take-aways
- Spend intentionally: Allocate funds for experiences at the time in your life when you can enjoy them the most.
- Health over wealth: Recognize that your health dictates the quality of your experiences, so plan your finances around your physical capabilities.
- Timely experiences: Invest in experiences over material possessions, as memories are more valuable.
- Plan your legacy: Consider the impact of inheritances and the value of giving at the right time.
- Avoiding regret: Ensure that you do not miss out on life’s experiences due to over-saving or poor financial planning.
- Optimizing fulfillment over a lifetime is the goal. We want to maximize the area under the entire curve. Not just for retirement. It takes hard work and planning. It’s easy to get lost in work and forget that money is supposed to increase our ability to enjoy life.
- Certain things can only be experienced at certain stages of your life. It makes sense to borrow from your future, likely wealthier, self. It doesn’t make much sense to save too aggressively when you’re young and broke. The 10% rule and the pay yourself first principles might be overly simplistic. According to his app, I should be spending roughly 15K per year on experiences right now.
- “Each age tends to have a different balance of health, money, and free time. Because fulfillment requires reasonable amounts of all three, it’s a good idea at every age to trade an abundance of one (such as money) to attain more of the other two (such as buying more health or free time).”
- Your ability to squeeze the juice of life is contingent on your health. Investing in your long-term health has one of the highest returns on investment when it comes to experience points.
- Given my Time Bucket exercise, it’s likely going to be very cheap to be an old man. An intentional effort is going to be required to spend my money from my fifties through my seventies.
- I’m at a high risk of saving way too much.
- Canada Pension Plan, Old age security, TFSA & RRSP
- “Retirees on a pension—meaning that they had a guaranteed source of ongoing income after retirement—spent down much less of their assets (only 4 percent) during the first 18 years after retirement than did non-pensioners (who had spent down 34 percent).”
- Distribute your inheritance while the people you care about need it (25-35 age range). Donate now instead of waiting till you’re dead, so they reap the return on investment.
- Three Random R’s: Random amount of money. Random people. Random time.
- You are the worst insurance broker. Trying to save for just in case disasters is a bad idea. That’s what insurance companies are for.
- Buy life insurance for mortality risk.
- Buy annuities for longevity risk.
- Stringing positive experiences one after another doesn’t guarantee fulfillment. Invest in experiences with people you love. Perform an 80/20 analysis of your calendar on a yearly basis.
- die with zero info graphic
- In investing, paence is your biggest virtue. You can be a successful investor only if you are patient with your investments.
- Sentiment and behaviour are your biggest enemies. In order to succeed at investing, you must be able to control your emotions and make rational decisions.
- Trying to predict the future is redundant. Instead, you should focus on trying to learn from the past.
- A successful investment mantra is to buy cheap. A better mantra is to buy quality at cheap prices.
- Always question whether the price that you are paying for an investment is reasonable.
- Whether in life or in investing, there is no substitute for hard work and discipline.
Maximize your positive life experiences.
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The time-sensitivity of experiences
- “For example, some experiences can be enjoyed only at certain times…”
- “So to increase your overall lifetime fulfillment, it’s important to have each experience at the right age.”
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The 10% Rule is broken
- “So why should I save this random percentage of my modest income for the future? I should enjoy that measly $1,000 right now!”
- “we need to basically transfer money from years of abundance into the leaner years. That’s one use of savings accounts. But in my case, I had been using my savings account totally backwards—I was taking money away from my starving younger self to give to my future wealthier self!”
- “But this book focuses on managing what is under your control through the decisions you make—so realize that a few factors are in your control, and one of the biggest is how much time at each age you devote to earning money versus having enjoyable experiences.”
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money = life energy
- maslow’s hierarchy
- We need to trade in life energy for money, so we can: survive, afford fulfilling experiences.
- Bill argues that most people focus way too much on saving money. Even as they get older, they carry on trading in their valuable time, all for cash they’ll never spend.
Invest in experiences early. - Memory dividends
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“Unlike material possessions, which seem exciting at the beginning but then often depreciate quickly, experiences actually gain in value over time: They pay what I call a memory dividend…”
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“That was when I realized that you retire on your memories. When you’re too frail to do much of anything else, you can still look back on the life you’ve lived and experience immense pride, joy, and the bittersweet feeling of nostalgia.”
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“So every time you remember the original experience, you get an additional experience from mentally and emotionally reliving the original experience. The recollection may bring you just a tiny fraction of the enjoyment that the original experience did, but those memories add up to make you who you are.”
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“The memory dividend is so powerful and valuable that tech companies are monetizing it and creating billions in wealth. Anyone who’s used Facebook or Google Photos has seen the occasional “On this day 3 years ago” message, with accompanying photos from that day. Through this feature, the companies tap into your memory dividend, sparking good feelings and a desire to reach out to those included in the photos.”
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“Before Facebook and the like, it used to be our friends and family who’d spark the “remember when” conversation—but now FB plays that role and cashes in financially on that all-important memory dividend.”
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“Some of these memories, upon repeat reflection, may actually bring more enjoyment than the original experience itself.”
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“So buying an experience doesn’t just buy you the experience itself—it also buys you the sum of all the dividends that experience will bring for the rest of your life.”
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“Like so many people who invest in real estate, Paulie was thinking only about return on equity—not about return on experience.”
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“Since the whole point of money is to have experiences, investing money to get a return with which to have experiences is a roundabout way of having experiences. Why go through all that when you can just invest directly in experiences—and get a return on experiences? Not only that, but the number of actual experiences available to you diminishes as you age. Yes, you need money to survive in retirement, but the main thing you’ll be retiring on will be your memories—so make sure you invest enough in those.”
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“Once you start thinking about the memory dividend, something becomes really clear: It pays to invest early.”
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“Think about how you can actively enhance your memory dividends. Would it help you to take more photos of your experiences? To plan reunions with people you’ve shared good times with in the past? Compile a video or a photo album?”
We could start playing a slideshow of our albums on Google photos on a digital frame in our apartment.
- Cherishing Memorable Moments
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Memorable moments don’t always have to come from life-changing events. Sometimes, the simple, everyday occurrences leave a lasting impact on our memories.
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Take time to reflect: Set aside a few minutes each day to recall special moments and acknowledge their impact on your life.
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Be present: Practice mindfulness and fully immerse yourself in the present moment during activities.
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Capture memories: Document your experiences and emotions using photographs, journals, or social media platforms.
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Celebrate milestones: Recognize and acknowledge accomplishments, big or small, to celebrate your progress and growth.
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Aim to die with zero.
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“Now, the vast majority of people can only dream of retiring by the relatively young age of 38—yet for John, that retirement age was actually a few years too late. Why? Two reasons. First, he’ll never get those years back that he spent just focusing on making money. He’ll never be 30 again, and his children will never again be babies. Second, he made so much money that he now faces the Brewster’s Millions problem: It’s actually hard to spend his fortune fast enough. He already lives in a magnificent house and these days does pretty much what he wants. One reason he can’t use up his money is his kids: Much as he’d enjoy having the über-popular pop band Maroon 5 play private concerts in his backyard every Saturday, for example, he doesn’t do anything of the sort, because he doesn’t want to spoil his children.”
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“But no matter who you are—a captain of industry or an everyday working stiff—one thing is true: If you spend hours and hours of your life acquiring money and then die without spending all of that money, then you’ve needlessly wasted too many precious hours of your life.”
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“So a rational person, in Modigliani’s view, will spread their wealth across all the years up to the oldest age to which they might live. Some people do try to live in this rational, utility-maximizing way, but many do not. Either they save too much or they save too little. Optimizing across your whole life takes a lot of thought and planning; it’s easier to live for short-term rewards (myopia) and to stay on autopilot (inertia) than to do what will be good for you in the long term.”
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Saving too much
- “And I’m not saying you shouldn’t save for the future. What I’m saying is that people who save tend to save too much for too late in their lives. They are depriving themselves now just to care for a much, much older future self—a future self that may never live long enough to enjoy that money.”
- “If you look at data on net worth by age, you find that most people keep accumulating wealth for decades, and most don’t start spending it down until very late in life.”
- “Americans’ median net worth keeps rising at least until their mid-seventies.”
- “That’s crazy—people in their seventies are still saving for the future! In fact, even in their mid-seventies, people in this upper half of the population don’t start dipping into their savings.”
- “People’s overall expenses decline with age, even counting the cost of healthcare.”
- “On the whole, people are very slow to spend down (“decumulate”) their assets. Across ages, whether looking at retirees in their sixties or those in their nineties, the median ratio of household spending to household income hovers around 1:1. This means that people’s spending continues to closely track their income—so as people’s incomes decline, their spending does, too. This is another way of seeing that retirees aren’t really drawing down all the money they’ve saved up.”
- “At the high end, retirees who had $500,000 or more right before retirement had spent down a median of only 11.8 percent of that money 20 years later or by the time they died. That’s more than 88 percent left over—which means that a person retiring at 65 with half a million dollars still has more than $440,000 left at age 85!”
- “At the lower end, retirees with less than $200,000 saved up for retirement spent a higher percentage (as you might expect, since they had less to spend overall)—but even this group’s median members had spent down only one-quarter of their assets 18 years after retirement.”
- “One-third of all retirees actually increased their assets after retirement! Instead of slowly or quickly decumulating, they continued to accumulate wealth.”
- “Retirees on a pension—meaning that they had a guaranteed source of ongoing income after retirement—spent down much less of their assets (only 4 percent) during the first 18 years after retirement than did non-pensioners (who had spent down 34 percent).”
- “Pensioners could dip more deeply into their savings than anyone, since their guaranteed income for life assures them they will never starve. But, interestingly, pensioners spend down the lowest percentage of their wealth, probably because, as the data shows, that they had more wealth to begin with.”
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The source of money
- “The source of your money doesn’t change the calculus on maximizing your life.”
- “Once it’s given to you it becomes yours. And once it’s yours, it now represents hours of your life, which you can exchange for whatever will help you live the best life you can.”
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But I like my work!
- “Because even if you enjoyed every minute of the work that brought you that money, failing to spend that money is still a waste.”
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The diminishing value of money as you age
- “So I gave her a $10,000 check. It feels like a dumb gift now, and if I knew then what I know now, I would have given her an actual memorable experience instead, such as a trip to visit relatives in another state. But back then, I was of the mind that people know best what to give themselves. I would have wanted someone to just give me the money, so that’s exactly what I did for my grandma.”
Use all available tools to help you die with zero.
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Annuities & Life Insurance
- “The possibility that you will live longer than you expect is called longevity risk. Nobody wants to die early—the possibility of that is called mortality risk—but nobody wants to die after their money runs out either.”
- Probability distribution: https://www.longevityillustrator.org/
- Detailed questionnaire: https://www.livingto100.com
- Bucket list timer: https://finalcountdownapp.com/
- “So that’s life insurance—it helps you deal with mortality risk, and 60 percent of Americans own at least some life insurance.”
- “These products are called income annuities (or simply annuities). Annuities are essentially the opposite of life insurance: When you buy life insurance, you’re spending money to protect your survivors against the risk that you’ll die too young, whereas buying annuities protects you against the risk of dying too old (outliving your savings).”
- “Well, buying an annuity means you give the insurance company a lump sum—say, $500,000 at age 60—and in return you get a guaranteed monthly payout (for example, $2,400 each month) for the rest of your life, however long that happens to be.”
- “For example, one popular rule of thumb for retirement spending is the “4 percent rule,” whereby you withdraw 4 percent from your savings each year of retirement. Well, with annuities, your annual payouts will probably amount to more than 4 percent of what you put into the annuity—and, unlike the 4 percent withdrawals, those payouts are guaranteed to continue for the rest of your life.”
- “In the extreme case—if you die the day after you buy the annuity—you won’t see any more of the money you put in, and it will instead go to monthly payments to the lucky stranger (another annuity buyer) who lives into her nineties.”
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You’re the worst insurance broker!
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“To put it bluntly, no amount of savings available to most people will cover the costliest healthcare you might possibly need. For example, cancer treatments can easily cost half a million dollars a year. Or, if your out-of-pocket medical expenses amount to $50,000 per night (as they did for my father’s hospital stay at the end of his life), does it really matter whether you’ve saved $10,000 or $50,000 or even $250,000? No, it doesn’t, because the extra $50,000 will buy you one extra night, a night that might well have taken you a year’s worth of work to earn!”
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“There’s a more general point I want to get across: For every single thing you might be worried about in your future, there is an insurance product to protect you. That doesn’t mean I recommend buying insurance for every single thing; obviously, insurance costs money. But the fact that insurance companies are willing to sell insurance for various risks shows that these risks can be quantified—and removed for those who don’t want to take those risks.”
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“Without an annuity, on the other hand, you are forced to self-insure—to be your own insurance agent. That’s not a great idea, because unlike the insurance agents who work for big insurance companies, you don’t have the ability to pool risk and cancel out errors on both sides. So, to feel financially secure until the end of your days, you will have to leave a large cushion to cover the worst-case scenario: You will have to oversave, which means that more likely than not you will end up dying with considerable money left over. You’ll have worked for years earning money that you never got to enjoy.”
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Automating Finances
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A major step in the Die With Zero process is to establish a reliable financial system. The best way to get there is to automate it as much as possible. You can read this article for more details on my system works, but here are the basic steps.
- Create a savings account for each financial goal.
- Calculate your contribution amount based on often you want to make the payments and how far in the future you need the money.
- Determine the location of your account.
- Savings account: low interest, best for short-term goals (1 to 6 months)
- High-interest savings account: best for medium-term goals (6 months to 3 years)
- GICs: best for medium-term goals (6 months to 3 years) where you know you won’t need the money
- Investments: best for long-term goals (3 years or more)
- Make sure that all income streams flow into your no-fee checking account.
- Automate a contribution from your checking account to your goal account.
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There’s no better feeling than having a guilt-free experience, knowing that it’s paid for. It also helps you sleep at night knowing that your money is working for you without having to lift a finger. It frees you from having to make tough decisions all the time.
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Give money to your children or charity when it has the most impact.
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Inheritances
- “Give your children whatever you have allocated for them before you die. Why wait until you’re gone?”
- “What is the most common age for people to get an inheritance? Well, people at the Federal Reserve Board track such things, and here’s what they find: For any income group you look at, the age of “inheritance receipt” peaks at around 60.”
- “I call it the three Rs—giving random amounts of money at a random time to random people (because who knows which of your heirs will still be alive by the time you die?).”
- “The vast majority—between 80 and 90 percent, depending on the year—of households that received some wealth transfer in 1989 through 2007 received an inheritance. (I’d prefer the percentage to be zero, but realistically, I would be happy to see it at 20 percent since some people die early.)”
- “The 26-to-35 age range combines the best of all these considerations—old enough to be trusted with money, yet young enough to enjoy its benefits fully.”
- “My stepson is older—29—so he’s already received 90 percent of his “inheritance,” in the form of money he used to buy a house.”
- “A while ago, I realized I had money in my will for people who are older than me—my mom, my sister and my brother. That made me think: What about now? Do I want to give anything now when they can enjoy those gifts more than later? My answer was yes, so I gave them that amount.”
- “If you want to give money to your children and future grandchildren, start to do it now. (For children who are currently too young, set up a trust.) As for the rest, spend it on making your best life possible.”
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Working for your kids
- “But once you get past the point of just working for basic needs and avoiding negative experiences, you can start to exchange your labour for positive life experiences. As far as your children are concerned, you can either work for more money to buy them experiences or spend your extra free time to give them the experience of time with you.”
- “Once you have enough money to take care of your family’s basic needs, then by going to work to earn more money, you might be depleting your kids’ inheritance because you are spending less time with them!”
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Donate now!
- “But I know that her delay was inefficient because her charities certainly could have used the money earlier, benefiting many more people sooner.”
- “Economists have also tried quantifying the return on investment in education, finding that, worldwide, the social returns to schooling at the secondary and higher education levels are above 10 percent (per year). What other investment can yield such a reliably high rate of return?”
- “For example, in 1999, foundations took in more than $90 billion but distributed less than $25 billion. That is why one analysis concludes that “donors should ask not just how, but how soon, their gifts will be used.” I couldn’t agree more.”
- “He started giving his money away (anonymously) early, and by the time he was in his eighties, he had given away more than $8 billion of his wealth. He had chosen to live frugally, like legal secretary Sylvia Bloom—but unlike Bloom, he didn’t wait until his death for that money to go to charitable causes. He’s now in his eighties, and by choice, he and his wife live in a rented apartment. His net worth is now down to about $2 million—still plenty to sustain him for the rest of his life, but a tiny fraction of the money he gave away over the years. Feeney has inspired many wealthy people, including Bill Gates and Warren Buffett. But you don’t have to be rich to give while living.”
- “Through organizations like Save the Children and Compassion International, you can sponsor a child for less than $500 per year, helping the child grow up safe, healthy, and better educated—and starting a positive cycle for future generations.”
- “If you don’t have as much money to give away as you’d like, you still probably have time to give.”
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The goal is to have roughly 50k for each child. I can use an RESP and combine it with government matching. Based on this calculator, saving roughly 150$ dollars per child per month from birth should be sufficient to pay for an undergraduate degree. This is especially true if they qualify for grants and scholarships.
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I plan to tell them that roughly 50k will be distributed to them as needed throughout their twenties and thirties. The less they use for school, the more they’ll have to start their life. I can distribute this amount as birthday gifts, Christmas gifts, wedding gifts, graduation gifts, etc.
Don’t live your life on autopilot.
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Spending-to-saving ratio
- The spending-to-saving ratio should be higher when you’re young and old.
- “Joe Farrell didn’t just make this advice up. The idea that it’s rational for young people to be freer with their money is shared by many economists, even though it runs counter to the advice most of us grow up hearing.”
- “Basically, if there were a more expensive version of something, I’d go for it without thinking about getting the maximum value. In effect, I just went from autopilot-save to autopilot-spend.”
- “To my way of thinking, no way can the same ratio of spending to saving be right for everyone—and, more importantly, no way should your savings percentage be the same when you’re 22 as when you’re 42 or 52.”
- “And when you have many years of rising income ahead of you, saving 20 percent of your income doesn’t make sense. That would mean forgoing memorable life experiences you could be having, and it also means working to pay for a richer future self—a suboptimal use of your life energy, that’s for sure.”
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The ability to enjoy wealth declines with age
- “Travel is the ultimate gauge of a person’s ability to extract enjoyment from money because it takes time, money, and health.”
- “Some researchers asked people of different ages what prevented them from taking a trip. They found that people under age 60 are most constrained by time and money, whereas people 75 and older are most constrained by health problems. In other words, when time and money are no longer a problem, health is.”
- “Friends who are around my age agree: At a certain point, your memories of having played football are a lot more pleasant than playing football.”
- “That’s a good thing because the better you can maintain your health during your lifetime, the higher your fulfillment score will be.”
- Each age tends to have a different balance of health, money, and free time. Because fulfillment requires reasonable amounts of all three, it’s a good idea at every age to trade an abundance of one (such as money) to attain more of the other two (such as buying more health or free time).
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mini-retirement
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Tim Ferris talks about mini-retirements in The 4-hour Work Week. It aligns quite well with the Die With Zero philosophy. Why delay gratification until we cannot enjoy travelling to start travelling? Interweaving extended periods of a few months during your career is a great way to find balance and come back energized.
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As a teacher, we have three built-in options for mini-retirements in addition to having summers off:
- Deferred Leave: “For example, if the employee opts for a 4/5 method, they would save and defer twenty percent (20%) of their salary each year for four (4) years, take a leave of absence in the fifth year, and be paid the amount saved (80% of salary) over a twelve (12) month period. See the Deferred Leave Guide for a complete list of X/Y options.” I can do this as often as I want.
Sabbatical Leave: I can leave for a year at a certain percentage of my salary, and the district will keep my job. I think I can only take this option once in my career. Educational Leave: My school would need to approve that I return to school with the intention of returning to teaching. It might be interesting to do a PhD.
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The three-factor model
- “In our three-pronged model—where fulfillment from a single experience is a function of health, money, and free time—health is the single biggest factor (or multiplier) affecting the size of a person’s lifetime fulfillment curve: Our simulations show that even a small permanent reduction in health at some point in a person’s life amounts to a large reduction in the person’s lifetime fulfillment score.”
Think of your life as distinct seasons.
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Many deaths
- “Likewise, but for reasons of my inevitable aging, there will eventually be the last time I ever go wave-running, the last time I play in a poker tournament, and the last time I’ll be able to board a plane and fly somewhere exotic.”
- “That is what I mean when I say that we die many deaths in the course of our lives: The teenager in you dies, the college student in you dies, the single unattached you die, the version of you that’s a parent of an infant dies, and so on. Once each of these mini-deaths occurs, there’s no going back. Maybe “dies” is a bit harsh, but you get the idea: We all keep progressing from one stage or phase of our lives to the next. So much death and doom, I know—but the upside is that we have many lives to live, enjoy, and maximize!”
- “If you listen to people tell their stories, most people’s lives are actually lived as a series of two-to-four-year seasons strung together.” – Designing Your Life Book
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Regret minimization
- “Because of this eventual finality of life’s passing phases, you can delay some experiences for only so long before the window of opportunity on these experiences shuts forever.”
- “An Australian woman named Bronnie Ware, whose work as a palliative caregiver put her at the bedsides of patients with just weeks left to live, talked with her patients about what they wished they had done differently in their lives and found five key regrets coming up more often than any others. As she describes in a popular online article and subsequent book, the two most common regrets are most relevant to my message.”
- “Her patients’ number one regret was wishing they’d had the courage to live a life true to themselves—as opposed to the life that others expected of them. … As the old saying goes, “No one ever regrets not having spent more time in the office.” Along those lines, the second regret—and the top regret among Ware’s male patients—was this: “I wish I had not worked so hard.”
- “And when people say they regret working so hard, they are not talking about the hard work of raising children; they are talking about working to make a living to pay the bills and, as a result, missing “their children’s youth and their partner’s companionship.”
- “Being aware that your time is limited can motivate you to make the most of your time.”
- “…it’s also that most people just have the sense that there’s no time urgency near home; they act as if they will always be able to visit that museum or that nearby beach or that friend some other time. As a result, we spend many of our evenings watching TV, and we fritter away our weekends.”
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Time Buckets
- “Draw a timeline of your life from now to the grave, then divide it into intervals of five or ten years. Each interval—say, from age 30 to 40 or from 70 to 75—is a time bucket, which is just a random grouping of years. Then, think about what key experiences—activities or events—you want to have during your lifetime. We all have dreams in life, but I have found that it’s extremely helpful actually to write them all down in a list.”
- “For example, you might want to have a child, run the Boston Marathon, hike the Himalayas, build a house, file a patent, start a business, volunteer for Doctors Without Borders, dine at a Michelin-star restaurant, attend the Sundance Film Festival, go skiing 50 times, go to the opera, take a cruise to Alaska, read 20 classic novels, attend the Super Bowl, compete in a Scrabble tournament, visit Yellowstone, see autumn in Vermont, take your kids to Disneyland three times, and so on.”
- “Then, once you have your list of items, drop each of your hoped-for pursuits into the specific buckets based on when you’d ideally have each experience.”
- “Remember, we’ve been focusing only on two key components of your time buckets: your physical health and your life’s dreams. We deliberately pushed financial concerns aside because it’s always too easy to blow off our dreams by simply saying, “Sounds nice, but let’s face it… I can’t afford that.” Focusing on money distracts from the truth that time and health are fleeting.”
- The amount of activities per bucket decreases with age, given that our health is expected to decrease.
The average cost per activity drops sharply in old age. This implies that our nest egg of retirement savings may not need to be as big as we think. I think my lifestyle as an old man will be relatively cheap.
- The autopilot of life pulls us away from our time buckets. We must block off chunks of our calendars and prioritize it. See the last section to see how I plan to implement this
- Now, as you fill up your time buckets, you might notice that some experiences are more flexible than others. For example, you can still enjoy visiting libraries, watching classic movies, reading novels, and playing chess well into your old age. Taking a cruise can be enjoyable at just about any age. Still, as you start filling up your time buckets, you’ll probably see that the experiences you want to have in life don’t fall evenly across the ages. Instead, they naturally cluster during certain periods—taking on roughly the shape of the right side of a bell curve (see figure below).
- “Experiences Clustered in Your Twenties vs More Traditionally Distributed Around Midlife Without the constraint of money, most of your experiences would optimally occur in your twenties and thirties, when your health is highest. But most people’s spending is generally clustered around midlife instead.”
- “If you have children, think about your version of the Heffalump movie: What one experience do you want to have more of with them in the next year or two before that phase of their life and your life is over?”
- “As you go through life, your interests change, and new people enter your life, so it’s a good idea to repeat the time-bucketing exercise now and then, such as every five or ten years. One of the most important times to re-bucket your life is when you’re nearing your net worth peak.”
- Add a reminder in Google Calendar that repeats every ten years to revisit your Time Buckets.
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Connects with Tim Ferris’ 80/20 calendar review
Know when to stop growing your wealth.
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But a number should not be most people’s main goal. One reason is that, psychologically, no number will ever feel like enough.
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Financial Independence Number
- “Being able to get to work on time, paying everyday bills, taking care of our kids, putting food on the table—these are the essentials in life.”
- “The threshold I’m talking about—how much you need to save at a bare minimum—is a number. But as you’ll see in a moment, that number may well be lower than what dutiful savers are already on track to save. That’s because the threshold is based on avoiding the worst-case scenario (that is, running out of money before you die); it’s the amount of money you need to have saved up to survive without any other income. Once you meet this threshold, you don’t need to work for money—and you can start carefully dipping into your savings.”
- “But for everybody, the survival threshold is based on your annual cost of living and the number of years you expect to live from the present day.”
- “The amount of money you’ll need in retirement is often much lower than you’ve been advised to save. For example, suppose you’ve been told that during each year of retirement, you will need 80 percent or more of your annual pre-retirement income. In that case, you will probably discover, after looking at the activities you’ve bucketed for your seventies, eighties, and beyond, that these don’t cost that much—far less than 80 percent of your previous spending. (Recall the research on the no-go years from chapter 3.)”
- “Calculate your annual survival cost based on where you plan to live in retirement.”
- “Consult your doctor to get a read on your biological age and mortality; get all the objective tests you can afford that gives you the status of your current health and eventual decline.”
- “Let’s also assume for this example that you are 55 years old and that, having looked at a life expectancy calculator, you expect to live until you’re 80. So your money will have to last you another 25 years (that is, years left to live = 25). How much do you need in your nest egg today to have a survival amount for the rest of your life? Well, to get a very rough answer—not the final answer—you would multiply your annual cost of survival, the cost to live one year, by the number of years you’ll be spending that amount, years left to live: (cost to live one year) × (years left to live) = $12,000 × 25 = $300,000 Again, this is not the final answer. The real amount you need to save up is much lower than $300,000. Why? Because your nest egg doesn’t just sit there while you dip into it year after year. Assuming you’ve invested it in a typical stock/bond portfolio, your money is usually earning interest, working to bring in income even when you are no longer working. Therefore, whatever interest it’s earning above inflation (whether that interest is 2 percent or 5 percent or whatever) is helping to offset the cost of your withdrawals.”
- “Before you start thinking about spending down your money, you must make sure you have enough to live on for the rest of your life. That’s an important caveat because plenty of people aren’t saving enough for retirement.”
- “Time for another disclaimer: Always remember that even a stock/bond portfolio does not always earn interest above inflation.”
- Project example from my grade 11 math class.
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Peak Date
- “You should find that one special point in your life when your net worth is the highest it will ever be. I call that point your net worth peak, or just “your peak.”
- “Thinking of your peak as a date—and not as a number—is good advice only for people who have reached a certain savings threshold.”
- Once you’ve resolved your worries about mere survival, you can start thinking about your net worth peak as a date rather than a number.
- “Some advisers even take into account the fact that your retirement spending won’t be constant from the start of retirement until its end—thus, they tell you that you will need more money at the start of retirement (your go-go years) than when you’re 10 or 20 years in.”
- “For most people, the optimal net worth peak occurs at some point between the ages of 45 and 60.”
- “Accumulation of Net Worth Traditionally, people continue to increase their net worth until they stop working and are afraid to dip much into their principal even after retirement. But to make the most of your hard-earned money, you must crack open your nest egg earlier (starting to spend down your savings sometime between 45 and 60 for most people) so that you end, theoretically, with zero.”
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Excuses
- “What, do you expect me to quit a job I love just because I’ve hit some magical date?” And my answer is no. If you want to keep working, be my guest. Just be sure to ramp up your spending accordingly so that you don’t end up dying with lots of money left over. That would be a waste no matter how much you enjoyed your job.”
- “Look, if all you want is to have a pile of money at the end, I guess that’s your choice. But remember that I have never seen somebody’s total net worth posted on their tombstone.”
- “How do you know your tastes if you haven’t done much except work and raise kids?”
- “Another strategy for squeezing the most experiences out of your early golden years without quitting your job is to cut back on your work hours if possible. If you’re lucky enough to work for an employer offering a formal “phased retirement” program, look into it.”
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How to spend your money. It’s harder than you might think.
- If Money Doesn’t Make You Happy, Then You Probably Aren’t Spending It Right – Dan Gilbert
- “The people you share experiences with truly affect the quality of the experience—and nowhere is that more true than at a once-in-a-lifetime event. So I knew that if I wanted to have this kind of unique birthday bash, I was going to have to step up and pay for a lot of my guests to attend.”
- “Invest in experiences that yield long-lasting memories, always bear in mind that everyone’s health declines with age, give your money to your children before you die instead of saving for their inheritance, and learn to balance current enjoyment with later gratification.”
- “For starters, he and his wife could put their heads together and list their three favourite musical groups. Why not fly out to see them in some destination locale for a weekend? Or he could join TED as a patron member, which costs several hundred thousand dollars and gives you special access to the main TED conference, where he could meet living intellectual legends in many fields. After one trip to TED and talking to these amazing people, he could find 13 different purposes and directions he could go in!”
- “Here’s the bottom line: More money doesn’t equal more experience points.”
- “Declining Utility of Money with Age Your ability to enjoy experiences depends on both your economic ability (the wealth curve shown here) and your physical ability (the health curve). Continuing to build wealth doesn’t necessarily buy you more experiences because your declining health limits your enjoyment of certain experiences no matter how much money you have.”
- “So, for example, $2.5 million does buy you a better quality of life than $2 million, all other things being equal—but all other things are usually not equal! That’s because for every additional day you spend working, you sacrifice an equivalent amount of free time, and your health gradually declines, too.”
- “In sum, from my perspective, the years you spend earning that extra $500,000 do not make up for (let alone surpass) the number of experience points you lost by working for more money instead of enjoying those five years of free time.”
Take your biggest risks when you have little to lose.
People are more afraid of running out of money than of wasting their lives, and that has to change.
- Asymmetric risk
- “When the upside of possible success is much greater than the downside of possible failure. When you face asymmetric risk, it makes total sense to be bold, to grab the opportunity at hand. At the extreme, when the downside is very low (or nonexistent, as in the “nothing to lose” case) and the upside is really high, it’s actually riskier not to make the bold move.”
- “Notice that I’m not saying that being bold in situations of asymmetric risk always leads to success, the way it did for Mark Cuban. Sometimes things don’t go your way, no matter how hard you try. What I’m saying is that the “loss” is worth it—it was still a good bet because I knew I had little to lose, I had plenty of time to course-correct, and I still acquired some great memories.”
- “Besides, if she couldn’t take the risk now, when could she take the risk?”
- “There’s a difference between low-risk tolerance and plain old fear. Fear tends to take the actual risk and then blow it out of proportion.”
- Fear Setting Exercise – Time Ferris
- Be bold.
- “When you consider all the safety nets you’ve got in your life—from unemployment insurance provided by your job to private insurance you can buy against any kind of disaster to good old-fashioned help from your family—the worst-case scenario is probably not as bad as you think.”
- “For example, let’s say you have an opportunity to move across the country (or across the world) for an exciting job that pays $70,000 a year more than your current job. But you’re afraid you’ll lose touch with your friends and family. When I hear something like that, I ask a couple of questions. One is: How much time do you spend with these people? Often it’s not that much time at all, because we tend to take for granted what is readily available. The other question I ask is: How much is a round-trip first-class ticket from here to there on no notice? This is the highest price you would have to pay to see the people you’d be moving away from.”
- “In all these cases, you can take the safer path of quiet misery or the bolder path that’s less certain but potentially much more rewarding, both financially and psychologically.”
- “I figured that if the post office was always hiring and provided a safe income, I could always go work there if all else failed, but there’s no need to start there.”
- “If that’s the case, your failure is no longer your own—it affects other people. It’s for the same reason that I stopped riding motorcycles and taking flying lessons once I had kids: In my mind, I no longer had the right to put my life on the line for the sake of those thrills.”
Questions
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Gift what you intend for your kids (or charities) while you’re still alive. Why hold on until the end?
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What memories would you want your kids to associate with you? What experiences would you like them to share with you?
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Does every extra hour at work justify the sacrifice for you and your children?
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Is your job enriching your legacy or chipping away at it?
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How does Die With Zero differ from traditional financial planning?
- Die With Zero challenges conventional financial planning by emphasizing the importance of enjoying and spending money during your life rather than solely focusing on saving and accumulating wealth for retirement. Traditional financial planning often advocates for growing wealth and minimizing risks, while Die With Zero encourages spending on memorable experiences and deriving fulfillment from life.
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How can the Die With Zero approach achieve financial independence?
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Does the book suggest that we shouldn’t save money for the future and instead spend all we have in the present?
- Not necessarily. The book’s central message is not about spending recklessly but prioritizing life’s peak experiences while you have the time and health to enjoy them. It proposes that while having enough money for security is essential, it’s equally crucial not to sacrifice too much time merely accumulating wealth. Instead, focus on creating enjoyable experiences, which become a significant sum of your life’s fulfillment.
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What if I run out of money before I die?
- Bill’s main point is that we fear running out of money a lot more than it’s likely to happen. People who save for the future tend to save up too much and wait until too late in their lives to spend it on fulfilling experiences, if at all.
The big caveat is that this all assumes you’re a reasonably high-earner with disposable income and savings. If you’re not, please don’t take the book too seriously.
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What about the kids?
- if you give them that money when they’re 25-35, that windfall will be ridiculously helpful. With a big chunk of cash at that age, your kids can:
- Put down a deposit on a house
- Start their own company
- Afford to have their kids
- Pursue interesting careers instead of working horrible jobs to make rent.
- Don’t wait until you die to give money away to your kids. If you’re going to do it, do it when you’re alive and when they’re younger, when the money will be most effective.
- if you give them that money when they’re 25-35, that windfall will be ridiculously helpful. With a big chunk of cash at that age, your kids can:
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How can the Die With Zero approach be applied to achieve financial independence?
- Applying Die With Zero’s approach to achieving financial independence involves balancing enjoying your experiences and managing your finances effectively. This means investing in experiences early in life, considering the timing and impact of gifts to others, and being open to non-traditional retirement plans. By focusing on living a fulfilling life rather than solely accumulating wealth, you ensure financial independence aligns with your personal values and life goals.
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How does Die With Zero differ from traditional financial planning?
- Die With Zero challenges conventional financial planning by emphasizing the importance of enjoying and spending money during your life rather than solely focusing on saving and accumulating wealth for retirement. Traditional financial planning often advocates for growing wealth and minimizing risks, while Die With Zero encourages spending on memorable experiences and deriving fulfillment from life.
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What are the main principles of the Die With Zero concept?
- The Die With Zero concept revolves around maximizing positive life experiences and spending your money wisely during your lifetime. The main principles include:
- Maximize your positive life experiences.
- Start investing in experiences early.
- Aim to die with zero.
- Use all available tools to help you die with zero.
- Give money to your children or charity when it has the most impact.
- Don’t live your life on autopilot.
- Think of your life as distinct seasons.
- The Die With Zero concept revolves around maximizing positive life experiences and spending your money wisely during your lifetime. The main principles include:
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How does the book “Die with Zero” suggest handling health care costs in later life?
- In “Die with Zero,” Bill Perkins addresses handling healthcare costs by recommending the early purchase of comprehensive health insurance and considering health savings accounts (HSAs) to manage potential expenses in older age. He underscores the importance of planning for medical costs while enjoying life’s peak moments before health declines.
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What criticisms have been levelled against the concepts in “Die with Zero”?
- Critics of “Die with Zero” often point to the unpredictability of life span and economic conditions as potential flaws in Perkins’ model. Some argue that his approach might lead to financial insecurity in the event of unexpected longevity or expenses. Additionally, critics suggest that the book might oversimplify complex financial decisions or underestimate some people’s emotional comfort in having savings.
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How does Bill Perkins address the fear of running out of money in “Die with Zero”?
- Bill Perkins tackles the fear of running out of money by encouraging a calculated approach to spending and life planning. He suggests methods for estimating your lifespan and adjusting your financial plan accordingly, ensuring you use your assets effectively without the risk of exhausting them prematurely. Perkins advocates for a balance between cautious saving and excessive frugality.
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What practical strategies does “Die with Zero” offer to achieve financial fulfillment?
- “Die with Zero” provides practical strategies such as mapping out your life’s financial phases to align with your energy levels and capabilities. Bill Perkins emphasizes the idea of creating a “memory dividend” by investing in experiences throughout life. He also discusses the importance of understanding your peak earning years and advises on how to plan for financial expenditures that correlate with personal peak experiences.
Bill Ruane
- “Do not borrow money to buy stocks.” — Ruane
- “You don’t act rationally when you’re investing borrowed money.” — Ruane
- “I firmly believe that nobody knows what the market will do… The important thing is to find an attractive idea and invest in a company that’s cheap.” — Ruane
- “I try to learn as much as I can about seven or eight good ideas. If you really find something very cheap, why not put fifteen percent of your money into it?” — Ruane
- “I don’t know anybody who can really do a good job investing in a lot of stocks except Peter Lynch.” — Ruane
- “Most people would be much better off with an index fund.” — Ruane
Mohnish Pabrai
The biggest lesson from his parents is not seeing them get rattled after losing money multiple times. His father was an optimist, always founding new businesses that eventually went bankrupt. Losing didn’t distract his father from trying again. Cloning: Pabrai studied the best investors, figured out why they were successful, and then cloned (copied) their approach (studying is a huge part of making sure he clones the right things). He did this for more than just investing strategies.
- He gets investment ideas by searching through 13F’s of the top investors, looks at the top holdings, studies the stocks, and tries to figure out why it’s a top holding.
- Pabrai cloned Buffett’s 3 core concepts:
- Buying a stock means buying a piece of a business with a value, not a piece of paper.
- That the value of the businesses is not always reflected in stock prices (Graham’s voting vs. weighing machine). The key is to stay disconnected from the market’s craziness and patiently wait for mispriced opportunities.
- Buy stocks only when it’s selling at a discount to that value.
- Pabrai theorizes that Buffett’s online bridge playing acts as a positive mental distraction that keeps him from trading Berkshire’s portfolio. We all have a bias towards action that can be distracting.
- On Buffett’s stock analysis: “What he’s looking for is a reason to say no, and as soon as he finds that, he’s done.” — Pabrai
- Pabrai’s Stock Filters (cloned from Buffett):
- Circle of Competence: Only invest in companies you truly understand.
- Margin of Safety: Only invest in companies trading at a deep — “no brainer” — discount from its true value. “I have very simple criteria: if something is not going to be an obvious double in a short period of time — you know, two or three years — I have no interest.” — Pabrai
- Competitive Advantage: Look for better businesses rather than just cheap businesses.
- Too Hard: Avoid companies with financial statements that are difficult to understand. It should be easy to figure out how the business makes money.
- He avoids companies based in countries with questionable shareholder rights.
- He avoids startups and IPOs. The added hype makes it less likely to find bargains.
- He avoids short selling because the upside is only 100% but the downside is unlimited.
- He ignores macroeconomics. It’s too complex.
He avoids meeting the management of the companies he owns and avoids being biased by sales speak and unreliable information.
- Inner Scorecard: live by the standards you set for yourself and stop worrying about what others might think of you.
- The key isn’t to get rich, it’s financial independence — to do what you want to do without money constraints.
John Templeton
- Templeton recognized early that a home country bias (investing only in the U.S.) was too limiting. He invested everywhere.
- Templeton bought stock in 104 U.S. companies, trading at $1 or less, in 1939 at the brink of WWII based on the theory that companies would see huge demand if war broke out. He invested $100 per stock. He made money on 100 out of 104 stocks — a total of 5x his money.
- Templeton’s Principles:
- Beware Emotion: “Most people get led astray by emotions in investing. They get led astray by being excessively careless and optimistic when they have big profits, and by getting excessively pessimistic and too cautious when they have big losses.” — Templeton
- Exploit the Irrationality in Markets: “To buy when others are despondently selling and to sell when others are enthusiastically buying is the most difficult. But it pays the greatest rewards.” — Templeton
- Beware Ignorance: Buy what you understand and never stop learning.
- Diversify Broadly: “Don’t put all your money with any one expert. Don’t put all your money in any one industry or any one nation. Nobody is that smart. So the wise thing is to diversify.” — Templeton
- Be Patient: The edge is in waiting. Too many investors are too impatient to wait for opportunities and too impatient to wait for results to play out.
- Find Bargains: “…study whichever assets have performed most dismally in the past five years, then assess whether the cause of those woes is temporary or permanent.”
- Avoid Fads: “The best way for an investor to avoid popular delusions is to focus not on outlook but on value.” — Templeton
- Beware Emotion: “Most people get led astray by emotions in investing. They get led astray by being excessively careless and optimistic when they have big profits, and by getting excessively pessimistic and too cautious when they have big losses.” — Templeton
- Templeton shorted 84 internet stocks, selling at triple its IPO price during the Dotcom Bubble on the theory that insiders would dump their shares after the lockup period ended. He bet $2.2 million on each stock ($185 million total) and made $90 million when the bubble burst. His strategy was to place short bets 7 days before the lockup expiration and cover the bets 10 days after expiration. He also had a rule in place to cover if the stocks rose a certain amount (to protect from excessive losses).
- The best way to find bargains is to study whichever assets have performed very badly in the past five years. Once you identify these assets, then you need to assess whether the cause of those woes is temporary or permanent.
- Buy at the point of maximum pessimism
- “You have to buy at a time when other people are desperately trying to sell.”
Howard Marks
- Stay Humble: Marks reminds himself of the role luck has played in his life. He keeps a list of the lucky breaks he’s had to help him stay humble.
- Find Inefficiencies: “The more a market is studied and followed and embraced and popularized, the less there should be bargains around for the asking.” — Marks
- Buy Cheap: “The essential question to ask about any potential investment should be ‘Is it cheap?‘”
- Markets are Cyclical: markets, the economy, etc. follow a pattern of cycles. Yet investors tend to expect the current trend to continue in a straight line. They fail to see the trend reverting.
- He avoids forecasters (they can’t predict the future), market timing, and fads (rarely cheap).
- Always ask: How much optimism is priced in?
- Marks collects examples of “stupid deals” to keep track of the frequency of craziness, greed, lowering of standards, etc. in markets.
- “He asks himself questions such as Are investors appropriately skeptical and risk-averse or are they ignoring risks and happily paying up? Are valuations reasonable relative to historical standards? Are deal structures fair to investors? Is there too much faith in the future?”
- “I always look at things in terms of ‘Where’s the mistake? Is the mistake in buying or not buying?’ ” — Marks
- “Both in markets and life, the goal isn’t to embrace risk or eschew it, but to bear it intelligently while never forgetting the possibility of an unpleasant outcome.”
- “Our performance doesn’t come from what we buy or sell. It comes from what we hold. So the main activity is holding, not buying and selling. I’ve always wondered if it wouldn’t enhance an organization to say, ‘We only trade on Thursdays.’ And the other four days of the week, all you can do is sit and think.” — Marks
- “If your thinking is heavily coloured by wishful thinking, then your probability assignments will be biased toward favourable… If you’re given to fear, then you’ll be biased toward the negative… No one is going to say, ‘This is my prediction and it’s probably wrong.’ But you must say, ‘This is my expectation, and I have to be aware of the likelihood that it’s coloured by my emotional bias.’ And you have to resist it. For me, that means not to chicken out when the going gets tough.” — Marks
- Markets move in cycles and thus, cycles will always reverse. By studying patterns of the past, you can take advantage of the cyclicality by behaving countercyclically.
- Marks never thinks of the future as a single predetermined scenario that’s bound to occur. He views it instead as a “distribution of different possibilities.” His standard approach is to assign probabilities to each of these “alternative futures.” But in this case, the uncertainty was so extreme that there was no point even trying to assign probabilities for the array of possible outcomes. He found it more helpful to simplify his decision-making by thinking of the situation in binary terms: “I think you can reduce it to, either the world ends or it doesn’t.… And if it doesn’t end and we didn’t buy, then we didn’t do our job. That made it awfully straightforward.”
Five Rules of Resilience
- First, you need to respect uncertainty.
- Second, to achieve resilience, it’s imperative to reduce or eliminate debt, avoid leverage, and beware of excessive expenses.
- Third, instead of fixating on short-term gains or beating benchmarks, you should place greater emphasis on becoming shock-resistant, avoiding ruin, and staying in the game.
- Fourth, beware of overconfidence and complacency.
- Fifth, as informed realists, you should be keenly aware of your exposure to risk and should always require a margin of safety.
Jean-Marie Eveillard
- Eveillard followed Ben Graham’s philosophy: minimize risk because the future is unpredictable.
- He took over the SoGen International mutual fund in 1979 (part of Société Générale). It had $15 million in assets. It was renamed the First Eagle Global Fund.
- He looked for a margin of safety of 30% to 40% and held over 100 stocks.
- On why he was diversified: “I’m too skeptical about my own skills and too worried that it could just blow up.” — Eveillard
- The fund’s returns were great until the Dot-com bubble. The fund underperformed from 1997 to 1999 and 70% of its shareholders left. Evelliard stuck to his strategy despite the pressure from shareholders, bosses, and career risk. Société Générale sold the fund in Oct. 1999. Evelliard crushed it from 2000 to 2002.
- Eveillard retired in 2008 and passed control of the First Eagle Global Fund to Matthew McLennan.
- McLennan follows a similar strategy — looks for at least a 30% margin of safety and owns over 100 stocks in the funds.
- “Our goal is not to try to become rich quickly. It’s resilient wealth creation.” — McLennan
- The goal directs every investment decision.
On Risk: Just because something has never happened doesn’t mean it can’t happen. We must be prepared for the possibility.
- “We just want to acknowledge that there are things that may not play out so well in the future. You want to be structured to participate in the march of mankind, but to survive the dips along the way.” — McLennan
- “I happen to believe that everything is on a path to fade. If you think of evolution, ninety-nine percent of species that have ever existed are extinct. And businesses are no exception.” — McLennan
- “Businesses that were robust today won’t be robust in the future. Uncertainty is intrinsic to the system. It’s entropy — the second law of thermodynamics. Basically, things tend toward disorder over time, and it takes a lot of energy to keep structure and quality in place. So, philosophically, we have great respect for the fact that things are not structurally permanent in nature, that things fade.” — McLennan
- Markets are biological. Businesses are born, evolve, and die. Investors should evolve (their thinking and strategies) along with it.
- McLennan builds his portfolio by eliminating anything that leads to mistakes — fads, countries with unstable political systems or a history of seizing corporate property, businesses with a high risk of tech disruption, excess leverage, complex financial statements, and questionable/adventurous management (he says no a lot). What’s left are businesses that tend to persist (and are generally boring) and avoid innovative disruptions.
- “What I observe in the world is that, if you can accept that stuff exogenous to you is in a state of flux, you can focus on your own endogenous equanimity. And what I see out there is most people doing the opposite. They’re trying to control that exogenous flux. They’re trying to predict. They’re trying to be positioned for it. And that causes a state of inner turmoil. So I think part of it is almost a very simple behavioral switch. It’s saying, am I philosophically willing to accept flux, complexity, and uncertainty, or not? And if you say, yes, I am, then I think it’s extremely freeing in terms of your ability to focus on your own equanimity.” — McLennan
Irving Kahn
- “Investing is about preserving more than anything. That must be your first thought, not looking for large gains. If you achieve only reasonable returns and suffer minimal losses, you will become a wealthy man and will surpass any gambler friends you may have. This is also a good way to cure your sleeping problems.” — Kahn
- “Considering the downside is the single most important thing an investor must do. This task must be dealt with before any consideration can be made for gains. The problem is that people nowadays think they’re pretty smart because they can do something quite rapidly.” — Kahn
Joel Greenblatt
- Greenblatt started on Wall Street with a summer job at Bear Stearns. He made riskless arbitrage trades via options.
- Founded Gotham Capital with $7 million in assets. Averaged 50% per year over the first 10 years and averaged 40% annually over the first 20 years.
- Roughly 80% of the fund was in 6 to 8 positions. Many were spinoffs, restructures, companies emerging from bankruptcy, and illiquid small caps.
- He purposely kept the fund small (all investor money was returned after 10 years).
- He looked for the hidden value that nobody wanted.
Investing has a complexity problem. It avoids simplicity. Whether it’s the number of investment options to choose from, the strategies available, MPT’s formulas and ratios, or behaviour, people gravitate toward the complex over the simple.
- “Why is it so valuable to reduce investing to a few core principles? For a start, it forces us to think through what we truly believe.”
- “I have a simple way of looking at things that makes sense to me and that I will stick with through thick and thin. That’s it.” — Greenblatt
- Investing (and life) should be a process of subtraction and simplification. Removing what’s unimportant and unnecessary means focusing on the key principles.
- On Noise: “The way I look at it is, if I own a chain store in the Midwest, am I suddenly going to sell it for half of what it’s worth because something bad happened in Greece? I don’t think so! But that’s what you read in the newspaper, and that’s what everyone is looking at. If you have a context to say, ‘Well, does it matter or doesn’t it matter?’—it’s just very helpful.” — Greenblatt
- “People are crazy and emotional. They buy and sell things in an emotional way, not in a logical way, and that’s the only reason why we have any opportunity.… So if you have a way to value businesses that are disciplined and make sense, you should be able to take advantage of other people’s emotions.” — Greenblatt
- 4 Valuation Techniques:
Discounted Cash Flow: Calculate the present value of estimated future earnings and compare it to the company’s market cap.
- Relative Value: compare a company’s valuation to similar businesses.
- Acquisition Value: an estimate of what another company might pay for it.
- Liquidation Value: estimated worth if the company is closed, assets are sold, debts are paid, and what’s left is distributed to shareholders.
- “I like calculating the odds. Consciously or unconsciously, I’m calculating the odds on every investment. What’s the upside? What’s the downside?… I don’t think you can be a good investor without thinking in that way.” — Greenblatt
- “It’s easier to find bargains off the beaten path or in extraordinary situations that other people aren’t looking at.” — Greenblatt
- “You size your positions based on how much risk you’re taking. I don’t buy more of the ones - I can make the most money on them. I buy more of the ones that I can’t lose money on.” — Greenblatt
- “Pretty much everything we ever owned, we sold way too early. If you’re very cheap in buying, it’s hard to be as comfortable when something has doubled or tripled, even if it’s still good.” — Greenblatt
- “One of the beauties of the pain that people have to take in underperformance is that, if it did not exist, everyone would do what we do.” — Greenblatt
- The best strategy is the one you can stick to in good and bad times.
- So, if you have a way to value businesses that are disciplined and make sense, you should be able to take advantage of other people’s emotions.
Will Danoff
- Managed Fidelity Contrafund since 1990.
- His investment philosophy: “Stocks follow earnings.” — Danoff
- He looks for companies that can grow earnings at a high rate over 5 years because stock prices will follow it.
- “Do you want to win the game for shareholders and own great companies? Sometimes, to own a great company, you’ve got to pay a fair price.” — Danoff
Bill Miller
- “The world changes. This is the biggest problem in markets.” — Miller
- “It’s all probabilities. There is no certainty.” — Miller
- “I’m trying to get rid of the unnecessary parts of what I used to do… I don’t build models anymore. It’s just stupid. It doesn’t make any sense… For every company, there are a few key investment variables and the rest of the stuff is noise.” — Miller
- “Will once said to me, falsely, ‘Look, I’m not that smart and there’s a lot of information out there. So when I look at a company, I just ask myself: ‘Are things getting better or are they getting worse?’ If they’re getting better, then I want to understand what’s going on.’ ” — Bill Miller
- Work hard so you have conviction
- The analyst on the other end of the line broke it to him that AES, a stock that Miller had only just bought, had announced terrible earnings. The stock halved, costing him $ 50 million before lunchtime. Miller instantly doubled his bet, calmly assuming that irrational investors had overreacted to the company’s dismal news. As he explained to me, investing is a constant process of calculating the odds: “It’s all probabilities. There is no certainty.”
Nick Sleep & Qais Zakaria
- Started Nomad Investment Partnership in 2001 and retired in 2014. They charged a tiny flat fee to cover expenses, then 20% of the funds profits over a 6% return hurdle.
- Both worked at Marathon Asset Management prior to starting the firm.
- They started in “cigar butts” but quickly graduated to a concentrated portfolio of high-quality companies held for years (the average holding period was about 7 years).
- No shorting, no leverage, no active trading.
- Information has a “shelf life.” Most of it expires in a few days, weeks, or months. They looked for information with a long shelf life.
- They purposely detached themselves from day-to-day market action. To limit its use, they even placed their Bloomberg terminal in the most uncomfortable location: a short corner table without a chair.
- “We just read annual reports until we were blue in the face and visited every company possible until we were sick of it.” — Sleep
- Questions:
- Where will the company be in 10 or 20 years?
- What’s management doing today to make that more likely to happen?
- What might stop that from happening?
- Is the company improving customer relations with “superior products, low prices, and efficient service?”
- Does management make sound capital allocation decisions to improve shareholder value?
- Does the company mistreat employees, suppliers, and customers?
- Does the company do anything that could hurt its reputation?
- On Benefits of Quality Management: “If they’re thinking rationally and thinking about the long term, you can subcontract the capital allocation decisions to them. You don’t have to be buying and selling shares.” — Sleep
- Scale Economies Shared Model:
- Companies that take advantage of economies of scale to grow revenue while lowering the cost of business only to share those cost savings with customers to further entrench their advantage over competitors.
- “Increased revenues begets scale savings begets lower costs begets lower prices begets increased revenues.” — Sleep
- Costco is an example. It deferred profits for customer satisfaction/retention and long-term growth.
- Tend to be founder-led companies where the founder is obsessive about small details.
- Tend to prioritize the customer experience.
- Tend to be serial cost-cutters.
- Tend to be very long-term focused.
- “Relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon.com.” — Jeff Bezos, 2005 Shareholder Letter
- “It’s all about deferred gratification. When you look at all the mistakes you make in life, private and professional, it’s almost always because you reached for some short-term fix or some short-term high… And that’s the overwhelming habit of people in the stock market.” — Sleep
- One practical trick, says Sleep, is to “reward yourself in the short term” by relishing the prospect of all the wonderful benefits you will enjoy because you chose to override your desire for instant gratification. That way, deferral becomes associated with pleasure and “you’re much more likely to embrace it.”
Thomas Russo
- “I call myself a farmer. Wall Street is flooded with hunters — people who try to go out and find the big game. They fell it and bring it back, and there’s a huge feast and everything is fabulous, and then they look for the next big game. I plant seeds and then I spend all of my time cultivating them.” — Russo
- He looks for companies with the “capacity to suffer.” They are built to survive tough times and outlast the competition.
- “Less jam today for more jam tomorrow, the three little piggies, etc, are childhood tales that inculcate thoughtful people with the message of deferred gratification. Society has, however, created endless reasons why decision makers mistakenly prefer more jam today even at the expense of jam tomorrow. Much investment opportunity arises from being able to take the other side of the short-termism bet. I have been blessed with investors who permit me to take the longer view.” — Russo
Jeff Gundlach
- “If I assume that I’m wrong on this, what’s the consequence going to be?… Make your mistakes nonfatal. It’s so fundamental to longevity. And ultimately, that’s what success is in this business: longevity.” — Gundlach
Tom Gayner
- Gayner manages Markel’s investment portfolio since 1990.
- His goal is to find tiny habits repeated daily that lead to long-term success.
- “If you want the secret to great success, it’s just to make each day a little bit better than the day before. There are different ways you can go about doing that, but that’s the story… Just making progress over and over again is the critical part.” Gayner
- “It struck me that we should think small, not big, and adopt a philosophy of continuous improvement through the aggregation of marginal gains. Forget about perfection; focus on progression, and compound the improvements.” — Sir David Brailsford, coach of the British cycling team
- Returns, training, learning, etc., it all compounds!
- 4 Principles:
- He looks for profitable companies with good ROC and little leverage.
- Quality management with integrity.
- The company can reinvest profits at a good rate of return.
- Can be bought at reasonable price.
- He wants compounding machines to hold “forever.”
- “It’s been my experience that the richest people were those who found something good and held on to it. The people who seemed the least happy and the most frenzied and the least successful are those that are always chasing the next hot thing.” — Gayner
- His portfolio is over 100 stocks with 66% in the top 20 positions.
- “You cannot control the outcome. You can only control the effort and the dedication and the giving of one hundred percent of yourself to the task at hand. And then whatever happens, happens.” — Gayner
Paul Lountzis
- “You need a maniacal focus to really be great at anything. Anyone who tells you that you can have everything all at once, you can’t. I mean, you don’t become Roger Federer by not playing tennis. It has to be consuming.” — Lountzis
- All great investors, CEOs, athletes, etc. are practically fanatical about it (at the expense of other areas of their life). Fanaticism won’t guarantee success but being fanatical makes it easier to compete in a world of fanatics.
- He hoards information on the best in the business and investing world to read and reread. The repetition makes the lessons unforgettable.
- “You can’t mimic them because you’re not them. Learn it and adapt it and modify it into your own process.” — Lountzis
Charlie Munger
- He constantly tries to avoid stupidity.
- “Other people are trying to be smart. All I’m trying to be is non-idiotic. I find that all you have to do to get ahead in life is to be non-idiotic and live a long time. It’s harder to be non-idiotic than most people think.” — Munger
- On Attacking Problems via Inversion: “It’s counterintuitive that you go at the problem backward. If you try and be smart, it’s difficult. If you just go around and identify all of the disasters and say, ‘What caused that?’ and try to avoid it, it turns out to be a very simple way to find opportunities and avoid troubles.” — Munger
- ‘What could I do to really ruin India?’ And you think through all of the things you could do to ruin India, and then you reverse it and say, ‘Now, I won’t do those.’ It’s counterintuitive but it really helps you to reverse these issues. It’s a more complete way of thinking a problem through.”
- The best way to avoid stupidity is to ask: How bad will this be? Instead of, How great will this be? Or about investing more broadly ask: what are all the stupid ways people lose money? Then don’t do those things.
- “Finding out what’s wrong and trying to avoid it is different from finding out what’s good and trying to get it. You have to do both, of course, in life. But this inversion of looking for the trouble and trying to avoid it keeps you out of a lot of messes… It’s a precaution. It’s like a checklist before you take off in an airplane.” — Munger
- “A lot of people are so interested in reaching for the prize that they don’t even think about the stupidities that might prevent them from getting it.” — Munger
- Munger collects examples of other people’s exceptionally stupid behavior. So can he learn from others’ mistakes.
- Common Errors:
- Listening to market predictions.
- Buying cyclicals at the top of the cycle or poor businesses at market tops.
- Being close-minded.
- Doing things because “other people do it.”
- Rush to decisions.
- Ego, overconfidence, overoptimism.
- “I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.” — Munger
- On Incentives: “If you would persuade, appeal to interest and not to reason. This maxim is a wise guide to a great and simple precaution in life: Never, ever, think about something else when you should be thinking about the power of incentives.” — Munger
- On Discovering Your Own Errors: “If Berkshire has made modest progress, a good deal of it is because Warren and I are very good at destroying our own best-loved ideas. Any year that you don’t destroy one of your best-loved ideas is probably a wasted year.” — Munger
- A systematic process of studying counterarguments, taking a devil’s advocate approach, or writing premortems (assuming disaster) are ways to limit biases and improve decisions.
Lists of your biggest biases, emotional tendencies, and mistakes serve as a good checklist before making a decision.
- “If you’re going to be in this game for the long pull, which is the way to do it, you better be able to handle a fifty percent decline without fussing too much about it. And so my lesson to all of you is, conduct your life so that you can handle the fifty percent decline with aplomb and grace. Don’t try to avoid it. It will come. In fact, I would say if it doesn’t come, you’re not being aggressive enough.” — Munger
- “You have to be like a man standing with a spear next to a stream. Most of the time he’s doing nothing. When a fat juicy salmon swims by, the man spears it. Then he goes back to doing nothing. It may be six months before the next salmon goes by.” — Munger
- There are no prizes for frenetic activity. Rather, investing is mostly a matter of waiting for these rare moments when the odds of making money vastly outweigh the odds of losing it. As Buffett has said, “You don’t have to swing at everything—you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’ ”
- I observe what works and what doesn’t and why
- best investor are seekers of what the economist John Maynard Keynes called “worldly wisdom,” which they deploy to attack more pressing problems, such as “How can I make smart decisions about the future if the future is unknowable?” They look for advantages wherever they can find them: economic history, neuroscience, literature, Stoicism, Buddhism, sports, the science of habit formation, meditation, or anything else that can help. Their unconstrained willingness to explore “what works” makes them powerful role models to study in our own pursuit of success, not only in markets but in every area of life.
Joel Tillinghast
- Manages Fidelity’s Low-Priced Stock Fund since 1989, outperforming by roughly 4% per year.
- He creates lists of things to avoid, “defensive principles and practices” that keep him focused and help outperformance.
- “Don’t pay too much. Don’t go for businesses that are prone to obsolescence and destruction. Don’t invest with crooks and idiots. Don’t invest in things you don’t understand.” — Tillinghast
- He also avoids cyclicals, fads, heavy leverage, sales-y management, questionable accounting.
- He won’t talk publicly about his positions (makes it harder to change his mind).
- “If you want to be superior, that’s difficult. But what you won’t do is easier to control and more attainable… I’m not going to lose fifteen pounds. But saying no to doughnuts, that’s easy for me.” — Tillinghast
Ed Thorp
- “As far as gambling is concerned, if I don’t have an edge, I don’t play.” — Thorp
- He heavily relied on the Kelly Criterion to size positions.
- Had a chance to invest in LTCM but passed because they were “taking too much risk… So the probability of their ruin appeared substantial to me.”
Peter Lynch
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“You get a lot of A’s and B’s in school. In the stock market, you get a lot of F’s. And if you’re right six or seven times out of ten, you’re very good.” — Lynch
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“Learning to play poker or learning to play bridge, anything that teaches you to play the probabilities…would be better than all the books on the stock market.” — Lynch
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Templeton, Soros, and Buffett share “the willingness to be lonely, the willingness to take a position that others don’t think is too bright. They have an inner conviction that a lot of people do not have.”– Michael Lipper
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“A necessary characteristic of great investors is that they can’t be overly influenced by what other people think. The easiest way not to be overly influenced by what other people think is not to be that aware of what they think. If you don’t really notice that and don’t really care about what other people think, that will make it easier to be a great investor.” — Chris Davis
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Rick Guerin tried to get rich faster than necessary. He was leveraged going into the 1973-74 crash, hit by margin calls, and forced to sell his shares in Berkshire Hathaway for less than they were worth (Buffett bought them).
Quotes
And so you shouldn’t be saving now, you should be borrowing. You should be living today in much the way that you’ll be living in 10 or 15 years, and it’s crazy to actually be scrimping and saving, which is what at least someone like me who was brought up in a middle-class family was taught to do.” Levitt says this was one of the best pieces of financial advice he ever got.
If you give generously when you’re alive, then I can consider you selfless. If you’re dead, you just don’t have that choice. So by definition, you cannot be generous when you’re dead.
This ability to pool risk across a large number of people is what gives insurance companies their edge over you as an individual. It’s why people are willing to pay money to buy insurance of all kinds, instead of trying to protect themselves from risk on their own. You are not a good insurance agent.
Make “maximize total life enjoyment” your mantra, using it to guide every decision—including what to focus on with your financial adviser.
Once you’re in the habit of working for money to live, the thrill of making money exceeds the thrill of actually living.
Living as if your life were infinite is the opposite of taking the long view: It’s terribly shortsighted.
“If you want to be superior, that’s difficult. But what you won’t do is easier to control and more attainable… I’m not going to lose fifteen pounds. But saying no to doughnuts, that’s easy for me.” — Tillinghast
“If you’re going to be in this game for the long pull, which is the way to do it, you better be able to handle a fifty percent decline without fussing too much about it. And so my lesson to all of you is, conduct your life so that you can handle the fifty percent decline with aplomb and grace. Don’t try to avoid it. It will come. In fact, I would say if it doesn’t come, you’re not being aggressive enough.” — Munger
“You have to be like a man standing with a spear next to a stream. Most of the time he’s doing nothing. When a fat juicy salmon swims by, the man spears it. Then he goes back to doing nothing. It may be six months before the next salmon goes by.” — Munger
“I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.” — Munger
“Other people are trying to be smart. All I’m trying to be is non-idiotic. I find that all you have to do to get ahead in life is to be non-idiotic and live a long time. It’s harder to be non-idiotic than most people think.” — Munger
“Finding out what’s wrong and trying to avoid it is different from finding out what’s good and trying to get it. You have to do both, of course, in life. But this inversion of looking for the trouble and trying to avoid it keeps you out of a lot of messes… It’s a precaution. It’s like a checklist before you take off in an airplane.” — Munger
“A lot of people are so interested in reaching for the prize that they don’t even think about the stupidities that might prevent them from getting it.” — Munger
“You need a maniacal focus to really be great at anything. Anyone who tells you that you can have everything all at once, you can’t. I mean, you don’t become Roger Federer by not playing tennis. It has to be consuming.” — Lountzis
“It’s been my experience that the richest people were those who found something good and held on to it. The people who seemed the least happy and the most frenzied and the least successful are those that are always chasing the next hot thing.” — Gayner
“You cannot control the outcome. You can only control the effort and the dedication and the giving of one hundred percent of yourself to the task at hand. And then whatever happens, happens.” — Gayner
“If you’re even a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy.” — Buffett
“You don’t have to swing at everything — you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’” — Warren Buffett
“We, and our judgment, and all mortal things go on flowing and rolling unceasingly. Thus nothing certain can be established about one thing by another, both the judging and the judged being in continual change.” — Michel De Montaigne
“The art of being wise is the art of knowing what to overlook.” — William James
“To attain knowledge, add things every day. To attain wisdom, subtract things every day.” — Lao-tzu
“Uncertainty compels diversification. Diversification is and always has been the first tenet of the Prudent Man Rule of Investing… In sub-Saharan Africa, for centuries, people believed cattle were the safest repository of wealth. That was until the great drought came along.” — Barton Biggs
“The stock market is a sadistic, contrary, changeable beast and nothing is forever.” — Barton Biggs
“The crucial question is whether the investor will, in fact, hold on. The problem is not in the market, but in ourselves, our perceptions, and our reactions to our perceptions. This is why it is so important for each client to develop a realistic knowledge of his own and/or his organization’s tolerance for market fluctuations…” — Charles Ellis
“I call myself a farmer. Wall Street is flooded with hunters — people who try to go out and find the big game. They fell it and bring it back, and there’s a huge feast and everything is fabulous, and then they look for the next big game. I plant seeds and then I spend all of my time cultivating them.” — Russo
“The world changes. This is the biggest problem in markets.” — Miller
“It’s all probabilities. There is no certainty.” — Miller
“I’m trying to get rid of the unnecessary parts of what I used to do… I don’t build models anymore. It’s just stupid. It doesn’t make any sense… For every company, there are a few key investment variables and the rest of the stuff is noise.” — Miller
“Do you want to win the game for shareholders and own great companies? Sometimes, to own a great company, you’ve got to pay a fair price.” — Danoff
“Will once said to me, falsely, ‘Look, I’m not that smart and there’s a lot of information out there. So when I look at a company, I just ask myself: ‘Are things getting better or are they getting worse?’ If they’re getting better, then I want to understand what’s going on.’ ” — Bill Miller
“People are crazy and emotional. They buy and sell things in an emotional way, not in a logical way, and that’s the only reason why we have any opportunity.… So if you have a way to value businesses that’s disciplined and makes sense, you should be able to take advantage of other people’s emotions.” — Greenblatt
“If the market is precarious, you don’t have to know what the catalyst will be. You only have to know that there’s a vulnerability.” — Marks
“Change is inevitable. The only constant is impermanence. We have to accommodate to the fact that the environment changes… We cannot expect to control our environment.” — Marks
“The only thing we can really count on in this uncertain world is human unreliability itself.” — Garrett Harden
“Most people make the mistake of adding too much complexity to their lives. They skim the surface, preoccupying themselves with the superficial and the extraneous. As the best investors show, sustained excellence requires us to subtract and go deep.”
“Do not borrow money to buy stocks.” — Ruane
“You don’t act rationally when you’re investing borrowed money.” — Ruane
“I firmly believe that nobody knows what the market will do… The important thing is to find an attractive idea and invest in a company that’s cheap.” — Ruane
“I try to learn as much as I can about seven or eight good ideas. If you really find something very cheap, why not put fifteen percent of your money in it?” — Ruane
“I don’t know anybody who can really do a good job investing in a lot of stocks except Peter Lynch.” — Ruane
“Most people would be much better off with an index fund.” — Ruane
“I’m a shameless copycat… Everything in my life is cloned… I have no original ideas.” — Pabrai
“There are no prizes for frenetic activity. Rather, investing is mostly a matter of waiting for these rare moments when the odds of making money vastly outweigh the odds of losing it.”
“The number one skill in investing is patience — extreme patience.” — Pabrai
“If a person were going to own stocks and bonds, it would be much wiser to search everywhere, rather than limiting themselves to one nation.” — Templeton
“You have to buy at a time when other people are desperately trying to sell.” — Templeton
“It’s a human failing to even put your mind on a question of which stock market is going to go up or down. There’s never been anybody who knew that.” — Templeton
“I’m convinced that everything that’s important in investing is counterintuitive, and everything that’s obvious is wrong.” — Marks
“He asks himself questions such as Are investors appropriately skeptical and risk-averse or are they ignoring risks and happily paying up? Are valuations reasonable relative to historical standards? Are deal structures fair to investors? Is there too much faith in the future?”
I always look at things in terms of ‘Where’s the mistake? Is the mistake in buying or not buying?’ — Marks
“Both in markets and life, the goal isn’t to embrace risk or eschew it, but to bear it intelligently while never forgetting the possibility of an unpleasant outcome.”
“Our performance doesn’t come from what we buy or sell. It comes from what we hold. So the main activity is holding, not buying and selling. I’ve always wondered if it wouldn’t enhance an organization to say, ‘We only trade on Thursdays.’ And the other four days of the week, all you can do is sit and think.” — Marks
“If your thinking is heavily colored by wishful thinking, then your probability assignments will be biased toward favorable… If you’re given to fear, then you’ll be biased toward the negative… No one is going to say, ‘This is my prediction and it’s probably wrong.’ But you must say, ‘This is my expectation and I have to be aware of the likelihood that it’s colored by my emotional bias.’ And you have to resist it. For me, that means not to chicken out when the going gets tough.” — Marks
“To lag is to suffer. It becomes psychologically painful, but also financially painful… After one year, your shareholders are upset. After two years, they’re furious. After three years, they’re gone.” and “It had gone on for so long that there were days when I thought I was an idiot. You do, in truth, start doubting yourself… Everybody seems to see the light. How come I don’t see it?” — Eveillard
“To the extent that we’ve been successful over the decades, it’s due mostly to what we did not own. We owned no Japanese stocks in the late eighties. We owned no tech in the late nineties. And we didn’t own any financial stocks to speak of between 2000 and 2008.” — Eveillard Matthew McLennan
“Why is it so valuable to reduce investing to a few core principles? For a start, it forces us to think through what we truly believe.”
“I have a simple way of looking at things that makes sense to me and that I’m going to stick with through thick and thin. That’s it.” — Greenblatt
“I like calculating the odds. Consciously or unconsciously, I’m calculating the odds on every investment. What’s the upside? What’s the downside?… I don’t think you can be a good investor without thinking in that way.” — Greenblatt
“It’s easier to find bargains off the beaten path or in extraordinary situations that other people aren’t looking at.” — Greenblatt
“If you want the secret to great success, it’s just to make each day a little bit better than the day before. There are different ways you can go about doing that, but that’s the story… Just making progress over and over again is the critical part.” Gayner
“It struck me that we should think small, not big, and adopt a philosophy of continuous improvement through the aggregation of marginal gains. Forget about perfection; focus on progression, and compound the improvements.” — Sir David Brailsford, coach of the British cycling team
“The sad truth is that too many people delay gratification for too long, or indefinitely. They put off what they want to do until it’s too late, saving money for experiences they will never enjoy.”
“When the end is near, we suddenly start thinking, What the hell am I doing? Why did I wait this long? Until then, most of us go through life as if we had all the time in the world.”
“We all get one ride on this roller coaster of life. Let’s start thinking about how to make it the most exciting, exhilarating, and satisfying ride it can be.”
“If you’ve got any money left in your bank account by the time you die, you’ve done something wrong”.