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 5 Big Ideas From 10 Of The World’s Best | Safal Niveshak

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 5 Big Ideas From 10 Of The World’s Best | Safal Niveshak

Contents
Preface 4

Guy Spier 5

Jeff Bezos 8

Jesse Livermore 16

Mark Zuckerberg 19

Michael Mauboussin 22

Mohnish Pabrai 25

Parag Parikh 28

Peter Thiel 31

Seth Klarman 34

Nassim Nicholas Taleb 38

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Preface
John Templeton said, “Success leaves traces.”

Although it's an equally good advice to blaze a new trail than to follow a so
called beaten up 'trace' but what's more important is to know that the traces
left by successful people isn't very obvious.

Since everybody has a different definition of success, the first step is to find
who your role models are.

And believe me, in today's society overburdened with mostly redundant

information, it's a difficult task to discover who are the people worth
emulating.

Here is an attempt to distill out the most important lessons from people who
are considered very successful in business and investing.

The lessons that we present here aren't really iron rules. They are more of a
gentle nudge to drive your thinking in different directions and then it's up to
you to figure out what works best for yourself.

All the best!

With respect,
Vishal Khandelwal
Safal Niveshak
www.safalniveshak.com

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Guy Spier
Guy Spier is a value investor who manages Aquamarine
Fund in Switzerland. He is known for paying $650,000 (in
partnership with Mohnish Pabrai) to have lunch with Warren
Buffett. With educational degrees from from Oxford and
Harvard he has an elite background.

He has written a wonderful book called “The Education Of A

Value Investor”. We find Guy’s book amazing because it talks
less about value investing rules and more on a value investor’s
character development.

Here are 5 big things you can learn from Guy, on how to invest and how to live a
successful life.

1. Adversity Is a Great Friend

Adversity is a great tool to accelerate the inner growth. He writes in his book...

“Adversity may, in fact, be the best teacher of all. The only trouble is that it takes a long
time to live through our mistakes and then learn from them, and it’s a painful process.”

On coping with adversity, he writes…

"One way that I coped with the stress was to apply a strategy I had learned from Tony
Robbins: studying heroes of mine who had successfully handled adversity, then imagining
that they were by my side so that I could model their attitudes and behavior.

One historical figure I used in this way was the Roman emperor and Stoic philosopher
Marcus Aurelius. At night, I read excerpts from his Meditations. He wrote of the need to
welcome adversity with gratitude as an opportunity to prove one’s courage, fortitude, and
resilience. I found this particularly helpful at a time when I couldn’t allow myself to become
fearful."

A large part of a person’s character is built through adversity. This is also true of the stock
market where people who have created the maximum wealth have done it through the
most trying of times.

2. Value People
It’s important to see and treat people not as ladders on which one must climb to achieve
one’s personal success, but as part of a wonderful ecosystem where one can survive and
prosper only when others survive and prosper.

Guy says…

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“The key, in my experience, is to value people as an end in themselves, not as a means

to our own ends. Mohnish (Pabrai) often quotes a beautiful line from the Bible, “I am but
dust and ashes.”

Thanks in large part to Mohnish and Warren, I began to realize that I ought to focus more
on what others need from me instead of constantly trying to get them to fulfill my own
needs. This might sound obvious, but it’s been a huge psychological shift for me, and it’s
really changed the way that I live my life.”

No wonder why Buffett treats shareholders and managers in his acquired businesses as
he would wish to be treated if the positions were reversed.

3. Find Role Models

Role models are highly important for us psychologically, helping to guide us through life
during our development, to make important decisions that affect the outcome of our lives,
and to help us find happiness in later life.

Guy also talks about the criticality for a budding value investor to find his role models
early in life…

“…there is no more important aspect of our education as investors, businesspeople, 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.”

The idea is to never stop looking, as role models can be great people who left much
behind them for you to follow. Role models may change your outlook on certain issues,
and by that change you entirely.

4. Be Authentic
In a world where most money managers and investors aspire to be the “next Warren
Buffett”, Guy writes…

"Instead of trying to compete with Buffett, I should focus on the real opportunity, which is
to become the best version of Guy Spier that I can be. It reminded me of an old joke that
Warren likes to tell: “How do you beat Bobby Fisher?” Answer: “Play him at anything other
than chess.”

I couldn’t beat Warren at his own game. But I could certainly follow his example. What
impressed me most about him that day was not just his mental firepower, but the fact that
he lived in a way that was totally congruent with his own nature. Nothing seemed to be
misaligned. He had evidently spent his life trying to be true to himself.

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This became my own goal: not to be Warren Buffett, but to become a more authentic
version of myself. As he had taught me, the path to true success is through authenticity."

Honestly accepting mistakes and learning from them is one of the ways to cultivate
authenticity as an investor. Creating an investment process that suits your temperament
– and not one that blindly copies other investors – is another.

The simple idea is that – to succeed in life and in investing, you have to be the real ‘you’.

As Oscar Wilde said, “Be yourself; everyone else is already taken.”

5. Love Is The Real Success In Life

Guy quotes Warren Buffett as saying this to college students…

“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 love you. I know people who have a lot of
money, and they get testimonial dinners and they get hospital wings named after them.
But the truth is that nobody in the world loves them. If you get to my age in life and nobody
thinks well of you, I don’t care how big your bank account is, your life is a disaster. That’s
the ultimate test of how you have lived your life.

...But the only way to get love is to be lovable...The more you give love away, the more
you get.” Of all the lessons that Warren has taught me, perhaps this is the most
important.”

This is one of our biggest takeaways from the book.

Conclusion
We will leave you with one thought that Guy shares about value investing. He writes that
value investing is “pretty hard to beat if your goal in life is to get rich.” He writes…

“Sure, there are times when it falls out of favor, when even the greatest practitioners find
themselves dismissed as fusty has-beens who have lost their touch. But it’s such a robust
and fundamentally sound way to invest that it eventually regains its luster. Irrational
exuberance comes and goes. The quest for value endures.”

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Jeff Bezos
Jeff Bezos is a technology entrepreneur and the founder
and CEO of Amazon, the largest Internet retailer in the
world. With the passing of Steve Jobs, Bezos is now tech’s
leading philosopher-CEO. His advice ranges from what to
read and how to deal with stress. Mostly, though, he sticks
to business.

Here are 5 big things you can learn from Bezos, on how to
do business and how to look at businesses from an
investor’s point of view.

1. Think Really Long Term

This is what Bezos said in an interview in 2011 (emphasis ours) …

If everything you do needs to work on a three-year time horizon, then you’re competing
against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re
now competing against a fraction of those people, because very few companies are
willing to do that. Just by lengthening the time horizon, you can engage in endeavors
that you could never otherwise pursue. At Amazon we like things to work in five to
seven years. We’re willing to plant seeds, let them grow—and we’re very stubborn. We
say we’re stubborn on vision and flexible on details.

In some cases, things are inevitable. The hard part is that you don’t know how long
it might take, but you know it will happen if you’re patient enough. EBooks had to
happen. Infrastructure web services had to happen. So you can do these things with
conviction if you are long-term-oriented and patient.

What a wonderful and sustainable moat this is – long-term thinking. Whether you are an
entrepreneur or an investor, by thinking and acting (investing) long-term, or just by
lengthening the time you stay with a good quality business, you can create wealth you
could have never thought of.

Here is something else we read on Bezos’s long-term thinking in the amazing book Bold…

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2. Focus on What’s NOT Going to Change

This lesson is closely related to the first one above i.e., long term thinking. Here’s more
on this from Bold…

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Focusing on “what’s not going to change” is what causes companies to endure over long
periods of time. Look at the biggest wealth creators in the history of the world, or in India.
Those have been the businesses where things have not changed much over long period

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of time. And we are not talking about companies that did not change despite seeing
changes in their industry (Nokia, MTNL, Kodak, etc.), but rather about companies that
have continued to provide tremendous value to customers (the core of any business),
even while changing with changing times.

3. Focus Intensely on the Customer

This lesson holds special relevance for an entrepreneur, but also applies to investors. “Do
the customers love this business and the products/services it sells?” and “Have they loved
this business for the past few years?” is what you as an investor must ask while analyzing
a business. Here is what the authors write on Bezos in Bold…

4. Experiment, Experiment…Repeat
Honestly speaking, it’s difficult to consider companies for investment that are
experimenting a lot by venturing into unrelated areas through mindless acquisitions. But
continuous experimentation within their circles of competence is an attribute of great
entrepreneurs, like Bezos.

Here’s Bezos on ‘experimentation’ and ‘living with being misunderstood and criticized’…

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5. Accept Failure and Move On

Warren Buffett said…

You’re going to make mistakes. You can’t play in the game without making any mistakes.
I don’t think about it, I just move on. Most business mistakes are irreversible setbacks,
but you get another chance. There are two things in life that you don’t get another chance
at – marrying the wrong person and what you do with your children. Business, you just
go on. It’s a mistake to dwell on mistakes, it’s unproductive. It’s like Mark Twain’s story
about the cat that sat on a hot stove – he never sat on a hot stove again, but he never sat
on a cold one again either.

Life teaches us each day that stuff happens (and sometimes shit happens!), but we don’t
need to give each of our experiences a label. Good, bad, hard, easy, success, failure etc.

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do not exist but as labels in our minds. All we need to do to hold our head high is to break
through these labels.

Here’s what Bezos says on dealing with failure…

Conclusion
To sum up, here are the five big things you can learn from Jeff Bezos -

1. Think really long term

2. Focus on what’s NOT going to change
3. Focus intensely on the customer
4. Experiment a lot
5. Accept failure and move on

And here are some more, straight from Jeff…

1. On never stopping to learn - “This is Day 1 for the Internet. We still have so much
to learn.”

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2. On telling stories that sell - “In the old world, you devoted 30% of your time to
building a great service and 70% of your time to shouting about it. In the new world,
that inverts.”

3. On minimizing regrets in life - “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.’”

4. On being flexibly stubborn - “The thing about inventing is you have to be both
stubborn and flexible, more or less simultaneously.”

5. On being realistic - “It’s very important for entrepreneurs to be realistic. So if you

believe on that first day while you’re writing the business plan that there’s a 70
percent chance that the whole thing will fail, then that kind of relieves the pressure
of self-doubt.”

6. On making bold decisions - “We will make bold rather than timid investment
decisions where we see a sufficient probability of gaining market leadership
advantages. Some of these investments will pay off, others will not, and we will
have learned another valuable lesson in either case.”

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Jesse Livermore
Living in the early part of the 20th century, Jesse
Livermore is considered one of the greatest traders that
few people know about. A book on his life written by Edwin
Lefèvre, "Reminiscences of a Stock Operator" (1923), is
highly regarded as a must-read for all traders, though it
has some great lessons for long-term investors too.

Here are 5 big things you can learn from Livermore on

investing your money, or even speculating with it. On
some of the following lessons, he failed to follow his own
advice...but these surely serve as great lessons for us
investors.

1. It’s More About Sitting than Buying

After spending many years in Wall Street and after making and losing millions of dollars I
want to tell you this: It never was my thinking that made the big money for me. It always
was my sitting. Got that? My sitting tight!

It is no trick at all to be right on the market. You always find lots of early bulls in bull
markets and early bears in bear markets. I’ve known many men who were right at exactly
the right time, and began buying or selling stocks when prices were at the very level which
should show the greatest profit. And their experience invariably matched mine – that is,
they made no real money out of it.

Men who can both be right and sit tight are uncommon. I found it one of the hardest things
to learn.

…a man may see straight and clearly and yet become impatient or doubtful when the
market takes its time about doing as he figured it must do. That is why so many men in
Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless
lose money.

The market does not beat them. They beat themselves, because though they have brains
they cannot sit tight.

2. It’s Foolish to Seek Stock Tips

If there is anything that Livermore hated, it was tips. He preferred to trade alone based
on his own strategies and analysis, but when he did listen to tips, it almost always caused
him grief. As he noted -

Tips! How people want tips! They crave not only to get them but to give them. There is
greed involved, and vanity. It is very amusing, at times, to watch really intelligent people
fish for them. And the tip-giver need not hesitate about the quality, for the tip-seeker is

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not really after good tips, but after any tip. If it makes good, fine! If it doesn’t, better luck
with the next.

It has always seemed to me the height of damfoolishness to trade on tips.

Livermore said that trading on tips cost him hundreds of thousands of dollars, especially
the kind casually given on the street by uninformed acquaintances -

I know from experience that nobody can give me a tip or a series of tips that will make
more money for me than my own judgment.

Unfortunately, even Livermore was vulnerable to tips from well-meaning friends -

Against ordinary tips you cannot guard. For instance, a lifelong friend sincerely desires to
make you rich by telling you what he has done, and that is to buy and sell some stocks.
His intent is good. If the tip goes wrong, what can you do?

And finally -

Tips are just that. Tips. Following blindly is setting you up for epic ruin. First of all you
have no idea what position that tipper is in. He may not even hold the stock he is
recommending. Even if he is, you have no idea when he will unload his lot. Suppose he
is selling his stock to you. Then you would be forced to dump it to someone else for a
higher price.

3. It Pays to Study Human Behaviour

Livermore's trading success was derived from his understanding of human behavior. He
realized early on that markets and stocks can and do change - but people and their
behaviors do not. Therein lay his formula for success, which has not changed since
Livermore's heydays in the stock and commodities markets almost a century ago. As he
is supposed to have said -

There is profit in studying the human factors — the ease with which human beings believe
what it pleases them to believe; and how they allow themselves — indeed, urge
themselves — to be influenced by their cupidity or by the dollar-cost of the average man’s
carelessness. Fear and hope remain the same; therefore the study of the psychology of
speculators is as valuable as it ever was.

…nowhere does history indulge in repetitions so often or so uniformly as in Wall Street.

When you read contemporary accounts of booms or panics the one thing that strikes you
most forcibly is how little either stock speculation or stock speculators today differ from
yesterday. The game does not change and neither does human nature.

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4. Never Forget Margin of Safety

I trade in accordance to my means and always leave myself an ample margin of safety.
…After I paid off my debts in full I put a pretty fair amount into annuities. I made up my
mind I wasn’t going to be strapped and uncomfortable and minus a stake ever again.

Livermore is not referring here to seeking a Benjamin Graham style “margin of safety” on
each bet but rather to this: once you establish a big financial stake as a speculator, setting
aside enough money so you don’t need to “return to go” financially is wise. Livermore
wanted a margin of safety in terms of safe assets so that he would always have some
money left to start over in his chosen profession of speculation.

5. Know What NOT To Do

When you know what not to do in order not to lose money, you begin to learn what to do
in order to win.” The finest art is not to lose money. Making money in the stock market
can be done by anybody.

This is another way of saying what Warren Buffett has said many times:

“The first rule of investing is: don’t lose money; the second rule is don’t forget Rule No.
1.”

It is amazing how much benefit once can get from consistently not being stupid.

Conclusion
To sum up, here are the five big things you can learn from Jesse Livermore -

1. It’s more about sitting than buying

2. It’s foolish to take stock tips
3. It pays to study human behaviour
4. Never forget margin of safety
5. Know what NOT to do

And here are some more…

1. On limiting the number of stocks - “Keep the number of stocks you own to a
controllable number. It’s hard to herd cats, and it’s hard to track a lot of securities.”

2. On a speculator’s worst enemies - “...ignorance, greed, fear and hope. All the
statute books in the world and all the rule books on all the Exchanges of the earth
cannot eliminate these from the human animal…”

3. On learning from history - “Whatever happens in the stock market today has
happened before and will happen again.”

4. On betting big on high conviction ideas - “Only make a big move, a real big
plunge, when a majority of factors are in your favor.”

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Mark Zuckerberg
Mark Zuckerberg is an American Entrepreneur and
founder of Facebook. At just 30, he is the youngest
billionaire in the world.

Apart from donating a sizeable sum of $100 million for

school systems in US, Zuckerberg has signed up for
the "Giving Pledge", promising to donate at least 50
percent of his wealth to charity over the course of his
lifetime. Other Giving Pledge members include Bill
Gates, Warren Buffett.

Here are five key ideas from Mark Zuckerberg.

1. A Compelling Mission
Right from the day Zuckerberg started Facebook, he had his mission clear in mind -
"connecting the world". His mission was so strong that he was able to attract the investors,
talented engineers and best people in the world to join him.

If you don't know where you're going, how will you be able to convince people to work
with you? Mark was so passionate about Facebook that it didn't take him much time to
refuse any buy out offers. Peter Thiel, an early investor in Facebook, recounts in his book
Zero to One -

When Yahoo! offered to buy Facebook for $1 billion in July 2006, I thought we should at
least consider it. But Mark Zuckerberg walked into the board meeting and announced:
“Okay, guys, this is just a formality, it shouldn’t take more than 10 minutes. We’re
obviously not going to sell here.” Mark saw where he could take the company, and Yahoo!
didn’t.

This is what happens when you have a compelling mission - It becomes easy to take
quick decisions.

2. Simplify
Have you ever wondered why Zuckerberg always wears the same gray coloured t-shirt?
Or for that matter why Steve Jobs mostly wore his black turtleneck?

The answer is - It's their hack to simplify life.

What to wear is a decision that everybody has to make at least once everyday. Although
an insignificant decision, it does consume some energy from your daily quota of decision
making will power.

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By sticking to same t-shirt Zuck doesn't have to think about 'what to wear' everyday.
Zuckerberg understands this concept very well.

A wise man once said, "The learned man aims for more, but the wise man decreases and
then decreases further."

Weed out the unimportant things from your environment and focus on few. It's a great
simplification hack.

3. Challenge Yourself
Overcoming challenge means personal growth. When life stops throwing challenges, you
go out and find new ones for yourself. That's an amazing way to live an exciting life.

If you think about it, he has experienced phenomenal success at very young age but he
hasn't let that affect his appetite for taking up new challenges.

Each year Zuckerberg sets a personal challenge for himself. In 2010, he learned Chinese
language so he could communicate with his wife's family. Not only that, when he was
invited in China in 2014 to interact with university students, he surprised everybody by
talking for 30 minutes in Chinese including the Q&A.

Last year, he pledged to write a thank you note every day.

This year he started an online book club through his personal Facebook account.
Zuckerberg makes a book recommendation every two weeks to his millions of Facebook
followers. He says,

"We will read a new book every two weeks and discuss it here. Our books will emphasize
learning about new cultures, beliefs, histories and technologies."

If Zuck, in spite of running a multibillion dollar company, can take out time for personal
growth, then we have no reason to shy away from trying this strategy.

4. Don't Fear Mistakes

In the initial few years, in Facebook the motto was, “Move fast and break things.”

Mark says, "We place a really big premium on moving quickly. One of the big theories
that I had about that, was that all technology companies, and probably all companies, just
slow down dramatically as they grow...But if we can focus at every step along the way on
moving quicker … then we’ll move as quickly as a company that only has 500 people"

When you aren't afraid of making mistakes, you almost become unstoppable. In
Zuckerberg's words -

“So many businesses get worried about looking like they might make a mistake, they
become afraid to take any risk...Biggest risk is not taking any risk."

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5. How to Find Right People

Zuck says, “overtime what I figured out was that the only actual way to let someone
analyze whether someone was really good was if they would work for that person …”

You can always find talented and smart people out there but what’s important, if you’re
thinking long term, is that you choose to work with only those who people who are not
only good at what they do but are also easy to work with.

Zuckerberg’s trick is very useful if you’re searching for a partner to work with. If can’t
imagine working for that person (as his subordinate) then you may want to rethink your
partnership.

Warren Buffett has been saying this for years.

“I only work with people I like.”

Conclusion
Mark Zuckerberg is sometimes portrayed in the media as geek who is socially awkward
and stays aloof. This may or may not be true but you can never deny the impact that he
has created in this world by enabling the mankind take that huge leap in communication
and connectivity.

When Hollywood made a movie on his life which did not portray his life and work in a very
positive way, what did he do? He took a bunch of people from his company to watch the
movie together.

So yes, he does have a good sense of humor.

Here is a bonus lesson - cultivate a sense of humor for your critics.

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Michael Mauboussin
Michael Mauboussin belongs to the breed of those rare
investment strategists who have spent their life puzzling over
the really crucial questions in the world of decision making. He
is an expert in one of the most debatable topic in the field of
business strategy i.e. role of luck in defining the success for
an individual as well as an organization.

Apart from being a successful investor, Michael Mauboussin

also teaches at Columbia Graduate School of Business. He
has authored three other books of which "The Success
Equation" is the latest one.

Here are five lessons from Michael that will help you become a better investor.

1. Don’t Forget the Outside View

Mauboussin writes...

“An inside view considers a problem by focusing on the specific task and by using
information that is close at hand, and makes predictions based on that narrow and unique
set of inputs. These inputs may include anecdotal evidence and fallacious perceptions.
This is the approach that most people use in building models of the future and is indeed
common for all forms of planning.

The outside view asks if there are similar situations that can provide a statistical basis for
making a decision. Rather than seeing a problem as unique, the outside view wants to
know if other have faced comparable problems and, if so, what happened. The outside
view is an unusual way to think, precisely because it forces people to set aside all the
cherished information they have gathered.”

IPOs are a good example where people forget about all the other IPOs, which lost money
for most of the investors. The investment bankers and promoter of the IPO company will
always present the information which will make the business look good and underpriced.
Don’t get enamoured with the inside view those guys present to you. Take a step back
and evaluate from the outside view.

2. Process Is More Important Than Outcome

The investment community is too focused on outcome and not enough on process.
Mauboussin writes …

“...investors often make the critical mistake of assuming that good outcomes are the result
of a good process and that bad outcomes imply a bad process. In contrast, the best long-
term performers in any probabilistic field - such as investing, sports-team management,
and pari-mutuel betting - all emphasize process over outcome.”

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Acknowledge the fact that in spite of the good process, the outcomes can be bad and
vice versa. However, over a long term a good sound investment decision making process
will ensure a better performance. Investors should constantly strive to improve their
process through quality feedback and ongoing learning.

In Robert Rubin’s words –

“It’s not that results don’t matter. They do. But judging solely on results is a serious
deterrent to taking risks that may be necessary to making the right decision. Simply put,
the way decisions are evaluated affects the way decisions are made.”

3. Understand The Skill-Luck Continuum

Michael introduced the Skill-Luck continuum in his book “The Success Equation”. The
continuum is an imaginary linear scale where on the far right are activities that rely purely
on skill such as running, swimming, chess, etc. On the far left are activities that depend
on luck and involve no skill. Roulette or the lottery are few examples.

Michael writes...

“On the skill side of the continuum, feedback is clear and accurate, because there is a
close relationship between cause and effect. Feedback on the luck side is often
misleading because cause and effect are poorly correlated in the short run.”

Which means, in skill dominated situations, following a good process almost always leads
to a good outcome. In a luck-dominated world, a good process also leads to a good
outcome but only over time.

This is a very helpful heuristic in thinking about markets and business performance. If you
can place the situation on the continuum with reasonable accuracy, you can get a
tremendous edge about predicting the future outcomes.

4. Beware of Unknowable
The modern world that we live in is pretty complex. Mauboussin writes...

“In most day-to-day decisions, cause and effect are pretty clear. But in decisions that
involve systems with many interacting parts [like stock market], causal links are
infrequently unclear. For example, what will happen with climate change? Where will
terrorists strike next? When will a new technology emerge? Remember what Warren
Buffett said: ‘Virtually all surprises are unpleasant.’”

Don’t assume simplicity when there is none. Resist the urge to treat a complex system as
if it’s simpler than it is. Beware of your own behavioural biases and deploy your rational
thinking brain when you’re dealing with complex systems especially when the stakes are
high.

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5. Develop Empathy
If you can feel the pain of others, you can become a better investor and a better human
being. Mauboussin writes …

“Considering the point of view of experience of other people is one of the most powerful
ways to facilitate better decisions...Considering what motivates the decisions of others,
especially when those decisions affect you, is also essential…

Leaders must develop empathy. If you are the decision maker and others live with the
consequences of your choices, understanding their perspectives and feelings is the key
to effectiveness. Not only will empathy help you decide, it will facilitate communication
and management after the decision.”

While evaluating a business, Prof. Bakshi recommends, you must learn to empathize with
the customer, competitor, entrepreneur and Mr. Market.

So learn to put yourself in the shoes of others.

Conclusion
In last fifty years Warren Buffett has recommended quite a few books in his lectures and
writings. But there is one book that can boldly claim to have found its way to Warren
Buffett’s reading desk. And that book is ‘The Success Equation’, authored by Michael
Mauboussin.

If Mauboussin’s book deserves to be on Buffett’s desk, there is no reason you shouldn’t

have all his books in your bookshelf.

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Mohnish Pabrai
Mohnish is one of the world’s most respected and followed,
a true Munger-Buffett style, value investor who manages a
$850+ million US based Hedge fund called Pabrai funds. He
was in news all over when he forked out $650,000 (along
with Guy Spier) to have lunch with Warren Buffett.

Pabrai has an eclectic background. He has built three

successful businesses in last twenty-five years including a
technology company, a Buffett style hedge fund and a very
successful philanthropic organization called Dakshana
foundation, which educates talented underprivileged
children to qualify for IITs. He is also the author of bestselling book called The Dhandho
Investor.

Here are five lessons from Mohnish that will help you become a better investor.

1. Be A Cloner
One of the mental model which Mohnish swears by is cloning i.e., copying the proven
strategies that have been tried and tested by other successful people.

According to Mohnish, it’s better to be copycat than an innovator. Innovation is a difficult

and risky game, but lifting and scaling existing ideas carries far lower risk and decent to
great rewards. Most entrepreneurs lift their business ideas from other existing businesses
or from their last employer. In his own words -

“In seeking to make investments in the public equity markets, ignore the innovators.
Always seek out businesses run by people who have demonstrated their ability to
repeatedly lift and scale. It is the Dhandho way.”

Mohnish himself cloned the Buffett partnership fee structure for Pabrai funds. It wasn’t
something that could be adopted by most mutual funds and hedge funds – even if they
recognized the competitive advantage it would bring.

“Having a moat that your competitors can see in broad daylight but never ever cross is
just fantastic.”

Mohnish not only copied the fee structure but copied many other aspects of Buffett’s
investing style like not disclosing the portfolio positions and discussing the performance
only once a year, very small investment team size, a concentrated portfolio etc.

He even used the cloning strategy to build his remarkably successful philanthropic
organization in India called Dakshana foundation.

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2. Few Bets, Big Bets, Infrequent Bets

In investing, there is no such thing as sure bet. It’s all about the odds. Most of the time
you should do nothing but once you encounter overwhelming odds that are in your favor,
act decisively and place a large bet. Even Charlie Munger suggests the same -

“The wise ones bet heavily when the world offers them that opportunity. They bet big
when they have the odds. And the rest of the time, they don’t. It’s just that simple.”

3. Invest in Low Risk High Uncertainty Businesses

You should learn to identify the opportunities where the risk i.e. odds of a permanent loss
of capital is extremely low. Markets sometimes get confused between risk and
uncertainty. Pabrai says -

“Always take advantage of a situation where Wall Street gets confused between risk and
uncertainty. The results will usually be quite acceptable…Savvy investors like Buffett and
Graham have been taking advantage of Mr Market’s handicap for decades with
spectacular results. Take advantage of Wall street’s handicap by seeking out low-risk,
high-uncertainty bets.”

The key to identifying such opportunities, according to Pabrai, is –

“Read voraciously and wait patiently, and from time to time these amazing bets will
present themselves.”

4. Focus on Durability of Moat

A moat can come from being low-cost producer, brands, innovative offerings or brilliant
execution. However, what pays is the durability of moat.

“In the overwhelming majority of businesses, the various moats are mostly hidden or only
in partial view. It takes some digging to get to the moat...How do we know when a
business has a hidden moat and what that moat is? The answer is usually visible from
looking at its financial statements. Good businesses with good moats, generate high
returns on invested capital.”

However, even strongest of moats can wither away. Mohnish writes...

“There is no such thing as a permanent moat. Even such invincible businesses today like
eBay, Google, Microsoft, Toyota, and American Express will all eventually decline and
disappear...Even businesses with durable moats don’t last forever.”

So learn to differentiate between a durable moat and a eroding moat.

5. Give Back With Head

When it comes to giving back to society, the easiest path most people take, if they choose
at all, is to write a cheque and sprinkle the money for multiple causes. Mohnish believes

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that while you are busy compounding money, don’t postpone the task of giving back and
don’t limit it to writing a cheque.

Giving back to society is an act driven by your heart. But don’t forget to put your head into
it also. Get involved. Use your knowledge and skills along with the money.

This is what Mohnish did. In 2007, he decided to set aside 2 percent of his net worth
(every year) for philanthropic causes. But he didn’t stop there, he went ahead and applied
his knowledge about investing and business to build Dakshana Foundation. In last 7
years, Dakshana has helped hundreds of underprivileged children to get into IITs and
other premier institutions.

Mohnish writes...

“...a life focused purely on the maximization of wealth or creature comforts for self and
family is a sub-optimal approach to living.

I do urge you to leverage Dhandho techniques fully to maximize your wealth. But I also
hope that, well before your body begins to fade away, you’ll use some time and some of
that Dhandho money to leave this world a little better place than you found it.”

Don’t forget, just like money, every act of charity, no matter how small, is a seed for
compounding. Start sowing the seeds today.

Conclusion
There aren’t many people in the world who can match Pabrai’s experience as a successful
entrepreneur, astute investor and remarkable philanthropist.

Mohnish spends a lot of time keeping fit also which is evident from his regular biking stats
that he shares on social media.

His humility and his way of life is worth emulating.

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Parag Parikh
Parag Parikh was founder of Parag Parikh Financial
Advisory Services. He had more than 30 years of
experience in Indian stock market and an unparalleled
reputation in value investing community.

Being a vocal proponent of behavioral finance and value

investing in India, he passionately worked for making
financial market a better and safer place for investors. Mr.
Parikh had also authored two widely acclaimed bestsellers
“Stocks to Riches” and “Value Investing and Behavioural
Finance”.

He left a big void in the Indian value investing circles when he passed away in May 2015.
Here are five lessons from Parag Parikh that will help you become a better investor.

1. The Law of the Farm

Parag Parikh was a firm believer in the law of the farm. What does the Law of the Farm
mean? It means that a farmer cannot expect to harvest a great crop unless he carefully
plans for the development of that crop and works diligently and consistently over a long
period of time.

Parag always used to say...

“You cannot sow something today and reap tomorrow. A seed has to go through different
seasons, before it turns into a fully grown tree and starts bearing fruit. This is exactly what
works in investing. You have to wait for years. It often gets boring. But that’s how you get
your fruits...The inability to delay gratification is the root of failure. Getting carried away
by the greed of quick returns ultimately destroys wealth, as it doesn’t conform to the law
of nature.”

Farming and investing are both about the right process and the right efforts, and then you
must let time take care of things. Most people in investing miss out on the time part – the
waiting part – which, by the way, is the most difficult but most important in the
compounding process.

You can learn all the right things in investing and invest in the best of businesses, but it
will be futile – you won’t be able to compound your money – unless you have a long-term
view. In investing as in farming, a rich harvest would come to you not from finding easy
shortcuts, but from disciplined, focused effort, directed tirelessly toward a desirable goal.

Try putting the Law of the Farm to work in your investing life.

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2. Be Generous
This is what Prof. Sanjay Bakshi wrote about Parag Parikh...

"I know of many people who drank the nectar of Parag’s generosity and kindness...in my
early days as a value investor, Parag propelled me forward."

Another value investor, Arpit Ranka who helped Parag Parikh with his second book,
recalls his experience -

“Sometimes a gesture remains with you for your entire life. One such gesture on his part,
which greatly exaggerated my contribution, was him sharing 25% of the royalty of his
book with me. I consider myself blessed to have worked under somebody like Parag bhai,
who not only inspired you immensely but then went out of his way to recognise your
contribution, which was effectively fruit of his trust more than anything else.”

3. Be Humble
Vishal recounts his experience when he met Parag Parikh for the first time -

“It was in 2012 when I first saw Mr. Parag Parikh at a conference. Knowing him to be a
veteran of the Indian value investing industry, I had imagined him to be an old, serious
man. But he was anything but old and serious. We were meeting for the first time, but it
didn’t seem that way, given how he made me comfortable in his company. Partly it was
his limitless energy and unpretentious, floodlight smile that made it sound as if he was
very happy to meet people and share his wisdom. But he also resembled strongly a child
who had dreams of changing the world – the fund management industry in his case – for
the better.”

For Parag, having decades of experience in Indian stock markets did in no way translate
to any kind of arrogance or sense of superiority. He set an example of humility and child
like enthusiasm.

4. Do The Right Thing

Parag Parikh, during the tech boom of 1999, suffered not because he invested in bubble
stocks, but because he kept telling his clients to sell them. They would buy and see the
price go up and tell him he was wrong. He openly confessed that he went through a
troubled phase then. However, it did not cause him to waver from the basic tenets of value
investing. He refused to crumble under the peer pressure and stuck to the value investing
principles. He believed -

“Merely doing things right is not enough. It is vital to do the right things too.”

He also used to say, “Being ethical, is not just an exercise in public-relations. It makes
good business sense too, as it helps us to attract the right type of clientele.”

When Mr. Parikh launched his Mutual Fund, he followed the principle of having ‘skin in
the game’. Most of his team in the mutual fund business and his company have majority

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of their assets invested in his fund. Not only that, he closed down his profitable brokerage
business and his PMS services so that he could focus only on one thing i.e. running his
Mutual Fund.

That’s the sign of a true leader, who leads by setting the right example.

5. Follow Your Dream

These were the last words that Parag told Vishal few months before his demise -

“Vishal, have the courage to follow your dreams, and never lose your integrity and
humility”

Every one of us is born with the ability to achieve our dreams. So it is up to us to dream
big. Don't let the fear of failure lead you to live a mediocre life. Negative thoughts and
doubt are detrimental to your dreams. Stop hanging out with people who are always
complaining about their job, circumstances, life, etc. Don't let them suck out your positive
energy.

If you don't have a dream yet, then find out people who are dreamers and hang out with
them. Their enthusiasm and life energy will rekindle your dream. Once that happens, get
busy chasing your dreams.

Conclusion
We in the investing world were always better off for his presence.

Parag Parikh will always be remembered for the countless moments of joy, wisdom and
hope he gave to thousands of people – his family members, colleagues, friends, and
investors.

A wise man said that to live in the hearts of others is never to die. Parag Parikh remains
immortal in our hearts.

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Peter Thiel
Peter Thiel is an entrepreneur and investor. He was the co-
founder of PayPal and Palantir. He was also one of the
biggest early investors in Facebook and held a major stake
in social networking giant. He invested in companies like
SpaceX and LinkedIn during their early phases.

He is one guy who has been there, done that. Thiel’s ideas
are must a read for every entrepreneur.

Thiel has authored a book called Zero to One, which was

based on his lectures at Stanford University. Nassim Taleb
says in his endorsement of this book: "If a risk taker writes a book, read it. If it is Peter
Thiel, read it twice. In fact, read it thrice to be safe."

Like a Zen master, Peter Thiel doesn’t believe in giving ready made answers. His ideas
are more like an exercise in thinking. Here are five takeaways from Peter Thiel that will
help you become a better thinker.

1. Zero to One
As a value investor you may find this unsettling but if you want to bring a change as an
entrepreneur, this philosophy will make a lot of sense. Thiel writes -

“The next Bill Gates will not build an operating system. The next Larry Page or Sergey
Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social
network. If you are copying these guys, you aren’t learning from them.

Of course, it’s easier to copy a model than to make something new. Doing what we
already know how to do takes the world from 1 to n, adding more of something familiar.
But every time we create something new, we go from 0 to 1. The act of creation is singular,
as is the moment of creation, and the result is something fresh and strange.”

2. How to Look into The Future

The most interesting question that Thiel talks about, which he routinely asks people in
interviews, is -

What important truth do very few people agree with you on?

He says -

“This is a question that sounds easy because it’s straightforward. Actually, it’s very hard
to answer. It’s intellectually difficult because the knowledge that everyone is taught in
school is by definition agreed upon. And it’s psychologically difficult because anyone

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trying to answer must say something she knows to be unpopular. Brilliant thinking is rare,
but courage is in even shorter supply than genius.”

Answers like “Our educational system is broken and urgently needs to be fixed” or “There
is no God” are all bad answers. When most people answer contrarian questions, they
usually try to extrapolate the present.

A good answer looks something like this - “Most people believe in x, but the truth is the
opposite of x”.

Answering contrarian questions and noticing what is ‘not present’ is a skill that can take
you closer to seeing the future.

3. Independent Thinking
The most contrarian thing of all, Thiel says, “is not to oppose the crowd but to think for
yourself."

Contrarianism shouldn’t be practiced for its own sake. You must know why the
conventional wisdom is wrong. Consider what Warren Buffett wrote in his 1990 letter to
investors -

“... [It doesn't mean], however, that a business or stock is an intelligent purchase simply
because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd
strategy. What’s required is thinking rather than polling. Unfortunately, Bertrand Russells
observation about life in general applies with unusual force in the financial world: Most
men would rather die than think. Many do.”

When your hypothesis is diverging from crowd, it must be grounded on reasons and
analysis. Thiel writes -

“To build the future we need to challenge the dogmas that shape our view of the past.
That doesn’t mean the opposite of what is believed is necessarily true, it means that you
need to rethink what is and is not true and determine how that shapes how we see the
world today.”

4. Right Foundation
Thiel’s law: a startup messed up at its foundation cannot be fixed.

He says -

“As a founder, your first job is to get the first things right, because you cannot build a great
company on a flawed foundation...When you start something, the first and most crucial
decision you make is whom to start it with. Choosing a co-founder is like getting married,
and founder conflict is just as ugly as divorce.

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...Bad decisions made early on—if you choose the wrong partners or hire the wrong
people, for example—are very hard to correct after they are made.

...Optimism abounds at the start of every relationship. It’s unromantic to think soberly
about what could go wrong, so people don’t. But if the founders develop irreconcilable
differences, the company becomes the victim.”

Choosing the right people doesn’t necessarily mean choosing the good people. You could
go wrong with good people also if they don’t share your vision.

“When I consider investing in a startup, I study the founding teams. Technical abilities
and complementary skill sets matter, but how well the founders know each other and how
well they work together matter just as much.”

5. Last Mover Advantage

Peter Thiel share an interesting insight in his book -

“You’ve probably heard about “first mover advantage”: if you’re the first entrant into a
market, you can capture significant market share while competitors scramble to get
started. That can work, but moving first is a tactic, not a goal. What really matters is
generating cash flows in the future, so being the first mover doesn’t do you any good if
someone else comes along and unseats you. It’s much better to be the last mover – that
is, to make the last great development in a specific market and enjoy years or even
decades of monopoly profits.”

Do yourself a favour and read about how Bill Gates and Warren Buffett played a game of
dice which was rigged in favour of the second mover.

“He loves games that involve problem solving,” Buffett says. “I showed him a set of four
dice with numbers arranged in a complex way so that any one of them would on average
beat one of the others. He was one of three people I ever showed them to who figured
this out and saw the way to win was to make me choose first which one I’d roll.”
(source: Billionaires wager with loaded dice)

Conclusion
Peter Thiel's ideas are full of counterintuitive insights that will help your thinking and ignite
possibility.

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Seth Klarman
Seth Klarman is not an investor you would read about much in
business media. He is one of the more reclusive kinds out there.
He rarely speaks in public or grants interviews.

Klarman is known for his very deep value investing style and
willingness to pursue value where others get very nervous.
Some people, in fact call him Warren Buffett of his generation.

Since founding his investment partnership, Baupost Group, in

1983, Klarman has not only produced unrivaled returns (in
excess of 20% per year), but he has also from time to time
offered wise and timeless commentary on markets and the craft
of investing.

He is the author of Margin of Safety, Risk Averse Investing Strategies for the Thoughtful
Investor, which became a value investing classic ever since it was first published in 1991.
Even though the book was written more than 20 years ago yet Klarman’s ideas are
perfectly suitable today.

In a financial world populated by fund managers running after bigger fund sizes, few years
back, he returned US$ 4 billion cash to his clients (from a fund size of around US$ 30
billion). That speaks volumes about his integrity and unwillingness to compromise with
his reputation.

Here are five lessons from Seth Klarman that will help you become a better investor. For
the uninitiated, the term Mr. Market is a metaphor for Stock Market. It was first introduced
by Benjamin Graham in his investment classic The Intelligent Investor.

1. Price Vs Value
It doesn’t help, and could be outright dangerous, to look at the price of a business without
thinking about its value.

Klarman says -

“Value in relation to price, not price alone, must determine your investment decisions.

If you look to Mr. Market as a creator of investment opportunities (where price departs
from underlying value), you have the makings of a value investor.

If you insist on looking to Mr. Market for investment guidance, however, you are probably
best advised to hire someone else to manage your money.

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Because security prices can change for any number of reasons and because it is
impossible to know what expectations are reflected in any given price level, investors
must look beyond security prices to underlying business value, always comparing the two
as part of the investment process.”

2. Margin of Safety
In value investing, element of bargain is the key to process. Because investing is as much
an art as a science, says Klarman,

“investors need a margin of safety. A margin of safety is achieved when securities are
purchased at prices sufficiently below underlying value to allow for human error, bad luck,
or extreme volatility in a complex, unpredictable, and rapidly changing world.

Value investors seek a margin of safety, allowing room for imprecision, bad luck, or
analytical error in order to avoid sizable losses over time.“

So a margin of safety is essential because -

• Valuation is an imprecise art

• Future is unpredictable, and
• Investors are human and do make mistakes.

3. Stock Market Is Not An Advisor

Mr. Market, i.e. the stock market, is just a place where you get daily quotes for businesses.
Those daily quotes shouldn’t be confused for the recommendations. Let’s hear the idea
straight from the horse’s mouth. Klarman says -

“Some investors – really speculators – mistakenly look to Mr. Market for investment
guidance.

They observe him setting a lower price for a security and, unmindful of his irrationality,
rush to sell their holdings, ignoring their own assessment of underlying value. Other times
they see him raising prices and, trusting his lead, buy in at the higher figure as if he knew
more than they.

The reality is that Mr. Market knows nothing, being the product of the collective action of
thousands of buyers and sellers who themselves are not always motivated by investment
fundamentals.

Emotional investors and speculators inevitably lose money; investors who take advantage
of Mr. Market's periodic irrationality, by contrast, have a good chance of enjoying long-
term success.”

4. Setting The Right Investment Goal

It’s easy for early investors to confuse between a sensible investment goal and achieving
a specific rate of return.

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The focus for people, who set out to achieve a specific rate of return, naturally gravitates
towards the upside potential and the analysis of downside risk takes a backseat.

Rather than targeting a desired rate of return, even an eminently reasonable one,
investors should keep risk at the center of their conscious forethought.

Setting a goal, says Mr. Klarman, “unfortunately, doesn’t make that return achievable.
Indeed, no matter what the goal, it may be out of reach. Stating that you want to earn say,
15 percent a year, does not tell you a thing about how to achieve it. Investment returns
aren’t a direct function of how long or hard you work or how much you wish to earn...An
investor cannot decide to think harder or put in overtime in order to achieve a higher
return. All an investor can do is follow a consistently disciplined and rigorous approach,
over time the returns will come.”

5. Fallacy of Indexing
Warren Buffett has observed that "in any sort of a contest -- financial, mental or physical
-- it's an enormous advantage to have opponents who have been taught that it's useless
to even try."

Indexing is one such thing where investors and index fund managers hope for better
results without doing any work. Seth Klarman says -

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

Indexing is a dangerously flawed strategy for several reasons. First, it becomes self-
defeating when more and more investors adopt it. Although indexing is predicated on
efficient markets, the higher the percentage of all investors who index, the more inefficient
the markets become as fewer and fewer investors would be performing research and
fundamental analysis.

Indeed, at the extreme, if everyone practiced indexing, stock prices would never change
relative to each other because no one would be left to move them. Another problem arises
when one or more index stocks must be replaced; this occurs when a member of an index
goes bankrupt or is acquired in a takeover.

Because indexers want to be fully invested in the securities that comprise the index at all
times in order to match the performance of the index, the security that is added to the
index as a replacement must immediately be purchased by hundreds or perhaps
thousands of portfolio managers.

Owing to limited liquidity, on the day that a new stock is added to an index, it often jumps
appreciably in price as indexers rush to buy. Nothing fundamental has changed; nothing
makes that stock worth more today than yesterday. In effect, people are willing to pay
more for that stock just because it has become part of an index.

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I believe that indexing will turn out to be just another Wall Street fad. When it passes, the
prices of securities included in popular indexes will almost certainly decline relative to
those that have been excluded.”

Conclusion
These ideas are hardly all encompassing of the Klarman’s wisdom, but they have helped
countless investor over the years.

We hope that you remember these lessons and make them part of your investing
checklist.

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Nassim Nicholas Taleb

Nassim Taleb is an unconventional thinker and controversial
author who predicted the 2008 financial crisis. He has been
studying the problems of uncertainty, probability and risk for
past 20 years.

He earned his financial freedom through wall street trading and

then devoted his life for studying esoteric ideas and connecting
them to modern world practices. He's notorious for using harsh
words against unethical journalists and academic personalities.

Here are some of his thought provoking, and sometimes

amusing, remarks -

“Resist trying to impress your enemies.”

“It is easier to bribe the moderately rich than the poor.”

His books have sold millions of copies and he has huge fan following among serious book
readers. He has written three books - Fooled By Randomness, The Black Swan and The
Antifragile - all of which have been best sellers and have propelled him into intellectual
celebrity.

Taleb is also a distinguished professor at Polytechnic Institute of New York University and
teaches a course on Risk engineering.

Here are five key ideas from Taleb’s works.

1. It’s More Random Than You Think

When we look back at things that have happened we see them as less random than they
actually were. In Fooled By Randomness, Taleb writes...

"It is as if there were two planets: the one in which we actually live and the one,
considerably more deterministic, on which people are convinced we live. It is as simple
as that: Past events will always look less random than they were (it is called the hindsight
bias). I would listen to someone’s discussion of his own past realizing that much of what
he was saying was just backfit explanations concocted ex post by his deluded mind."

This problem manifests itself most frequently in the lucky fool, “defined as a person who
benefited from a disproportionate share of luck but attributes his success to some other,
generally very precise, reason.” The reason the person is fool because he himself has no
idea that it's the luck not his skill.

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This does not mean that all success is luck or randomness. There is a difference between
“it is more random than we think” and “it is all random.” He explains ..

"Of course chance favors the prepared! Hard work, showing up on time ...they are
certainly necessary but may be insufficient as they do not cause success. The same
applies to the conventional values of persistence, doggedness and perseverance:
necessary, very necessary. One needs to go out and buy a lottery ticket in order to win.
Does it mean that the work involved in the trip to the store caused the winning? Of course
skills count, but they do count less in highly random environments than they do in
dentistry.

No, I am not saying that what your grandmother told you about the value of work ethics
is wrong! Furthermore, as most successes are caused by very few “windows of
opportunity,” failing to grab one can be deadly for one’s career. Take your luck!"

2. Build Antifragility
Fragile is which breaks down when subjected to a stress or disorder. Robust or resilient
is something which doesn’t break, i.e. stays the same, under stress. But antifragile
benefits from stress.

The simplest example of an antifragile system would be a human body or for that matter
our bone structure. Our bones grow stronger when subjected to moderate stress. Not
only that, in absence of stress bones actually become weak and wither away. So an
antifragile body doesn’t just thrive on stress but it needs it to flourish.

We should strive to bring antifragility in our affairs. And one way to do that is to remove
the factors which make us fragile. Debt is one such element. Debt not only takes away
the safety, it actually makes your finances extremely fragile in the face of unexpected
adversity. Taleb writes...

“When you don’t have debt you don’t care about your reputation in economic circles - and
somehow it is only when you don’t care about your reputation that you tend to have a
good one.”
Isn’t this obvious that the first recommendation of any sensible personal finance advisor should
be to get rid of personal debt and create an emergency fund. This will make sure that you don’t
get wiped out in the face emergency and have sufficient cushion to build your financial strength
again.

3. Probabilistic Thinking
Charlie Munger once said, “Without the knowledge of probability, you’re like one legged
man in ass-kicking contest.”

This doesn’t mean that you have to learn the complex mathematical computations which
normally go with the subject of probability in academic circles. It’s about learning to think
about events with a probabilistic mindset. Taleb says …

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"Probability is not a mere computation of odds on the dice or more complicated variants;
it is the acceptance of the lack of certainty in our knowledge and the development of
methods for dealing with our ignorance. Outside of textbooks and casinos, probability
almost never presents itself as a mathematical problem or a brain teaser. Mother nature
does not tell you how many holes there are on the roulette table , nor does she deliver
problems in a textbook way (in the real world one has to guess the problem more than
the solution)."

This brings out the all important idea of differentiating between risk and uncertainty. Most
of the world is obsessed with measuring risk and avoiding uncertainty.
In investing, risk doesn’t really come from volatility but it comes from being ignorant about
the spectrum of possible outcomes of event - the spectrum of uncertainty.

As Warren Buffett said, “Predicting the rain doesn’t count, but building an ark does.”

4. Non Predictive Decision Making

The mental model of antifragility is very useful in dealing with uncertainty in various human
affairs including business, politics, medicine and life in general. A system of nonpredictive
decision making is required in any situation where there is randomness, unpredictability
or incomplete understanding of things.

And how do you deal with this uncertainty? You don’t need to forecast the rare, high
impact events (Black Swans), you only need to figure out if your systems are fragile. Taleb
suggests -

“...we can almost always detect antifragility (and fragility) using a simple test of
asymmetry: anything that has more upside than downside from random events(or certain
shocks) is antifragile; the reverse is fragile.”

In a discussion of the earthquake and tsunami that produced the 2011 Fukushima nuclear
disaster in Japan, Taleb writes -

“Not seeing a tsunami or an economic event coming is excusable; building something

fragile to them is not...It had been built to withstand the worst past historical earthquake,
with the builders not imagining much worse - and not thinking that the worst past event
had to be a surprise, as it had no precedent.

...In the wake of Fukushima disaster, instead of predicting failure and the probabilities of
disaster, these intelligent nuclear firms are now aware that they should instead focus on
exposure to failure - making the prediction or nonprediction of failure quite irrelevant. This
approach leads to building small enough reactors and embedding them deep enough in
the ground with enough layers of protection around them that a failure would not affect
us much should it happen - costly, but still better than nothing.”

5. Skin In The Game

Never complain unless you are taking risks doing it!

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In the contemporary world marred with complex rules, policies, regulations, and laws it’s
extremely difficult to track down the causality (because of delay and invisibility) of
interventions made by policy makers, bankers, politicians, and corporate executives. So
the only solution to mitigate the fragility is ‘skin in the game’ - a metaphor for ethical
conduct.

Because of incentive bias these interventionists side with unethical behaviour, still legal
because of the complexity, and transfer the fragility from one party to the other, with one
getting the benefits, the other one getting the harm.

For example, the people responsible for the financial meltdown in 2008 got away with
multi million dollar commissions but it was the taxpayer who bore the brunt of bailout
packages. These people had no skin in the game. They didn’t face the downside and got
all the upside. They were benefitted by transferring the fragility to the common man.

The solution is found in 3800 years old Hammurabi’s code which says - If a builder builds
a house and the house collapses and causes the death of the owner of the house - the
builder shall be put to death.

Taleb writes...

“The entire idea is that the builder knows more, a lot more, than any safety inspector,
particularly about what lies hidden in the foundations - making it the best risk management
rule ever as the foundation, with delayed collapse, is the best place to hide risk...Now,
clearly the object here is not to punish retrospectively, but to save lives by providing up-
front disincentive in case of harm harm to others during the fulfillment of one’s profession.

Ralph Nader has simple rule: people voting for war need to have at least one descendant
(child or grandchild) exposed to combat. For the Romans, engineers needed to spend
some time under the bridge they built - something that should be required of financial
engineers today.”

With this logic, every professional who forecasts or makes an economic analysis needs
to have something to lose from it, given that others rely on those forecasts.

Conclusion
Taleb is largely an autodidact. He has higher degrees but most of his working life was
spent outside academia. He has practiced, and made millions, what he talks about.

The ideas that I have picked up here are just a small sample from Taleb's works. For
more such thought provoking gems, there is no other way but to diligently study Taleb
and all his books.

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About Safal Niveshak

Safal Niveshak (Hindi phrase for ‘successful investor’) is a movement
to help you, the small investor, become intelligent, independent, and
successful in your stock market investing decisions. It’s about a new
way of thinking about investing that can unleash the smart investor
within you, and lead you to prosperity and financial peace of mind.

Safal Niveshak was founded by Vishal Khandelwal in 2011.

Through this platform, Vishal focuses on simplifying the art
of investing and the causes of human misjudgment when
it comes to investing. He also shares his experiences as an
investor and lessons from some of the greatest investors of
all time. You can connect with Vishal on Twitter.

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Premium Members of Safal Niveshak

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