I think it's important to discuss just how easy it is for any of us to get caught up in things that might seem unthinkable--to get sucked into the wrong environment and make moral compromises that can tarnish us terribly. We like to think that we change our environment, but the truth is that it changes us. So we have to be extraordinarily careful to choose the right environment--to work with, and even socialize with, the right people. Ideally, we should stick close to people who are better than us so that we can become more like them.
It was a powerful example of what happens when we heed Joseph Campbell's injunction to "follow our bliss": new paths open up, and we feel a joy at being alive.
The efficient-markets hypothesis, which is a powerful and theoretically useful assumption about how the world works. This hypothesis holds that financial prices reflect all of the information available to participants in the market. That has profound implications for investors. If it were true, there would be no bargains in the stock market since any price anomalies would be instantly arbitraged away. In the real world, this is simply not true. But it took me a decade to realize it.
In retrospect, I've come to see that this is a smart strategy for life: whenever I have the choice of doing something with an uncertain but potentially high upside, I try to do it. The payoffs may be infrequent, but sometimes they're huge. And the more often I pick up these lottery tickets, the more likely I am to hit the jackpot. This is an application of a powerful philosophy that Mohnish describes in his book The Dhandho Investor: The Low-Risk Value Method to High Returns. As he puts it, "Heads, I win. Tails, I don't lose much."
Robbins hammered into my head the idea that, if you want to get somewhere, anywhere, and you're stuck, "Just Do It! Just make a move. Any move!" This might be obvious to many. Hell, it was obvious to me. But my bias toward analysis-paralysis meant that it was easier for me to pontificate in a library than to act. Robbins convinced me that I had to break the patterns of negative thought, push through my fears, and get moving.
Another cornerstone of my reeducation involved studying Buffett's investment strategy with even greater intensity. There's no better way to do this than to read Berkshire Hathaway's annual reports.
Desperate to figure out how to lead a life that was more like his, I began constantly to ask myself one simple question: "What would Warren Buffett do if he were in my shoes?" I didn't ask this question idly while sitting in a coffee shop sipping a cappuccino. No. I sat down at my desk and actively imagined that I was Buffett. I imagined what the first thing would be that he would do if he were in my shoes, sitting at my desk. Robbins describes this process as "modeling" our heroes. The key is to be as precise as possible, picturing them in as much detail as we can.
As I looked for more opportunities to thank people, I found that I truly did become more thankful. And the more I expressed goodwill, the more I began to feel it. There was something magical about this process of getting outside myself and focusing on other people.
I didn't understand this at the time, but I now see that every letter I wrote was an invitation for serendipity to strike. To many people, it might seem like a waste of time. But I couldn't win the lottery without a ticket, and these tickets were almost free. In a sense, this is a value investing approach to life: pick up something cheap that may one day prove to be precious.
Many of the best ideas are already out there for us to see; we just have to clone them.
Some businesses succeed because they get one thing right, but most succeed because they get a lot of small things right. A key aspect of my real-world education involved learning to take more and more of these intelligent but practical actions on a micro level: writing thank-you notes, picking a great place for breakfast, listening actively to what people told me, or treating them the way I wished to be treated. Over a lifetime, a myriad of simple actions like these can accumulate to create big reputational and relationship advantages. It's not about luck. It's about working harder to get these things right so that it becomes more likely that something good will happen.
I would find myself sitting with Mohnish at the front of the room, enjoying a perfect view of Warren and Charlie. This was a much better place from which to learn than the back row, where I had previously been a more passive and even judgmental observer. As I had come to realize, if you're going to do something, it's best to commit to it with wholehearted gusto.
Creating the Ideal Environment
There are plenty of useful things I learned at university that shouldn't be junked. For example, it's indispensable for any serious investor to know how to read a company's accounts. This doesn't mean simply grasping the difference between cash and accrual accounting. It also involves understanding the various ways that accounting rules can be used to skew the headline earnings numbers, not to mention the ability to tell whether the quality of earnings is increasing or decreasing. If you've picked up an MBA or a CFA, you've already gleaned the basic mechanics of this type of analysis. If not, there are lots of books that can impart this fundamental knowledge, including seminal works by Ben Graham and David Dodd, Marty Whitman, John Mihaljevic, Seth Klarman, and Joel Greenblatt.
Following my move to Zurich, I focused tremendous energy on this task of creating the ideal environment in which to invest--one in which I'd be able to act slightly more rationally. The goal isn't to be smarter. It's to construct an environment in which my brain isn't subjected to quite such an extreme barrage of distractions and disturbing forces that can exacerbate my irrationality.
At one end of the corridor, I have a "busy room," with a phone, a computer, and four monitors. But I keep the computer and the monitors on an adjustable-height desk, which I typically position so that I have to stand beside it. Responding to emails is a low mental task, but it's easy to get sucked into it for long stretches of time. So I've intentionally set up the desk in a way that prevents me from sitting at it. This might seem perverse, but the goal is to create an office that gives me the space to think quietly and calmly. Minor adjustments like this awkward positioning of the computer help to stack the odds in my favor. At the other end of the corridor, I have a room that I call the library. Here, there's no phone or computer. I want to encourage myself to spend more time sitting and thinking, so this room is designed to be warm and welcoming. I can take piles of financial documents to study in there or select a book from the shelves that line the walls. If I close the door, it means that nobody is allowed to bother me. The library also serves as a nap room.
A New Sense of Playfulness
Mohnish and I also set up a mastermind group of eight people, the Latticework Club, which meets every few months to share what's going on in our lives and to support one another. This group has helped me to open up emotionally and to introspect in a more systematic way.
With my bridge hat on, I'm always searching for the underlying truth, based on insufficient information. The game has helped me to recognize that it's simply not possible to have a complete understanding of anything. We're never truly going to get to the bottom of what's going on inside a company, so we have to make probabilistic inferences.
I was also struck by the memorable mantra of a chess champion, Edward Lasker, who remarked, "When you see a good move, look for a better one." Applying this insight to stocks, I modified his mantra, often telling myself, "When you see a good investment, look for a better investment." Indeed, as Munger has pointed out, there's a common tendency to like a particular idea--whether it's a chess move or an investment--because it was the first one that popped into our heads. But is it really superior? Chess highlights the need to keep searching for a better move even after the brain has latched onto that first idea. Playing chess also strengthens this particular mental muscle.
Investing Tools: Building a Better Process
Stop Checking the Stock Price. As Buffett has said, when we invest in a business, we should be willing to own it even if the stock market were to close the next day and not reopen for five years. If I were managing solely my own account, I'd set up a system in which I'd look at the price of my holdings only once a quarter, or possibly even once a year. The Rule: Check stock prices as infrequently as possible.
If Someone Tries to Sell You Something, Don't Buy It. The problem is that my brain (and most likely your brain too) is awful at making rational decisions when confronted with a well-argued, detailed pitch from a gifted salesperson. So I adopted a simple rule that has proved extraordinarily beneficial. When people call to pitch me anything at all, I reply in as pleasant a manner as possible, "I'm sorry. But I have a rule that I don't allow myself to buy anything that's being sold to me." The Rule: If the seller has a self-interest in me buying, I ain't buying.
Don't Talk to Management. The Rule: Beware of CEOs and other top management, no matter how charismatic, persuasive, and amiable they seem.
Gather Investment Research in the Right Order. Socially, it might seem awkward to insist on getting an idea in writing first. But it's important to take as much heat and emotion as possible out of the research process. In my experience, I'm much better at filtering what I read than what I hear. My routine is to start with the least biased and most objective sources. These are typically the company's public filings, including the annual report, 10K, 10Q, and proxy statement. After working my way through the corporate filings, I typically turn to less objective corporate documents--things like earnings announcements, press releases, and transcripts of conference calls. The corporate filings are my meat and vegetables--less enjoyable, but usually more nutritious. As for the equity research published by brokerage firms, I read little of it, and I never rely on it. The Rule: Pay attention to the order in which you consume information. And don't eat your dessert until you've finished your meat and vegetables.
Discuss Your Investment Ideas Only with People Who Have No Axe to Grind. If I want somebody else's perspective (and I often do), I find it more useful to seek out the opinion of a trusted peer on the buy side. In my experience, the best people to speak with about investments aren't just intelligent but have an ability to keep their ego out of the conversation. As a result, these discussions tend to be playful and fun, and they don't disturb my calm pond. The Rule: Pool your knowledge with other investors, but stick with people who can keep their ego in check.
Never Buy or Sell Stocks When the Market Is Open. The Rule: Keep the market at a safe distance. Don't let it invade your office or your brain.
If a Stock Tumbles after You Buy It, Don't Sell It for Two Years. Once again, it acts as a circuit breaker, a way to slow me down and improve my odds of making rational decisions. Even more important, it forces me to be more careful before buying a stock since I know that I'll have to live with my mistakes for at least two years. That knowledge helps me to avoid a lot of bad investments. The Rule: Before buying any stock, make sure you like it enough to hold on for at least two years, even if the price halves right after you buy it.
Don't Talk about Your Current Investments. The Rule: Don't say anything publicly about your investments that you may live to regret.
An Investor's Checklist
A sage observation of Buffett's: "The key to life is figuring out who to be the batboy for."
The checklist is invaluable because it redirects and challenges the investor's wandering attention in a systematic manner. I sometimes use my checklist in the middle of the investing process to deepen my understanding of a company, but it's most useful right at the end as a way of backstopping myself.
Are any of the key members of the company's management team going through a difficult personal experience that might radically affect their ability to act for the benefit of their shareholders? Also, has this management team previously done anything self-serving that appears dumb?
Is this company providing a win-win for its entire ecosystem? I want to invest in companies that control their own destiny, not in companies that have their destiny determined by forces beyond their control
How could this business be affected by changes in other parts of the value chain that lie beyond the company's control? For example, are its revenues perilously dependent on the credit markets or the price of a particular commodity?
Is this stock cheap enough (not just in relative terms)? Am I sure that I'm paying for the business as it is today--not for an excessively rosy expectation of where it might be in the future? Does this investment satisfy me psychologically by meeting some unmet personal need? For example, am I keen to buy it because it makes me feel smart?
Doing Business the Buffett-Pabrai Way
Nothing, nothing at all, matters as much as bringing the right people into your life. They will teach you everything you need to know.
The more you give love away, the more you get.
There are countless ways of improving the circles in which we operate. Some of these are so obvious that it's tempting not to mention them at all. But these simple, practical steps have made such a difference to my life that I'll briskly mention some of them, even at the risk of sounding trite. For example, I joined various organizations where I could regularly rub shoulders with people who are better than me in a multitude of ways. I also joined Toastmasters, which teaches leadership through public speaking. I also consciously moved away from dealing with anyone who struck me as mysterious or opaque in any way.
The key, in my experience, is to value people as an end in themselves, not as a means to our own ends.
Guide to Further Reading
The Intelligent Investor: The Definitive Book on Value Investing by Benjamin Graham is where it all started for me. Four other books that deserve to be read and reread many times are Seth Klarman's Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor; Joel Greenblatt's You Can be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits; The Aggressive Conservative Investor by Martin J. Whitman, Martin Shubik, and Gene Isenberg; and John Mihaljevic's The Manual of Ideas: The Proven Framework for Finding the Best Value Investments. Before I discovered value investing, I was also captivated by two other investment classics: Edwin Lefèvre's Reminiscences of a Stock Operator and The Alchemy of Finance by George Soros.
Security Analysis by Benjamin Graham and David Dodd
The Dhandho Investor: The Low-Risk Value Method to High Returns by Mohnish Pabrai
The Manual of Ideas: The Proven Framework for Finding the Best Value Investments by John Mihaljevic
Heroes, Mentors, and Role Models
Roger Lowenstein's biography Buffett: The Making of an American Capitalist was the first book that I consciously used to help me "model" Warren Buffett.
Another marvelous glimpse inside the mind of a master is Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger, which includes his eye-opening analysis of the causes of human misjudgment.
For me, the central figure here is Tony Robbins. Awaken the Giant Within: How to Take Immediate Control of Your Mental, Emotional, Physical, and Financial Destiny! provides as good an introduction as any to his ideas, as do his various recordings.