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The Most Important Thing

Jul 2023
3 min read
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  1. The definition of successful investing is doing better than the market and other investors. To accomplish that, you need either good luck or superior insight. Counting on luck isn’t much of a plan, so you’d better concentrate on insight.
  2. First-level thinkers look for simple formulas and easy answers. Second level thinkers know that success in investing is the antithesis of simple. To outperform the average investor, you have to be able to outthink the consensus.
  3. For investing to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point. Without it, any hope for consistent success as an investor is just that: hope.
  4. Investment success doesn’t come from “buying good things,” but rather from “buying things well.”
  5. Investing consists of exactly one thing: dealing with the future. And because none of us can know the future with certainty, risk is inescapable. Thus, dealing with risk is an essential element in investing.
  6. Certainly the fact that an investment worked doesn’t mean it wasn’t risky, and vice versa.
  7. Return alone— and especially return over short periods of time— says very little about the quality of investment decisions. Return has to be evaluated relative to the amount of risk taken to achieve it.
  8. The reality of risk is much less simple and straightforward than the perception. People vastly overestimate their ability to recognize risk and underestimate what it takes to avoid it; thus, they accept risk unknowingly and in so doing contribute to its creation.
  9. When you boil it all down, it’s the investor’s job to intelligently bear risk for profit. Doing it well is what separates the best from the rest.
  10. Cycles always prevail eventually. Nothing goes in one direction forever. Trees don’t grow to the sky. Few things go to zero. And there’s little that’s as dangerous for investor health as insistence on extrapolating today’s events into the future.
  11. The market has a mind of its own, and it’s changes in valuation parameters, caused primarily by changes in investor psychology (not changes in fundamentals), that account for most short- term changes in security prices. This psychology, too, moves like a pendulum.
  12. Inefficiencies—mispricing, misperception, mistakes that other people make—provide potential opportunities for superior performance. Exploiting them is the only road to consistent outperformance. To distinguish yourself from the others, you need to be on the right side of those mistakes.
  13. Overestimating what you’re capable of knowing or doing can be extremely dangerous - in brain surgery, trans ocean racing or investing. Acknowledging the boundaries of what you can know - and working within those limits rather than venturing beyond - can give you a great advantage.
  14. Every once in a while, someone makes a risky bet on an improbable or uncertain outcome and ends up looking like a genius. But we should recognize that it happened because of luck and boldness, not skill.
  15. It’s not hard to perform in line with the market in terms of risk and return. The trick is to do better than the market: to add value. This calls for superior investment skill, superior insight.
  16. The best foundation for a successful investment - or a successful investment career - is value. You must have a good idea of what the thing you’re considering buying is worth.
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