The Joys of Compounding: The Passionate Pursuit of Lifelong Learning

By Gautam Baid

CHAPTER 1 

INTRODUCTION: THE BEST INVESTMENT YOU CAN MAKE IS AN INVESTMENT IN YOURSELF 

• 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. —Charlie Munger
• All of us can work to improve our knowledge, but most of us won’t put in the effort. More important than the will to win is the will to prepare. —Charlie Munger
• Self-improvement is the ultimate form of investing in oneself. It requires devoting time, money, attention, and hard effort now for a payoff later, sometimes in the far distant future. A lot of people are unwilling to make this trade-off because they crave instant gratification and desire instant results.
• If you think of your mind as a library, three things should concern you: 
  • 1. The accuracy and relevance of the information you store. 
  • 2. Your ability to find or retrieve that information on demand. 
  • 3. Your ability to put that information to use when you need it—that is, your ability to apply it.What many people see as a three-hundred-page book is often the accumulation of thousands of hours and decades of work. Where else can you get the entire life’s work of someone in the space of a few hours?

• Self-improvement is the best way to spend some of your time every day. And finding the time to read is easier than you think. One way to make this happen is to carve out an hour of each day just for yourself.

 

SECTION I 

ACHIEVING WORLDLY WISDOM CHAPTER 2 BECOMING A LEARNING MACHINE

• Books are truly life-changing, particularly once you’ve developed the habit of reading every day while watching your every thought. The neuronal connections that compound through the effort will make you an entirely new person after a few years.

Vicarious Learning The reading of all good books is like a conversation with the finest minds of past centuries. —René Descartes

• Morgan Housel writes: Everything’s been done before. The scenes change but the behaviors and outcomes don’t. Historian Niall Ferguson’s plug for his profession is that “The dead outnumber the living 14 to 1, and we ignore the accumulated experience of such a huge majority of mankind at our peril.” The biggest lesson from the 100 billion people who are no longer alive is that they tried everything we’re trying. The details were different, but they tried to outwit entrenched competition. They swung from optimism to pessimism at the worst times. They battled unsuccessfully against reversion to the mean. They learned that popular things seem safe because so many people are involved, but they’re most dangerous because they’re most competitive. Same stuff that guides today, and will guide tomorrow. History is abused when specific events are used as a guide to the future. It’s way more useful as a benchmark for how people react to risk and incentives, which is pretty stable over time.
• The more you read, the more you build your mental repertoire. Incrementally, the knowledge you add to your stockpile will grow over time as it combines with everything new you put in there. This is compounding in action, and it works with knowledge in much the same way as it does with interest.
• The rich have money. The wealthy have control over their time.

Finding Time to Read

• Shane Parrish writes: While most of us don’t have the time to read a whole book in one sitting, we do have the time to read 25 pages a day. Reading the right books, even if it’s a few pages a day, is one of the best ways to ensure that you go to bed a little smarter than you woke up. Twenty-five pages a day doesn’t sound like much, but this commitment adds up over time. Let’s say that two days out of each month, you probably won’t have time to read. Plus Christmas. That gives you 340 days a year of solid reading time. If you read 25 pages a day for 340 days, that’s 8,500 pages. 8,500. What I have also found is that when I commit to a minimum of 25 pages, I almost always read more. So let’s call the 8,500 pages 10,000. (I only need to extend the daily 25 pages into 30 to get there.) With 10,000 pages a year, at a general pace of 25/day, what can we get done? Well, The Power Broker is 1,100 pages. The four LBJ books written by Robert Caro are collectively 3,552 pages. Tolstoy’s two masterpieces—War and Peace, and Anna Karenina—come in at a combined 2,160. Gibbon’s The Decline and Fall of the Roman Empire is six volumes and runs to about 3,660 pages. That’s 10,472 pages. That means, in about one year, at a modest pace of 25 pages a day, you’d have knocked out 13 masterful works and learned an enormous amount about the history of the world. In one year! That leaves the following year to read Shirer’s Rise and Fall of the Third Reich (1,280), Carl Sandburg’s Six Volumes on Lincoln (2,000), Adam Smith’s Wealth of Nations unabridged (1,200), and Boswell’s Johnson (1,300), with plenty of pages left to read something else.

This is how the great works get read: day by day, 25 pages at a time. No excuses… The point of assigning yourself a certain amount of reading every day is to create a deeply held habit. The 25-pages-a-day thing is a habit-former!… …Read what seems awesome and interesting to you now and let your curiosities grow organically. A lifelong interest in truth, reality, and knowledge will lead you down so many paths, you should never need to force yourself to read anything unless there is a very, very specific reason. (Perhaps to learn a specific skill for a job.)

Nassim Taleb, “Curiosity is antifragile, like an addiction; magnified by attempts to satisfy it.”

I read to increase knowledge. I read to find meaning. I read for a better understanding of others and myself. I read to discover. I read to make my life better. I read to make fewer mistakes.

 

• The key lesson is that, in the pursuit of wisdom, we must read much more of what has endured over time (such as history or biographies) than what is ephemeral (such as daily news, social media trends, and the like). I agree with Andrew Ross, who says, “The smallest bookstore still contains more ideas of worth than have been presented in the entire history of television.”

All of the history of humankind is a short chapter in the history of biology. And all of biology is a short chapter in the history of the planet. And the planet is a short chapter in the history of the universe. —Will and Ariel Durant

Approach to Reading

• Mortimer Adler and Charles Van Doren have written the seminal book on reading. Their How to Read a Book provides the necessary skills to read anything. Adler and Van Doren identify four levels of reading: elementary, inspectional, analytical, and syntopical.
  • 1. Elementary reading. This is the most basic level of reading as taught in our elementary schools. It is when we move from illiteracy to literacy.
  • 2. Inspectional reading. This is another name for “scanning” or “superficial reading.” It means giving a piece of writing a quick yet meaningful advance review to evaluate the merits of a deeper reading experience. Whereas the question that is asked at the first level (elementary reading) is “What does the sentence say?” the question typically asked at this level is “What is the book about?”
  • 3. Analytical reading. Analytical reading is a thorough reading. This is the stage at which you make the book your own by conversing with the author and asking many organized questions. Asking a book questions as you read makes you a better reader. But you must do more. You must attempt to answer the questions you are asking. While you could do this in your mind, Adler and Van Doren argue that it’s much easier to do this with a pencil in your hand. “The pencil,” they argue, “becomes the sign of your alertness while you read.” Cicero said, “Nothing so much assists learning as writing down what we wish to remember.”
  • Syntopical reading, allows you to synthesize knowledge from a comparative reading of several books about the same subject. This is where the real virtue of reading is actualized. Syntopical reading, also known as comparative reading, involves reading many books on the same subject and then comparing and contrasting the ideas, insights, and arguments within them. In syntopical reading, you create a latticework of the information in those books, along with your own life experiences and personal knowledge, to create mental models and new insights and form an understanding of the world that never quite existed before. This is the step that prepares the way for an original thinker to make a breakthrough.

 

The past is not fixed. Yes, it is true. The past is not fixed. Reading can change this because a new book can make you aware of something incredible in an old book that you previously had not recognized. This is how knowledge compounds. Something you perceived to be of low value in an old book transforms into something of significant value, unlocked by another book in the future.

• Therefore, no books are necessary “the best.” Usually, some combination of books, in unison, produce a big, nonlinear impact. Although many books may seem unrelated to one another, in reality, they are all connected through some common threads. This realization creates a significant advantage because it lets your interests pull you along, rather than forcing you to set a self-imposed deadline to finish a book.
• As you read increasingly more, your capacity to read and absorb more knowledge increases rapidly. During the initial days of inculcating my reading habit, I found it difficult to grasp the deep significance of many of the concepts in the books I read. Gradually, over time, I started discovering connections between the ideas that spread across different books. It is these connections that lead to the development of the “tapestry of the psyche,” which in turn deepens our understanding of the big ideas coming from the key disciplines. This deep understanding makes the brain more efficient and smarter and better able to make sense of new information. None of us can know everything, but we can work to understand the big important models at a basic level across a broad range of disciplines so they can collectively add value in the decision-making process. Deep reading of the fundamentals enables us to understand the world for what it is. This is how we learn to reason from first principles.

As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble. —Harrington Emerson

• When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles—generally three to twelve of them—that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles. —John Reed

 

Five words separate the good from the great: flawless execution of the fundamentals.

• Reasoning from first principles removes the impurity of assumptions and conventions. Instead, what remains is the essential information. First principles are the origins or the main concepts that cannot be reduced to anything else. Over two thousand years ago, Aristotle defined a first principle as “the first basis from which a thing is known.” These are the fundamental assumptions that we know are true.
• When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it. —Jeff Bezos

Chipping Away at Truth

• By focusing on the fundamental questions and then, while answering these questions, going two or three levels deeper by asking at every step “and then what?” we can arrive at the truth. This is the art of “reductionism.” Less is more. When we remove the things that aren’t truly representative of reality, we get closer to the ultimate truth.
• “David was always there in the marble. I just took away everything that was not David.” Nassim Taleb calls this “subtractive epistemology.” He argues that the greatest contribution to knowledge consists of removing what we think is wrong. We know a lot more about what is wrong than what is right. What does not work (i.e., negative knowledge) is more robust than positive knowledge. This is because it is a lot easier for something we know to fail than it is for something we know isn’t so to succeed. Taleb dubs this philosophy “via negativa,” employing a Latin phrase used in Christian theology to explain a way of describing God by focusing on what he is not, rather than on what he is.
• The absence of evidence doesn’t qualify as the evidence of absence. In other words, just because all of the swans that have been observed to date are white, doesn’t prove that all swans are white. One small observation (i.e., spotting a black swan) can conclusively disprove the statement “all swans are white” but millions of observations can hardly confirm it. Thus, disconfirmation is more rigorous than confirmation.

The Feynman technique has four simple steps: 

• 1. Pick and study a topic. 
• 2. Take out a blank sheet of paper and write at the top the subject you want to learn. Write out what you know about the subject as if you were teaching it to someone who is unfamiliar with the topic—and not your smart adult friend but rather a ten-year-old child who can understand only basic concepts and relationships.
• 3. When you must use simple language that a child can understand, you force yourself to understand the concept at a deeper level and to simplify relationships and connections among ideas. If you struggle, you have a clear understanding of where you have gaps in knowledge. This is valuable feedback because you have now discovered the edge of your mental capabilities. Knowing the limits of your knowledge is the dawning of wisdom. 
• 4. Return to the source material, and then reread and relearn it. Repeat step 2 and compile information that will help you fill in those gaps in your understanding that you identified in step 3. Review and simplify further as necessary.

Opportunity Cost 

• Think in terms of opportunity costs when evaluating new ideas and keep a very high hurdle rate for incoming investments. Be unreasonable. When you look at a business and get a strong desire from within saying, “I wish I owned this business,” that is the kind of business in which you should be investing. A great investment idea doesn’t need hours to analyze. More often than not, it is love at first sight.

Probabilities 

• Think probabilistically rather than deterministically, because the future is never certain and it is really a set of branching probability streams. At the same time, avoid the risk of ruin, when making decisions, by focusing on consequences rather than just on raw probabilities in isolation. Some risks are just not worth taking, whatever the potential upside maybe.

More Tools for 1st Principle Thinking

• Never underestimate the power of incentives in any given situation. 
• When making decisions, involve both the left side of your brain (logic, analysis, and math) and the right side (intuition, creativity, and emotions). 
• Engage in visual thinking, which helps us to better understand complex information, organize our thoughts, and improve our ability to think and communicate. 
• Invert, always invert. You can avoid a lot of pain by visualizing your life after you have lost a lot of money trading or speculating using derivatives or leverage. If the visuals unnerve you, don’t do anything that could get you remotely close to reaching such a situation. 
• Vicariously learn from others throughout life. Embrace everlasting humility to succeed in this endeavor.
• Embrace the power of long-term compounding. All the great things in life come from compound interest. 

Additional Truths 

• Knowledge is overrated. Wisdom is underrated. 
• Intellect is overrated. Temperament is underrated. 
• The outcome is overrated. The process is underrated. 
• Short-term outperformance is overrated. Long-term adherence to one’s investment philosophy is underrated. 
• Gross return is overrated. Stress-adjusted return is underrated. 
• Upside potential is overrated. Downside protection is underrated. 
• The maximization of returns is overrated. Avoidance of ruin is underrated. 
• Growth is overrated. Longevity is underrated. 
• Entry multiple is overrated. Exit multiple is underrated. 
• The Price-to-earnings ratio is overrated. The duration of the competitive advantage period is underrated. 
• Categorization of stocks into large-cap, mid-cap, and small-cap is overrated. The categorization of businesses into great, good, and gruesome is underrated. 
• Being more frequently right than others is overrated. Being less wrong than others is underrated. 
• Forecasting is overrated. Preparation is underrated. 
• Confidence is overrated. Humility is underrated. 
• Conviction is overrated. Pragmatism is underrated. 
• Complexity is overrated. Simplicity is underrated. 
• Analytical ability is overrated. Personal behavior is underrated.
•  Having a high-income level is overrated. Inculcating a disciplined saving habit is underrated. 
• Competition with peers is overrated. Helping our peers is underrated. 
• Their large personal net worth is overrated. Good karma is underrated. 
• Talent is overrated. Resilience is underrated. 
• Being the best investor is overrated. Being the most authentic version of you is underrated. 

CHAPTER 3 

OBTAINING WORLDLY WISDOM THROUGH A LATTICEWORK OF MENTAL MODELS

Study the science of art. Study the art of science. Develop your senses—especially learn how to see. Realize that everything connects to everything else. —Leonardo da Vinci

Marcel Proust said, “The real voyage of discovery consists not in seeing new sights, but in looking with new eyes.”

A Chinese proverb goes, “I forget what I hear; I remember what I see; I know what I do.”

 

• Specialize most of the time, but spend some time understanding the broader ideas of the world. That is how one attains worldly wisdom.
• Every statistician knows that large, relevant sample size is their best friend. What are the three largest, most relevant sample sizes for identifying universal principles? Bucket number one is inorganic systems, which are 13.7 billion years in size. It’s all the laws of math and physics, the entire physical universe. Bucket number two is organic systems, 3.5 billion years of biology on Earth. And bucket number three is human history, you can pick your own number, I picked 20,000 years of recorded human behavior. Those are the three largest sample sizes we can access and the most relevant.- Peter Kaufman 
• The fastest way to simplify things is to spot the symmetries, or invariances—that is, the fundamental properties that do not change from one object understudy to another. Things that don’t change 
• But learning the big ideas from the key disciplines is not enough. We need to understand how these ideas interact and combine with each other because this is what leads to “lollapalooza effects.” Munger explains: You get lollapalooza effects when two, three, or four forces are all operating in the same direction. And, frequently, you don’t get simple addition. It’s often like critical mass in physics where you get a nuclear explosion if you get to a certain point of mass—and you don’t get anything much worth seeing if you don’t reach the mass.
• Models are additive. Like building blocks. The more you have, the more things you can build, the more connections you can make between them, and the more likely you are to be able to determine the relevant variables that govern a situation. And when you learn these models, you need to ask yourself under what conditions this tool will fail. That way, you’re not only looking for situations in which the tool is useful but also for situations in which something interesting is happening that might warrant further attention.

Bertrand Russell rightly said, “Most people would rather die than think, and many of them do.” Without great solitude no serious work is possible. —Pablo Picasso

 

I find for myself that my first thought is never my best thought. My first thought is always someone else’s; it’s always what I’ve already heard about the subject, always the conventional wisdom. It’s only by concentrating, sticking to the question, being patient, letting all the parts of my mind come into play, that I arrive at an original idea. By giving my brain a chance to make associations, draw connections, take me by surprise…You do your best thinking by slowing down and concentrating.

 

• Thinking is really hard work. It is why Henry Ford said, “Thinking is the hardest work there is, which is probably why so few people engage in it.” The best ideas come to you in solitude. Brilliant people aren’t a special breed—they just use their minds differently. They practice certain habits of thinking that allow them to see the world differently from others.

The 5 Elements of Effective Thinking, Dr. Edward B. Burger and Dr. Michael Starbird outline some practical ways for us to improve our thinking:

• 1. Understand deeply. When you learn anything, go for depth and make it rock solid. Any concept that you are trying to master is a combination of simple core ideas. Identify the core ideas and learn them deeply. This deeply ingrained knowledge base can serve as a meaningful springboard for more advanced learning and action in your field. Be brutally honest with yourself. If you do not understand something, revisit the core concepts again and again. Remember that merely memorizing stuff is not deep learning. 
• 2. Make mistakes. Mistakes highlight unforeseen opportunities as well as gaps in our understanding. And mistakes are great teachers. As Michael Jordan once said, “I’ve missed more than nine thousand shots in my career. I’ve lost almost three hundred games. Twenty-six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.” The takeaway is that we cannot come out with a correct solution on the first attempt. Start with a probable solution (hypothesis) and continue correcting the mistakes until you arrive at the right solution. Thomas Edison was famous for using this approach for his inventions. When he said that invention is 1 percent inspiration and 99 percent perspiration, the perspiration was the process of incrementally making mistakes and learning from them to make the next attempts apt to be closer to right. “I have not failed. I’ve just found ten thousand ways that won’t work.” 
• 3. Raise questions. If you want to deepen your understanding, you need to raise questions. Do not be afraid to show your ignorance. If you do not understand, ask. The great philosopher Socrates would challenge his students, friends, and even enemies to make new discoveries by asking them uncomfortable questions, core questions, which often led to new insights. 
• 4. Follow the flow of ideas. To truly understand a concept, discover how it evolved from simpler concepts. Recognizing that the present reality is a moment in a continuing evolution makes your understanding fit into a more coherent structure. You cannot discover everything on your own. You need to use the existing idea and improve it. Edison was supremely successful at inventing product after product, exploiting the maxim that every new idea has utility beyond its original intent. He is credited with having said, “I start where the last man left off.” “Many of life’s failures are people who did not realize how close they were to success when they gave up. 
• 5. Change. You need to shrug off a lifetime’s habit of accepting a relatively superficial level of understanding and start learning more deeply. You need to let go of the constraining forces in your life and let yourself fail on the road to success. You should question all of the issues you have taken for granted all those years. View every aspect of your world as a stream of insights and ideas. Be amenable to change. Each of us forever remains a work in progress- always evolving, ever changing. We’re all rough drafts of the person we’re still becoming. 

“I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” 

 

CHAPTER 4 

HARNESSING THE POWER OF PASSION AND FOCUS THROUGH DELIBERATE PRACTICE

You are what your deepest desire is. As is your desire, so is your intention. As is your intention, so is your will. As is your will, so is your deed. As is your deed, so is your destiny. —Upanishads

Take up one idea. Make that one idea your life—think of it, dream of it, live on that idea. Let the brain, muscles, nerves, every part of your body, be full of that idea, and just leave every other idea alone. This is the way to success. —Swami Vivekananda

• According to the Japanese, everyone has an ikigai—a reason for living. And according to the residents of the Japanese village with the world’s longest-living people, finding it is the key to a happy life. Having a strong sense of ikigai—where passion, mission, vocation, and profession intersect—means that each day is infused with meaning.
• According to Gordon Matthews, professor of anthropology at the Chinese University of Hong Kong, how people understand ikigai can, in fact, often be mapped to two other Japanese ideas—ittaikan and jiko jitsugen. Ittaikan refers to “a sense of oneness with, or commitment to, a group or role,” while jiko jitsugen relates more to “self-realization.”
• Abraham Maslow’s hierarchy of needs. Self-actualized people are those who are fulfilled and are doing all that they are capable of. Maslow described the good life as one directed toward self-actualization, the higher need. Self-actualization occurs when you maximize your potential by doing your best.

Focus

• Once we have discovered our calling in life, we need to embrace the power of focus. I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times. —Bruce Lee
• When Bill Gates met Warren Buffett for the first time, their host at dinner, Gates’s mother, asked everyone around the table what they believed was the single most important factor in their success in life. Gates and Buffett gave the same one-word answer: “focus.” Both men agree that relentlessly focusing on one specific passion leads to achievement. And that means pushing aside other ideas and interests until a goal is reached. Intensity is the price of excellence. —Warren Buffett
• Having the ability to focus on what is “important and knowable” is valuable in a world in which we are constantly bombarded with distracting and disparate ideas, information, and opinions.
• Today, an investor’s edge is less about knowing more than others about a specific stock and more about the mind-set, discipline, and willingness to take a long-term view about the intrinsic value of a business.

• Achievement is so ingrained in our culture that we often ignore the fact that gunning to maximize short-term productivity usually comes at the expense of slower but more consistent and durable long-term progress. We live in a society in which inactivity is often frowned upon, but part of our focus should be not just on doing but also on deeply understanding the parameters of what we need to do, now and in the future. Learning and understanding the upfront and changing parameters of the field in which you are participating will help you focus on the right place. As Albert Einstein said, “You have to learn the rules of the game. And then you have to play better than anyone else.” These are incredibly powerful words in the context of focus. Buffett’s genius is that he prioritizes learning so that he can have higher quality insights.

Many people would see this as totally unproductive, but many of my best business solutions and money problem answers have come from periods of just sitting and thinking. —Warren Buffett

• In a knowledge economy, learning and thinking are the best long-term investments you can make in your career. Learning and thinking determine our decisions, and those decisions, in turn, determine our results.
• Investing is a field in which success can flow from passively observing the world, reading, thinking, and doing nothing more than making an occasional telephone call. Most investors would perform better if they thought more and did less. One of the best hacks in the investment field is learning to be happy doing nothing.
• Having a strong passion for lifelong learning is a durable competitive advantage for an investor. What differentiates successful investors from mediocre ones is passion. To be a truly passionate investor means you are always thinking about the future and the direction of the world. It means you are always enthusiastically observing everything around you. Investing isn’t just a process of wealth creation; it is a source of great happiness and sheer intellectual delight for the truly passionate investor. It is great to be passionate in life, but it is wise to be so only for things that are under our control, or else we risk being dejected because of unfavorable outcomes. Value investors derive satisfaction from the mental process of investing and from the learnings embedded in the outcomes. Those who love the process end up with results naturally, unlike others who worship only outcomes.

We have two lives, and the second begins when we realize we have only one. — Confucius

• Instead of merely trying to live a long life, we should endeavor to infuse life into our lives. Too often, life appears short to us because we all seem to have so much to do. But the reality is that life is long if you know how to use it well.
• It is not that we have a short time to live, but that we waste a lot of it. Life is long enough, and a sufficiently generous amount has been given to us for the highest achievements if it were all well invested. But when it is wasted in heedless luxury and spent on no good activity, we are forced at last by death’s final constraint to realize that it has passed away before we knew it was passing. So it is: we are not given a short life but we make it short, and we are not ill-supplied but wasteful of it…. Life is long if you know how to use it. —Seneca
• When you find your North Star, that is, the most important thing that sets your life’s course, you learn where you’re headed. And that is such a good feeling. It is fine for your North Star to change over time. But whatever it is right now, let it guide you.

The only thing you can guarantee at somebody’s birth is his or her death; everything else is unpredictable.

One day your life will flash before your eyes. Make sure it’s worth watching. — Gerard Way

❝Remembering that I’ll be dead soon is the most important tool I’ve ever encountered to help me make the big choices in life. Because almost everything—all external expectations, all pride, all fear of embarrassment or failure—these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart… [emphasis added]. Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma—which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition [emphasis added]. They somehow already know what you truly want to become. Everything else is secondary.❞

 

“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”

 

• Most of us miss out on life’s big prizes. The Pulitzer. The Nobel. Oscars. Tonys. Emmys. But we’re all eligible for life’s small pleasures. A pat on the back. A kiss behind the ear. A four-pound bass. A full moon. An empty parking space. A cracking fire. A great meal. A glorious sunset. Hot soup. Cold beer. Don’t fret about copping life’s grand awards. Enjoy its tiny delights. There are plenty for all of us.
• And therein lies the big life lesson for all of us: this moment is all that we have with us, and we need to prioritize things we want to do now. Take young children. They are in a natural state of happiness; they are neither stuck in the past nor living in anticipation of the future.

Enjoy the little things, for one day you may look back and realize they were the big things. —Robert Brault

Don’t chase things. Make memories. We are all on a journey. No one lives forever. Be generous to those who cross your path. Give to those who need it. Touch hearts and spread happiness, hope, and optimism through your words and actions.

• All our worries and plans about the future, all of the replays in our minds of the bad things that happened in the past is all in our heads (the human mind has a tendency to create issues out of nothing when it’s idle). This worrying just distracts us from living fully right now. Let go of all that and instead focus on what you’re doing right at this moment. You cannot reconstruct the framework of your reactions unless you deconstruct everything first, which you can only do by leaving things behind. Many events in life are outside our control. So we should just let it go and continue putting our best foot forward every day.
• In his Stanford speech, Jobs shared the thought that would set the tone for the rest of his day: “For the past thirty-three years, I have looked in the mirror every morning and asked myself: ‘If today were the last day of my life, would I want to do what I am about to do today?’ And whenever the answer has been no for too many days in a row, I know I need to change something.”
• Every big decision we make in life usually involves some sort of a trade-off. At times, we have to accept small regrets to avoid large ones later. Many people spend so much time worrying about the risks of taking action that they completely overlook the risks of failing to act. Sure, if you don’t take any risk, there’s no failure associated.

Regrets

Regrets will haunt you for the rest of your life. Failure hurts but passes quickly. Conversely, regret hurts forever. It’s hard to look back and face the opportunities missed because of a lack of initiative. Failure doesn’t hurt as much as witnessing how fear led us to mistrust our intuition. You only need to succeed once to unlock a new world of possibilities. Regret is in the nondoing. Many people are experts at success, but amateurs at failure.

Regret Minimization Framework

• Bezos: The framework I found, which made the decision incredibly easy, was what I called—which only a nerd would call—a “regret minimization framework.” So I wanted to project myself forward to age 80 and say, “Okay, now I’m looking back on my life. I want to have minimized the number of regrets I have.” I knew that when I was 80 I was not going to regret having tried this. I was not going to regret trying to participate in this thing called the Internet that I thought was going to be a really big deal. I knew that if I failed I wouldn’t regret that, but I knew the one thing I might regret is not ever having tried [emphasis added]. I knew that that would haunt me every day, and so when I thought about it that way it was an incredibly easy decision.

Developing Talent 

James Clear says, “Motion does not equal action. Busyness does not equal effectiveness.”

• Talent Is Overrated, Fortune magazine editor Geoff Colvin highlights studies that show that greatness can be developed by any individual, in any field, through the process of what he calls “deliberate practice.”It is one of the big ideas from science on human performance.
• Following are some of the key elements of deliberate practice: 
  • 1. It’s repeatable. If you’re a writer, you write a lot. If you are a musician, you know the importance of repeating your notes.
  • 2. It receives constant feedback. Learning occurs when you get lots of feedback tied closely in time to decisions and actions. And deliberate practice constantly refers to results-based feedback. No mistakes go unnoticed. In fact, every error is a crucial piece of information for further improvement. The feedback can come from your observations or from a coach or mentor who notices the things that aren’t always visible to you.
  • 3. It is hard. Deliberate practice takes significant mental effort. 
  • 4. It isn’t much fun. Most people don’t enjoy doing activities that they’re not good at. It’s no fun to fail time and time again and to receive criticism about how to improve. Yet the deliberate practice is designed to focus specifically on those things you are weak at, and this requires you to practice those skills repeatedly until you master them.

Chuck Close says, “Inspiration is for amateurs.”13

Will Durant put it best when he said, “We are what we repeatedly do. Excellence, then, is not an act, but a habit.”

SECTION II 

BUILDING STRONG CHARACTER CHAPTER 5 THE IMPORTANCE OF CHOOSING THE RIGHT ROLE MODELS, TEACHERS, AND ASSOCIATES IN LIFE

I was lucky to have the right heroes. Tell me who your heroes are and I’ll tell you how you’ll turn out to be. The qualities of the one you admire are the traits that you, with a little practice, can make your own, and that, if practiced, will become habit-forming. —Warren Buffett

• In his book The Education of a Value Investor, Guy Spier writes about the importance of finding one’s role models in life: There is a no more important aspect of our education as investors, business people, and human beings than to find these exceptional role models who can guide us on our own journey. Books are a priceless source of wisdom. But people are the ultimate teachers, and there may be lessons that we can only learn from observing them or being in their presence. In many cases, these lessons are never communicated verbally. Yet you feel the guiding spirit of that person when you’re with them.

Teachers open the door, but you must enter by yourself. —Chinese proverb

Nothing, nothing at all, matters as much as bringing the right people into your life. They will teach you everything you need to know. —Guy Spier

• It is better to be an average guy on a star team than a star on an average team. The former will be better for you in the long term; the latter is just an ego trip.
• If you are the smartest person in the room, you are in the wrong room. It is wiser to be with better people and to be uncomfortable than to limit yourself to a mediocre circle just to feel comfortable.
• Trust creates the foundation of all relationships, societies, organizations, nations, and our entire civilization. It is the oil that lubricates our entire economic and business system. Trust drives risk-taking, which leads to innovation and progress.
• In his book, Pebbles of Perception, Laurence Endersen writes, “Our ability to choose is one of life’s great gifts. We are the product of our choices. Good choices come from good character, and a few good choices make all the difference.”

More on choosing role models see Eric Greteins book Resilience 

CHAPTER 6 

HUMILITY IS THE GATEWAY TO ATTAINING WISDOM 

Acknowledging what you don’t know is the dawning of wisdom. —Charlie Munger

• According to Confucius, real knowledge is knowing the extent of one’s ignorance, and this sentiment has been expressed by many philosophers, in one form or another. Socrates, for example, put it quite bluntly when he said, “The only true wisdom is in knowing you know nothing.” Only if we approach learning with an open mind can we truly educate ourselves.

Albert Einstein rings true: “Ego = 1 / Knowledge. More the knowledge lesser the ego, lesser the knowledge more the ego.”

• True expert knowledge in life and investing does not exist, only varying degrees of ignorance. This is not a problem to solve; it is simply how the world works. We cannot know everything, but we can work hard to become just about smart enough to make above-average decisions over time. That is the key to successful compounding.

People couldn’t believe that I suddenly made myself a subordinate partner to Warren. But there are people that it’s okay to be a subordinate partner. I didn’t have the kind of ego that prevented it. There always are people who will be better at something than you are. You have to learn to be a follower before you become a leader. People should learn to play all roles. —Charlie Munger

Humility

• The constant desire to learn so that you can overcome ignorance. Open-mindedness to listen to what makes you uncomfortable. Humility—or lack of it—is reflected through your actions. Not asking. Not learning from others. All because you think you already know. Truly humble people do not experience any uneasy feelings when someone younger but more successful or knowledgeable than them shares advice. If you’re truly happy and satisfied with the life you’re leading, you’ll be happy to see other people succeed. Don’t make this life all about you. Be happy when other people are doing well and encourage their success. When you support others, it shows that you’re not threatened by them because you are confident in your abilities.

Doubt is not a pleasant condition, but certainty is absurd. —Voltaire

The quality of our lives is the sum of decision quality plus luck

• The best cure for overconfidence in your beliefs is to constantly remind yourself that you have experienced less than a tiny fraction of a percent of what has happened in the world. This experience, however, ends up representing nearly 100 percent of how you believe the world works. People tend to believe in what they have personally seen, far more than what they read has happened to others. We are all biased by our personal history. Our installed beliefs are the result of our personal experiences in the past, and they shape our visual prism.
• The question is not “Will I be right or will I be wrong?” The question should be “What is the probability of this scenario versus another, and how does this information affect my assessment of value?” We must always leave room for doubt, even in those ideas that hold our highest conviction. Otherwise, we risk becoming complacent.
• Acknowledging that we do not know something is much more beneficial than having incorrect answers. If we can be certain of one thing, it is that we can never be fully sure. We must learn to live with doubt and embrace uncertainty. We shouldn’t feel anxious about not knowing things. Rather, we should welcome it. Because the realization of not knowing something is an opportunity to learn. In science, “I don’t know” is not an indication of a failure but rather is a necessary first step toward enlightenment.
• The sooner we accept that we live in an uncertain world—that we don’t have all the answers—the sooner we can begin trying to become wiser.
• Incorporating uncertainty in the way we think about what we believe creates open-mindedness to alternative hypotheses, moving us closer to a more objective stance toward information that does not align with what we believe—that is truth-seeking.

 Circle of Competence 

• The basic idea behind the circle of competence is so simple it is embarrassing to say it out loud: when you are unsure and doubtful about what you want to do, do not do it.
• “You have to figure out what your own aptitudes are. If you play games 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’ve got an edge. And you’ve got to play within your own circle of competence.”
• If you want to improve your odds of success in life, business, and investing, then clearly define the perimeter of your circle of competence and operate only inside it. Over time, work to expand that circle, but never fool yourself about its current boundaries.

 

As Feynman says, “The first principle is that you must not fool yourself—and you are the easiest person to fool.”

CHAPTER 7 

THE VIRTUES OF PHILANTHROPY AND GOOD KARMA 

If you are in the luckiest 1 percent of humanity, you owe it to the rest of humanity to think about the other 99 percent. —Warren Buffett

The best “value investment” of all is channeling money into goals that will make your life more valuable: drawing out your innate gifts to make yourself matter to other people and to make the world around you a better place. —Jason Zweig

• Thomas Jefferson, the ‘pursuit of happiness’ has to do with an internal journey of learning to know ourselves and an external journey of service of others.”
• In philanthropy as in business, supporting the right people is more important than all other factors, according to Buffett: “When I buy businesses, it’s the same as investing in philanthropy. I’m looking for somebody who will get the job done and is in synch with my goals…. You can have the greatest goals in the world, but if you have the wrong people running it, it isn’t going to work. On the other hand, if you’ve got the right person running it, almost anything is possible.”

Love is doing small things with great love. It is not how much we do, but how much love we put in the doing. It is not how much we give, but how much love we put in the giving. To God, there is nothing small. —Mother Teresa

Karma Is Like a Big Snowball You can’t live a perfect day without doing something for someone who will never be able to repay you. —John Wooden

 

CHAPTER 8 

SIMPLICITY IS THE ULTIMATE SOPHISTICATION

Most geniuses—especially those who lead others—prosper not by deconstructing intricate complexities but by exploiting unrecognized simplicities. —Andy Benoit

Life is really simple, but we insist on making it complicated. —Confucius

• Simplicity is the result of long, hard work, not the starting point. The ability to reduce something to its essence is the true mark of understanding. But one of the great ironies in life is that when the smartest minds generously share the secrets of their success with us, we ignore them because they sound too basic and simple for us to appreciate.

The simple ideas with intensity of pursuit are what get you to the promised land. —Mohnish Pabrai

• Buffett’s key takeaway from The Intelligent Investor was this: If you eliminate the downside, then all that remains is the upside. After that, the key is to keep emotions in check and be patient. It really is that simple. It’s simple but not easy.

In the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand. —Benjamin Graham

Henry Thoreau recognized this when he said, “Our life is frittered away by detail…simplify, simplify.”

• 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 whose 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
• As investors, our job is simply to compound capital over time at the highest possible rate with the minimum amount of risk.
• Investing is not about being original or creative; it is about looking for the greatest amount of value (for the price paid) with the least amount of risk. Putting in more time and effort does not guarantee better results in investing. Rather, it is more beneficial to do less and make fewer but better choices.
• The more decisions you make, the less willpower you have. It’s called decision fatigue. Focus on making fewer and better decisions.
• “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective…. 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.”

Sherlock Holmes once said, “If you eliminate the impossible, whatever remains, however improbable, must be the truth.”

 

William James, “The art of being wise is the art of knowing what to overlook.”

 

Complexity is about tactics; simplicity is about systems. Tactics come and go but an overarching philosophy about the way the world works can help you make better decisions in multiple scenarios. Simple doesn’t go out of style but complex does. —Ben Carlson

Steps to Simplification 

• The first step in simplification is to avoid wasting time on things that are unknowable and unimportant. Before attacking a problem, ask whether it is important and worth solving.
• The second step for simplification is focus. When we try to accomplish too many things simultaneously, we end up doing all of them poorly. Attention is a scarce resource that gets depleted throughout the day. Yet, we act as if it can be divided unlimitedly with no negative consequence. Decision-making is more effective when we focus on one thing at a time.
  • One of the hardest things to do in life is to avoid good opportunities so that you have time to devote to great opportunities—and having the wisdom to know the difference. We have so many things in our life that we want to do. Who wouldn’t want to succeed at twenty-five different things? But when we chase after twenty-five things at once, that’s when we run the risk of becoming a jack-of-all-trades but a master of none.

• The third step for simplification is to reason backward. Instead of trying to arrive directly at the solution, begin by eliminating the options that are not correct. You get an enormous advantage by narrowing your problem space. You can then focus your time and attention on the more productive areas.

Saying No

• The not-to-do list concept is similar to the primary idea behind Gary Keller and Jay Papasan’s book The ONE Thing. It debunks the theory that multitasking is the path to success. Instead, ask yourself, “What is the most important thing I can do today? What is the one thing that would make everything else in my life either easier or unnecessary?”
• When you say no, you are saying no only to one option. When you say yes, you are saying no to every other option. So be careful to what and to whom you say yes. This choice eventually will shape many things in your life. Every day we have the opportunity to make choices and shape our future; every day is the first day of the rest of our lives.

 

To make good investing decisions, you need to actively look for reasons not to buy the stock in question. Invert, always invert. Simplifying helps us make better decisions by breaking down complex problems into component parts. For example, I ask four inverted questions whenever I am looking at a stock.

1. How can I lose money? versus How can I make money? If you focus on preventing the downside, the upside takes care of itself. 
2. What is this stock not worth? versus What is this stock going to be worth? If you can identify the floor price or a cheap price for a stock, it’s far easier to make profitable decisions. 
3. What can go wrong? versus What growth drivers are there? Rather than focusing just on the growth catalysts, think probabilistically, in terms of a range of possible outcomes, and contemplate the possible risks, especially those that have never occurred. 
4. What is the growth rate being implied by the market in the current valuation of the stock? versus What is my future growth rate assumption? A reverse discounted cash flow fleshes out the current assumptions of the market for the stock. We can then compare the market’s assumptions with our own and make a decision accordingly.

Good investors demonstrate the flexibility to completely change their opinions if necessitated by the facts. They don’t hope they will be right; they keep evaluating why they might be wrong.

It is very simple to be happy, but it is very difficult to be simple. —Rabindranath Tagore

To attain knowledge, add things every day; to obtain wisdom, remove things every day. —Lao Tzu

• Few things in life really matter. Because few things matter, we must think carefully about what really matters to us and then commit our time primarily to those things. That way, we will remain focused on what matters rather than chasing the new thing, which probably will not really matter. The goal is not to have the fewest number of things but to have the optimal number of things. It is habitual for most of us to build incessantly and forget that the endgame should really be happiness and a fulfilling life. It is equally easy to overlook all the goodness we are surrounded by today.

CHAPTER 9 

ACHIEVING FINANCIAL INDEPENDENCE 

It is difficult to get a man to understand something when his salary depends on his not understanding it. —Upton Sinclair

• You cannot really understand how the world truly works unless you have financial independence. Once you achieve this state, it changes everything. It enables you to look at reality in a truly unbiased manner.
• True wealth is measured in terms of personal liberty and freedom, not monetary currency. Money alone does not signify independence. Control overtime does. The only definition of success is to be able to spend your life in your own way.
• Wealth is the accumulated savings, over time, that is left over after you are done spending from your income. Because you can build wealth without a high income but have no chance without any savings, it is pretty obvious which one deserves a higher priority.
• A friend once asked me, “Why make all that money so you can save it?” to which I replied, “Why spend all that money so you need to earn it again?”

 

Money can’t buy a loving family, good health, integrity, ethics, humility, kindness, respect, character, or a clear conscience. The most important things in life are priceless, and, in my view, those are the true measures of wealth. Lasting happiness is achieved by living a meaningful life—a life filled with passion and freedom in which we grow as individuals and contribute beyond ourselves. Growth and contribution are the bedrocks of happiness. Not stuff.

In his book The Geometry of Wealth, Brian Portnoy describes wealth as “funded contentment,” that is, the ability to underwrite a meaningful life in which purpose and practice are thoughtfully calibrated. Wealth derives its real meaning from a personal definition of our inner values.

• Only then can we engage in frequent pauses, self-reflection, and a calm distillation of thoughts, patterns, and wisdom. (This is essential. As investors, we tend to spend too much time reading about what others think or are investing in. As a result, we spend too little time on introspection.)
• Quiet freedom is exotic. Freedom is like income that cannot be taxed. Value investors who achieve financial independence in their thirties or forties spend the rest of their lives doing something that they love: learning more about the world.

Franklin wrote, “I would rather have it said, ‘He lived usefully,’ than, ‘He died rich.’

Steve Jobs once remarked, “You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something—your gut, destiny, life, karma, whatever.”

❝Dogged, incremental progress over a long period of time is the key to success, and this, in essence, is what compounding is all about.❞

I saw that it was the artificial needs of life that made me a slave; the real needs of life were few. —William James Dawson

• We want what we want until we want some more. A process called “hedonic adaptation” determines that we quickly become accustomed to most things in our lives. As a result, experienced happiness is often fleeting. We may have x and think this should be sufficient to live a happy life, but when we see others who have 2x, we think that would make us happier. And then we raise the bar to 3x, 4x, or 10x. This is a sure path to lifelong misery, even if one eventually becomes monetarily rich. Very often, as Dave Ramsey points out, “We buy things we don’t need with money we don’t have to impress people we don’t know.”6 We want to look good over doing good. Consequently, we make choices based on optics, defensibility, and so on. This typically results from not having a strong sense of self and from seeking external validation.

George Lorimer: “It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure that you haven’t lost the things that money can’t buy [emphasis added].”

 

CHAPTER 10 

LIVING LIFE ACCORDING TO THE INNER SCORECARD

To be yourself in a world that is constantly trying to make you something else is the greatest accomplishment. —Ralph Waldo Emerson

The path to true success is through authenticity. —Guy Spier

• There are two kinds of people in life: those who care what people think of them, and those who care how good they really are. Don’t live a life based on approval from others. Be authentic—act in accordance with who you are and what you believe in, or one day your mask will fall off.
• A contrarian isn’t one who always takes the opposite path just for the sake of it. That is simply a conformist of a different sort. A true contrarian is one who reasons independently, from the ground up, based on factual data, and resists pressure to conform.
• If, in your heart, you know who you really are and that the choice you made was absolutely right, then the criticism of others should be considered and analyzed to see whether it truly has any merit, but it should not be given permission to belittle what you are trying to achieve. Let your life be guided by internal principles, not external validation. Self-respect beats social approval. Every time. We are not perfect, nor should we pretend to be, but we always should endeavor to be the best version of ourselves.
• Equity investing is like growing a Chinese bamboo tree. We should have passion for the journey as well as patience and deep conviction after planting the seeds. The Chinese bamboo tree takes more than five years to start growing, but once it starts, it grows rapidly to eighty feet in less than six weeks. As prominent blogger Anshul Khare once aptly remarked, “In the initial years…compounding tests your patience and in later years, your bewilderment.”
• Embracing deferred gratification is what leads to the single biggest edge for an investor. Human nature makes it difficult to utilize this edge. This difficulty is the very reason the edge exists, and because human nature will never change, this edge is a durable one for those who possess the right temperament to capitalize on
• Critical thinking is always difficult, but it’s almost impossible when we are scared. There’s no room for facts when our minds are occupied by fear. Once fear about one aspect gets into the minds of people, they can’t see other things some distance away. We are emotional first and logical second. We are designed that way.

Seeking Wisdom, Peter Bevelin writes, “It is a natural tendency to act on impulse—to use emotion before reason. The behaviors that were critical for survival and reproduction in our evolutionary history still apply today.”

• Neuroscience has shown that the human brain processes value over different time periods inconsistently. We are short-term demanding and long-term inattentive. Our brain is hardwired for immediate rewards.

Kaizen, which is Japanese for “taking small steps for continual improvement.”

The difference between those who fail and those who succeed is the courage to act—repeatedly.

• The idea of kaizen is to make such small changes in your life that your brain doesn’t even realize that you are trying to change and therefore doesn’t get in the way. Kaizen is a neat mental hack that helps us bypass our brain’s fear response.

 

• Once a strong foundation is created for a business, owners don’t work for money. Rather, money works for them. As an investor, your money is working for you 24/7. You are becoming wealthier with each passing second, alongside the increasing intrinsic value of your businesses. Tick, tick, tick.
• It’s not the answers that make you good in the investing business; it’s the questions you ask. Ask the right questions; you’ll get valuable answers.
• Underestimating the power of rewards and punishment. People repeat actions that result in rewards and avoid actions for which they are punished. If people don’t have to pay for a benefit, they tend to overuse it. After a success, we become overly optimistic risk-takers. After a failure, we become overly pessimistic and risk-averse. This happens even in cases in which success or failure was merely a result of chance. We do not improve the man we hang; we improve others by him. Tie incentives to performance. Ensure that people share both the upsides and downsides. Make them understand the link between their performance, their reward, and what you want to accomplish. Reward individual performance, not effort or length of time in the organization.
• Rigid convictions are more dangerous enemies of truth than lies. It is better to be right than to be consistent. Calibration requires an open-minded consideration of diverse points of view and exploration of alternative hypotheses.
• You are more likely to be right if you try to prove yourself wrong. You should hold and explore conflicting possibilities in your mind while steadily advancing toward what is likely to be the truth, based on what you learn along the way.
• Growth requires a steadfast commitment to pivot and adapt. Be open-minded and always triangulate your thesis with people who see things differently from you.
• Our minds are drawn to what feels true, not to what is necessarily so. Every time we pull out a piece of information from memory, we get back a summary that has a lot of missing details.
• When our intuitions pertain to probability and statistics, we shouldn’t trust them. We tend to focus on specific circumstances and to search for evidence within the small world of our personal experiences, a phenomenon known as availability bias. When we have information about an individual case, we rarely want to know the statistics of the reference class to which the case belongs. We tend to forecast based on the information in front of us (availability bias again). We do not consider the succession of possible events that could cause the task to drag on longer. In other words, we ignore the very existence of unknown unknowns.
• According to Kahneman, taking an outside view is a way to break the overconfidence illusion created by planning fallacy. To take an outside view is to take your attention away from your specific case and focus it toward a class of similar cases. Check the statistics of success and failure rates of similar cases in the past. If you want to know how something is going to turn out for you, look at how it turned out for others in similar situations in the past—the base rate.

What can go wrong?

• When making an investment, always ask, What can go wrong? What will be my reaction if those things do go wrong? What are the risks? How likely are the risks? How big are the risks? Can I bear them if they come true? When making decisions under conditions of uncertainty, always think in terms of consequences (and “consequences of consequences”), and not just in probabilities. As Benjamin Franklin wrote in Poor Richard’s Almanack, “He that builds before he counts the cost, acts foolishly; and he that counts before he builds, finds he did not count wisely.”
• Writing Is a Medium for Increased Self-Awareness, Understanding, and Happiness. Journaling turns out to be not just a tool for thinking but also a highly effective medium for focusing our thoughts.

Incentives 

• We do that for which we are rewarded and avoid that for which we are punished. Incentives are at the root of most of the situations we face, and yet we often fail to account for them. The behavior we observe is usually the result of incentives we do not observe. Incentives carry the power to distort our behavior and blind us to reality.
• The iron rule of life is that you get what you reward for.
• It is imperative that we think deeply about the incentive systems we create, because ignoring the second- or third-order effects of an incentive system often leads to unintended consequences, also known as the Peltzman effect.
• It is better to miss rewarding a desirable behavior than to produce an incentive system that promotes cheating behavior, because bad behavior, once rewarded, is habit forming. And then it spreads.
• Charlie Munger recommends, “Anti-gaming features constitute a huge and necessary part of system design. Also needed in the system design is an admonition: dread.” Incentives are not only financial but also include prestige, freedom, time, titles, power, and admiration. All of these are powerful incentives.

In his 1996 letter, Warren Buffett explained Berkshire Hathaway’s incentive compensation principles. It is widely regarded as the blueprint for how organizations should design incentive and compensation structures: Goals should be (1) tailored to the economics of the specific operating business; (2) simple in character so that the degree to which they are being realized can be easily measured; and (3) directly related to the daily activities of plan participants. As a corollary, we shun “lottery ticket” arrangements, such as options on Berkshire shares, whose ultimate value—which could range from zero to huge—is totally out of the control of the person whose behavior we would like to affect. In our view, a system that produces quixotic payoffs will not only be wasteful for owners but may actually discourage the focused behavior we value in managers.

• When you align incentives of everyone in both positive and negative ways, you create a system that takes care of itself. Thinking about the incentives of others is necessary to creating win–win relationships.
• Incentives encourage desirable behavior. Disincentives prevent them.
• The real power of incentives is the ability to manipulate the cognitive process. An otherwise-decent individual may act immorally because he or she is driven by the perverse incentives prevailing in the system.
• When you work in a job for someone else, you could face the same problem. Because incentive-caused bias operates automatically, at a subconscious level, you may be fooled into believing that what is good for you is also good for the client. And so you may find yourself selling addictive and harmful products like tobacco and alcohol, or overpriced and sales-load-heavy insurance and investment products, just for the money.
• Widespread incentive-caused bias requires that one should often distrust, or take with a grain of salt, the advice of one’s professional advisor, even if he is an engineer. The general antidotes here are: (1) especially fear professional advice when it is especially good for the advisor; (2) learn and use the basic elements of your advisor’s trade as you deal with your advisor; and (3) double-check, disbelieve, or replace much of what you’re told, to the degree that seems appropriate after objective thought. —Charlie Munger
• Munger recommends that we should always reflect on the question “What is someone getting out of this?”
• The world cannot be understood without numbers. At the same time, it cannot be understood with numbers alone. Relying solely on complex quantitative analysis can divert our attention away from things that really matter.
• I also have realized that investing is less a field of finance and more a field of human behavior. The key to investing success is not how much you know but how you behave.
• You may be smart, but not necessarily intelligent because intelligence is the ability to arrive at accurate cause-and-effect descriptions of reality.

Jason Zweig explains the constant human urge to predict, in his book Your Money and Your Brain: “Just as nature abhors a vacuum, people hate randomness. The human compulsion to make predictions about the unpredictable originates in the dopamine centers of the reflexive brain. I call this human tendency ‘the prediction addiction’ 

 

CHAPTER 28 

LIFE IS A SERIES OF OPPORTUNITY COSTS 

If you take the best text in economics by Mankiw, he says intelligent people make decisions based on opportunity costs—in other words, it’s your alternatives that matter. That’s how we make all of our decisions. —Charlie Munger

• In the long run, opportunity costs can really matter a lot and sometimes are far more significant than errors of commission. Mistakes of commission are capped at 100 percent, but mistakes of omission have no such ceiling. When people think about costs, they don’t think in terms of opportunity costs. For most people, the explicit out-of-pocket costs carry more meaning than opportunity costs, and because forgone opportunities are not out-of-pocket costs, people underweight them.
• An effective way to counter this bias is to mentally liquidate your portfolio before the start of every trading day and ask yourself a simple question: “Given all the current and updated information I now have about this business, would I buy it at the current price?”
• As an investor, I have a simple rule when looking at new ideas. If I am going to add a new position to my portfolio, it needs to be “significantly better” than what I already own.
• Don’t diversify just for the sake of it. Avoid adding anything to your life, your investment portfolio, or your business unless it makes them better.
• In essence, you make your choices, and then your choices make you. Every decision, no matter how slight, alters the trajectory of your life. Every choice’s compound effect is in action all the time. Your life today is a result of your past choices. Hard choices, easy life. Easy choices, hard life.

 

CHAPTER 29 

PATTERN RECOGNITION

Fear of the unknown is one of the most potent kinds of fear, and the natural reaction is to get as far away as possible from what is feared. Unknown unknowns make most of us withdraw from the game. These, however, are also the circumstances in which extraordinary returns are possible.

• If you have a chance to multiply your money ten to twenty times, and that chance is offset by the possibility that you could lose all of it in that particular commitment, then it is a good bet to be exercised, provided you are sufficiently diversified. This is how to bet in asymmetric payoffs. This is the Babe Ruth effect in action. Provide for low-probability outcomes. Play for high-probability outcomes. This applies to both value investors and corporate capital allocators.

 

CONCLUSION: UNDERSTANDING THE TRUE ESSENCE OF COMPOUNDING 

Life is like a snowball. The important thing is finding wet snow and a really long hill. —Warren Buffett

❝You only get one mind and one body. And it’s got to last a lifetime. Now, it’s very easy to let them ride for many years. But if you don’t take care of that mind and that body, they’ll be a wreck forty years later…. It’s what you do right now, today, that determines how your mind and body will operate ten, twenty, and thirty years from now.❞

• Understand what is truly important to you and pursue your dreams with full dedication in a principled manner. Everything you are looking for is closer than you think, but sometimes you have to go on a journey to find it.

Whatever the mind of man can conceive and believe, it can achieve. Thoughts are things! And powerful things at that, when mixed with definiteness of purpose, and burning desire, can be translated into riches. —Napoleon Hill

Acknowledging the good that you already have in your life is the foundation for all abundance. —Eckhart Tolle

 

• When you appreciate, optimize, and leverage what you do have instead of ruminating over what you don’t have, you have the power to change your circumstances.
• Inhale blessings. Exhale gratitude.
• The difference between winners and losers is that winners take ownership of their mistakes and, as a result, they learn from them and progress in life. The key to learning from mistakes is to acknowledge them without excuses and to make the necessary changes to improve going forward. If you can’t admit your mistakes, you won’t grow. When negative emotions come into play, your mind is telling you that something is wrong on your current path and that you need to change direction. Most people tend to ignore this warning.
• You are not a product of your circumstances. You are a product of what you think. Happiness is all about the quality of thoughts you put in your head, so ensure that you entertain the right ones. Your thoughts influence your words and actions. If you want to be a better person, you need to discipline your mind. When you begin to change yourself internally, the world around you responds. When your consciousness or mental attitude shifts in the right direction, remarkable things begin to happen. Try to read or watch something productive or inspirational before going to sleep. The mind continues to process the last information consumed before bedtime, so you want to focus your attention on something constructive and helpful in making progress with your goals and ambitions.
• The first thing you have to know is yourself. People who are self-aware can step outside and observe their reactions. Self-awareness allows you to experience life twice—first with a detached point of view and second with the usual set of sensorial reactions embed in thoughts and emotions.
• The underlying nature of the universe is insecure, impermanent, and ultimately fleeting. Therefore, don’t seek security, permanence, or prolongation. Instead, make peace with your place in the greater process. The universe is in a constant state of regeneration. To evolve, the new replaces the old. The same applies at the cellular level in the human body. This is a lesson in letting go and detachment. Our body is made up of approximately 37 trillion cells, and each day our body and mind go through countless permutations and transformations. Yet, if we really pay attention, we are bound to discover a single, clear, and authentic voice. 
• Success lies on the same road as failure; success is just a little farther down that road. Keep plugging away; you never know when your next action is going to hit it big. Never give up after putting in hard work and effort, because compounding bestows its benefits on you only after a long time, after testing your patience and conviction to the fullest.
• When you’ve prepared, practiced, worked hard, and consistently put in the required effort, sooner or later you’ll be presented with your moment of truth in life. In that moment, you will define who you are and who you are becoming. It’s not getting to the wall that counts; it’s what you do after you hit it. These are the defining moments of success and progress. Growth and improvement live in those very moments—when we either step forward or shrink back. Instead of quitting every time you hit a mental or physical wall, recognize that your competitors are facing the same challenges. At this moment, if you persist and keep going, you will end up miles ahead. This “little longer” results in a massive expansion of your limits. 
• Every success is an opportunity to demonstrate humility. Every setback is an opportunity to demonstrate resilience and build character.
• Whenever you think that some situation or some person is ruining your life, it’s actually you who are ruining your life. It’s such a simple idea. Feeling like a victim is a perfectly disastrous way to go through life. If you just take the attitude that however bad it is in any way, it’s always your fault and you just fix it as best you can—the so-called iron prescription—I think that really works.
• Through reflection, we learn that adversity is a natural part of life. The purpose of reflecting on adversity is to understand that it is inevitable, indiscriminate, and arbitrary. Bad things can and do happen to good people. But we all have a hidden reserve of great strength inside that emerges when life puts us to the test. You never know how strong you are until being strong is the only choice you have. In the end, we are defined by how we respond to failures and setbacks in our lives. Indifference toward the things outside our control is the essence of the stoic discipline—and it is one of the most liberating realizations in life.
• All of us can find peace by cultivating indifference to things outside our control. Acceptance is pragmatic. We cannot change what has already happened, but we can choose our reaction.
• And our opinion of what happens is entirely up to us. Whatever happens in our lives, our capacity to choose our response is eternal and cannot be taken from us. From this capacity, we can draw great strength.
• When we see the human side of everyone, we learn to accept each other. When we see the good in everyone, we start to develop compassion and understanding and, in so doing, we begin treating others the way we would want to be treated: with honor, dignity, respect, empathy, and humanity. When we learn to see the smallest of positive attributes in everyone, we begin to respect and care for each person we encounter. And that love, friendship, and trust, in turn, brings out the best virtue in each one of us. When we treat people like we wanted to be treated, everyone becomes happier and better, and positivity spreads across our civilization. This is compounding positive thoughts in action.
• James Clear aptly puts it, “The costs of your good habits are in the present. The costs of your bad habits are in the future.”
• Your energy levels are low only when you fail to reinvest into it the means of a stronger foundation. Slowly deconstruct (through workouts, weight training, and meditation) and reconstruct (through sleep, water, and nutrition) the only receptacle your self will ever have. Your body dictates the nature of your thoughts.
• High performance often hides behind boring solutions and underused basic insights.
• Compounding Good Habits What you are is what you have been. What you’ll be is what you do now. —Gautama Buddha The compound effect is always in action, and it doesn’t apply to money only. Intellectual and physical aptitudes behave similarly. A person who puts in continuous effort for ten years may achieve more in one week than someone who, having started six months ago, will achieve in an entire year.
• Duhigg’s research, habits make up 40 percent of our waking hours. These actions add up and make us who we are. And the effects of these actions compound. Every single manifestation of our thoughts and emotions is a direct consequence of a succession of habits that have been compounding through the years. As the saying goes, “First we make our habits, then our habits make us.”
• Do less than you’re capable of, but do it consistently. That is the key to compounding. You have to build a program that you can do for decades, not weeks or months.
• Pursue small, incremental victories. A small, concrete win creates momentum and affirms our faith in our further success. Confidence is like a muscle. The more you use it, the stronger it gets.
• Habits form the foundation of productivity. The more you do automatically, the more you are subsequently freed to do. This effect compounds. Focus on your environment (virtual and physical), because it nudges your subconscious and affects your habits. It is more effective to design an environment in which you don’t need willpower than to rely on willpower to conquer your surroundings.
• Set up an environment that plays to your strengths and minimizes your weaknesses. Remember, acknowledging your weaknesses is not the same as surrendering to them. Acknowledgment is the first positive step toward overcoming weaknesses.
• The real question isn’t “Who am I?” The real question is “Who am I becoming?” We are constantly evolving, but the person you will be in the next five to ten years is feeding on the habits and decisions you make today.
• Our decisions determine our trajectory, but our habits determine how far we travel along that path. To paraphrase James Clear, “Our outcomes are a lagging measure of our habits. Our net worth is a lagging measure of our financial habits. Our knowledge is a lagging measure of our learning habits. Our health is a lagging measure of our eating habits. Our energy is a lagging measure of our sleep habits. Our fitness is a lagging measure of our exercise habits.” We get what we repeat, so our current trajectory matters more than our current results. Success is earned—one day at a time. The seeds of greatness are planted in the daily grind. In his book Good to Great, Jim Collins explains that in the transition from good to great, the flywheel starts slowly, and through consistent, small actions, momentum builds. Most people end up in this cycle: hard, hard, hard, hurt. I’d rather go: slow, slow, slow, never stop. Slow but consistent gains add up much faster than you can imagine. Small, positive changes add up to massive improvements over time (figure 32.1). If we can get 5 percent better every year, then we will be about twice as good in less than fifteen years. In less than thirty years, our growth will be 4×. This is how people with average intellect surpass far more intelligent people. It is also why Peter Kaufman says, “The most powerful force that could be potentially harnessed is dogged incremental constant progress over a very long time frame.”
• When you improve a little each day, eventually big things occur. When you improve conditioning a little each day, eventually you have a big improvement in conditioning. Not tomorrow, not the next day, but eventually a big gain is made. Don’t look for the big, quick improvement. Seek the small improvement one day at a time. That’s the only way it happens—and when it happens, it lasts. —John Wooden
• According to the rule of seventy-two, we double our capital every three years by compounding at 26 percent, ten times in ten years, and one hundred times in twenty years. The day I understood the dynamics of reinvested profit and compound interest, I immediately knew that I was going to become wealthy in my lifetime. I just needed to get started.
• “Money makes money. And the money that money makes, makes money” If Warren Buffett had begun investing at age thirty, he would be worth “only” about $2 billion today. Instead, he started in third grade, accumulated $1 million by the age of thirty, and has around $81 billion today—an extra $79 billion. And more than 99 percent of Buffett’s net worth was created after his fiftieth birthday. The key takeaway is this: the power of compounding is back-loaded. Rule number 1: Never lose money. Rule number 2: Live a long and healthy life.
• “Neither Warren nor I is smart enough to make the decisions with no time to think. We make actual decisions very rapidly, but that’s because we’ve spent so much time preparing ourselves by quietly sitting and reading and thinking.”
• Confucius wrote in “Higher Education”: When things are investigated, knowledge is extended. When knowledge is extended, the will becomes sincere. When the will is sincere, the heart is set right. When the heart is right, the personal life is cultivated. When personal lives are cultivated, families become harmonious. When families are harmonious, government becomes orderly. And when government is orderly, there will be peace in the world.

When you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you…. The more you give love away, the more you get. —Warren Buffett

• It takes a long time to create anything that is valuable. 
• Work hard every day, even without seeing any results in the short term. 
• Keep doing it consistently for a long time without giving up. 
• Enjoy the process and live life according to the inner scorecard. 
• Do not compare yourself to others. Instead, always endeavor to become a better version of yourself compared to what you were the previous day.

Mahatma Gandhi described compounding in all its glory when he said these words: “Your beliefs become your thoughts. Your thoughts become your words. Your words become your actions. Your actions become your habits. Your habits become your values. Your values become your destiny.”

 

SLOW DANCE DAVID L. WEATHERFORD 

Have you ever watched kids on a merry-go-round, or listened to rain slapping the ground? Ever followed a butterfly’s erratic flight, or gazed at the sun fading into the night? You better slow down, don’t dance so fast, time is short, the music won’t last. Do you run through each day on the fly, when you ask “How are you?” do you hear the reply? When the day is done, do you lie in your bed, with the next hundred chores running through your head? You better slow down, don’t dance so fast, time is short, the music won’t last. Ever told your child, we’ll do it tomorrow, and in your haste, not see his sorrow? Ever lost touch, let a friendship die, ‘cause you never had time to call and say hi? You better slow down, don’t dance so fast, time is short, the music won’t last. When you run so fast to get somewhere, you miss half the fun of getting there. When you worry and hurry through your day, It’s like an unopened gift thrown away. Life isn’t a race, so take it slower, hear the music before your song is over.