakes, we always try to do post-mortems.” Lou Simpson

"Post-mortems prove useful for hospitals and football teams; why not for businesses and
investors?" Warren Buffett

"We do post-mortems on all of our positions -as well as regular position reviews of what we
own - to constantly assess what we got right and what we didn't. That matters because we want
to learn from mistakes even if the investment outcome turned out fine because we were lucky.
Luck is not a sustainable way to make money as an investor. Avoiding mistakes that you've
made before is" Shawn Kravetz

"One way to improve investment results – which we try hard to apply at Oaktree – is to think
about what “today’s mistake” might be and try to avoid it" Howard Marks

"Pain plus reflection equals progress. We must admit that we were wrong in orders to learn
from our mistakes." Christopher Parvese

"The big difference between those who are successful and those who are not is that successful
people learn from their mistakes and the mistakes of others" Sir John Templeton

"An investor doesn't need to make personal investment mistakes to find out what doesn't work.
What's needed is to read about other's mistakes and never follow them" Fransico Garcia
Parames

"Each mistake that I make, and there are probably a huge number of mistakes in the future, but
each mistake is an opportunity to learn. I look very carefully at the mistakes and say, why did
this happen; are there lessons here that can help in the future? It's best to learn from other
people's mistakes because they are a lot cheaper. But still, your own mistakes hit home the
most and one is likely to learn the most from them" Mohnish Pabrai

“If you’re willing to fail, not every ideas is going to work, and you allow people to fail, and you
may learn something in the failing, I think that is a good strategy. If you’re not innovating you’re
dying. We’re always thinking of new ways to attack the problems we deal with on a daily basis”
Steve Cohen

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"You need to learn from your failures and mistakes and I have had many" Marc Cohodes

“It’s very difficult in the investment business to avoid mistakes. You are going to
make mistakes. The key is to keep learning and getting better and over time even with a one
third error rate you will end up with a better than average record if you keep at it” Mohnish
Pabrai

"We’re going to make mistakes. Believe me, we’ve made a lot of mistakes.... I don’t know if
there’s any one biggest mistake. We’ve had financial mistakes. We’ve had companies that didn’t
work out, such as TXU and Samson, or Regal Cinemas a long time ago. But you learn from
those mistakes. You hope you never do them again; shame on us if we do." Henry Kravis

"We realise that from time to time we will make mistakes. If we never made a mistake, we
should properly be criticised for being too conservative. To make money one must take some
risks" Ed Wachenheim

"If you don't make some misjudgements, you're doing it wrong: you've not taken enough risk
and you'll never score a big one. You do best when your investments are controversial - when
you stray farthest from the herd" Ralph Wanger

"I have always believed that the chief difference between a fool and a wise man is that the wise
man learns from his mistakes, while the fool never does. The corollary of this is that it
behooved me to go over my mistakes pretty carefully and not to repeat them again" Phil Fisher

"My techniques have changed from time to time as I learned from events and mistakes. Anyone
can make a mistake - the important thing is to recognise an error in judgement as quickly as
possible and do something about it" Roy Neuberger

"When my efforts resulted in failure, I did everything possible to insure that my mistakes were
not repeated" J Paul Getty

"Turn each mistake into a learning experience. Determine exactly what went wrong and how
you can avoid the same mistake in the future" Sir John Templeton

“I’ve studied a lot of thinkers and game-players. You read about chess masters and they
basically tell you what makes them great is not the quantity of practice it’s the quality. They
spend most of their time after the chess match reviewing their decisions that were bad. Self-
criticism is the secret to self-improvement. Negative feedback is a good thing. This physicist,
named Niels Bohr, who says ‘the definition of an expert is one that makes all the mistakes you
can make in a very narrow field. Mistakes are not to be discouraged; on the contrary they
should be cultivated and investigated.” Jeffrey Ubben
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“The best advice I can give an investor whose already developed his own technique is to keep
on sharpening the saw. Keep on saying, okay I made a mistake here, what was the mistake.
Study the mistakes you make, which every investors makes. Search out what you could have
done differently. Write it down in a book and then when you get together with your quiet
moments, say to yourself what could I have done different, how come I went wrong, where did
I go wrong? And then get in a quiet state and let that develop in your mind. And eventually as
you get into your subconscious it will give you guidance.” Arnold Van Den Berg

"It is important to distinguish between mistakes. A mistake that wipes out 85% of capital
invested isn't remotely comparable to one that brings a 10% loss. The 85% loss requires a
566% return to get back to par, while a 10% loss requires only an 11% return. I'll certainly
make mistakes in the future, but I hope to avoid major blow-ups that cripple returns" Allan
Mecham

"We constantly attempt to learn from our mistakes and draw enduring lessons" Seth Klarman

"I think most investment shops slide their mistakes under the rug. There aren’t a lot of
discussions about the years and the places when they screwed up. This is a mistake because
they hurt themselves. They don’t learn, and we want to air the laundry in public. Part of airing
the laundry in public helps us to learn. Warren does the same thing at Berkshire, and he always
started his letters with the mistakes first. We want to do that too, because we want to learn.
It’s the only way to improve." Mohnish Pabrai

"Charlie [Munger] constantly collects and researches the notable failures in each and every type
of people, business, government, and academia, and arranges the causes of failures into a
decision-making checklist for making the right decisions. Because of this, he has avoided
major mistakes in his decision making in his life and in his career. The importance of this on the
performance of Buffett and Berkshire Hathaway over the past 50 years cannot be emphasized
enough." Li Lu

"I have not, however, made my last mistake in purchasing either businesses or stocks. Not
everything works out as planned." Warren Buffett

"Granted, we all make mistakes. The important thing about making errors in judgement is the
ability to admit those errors. If you grow into adulthood unable to acknowledge your mistakes -
in life, as well as investing - you will learn your lessons the hard way. Only when you recognise
your mistakes will you be able to make corrections necessary to put yourself on the right path"
Jim Rogers

14. INVESTING GENERALIST

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“See a lot, be a generalist. Be security agnostic." Andy Redleaf

“We consider our lack of formal industry specialisation a strength. Without a dedicated retail
specialist, for example, we’re less obliged to invest in retail businesses if opportunities seem
scarce.” Vinson Walden

“The benefit of being a global generalist is that we’re not forced to do anything. We just need
to find the best ideas from a wide universe.” Ed Bosek

“We think more value is added by being generalists and seeing opportunities from a broader
perspective. If you have silos, you’re going to own things only within those silos. If you have the
broader perspective, you can say, “I don’t even like stocks, I’m working on distressed debt,” or
something like that.” Seth Klarman

"There's a certain trade-off with having very narrow expertise. If one focuses on just a very
small number of names they can develop a deep understanding of certain companies but may
lose perspective of how that opportunity set compares to a broader universe.” Lee Ainslee

“One of the reason of my success was open mindedness to various asset classes. It gives you the
discipline to not play when you shouldn’t be playing. If you looks at bonds, currency, equities
and commodities, if you are involved in a whole bunch of different asset buckets and open -
minded you tend to only play when you should.” Stanley Druckenmiller

"It is a first principle at Whitebox to be "security agnostic": to penetrate the labels like "bond"
and "stock" and "hybrid" and assess the real status of a security by the risks and rewards that
flow from the combination of economic circumstances and the details of capital structure."
Andy Redleaf

“We’re generalists, but we need to find the non-Wall Street people who have lived and
breathed and suffered in the industries and business we’re now looking at .” Bruce Berkowitz

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“Our analysts are generalists. The problem with specialising in sectors is that you tend not to
have your eyes open to other sectors.” William von Mueffling

“The successful businessman is no narrow specialist.” J Paul Getty

“We are global generalists and think the best way to invest is to generate ideas as generalist.”
Ed Bosek

"I came from the school of thought where we are all generalists. I think that's a huge
advantage... We still use a generalist model. We need to go figure out what ponds we're going
to fish in. I believe that 80% of the game is figuring out what to work on. We've created our
firm to be very good at figuring out what to work on." John Phelan

"Like Baskin Robbins ice cream, opportunities come in dozens of flavours, not all of which are
served at the same time. Investors who find an overly narrow niche to inhabit prosper for a
time but usually stagnate. Those who move on when the world changes at least have the
chance to adapt successfully." Seth Klarman

"Industry specialists are prone to taking the “inside view.” Having got lost in a thicket of detail,
industry specialists end up not seeing the wood for the trees. They may, for instance, spend too
much time comparing the performance and prospects of companies within their sector and fail
to recognize, as a result, the risks that the industry as a whole is running. Marathon prefers to
employ generalists who are less likely to suffer from “reference group neglect” and better able
to employ an understanding of capital cycle dynamics across industries" Edward Chancellor

"Having insight into only one market is likely not going to be sufficient" Seth Klarman

"I also believe that the more businesses you look at and can compare the better investor you
will become. This is why we like the generalist versus specialist model. We are confident we can
get to 80% - 85% of the knowledge base any specialist has. We can go buy the other 15%. We
can go hire a consultant or whatever we need to get up to speed." John Phelan

"We think the best way to do it is to have a generalist culture across industries, across
strategies, and - to a lesser extent - across geographies" Larry Robbins

"One big advantage is we don’t think of ourselves as one industry, like department store guys,
steel guys or tyre guys. We thought of ourselves as having capital to allocate. If you start with
a given industry focus and you spend your whole time to make a better tyre, or whatever, it's
hard to have the flexibility of mind, that you have if you just think you have a large growing pile
of capital and trying to figure out what is the next best move you can make with that capital. I
think we have a real advantage that way." Warren Buffett
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"Our approach is opportunistic in the sense that I don't have a particul ar top down approach to
saying that I want to go into this asset class or this type of market cap or this type of industry or
any of those things. I am completely wide open on that" Mohnish Pabrai

"Remain flexible and open-minded about types of investments. There are times to buy blue
chip stocks, cyclical stocks, corporate bonds, US Treasury instruments, and so on. And there
are times to sit on cash, because sometimes cash enables you to take advantage of investment
opportunities. The fact is there is no type of investment that is always best. If a particular
industry or type of security becomes popular with investors, that popularity will always prove
temporary and - when lost - may not return for years" Sir John Templeton

15. UNDERSTAND

“Never invest in a business you cannot understand.” Warren Buffett

"First understand the business and then understand the stock" Mario Gabelli

"What I want to do is understand the business" Marty Whitman

“If you understand the business, you ought to know what the business is worth. If you don’t
understand the business then you probably wouldn’t know how to value it” Mohnish Pabrai

“If the estimation of intrinsic value is deemed substantially unreliable, there is simply no way to
determine the extent to which the current market price affords a margin of safety” Frank
Martin

“If you get into some complicated business, you can get a report that’s 1,000 pages thick and
you can have Ph.D’s working on it. But it doesn’t mean anything. What you’ll have is a report.
But you won’t have any better understanding of that business and what it’s going to look like in
10 or 15 years. The thing to do is avoid being wrong” Warren Buffett

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“If we don’t know what something is worth, how can we possibly determine whether the price
is cheap or expensive?” Frank Martin

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an
easily-understandable business whose earnings are virtually certain to be materially higher five,
ten and twenty years from now.” Warren Buffett

“We like businesses that are simple to understand and simple to discuss” Larry Robbins

"First and foremost may sure they [you] really understand what the company does at a very
simple level. So, for example, who buys from the company, Why does a customer buy from the
company? Why does a customer fire this company and buy from a competitor? and vice versa:
Why do they fire a competitor and move on to buy from this company? If we took at a company
like Hershey's Chocolate, you'd be able to answer that question easily. If we took a company
with complicated software or business processes or other things that maybe aren't clear to
people in the field it is less obvious, right? So, first and foremost, I think people need to have a
very good basic understanding of why it is that the company exists and what customer base do
they serve? And what do they offer the customer base that their competiors don't? Trying to
get to the concept of, what is this company's advantage? And if you can't define very simply
what this company's competitive advantage is, I think that's really a qualifying first step" Ken
Shubin Stein

"Fortunately, I never invested much money in things I didn't understand" Peter Lynch

"We focus on good businesses we understand because it makes everything easier" John Fox

“The advantage of low-tech stuff for us is that we think we understand it fairly well. The other
stuff we don’t. And we’d rather deal with what we understand” Charlie Munger

“We try to stick to businesses we believe we understand. That means they must be relatively
simple and stable in character” Warren Buffett

“I look for great companies in businesses I understand and which I believe have competitive
advantages” Francois Rochon

“I will not abandon a previous approach whose logic I understand even though it may mean
foregoing large and apparently easy, profits to embrace an approach which I don’t fully
understand, have not practiced successfully and which, possibly, could lead to substantial
permanent loss of capital.” Warren Buffett

“First and foremost, we’re trying to understand the business” Lee Ainslee

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"The first thing, is it an easily understandable business" Kevin Daly

"Investing is tough enough when you think you know something. When you have to start
guessing, forget it." Bruce Berkowitz

“The most important thing in investing is to know what you’re invested in, and if your confident
in the outcome it’s important to stay true to your position” John Paulson

"We are seeking a level of Mastery in understanding the fundamental truths that enable a
business to earn superior returns, with a healthy margin of safety over the longest duration
possible" Christopher Begg

"I need to get a general understanding of what a business does in a few minutes. If I cannot
generally grasp how it makes money and how it works in I would say the first 30 minutes, then
in general I am wasting my time. I may not understand all the intricate details but I should at a
high level understand" Mohnish Pabrai

"I first try to understand if it's a good business. Then, if I don't understand the business, can I
do the work to understand it. Those are the key things we think about first" Jeff Gramm

"I like businesses that I can understand. Let‘s start with that. That narrows it down by 90%.
There are all types of things I don‘t understand, but fortunately, there is enough I do
understand." Warren Buffett

"The source of a business' strength may not always be obvious. Therefore, understanding that
first leg of the stool, the business model, has its own level of difficulty. It's also where the fun
is, I might add, and we believe it is absolutely critical" Chuck Akre

"I think that in order to be a great investor, it's very helpful to understand business and how to
run a business" Bill Ackman

"You have to be an expert in what you invest in. You need to understand why you are invested.
If you don't understand why you are in a trade, you won't understand when it is the right time
to sell, which means you will only sell when the price action scares you. Most of the time when
price action scares you, it is a buying opportunity, not a sell indicator" Martin Taylor

"I like to stick to businesses we understand and for which there is an ongoing need. If there is
something you do not understand or are not comfortable with, in the no-thank-you pile it
should go" Chris Browne

"Investment must be rational; if you can't understand it, don't do it" Warren Buffett

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"The further you stray from stocks you really understand, the more likely you are gambling
rather than investing" Ralph Wanger

"I would rather stay away from businesses that I don't understand. When I say I don't
understand I mean I do understand what a certain business does and how it makes money, but I
don't understand what it will look like in the next five to ten years. When I say that I
understand a business I mean I have a reasonable fix on the earning power of the business in
five or ten years - so I've got some notion on how the industry will evolve and where the
company will sit in the industry in the future" Warren Buffett

"Understand the nature of the companies you own and the specific reasons for holding the
stock ("It is really going up!" doesn't count)" Peter Lynch

"I don't invest in things I don't understand. If I don't understand something, I've learned to walk
away" Bruce Berkowitz

Tutorial 11-15 Recap

1) CHECKLISTS - An investment checklist is a tool that can help overcome human biases and
assist avoiding common mistakes investors make. Checklists should be developed to focus on
situations where capital has a high probability of being lost or has been lost. Checklists are
likely to cover many of the topics in the tutorials of the Investment Masters Class. An investor
should screen an investment with a checklist prior to making an investment. An investment
may not pass all the checklist items, however the checklist will identify potential risk areas
which must be weighed against the investment's potential. Investors should constantly review
their investments to ensure they merit retention.

2) STUDY HISTORY - Having an understanding of history can help an investor identify similar
situations to current market events. There is not a lot new when it comes to investing. Many
aspects of the the Tech boom and the Global Financial Crisis had parallels in history.

3) INVESTING MISTAKES - The Investment Masters make mistakes. Despite the fact most people
study success, many of the Investment Masters believe you will learn more from studying your
failures. It is important to analyse and learn from unsuccessful investments to ensure you
don't repeat those mistakesYou should study other investors mistakes to help improve your
investment process.

4) INVESTING GENERALIST - having a broad view of investing helps to identify a broader range of
investment options and can help to identify pricing risks in certain parts of the market.
Sometimes credit investments offer a return profile more akin to an equity investment. At
times a whole sector maybe over or undervalued which can be difficult to ascertain without a
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broader knowledge of the investment universe. Understanding a wide array of businesses can
help identify investment opportunities.

5) UNDERSTAND - The Investment Masters understand the businesses they invest in. Without
an understanding of the underlying business you will not be able to make an informed decision
if it is a suitable investment or not. Not understanding a business can impose risks that you are
not wary of. Don't invest in assets you do not understand.

16. VALUE INVESTING

"Buy values, not fancy names" Philip L Carrett

"We know from experience that eventually the market catches up with value. It realises it in
one way or another" Benjamin Graham 1955

"We take what we call a value approach to securities" Roy Neuberger

"The real secret to investing is that there is no secret to investing. Every important aspect of
value investing has been made available to the public many times over, beginning with the first
edition of Security Analysis" Seth Klarman

“All intelligent investing is value investing — acquiring more that you are paying for. You must
value the business in order to value the stock.” Charlie Munger

“First, we are value investors.” David Einhorn

"I’ve spent most of my professional life as a long-term bottom-up value investor" Frank Martin

"Since I started managing money, I used a “value” approach" Francois Rochon

"Value investing remains the best course" Julian Robertson

"Our quest for a margin of safety makes us a value investor" Ed Wachenheim

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"Value investing is an approach to stocks that is as close as it gets to a golden rule" Leon Levy

“In general, the upside potential for being right about growth is more dramatic, and the upside
potential for being right about value is more consistent. Value is my approach. In my book,
consistency trumps drama” Howard Marks

“When we study the best compounding records, the vast majority of successful records were
produced by a single manager or a small team where process, skill, intelligence and control
were coupled with a value philosophy. I believe one of the key insights into having an edge is
through building this type of insight into a business plan.” Christopher M Begg

“Value investing is one of the best ways to step apart from the crowd and to protect oneself
from the unpredictable behaviour of the securities markets.” Irving Kahn

“Fairholme's strategies are rooted in a school of thought called value investing. This
longstanding investment paradigm is built upon ideas set forth by Benjamin Graham and David
Dodd in their seminal 1934 text Security Analysis, and popularized by Warren Buffett.” Bruce
Berkowitz

“I believe that over time value investors will outperform the market and that choosing to match
it is both lazy and shortsighted” Seth Klarman

“Buy value, not market trends or the economic outlook” Sir John Templeton

“Value investing, as Bruce Greenwald says, is a big tent. Everyone under the tent, including us,
ascribes a range of values to something and wants to buy it as some level of discount to that.”
Adam Weiss

“We will not stray from our rigid value investment discipline” Seth Klarman

“Markets behave in ways, sometimes for a long stretch, that are not linked to value. Value,
sooner or later, counts” Frank Martin

“We have observed that the money managers who have achieved long term market beating
results in this business, Walter Schloss, Warren Buffett, Bill Ruane and Rick Cunniff, Mario
Gabelli and John Neff, all have an investment philosophy based on their definition of value. Our
booklet, ‘What has worked in investing’, shows that both in the US and internationally, basic
fundamental value criteria produce better than market returns over long periods of time.”
Christopher Browne

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"How naïve all of my previous investing suddenly seemed compared with the simple but
incontrovertible logic of value investing. Indeed, once you adopt a value-investment strategy,
any other investment behaviour starts to seem like gambling" Seth Klarman

"Value in an investment is similar to character in an individual – it stands up better in adversity"

Peter Cundill

"Our view is that over time, value investing is more successful than investment strategies that
ignore value." David Einhorn

"There's only one intelligent form of investing: figuring out what something's worth and see if
you can buy it at or below that price. It's all about value" Howard Marks

"Value investing continues to be the best (and perhaps only) reliable North Star for those who
are able to remain patient, long-term oriented, and risk averse" Seth Klarman

“I’ve observed a great many investors over the years, and I’ve never seen a consistently
successful one whose strategy was not based on a value approach —paying less for something
than it is worth, either today or in the future” David Abrams

"Fundamental value investing will always be relevant. To succeed, always buy for less than
what it is worth, and be smarter than the market. It will never go out of style" Charlie Munger

"[The single biggest mistake] is not being value investors." Jean-Marie Eveillard

"The key, in my opinion, to successful investing is to relate value to price today. Instead of
present value many investment managers are relating future value to present prices. Since I
can't do that, I will let others do it and stick with what has worked for us" Walter Schloss

"The bread and butter business where I spend the bulk of my time, is looking for under-valued
stocks on the long side. I Have a very value-orientated approach" Leon Cooperman

"There are few people that switch in between or get it [value investing] gradually. They either
get it right away of they don't get it at all. I never really tried anything else. The first time I
heard it, it just made sense; and I heard it from the best" Li Lu

“Too many investors focus on “outlook” and “trend”. Therefore, more profit is made by
focussing on value” Sir John Templeton

“My weapon of choice as a stock picker is research; it’s critical for me to understand a
company’s value before laying down a dime. I really had no choice in this matter, for when I

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first happened upon the writings of Benjamin Graham, I felt as if I was born to play the role of
value investor.” Michael Burry

"The fundamental principles of value investing, if they make sense to you, can allow you to
survive and prosper when everyone else is rudderless" Seth Klarman

"I’m always amazed that someone would say they weren’t a value investor – I wouldn’t admit it
even if I wasn’t. It just seems silly to think about investing any other way." Thomas Gayner

"In a rising market, everyone makes money and a value philosophy is unnecessary. But because
there is no certain way to predict what the market will do, one must follow a value philosophy
at all times" Seth Klarman

"We are value investors who seek margins of safety in value stocks" Ed Wachenheim

"The probabilities, the odds, the very laws of nature are tilted in favour of the value school.
Some three dozen published academic studies have shown that, indeed, over long periods,
value investors, culling from the bottom of the list, have tended to outperform growth
investors" Ralph Wanger

"Most of the legends of money management business pursued a value strategy, and they
enjoyed or continue to enjoy careers spanning more years than the average age of many of
today's hot money managers. It has been my observation that value investing works long term,
and that the strategy has never, to my knowledge, experienced any of the infamous blow -ups of
racier, sexier investment styles" Chris Browne

"The best foundation for a successful investment - or a successful investment career - is value"
Howard Marks

"I must remind you that value investing is not designed to outperform in a bull market. In a bull
market, anyone, with any investment strategy or none at all, can do well, often better than
value investors. It is only in a bear market that the value investing discipline becomes especially
important because value investing, virtually alone among strategies, gives you exposure to the
upside with limited downside risk. In a stormy market, the value investing discipline becomes
crucial, because it helps you find your bearings when reassuring landmarks are no longer
visible. In a market downturn, momentum investors cannot find momentum, growth investors
worry about a slowdown, an technical analysts dont like their charts. But the value investing
discipline tells you exactly what to analyze, price versus value, and then what to do, buy at a
considerable discount and sell near full value. And, because you cannot tell what the market is
going to do, a value investment discipline is important because it is the only approach that
produces consistently good investment results over a complete market cycle" Seth Klarman
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17. STOCK PRICES

"It is our argument that a sufficiently low price can turn a security of a mediocre quality into a
sound investment opportunity" Ben Graham

“Price is a liar” John Burbank

"A similar wisdom can be applied to market quotations. Once we understand that they can
often be mirages, we can transcend them and come to see stocks simply as shares of
businesses…which in the end is the one and only reality." Francois Rochon

“Price is what you pay, value is what you get” Warren Buffett

"Price means nothing other than the equilibrium of liquidity" John Burbank

"The price of a stock at any one moment reflects the conventional wisdom of other
investors" Ed Wachenheim

"Prices fluctuate more than values - so therein lies opportunity" Joel Greenblatt

"What is smart at one price is dumb at another." Warren Buffett

"The price must have a rational basis" Frank Martin

"No business is attractive at any price" Shelby Davis

"Price is the all-important consideration" Gerald Loeb

"An important observation to us is that price matters enormously. The starting price has
everything to do with your compound returns" Chuck Akre

“Prices do not exist in a vacuum, but are tethered to something, even if by a huge bungee cord”
Frank Martin

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“In our view, there is no such thing as a value company. Price is the essential determinant in
every investment equation. At some price, every company is a buy; at some price, every
company is a hold; and at a still higher price, every company is a sell. We do not recognize the
concept of a value company” Seth Klarman.

“By itself risk does not create incremental return; only price can accomplish that” Seth Klarman

“Pursuing quality regardless of price is, in my opinion, one of the riskiest – rather than safest –
of investment approaches” Howard Marks

“There’s good assets and bad assets but good prices and bad prices supercede whether the
assets are good or bad” David Abrams

"Even the ugliest of assets purchased at the right price can make a great investment" Marathon
Asset Management

"Nearly every issue might conceivably be cheap in one price range and dear in another"
Benjamin Graham

“Investors who had no idea of the private worth of their holdings were susceptible to being
scared out of them. Their only measure of value was the stock price, so the more the
price dropped, the more they were inclined to sell. Davis was panic-proof” The Davis Dynasty

“The concept that investment risk is less a function of the individual company than the price of
its stock is not recognized by many investors” Chris Browne

“The single biggest determinant of investment returns is the purchase price” Josh Harris

"Price - the only thing that should matter to any investor" Christopher Parvese

"It’s simple: the relationship between price and value is the only thing that guides our
decisions" Warren Buffett

"Day-to-day market prices can tell you as much, if not more, about market buyers and sellers
than about underlying values. Over my career, it is clear that an understanding of psychology
has been as important as a degree in accounting” Bruce Berkowitz

"On any given day, market prices are driven almost 100% by sentiment. As one's investment
horizon lengthens, however sentiment matters less and returns are more dominated by cash
flows" Andy Redleaf

"Business fundamentals, not price quotations, convey useful information" Seth Klarman
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"The only true test of whether a stock is "cheap" or "high" is not its current price in relation to
some former price, no matter how accustomed we may have become to that former price, but
whether the company's fundamentals are significantly more or less favourable than the curre nt
financial-community appraisal of that stock" Phil Fisher

"Investors must never mistake an investment that is down in price for one that is bargain
priced; undervaluation is determined only by a security's price compared to its underlying
value" Seth Klarman

“The stock market is filled with individuals who know the price of everything, but the value of
nothing.” Phil Fisher

“The key to successful investing is to relate value to price today.” Walter Schloss

"Success in publicly traded equity investment rests on drawing superior conclusions on the
worth of a company versus the price available in the stock market" Marathon Asset
Management

"To the extent price deviates markedly from value, opportunity presents itself, whether as a
buyer or as a seller. Understanding the difference between price and value is perhaps the most
critical aspect of investing.” Christopher Bloomstran

“Even the world’s greatest business is not a good investment, if the price is too high.” Lou
Simpson

"It is not liquidity or perfect price discovery that ensures good pricing, but knowledge of value.
It is when we lack this knowledge that we demand liquidity and price discovery as poor
substitutes" Andy Redleaf

"Value in relation to price, not price alone, must determine your investment decisions" Seth
Klarman

"Precisely because their knowledge base is so thin, financial markets take seriously a huge
amount of information of very dubious value: specifically their own prices. Lacking a more
substaintial basis on which to make decisions, financial markets set prices to an astonishing
extent by watching - prices" Andy Redleaf

“I always like to look at investments without knowing the price – because if you see the price, it
automatically has some influence on you" Warren Buffett

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“Value investors know – although efficient market believers fail to comprehend – that the
underlying value of a security is distinguishable from its daily market price, which is set by the
whim of buyers and sellers, as are the prices of rare art and other collectibles” Seth Klarman

"Our experience over the last 20 years taught us that stock prices in the short term don’t always
reflect what is occurring in the underlying companies, sometimes for long (and frustrating)
periods of time. But in the long term, the market ultimately reflects the true value of a
business" Francois Rochon

"At one price any company is a terrible purchase, and at another price virtually any company is
a good investment" David Hurwitz

"I don't need a stock price to tell me what I already know about value" Warren Buffett

"When someone says, “I wouldn’t buy that at any price,” it’s as illogical as, “I’ll take it regardless
of price.” Howard Marks

"Prices are continuously moulded by fears, hopes and unreliable estimates. Capital is always at
risk unless you buy better than average values" Irving Kahn

"Price fluctuations have only one significant meaning for the true investor. They provide him
with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance
a great deal" Benjamin Graham

"The final determinant of investment success or failure is market price" Gerald Loeb

"Price is perhaps the single most important criterion in sound investment decision making" Seth
Klarman

"The beauty of stocks is that that do sell at silly prices from time to time. That's how Charlie
and I have gotten rich" Warren Buffett

18. RISK

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“The best way to minimize risk is to think” Warren Buffett

“If we put our head in the lion’s mouth, we shouldn’t be surprised if it’s bitten off” Peter
Bevelin

"Risk never looks like risk when it’s generating a high return" Howard Marks

“Makes sure that the probability of the unacceptable (ie the risk of ruin) is nil” Ray Dalio

“Never set yourself up for the knockout punch” Kyle Bass

“Whatever you do, make sure you're around tomorrow" James Dinan

“If a gambler has a risk of terminal blow-up (losing back everything), the “potential returns” of
his strategy are totally inconsequential” Nicholas Nassim Taleb

“If we can’t tolerate a possible consequence, remote though it may be, we steer clear of
plantings its seeds” Warren Buffett

"I’m firmly convinced that investment risk resides most where it is least perceived, and vice
versa" Howard Marks

"Paradoxically, it is exactly then, when investors don’t see any risk in a market that it becomes
the riskiest. But this is usually realized later" Francois Rochon

“Our style is to try to minimize risk in every way we can, and be glad by what is left by way of
return. We don’t love risk for the sake of excitement (Some people do). We think of risk as a
phenomenon to be watched from afar, like some wonderfully picturesque flaming lava flow
from a volcano. It looks inviting and beautiful, but it scorches, if not destroys, those who
venture to close.” Paul Singer

“Especially in good times, far to many people can be overheard saying “riskier investments
provide higher returns. If you want to make more money, the answer is to take more risk”.
But riskier investments absolutely cannot be counted on to deliver higher returns. Why not? It’s
simple; if riskier investments reliably produced higher returns, they wouldn’t be riskier!”
Howard Marks

“At every turn of economic life, the reduction of risk is the key to prosperity. Except in financial
markets? Why should it be so?” Andy Redleaf

“Eliminating risk is preferable to finding out where the risk lies” Peter Bevelin

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“Investors are paid for being right, not for the possibility of being wrong?” Andy Redleaf

"You can get paid generously for perceived risk, but you don't necessarily get paid for taking
real risk." Wilbur Ross

“I put heavy weight on certainty .. if you do that, the whole idea of a risk factor doesn’t make
any sense to me. You don’t do it where you take a significant risk. But it’s not risky to buy
securities at a fraction of what they are worth” Warren Buffett

“Risk is not the foundation of profit but its most dreaded enemy” Andy Redleaf

“You have to be in risk management mode all the time, not just when you might be particularly
nervous, because it is impossible to time the transitions of markets to crisis conditions.” Paul
Singer

“We have all been taught that earning high rates of return requires taking on greater risks… If
an investor can make virtually risk-free bets with outsized rewards, and keep making the bets
over and over, the results are stunning.” Mohnish Pabrai

“Risk managed at all times and hedged at all times is the only way to actually control risk.” Paul
Singer

“Attention to risk must be a 24/7/365 obsession, with people - not computers - assessing and
reassessing the risk environment in real time.” Seth Klarman

“Risk control is invisible in good times but still essential, since good times can so easily turn
onto bad times” Howard Marks

“Basically if you study entrepreneurs, there is a misnomer: : People think that entrepreneurs
take risk. And they get rewarded because they take risk. In reality, entrepreneurs do everything
they can to minimize risk. They are not interested in taking risk. They want free lunches and
they go after free lunches.” Mohnish Pabrai

“In the real economy we see all the time people being paid for hard work, for perseverance, for
insight, and for experience. It is easiest to see this by starting with some extreme cases. There
are many great heroes among the great entrepreneurs. It is almost impossible to think of one
who got paid for taking risk. The more brilliant the entrepreneur and grand his achievements,
the less true it seems. Was Alexander Graham Bell paid for the risk he might not invent the
telephone? Nonsense, he was paid for inventing it. Was Edison paid for the risk that he might
not invent a light bulb, or for actually inventing it? Henry Ford was not paid for taking the risk

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he might not be able to build a car affordable to “any man of good salary” he was paid for
actually doing it” Andy Redleaf

"I am sure that any competent judge would be surprised to find how little I ever risked for
myself and my partners. When I did big things, some large corporation like the Pennsylvania
Railroad Company was behind me and the responsible party. My supply of Scotch caution has
never been small; but I was apparently something of a daredevil now and then to the
manufacturing fathers of Pittsburgh" Andrew Carnegie

"The received wisdom is that risk increases in the recessions and falls in booms. In contrast, it
may be more helpful to think of risk as increasing during upswings, as financial imbalances build
up, and materializing in recessions." Andrew Crockett

"Any look at the prospect for all types of investments would be grossly incomple te without a
careful examination of the risks that one would have to assume to be in the game" Frank Martin

"Baupost, as a long-time participant in the financial markets, has always confronted serious
risks. Our ongoing response to omnipresent risks is to attempt to mitigate as much as we can,
intelligently and affordably, while willingly incurring only those risks for which we are being well
compensated" Seth Klarman

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19. VOLATILITY

“Opportunities to purchase what we deem to be attractively undervalued companies occur

more frequently when stock prices are volatile.” Chuck Royce

“We steer clear of the foolhardy academic definition of risk and volatility, recognizing, instead,
that volatility is a welcome creator of opportunity” Seth Klarman

“Risk is not defined by volatility, but rather ill-conceived investment” Michael Burry

"Volatility is not synonymous of risk but – for those who truly understand it – of wealth"
Francois Rochon

"We do not view volatility as risk" Tweedy Browne Co

"Investors should treat volatility as a friend. High volatility permits an investor to purchase
stocks that are particularly depressed and to sell stocks when they are selling at particularly
high prices. The greater the volatility, the greater the opportunity to purchase stocks at very
low prices and then sell stocks at very high prices" Ed Wachenheim

“We think short-term volatility should often be viewed as an opportunity to the long-term
investor who seeks enduring businesses at reasonable prices” Christopher Begg

“We are willing to endure a high degree of stock price and portfolio volatility because we
believe it allows us to achieve a greater degree of investment performance over the long term”
Bill Ackman

“The true investor welcomes volatility” Warren Buffett

"I have never thought of volatility as a measure of risk. The investment business tends to think
there is some correlation between volatility and risk and I don't think that is true. We are not

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concerned with price fluctuations and to the extent that the price drops , we can take
advantage of that and can buy more of the same thing" Mohnish Pabrai

“You can get lulled to sleep when markets haven’t been volatile, which likely means it’s time to
take some chips off the table” Kevin O’Brien

"Not only doesn't a stock's past price volatility serve as a good indicator of future profitability, it
doesn't tell you something much more important - how much you can lose. Let's repeat that: It
doesn't tell you how much you can lose. Isn't risk of loss what people most care about when
they think of risk?" Joel Greenblatt

“There are many kinds of risks .. But volatility may be the least relevant of them all” Howard
Marks

“If you make more money when you are right than you are hurt when you are wrong, then you
will benefit, in the long run, from volatility [and the reverse]” Nicholas Taleb

“You can’t overlook the volatility, but you don’t let it push you around in the market” Boone
Pickens

“Volatility is the friend of the unleveraged long-term investor. We much prefer the bumpy road
to higher rates of return than a smoother rise to more modest profits” Bill Ackman

"Most investors incorrectly consider volatility to be a risk. These investors thus demand a
higher return from common stocks than the deserved return. This error is our opportunity -
this is another reason we treat volatility as a friend" Ed Wachenheim

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather
than participate in it.” Warren Buffett

“One of the great lessons on the crisis was learning the difference between volatility, which
most people perceive as risk, and a permanent impairment of capital, which is what we believe
is risk” Matt McLennon

“While many investors think of volatility as synonymous (or nearly so) with risk, we take a
different view. Rather than avoid volatility, we see the challenge of managing risk as trying to
take advantage of the market’s movements—an essential skill for any successful active
manager.” Chuck Royce

“Risk is a far more complex consideration than merely the simple but widespread notion of
volatility” Paul Singer

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“Pick any Company you want – the price is very volatile over short periods of time. It does not
make sense to me that their values are nearly as volatile as the prices and therein lies what
should be a great opportunity” Joel Greenblatt

"Volatility is our friend. Volatility has nothing to do with risk" Mohnish Pabrai

"Volatility is terrific. What we don't want is the permanent loss" Wally Weitz

"If we insist on a significant margin of safety at the time of purchase, above-

average volatility may well provide above-average returns. Rather simple, when you ponder it a
while" Frank Martin

"I think volatility is so widely used as a risk-metric simply because it is easy to measure, not
because it is a good gauge of risk of permanent loss of capital. Downside volatility is merely
one aspect of risk, not necessarily the most important, while upside volatility isn't much of a
risk at all - unless you are short" Joel Greenblatt

"Another important point: the significant volatility of the market is often perceived negatively
by many investors. It’s actually the contrary. When we see stock prices as “what other people
believe the company is worth” rather than the real value (at least in the short term) , these
fluctuations become our allies in our noble quest for creating wealth. Instead of fearing them,
we can profit from them by acquiring superb businesses at attractive prices." Francois Rochon

“I certainly view volatility as my friend. Volatility is on sale because 99% of the institutions out
there are doing their best to avoid it.” Michael Burry

"Financial academics define risk as volatility. That may be fine for theory, but for those of us
who live in the real world, we define risk as permanent loss of capital. The likelihood of risk
using our definition is always highest at the point where the general perception of risk is
lowest" Christopher Bloomstran

"When people do try to measure investment risk, they typically assess the historic volatility of
an investment compared to that of the overall market (known as beta), which derives from
capital asset pricing theory. We consider the concept of beta to be irrelevant, both because
volatility is not the same thing as risk and because one cannot reliably project past share price
patterns into the future. (It is, of course, fortunate for us that others remain so misguided.)"
Seth Klarman

"If you want to start talking volatility equals risk, sharpe ratios, beta and gamma, the Greek
alphabet, we're not a good match for you" John Phelan

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"Volatility is not part of our analysis of risk; rather we view it as an opportunity generator.
What we say for our purposes is that risk involves the exposure of permanent loss of capital"
Chuck Akre

"In the first place it has been known for decades that there is no correlation between risk, as
the academics define it, and return. Higher volatility does not give better results, nor lower
volatility worse. Volatility is not risk. Avoid investment advice based on volatility" David
Dreman

"How can professors spread this [nonsense that a stock's volatility is a measure or risk]? Ive
been waiting for this craziness to end for decades. It's been dented, but it's still out there"
Charlie Munger

"Because we focus on value instead of price, we do not consider short-term stock market
volatility a risk. Instead, we define risk as long-term value destruction. For today’s investors, the
potential loss of purchasing power on the dollars they save is one of the largest value -
destroying risks they face" Chris Davis

20. THE VALUE OF CASH

“Cash is the equivalent of financial Valium. It keeps you cool, calm and collected.” Bruce
Berkowitz

“I think it’s [cash] actually an aggressive strategic asset because it’s one of the few things that
rises in value as the market plunges. Its value is inversely proportional to how challenging the
environment is” Ken Shubin Stein

“Holding cash is uncomfortable, but not as uncomfortable as doing something stupid” Warren
Buffett

"The hardest thing to do in investing is not the decision to buy or sell but to sit idle even if that
means allowing the build-up of some cash" Christopher Begg

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"The big lesson I learned, which was a correct lesson to learn, in the financial crisis is to hold
cash" Mohnish Pabrai

“I have found it wise, in fact, to periodically turn into cash most of my holdings and virtually
retire from the market. No general keeps his troops fighting all the time, nor does he go into
battle without some of his forces held back in reserve” Bernard Baruch

"There will be some incident, it could be tomorrow. At that time, you need cash. Cash at that
time is like oxygen. When you don't need it, you don't notice it. When you do need it, it's the
only thing you need. We operate from a level of liquidity that no one else does." Warren Buffett

“Buying hedges in a choppy market can be expensive, so we view cash as one of the cheapest
hedges out there” David Nierenburg

“Unfortunately the important criterion of investment merit is obscured or lost when

substandard investments are acquired solely to remain fully invested” Seth Klarman

“While the S&P Index is by design a fully invested index, we have generated our returns with
negative leverage, ie cash has averaged 14% of invested capital since inception” Bill Ackman

“Fairholme views market crashes, panics, and downturns as opportunities to buy more of the
companies we love at fire sale prices. The only way to exploit these opportunities is to have
cash on hand.” Bruce Berkowitz

“Naysayers argue that holding a large amount of cash that yields nearly nothing is foolish, and
perhaps it is - until it isn't. On all counts, we think it's better to have cash and not need it,
rather than to need it and not have it.” Bruce Berkowitz

“There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when
I wasn’t awash in cash – and I don’t want to go back.” Charlie Munger

“Our willingness to hold cash at times when great opportunities are scarce allows us to take
advantage of opportunity amidst turmoil that could handcuff a competitor who is always fully
invested” Seth Klarman

“I’d much rather apologize for holding cash than for paying too much” Gregg Powers

“Cash is our hedge. That’s an anchor on returns when the market’s strong, but it’s a hedge
when markets are bad and it allows you to put money to work at those times to generate
attractive future returns” Andrew Jones

“When bargains are lacking, we are comfortable holding cash” Seth Klarman
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"Because we are focussed on absolute returns, we will hold cash in the absence of values and a
margin of safety. We view cash as an opportunity fund" Arnold Van Den Berg

“It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by
going after mediocre opportunities.” Charlie Munger

"You're deluding youself if you believe your stocks, however cheap they are, won't temporarily
go down when Mr Market decides to correct. When that happens, your cash becomes
ammunition for future bargains" Charles de Vaulx

"You invest only in the opportunities you see. I have no problem sitting on cash." Marc Lasry

"We view cash as a residual of a disciplined underwriting approach and as deferred purchasing
power" Mathew McLennon

"Cash is a wonderful thing. If you have cash you can buy" David Winters

"There are times to sit on cash, because sometimes cash enables you to take advantage of
investment opportunities" Sir John Templeton

"We don't feel the need to force cash to work just because it is a zero-percent yield today,
because the return to cash has two components; it has current yield, and it has the option of
redeployment in distress" Mathew McLennon

“Contrary to many mutual fund managers, we do not believe we have to be fully invested 100%
of the time. Our cash balance is purely a residual of whether or not we’re finding enough to
invest in.” Jean Marie Eviellard

“Cash combined with courage in a time of crisis is priceless.” Warren Buffett

"In many different ways, cash gives you options. It offers wonderful downside protection and
upside optionality" Mohnish Pabrai

"It's better to earn nothing than to potentially lose money by making a risky investment that
isn't up to your standards. Cash is a weapon. Guy Gottfried

"In an up market the liquidity looks like it’s hurting you, but when prices on average are high,
people don’t think about the optionality value of cash. That value reflects what cash can buy in
the future versus what it can buy today. Sometimes the difference can be enormous." Keith
Trauner

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"I have always loved cash - if you've got lots of it you will never have to pass up a great
opportunity" Peter Cundill

"Cash is misunderstood by some, who do not appreciate the value of a cheap option on a better
future entry point" Steve Romnick

"The “we” investor is comfortable holding cash when he can’t find attractive investments"
Howard Marks

"If you have cash, you may remain safe in the shelter of the harbour until the storm passes"
Frank Martin

"One of the most common misconceptions regarding Baupost is that most outsiders think we
have generated good risk-adjusted returns despite holding cash. Most insiders, on the other
hand, believe we have generated those returns because of that cash. Without that cash, it
would be impossible to deploy capital when we enter a tide market and great oppo rtunities
become widespread." Brian Spector

"If you go back and study the great investors throughout history—the Medicis, the Morgans,
the Rothschilds, and recently Buffett—these great investors with terrific records share a
common trait: they were always in a position to be liquidity providers. Each was willing to hold
cash until someone was in distress or under duress, and they could provide liquidity at very
attractive prices... I actually consider cash to be an asset class" John Phelan

Tutorial 16-20 Recap

1) VALUE INVESTING- The ranks of the Investment Masters are filled with Value Investors.
While a number of the Investment Masters are traders [Soros, Druckenmiller, Tudor -Jones],
the great majority are value investors. Over the long term Value Investing has proven itself as
the most successful investment strategy. Focus on buying stocks below their intrinsic worth.

2) STOCK PRICES - Stock prices are far more volatile than the underlying earnings or underlying
intrinsic value of the companies they represent. The key to long term returns is to buy stocks
when their prices have diverged significantly from their intrinsic value. In general, price is not
news. Focus on the underlying value offered in relation to the market price.

3) RISK - The Investment Masters see risk as the permanent loss of capital NOT volatility. This is
because it is permanent losses which impede the power of compounding.

4) VOLATILITY - Volatility is welcomed by the Investment Masters as it allows them to buy

companies at prices well below their intrinsic value. Market prices fluctuate far more than the

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prices of most things. Being able to take advantage of those low prices is one of the keys to
successful investment.

5) THE VALUE OF CASH - Unlike most mutual funds who are fully invested at all times, the
majority of the Investment Masters understand that having cash can allow you to take
advantage of weaker markets or to protect capital in times of market overvaluation. Don't be
afraid to hold cash if you can't find attractive investment opportunities.

21. FORECASTS

"I have never specialised in economic forecasting or market forecasting either. My own
business has largely been based on the principle that if you can make your results independent
of any views as to the future you are that much better off" Benjamin Graham 1955

“I have never professed to have a crystal ball that forecasts market direction” Daniel Loeb

"It is absurd to think that the general public can ever make money out of market forecasts."
Benjamin Graham

"Most forecasts don’t allow for alternative outcomes" Howard Marks

“The differences between forecasts are trivial relative to the difference between all
forecasts and what happens” John Kay

"We have two kinds of forecasters, those who don't know and those who don't know they don't
know." John Kenneth Galbraith

"I continue to believe that short-term market forecasts are poison and should be kept locked up
in a safe place, away from children and also from grown-ups who behave in the market like
children" Warren Buffett

“People have always had this craving to have someone tell them the future. Long ago, kings
would hire people to read sheep guts. There’s always been a market for people who pretend to
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know the future. Listening to today’s forecasters is just as crazy as when the king hired the guy
to look at the sheep guts. It happens over and over and over.” Charlie Munger

“My financial success stands in stark contrast with my ability to forecast events” George Soros

"I don't always have a notion of where the market's headed, but usually I do. I've found that
sometimes I'm right and sometimes I'm wrong. All in all, my calls are useless" Ralph Wanger

“When it comes to macro events, you can either predict or react. I’ve proven time and again
that my crystal ball is horrible, so my focus has to be on reacting to extremes in individual
securities by selling at high valuations and buying at low valuations.” Bruce Berkowitz

"I have resigned from the professional undertaking of coin-flipping. I am a student of

uncertainty. I have no idea where the stock market is going to be. So when I am creating trades
for my portfolio and my clients I am agnostic. I just want to enhance the probability that I make
money come what may" Hugh Hendry

“If I were to judge any of the best money managers, including myself, simply on the quality of
their long term predictions, including myself, both micro and macro, the rating would be
average at best” Michael Steinhardt

"My own investment philosophy has developed around the theory that prophecy reveals far
more about the frailties of the prophet than it reveals of the future" Warren Buffett

"I'd advise you to approach the entire subject of forecasts and forecasters with extreme
mistrust" Howard Marks

"Trying to predict the direction of the market over one year, or even two years is impossible"
Peter Lynch

“The only function of economic forecasting is to make astrology look respectable” John Kenneth
Galbraith

“I really have no ability to forecast gold prices. I have been in the business for 30 years, and it
occupies my mind day and night.” Peter Munk, chairman of Barrick Gold

"Amazingly investors often rely on interest rate forecasts and stock market predictions despite
overwhelming evidence that these have little or no value in predicting stock price moves" Chris
Davis

“We ignore outlooks and forecasts… we’re lousy at it and we admit it… everyone else is lousy
too, but most people won’t admit it.” Marty Whitman
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"Every year I talk to the executives of a thousand companies, and I can’t av oid hearing from the
various gold bugs, interest rate disciples, Federal Reserve watchers, and fiscal mystics quoted in
the newspapers. Thousands of experts study overbought indicators, oversold indicators, head
and shoulder patters, put-call ratios, the Fed’s policy on money supply, foreign investment,
movement of all the constellations through the heavens, and the moss on the oak trees and
they can’t predict markets with any useful consistency any more than the gizzard squeezers
could tell the Roman emperors when the Huns would attack." Peter Lynch

"When one is investing, one is dealing with the future. None of us - regardless of intellect have
actually been to the future, so we don't know what we are talking about" Hugh Hendry

"I have no use whatsoever for projections or forecasts. They create an illusion of apparent
precision. The more meticulous they are, the more concerned you should be. We never look at
projections, but we care very much about, and look very deeply at, track records. If a company
has a lousy track record, but a very bright future, we will miss the opportunity..." Warren
Buffett

"[Projections] are put together by people who have an interest in a particular outcome, have a
subconscious bias, and its apparent precision makes it fallacious. They remind me of Mark
Twain's saying, 'A mine is a hole in the ground owned by a liar.' Projections in America are often
a lie, although not an intentional one, but the worst kind because the forecaster often believes
them himself." Charlie Munger

"In both economic forecasting and investment management, it’s worth noting that there’s
usually someone who gets it exactly right… but it’s rarely the same person twice. " Howard
Marks

“The biggest lesson I learned was that it is very difficult to predict future market trends" John
Paulsen

"We don't do a lot of forecasting per se about where markets are going. I have been burned
enough trying" Peter Cundill

“Pundits forecast not because they know, but because they are asked.” John Kenneth Galbraith

"The first clue that should make you suspect that it's not going to be all that easy to foretell the
market's future is that all the prognosticators start with the same material but end up with
wildly different scenarios" Ralph Wanger

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"I am not in the business of predicting general stock market or business fluctuations. If you
think I can do this, or think it is essential to an investment program, you should not be in the
partnership" Warren Buffett 1966

"I don't believe in predicting markets. I believe in buying great companies - especially
companies that are undervalued, and/or under appreciated" Peter Lynch

"I have often argued that precise forecasting is a futile exercise anyway; Not only are the
predictions overwhelmingly incorrect, but what really matters is how much you stand to gain if
you are right and how much you stand to lose if you are wrong." Francois Sicart

"It all boils down to the following; figuring out if our miscalculations or misforecasts are on
balance more harmful than they are beneficial, and how accelerating the damage is" Nassim
Nicholas Taleb

"Accepting that we cannot predict the future - ie there will always be unexpected and highly
consequential events - is the first step to becoming less fragile and more adaptable. People
should be highly skeptical of anyone's, including their own, ability to predict the future and
instead pursue strategies that can survive whatever may occur" Seth Klarman

"We are decidedly agnostic when it comes to acting on the majority of forecasts for the
economy - in part because prognosticators are, at least in the short term not paid according to
the accuracy of their pronouncements. If they were, there would be no economists" Frank
Martin

"Old forecasts are like old news - soon forgotten - and pundits are almost never asked to
reconcile what they said with what actually happened" Philip Tetlock

"One of my greatest complaints about forecasters is that they seem to ignore their own
records. The amazing thing to me is that these people will go on making predictions with a
straight face, and the media will continue to carry them" Howard Marks

“What is surprising is that even the most sophisticated investors, traders and commentators
continue to rely on predictions issued by those who have no record of success at such
forecasts.” Paul Singer

"Why do we fall for such tricks and listen to market forecasters who are no better than
astrologers. Because the human mind is a pattern seeking mind. We are all descended from
people who are good pattern finders" Ralph Wanger

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“We always read “I think the stock market's going to go up." We never read "I think the stock
market’s going up, (and 8 out of my last 30 predictions were right) or "I think the stock market's
going to go up (and by the way I said the same thing last year and was wrong)." Can you
imagine deciding which baseball players to hire without knowing their batting averages? When
did you ever see a market forecaster's track record? “ Howard Marks

“All over the world, year after year, economic prognosticators of all nationalities make their
economic contributions to what can only be called a concert of prediction failure. In 1993, the
OECD analysed forecasts made between 1987 and 1992 by the governments of the US, Japan,
Germany, France, Italy, Canada as well as by the IMF and the OECD itself. Not only were each
of these organization’s predictions abysmally inaccurate, but they would have made better
predictions for inflation and GDP if they had scrapped their “sophisticated” economic models
and simply guessed that the numbers in each year would be unchanged from the last” Mark
Buchanan, Ubiquity - Why Catastrophes Happen

"If I tried to predict the short-term prices of almost any other commodity, or any currency, or
any market, I likely would be wrong about as often as I would be right" Ed Wachenheim

"Trying to predict market quotations – for a stock, a sector or the whole market – is futile. It is
astounding to see how many investment “professionals” continue to waste their time and
talent on an activity that has so many times proved its uselessness. And what is most surprising
is that many investors still continue to read almost religiously market forecasts. In Greek
mythology, Cassandra was condemned by Apollo to know the future but to be disbelieved when
she foretold it. Hence the agony of foreknowledge combined with the impotence to do
anything about it. Wall Street gurus are in the reverse situation: They don’t know the future but
they are often blindly believed when they foretell it." Francois Rochon

“I don’t know how to predict the stock market, I don’t know how to predict interest rates, I
don’t know how to predict business. All I know is if I buy the right kind of business at the right
price with the right people I’ll do well over time. In stocks it’s very hard to know when
something will happen and it’s very easy to know what will happen” Warren Buffett

"One would expect a successful method to yield firm predictions; but all my forecasts are
extremely tentative and subject to constant revision in the light of market developments.
Occasionally I develop some conviction and, when I do, the payoff can be substantial; but even
then there is an ever present danger that the course of events fails to correspond to my
expectations" George Soros

"Obviously you don't have to be able to predict the stock market to make money in stocks, or
else I wouldn't have made any money. I've sat right here at my Quotron through some of the
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most terrible drops, and I couldn't have figured them out beforehand if my life ha d depended
on it" Peter Lynch

"I think the financial community devotes far too much time and mental resources to its
constant efforts to predict the economic future and consequent stock market behaviour using a
disparate, and almost certainly incomplete, set of statistical variables. It makes me wonder
what might be accomplished if all this time, energy and money were to be applied to
endeavours with a better chance of proving reliable and practically useful" Peter Cundill

22. TURNING ON A DIME

“The market gods rule. We don’t understand what makes all the animal spirits wake up one day
and decide to sell all at once” Bernay Box

“The crowd madnesses recur so frequently in human history that they must reflect some deeply
rooted trait in human nature. Perhaps it is the same kind of force that motivates the migration
of birds or the mass performances of whole species of ocean eels. There seems to be a cyclical
rhythm in these movements. A bull market, for example, will be sweeping along and then
something will happen – trivial or important – and first one man will sell and then others will sell
and the continuity of thought toward higher prices is broken” Bernard Baruch

"I can calculate the motions of the heavenly bodies, but not the madness of people.” Isaac
Newton

“The psychology that allows bubbles to form always break, sometimes on a dime” Seth Klarman

“At one moment, the mood in one aspect of the market may be ebullient, while elsewhere it is
morose; the entire market gets swept along by a tide of emotion. Intellectual measures often
seem not to apply” Leon Levy

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"Ideas, tones, markets can go in one direction for so long supported by one concept - and on a
given moments's notice, and unpredictably, it may be over and replaced by a whole other
feeling and last another 20 years" Paul Singer

“When a change in trend is recognised, the volume of speculative transactions is likely to

undergo a dramatic, not to say catastrophic increase. While a trend persists, speculative flows
are incremental; but a reversal involves not only the current flow but also the accumulated
stock of speculative capital. The longer the trend has persisted, the larger the accumulation”
George Soros

"Market values are fixed only in part by balance sheets and income statements; much more by
the hopes and fears of humanity; by greed, ambition, acts of God, invention, financial stress
and strain, weather, discovery, fashion and numberless other causes impossible to be listed
without omission" Gerald Loeb

Securities prices rise and fall much more than profit, introducing considerable investment risk.
Why is that so? Primarily, I think, because of the dramatic ups and downs in investor
psychology” Howard Marks

“Booms and busts are not symmetrical because, at the inception of a boom, both the volume of
credit and the value of the collateral are at a minimum; at the time of the bust; both are at a
maximum” George Soros

“The farther prices rise above or fall below their fundamental value, the greater the store of
potential energy to be released in the resulting disequilibrium. Once the reversal process
begins, momentum develops and markets generally overact. Does [can?] a swinging pendulum
stop on a dime, at its position of balance between the two extremes?” Frank Martin

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23. PESSIMISM

“Our fears are always more numerous than our dangers” Lucius Annaeus Seneca|

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every
difficulty." Winston Churchill

"I've suffered a great many catastrophes in my life. Most of them never happened" Mark Twain

"When investing, pessimism is your friend, euphoria the enemy" Warren Buffett

“Whatever men attempt, they seem driven to try to overdo. When hopes are soaring I always
repeat to myself “Two and two still make four and no-one ever invested a way of getting
something for nothing". When the outlook is steeped in pessimism I remind myself, “two and
two still make four and you can’t keep mankind down for long” Bernard Baruch

“Could anyone really believe the earth was going to swallow up the incredible productive assets
and unlimited human ingenuity existing in America?” Warren Buffett

"We find it helpful to read historical writings in times of pessimism in order to keep current
events [2009] in perspective. Abraham Lincoln wrote in 1859: "It is said an Eastern monarch
once charged his wise men to invent him a sentence to be ever in view, and which should be
true and appropriate in all times and situations. They presented him the words: 'And this, too,
shall pass away.' How much it expresses! How chastening in the hour of pride! How consoling in
the depths of affliction!" Francois Rochon

“People are always predicting the end of the world, but the only things that end are the people;
the world keeps going” Arnold Van Den Berg

“One needs to be an optimist in times of maximum pessimism” Sir John Templeton

"The bear market is where I do well because I am an optimistic contrarian. If a lot of people
become pessimistic, I become bullish, and vice versa" Roy Neuberger
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“It is much easier to make money when the world is depressed, because when it stops being
depressed, it’s like a compressed spring that comes back.” Howard Marks

“Times of universal pessimism usually represent remarkable buying opportunities, and times of
buoyant optimism are often a clarion call to sell” Leon Levy

“In times of general market pessimism, this kind of “undiscounting” of some of the very finest
investments can reach rather extreme levels. When it does, it affords the patient investor, with
the ability to distinguish between current market image and true facts, some of the most
attractive opportunities common stocks can offer for handsome long term profits at relatively
small risk” Phil Fisher

“The most common cause of low prices is pessimism – sometime pervasive, sometimes specific
to a company or industry. We want to do business in such an environment, not because we like
pessimism but because we like the prices it produces. It’s optimism that is the enemy of the
rational buyer” Warren Buffett

"To have good opportunities of enrichment, we therefore need a climate of pessimism that
brings good businesses to prices well bellow their intrinsic value. The higher the pessimism and
related market fluctuations better are the opportunities to enrich ourselves . So the next time
someone asks you “does the stock correction affects you?” you can answer: “Certainly, it
improves my chances of getting richer”. Francois Rochon

“Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on
euphoria.” Sir John Templeton

"You can have cheap equity prices, or you can have good news, but you can’t have both” Leon
Cooperman

“When things look bleak there’s a great opportunity for everyone.” Mario Gabelli

“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is
the best time to sell." Sir John Templeton

"The skittish investor, no matter how intelligent, is always susceptible to getting flushed out of
the market by the brush beaters of doom" Peter Lynch

"Buy when most people .. including experts .. are pessimistic, and sell, when they are actively
optimistic" Ben Graham

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"Unhealthy investor behaviour typically leads to selling during periods of great pessimism and
leaping in at the top of bubbles. Such emotional decisions can wipe out years of gains achieved
through compounding" Chris Davis

"Skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is
excessive. But it also calls for optimism when pessimism is excessive" Howard Marks

"We are in agreement with Sir John Templeton who used to say he liked pessimism because of
the prices it produced" Frank Martin

"It sounds simple, but as anyone who has invested knows, moods are powerful, and it is not
easy to buy in a period of profound pessimism, even if your mind tells you a particular moment
could be the buying opportunity of the decade. For one thing, all your friends are doing the
opposite. For another, pessimism is based on plausible arguments. Although, you might tell
yourself the bottom is at hand, you can never know that for a fact. Playing the market is not a
science, and the market is not characterised by causal relationships. In the midst of panic, you
might tell yourself it is highly unlikely for the market to fall further, bu t you can never say it is
inconceivable. However tiny, this room for doubt is wide enough to permit fears to flow in and
paralyse the investor" Leon Levy

"The real opportunities in any market of common stocks will occur when it is the investors who
carry the pessimism" Michael Burry

"Our enthusiasm is negatively correlated with the mood of the markets; we like the price of fear
and uncertainty" Christopher Begg

"The error is clear. The herd applies optimism at the top and pessimism at the bottom. Thus,
to benefit, we must be sceptical of the optimism that thrives at the top, and sceptical of the
pessimism that prevails at the bottom" Howard Marks

"Because bad news sells, the media has a pessimistic bias. Over many years, a large percentage
of the severe problems predicted by the media never materialised, or proved to be far less
severe than predicted" Ed Wachenheim

"If you look at the shelf of market-wisdom books of the last quarter century you find that a
large number of them, and some of the most successful, have been those predicting imminent
disaster. They all predicted doomsdays that never arrived" Ralph Wanger

"Because it is new and unforeseen, the present crisis always looks worst than the previous ones.
I keep preciously old articles from 1962, 1974, 1982, 1987 and 1990 to remind myself how
gloomy the future looks in the depressive phases of the stock market." Francois Rochon
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24. WEAK MARKETS

“A down market lets you buy more shares in great companies at favourable prices. If you know
what your doing, you’ll make most of your money from these periods. You just won’t realise it
to much later” Shelby Davis

“Real investors should never feel bearish because the time to buy value is when markets go
down!” Thomas Kahn

“We see the latest correction not as a disaster, but as an opportunity to acquire more shares at
low prices. This is how great fortunes are made over time.” Peter Lynch

"Bear markets are great times to load up on stocks" Ralph Wanger

"I am a bear market buyer; I like to sell into market strength" Peter Cundill

"Since day one, I emphasized how inevitable stock market corrections are. I even wrote many
times that they were “partners” in our quest for superior returns. So, we should not fear them
but acknowledge right from the start that we will live through many corrections over the years.
We should even try to benefit from them as much as we can." Francois Rochon

“You need to have bad markets to set the stage for the 40% annual increases. If we had good
markets forever, I’d be dead” Peter Cundill

"Down cycles are not fun. But they form the basis for enormous future profitability.” Steve
Schwarzman

“Difficult markets help us succeed as investors. While claiming no predicitive ability to recognize
or time the next recession, we are not afraid of periods of slow business and weaker markets.
Only in adverse environments do owner-orientated companies with proven track records and
strong balance sheets sell at bargain prices. Tough times allow the prepared to attractively
deploy capital, setting the stage for future growth” Bruce Berkowitz

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“In recent weeks, investors have relearned a basic truth about markets – prices go down as well
as up. While emotionally taxing, down markets give us what we need to earn above average
returns – low prices for excellent businesses” Bruce Berkowitz

"Most investors take comfort from calm, steadily rising markets: roiling markets can drive
investor panic. But these conventional reactions are inverted. When all feels calm and prices
surge, the markets may feel safe; but, in fact, they are dangerous because few investors are
focussing on risk. When one feels in the pit of one's stomach the fear that accompanies
plunging market prices, risk-taking becomes considerably less risky, because risk is often priced
into an asset's lower valuation" Seth Klarman

“Stocks don’t read the paper or swoon in response to scary headlines. When they’re priced for
desperation they can rally in the face of desperation” The Davis Dynasty

“A stock market decline is as routine as a January blizzard in Colorado. If you’re prepared, it

can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors
who are fleeing the storm in panic” Peter Lynch

"For those properly prepared in advance, a bear market in stocks is not a calamity but an
opportunity" Sir John Templeton

“Investors have no reason to feel bearish. True value investors are glad the markets are down.”
Irving Kahn

“We have this saying: The worst things get, the better they get. When things are bad, they go
up.” David Tepper

"I'm very bullish when the market drops perceptibly because I feel it has already discounted any
troubles we are going to have" Roy Neuberger

“Invest in time of chaos, harvest in times of prosperity” Jonathon Sokoloff

“The best bargains are always found in frightening environments” Howard Marks

“Declining stock prices can ultimately cause people to panic and sell. But the moment they join
the panic and sell stock, they also relieve the cause of their fears and become potential buyers.
The act of selling removes the anxiety, restores equanimity, and gives them the cash to buy”
Leon Levy

“When things are bad, we’re going to parachute in and look” Scott Hood

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“The best time to buy stocks is when they are cheap. However, when stocks are at thei r
cheapest, there are usually a whole host of reasons not to buy them” Christopher Browne

“We’re very focussed on paying a cheap price, and that only comes about when there’s some
short term challenge” David Herro

“Our clients are often surprised to find that our biggest gains spring from buying up stocks
during their worst performance periods. It's after these downturns that committed investors
learn that market adversities often create great long-term benefits, and that it truly can pay to
ignore the crowd.” Bruce Berkowitz

“A market downturn doesn’t bother us. For us and our long-term investors, it is an opportunity
to increase our ownership of great companies with great management at good prices. Only for
short-term investors and market timers is a correction not an opportunity.” Warren Buffett

"We should not lament market downdrafts, but instead remain completely focussed on taking
advantage of them" Jim Mooney

“No one enjoys a sharp market downturn, with mark to market losses, growing panic and
economic dislocation. Yet a downturn is a necessary precursor to an upturn; the seeds of
recovery and eventually of substantial profit are sown amidst the carnage." Seth Klarman

"You know the prose : "Maintain buying reserves until current uncertainties are resolved," etc.
Before reaching for that crutch, face up to two unpleasant facts: The future is never clear; you
pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of
long-term values" Warren Buffett

"My philosophy is that life if not about waiting for a storm to pass. It is about dancing in the
rain. One usually can read a weather map and reasonably predict when a storm will pass. If
one waits for the moment when the sun breaks out, there is a high probability o thers already
will have reacted to the improved prospects and already driven up the price of the stock - and
thus the opportunity to earn large profits will have been missed" Ed Wachenheim

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25. TIPS

“Beware of barbers, beauticians, waiters – or anyone – bringing gifts of inside information or

‘tips’” Bernard Baruch

"Avoid inside information as you would the plague" Philip Carret

“With enough inside information and a million dollars, you can go broke in a year” Warren
Buffett

“When somebody is trying to give you information that might be a problem – what you want to
do is shut your ears because it sounds like inside information and firstly might get you into
trouble and almost invariably it is wrong, so ignore it as best you can. If necessary say “don’t
talk to me anymore” Peter Cundill

“I urge you always to keep a little notebook with you. Jot down interesting market information;
thoughts that maybe helpful in the future; ideas that may be re-read from time to time; little
personal observations you have made on price movements. On the first page of this little book I
suggest you write – no, better print- it in ink: Beware of inside information …. All inside
information” Jessie Livermore

“I will never use inside information or seek it out. I do implicitly believe in Sir Simund Warburg’s
adage, 'All you get from inside information is a whiff of bad breath'” Peter Cundill

“Don’t buy on tips or for a quick move.” Walter Schloss

“Never invest solely on a tip. Why, that’s obvious, you might say. It is. But you would be
surprised how many investors, people who are well educated and successful, do exactly this.
Unfortunately, there is something psychologically compelling about a tip. It’s very nature
suggests inside information, a way to turn a fast profit” Sir John Templeton

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"You’re not going to win by trying to get what the next tip is – what’s going to be good and
what’s going to be bad. You’re definitely going to lose.” Ray Dalio

“I go cold when someone tips me on a company. I like to start with a clean sheet: no one’s
word. No givens. I’m more comfortable where there are no brokers looking over my shoulder”
Peter Cundill

"To the rash and impetuous stock picker who chases hot tips and rushes in and out of his
equities, an "investment" in stocks is no more reliable than throwing away paychecks on the
horse with the prettiest mane, or the jockey with the purple silks" Peter Lynch

Tutorial 21-25 Recap

1) FORECASTING - The Investment Masters understand the folly of forecasts. Do not rely on
economic, FX, stock market, commodity or interest rate forecasts to underpin your investment
decisions. Base your investment decisions on price versus intrinsic value. The next time a
financial commentator or stock market guru provides a forecast ask for their forecasts from t he
previous five and ten years. The difference between the Investment Masters and market
forecasters is skin in the game!.

2) TURNING ON A DIME - markets can turn abruptly in unexpected ways. This tends to be a
result of crowd psychology which can cause prices to deviate significantly from intrinsic value.

3) PESSIMISM - the best time to BUY stocks is when investors are pessimistic as it is more likely
the bad news has been discounted into the prices of stocks.

4) WEAK MARKETS - Weak markets provide the opportunity to buy quality stocks at cheap
prices. The higher a market trades the more likely future returns will be weak and vice versa.
In almost all situations outside financial markets people like to buy things when they are on
sale. Investors take the reverse approach. They should buy their stocks like their groceries,
when they are on sale.

5) TIPS - the Investment Masters don't rely on tips. You don't need investment tips to produce
attractive long term compound returns.

26. CIRCLE OF COMPETENCE

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“It makes sense that if you limit your investments to those situations where you are
knowledgeable and confident, and only those situations, your success rate will be very high.”
Joel Greenblatt

“If we have a strength, it is in recognizing when we are operating well within our circle of
competence and when we are approaching the perimeter” Warren Buffett

“When I stray out of my comfort zone I usually get my head handed to me on a platter” Peter
Cundill

"If you know nothing about at area and haven't studied the companies and the sector, stay away
from it" Roy Neuberger

“The game of investing is one of making better predictions about the future than other people.
How are you going to do that? One way is to limit your tries to areas of competence. If you try
to predict the future of everything, you attempt too much.” Charles Munger

“Dealing in a circle of competence, dealing with companies that you have the ability to
understand, being able to come up with a good analysis of a company’s value and earni ng
power, is fundamental.” Lou Simpson

If you have competence, you pretty much know it’s boundaries already. To ask the question [of
whether you are past the boundary] is to answer it. Charlie Munger

“You have to know what you know—your circle of competence.” Joel Greenblatt

“Don’t try to be a jack of all investments. Stick to the field you know best” Bernard Baruch

“If we can’t find things within our circle of competence, we won’t expand the circle. We’ll wait”
Warren Buffett

"Knowing you don’t know something is nearly as valuable as knowing it. The worst situation is
thinking you know something when you don’t" Ray Dalio
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“Investors who confine themselves to what they know, as difficult as that may be, have a
considerable advantage over everyone else” Seth Klarman*

“Most businesses that I look at are typically rejected within two or three minutes or even less.
They are rejected in two or three minutes for one of two reasons – they are either outside the
circle of competence or the quick look at the price, market cap and such doesn’t make it
interesting. They either are things that I don’t understand or they are things that don’t seem to
be cheap by any measure that I would have an interest in.” Mohnish Pabrai

“You don’t have to be an expert on every company, or even many. You only have to be able to
evaluate companies within your circle of competence. The size of that circle is not very
important; knowing its boundaries, however, is vital.” Warren Buffett

"One of the lessons I took from Warren Buffett years ago was to define areas you're
comfortable with and stick to them" Thomas Russo

"Circle of competence essentially comes down to whether we understand the business. There
are several sub-questions under than; Do we know the right people in the industry? How well
do we understand the products and customer decision making process? Are there unanalyzable
things that could have a big impact?" James Chrichton

"The most important thing in terms of circle of competence is not how large it is but how well
you define the parameter. If you know where your edges are, you are way better off than
somebody who has a circle five times as large but is very fuzzy about the border" Warren
Buffett

"It's not how big your circle of competence is - it's more about how well you know the stuff in
your circle" Mohnish Pabrai

"You have to be an expert in what you invest in. You need to understand why you are invested.
If you don't understand why you are in a trade, you won't understand the right time to sell,
which means you will only sell when the price action scares you. Most of the time when the
price action scares you, it is a buying opportunity, not a sell indicator" Martin Taylor

"Investors stumble when they get bull-headed or when they shift to doing something that is
outside of their core competencies" Sam Zell

"A policy judgement that was wrong for me engendered quite a different kind of mistake, and
one which did cost a significant amount of dollars. My mistake was to project my skill beyond
the limits of experience. I began investing outside the industries which I believe I thoroughly
understood, in completely different spheres of activity; situations where I did not have
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comparable background information.. An analyst must learn the limits of his or her competence
and tend well the sheep at hand" Phil Fisher

"The beauty of the stock market is that it gives us the luxury to avoid sectors and/or businesses
that are outside our circle of understanding" Mohnish Pabrai

"It's also important to never be satisfied with anything, including your circle of competence.
One of the things you should always be doing with your circles of competence is see if you can
push it a little bit more, because the world changes" Thomas Gayner

27. PERFORMANCE IN DOWN MARKETS

“A market downturn is the true test of an investment philosophy” Seth Klarman

“I feel the most objective test as to just how conservative our manner of investing is arises
through evaluation of performance in down markets” Warren Buffet

“True managers need to be tested in multiple business cycles to prove their compound annual
return is consistent over long periods of time” Thomas Kahn

"I have consistently told partners that we expect to shine on a relative basis during minus years
for the Dow, whereas plus years of any magnitude may find us blushing" Warren Buffett,
Partnership Letter 1962

“If you run your portfolio to be fine in an upward market, if you're in the game, you will have
exposures that you wish you didn’t have in a worse market” Seth Klarman

"The other characteristic I look for in a money manager is when I look at their record, I
immediately go to the bear markets and see how they did. I want to make sure I've got a
money manager who knows how to make money and manages money in turbulent times, not
just bull markets" Stan Druckenmiller

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“Good long-term performance results from beating the market in bad times. Caution should not
be seasonal.” Christopher Browne

“As money managers we have to build portfolios that can survive all environments – neutral,
positive, negative ... and worst-case.” Zeke Ashton

“Because ensuring the ability to survive under adverse circumstances is incompatible with
maximising returns in the good times, investors must choose between the two” Howard Marks

“Outperform the market in bad times” Julian Robertson

"The cost of performing well in bad times can be relative underperformance in good times."
Seth Klarman

“We would rather underperform in a huge bull market than get clobbered in a really bad bear
market” Seth Klarman

"We truly believe the key to investment success is losing less than the market during declines -
losing small is more important that winning big. The math works and it keeps you in the game
when you should be" Brian Krawez

"The true investment challenge is to perform well in difficult times. It is unfortunately not
possible to reliably predict when those times might be. The cost of performing well in bad
times can be relative underperformace in good times. We have always judged that a
worthwhile price to pay" Seth Klarman

"I have pointed out that any superior record which we might accomplish should not be
expected to be evident by a relatively constant advantage in performance compared to
average. Rather it is likely that if such an advantage is achieved, it will be through better-than-
average performance in stable or declining markets and average, or perhaps even poorer-than-
average performance in rising markets" Warren Buffett, Partnership letter 1960

"I expect bear markets to be most favourable for the fund in terms of relative performance.
Generally speaking, this means I expect the fund will fall less than the market in a bear market.
Similarly, I expect that in the event of a general bull market in stocks, the fund will not shine so
brightly in terms of relative performance., The math of investing would favour the fund,
however, over several bull and bear market cycles because, on a percentage basis, lost dollars
are simply harder to replace than gained dollars are to lose. The emphasis will always be
placed first on preventing the permanent loss of capital, and good results should follow"
Michael Burry

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"When the market goes up, I try to capture 70 to 80 percent of the move, and when the market
goes down, I try to lose only 30 or 40 percent of it" Martin Taylor

"There is a time when it's essential that we beat the market, and that's in bad times. Our goal is
to generate performance that is average in good times (although we'll accept more) and far
above average in bad times. If in the long run we can accomplish this simple feat (which time
has shown isn't simple at all), we'll end up with (a) above-market performance on average, (b)
below-market volatility, (c) highly superior performance in the tough times, helping to combat
people's natural tendency to "throw in the towel" at the bottom, and thus (d) happy clients.
We'll settle for that combination" " Howard Marks

28. INDEXING - HUGGING

"Any program which involves complete investment of all capital at all times is not apt to be the
most successful one" Gerald Loeb

“You can understand why many succumb to the pressure to “hug” the index, so to speak. But
we believe if you go down the road of trying to make sure you’ll never do much worse than the
index, you’re almost insuring that you’ll never do well enough to justify your compensation as
an active manager” Bill Nygren

"Both closet indexing and shooting for the stars are exposing financial planners’ clients to
undue risk. Both are a result of benchmark tyranny.” Jean Marie Elliellard

“Money managers motivated to outperform an index or a peer group of managers may lose
sight of whether their investments are attractive or even sensible in an absolute sense” Seth
Klarman

“Passive investors, benchmark huggers and herd followers have a high probability of achieving
average performance and little risk of falling far short” Howard Marks

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“The pressure to retain clients exerts a stifling influence on institutional investors. Since clients
frequently replace the worst-performing managers [and since money managers live with this
fear], most managers try to avoid standing apart from the crowd. Those with only average
results are considerably less likely to lose accounts than are worst performers. The result is that
most money managers consider mediocre performance acceptable” Seth Klarman

“[With] closet indexing….you’re paying a manager a fortune and he has 85% of his assets
invested parallel to the indexes. If you have such a system, you’re being played for a sucker.”
Charlie Munger

“At the extreme, if everyone practised indexing, stock prices would never change relative to
each other because no one would be left to move them” Seth Klarman

“No matter how diverse the companies in an index are, if the indices themselves dominate the
market, then all the securities in the index do indeed share one fateful “shadow” correlation.
They are all members of the index, and it is the index, not the companies, that the market is
trading” Andy Redleaf

“When everybody indexes, the 500 stocks will remain unchanged relative to each other” Gary
Helms

“I think the reason why we got into such idiocy in investment management is best illustrated by
a story that I tell about the guy who sold fishing tackle. I asked him, “My God, they’re purple
and green. Do fish really take these lures?” And he said, “Mister, I don’t sell to fish.” Charlie
Munger

“Stocks trade up when they are put in an index. So index buyers are overpaying just because a
stock is included in an index. I am much more inclined to buy a stock that has been kicked out
of an index because then it may have value characteristics – it has underperformed.” Seth
Klarman

“You have to strike the right balance between competency or knowledge on the one hand and
gumption on the other. Too much competency and no gumption is no good. And if you don’t
know your circle of competence, then too much gumption will get you killed. But the more you
know the limits to your knowledge, the more valuable gumption is. For most professional
money managers, if you’ve got four children to put through college and you’re earni ng
$400,000 or $1 million or whatever, the last thing in the world you would want to be worried
about is having gumption. You care about survival, and the way you survive is just not doing
anything that might make you stand out.” Charlie Munger

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“The percentage of assets under management with active share less than 60% went from 1.5%
in 1980 to 40% today” Michael Maubousssin

"Share prices fluctuate more widely than values. Therefore, index funds will never produce the
best total return performance" Sir John Templeton

"Closet indexing is far more comfortable than being wrong but it is certain to produce subpar
returns" Christopher Parvese

"Even indexes can be victims of bubbles.. at certain times, an index is not a conservative
investment" Chris Browne

29. ABSOLUTE RETURN

“An absolute-performance orientation is consistent with loss avoidance, a relative performance

orientation is not” Seth Klarman

“Relative returns are important, but absolute returns are ultimately what can be spent” Larry
Pitkowsky

"Our primary focus is on absolute value versus relative value. Because we are focussed on
absolute returns, we will hold cash in the absence of values and an appropriate margin of
safety" Arnold Van Den Berg

"Most of the professional investor army goose-step to the relative-return cadence and we,
though not out of unthinking conformity, to the absolute-return one." Frank Martin

"I am relatively insensitive to market benchmarks, and I opt toward moderate, safe, absolute
returns" Michael Steinhardt

“Real people live in the absolute world. We spend absolute dollars. If I sent my clients a relative
performance orientated letter—“Dear Client, we are pleased to report that we beat the market
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this year by 300 basis points; the market declined 43% for the year but we onl y lost 40% of your
net worth” – I don’t think any of them would be thrilled” Seth Klarman

“Our job is to pile up yearly advantages over the performance of the Dow without worrying too
much whether the absolute results in a given year are a plus or minus. I would consider a year
in which we were down 15% and the Dow declined 25% to be much superior to a year when
both the partnership and the Dow advanced 20%” Warren Buffett, Partnership letter

“We don’t want only to beat the indices, we also want to have absolute positive returns”
Mohnish Pabrai

"We consider ourselves to be ‘absolute-return’ investors and do not compare our results to
long-only indices. That means our goal is to try to achieve positive results over time regardless
of the environment…. In assessing an investment opportunity, a relative return investor asks
“Will this investment outperform my benchmark?” In contrast, an absolute return investor asks,
“Does the reward of this investment outweigh the risk?” This leads to a completely different
analytical framework. As a result both investors might look at the same situation and come to
opposite conclusions” David Einhorn

“Because ensuring the ability to survive under adverse circumstances is incompatible with
maximising returns in the good times, investors must choose between the two” Howard Marks

"We have said before and will repeat here that you do not really need Baupost to invest your
money in bull markets. An index fund could likely perform better. The true investment
challenge is to perform well in difficult times. It is unfortunately not possible to reliably predict
when those times might be. The cost of performing well in bad times can be relative
underperformance in good times. We have always judged that a worthwhile price to pay’” Seth
Klarman

"One thing that brings my blood to a boiling point is when an absolute return guy starts talking
about his return relative to anything. My response was, ‘You are not relative to anything, my
friend. You can’t be in the relative game just when it suits you and in the absolute game just
when it suits you. You are in the absolute return game, and the fact that you use the word
relative means that I don’t want you anymore’” Michael Platt

“If more institutional investors strove to achieve good absolute rather than relative returns, the
stock market would be less prone to overvaluation and market fads would less likely be carried
to excess” Seth Klarman

“We don’t try to be anyone’s best performing manager in a given year because such an attempt
would almost certainly fail. It would distract us from our focus on risk-aversion and the pursuit
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of excellent long term results, while shifting our attention towards quick gains, short -term
trades and market momentum” Seth Klarman

“We study companies and try to find undervalued securities… We’re absolute value investors
focusing on asset values, book value discounts and low price to earnings ratios to normalized
earnings. And we aren’t interested in so-called relative values — you know, something selling at
20 times earnings in an industry group with a 35 multiple.” Thomas Graham Kahn

"We seek to earn a solid, average absolute return by rational means, avoiding the mythological
sirens' call to follow the relative-return crowd" Frank Martin

"The trouble with institutional investors is that their performance is usually measured relative
to their peer group and not by an absolute yardstick. This makes them trend following by
definition" George Soros

"Our goal is to generate good absolute returns with limited downside risk over time" Seth
Klarman

30. HOME-RUNS

“For an investor who had a gross return of over 30% per year for 28 years, the number of
‘home-runs’ – shares we had doubles or triples or more – in this period were surprisingly few.
My gains were earned the hard way. I would kiddingly repeat ‘our investment style is four yards
up the middle in a cloud of dust’” Michael Steinhardt

“There were no home-runs and no strike outs, few singles and doubles and occasional triples”
Frank Martin

"The key to investment success isn't hitting home runs; it's avoiding the strike outs and inning-
ending double plays" Howard Marks

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"Real investment success is much more the product of minimizing losses than it is hitting “ home
runs" Scott Fearon

“As an investor, I’m not a home-run hitter and can’t think of a lot of securities on which I’ve
made ten times my money. But I also can’t think of a lot of securities, post -1970 on which I’ve
lost a meaningful amount of capital. It’s not really much more complicated than that” Spencer
Davidson

“In the end, our success is driven by making many good decisions rather than depending upon a
few big home-runs. In the long run, we believe this approach creates a more sustainable
investment model.” Lee Ainslee

“Being a high-risk, high return investor is in my opinion like operating on the high wire without a
net. You can do it spectacularly .. for a little while” Howard Marks

“I don’t think many investment managers’ careers end because they fail to hit home-runs.
Rather, they end up out of the game because they strike out to often – not because they don’t
have enough winners, but because they have too many losers. And yet, lots of managers keep
swinging for the fences” Howard Marks

"Don't gamble, don't try to hit home-runs - it's a losing strategy, unless you're Soros, then
you're the exception" James Dinan

“If you base a fund’s growth or a clients future on one or two potential sky-rockets, you have to
be prepared to live with the misfires. And I simply can’t do that. I strive for consistency” Peter
Cundill

“Of the two ways to perform as an investor – racking up exceptional gains and avoiding losses –
I believe the latter is the more dependable” Howard Marks

“Over a full career, most investors’ results will be determined more by how many losers they
have, and how bad they are, than by the greatness of their winners. Skilful risk control is the
mark of the superior investor” Howard Marks

“Return maximization and ensuring survival are mutually exclusive. That is very important to
bear in mind” Howard Marks

"To explain their approach, the Managers [Canyon Partners] 2006 year end letter to clients
used the language of baseball.. Quoting George Will's Men at Work, they reminded investors
that baseball "involves constant attention to the law of cumulation, wh ich is a lot of little things
add up, through 162 games, 1,458 innings, to big differences. A 162-game season is like life, an

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exercise in cumulation. It's about getting on base often and hitting singles or doubles, rather
than setting out to hit a home-run every time and risking a lot more strike-outs" Katherine
Burtin

"We think hitting a homer once every hundred times at bat, with dozens of strike-outs in
between, will not get us an invitation to the Hall of Fame. We're content to concentrate on
singles and doubles." Frank Martin

"For most participants, success is likely to lie more dependably in discipline, consistency and
minimization of error, rather than in bold strokes -high batting average and an absence of
strikeouts, not the occasional, sensational home run." Howard Marks

“We don’t want to swing for the fences and go for home runs because that also raises the risk
of striking out.” Shelby M.C.Davis

Tutorial 26-30 Recap

1) CIRCLE OF COMPETENCE - the Investment Masters stay within their circle of competence. It's
important to invest in stocks you can understand and where you can have an edge. Investing in
assets you don't understand tends to lead to trouble.

2) PERFORMANCE IN DOWN MARKETS - The Investment Masters focus more on their

performance in down markets than outperformance in strong markets. Given the asymmetric
nature of losses versus profits, you will compound returns at a much higher return if you
protect capital in weak markets. The cost of this protection maybe underperformance in strong
markets, a worthwhile price to pay. This is in contrast to most investors who focus as much on
beating the markets when they are weak or strong.

3) INDEX HUGGING - The Investment Masters prove that active value managers can outperform
over time. Investors often overlook the fact that stock markets can go for decades without
positive returns. Index funds have NO mandate to protect capital or compound returns, the
two keys to long term successful investment. None of the Investment Masters have joined the
Hall of Fame by investing in the index.

4) ABSOLUTE RETURNS - Absolute returns are the only benchmark consistent with the Number
1 rule of investing - don't lose money. Once again it is the asymmetric nature of losses versus
profits that means losing less will increase returns over the long run. As stated above, stock
markets can go for decades without positive returns. Being in an index fund and selling during
these times can lead to a loss of capital.

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5) HOME RUNS - The Investment Masters have tended to achieve their returns slowly over time
rather than by hitting home runs. Home runs tend to require very concentrated risky bets
where mistakes can be very costly. If you can compound capital at 10%+ over the long term
you will make a significant amount of money.

31. KEEPING STOCK VALUATIONS SIMPLE

"In 44 years of Wall Street experience and study I have never seen dependable calculations
made about common stock values, or related investment policies, that went beyond simple
arithmetic or the most elementary algebra. Whenever calculus is brought in, or higher algebra,
you could take it as a warning signal that the operator was trying to substitute theory for
experience" Ben Graham

"Simplicity or singleness of approach is a greatly underestimated factor of market success. As

soon as the attempt is made to watch a multiplicity of factors even though each one has some
element to justify it, one is only too likely to become lost in a maze of contradictory
implications.. the various factors involved may be so conflicting that the conclusion finally
drawn is no better than a snap judgement would have been" Garfield Drew, 1941

“Any attempt to value businesses with precision will yield values that are precisely inaccurate”
Seth Klarman

“We’d argue there’s a lot of false precision in our business and that the best investments don’t
require a financial model that goes out five significant digits” Ira Rothberg

"We never sit down, run the numbers out and discount them back to net present value ... The
decision should be obvious" Charlie Munger

“It is better to be approximately right, than precisely wrong” Warren Buffett

"There's no such thing as precise intrinsic value" Mohnish Pabrai

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"There are so many factors involved that it is never wise to attempt to judge intrinsic value to
the last eighth or even point" Phil Fisher

"Given that the future is inherently uncertain, we do not believe the value of any business can
be known with certainty at a given point in time, so our aim is to be generally right as op posed
to precisely wrong." Wally Weitz

"The cost of obsessing on precision is to often miss the forest for the trees" Frank Martin

“Having more information doesn’t necessarily improve decision-making. We know from studies
of horse racing than when handicappers receive more information about horses and riders,
they become proportionately more confident even though they are no more likely to pick the
winner. When analysts have too much data, there’s a danger they won’t see the wood for the
trees” Marathon Asset Management

“Using precise numbers is, in fact, foolish: working with a range of possibilities is the better
approach” Warren Buffett

“When we think about intrinsic value, it is always a rough guess. In my mind, if I throw out a
number to you such as “I think intrinsic value for this stock is 100,” What I’m really saying, and
the way we internally use that statement is “it’s 100, give or take 10% to 15%. It might be 85, it
might be 115” It’s 100 with implied error bars around the statement." Ken Shubin S tein

“Charlie and I admit that we feel confident in estimating intrinsic value for only a portion of
traded equities and then only when we employ a range of values, rather than some pseudo -
precise figure” Warren Buffett

“It is easy to confuse the capability to make precise forecasts with the ability to make accurate
ones” Seth Klarman

“I’ve found most of our investments I can summarize in a sentence” Glenn Greenberg

" The truly big investment idea can usually be explained in a short paragraph" Warren Buffett

“Keep it simple. Your thesis should be on the back of a postcard if it’s right.” Bruce Berkowitz

“In depth information does not mean indepth profits” Dave Dreman

"In general, I haven't run spreadsheets and I find that, if there is a need to run a spreadsheet,
that is a red flag to take a pass" Mohnish Pabrai

“Never invest in any idea you can't illustrate with a crayon” Peter Lynch
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“Conservative forecasts can be more easily met or exceeded. Investors are well advised to make
only conservative predictions and then invest only at a substantial discount from the valuations
derived therefrom.” Seth Klarman

“I think analysts spend too much time building models and being myopic in they don’t spend
enough time trying to take a broader perspective” Michael Karsch

“Businesses, unlike debt instruments, do not have contractual cash flows. As a result, they
cannot be precisely valued as bonds” James Montier

“The essential point is that security analysis does not seek to determine exactly what is the
intrinsic value of a given security. It need only establish that the value is adequate” Ben Graham

“Several difficulties confront growth-orientated investors. First such investors frequently

demonstrate higher confidence in their ability to predict the future than warranted”. Seth
Klarman

“An unresolved contradiction exists: to perform present value analysis, you must predict the
future, yet the future is not reliably predictable” Seth Klarman.

“If modest changes in assumptions cause a substantial change in NPV, investors would be
prudent to exercise caution in employing this method of valuation” Seth Klarman

“Investment experts continue to be convinced that their major problems could have been
handled if only those extra few necessary facts had been available. They thus tend to overload
themselves with information, which usually does not improve their decisions but only makes
them more confident and more vulnerable to serious errors”. Dave Dreman

“The value of in-depth fundamental analysis is subject to diminishing marginal returns” Seth
Klarman

“The most elegant valuation spreadsheet in the world won’t be worth much if you don’t
understand and account for the bigger-picture influence on a company's business” David Iben

"I think it is not how sophisticated you are in your valuation model, but how well you know the
business and how well you assess its competitive advantage. This cannot be modelled
mathematically, but has more to do with the investor's own experience" Francisco Garcia
Parames

"We try to avoid investing in businesses where an exogenous event can completely rewrite your
spreadsheet." Gregg Powers

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"There are only a few things you have to get right about a company for it to be successful
investment. Our view is that if you can get 85% of the way there by answering the big
questions, don't waste your time on the last 15% because the marginal utility isn't worth it"
Steve Morrow

“A key rule in investing is that you don’t necessarily need to understand a lot of different
things at any given time, but you need to understand the one thing that really matters” Dan
Loeb

"I always try to use a no brainer test where I should be able to write down within a
paragraph exactly why a particular investment will work out and what are the factors that will
drive the result. I write a paragraph and keep it. If I cannot articulate in that type of format,
then I leave it alone" Mohnish Pabrai

"We don’t use DCF – there are too many variables." Thomas Schrager

"If you can't figure it out on the back of an envelope, a big spreadsheet model is not going to
give you the right answer" William Martin

"We’ve always done very well when we can use sixth-grade math on the back of a postcard to
show how inexpensive something is relative to its free cash. Once we start getting more
sophisticated – trying to prove something rather than see if we can disprove it by killing the
business – we get into trouble." Bruce Berkowitz

"Calculations of intrinsic value, though all-important, are necessarily imprecise and often
seriously wrong. The more uncertain the future of the business, the more possibility there is
that the calculation will be wildly off-base." Warren Buffett

"Historical experience teaches that valuation is not an exact science; the variability of multiples
even over short periods makes something of a mockery of the idea of fixed target prices. It is
far more realistic to have a range in mind for what a business can be worth" Marathon Asset
Management

"Spreadsheets make everything look linear and controlled, but the real world oscillates,
overshoots, collapses and rebounds. A company with operational and financial flexibility - what
we mean by staying power - is able to exercise options that are quite valuable at different
points in the cycle. Without the firm handle on that flexibility that credit analysis provides,
we'd argue you can't fully understand the wealth creation process as an equity investor"
Mitchell Julis

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"I use a very simple calculator: plus, minus, divide, multiply - that's it" Francisco Garcia
Parames

"A person infatuated with measurements, who has his head stuck in the sand of the balance
sheet, is not likely to succeed" Peter Lynch

"The simpler the investment thesis, in general, the more money you'll make" Mohnish Pabrai

"Avoid over-relying on numbers and models. Investors often feel comfortable with numbers and
models because they appear definitive. However, they can be misleading because they often
are based on historical data that may not be repeatable or are based on assumptions that may
not prove valid. We need numbers and models, but their utility should be paired with judgment
and common sense" Ed Wachenheim

“Warren often talks about these discounted cash flows, but I’ve never seen him do one. If it
isn’t perfectly obvious that it’s going to work out well if you do the calculation, then he tends to
go on to the next idea.” Charlie Munger

"In general I would say it is better not to have a whole bunch of precise DCF's going out 15
years and then coming up with some value. You are better off saying the bank's at half book
value. For various reasons, the book value is solid. For various reasons, book value will grow
and that long term it will trade at the premium book value. Then, leave it at that". Mohnish
Pabrai

"When it comes to using discounted cash flows I have a firm view. I was reading some work and
it used discounted cash flows and some sophisticated stuff and I am not good enough at math to
be able to work out that kind of stuff and I have sort of come back in my simple way to Graham
who said it you can't add it, subtract it, multiply or divide it, then the math is too heavy. And
the problem with this kind of cash flow is that it is simply a projection and, whatever the rate
you choose to use, that will almost certainly shift on you. So you are trying to make two
imprecise variables into a precise tool and that could get you into a whole mess of trouble"
Peter Cundill

"Investment models encourage anchoring. Most models are calibrated to produce a current
value for a company within a reasonable range of the current price. Another wrinkle is the
discount rates. If you don’t accept that historical volatility (beta) is a good measure of risk
(which we do not), then it’s not clear how to calculate the appropriate discount rate. At
Marathon, we believe that detailed forecasting adds little value". Marathon Asset
Management

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"I agree with Warren to keep is simple and not use higher mathematics in your analysis" Walter
Schloss

"Going for too much certainty can hold you back – there is no certainty. A lot of it is weighing
probability, a lot is judgement, and a lot less is number crunching and multi-variable modelling. I
have seen so many cases where there is a complex model that is exactly wrong. This focus on a
model may cause you to move away from thinking about the competitive advantages of the
business. Then you are making decisions based on all these numbers rather than thinking about
whether this is one of the ten businesses that you would like to own." Glenn Greenberg

"In my mind, if things cannot be explained simply, that is a signal that you should start to dig
because things in general shouldn’t be convoluted or complex. When someone explains a
business or an investment thesis to me, and it can’t be explained to a 10th grader in a
paragraph or less, that’s a bad sign." Marc Cohodes

“It’s not about the numbers. For most investments the factors that will drive long term success
don’t have much to do with spreadsheets. They have to do with something other, either
understanding human nature or understanding nuances about how certain aspects of how
things work rather than running spreadsheets” Mohnish Pabrai

"In my life there are not many questions I can't properly deal with using my $40 adding machine
and dog-eared compound interest table" Charlie Munger

"I revise models frequently because my initial models rarely are close to being accurate. Usually,
they are no better than directional. But they usually do lead me in the right direction, and,
importantly the process of constructing a model forces me to consider and weigh the central
fundamentals of a company that will determine the company's future value." Ed Wachenheim

"I'm very much a believer in Peter Lynch's old dictum that a good stock idea can be written on
the back of a matchbox cover" Shad Rowe

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32. MARGIN OF SAFETY

“Confronted with a challenge to distil the secret of sound investment into three words, we
venture the motto, Margin of Safety” Ben Graham

“In the final chapter of the 'Intelligent Investor' Ben Graham forcefully rejected the dagger
thesis; “Confronted with a challenge to distill the secret of sound investment into three words,
we venture the motto, Margin of Safety.” Forty two years after reading that, I still think those
are the right three words.” Warren Buffett

"The idea of a margin of safety, a Graham precept, will never be obsolete" Charlie Munger

"The three most important words in investing -- "margin of safety" and the four most dangerous
-- "this time is different." Frank Martin

“Low price is the ultimate source of margin for error” Howard Marks

“Is there a sufficient margin of safety?” Bruce Berkowitz

“Most of the top ranked business schools around the world do not understand margin of safety.
For them, low risk and low returns go together as do high risk and high returns. Ove r a lifetime,
we all encounter scores of low-risk, high return bets. They exist in all facets of life. Business
schools should be educating their students on how to seek out and exploit these opportunities”
Mohnish Pabrai

“The best investments have a considerable margin of safety. This is Benjamin Graham’s concept
of buying at a sufficient discount that even bad luck or the vissitudes of the business cycle
won’t derail an investment. As when you build a bridge that can hold 30 -ton trucks but only
drive ten-ton trucks across it, you would never want your investment fortunes to be dependent
on everything going perfectly, every assumption proving accurate, every break going your way.”
Seth Klarman

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“We only want to buy when we can pay less than 60% of a conservative appraisal of a
company’s value, based on the present value of future free cash flows, current liquidation value
and/or comparable sales…. trying to create a big margin of safety” Mason Hawkins

"There is no investment rule that remains immutable except the margin of safety. There are
always breaks and the trick is to begin to anticipate, if you can, where the break points will be
and shift. Not the disciplines and not the framework but the tactics that are involved. " Peter
Cundill

“No matter how wonderful [a business] is, it’s not worth an infinite price. We have to have a
price that makes sense and gives a margin of safety considering the normal vicissitudes of life.”
Charlie Munger

"The concept of a margin of safety is that an investor should purchase a security at a price
sufficiently below his estimate of its intrinsic value that he will have protection against
permanent loss even if his estimate proves somewhat optimistic. An analogy is an investor
standing on the 10th floor of a building, waiting for an elevator to carry him to the lobby. The
elevator door opens. The investor notices that the elevator is rated for 600 pounds. There
already are two relatively obese men in the elevator. The investor estimates their weights at
about 200 pounds each. The investor knows that he weighs 175 pounds. The investor should
not enter the elevator. There is an inadequate margin of safety. Maybe he underestimated
the weights of the two obese men. Maybe the elevator company overestimated the strength of
the elevator’s cable. The investor waits for the next elevator. The door opens. There is one
skinny old lady in the elevator. The investor says hello to the lady and enters the elevator. On
his ride to the lobby, he will enjoy a large margin of safety." Ed Wachenheim

“Purchasing a business at a price that provides reasonable assurance of a generous margin for
error is an erudite way of saying to ourselves, ‘Buy low, stupid’” Frank Martin

“There is no margin of safety in top-down investing” Seth Klarman

"A margin of safety gives you an edge over just blindly buying stocks or an index fund" Chris
Browne

“The function of margin of safety is, in essence, that of rendering unnecessary an accurate
estimate of the future” Ben Graham

“Margin of safety for us comes from the quality of the business and second from buying into it
at a substantial discount to our estimate of intrinsic value. Neither is sufficient on its own for us
to be interested” Mark Curnin
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“The greater the margin of safety implicit in a deeply depressed market or stock, the less the
risk and the greater the expected return” Frank Martin

"Always keep a large margin of safety, even if you're playing with house money" Joel Greenblatt

"Because we look for investments that have a healthy margin for error, a mis-judgment of
analysis is rarely a disaster. We don’t need much to go right in order to make money, and in
many cases we can get a lot wrong and still break even." David Einhorn

"You might want to give some thought to how you'll fare if the future doesn't oblige. In short,
what is it that makes outcomes tolerable even when the future doesn't live up to your
expectations? The answer is margin for error" Howard Marks

"If I pay too much upfront, I'd better understand everything there is to know ab out the
company since there is no margin of safety. If I invest when its undervalued, I can be wrong
about a whole host of issues and still make a good return" Guy Spier

"We take very much to heart Ben Graham’s notion of margin of safety and use what we believe
are demonstrably conservative assumptions. If you can do that and still conclude a business is
undervalued, that’s built-in margin of safety." Ken Burgess

“All my stock picking is 100% based on the concept of a margin of safety, as introduced to the
world in the book “Security Analysis,” which Graham co-authored with David Dodd. By now I
have my own version of their techniques, but the net is that I want to protect my downside to
prevent permanent loss of capital." Michael Burry

"We insist on a margin of safety in our purchase price. If we calculate the value of a common
stock to be only slightly higher than it's price, we're not interested in buying. We believe this
margin of safety principle, emphasised by Ben Graham, to be the cornerstone of investment
success" Warren Buffett

"We greatly doubt whether the man who stakes money on his view that the market is heading
up or down can ever be said to be protected by a margin of safety in any useful sense of the
phrase… Thus, in sum, we say that to have a true investment there must be present a true
margin of safety. And a true margin of safety is one that can be demonstrated by figures, by
persuasive reasoning, and by reference to a body of actual experience." Benjamin Graham

“We have to be comfortable buying in at a valuation that provides us with a margin of safety,
irrespective of any activism we will attempt to initiate and that may be unsuccessful” Barry
Rosenstein

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"We insist on a margin of safety to minimize the effects of bad judgements and maximise the
results of good ones" Frank Martin

"To help minimize the risk of permanent loss, I look for a margin of safety in the stocks we
purchase" Ed Wachenheim

"Margin for error is a critical element in defensive investing. Whereas most investments will be
successful if the future unfolds as hoped, it takes margin for error to render outcomes tolerable
when the future doesn't oblige. An investor can obtain margin for error by insisting on tangible,
lasting value in the here and now: buying only when price is well below value; eschewing
leverage; and diversifying" Howard Marks

"The further off you get into the future, the greater your chances of misjudging what will
happen. Therefore, the greater the allowance needed for a possible margin of error the more
difficult it becomes to determine true value" Phil Fisher

33. PRIVATE MARKET VALUE

“We try to appraise every company in a way that reflects its private market value in a sale
today” Chris Mittleman

“If the price of the stock is well below what an intelligent owner would pay for the whole
business, the odds are strong that something good will happen with the stock” Wally Weitz

“The underlying principle is to arrive at what someone would pay in an arms-length

transaction to buy the business” Andrew Jones

“Value investing is a large-scale arbitrage between security prices and underlying business
value” Seth Klarman

“Generals - A category of generally undervalued stocks, determined primarily by quantitative

standards, but with considerable attention also paid to the qualitative factor. There is often

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little or nothing to indicate immediate market improvement. The issues lack glamour or market
sponsorship. Their main qualification is a bargain price, that is, an overall valuation on the
enterprise substantially below what careful analysis indicates its value to a private owner to be”
Warren Buffet [on the 3 investment categories of the partnership].

“We want to understand what a strategic buyer in the industry would pay for the assets and
why” Clyde McGregor

“We try to determine what a knowledgeable buyer expecting a reasonable return would be
willing to pay today, in cash, for the entire business. Our approach requires us to understand
the business – its strengths and weaknesses – rather than just the numbers. As investors have
learned, the numbers can’t always be trusted.” Jean Marie-Eveillard

“One of the approaches I take is to look for a stock in the public market that is selling at a
significant discount to private market value where I can identify catalysts for potential change”
Leon Cooperman

“Look at the prices paid in corporate mergers and acquisitions to find stocks that are selling at a
significant discount to what they are actually worth to aknowledgeable buyer” Christopher
Browne

“How do sophisticated private-market buyers themselves evaluate businesses for possible

purchase? In general, they make projections of free cash flow and then calculate the present
value of those cash flows, evaluating the impact of differing assumptions on valuation. In other
words they perform present value analysis.” Seth Klarman

“The big difference between private acquisitions and public equities is a negotiated transaction
versus the non-negotiated transaction. When I buy stocks in the public markets, I am dealing
with unintelligent sellers for the most part, or sometimes sellers that are very influenced by
psychology on market nuances” Mohnish Pabrai

"Investors must remember – although at the peak of emotion they sometimes forget – that
securities are fractional interests in, or claims on, businesses that have their own assets and
cash flows. They have (usually) ongoing business value and (at least hypothetically) a liquidation
value. The herd can irrationally lose sight of the underlying assets or long -term prospects of a
business when it focuses on price movements triggered by disappointing quarterly results of
the latest overheated social networking IPO." Seth Klarman

“We focus on what private market values are, particularly if there is an opportunity to realize
those values through either a financial or strategic transaction” Kevin Dreyer

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"In the core part of our business, we try to approach valuation as if we were buying the whole
company. If we were buying the whole company, would we be satisfied with the absolute return
that we could take out in the form of dividends and free cash flow" Chuck Royce

"There are two prices to stocks: the one using the stock market and the one you would get in a
private market transaction. You still want a 30% discount from that intrinsic valuation." Thomas
Schrager

"I‘d say a theme that runs throughout a lot of our portfolio holdings is the concept of public
market value versus private market value. About 95% of publicly traded companies have two
values. One is the auction market value, which is the price you and I would pay for one hundred
shares of a company. The other is the so-called private market value, which is the price a
strategic or financial investor would pay for the entire business. So one of the approaches I take
is to look for a stock in the public market that is selling at a significant discount to private
market value where I can identify catalysts for a potential change. " Leon Cooperman

"I saw an opportunity in the public markets to close what I saw as a gap between t he price at
which public companies were trading and what I felt their ultimateprivate market values were
worth. So not knowing anything about how a hedge fund works, I set up a hedge fund." Barry
Rosenstein

"The benefit of being a public investor is that you can typically acquire equity at a significant
discount to its intrinsic private market value (rather than a buyout premium), employ no
leverage (rather than 4x or often greater debt/EBITDA in an LBO), and still have an element of
constructive influence on the company." Russell Glass

"Growth in corporate intrinsic value is often obfuscated by stock price movement, which does
not appropriately track the accretion in business value. That’s good for all of us who are
appraisers of businesses, because it means you get more mispricing and better opportunity to
get a franchise at a cheap price." Mason Hawkins

"The whole notion of private market value with a catalyst was not that much different than the
way that I had looked at companies as an M&A banker." Kevin Dreyer

'We focus on what private market values are, particularly if there is an opportunity to realize
those values through either a financial or strategic transaction." Kevin Dreyer

"In an auction driven market you are likely to see more mispricing than in a private kind of
negotiated transaction environment" Mohnish Pabrai

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“What you do is identify a company in the public markets that is selling below a channel called
‘intrinsic private market value. We define Private Market Value (PMV) as the value an informed
industrialist would pay to purchase assets with similar characteristics. We measure PMV by
scrutinizing on- and off-balance sheet assets and liabilities and free cash flow. As a reference
check, we examine valuations and transactions in the public domain. Our investment objective
is to achieve an annual return of 10% above inflation for our clients. That gives you a margin of
safety, and help protect the downside by providing a cushion, because it is selling at a
significant discount to “private market value.” Mario Gabelli

"In step three, he [Shelby Davis] made a rough guess at the private market value of any
apparent opportunity. In other words, what would the company be worth if a larger company
decided to acquire it" The Davis Dynasty

"We view valuation in light of what a reasonable business person might pay - not too dissimilar
to what private equity, leveraged buyout, or control investors do" Marty Whitman

"Our valuation is always based on acquisition or going-private values, which are generally two
different numbers because a strategic buyer is typically able to pay a higher price" Gregg
Powers

"In a sense, value investing is a large-scale arbitrage between security prices and underlying
business value" Seth Klarman

"We approach valuation as a private owner would, meaning we determine what we would be
willing to pay for the expected cash flow stream from the business. If the share price is at a
sufficient discount to that value, we're interested" Robert Kleinschmidt

"When we buy a stock, we always think in terms of buying the whole enterprise because it
enables us to think as businessmen rather than stock speculators" Warren Buffett

“We are evaluating all alternatives in order to buy our equity at current prices to arbitrage the
differential between its current multiple and the private market value. These buybacks provide
a useful benchmark in evaluating other capital allocation options, including acquisitions” John
Malone

"We're focussed on valuing the business rather than just the stock. Underlying that is our
estimate of private market value, which is what an informed, rational investor would pay for the
entire company" John Rogers

"In essence, the [my] fund invested in companies that, as a result of detailed fundamental
analysis, were trading below their "intrinsic value"". The intrinsic value was defined as the price
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that a private investor would be prepared to pay for the security if it were not listed on a public
stock exchange" Peter Cundill

"A private market value model allows us to disaggregate business segments and uncover hidden
value.. Try to invest in companies you'd be happy to buy lock, stock and barrel at their current
price " Ralph Wanger

"At all times I strive to buy stock at prices per share that no acquirer could eve r pay for the
whole company - not because the prices are too high, but because the prices are so low that a
potential acquirer proposing them would be laughed out of the boardroom. Such is the
opportunity afforded by the very human market for common stocks." Michael Burry

34. TIME ARB

"Human nature desires quick results, there is a particular zest in making money quickly, and
remoter gains are discounted by the average man at a very high rate" John Maynard Keynes

“The single greatest edge an investor can have is a long-term orientation” Seth Klarman

“We arbitrage time horizons. Our time horizon is long while for other investors it’s short. When
they are panicking we must not panic” Chuck Royce

"We rely on concentrated research to identify great businesses that are trading at highly
discounted valuations because investors have over-reacted to negative macro or company
specific events. That's the time-arbitrage part of the strategy, taking advantage when the
market reacts to short-term factors that have little impact on long-term intrinsic values" Bill
Ackman

"One thing I think we would say is that we arbitrage time-horizons. Our time horizon is long
while for other investors it's short. When they are panicking we must not panic" Chuck Royce

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“Time-arbitrage just means exploiting the fact that most investors - institutional, mutual funds
or hedge funds - tend to have very short-term horizons, have rapid turnover or are trying to
exploit very short term anomalies. So the market looks extremely efficient in the short run. In
an environment with massive short-term data overload and with people concerned about
minute-to-minute performance, the inefficiencies are likely to be looking out beyond, say, 12
months." Bill Miller

"If everyone else is dashing around pricing assets on the bias of the next three months, then
they are likely to misprice assets for the longer term. So an opportunity for time-arbitrage arises
for the investor with a longer horizon" James Montier

“If you look carefully, almost all Old Money secrets can be traced to a single source: a longer-
term outlook.“ Bill Bonner

“Greenlight believes the traditional investment horizon is too short because equities are long, if
not indefinite duration assets. When we make an investment, we usually don’t have an y idea
how long we will be invested. If the downside of an opportunity is no short -term return or
“dead money”, we can live with that. We are happy to hold for more than a year before
succeeding. In practice, some “dead money” opportunities work out more quickly than we
expect. A portfolio where some investments work quickly, some work more slowly, and the rest
retain their value generates exciting results” David Einhorn

“We’d ideally like to see value created within a year’s time, if not sooner, but we are not short
term opportunists. As arbitrageurs of value we are content to invest in longer-term
opportunities.” Russell Glass

“Our goal has always been to seek reasonable returns over a very long period of time. I don’t
know why anyone would look at a short time horizon. In my life, I invested over decades.
Looking for short-term gains doesn’t aid this process.” Irving Kahn

“What we do from others is to maintain a very long time horizon. In our industrry this is a
luxury, as many other investment firms have clients that don’t let them do this. As a result of
having a very long time horizon, we can sit back and logically imagine a very different
environment than the one we are in today. We are looking for themes that will produce epic
investment results” William Strong

“It’s still true that the biggest players in the public markets – particularly mutual funds and
hedge funds – are not good at taking short-term pain for long-term gain. The money’s very
quick to move if performance falls off over short periods of time. We don’t worry about

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headline risk – once we believe in an asset, we’re buying more on any dips because we’re
focused on the end game three or four years out.” Jeffrey Ubben

“Time is our friend. Today there’s so much money chasing quarterly performance or driven by
program trading, index funds or ETFs. That leaves a real opportunity for fundamental investors
like us who are looking out two to four years to find inflections in businesses which aren’t
currently appreciated by the market.” Joe Wolf

“The longer you’re willing to hold, the less crowded the opportunities are” Richard Perry

"The more I mature as an investor, the more I appreciate the absolute immeasurable
competitive advantage time horizon has on Mr. Market." Christopher Begg

"One thing you can do as a value investor is to arbitrage time and to recognize that you're going
to be early, but if you get the right price, it all works out in the end" Preston Athey

"Our edge is a longer term view and an ability to tolerate losing money before we make it"
Robert Robotti

"Common situations that result in a mismatch between share price and share value .. may
simply be time arbitrage, where we think the business performance looking out 18 to 24
months will be much better than the share price implies" Robert Alpert

"In a sense, value investing is a large-scale arbitrage between security prices and underlying
business value" Seth Klarman

"Our thesis often is based on the passage of time. What makes a negative story negative may
just be that the next three to six months - the time space in which Wall Street analysts live -
don't look so great." Robert Kleinschmidt

"We are in the arbitrage business, but not in the traditional merger arbitrage sense of the
term. We engage in time arbitrage. We tend to buy early, average down, and then wait until
our thesis is proven correct, and then we exit. This can happen quickly or it may take years"
Steven Romick

"We'll often find opportunity because the markt doesn't look out far enough to correctly value
durable competitive advantages" Chris Davis

"We have a time frame that is typically longer than most investors have" Mohnish Pabrai

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"Time arbitrage - taking advantage of the opportunity for long-term profit offered when short-
term investors sell due to disappointing short-term macro or business progress - has been a
major source of profitability at Pershing Square since the inception of the firm" Bill Ackman

"The inability of so many investors and managers to invest with a long term horizon creates the
opportunity for time arbitrage - an edge in an investing approach that requires the commitment
to long-term holding periods" Joel Greenblatt

"There must be opportunities if you can construct a platform that will allow you to lean against
biases in general. For us, the most important bias was definitely focusing on time preference
[time arbitrage]" Alex Magaro

"We are disinterested in short-term results and thus have the luxury of focusing our research
and purchases on the much less competitive universe of stocks that have less promise of near-
term appreciation, but that have exciting longer-term potential. This gives us a competitive
edge" Ed Wachenheim

"The forecasting horizon trap lures you into spending all your time on what's more knowable -
the same immediate horizon that occupies everyone else. If you fall into the trap, competing
with all the other investors concentrating on these short term events, it is impossible to
outperform the market. You have to escape to a longer term horizon" Ralph Wanger

"Time Horizon Arbitrage .... If there is a free lunch on Wall Street, we feel it is the time horizon
perspective" Christopher Begg

35. LOW RATES

“At times when interest rates are unusually low, however, investors are likely to find very high
multiples being applied to share prices. Investors who pay these high multiples are dependent
on interest rates remaining low, but no one can be certain that they will. This means when
interest rates are unusually low, investors should be particularly reluctant to commit c apital to
long-term holdings unless outstanding opportunities become available, with a preference for
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either holding cash or investing in short-term holdings that quickly return cash for possible
redeployment when available returns are more attractive” Seth Klarman

“When interest rates are low we have conditions for asset bubbles to develop. When money is
free the rational lender will keep on lending until there is no one else to lend to” George Soros

“Tight money conditions, which translates into high costs for liabilities, will create the best
opportunities for acquisitions, and cheap money will cause assets to be bid to the sky” Warren
Buffett

“Simply put, investors will willingly pay higher multiples if they receive low-rate non-recourse
financing than they will in an unleveraged transaction” Seth Klarman

“I have quoted before the Scandinavian economist, Knut Wicksell, who observed that when
interest rates went to zero and stayed there, expect investment valuations to reach infinity.”
Jonathan Ruffer

“.. every time the risk-free rate moves by one basis point--by 0.01%--the value of every
investment in the country changes. People can see this easily in the case of bonds, whose value
is normally affected only by interest rates. In the case of equities or rea l estate or farms or
whatever, other very important variables are almost always at work, and that means the effect
of interest rate changes is usually obscured. Nonetheless, the effect --like the invisible pull of
gravity--is constantly there. In the 1964-81 period, there was a tremendous increase in the
rates on long-term government bonds, which moved from just over 4% at year-end 1964 to
more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all
investments, but the one we noticed, of course, was the price of equities. So there--in that
tripling of the gravitational pull of interest rates--lies the major explanation of why tremendous
growth in the economy was accompanied by a stock market going nowhere” Warren Buffett

“A speculative wave was beginning to gather force and money was freer than it had been at any
time since the panic” Bernard Baruch

“To be sure, money greases the skids of commerce, and easy money lubricates the engine of
success. In simple terms, financial bubbles, driven as they are by human folly, are often the
result of too much money chasing too few worthy ideas, leading to overinvestment and excess
supply” Frank Martin

"In Field of Dreams, Kevin Costner was told, "If you build it, they will come". In the financial
world, if you offer cheap money, they will borrow, buy and build - often without discipline, and
with very negative consequences" Howard Marks

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“We use the same discount rate across all securities. We may be more conservative in
estimating cash in some situations. Just because interest rates are at 1.5% doesn’t mean we like
an investment that yields 2-3%. We have minimum thresholds in our mind that are a whole lot
higher than government rates. When we’re looking at a business, we’re looking at h olding it
forever, so we don’t assume rates will always be this low.” Warren Buffett

“A reasonable spread is only good enough if you have an acceptable starting yield” Steve
Romick

“Years of picking up a few points of extra yield can be wiped out in a matter of days – or even
hours – of capital losses” Marathon Asset Management

Tutorial 31-35 Recap

1) KEEPING STOCK VALUATIONS SIMPLE - you don't need complex valuation models to pick
winning stocks. It's important to identify the key drivers of a stocks performance and to work
out whether the stock is cheap or reasonably priced. It far better to be approximately right
than precisely wrong. Spend time understanding how the business works, how it interacts in its
ecosystem and the risks rather than building a model out to five decimal places.

2) MARGIN OF SAFETY - The Investment Masters seek a margin of safety in their investments.
They try to buy stocks at a price which allows them downside protection should something go
wrong. All investors make mistakes and by having a margin of safety, using conservative
forecasts and by not paying too much you should be able to protect capital which is the number
one rule of investing.

3) PRIVATE MARKET VALUE - The Investment Masters look at stocks as small pieces of a business
not just a piece of paper. Many of the Investment Masters look at what the business would be
worth to a private buyer looking to buy the entire business. Stock prices can fluctuate
significantly due to investor emotions providing an opportunity to buy a piece of a business at a
discount to what a private buyer might pay. In time, if a business trades at a significant
discount, its more likely a private buyer will show up.

4) TIME ARB - Time arb [arbitrage] refers to the practice of seeking to make returns from taking
a longer term view. The short term nature of most investors means they are focussed on the
next quarterly report rather than what the business will look like in a few years time. A
business today maybe trading at a significant discount to what it should be worth in a few years
because of the short term focus of the market. Investment Masters look to take advantage of
this pricing inefficiency.

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5) LOW RATES - The Investment Masters recognise that low rates tend to inflate asset values
and yet low rates can always become higher rates. Investors priced 30 year government bonds
in the 1980's at a yield of over 15%. The market was pricing the bonds on the basis rates would
stay high for 30 years. Clearly that didn't happen. Be careful not to overpay for assets on the
basis that rates will remain low indefinitely.

36. COMPOUNDING MACHINES

“The ideal business is one that earns very high returns on capital and that keeps using lots of
capital at those high returns. That becomes a compounding machine.” Warren Buffett

"A compounder is a competitively advantaged business that earns superior returns on invested
capital. As cash earnings are reinvested back into the business, the value of the business grows
year after year compounding our investment. If we buy at a discount to what we believe the
business is worth, we will benefit twofold: by the growth of the intrinsic value and the market
correction for the discount. There are two key variables when we evaluate a compounder: the
competitive advantage of the business and the discrepancy between intrinsic value and quoted
price. Competitive advantage can be fluid and fleeting, thus having a deliberate way to qualify
this attribute is critical to success in this category." Christopher Begg

“The compounding machine stocks are the Holy Grail of investment” Mohnish Pabrai

“To his son, [Shelby] Davis passed along his infectious passion for owning shares in carefully
chosen companies (he called them “compounding machines’), his conviction that owning the
best compounding machines would lead to unimagined rewards, his distrust of unnecessary
spending (why waste money they could be invested?), and his workaholic tendencies” The Davis
Dynasty

“What we learned is that if you buy a good and sustainable business, then over time the return
of that business will do the natural compounding for you” William Browne

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“We expect most or our return to come from compounding of intrinsic value rather than a
return to intrinsic value” Ira Rothberg

“Discounts to asset value are not enough, in the long run you need earnings to be able to
sustain and nurture the corporate values” Peter Cundill

"The three areas of analysis – business, management, and reinvestment – are the key
components of what we call our “three-legged stool.” When we find a business that satisfies all
three of our requirements, we refer to it as a “compounding machine,” and we seek to purchase
shares at a modest valuation." Chuck Akre

“Compounders are generally market leaders, with high barriers to entry and high returns on
capital, whose intrinsic values are growing at a healthy rate. The reason they can be mispriced
is typically a function of time horizon. When investor’s don’t focus on the distant
compounding merit of a great business, they may not assign that merit a fair value” Christopher
Begg

“Our strategy is to own high quality, modestly valued business over many years, to take
advantage of the power of compounding as earnings grow. To do that successfully only works if
we avoid mistakes – unforced errors – that interrupt the power of compounding” Ira Rothberg

“If you’re going to own a company for a long time, the earnings it generates today will be a
small component of the eventual return. Much more important will be how those earnings can
be reinvested over time to build value. When companies with positive compounding
characteristics become available at really attractive prices, we’ll hope to take advantage” Chris
Davis

“A penny doubled every day for a month turns into $10.7m, that’s the effect of
compounding. When we are looking for businesses that can do this we are looking for
businesses that can reinvest their free cash flow back in the business to continue to earn above
average rates of return on that capital and therefore compound the owners capital” Chuck Akre
[on compounding machines]

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37. FOCUS ON THE CASH

"Remember cash is a fact, profit is an opinion" Al Rappaport

"Great fundamental investors focus on understanding the magnitude and sustainability of free
cash flow" Michael Mauboussin

“If you don‘t have the free cash flow, you don‘t have anything.” Leon Cooperman

“When I think of ownership of a business we are basically counting cash as it is earned, which is
typically when the product or service is delivered. Investing is simply the counting of all that
cash and discounting that cash stream at an acceptable rate to determine what the investment
is worth and buying that stream as a discount to what it is worth” Christopher Begg

“We want to basically count the cash. For example many people want to look at free cash flow.
They will not deduct capital expenses from it. So this goes back to the Patel, Dhandho mentality
which at the end of the day is “what’s in the register?” So what I always ask myself is what’s in
the register the end of the year after everything’s done. You’ve paid the taxes and you have the
capital expenditures. What’s in the register at the end of the next year and the year after? In
general that is a metric that I use - what’s in the register? Because different businesses are
different, you might have to get to that register number in different ways. I’m focused on the
idea that you have some black box that generates some cash. What is that cash and what is the
consistency of that cash over time? Then we can put a multiple on it and take it from there. So
that’s generally how I go about it.” Mohnish Pabrai

“We quantify scenarios above and below our base case, but the base-case valuation typically
looks two years out at our estimate of free cash flow, then applies a forward multiple we
believe is reasonable” Adam Weiss

"Our valuation methods are heavily focused on free cash flow (which we define as cash that can
be returned to investors or reinvested in the business)" Zeke Ashton

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“There is a class of business where the eventual “cash back” part of the equation tends to be an
illusion. There are businesses like that – where you constantly keep pouring it in and in, but
where no cash ever comes back… struggling with a business that never produces any cash –
whether its winning or losing as a matter of accounting – is no fun”. You should seek businesses
that just drown in money if they just pause for breadth” Charlie Munger

“I think the job of a security analyst is to take the reported GAAP earnings of a business and
translate them into what Buffett calls owner earnings. I call them economic earnings. The next
step is to assess and understand the durability of those earnings. Fundamentally, what you’re
looking for is how much cash the business can generate on a recurring basis over a very long
period of time” Bill Ackman

“The nature of the business and its ability to generate reasonable amounts of free cash flow –
even in stressful environments – in relationship to price paid is the most important factor”
Bruce Berkowitz

"The future value of all the future cash flows of the company is ultimately the only thing we
care about" Andrew Brenton

"I want to see if a company is generating cash or simply accounting earnings" Ralph Wanger

“We’re essentially trying to pay a low-teens multiple of what Warren Buffett defined in his 1986
Berkshire Hathaway shareholder letter as owner earnings –free cash flow before growth related
capital spending – for businesses we believe can compound our capital at a mid-teens rate or
better” Ira Rotherberg

“Not every idea fits this, but we basically estimate free cash flow – EBITDA less maintenance
capital spending, cash taxes and cash interest, over whatever time horizon we can reasonably
assess, putting a reasonable multiple on that in the out year. We’re shooting for situations with
double-digit free-cash-flow yields. We think with those we have a very significant margin of
safety” Jason Stankowski

"Investments throw off cash flow for the benefit of owners, speculations do not. The return to
the owners of speculations depends exclusively on the vagaries of the resale market” Seth
Klarman

“The most important metric we look at is probably Enterprise Value to free cash flow” Eric
Rosenfeld

“We value companies based on normalised free cash flow, where we strip out the quirks of
GAAP to arrive at the excess cash a business generates – or could generate – after reinvesting
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enough to maintain current capacity and competitive advantages but before investing for
growth” Danton Goei

“Good companies will generate free cash that is around the same level as net income, give or
take. When that isn’t the case, it’s a flashing red signal to us to look more closely at the quality
of the earnings” Kevin Holt

"Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and
even growth rates have nothing to do with valuation except to the extent they provide clues to
the amount and timing of cash flows into and from the business" Warren Buffett

“We want to know how much cash is coming back to investors, how predictable that cash
flow is going to be and how would I value that relative to the risk-free rate of return. So we’re
trying to look at a business as you would look at a bond or as a private equity investor might
look at a private entity.” Chris Mittleman

"We approach valuation from a perspective similar to that of a 100% owner – what are the
excess cash flows we will receive in the future and how certain are we about their durability?"
Wally Weitz

"My father and grandfather were in the construction business, so after my exposure to that I've
never been comfortable looking at anything other than cash flow to try to fundamentally
understand a business. Over time I've refined that down to discretionary cash flow, what's left
over after what we consider maintenance capital spending and dividends" Micheal Cook

"We want to build a portfolio of undervalued businesses that are good companies that
generate cash flow" Dave Samra

"A primary determinant of which stocks become a core holding in the portfolio and receive a
higher capital allocation are the predictability and reliability of the company's cash flows" Alex
Roepers

"We use many different valuation methodologies, but the most common at Maverick is to
compare sustainable free cash flow to enterprise value." Lee Ainslee

"I tend to focus on free cash flow. We basically looked at the amount of cash that the business
could return to us as shareholders and valued that." Glenn Greenberg

“How do I determine the discount? I usually focus on free cash flow and enterprise value
(market capitalization less cash plus debt). I will screen through large numbers of companies by

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looking at the enterprise value/EBITDA ratio, though the ratio I am willing to accept tends to
vary with the industry and its position in the economic cycle." Michael Burry

"Ultimately, in one form or another, cash flow is all companies have to distribute to investors,
and cash flow is the only thing investors can spend. Ultimately, investment success depends on
how much an investor pays for the cash flow a company generates." Andy Redleaf

38. BUYING THE BOTTOM?

“Your chances of picking the bottom of the market are very slim, but if you’re within five or ten
percent, your gains can be extraordinary” Shelby Davis

“Some people boast of selling at the top of the market and buying at the bottom – I don’t
believe this can be done except by latter-day Munchausens. I have bought when things seemed
low enough and sold when they seemed high enough. In that way I have managed to avoid
being swept along to those wild extremes of market fluctuations which prove so disastrous.”
Bernard Baruch

“No man is more entitled to buy at the bottom than Buffet, and yet no man is more aware of
the foolishness in trying” Frank Martin

“At major turning points in markets, market prognosticators are generally wrong” Leon Levy

“It’s difficult - and, I later came to conclude, impossible - to determine turning points” Paul
Singer

“Since the “bottom” is only declared in retrospect, those who wait for it almost always go away
empty-handed” Frank Martin

“Even in more normal markets the typical investor feels uncomfortable when he buys too
soon and unhappy when he sells too soon. Yet to be a true practitioner of the buy-low-sell-
high rule he must be entirely ready to do both” Benjamin Graham

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“The lesson learned here is that we are never able to buy at the low. Almost every stock I’ve
ever had in the portfolio has always declined after we buy it, and thankfully most usually don’t
go down to this extreme, but I think it is pretty normal to have it go down and I almost expect it
now.” Mohnish Pabrai

“You must buy on the way down. There is far more volume on the way down than on the way
up, and far less competition among buyers. It is almost always better to be too early th an too
late, but you must be prepared for price markdowns on what you buy” Seth Klarman

“A savant is one who buys or sells within 20% of the top or bottom. Most who believe they’re
smart enough to recognize and take appropriate action to capitalize on a m arket top or bottom
as it is occurring are likely more idiot than savant” Frank Martin

"You never get the high and you never get the low" Walter Schloss

“In my experience, most people who are lucky enough to sell something before it goes down get
so busy patting themselves on the back they forget to buy it back.” Howard Marks

“The important turning points in markets are never identified with precision in advance by
‘experts’ and policymakers. This lack of foresight is not surprising, because markets and th e
course of the economy are not model-able scientific phenomena but rather are examples of
mass human behavior, which are never predictable with anything like precision. But what is
surprising is that even the most sophisticated investors, traders and commentators continue to
rely on predictions issued by those who have no record of success at such forecasts.” Paul
Singer

"While it is always tempting to try to time the market and wait for the bottom to be reached (as
if it would be obvious when it arrived), such a strategy has proven over the years to be deeply
flawed. Historically, little volume transacts at the bottom or on the way back up and
competition from other buyers will be much greater when the market settle down and the
economy begins to recover. Moreover, the price recovery from a bottom can be swift.
Therefore, an investor should put money to work amidst the throes of a bear market,
appreciating things will likely get worse before they get better" Seth Klarman

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39. TESTING INVESTMENT IDEAS

“One of the best ways to get confidence in an idea is to find a smart person who has the
opposing view and listen to all their arguments. If they have a case that you haven’t considered,
then you should get out. But they can also help give you more conviction” Bill Ackman

“The important thing to do as analysts is to come up with a central thesis and then build the
evidence to try to prove ourselves wrong” Roberto Mignone

“I stress tested my opinions by having the smartest people I could find challenge them so I
could find out where I was wrong. “ Ray Dalio

“I’m not entitled to have an opinion unless I can state the arguments against my position better
than the people who are in opposition. I think that I am qualified to speak only when I’ve
reached that state.” Charlie Munger

"We are very careful not to close ourselves off to opportunities to hear a well -
developed counterview on any of our investments. Vibrant debate is part of our internal
process; however, there is no substitute for the argument of an investor who has risked real
capital on a view that is in opposition to ours. Without fail, this shines a light on the potential
soft spots of an investment and causes us to work even harder to bottom-out the critical
elements of our own thesis" Jim Mooney

"In controlling risk, it is also very important to have people in your team whose opinions you
respect, who can push back at your ideas in a way that will make you stop, listen, and test your
own views" Martin Taylor

“I try to assume that the guy on the other side of a trade knows at least as much as I do. Let’s
say I buy Texaco at $52 and it suddenly goes down to $50. Whoever sold Texaco at $52 had a
perception dramatically different to mine. It is incumbent on me to find out what his perception
was” Michael Steinhardt

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“I’m so worried that I may be wrong that I work really hard at putting my ideas out in front of
other people for them to shoot down and tell me where I may be wrong” Ray Dalio

"My thought is, if there's no natural sceptic on an investment maybe it would be wise to
appoint one to play Devil's Advocate anyway" Peter Cundill

“Investing lies at the intersection of economics and psychology, the place where net present
value meets greed and fear. It is important to know the numbers – but that is not sufficient.
And it is important to know how people think – but that, too, is not enough. Both matter; it is,
of course, good to buy investment bargains, but it is far better if you know why they are bargain
priced” Seth Klarman

"We continually challenge ourselves by asking, "What can go wrong?" with investments we own
or consider owning. By playing mental war games against our best ideas we may gain or lose
confidence in an initial thesis, or perhaps come to accept that a long-loved holding should be
let go. We call this stress testing process "killing the company." Bruce Berkowitz

"I work really hard to have this independent point of view, and then I bring that independent
point of view out there and I say, "Shoot at it. How am I going to be wrong?" So let's have that
quality back-and-forth. And so that was just a practical approach. Find people of alternative
points of view and have quality conversations back and forth. Not to let them think for me, not
for me to follow their point of view, but for me to understand the different perspectives. Right?
Very, very practical. Because it increases my probability of being right, and it reduces my
probability of being wrong. And what I've discovered in that process is that I was learning so
much. So just imagine what a fantastic path to think, "Let me go after the person who has got
the opposite point of view, who is really smart, and let me have quality conversations, quality
disagreement." Ray Dalio

“Why something is mispriced – is too often ignored by value investors. The general thinking is
that it doesn’t really matter – if you’re right that something is mispriced, it will eventually take
care of itself. We think it matters because you can conceivably avoid a lot of pain waiting for
truth to prevail if you have a good read on why it currently doesn’t.” Curtis Macnguyen

“In order to invest, we need to have a sizeable analytical edge over the person on the other
side of the trade. The market is an impersonal place. When we buy something, we generally do
not know who is selling. It would be foolish to assume that our counterparty is uninformed or
unsophisticated. In most circumstances, today’s seller has followed the situation longer and
more closely than we have, havs previously been a buyer, and has now changed his mind to
become a seller. Evern worse, the counterparty could be a company insider or an informed
industry player working at a key supplier, customer or competitor.” David Einhorn
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“Investors should pay attention not only to whether but also to why current holdings are
undervalued” Seth Klarman

“One of the biggest things we struggle with in training people is driving home the fact that you
cannot have an opinion about an investment unless you really understand what the consensus
is and are then able to articulate why the consensus is wrong.” Jon Jacobson

“There’s a virtuous cycle when people have to defend challenges to their ideas. Any gaps in
thinking or analysis become clear pretty quickly when smart people ask good, logical questions.
You can’t be a good value investor without being an independent thinker – you’re seeing
valuations that the market is not appreciating. But it’s critical that you understand why the
market isn’t seeing the value you do. The back and forth that goes on in the investment p rocess
helps you get at that.” Joel Greenblatt

"I have a lot of ideas. Most of them are terrible. But what saved me – well, to the extent I’ve
been saved – is that… I want to get people with the best knowledge and insights in each one of
those key aspects and get a challenge from them." Charles Koch

"At Pabrai Funds I have several times leveraged the partners on specific investments because
we have so many entrepreneurs and CEO's in our midst with deep domain knowledge. Many
times when I have looked at the list and then presented it to one to three of them with my
analytics and said to them "Please don't go buy the stock, but could you tell me if I'm thinking
about this the right way; What's your take on it or what insight do you have that I may not
know?" Mohnish Pabrai

“The markets taught me humility. What I found that was helpful for me was to find the
smartest people who disagreed with me and try to see it through their eyes. And by doing that I
would reduce my chances of being wrong and I wouldget a fabulous education. I think the
greatest tragedy of mankind is that people keep in their heads wrong thoughts and opinions.
Options are a dime a dozen and are often misleading and are not tested ” Ray Dalio

"Whenever (a partner) brings in a new idea, I just beat the sh*t out of it ... and he does the
same to me. It's the torture test." Marc Andreessen

“Disagreement is what we do a lot of. It’s in our culture to disagree. It’s an approach which is
going to produce much less one-mindedness. Part of our culture is to be scared of one-
mindedness ” Ray Dalio

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40. THE DAILY REVIEW

"If you know the stock doesn't know you own it, you are ahead of the game. You are ahead
because you can change your mind and your actions without regard to what you did or tho ught
yesterday; as you can start out with no preconceived notions. Every day is a new day, providing
a new set of continuously measurable options. You can live up to all those old market saws,
you can cut your losses and let your profits run, and it doesn't even make your scar tissue itch
because, being selfless, you are unscarred" Adam Smith, The Money Game

"In Wall Street the curtain goes up every day at ten o'clock on a new show" Adam Smith, The
Money Game

"Our portfolio is 'made fresh daily' and we will aggressively recycle capital from names that
have fully played out to more opportunistic situations to reduce risk and sow the seeds for
future productive harvests" Larry Robbins

“It has to meet the test every day: ‘If we didn't own it, would we buy it today?’ And if the
answer is no, we say maybe we should get out.” James Dinan

"I look at each trade in my book every day and ask myself the question “Would I enter this trade
today at this price?” If the answer is “no”, then the trade is gone. Most of the trades I do stop
myself out of, I stop out because of time rather than because of loss. If I really love the trade
and get strongly positioned, and then a month later, it still hasn’t moved, alarm bells start
ringing in my head. I think to myself, that is a really great idea you have, but the market is just
not playing ball” Michael Platt

“Don’t be too concerned about where you got into a position. The only relevant question is
whether you are bullish or bearish on the position that day. Always think of your entry point as
last night’s close” Paul Tudor Jones

“The proper perspective on an investment is not what you have made so far, but rather the risk
and reward ratio at any given point. The price you paid for a stock is irrelevant” Leon Levy
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"The price of which a stock was originally purchased or shorted should be irrelevant to any
decision regarding the fate of that holding." Lee Ainslee

“The most important rule of trading is to play great defence, not great offense. Every day I
assume every position I have is wrong. I know where my stop points are going to be . I do that
so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying
positions that are going in my direction. If they are going against me, then I have a game pl an
for getting out” Paul Tudor Jones

“The “no holds” concept simply reflects the approach that every investment should represent a
very compelling risk/reward opportunity from current prices, and if that’s not the case then
capital should be redeployed into positions that are viewed as very compelling at
current prices” Lee Ainslee

"I tried to view the portfolio fresh every day". Michael Steinhardt

"We do evaluate each position every day to consider whether the current position size is the
most effective use of capital" Lee Ainslee

"Once a position goes on the sheet, it has to earn the right to stay on the sheet almost on a
daily basis.” James Dinan

Tutorial 36-40 Recap

1) COMPOUNDING MACHINES - The Investment Masters seek businesses which can grow over
time. Ordinarily these businesses have pricing power which is not eroded by competition.
These businesses tend to have low capital requirements to be sustained and are able to
reinvest surplus capital at high rates of return. This creates Compounding Machines.
Remember the power of compounding.

2) FOCUS ON THE CASH - The Investment Masters tend to focus on the cash coming out of the
business. The cash-flow is the money that can actually be utilised by someone if they owned
the entire business. The cash-flow is usually far cleaner than the companies profit which can be
manipulated by accounting treatment of revenue recognition, depreciation, provisions etc. Be
extra careful investing in businesses which have attractive profit statements but earn little or
no cash.

3) BUYING THE BOTTOM - The Investment Masters understand that no-one can pick the bottom
when investing. It's more important to pay an attractive price versus the value you are getting
than to try and pick the bottom of a market. Provided you have bought a good business with a
strong balance sheet you should be able to ride out market volatility.
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4) TESTING INVESTMENT IDEAS - the Investment Masters understand they are not perfect and
it's important to test investment ideas. Do not seek out only people who agree with your
investment ideas. It's a worthwhile exercise to seek out opposing views to understand what
you may have missed or where you may be wrong.

5) THE DAILY REVIEW - The Investment Masters understand that the entry price of your
investment is irrelevant to where the stock will trade. Do not hold a stock in the hope you will
break-even at your entry price. Consider each stock on a daily basis and ask yourself would you
buy that stock at that price today. If not, it should probably not be in your portfolio. Review
your stocks regularly to ensure your investment thesis remains intact and you are holding for
the right reasons.

41. CHANGE

“Nothing endures but change” Heraclitus

“Faced with the choice between changing one’s mind and proving that there is no need to do
so, almost everyone gets busy on the proof.” John K Galbraith

"One has to be a student of change. Everything changes. I just don't believe you can have
confidence in any industry for an infinite length of time" Roy Neuberger

"Facts change, we change" Bruce Berkowitz

"Conviction. Conviction. Conviction. New facts. Change" Marc Andreessen

"Change, the investors only certainty" T. Rowe Price

"The only thing you can count on is change. Even if the fundamental environment were to
remain unchanged - which it won't - risk/return prospects would change because (a) investors
will move the prices of assets, certainly in relative terms, and (b) investor psychology will
change. That is why no strategy, tactic or opinion will work forever" Howard Marks

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"Markets change radically, every five years that I've seen. Markets aren't nearly as good at
discounting the future as people think" John Burbank

"A significant number of companies disappeared almost overnight over the last d ecade (the
corporate cemetery is full of companies formerly believed to be indestructible). Nevertheless,
others were born or reborn and became titans of industry within a few years (Google, Apple,
Amazon, Intuitive Surgical, PetroChina, Tata Group, etc.) If there is one constant in the business
world, it is change!" Francois Rochon

"One cannot make an investment and take for granted that its worth will remain unchanged.
New sources of supply coming from hitherto untapped areas of the world may transform th e
competitive position of a company, as will changes in people's habits or technological
innovations. Often something will shrink in value because of one discovery, as coal did in
relation to oil and electricity, only to be given new economic life by anoth er development such
as the new chemical uses being made of coal. Actually one can point to only a few things
whose value has resisted the change of time down through the centuries - and even then not
without fluctuations. Among these I would list some minerals like gold, silver, and copper
precious stones, works of art; and crop bearing lands. Even with these things one must add
the qualification "at least so far." Bernard Baruch 1957

"Fortunes change; there's no assurance that major companies won't become minor, and there's
no such thing as a can't miss blue-chip" Peter Lynch

"Most businesses are subject to change if you stay with them long enough. There's not a single
business that I know of that will never change" Li Lu

“Those who will not face improvements because they are changes, will face changes that are
not improvements” Charlie Munger

"Probably one of my greatest assets over the last 30 years is that I’m open -minded and I can
change my mind very quickly." Stanley Druckenmiller

"The key is to constantly adapt and find the strategy that works" Bruce Kovner

"Traders who are successful over the long run adapt. If they do use rules, and you meet them
10 years later, they will have broken those rules. Why? Because the world has changed" Colm
O'Shea

“In Wall Street, the man who does not change his mind will soon have no change to mind” W.D
Gann

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"If you know that the stock doesn't know you own it, you are ahead of the game. You are ahead
because you can change your mind and your actions without regard to what you did or thought
yesterday" Adam Smith, The Money Game

“My perculiarity is that I don’t have a particular style of investing, or, more exactly, I try to
change my style to fit conditions” Geroge Soros

“There is a place and time for every style.” Larry Robbins

“When you're betting the ranch and the circumstances change, you have to change, and that's
how I've always managed money” Stanley Druckenmiller

"In the stock market, in investing, there is nothing permanent except change. The investment
manager should try to cultivate a mix of healthy scepticism, open-mindedness, and willingness
to listen. It is not easy" Barton Biggs

“One of the things I most want to emphasize is how essential it is that one's investment
approach be intuitive and adaptive rather than fixed and mechanistic" Howard Marks

“Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-
minded, and sceptical. Long term top results are achieved only by changing from popular to
unpopular the type of securities you favour and your methods of selection” Sir John Templeton

“Above all, we were flexible, opportunistic, and unconstrained in where we would and could
invest” Michael Steinhardt

"To achieve balance one must be flexible. I know an investor who bought his first bond after 50
years of doing very well without bonds. He was flexible enough to realise that after half a
century, the time had come"Roy Neuberger

“Sir John Templeton said something to me and it stuck in my mind and I didn’t do anyth ing
about it at the time. We were on a roll of fifteen years of wonderful results, no down years, a
high compound rate of return and some money coming in. He said something which I thgink is
correct, and that Graham also talks about; ‘always change a winning game’. I didn’t do it
because I was on a roll then and I wasn’t flexible enough.” Peter Cundill

“Expect and react to change. No bull market is permanent. No bear market is permanent. And
there are no stocks that you can buy and forget. The pace of change is too great. Being relaxed,
as Hooper advised, doesn’t mean being complacent” Sir John Templeton

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"If the world were constant, without change, analytical skills would be all that was necessary for
successful investing. Economic models would work perfectly, as correlations would be static
and thus predictable. Unfortunately, a'la Allen Toffler's Future Shock, not only is there change
in the world, but its pace is accelerating." Bennett Goodspeed 1978

“The biggest risk we worry about is not adapting to the times and participating in change. That’s
what keeps us on our toes.” Chris Davis

"The ability to learn new ways to look at value allows you to make some profitable investments
that you may well have overlooked had you not adapted to the times" Chris Browne

“The screwiest thing you can do is to think you're a master of the universe. We're all just little
cogs, and the universe will go on without us. We have to fit into it and adapt to it. Change is
inevitable. The only constant is impermanence. We have to accommodate to the fact that the
wheel turns and the environment changes. It's very helpful to view the world as behaving
cyclically and oscillating rather than going in a straight line. Everything is cyclical.” Howard
Marks

"To be successful in the markets, you have to be willing to change your opinion. Most people
are not willing to change their opinion. You have to be humble about your ideas" Joe Vidich

"While investors and managers must place their feet in the future, their memories and nervous
systems often remain plugged into the past. When change is slow, constant rethinking is
actually undesirable; it achieves little and slows response time. But when change is great,
yesterday's assumptions can be retained only at great cost" Warren Buffett

"There are no easy answers about what personal qualities make for survival and longevity, but a
successful manager is one who has found a balance between discipline and flexibility, between
the courage of his convictions and the need to desert the battlefield in order to live to fight
another day" Paul Singer

"Remember the world is always changing. Be aware of change. Buy change. You should be
willing to buy or sell anything. So many people say, "I could never buy that kind of stock," "I
could never buy utilities,", "I could never play commodities." You should be flexible and alert to
investing in anything" Jim Rogers

“Whatever the outcome, we will heed a prime rule of investing; you don’t have to make it back
the way you lost it” Warren Buffett

“It is easy for a discretionary trader to become obsessed with a particular market that has
delivered a few straight losing trades, thinking that the market owes him something. This is a
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bad mental state to enter. Being compelled to recoup losses from a particular market in the
same market is a dangerous practice.” Peter Brandt

"If you make a big bet, be open-minded, if the situation changes, you must change." Stanley
Druckenmiller

"My views change as economic, political, and technological changes occur on our planet and
sometimes out in space. It is imputative that you be willing to change your thoughts to meet
new conditions" Roy Neuberger

"We strive to be intellectually honest at all times, maintaining a willingness to change our mind
when we are wrong" Seth Klarman

"As Darwin described, adaption ie adjusting appropriately to changes in one's circumstances - is

a big part of the evolutionary process, and it is rewarded" Ray Dalio

"Everything is in a constant state of change, and the wise investor recognises that success is a
process of continually seeking answers to new questions" Sir John Templeton

"The world changes. It keeps spinning, and things don't stay the same, so you always need to be
working and learning and studying to make sure that your circles of competence are relevant"
Thomas Gayner

"We always welcome the challenge [of well-developed counterviews] and remain committed to
changing our view in the face of a more compelling argument" Jim Mooney

"The investment world has clearly changed and you have to change with it or you become a
dinosaur." Ed Wachenheim

"The lesson for me is that things change. Seldom do businesses stay great for decades. So we
have to always keep an opened mind and not lose track of the fundamentals of a company we
own shares in." Francois Rochon

"Sooner or later every popular fast growing industry becomes a slow growing industry, and
numerous analysts and prognosticators are fooled. There's always a tendency to think things
will never change, but inevitably they do" Peter Lynch

"Embracing change as a constant is not consensus wisdom... it is the stark reality of humanity.
Human nature does a better job of taking experience and observations, and extrapolating them
to infinity: great will remain great, good will remain good, and poor will remain poor. We

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attempt to counter human nature by embracing change as its own checkpoint in our investment
process." Christopher Begg

"Many stocks bought at a time when they were deemed good investments have later met with
drastically changed conditions. Hence such so-called "investment stocks'' frequently become
purely speculative. Some go out of existence altogether. The original "investment" evaporates
into thin air along with the capital of the investor. This occurrence is due to the failure t o
realize that so-called "investments" may be called upon in the future to face a new set of
conditions which would jeopardize the earning capacity of the stock, originally bought for a
permanent investment. Before the investor learns of this changed situation, the value of his
investment is already greatly depreciated. Therefore the investor must guard his capital
account just as the successful speculator does in his speculative ventures. If this were done,
those who like to call themselves "investors" would not be forced to become unwilling
speculators of the future -nor would trust fund accounts depreciate so much in their value"
Jesse Livermore

42. CORRELATION

“Be cognizant that in a market meltdown there can be correlations among various positions in
the portfolio that no one ever expects” Josh Friedman

“When times get very tough, everything is correlated. And people need to sell whatever they
have. And they sell what’s most liquid. So even the baby gets, you know, baby gets thrown out
with the bathwater.” Bruce Berkowitz

"In crisis all asset classes become correlated. There is no such thing as having diversified, non-
correlated portfolios. There you want to have hedges and you want to be liquid." James Dinan

“Through bitter experience, I have learned a mistake in position correlation is the root cause of
the most serious problems in trading. If you have eight highly correlated positions, then you are
really trading one position that is eight times as large” Bruce Kovner

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“It’s the rare investor who achieves the sophistication required to appreciate correlation, a key
element in controlling the riskiness of an overall portfolio. Most investors think diversification
consists of holding many different things, few understand that diversification is effectiv e only if
portfolio holdings can be counted on to respond differently to a given development in the
environment” Howard Marks

"When I have nine businesses in a portfolio, and I'm adding a tenth one, I think very carefully
about the correlation the tenth one has with the other nine. I want the correlation to be as low
as possible" Mohnish Pabrai

“Long/short funds typically don’t blow up because they made a bunch of wrong fundamental
stock picks. They blow up because they’re overexposed to correlated sectors, or they own too
many leveraged companies, or they have too many illiquid positions. These are “explanations”
you see all the time in funds' letters to investors. That’s exactly what we try to avoid.” Curtis
Macnguyen

“In almost every case of catastrophic failure that we’ve observed, we believe the root cause can
ultimately be boiled down to one or a combination of just five factors. The five factors are 1)
leverage 2) excessive concentration 3) excessive correlation 4) illiquidity and 5) capital flight”
Zeke Ashton

“In bear markets, all to many investments turn into roach motels: ‘You can get in but you can’t
get out.’ Correlations of otherwise uncorrelated investments will temporarily be extremely high.
Investors in bear markets are always tested and retested. Anyone who is poorly positioned and
ill-prepared will find there’s a long way to fall. Few, if any, will escape unscathed”. Seth Klarman

“If every position in the portfolio could be uncorrelated with every other position and also
uncorrelated with the markets, we would be happy indeed. However, as the world does not
work that way, we approach diversification and seek un-correlation in an incremental fashion”
Paul Singer

“I strive for approximately 100 different return streams that are roughly uncorrelated to each
other” Ray Dalio

"Hidden fault lines running through portfolios can make the prices of seeminly unrelated assets
move in tandem. Correlation is often underestimated, especially because of the degree to
which it increases in crisis. A portfolio may appear to be diversified as to asset class, industry
and geography, but in tough times, non-fundamental factors such as margin calls, frozen
markets and a general rise in risk aversion can become dominant, effecting everything
similarly." Howard Marks

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"I look at investing in terms of probabilities. They are no absolutes. We could have a 50 mile
meteor come in and that would take out everything in the portfolio. There are events that
could take out a lot of things. That's why you want to have uncorrelated positions" Mohnish
Pabrai

"I don’t believe in hedging I thinks it’s a very destructive concept. If you think you have too
much risk in portfolio, the last thing you want to do is add S&P shorts etc. When you get into
chaos, historic correlations break down and you want low gross in your portfolio" Stanley
Druckenmiller

"To the extent possible, I have the responsibility to structure the portfolio such that if any of a
number of unforseen events occur, that I do not lose the whole, or even a signifi cant portion of
client's money. To do this, I seek to minimize the correlation between the intrinsic values of the
various securities held in the portfolio. Minimizing this correlation involves a bit of
diversification among industries. Minimizing this correlation does not involve straying from
sound principles of securities analysis. Including speculative or overpriced stocks in the
portfolio simply to diversify against the impact of an array of possible external shocks is simply
irrational given the relative odds involved. Moreover, minimizing the correlation does not
require a portfolio of more than fifteen or so stocks. Therefore, a relatively concentrated
portfoliomay offer decent protection against unforseen adverse future circumstance" Michael
Burry

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43. INVESTING INSTINCT

"You can't just graduate an analyst into managing funds. What is it the good managers have?
It's a kind of locked in intuition, a feel, nothing that can be schooled. The first thing you have
to know is yourself. A man who knows himself can step outside himself and watch his own
reactions like an observer." Adam Smith, The Money Game

"Rely more on your intuition and gut feeling. Learn to develop your ability to see what is
happening and what is unique. It is better for you to transcend "Heard on the Street" to your
own column better titled "Seen in the World" Bennett Goodspeed 1978

“Intuition, whether positive or negative, is quite another matter. It is a vital component of my

art” Peter Cundill

“Instinct and Intuition are words used to describe unconscious processes that bear on
judgements in a range of human activities… I soon discovered I had a natural instinct for
trading, and this became a cornerstone of my career” Michael Steinhardt

“Trading can be intuitive. We are looking at so many factors in the markets [that] a lot of our
analysis operates on a subconscious level. All of a sudden you know this is the right trade. If
somebody really quizzed you, you probably couldn’t clearly articulate your views and would just
say no no no, I know this is the right trade. It’s because all these things have been taken in – the
market action, the technicals, the things that you read in the newspapers or on Bloomberg and
the conversations you have with other traders, analysts and policy makers. It just comes
together” Roy Lennox

“When it comes to investing, intuition and analysis are inextricably bound together” Leon Levy

"Intuition, strengthened by experience plays its role in the investment process, but there is no
substitute for careful analysis" Ralph Wanger

“Instincts are often all one has” Michael Steinhardt

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"Experience builds intuition" Ed Wachenheim

“In the final analysis you must rely on your instincts for survival” George Soros

“One of the essential traits of the successful “vulture” value investor is instinct.” Peter Cundill

“Gut feel is actually crucial. If something isn’t acting right, it is an indication that you need to go
back and recheck the fundamentals” Martin Taylor

“Better to try and lose, then not to try. You learn through osmosis - learn in real time.” James
Dinan

"You really learn everything valuable through osmosis. It’s the same with play-writing or movie-
directing or acting. You love either reading or watching films or plays or listening to music. And
in some way, over the years, without making any attempt, it gets into your blood, into the fibre
of your body. The art of investing is made out of the same framework." Francois Rochon

“Beginning at a very early age, I have made cumulatively more judgements, a nd more
investment decisions based on the same kinds of data, than almost anyone else. This process
unconsciously leads to a sharpening, a fine tuning, that over time, results in fewer mistakes. In
this repetitious behaviour, a learning occurs that is not consciously understandable but allows
one to ferret out the higher probability from the lower. Thus one develops ‘good instincts’.
Often listening to an idea led me to an entirely different conclusion than the proponent of that
same idea, whose knowledge was far deeper than mine. It seemed knowledge was necessary
but insufficient ” Michael Steinhardt

“Another common illusion some people have is that they can do anything – buy and sell stocks,
dabble in real, estate, run a business, engage in politics – all at once. My own experience is that
few men can do more than one thing at a time – and do it well. A skilled operator in any field
acquires an almost ‘instinctive’ feel which enables him to sense many things even without being
able to explain them. In a few instances, and in coffee, where I went into speculations where I
lacked this “feel”, I have not done too well.” Bernard Baruch

"One of the things I most want to emphasize is how essential it is that one's investment
approach be intuitive and adaptive rather than fixed and mechanistic" Howard Marks

"With the benefit of hindsight, at critical inflection points over the last decade it appears that
the intuitive thinker was better equipped as a problem solver than the analytical
one. Intuition tends to rise in relative importance when the environment is undergoing rapid
and dynamic change, wherein present analytical models are suspect and, post mortem, proved
obsolete" Frank Martin
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"As in music and sports, the best professionals tend to develop a rhythm and feel that comes
with long practice and that leads to optimum results. In my opinion, the intuitive feel (or sixth
sense) that most good investors develop partially comes from an innate ability and partially
from experience" Ed Wachenheim

"The market has a life of its own, and a lifetime of investing has allowed me to develop instincts
for the ways in which the markets and the economy affect each other" Leon Levy

"My instinct was very good because of my intensity and the extend of experience" Michael
Steinhardt

"I believe many operators have has similar experiences with that curious inner mind which
frequently flashes the danger signal when everything marketwise is aglow with hope. It is just
one of those peculiar quirks that develops from long study and association with the market"
Jesse Livermore

"I find that, in the stock market, it is best to be flexible and not be tied to conventions or rules.
Sometimes, it is best to follow your intuitions" Ed Wachenheim

"Trading securities requires a lot of intuition, something you can only develop as a student of
life. In Paris, and ever since, I have been studying constantly. I study people, I study life, I look
and listen and read. I never found learning about anything a waste of time" RoyNeuberger

“Sometimes a flippant remark allows the spikes of reason to penetrate the brain. I should be
reading plenty of poetry, if for no other reason that it deals directly to the intuitive side of the
brain” Peter Cundill

44. EFFICIENT MARKETS

“I’d be a bum on the street with a tin cup if the markets were always efficient” Warren Buffett

"It is hard for me to see how anyone can consider the stock market efficient" Phil Fisher

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“Despite the comfortable academic consensus of market efficiency, financial markets will never
be efficient because markets are, and will always be, driven by human emotions: greed and
fear” Seth Klarman

“We believe the efficient market hypothesis is a bunch of crap” Bernay Box

"No, no, no, no, no, no. No, I do not know most of that stuff [modern portfolio techniques] and
do not understand it" Jim Rogers

“My experience makes it difficult for me to believe in the efficient market hypothesis” Jean
Marie Eviellard

“Value investors know – although efficient market believers fail to comprehend – that the
underlying value of a security is distinguishable from its daily market price, which is set by the
whim of buyers and sellers, as are the prices of rare art and other collectibles” Seth Klarman

“I was never a believer that the markets are efficient.” David Einhorn

“I have a name for people who went to the extreme efficient market theory- which is ‘bonkers’.
It was an intellectually consistent theory that enabled them to do pretty mathematics. So I
understand its seductiveness to people with large mathematical gifts. I just had a difficulty in
that fundamental assumption did not tie properly to reality” Charlie Munger

“Naturally the disservice done students and gullible investment professionals who have
swallowed Efficient Market Hypothesis has been an extraordinary service to us. In any sort of a
contest – financial, mental or physical – it’s an enormous advantage to have opponents who
have been taught that it’s useless to even try” Warren Buffett

"Is there a Nobel Laureate in finance more highly regarded than the Oracle of Omaha? He
makes a mockery out of Modern Portfolio Theory by simply proving its relative uselessness with
his own results year after year" Frank Martin

"Modern financial theory amounts to the belief that hard work, superior insight, and good
judgement - the keys to success in the real economy - are ineffectual for the investor in public
markets. It tells the investor: hard work and clear thinking doesn't help here, for now you are
in a special place where the quaint rules of Main Street do not apply. Here all is mystery; your
fate is controlled by forces you can never understand. "But", say the masters of the theory, "We
understand. Follow us". Then one day it becomes clear that the masters do not understand,
and panic reigns" Andy Redleaf

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“The efficient-market-believing professor takes a walk with a student. “Isn’t that a $10 bill lying
on the ground” asks the student. “No, it can’t be a $10 bill,” answers the professor. “if it were,
someone would have picked it up by now”. The professor walks away, and the student picks it
up and has a beer” Howard Marks

"For an astute investor, the worst situation is an “efficient market” for which prices accurately
reflect the information. Not to worry – none of us will ever see that” Leon Levy

"Markets aren't fully efficient because humans control its auction-driven pricing mechanism.
Humans are subject to vacillating between extreme fear and extreme greed" Mohnish Pabrai

"Forget the shibboleth that stocks are going to give you a higher rate of return because they are
more risky. That is not true" Michael Steinhardt

"Corporate finance is beneath contempt. Believing just by buying volatile stocks you make an
extra 7 percentage points per annum, I mean those people still believe in the tooth fairy and
yet it is taught to children" Charlie Munger

“Beta is deemed to be constant, regardless of price. Because MPT advocates believe that
markets are largely efficient – ie the current price is an accurate reflection of the value of the
business based on all available information – risk should not be price-related. Speaking of price,
in other words, on March 10 2000 when priceline.com peaked at $162 per share, it was no
more risky than its current price of $1.50. That’s where they lost us” Frank Martin

“Some of the best early advice I got was to forget all I’d learned in business school
about efficient markets and instead read Ben Graham. You either take to it or you don’t, and I
knew right away that this was how I wanted to do it.” Prem Watsa

"In short, we believe market efficiency is a fine academic theory that is unlikely ever to bear
meaningful resemblance to the real world of investing" Seth Klarman

“Modern Capital Theory is of little or no help to those involved primarily with making
investment decisions – value investors, control investors, most distress investors, credit
analysis, and first and second stage venture capital investors” Marty Whitman

“Buffett and his later ego, Charlie Munger have characterized the widely practiced MPT as
laughable” Frank Martin

"A whole body of academic work formed the foundation upon which generations of students at
the country’s major business schools were taught about Modern Portfolio Theory, Efficient
Market Theory and Beta. In our humble opinion, this was a classic example of garbage

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in/garbage out. One could have just as easily manipulated the data to show that corporations
with blue covers on their annual reports performed better than corporations with green covers
on their annual reports." Christopher Browne

"Our universe is the approximately 1,900 companies listed on North American stock exchanges
with market capitalisation between $1b and $25b. Within that range we've found no
correlation between market cap and market efficiency. We actually don't consider the market
very efficient, period" Andrew Benton

“Beta and modern portfolio theory and the like – none of it makes any sense to me.” Charlie
Munger

“I don’t think Warren Buffett got to going from flipping newspapers to worth $75b if the market
was totally efficient. Whether it’s Mario Gabelli, whether it’s Stan Druckenmiller or Lee
Cooperman. Everyone seems to think it is hard to beat the S&P, if its so easy to underperform,
the ability must exist to outperform. I think there are enough people that have outperformed
over the years, to suggest with patience, some brains and a little bit of luck you can
outperform. I’m committed to that proposition” Leon Cooperman

"Notions of market efficiency - the idea that most assets are priced "right" - are based on belief
in investor rationality and objectivity. But certainly those traits are little seen in real life"
Howard Marks

"The academic world still insists on teaching that financial markets are largely efficient, with
perhaps a few minor anomalies (such as the "January effect") that give tenure-seeking finance
professors something to research" Seth Klarman

"The possibility that stock value in aggregate can become irrationally high is contrary to the
hard-form “efficient market” theory that many of you once learned as gospel from your
mistaken professors of yore. Your mistaken professors were too much influenced by “rational
man” models of human behavior from economics and too little by “foolish man” models from
psychology and real-world experience.” Charlie Munger

"The elegance of the efficient market theory is at odds with the reality of how the financial
markets operate" Seth Klarman

"The facts are that the capital asset pricing model has clearly been rejected as an adequate
description of the movement of stock prices. Beta, the only factor that was once thought to
matter, does not appear to explain very much" Richard Thaler

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"The thing about mathematical modelling is that in order to make problems tractable, you need
to make assumptions. Assumptions then become axiomatic for the entire subject - not because
they are true, but because they are necessary to get a solution. So, it is easier to assume
efficient markets because without that assumption, you can't do the math. The problem is that
markets aren't efficient, but that fact is just conveniently ignored" Colm O'Shea

"Academics are deliberately blind to the fifty-plus year track record of Warren Buffett as well as
those of other accomplished investors, for if markets are efficient, how can Warren Buffet's
astonishing success possibly be explained?" Seth Klarman

"Modern Portfolio Theory is the ultimate application of mathematics to what really is a soft
science. So even though MPT is an important part of the CFA program and the curriculum in
most graduate business schools, Buffett & I consider it almost laughable. Yet it continues as a
core curriculum in most graduate business schools because that's what teachers have been
taught to teach, and it's hard for this battleship to change direction" Frank Martin

"Beta and modern portfolio theory and the like - none of it makes any sense to me. We're
trying to buy businesses with sustainable competitive advantages at a low, or even, a fair price"
Charlie Munger

"I believe that the efficient market hypothesis fails because it ignores human nature, particularly
the nature of most individuals to be followers, not leaders. As followers, humans are prone to
embrace that which has been faring well and to shun that which recently has been fairing
poorly" Ed Wachnheim

"When I went to Stanford business school and I hadn't been an investor I had all these PHD's in
finance that said the same thing .. the efficient market hypothesis - all the information is in the
price. Instinctively I knew that was wrong, it just wasn't right. Why would everyone be of the
same intelligence and of the same risk profile and same everything. And how could someone
digest all that information too. Price is not the proper discounting of the future the way the
efficient market hypothesis insists and applies" John Burbank

"Academia failed. The professors at our greatest universities have perfectly asinine ideas - first,
about efficient market theory. One of those people influenced McKinsey [& Company] so much
that McKinsey came to the Washington Post at the time it was selling at one-fifth of what it was
plainly worth as a share of the total enterprise, and said, "You can't buy the stock in because,
under efficient market theory, it can't be worth a fifth of what people would pay for the whole
company. Of course, the kind of mind that would keep a stupid idea like this when they have a
fact that would clearly refute it - it clearly violates traditions of science and mental decency.
They taught this drivel to our children for decades and, by God, a lot of peopleare still doing it.
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It was in the major textbooks in economics and people as smart as Paul Samuelson believed it -
and that is a significantly smart man.

"How do smart people get such dumb ideas and hold them so long? Then these ideas from
economics drifted into corporate finance, and they got the capital asset pricing model - also
pure drivel. They taught it to all of our children and the law schools picked it up. They didn't
understand it, but they could repeat it like a mantra from Buddhism, and people would learn it
and regurgitate it on the examinations and they get A's and so forth. Of course, they got out
into the real world and they were menaces to decency and sound thinking. That didnt bother
the people at Harvard University or any of the people that were doing it. And you say, how can
smart people do such immensely dumb things? " Charlie Munger

"Most of the assumptions behind the CAPM model do not come close to reality - at least not on
this planet" David Dreman

"I also found it difficult to integrate the efficient-market hypothesis (that everything in the stock
market is "known" and prices are always "rational" with the random-walk hypothesis (that the
ups and downs of the market are irrational and entirely unpredictable). Already I'd seen enough
odd fluctuations to doubt the rational part, and the success of the great Fidelity fund managers
was hardly unpredictable. It also was obvious that Wharton professors who believed in
quantum analysis and random walk weren't doing nearly as well as my new colleagues at
Fidelity, so between theory and practice, I cast my lot with the practitioners. It's very hard to
support the popular academic theory that the market is irrational when you know somebody
who just made a twenty fold profit in Kentucky Fried Chicken, and furthermore who explained
in advance why the stock was going to rise. My distrust of theorizers and prognosticators
continues to the present day" Peter Lynch

"A lot of MBA programs, particularly these days, teach you about market efficiency and
accounting rules, but this is not a perfect world and there will always be anomalies and there is
always "wriggle room" within company accounts so you have to stick to your guns and forget
the hype" Peter Cundill

"This theory [Efficient Market Theory] is what they teach in business school so that you'll have
less competition when doing your own stock research" Joel Greenblatt

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45. SHORTS

"He who sells what isn't his'n must make it good or go to prison." The amateur speculator soon
learns this little Wall Street jingle and is often deterred by it from making a short sale. It is
essential, however that he understand the mechanics of short selling, its economic function and
perhaps the ethics, if any, of such a transaction" Philip Carret 1930

“We do short individual equities from time to time, but we short with respect, experience, and
proper sizing and stop-loss levels” Kyle Bass

“For the most part, we avoided the damage in the short portfolio by refusing to sell
short anything just because its valuation appeared silly. We reasoned that twice a silly valuation
is not twice as silly. It is still just silly. Kind of like twice infinity is still infinity” David Einhorn

“If I ask someone who runs a long/short equity fund who is 20% long and 20% short, if they’re
levered, the most likely answer would be no. In reality, if you’re short anything you’re levered,
because if it “Volkswagens” you, you’re going to lose all your money” Kyle Bass

“While we love catalysts on the long side, we require them on the short side. Valuation shorts
are always tricky” Shawn Kravetz

"A basic principle in going short is that there has to be a catalyst" Steve Cohen

"Many of my shorts over the years have been management teams that are repeat offenders.
Some of these guys, no matter where they go, hype whatever the current product, idea,
concept or whatever flavor of the day people want to hear." Marc Cohodes

“You have to remember that if you are shorting a leveraged company, with 90% of the
capitalization in debt and 10% in equity, a 50% decline in the stock only wipes out 5% of the
total capitalization. You have to look at the total capitalization” Jim Chanos

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"We’re looking for companies [to short] with weakening moats, often coupled with a resulting
deployment of capital into areas in which they have no competitive advantage. Even better is
when they’re deploying not just excess capital, but leveraging the balance sheet to do so”
James Chrichton

"The goal should be that in the middle of a storm that puts all the less-seaworthy boats at the
bottom of the ocean, your boat, battered as it may be, makes it back to shore. Short
selling helps you do that." Zeke Ashton

“Our favourite short opportunities are companies that are highly leveraged, need access to
capital to survive, require substantial management judgement in the determination of their
reported earnings, and have fundamentally bad business models. For equity shorts, we have an
additional criterion that there is a “ceiling on valuation”. A ceiling on valuatio n is what we deem
to be the equivalent of a margin of safety for long investments. In other words, we look for
equity shorts where the conventional bounds of valuation for a particular business protect us
from material stock price increases” Bill Ackman

“One painful lesson on the short side has been that mere absurd overvaluation is not sufficient
reason to be short” Whitney Tilson

"We do not generally engage in the short sale of overvalued securities, believing that short-
selling could effectively increase, not decrease, portfolio risk in certain kinds of markets" Seth
Klarman

"Shorting great companies on valuation is a formula for going broke" Shad Rowe

“Investors often become emotionally attached to companies in which they’ve made a lot of
money, so I’ve found that in the first year or so after a company starts to make excuses for
falling short of its historical success, the market reacts in a very benign way. That can give us an
opportunity, if we believe the situation has fundamentally changed, to mak e attractive bets on
the short side” Brian Zied

"If you're interested in shorting stocks, it's very labor intensive. You probably have to do 6x the
work that the longs do. You have to have the courage and faith in your work. I used to say, 96%
of the time, you go home feeling and thinking like you're an idiot, and you get paid 4% of the
time. So when you have a good day, you have a great day. But your bad days are numerous. It
takes a certain mind and mindset to be able to deal with that. Most people just can't." Marc
Cohodes

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“Part of it is the fear in the back of every manager’s head that stocks can go up infinitely but
you can only make 100 percent on the short side; stocks can only go to zero. My reply to that
has always been: I have seen more stocks go to zero than infinity” Jim Chanos

“I believe the internet bubble made its ultimate top the last day the last short seller could no
longer afford to hold his position and was forced to cover. Market extremes occur when it
becomes too expensive in the short term to hold for the long term” David Einhorn

"A few thoughts should be kept uppermost in mind. One is: never sell a stock, because it seems
high priced. You may watch the stock go from 10 to 50 and decide that it is selling at too high a
level. That is the time to determine what is to prevent it from starting at 50 and going to 150
under favourable earnings conditions and good corporate management. Many have lost their
capital funds by selling a stock short after a long upward movement, when it "seemed too high"
Jesse Livermore

“I need to have conviction in all my shorts about either a company specific catalyst or a macro
catalyst” Whitney Tilson

"Any company with a management team that focuses on, mentions, is bothered by, or attempts
to squeeze short sellers, is almost definitely a short." Marc Cohodes

"Shorting is not a criminal trial. It doesn't have to be beyond a reasonable doubt. There just has
to be a preponderance of evidence" Jim Chanos

"With our shorts we're even more focussed on catalysts and we've found our performance has
improved since we created an entirely seperate investment process around them" Richard
Vogel

"As long as no-one cares about it, there is no trend. Would you short Nasdaq in 1999? You can't
be short just because you think fundamentally something is overpriced. You can wait until
people start to care. So you are selling the market on the way down not the way up" Colm
O'Shea

"In general, on the short side we focus on poor fundamental and competitive situations,
hopefully with weak management teams, more than we focus on valuation. In other words, we
have no problem shorting cheap stocks where we see long-term structural or competitive
problems. And we never short stocks purely for valuation reasons. As we have all seen over the
last year, unreasonable valuation can often become more unreasonable" Lee Ainslee

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“Valuation itself is probably the last thing we factor into our decision. Some of our very best
shorts have been cheap or value stocks. We look more at the businsss to see if there is
something structurally wrong or about to go wrong, and enter the valuation last” Jim Chanos

“In most walks of life the early bird undoubtedly gets the worm, but in selling short it is mostly
the tardy sellers who succeed” Gerald Loeb

"We do not short to hedge. If we are uncomfortable with the risk in the position, we simply
reduce or eliminate it. By having a portfolio of worthwhile longs and worthwhile shorts, we
achieve a partial market hedge without having to spend capital on negative-expected-return
propositions" David Einhorn

“A stock should never be sold short because its price looks too high” W O’Neil

"Catalysts are a higher priority for shorts because time is generally not on our side given that
the market goes up longer term. Occasionally we will short on valuation without a specific
catalyst, but that can be risky because an excessive valuation can easily become more
excessive. In those cases there are two things we like to do to mitigate our risk. First we
generally make the position sizes smaller. Second we try to use the law of large numbers to our
advantage. For example, if we're anticipating that a glamour stock's revenue growth will mean
revert, it's easier to do that with a company that has billions of dollars in sales facing natural
deceleration. Also from a maker cap standpoint, its a lot harder for a company with a $45b
market cap to double than it is for a company with a $45m market cap." Rolf Heitmeyer

"A key problem for investors who short a company that is subject to government oversight is
that the government, even when it acts, does not move at the speed of the stock market. Two
years might make a prompt government investigation, but it is an eternity for investors such as
Greenlight reporting monthly results, even in a long term strategy" David Einhorn

"I prefer situations in which I can have five shooters on the target rather than one. For example
.. I think I can win on a bubble, on fraud, on lack of reserves, on the macroeconomics, on money
laundering. There's a zillion ways I can win." Marc Cohodes

“For my shorts, I look for a bad management team, and a wildly overvalued company in an
industry that is declining or misunderstood” Julian Robertson

"While on the long side we're concentrated with a one or two year time horizon, on the
short side we're diversified with a time horizon of two weeks to two months" Alex Roepers

"When we’re short, we look for deteriorating industry conditions, company-specific

fundamentals at risk and liquidity issues. We will short a good company, even a cheap company,
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if we think reality will fall short of current expectations. The best way I’ve learned to short is by
making mistakes on the long side – in value traps, for example – and then recognizing when
others are making the same mistake." Larry Robbins

"Because there are more ways to get hurt on shorts than longs, we typically keep the position
sizes smaller and pay even more attention to liquidity and how crowded the trade is. There's
no worse feeling than being stuck in a short as it's going up" Curtis Macnguyen

"Our view is that short selling may not in most years be worth the time and effort you spend on
it, but you do it precisely for those years like 2008 when shorting not only offsets losses on your
longs, but also produces capital that allows you to average down on the long side." Zeke
Ashton

"I think making money on the long side is a more fruitful activity, but from a portfolio -
management standpoint, the shorts give you the staying power to live through difficult market
conditions. In a perfect world, you should be able to make money on both your longs and your
shorts in the long run" Dan Loeb

"You don't see any Fifth Avenue mansions built by bears" James R Keene [from Bernard
Baruch's 'My Own Story]

"One important thing to understand is that there are many easier ways to make a living than
shorting stocks. If you want to make a lot of money on Wall Street, shorting stocks is not what
you want to do." Marc Cohodes

"As an equity trader, I leaned the short-selling lessons relatively early. There is no high for a
concept stock. It is always better to be long before they have already moved a lot than to try to
figure out where to go short" Joe Vidich

"In shorting it's much harder to underwrite your downside which is something crucial to keep in
mind" Ed Bosek

"People make trades without a good reason. They step in front of freight trains. They
short stocks because they are up, as if that were a reason. They'll say "I can't believe the stock
is so high," and that's their total research. That makes no sense to me. My response is: "You
have to do better than that'" Steve Cohen

"If I make you a few percent a year being short, in effect I'm an insurance policy. I'm protecting
your downside and I'm paying you a small amount in dividends. But think about it. You could
then go twice long the market, be short my portfolio, and have 2X the market plus a few
percent, minus your cost of the additional carry. And that's the proposition, and that's why
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short selling alpha is so prized in the marketplace when you can find it, because it enables you
to be more long. As I keep saying to people: I'm in the insurance business" Jim Chanos

"It’s difficult to have hard and fast rules. When you short stocks, you get involved on a carnival
ride that's called 'anything goes,' which includes buy-ins, manipulations, fake tenders, and all
sorts of shenanigans which can cause stocks to gyrate in a crazy fashion. Before I short
anything, I have a few protections. First, I always assume the short can double on me. I size the
position accordingly. Second, I guard against "thesis creep." If the thesis changes, you better
get the hell out. If you don’t, you'll clearly get buried. As long as your thesis is pretty good and
your analysis is right, you can hang in there. Third, I never, ever, ever get involved in what I
would call open- ended situations. I've never been short a drug company that can theoretically
solve a big problem. I have avoided pie-in-the-sky names. To use an analogy, I’m not interested
in climbing into a tree and wrestling the jaguar out of the tree. I'm interested in someone
shooting the jaguar out of the tree, and then I will go cut the thing apart once it hits the
ground. Instead of open-ended situations, I like to short complete pieces of garbage with
fraudulent management and horrifically bad balance sheets. I look for change, I look for "if this
goes away tomorrow will anyone miss them"? What do they do well? " Marc Cohodes

"In most successful short sales, we lose money gradually for a period of time until we suddenly
make a large gain - often in a single day" David Einhorn

"I normally lose [on shorts] first then hopefully win. I do look for breaks in the fundamentals
first before I dive in. When the market begins to care is anyone’s guess." Marc Cohodes

"Timing is delicate, sometimes exquisitely so. To go short on the right stock at the wrong time
(on the way up) may be horrendously expensive. Ask those who went short Litton,
TelePrompTer, Levitz Furniture, Memorex, and many others - rightly but too soon. I knew a
man who lost everything selling short in the summer of 1929, at the height of the bull market.
He didn't have the reserves to hold out until autumn" Roy Neuberger

"When they first went public I noticed the top two guys in management wore wigs. I am 10/10
in shorting guys who wear wigs. It’s another indicator of mine. I don’t know what it is with guys
who wear wigs but they make great shorts." Marc Cohodes

"Over the years, we have uncovered many of our best short opportunities in mundane and
competitive businesses that have experienced a significant increase in their valuations following
an unsustainable increase in margins and earnings." Anthony Bozza

"Ideally I would like to go short companies that are expensive relative to their sector and where
I expect profit warnings over the next few years. The problem is that these bad companies

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have the greatest risk of being takeover targets... You can be long a good stock at 7 times
earnings and short a bad stock at 15 times earnings, and some stupid foreign company comes
along and pays a 50 precent premium to buy the bad company" Martin Taylor

“Be very wary of a company that shows two things .. lots to management stock sales from
different people, but more importantly management departures, if you are seeing a company
when 10 or 15 or 20 people are leaving within a year or two.. look out” Jim Chanos

“When I sell something short I am not trying to create a hedge, I am trying to create a profit.
We do this by identifying stocks that are both overvalued and deteriorating. In many cases
there is something wrong that we have unearthed that is not widely understood in the market”
David Einhorn

"The two best indicators of a company on its way to bankruptcy - rapidly shrinking revenues and
a quickly rising debt level" Scott Fearon

Tutorial 41-45 Recap

1) CHANGE - The Investment Masters understand that nothing is permanent. Businesses

change and markets change. Technology is changing businesses at a rapid pace. It's important
to recognise change and react to change. At the same time an investor must change his view or
position if the circumstances change. Be open to new information and be open minded about
change and your response to it.

2) CORRELATION - The Investment Masters recognise the dangers of excessive correlation.

Correlation is used to measure how one stock moves in relation to another. Remember that
correlations are based on historic data and are not constant. Investors should seek to build
portfolios with uncorrelated assets to help protect capital. In weak markets, there is a
tendency for all assets to move together. Be mindful of the correlations in your portfolio which
requires a lot of thought. What are the factors that could do serious damage to your portfolio.
It may be that you have all or too many of your assets exposed to one currency, industry,
sovereign risk, investing style, interest rates, commodity, etc. As circumstances change risks
change so continually assess the correlation risks in the portfolio.

3) INVESTING INSTINCT - The Investment Masters understand the power of intuition and
instinct. The longer you spend analysing companies and industries and investing the larger the
subconscious library of information you build. It's often the connection of this subconscious
information that provides investing insights. Over time pattern recognition improves
significantly to help the investment process.

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4) EFFICIENT MARKETS - the Investment Masters understand markets are not perfectly efficient.
At times stock prices move far more than the underlying values of the businesses they
represent as prices are driven by human emotions. There are no investors in the ranks of the
Investment Masters who have used the Capital Asset Pricing Model and the theory of Efficient
Markets as the basis of their investing style.

5) SHORTS - Those of the Investment Masters who utilise shorting in their investment tool kit
recognise the additional risks involved. There are a multitude of factors that must be
considered when implementing a short strategy. Factors such as crowding, stock borrow, risk
of corporate activity, risk of short squeeze, risk of management over-promotion, timing, sizing
versus longs etc. Shorting stocks on the basis that they are expensive is a quick way to the poor
house.

46. DIVERSIFICATION

"There is one other rule you ought to keep in mind and that is to concentrate, and not only in
the Zen sense. Sweet are the uses of diversity, but only if you want to end up in the middle of
an average" Adam Smith, the Money Game 1968

“Statistical analysis shows that security-specific risk is adequately diversified after 14 names in
different industries, and the incremental benefit of each additional holding is negligible. We
own 18-22 companies to allow us to be amply diversified but have the flexibility to overweight a
name or own more than one business within an industry.” Mason Hawkins

“Empirical testing has proved beyond a reasonable doubt that the “riskiness” of a portfolio of
12-15 diverse companies is little greater than one loaded with a hundred or more” Frank Martin

"If you can identify six wonderful businesses, that is all the diversification you need. And you
will make a lot of money. And I can guarantee that going into a seventh one instead of putting
more money into your first one is gotta be a terrible mistake. Very few people have gotten rich
on their seventh best idea. But a lot of people have gotten rich with their best idea. So I would

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say for anyone working with normal capital who really knows the businesses they have gone
into, six is plenty, and I probably have half of what I like best. I don‘t diversify personally. "
Warren Buffett

“Two things should be remembered, after purchasing six or eight stocks in different industries,
the benefit of adding even more stocks to your portfolio in an effort to decrease risk is small,
and overall market risk will not be eliminated merely by adding more stocks to your portfolio”
Joel Greenblatt

“The number of securities that should be owned to reduce portfolio risk is not great; as few as
ten to fifteen holdings usually suffice.” Seth Klarman

“The more positions you have, the more average you are” Bruce Berkowitz

"The idea of excessive diversification is madness" Charlie Munger

“Don’t buy too many different securities. Better to have only a few investments which can be
watched.” Bernard Baruch

"I think diversification and all that stuff they're teaching at business school today is probably the
most misguided concept anywhere" Stanley Druckenmiller

“Diversification is always and everywhere a confession of ignorance” Andy Redleaf

“Diversification covers up ignorance.” Bill Ackman

“Diversification is a protection against ignorance. It makes very little sense for those who know
what they’re doing.” Warren Buffett

"One of the things that is very important to understand is that diversification is only a
surrogate, and usually a poor surrogate, for knowledge, control and price consciousness" Marty
Whitman

"Once you attain competency, diversification is undesirable" Gerald Loeb

“We strongly believe that the supply of great businesses is severely limited and to engage in
broad diversification is dilutive to the implicit purpose of earning above-average longer-term
returns” Frank Martin

"Our investment style has been given a name - focus investing, which implies ten holdings, not
one hundred or four hundred" Charlie Munger

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“Diversification is the most destructive, over-rated concept in our business. Look at George
Soros, Carl Icahn, Warren Buffett. What do they have in common? they make huge
concentrated investments. You need ruthless discipline. If the reason you invested changes get
the hell out and move on.” Stanley Druckenmiller

"The academics have done a terrible disservice to intelligent investors by glorifying the idea of
diversification. Because I just think the whole concept is literally almost insane. It emphasises
feeling good about not having your investment results depart very much from average
investment results" Charlie Munger

“The appeal of a concentrated portfolio is that it is the only chance an investor has to beat the
averages by a noteworthy margin” Frank Martin

“The desire to spread stock picking risks over a number of different securities must be balanced
against the negative impacts of spreading research resources so thin that an intimate
understanding of a company or industry is lost. In such cases, diversification can become ‘di-
worse-ification” Lee Ainslee

“Some people say that concentrating on just a few positions in which you have most confidence
and focus is the way to both make money and decrease risk. I agree, but only up to a point.
Often a risk manager faces the greatest need to limit position size when the enthusiasm and
self-confidence which enable money managers to “pull the trigger” scream to take a larger
position” Paul Singer

“A well-diversified portfolio needs just four stocks” Charlie Munger

"There is a downside to extensive diversification. As the market goes, so goes your portfolio"
Frank Martin

“Charlie Munger considers that a portfolio of four stocks is a well diversified portfolio. He says,
you don’t even need a 5th stock. He goes on to say that if you lived in a small town, and if you
owned the best apartment building in town, if you owned the highest quality office building in
town, if you owned the McDonalds franchise in town, if you owned the Ford dealership. if you
owned this collection of assets, even though they're all geographically concentrated, his
perspective is that you will do very well. You will not need to do much else beyond that to have
an interesting investing career.” Mohnish Pabrai

“There is one thing I can assure you. If good performance of the fund is even a minor objective,
any portfolio encompassing one hundred stocks is not being operated logically. The addition of
the one hundredth stock simply can’t reduce the potential variance in portfolio performance

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sufficiently to compensate for the negative effect its inclusion has on overall portfolio
expectations”. Warren Buffett, Partnership letter 1965

“Limiting the portfolios to our 20 most qualified investments allows us to know the companies
we own and their managements extremely well while providing ample security -specific
diversification.” Bruce Berkowitz

“For individuals, any holding of over twenty different stocks is a sign of financial incompetence”
Phil Fisher

“Investors have been so oversold on diversification that fear of having too many eggs in one
basket has caused them to put far too little into companies they thoroughly know an d far too
much in others which they know nothing at all. It never seems to occur to them, much less to
their advisers, that buying a company without having sufficient knowledge of it may be even
more dangerous than having inadequate diversification” Phil Fisher

“For an individual investor you want to own at least 10 and probably 15 and as many as 20
different securities. Many people would consider that to be a relatively highly concentrated
portfolio. In our view you want to own the best 10 or 15 businesses you can find, and if you
invest in low leverage/high quality companies, that’s a comfortable degree of diversification.”
Bill Ackman

“I decided to run a concentrated portfolio. As Joel Greenblatt pointed out, holding eight stocks
eliminates 81% of the risk in owning just one stock, and holding 32 stocks eliminates 96% of the
risk. This insight struck me as incredibly important. It is hard to find long ideas that are ones or
twos or shorts that are nines or tens, so when we find them, we decided that Greenl ight would
have a concentrated portfolio with up to 20% of capital in a single long idea (it had better be a
one!) and generally would have 30-60% of our five largest longs.” David Einhorn

“Let there be no doubt: If you go the route of broad diversification, rest assured that you will
never stand out in a crowd” Frank Martin

“The strategy we’ve adopted precludes our following standard diversification dogma. Many
pundits would therefore say the strategy must be riskier than that employed by more
conventional investors. We disagree. We believe that a policy of portfolio concentration may
well decrease risk if it raises, as it should, both the intensity with which an investor thinks about
a business and the comfort-level he must feel with its economic characteristics before buying
into it.” Warren Buffett

“In the field of common stocks, a little bit of a great many can never be more than a poor
substitute for a few of the outstanding” Phil Fisher
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“Diversification, too aggressively used as a substitute for knowledge, ultimately undermines
diversification itself. A poorly understood portfolio may be far less diversified than it appears to
be” Andy Redleaf

"Structure a concentrated portfolio, yet a diverse portfolio" Ed Wachenheim

"I seek to construct a portfolio that is both highly concentrated, yet also diverse in terms of
industries, types of value, catalysts, and risk" Whitney Tilson

"Owning a diverse portfolio in one market may greatly reduce the risk of being in that market.
If that market runs into a pothole, its components could all breakdown at once. Of
course, diversification is for us only the starting point for risk reduction. Solid fundamental
research, emphasis on catalysts, value discipline, preference for tangible assets, hedge short
selling, market put options and other strategies combine to create an overall portfolio safety
net for our portfolio that we believe is second to none" Seth Klarman

“Most investors think diversification consists of holding many different things, few understand
that diversification is effective only if portfolio holdings can be counted on to respond
differently to a given development in the environment” Howard Marks

"A key component of our investment strategy is sufficient but not excessive
diversification. Rather than own a little bit of everything, we have always tended to place our
eggs in a few dozen baskets and watch them closely. These bargain-priced opportunities are
selected one at a time, bottom up, which provides a margin of safety in case of error, bad luck
or disappointing business results. However, we are always conscious of whether these
different investments involve essentially the same bet. If each of our holdings turned out to
involve similar bets [inflation hedges, interest rate sensitive, single mark et or asset type etc],
we would be exposed to dramatic and sudden reversals in our entire portfolio were investor
perceptions of the macro environment to change. Since we are not able to predict the future,
we cannot risk such concentrations" Seth Klarman

"We don't believe that widespread diversification will yield a good result. We believe almost all
good investments will involve relatively low diversification" Charlie Munger

"You will find our challenge to the popular custom of diversification among asset classes, styles,
and stocks of so many varieties that they defy description in an essay of this length. We have
never understood the truism that most first-generation wealth is created on the strength of
one idea or company, and then concludes with the dubious assumption that in order to
preserve it, it must be spread among a thousand other companies" Frank Martin

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“Phil Fisher believed in concentrating in about 10 good investments and was happy with a
limited number. That is very much in our playbook. And he believed in knowing a lot about the
things he did invest in. And that’s in our playbook, too. And the reason why it’s in our playbook
is that to some extent, we learned it from him.” Charlie Munger

"We believe that exceptional returns are created by concentrated portfolios, as excellent ideas
are few and far between. The idea that you should own a little bit of everything is a recipe for
mediocrity" Christopher Parvese

"A lot of great fortunes in the world have been made by owning a single wonderful business. If
you understand the business, you don't need to own very many of them". Warren Buffett

"So long as you choose to be invested in stocks, there is one risk for which diversification
affords no protection. As you increase diversification, you concurrently and inevitably increase
your exposure to market risk - namely, the tendency of your portfolio, like an index fund, to
mirror the performance of the market. If you owned an index fund that mimicked the Nasdaq
500 as it fell from 5050 to just over 1000, you might begin to doubt the concept of security of
principal (or the principle of security!) that is presumed to be found in the safety of large
numbers" Frank Martin

"What works for us is between 10 and 20 (stocks). Owning more than 20 stocks, it's too hard to
follow the companies very closely, and a big winner won't move the needle enough. I'm
uncomfortable with the risk of owning fewer than 10, because we live in a dynamic world and
you do make mistakes. I don't want to make a mistake in a 15% position" Ed Wachenheim

"The idea that it is hard to find good investments, so concentrate in a few, seems to me to be
an obviously good idea. But ninety-eight percent of the investment world doesn't think this
way. It's been good for us - and you - that we've done this" Charlie Munger

"A few things have worked out very well [for me]. And the nice thing about the investment
business is that you don't need very many. You'll see plenty of times when you get chances to
do things that just shout at you. And the thing you have to do is, when that happens, you have
to take a big swing. That is no time to be reading a book on the theory of diversification....When
you find something where you know the business is within your circle of competence, you
understand it, the price is right, the people are right--then you take your thumb out of your
mouth and you barrel in" Warren Buffett

47. INVESTMENT FACTORS

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“A key rule in investing is that you don’t necessarily need to understand a lot of different things
at any given time, but you need to understand the one thing that really matters” Dan Loeb

"If you are an investment analyst or investment manager, to be successful and to do well, a
couple of things have to happen. Number one, in most businesses, the results a re driven by
three or four factors that control let’s say 80 percent of the outcome and most entrepreneurs
are honed in on those three or four factors. They understand those factors and they focus on
those factors. If the factors you focus on do not match the factors that the guy running the
business is focused on, you’ve not understood the business and there’s a problem over there."
Mohnish Pabrai

“I think ultimately, the ability to distill two or three major themes out of an investment and get
right to the heart of the matter – is truly an art” Seth Klarman

“Based on my own personal experience – both as an investor in recent years and an expert
witness in years past – rarely do more than three or four variables really count. Everything else
is noise.” Marty Whitman

“A lot of people will have an hour with the CEO and ask about a lot of industry jargon that could
only possibly matter if you knew absolutely all there is to know about everything else in the
universe, and these were the last things you didn’t know. But most of the time there’s two or
three big things that really matters and it makes sense to focus the research effort there”
Daniel Krueger

“Our failure here illustrates the importance of a guideline – stay with simple propositions – that
we usually apply in investments as well as operations. If only one variable is key to a decision,
and the variable has a 90% chance of going your way, the chance for a successful outcome is
obviously 90%. But if ten independent variables need to break favorably for a successful result,
and each has a 90% probability of success, the likelihood of having a winner is only 35%. In our
zinc venture, we solved most of the problems. But one proved intractable, and that was one too

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many. Since a chain is no stronger than its weakest link, it makes sense to look for – if you’ll
excuse an oxymoron – mono-linked chains.” Warren Buffett

"In my early years, I ended up too much in the weeds. I had to know everything about a
company and its industry. I’ve since learned that knowing less is okay as long as you have
identified the one to three things that will drive the company. We believe exactness offers little
so we prefer to establish a potential range of outcomes instead. We’d rather be directionally
right rather than precisely wrong. " Steven Romick

"To make big money on investments it is unnecessary to get some answer to every investment
that might be considered. What is necessary is to get the right answer a large proportion of the
very small number of times actual purchases are made”. Phil Fisher

"There are only a few things you have to get right about a company for it to be successful
investment. Our view is that if you can get 85% of the way there by answering the big
questions, don't waste your time on the last 15% because the marginal utility isn't worth it"
Steve Morrow

“It’s very common to drown in the details or be attracted to complexity, but what’s most
important to me is to know what three, four or five major characteristics of the business really
matter. I see my job primarily as asking the right questions and focusing the analysis in order to
make a decision” James Montier

"We've generally found that the really great investments come down to one or two drivers that
tell a story differently than people think" Ed Bosek

"One of the difficult things about being a good fundamental investor is that you want to start
out with all of the information, but then you want to synthesize it down to just the important
factors. It is always a struggle not to be myopic - you want to make sure that you constantly
think about and react to new information. But you do not want to be chasing your tail. You
want to be focussed on the truly important things" Larry Robbins

"I believe that there's no need to know every detail, rather there's a need to understand
the three, four or five factors affecting the company" Charles De Vaulx

"Our approach stresses the importance of wisdom by subtraction. We endeavour to look past
the non-essential details and tune out the often deafening noise. We want to identify the
“essence” of each business. So, for instance, what is it about MasterCard that enables them to
generate after-tax margins approaching forty percent? Why have the Rales brothers, first with
Danaher and second with Colfax, been so successful buying and fixing businesses? How has
Markel managed to compound book value per share at fifteen percent for the past twenty
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years despite falling interest rates and a competitive underwriting environment?." Chris
Cerrone

"If anything, too much information may be available today. The problem has become less one
of digging out information than to separate the irrelevant detail from the essential facts and to
determine what those facts mean. More than ever before what is needed is sound judgement"
Bernard Baruch

"There is the qualitative side, which is of course judgemental and has a lot to do with trying to
figure out the three, four or five major characteristics of the business. For instance in the early
1970's, Buffett figured out that the major characteristics of the newspaper business had to do
with the fact that many newspapers had a quasi-monopoly" Jean Marie-Eveillard

"Before meeting with top management, I determine the three questions I would ask if I could
administer truth serum. I see a lot of analysts who arrive with five pages of questions, and
that’s not very helpful. You want to identify the key questions that are going to drive the
investment, and ask the CEO." Glenn Greenberg

"Investors should remember that their scorecard is not computed using Olympic-diving
methods: Degree-of-difficulty doesn’t count. If you are right about a business whole value is
largely dependent on a single key factor that is both easy to understand and enduring, the
payoff is the same as if you had correctly analyzed an investment alternative characterized by
many constantly shifting and complex variables." Warren Buffett

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48. POSITION SIZING

“If you wake up thinking about a position, it’s too big” Steve Clarke

“Make your position size more a function of not how much you can make, but really how much
you can lose. So manage your position based on your downward loss perspective not your
upward potential.” James Dinan

“We will make something a large position if we think there is an extremely low chance of losing
money on a permanent basis. Even if we think it might be a 4X return, if the idea could be a
zero, it’ll be a small position” Ken Shubin Stein

“I’ll limit position sizes when potential outcomes are too binary” Chris Mittleman

"We do not bet the ranch on any single investment; few positions have exceeded 5% of assets
in recent years" Seth Klarman

“We size things based on how much we think we can make versus how much we think we can
lose. We’ll probably be willing to lose 5-6% of our capital in any one investment” Bill Ackman

“You want to have no one position that can damage you or take you down. You always want to
be in business tomorrow.” James Dinan

“Setting maximum and minimum position sizes helps enforce several disciplines, including
diversification. Minimum position sizes limits guard against ‘di-worse-ification’’. On the short
side, maximum size limits can serve as an important ceiling to reduce losses from large short
investments that are growing the wrong way” Lee Ainslee

“All other things being equal, a larger maximum position size in relation to capital increases risk.
Some people say that concentrating on just a few positions in which you have most confidence
and focus is the way to both make money and decrease risk. I agree, but only up to a point”
Paul Singer

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"There is no single correct answer the optimum diversity in a portfolio. My own policy is that no
single stock should equal more than 12 percent of the total value of a portfolio and that no
single industry should equal more than 25 percent of the total value." Ed Wachenheim

"We have position limits on how much we are willing to put into a position. I look at those
position limits from a cost basis, so we don't look at it based on current prices. We are
unwilling to commit more than 10% of assets to one position" Mohnish Pabrai

“I wish I could describe some complicated algorithm that can tell us when a position is big
enough. Without any such magic formula, however, what we have to do is this.. 1) look at each
position 2) try and assess the downside case 3) envision the rest of the portfolio will look like
when the downside case occurs 4) assess the quality of our effort and what we or the rest of
the world might be missing; and 5) choose position size from there” Paul Singer

"You want to limit your size in a position so that fear does not become the prevailing instinct
guiding your judgement. Everyone will have a different level. It also depends on what kind of
stock it is. A 10% position might be perfectly okay for a large cap, while a 3% position in a
highflying mid-cap stock, which has frequent 30% swings, might be far too risky" Joe Vidich

“There are fantastic risk/reward opportunities that you are willing to do at 3% of your portfolio
that you might be unwilling to do at 10%. When a position gets that big, you look for perfection
and there’s no such thing. You become overly sensitive to the downside, remote as it may be.
And for every unit of downside you eliminate, you tend to sacrifice multiple units of upside and
over the long run, end up with lower returns” Andrew Wellington

"Once we own something, position size is driven primarily by expected return from today's
price, but we also consider other factors like quality of management, how well we believe we
understand the business and how broad or narrow we consider the range of possible
outcomes." Andrew Brenton

“When we consider a trade, we ask ourselves, ‘How much do we want to risk in this thing? How
comfortable are we with it?’ We normally would start to have anywhere between 1% and
maybe 3% in the portfolio. In a nice friendly stock-for-stock merger with no thorny issues we
can put 5%-10% of our capital in, but you'll be making a lesser return. In a more dicey corporate
spinoff, you really can't hedge out anything; that's going to be a much smaller position. Once a
position goes on the sheet, it has to earn the right to stay on the sheet almost on a daily basis.”
James Dinan

“Even the best managers in the world have difficulty with sizing positions. Positioning is very
correlated to conviction level. Look at risk management in totality. Position level and portfolio

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level. Have position level stops or targets. Portfolio wide have risk levels of down 2%, down 5%
and down 10%. Down 10% is almost mandatory risk reduction across the board to l ive again
another day. Think about enormity of correlations when positions are large.” Kyle Bass

“I keep cutting my position size down as I have losing trades. When I am trading poorly, I keep
reducing my position size. That way, I will be trading my smallest position when my trading is
worst” Paul Tudor Jones

“During periods when we were losing money, I significantly reduced our overall exposure, and
raised cash” Michael Steinhardt

“In my younger days I heard someone, I forgot who, remark “sell to the sleeping point”. This is a
gem of wisdom of the purest ray serene. When we are worried it is because our subconscious
mind is trying to telegraph us some message of warning. The wisest course is to sell to the point
where one stops worrying” Bernard Baruch

“In terms of sizing, our average long is twice the size of an average short” Lee Ainslee

“We would size the shorts as half as large as we would our longs of the same quality, because
when shorts move against us, they become a bigger portion of the portfolio and to give us the
ability to endure initial losses and maintain or even increase the investment” David Einhorn

"The question always is "How much do I put in number one (ranked by expectation of relative
performance) and how much do I put in number eight? This depends to a great degree on the
wideness of the spread between the mathematical expectation of number one versus number
eight. It also depends on the probability that number one could turn in a really poor relative
performance. The above may make the whole operation sound very precise, it isn't" Warren
Buffett 1966 Letter

"At the position level, we use a risk budget for each position – what’s the most we’re willing to
lose on each investment idea. That risk budget, together with hedging instrumen ts, dictates the
position size. The sum of the risk budgets on individual positions adds up to the utility curve for
the entire portfolio." Adam Weiss

"What we have learned here is, "Don't be so big where your eyes are bleeding and you've got to
get out". Size your positions so that you can withstand what happens if you are wrong" Craig
Effron

"If a company meets all the criteria [Do we like the company? Is it cheap? Does it generate cash
flow? Do we trust management? Do I have confidence in my projections? Is the macro outlook
favourable? etc], then the next step is determining the appropriate position size. Given the
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degree of company and country risk, what do I think is the appropriate position size? If it is
something very risky, a large position for me might be 1 percent to 5 percent of the portfolio. If
it is a lower risk position in which I have very high confidence, the position could be as large as
20 percent of the portfolio" Martin Taylor

"I want to have sizeable positions because if you're right that's how you can do really well, but I
know if it's not expected by the market the path isn't linear, so you just have to understand
how much you can tolerate" John Burbank

"In selecting the limit to which I will go in any one investment, I attempt to reduce to a tiny
figure the probability that the single investment can produce a result for our portfolio that
would be more than 10 percentage points poorer than the Dow" Warren Buffett 1962
Partnership Letter

49. PORTFOLIO MANAGEMENT

"There is a personality difference between the people who are good at finding stocks and the
people who call the shots on timing and manage the whole portfolio. Security analysts dog
down information and come up with an idea about what should be bought or sold, but they do
not necessarily make good conductors for the whole orchestra. If they are woodwind players to
start, they tend to hear the whole orchestra as woodwinds, and it takes another type to keep
the woodwinds and brasses and strings in line" Adam Smith, The Money Game

“I’ve learned that finding great ideas and portfolio management are very different skills. Both
are critical” Kevin Byun

“The challenge of successfully managing an investment portfolio goes beyond making a series of
good individual investment decisions” Seth Klarman

"Portfolio positioning matters as much as stock picking skill" Dan Loeb

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“Construction of a financial-asset portfolio involves full measures of science and art” David
Swenson

“What does the idea bring to the whole portfolio? It’s very tempting to be excited about an
individual opportunity, but you have to look at things overall, at how this will change the
portfolio level. Will it affect profitability. Does it create more volatility? Does it get us closer to
the Holy Grail Company where you’ve got top line gross, margin improvement and multiple
expansion, and balance sheet optimization policy? When you’ve got a company where you’ve
got all these green lights, that’s what you look for.” Pierre Lagrange

“The inability to think about risk the right way may not matter at all for an analyst. We’re not
asking for their judgement on risk, we’re asking for analysis and facts, and secondarily, their
opinion. It’s the portfolio manager who eventually needs to be able to identify risk, whether it’s
an excessive concentration, a failure to diversify, a failure to hedge, or a failure to understand
the risk that is sitting right on your shoulders and you don’t realise it. Failure to recognize those
things can kill people” Seth Klarman

“Portfolio construction is not a science, more an art and involves lots of judgement” Neil
Woodford

“Long/short funds typically don’t blow up because they made a bunch of wrong fundamental
stock picks. They blow up because they’re overexposed to correlated sectors, or they own too
many leveraged companies, or they have too many illiquid positions. These are “explanations”
you see all the time in funds' letters to investors. That’s exactly what we try to avoid.” Curtis
Macnguyen

“In almost every case of catastrophic failure that we’ve observed, we believe the root cause can
ultimately be boiled down to one or a combination of just five factors. The five factors are 1)
leverage 2) excessive concentration 3) excessive correlation 4) illiquidity and 5) capital flight”
Zeke Ashton

"When I have nine businesses in a portfolio, and I'm adding a tenth one, I think very carefully
about the correlation the tenth one has with the other nine" Mohnish Pabrai

"Successful portfolio management transcends stock picking" Michael Burry

"There's more to managing a pile of money than picking stocks. There's tracking their progress,
knowing when they should be sold, getting the right mix of stocks, adding the garlic and
lemongrass of foreign issues, and all the rest. It is not a job for amateurs who aren't willing to
commit a great deal of time and study to the process" Ralph Wanger

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"We tag every stock in our portfolio for more than 40 possible spread-risk factors on which
stock prices can diverge dramatically. The factors include common ones like sector exposure,
market cap, liquidity, leverage and dividend rates, and maybe less obvious ones like exposure
to China or the constitution of the shareholder base. At any given time, for example, we'll know
that 16% of our longs and 13% of our shorts are in highly leveraged companies. We'll know our
exposure to companies that should perform well in an inflationary environment versus those
that won't. With 40 different factors, it's impossible to balance every exposure, but fortunately
only a few risk factors matter in any given market those are the ones we try to neutralize.
We're just trying to be sensitive to the fact that many other factors can determine stock prices
besides fundamental value. Sometimes value investors can get caught up in the intellectual
rightness of what they're doing and ignore risks that can hurt them" Curtis Macnguyen

50. THINKING ABOUT MANAGEMENT?

“Study the company's management, the leaders, their track records, and their goals" Roy
Neuberger

"Management is one of the most important factors in the evaluation of a leading company and
it has a great effect upon the market price of secondary companies" Benjamin Graham 1955

"The first thing is, is the management decent and honest?” Julian Robertson

"We do not wish to join with managers who lack admirable qualities, no matter how attractive
the prospects of their business. We've never succeeded in making a good deal with a bad
person" Warren Buffett

"Quality of, and incentives for, management are also very important. We look at management
ownership to see whether their interests are aligned with the shareholders‘ interests and we
look for their compensation levels to be reasonable." Leon Cooperman

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“Of course, we have made mistakes when assessing management teams. But, in our view, trying
to spot a great manager remains a game very much worth playing” Marathon Asset
Management

“Good management gives you upside options for free.” Mohnish Pabrai

“Choosing great management teams is a key ingredient to hitting a high batting average” Steve
Major

"In my books, I’ve always placed the emphasis on the importance of the management team in
selecting companies… and yet, I didn’t do it enough" Philip A. Fisher

“When you asked me about characteristics I look for in stocks, I mentioned qu ality
of management is the most important” Lee Ainslee

“Our biggest mistakes have always involved overestimating management" Bruce Berkowitz

"Most important is the character and brains of management. Poor management can ruin even a
good proposition. The quality of management is particularly important in appraising the
prospects of future growth. Is the management inventive and resourceful with a determination
to keep itself young in a business way? Or does it have a sit and die attitude?" Bernard Baruch

“Marathon puts enormous weight on the assessment of management” Marathon Asset

Management

"We tended to buy the stock of companies that had franchises and good management" Roy
Neuberger

“Mismanagement also can bring no end of trouble to otherwise fine businesses” Frank Martin

“The single most important variable for us when we’re looking at companies, is assessing
management” Josh Resnick

"You need both great management and a great asset. Having one or the other is a bad recipe”
Richard Perry

“From our perspective, an ideal management team is one with a clear strategic vision, a
thoughtful and pro-active approach to capital allocation, and a strong alignment with
shareholders” Dan Loeb

“I like to talk to management, assess their abilities and personalities, and understand their way
of thinking so that we are on the same page. I am always friendly, and my intention is to look
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them in the eye and get a good sense of their character. This may seem an old fashioned way of
judging people, but it’s very effective” Thomas Khan

“If there is a serious question of the lack of a strong management sense of trusteeship for
stockholders, the investor should never seriously consider participating in such an enterprise”
Phil Fisher

“It comes down to doing business with people you trust. We pay careful attention to all
management communications. Does the CEO write the shareholder letter himself or herself?
Do they tell you where they’ve been right and where they’ve been wrong? Do they talk about
what’s difficult about the business? Do they articulate how they allocate free cash flow, and do
so in an owner mentality? Are the key benchmarks consistent? We worry about companies that
one year focus you on adjusted net operating EPS, then the next year on EBITDA margin and the
next year on something else” Adam Weiss

"Benjamin Graham, in the Intelligent Investor, said you evaluate management twice in the
decision making process. Once through face-to-face interrogation. You ask them questions and
they respond and you make a judgement about the quality of their responses. In addition, the
quality of management also manifests itself in the numbers: in ROE (absolute and relative to
competitors), return on total capital, growth rate, industry position, trend of market share, and
profit margins" Leon Cooperman

“More and more I think it is going to be important to study the paper trail of existing
management. You have to understand how a manager behaves and how that manager has
behaved in past situations. In general, you have to understand the history of that person’s
behaviour to get an idea of what the future is going to look like” Bruce Berkowitz

“When we evaluate a management team, we’re much more focussed on analysing past
decisions and actions than simply reviewing their responses to our questions” Lee Ainslee

“I spend most of my time reading everything the company has said: How has the business done
relative to what was planned? Has management consistently done what it said it was going to
do? " Chris Mittleman

“The best judgement we can make about management competence does not depend on what
people say, but what the record shows” Warren Buffett

“There’s no excuse for cutting corners when it comes to vetting management’s track record,
verifying what they say is correct, and tracking if what they do is what they say they’re going to
do” David Herro

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“.. what you’re better off doing [than interviewing management] is sitting in a room and reading
the last 10 years of what they said what happened, and then form your own conclusion of
where you think the business is going to go in the future, rather than having them tell you
about it” Mohnish Pabrai

"Rather than relying on meetings with management I instead rely on deep dives into firm's
accounting. If the company's business hasn't changed, and management hasn't changed, my
litmus test is the numbers. Don't sell me a bill of goods; let me see what you've done" Charlie
Dreifus

"Managements of companies possess more information about their companies than you ever
will be able to possess. Pay more attention to what managements do than to what they say.
Remember, managements, like most other people, tend to act in their self-interest. It often is a
favorable sign when managements purchase shares of their companies for their own accounts,
and vice versa. Favor managements who are highly incentivised to achieve higher prices for
their shares. " Ed Wachenheim

“Don’t trust quarterly earnings. Verify reports through the source and application statement.
Figures can lie and liars can figure.” Irving Kahn

"In the long run, management stressing accounting appearance over economic substance
usually achieve little of either" Warren Buffett

“It’s a Wall Street truism that good management is important to any company’s success, but the
typical analysts report ignores the subject. Analysts prefer to discuss the latest numbers, but
we never buy anything without assessing the leadership” Chris Davis

"Analysts are competent gatherers of facts and figures, but few can be relied upon for much
more. Their assessments of managements are superficial and far too uncritical. I want a small
group of hard workers who know their industry, who have plans for the future but can adapt to
change, and who are shareholder orientated, in large part because they own a large ch unk of
stock themselves. We always ask around, get third-party opinions from the company's
suppliers and customers and others in the same industry" Ralph Wanger

“Broker/analysts rarely comment on management in any detail and if so they tend not to
criticise. For many years, when presenting the importance of management assessment work,
the following quote from Warren Buffett has been used by Marathon “After ten years in the
job, a CEO whose company retains earnings equal to 10% of net worth, will have been
responsible for the deployment of more than 60% of all capital at work in the business”. This
confirms what we have, always believed, namely that a management can make or break a

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company. By far the greatest failing of broker research therefore is its inab ility to address the
most important issue at a company, namely the quality of management” Marathon Asset
Management

"We never meet with management. For all the bad asymmetries of being on the short side, one
of the good asymmetries is that we don't rely on the company. Those that are long the stock
and are close to the company almost never hear the negative side in any detail. The biggest
mistake people make is to be co-opted by management. The CFO will always have an answer for
you as to why certain numbers that look odd really is normal, and why some development that
looks negative is actually positive" Jim Chanos

“The real way to get a feel for a company’s strategy is through discussions with customers and
competitors. Customers and competitors give you the truth. Management may or may not give
you the truth” Chuck Royce

"Management always has a big influence on your success, no matter how good or how bad the
business is itself. Management is always part of the equation of making the company
successful, so the quality of management always matters" Li Lu

"The longer I've been in the business, the more I think management really makes a difference.
The main question is, how do you determine if it's a good management? The interview is not
sufficient; it's only a first step. Interesting though, studying the past record of that
management more often than not is a pretty good indicator of what the future will be."
Preston Athey

"I try to know as much as I can about the nature of management" Mohnish Pabrai

"I’ve been fooled many times by being too impressed by executives who are articulate and have
done well in the past. I’ve learned to be humble about my own opinions and rely more on the
opinions of people who aren’t biased and have known the management personally or
professionally for a long time." Ed Wachenheim

"Given the availability of so much information on the internet, I'm not so interested in meeting
management today. You can get seduced too easily. I'm more interested in finding out how a
person has behaved in the past. If I can listen to a few of the CEO's speeches and read the
transcripts or earnings calls, that is more important than talking to him. A smart, dishonest
person can fool you, especially when he's talking about his own business" Bruc e Berkowitz

"Make no mistake about it: a management's acumen, foresight, integrity, and motivation all
make a huge difference in shareholder returns" Seth Klarman

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"Our second key principle is to invest in management teams with equal measures of talent and
integrity, because one without the other is worthless. The talent part largely speaks for itself
through an objective look at performance, especially over time. Integrity is a bit harder to
judge, but it’s one of those things that you know when you see. Think about how you decided
whom you were going to marry. You spent lots of time together. You met her family. You met
her friends. You learned what she cared about and her basic value structure. We do the same
types of things to get to know management of the companies we invest in. It’s imperfect, but to
our way of thinking nothing is more important." Thomas Gayner

"I realized that in order to be serious in this business, you need to raise your research skills to a
high enough level to assess management teams and whether your investment mosaic is
accurate." Marc Cohodes

"If a management makes bad decisions in order to hit short-term earnings targets, and
consequently gets behind the eight-ball in terms of costs, customer satisfaction or brand
strength, no amount of subsequent brilliance will overcome the damage that has been
inflicted" Warren Buffett

"We spend an inordinate amount of time trying to understand the quality, ability, and
motivation of a management team. Sometimes we get very excited about a business with an
attractive valuation only to discover that the company has a weak management team with a
history of making poor strategic decisions or that is more concerned about building an empire
than about delivering returns. We have made the mistake more than once of not investing in a
company with a great management team because of valuation concerns—only to look back a
year later and realize we missed an opportunity because the management team made
intelligent, strategic decisions that had a significant impact." Lee Ainslee

"And ideally and we've done a lot of this you get into a great business which also has a great
manager because management matters. For example, it's made a great difference to General
Electric that Jack Welch came instead of the guy who took over Westinghouse - a very great
difference. So management matters too" Charlie Munger

"One of the questions I always like to ask a CEO when I’m thinking of us making an investment
is, “You’re here today, where do you want to be five years from now?” Then I want to know 10
years. And the body language is great. Most of the time they’re thinking about what’s going to
happen next quarter. But we really do think in those long-term increments." Henry Kravis

"One of my favourite questions in talking to any top business executive for the first time is what
he considers to be the most important long-range problem facing his company" Phil Fisher

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"I don't think you can spend too much effort trying to understand the quality of management –
at the end of the day, it's the most important investment criterion. I've learned over time that
great management teams deliver positive surprises and bad ones deliver negative surprises."
Lee Ainslee

"Graham and Dodd didn't place the quality of management as high as they might have. Good
managements add value, they have lots of levers they can pull, they can buy back stock when
it's under-valued, they can use the stock as currency when its over-valued. Bad managements
will think only of themselves first. Those are early lessons, but they are profound lessons that I
learned, and I learned them well" Seth Klarman

"If a company's balance sheet passes muster, I then try to get a handle on management. The
competence, motivation, and character of management often are critical to the success or
failure of a company. To form an opinion on management, I normally pay careful attention to
the management's general reputation, read what the management has said in the past, assess
whether the managements stated strategies and goals make sense, and analyze whether the
management has been successful carrying out its strategies and meeting its goals. However, I
am humble about my abilities to accurately assess managements. Experience shows that
investors can be unduly impressed by executives who are charismatic or who purposely say
what investors want to hear - who play to their audience" Ed Wachenheim

“I would love to own businesses in which management have large stakes. That’s one of the
checklist questions. Does management have a large stake? Well, are you always going to
exclude a business in which management doesn’t have a large stake? No, you’re not going to
exclude a business just for that reason, if everything else is fine. But for any portfolio, you want
to make sure that all your businesses are not in business in which management has very low
stakes because you kind of get stuck investing in one particular manner” Mohnish Pabrai

"The legendary investor Philip Fisher passed away in 2004. I had the chance to talk to him two
times on the telephone and to meet him briefly in San Francisco, many years ago. Over our
conversations, I asked him many questions and at some point, he summarized his approach in
these words : “You know, Wall Street focuses on lots of unimportant things. But the quality of
the management makes up 90 to 120% of the success of a business. Investors think with such a
short term horizon but in the end, management is the key factor”. I never forgot this advice"
Francois Rochon

“When we buy a business, we’re looking at a management that’s been there for a long time, we
can see their performance, we can see how they behaved in difficult situations, we can see how
they treated their customers and employers and we can get a really good read on them”
Warren Buffett
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Tutorial 46-50 Recap

1) DIVERSIFICATION - while diversification is a worthy goal to protect capital, excessive

diversification is likely to dilute returns. None of the Investment Masters made the list by
investing in an index fund. It's better to have a solid understanding of 15-20 stocks than a
broad understanding of 100-200 stocks. The benefits of diversification fall away once you move
beyond about 15 stocks. It's important to understand the benefits of diversification will be
nullified if those stocks are highly correlated.

2) INVESTMENT FACTORS - The Investment Masters understand it's important to focus on the
three to four factors which are going to drive the companies business going forward. It is
impossible to know everything there is to know about a company. It's important to spend your
time thinking about what are going to be the key drivers that determine how the business will
perform in the future. It is also important to understand the factors that are leading to an asset
being mis-priced, such as analyst neglect, index implications, macro concerns, crowd
psychology etc.

3) POSITION SIZING - there is no magic formula to determine the appropriate sizing for an
investment. An investor must consider the downside risk to a stock and the implications to the
portfolio should the worst case scenario actually happen. An investor needs to consider
downside risk, portfolio concentration, correlations, liquidity risk as well as the risks inherent in
the stock before deciding an appropriate size. Generally its considered wise to keep maximum
position sizes below 10% of the portfolio. The Investment Masters generally size shorts
significantly smaller given the additional risks of shorting.

4) PORTFOLIO MANAGEMENT - The Investment Masters understand that picking stocks and
portfolio management are two different skills. The portfolio manager must consider, in
addition to the inherent risks in each stock, how the portfolio will perform under different
investing landscapes and were the risks of combining stocks are elevated. This includes analysis
of the seven deadly sins of portfolio management - concentration, correlation, liquidity,
leverage, overpriced assets, fraud and capital flight.

5) THINKING ABOUT MANAGEMENT? - Management is a key ingredient to a successful

investment. The Investment Masters study the track record of management, what they have
done versus what they said they would do. It's important that management understand the
business and allocate capital in a productive manner. Management can add a significant
amount of value to a company. It is preferable that management have the right incentives and
that management have skin in the game.

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51. INVESTOR PSYCHOLOGY

"Eighty percent of the market is psychology. Investors whose actions are dominated by their
emotions are most likely to get into trouble" Adam Smith, The Money Game

"It is more especially with respect to those unconscious elements which constitute the genius of
a race that all individuals belonging to it resemble each other, while it is principally in respect to
the conscious elements of their character - the fruits of education, and yet more of exceptional
hereditary conditions - that they differ from each other. Men the most unlike in the matter of
their intelligence possess instincts, passions, and feelings that are very similar" Gustav LeBon
1895

"Study the psychology of the stock market as well as the elements of real value" Philip Carret

"Is there, then, any area outside of such already recognised influences as business
management, variations in interest rates and changes in such legislative fields as taxation, to
which investors will be paying increasing heed? I believe there is. For lack of a better term I
will call it the psychological factors affecting security prices" Phil Fisher 1960

"Psychology plays a major role in markets, and because it's highly variable, cause-and-effect
relationships aren't reliable. An investment approach may work for a while but eventually the
actions it calls for will change the environment, meaning a new approach is needed" Howard
marks

"Markets affect investor psychology, but investor psychology also affects markets" Leon Levy

"Don't underestimate the importance of psychology in the stock market. Many factors go into
the buy or sell decision besides economic statistics or security analysis" Roy Neuberger

"Changes in mass psychology and in how the financial community as a whole decided to
appraise the outlook either for business in general or for a particular stock can have over riding
importance" Phil Fisher

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“In order to be successful, an investor has to understand not just finance, accounting and
economics, but also psychology” Howard Marks

“When you get into psychology, of course, it gets very much more complicated. But it’s an
ungodly important subject if you are going to have any worldly wisdom” Charlie Munger

“The discipline which is most important in investing is not accounting or economics, but
psychology” Howard Marks

"Psychology is probably the most important factor in the market – and one that is least
understood" David Dreman

"Understanding how our brains work - our limitations, endless mental short cuts and deeply
ingrained biases - is one of the keys to successful investing" Seth Klarman

"Day-to-day market prices can tell you as much, if not more, about market buyers and sellers
than about underlying values. Over my career, it is clear that an understanding of
psychology has been as important as a degree in accounting” Bruce Berkowitz

"Stock prices move around quite a bit more than the movement in underlying intrinsic value.
Human psychology affects the buying and selling of fractions of businesses on the stock market
much more than the buying and selling of entire businesses" Mohnish Pabrai

“Mood or investor psychology is as important to markets as is information” Leon Levy

"Psychological factors that weigh on other investors' minds and influence their actions will
weigh on yours as well. These forces tend to cause people to do the opposite of what a
superior investor must do. For self-protection, then, you must invest the time and energy to
understand market psychology" Howard marks

“Investing lies at the intersection of economics and psychology, the place where net present
value meets greed and fear." Seth Klarman

"Constant alertness, as to whether current mass psychology may be out of step with
fundamentals and as to how long such a trend may continue, can help enormously in
determining when to buy into an outstanding company" Phil Fisher

“I have had the privilege of talking to some of the leading psychologists studying market
decision-making. Although they have provided outstanding research identifying many
behavioural errors, they have yet fully recognized just how lethal these psychological pitfalls are
for investors. David Dreman

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“Focussing on the quantitative is never enough. One must also have been able to integrate the
soft sciences of individual and social psychology; the qualitative” Frank Martin

"The psychology of misjudgement is every bit as valuable as the thoughtful analysis of a balance
sheet. Possibly more so" Robert Hagstrom

"To ignore the psychological component of the flux of the markets is to miss seeing the
elephant in the room. Psychology plays a role in all events in the market, from the actions of
the day trader riding the momentum of Internet stocks to the broad shifts that become obvious
and undeniable only over time" Leon Levy

"I came to the psychology of human misjudgement almost against my will; I rejected it until I
realized that my attitude was costing me a lot of money" Charlie Munger

"Pundits often speak of the psychology of markets, but in investing it is one's own
psychology that can be most dangerous and tenuous" Seth Klarman

"It is crucially important not to let psychological factors interfere with economic rationality in
investment decision making" Bill Ackman

"Investing is as much a psychological as an economic act" Leon Levy

"The psychologist far more than the economist may be of help in deciding when to buy" Phil
Fisher

"The greatest mistakes investors make are not logical but psychological. They neglect simple
analytical disciplines that would protect themselves from their emotions" Andy Redleaf

"At the heart of Marathon's Capital Cycle approach is the importance of behavioural factors
among investors and the interaction of investor psychology, management action and business
returns" Marathon Asset Management

"You must be aware of what's going on around you in terms of investor psychology" Howard
Marks

“I needed to understand psychology. I got very interested in neuroscience, artificial intelligence

and all of that, all related to decision making” Ray Dalio

"The most useful and practical part of psychology—which I personally think can be taught to
any intelligent person in a week—is ungodly important. And nobody taught it to me by the way.
I had to learn it later in life, one piece at a time. And it was fairly laborious. It's so elementary
though that, when it was all over, I felt like a fool. And yeah, I'd been educated at Cal Tech and
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the Harvard Law School and so forth. So very eminent places miseducated people like you and
me. The elementary part of psychology—the psychology of misjudgment, as I call it—is a
terribly important thing to learn. There are about 20 little principles. And they interact, so it
gets slightly complicated. But the guts of it is unbelievably important. Terribly smart people
make totally bonkers mistakes by failing to pay heed to it. In fact, I've done it several times
during the last two or three years in a very important way." Charlie Munger

"Most people believe that markets are driven primarily by economic factors, and that
psychology plays a minor role. I take the position that markets are driven by both psychological
and economic factors. I owe a great debt to economists for their inability to acknowledge the
degree to which psychology moves markets" Leon Levy

"This business is largely about psychology. If you're down a huge amount, you're not thinking
straight. If the markets do something that completely surprises you, you can be a deer in the
headlights. It's a huge benefit to not have your own psychology get interrupted" Seth Klarman

"The power of psychological influences must never be underestimated. Greed, fear, suspension
of disbelief, conformation, envy, ego and capitulation are all part of human nature, and their
ability to compel action is profound, especially when they're at extremes and shared by the
herd" Howard Marks

"We simply think an attempt at understanding the psychology of the marketplace will give us a
competitive edge" Frank Martin

"It is far safer to project a continuation of the psychological reactions of investors than it is to
project the visibility of the companies themselves" David Dreman'

"Investor psychology can cause a security to be priced just about anywhere in the short run,
regardless of fundamentals" Howard Marks

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52. EMOTIONS

"Emotions are universal and there is no stopping the flow of seasons" Adam Smith, The Money
Game

"There is one requirement that is absolute in money management, and you have already
learned it with the first Irregular Rule: If you don't know who you are, this is an expensive place
to find out. The requirement is emotional maturity. In short, you have to be able to handle any
situation without losing your cool, or letting your emotions takeover. You must operate without
anxiety" Adam Smith, The Money Game

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” Ben Graham

"Your personal strengths will help determine your success as an investor. Before you begin
studying companies for investment, study yourself" Roy Neuberger

“Again let me say, the human side of every person is the greatest enemy of the average investor
or speculator” Jessie Livermore

“Almost all the great investors I know are unemotional. Unemotionalism is one of the most
important criteria for being a successful investor” Howard Marks

“The main obstacle lies in disentangling ourselves from our emotions” Bernard Baruch

"Very few, if any, of us are wholly rational, that capacity compromised by mental shortcuts and
biases - many subconscious - that impede the faculty of reasoning through to purely logical
conclusions. If there is hope, it comes from knowing the enemy that lies within, so that, thus
fortified, we can face the enemy without untrammelled by such emotions as greed or (later)
fear" Frank Martin

“Time and time again, in every market cycle I have witnessed, the extremes of emotion always
appear, even among experienced investors” Michael Steinhardt

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“It is a human frailty which we all possess in some degree that becomes the investor’s and
speculator’s greatest enemy and will eventually, if not safeguarded, bring about his downfall. It
is a human trait to be hopeful and equally so be fearful, but when you inject hope and fear into
the business of speculation, you are faced with a very formidable hazard, because you are apt
to get the two confused and in reverse positions” Jessie Livermore

“Unsuccessful investors are dominated by emotion” Seth Klarman

“We’re pretty unemotional when we invest” David Tepper

"In general, emotions should be left out of the investment process." Francois Rochon

“What makes the task of fact finding so difficult is that in the stock market the facts of an y
situation come to us through a curtain of human emotions” Bernard Baruch

“Individuals who cannot master their emotions are ill-suited to profit from the investment
process.” Ben Graham

“In speculation our emotions are constantly setting traps for our reasoning powers” Bernard
Baruch

“The emotional burden of trading is substantial; on any given day I could lose millions of dollars.
If you personalise these losses, you can’t trade” Bruce Kovner

“The biggest investing errors come not from factors that are informational or analytical, but
from those that are psychological.” Howard Marks

“Mood or investor psychology is as important to markets as is information” Leon Levy

“At one moment, the mood in one aspect of the market may be ebullient, while elsewhere it i s
morose; the entire market gets swept along by a tide of emotion. Intellectual measures often
seen not to apply” Leon Levy

“Why should the market be any more perfect than the very human emotions and calculations
that drive it” Leon Levy

"Investors assess information emotionally, creating price distortions that the astute and nimble
can exploit" Ralph Wanger

"Healthy investor behaviour means being disciplined, patient and unemotional" Chris Davis

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"Maintaining a steady state of mind, whether we are in good times or bad, is the key to
successful long-term investing" Christopher Browne

"Whether times are good or bad, I would say that the emotional quotient is more important
than the intelligence quotient" Francisco Garcia Parames

"Separate your analysis from your emotions. Especially during a difficult period, many investors
become distraught, let their emotions dictate their investment decisions, and make decisions
that are irrational and costly. By understanding your emotions and by understanding the nature
of a difficult period, an investor can hope to organize and control his mind to think and act
rationally. " Ed Wachenheim

"I cry when I watch the Olympics. I am part of the one percent of the people in the movie
theatre crying. So I'm an emotional person. But about investing, I'm not emotional. Emotion is a
very bad thing to mix with investing" Bill Ackman

“Emotion lies dangerously close to the surface for most investors and can be particularly
intense when market prices move dramatically in either direction” Seth Klarman

“I believe that uncontrolled basic emotions are the true and deadly enemy of the speculator;
that hope, fear, and greed are always present, sitting on the edge of the psyche, waiting on the
sidelines, waiting to jump into the action, plow into the game.” Jesse Livermore

"I try to stay as unemotional as possible when things go against me" Kevin Daly

"Over the years, I have learned to control my emotions, especially when the prices of some or
all of our stocks are falling sharply" Ed Wachenheim

"You really have to ban emotion from your process" Chris Mittleman

"An important quality in my field is emotional stability" Warren Buffett

"Try not to let your emotions affect your judgement. Fear and greed are probably the worst
emotions to have in connection with the purchase and sale of stocks" Walter Schloss

"To be the person who steps onto the exchange floor in 1929 and says 'I buy', you have to be
unemotional" Howard Marks

"Fear and greed, most notable among counterproductive emotions where money is the object
of human desire, can and often do compromise the capacity for rational and orderly thought"
Frank Martin

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"There are very few people who have really beaten the market for more than a decade - and I
have had the good fortune of knowing a decent percentage of them. My observation is that
they all have an uncommon mental game - when things get tough and the chips are down, and
most people stop doing what they are supposed to do because of greed or fear, this group
manages to avoid the mental fog that plagues the majority" Adam Weiss

"It is critical not to get caught up in the emotions of the market" Marathon Asset Management

"Why do experienced investors continue to make behavioural errors? Seth Klarman once said
that "people don't consciously choose to invest with emotion - they simply can't help it". I
agree. That's what makes investing so difficult for most people" Ed Wachenheim

"To master investing you need to master your emotions. You cannot get emotional in making
investment decisions." Peter Lynch

53. HUBRIS & HUMILITY

“Markets taught me humility” Ray Dalio

"It can be granted right away that if you have been a brilliant decision-maker, over a long
enough period of time, maybe that's who you are, and it won't hurt you to walk around feeling
brilliant. But it is a dangerous procedure, for the market has a way of inducing humility in even
its most successful students" Adam Smith, The Money Game

"We think humility is essential, especially concerning the ability to know the future. Before we
act on a forecast, we ask if there's good reason to think we're more right than the consensus
view already embodied in prices. As to macro projections, we never assume we're superior"
Howard marks

"It’s when you’re not humble that you end up doing things that will make you humble." Francois
Rochon

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"I would recommend being humble. Be open-minded, and do not be conceited." Sir John
Templeton

"Humility is an enormously important quality. You can’t win without it. Survival in the end is
where the winners are by definition, and survival begins with humility" Peter Bernstein

“If you allow yourself to start thinking you’ve got it all figured out, that’s probably the beginning
of the end” Chris Mittleman

“I think the biggest driver for me is humility. By that I mean that I constantly question my
thinking on a stock. I am not wed to any particular view” Josh Resnick

“To make money in the markets, you have to think independently and be humble” Ray Dalio

“There’s obviously a balance to maintain between confidence and humility. You have to be
humble enough to recognise when you’re wrong. I’m willing to look silly” Bill Ackman

"The balance between confidence and humility is best learned through extensive experience
and mistakes" Michael Steinhardt

"You need humility to say 'I might be wrong'.'' Seth Klarman

"You keep an open mind, keep trying to learn, stay humble and keep trying to learn from your
mistakes and other people's mistakes" Ken Shubin Stein

"A lot of my investing is I have humility in that I don't know. I have a hypothesis, an idea, a
belief. I try and get information" John Burbank

“Hubris increases risks more than any other factor. Hubris decreases the quality and quantity of
work. Hubris ignores advice. Hubris causes people to treat people badly (and for the ‘treatees’
to decrease their loyalty to the ‘treator’ and fail to inform him of his errors).” Paul Singer

“One of the greatest dangers that confront those who have been through a period of successful
investment is hubris – the conviction that one can never be wrong again. An ability to see the
funny side of oneself as it is seen by others is a strong antidote to hubris” Peter Cundill

“You need humility because you know you can be wrong, and when you admit that you stress
caution by assigning a margin of safety to your investments so that you don’t overpay for
them.” Jean-Marie Eveillard

"This is a world of very smart people and you can't enter that marketplace without a profoundly
humble view about how you're going to win" James Chrichton
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"We regard investing as an arrogant act, an investor who buys is effectively saying that he or
she knows more than the seller and the same or more than other prospective buyers. We
counter this necessary arrogance with an offsetting dose of humility, always asking whether we
have an apparent advantage over other market particiapants in any potential investment. If the
answer is negative, we do not invest" Seth Klarman

"We remain humbled by the day-to-day vagaries of our capital markets, and how little control
we ultimately have over our investment fortunes in the short term" Tweedy Browne Co

"Humility is essential in this business. If you don't listen to others, it's a danger for you, a
danger for your clients, and a danger for the portfolio. If you think you know, you get killed.
It's the end of the game because you stop learning" Vincent Strauss

"I think a good trader has to have three things: a chronic inability to accept things at face value,
to feel continually unsettled, and to have humility, because you are made humble very often in
this trade" Michael Steinhardt

"There are two kinds of people who lose money; those who know nothing and those who know
everything" Henry Kaufman

"A cocksure approach to investing will lead, probably sooner than later, to disappointment if not
outright disaster" Sir John Templeton

"We make a lot of mistakes each day… You need to have humility in investing" Francois-Marie
Wojcik

"We know that we are fallible and must therefore consider the possibility that for every
investment we make we may be wrong" Seth Klarman

“Become more humble as the market goes your way.” Bernard Baruch

"I had a great martial-arts teacher who said, “You can’t pour any water into a cup that’s full.”
Without humility, no learning. If you think you know, you don’t know. Humility is the most
important risk-management characteristic." Adam Weiss

"Humility is the fertilizer of a mind in a constant of mode of learning." Francois Rochon

"We welcome rewarding periods of portfolio performance with humility—and with joy. While
it’s not always easy, we try to remain unaffected by short term results, both good and bad."
Francois Rochon

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"The other thing I look for [in a money manager] is open-mindedness and humility. I have never
interviewed a money manager who told you he'd never made a mistake, and a lot of them do,
who didn't stink. Every great money manager I've met, all they want to talk about is their
mistakes. There's a great humility there" Stanley Druckenmiller

"While we invest with strong conviction, we also know that we do not know everything as
humility is an important part of investing" Corsair Capital

"Self awareness is a really important quality to have, as is humility" John Phelan

"Investment success can breed overconfidence and a resulting unrealistically low assessment of
risk. Luckily, I have made a sufficient number of mistakes in my life that there is little danger
that I will become over-confident. In my opinion, a good investor needs to strike the right
balance between confidence and humility" Ed Wachenheim

"Self delusion is a powerfully democratic force. It cuts across all social classes. You can be
richer, smarter, and more successful than anyone else. But if you're not brutally honest with
yourself about your own potential for failure, you're going to have a problem and you're going
to lose money, maybe a lot of money." Scott Fearon

"The only thing that could hurt me is if my success encouraged me to return to my childhood
fantasies of omnipotence - but that is not likely to happen as long as I remain engaged in the
financial markets, because they remind me of my limitations" George Soros

54. PATIENCE

"Patience can produce uncommon profits" Philip L Carret

“This company looks cheap, that company looks cheap, but the overall economy could
completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing.”
David Tepper

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“Most people are too fretful, they worry too much. Success means being very patient, but
aggressive when it’s time.” Charlie Munger

"I consider patience to be the most important ingredient for success in the market." Francois
Rochon

“People always want investments to go up like a line.…That’s just not reality. You make 80% of
your money in 20% of the time in investing and you have to be patient.” Jeffery Gundlach

"[There] is the need for patience if big profits are to be made from investment. Put another
way, it is often easier to tell what will happen to the price of a stock than how much time will
elapse before it happens" Phil Fisher

“One of the best rules anybody can learn about investing is to do nothing, absolutely nothing,
unless there is something to do” James Rogers

“Patience, patience and more patience. Ben Graham said it, but it is true of all investment
disciplines, not only value investing, although it is indispensable to that” Peter Cundill

“Inaction and patience are almost always the wisest options for investors in the stock market”
Guy Spier

“Throughout all my years of investing I've found that the big money was never made in the
buying or the selling. The big money was made in the waiting” Jessie Livermore

“There aren’t always great things to do, and sometimes we maximize our contribution by being
discerning and relatively inactive. Patient opportunism – waiting for bargains – is often your
best strategy” Howard Marks

“You don’t have to be fully invested all the time. Have patience, keep your standards.” Irving
Kahn

“We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait
indefinitely” Warren Buffett

“In our style of doing things, patience is patience is patience” Peter Cundill

“When there’s nothing particularly clever to do, the potential pitfall lies in insisting on being
clever” Howard Marks.

"Happiness ensues when it is not pursued - investing is the same thing. Success occurs when
you are willing to wait for opportunities” Mark Kingdon
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“Investors need discipline to avoid the many unattractive pitches that are thrown, patience to
wait for the right pitch, and judgement to know when it is time to swing” Seth Klarman

"The big money is not in the buying and selling … but in the waiting" Charlie Munger

“The stock market is like the weather in that if you don’t like the current conditions all you have
to do is wait awhile” Lou Simpson

“The single most important skill for being a good investor is to be very content with not doing
anything for extended periods and that’s perfectly fine” Mohnish Pabrai

“Our success rests on having the discipline to wait patiently for opportunities to present
themselves and then having the courage to run towards them when everyone else is running
away” Steve Leonard

"Some would say that this patience is part of our strategy, but I would say it's more part of our
DNA. I like to say "If there's nothing to do, do nothing" Jim Tisch

“We don’t have to swing at everything” Mario Gabelli

"Be patient. Watched stock never boils" Peter Lynch

"Legendary investor Peter Lynch always emphasized the importance of being patient:
"Frequently, years of patience are rewarded in a single year" Francois Rochon

"Sitting still is the hardest thing to do. As Pascal wrote 'The hardest thing for a man to do is sit
quietly in a room'" Mark Kingdon

“Money managers running all types of strategies need good action plans for periods when the
opportunity set is fallow. They must resist the allure of stretching parameters and rationalizing
why merely good positions are okay to establish in the absence of very good or great positions”
Paul Singer

"The beauty in this business is that there are just hordes of future opportunities waiting and
some of them may be huge if you're patient. And I think Ben Franklin summed it up well: "He
who has patience can have what he will" Frank Martin

"Have patience. Stocks don't go up immediately" Walter Schloss

“Traditionally the investor has been the man with patience and the courage of his convictions
who would buy when the harried or disheartened speculator was selling” Benjamin Graham &
David Dodd
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"Being patient is at the cornerstone of everything we do" John Rogers

"We do a lot of thinking and not a lot of acting. A lot of investors do a lot of acting, and not a
lot of thinking" Lou Simpson

"Investors who aspire to long term success cannot afford the luxury of impatience [though they
usually think the opposite is true]" Frank Martin

"Value investing requires deep reservoirs of patience and discipline" Seth Klarman

"We have a culture of patience. Even though we work hard every day trying to uncover the next
great investment, we only deploy our capital when we have real conviction that we have found
one. When we don’t find interesting ideas, we do nothing and hold cash. For this reason, I’ve
often joked that I’m 97% unproductive. While this means I better be damn productive the other
3% of the time, it also means exercising patience often and waiting for great opportunities."
Brian Spector

“The stock market is designed to transfer money from the active to the patient.” Warren
Buffett

"My mantra has always been like that of Milwaukee Braves pitcher Lew Burdette, who once sai d
"I earn my living from the hungriness of the hitters." I earn my living from the hungriness of
investors, from their decisiveness, their forcefulness, from their great urge for immediacy" Mark
Spitznagel

"Phil Carret is about 96 and has been investing for over 70 years. He has done very well but he
is patient. I'm not as patient as he is but I'd like to last as long" Walter Schloss

“Patience is one of the most important virtues for making any value investment.” Jim Tisch

"If you've done the numbers and are satisfied with them and the principle is right, you just have
to grit your teeth and be patient" Peter Cundill

"We think one of our advantages is the ability to be more patient than others, especially as
investment time horizons appear to be getting shorter" David Einhorn

"Patience, steady emotions, and common sense all are important when investing in common
stocks" Ed Wachenheim

"What you are trying to do is find specific investments that you think over time are going to
work out when someone’s gotta sell. There is always a problem. All you gotta do is wait and
take your time and there is always somebody who has made a mistake or a company is over-
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levered and really what we try to do is wait for those moments in time when we can invest"
Marc Lasry

"In my free time, I listen to some old Wall-Street Week TV shows (I keep quite an extensive
personal archive). In 1996, Louis Rukeyser interviewed the legendary Philip Carret and asked
him what was the most important lesson of his 75 years of experience. Carret answered just
one word: “Patience”. Francois Rochon

"Our stay-put behaviour reflects our view that the stock market serves as a relocation centre at
which money is moved from the active to the patient" Warren Buffett

"Patience is one of the most critical attributes for a long-term investor because you can be right
and the market may tell you that you’re wrong, and it may tell you so for an extended period of
time. It may reach the point where your sanity begins to be questioned by clients and even your
colleagues. I’ve been in situations like that. There were many times where I’ve been involved in
an investment, where it looks like it might not work out, and it ultimately did work out, and
worked out wonderfully" Chris Mittleman

55. FEELINGS

"A stock is for all practical purposes, a piece of paper that sits in a bank vault. Most likely you
will never see it. It may or may not have an intrinsic value; what it is worth on any given day
depends on the confluence of buyers and seller on that day. The most important thing to
realise is simplistic: The stock doesn't know you own it. All those marvellous things, or those
terrible things, that you feel about a stock, or a list of stocks, all these things are
unreciprocated by the stock or group of stocks. You can be in love if you want to, but that
piece of paper doesn't love you, and unreciprocated love can turn into masochism, narcissism,
or, even worse, market losses and unreciprocated hate" Adam Smith, the Money Game

“As investors, we deceive ourselves a thousand different ways, both small and large. We
attribute gains to acumen when they are the product of luck, and attribute losses to ill fortune

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when they are often the product of stupidity or inattention. We believe that the market
remembers or cares about the price we paid for a stock, or that our stocks will go up when
every other stock is going down. But most commonly in markets, we fall in love with a company
that is unworthy of our affection” Leon Levy

"We document our analysis and valuation not only at the beginning, but also by formally
revisiting everything in writing at least twice a year. It’s easy to get married to something you
own and if it’s not working to change the reason your’e still in it. We find this a very good
exercise to help prevent that kind of thesis creep” David Hurwitz

“Never fall in love with anything! If facts change, re-evaluate your position!” James Dinan

"One should fall in love with ideas, with people, or with idealism based on the possibilities that
exist in this adventuresome world. The last thing to fall in love with is a particular security. It
is, after all, just a sheet of paper indicating a part ownership in a corporation. Its use is purely
mercenary" Roy Neuberger

“If we only confirm our beliefs, we will never discover if we’re wrong. Be self-critical and
unlearn your best-loved ideas. Search for evidence that disconfirms ideas and assumptions.
Consider alternative outcomes, viewpoints and answers.” Peter Bevelin

“He [Michael Steinhardt] doesn’t fall in love with his position. It’s only a piece of paper”
Lattanzio

"Never fall in love with a stock; always have an open mind" Peter Lynch

“One of the important things in stocks is that a stock does not know that you own it. You have
all these feelings about it; You remember what you paid. You remember who told you about it –
all these little things. And it doesn’t give a damn. It just sits there. If a stock’s at $50,
somebody’s paid $100 and feels terrible, somebody else has paid $10 and feels wonderful – all
these feelings. And it has no impact whatsoever” Warren Buffett

“A market could care less if I am bullish or bearish. In fact, if I am a bull, once I do my buying,
my only influence is as a bear because I become a source of selling” Peter Brandt

"You never understand a stock until you’re long (or short)” Gary Helms

"We don't have many rules, but when a stock is down materially relative to its peer group we
assign another analyst to formally review it and then force ourselves to buy more or get out.
Not surprisingly, the analyst who originally recommended the stock is the last person to want
to sell it" Jeff Bronchick

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"Never fall in love with an asset. If you get deal fever you can do really stupid things. So if it's
going to be, it'll be. If not, it won't be" Jim Tisch

"Stuff happens. Don't fall in love with any position" Joel Greenblatt

"If you let your emotions dictate when to sell, you risk falling in love with companies that have
been doing well and you ride them too long." Richard Pzena

"The biggest key is to never fall in love with what you own. Something you've made a lot of
money on is going to look absolutely great to you at precisely the time you should be getting
out" James Clarke

"One thing my father taught me at a young age was not to fall in love with companies or the
people running them" Lloyd Khaner

“You have got all these feelings. The stock doesn't know you own it. The stock just sits there; it
doesn't care what you paid or the fact that you own it. Any feeling I have about the market is
not reciprocated. I mean it is the ultimate cold shoulder we are talking about here.” Warren
Buffett

"A stock doesn't know you own it. Don't become so attached to a winner that complacency sets
in and you stop monitoring the story" Peter Lynch

“The stocks we own don’t know we own them, and therefore do not behave in ways that are
always consistent with our near term interests” Tweedy Browne Co

“A common mistake is to think of the market as a personal nemesis. The market, of course, is
totally impersonal; It doesn’t care whether you make money or not. Whenever a trader says “I
wish” or “I hope” he is engaging in a very destructive way of thinking because it takes attention
away from the diagnostic process” Bruce Kovner

“Investment managers, without realizing it, often personalise and become emotionally involved
with stocks when the investment decision-making process should be completely intellectual
and rational because, after all, they are just pieces of paper. Or as Adam Smith put it, the stock
doesn’t know you own it, and there’s no reward or pension paid for being a faithful long -term
holder” Barton Biggs

Tutorial 51-55 Recap

1) INVESTOR PSYCHOLOGY - the Investment Masters understand that human psychology is as

important to markets as hard numbers and at times can be more important. It's important to

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understand the dynamics of human psychology to better understand yourself and your biases
and also to help identify where investors may be making mistakes to which you can take
advantage and or manage risk. Understanding human psychology can give you an edge.

2) EMOTIONS - the human emotions of fear and greed have developed over hundreds of
thousands of years to help humans survive. Unfortunately these emotions are likely to be
detrimental to successful investing. Humans feel fear greater than any other emotion. Being
scared out of the market at the lows or chasing markets at their highs will be detrimental to
your portfolio. It's important to be aware of and learn to control your emotions when
investing.

3) HUBRIS AND HUMILITY - no one is above the market. It's important to recognise that all
investors make mistakes. Being humble will allow you to remain open minded when investing.
If you go into a stock acknowledging you don't know all the informati on and that you could be
wrong will place you in a better position to recognise and address investing mistakes.
Successful investing is getting the right balance between confidence and humility.

4) PATIENCE - The Investment Masters understand that making money doesn't happen over
night. The Investment Masters understand the power of compounding over a long period of
time. The Investment Masters also understand that opportunities may present themselves
sporadically. Investors need the patience to do nothing until such attractive investment
opportunities are available.

5) FEELINGS - Investment Masters understand that the stocks they own don't know they own
them. Stocks offer no reciprocal feelings. It's important to recognise stocks are just 'three
letters' and not to fall in love with a position. Falling in love with a stock can blind an investor
to new information that suggests a stock should be sold.

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56. MR. MARKET

“The intelligent investor shouldn’t ignore Mr. Market entirely. Instead, you should do business
with him- but only to the extent that it serves your interests." Benjamin Graham

“Mr. Market’s most dangerous foil tactic is placing silly valuations on businesses, which
encourages further speculations driving the tide so high that bubbles are formed.” Christopher
Begg

"If you look to 'Mr.Market' for advice, or if you imbue him with wisdom, you are destined to
fail" Seth Klarman

“To unquestioningly accept mercurial Mr Market’s judgement as the final arbiter of the fairness
of the price-to-value relationship is to mistake a stooge for a sage” Frank Martin

“Mr. Market’s job is to provide you with prices; your job is to decide whether it is to your
advantage to act on them. You do not have to trade with him just because he constantly begs
you to.” Benjamin Graham

“Don’t take advice from Mr. Market, who again and again is a wonderful creator of
opportunities but whose advice should never, ever be followed” Seth Klarman

“Let it be emphasized that Mr. Market is an unprincipled man of genius. He is seeking to buy
your interest at the lowest price and sell you shares at the highest possible price.” Christopher
Begg

"Mr Market's predictably irrational proclivities can become our edge. He's a terrible master but
a worthy servant" Frank Martin

"Mr. Market gives you opportunities to buy above and below intrinsic value.” Mario Gabelli

“Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that
you will find useful.” Warren Buffett
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“There are three core concept:, you’re not buying a stock, you’re buying a business; you have
Mr Market who has all sorts of mood swings and you want to take advantage of Mr
Market when he’s depressed to buy and euphoric to sell; and the third is margin of safety,
which is trying to buy things significantly below what they are worth. These are timeless and
universal” Mohnish Pabrai

“Of course the best part of it all was his [Ben Graham’s] concept of “Mr. Market.” Instead of
thinking the market was efficient, he treated it as a manic-depressive who comes by every day.
And some days he says, “I’ll sell you some of my interest for way less than you think its worth.”
And other days, “Mr. Market” comes by and says, “I’ll buy your interest at a price that’s way
higher than you think its worth.” And you get the option of deciding whether you want to buy
more, sell part of what you already have or do nothing at all. To Graham, it was a blessing to be
in business with a manic-depressive who gave you this series of options all the time. That was a
very significant mental construct.” Charlie Munger

“Mr Market’s pari-mutuel approach to setting prices could not be more different from the way
prices are determined for the sale of entire businesses.” Mohnish Pabrai

“Ben Graham advanced the idea that in the short term, Mr. Market is a voting machine and in
the long term a weighing machine. Mr. Market’s most coy manoeuvre, to foil your plans of
superior compounded returns, is to encourage you to sell something of value for the perceived
comfort of cash. Earnings releases, geopolitical events, change in political leadership, change in
sector leadership, change in commodity prices, are just a few of the things that Mr. Market will
throw at the investor as he asks the investor to rise to vote – take action – make a decision –
make a trade – sell something of worth in exchange for something of less worth.” Christopher
Begg

"Successful investors must possess the mindset to take advantage of Mr Market's bipolarity,
and even come to appreciate it." Seth Klarman

"Mr Market will make you work for it. But eventually, I believe, when investor emotions change
or deeply buried facts emerge, the price pendulum swings back to more normal positioning"
Bruce Berkowitz

"Benjamin Graham said if you don't have an intimate knowledge of the chronic behavioural
anomalies of "Mr Market", the imaginary manic/depressive, who personifies the emotional
impetus behind the actions of the "crowd", you're doomed to mediocrity or worse." Frank
Martin

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"The reality is that Mr.Market knows nothing, being the product of the collective action of
thousands of buyers and sellers who themselves are not always motivated by investment
fundamentals. Emotional investors and speculators inevitably lose money; investors who take
advantage of Mr Market's periodic irrationality, by contrast, have a good chance of enjoying
long-term investment success" Seth Klarman

"It’s all about stacking the odds in your favour by understanding Mr. Market (aka/ “the crowd”)
and patiently waiting for him to make you a deal you simply can’t refuse" Frank Martin

57. INVESTMENT COMMITTEES

"Positive decisions have to be made by an individual; groups can't do it. And I think a lot of the
investment business was committee-orientated. " Adam Smith, The Money Game

“Search all the parks in all your cities; you’ll find no statues of committees” David Ogilvy

"It has been my experience that the more power given to the investment specialist and the
smaller the influence of the individuals on investment committees, the better the quality of the
work accomplished" Phil Fisher

"I do not have a committee" Jim Rogers

"My idea of a group decision is to look in the mirror" Warren Buffett

“The best performance is produced by a person, not a committee” Sir John Templeton

"If no great book or symphony was ever written by committee, no great portfolio has ever been
selected by one, either" Peter Lynch

"As your company gets larger and larger and you have larger groups making decisions, the
decisions get more homogenised. I don't think you will ever get brilli ant investment decisions
out of a large committee" Warren Buffett

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“A committee is an odd potpourri of people whose collaborative idiosyncratic behaviour is often
in no way reflective of the brilliance or sagacity of any of the individuals of which it is ma de. A
person’s capacity changes, and usually not for the better, when he or she submits to the will of
a group” Frank Martin

“John Templeton use to always counsel on the dangers of management by committee, where
the only ideas on which there’s a consensus are the mediocre ones, not those that are creative
and insightful” Eric Marshall

“A committee is a group of people who keep minutes and waste hours” Mark Mobius

“To my knowledge there are no good track records that have been built by institutions run by
committee. In almost all cases the great records are the product of individuals, perhaps working
together, but always within a clearly defined framework. Their names are on the door and they
are quite visible to the investing public” Peter Cundill

“If you look at all the great inventions and discoveries and music and art or anything we value
on the planet, it’s been a single mind that’s delivered. So Pabrai funds is focussed on delivering
what one mind is capable of” Mohnish Pabrai

"The more people you have, the more difficult it is to do well. You have to satisfy everybody. If
you have a limited number of decision makers, they are more likely to agree" Lou Simpson

“After years of first hand observation, I am convinced beyond a shadow of doubt of the
counterintuitive notion that one astute individual has five times the investment decision -
making capacity of a committee of five persons who, individually, are equally endowed
intellectually” Frank Martin

“It’s hard to think of great success by committees in the investment world – or in physics. Many
people miss this. Look at John Wooden, the greatest basketball coach ever: his record improved
later in life when he got a great idea: be less egalitarian. Of 12 players on his team, the bottom
five didn’t play – they were just sparring partners. Instead, he concentrated experience in his
top players. That happened at Berkshire – there was concentrated experience and playing
time.” Charlie Munger

“Committees are small crowds and, according to my favourite book on crowd psychology, ‘The
Crowd’ by Gustave LeBon, when smart men and women combine their intellects to presumably
optimise a solution, the result tends to be surprisingly counterproductive. Rather than being
boosted by brilliance, groupthink has a perversely dilatory effect on collective reasoning”. Frank
Martin

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“The mass never comes up to the standard of its best member, but on the contrary degrades
itself to a level with the lowest” Henry David Thoreau

"Large organisations usually haven't had very good results as fund managers. Superior analysts
are rare, and funds seem to do well only so long as the decisions are made by a small group of
talented people" Ralph Wanger

"In general, it's hard to get intelligent people to agree on stuff that is hated and unloved an d in
meaningful quantities. As you add more team members to an investment team, you will get
closer and closer to buying the flavour of the day and the odds of beating the market go down
dramatically. In investing, the more people you add, the worse off you are. The best investing
teams are small" Mohnish Pabrai

"Group decisions - My perhaps jaundiced view is that it is close to impossible for outstanding
investment management to come from a group of any size with all parties really participating in
decisions" Warren Buffett 1965

"While managing money successfully is not easy for anyone, many institutional investors
compound that difficulty with a tendency toward conformity, inertia, and excessive
diversification that results from group decision making" Seth Klarman

"I had made the decision late the previous year to manage the portfolio with a committee-
decision structure, and it was a disaster. Nobody was responsible for failures and everybody
took credit for successes, which led to a lot of bad decisions. You have to have one or two
people carrying the keys who have full responsibility and are waking up in the middle of the
night worried about risk. We limited the damage to one year, but it was a hard lesson learned"
John Day

"Like art, portfolio management can rarely be done in teams (or worst in committees). We can
add experience but we lose in personal creativity. Like Warren Buffett once said: “My vision of a
group decision is to look into a mirror” Francois Rochon

"If there were such thing as the Laws of Investing, they would have been written by Graham,
Buffett and Munger. A small team size (ideally one) would be one of these laws" Mohnish
Pabrai

"Investing probably is not played best as a group sport" Leon Levy

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58. HUMAN NATURE

"Wall Street never changes, the pockets change, the suckers change, the stocks change, but
Wall Street never changes, because human nature never changes." Jesse Livermore

"As a student of human nature, I always have felt that a good speculator should be able to tell
what a man will do with his money before he does it". Bernard Baruch

"We're all supposed to be more sophisticated investors now, but human psychology doesn't
change" Ralph Wanger

"Human nature and the emotions of greed and fear have not changed as civilization has become
more sophisticated" Barton Biggs

"It is my belief that one constant in the stock market is human nature" Michel Burry

"Human nature—and by extension the stock market—is always the same" Francois Rochon

"The world has changed, but people haven't changed, and the mind hasn't changed" Arnold
Van Den Berg

"Fear and greed are very much fundamental to the human psyche. As long as humans drive
buying and selling decisions in equity markets, pricing will be affected by these fear and greed
attributes" Mohnish Pabrai

"Markets are inefficient because of human nature - innate, deep rooted, permanent. People
don't consciously choose to invest with emoption - they simply can't help it" Seth Klarman

"The basic neural network of the brain is there through broad genetic and cultural evolution.
And it's not Fermat/Pascal. It uses a very crude, shortcut-type of approximation. It's got
elements of Fermat/Pascal in it. However it's not good" Charlie Munger

"It's crucial to be able to resist your human nature" Peter Lynch

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“Humankind’s recurring propensity to unwittingly fall victim to financial fads, follies, and foibles
is like a bad dream that we can’t get out of our minds” Frank Martin

"Human beings in mass respond to the same investment stimuli of hope, confidence, fear and
impatience in exactly the same way, not alone year by year but century by century" Phil Fisher

"Stock market trends reflect the buying and selling of thousands of human beings. Their trading
reflects only in part, consciously and subconsciously, the state of trade. At one time their
hopes and at another their fears affect prices more vitally that steel production, carloadings, or
any other business fact" Philip Carret

“Studies have shown that human beings do not exhibit their best decision making under duress
or in an environment of negative reinforcement” Jim Chanos

“Human nature is a key factor in stocks being mispriced. I wouldn’t expect that to change
anytime soon” Bernard Horn

“At the centre of all market pricing are human beings. I joke the Four Horseman of the
investment apocalypse are fear, greed, hope and ignorance, only one of which is not an
emotion. Fear, greed and hope have wiped out more money than any market downturn.
Because of all the foibles of human nature that are well documented by behavioural research –
and now by neuroloigical research – people are always going to overshoot and undershoot
when pricing securities. A review of financial markets all the way back to the South Sea
company proves this out. As long as human nature doesn’t fundamentally change, we can
continue to arbitrage the pricing inefficiencies it creates” James O’Shaugnnessy

“You must have the discipline and temperament to resist your impulses. Human beings have
precisely the wrong instincts when it comes to the markets.” Walter Schloss

“Crowd madnesses recur so frequently in human history that they must reflect some deeply
rooted trait in human nature. “ Bernard Baruch

“Behind every order ticket to buy or sell a stock or security is a human being, most of whom
suffer from one sort of affective disorder or another” Frank Martin

“The stock market is the story of cycles and of the human behaviour that is responsible for
overreactions in both directions” Seth Klarman

“Mass human behaviour cannot be modelled or predicted with any degree of precision.” Paul
Singer

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“People chronically mis-appraise the limits of their own knowledge; that’s one of the most basic
parts of human nature.” Charlie Munger

“there will always be the opportunity to gain a behavioural edge because most innate cognitive
biases are Darwinian. Evolutionary forces caused these behaviours to evolve because they were
useful at a prior point in history even though they are not useful in modern, complex markets.
They are hardwired into all of us” Ken Shubin Stein

“For participants in the stock market, one of the biggest problems is that the subrational,
instinctive part of the brain is subject to dire mood swings, including outbreaks of irrational
optimism and irrational pessimism. Indeed, money related issues often activate the
“subrational” parts of our brain” Guy Spier

"The market is made up of people, and to beat it you have to know them as well as you do the
thing your investing in" Howard Marks

"Independent thinking, emotional stability, and a keen understanding of both human and
institutional behaviour are vital to long-term investment success" Warren Buffett

"In the figurative canyons of Wall Street, learning is not cumulative - in large measure because
ignorance, greed, fear and folly indigenous to the human species regularly impede the process
of acquiring wisdom. Today's follies are little more than yesterday's foolishness adorned in
different finery" Frank Martin

"One could say that my whole career in Wall Street proved one long process of education in
human nature" Bernard Baruch

"The manic-depressive behaviour of stock market investors is immutable. It is inherent to the

nature of human beings and no system is going to change that" Francois Rochon

"In many ways the art of common stock investment has changed radically over the past fifty
years. However, human nature en masse in relation to its attempt to make profits through
buying capital assets does not change at all. What figures are available show that a chart of
prices for tulip bulbs during the great speculative mania that occurred in that exotic commodity
in Holland many centuries ago would parallel with amazing closeness a comparable chart of the
rise and fall of leading stock prices in our own hectic period just before and after 1929.

Even more illuminating is a study of what happened when nation wide optimism about the
profit possibilities of the British East India Company caused a great wave of eagerness for
common stocks to en gulf the British Isles in the eighteenth century. The parallel between the
difference in action of leading and secondary stocks then and in recent markets is astonishingly
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close. So are the resemblances in size and duration of the various dips or rallies that ran against
the general price trend both on the way up and the way down. While these parallels are
colorful, they merely confirm what most shrewd observers have recognized after they have had
enough experience with the investment public: Human beings en masse always react about the
same way to the same investment stimuli" Phil Fisher

59. WHAT YOU KNOW?

".. it seems that neither of us knows anything great, but he thinks he knows something when he
does not, whereas when I do not know, neither do I think I know. So it seems I am wiser than he
in this one small thing, that I do not think I know what I do not know." Socrates

"Ask yourself and your analysts what isn't known. By doing so, you can get a better feel for the
inefficient side of the market as well as the degree of uncertainty affecting the situation"
Bennett Goodspeed 1978

"Acknowledging what you don’t know is the dawning of wisdom" Charlie Munger

"Knowing what we don't know is better than thinking we know what we don't" Philip Tetlock

“We’re blind to our blindness. We have very little idea of how little we know. We’re not
designed to know how little we know.” Daniel Kahneman

"What counts for most people in investing is not how much they know, but rather how
realistically they define what they don't know" Warren Buffett

"The ability to deal with not knowing is far more powerful than knowing. That is because
there's way more that we don't know than we could possibly ever know" Ray Dalio

"You have to know what you know - your circle of competence" Joel Greenblatt

“There are two kinds of people who lose money: those who know nothing and those who
know everything.” Henry Kaufman
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“Investing is about intellectual honesty. You want to know what you know. You want to know,
mostly, what you don’t know” Li Lu

“Financial assets are like life. There are things that we think we know that we really do
know. There are other things that we think we know that we turn out not to know” Paul Singer

“Investing is about predicting the future, and the future is inherently unpredictable. Therefore
the only way you can do better is to assess all the facts and truly know what you know and
know what you don’t know. That’s your probability edge. Nothing is 100%, but if you always
swing when you have an overwhelming better edge, then over time, you will do ve ry well” Li Lu

“I always approach things with the same mindset asking myself “What is it that I don’t know,
and do I really know better than the next guy?” Daniel Krueger

"One of the key traits of successful investing is knowing what you don’t know" Christopher
Bloomstran

“People chronically mis-appraise the limits of their own knowledge; that’s one of the most basic
parts of human nature. Knowing what you don’t know is much more useful in life and business
than being brilliant.” Charlie Munger

“I dealt with my not knowing by either continuing to gather information until I reached a point I
could be confident or by eliminating my exposure to risks of not knowing” Ray Dalio

“The first thing you need to understand is how little you know.” Sam Zell

“One of the things I do very well investing is, I gather a lot of information but I never know the
whole picture. I have a lot of inputs but never everything and I have to make a decision on
incomplete information. And I feel very comfortable doing it. [Indirectly related to his hearing
loss...] All my life I’ve had to make decisions based on hearing incomplete information. I have to
fill in the blanks a lot... When you’re only hearing two-thirds of what the teacher is saying you
either guess what the other one-third is and go with it or basically you’re in real trouble. I just
learnt early on to start guessing and I was consistently almost right.” James Dinan

“Warren and I know better than most people what we know and what we don’t know. That’s
even better than having a lot of extra IQ points. “ Charlie Munger

“Mark Twain put it best “It ain’t what you don’t know that gets you into trouble. It’s what you
know for sure that just ain’t so”. Overestimating what you’re capable of knowing or doing can
be extremely dangerous – in brain surgery, trans-ocean racing or investing” Howard Marks

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“People think my success is due to what I know, It’s not, it’s due more to dealing with what isn’t
known that is more effective than knowing.” Ray Dalio

"It is not really within human nature to comprehend that you may not know everything you
think you know, and, further, that what you believe in could change on a dime. When your
investments are back-stopped by reasonably-priced tangible assets, the prospect of a change is
not very costly. Not so for dreams." Seth Klarman

"Sometimes when I know that I don't know which way the coin is going to flip, I try to position
myself so that it won't have an impact on me either way. I don't make an inadvertent bet. I try
to limit my bets to the limited number of things I am confident in" Ray Dalio

"We want to eliminate the 'what you don't know risk'" Jeffrey Ubben

"I keep a few questions on my whiteboard at all times: 1) What do I really know? 2) What don't I
know 3) How do I learn that?" Christopher Parvese

"A basic rule for stock investors: find out what you know and what you don't know. When you
deviate from what you know and do best, you usually get into trouble" Ralph Wanger

“…what I have observed about the really great investors is the simple decisions that they end
up having to make by virtue of focusing on what’s important and what’s unknowable.” Tom
Russo

60. HATE

“When times aren’t good I’m still here. You find bargains among the unpopular things, the
things everybody hates. The key is you must have patience” Peter Cundill

“I would say that one of the questions I’m always asking my broker salespeople is, “I don’t want
to know what your analysts like. Tell me what your clients hate.What are the sectors that are
most hated?. What are the industries your clients don’t want to hear about?” It doesn’t even

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necessarily mean that’s the best value, but I want to know what the world hates. When it’s out
of favour and really hated, that to me is a good sign, and it means it’s time to do the work and
move forward” Preston Athey

“The very best time to buy a business is when it’s near term future prospects are murky and the
business is hated and unloved. In such circumstances, the odds are high than an investor can
pick up assets at steep discounts to their underlying value” Mohnish Pabrai

"Almost by definition we are running towards that which most people are running away from
because how else are you going to get a very reasonable, cheap price on a good company
unless the marketplace believes something is terribly wrong.” Bruce Berkowitz

"We try to look for places that other people are running from or people don't like. Zell used to
always say, "I like to look for trouble." I think that's something we try to do, as well." John
Phelan

When people walk through all the reasons to hate something, we often don't disagree with
them on the current facts, but may come to a different conclusion on the long -term investment
prospects given what we have to pay. People at times don't put enough weight on valuation"
David Green

“Part of the future is unknowable but there are some instances where you can take a calculated
risk/reward bet. One thing I would say is that a common characteristic of many of the stocks
that we buy is that everyone hates them. We do that a lot." Joel Greenblatt

“The safest and most potentially profitable thing is to buy something when no-one likes it.
Given time, its popularity, and thus its price, can only go one way; up” Howard Marks

“We buy that which is hated. When it is hated it’s usually cheap. No guarantee that it is cheap,
but the more you hate something the better we like it”. Bruce Berkowitz

“I want fear. I want to buy things when people are afraid of it, not when they think it’s a gift
being handed down to them.” Jeffery Gundlach

“We are highly opportunistic, and I will be buying what other people are selling, what is out of
favour, what is loathed and despised, where there is financial distress, litigation- basically,
where there is trouble. That is how we direct our search” Seth Klarman

“Great investing requires an independent spirit, and the courage to acquire assets the crowd
disdains. Disdain creates bargains” Shelby Davis

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“The balance of risk tends to be more in your favour when everybody is scared than when
everybody is happy” James Hunt

"The proper response lies in contrarian behavior: buy when they hate ‘em, and sell when they
love ‘em." Howard Marks

Tutorial 56-60 Recap

1) MR. MARKET - the idea of Mr Market was coined by Benjamin Graham to describe an
emotional character that offers to trade his stocks every day at different prices depending on
the mood he is in. The Investment Masters understand the market can be irrational and is
subject to mood swings by the crowd. The price signals and bids and offers by Mr Market are
not necessarily reflective of a company's worth. The Investment Masters seek to take
advantage of Mr Markets wild mood swings to buy securities below what they are
fundamentally worth.

2) INVESTMENT COMMITTEES - Investment committees have a poor track record of success.

The world's greatest investor has no investment committee. Ultimately the more people with
input into a decision the more likely the investment decisions are sub-optimal and at risk from
groupthink.

3) HUMAN NATURE - the Investment Masters recognise that human nature doesn't change and
continues to provide opportunities for skilful investors who are aware of human biases and
their impact on investment decisions.

4) WHAT YOU KNOW? - The Investment Masters understand it is more important to

acknowledge what you don't know as opposed to what you know. Recognising what you don't
know can help identify the risk factors in an investment position and keep you out of a position
you might otherwise have invested in. Always ask yourself what don't you know.

5) HATE - Investment Masters often look for stocks that are generally hated rather than those
that are loved. When stocks are hated they are more likely to be mispriced and the bad news
may already be reflected in the price.

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61. LEVERAGE

"Almost every financial blow-up is because of leverage" Seth Klarman

“When excessive leverage provides pain, I blame the leverage and the manager for taking on
the leverage, not the events” Paul Singer

“In almost every case of catastrophic failure that we’ve observed, we believe the root cause can
ultimately be boiled down to one or a combination of just five factors. The five factors are
1) leverage 2) excessive concentration 3) excessive correlation 4) illiquidity and 5) capital flight”
Zeke Ashton

“Leverage is really an enemy of being able to take a long term perspective” Seth Klarman

“Using leverage can produce superior results when the going is good, but it can wipe you out
when events fail to conform to your expectations. One of the hardest things to j udge is what
level of risk is safe. There are no universally valid yardsticks; each situation needs to be judged
on its own merit. In the final analysis you must rely on your instincts for survival” George Soros

“In addition to magnifying losses as well as gains, leverage carries an extra risk on the downside
that isn’t offset by accompanying upside: the risk of ruin” Howard Marks

“If you don’t have any leverage you’re in a much better position to make it over the canyon”
David Abrams

“In an adverse environment when most strategies are not working well, any leverage is too
much, and vice versa” Paul Singer

“Leverage may not change the odds of a given investment, but it makes the consequences
much more stomach-turning if the investment turns bad and you end up with a pile of debt”
Leon Levy

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“A leveraged portfolio forces you to act irrationally when markets are irrational, as opposed to
acting rationally when markets are irrational.” Marc Lasry

"If you take a 10 percent return in security and lever it up four times an after financing costs
generate 15 or 20 percent returns, you haven't increased your returns. You've just increased
your leverage and significantly increased your risk... You've also got a 20, 25 percent downside
threat..." Dan Loeb

“By definition there are two characteristics to borrowing. Number one: borrowing works both
ways. So you are compromising the idea of margin of safety if you borrow. Number
two: borrowing reduces your staying power. As I said, if you are a value investor, you are a long
term investor, so you want to have staying power.” Jean Marie Eviellard

“For an individual investor, debt can be disastrous, making it even harder to stay in the game –
both financially and emotionally – when the market turns against you” Guy Spier

"I haven't seen circumstances that would warrant lots of leverage. A bad return is a bad return.
Using leverage is only going to leverage you on the downside" Mark Kingdon

"Whenever a really bright person who has a lot of money goes broke, it's because of leverage..
it's almost impossible to go broke without borrowed money being in the equation" Warren
Buffett

"By not having leverage you'll always be in charge of your own destiny" James Dinan

"Be careful of leverage. It can go against you." Walter Schloss

"Never borrow. I had a margin call in 1924, and I swore I never would buy on margin again.
That’s one of the main reasons I got through the 1930s” Philip Carret

"Leverage magnifies outcomes but doesn’t add value." Howard Marks

"Consistent with our attitude toward catastrophic risk, we have little interest in the use of
leverage" Frank Martin

"There are six sigma events when you are levered which will force you to liquidate at times that
are the absolute opposite of the time you want to liquidate. I don't want to be in a situation,
especially with other people's money where we are looking at forced liquidations at the worst
possible times. We don't want to deal with a margin call - ever" Mohnish Pabrai

"Leverage is a two-edged sword. It's wonderful when the trade is going up, but you're out of
business quickly when it goes the other way" Craig Effron
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“Because we are human and can make mistakes, and because we never want to be forced to
sell investments at an inopportune time,, we never use recourse leverage on our portfolios. This
has been an expensive decision much of the time, in that leverage magnifies returns. But it is
not a decision we ever regretted, because the downside risk of leverage is far to great.” Seth
Klarman

"Many investors who were on margin at the beginning of 2009 were forced to sell at the worst
possible time. An investor who uses margin to invest can do well for 30 years and then lose
everything in a single day of irrational market movements." Francois Rochon

"Leverage is just a way to let you bet more than your capital, and it exposes you to more of the
good and more of the bad. Leverage can truly be dynamite" Howard Marks

62. CORPORATE DEBT

“A company should own twice as much as it owes. This philosophy has helped me avoid
companies that owe too much to survive” Chris Browne

"What you want to see on a balance sheet is at least twice as much equity as debt, and the
more equity and the less debt the better" Peter Lynch

“Never borrow short term against long term debt, and beware of stock companies that do”
Leon Levy

“The most important question to ask about a cyclical is whether the company’s balance sheet is
strong enough to survive the next downturn” Peter Lynch

“In addition to magnifying losses as well as gains, leverage carries an extra risk on the downside
that isn’t offset by accompanying upside: the risk of ruin” Howard Marks

“In bad times cyclical companies with heavy debt loads may well face insurmountable
problems” Chris Browne

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"The floor for any business is different. If a company is highly levered, the floor could be zero"
Mohnish Pabrai

“Corporate health provides a much better margin of safety than good current earnings. We
would rather invest in a company with a solid balance sheet, strong working capital, and little
leverage than in a company with a lot of debt but strong earnings at present” Thomas Khan

"I turn down many otherwise down attractive investments because of their weak balance
sheets, and I believe that this discipline is a material reason for our success over the year s. " Ed
Wachenheim

“Our best bear protection is buying companies with strong balance sheets, low debt, real
earnings and powerful franchises. These companies can survive bad times and eventually
become more dominant as weaker competitors are forced to cut back or shut down” Chris
Davis

“Our long-standing philosophy has always been that excess financial leverage was not a good
bedfellow with value investing” Richard Pzena

"I insist on financial strength" Ralph Wanger

“Whether it is a company running up debt to pay for expenses, or a person borrowing to buy
stocks on margin, the borrower is giving someone else the right to say when the game is over”
Chris Browne

"The biggest losses in stocks come from companies with poor balance sheets" Peter Lynch

“The year 1974 taught me that leverage can decimate even the best company when its access
to capital is cut off. It also taught me that most people have short memories. That’s why most
financial people have five-year careers – one market cycle.” Michael Milken

"Unjustifiably high financial leverage has been the cause of more investment failures than any
other variable" Frank Martin

"Debt is an amplifier and an accelerant. When times are good, sales ticking higher, margins
expanding and cash flows strong, only the advantages of leverage are visible - higher returns on
equity, faster growth rates and an enhanced benefit to stock holders as debt is repaid. When
conditions change, very quickly (and, more often than not, very unexpectedly) debt, hitherto
unnoticed, takes centre stage. Those who comfortably applauded the results of the leverage in
the good times then find themselves caught in a negative spiral as the process reverses"
Marathon Asset Management

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"It has been our experience that excessive debt (almost always taken on during periods of
optimism) is the single most common cause of permanent capital loss for investors" Zeke
Ashton

"Balance sheets don't really matter until the day they do. Then they're all that matters"
Whitney George

"The balance sheet is the barrier to the long term arbitrage. We want to have our investment
right even if we have our timing wrong" Chuck Royce

"We want protection against risk, so are attracted to strong balance sheets. It's much easier to
analyse a balance sheet than it is management, so we start by getting a good handle on the
financial strength of the company. If you've looked at tens of thousands of balance sheets, as I
have, you know what to look for in each case. Generally, though, we look at debt-to-equity
ratios, liquidity, depreciation rates, accounting practices, pension and healthcare liabilities, and
"hidden" assets and liabilities. The overriding question is, if something goes wrong, what's our
protection?" Ed Wachenheim

"If you are dependent on borrowed money, you have to wake up every day and worry about
what the world thinks of you" Warren Buffett

"The first and most toxic reason that stocks become cheap is too much debt" Chris Browne

"Staying away from excessive leverage cures a lot of ills" Thomas Gayner

"I like to look at the balance sheet and I don’t like debt because it can really get a company into
trouble. I prefer to buy basic businesses with strong balance sheets." Walter Schloss

"When a stock market decline coincides with a fairly sizeable economic s lump as happened in
1937-38 or 1957-58, most stocks sell off from 35 to 50 percent. The better ones then recover
when the slump ends and usually go on to new high levels. Even in the greatest slump of all
time, only a small percentage of all companies failed, that is went down 100%. Most of these
were companies which had fantastic amounts of debts and senior securities placed ahead of
their common" Phil Fisher

"If I find fault with a company's balance sheet, especially with the level of debt relative to the
assets or cash flows, I will abort our analysis, unless there is a compelling reason to do
otherwise" Ed Wachenheim

"The obvious consequence of owning a financially leveraged business is that, if you get it wrong,
you can put the business in a challenging position. It may not be able to raise capital and

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because the equity is a relatively small portion of the capitalization, very small movements in
the operating performance of that business can have a damaging impact on the equity value."
David Samra

"To Marathon's way of thinking, it is not wise to introduce financial leverage into a business that
already has a high degree of operating leverage. The two together are a dangerous
combination. Even history shows that investors who cheer leverage in the good times often
exhibit little fortitude in the bad." Marathon Asset Management

"What constitutes too much of it [debt] is a function of the kind of company you're looking at.
A consumer loan company, for example, has to carry a debt load that would be totally
inappropriate for a cyclical manufacturing company. If you're the latter with a heavy load of
debt, you'll go broke when demand slackens, and that's a very bad idea for shareholders. You
read about such failures during every recession. Generally, if the debt of any kind of
manufacturing or retail business is more than half of the company's total capitalisation, there's
a problem" Ralph Wanger

"I generally tend to avoid companies with stressed balance sheets. I've been through too many
cycles where debt kills you" Preston Athey

"As I look at my pre-investment checklist, the number one reason for losses for many great
value investors is leverage. Unfortunately, this has been true for Pabrai Funds as well. In the last
seventeen years, leverage is front and center on a number of my mistakes. My interest in
investing in levered businesses in the future is likely to be very low. And when we do take the
plunge, position sizing will be quite conservative." Mohnish Pabrai

"Be really, really, really careful about things that are leveraged" Thomas Gayner

"I almost always start my analysis of a company by studying its balance sheet. It is said the
shareholder makes money off the income statement, but survives off the balance sheet, I
agree" Ed Wachenheim

"It is important to understand that the prices of solid companies with strong balance sheets and
earnings usually recover [in market sell-offs]. In my experience, if the fundamentals are sound,
they always have and always will" Chris Browne

"If the investment is a well-run company with sufficient financial strength, even the greatest
bear market will not erase the value of holding" Phil Fisher

"Companies that went bankrupt [in the Financial Crisis] all had faced a common pitfall: too
much debt. The companies that withstand crises are most often the ones with solid balance
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sheets and with leadership that is prudent, trustworthy and devoted. Isn’t this perfectly
logical?" Francois Rochon

"The four letter word that messes up households, governments, and companies is 'debt'., If you
can stay away from debt you will be much better off. Off course, there are some situations
where it makes sense to take on a reasonable level of debt. For example, a fixed rate mortgage
that costs no more than 25% of your income, to buy your first house makes sense. But many of
the financial problems in the world have been due to entities taking on way too much debt.
The companies that we own, have very manageable debt, if any. I always look closely at the
interest costs on the debt related to EBITDA. Our companies must have at least 4X EBITDA as
compared with net interest expense, and most have a far greater cushion than that" Alex
Roepers

"I've made so many mistakes over the years that I struggle to isolate just one as the b iggest
single mistake. Among the choices though I think excessive leverage has been the most
personally painful. I did not fully appreciate the degree of leverage that existed in so many
aspects of so many businesses and how painful the unwinding of that leverage would prove to
be" Thomas Gayner

63. VALUE TRAPS

"I think that it’s easy to avoid value traps. The trick is to stay away from companies that can’t
grow their cash flow and increase intrinsic value. If I think the business is a “melting ice cube”
like newspapers, yellow pages and video rentals, to name a few bad businesses, then I won’t
invest in it, no matter how cheap it is” Kevin Daly

“The best way to avoid a value trap is to ask the obvious question; “if this stock is so cheap, why
is it cheap? The cheaper it is the more the market is telling you there is something wrong. If
that’s the case and you’re still intrigued, you better dig really deep”. Preston Athey

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"If the industry is subject to rapid and unpredictable change and we can’t reasonabl y
understand where the business will be in five years, we should move on to the next idea. That
discipline alone goes a long way toward avoiding value traps." David Green

“I’ve never felt that there is any such thing as a value trap. They are investing mistakes but I
don’t think they are value traps. If an investment flat lines or declines on you, people have a
cute way of saying it’s a value trap. If you were intellectually honest, you would fine a proper
reason for why things didn’t work out” Mohnish Pabrai

“Value traps” are cheap for a reason--perhaps an inept and entrenched management, a poor
history of capital allocation, or assets whose value is in inexorable decline.” Seth Klarman

“Value Traps: some common characteristics .. cyclical and/or overly dependent on one product,
hindsight drives expectations, marquis management and/or famous investor(s), appears cheap
using management’s metrics, accounting issues” Jim Chanos

“The question in avoiding a value trap is two fold. First, are the dominant shareholders or
management incentivised to have some kind of transaction that’s going to increase the market
value of the company in the near future? And second, is the intrinsic value of the company
increasing at a relatively attractive rate of return?” Paul Issac

“You have to recognize if a disruptive technological or structural industry change is underway

or relative value will point you to a lot of value traps. We always asking whether there’s a
transitory disruption to a business or whether there’s a point of discontinuity, as was the case
with Kodak” Brian Barish

“To avoid potential value traps, we also filter our companies where the 10 year trend in cash
flow as a percentage of sales or per fully diluted share is negative” Bernard Horn

"Part of the process is meant to identify potential value traps. We do that in a variety of ways,
but key among them is reconciling the income statement to the cash-flow statement to identify
permanent or semi-permanent shortfalls in cash flow relative to earnings." Joe Huber

"Given that value traps often result from companies squandering your capital, we put a lot of
emphasis on management’s capital-allocation prowess. That involves understanding how they
make capitalallocation decisions as well as their track record thus far in doing so." David Green

"Starting out I was a Graham and Dodd investor, focused on low price/ earnings ratios, good
balance sheets and high dividend yields. The problem with that is you can get caught in too
many value traps. I concluded I was better off focusing primarily on two key variables in
weighing investment attractiveness: company valuation and business quality." David Herro
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"I don't use the term "value trap". I find it more helpful to say "okay, I didn't understand a
component of this, so it's not working out". Generally, if you're right in your analysis, including
understanding the incentives of the company's leadership, then most of the time the market
will agree with you in two or three years" Ken Shubin Stein

"You make your profit in stocks between reality and perception. If we think the reality is X and
the market's perception is Y, we want to have a clear view on what's going to change the reality
or the perception that is going to cause the earnings to increase, the multiple to expand a nd
the stock price to go up. That's how we try to avoid value traps" Eric Marshall

"Relying purely on a reversion to the mean can lead to a lack of understanding of the underlying
business dynamics in an industry or company, making an investment more sus ceptible to 'value
traps' and long term value destruction" Marathon Asset Management

"When I think about the history of my mistakes (and it’s a long history), those mistakes have
generally been when the investment was in a business that was ostensibly very cheap, but
where you had secular headwinds, and those headwinds led to the undoing of the thesis. When
I look back on the investments that I sold at a loss, they were bought at a very low valuation.
But that valuation was not enough to discount fully what was to come, which was a demolition
of EBITDA and free cash flow." Chris Mittleman

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64. HIGH FLYERS

"The only thing that higher multiples hedge is capital gains" Arnold Van Den Berg

“If a stock is selling at a PE of 50, you have to be right about too many things to consider the
principal secure: at a minimum you have to be right about both future earnings and future PE.
With a PE of 12, several points below the historic average, you can get away with being right
about either future earnings or future PE. With a stock selling below book, all you have to be
right about is book value and the efficiency of your claim” Andy Redleaf

"Rarely can securities be valued correctly at over 15X earnings because rarely is there any clear
prospect that a company's earnings will grow sufficiently in the future to make it worth that
price. We know that there are exceptions, buy they account for perhaps 1% of the cases. So
the odds are against you when you pay a very high multiple" Roy Neuberger

"We had an aversion to paying high multiples even when we were sufficiently persuaded of the
growth prospects. It seemed to us that unless one could realistically seek the expansion of a
multiple as well as earnings growth in a long investment, it wasn't worth doing" Michael
Steinhardt

“Equity prices typically imply not only current realities but a set of future events. High prices
often imply that multiple significant uncertainties must be resolved for the price to be
vindicated. High priced shares are like thoroughbred racehorses or over-engineered sedans:
they may be beautiful performers under ideal conditions but they are very sensitive to
circumstances – especially when they are running flat out” Andy Redleaf

“The function of margin of safety is, in essence, that of rendering unnecessary an accurate
estimate of the future” Ben Graham

“The consequences of the stock market revaluing overpriced stocks is often what Graham and I
call 'permanent capital loss'” Christopher H Browne

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"If a high P/E is attached to earnings that are expected to grow rapidly, an earnings shortfall will
cause the P/E ratio to be reduced, bringing about a double-barrelled price decline" Howard
marks

“For us, the risk is lower when granular, and very likely high, expectations don’t exist” Jason
Stankowski

“Once a fast grower disappoints, investors fall prey to cruel mathematics; a stock that’s down
50% must rise 100% before it returns to break-even point” Chris Davis

"High multiple stocks can become average multiple stocks at the drop of a penny in expected
earnings. You never know for sure if a company's going to do what you hope it will" Ralph
Wanger

“Our business is one requiring patience. It has little do with a portfolio of high-flying glamour
stocks and during periods of popularity for the latter, we may appear quite stodgy” Warren
Buffett, Partnership Letter 1963

“Conservative forecasts can be more easily met or even exceeded. Investors are well advised to
make only conservative projections and then invest only at a substantial discount from the
valuations derived therefrom” Seth Klarman

“Any growth stock that sells for 40 times its earnings for the upcoming year is dangerously high-
priced, and in most cases extravagant. As a rule of thumb, a stock should sell at or below its
growth rate – that is, the rate at which it increases its earnings every year. Even the fastest
gowing companies can rarely achieve more than a 25% growth rate, and a 40% growth rate is a
rarity. Such frenetic progress cannot long be sustained, and companies that grow too fast tend
to self destruct”. Peter Lynch

"Exceptional growth usually sows the seeds of its own decline" Ralph Wanger

“When a stock is relatively expensive, it is much harder to assess whether other people have
simply done a better job than me at assessing the probabilities of successful outcomes. So you
have to start with something that is demonstrably cheap because, first it is harder to get hurt if
you fall out of the basement window, and second, it’s so difficult to assess whether other
people have a more accurate handle on favourable characteristics than you do”. Paul Isaac

"Since analysts consistently overestimate growth rates, disasters happen all the time. A 20%
growth rate is a nice round number, easy for an analyst to pencil in, and that gets people
excited. It should, because 20% growth over time would be spectacular. And at some point

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impossible to sustain. Earnings disappointments aren't as rough on value stocks, because
they're already in the basement" Ralph Wanger

"Fast growers can lead exciting lives, and then they burn out, just as humans can. They can't
maintain double-digit growth forever, and sooner or later they exhaust themselves and settle
down into the comfortable single digits of sluggards and stalwarts. I've already seen it happen
in the carpet business and in plastics, calculators and disk drives, health maintenance and
computers. From Dow Chemical to Tampa Electric, the high flyers of one decade become the
groundhogs of the next" Peter Lynch

“Companies that were nobody’s darlings when stock prices rose, he decides, were less likely to
disappoint when the market fell. Why risk a pole vault when you could take the stairs” The Davis
Dynasty

“It’s unrealistic to expect companies to grow at 15% for extended periods. Most great
companies can’t do it. People who pay high prices for stocks based on high growth assumptions,
are asking for trouble up the line” Chris Davis

"The more you grow, the harder it is to keep the percentage of growth constant or increasing
because the base gets so big. A company with $10m of sales and something unique can double
its profits in a year, a company with $1b in sales is simply too big to double it's profits in a year,
it takes time and energy and capital for each incremental increase, and none of these factors is
infinite" Adam Smith, The Money Game 1968

“We’ve earned our money over time by significant outperformance in down markets, which is
primarily a function of owning low-expectation stocks that are less susceptible to market
corrections” Tom Shrager

“When you buy a battered stock in a solid company, you take some risk out of the purchase.
Investors have low expectations” Chris Davis

“Proportionally, a contraction in PE from 35 to 29 looks just like a contraction from 12 to 10, in

both cases around 17%. But here is the great difference. A contraction from 35 to 29 is very
likely one step on a path that leads to 15. A contraction from 12 to 10 is also only one step on a
path. And that path also very likely leads to 15”. Andy Redleaf

“Capitalism has a way of turning a good idea at a low price into a bad idea at a high price"
Mason Hawkins

"Study after study has shown that when low P/E, low expectation stock reports disappointing
news, the effect is usually minimal. Conversely, when a low expectation stock surpri ses the
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market with good news, the price can pop. The reverse is proven to happen with high
expectation stocks. If they report a good quarter the stock doesn't necessarily jump. But bad
news can crater a high-expectation stock" Christopher Browne

"We are wary of assets with sky-high valuations. We are not tempted to invest in them because
it's going to end badly" Steve Feilmeier

“High PE stocks are usually high expectation stocks. Everything is going right, and investors are
convinced their run of great returns will continue for many years. As the legendary manager of
the Vanguard Windsor Fund, John Neff, once said to me, 'Every trend goes on forever until it
ends'. Things change and trends do not go on forever” Christopher H Browne

"If you remember nothing else about p/e ratios, remember to avoid stocks with excessively high
ones. You'll save yourself a lot of grief and a lot of money if you do. With few exceptions, an
extremely high p/e ratio is a handicap to a stock, in the same way that extra weight in the
saddle is a handicap to a racehorse. A company with a high p/e must have incredible earnings
growth to justify the high price that's been put on the stock. In 1972, McDonald's was the same
great company it had always been, but the stock was bid up to $75 a share, which gave it a p/e
of 50. There was no way that Mc Donald's could live up to those expectations, and the stock
price fell from $75 to $25, sending the p/e back to a more realistic 13. There wasn't anything
wrong with McDonald's. It was simply overpriced at $75 in 1972" Peter Lynch

“Here’s a simple principle about principal: principal is secured by price. Assuming ahealthy
business, the lower the PE the more secure the principal and the more bond-like the stock”
Andrew Redleaf

"We confess to being investment acrophobics: We fear high places" Frank Martin

"We were orphans when everybody else was rushing after all of those so-called one-decision
growth stocks, but we never did like the high fliers... I think that's one of the reasons why our
record is so good." Richard Cunniff

"The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market
does not forgive those who know not what they do. For the investor, a too-high purchase
price for the stock of an excellent company can undo the effects of a subsequent decade of
favourable business developments" Warren Buffett

“The risk of loss stemming from equity’s place in the capital structure is exacerbated by paying
a high price ” Seth Klarman

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"Examine the record of, say, the 200 highest earnings companies from 1970 or 1980 and
tabulate how many have increased per-share earnings by 15% annually since those dates. You
will find only a handful have. I would wager you a very significant sum that fewer than 10 of the
200 most profitable companies in 2000 will attain 15% annual growth in earnings per-share over
the next 20 years" Warren Buffett 2000

“The notion that any business can grow at 20% per year forever is a fallacy. It doesn’t happen. In
fact, if you go back in time. Let’s say I go back 50 years and I look at the best businesses of the
era 50 years back, the bluest of blue chips which were the Amex of the time. Most of them are
not around today. They don’t even exist. They have gone bankrupt or they have been acquir ed
or gone. You cannot get long, long runs on most of these businesses” Mohnish Pabrai

"I find the fact that trees cannot grow to the sky, because of the effects of gravity on tall
slender structures, a useful metaphor, suggesting a limit to growth of most things, including
corporations" Ralph Wanger

"Many people prefer to invest in a high-growth industry, where there's a lot of sound and fury.
Not me. I prefer to invest in a low- growth industry like plastic knives and forks, but only if I
can't find a no-growth industry like funerals. That's where the biggest winners are developed.
There's nothing thrilling about a thrilling high-growth industry, except watching the stocks go
down. Carpets in the 1950s, electronics in the 1960s, computers in the 1980s, were all exciting
high-growth industries, in which numerous major and minor companies unerringly failed to
prosper for long" Peter Lynch

"As well as being difficult to manage and also attracting competition, high rates of growth are,
in any case, unsustainable. Eventually, even the most successful business models must face the
law of large numbers - all markets are of finite size (even Coca-Cola's despite it's mid-90's
slogan: "The closer we get to infinity, the better it looks!"). Empirically, very few companies
can sustain anything like double-digit growth for a decade or more. In some businesses, the risk
is more pronounced when the product is relatively faddish (such as consumer electronics or
fashion retailing). Rapid growth can quickly turn into just as spectacular decline. In such cases,
the damage wrought by compounding negative numbers can be especially painful. Momentum-
orientated investors (of which there appear always to be more in practice than in theory) will
happily pay any multiple for so long as growth is accelerating, but no multiple is cheap enough
when it is falling" Marathon Asset Management

"Over time, the growth rate of almost all technologies, products, and services slow because of
saturation, obsolescence, or competition. Many investors tend to project high growth rates far
into the future without fully considering forces that eventually will lead to slower growth" Ed
Wachenheim
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"High growth and hot industries attract a very smart crowd that wants to get into the business.
Entrepreneurs and venture capitalists stay awake nights trying to figure out how to get into the
act as quickly as possible. If you have a can't-fail idea but no way of protecting it with a patent
or a niche, as soon as you succeed, you'll be warding off the imitators. In business, imitation is
the sincerest form of battery" Peter Lynch

"When you begin to expect the growth of a component factor to forever outpace that of the
aggregate, you get into certain mathematical problems" Warren Buffett

"I like to buy basic businesses not high flyers that sell at huge multiples." Walter Schloss

"In a finite world, high growth rates must self-destruct. If the base from which the growth is
taking place is tiny, this law may not operate for a time. But when the base balloons, the party
ends; a high growth rate eventually forges its own anchor" Warren Buffett

"Wall Street does not look kindly on fast growers that run out of stamina and turn into slow
growers, and when that happens, the stocks are beaten down accordingly" Peter Lynch

"High valuations entail high risks" Benjamin Graham

"A full price paid for admission carries a double penalty when the projected future growth rate
in the company's earnings errs on the side of being excessively optimistic. The injury of lower-
than-expected earnings is usually compounded by the insult of a lower price-earnings ratio"
Frank Martin

"Some may say that earnings growing at 25% a year justify a 40 P/E, but its extremely difficult
for a company to maintain that kind of growth, even for a short period of time, and no company
can do it over a long period" Ralph Wanger

"The rule is you cannot invest pretty much in any business on the planet that would make 20% a
year on that business for the next 50 years. Not happening. Eventually what would happen is
that business would be bigger than planet Earth. Since planet Earth is not growing, we are
stuck." Mohnish Pabrai

"We want to avoid situations where a valuation would wipe out the benefits we identify from
misunderstanding. There are big sectors of the market – food companies, for example – where
companies believed to be of high-quality, with low single-digit growth, are trading at 20-25x
free cash flow. You could have a view they’ll cut costs, put another turn of debt on the balance
sheet and buy back some stock to get 20-25% upside to earnings. But there’s 40% downside to
the multiple. Unless the misunderstanding is very big, you’re just taking a bad risk." Adam
Weiss
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"I want to pay a multiple that does not expose me to a high risk of multiple compression"
Thomas Gayner

"There is nothing at all conservative, in my opinion, about speculating as to just how high a
multiplier a greedy and capricious public will put on earnings" Warren Buffett, Partnership
Letter 1962

"Even if, by some magic, you knew the future growth rate of the little darling you just
discovered, you really know how the market will that growth. Sometimes the market will pay
twenty times earnings for a company growing at an annual compounded rate of 30 percent;
sometimes it will pay sixty times earnings for the same company. Sometimes the market goes
on a growth binge, especially when bonds and the more traditional securities do not seem to
offer intriguing alternatives. At other times the alternatives are enticing enough to draw away
some of the money that goes into pursuing growth. It all depends on the psychological climate
of the time. Obviously you are safer buying compounded earnings cheap than dear, because if
you have a stock at eighteen or four- teen or eleven times earnings, and it takes a very damp
climate indeed to suppress a record at those ratios. But since you will never be first on the
scene, there will always be something to make your little darling seem expensive: Competition
is lurking imminently, the stock has already run up, or the market is going to hell in a hand
basket." Adam Smith, The Money Game

"Once a fast grower gets too big, it faces the same dilemma as Gulliver and Lilliput. There's
simply no place for it to stretch out" Peter Lynch

65. BUBBLES

“One man’s bubble is another man’s growth stock” Murray Stahl

“At the root of all financial bubbles is a good idea carried to excess” Seth Klarman

"Logical-seeming rationales play a part in most bull markets... All bubbles start with a modicum
of truth" Howard Marks
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"The only way you get a bubble is when basically a very high percentage of the population buys
into some originally sound premise and - it's quite interesting how that develops -originally
sound premise that becomes distorted as time passes and people forget the original sound
premise and start focussing solely on the price action" Warren Buffett

“Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as
distorted by a misconception." George Soros

“In simple terms, financial bubbles, driven as they are by human folly, are often the result of
too much money chasing too few worthy ideas, leading to overinvestment and excess supply”
Frank Martin

“It’s an oversimplification – but not a grievous one – to say the inevitable hallmark of bubbles is
a dearth of risk aversion” Howard Marks

“A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors
learns some very old lessons: First, many in Wall Street (a community in which quality control is
not prized) will sell investors anything they will buy. Second, speculation is most dangerous
when it looks easiest” Warren Buffett

"A good working knowledge of the history of bubbles can also help preserve your capital"
James Montier

“The psychology that allows bubbles to form always break, sometimes on a dime” Seth Klarman

“To avoid losing money in bubbles, the key lies in refusing to join in when greed and human
error cause positives to be wildly overrated and negative to be ignored. Doing these things isn’t
easy, and thus few people are able to abstain” Howard Marks

“The euphoria in human nature takes over when the economy is expanding for several years,
leading to bubbles, and these bubbles cannot be defused until the fever breaks” Frank Martin

“Bubbles blown large enough inevitably pop. And then the old proverb is confimed once again:
“what the wise man does in the beginning, the fool does in the end” Warren Buffett

"There are two cornerstones to a bubble. The first is price momentum; the second, wide
discrepancy between price and value" Marathon Asset Management

"This is what happens in manias - people wilfully forget inconvenient facts like arithmetic"
Scott Fearon

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“When I see a bubble forming I rush in to buy, adding fuel to the fire. That is not irrational."
George Soros

"I know that bubbles have always happened and they always look the same, it is the damnedest
thing. People always say the same things in bubbles: "This new technology is going to change
the world," or "You don't understand what is going on, you old fogey." All those same things
have been trotted out in every bubble in history, whether it is commodities, tankers or bonds.
People always get just as hysterical. The smart money always loses money shorting them
because they cannot comprehend that it could go as high as it does" Jim Rogers

"A bubble can be identified partly based on nosebleed valuations, but a bubble is also
behavioural. When prices are rising simply because they have been rising, when people on the
sidelines are drawn into speculation because they can't stand their friends and neighbours
making what seems like free money while they themselves are not, the market maybe
entering bubble territory. In the words of fames economist John Kenneth Galbraith, "A
bubble comes from rising prices, whether of stocks, real estate, works of art or anything else. A
price increase attracts attention and buyers, which results in even higher prices" Seth Klarman

"What I've learned is that bubbles last a long time, and that there's money to be made out of
bubbles. The main thing about bubbles is that you need to be early. The worst thing you can
do is to be stubborn and then late to convert" Colm O'Shea

"All bubbles result from megatrends and the excess focus on the demand side of the equation,
with little reference to management quality and the supply side, is usually the great error made
by investors" Marathon Asset Management

"The belief that some fundamental limiter is no longer valid - and thus historic notions of fair
value no longer matter - is invariably as the core of every bubble and consequent crash"
Howard Marks

"Giant bubbles are easy to spot statistically but hard to call from a career risk perspective. It is
easy to be early, and being early may lose you your job, your clients, and your credibility.
Every major bull event is called a paradigm shift but they almost never exist. Almost never. But
not never, ever. In 1999 we presented 28 major bubbles of the past and were able to call the
score: Mean Reversion, 28; Paradigm Shift, Nil!" Jeremy Grantham

"In many ways, mania participants suffer from acute cases of historical myopia. They only look
as far back as the first days of their particular bubble and assume the older ways of living or
doing business have now been rendered permanently obsolete" Scott Fearon

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"When an asset class is very popular in all layers of the financial system and when it is
purchased without to the risks imposed, we can begin talking about a bubble" Francois Rochon

"The problem is that in bubbles attractive" morphs into "attractive at any price." People often
say, "It's not cheap, but I think it'll keep going up because of excess liquidity" (or any number of
other reasons). In other words, they say, "It's fully priced, but I think it'll become more so."
Buying or holding on that basis is extremely chancy, but that's what makes bubbles. In bubbles,
infatuation with market momentum takes over from any notion of value and fair price, and
greed (plus the pain of standing by as others make seemingly easy money) neutralizes any
prudence that might otherwise hold sway. To sum up, I believe that an investment approach
based on solid value is the most dependable. In contrast, counting on others to give you a profit
regardless of value, relying on a bubble is probably the least" Howard Marks

Tutorial 61-65 Recap

1) LEVERAGE - investing with leverage is a double edged sword. While leverage magnifies
returns it also magnifies losses, which can become permanent. Given the increased risk
involved in leveraging a portfolio the Investment Masters tend to avoid leverage.

2) CORPORATE DEBT - companies which carry a lot of debt can face insurmountable problems
when or if their business hits tough times. Companies with excessive leverage are also at risk of
debt markets closing. Be cognisant of high levels of debt particularly where a company has
cyclical earnings. Over the years I've witnessed more company failures because of debt that
any other factor.

3) VALUE TRAPS - a key risk for value investors is value traps. These are companies that appear
cheap on valuation metrics but the underlying business is deteriorating. This maybe a result of
technological obsolescence, changing industry dynamics or poor company management. It's
important to ascertain why a company is cheap and to understand the nature of the business to
avoid value traps. Just because a stock has fallen 50% doesn't mean it can't fall another 50%.

4) HIGH FLYERS - The Investment Masters have a tendency to avoid buying companies on very
high multiples with high growth expectations. Most companies cannot sustain high rates of
growth over long periods. When companies on very high multiples miss earnings expectations
their PE multiple and EPS forecasts can fall dramatically leading to a significant share price
decline.

5) BUBBLES - the Investment Masters are cognisant of investment bubbles and would rather
avoid investing in stock market bubbles than face the possibility of a future stock price collapse.

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When stock prices go parabolic or their is a significant increase in capital chasing an industry or
sector it's likely future returns will disappoint.

66. HERDS CROWDS CONTRARIANS

"The market is a crowd, and if you've read Gustave Le Bon's 'The Crowd' you know a crowd is a
composite personality" Adam Smith, The Money Game

"No matter what role the investor has started with, in a climax on one side or the other the role
melts into the crowd role of greed or fear. The only real protection against all the vagaries of
identity playing, and against the final role of being part of the crowd when it stampedes, is to
have an identity so firm it is not influenced by all the brouhaha in the marketplace" Adam
Smith, The Money Game

"Mimicking the herd invites regression to the mean" Charlie Munger

"According to Le Bon, the crowd loves simple suggestions. Understandably, it is incapable of

complex reasoning. Imagine the edge one has if one simply disassociates himself from the
crowd." Frank Martin

"Le Bon basically said that when one joins a crowd – when one becomes part of the herd – he
tends to function at a much lower level. In the capital markets – because of the Bloomberg
terminal, because of instantaneous communications, because everything is live and online – we
can create instantaneous synthetic crowds." Frank Martin

"In the sheep market, people try to guess what the crowd will do, believing they can be swept
along in a favourable current. That can be dangerous. The crowd maybe very late in acting.
Suppose it's an institutional crowd. Sometimes they over-influence each other and are the
victims of their own habits. Sheep investors are very susceptible to suggestion. It's much
better to do your own research and choose stocks on their merit than it is to take tips you reall y
can't substantiate" Roy Neuberger

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"Berkshire buys when the lemmings are heading the other way" Warren Buffett

"Never follow the crowd" Bernard Baruch

"If you want to stand out from the pack, you have to stand outside the pack" Ralph Wanger

"The crowd is usually wrong on the market." Stanley Druckenmiller

“Buy when everyone else is selling and hold until everyone else is buying.” J. Paul Getty

“The consensus is often wrong, so I have to be an independent thinker. To make any money,
you have to be right when they’re wrong” Ray Dalio

"Being “right” doesn’t lead to superior performance if the consensus is also right” Howard
Marks

“In the top financial ranks are disproportionate numbers of contrarians (This makes perfect
sense, since investors too deeply wedded to conventional wisdom will perform only as well as
the bulk of the crowd)” Leon Levy

"You need to avoid crowd judgement" Bruce Kovner

"Acquiring knowledge of the psychology of crowds not only teaches one about the beguiling
and insidious dangers of embracing crowd-think - sometimes termed groupthink - but,
forewarned and thus forearmed, the erudite investor is less likely to succumb to its often
ruinous reasoning" Frank Martin

“There is a very important difference between being a theoretical contrarian and dealing with it
in practical terms. In order to win as a contrarian, you need the right timing and you have to put
on a position in the appropriate size. If you do it too small, it’s not meaningful; if you do it too
big, you can get wiped out if your timing is slightly off. The process requires courage,
commitment and an understanding of your own psychology” Michael Steinhardt

“You are neither right nor wrong because the crowd disagrees with you. You are right because
your data and reasoning are right.” Ben Graham

“When views are truly contrarian, they are inevitably uncomfortable. Courage and the ability to
withstand pain are required” Michael Steinhardt

“Non-consensus ideas have to be lonely. By definition, non-consensus ideas that are popular,
widely held or intuitively obvious are an oxymoron” Howard Marks

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“It is always easiest to run with the herd; at times, it can take a deep reservoir of courage and
conviction to stand apart from it. Yet distancing yourself from the crowd is an essential
component of long-term investment success” Seth Klarman

“When everybody is on one side of the boat, you should go to the other side” Jim Rogers

“Having a variant perception can be seen benignly as simply being contrarian. The
quintessential difference, that which separates disciplined, intensive analysis from “bottom
fishing” is the degree of conviction one can develop in one’s views” Michael Steinhardt.

“Unanimity of opinion is a danger sign. When everybody thinks that interest rates are going to
remain lower or go lower, Look out” Shelby Davis

“Contrarian behaviour lies at the heart of most successful investment strategies. Unfortunately
for investors, human nature craves the positive reinforcement that comes from running with
the crowd” David Swenson

“Much has been written in the literature of investments on the importance of contrary opinion.
Contrary opinion, however is not enough. I have seen investment people so imbued of the need
to go contrary to the general trend of thought that they completely overlook the corollary of all
this which is: when you do go contrary to the general trend of investment thinking, you must be
very very sure that you are right” Phil Fisher

"You have to be an independent thinker because you can’t make money agreeing with the
consensus view, which is already embedded in the price. Yet whenever you’re betting against
the consensus, there’s a significant probability you’re going to be wrong, so you have to be
humble” Ray Dalio

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they
only recover their senses slowly, and one by one.” Charles Mackay

“Training oneself not to go with the crowd but to be able to zig when the crowd zags, in my
opinion, is one of the most important fundamentals of investment success” Phil Fisher

“Markets are in a constant state of uncertainty and flux and money is to be made by
discounting the obvious and betting on the unexpected.” George Soros

"The stock exchange is only a crowd. If you don't understand that, you can't understand the
way to invest" Francois-Marie Wojcik

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“One of the few sure ways to make money is to have a view that is off-consensus and have that
view turn out to be right. To be contrarian is not enough. You have to be right. Contrarian in a
plus. To be contrarian and be right on you judgement is when you get the golden ring. It
doesn’t happen that much but when it does happen you make extraordinary amounts of
money” Michael Steinhardt

"You do best when your investments are controversial - when you stray farthest from the herd"
Ralph Wanger

“You will not be right simply because a large number of people momentarily agree with you.
You will not be right simply because important people agree with you. You will be right over the
course of many transactions, if your hypothesis are correct, your facts are correct, and your
reasoning is correct” Warren Buffett

“Contrarian investment behaviour requires shunning the loved and embracing the unloved.
Most people do the opposite” David Swenson

“Huge profits are frequently available to those who zig when most of the financial community is
zagging, providing they have strong indications that they are right in their zigging” Phil Fisher

“It is impossible to produce superior performance unless you do something differ ent from
the majority.” Sir John Templeton

"Sooner or later the market will do what it has to do to prove the majority wrong" Peter Cundill

“Great investing requires an independent spirit, and the courage to acquire assets the
crowd disdains. Disdain creates bargains” Shelby Davis

“Our contrarian nature reflects a fundamental belief that you don’t make money doing what
everybody else is doing and that the balance of risks tends to be more in your favour when
everybody is scared than when everybody is happy” James Hunt

“Almost by definition we are running towards that which most people are running away from
because how else are you going to get a very reasonable, cheap price on a good company
unless the marketplace believes something is terribly wrong.” Bruce Berkowitz

“When times aren’t good I’m still here. You find bargains among the unpopular things, the
things everybody hates. The key is you must have patience” Peter Cundill

"Most people get interested when everyone else is. The time to be interested is when no one
else is. You can't buy what is popular and do well" Warren Buffett

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"We get comfort from the consensus, but making the same investment choices as a large
number of other intelligent people almost mathematically insures you’ll do the wrong thing a t
the wrong time because security prices reflect that consensus." Staley Cates

"None of this means, however, that a business or stock is an intelligent purchase simply
because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy.
What's required is thinking rather than polling. Unfortunately, Bertrand Russell's observation
about life in general applies with unusual force in the financial world: "Most men would rather
die than think. Many do" Warren Buffett

"As is the case with unconventionality, you should not aim for contrarianism for its own sake,
but only when the reasons are good and the actions of the crowd look particularly foolish."
Howard Marks

"We are contrarian, not for the sake of being contrarian, but contrarian as a result of our
research work to find bargains. Three decades of experience have taught me that this is the
safest investment approach and the safest way to meet our investment objectives" Bruce
Berkowitz

“One of the things I’ve learned over the years is that with a lot of securities, you have to buy
them when nobody wants them” David Abrams

"It's not impossible but the odds are against you if your view is the same as everybody
else's because that view is probably already reflected in a stock's valuation. Our most
successful investments tend to be where our research process has led us to a conclusion that is
different than the perspective commonly held by most investors" Lee Ainslee

“What’s clear to the broad consensus of investors is almost always wrong.. the very coalescing
of popular opinion behind an investment tends to eliminate its profit potential” Howard Marks

"Our ideas will sound wrong to most people. Any investment policy followed by all naturally
defeats itself. Thus, the first step for the individual really trying to secure or preserve capital is
to detach himself from the crowd" Gerald M. Loeb

"It is my assertion that what makes a great fund manager first and foremost is the ability to
establish a contentious premise outside the existing belief system and have it go on to become
adopted by the broader financial community." Hugh Hendry

"What I am really looking for is a consensus that the market is not confirming. I like to know
that there are a lot of people who are going to be wrong” Bruce Kovner

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“Even the intelligent investor is likely to need considerable willpower to keep from following
the crowd.” Benjamin Graham

"We focus on the facts of an investment case and ignore the crowd." Bruce Berkowitz

“I would recommend that private investors tune out the prevailing views they hear on the radio,
television and the internet. They are not helpful. People say ‘buy low, sell high’, but you cannot
do this if you are following the herd.” Irving Kahn

"I think is is very useful to develop a contrarian cast of mind" Peter Cundill

“The hardest trait for humans is they are adverse from stepping away from the crowd. So
having no concerns about how people think about you based on what actions you take is a very
important trait. And having no stress about it” Mohnish Pabrai

“First, we seem to assume that if a lot of people are doing the same thing, they must know
something we don’t. Especially when we are uncertain, we are willing to place an enormous
amount of trust in the collective knowledge of the crowd. Second, quite frequently the crowd is
mistaken because they are not acting on the basis of any superior information but are reacting,
themselves, to the principle of social proof” Robert Cialdini

"When everybody is on one side of the market, it has nearly always proven to be wrong. We
human beings have not changed in hundreds of years, so we are still guided by the same fears
and aspirations" Jim Rogers

"Successful investing requires that you have a different view from the consensus - but that view
also needs to be right." Chris Parvese

“The consensus thinking is generally wrong. If you go with a trend, the momentum always falls
apart on you. So I buy companies that are not glamorous and usually out of favour. It is even
better if the whole industry is out of favour.” Carl Icahn

"Being a contrary investor – thinking and being ahead of the pack – is intellectually exciting and
keeps me in love with the business.' Ed Wachenheim

"All of the consensus is already baked into the price. In order to be correct in the markets, in
order to make money in the markets, you have to see something that the consensus doesn't
see. So you have to have an independent point of view. Very different than most other
professions. Most other professions you can build on existing knowledge. You don't have to
have a point of view. If you're a doctor and somebody breaks a leg or whatever, you can repair

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that leg. It's not zero-sum, in the sense that you have to be smarter than the next person or
different from the consensus" Ray Dalio

"The only way for investors to significantly outperform is to periodically stand far apart from
the crowd, something few are willing or able to do" Seth Klarman

"When everybody is on one side of a market, it has nearly always proven to be wrong. We
human beings have not changed in hundreds of years, so we are still guided by the same fears
and aspirations" Jim Rogers

"Effective money managers do not go with the flow. They are loners, by and large. They're not
joiners; they're skeptics, cynics even. Whatever label you want to put on them, the trait they all
share is that they don't automatically trust that what the majority of people - especially the
experts - are doing is necessarily correct or wise. If anything, they move in the opposite
direction of the majority, or they at least seek out their own course. " Scott Fearon

"The hardest thing over the years has been having the courage to go against the dominant
wisdom of the time, to have a view that is at variance with the present consensus and bet that
view. The hard part is that an investor must measure himself not by his own perceptions of his
performance but by the objective measure of the market. The market has its own reality. In an
immediate, emotional sense, the market is always right. So if you take a variant point of view,
you will always be bombarded for some period of time by the conventional wisdom as
expressed by the market. " Michael Steinhardt

"It has rightly been said that all investors worth their salt must have a contrarian streak in them.
If you go with the consensus, your performance will be consensus - ho-hum average" Ralph
Wanger

"We at Baupost march to our own drumbeat, unafraid to stand apart from the crowd" Seth
Klarman

"With a little help from an obscure Frenchman [Gustav Le Bon], years ago I concluded that
investment success is more likely to come to those who have some clue about the
counterintuitive way that the thought processes and subsequent behaviors of crowds differ
from individuals in isolation. Individuals who submit to the will of a crowd are effectively
hypnotized, and behaviours become emotional, impulsive, and difficult to terminate." Frank
Martin

67. VAR LECTURE - VALUE AT RISK

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"Organised common sense - very basic knowledge - is an enormously powerful tool. There are
huge dangers with computers. People calculate too much and think too little" Charlie Munger

“I am extremely sceptical of automated, algorithmic, Value at Risk, and other business school
sanctioned approaches to risk management. None of these approaches saved Lehman, Bear
Stearns, Fannie, Freddie, AIG, WaMu, Wachovia or any of the other institutions that used these
and other ostensibly more sophisticated risk management strategies” Bill Ackman

“We will never put our faith in computer “risk models”; instead, we apply sound judgement and
common sense to our assessment of risk” Seth Klarman

“The use of the value-at-risk models which made no sense from my judgment because they cut
off the tail” David Einhorn

“If the financial crisis taught nothing else, it showed how elegant financial models that calculate
risk to decimal point precision act like a sedative towards critical thinking and even common
sense” Allan Mecham

“VAR tells you how volatile your current portfolio was in the past. That is all. VAR is entirely
backward looking. You have to recognise that the future will be different. VAR doesn’t blow up
portfolios, people do” Colm O’Shea

“We have never had and would never use any form of quantitative risk control because all
quantitative risk control models use historical volatility. It is like driving by looking in the rear -
view mirror” Martin Taylor

“A 99% Value-at-Risk calculation does not evaluate what happens in the last one percent… This
is like an airbag that works all the time, except when you have a car accident.” David Einhorn

"Once a bank adopts VAR the managers manage to it because they .. have no choice but to keep
the VAR numbers shiny for their clients as well as for their own internal risk managers. This is
extremely dangerous, for VAR is a complex formal system. The essence of all formal systems is
to carve away some information so as to cast what remains into bold relief, to make choices
about what is important and what is not. And the truth about all models that exceed a certain
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point of complexity is that things left out eventually become invisible even if they never
become insignificant" Andrew Redleaf

“The rocket scientists (at financial institutions) managed to create a missile that landed on
themselves.” Anthony Sanders, professor of finance, Arizona State University

"I find it preposterous that a single number reflecting past price fluctuations could be thought
to completely describe the risk in a security" Seth Klarman

"Things like Gaussian curves and Value at Risk (VAR) were some of the dumbest ideas ever put
forward" Charlie Munger

"The key hazard of quantative risk management is the illusion of control the models and their
results impart to us. No model has an R-sqare of 1.00. Even if you have a so-called statistically
significant outcome, which is 95% certain - 95% still leaves 5% you know nothing about. The
devil is in the residuals, as all of us have discovered to our sorrow." Howard Marks

"Those who trust the models do so at their own peril. They will be hurt as the models are
wrong. The world may be different than those used in the model's history" Paul Singer

"Using backward-looking models - a common coping tool - computing the probability of

something disastrous that has never happened before usually produces a number close to
zero. With a probability that slim, most become disaster myopic." Frank Martin

"Over time, markets will do extraordinary, even bizarre things. A single, big mistake could wipe
out a long string of success. We therefore need someone genetically programmed to recognize
and avoid serious risks, including those never before encountered. Certain perils that lurk in
investment strategies cannot be spotted by use of models commonly employed today by
financial institutions" Warren Buffett

"The real danger of VAR was [is] the same as that of all statistical systems that become
substitutes for human judgement. By encouraging bankers to surrender their
judgement, VAR radically increased [increases] the possibility of disaster" Andrew Redleaf

"Certain perils that lurk in investment strategies cannot be spotted by use of the models
commonly employed today by financial institutions." Warren Buffett, March 2007.

"Do not trust financial market risk models. Reality is always to complex to be accurately
modelled. Attention to risk must be a 24/7/365 obsession, with people - not computers -
assessing and reassessing the risk environment in real time" Seth Klarman

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"A good deal of common sense has to be utilized in conjunction with risk model output. We
generally assume risk models and stress tests are significantly underappreciating true risk"
John Burbank

"One of the things I have observed during my career that I think is interesting is that the basics
of investing do not change only the terminology or lexicon seems to. VAR, sharpe ratio, Market
Neutral - whatever that means, tail risk, black swans, Sortino ratio. To me, there just seems to
be some perverse human characteristic that likes to make easy things difficult" John Phelan

"I discovered along the way that the economists and social scientists were almost always
applying the wrong maths to the problems, what became later the theme of the Black Swan.
Their statistical tools were not just wrong, they were outrageously wrong - they still are. Their
methods underestimated "tail events", those rare but consequential jumps. They were too
arrogant to accept it. This discovery allowed me to achieve financial independence in my
twenties, after the crash of 1987" Nassim Nicholas Taleb

"The modern financial system seems almost designed for systemic trouble because it continues
to rely on VaR (value at risk), carrying the antiquated intellectual baggage of efficient markets
and normal distributions into the world of risk management" Frank Martin

"Life in financial markets has got no relation to standard deviation" Warren Buffett

"We have seen many instances when probabilistic models turned out not to have made
sufficient allowance for an "improbable disaster" Howard Marks

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68. REAR VIEW MIRROR INVESTING

"It is a cruel joke that the most popular asset of each era will impoverish it's owners? Every 20
years or so in the twentieth century, the most rewarding investment of the day reached the top
of its rise and started a long decline, and the least rewarding investment hit bottom and began
a long ascent. These turning points enriched a small group of nonconformists who caught the
turn, but the majority continued to put their money on yesterday's proven winner. The
majority's loyalty cost them plenty" John Rothchild, The Davis Dynasty

"True, it takes courage to make decisions when only a few clues of change are available.
However, one must constantly try, or else be guilt of what Marshall McLuhan refer's to as
mankind's tendency to "march into the future looking in the rearview mirror" - a sure way to
end up playing the loser's game" Bennett Goodspeed 1978

“The biggest mistake investors make is to believe that what happened in the recent past is likely
to persist. They assume that something that was a good investment in the recent past is still a
good investment. Typically high past returns simply imply that an asset has become more
expensive and is poorer, not better, investment” Ray Dalio

“Most people seem to think outstanding performance to date presages outstanding future
performance. Actually, it’s more likely that outstanding performance to date has borrowed
from the future and thus presages subpar performance from here on out.” Howard Marks

“Anchored in the present, one of the great ironies is that investors imagine the future to be
what they see in the rear-view mirror. The windshield is simply too foggy." Frank Martin

“In the business world, the rear view mirror is always clearer than the windshield.” Warren
Buffett

“The tendency of investors to follow the market’s momentum and bet on whatever has worked
recently is accompanied by antipathy to whatever hasn’t. Underperforming market sectors and
asset classes are generally experiencing fund outflows, exacerbating the downward trend.
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Historically, out-of-favour investments have typically performed best in the periods
immediately following their underperformance, while those that have done well almost always
follow their success by lagging badly” Seth Klarman

"In the world of investment, failure sows the seeds of future success. The attractively priced,
out-of-favour strategy frequently provides much better prospective returns than the highly
valued, of-the-moment alternative. The discount applied to unloved assets enhances expected
returns, even as the premium assigned to favored assets reduces anticipated results" David
Swenson

“Every trendy industry in one decade has a habit of destroying its backers in the next” Chris
Davis

“You cannot look at the future by naïve projection of the past” NicholasTaleb

“Customers and capital tend to flow to recently successful mutual managers. But it is just these
recently successful managers who, according to voluminous research, are quite likely to be
heading for a bad year” Andy Redleaf

"The investor of today does not profit from yesterday's growth." Warren Buffett

“Studies show that what has worked well lately in investing is likely to underperform in the
future, while what has lagged is likely to rebound. In the words of the Roman poet Horace,
“Many shall be restored that now are fallen and many shall fall that now are in honor”. But such
contrarian thinking is always in short supply on Wall Street.” Seth Klarman

“Moving in and out of stocks, funds, investment styles, or asset classes based on what has
already gone up or down generally results in unsatisfactory long-term returns” Chris Davis

"it is obvious that the performance of a stock last year or last month is no reason per se, to
either own it or to not own it now. It is obvious that an inability to "get even" in a security that
has declined is of no importance. It is obvious that the inner warm glow that results from
having held a winner last year is of no importance in making a decision as to whether it belongs
in an optimum portfolio this year" Warren Buffett

"It has been shown than high performance seems to beget lower returns, and low performance
leads to higher returns in nearly all markets from the United States and Canada to Japan and
Europe. Today's worst stocks become tomorrow's best stocks, and the darlings of the day turn
into tomorrow's spinsters" Christopher Browne

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"Overweighting assets that produced strong past performance and underweighting assets that
produced weak past performance provides a poor recipe for pleasing prospective results.
Strong evidence exists that markets exhibit mean-reverting behaviour, a tendency for good
performance to follow bad and bad performance to follow good" David Swenson

“Typically, analysts evaluating the future prospects of a company look at its past. Where else
can you look after all? And yet, even if they had a perfect snapshot of the past, they would be
mistaken to assume that the conditions that held in the past will hold in the present or future”
Leon Levy

"One of the biggest mistakes investors make is to look at the last few years and assume that’s
the new norm. If recent years have been volatile and unrewarding, that’s what people generally
expect the next few years to be like as well." Francois Rochon

"Computers and their endless databases cause investors to focus on the past. More than ever
before, people are looking backward into the future" Shelby Davis

"Beware of past-performance "proofs" in finance; If history books were the key to riches, the
Forbes 400 would consist of librarians" Warren Buffet

“You can’t see the future through a rearview mirror” Peter Lynch

"Investors often interpret a stock price rise as confirmation of the underlying company's
attractiveness, whereas it really means that the market is reducing your odds of making money
and increasing the odds of you losing your money" Francois Sicart

"Projecting market expectations through a rearview mirror is a limiting strategy" Christopher

Begg

"It bears repeating that most investors extrapolate past performance, expecting the
continuation of trends rather than the far-more-dependable regression to the mean. First-level
thinkers tend to view past price weakness as worriesome, not as a sign that the asset has
gotten cheaper" Howard Marks

“Money always chases performance, so it tends to mostly show up after you’ve done really well
for a long period of time, probably ten minutes before you’re about to look really silly” Chuck
Royce

"Pension fund managers continue to make investment decisions with their eyes firmly fixed on
the rear-view window. This general fight-the-last-war approach has proven costly in the past
and will likely prove costly this time around" Warren Buffett

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"I have been around long enough to know that what has worked well in the past rarely
continues to do so in the future" Michael Steinhardt

"Buffett concludes that simple extrapolation of the past is the principal instigator of most
investment follies" Frank Martin

“It is important to remember that the consensus is oftentimes wrong – not always wrong, but
often enough. Invariably, analysts do not see changes coming – they tend to do what I call
“rear-view mirror analysis” by projecting along a straight line from the most recent past and
therefore oftentimes miss some big moves.” Jim Tisch

"Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can
do" Howard Marks

"It is dangerous to project past trends into the future. It is akin to steering a car by looking
through the rearview mirror (which is OK while the road remains straight, but a catastrophe
when the car comes to a curve)." Ed Wachenheim

"Too often, investors are more inclined to look at the rearview mirror than the windshield."
Francois Rochon

69. NEW ERA THINKING

“I’ve tried not to analyse companies by telling a story and then finding data to support it” Chris
Davis

“When valuations aren’t running in our direction we don’t say our models aren’t working and
we don’t change them” Joel Greenblatt

“How does one reduce the margin of error while recognising that investments do, of course go
down as well as up? The answers are not absolutely clear cut but they certainly include refusing

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to compromise by subtly changing a question so that it shapes the answer one is looking for”
Peter Cundill

"When we are wrong or when fundamentals turn against us, we readily admit we are wrong
and we reverse our course. We do not seek new theories that will justify our original decision.
We do not let errors fester and consume our attention. We sell and move on" Ed Wachenheim

"New eras usually ride into town on the back of a horse mistaken for a golden stallion,
transformed momentarily by the brilliance of the afternoon sun. Incredulous onlookers
(investors) are thinking riches, when all that's left when the illusion fades is manure" Frank
Martin

“When there is a discrepancy between my expectations and the actual course of events, it
doesn't mean that I dump my stock. I re-examine the thesis and try to establish what has gone
wrong. I may adjust my thesis or I may find that there is some extraneous influence that has
come into the picture. I may end up actually adding to my position rather than dumping it. But I
certainly don't stay still and I don't ignore the discrepancy. I start a critical examination. And
generally, I'm quite leery of changing my thesis to suit the changed circumstances, although I
don't rule it out completely.” George Soros

“Over time, I’ve noticed that investors tend to invoke “new economies” when they want to
justify actions that are unjustifiable by conventional analysis. Rather than h eralding a new era,
the shift in attitudes toward risk exposed a neglected but hugely important attribute of all
markets, past, present and future; namely, the role of psychology” Leon Levy

“Every once in a while, an up-or-down-leg goes on for a long time and/or to a great extreme
and people start to say "this time it's different." They cite the changes in geopolitics,
institutions, technology or behaviour that have rendered the "old rules" obsolete. They make
investment decisions that extrapolate the recent trend. And then it turns out that the old rules
still apply and the cycle resumes. In the end, trees don't grow to the sky, and few things go to
zero.” Howard Marks

“High levels of greed sometimes cause new-era thinking to be introduced by market

participants to justify buying or holding overvalued securities. Reasons are given as to why this
time is different from anything that came before. As the truth is stretched, investor behaviour is
carried to an extreme. Conservative assumptions are revisited and revised in order to justify
even higher prices, and a mania can ensue” Seth Klarman

"I have lived through or studied hundreds, possible\y even thousands of bull and bear markets.
In every bull market, whether it is IBM or oats, the bulls always seem to come up with reasons

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why it must go on, and on and on. I remember hearing hundreds of times "We are going to run
out of supply", "This time it's going to be different", "Oil has to sell at $100 a barrell." "Oil is not
a commodity". Well, damn, for 5,000 years it has not been different from every other
commodity". Jim Rogers

"The four most dangerous words in investing are: 'this time it's different'" Sir John Templeton

“At the end of the day, markets will always be driven by greed and fear, valuations w ill always
swing from too cheap to too dear, and there will always be a new generation to rationalize why
this time it is different. But I guarantee that for as long as I live I will always be able to find a
chart that will look like another chart from another era, showing once again how Mr Market ran
the full gamut of emotions from bottom to top, and top to bottom all over again. As it is
written, there is nothing new beneath the sun or Wall Street” Paul Tudor Jones

"Another tool Mr. Market uses to the detriment of investor success is to convince the investor
that "This time is different". Mr. Market cajoles you to believe that we are truly in a new
era that requires different tools and a different way to see the world. Mr. Market will
encourage you to change your perspective from cash flow and value to some new paradigm
that may prove impossible or unsustainable. Every invesrtor will consider the words "this time
is different"at least a few times over their investment lifetime, most typically in the fear of
panic and the euphoria of rising tides" Christopher Begg

"We try not to have many investing “rules,” but there is one that has served us well: If we
decide we were wrong about something, in terms of why we did it, we exit, period. We never
invent new reasons to continue with a position when the original reasons are no longer
available." David Einhorn

"One of the best ways to lose money over time is by owning stocks with changing investment
rationales" Ragen Stienke

"Some grasp of history's abundant lessons becomes especially relevant in the examination of
the goings-on in the capital markets where emotions, particularly at extremes, run high - and
reason often is overwhelmed. Careful study of the past would suggest that it's quite
appropriate to argue that there are no "new eras" in finance, only "new errors" Frank Martin

"Ridiculous as it may seem to most of us today, in the period from 1927 to 1929, the majority of
the financial community actually believed we were in a 'new era'" Phil Fisher

"Often investors invent a thesis to justify a trend: "Outsized returns can be realized by
purchasing growth stocks regardless of their PE ratios because their PE ratios are not relevant
over the longer term." Or "New Economy internet stocks will continue to grow exponentially -
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and Old Economy stocks are dead and should be sold." In my opinion, booms become
particularly dangerous when the theses that justify the booms generally become uncritically
accepted by investors. Then, investors are prone to become complacent and to accept the
excesses as new norms. History books are full of booms and busts, and booms and busts likely
will continue to occur because of the proclivity of humans to become uncritical participants in
trends and fads" Ed Wachenheim

70. MACRO MATTERS

“The lesson I have learned is that it isn’t reasonable to be agnostic about the big picture” David
Einhorn

"For the value investor who is traditionally involved mostly as a stock picker, I think today
should pay more attention to the top down" Jean Marie Eviellard

"Macro-agnosticism has become mainstream. This development is dangerous and hubristic in

our view" Frank Martin

“If you are a value investor and you invest whenever you find a stock which is selling for one -
third less than your estimate of intrinsic value, and you say, I don’t care about the macro, nor
what I call the temperature of the market, then you are acting as if the world is always the
same and the desirability of making investments is always the same. But the world changes
radically, and sometimes the investing world is highly hospitable (when the prices are
depressed) and sometimes it is very hostile (when prices are elevated).” Howard Marks

“Not paying attention to the macro side could be hazardous to your health,” Robert Rodriguez

“You cannot micro-manage your way out of macro problems” Wilbur Ross

“What I’ve learned to do is to pay more attention to the macro. But I can’t completely fix it. I
can’t completely get my head around the future unknowns in the world.” Mohnish Pabrai

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"2008 made an indelible impression on me, and I think of my clients and I have adjusted the
way that I look at things to try to better incorporate my world views into my overall security
selection in portfolio construction, still very much a bottom-up stock picker, but just trying to
be wiser about the process" Chuck Akre

“Where we do cast an eye to the macro is usually with respect to what can go wrong” Matthew
McLennan

“Tyring to value a business without taking into account the macro and competitive environment
is like music without instruments; it doesn’t work” Neil Woodford

“Let me tell you about the ones [value investors] who refused to fancy themselves macro-
economists. Investors who turned a blind eye to credit – to monetary policy, to the Federal
Reserve- didn’t notice the stupendous build-up of bad debt through 2007. They tended to own
a lot of optically cheap financial stocks that got cheaper and cheaper until they weren’t there
anymore” Jim Grant

“I think it is unrealistic and maybe hubristic to say, ‘I don’t care about what is going on in the
world. I know a cheap stock when I see one.’ If you don’t follow the pendulum and understand
the cycle, then that implies that you always invest as much money as aggressively. That doesn’t
make any sense to me. I have been around too long to think that a good investment is always
equally good all the time regardless of the climate.” Howard Marks

"Everyone makes mistakes. A mistake in security selection involves that security. A mistaken
macro bet engulfs the entire portfolio.” Jeff Gundlach

"Bottom-up value investors would not wish to bet the ranch on a macro economic view, but
neither would they be wise to ignore the macro economy altogether" Seth Klarman

"For years I had believed that I didn't need to take a view on the market or the economy
because I considered myself to be a ‘bottom up’ investor. Having my eyes open to the big
picture doesn't mean abandoning stock picking, but it does mean managing the long-short
exposure ratio more actively, worrying about what may be brewing in certain industries, and
when appropriate, buying some just-in-case insurance for foreseeable macro risks even if they
are hard to time." David Einhorn

"Warren Buffet's vision of the world is not as narrow as some think. His actions speak volumes
about his awareness of both the micro and the macro environments" Frank Martin

"The tour we've taken through the last century proves that market irrationality of an extreme
kind periodically erupts--and compellingly suggests that investors wanting to do well had better
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learn how to deal with the next outbreak. What's needed is an antidote, and in my opinion
that's quantification. If you quantify, you won't necessarily rise to brilliance, but neither will you
sink into craziness. On a macro basis, quantification doesn't have to be complicated at all."
Warren Buffett

"We are not macro investors. That said, we are not completely blind to the extremes of the
world." Keith Trauner

"You can have a much higher degree of confidence about the prospects for company
performance than you can about the macro outlook. The type of trade in which you can get a
big position and stay with it for years is therefore more likely to be company driven rather than
macro driven. Having said that, though, the macro outlook is still very important. There are
three things I like to see when I buy a stock: a favourable macro situation, a secular trend, and
good company management" Martin Taylor

"Our focus used to be much more on the micro, which meant we focused on t he company and
didn’t look at the macro enough—and that’s something you have to take into account if you
want to be a good investor. Certain times we got into trouble and made mistakes; I think there
were macro issues that were really out of management’s control. But having said that, shame
on us. We should have known that this would happen or would be an issue. We didn’t focus on
it enough. And about five years ago we set up a macro asset and allocation group, which has
been invaluable and made a huge difference in how we think." Henry Kravis

"Putting money to work in equities and credit today requires a thoughtful perspective on global
events. Macro analysis is no longer just for macro traders" Dan Loeb

Tutorial 66-70 Recap

1) HERDS - CROWDS - CONTRARIANS - the Investment Masters are independent thinkers who
don't get carried along with the herd. They are prepared to stand apart from the crowd and
buy when the majority are selling and sell when the majority are buying. The Investment
Masters tend to be contrarians, but only when they are confident that the facts support such a
stance.

2) VAR LECTURE - VALUE AT RISK - the Investment Masters do not rely solely on mathematical
formulas to identify risks in their portfolios. They take the time to think about what risks
factors could influence the portfolio and use common sense to identify potential pitfalls and to
consider how the portfolio may perform in adverse market conditions. Historic risk measures
can change and missing such changes can lead to serious capital losses.

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3) REARVIEW MIRROR INVESTING - the Investment Masters understand that historic returns
don't guarantee future returns. To be a successful investor you must look to the future and not
the recent past. The better a stock has performed, all else being equal [ie earnings remaining
the same], the more likely future returns will be lower. Don't base your investment decisions
on the past performance of a stock.

4) NEW ERA THINKING - When assets trade at very high multiples versus history or companies
experience sharp increases in earnings investors often start to set new parameters to justify
what ordinarily would look like an over-priced asset. Understand there are very few new eras
in investing. More recent examples include the internet stocks at the height of the tech boom
in 2000 where new valuation metrics were developed [eg clicks/number of eyeballs] and the
more recent commodity boom driven by China's insatiable appetite for hard commodities which
was coined the "super-cycle".

5) MACRO MATTERS - while most of the Investment Masters are bottom-up value investors they
also recognise the necessity to keep an eye on the macro environment. Missing major macro
headwinds such as the credit crisis or commodity collapse can lead to permanent lo ss of capital.

71. PERMANENT CAPITAL LOSS

"One important test is the avoidance of 'stumers' with which many investment lists are
disfigured. I mean by this definite mistakes where the fall in value is due not merely to
fluctuations, but to an intrinsic loss of capital. These are in an altogether different category
from fluctuating securities, since there is no particular reason to expect a subsequent
recovery" John Maynard Keynes

“I define risk as the chance of permanent capital loss adjusted for inflation. Volatility, I believe
to be just price changes based on market perceptions of risk. Risk does not equal volatility”
Bruce Berkowitz

"I cannot promise results to partners. What I can and do promise is that a) Our investments will
be chosen on the basis of value not popularity, b) That we will attempt to bring risk of
permanent capital loss (not short term quotational loss) to an absolute minimum by obtaining a
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wide margin or safety in each commitment and a diversity of commitments; and c) My wife,
children and I will virtually have out entire net worth in the partnership" Warren Buffett,
Partnership Letter 1962

"As always, we will forsake the lure of so-called opportunity where the flip side of that coin may
result in permanent loss of capital" Frank Martin

"Greenhaven hates permanent loss" Ed Wachenheim

“Volatility is not a risk we care about. What we care about is avoiding the permanent loss of
capital and, increasingly relevant today, the permanent loss of purchasing power” David Iben

"From our perspective, the certainty of capital loss in purchasing power is the very definition of
risk" Francois Rochon

“I don’t think most investors fear volatility. In fact, I’ve never heard anyone say, “the
prospective return isn’t high enough to warrant bearing all that volatility.” What they fear is the
possibility of permanent loss” Howard Marks

“Given the importance we place on not interrupting the power of compounding, we want our
mistakes to be time-value-of-money mistakes and not permanent-loss-of capital ones” Ira
Rothberg

“The manager of one of the world’s biggest hedge funds looked into the CNBC camera the
other day and said that risk is the volatility of returns. I would say – many value investors would
agree – that risk is the likelihood of the permanent impairment of capital”. Jim Grant

“The possibility of permanent loss is the risk I worry about, Oaktree worry about and every
practical investor I know worries about” Howard Marks

“The chance of gains means very little to us until we have attempted to rul e out the probability
of permanent loss” Chris Begg

“The consequences of the stock market revaluing overpriced stocks is often what Graham and I
call “permanent capital loss”. Christopher Browne

“Risk to us is 1) the risk of permanent loss of capital, or 2) the risk of inadequate return.” Charlie
Munger

“The risk you should be focused on is if you invest in a business, what are the chances that
you’re going to lose your money, that there is going to be a permanent loss.” Bill Ackman

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“Avoid permanent impairment of capital” Jean Marie Eviellard

"Avoiding permanent loss of capital is the number one rule" Bruce Berkowitz

"We have an aversion to investment operations that may lead to permanent loss of capital"
Frank Martin

"I am not willing to incur risk of substantial permanent capital loss in seeking to better long
term performance" Warren Buffett

"A vey important data point for me is to try to avoid permanent loss of capital" Mohnish Pabrai

"Underlying our investment values is the principle that the mathematic s of compounding
demands putting a high priority on avoiding substantial permanent losses. That’s why we’re
committed to owning high-quality businesses in industries we understand and can underwrite.
It’s also why we put the emphasis we do on risk management." Adam Weiss

"We need volatility from time to time to buy and sell advantageously. Volatility does not bother
us. What bothers us is whether we properly evaluate an investment as to the risk that we
can permanently lose our money. That is the definition of risk that we start with." Larry
Pitkowsky

"We spend an enormous amount of time focused on the downside and the risk of permanent
capital loss." Brian Spector

“Because we have our entire financial net worth in the fund, we care more about avoiding large
permanent losses, and less about managing small swings in performance” James Crichton

“It is a tenet of my investment style that, on the subject of common stock investment,
maximizing the upside means first and foremost minimizing the downside. The deleterious
effect of permanent capital loss on portfolio returns cannot be overstated” Michael Burry

"At the most basic level, we’re interested in achieving high long- term returns without taking
large risks of permanent loss." Ed Wachenheim

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72. THE UNEXPECTED

“Uncertainty, in the presence of vivid hopes and fears, is painful, but must be endured if we
wish to live without the support of comforting fairy tales” Bertrand Russell

"Our society and educational systems are analytically oriented. Consequently, like the captain
of the Titanic, it is easy for us to prefer to rely on data or other hard, empirical information
(seeing the iceberg) versus clues (the telegraph). Unfortunately, such reliance makes us
vulnerable to the unexpected. Of course it is easier to deal with certainty rather than with the
unknown. Thus it is easier to look at the numbers, which are historical as they measure events
after the fact, and what management has to say (the table talk of the poker game of investing)
than to deal subjectively with events and with what management is not saying" Bennett
Goodspeed 1978

"A boxer is rarely knocked out by the punch he expects. It's the unexpected one that does him
in” S Stovall

“Whenever the market is pointing at something and saying this is a risk to be concerned about,
in my experience, most of the time, the risk ends up being not as bad as the market
anticipated” Jamie Mai

“I believe it’s very rare that when you’re focused on a risk that it kills you, because you’re doing
something about it. It’s usually what people aren’t talking about that ends up hurting you.”
Bruce Berkowitz

"Financial markets constantly anticipate events, both on the positive and on the negative side,
which fail to materialize exactly because they have been anticipated. No wonder that financial
markets get so excited in anticipating events that seem quite harmless in retrospect! It is an
old joke that the stock market has predicted seven of the last two recessions. We can now
understand why that should be so. By the same token, financial crashes tend to occur only
when they are unexpected." George Soros

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“The real catastrophic events are the ones you never see coming. “ Robert Kleinschmidt

“A former colleague used to say, “It’s the things people aren’t worried about t hat you need to
worry about,” which I think is often true. What hits us out of left field and we don’t
anticipate” Stephen Goddard

“It does no good to rail against unexpected events in the world. The only thing unexpected
should be the exact way that the world surprises us, not the fact of periodic surprises” Paul
Singer

“In the financial markets, there is rarely anything new under the sun, but you can never say
you’ve seen it all, and what you thought you would never see can clobber you” Seth Klarman

"Being aware that a single, big mistake can wipe out a lifetime of successes, a wealth manager
must be hardwired to recognise and avoid grave risks, including those never experienced
before" Frank Martin

"We are information hounds. I have to be prepared for the unexpected and always afraid of
missing something, paranoid about what I don't hear. The risk of failure is an important driver"
Mario Gabelli

“The expected never happens; it is the unexpected always." John Maynard Keynes

“Be prepared for the unknown, it happens” Bruce Berkowitz

“When you are uncertain about the future, don’t position your portfolio as if you were certain”
James Montier

“Events can move from the impossible to the inevitable without ever stopping at the probable."
David Einhorn

“Albert Einstein said: ‘Whoever undertakes to set himself up as a judge of truth and knowledge
is shipwrecked by the laughter of the gods.’ We can’t predict what is going to happen in life.
Never underestimate the chance of rare events” Peter Bevelin

“In an uncertain world, governed by probabilities rather than rules, the only constant may be
that the more time that passes, the more probable it becomes that you will at some point
encounter an improbable event” Leon Levy

“Things that have never happened before are bound to occur with some regularity. You must
always be prepared for the unexpected, including sudden, sharp downward swings in markets

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and the economy. Whatever adverse scenario you can contemplate, reality can be far worse. “
Seth Klarman

“What may “kill me” is often what I least expect” Peter Bevelin

“Accepting that we cannot predict the future ie that there will always be unexpected and highly
consequential events – is the first step in becoming less fragile and more adaptable.” Seth
Klarman

“Despite claims to the contrary, even the best fund managers can never predict with any
certainty what the future holds. Since fortune-telling is not a viable option, we must be
prepared to react to whatever reality comes our way.” Bruce Berkowitz

“The assumption that something can’t happen has the potential to make it happen , since
people who believe it can’t happen will engage in risky behaviour and thus alter the
environment” Howard Marks

“Depend on the unimaginable. Its important that you put a non-zero imaginative quality to your
approach.” John Burbank

"Occasionally .. the unthinkable happens" Warren Buffett

“Failure of imagination consists in the first instance of not anticipating the possible extremeness
of future events, and in the second instance of failing to understand the knock-on
consequences of extreme events” Howard Marks

"You could say our failures of foresight were primarily failures of imagination, like the failure to
foresee terrorists flying planes into buildings before September 11" Tim Geithner [on the GFC]

"We should all be humble enough to realize that once every 20 or 30 or 40 years, values go to
real extremes. Any investment program must take into account the impossibility of
knowing when and to what extent such extremes might occur". Paul Singer

"In the investment business, relatively unpredictable outlier developments sometimes can
quickly derail otherwise attractive investments. It comes with the territory. So while we work
hard to reduce the risks of large permanent loss, we cannot completely eliminate large risks.
However, we can draw a line on how much risk we are willing to accept - a line that provides
sufficient apparent protection and yet prevents us from being so risk averse that we turn down
too many attractive opportunities. One should not invest with the precept that the next 100-
year storm is around the corner." Ed Wachenheim

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73. LIQUIDITY

“When over leveraged markets begin to decline, the preference for liquidity becomes all-
consuming, like the life-or-death struggle for a single life preserver thrown to non-swimmers
when a boat capsizes. In an instant, all civility is suspended and everything is for sale at almost
any price. Once uncorrelated assets begin to share a common fate – they sink together” Frank
Martin

“In truth liquidity is closely correlated with investment fashion. During a market panic the
liquidity that seemed miles wide in the course of an upswing may turn out to have only been
inches deep” Seth Klarman

“All market look liquid during the bubble, but’s it’s the liquidity after the bubble ends that
matters” Colm O’Shea

“We’re very thoughtful of liquidity.” Lee Ainslee

"We are always in the most liquid securities. If we get it wrong, we get out immediately"
Martin Taylor

“The liquidity of an asset often depends on which way you want to go … and which way
everyone else wants to go” Howard Marks

“Focus on liquidity, so that you can get out if you’re wrong. Because there’s nothing more scary
knowing that you’re wrong and you can’t get out.” James Dinan

“You can have all of the assets in the world you want, but if you have no liquidity it doesn’t
matter. Liquidity equals value. At no time in my career has it ever been more clearly brought
home to me than in the 2008-09 period. If you had liquidity, you had value. … Everything comes
down to liquidity, everything comes down to exit strategies, everything comes down to knowing
when you get in how you are going to get out.” Sam Zell

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“Liquidity is really worth the premium that I think investors attach to it. “ James Dinan

“Liquidity is definitely a now-you-see-it-now-you-don’t phenomenon. It is a lack of liquidity that

turns a decline in asset prices into a panic” Paul Singer

“Liquidity can be illusory. As Louis Lowenstein has stated ‘In the stock market, there is liquidity
for the individual but not for the whole community’” Seth Klarman

“You don’t know the value of liquidity until you need it and don’t have it” Dennis Bryan

“Liquidity is ephemeral: it can come and go” Howard Marks

“It's like a 5-lane highway going in and goat trail coming out..” Kyle Bass [on equities liquidity]

"We are very concerned about liquidity" Mark Kingdon

"A factor often overlooked in reducing stock-picking risk is liquidity. Despite some portfolio
managers' belief to the contrary, all investors are human, and, therefore will make mistakes.
The ability to recognise these errors and recover from such mistakes is a critical factor in
performance. The liquidity of each underlying position drives the ability to quickly reverse
course and mitigate the cost of errors" Lee Ainslee

"Illiquid assets and the possibility of capital flight: there are few surer recipes for investment
disaster" Howard Marks

"Managing liquidity risk is one of the most important jobs of a fund manager" Marathon Asset
Management

"Liquidity helps protect us from permanent losses. We do make mistakes, and when we make a
mistake, we sometimes wish to exit the mistake quickly" Ed Wachenheim

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74. CAPITAL ALLOCATION

“Capital allocation is the CEO’s most important job” William Thorndike

“If you buy something with a 10% free cash flow yield and hold it for 3 years, management is
going to be responsible for allocating a third of the value of the company over that time. You
have to really care about that” Adam Weiss

"Given the long-term nature of our investment approach, capital allocation is of paramount
importance" Marathon Asset Management

"After ten years in the job, a CEO whose company retains earnings equal to 10% of net worth,
will have been responsible for the deployment of more than 60% of all capital at work in the
business.” Warren Buffett

“I want to know in allocating the company’s capital specifically how they rank paying a dividend,
making acquisitions or investing in organic growth” Carlo Cannell

“One major factor we analyse is capital allocation. If the company generates a lot of free cash
flow and the management proceeds to waste it, that free cash flow has no value to investors.”
Andrew Wellington

“The companies in which we have our largest investments have all engaged in significant stock
repurchases at times when wide discrepancies existed between price and value” Warren Buffett

"Effective capital allocation...requires a certain temperament. To be successful you have to

think like an investor, dispassionately and probabilistically, with a certain coolness" Michael
Mauboussin

“Capital allocation is fundamental” Mohnish Pabrai

"The first law of capital allocation - whether the money is slated for acquisitions or share
repurchases -is that what is smart at one price is dumb at another" Warren Buffett
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“Over time, the skill with which a company’s managers allocate capital has an enormous impact
on the enterprise’s value” Warren Buffett

"Over a period of years, our thinking has focused more and more on the issue of
reinvestment as the single most critical ingredient in a successful investment idea, once you
have already identified an outstanding business." Chuck Akre

“I learned early on how truly valuable – and rare – it is to find skilled and creative management
teams and boards with a clear and rational approach to capital allocation” Jason Stankowski

“Substantial research has long shown that firms that issue new stock tend to underperform the
market in subsequent years while those who buy back their own stock tend to outperform”
Andy Redleaf

“While goodwill write-offs are non-cash, they can indicate just horrendous capital allocation”

“I’m amazed at how many CFOs don’t truly understand the long-term sustainability and value
creation of stock buybacks.” Lee Ainslee

"When companies with outstanding businesses and comfortable financial positions find their
shares selling far below intrinsic value in the marketplace, no alternative action can benefit
shareholders as surely as repurchases." Warren Buffett

“Our preference is for companies to employ cash for buybacks because we believe every stock
we own is under-valued” Andrew Wellington

“As long as you’re doing something that doesn’t harm the value of the company, accelerating
the benefits to shareholders is exactly what creating value is about. The best example, of
course, is buying back stock. If you have a great long-term story and a value creating plan
ahead of you, why would you wait and buy back stock after the market fully reflects the value?
From a capital allocation standpoint, you want to buy back stock ahead of all that” Scott
Ostfeld

“The fact of the matter is that, for most declining businesses, management tends to redeploy
cash flow into things outside of their core competencies in a desperate attempt to save their
jobs. In the case of Kodak, they took some of their patent proceeds and cash flow and invested
in a printer business, which is another declining business model.” Jim Chanos

"In allocating capital, activity does not correlate with achievement. Indeed, in the fields of
investments and acquisitions, frenetic behaviour is often counterproductive" Warren Buffett

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"The most important thing management does is allocate capital" Jonathan Shapiro

"Understanding intrinsic value is as important for managers as it is for i nvestors. When

managers are making capital allocation decisions—including decisions to repurchase shares—
it’s vital that they act in ways that increase per-share intrinsic value and avoid moves that
decrease it. This principle may seem obvious but we constantly see it violated. And, when
misallocations occur, shareholders are hurt." Warren Buffett

“Managers tend to be reluctant to look at the results of the capital projects or the
acquisitions that they proposed with great detail only a year or two earlier to a board. And they
don’t want to actually stick the figures up there as to how the reality worked out relative to the
projections. That’s human nature.” Warren Buffett

"Because management's capital allocation decisions have such an important impact on the
value created over our expected five to ten year holding period, we pay careful attention to
their historical track record and want to hear that they have a rational framework for making
decisions" Brian Macauley

"CEO's who recognise their lack of capital-allocation skills (which not all do) will often try to
compensate by turning to their staffs, management consultants, or investment bankers.
Charlie [Munger] and I have frequently observed the consequences of such "help". On balance,
we feel it is more likely to accentuate the capital allocation problem than to solve it" Warren
Buffett

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75. MERGERS & ACQUISITIONS

“While deals often fail in practice, they never fail in projections – if the CEO is visibly panting
over a prospective acquisition, subordinates and consultants will supply the requisite
projections to rationalize any price” Warren Buffett

“The fact of the matter is that, for most declining businesses, management tends to redeploy
cash flow into things outside of their core competencies in a desperate attempt to save their
jobs. In the case of Kodak, they took some of their patent proceeds and cash flow
and invested in a printer business, which is another declining business model.” Jim Chanos

“What really counts is whether a merger is dilutive or anti-dilutive in terms of intrinsic business
value. We believe calculation of dilution from this viewpoint to be all-important (And too
seldom made)” Warren Buffett

“Managers and directors may sharpen their thinking by asking themselves if they would s ell
100% of their business on the same basis they are being asked to sell part of it [as exchange in a
scrip merger/acquisition]. And if it isn’t smart to sell all on such a basis, they should ask why it is
smart to sell a portion” Warren Buffett

"I will tell you a secret: Deal-making beats working. Deal-making is exciting and fun, and working
is grubby. Running anything is primarily an enormous amount of grubby detail work . . . deal -
making is romantic, sexy. That's why you have deals that make no sense." Peter Drucker

“With acquisitions, patience is a virtue .. as is occasional boldness” William Thorndike

“Two thirds of acquisitions don’t work. Ours work because we don’t try to do acquisitions — we
wait for no-brainers.” Charlie Munger

"The most successful overall record on acquisitions has usually been made by companies that
are not constantly seeking such acquisitions but that only make them very occasionally when all
measurable factors seem overwhelmingly propitious, and when the acquired company is in a
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field closely related to the existing company's activities. The occasional deal of such a company
is usually a good deal for the stockholder because the acquiring company "only does what
comes naturally" and is not straining to be making "deals" all the time" Phil Fisher 1960

“We believe most deals do damage to the shareholders of the acquiring company. Too often,
the words from HMS Pinafore apply: "Things are seldom what they seem, skim milk
masquerades as cream." Specifically, sellers and their representatives invariably present
financial projections having more entertainment value than educational value. In the
production of rosy scenarios, Wall Street can hold its own against Washington” Warren Buffett

"Why do mergers and acquisitions carry such a high degree of risk? In almost all cases the
seller, who has operated the business for years, knows much more about it and its weak spots
than does the buyer" Phil Fisher

"Many acquisitions do not turn out as planned. The sellers know more than the buyers and may
know of problems or uncertainties that are not apparent to the buyers" Ed Wachenheim

“The most frequent question managers ask is whether the transaction will dilute EPS over the
first year or two. Given the popularity of EPS as a yardstick for company decisions, you might
think that a predicted improvement in EPS would be an important indication of an
acquisition’s potential to create value. However, there is no empirical evidence linking
increased EPS with the value created by a transaction. Deals that strengthen EPS and deals
that dilute EPS are equally likely to create or destroy value.” McKinsey Report

"In contemplating business mergers and acquisitions, many managers tend to focus on whether
the transaction is immediately dilutive or anti-dilutive to earnings per share (or, at financial
institutions, to per-share book value). An emphasis of this sort carries great dangers. Going
back to our college-education example, imagine that a 25-year-old first-year MBA student is
considering merging his future economic interests with those of a 25-year-old day laborer. The
MBA student, a non-earner, would find that a “share-for-share” merger of his equity interest in
himself with that of the day laborer would enhance his near-term earnings (in a big way!). But
what could be sillier for the student than a deal of this kind?" Warren Buffett

“Most conglomerates fail because of financial engineering (issuing stock at 20x to buy at 10x—
Buffett likened this process to a chain letter). This practice doesn’t create long term value. The
key is to buy great businesses and focus on earning power, not engage in financial
engineering.” John Huber

“I have had bad experience with companies making transformational acquisitions.....

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An example that sticks in my mind is Thompson Creek Mining, a molybdenum miner. They
bought a company with a “shovel-ready” copper and gold mine project and the cost overruns in
constructing that mine ended up almost taking Thompson Creek under. What I should have
asked at the time of the acquisition was, “If they don’t like the molybdenum business and are
diversifying away from it, why do I own the stock?” or alternatively, “If they do like the
molybdenum business, why are they diluting their exposure to it by making this acquisition?”

"Now if I see a company I own getting into a different business, even if they can spin a story of
why it’s somehow related, my default position is to sell and watch what happens. More often
than not those things go poorly, so if it ever does make sense to get back in , there will be a
better opportunity to do so.” Jeffrey Shwartz

"The greatest chances of a costly failure occur when a merger or acquisition happens relatively
quickly between two companies in quite dissimilar lines that were previously only vaguely
aware of each other" Phil Fisher 1960

"If a company must acquire something, I'd prefer it to be a related business, but acquisitions in
general make me nervous. There's a strong tendency for companies that are flush with cash
and feeling powerful to overpay for acquisitions, expect too much from them, and then
mismanage them. I'd rather see a vigorous buyback of shares, which is the purest synergy of
all." Peter Lynch

“A more subtle red flag is when a company is either acquiring other companies or investing in
capex projects that are different to what they have done in the past. They pose risks that need
to be considered. The new acquisitions or projects may be different in size and scope, or may
be in new areas but, either way, they pose a risk that needs to be considered carefully. This is
especially true if the new large project is causing the company to incur more debt.” Ken Stein

"A serious problem occurs when the management of a great company gets sidetracked and
neglects its wonderful base business while purchasing other businesses that are so-so or worse
(Would you believe that a few decades back they were growing shrimp at Coke and exploring
for oil at Gillette). Loss of focus is what worries Charlie and me when we contemtplate
investing in busineesses that in general look outstanding" Warren Buffett

"Companies that would otherwise have been a magnificent opportunity for stockholders have a
number of times been made quite unattractive by a management with one good line of great
intrinsic strength and potential, acquiring several other weak or run-of-the-mill types of
business. Usually this is done with the explanation to stockholders that by diversifying the
company's activities, the stockholder's position is being strengthened! When this happens, the

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previous steady upward trend of the price of the company's shares sometimes comes to an
abrupt and perhaps permanent halt" Phil Fisher 1960

"It is assumed by many business school graduates, and by almost all consultants, that a
corporation can easily improve its outcome by purchasing unrelated or tenuously related
businesses... Our experience, both actual and vicarious, makes us less optimistic about easy
solutions through business acquisition. We think undue optimism arises because successful
records draw to much attention... Far too little attention is given to the terrible effects on
shareholders (or other owners) of the worst examples of corporate acquisitions" Charlie
Munger

"In our judgment, onetime acquisitions that enhance earnings by cutting expenses do not
represent sustainable growth and are rarely as productive as either management or investors
expect." Lee Ainslee

"There is nothing like success to blind one of the possibility of failure. What tends to inflate the
price that CEO's pay for acquisitions? Studies found evidence of infection through three sources
of hubris: 1) overconfidence after recent success, 2) a sense of self -importance; the belief a
high salary compared to other senior ranking executives imply skill, and 3) the CEO’s belief in
their own press coverage” Peter Bevelin

“Managers tend to be reluctant to look at the results of the capital projects or the acquisitions
that they proposed with great detail only a year or two earlier to a board. And they don’t want
to actually stick the figures up there as to how the reality worked out relative to the
projections. That’s human nature.” Warren Buffett

"There may be quite a high degree of investment risk in a company that as a matter of basic
investment policy is constantly and aggressively trying to grow by acquisition.. it is my own
belief that this investment risk is significantly still further increased when one of two conditions
exist in a company's organisational make-up. One is when the top executive officer regularly
spends a sizeable amount of his time on mergers and acquisitions. The other is when a
company assigns one of its top officer group to making such matters one of his principal duties.
In either event powerful figures within a company usually soon acquire a sort of psyc hological
vested interest in completing enough mergers or acquisitions to justify the time they are
spending." Phil Fisher 1960

Tutorial 71-75 Recap

1) PERMANENT LOSS OF CAPITAL - the Investment Masters seek to avoid the permanent loss of
capital before seeking gains. Fluctuations in stock prices will always occur, but it is the

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permanent loss of capital that cannot be recovered. Typical contributors to permanent loss of
capital include one or a combination of the following: paying too much for a stock, poor capital
allocation, excessive indebtedness, overly cyclical businesses, technological obsolescence, value
traps and fraud.

2) THE UNEXPECTED - the Investment Masters prepare for the unexpected. Sometimes
investors incur losses due to a failure of imagination, they haven't considered events that may
never have occurred before. The Investment Masters seek to build portfolios that will survive
unexpected events by limiting exposure to corporate debt and leverage and limiting correlation
and concentration risks in the portfolio.

3) LIQUIDITY - the Investment Masters understand that investment mistakes can be made or
circumstances may change and liquidity is essential in exiting such positions. Having a portfolio
full of illiquid stocks may force an investor to sell assets at an inopportune time. Furthermore,
an investor maybe unable to sell assets at any price in a crisis. Liquidity tends to dry up when
it's most needed.

4) CAPITAL ALLOCATION - the great 'Compounding Machines' have management who

understand and execute appropriate capital management. Management can destroy capital
and share prices by poor capital allocation decisions. Capital management is a key driver of
future business returns if a significant proportion of a companies earnings ar e re-invested in
the business.

5) MERGERS AND ACQUISITIONS - The Investment Masters understand the risks involved with
M&A. The seller of a business knows more than the buyer. Be careful investing in businesses
built on a strategy of acquisition. Be cautious of businesses acquiring new businesses outside
their circle of competence. Management are often overly optimistic on the revenue and cost
synergies M&A transactions will deliver. The track record of corporate M&A has very much
favoured the seller of the business, not the buyer.

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76. ASYMMETRIC TRADES

“Although our views are dogmatic, we build positions with asymmetry through optionality, so
that even if we’re wrong, we have a defined downside” Kyle Bass

“Return profiles that are asymmetrical (small possible loss, big possible gain) are better than
symmetrical risk/rewards” Paul Singer

“Some of the best investments that we’ve ever done – I think most people have ever done –
aren’t necessarily attractive in their own right. They’re attractive because the upside versus the
downside is compelling, rather than being right that earnings would come in a certain way.
Hunting for an extremely mispriced risk and return scenario takes skill and determination” Seth
Klarman

“I can be wrong more often than I am right, so long as the leverage on my correct judgements
compensates for my mistakes” Leon Levy

“We love trades that appear to be approaching limits – trades that are so close to their
absolute limits that they have tremendous asymmetry. Some examples are CDS protection on
European banks in 2007 for three basis points and CDS on the ABX for nine basis points” Jamie
Mai

“The goal in investing is asymmetry: to expose yourself to return in a way that doesn’t expose
you commensurately to risk, and to participate in gains when the market rises to a greater
extent than you participate in losses when it falls. But that doesn’t mean the avoidance of all
losses is a reasonable objective. Take another look at the goal of asymmetry set out above: it
talks about achieving a preponderance of gain over loss, not avoiding all chance of
loss.” Howard Marks

“If you make more money when you are right than you are hurt when you are wrong, then you
will benefit, in the long run, from volatility [and the reverse]” Nassim Taleb

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“It's not whether you're right or wrong that's important, but how much money you make when
you're right and how much you lose when you're wrong” Stan Druckenmiller

"We tend to triangulate valuations using a number of different methodoligies that give us a
range of asymmetric return expectations appropriate for the opportunity" Christopher Begg

“Listen, business is easy. If you’ve got a low downside and a big upside, you go do it. If you’ve
got a big downside and a small upside, you run away." Sam Zell

"Our fund is looking for asymmetric investments, ones where we can make a lot more than we
can lose" Boaz Weinstein

"Analyze risk/reward of every decision and seek asymmetrical returns. If the upside is $2, and
the downside is $10, and you figure there is a 98% chance of the upside, do it." James Dinan

"We are looking for these types of low risk opportunities, where our lens can detect
asymmetric risk/reward" Steve Major

"We try to find really good setups, where you have to be a little bit right to make a lot of mon ey
and a lot wrong to lose a little bit of money" Curtis Macnguyen

"The Holy Grail of Investing is finding a situation with an asymmetricupside/downside ratio"

Mark Unferth

"I have a good sense that I will want to make sure downsides are pretty neutral, and upsides
pretty large before we would do anything" Mohnish Pabrai

"I look for opportunities with tremendously skewed reward-riskopportunities." Paul Tudor Jones

"Asymmetry — better performance on the upside than on the downside relative to what your
style alone would produce — should be every investor’s goal." Howard Marks

"We don't sell short, but we do access instruments that allow us to make small bets (with
known and finite downside), that have the potential for asymmetrical payoffs. While carefully
managing risk, an investor can profit from an overvalued asset that becomes fairly valued"
Frank Martin

"The search for asymmetric returns has and always will be our mission" Christopher Begg

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77. NEW LOWS

“Search out the new lows, not the new highs” Peter Cundill

“Those of us buying cheap inventory realise the bargains are found in the sales flyers and the
new lows lists, not in highfliers and $12 per pound Delmonico steaks” Christopher Browne

"There are widely available means of improving the likelihood of finding mispriced securities.
Looking at stocks on the Wall Street Journal's leading percentage-decline and new-low lists, for
example, occasionally turns up an out-of-favor investment idea" Seth Klarman

“Like most value investors, we’re regularly looking at the 52 week lows and at companies
generating negative headlines” Vinson Walden

“Barron’s publishes a list of new weekly lows every Saturday. These lists of new lows are a good
starting point in the search for value” Christopher Browne

“Looking at the new lows and new highs informs you of market sentiment. It’s not a high-tech
way of looking for ideas, but it’s one way of assessing the market that has worked for us for
decades” Thomas Kahn

“Probably my best source of new ideas is the most-down list among our internal holdings” Jim
Larkins

“The single best starting place for us is screening for stocks with the greatest percentage
declines and/or trading near 52 week lows” Andrew Jones

"Our most important source of potential ideas is what we call our Daily Downtrodden list, which
essentially tracks the stocks with recent large percentage declines" James Kieffer

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"I get Value Line. I look at their 52 week lows. I look at their stocks that have lost the most
value in 13 weeks, the lowest P/E stocks. I;m just trying to look through all of those to see if
anything percolates through." Mohnish Pabrai

"Look at companies selling at new lows" Walter Schloss

78. THE IMITATION GAME

"One of the most important of the Irregular Rules, find smart people, because if you can do
that, you can forget a lot of the other rules" Adam Smith, The Money Game 1968

“I believe in the discipline of mastering the best that other people have figured out. I don’t
believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” Charlie
Munger

"You can learn a lot from other people. In fact I think if you learn basically from other people,
you don’t have to get too many new ideas on your own. You can just apply the best of what
you see." Warren Buffett

“If you want to, you can make all the mistakes by trying to learn everything yourself, or you can
sit at the feet of the masters, which I have chosen to do, and short cut that” Frank Martin

"The trick is to learn most lessons from the experience of others. Managers who have learned
much from personal experience in the past usually are destined to learn much from personal
experience in the future" Warren Buffett

“I confess that I’m always interested in following what really smart people do in this business
and the stuff they’re most frustrated in” Paul Issac

"We use a lot of grapevine ideas, asking people what they’ve finished buying that might be
interesting. Why wouldn’t you look at what other great investors have found? Bruce Berkowitz

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“For prospecting ideas we pay a lot of attention to where the most effective activists are getting
involved” Brian Lancaster Clayton Partners

“I liberally swipe investing ideas from other value investors” Monish Pabrai

“Try to steal good ideas from other people” David Abrams

"We look at what other people we respect own" John Fox

"I learned the investment business largely from the work and thinking of others" Bill Ackman

“I’d rather steal a good idea than generate a bad one myself” Steve Morrow

“I am a shameless copycat” Monish Pabrai

"Start looking at what other people that you know and respect are buying. This is far from a silly
filtering device" Charlie Munger

"It behooves you as a professional when you see talented people or smart people that have
demonstrated records of excellence, you ought to at least think about why they’re doing
something and see whether that fits or makes sense for something you do as well or not"
Thomas Gayner

“What too few money managers do is analyse the fundamental financial characteristi cs of
portfolios that produce long-term market beating results, and develop a set of investment
principles that are based on those findings” … “We have done this and we have observed that
the money managers who have achieved long-term market beating results in this business,
Walter Schloss, Warren Buffet, Bill Ruane and Rick Cunnif, Mario Gabelli and John Neff, all have
an investment philosophy based on their definition of value” Chris Browne

“.. the first original idea for almost four-fifths of the investigations and almost five-sixths of the
ultimate pay-out (as measure by worthwhile purchase) had come from quite a different group.
Across the nation I had gradually come to know and respect a small number of men whom I had
seen do outstanding work of their own in selecting common stocks for growth.” Phil Fisher

"You know good poets borrow and great poets steal. So see what you can find" Peter Cundill

"As you might know, we don't have any original ideas - everything is cloned" Mohnish Pabrai

"Many of the best ideas are already out there for us to see; we just have to clone them" Guy
Spier

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"Cloning is a very powerful concept. If you are able to reverse engineer what another great
mind has done in investing, and understand why they were doing it and why they ma de these
investments, those decisions will tend to be better than something you just come up with on
your own." Mohnish Pabrai

"I used to wait for the Graham Newman newsletter to come out each week so I could see what
they were buying and it would be a good place to start to look for investments. If Graham
Newman was looking at something it was definitely worth my while to look into it" Warren
Buffett

"There's a quote by Picasso, which basically says good artists copy and great artists steal. We
look at other investors and also observe other fields to see how star performers do their jobs
and continue to improve" Ken Shubin Stein

"I have tried to learn from Warren Buffett and Charlie Munger. Studying their writings and
speeches to become a better investor is relatively easy to do and anyone with above average
intelligence could learn from them and significantly improve their results" Mohnish Pabrai

"I study the people we compete with and collaborate with very closely. I (also) particularly study
value investors, on the completely other side of the spectrum. Warren Buffett is the archetype
but Seth Klarman, and others." Marc Andreessen

"I like to follow sound and successful investors who are particularly knowledgeable about a
company or industry they are investing in" Ed Wachenheim

"Knowing that very successful investors are interested is a reason for us also to take a look [at a
stock]" Chris Browne

"Warren has made a number of people rich who have just copied his investments" Charlie
Munger

"I think it is very important to pay attention to what really smart people are doing and
incorporate that into your thinking and sort of ask yourself, “Why are they doing that and why
are they not doing something else?” And, “How did they come to those decisions?” Or, “What
did they see that I don’t see?” It is a very helpful and healthy thing to indeed follow the actions
of smart people and think about what they’re doing and why" Thomas Gayner

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79. SPIN-OFFS

"Researchers who did a meta-analysis of more than 25 papers in the spin-offs literature
summed up their findings this way "The main conclusion is consistant: spin-offs are associated
with strongly significant abnormal returns. They suggest the factors that explain these wealth
effects include sharpened focus, better information, and in some cases tax treatment" Michael
Maouboussin

"There are plenty of reasons why a company might choose to unload or otherwise separate
itself from the fortunes of the business to be spun-off. There is really only one reason to pay
attention when they do; you can make a pile of money investing in spin-offs" Joel Greenblatt

“Spin-offs often present attractive opportunities for value investors” Seth Klarman

"Spin-outs continue to provide opportunity" Chris Davis

"Spin-offs of divisions or parts of companies into separate, freestanding entities often result in
astoundingly lucrative investments" Peter Lynch

"One study completed at Penn State, covering a twenty-five year period ending in 1988, found
that stocks of spin-off companies outperformed their industry peers and the S&P500 by about
10% per year in their first three years of independence. The parent companies also managed to
do pretty well – outperforming the companies in their industry by more than 6% annually
during the same three-year period…. These extra spin-off profits are practically built into the
system. The spin-off process is a fundamentally inefficient method of distributing stock to the
wrong people” Joel Greenblatt

“Some spin-offs have similar dynamics, though they need to be assessed case by case. A spin-
off is when a large company divests a subsidiary by distributing the subsidiary’s shares to the
parent company’s shareholders. Over the years we have found that carefully selected spin-
offs are terrific opportunities” David Einhorn

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“Work-outs – these are the securities with a timetable. They arise from corporate activity – sell-
outs, mergers, reorganizations, spin-offs etc. .. the category produces more steady absolute
profits from year to year than “generals” do. In years of market decline it should usually pile up
a big edge for us; during bull markets it will probably be a drag on performance. On a long term
basis, I expect the workouts to achieve the same sort of margin over the Dow attained by
generals” Warren Buffett 1966 [on workouts, one of the three categories of investments in the
Buffett investment partnership]

“[On spin-offs]: We don’t see this anomaly going away. First, the reason a company spins off a
division is that the shareholders want that to happen. So they’re going to sell the shares they
receive in the spin-off regardless, which is clearly not a positive for the share price. It is also
true that businesses prior to being spun off bear a disproportionate cost burden from the
parent, and are subject to any number of pressures that inhibit long-term value creation in
those businesses. A spin-off can help shed those burdens over time” Murray Stahl

“Charlie [Munger] mentioned if an investor did just just three things the end results would be
vastly better than the rest. 1) Carefully look at what the other great investors have done, 2)
Look at the cannibals, ie businesses buying back huge amounts of their stocks, and 3) carefully
study spin-offs. Charlie said that an investment operation that focussed on these three
attributes would do exceedingly well” Mohnish Pabrai

“We believe you can find opportunities when companies are going through change and
transition. When a company goes through a major acquisition, spin-off, privatization, new
product introduction, new regulation, post-bankruptcy, new management, or a recapitalization
of the balance sheet, future results could be much better than past results. “Jay Petschek

"Spinoffs are an interesting place to look because there's a natural constituency of s ellers and
there's not a natural constituency of buyers" Seth Klarman

“The most common separations are spin-offs, demutualizations, and carveouts. Often a
declaration of independence is necessary to give freedom to a business that is not operating at
its full potential while part of a larger organization. The most successful separations are
prompted by the fact that these minority ownerships become too important to ignore. Once
they are given their freedom, capital and human creativity is unleashed to prod uctive use. The
power of incentives is a major reason why this category continues to provide the best
compounding opportunities of all three of our transformation categories.” Christopher Begg

"Events such as spin-offs, emergence of bankruptcy, and recapitalisations - where the

movement of debt, equity or assets around on the balance sheet can lead to analytical
complexity or some form of irrational selling" James Crichton
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"Spin-offs were another thing that attracted our interest. We figured, if someone is spinning
off pieces like that, it is a clear indicator that they are concerned about shareholder value"
Robert Robotti

"If you hear about a spin-off, or if you're sent a few fractions of shares in some newly created
company, begin an immediate investigation into buying more. A month or two after the spin-
off is completed, you can check to see if there is heavy insider buying among the new officers
and directors. This will confirm that they, too, believe in the company's prospects" Peter Lynch

"You are looking for situations where the status quo is not going to stay in place and you can
profit from the extra-ordinary change that is embedded in a particular security. Things like spin-
offs would be a major special situation play, as would proxy fights and other efforts to maximise
shareholder value" James Dinan

"Our opportunistic investments target more serially inefficient areas such as spin-offs, rights
offerings, tracking stocks, low-float securities and restructurings" Mario Cibelli

"Both spin-offs and merger securities are distributed to investors who were originally investing
in something entirely different. Both spin-offs and merger securities are generally unwanted by
those investors who receive them. Both spin-offs and merger securities are usually sold
without regard to the investment merits. As a result, both spin-offs and merger securities can
make you a lot of money" Joel Greenblatt

"There is plenty of supporting evidence to suggest that spin-offs often go on to outperform the
market. Pure play companies tend to do one thing well, whereas their efforts are often lost or
undervalued by investors within a large organization. As a contrarian investor, Marathon is
more often than not drawn to examine the slower-growing spin-off, the orphan business which
investors may ignore or sell in a quest for more growth and excitement. A new business with
low external expectations, less competition, less Wall Street coverage, greater focus and
appropriately-incentivised management can make for a highly attractive long-term investment"
Marathon Asset Management

"Spin-off companies are often misunderstood and get little attention from Wall Street.
Investors often are sent shares in the newly created company as a bonus or a dividend for
owning the parent company, and institutions, especially, tend to dismiss these shares as pocket
change or found money. These are favourable omens for spin-off stocks" Peter Lynch

"Certain characteristics point to an exceptional spin-off opportunity: a) Institutions don't want

the spin-off (and not because of the investment merits), b) Insiders want the spin-off, and c) A

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previously hidden investment opportunity is uncovered by the spin-off transaction (e.g., a
cheap stock, a great business, a leveraged risk/reward situation) Joel Greenblatt.

80. CATALYSTS

“Sometimes the only thing standing in the way of a cheap stock and a profit for an investor is
a catalyst that can make the market take notice. Both insider buying and activist investors can
provide the push that makes the market realise a stock is good value” Christopher Browne

“Undervalued stocks can remain under-priced indefinitely if nothing happens to them. We ask
ourselves what the catalysts are that can turn around these fallen companies” Thomas Kahn

“We need catalysts because we need to make money for our investors every year” Steve Major

“I believe it is important to identify a catalyst that should help benefit the valuation. The
approach of identifying a very cheap stock that often has been cheap for a while and th en just
crossing your fingers and hoping the world will wake up and be willing to assign a higher
valuation one day soon is not a very effective approach in my judgement” Lee Ainslie

“A cheap price alone is not sufficient reason to invest. If something is forever cheap, then it has
no recognized value, and its stock may very well remain a worthless piece of paper. For a
bargain to soar in price, there has to be a catalyst, and from an investment perspective,
that catalyst is change” Jim Rogers

“A catalyst for the realization of underlying value is something we seek, but we will also make
investments without a catalyst when the price is sufficiently compelling” Seth Klarman

“I believe definitive catalysts create a much higher-probability way to extract value over time”
H. Kevin Byun

"Passage of time at a low valuation, assuming reliable cash flows and a durable franchise ranks
as an important catalyst. However we look for other catalysts as well, including asset

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divestitures, smart synergistic acquisitions, share buy-back programs, dividend initiations,
analyst upgrades, insider buying, judicious capacity expansion in growth markets and others -
the more catalysts the better" Alex Roepers

"Investors should pay attention not only to whether but also to why curr ent holdings are
undervalued. Look for investments with catalysts that may assist directly in the realization of
underlying value." Seth Klarman

“Undervalued stocks are of interest when several or all of the following criteria are met; if the
undervaluation is substantial; if there is a catalyst to assist in realization of that value; if the
business value is stable and growing, not eroding; and if the company’s management is able
and properly incentivized” Seth Klarman

“The longer you’re in an investment, the longer you’re subject to exogenous risks. If you can
influence change sooner, it increases your IRR and reduces macro economic risk." Russell Glass

“I need to have conviction in all my shorts about either a company specific catalyst or a
macro catalyst” Whitney Tilson

“While we love catalysts on the long side, we require them on the short side. Valuation shorts
are always tricky” Shawn Kravetz

"The presence of a catalyst serves to reduce risk. If the gap between price and underlying value
is likely to be closed quickly, the probability of losing money due to market fluctuations or
adverse business developments is reduced" Seth Klarman

"Without catalysts, any near term market prices are a random walk" Marty Whitman

"Positions with catalysts tend to lag a rapidly rising stock market and outperform a lacklustre or
declining one" Seth Klarman

"In any situation, we try to isolate idiosyncratic events and find a catalyst to realize value, to
accelerate outcomes. Time is risk. So the longer you are at risk, the more things that you
haven’t been able to analyze can happen. You’re accelerating time frames to achieve rates of
return and control risk." Jonathan Pollock

Tutorial 76-80 Recap

1) SEEK ASYMMETRY - the Investment Masters seek situations where the potential upside is
much greater than the downside. The best opportunities are those where you have high

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potential for gains with only a small chance of loss. Buying stocks with a large margin of safety
helps lower the downside risk.

2) NEW LOWS - the New Lows lists can be a fertile ground for searching for mis-priced assets.
But remember, just because a stock has fallen 50% doesn't mean it can't fall a further 50% and
so on. Be careful of value traps.

3) THE IMITATION GAME - the Investment Masters take note of what other smart investors are
buying. It's worth looking at what other outstanding investors with long term track records
have put real money to work in. When other investors buys stocks, unlike Wall Street analysts,
they have skin in the game. That's not to say you still don't have to do your own work,
remember even great investors make mistakes.

4) SPIN-OFFS - the track record of companies that have been spun-off from larger entities tends
to be good due to market inefficiencies. Once again, not all spin-offs are alike. You need to do
the work to determine the specific characteristics of any spin-off company. Characteristics to
look for include: the spin-off being small part of the business, recent high levels of capex in the
spin-off, management teams moving to the spin-off, attractive incentive scheme for
management post spin, shareholders who won't want the spin-off due to index/other reasons,
potential corporate appeal of the spin, the spin being a mismanaged/neglected entity etc.

5) CATALYSTS - The Investment Masters understand that catalysts can expedite investment
returns and reduce a stocks correlation with the broader market. Many Investment Masters
seek a catalyst when shorting stocks.

81. INVERT, ALWAYS INVERT

“If you want to understand something, take it to the extremes or examine its opposites” John
Boyd

"Our checklists have been invaluable in helping us reduce pilot error and they have become a
platform to remind us of previous lessons learned. These lessons can be soon forgotte n when
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animal spirits and biases emerge to prove a theory. Our checklists were built to invert our
thinking the way a scientist would seek to prove the null hypothesis. For example, if we want to
know if the investment is mispriced, the checklist seeks to invert the question to solve why the
investment is NOT mispriced. We have found that this inversion helps reduce the biases that
bleed into any investment process. Christopher Begg

“Long ago, Charlie laid out his strongest ambition: “All I want to know is where I’m going to die,
so I’ll never go there.” That bit of wisdom was inspired by Jacobi, the great Prussian
mathematician, who counselled “Invert, always invert” as an aid to solving difficult problems. (I
can report as well that this inversion approach works on a less lofty level: Sing a country song in
reverse, and you will quickly recover your car, house and wife.)” Warren Buffett

“Once a person has an idea, we then start whacking at it. We invert the concept. Instead of
trying to prove a person’s idea, we try to kill it, and if we can’t kill it then the person is onto
something. Whether it is my own idea or someone else’s, that is the process we go through”
Bruce Berkowitz

“Invert, always invert” Jacobi said. He knew that it is in the nature of things that many hard
problems are best solved when they are addressed backwards” Charlie Munger

“Invert, always invert: Turn a situation or problem upside down. Look at it backward. What
happens if all our plans go wrong? Where don’t we want to go, and how do y ou get there?
Instead of looking for success, make a list of how to fail instead – through sloth, envy,
resentment, self-pity, entitlement, all the mental habits of self-defeat. Avoid these qualities and
you will succeed. Tell me where I’m going to die, that is, so I don’t go there.’ Bruce Berkowitz

"We spend a lot of time asking such questions as: “How does the business work?” “Why does
this opportunity exist?” And then, “What if?” Knowing that successful investing is as much
about finding winners as it is about avoiding losers, we invert a favourable thesis so as to see it
through less rose- colored lenses, all of which hopefully limits negative surprises." Steven
Romick

“Our research process reverses the analytical framework that most traditional value investors
use. Many value investors determine whether a security is cheap. If it is they seek to determine
whether it is cheap for a good reason. Greenlight takes the opposite approach. We start by
asking why a security is likely to be misvalued by the market. Once we have a theory, we
analyse the security to determine if it is, in fact cheap or overvalued” David Einhorn

"The mental habit of thinking backwards forces objectivity - because one of the ways you think
a thing through backward is to take your initial assumption and say, "Let's try and disprove it".

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That is not what most people do with their initial assumptions. They try and confirm it. It's an
automatic tendency in psychology - often called "first-conclusion bias". But it's only a
tendency. You can train yourself away from the tendency to a substantial degree. You just
constantly take your own assumption and try to disprove them" Charlie Munger

"We tackle things not by trying to prove them, but trying to disprove them. Falsifying a thesis is
the fundamental approach of the scientific method and it's an approach we use and like" Ken
Shubin Stein

"I don't look for reasons to buy a given business. I look for reasons to reject buying the stock.
I'm looking for why should I turn it down. If I can find what I call the slightest pretext to turn it
down, I'm done" Mohnish Pabrai

"Jim Sawyer's retirement, after more than a decade as CFO at Praxair, offers the opportunity to
reflect on a stellar record. Jim pursued value creation through "inverted" thinking. In other
words, before he began the journey, he worked out where he wanted it to end. With a
destination firmly fixed in his mind, he traced the route back, step by step, to its starting point.
Other corporate managers - not to mention many of today's investors - might benefit from
apply just such a "backwards" process in their own thinking" Marathon Asset Management

"Charlie Munger is famous for the pioneering concept of inverting as an investor, of thinking
backwards to find one's way to the beginning of an idea or concept. In our application, an
advantage can be gained in the competitive world of active investment management by
preparing for the unknown by inverting, reasoning backwards to attempt to learn how others in
the past have coped with the unforeseeable and the unpredictable" Frank Martin

82. QUALITY BUSINESSES

“We’ve really made the money out of high quality businesses. In some cases, we bought the
whole business. And in some cases, we just bought a big block of stock. But when you analyze
what happened, the big money’s been made in the high quality businesses. And most of the

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other people who’ve made a lot of money have done so in high quality businesses.” Charlie
Munger

“The risk of paying too high a price for good-quality stocks – while a real one – is not the chief
hazard confronting the average buyer of securities. Observation over many years has taught us
that the chief losses to investors come from the purchase of low-quality securities at times of
favorable business conditions.” Benjamin Graham

“I much prefer to be long a good business, so we focus on buying growth at a reasonable price.”
Larry Robbins

"I look for good businesses. A good business is one that provides a necessary service or
products and has a balance sheet and cash flow that can sustain it through difficult periods"
Kevin Daly

“You have to focus first and foremost on high-quality businesses that can’t blow up and should
grow in value over time” Bill Ackman

“Our strategy is to own high quality, modestly valued business over many years, to take
advantage of the power of compounding as earnings grow. To do that successfully only works if
we avoid mistakes – unforced errors – that interrupt the power of compounding” Ira Rothberg

“We’re committed to owning high-quality businesses in industries we understand and can

underwrite.” Adam Weiss

"I started out looking for cheap securities... Over time, I really fell in love with strong
businesses. I morphed into finding strong businesses at bargain prices. I still have a streak in me
that favours finding really cheap securities - I just can't help it. But over time, I've become
more attracted to looking for great businesses that are inherently superior, more competitive,
easier to predict, and with strong management teams" Li Lu

“What we learned is that if you buy a good and sustainable business, then over time the return
of that business will do the natural compounding for you” William Browne

“Our preference is for high quality businesses that are easily understood. This alone eliminates
the majority of investment alternatives, allowing us to focus our resources on understanding
simple businesses without distraction from the noise outside of our circle” Chris Parvese

“Our resulting style in the partnership is to try and find outstanding businesses, to understand
their true value, and when the price is reasonable, purchase shares.” Chuck Akre

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“The practice of not losing money is significantly advanced by the selection of superior
businesses, because their royalty keeps on working in spite of general business conditions and
isolated poor managerial decisions.” Chuck Akre

“This isn’t unique to us, but we want companies with large amounts of free cash flow, good
business dynamics, a proven ability to profitably reinvest that cash flow and management
properly incentivized to do the right thing for shareholders. We generally focus on businesses
that are “two-cycle tested,” where they’ve been through a couple recessions and have survived
intact.” Leon Cooperman

"We don't want any lousy businesses. We used to make money buying them and wringing
money out, but it is painful, especially when you're rich. Sometimes it happens by accident,
and then it is like dealing with your relatives and you hope to get rid of them but can't really"
Charlie Munger

“If you’re in a lousy business for a long time, you’re going to get a lousy result even if you buy it
cheap.” Warren Buffett

"I tend to avoid the shares of weaker companies, even if their shares are selling at depressed
prices. I strongly prefer purchasing undervalued shares of strong and well-positioned
companies" Ed Wachenheim

"With respect to quality businesses, the key aspects are unit economics, returns on capital,
appropriate leverage, free-cash conversion, market share, margin resiliency, moat, long-term
growth potential, and management. The motivation for focusing on these types of businesses is
that they blow up less frequently, and even if they do blow up, they do so with less
severity. High-quality businesses also provide natural tailwinds to returns by virtue of their
economics, and their resiliency enables portfolio concentration, which is valuable because it
affords the opportunity to perform deep primary research." Adam Weiss

"People don't believe business quality is a hedge, but if your valuation discipline holds and you
get the quality of the business right, you can take a 50 year flood, which is what 2008 was, and
live to take advantage of it" Jeffrey Ubben

"I’m most interested in owning good businesses, run by managers who don’t make big
mistakes." Ed Wachencheim

"A great business at a fair price is superior to a fair business at a great price." Charlie Munger

"One characteristic that makes owning a high quality company so attractive is the growth that
comes from reinvesting cash flows at high rates of return. Clearly compounding is a powerful
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force and is often the reason a stretched valuation can be made palatable" Marathon Asset
Management

“A base business cannot be transformed into a golden business by tricks of accounting or capital
structure. The man claiming to be a financial alchemist may become rich. But gullible investors
rather than business achievements will usually be the source of his wealth” Warren Buffett

“Almost by definition, a really good business generates far more money (at least after its early
years) than it can use internally” Warren Buffett

"The main thing is to find a wonderful business, like Phil Carret always did. He’s one of my
heroes, and that’s an approach he’s used" Warren Buffett

"The single-most important decision in evaluating a business is pricing power. If you’ve got the
power to raise prices without losing business to a competitor, you’ve got a very good business.
And if you have to have a prayer session before raising the price by a tenth of a cent, then
you’ve got a terrible business. I’ve been in both, and I know the difference." Warren Buffett

"Over the long term, it's hard for a stock to earn a much better return than the business which
underlies it. If the business earns 6% on capital over 40 years and you hold it for 40 years,
you're not going to do make much different than a 6% return even if you buy it at a huge
discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an
expensive looking price, you'll end up with a fine result. So the trick is getting into better
businesses" Charlie Munger

"Bear in mind--this is a critical fact often ignored--that investors as a whole cannot get anything
out of their businesses except what the businesses earn. " Warren Buffett

“Good is the enemy of great. We see many companies that are just fine ... founders are good,
market seems good, product seems good, customers kinda like it, and they got a little revenue
and it's all fine, but those companies tend to never go anywhere. Every once in a while we'll
see these companies that have some extremely strong strength, some extremely special
wonderful thing going on, that by the way may have all kinds of problems and issues, but
there's something at the core of what it is that's really special and magical. And those are the
ones that we want to do. We're trying to stock our portfolio with just investments like that."
Marc Andreessen

"Ira Marshall said [in reference to See's Candy] you guys are crazy - there are some things you
should pay up for, like quality businesses and people. You are underestimating quality. We
listened to the criticism and changed out mind. This is a good listen for anyone, the ability to
take the criticism constructively and learn from it" Charlie Munger
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"From 1932 to nearly the present, the studies confirm that when bad things happen to good
companies, they recover - and usually quite nicely in a reasonable amount of time" Chris
Browne 2007

"At the end of the day, in order to build wealth, there is a simple approach which we have
followed for 17 years at Giverny Capital: investing for the long term in high-quality companies
purchased at attractive valuations—investing in companies that will survive the crises of our
civilization and the short-term irrationally of our economic system." Francois Rochon

"Generally speaking, it pays to stay away from declining businesses. They are very difficult to
value. We have several declining businesses - the newspaper business is a declining business.
We will pay a price to be in that business but that is not where we are going to make a lot of
money. All the money at Berkshire is going to be made from investing in growing businesses. I
would never spend a lot of time trying to value a declining business that I call a cigar butt (one
last free puff out of the business). I can spend the same amount of energy and intelligence
analysing a growing business and am going to get a better outcome. At Berkshire, we have
some declining businesses. We started with declining businesses, textiles, US made shoes, Blue
Chip Stamps - We have one business that did $120 million in sales in 1968 and last year did
about $20,000 in sales. We'd like to bring the sales chart out and put it upside down" Warren
Buffett

"We buy good companies that we know will endure, that generate free cash usually in and
out of recession" Chris Mittleman

"Charlie and I are simply not smart enough to get great results by adroitly buying and selling
portions of far-from-great businesses" Warren Buffett

"Is it a great business? That’s the key question. Is it earning high returns on capital and
command high margins? Does it have a good history of growing its intrinsic value and rewarding
shareholders? Warren Buffett has this great phrase: “If a company has a lousy past and a great
future, we’ll miss it.” It’s the same thing here" Francois Rochon

"I would prefer a great business, great manager, one that is able to use all the capital they
generate and can keep doing that. Behind that will be a great business, great managers that can
use the capital; and then great business, not such great manager, and then we just go down the
line. Not such a great business, not such a great manager, but still out to achieve and we will
probably still make out. We have made investments in all of those and I learned over time that
I am better off being more on the top than at the bottom end" Mohnish Pabrai

83. WIN-WIN
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“I want to invest only in companies that are a win-win for their entire ecosystem. I don’t want
to invest in companies that make society worse even if their products are legal” Guy Spier

"I always said that we look for managers who have reached a balance in treating fairly the
customers, the suppliers, the employees and the shareholders" Francois Rochon

“I am more interested in my nature, in win-win situations” Li-Lu

“For business to survive and prosper, it must create real long-term value in society through
principled behaviour.” Charles Koch

“There is an excellent correlation between giving society what it wants and making money, and
almost no correlation between the desire to make money and how much money one makes”
Ray Dalio

“One of the things I now look very carefully for in a business we invest in is that the entire
ecosystem serves everyone, everyone is a winner. If you look, for example at a company like
Geico, the consumers win because they get a lower rate. Buffett wins because he has a lower
cost of operation, so he has nice margins. Everyone, pretty much, comes out ahead. So t hose
are win-win companies” Mohnish Pabrai

“Win-lose is not sustainable over time. You can’t do what Koch has done over 50 years by us
winning and our customers losing. Competitive advantages assumes that we can provide goods
and services to customers and be the best alternative. The spread in that equation is profit, and
we believe profit really is the measure of how much value we are adding to society. The only
reason a business exitss is to make people’s lives better” Dave Robertson

“People benefit through profit and loss according to the value they create in society” Charles
Koch

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“We consider some investments unacceptable because they take advantage of others or are
anathema to our values or to the interests of the United States. They have no place in o ur
portfolio” Seth Klarman

“He wanted win/win results everywhere--in gaining loyalty by giving it, for instance" Charlie
Munger [describing Buffett's aim in designing the Berkshire System]

"We want our operations and the businesses we invest in to pass the “Win-Win Test” with all six
counterparties: customers, employees, suppliers, stewards, shareholders, and the community.
Win-Win is the only system that is sustainable over the long-term – any fatal flaw with any
counterparty will inevitably self-correct. We believe by striving to eliminate Win-Lose, Lose-
Win, and Lose-Lose situations we can go far in removing many of the blind spots that those
unsustainable relationships nurture." Christopher Begg

"I believe that businesses should aim to reach a balance in its management style in which all
stakeholders are treated with respect and fairness: employees, clients, the environment,
executives, and shareholders. It is with this in mind that we look for businesses that try to
maintain this balance. Ultimately, I believe that these businesses will experience the most
success." Francois Rochon

84. GONNA CHANGE THE WORLD

“I won't dwell on other glamorous businesses that dramatically changed our lives but
concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and
televisions, for example. But I will draw a lesson from these businesses: The key to investing is
not assessing how much an industry is going to affect society, or how much it will grow, but
rather determining the competitive advantage of any given company and, above all, the
durability of that advantage. The products or services that have wide, sustainable moats around
them are the ones that deliver rewards to investors.” Warren Buffett

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“Gonna change the world” is what people believed about e-commerce and the Internet. A few
of the companies did, as had pioneers in radio and airlines. However, “change the world”
proved once again to be far from synonymous with “make money for investors.” Howard Marks

“Capitalising on rapid growth industries, as the Internet speculators have so painfully

discovered, is often fraught with more peril than prize. Easy money is an oxymoron” Frank
Martin

“The 20th century has spawned a momentous series of inventions that have changed forever
the way we engage in nearly every aspect of our daily lives. Think of how far Americans have
progressed from the snail’s pace of the horse, buggy, ship, and steam locomotive to the speed,
comfort and convenience of the automobile and then the airplane. In communicati ons, we’ve
gone from the Pony Express to the telegraph to worldwide communications. In media, we’ve
progressed from local performances to national book chains and “talking colour pictures”.
Chronicles of the pervasive impact of these marvels of ingenuity where we live, work and play
would fill a large library. Surprisingly, as awe-inspiring and life-changing as these inventions
have been, almost without exception they were a boon to consumers and a disappointment to
investors” Frank Martin

“If you were to go back to 1921, there were hundreds of automobile manufacturers in the US.
At that time, the United States was an emerging market in the automobile industry. There were
about 7.5 million cars on the roads in the country and about 2 million cars sold that year. That
number was growing at about 25% a year. It was a high growth industry. Any way you looked at
it, you would be correct in assessing that automobile ownership and growth was going to be
very significant in the United States for a very long period of time. Because of that reality, there
was a massive surge of companies that went public that focused on manufacturing
automobiles. A lot of them had the word “motor” in them. If you wanted to get funded and go
public, you could come up with some auto manufacturer with the name “motor” in it and you
would get a huge valuation. About 10 years later in the 1930s, we were left with three auto
manufacturers. Basically those who invested in the auto business ended up holding the bag. It
turned out to be a terrible investment, even though the long-term trajectory of growth of the
industry was absolutely right on.” Mohnish Pabrai

"If new technologies are generally applicable, then competition means that the benefits will go
to consumers. Not just most of them, all of them. New technology has always been better
news for customers than shareholders" John Kay

"Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their
products may be. In the past, it required no brilliance for people to foresee the fabulous growth
that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950).
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But the future then also included competitive dynamics that would decimate almost all of the
companies entering those industries. Even the survivors tended to come away bleeding. Just
because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we
can judge what its profit margins and returns on capital will be as a host of competitors battle
for supremacy." Warren Buffett

"I still believe that the Internet is probably the most important industrial revolution in many
decades. But we still have to be very selective because a growing industry is not synonymous
with profitability. On the contrary. To have a little perspective on that, here is a passage of a
Reader’s Digest article published in October of 1983 entitled “The computer: the servant of the
future”: It is believed that annual sales of personal computers will go from $350 million (M) in
1983 to some $2 billion (G) in 1987. In June 1982, Commodore was the market leader with
23,000 units sold for $28M followed by Apple and Tandy with $20M each. But new comers are
plenty: Atari, Timex Sinclair and Coleco are now looking for a piece of the ac tion. Also, Osborne
is now putting on the market a portable computer that could be stored in an attaché -case."
This article – would you believe? - is only 18 years old. Sales growth of PCs turned out to be
much higher than anticipated even by the most optimistic forecasters. And what kind of return
would an investor had received would he had bought all the companies mentioned? Probably,
he would have lost almost all of his investments? The best stock would have been Apple
Computer [Q:AAPL], which is today still the same price as it was 15 years ago (and they stopped
paying dividends in 1997)." Francois Rochon 2001

"The primary driver of healthy corporate profitability is a favourable supply side not high rates
of demand growth. Hence, it is possible for there to be rapid growth in an industry which
brings little or no benefit to investors. In fact, strong growth in demand is often the direct cause
of value destruction as it encourages a flood of capital into the industry, eroding returns. It is
not hard to think of examples. Technological advancement in digital semiconductors has
revolutionized technology and economic productivity. Yet the experience of investors in the
semiconductor industry has been a depressing one. A fragmented supply side allied with high
capital intensity and low product differentiation has led to long-term destruction of economic
value. It is only very recently, with an improvement in the supply side via consolidation, that the
outlook has improved The airlines have revolutionized travel over the last 60 years, with
attendant economic benefits, but again a poor supply side has led to a very bumpy ride for
investors. Even the most bullish tech analyst would not have predicted how widespread mobile
phones have become, and yet such foresight would not have helped long-suffering
shareholders in Nokia, Motorola or Blackberry-maker RIM" Marathon Asset Management

85. THINKING ABOUT COMMODITY COMPANIES?

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"A mine is a hole in the ground with a liar on top" Mark Twain

“In an unregulated commodity business, a company must lower its costs to competitive levels or
face extinction” Warren Buffett

“[In] commodity businesses, being a low cost provider is not enough of an advantage for an
overweight position since the commodity price is subject to going below the cost of production
for an unpredictable period of time.” Mason Hawkins

“The most important question to ask about a cyclical is whether the company’s balance sheet is
strong enough to survive the next downturn” Peter Lynch

“Businesses in industries with both substantial over-capacity and a “commodity” product are
prime candidates for profit troubles” Warren Buffett

“In a business selling a commodity-type product: it’s impossible to be a lot smarter than your
dumbest competitor” Warren Buffett

“Charles Munger points out that in a commodity business or a business earning substandard
returns ‘All of the advantages from great improvements are going to flow through to the
customers .. the people who sell the machinery – and, by and large, even the internal
bureaucrats urging you to buy the equipment .. and it isn’t that the machines weren’t better.
It’s just that the savings didn’t go to you. The cost reductions came through all right. But the
benefit of the cost reduction didn’t go to the guy who bought the equipment” Peter Bevelin

“Buying a cyclical after several years of record earnings and when the P/E ratio has hit a low
point is a proven method for losing half of your money in a short period of time.” Peter Lynch

“If a company is facing strong competition from a more efficient competitor with lower costs, it
is perhaps best to utter those comforting words “no, thank you” and move on to the next
candidate” Chris Browne

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Peter Brandt [a veteran commodity trading adviser since 1976] has stated in regards to
commodities trading below costs ... "But, you might say, this kind of drop is impossible because
producers must make money. Who says?? Markets in supply surplus tend to go the production
price of the most efficient producers. Plus, who would have ever believed when Crude was at
$148 in mid-2008 that prices would retreat to below $40 in just six months. So take your pet
macro-economic/fundamental scenario and burn it with the trash!"

“The supply curve is inverted. Most producers need to generate a certain amount of dollars; as
the price falls, they will try to increase the amount sold until the price falls below the point at
which high cost producers can break even. Many of them will be unable to service their debt.”
Soros [on oil in 1985]

“It so happens that contemporary economic optimized life causes us to build larger and larger
theatres, but with the exact same door. They no longer make this mistake too often while
building cinemas, theatres, and stadiums, but we tend to make the mistake in other d omains,
such as, for instance, natural resources and food supplies. Just consider that the price of wheat
more than tripled in the years 2004-2007 in response to a small increase in net demand,
around 1 percent. Bottlenecks are the mother of all squeezes.” Nassim Nicholas Taleb

“Another way to prosper in a commodity-type business is to be the low-cost operator. But a

company holding a low-cost advantage must pursue an unrelenting foot-to-the-floor strategy.”
Warren Buffett

“When you’re buying a mine or a commodity producer, cost of production becomes the moat
and consistent low cost of production is the way to go about it. And so what I try to do, when I
look at the miners – because obviously with commodities, you have no moat – is to create a
moat by choosing a consistently low-cost provider” Mohnish Pabrai

"In the bad times, cyclical companies with heavy debt loads may well face insurmountable
problems" Christopher Browne

"We do not have a bias toward any commodity-related business. If we have any bias, it’s
against." Warren Buffett

"Financial and operating leverage coupled with a cyclical, commodity-like business can create a
volatile and potentially disastrous combination" Frank Martin

"We tend to avoid enterprises that sell a commodity-like product or service (as Warren Buffett
said: no one ever asks, “I want a Coke only if it comes in an Alcoa aluminum can”). We believe
that our philosophy is prudent and rational. We also believe that it should yield superior returns
over the long run." Francois Rochon
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“When it comes to cyclical industries, using the recent past rather than the panorama of
multiple cycles as your guide can lead you either to not buying at all or selling too soon. So the
ability to foresee changes in cyclical industries when others don’t see them can be worth a
fortune.” Jim Tisch

"When commodities are an input, often it's the same commodity for everyone else, so if
economics get much better in an industry [ie commodity prices fall], it just gets better for
everyone. You'd need to find a company that has a real franchise while their input costs are
going down" Ed Bosek

"Commodity businesses are not good businesses at the end of the day: they're capital intensive,
the products don't have any differentiation, and returns tend to be lower o ver time. We've
decided that we would only get involved incommodity businesses if we can identify the low cost
producer, the commodity is priced below the cost of production, and the balance sheet is
clean." Dave Samra

"We're also asking if there are large, unanalyzable forces at work that could nullify the impact
of any special insights we might have. This applies to many cyclical and commodity-orientated
businesses. Very few people predicted oil prices were going to be cut in half, and this move
obliterated the value of any deep insights that energy shareholders may have had on particular
companies." Adam Weiss

"Unless pricing is controlled by a cartel, commodities tend to be cyclical - very cyclical. The
proclivity of managements to develop herd instincts when deciding to add capacity is an
example of the "fallacy of composition" which states that a decision or action that is rational for
one or a few individuals or companies becomes irrational if a whole group of individuals or
companies follow the decision or action, and the outcome of the irrationality is adverse for all"
Ed Wachenheim

"For the great majority of companies selling 'commodity' products, a depressing equation of
business economics prevails; persistent over-capacity without administered prices (or costs)
equals poor profitability" Warren Buffett

"If you want to create and capture lasting value, don't build an undifferentiated commodity
business" Peter Thiel

“What we try to avoid is everything that is commodity in nature, particularly related to natural
resources.” Francois Rochon

"We have generally avoided commodity-sensitive businesses. With commodity businesses, it's
very difficult to predict the future price of the commodity" Bill Ackman
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“In areas like basic materials and other commodity businesses, there usually just isn’t enough of
a moat, which makes it hard for us to get interested on a fundamental basis” Adam Weiss

"Commodity businesses with heavy reliance on debt are playing with fire. One never knows how
prices can change. Unless one is a low cost producer and debt-free, if prices collapse, one is
likely to be in trouble." Mohnish Pabrai

"When a company is selling a product with commodity-like economic characteristics, being the
low-cost producer is all-important" Warren Buffett

"When relatively non-differentiable products are sold based on their price, the manufacturers of
the products need to have low cost structures if they wish to be competitive and earn
reasonable profits" Ed Wachenheim

"We are willing to tolerate cyclicality, but I don’t like to invest in cyclicals that have a history of
going into a significant cash burn mode during the down part of the cycle. The cyclical
businesses that we’ve invested in are such that if you look at their EBITDA and free cash flow
profile, you may see a dramatic drop in sales during the period of the down cycle, but you don’t
see cash burning and that’s the key differentiator." Chris Mittleman

Tutorial 81-85 Recap

1) WIN-WIN - businesses which have positive relations with their staff, their customers and
suppliers and add value to society are more sustainable over the long term. Investing in
businesses which take advantage of one or a combination of these groups is unlikely to be an
investment winner.

2) THINKING ABOUT COMMODITY COMPANIES - you need to be particularly careful investing in

companies exposed to commodity products. In a commodity industry, the lowest cost
producers have the best chance for success over a cycle. Mixing too much debt with cyclical
earnings is a recipe for disaster. A lack of pricing power ordinarily means cost savings are
transferred to the companies customers. Many Investment Masters avoid cyclical companies
given the inherent difficulty in obtaining a margin of safety.

3) QUALITY BUSINESSES - quality business are able to grow intrinsic value over time and
generally have characteristics such as a strong moat, reasonable pricing power, high returns on
capital, solid reinvestment opportunities, low capital intensity and good management. A large
runway for sales growth, potential network effects and operating leverage are examples of
other attributes that can enhance a companies earnings potential. Once you have identified a
quality business it's important not to overpay.

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4) GONNA CHANGE THE WORLD - while new industries may have enormous potential to change
the world, history is littered with investors who lost money investing in these new wonders.
Enormous potential does not equate with enormous returns. Ordinarily an influx of capital into
a new industry destroys investor returns.

5) INVERT, ALWAYS INVERT - inverting the critical questions during the investment analysis can
shed light on opportunities and risks. For example, instead of asking "how will I make money in
this investment?" ask "what are the factors that could lead me to lose money in this
investment?"

86. OWN COOKING

"My family is the largest investor in the funds, so we eat our own cooking” Mohnish Pabrai

"Yes, we eat our own cooking, and that's a good thing" Bruce Berkowitz

"Eating home cooking is a cornerstone to our approach. But sometimes, home cooking isn't
prepared in a microwave oven but in a crock pot. It'll be ready when its ready" Seth Klarman

"We eat our own cooking. It probably goes without saying that such a policy demonstrates the
sincerity of our position – not necessarily the soundness of it” Frank Martin

“There is something comforting knowing that managers have their own money on the line. It
keeps them from taking undue risks if they hit a rough patch of performance” Christopher
Browne

“Most of our directors have a major portion of their net worth invested in the company. We eat
our own cooking.” Warren Buffett

“When taking a flight, you want the pilot on the plane for the ride” Leon Levy

“Eating the home cooking is true for us.” Wally Weitz

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“There is no better place to begin one’s investigation than with personal ethics. Do they “eat
home cooking?” I can think of no more important test of investment success of the integrity of
a manager than his or her confidence in the approach pursued on behalf of clients” Seth
Klarman

“I cannot promise results to partners. What I can and do promise is that: my wife, children and I
will have virtually our entire net worth invested in the partnership” Warren Buffett 1962 Letter

“We have always believed in eating our own cooking. This alignment means that in addition to
thinking about the upside potential of any investment, we also think about the downside. As
fellow investors, we are also motivated to maintain a relentless focus on research and results
while avoiding the conflicts that can arise when portfolio managers invest their own money
differently than their clients’ money.” Chris Davis

“I believe that a manager should have an investment in his fund that is significant in terms of his
net worth, as a percentage of the fund’s total assets, and in absolute dollars. All too often the
flaws of a fund are only evident when it is too late, and the confidence that an investor has in
the manager may ultimately be the most important consideration” Lee Ainslee

"You probably would not choose to dine at a restaurant whose chef always ate elsewhere. You
should be no more satisfied with a money manager who does not eat his or her own cooking"
Seth Klarman

"We felt it was critical for each of us to invest virtually all of our personal wealth side by side
with our clients. We were partners with them in each and every investment; their risks were
our risks. Indeed, throughout my career; the great bulk of my personal net worth was al ways
invested in my funds, and, to this day, I will not invest money with a manager who does not do
the same" Michael Steinhardt

"I am proud to say that the Quantum Group of Funds, with which I am associated, managers
have a substantial ownership interest in the funds they manage. That is a key point. Our
ownership is a direct and powerful incentive to practice sound money management." George
Soros

"I put all of my investment capital into my funds. So it's a true partnership" Li Lu

"We believe the investment decisions we make for you should be bound to the decisions we
make for ourselves, so we at Fairholme put our money where our mouths are by staying
personally and increasingly invested in our funds and ideas. We succeed when you do, and lose
if you do." Bruce Berkowitz

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"It is crucial to me that clients of Giverny and its portfolio managers are in the same boat"
Francois Rochon

"Be assured that I eat my own cooking. The vast majority of my net worth, aside from money
set aside for modest living expenses, is in the fund." Michael Burry

87. BUY GOLD?

“There are only two people who understand gold: One is a director in the Bank of England, and
the other an obscure clerk in the Bank of France. Unfortunately, they disagree.” Nathan Meyer
Rothschild (1777-1836)

"I really have no ability to forecast gold prices. I have been in the business for 30 years, and it
occupies my mind day and night.” Peter Munk, chairman of Barrick Gold

“The history of the metal [Gold] cannot hold a candle to investing in productive assets”
Mohnish Pabrai

"The thing about gold is that if you told me gold has a price of $100, that's fine. If you told me
it's $10,000, that's fine as well. It can be any price. Gold is worth exactly what people think it's
worth" Colm O'Shea

“I’ve never been particularly comfortable with gold as an investment. Once it’s discovered none
of it is used up, to the point where they take it out of cadavers’ mouths. It’s less a
supply/demand situation and more a psychological one – better a psychiatrist to invest in gold
than me.” Julian Robertson

“There is nothing intelligent to be said about gold. Nobody can tell you the right price for an
ounce of gold. People will tell you it should go up or go down. To make any intelligent
statements about investments you have to know what the right price is. You can’t do that with
an asset like gold, which doesn’t produce any cash flow. So you can buy it out of superstition or

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ignore it because you are an atheist but you cannot buy it with an analytical foundation.”
Howard Marks

"I’ve never believed that gold is an investment asset. Would you rather have faith in that, or
McDonald's (MCD), which has 32,000 stores?” Bill Ackman

“Some folks think it [gold] as the last bastion of preserving assets and instead of having dollars
under your mattress and such, it is better to have gold. I prefer having investments in
businesses that to the Martian look like something productive was going on versus taking it out
of the ground and putting it back in the ground. I would probably tak e a pass on gold forever
for that reason. It just seems to make more sense to have ownership stakes in productive assets
or businesses or productive natural resources like oil over gold” Mohnish Pabrai

"I have lived through or studied hundreds, possibly even thousands of bull and bear markets. In
every bull market, whether it is IBM or oats, the bulls always seem to come up with reasons it
must go on, and on and on. I remember hearing hundreds of times "We are going to run out of
supply". "This time is going to be different" "Oil has to sell at $100 a barrell." Oil is not a
commodity [he laughs]. "Gold is different from every other commodity. Well, damn, for 5,000
years it has not been different from every other commodity. There have been periods when
gold has been very bullish and other periods when it has gone down for years. There is nothing
mystical about it. Sure it has been a store of value, but so has wheat, corn, copper - everything.
All of these things have been around for thousands of years. Some are more valuable than
others, but they are all commodities. They always have been, and they always will be" Jim
Rogers

“Gold bugs, generally speaking, are some of the craziest people on the face of the globe.”
Julian Robertson

“If you have the opportunities of Berkshire, an investment in gold is dumb” Charlie Munger

"Gold is special, magical, and great. It's not. But if people believe it, they buy it. And if they buy
it, it goes up. That's why there's a bull market. You can't go to a meeting without someone
saying "What do you think about gold?". You know the dot-com bubble is over when it starts
going down. It will be the same thing with gold" Colm O'Shea

"At its current high of $1400 an ounce, gold prices are 74 times higher than they were 100
years ago— an annual return of 4.3% versus for 3.3% for inflation. So gold has slightly
outperformed inflation over this period (though if we used gold prices from 5 years ago, we
would have a return equal to inflation). It is worth noting that stocks have ret urned 1,300,000%
over the same 100 years— approximately 200 times better than the performance of gold. An

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unequivocal truth stems from taking an historical perspective: in the long term, gold has not
been a better investment than stocks and barelyoutperforms Treasuries. Once inflation is taken
into consideration, the source of wealth creation has been stocks.

There is a certain logic to all of this. The activity of lending money to governments does not
create wealth. Owning a few kilograms of a yellow metal in a safe doesn’t either. Businesses
create products that meet the needs of consumers, new technological tools that improve our
lives, new medicines that allow us to live longer, and services that help us better manage our
activities. And we must admit that the capacity of businesses to develop new ways of
entertaining us seems without limit. To own an economic participation in these businesses is
an authentic source of wealth creation. And the long-term performance numbers adequately
illustrate this.

But this doesn’t prevent people from speculating on gold these days. The most often invoked
reason behind the rise of gold prices is the loss of confidence in our capitalist system. No one
knows the future (regardless of what “they” say) but, historically, betting against the progress
of humanity and the improvement of our standard of living as always been a losing proposition.
The desire to progress and build a better life for ourselves is bound within the genes of a
human being. I believe that those who speculate on gold will eventually lose capital—or as a
better outcome, hold on to an asset that will standstill for several years. Nothing gets built in
the long term with pessimism.

I would be remiss to not share with you a quote from Charlie Munger, Warren B uffett’s long
time partner: “I don't have the slightest interest in gold. I like to understand what works and
what doesn't in human systems. To me that's not optional; that's a moral obligation. If you're
capable of understanding the world, you have a moral obligation to become rational. And I
don't see how you become rational hoarding gold.” Francois Rochon

"You can have all the gold in the world and all you could do is polish it. Since it’s an
unproductive assets, you’re really just hoping that someone pays you more money for this asset
in the future." Warren Buffett

88. AGE

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[At age 103 to a 40 year old] “I think people my age are brighter than people your age. You
don’t make the same mistakes and that by itself gives you an enormous edge.” Irving Kah n [the
legendary late Irving Kahn died in early 2015, at the time the oldest living investor at 109]

"It's hard to believe that he's getting better with each passing year. It won't go on forever, but
Warren is actually improving. It's remarkable: Most seventy-two-year-old men are not
improving, but Warren is" Charlie Munger

“There is no secret method for any of this stuff. You just have to be aware of concepts, smart
in their application, and it helps to be an old man so that you have the experience that helps, or
an old woman…” Howard Marks

"I'm eager to report that great investing has nothing to do with youth - and that the middle-
aged investor who lived through several kinds of markets may have an advantage over the
youngster who hasn't" Peter Lynch

“There are secrets to our world than only practice can reveal, and no opinion or analysis will
capture in full.” Nassim Nicholas Taleb

“I believe I’m a much better investor today than I was twenty years ago, and I really have my
colleagues to thank for that more than anything else” Lee Ainslee

“You do get better over time because you take more arrows in your back, and with each arrow
in your back you learn to run better” Mohnish Pabrai

“I don’t know anyone who [learned to be a great investor] with great rapidity. Warren has
gotten to be one hell of a lot better investor over the period I’ve known him, as have I. So the
game is to keep learning. You gotta like the learning process. “ Charlie Munger

“When you’re twenty-eight you think you know everything. When you’re thirty-one you think
you know everything. Now I’m fifty-two you now realize you didn’t really know that much. The
hubris of youth.” James Dinan

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"The wisdom to be gleaned from older men is a sure way to steepen the DIY (do it yourself)
learning curve" Frank Martin

"Investing is kind of a game of connecting the dots. The nice thing about it is the longer you are
in the business, as long as you are intellectually curious, your collection of data points of dots
gets bigger and bigger. That is where someone like Warren is just incredible. He has had a
passion for investing for well over 70 years. He started by the age of 10 or 12. He keeps building
that library of data, the ability to recognize patterns in data." Ted Weschler

"Charlie Munger talks about this quite a bit; accumulated wisdom, and having been in the
business and studied companies, and studied business, and studied people, and studied history
for years and years and years and years and years, you ought to be better at it the longer you've
been doing it and the older you get" Thomas Gayner

"You evolve to more and more levels of difficulty. It's like learning how to ski, I guess. You ski
at one level, and then all of a sudden - I've skied for 50 years, 15 hours a day or 14 hours a day.
I got better at skiing, and so what's the kick? The kick is then to ski where you keep yourself
still at the edge, and to do that, that's the kick, the evolution" Ray Dalio

"This is an accretive business. The longer you do it, the more you learn, the better you get at it.
Because you see more things. We see more cycles, we see more industries, we learn more
business models. We learn how more business models fail. And all of us in business tend to get
better as we get older" Ken Shubin Stein

89. CHARTS

"A chart can show you what has been going on, and if this differs from what you think ought to
be going on, maybe you ought to think again, even if the future is not there in the tea leaves.
The assumption of the chart is that you ought to pay attention to it because the people who
have already acted, and therefore created the chart, are smarter than you, or know something

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you don't know. You may reject the assumption, but it's a good check." Adam Smith, The
Money Game 1968

"Totems may be superstition, but if superstition is part of the scene and the exercise is to
anticipate the actions of the crowd, then knowing the totems must become part of the
anticipation" Adam Smith, The Money Game 1968

"I am a great fan of keeping charts. They tell you a lot in a hurry about a company or a trend or
how your investments are doing" Roy Neuberger

“While our portfolio decisions are driven by fundamental analysis, we certainly do not ignore
technical and quantitative analysis, which have come into vogue once again” Lee Ainslee

“For me, technical analysis is like a thermometer. Fundamentalists who say they are not going
to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s
temperature” Bruce Kovner

“I never use valuation to time the market. I use liquidity considerations and technical
analysis for timing. Valuation only tells me how far the market can go once a catalyst enters the
picture to change the market direction” Stanley Druckenmiller

“It is very important for me to study the details of price action to see if I can observe something
about how everybody is voting. Studying the charts is absolutely crucial and alerts me to
existing disequilibria and potential changes.” Bruce Kovner

“There are many more deep intellectuals in the business today. That, plus the explosion of
information on the Internet, creates an illusion that there is an explanation for everything.
Hence, the thinking goes, your primary task is to find that explanation. As a result of this poor
approach, technical analysis is at the bottom of the study list for many of the younger
generation, particularly since the skill often requires them to close their eyes and trust price
action. The pain of gain is just too overwhelming to bear.” Paul Tudor-Jones

“Charts are extremely important. One of the best patterns is when a stock goes sideways for a
long time in a narrow range and then a sudden, sharp upmove on large volume. That type of
price action is a wake-up call that something is probably going on, and you need to have a look
at it”. Joe Vidich

“To use a sailing analogy, the wind matters, but the tide matters too. If you don’t know what
the tide is, and you plan everything just based on the wind, you are going to end up crashing on
the rocks. That is how I see fundamentals and technicals. You need to pay attention to both to
make sense of the picture” Colm O’Shea
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“Charts are trading tools and not useful for price forecasting. Over the years, I have been
extremely amused by “chart book economists” who are constantly reinterpreting the
fundamentals based on the latest twists and turns of chart patterns” Peter Brandt

“Charts are very important. Once I have done the fundamental work and decided to buy a stock,
I will first look at the chart before putting on a position. If the stock is very overbought, it won’t
stop me from buying, but I will start with a small position because there is a larger chance of a
correction” Martin Taylor

“While I spend a significant amount of my time on analytics and collecting fundamental

information, at the end of the day, I am a slave to the tape (and proud of it).” Paul Tudor-Jones

"Technical analysis can be a very powerful - and profitable - predictor of prices over short time
periods in narrow segments of the market. The reason the professors missed this is far more
important than the fact that they missed it. They were required by their own protocols to
exclude the very force they were investigating - the power of human judgement to create
entrepreneurial profits" Andrew Redleaf

"I do believe in the black magic art of technical analysis" Stanley Druckenmiller

"Do I also look at charts to help me in making buy decisions? I do. I'd never buy a stock solely
on the basis of its "breaking out" or anything of that sort, but a chart is a handy, shorthand way
of checking up on what's been going on in the stock. If you see a stock has doubled in the past
six months, you're probably too late" Ralph Wanger

90. ALTERNATIVE INVESTMENT SCENARIOS

“The number one principle would be do not look at the world today, what’s happened in the
past and happening currently, is in the price. Try and think how the world may look differently in
18-24 months from now and try and base your investments on that and not what’s true today.
It’s amazing what that single little exercise can do” Stanley Druckenmiller

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“Even though we all live in the present, in our role as investors we must think like futurists; We
must always try to visualize the environment in which we will reap so that, in the here and now,
experience-based rationality will determine when and where to sow” Frank Martin

“One of the jobs of a good trader is to imagine alternative scenarios. I try to form many
different mental pictures of what the world should be like and wait for one of them to be
confirmed” Bruce Kovner

“Quite often when I seem off in the clouds, I’m imagining myself in another time, reacting to
events of another time or era, whether those events involve the advent of a common currency
for Europe, the crash of 1987, the Internet bubble, or whatever the compelling news of the day
might have been – or something totally unrelated .. my attempt to imagine the present as it
would look from a different time helps me sort out the real from the illusions that blind us to
what is before our eyes” Leon Levy

“Putting yourself in different situations, sleeping in ideas and letting yourself be creative lets
you engage your subconscious to process information” Ken Shubin Stein

“The financial markets generally are unpredictable. So that one has to have different scenarios...
The idea that you can actually predict what's going to happen contradicts my way of looking at
the market." George Soros

"Always remembering that we might be wrong, we must contemplate alternatives, concoct

hedges, and search vigilantly for validation of our assessments" Seth Klarman

"Charlie and I both think about worst case scenarios a lot" Warren Buffett

“Having imagination, a feel, a gut sense of what could be that isn’t now is very important, to
prepare for something that the price doesn’t tell you” John Burbank

"In this hectic age of distraction, all of us need to pause every now and then in what we are
doing to examine where the rush of the world and of our own activities is taking us. Even an
hour or two spent in such detailed contemplation on a park bench will prove rewarding. The
importance of such periodic stocktaking was one of the most valuable lessons I learned from
my early experiences as a speculator" Bernard Baruch

Tutorial 86-90 Recap

1) OWN COOKING - the Investment Masters tend to have a very high proportion of their net
worth in the fund that they manage. This ensures the managers interests are aligned with the
investors. The Investment Masters eat their own cooking.

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2) BUY GOLD? - the difficulty with gold is estimating what it is worth. Unlike a company, gold
provides no return or cash flow to the investor. Gold is only worth what someone else is
prepared to pay for it. It is only a store of wealth to the extent it acts as a store of wealth. For
these reasons, it's hard to get a margin of safety with gold.

3) AGE - over time, the more market experiences, learning and wisdom that accrues. Provided
an investor remains open minded and continues to learn, investors should improve with age.

4) CHARTS - charts can be useful tools and have been successfully incorporated into investment
processes by many of the Investment Masters.

5) IMAGINE ALTERNATIVE SCENARIOS- there is always the possibility of more than one
investment outcome. It's important to contemplate different investment outcomes to help
manage risk. It can also be useful to consider investments in a different time frame to help
provide an unbiased view and provide insights the market may be missing.

91. STOCK MARKET GENIUS

“Never confuse genius with luck and a bull market” John C Bogle

"During 'bull' markets, many investors tend to give themselves too much credit for favourable
results and to give insufficient credit to the positive environment that played a large role in
creating the results. This can lead to overconfidence on the part of the investor and resulting
mis-assessment of risks" Ed Wachenheim

"Just because you made money doesn’t mean you were right, and just because you lost money
doesn’t mean you were wrong. It is all a matter of probabilities. If you take a bet that has an
80% probability of winning and you lose, it doesn’t mean it was a wrong choice” Tom Claugus

"Every once in a while, someone makes a risky bet on an improbable or uncertain outcome and
ends up looking like a genius. But we should recognise that it happened because of luck and
boldness, not skill" Howard Marks

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“The absence of loss does not necessarily mean the portfolio was safely constructed. So, risk
control can be present in good times, but it isn’t observable because it’s not tested. Ergo, there
are no awards. Only a skilled and sophisticated observer can look at a portfolio in good times
and divine whether it is a low-risk portfolio or a high-risk portfolio” Howard Marks

“Alpha is a profit that doesn’t come from the whole market going up or down. Anyone can get
lucky and make big money taking a big risk. Alpha is different. It’s return you get beyond the
risk you take” Chris Macnguyen

“The correctness of a decision can’t be judged from the outcome. Nevertheles s, that's how
people assess it. A good decision is one that’s optimal at the time it’s made, when the future is
by definition unknown. Thus, correct decisions are often unsuccessful, and vice versa.” Howard
Marks

“Any asset class or strategy can have its moment in the sun, yet as time passes we learn what
risks were employed to achieve those periods of outperformance” Christopher Begg

"It is all about believing in yourself and not confusing a bull market with brilliance and a bear
market with stupidity.. markets are markets. You can't take it personally" Mark Kingdon

“It is not a good idea from the standpoint of preserving and growing private capital over long
periods of time to assume, after events transpire, that what actually happened is the only way
things could have worked out” Paul Singer

“Just because you did something that worked doesn’t mean that it wasn’t risky or wasn’t smart”
David Abrams

"The mere fact an aggressive strategy wins in a winning period doesn't prove it's the right
strategy for all periods" Howard Marks

"Just because you buy a stock and it goes up does not mean you are right. Just because you buy
a stock and it goes down does not mean you are wrong." Peter Lynch

"Don't be a hero. Don't have an ego. Always question yourself and yo ur ability. Don't ever feel
that you are very good. The second you do you are dead. If you make a good trade, don't think
it is because you have some uncanny foresight. Always maintain your sense of confidence, but
keep it in check" Paul Tudor Jones

"Any investor can chalk up large returns when stocks soar .... In a bull market, one must avoid
the error of the preening duck that quacks boastfully after a torrential rainstorm thinking its
paddling skills have caused it to rise in the wrold. A right-thinking duck would instead compare
its position after the downpour to that of the other ducks on the pond" Warren Buffett
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"Good decision-making can lead to bad outcomes and vice versa. If we believe that we
predicted the past better than we did, we may also believe that we can predict the future
better than we can" Peter Bevelin

"The riskiest thing is getting lucky - a false positive. You have a positive result, but your process
was poor. That's the most dangerous because, after a few false positives, yo u typically go
bigger, and that leads to the old saying of "succeed small, fail big". So we think about this
pretty carefully" Ken Shubin Stein

"We have talked about how a sound investment process likely leads to a good investment
result. A good result, though, says nothing about whether the process involved was a good
one, and, thus, whether or not the success might be replicable" Seth Klarman

"In a bad year, defensive investors lose less than aggressive investors. Did they add value? Not
necessarily. In a good year, aggressive investors make more than defensive investors. Did they
do a better job? Few people would say yes without further investigation. A single year says
almost nothing about skill, especially when the results would be expected on the basis of the
investor's style" Howard Marks

“Short-term performance is an imposter" Howard Marks

“Track records can tell you something, but you need a really long history of outperformance to
have even a moderate belief. They’re just noisy.” Alex Magaro

“Short term performance of skill is an imperfect indicator of skill at best”James Surowiecki

"One of the allures of this business is that sometimes the greatest ignoramus can do well. That
is unfortunate because it creates the impression that you don't necessarily need any
professionalism to do well, and that is a great trap" Michael Steinhardt

“Return alone—and especially return over short periods of time—says very little about the
quality of investment decisions.” Howard Marks

“A year is far too short a period to form any kind of an opinion as to investment performance,
and measurements based on six months become even more unreliable. One factor that has
caused some reluctance on my part to write semi-annual letters is the fear that partners may
begin to think in terms of short-term performance which can be most misleading. My own
thinking is much more geared to five year performance, preferably with tests of relative results
in both strong and weak markets.” Warren Buffett 1960 Partnership letter

"Short-term performance measurements are meaningless, and it is impossible to forecast with

any certainty what the relative performance of a manager will be in any given year. In fact, even
a several-year span can be misleading, as a manager may be able to achieve above-average

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results by owning very high-risk stocks in a generally rising market (as we had in the 1960s) but
be virtually wiped out in the same class of stocks in a bear market. The only true test of a
money manager's ability is if he can obtain above-average results over a full cycle that includes
both bull and bear markets. A great investment manager must be "a man for all seasons."
Barton Biggs

“When you are looking at any manager and you’re trying to decide how they’ve done and how
they are likely to do in the future, always give the most weight to the long term track record
and how it was achieved” Mohnish Pabrai

"It can take years to judge the quality of an investment decision. Those who believe that they
are quite witty because of a few years of strong performance – for a stock or for the whole
portfolio – should develop a strong auto-scepticism reflex" Francois Rochon

92. JOB IS TO MAKE MONEY

“But above all, my job is to make money” Hugh Hendry

“Your job as a trader is to make the line go from bottom left to top right. That’s it. If the line
goes down to much or too long, you were wrong.” Steve Clark

“The point of investing, after all, is not to have a great story to tell, the point of investing is to
make money with limited risk” Seth Klarman

“In investing, you are not trying to make the world a better place; you are trying to make
money” James Dinan

“First, you have to have good returns. It’s not complicated” Marc Lasry

“You can’t be a great money manager unless you have good numbers. When I look at the list of
forty or so hedge funds in which I invest at the end of every month, I look at their numbers. I
don’t care what they say about why they did well or didn’t do well” Michael Steinhardt

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“Our goal is to make money, or at least to preserve capital, on every investment.” David Einhorn

“I do what’s right for the portfolio – whatever will maximize its returns” Dan Loeb

“The concept of paying one-hundred-and-something times earnings for any company for me is
just anathema. Having said that, at the end of the day, your job is to buy what goes up and to
sell what goes down so really who gives a damn about PE’s?” Paul Tudor-Jones

“If I have dramatically misjudged the free cash flows of companies or the safety of their balance
sheets, then I shouldn’t be in business. Over the long term, your performance record will tell
you that.” Bruce Berkowitz

“There are roughly 10,000 mutual funds that will manage your money for 1% or less and there
are roughly 10,000 hedge funds that have the audacity to ask for 1-2% management fees and
20% of the profits. Our clients have a right to expect more because they are paying more.” Leon
Cooperman

"The investment community is like the track and field people. If your stocks go up, they went up
period. It does not matter whether you went to high school, wear the right suit, or play golf
well. It is the same way with the 100-metre dash. If you run faster than anybody else, no one
cares anything about you except that you ran it faster than everyone else" Jim Rogers

"Most investment managers adopt two goals: (1) to earn a good return on their holdings and
(2) to keep their clients happy. I have only one goal: to earn high returns. If I earn high returns
(without taking large risks of permanent loss), then my clients likely will be happy" Ed
Wachenheim

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93. PROFIT IS IN THE BUYING

“The single biggest determinant of investment returns is the purchase price” Josh Harris

“Typically, we make money when we buy things. We count the profits later, but we know we
have captured them when we buy a bargain” Seth Klarman

“The entrance strategy is actually more important than the exit strategy” Eddie Lampert

“Never count on making a good sale. Have the purchase price be so attractive that even a
mediocre sale gives good results. The better sale will be frosting on the cake” Warren Buffett

"At Oaktree we say, "Well bought is half sold". By this we mean we don't spend a lot of time
thinking about what price we're going to be able to sell a holding for, or when, or to who m, or
through what mechanism. If you've bought it cheap, eventually those questions will answer
themselves" Howard Marks

“We expect our outperformance to come from making great purchases than from making great
sales” Mark Curnin

“As the saying goes, a stock well bought is half sold. I think Ben was an expert in that area.”
Walter Schloss

“Price matters: compounded returns [are] significantly affected by starting valuations” Chuck
Akre

“Rate of return is a function of entry level” Charles Driefus

“We are less concerned with the absolute quality of our companies than with the price we
pay for whatever it is we’re getting. In short, we feel “everything is triple-A at the right price”.
Howard Marks

“Price is the single largest determinant of an investor’s returns.” Wally Weitz

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"If you focus on the entrance strategy then the exit normally works out fine" Mohnish Pabrai

"We make money when we buy, not when something goes up in value" Seth Klarman

94. GET OUT

"When in doubt get out, and don't get in when in doubt" William D Gann

“When I see a danger signal handed to me, I don’t argue with it. I get out! I figure it out this
way. If I were walking along a railroad track and saw an express train coming at me sixty miles
an hour, I would not be damned fool enough not to get off the track and let the train go by.
After it had passed, I could always get back on the track again, if I desired. I have always
remembered this as a graphic bit of speculative wisdom” Jesse Livermore

"When something happens to disturb my emotional equilibrium and my sense of what the
world is like, I close out all positions related to that event” Bruce Kovner

"Over many decades, our usual practice is that if something we like goes down, we buy more
and more. Sometimes something happens, you realize you wrong, and you get out. But if you
develop correct confidence in your judgement, buy more and take advantage of stock prices"
Charlie Munger

"If you have a losing position that is making you uncomfortable, the solution is very simple: Get
out, because you can always get back in. There is nothing better than a fresh start” Paul Tudor -
Jones

"If you think we have a big problem coming just get out. There's nothing wrong with preserving
capital, having zero money. Don't compound it by putting some silly hedge on" Stanley
Druckenmiller

“When I am wrong, the only instinct I have is to get out. If I was thinking one way, and now I can

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see that it was a mistake, then I am probably not the only person in shock, so I better be the
first person to sell. I don’t care what the price is. In this game you have an option to keep 20%
of your P&L this year, but you also want the serial option of being able to do that every year.
You can’t be blowing up” Michael Platt

"Irregularly, my substantial turnover of the portfolio was exacerbated by my decision to ‘start

all over again’. I would decide I did not like the portfolio writ large. I did not think we were in
sync with the market and while there were various degrees of conviction on individual
securities, I concluded we would be better off with a clean slate. I would call either Goldman
Sachs or Salomon Brothers and ask to have us taken out of the entire portfolio” Michael
Steinhardt

"It is significant that Bernard Baruch and Jessie Livermore, probably the two greatest private
investors of the twentieth century, made it a practice completely to liquidate their
holdings every so often, take a vacation, and start over by buying a completely fresh portfolio"
Barton Biggs

“I always take my losses quickly. That is probably the key to my success. You can always put the
trade back on, but if you go flat, you see things differently” M Schwartz

“A speculator of great genius once told me: ” When I see a danger signal handed to me, I don’t
argue. I get out!” Jessie Livermore

"So many people lose money by giving a trading limit - if you want to get out, get out!" James
Dinan

"If you feel you have made a mistake, get out fast" Roy Neuberger

"You just have to be pragmatic. When you get it wrong, you need to get out immediately. "
Martin Taylor

"We don't have many rules, but when a stock is down materially relative to its peer group we
assign another analyst to formally review it and then force ourselves to buy more or get out.
Not surprisingly, the analyst who originally recommended the stock is the last person to want
to sell it" Jeff Bronchick

"When I get out of a trade now, it is because I was wrong. I'm thinking "Hmm, that shouldn't
have happened. Prices are inconsistent with my hypothesis. I'm wrong. I need to get out and
rethink the situation" Colm O'Shea

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"The best money managers are also the best quitters. They quit early and they quit often. As
soon as they see things turning for the worse, they don't wait around, they bail" Scott Fearon

95. UNCONVENTIONAL?

“It is the long-term investor who will, in practice, come in for most criticism. For it is in the
essence of his behaviour that he should be eccentric, rash and unconventional in the eyes of
average opinion.” John Maynard Keynes

“Wordly wisdom teaches that it is better for reputation to fail conventionally than to succeed
unconventionally” John Maynard Keynes

“If your behaviour is conventional, you’re likely to get conventional results – either good or bad.
Only if your behaviour is unconventional is your performance likely to be unconventional and
only if your judgements are superior is your performance likely to be above average” Howard
Marks

"We take unconventional approaches to investing. Our clients expect us to beat to a different
drum. They expect us to ignore the crowd, and they expect us to focus on our best
opportunities, as we said we would since inception of the fund. We continue to do this day in
and day out" Bruce Berkowitz

“Unconventional behaviour can be quite conservative just as conventional behaviour can be

terribly risky” Frank Martin

“Our determination to prioritize capital preservation, while seeking strong, risk -adjusted
returns when measured over the fullness of time, drives us to do many things unconventionally.
In a business plagued by group think and conventional wisdom, we try to avoid consensus
thinking.” Seth Klarman

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“The typical investor I’ve met is idiosyncratic, superstitious, and perhaps most important, prey
to fears of the unknown. In short, he or she likes company. But the unconventional is what
often creates opportunity. Investing probably is not played best as a group sport.” Leon Levy

“I might add that in no way does the fact that our portfolio is not conventional prove that we
are more conservative or less conservative than standard methods of investing. This can only be
determined by examining the method or examining the results. I feel the most objective test as
to just how conservative our manner of investing is arises through evaluation of performance in
down markets” Warren Buffett, Partnership Letter 1963

“We don’t want to change the culture to make it comfortable for people who are
uncomfortable with it, because changing it would redefine the norm that people gravitate
toward and slow the adaption process. Changing it would also put us on a slippery slope toward
having a more conventional culture, which would produce more conventional results and
impede our mission to get at truth and excellence” Ray Dalio

“More people should copy us. It’s not difficult, but it looks difficult because it’s unconventional
— it isn’t the way things are normally done. We have low overhead, don’t have quarterly goals
and budgets or a standard personnel system, and our investing is much more concentrated
than average. It’s simple and common sense.” Charlie Munger

"It is our belief that outlier success in the money management business does not go to people
who think and behave conventionally - and are therefore statistically destined to be average"
Frank Martin

"I liked to say that, contrary to conventional wisdom, we created a conservative medium that
used speculative techniques to ameliorate risk. Most traditional money managers at that time
were nearly entirely invested on the long side and therefore had anywhere between 85 and 99
percent of their capital exposed to the stock market all the time. This works well when the
market goes up, but when the market goes down, such investment vehicles invariably lose
money. Our hedge fund sought to generate absolute positive returns for our inves tors,
regardless of the direction of the stock market" Michael Steinhardt

“I was running the investment advisory program [at Kidder Peabody] and I think I realised that
what we were doing was the wrong way of investing, we were doing the conventional stuff of
15% bonds and 85% stocks or something of that nature, and I realised pretty quickly what we
should be doing was, because I ran my account this way, was running a hedge fund” Julian
Robertson

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"In one of his old partnership letters, Buffett makes the point that in investing, there's a
difference between being conventional and being conservative. Since convention is dictated by
the crowd, following it will frequently lead you in the wrong direction" Guy Gottfried

"It is unquestionably true that the investment companies [ie mutual funds] have their money
more conventionally invested than we do. To many people conventionality is indistinguishable
from conservatism. In my view, this represents erroneous thinking. Neither a conventional nor
an unconventional approach, per se, is conservative. Truly conservative actions arise from
intelligent hypothesis, correct facts and sound reasoning. These qualities may lead to
conventional acts, but there have been many times when they have led to unorthodoxy. In
some corner of the world they are probably still holding regular meetings of the Flat Earth
Society" Warren Buffett, Partnership letter

"We derive no comfort because important people, vocal people, or great numbers of people
agree with us. Nor do we derive comfort if they don't. A public opinion poll is no substitute for
thought. When we really sit back with a smile on our face is when we run into a situation we
can understand, where the facts are ascertainable and clear, and the course of action is
obvious. In that case - whether conventional or unconventional - whether others agree or
disagree - we feel we are progressing in a conservative manner." Warren Buffet, Partnership
letter

"Unfortunately, often there is so much confusion between acting conservatively and acting
conventionally that for those truly determined to conserve their assets, this whole subject
needs considerable untangling - which should start with not one definition but two:

1. A conservative investment is one most likely to conserve (i.e. maintain) purchasing

power at a minimum of risk
2. Conservative investing is understanding of what a conservative investment consists and
then, in regard to specific investments, following a procedural course of action needed
properly to determine whether specific investment vehicles are, in fact, conservative
investments.
Consequently, to be a conservative investor, not one but two things are required either
of the the investor or of those whose recommendations he is following. The qualities
desired in a conservative investment must be understood. Then a course of inquiry
must be made to see if a particular investment so qualifies. Without both conditions
being present the buyer of common stocks may be fortunate or unfortunate,
conventional in his approach or unconventional, but he is not being conservative" Phil
Fisher

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"As an idealist, I don't generally like to accept what is called conventional wisdom. I had great
respect for my elders, but I learned early that everything practiced by my contemporaries was
not necessarily sound" Roy Neuberger

"Our investment philosophy doesn’t reflect the conventional approach toward portfolio
management. To own few stocks, to avoid some industries that we know nothingabout and to
ignore market fluctuations is a sensible approach but that is far from being widely used in the
industry. But that doesn’t disturb us a bit: since our beginning we have known that “being
different” is the first ingredient of success (although there are many other ingredients
needed!). I was very much influenced by John Templeton’s maxim: “It is impossible to obtain a
performance superior to the average unless you do something different from the average”.
Francois Rochon

"We recognize the risks of unconventional investing, but the true test of performance in the
handling of money is the record of achievement not the opinion of the respectable" Adam
Smith, The Money Game

96. PROJECT OVERRUNS?

“There may be powerful economic and prestige-related incentives to under-estimate costs and
over-estimate benefits when people try to sell projects. For example, studies based on data
from several hundred large transportation infrastructure projects in twenty nations and five
continents found evidence that in a number of cases, project promoters and forecasters of
billion-dollar projects intentionally misrepresented the costs, benefits and risks of projects to
get them approved” Peter Bevelin

“Managers tend to be reluctant to look at the results of the capital projects or the acquisitions
that they proposed with great detail only a year or two earlier to a board. And they don’t want
to actually stick the figures up there as to how the reality worked out relative to the
projections. That’s human nature.” Warren Buffett

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“Overly optimistic forecast of the outcome of projects are found everywhere. Amos and I
coined the term “planning fallacy” to describe plans and forecasts that 1) are unrealistically
close to best-case scenarios and 2) could be improved by consulting the statistics of similar
cases. Errors in the initial budget are not always innocent. The authors of unrealistic plans are
often driven by the desire to get the plan approved – whether by their supporters or by a client
– supported by the knowledge that projects are rarely abandoned unfinished merely because of
over-runs in costs or completion times. In such cases, the greatest responsibility for avoiding
the 'planning fallacy' lies with the decision makers who approve the plan. If they do not
recognise the need for an ‘outside view’, the commit a planning fallacy” Daniel Kahneman

“The ‘Outside view’ is implemented by using a large database, which provides information on
both plans and outcomes for hundreds of projects all over the world, and can be used to
provide statistical information about the likely overruns of costs and time, and about the likely
underperformance of projects of different types” Daniel Kahneman

“The prevalent tendency to underweight or ignore distributional information is perhaps the

major source of error in forecasting. Planners should therefore make every effort to frame the
forecasting problem so as to facilitate utilizing all the distribution information that is available”
Bent Flyvbjerg

“When forecasting the outcomes of risky projects, executives too easily fall victim to the
‘planning fallacy’. In its grip, they make decisions based on delusional optimism rather than on
rational weighting of gains, losses and probabilities. They overestimate benefits and under -
estimate costs. They spin scenarios of success while overlooking the potential for mistakes and
miscalculation. As a result, they pursue initiatives that are unlikely to come in on budget or on
time or to deliver the expected returns – or even to be completed” Daniel Kahneman

“In project management, Bent Flyvberg has shown firm evidence that an increase in the size of
projects maps to poor outcomes and higher and higher costs of delays as a proportion of the
total budget. But there is a nuance: it is the size of the segment of the project that matters,
both the entire project – someprojects can be divided into pieces, not others. Bridge and tunnel
projects involve monolithic planning, as these cannot be broken up into small portions; their
percentage costs overruns increase markedly with size. Same with dams. For roads, buil t by
small segments there is no serious size effect, as the projectmanagers incur only small errors
and can adapt to them. Small segments go one small error as the time, with no serious role for
squeezes” Nassim Nicholas Taleb

“Black swan effects are necessarily increasing, as a result of complexity, interdependence

between parts, globalization, and the beastly thing called ‘efficiency’ that makes people now
sail too close to the wind. Add to that consultants and business schools. One problem
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somewhere can halt the entire project – so the projects tend to get weak as the weakest link in
their chain (an acute negative convexity effect)” Nassim Nicholas Taleb

“No psychologist who has discussed the ‘planning fallacy’ has realised that, at the core, it is not
essentially a psychological problem, not an issue with human errors; it is inherent to the non -
linear structure of the projects. Just as time cannot be negative, a three month project cannot
be completed in zero or negative time. So, on a timeline going left to right, errors add to the
right end, not the left end of it. If uncertainty were linear we would observe some
projects completed extremely early. But this is not the case” Nassim Nicholas Taleb

97. BUYBACKS

“Repurchases - is sensible [allocation of capital] for a company when its shares sell at a
meaningful discount to conservatively calculated intrinsic value. Indeed, disciplined repurchases
are the surest way to use funds intelligently. It’s hard to go wrong when you’re buying dollar
bills for 80c or less. But never forget: In repurchase decisions: price is all important. Value is
destroyed when purchases are made above intrinsic value” Warren Buffett

“Analysts tend to be cheer-leaders for corporate re-purchase programs. In my view, these

programs only make sense under one condition – the company is buying back shares that are
significantly under-valued. Most management teams have demonstrated the total inability to
understand what their businesses are worth. They’re buying when the stock is up, and ha ve no
courage to buy when the stock is down”. Leon Cooperman

“When the board of directors of a company decides to buy-back its stock in the open market, it
may well be a sign that they believe the shares are undervalued and do not adequately reflect
the prospect for growth. They feel that the best return on corporate cash is by buying up their
own shares in the marketplace” Christopher Browne

“[CEO] views on share buy-backs can also be highly informative. Very few CEO’s see this as a
legitimate investment on par with capital expenditure or M&A decisions, presumably due to an

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aversion to shrinking any aspect of the company. Many fear that buybacks are an admission
that the company has run out of investment ideas. On this subject we like to hear managers
justify buybacks based on an internal valuation model, as this can then lead to an interesting
discussion about valuation of their business. Marathon Asset Management

“The companies in which we have our largest investments have all engaged in significant stoc k
repurchases at times when wide discrepancies exist between price and value. As shareholders,
we find this encouraging and rewarding” Warren Buffett

"I look more favourably if a company is doing significant buybacks. That actually adds something
to the equation for me. The dividends particularly are not of interest" Mohnish Pabrai

“At the core of their [the Outsider CEO’s ] shared worldview was the belief that the primary
goal for any CEO was to optimize long term value per share, not organizational grow th.. This
may seem like an obvious objective, however, in American business, there is a deeply ingrained
urge to get bigger. Larger companies get more attention in the press, the executives of those
companies tend to earn higher salaries and are more likely to be asked to join prestigious
boards. As a result, it is very rare to see a company pro-actively shrink itself. And yet virtually all
of these CEO’s shrank their share bases significantly through repurchases” William Thorndike
[The Outsider CEO’s]

“I’m amazed at how many CFOs don’t truly understand the long-term sustainability and value
creation of stock buybacks.” Lee Ainslee

"Buying back shares is the simplest and best way a company can reward its investors. If a
company has faith in its own future, then why shouldn't it invest in itself, just as the
shareholders do?" Peter Lynch

“Our preference is for companies to employ cash for buybacks because we believe every stock
we own is under-valued” Andrew Wellington

“As long as you’re doing something that doesn’t harm the value of the company, accelerating
the benefits to shareholders is exactly what creating value is about. The best example, of
course, is buying back stock. If you have a great long-term story and a value creating plan
ahead of you, why would you wait and buy back stock after the market fully reflects the value?
From a capital allocation standpoint, you want to buy back stock ahead of all that” Scott
Ostfeld

“Buying-in shares can be a smart tactic if a company is flush with cash and the stock is in the
tank. As Warren Buffett once noted, who wouldn’t junp at the chance to buy out his partners as
50 cents in the dollar? And of course, as the number of shares being traded shrinks, the
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percentage of a controlling stake expands. Buying-in shares is another thing entirely, however,
when shares are selling at or near historic highs and priced at many times earnings. Worse is for
a company to take on debt in the process, as some companies have done to make purchases,
because when the stock falls, the company is left with increased debt and diminished capital”
Leon Levy

"When your business is not doing well from a fundamental perspective, the last thing you're
supposed to do is buy back stock." Marc Cohodes

"It is generally the case that most managements, and indeed whole industries, engage in pro-
cyclical behaviour. It is greatly dispiriting to see companies repeatedly buying back their shares
as the cycle peaks, only to raise fresh capital at the trough. Shareholders invariably lose out in
the process” Marathon Asset Management

"Boards that authorise share-repurchase initiatives at market prices below what the businesses
are intrinsically worth per share (without foregoing investment in even more compelling growth
opportunities and with due regard for the financial security of the remaining shareholders) are
clearly putting the shareholder's interest high on the priority list" Frank Martin

98. COMMITMENT-CONFIRMATION-CONSISTENCY
BIAS

"Once we have made a choice or taken a stand, we will encounter personal and interpersonal
pressures to behave consistently with that commitment. Those pressures will cause us to
respond in ways that justify our earlier decision." Robert Cialdani

“It is the peculiar and perpetual error of the human intellect to be more moved and excited
by affirmatives than by negatives; whereas it ought properly to hold itself indifferently disposed
towards both alike” Francis Bacon

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"We rarely seek out evidence that undercuts our first explanation, and when that evidence is
shoved under our noses we become motivated skeptics - finding reasons, however tenuous, to
belittle it or throw it out entirely" Philip Tetlock

"Charlie and I believe that when you find information that contradicts your existing beliefs,
you've got a special obligation to look at it - and quickly" Warren Buffett

"We constantly need to be open to new information that may cause us to alter previous
opinions or decisions" Ed Wachenheim

"We strive to eliminate biases in our decision making that could cause us to reject new
information or cling to erroneous beliefs" Seth Klarman

“What the human being is best at doing is interpreting all new information so that prior
conclusions remain intact” Warren Buffett

“When one shares an investment thesis publicly, it can be more difficult to change one’s mind
because the human mind has a tendency to ignore data that are inconsistent with a firmly held
view, and particularly so, when that view is aired publically” Bill Ackman

“People tend to accumulate large mental holdings of fixed conclusions and attitudes that are
not often re-examined or changed, even though there is plenty of good evidence that they are
wrong” Charlie Munger

“Insidious for investors are the following biases .. ‘Anchoring effect’ constitute a class of robust
psychological phenomena showing that people adjust insufficiently for the implication of
incoming information. We form beliefs around an anchor, and additional incoming data must
fight against the inertia of the anchor, even when it is objectively irrelevant to the judgement at
hand” Frank Martin

“The consistency bias or commitment bias that comes from talking in a public group that Charlie
Mungers talks about where, If I stand up on stage and I praise a wonderful traits of Horsehead
or Fiat, and later things don’t go the way I expect them to go, can be pretty powerful” Mohnish
Pabrai

“One of the most difficult intellectual confessions is to admit you are wrong. Behaviourally we
know we are subject to confirmation bias. Eagerly we wrap our minds around anything and
everything that concurs with our statement” Robert Halgstrom

"I believe it is important for investors to avoid seeking out information that reinforces their
original analysis. Instead, investors must be prepared and willing to change their analysis and

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minds when presented with new developments that adversely alter the fundamentals of an
industry or company. Good investors should have open minds and be flexible" Ed Wachenheim

“Failure to handle psychological denial is a common way for people to go broke. You've made
an enormous commitment to something. You've poured effort and money in. And the more you
put in, the more that the whole consistency principle makes you think, "Now it has to work. If I
put in just a little more, then it 'all work." People go broke that way, because they can't stop,
rethink, and say, "I can afford to write this one off and live to fight again. I don't have to pursue
this thing as an obsession in a way that will break me." Charlie Munger

“Commitment is a very strong psychological problem that most humans have. Once you
publically commit to a certain position and then later facts show otherwise to be able to own up
to it and be honest to alter yourself. The only defence I’ve tried to use on that front is to try to
be honest” Mohnish Pabrai

"Simple inertia stops people from acting on blindingly clear signals that they should buy or sell.
There may be huge downside risks on stocks they own. Reading a newspaper account of bad
news at a company is much more likely to dissuade an investor from buying its stock than to
cause someone who already owns the stock to dump it." Leon Levy

"People become overconfident because they never bother to document their past track record
of wrong predictions, and then they make things worse by falling victim to the dreaded
confirmation bias - they only look for evidence that confirms their preconceived hypothesis.
The only protection against overconfidence is to systematically collect data, especially data that
can prove you wrong" Richard Thaler

"Another indication is how passionately people defend things that makes no sense. The point is
that beliefs that are completely invulnerable to evidence and passionately defended can be
quite durable. It has nothing to do with fundamental logic" Colm O'Shea

“We try and avoid the worst anchoring effect which is always your previous conclusion. We
really try and destroy our previous ideas.” Charlie Munger

"If we only look to confirm our beliefs, we will never discover if we're wrong. Be self critical and
unlearn your best-loved ideas. Search for evidence that disconfirms ideas and assumptions.
Consider alternative outcomes, viewpoints and answers" Peter Bevelin

"Charles Darwin used to say that whenever he ran into something that contradicted a
conclusion he cherished, he was obliged to write the new finding down within 30 minutes.
Otherwise his mind would work to reject the discordant information, much as the body rejects

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transplants. Man's natural inclination is to cling to his beliefs, particularly if they are reinforced
by recent experience" Warren Buffett

"Confirmation bias - believing what you want to believe and discounting contrary information -
it has destroyed countless portfolios and businesses alike" Scott Fearon

99. BULL MARKETS

“If it trades like a bull market, it’s a bull market” Colm O’Shea

“Bull markets ignore bad news, and any good news is reason for a further rally ” Michael Platt

“Gresham’s Law says that the bad money [paper] drives the good money [specie] out of
circulation; this accurately describes human behaviour when people are confronted with a cost-
free choice. I now believe this accurately describes people’s choice of investment philosophies,
especially late in a bull market, when the sloppy analysis drives out the disciplined assessment,
and when the grab for return overwhelms the desire for capital preservation” Seth Klarman

“In investor behaviour, particularly during the last stages of a great bull market,perception of
risk and actual risk are at opposite ends of the spectrum” Leon Levy

“After a bull market that goes on for years, who is managing most of the money? The bears are
all unemployed; they’re not managing any money at all. You have a few very flexible smart
people, but they run relatively small amounts of money, so they don’t matter either. The
managers who are relentlessly bullish and who buy more every time the market goes down will
be the ones who end up managing most of the money. So, you shouldn’t expect a big bull
market to end in any rational fashion” Colin O’Shea

“The longer a benign circle lasts the more attractive it is to hold financial assets. Those who are
inclined to fight the trend are progressively eliminated and in the end only trend followers
survive as active participants. As speculation gains in importance, other factors lose their
influence. There is nothing to guide speculators but the market itself, and the market is

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dominated by trend followers. When a change in trend is recognised, the volume of speculative
transactions is likely to undergo a dramatic, not to say catastrophic, increase. While a trend
persists, speculative flows are incremental, but a reversal involves not only the current flow but
also the accumulated stock of speculative capital. The longer the trend has persisted, the larger
the accumulation” George Soros

“Once a bull market gets under way, and once you reach the point where everybody has made
money no matter what system he or she followed, a crowd is attracted into the game that is
responding not to interest rates and profits but simply to the fact that it seems a mistake to be
out of stocks. In effect, these people superimpose an I-can't-miss-the-party factor on top of the
fundamental factors that drive the market. Like Pavlov's dog, these "investors" learn that when
the bell rings--in this case, the one that opens the New York Stock Exchange at 9:30 a.m.--they
get fed. Through this daily reinforcement, they become convinced that there is a God and that
he wants them to get rich.” Warren Buffett

“Never confuse genius with luck and a bull market” John Bogle

"In a bull market, it is advisable to restrain one's greed. There is an old wall street saying "The
bulls make money, the bears make money. But what happens to the pigs?" You can't make 101
percent. You shouldn't even strive to make 100 percent. Your goal should be 66.6% of a big
move. Get out and then reinvest in something that has been newly studied" Roy Neuberger

“When an epidemic of high-turnover speculation has displaced long-term investment as the

standard conduct in the financial markets, the endgame is always never pleasant” Frank Martin

"I have lived through or studied hundreds, possibly even thousands of bull and bear markets. In
every bull market, whether it is IBM or oats, the bulls always seem to come up with reasons it
must go on, and on and on. I remember hearing hundreds of times "We are going to run out of
supply". "This time is going to be different" "Oil has to sell at $100 a barrell." Oil is not a
commodity [he laughs]. "Gold is different from every other commodity. Well, damn, for 5,000
years it has not been different from every other commodity" Jim Rogers

“Markets may initially trend for fundamental reasons, but prices overshoot by ludicrous
amounts. At some point, prices go up today simply because they went up yesterday” Michael
Platt

"Whenever there is a bull market, people become hysterical after a few years. They think,
'Gosh, what has happened for the past five years is going to go on forever'" Jim Rogers

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"Bulls will patiently explain that "it is different this time" .. Of course, any contrarian knows that
just as a grim present is usually a precursor to a better future, a rosy present may be a
precursor to a bleaker tomorrow" Seth Klarman

"During 'bull' markets, many investors tend to give themselves too much credit for favourable
results and to give insufficient credit to the positive environment that played a large role in
creating the results. This can lead to overconfidence on the part of the investor and resulting
mis-assessment of risks" Ed Wachenheim

"Very early in my career, a veteran investor told me about the three stages of a bull market.
Now I'll share them with you. The first, when a few forward-looking people begin to believe
things will get better. The second, when most investors realize improvement is actually taking
place. The third, when everyone concludes things will get better forever. Why would anyone
waste time trying for a better description? This one says it all. It's essential that we grasp its
significance. " Howard Marks

100. TECH INVEST?

“Consider the field of technology. The rate of “creative destruction” have never been faster.
The new products are a boon to the consumer but a bane to the legacy company. Avoid
companies that are subject to technological obsolescence” Christopher Browne

“The durability of technology moats is many times an oxymoron.” Mohnish Pabrai

“In an era of rapid technological change, investors must be ever vigilant, even with regard to
companies that are not involved in technology but are simply affected by it. In short, today’s
good businesses may not be tomorrow’s” Seth Klarman

“Our approach is very much profiting from lack of change rather than from change.” Warren
Buffett

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“We don’t invest in tech, simply because we don’t understand it and because it’s valued on if-
come-maybe” Sam Zell

"I note with no particular surprise that my most consistent losers were the technology stocks"
Peter Lynch

“Predicting the long-term economics of companies that operate in fast-changing industries is

simply far beyond our perimeter .. we just stick with what we understand” Warren Buffett

“We focus a lot on disrupters: What they’re doing, what they could do. When we’re making an
investment in a non startup-type company, we ask ourselves, “Who’s going to disrupt this
company or industry?” Then, “Let’s really think about it, so we don’t make the wrong
investment.” Henry Kravis

“Companies with short product lifecycles face a constant challenge; they must develop new
products or re-invent themselves regularly or risk losing market share or profitability. Consider
computer hardware manufacturers or video game developers, for example. As new
technologies or games come to market, prior versions quickly become obsolete, or at least fall
in popularity. Therefore, continuous investments in research, product development, and
marketing are required just to stay in place, much less to increase market share or profitability”
Murray Stahl

“We’d like to believe any business is analysable, but when you have product cycles of only
twelve months, as an investor you’re very reliant on the company hitting that window exactly
right. If they don’t and somebody else does, you can buy low all you want, but you find out
pretty quickly that you were buying a future income stream that was a mirage. We haven’t
sworn off technology entirely, but we’ve essentially sworn off investing in short-product-cycle
technology.” Larry Robbins

“I like businesses with long product cycles – say, cornflakes as opposed to cell phones – where
there’s less risk of technological obsolescence” Murray Stahl

“We focus on companies with long competitive-advantage periods, which puts a premium on
truly understanding the business dynamics over time” James Crichton

“A well managed technology company could always be toppled by a clever competitor or the
latest scientific eureka from a rival” Shelby Davis

“There are some general rules. I’m not interested in investing in rapidly changing industries
which means, generally speaking biotech, tech or anything that is moving real fast is not of
interest. I’m looking for businesses in steady state industries” Mohnish Pabrai
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“In the technology sector, and especially in consumer electronics, where replacement cycles are
short and consumers are open-minded to new and better products, market share changes can
be dramatic and difficult to reverse” Marathon Asset Management

“It is still surprising how many investment fads have elaborate spindrifts of ethereal logic which,
when stripped away, are really dumb.” Paul Singer

“There are risks of obsolescence in high-technology stocks that do not give us the margin of
safety we cherish” Ed Wachenheim

“It’s very hard to look at a tech company and go 5 or 10 years out and have a good picture of
what the company might look like” Mohnish Pabrai

"In technology if you're not growing, you're in effect dying." Jim Chanos

“We avoid many areas in technology because of the speed of the product cycles and the
magnitude of change from cycle to cycle” Adam Weiss

"Competitive advantages in the technological world are rare and often not durable. The rapid
progress in technology, while delightful to consumers, is rarely a source of riches for
shareholders. Yahoo! lost a good portion of its competitive advantage in 2004 to another
business that went public that year: Google." Francois Rochon

“A business that must deal with fast moving technology is not going to lend itself to reliable
evaluations of its long term economics. Did we foresee thirty years ago what would transpire in
the television manufacturing or computer industries? Of course not (nor did most of the
investors and corporate managers who enthusiastically entered those industries.) Why the,
should Charlie and I now think we can predict the future of other rapidly evolving businesses?
We’ll stick instead with the easy cases. Why search for a needle buried in a haystack when one
is sitting in plain sight?” Warren Buffett

“It’s no surprise that the best returning stocks over time have been in areas like consumer
goods where change is relatively incremental” Marathon Asset Management

“I am not going to be able to figure what the moat is going to look like for Oracle, Lotus or
Microsoft, ten years from now. Gates is the best businessman I have ever run into and they
have a hell of a position, but I really don‘t know what that business is going to look like ten
years from now. I certainly don‘t know what his competitors will look like ten years from now. I
know what the chewing business will look like ten years from now. The Internet is not going to
change how we chew gum and nothing much else is going to change how we chew gum.”
Warren Buffett
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“I have very little interest in industries with rapid change. Buffett says industries withrapid
change are the enemy of the investor” Mohnish Pabrai

“We don’t do a lot in technology. Successful technologies change something, creating an

efficiency or demand that wasn’t there before. But the very fact the change happens means
somebody else can come along and change it again. If, because of the threat of technological
obsolescence, I’m uncertain about a company’s cash flows several years out, I’ll put a big
discount on those cash flows and conclude they’re not worth much. Because Wall Street tends
to put a large value on the future cash flows of technology companies, we ra rely find one that
we consider very attractive” Ed Wachednheim

“Our problem – which we can’t solve by studying up – is that we have no insights into which
participants in the tech field possess a truly durable competitive advantage” Warren Buffett

"A computer company can lose half its value overnight when a rival unveils a better product,
but a chain of donut franchises in New England is not going to lose business when somebody
opens a superior donut franchise in Ohio. It may take a decade for the competito r to arrive, and
investors can see it coming" Peter Lynch

101. THINKING ABOUT LOSSES?

"Large permanent losses can dampen the confidence of an investor - and I sternly believe that a
good investor needs to be highly confident about his ability to make dec isions, because
investment decisions seldom are clear and usually are muddled with uncertainties and
unknowns" Ed Wachenheim

"Even the most conservative investors can be paralysed by large losses, whether due to
mistakes, premature judgements, or the effects of leverage. If losses impair your future
decision making, then the cost of a mistake is not just the loss from that investment alone, but
the impact that loss may have on the future chain of events. If a loss freezes you from taking
full advantage of a great opportunity, or pressures you to make it a smaller position than it

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should or would otherwise be, then the cost may be far greater than the initial loss itself" Seth
Klarman

“Soros is the best loss taker I’ve ever seen. He doesn’t care whether he wins or loses on a trade.
If a trade doesn’t work, he’s confident enough about his ability to win on other trades that he
can easily walk away from the position. There are a lot of shoes on the shelf; wear only the
ones that fit. If you’re extremely confident, taking a loss doesn’t bother you” Stanley
Druckenmiller

“I always take my losses quickly. That is probably the key to my success. You can always put the
trade back on, but if you go flat, you see things differently” Marty Schwartz

"I learned early in my career to be skeptical and flexible, not stubborn about a stock. I also
learned to take quick, small losses rather than get emotionally involved in a stock that was
dragging me down. When I am wrong about a security, I try to take my loss at the 10% level"
Roy Neuberger

"I don't have any tolerance for trading losses. I hate losing money more than anything. Losing
money is what kills you. It's not the actual loss. It's the fact that it messes up with your
psychology. You lose the bullets in your gun. What happens is you put on a stupid trade, lose
$20m in ten minutes, and take the trade off. You feel like an idiot, and you’re not in the mood
to put on anything else. Then the elephant walks past you while your gun's not loaded. It's
amazing how annoyingly often that happens. In this game, you want to be there when the great
trade comes along. It's the 80/20 rule of life. In trading, 80% of your profits come from 20% of
your ideas". Michael Platt

"A good rule to remember is that people who are threatened with big losses and have a chance
to break even will be unusually willing to take risks, even if they are normally quite risk averse.
Watch out!" Richard Thaler

“A person who has not made peace with his losses is likely to accept gambles that would be
unacceptable to him otherwise” Daniel Kahneman

“One of the things I think has really made us good is that we have not just done very well
picking stocks, but we've done a great job of avoiding losers.” James Dinan

“Perhaps our profession is not unlike amateur tennis: It’s usually not the number of winners hit
but the number of unforced errors, that determine the outcome” Frank Martin

“Successful investing is not just about achieving stellar returns, it is also about avoiding loss”
Jean Marie-Eveillard
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“Avoiding loss is the most important prerequisite to investment success” Seth Klarman

“George Soros has the least regret of anyone I have ever met. Even though he will sometimes
play up to his public image as a guru who knows what is going on, it is in no sense what he does
as a money manager. He has no emotional attachment to an idea. When a trade is wrong, he
will just cut it, move on, and do something else” Colm O’Shea

“We prioritize the avoidance of catastrophic loss first and foremost and focus on potential gains
second.” Zeke Ashton

"What I am trying to do is find trades that won’t lose much money even if I am wrong” Colm
O’Shea

“Profits always take care of themselves, but losses never do. The speculator has to insure
himself against considerable loss by taking the first small loss” Jesse Livermore

“Sometimes in life, it’s not just about what we buy, but what we don’t buy.” Jean Marie-
Eveillard

“In my book, trying to avoid losses is more important than striving for great investment
success” Howard Marks

“The key to beating the indices is to minimize the loss of capital in investments” Mohnish Pabrai

“You rarely, if ever, make money from worrying; it does not typically enhance return. But by
avoiding loss, you are able to hang on to what you have accumulated, which is a cornerstone of
successful investing” Seth Klarman

“The key to beating the indices is to minimize loss of capital in investments” Mohnish Pabrai

“The elements of good trading are (1) cutting losses (2) cutting losses and (3) cutting losses. If
you can follow these three rules, you may have a chance.” Ed Seykota

"Willingness to take small losses in some stocks and to let profits grow bigger and bigger in the
more promising stocks is a sign of good investment management. Taking small profits in good
investments and letting losses grow in bad ones is a sign of abominable investment judgement"
Phil Fisher

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