Why do you want to be an investor? Many would probably say that
they are interested in investing because it’s a way to make
money without working. Or that it would be cool to generate
wealth by merely outthinking others. Or because they want to be wealthy enough
to quit their job and be their own boss. Well, investing can do that for you. But if you only think in terms of what the
money generated from investing can bring you, you are missing a bigger point. Investors win both in life
and in the markets by finding ways to improve
the odds of success. If you act like this, you are not just
likely to get richer than most, but also wiser and happier. This is a top five takeaways summary of
Richer, Wiser, Happier: How the World’s Greatest Investors
Win in Markets and Life. Written by William Green. And this is The Swedish Investor, bringing you the best tips and tools
for reaching financial freedom through stock market investing. Takeaway number 1: Be a Copycat “A wise man ought always to follow
the paths beaten by great men, and to imitate those who
have been supreme, so that if his ability does not equal theirs, at least it will savour of it.” Someone in the investment world who lives by
this wisdom is the Indian investor Mohnish Pabrai. Pabrai has been able to beat the stock market
by about 6% per year, net of fees, since the inception of his
Pabrai Investment Fund 2. How did he do it? By never coming up with
anything smart himself, but simply copying smart ideas
from other people. Now, I don’t want to sound too harsh here, it was very smart of him to come up
with that idea in the first place. Who does he copy? Pabrai used the hashtag moneytok
to get his investment advice. He studies their every move. Follows them like a shadow
into Tesla, Luna and FTX … Okay, no, he copies Warren Buffett. When Monish Pabrai was getting
started in the investing field, he came to the most bizarre realization. Very, very few fund managers
on Wall Street were mimicking the obvious success of Warren Buffett
and his Berkshire Hathaway. They didn’t follow the equivalent of his
ten commandments of the investing world. It was like meeting a group of physicists
who didn’t believe in gravity. Well, Pabrai chose to be a believer. He studied Buffett thoroughly and cloned pretty
much every part of his value investing strategy, right down to the fee structure of
his partnership, which, Buffett had copied from
Benjamin Graham by the way, so there’s some inception here. Pabrai even paid $650,000 in an auction
to go to lunch with Buffett. And, of course, he has visited Berkshire
Hathaway’s annual meetings on multiple occasions for inspiration. Good afternoon, Mr. Buffett,
and good afternoon Mr. Munger. My name is Mohnish Pabrai … Good morning, Mr. Buffett,
and good morning Mr. Munger. My name is Mohnish Pabrai … Just like Pabrai, we should strive
to learn from the best. And not just in investing. In any field we wish to succeed in, we should try to copy the best
who did it before us. Takeaway number 2: Invert, Always Invert Charlie Munger is famous for saying: “All I want to know is where
I’m going to die so I’ll never go there.” At the time of this writing,
Munger has just turned 99, so he must have discovered
something important here. What does it mean to invert something? It means turning a problem on its head. Instead of asking
“how can I be a great partner?” one asks, “how can I be a terrible partner?”. Then you try to backtrack
what might get you there and avoid it. For example, cheating is something that
could wound a relationship beyond repair. So it might not be such a good idea to down
10 beers in a bar when your partner isn’t there but many other attractive people are. I’m not saying that it would be a good idea
to down 10 beers under any circumstances, but I hope you get the point. How do we find an excellent
investment in the stock market? Wrong question! How do we avoid ending up in a really
shitty investment in the stock market? Now we are onto something … Imagine the whole stock market
as a block of marble. You could invest in an index fund and
be satisfied with the whole block, but for those who are willing
to put in the effort, we can transform this block
into a beautiful sculpture, by removing bad investment ideas. Chipping away at them, one by one, by one, by one, by one. For starters, many great value investors remove
anything that is outside their circle of competence. Bye-bye to everything that
cannot be understood. Then we kick out businesses with incompetent
and/or dishonest management. See you later. After this, we look at
the prospects of the business. Does it look like something that you might
want to invest in even in 10 years time? If not … Finally, insist on a reasonable price
when purchasing this company. There are no strict rules here. The cheaper, the better. I currently don’t own a single company
with a P/E higher than 12. Takeaway number 3:
Focus on the Ultra-Long Run The investor Nick Sleep and his partner Zack
started their Nomad Investment Partnership on the 10th of September 2001. To be sure, others have begun their investment
journeys during less volatile circumstances, but Sleep and Zack were
successful nonetheless. During 14 years, they beat the MSCI World
index by about 800% points. Their secret sauce? Focusing on the ultra-long run. Nick Sleep thinks that all information
has a shelf-life, and he is only interested in learnings
stuff that is useful for very long. One thing that neither he nor Zakaria thinks
of as useful information is price fluctuations. Therefore, they’ve placed their only
computer with a Bloomberg Terminal, a terribly expensive service that most
Wall Streeters view as a status symbol, on the short side of a table with no chair. This minimizes the time that
they can spend there, very smart. Instead, they allocate most of their time
to devouring annual reports and interviewing people at companies,
Phil Fisher style. They are seeking answers
to questions such as: - Where does the company
want to be in 10 to 20 years? - What must management do today
to reach that destination? - What could hinder the business
from reaching that destination? This approach is worlds apart from
the generally accepted rule on Wall Street to focus on the earnings of
the next quarter. It’s an obvious way to get
ahead in the long run. Here’s how knowledge accumulates
in the mind of someone devoted to information
with a long shelf-life vs someone only being fed
social media and clickbait daily news. Another interesting thing that Sleep and Zack
did that shows their dedication to the long run is that they had a truly fair fee structure. They only made money as long as
their investors did. This of course helped them maintain great
personal relationships with their investors. And having great personal relationships is something old people admit as being
one of the most important ingredients for happiness in life. The clearest message that we get
from this 75 years study is this: Good relationships keep us
happier and healthier, period. In a world where everyone is going
for instant gratification (and Wall Street is certainly
no exception here) the competition for these types of
bets on the ultra-long run is very low. Therefore, the chance of succeeding is
disproportionately high. Takeaway number 4:
Decisions Made Under Uncertainty Investors are faced with
a peculiar problem. We are playing a game of
guessing the future, and the rules of this game are
elusive and uncertain. Nature, economics, markets,
industries, companies, everything is in constant flux. Yet, investors must bet very real money on
these unknowable circumstances. At a first glance, this may seem like some
nasty trap set up by a guy from a horror movie, but there are good and bad
ways of playing this game. Here are three rules for making
decisions under uncertainty. Rule number one is that we must
be honest about our limitations. Famed investor Howard Marks has said that: “I’ll do anything except spend the rest of my life
choosing between Merck and Eli Lilly. Nobody is going to get that right
more than fifty percent of the time.” Merck and Eli Lilly are two of the largest
pharmaceutical companies out there. I think Marks is pointing to two
important limitations here. First – he doesn’t think that he has
an edge against everyone else in really crowded large-cap stocks. Second – some industries are just
more difficult to predict than others. Who’s going to produce
the next blockbuster medicine? It’s a question that’s too tough to answer. Rule number two is to use history
as a rough guide for the future. A growing company is more likely to continue
to grow than a declining one. A cyclical company is more likely to continue
to be cyclical than not. A product that has been around for
long time is more likely to stay around than something that just
recently became popular. Etcetera. Rule number three is understanding
potential vulnerabilities and actively trying to minimize these. In investing and in life, it is simpler
to realize that a risk exists than it is to predict when an event might
come along and expose this risk. For example, if you are driving on an icy
road in the middle of the night, there’s a risk. You don’t need to try to predict exactly
when or where you might slide off. No. You just lower your speed. The keyword isn’t predicting
but preparing. This is super easy to apply
in the world of investing too. You can identify friends that are doing the
equivalent of driving fast on an icy road by observing if they: - Have a very low number of
stocks, say, less than 5 - Are concentrated in just
a few industries - Have a portfolio with a very high average
P/E ratio, say, higher than 25 - Are using much leverage If these friends are
boasting high returns, you can congratulate them, or you can warn them,
the choice is yours. Just don’t join them in the car, because they may well be sliding off
into a tree soon. Takeaway number 5:
A Non-Perfect Perfect Strategy According to Joel Greenblatt, the manager of Gotham Capital and author of “The Little Book
that Beats the Market”: “The best investment strategy is not
the highest returning one, but the highest returning one that
you are able to stick with.” You might hear this and think “well … duh”, but from personal experience, I must say
that this is harder to apply than expected. On numerous occasions, both
within the field of investing, but also within areas such as working out, productivity and friendship, I’ve been stuck in the starting blocks because
I’ve been obsessed with optimizing. It’s all or nothing, if I can’t do it
the best way, why bother at all? For example, I went to the gym
the other day to train legs (yes, really). I warmed up and hit the bar to do some squats
because that’s what my programming told me to, but my groin was bothering me,
so I couldn’t finish the exercise. So … I went home. What’s the problem here? I forgot why I went to the gym
in the first place, which is to stay healthy, and, probably, in this case, to build
some nice glutes and quads. When I couldn’t execute
the optimal protocol, I just abandoned the whole thing. Here's another example,
from the investment world. I started this YouTube channel in mid-2018. For about a year, I was finishing my master’s
degree and building this channel simultaneously. That didn’t leave me with much time
to think about individual stocks. When I couldn’t pick individual companies,
I paused investing altogether, I let all my money just sit in cash. This is really stupid, I should have
invested my money in an index fund. My end goal is not to invest in stocks per se, it’s to snowball my saved capital. Investing in an index would
have satisfied that too. I think that’s a keyword here. Satisfy. Mostly, you want to strive to be a “satisfier”
rather than an “optimizer”. Mathematically speaking,
if you see a 10 and an 8, but for some reason, it is impossible
for you to get the 10 right now, don’t just abandon the 8. 8 is really good. As long as you are directionally correct,
you’ll get ahead. Keep putting one foot in front of the other and
eventually, you’ll see some amazing results. This mindset will not only increase
your chances of succeeding, but it will also make you happier
on your way toward your goals. Being dissatisfied while getting
8s is a horrible way to live. Sometimes a non-perfect strategy is
your perfect strategy. So, to become richer, wiser,
and happier, you should: - Copy the best within the field
you wish to excel in - Focus on avoiding terrible outcomes
just as much as hitting jackpots - Commit to the ultra-long run - Admit limitations, use history as a proxy for the future and decrease vulnerabilities
in an uncertain world; and - Remember what the military
strategist Cal von Clausewitz said: “The greatest enemy of a good plan is
the dream of a perfect plan.” Even a non-perfect perfect strategy
requires changing your habits. An awesome book that can help you
with that is James Clear’s Atomic Habits. Check out my 5 takeaways from that one. Cheers guys!
