but Avoid Physics Envy
18. Intelligent Investing Is All About Understanding Intrinsic Value
19. The Three Most Important Words in Investing
20. Investing in Commodity and Cyclical Stocks Is All About the Capital Cycle
21. Within Special Situations, Carefully Study Spinoffs
SECTION IV—PORTFOLIO MANAGEMENT
22. The Holy Grail of Long-Term Value Investing
23. The Market Is Efficient Most, but Not All, of the Time
24. The Dynamic Art of Portfolio Management and Individual Position Sizing
25. To Finish First, You Must First Finish
26. Read More History and Fewer Forecasts
27. Updating Our Beliefs in Light of New Evidence
28. Life Is a Series of Opportunity Costs
30. Acknowledging the Role of Luck, Chance, Serendipity, and Randomness
31. The Education of a Value Investor
Conclusion: Understanding the True Essence of Compounding
A little more than twenty years ago, I discovered Warren Buffett, Charlie Munger, Ben Graham and the art of Intelligent Investing. Even before attending my first Berkshire Hathaway meeting, I had become a converted disciple—such that, when I first arrived at Berkshire, I felt like I had found “my tribe.” At the time, we were one or two thousand people in Omaha. But the tribe was growing. Today, tens of thousands attend the Berkshire meeting, and many more watch online.
And just as the size of the tribe has not been static, neither has its world view or self-understanding. Back in those early days, I saw value investing as merely a way to invest well, get rich, and live The Good Life. But as the years went on, I came to realize that there was far more to it than this. I began to see it as a system for living the best possible life. Thus, the Value Investor’s view of life encompasses far more than concepts like Mr. Market, and Margin of Safety. It extends to questions like, “What is Worldly Wisdom and How does one Acquire it?,” “How does one build a Latticework of Mental Models,” “What role can and should Stoicism play in life and investing?,” and “What can the Mahabarata, the Gita and other great works of Eastern Wisdom teach us about investing and life?”
Gautam Baid’s book is another step in the Value Investing tribe’s unfolding knowledge about the world we inhabit. In it, you will learn his lessons from the greats—as updated by more recent students. So in addition to Buffett, Munger, and Graham, you will read about what Baid has learned from people like Mohnish Pabrai, Tom Russo, Mike Mauboussin, Peter Bevelin, Saurabh Madaan, Marcelo Lima, Paul Lountzis, and others. You will also benefit from Baid’s broad reading across many disciplines as he distils his understanding of works by a broad range of authors, including Herbert Simon, Shane Parrish, Nassim Taleb, Rolf Dobelli, Richard Zeckhauser, and others.
And, just as all true value investors are travelers on a path, this book itself has come a long way since it crossed my desk not so long ago. This Columbia Business School Publishing edition benefits from improved organization around topics and a clearer focus on Gautam’s voice and insights. It offers fresh opportunity to learn and relearn those key lessons that will make us better investors and better human beings.
Guy Spier
Zurich, Switzerland
INTRODUCTION: THE BEST INVESTMENT YOU CAN MAKE IS AN INVESTMENT IN YOURSELF
I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.
—Charlie Munger
In his 2007 University of Southern California School of Law commencement speech, Charlie Munger said that lifelong learning is paramount to long-term success. Without it, we won’t succeed, because we won’t get far based on what we already know.
If you take Berkshire Hathaway, which is certainly one of the best-regarded corporations in the world and may have the best long-term investment record in the entire history of civilization, the skill that got Berkshire through one decade would not have sufficed to get it through the next decade with the achievements made. Without Warren Buffett being a learning machine, a continuous learning machine, the record would have been absolutely impossible.1
Most people go through life not really getting any smarter. But you can acquire wisdom if you truly want to obtain it. In fact, a simple formula, if followed, is almost certain to make you smarter over time. It’s simple but not easy.
It involves a lot of hard work, patience, discipline, and focus.
Read. A lot.
This is how Warren Buffett, one of the most successful people in the business world, describes his typical day: “I just sit in my office and read all day.”2
Sitting. Reading. Thinking.
Buffett credits many of his successful decisions to his incredible reading habit. He estimates that he spends as much as 80 percent of his day reading and thinking.
In a 2014 letter to Berkshire shareholders, Munger outlined his expectations of the chair of the firm: “His first priority would be reservation of much time for quiet reading and thinking, particularly that which might advance his determined learning, no matter how old he became.”3
Once, when asked about the key to his success, Buffett held up stacks of paper and said, “Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”4