Success

Shift Your Mindset for Success

by Investing

The only real mistake is the one from which we learn nothing – Henry Ford

I recently had the pleasure of talking with Phil Muscatello on his podcast Shares For Beginners. It was wonderful to begin exploring the similarities between my past career coaching athletes and now developing investor education.

Upon reflection and reviewing the recent Education and Events survey responses, there is an area of coaching that I focussed heavily on that is worth sharing. Often, athletes came to me describing how they were stuck, listing obstacles and challenges that held them back from achieving their goals and reaching the next level in their sports career.

I would interview these potential clients, sometimes for hours, to figure out if we could work together. That decision would essentially be based on one thing: can this athlete adopt mindset changes that will allow them to do what is needed to progress? The problem is, many of them believed their mindset couldn’t change. They believed their skills and intelligence were innate and that there was nothing more to learn. These were the athletes I couldn’t help.

“The thing that separates the best from the rest is mindset” – Bianca Andreescu, 2019 US Open Champion.

Psychology Professor Carol Dweck from Stanford University has examined the notion of mindset, and argues that there are two fundamental mindsets that people use: the fixed mindset and the growth mindset.

Those with a fixed mindset believe they are born with a certain amount of intelligence or talent, and these abilities cannot be improved. A fixed mindset is characterised by the interpretation of situations as unchangeable. It leaves little or no room for personal agency. In jobs, relationships, and daily operations, challenges are absolute. How one engages with those challenges (and their perceived level of agency within them) will influence further behaviour.

Meanwhile, a growth mindset is not as limiting as a fixed mindset. People that possess a growth mindset believe abilities such as intelligence, skills and/or athleticism can be improved through hard work and persistence. People with a growth mindset understand that they can work to change themselves and their surroundings if they put in the time and effort. They seek out challenges, are persistent, learn from feedback, and are inspired by the success of others. They avoid seeing things in binaries (good/bad, win/lose, success/failure), and see skills or mastery as the result of practice over time.

People with a growth mindset generate a capacity for lifelong learning and constantly strive to improve.

When presented with an obstacle, those possessing a growth mindset tend to rise to the challenge. If you doubt yourself, you already lost half the battle. A fixed mindset can make you fail before you even start, and you might find yourself giving up early, at the smallest sign of frustration.

Have you ever said to yourself, “I’m never going to ” (learn valuation techniques/understand business fundamentals/read charts/etc.) ?

This is a fixed mindset statement. People with a fixed mindset see things as largely unchangeable, and if they are changeable not worth the effort. With a fixed mindset, you don’t have a chance to develop your potential.

Instead, try rewording this into a growth mindset statement. “I don’t know how to value an individual business YET.”

This simple rephrasing gives you the power to develop your abilities through dedication, perseverance, and the right strategy.

Dweck explains, “Mindsets are just beliefs. They’re powerful beliefs, but they’re just something in your mind, and you can change your mind.” Dweck created this 4-step process below and I recommend anyone experiment with it.

How to Shift From a Fixed to a Growth Mindset

  • Step 1: Learn to hear your fixed mindset “voice.”
  • Step 2: Recognize that you have a choice.
  • Step 3: Talk back to it with a growth mindset voice.
  • Step 4: Take the growth mindset action.

Having a growth mindset will also help you in other areas of your life. What areas of your investing, health and fitness, career, relationships do you want to shift from a fixed to growth mindset?

The only way you can change your mindset is by entering the growth stage and leaving your comfort zone behind. Try new ideas, try different approaches and be curious.

“Insanity is trying the same thing over and over and expecting the same results.” – Albert Einstein

Becoming a better investor, a better partner, a better colleague, and a better human, really comes down to the power of changing your mindset, both consciously and subconsciously.

Doing so can have a profound impact on your happiness and your pathway to success.

Play games you can win

Investing Wisely: Choosing Battles You Can Win

by with No Comment Investing

In his lesser-known yet fascinating book, “Extraordinary Tennis for Ordinary Players,” scientist and statistician Simon Ramo presents an insightful perspective on tennis, distinguishing between the sport as played by professionals and amateurs.

From an outsider’s view, the game appears uniform. Competitors follow the same rules, use the same courts, and even sometimes wield similar rackets. At its core, the fundamental aspects remain consistent.

Yet, Ramo notes a distinct difference in how points are accumulated. Professionals aim to earn points through a combination of precise skills—maneuvering, controlling, and spinning the ball with finesse. Each match is a tight contest of near-perfect plays, where the winner often prevails by mere centimetres.

Amateur tennis presents a stark contrast. Extended, powerful exchanges are rare, as players frequently commit errors. Balls are routinely knocked into the net or sent flying beyond the boundaries. Moreover, double faults occur almost as often as regular faults, highlighting the less polished nature of the game at this level. This frequent inconsistency underscores the primary challenge for amateur players: managing and minimizing mistakes.

This distinction underlines a profound philosophical shift from merely striving to win to strategically playing not to lose.

According to Ramos:

“The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points.”

The conclusion Ramos drew for amateurs to win was a strategy of avoiding mistakes: play conservatively and keep the ball in, letting the opponent have plenty of room in which to make errors and capitulate.

The phenomenon of the ‘loser’s game’ can be observed everywhere. In chess it is the amateur who blunders and loses all his pieces. In investing it is the amateur who doesn’t know their circle of competence and makes enough mistakes to suffer disastrous permanent capital loss.

This brings to mind quotes from Warren Buffett and Charlie Munger.

Buffett:

“How do you beat (chess champion) Bobby Fischer?” You play him at any game but chess. I try to stay in games where I have an edge.”

Munger:

“Knowing what you don’t know is more useful than being brilliant”

It requires a great deal of self-awareness and humility to acknowledge your own limitations, albeit that is what is required in order to know how to play games you can win.

Humans, by nature, are overconfident beings. We are also enterprising. And when you combine enterprise with overconfidence, especially in domains involving large and asymmetric payoffs like investing, you find people venturing out into areas they have no competence in and playing games they know little about.

In investing, specifically, this involves pouring hard earned savings into businesses or industries one has no experience with. Or jumping into stocks due to a tip rather than research. Or indulging in derivatives where the stakes can easily wipe out the uninitiated. Or borrowing money to invest in stocks due to the fear of missing out.

Being humble enough to admit you might be an amateur allows one to invert the situation and take advice from Ramo: rather than trying to win and beat professionals, we should focus on avoiding losing.

If you don’t understand SaaS or biotech stocks, don’t invest in them. If you don’t understand derivatives or cryptocurrencies, avoid them. If you don’t know with certainty where stocks will go (nobody knows that), don’t borrow to invest. If you cannot analyse businesses, don’t pick individual stocks.

In fact, many of history’s greatest investors developed their strategies and philosophies from a simple vantage point that is often overlooked: how to not lose. Warren Buffett’s number one rule is “don’t lose money” (and rule number two — DON’T FORGET RULE ONE). Buffett is infamous for sticking to where he has an edge and throwing opportunities in his own “too hard” basket, for example his omission of Google in 2009.

Investors who concentrate on areas within their expertise and leverage their strengths are positioning themselves for consistent, long-term gains.

It bears repeating, though it may seem repetitious: compounding is essentially returns to the power of time. Time acts as the critical multiplier, and the key ingredient in most substantial fortunes isn’t merely high returns; it’s resilience and duration.

Contrary to what one might expect, investors often enhance their lifetime investment outcomes by prioritising self-awareness and avoiding significant losses.

To capitalise on this approach, engage in behaviours where your chances of success are highest.

That is, choose battles you can win.

Fortune Favours the Reasonable

Investing Wisely: The Power of Reasonable Behaviour

by InvestingLeadership

Jeremy Grantham, the renowned British investor and perennial bear, seems to pencil in the same date each year to announce his forecasts that the markets are teetering on the brink of a colossal bubble, and that a crash in the NASDAQ, S&P 500, or global markets is imminent.

I find Grantham intriguing because he exemplifies the idea that market prophets will ultimately be correct if they repeatedly predict a downturn. However, nestled between these sporadic accurate forecasts are prolonged periods of faulty prognostications, during which markets climb contrary to Grantham’s bleak predictions.

Contemplating a potential market retreat strikes me as peculiar—stock pullbacks are inevitable. Since 1928, the S&P 500 has retreated by 10% or more from recent peaks over 90 times, averaging about once every 11 months, with only a few years avoiding a 10% drop. Such corrections are nearly as routine as the arrival of summer, yet we seldom question if summer will return each year.

Eleven to twenty-percent market drops have occurred 30 times since 1928, or about an average every four years. Thirty-percent market drops have occurred about an average every ten years and forty-percent declines happen a few times per lifetime. In Australia, the figures are within the same ballpark, albeit a little less volatile in the last 35 years.

Few of us are immune to the emotional delusion that the market won’t crash from time to time and panic when it does. The number of investors who claim to be contrarians outnumber actual contrarians by orders of magnitude.

When you become resigned to the frequency of market crashes (and our tendency to panic when they hit), having an investing practice based on reasonable rules makes way more sense than flying by the seat of your pants and hoping you act rationally when everyone else doesn’t.

Perhaps you can sense where this article is heading: I have received many questions since my previous article about how I am investing now given the recent pull backs, inflation, interest rate changes and macro concerns.My answer might sound trite, but stay with me.

I haven’t changed anything about my investing practice, but that’s not to say I haven’t changed my investing.

I use the term “practice” very deliberately. Yoga is a practice of the mind and body. There are various styles of yoga that combine physical postures, breathing techniques, and meditation or relaxation to promote mental and physical well-being. Those who do yoga understand it is called a practice because the work is never ending. One cannot beat or win yoga, there is no point in time where one finishes yoga. The practice continually evolves along with the yogi.

Investing is the same. There are many styles of investing and the learning never ceases. Thus, an investing practice is a framework that allows you to stay in the game, fosters continuous education and adapts as progress is made.

Forming reasonable rules is a lesson in psychology: being coldly rational is not always realistic. Many believe that success in compounding wealth is all about maths, yet while it does play a powerful role, we all have emotions and that must be factored into decision making.

By building a practice around a set of reasonable rules, we can drive much of the behaviour and attitudes that will impact success or downfall. Here are mine:

Rule #1 Don’t lose money. Rule #2 Don’t forget rule number one.

This infamous Warren Buffett quote means something different to every reader. I define it as avoiding catastrophe and protecting wealth as a priority. Rather than focussing on the potential upside of an investment, look at the risk or downside of a business to assess how it could permanently destroy wealth. This makes saying “no” easy, portfolio allocation and weightings easier to prescribe and reduces any anxiety because I won’t invest in things I don’t understand.

I, of course, have sold investments at below the initial buy price and so has Buffett. It is impossible to have a perfect strike rate. However, thanks to this mindset I am able to consistently do well, have more winners than losers and my portfolio does not keep me awake at night

“Worship room for error. A gap between what could happen in the future and what you need to happen in the future in order to do well is what gives you endurance, and endurance is what makes compounding magic over time.”
– Morgan Housel

Rule #3 Save like a pessimist, invest like an optimist.

Market crashes in the future look like risk and look like opportunity in hindsight. Knowing that markets frequently crash, it is crucial that investors save for a rainy day. There are going to be opportunities for you to deploy cash but only if you have it sitting and waiting.

Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms.

Having an emergency fund and an investing emergency means I never have any pressure to sell holdings. All good investing comes down to surviving an inevitable chain of short-term setbacks and disappointments in order to enjoy long-term progress and compounding.

Rule #4 Aim for progress, not perfection.

One of the most challenging hurdles to overcome is the certainty that I will make mistakes, even when following rules and consistently learning. No one is perfect.

To strive for progress , not perfection, means that you should appreciate and be proud of your work. You shouldn’t be focused on what something could or should be; instead, focus on the small steps, the positive ways to improve yourself, and moving forward.

Rule #5 Follow an investing system

Drawing from his experience as a general surgeon, Atul Gawande’s The Checklist Manifesto reveals startling evidence on how using a simple checklist can significantly reduce human error in complex professions such as aviation, engineering and medicine.

Evolution has designed our brains to take shortcuts and make hasty decisions. In the wild, when you see a predator, you simply run without thinking, a typical “System 1” decision (automatic, intuitive, with little effort). Investing requires “System 2” thinking which is conscious, logical and requires more effort. A good checklist does not try to spell out everything – a checklist cannot fly a plane. Instead, it provides reminders of the most critical and important steps – the ones that even the highly skilled professional using them could miss. Good checklists are, above all, practical.

What does this look like in reality?

Echoing my earlier sentiment, my investment strategy remains unchanged. I take great pleasure in exploring and discussing various companies. My efforts are dedicated to evaluating potential investment opportunities and revisiting the ones I currently hold.

When a company catches my interest, I initiate a thorough analysis based on a structured checklist. If the company aligns with many of the criteria on my list, I add it to my watchlist. While I won’t delve into the details, this checklist is crucial for ensuring I comprehensively understand the business, confirming the company possesses one or more sustainable competitive advantages, assessing the capability and ethical standing of its management, and finally, determining the appropriate stock price that would offer a margin of safety.

This is where perhaps my investing is different than it was two years ago. Some companies that were very attractive in March to May 2020 aren’t so any more. Elements like risky balance sheets, shrinking operating margins and slowing revenue growth are increasingly unattractive in a world of higher inflation and rising interest rates.

However, there are businesses out there that have pricing power and can raise prices with inflation or even beyond inflation; companies that have a really attached customer base who need their product or service regardless of inflation; and, as we know frequently happens, can go “on sale” when the market has one of its semi-regular crashes.

When I’m not researching a business, I love learning about super investors with incredible track records. There is an abundance of investing education to sift through: books, quarterly/annual letters and interviews are easily accessible for any investor who has the time and interest.

If you don’t share my passion for investing, you might opt to skip the strategies I’ve mentioned, and that’s completely acceptable. Your approach to investing should align with your personality and interests. When executed effectively, it shouldn’t feel like a chore but rather a fulfilling activity that keeps you engaged over the long term—which, as we understand, is essential to succeeding in this arena.

Ultimately, achieving average returns over an extended period can yield exceptional results.

A Titan of Wisdom in the Investment World

The Legacy of Charlie Munger: Investing Wisdom and Life Lessons

by Investing

“The best armour of old age is a well spent life preceding it.”
– Charlie Munger

Often, we reassure ourselves by believing that we are unlikely to encounter specific adversities, whether they are health problems or personal disasters. This perspective forms a psychological barrier that instills in us feelings of safety and imperviousness.

Yet, life consistently proves its unpredictability and neutrality.


November 28, 2023 marked one of those sobering moments.


Charlie Munger, a figure I have long admired and considered an inspiration, has left us at the age of 99, merely a month short of his centennial.


Crafting a fitting homage to a figure such as Charlie Munger is challenging. Media, investors, acquaintances, analysts, and stakeholders will all honor him, chronicling his extensive life and numerous achievements. All of these articles will be inadequate when it comes to explaining the impact Munger had on countless individuals, most of whom he never knew personally. I count myself in this group.


Charlie Munger emerged as more than an investing icon; he was a beacon of insight, significantly shaping perspectives on business, investment strategies, and life philosophies. His long journey, marked by both towering achievements and overcoming adversities, is a treasure trove of lessons for investors, entrepreneurs, and thinkers.


“Envy, resentment, revenge and self-pity are disastrous modes of thought”


Munger’s life story is one of resilience and perseverance in the face of obstacles and losses. Despite these hardships, Munger went on to become one of the most successful investors of his time and generously shared his learned wisdom consistently over the years.


Born in Omaha, Nebraska, Munger’s journey was not a linear path to success. He started his career working at Buffett & Son, a grocery store owned by Warren Buffett’s grandfather. His early life took a dramatic turn when he dropped out of college in 1943 to join the World War II effort with the U.S. Army Air Corps. Despite lacking a college degree, Munger’s determination saw him become an officer and train as a meteorologist.


After the war, Munger used the GI Bill to take advanced courses and, despite an initial rejection, was admitted to Harvard Law School, graduating magna cum laude with a Juris Doctor (JD).
In 1953, Charlie Munger, at the age of 29, encountered a major life challenge when his eight-year marriage ended in divorce. This event was not only socially stigmatising at the time but also left him in a precarious financial situation, as his wife received most of their assets, including their home. This led to Munger living in significantly reduced circumstances. Despite these setbacks, he dedicated himself to work, putting in long hours to regain his financial stability.


Munger’s resilience was further tested at 31 with the loss of his 9-year-old son to leukaemia, a devastating personal tragedy, compounded by ongoing financial struggles. However, Munger chose perseverance over despair. His resolve was again put to the test at the age of 52 when he developed cataracts. A surgical complication resulted in the loss of vision in one eye. Unfazed by this adversity, Munger learned braille, showcasing his unwavering commitment to adapt and continue learning, no matter the obstacles.


“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”


Charlie Munger’s influence on Warren Buffett and, by extension, the entire investing world, has been profound and enduring. As Buffett himself acknowledged, Munger’s inspiration, wisdom, and active involvement were crucial in building Berkshire Hathaway to its current stature. The duo, who met in 1959 and quickly bonded over their shared success and sense of humour, soon embarked on a partnership that would redefine the investment landscape.


“About five minutes into it, Charlie was sort of rolling on the floor laughing at his own jokes, which is exactly the same thing I did,” Buffett once told CNBC. “I thought, ‘I’m not going to find another guy like this.’ And we just hit it off.”


Munger’s vision and insights were pivotal in guiding Buffett away from his early “cigar butt” investment style, which focused on undervalued smaller companies trading at less than their liquidation value (net-nets, or Value 1.0, as described in our Models of Investing series this year).


It was Munger who encouraged Buffett to shift his strategy towards investing in high-quality businesses at reasonable prices. This approach, as Buffett reflects, helped him break free from his earlier habits, setting Berkshire on a path to become not just an investment house, but a vast conglomerate. Munger’s philosophy of buying wonderful businesses at fair prices became the cornerstone of Berkshire Hathaway’s investment strategy. This blueprint facilitated the transformation of Berkshire into a powerhouse, diversifying into various sectors including railroads, energy, confectionery, furniture and iPhones.


“Acquire worldly wisdom and adjust your behaviour accordingly. If your new behaviour gives you a little temporary unpopularity with your peer group … then to hell with them.”


Munger was renowned not only for his investment acumen but also for his voracious appetite for learning and wisdom. As Chairman of the Daily Journal Corporation and a board member of Costco, Munger cultivated a reputation that drew enthusiasts and prominent investors to his talks. His annual meetings at the Daily Journal were events of keen interest, much like those in Omaha with Berkshire Hathaway. William Green, in his book “Richer Wiser Happier,” describes how respected figures in the investment world, such as Li Lu, Mohnish Pabrai, Francois Rouchon, Whitney Tilson, Christopher Davis and Francis Chou, were drawn to Munger’s sharp wit and profound insights. These meetings were not just business gatherings but congregations of minds eager to absorb Munger’s wisdom.


Munger’s intellect and breadth of knowledge commanded respect and admiration, even from those not prone to idolisation. Bill Gates, a heavyweight of the tech industry, acknowledged Munger as “the broadest thinker I have ever encountered,” underlining the depth and versatility of Munger’s intellect. This respect was a testament to Munger’s unique ability to traverse diverse disciplines, providing insights that resonated far beyond the realms of finance and business. His wisdom was not confined to investing alone; it extended into realms of philosophy, psychology, and ethics, making him a polymath in the truest sense.


Central to Munger’s philosophy was a relentless pursuit to minimise errors in judgment and avoid what he termed “standard stupidities.” He constantly endeavoured to reduce “foolish thinking,” “idiotic behaviour,” and “unoriginal error.” This focus on reducing mistakes rather than solely seeking brilliance set Munger apart and became a cornerstone of his intellectual approach. His emphasis on rationality and clear thinking influenced not just his investment strategies but also provided a framework for effective decision-making in various aspects of life. Munger’s legacy, therefore, lies not just in the wealth he helped create but in the clarity of thought and wisdom he imparted to countless individuals across the globe.


“The best thing a human being can do is to help another human being know more.”


In reflecting upon the life and legacy of Charlie Munger, it’s clear that he was more than an iconic figure in the world of investing; he was a signal of wisdom and a moral compass. His teachings and principles have been a guiding light in my life, shaping my values and decisions. Munger’s sagacity has served as a North Star, helping navigate the complexities of both professional and personal realms. While I grieve his loss, it is with a deep sense of appreciation for the profound impact he had on my life and the lives of many others. His legacy is a testament to the enduring power of knowledge and ethical integrity.


The world has seen many public figures falter, but Munger remained steadfast, never wavering from the path that earned him respect and admiration. While I may not have agreed with every one of his views or actions, I never doubted his sincerity and integrity. In an era where positive examples are key to avoiding negativity, Munger stood as an exemplar of speaking your mind and sharing insights (regardless of whether people agree with you or not).


His passing leaves a void, but also a treasure trove of insights and principles that will continue to enlighten and guide.


As I navigate through this moment of reflection, I am reminded of Munger’s own words.


These words resonate as I ponder the wealth of knowledge he shared over a remarkable life. In honouring Munger, it is fitting to let his own insights mark the conclusion of this tribute:


“I have nothing more to add”