contribution of the rare event is going to be massively faulty (contribution is probability times effect; multiply that by estimation error); and nothing can remedy it. So the rarer the event, the less we know about its role – and the more we need to make up such deficiency with an extrapolative, generalizing theory. It will lack in rigor in proportion to claims about the rarity of the event. Hence model error is more consequential in the tails and some representations are more fragile than others.” – N.N. Taleb[66]
“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). In this book, considering that alternative outcomes could have taken place, that the world could have been different, is the core of probabilistic thinking.” –Nassim Taleb, Fooled by Randomness
“If you don’t know who you are, the market is an expensive place to find out.” – Adam Smith
“Finding an edge really only comes from a right frame of mind and years of continuous study. But when you find those insights along the road of study, you need to have the guts and courage to back up the truck and ignore the opinions of everyone else. To be a better investor, you have to stand on your own. You just can’t copy other people’s insights. Sooner or later, the position turns against you. If you don’t have any insights into the business, when it goes from $100 to $50 you aren’t going to know if it will back to $100 or $200.
“So this is really difficult, but on the other hand, the rewards are huge.Warrensays that if you only come up with 10 good investments in your 40 year career, you will be extraordinarily rich. That’s really what it is. This shows how different value investing is than any other subject.
“So how do you really understand and gain that great insight? Pick one business. Any business. And truly understand it. I tell my interns to work through this exercise – imagine a distant relative passes away and you find out that you have inherited 100% of a business they owned. What are you going to do about it? That is the mentality to take when looking at any business. I strongly encourage you to start and understand one business, inside out. That is better than any training possible. It does not have to be a great business, it could be any business. You need to be able to get a feel for how you would do as a 100% owner. If you can do that, you will have a tremendous leg up against the competition. Most people don’t take that first concept correctly and it is quite sad. People view it as a piece of paper and just trade because it is easy to trade. But if it was a business you inherited, you would not be trading. You would really seek out knowledge on how it should be run, how it works. If you start with that, you will eventually know how much that business is worth.”
— Li Lu
“The great story in my investing lifetime has been and will continue to be the increasing affluence of billions of people around the world and how that translates into increasing demand for goods and services. A central aspect of the long-term thesis for almost every company we’ll talk about it how they will benefit from that rising affluence. Compared to that, hand-wringing about whetherGreeceis going to default or what happens after QE2 ends is really just noise.” – Tom Gayner
“When people ask us about Baupost’s risk controls, we have no glib answer. We have no risk control group we can trot out with a PowerPoint presentation. Risk control to us is a careful aligning of interests, a proper balance in our investing between greed and fear, experienced and collaborative senior management and investment teams that have worked together for quite some time, a consistent and disciplined investment approach where every opportunity is individually and meticulously evaluated on its fundamentals, a strict sell discipline, a willingness to hold cash when opportunity is scarce, a complete avoidance of recourse leverage, and a healthy level of fear.” – Seth Klarman[67]
On leverage: “the only way a smart person can go broke.” – Warren Buffett[68]
On leverage: “if you’re smart you don’t need it, and if you’re dumb you shouldn’t be using it.” – Warren Buffett[69]
“If you own a wonderful business…the best thing to do is keep it. All you’re going to do is trade your wonderful business for a whole bunch of cash, which isn’t as good as the business, and you got the problem of investing in other businesses, and you probably paid a tax in between. So my advice to anybody who owns a wonderful business is keep it.” – Warren Buffett[70]
Paraphrasing: The first few hundred million dollars for Buffett andBerkshirecame from running a Geiger counter over everything, but the subsequent tens of billions have come from waiting for the no-brainers. – Charlie Munger
“Time is a precious resource and if you make it your task to not ‘miss’ anything, you set yourself up for failure. There are too many opportunities out there and, by definition, you will miss many of them.” – Oliver Kratz
“Investing is not a natural science but rather a social science. So, it’s never purely empirical; what you are trying to do is everything you possibly can to enhance your probabilities of being right more often than being wrong.” – William Browne[71]
“Make a clear distinction when selling between ‘compounders’ and cigar butt stocks. Once the cigar butts come back, you know to get out because they’re just going to go down again. With something like Johnson & Johnson, though, you make a judgment call when it hits intrinsic value, based on your confidence in its ability to compound returns and what your alternatives are.” – Christopher Browne
“The key to being successful as a value investor is this willingness to accept the near-term randomness that goes on in our markets. And to be able to emotionally deal with that and accept that that is something that goes along with investing.” – Bob Wyckoff[72]
“In looking for someone to hire, you look for three qualities: integrity, intelligence and energy. Without the first the other two will [kill] you.” – Warren Buffett
“You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.” – Seth Klarman[73]
“In forty years of Wall Street experience and study I have never seen dependable calculations made about common stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra. Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience, and usually also to give to speculation the deceptive guise of investment.” – Ben Graham
On the definition of reflexivity: “The generally accepted theory is that markets tend toward equilibrium, and on the whole, discount the future correctly. I operated using a different theory, according to which financial markets cannot possibly discount the future correctly because they do not merely discount the future; they also help to shape it. In certain circumstances, financial markets can affect the so-called fundamentals which they are supposed to reflect. When that happens, markets enter into a state of dynamic disequilibrium and behave quite differently from what would be considered normal by the theory of efficient markets. Such boom/bust sequences do not arise very often, but when they do, they can be very disruptive, exactly because they affect the fundamentals of the economy.” – George Soros[74]
Ben
