Luis Saffie

My notes and principles

Observe what works and what doesn’t and understand why
Investing is simple but not easy
Munger: Life is too short to do business with people you don’t like
The most effective way to genuinely reduce risk is to know what you’re doing
No one should buy an investment merely because it’s better than the lousy one you just saw/owned
Success means being patient but aggressive when it’s time
If you don’t get elementary probability into your repertoire, you go through life flying blind
if you get heavy ideology when you’re young, you’re locking your brain
Problem with ideology is that you stop thinking when it comes to hard issues
You gotta work where you’re turn on
One way to avoid mistakes is to have someone to run your decisions by
How a person responds emotionally to events is more important than intelligence
Skin in the game: No situations where managers win and managers don’t lose
Integrity and reputation are your most valuable assets - and can be lost in a heartbeat
Buffet and Munger are not interested in investing in company turnarounds because they seldom do

Principles
- Treat a share of stock os a proportional ownership of a business
- Buy a significant discount to intrinsict value to create margin of safety
- Make the market your servant and not your master
- Be rational objective and dispassionate
The right stuff *
Variables

it’s not possible to consistently outperform the market
Understand what the company sell, who are their customers
If it’s too hard to understand, move on
To outperform the market, you must be a contrarian. Must be right enough occasions
- it’s much easier to follow the crowd than be a contrarian
Understand how a company generates cash flow
Making successful predictions about complex systems is aprocess in which errors are inevitable. → Having a margin of safety paramount
Prices will sway above and under intrinsic value, don’t try to predict
If you’re the crowd, you cannot, by definition, beat the crowd
Rationality is the best antidote to making psychological and emotional errors
Best quality of Munger → Rationality

You can’t really know anything if you just remember facts
You must know the big ideas
People who think broadly make better decisions
It’s better to be wordly wise than understand on a single model that is precisely wrong
Munger == Fox → knows a little about a lot
- Rather than a hedgehog
Go over decision making process carefully using skills, ideas and models from many disciplines
Focus on learning from mistakes
If you cannot explain why you failed, the business is too complex
Extreme mistakes in Berkshire’s history have been mistakes of omission

You get what you are rewarded for
Loss aversion: People put more emphasis in losses than gains
- I rather not lose $10 than pay $10 more for an item
Liking/Loving tendency: Admiration causes or intensifies liking or love (feedback loop)
- People deny/ignore distort facts of people they like/love/admire
Doubt avoidance tendency: People tend to avoid subjects they don’t know or have doubts about even if that’s the best path
Systems
- System 1: experiential. It’s fast, automatic and difficult to control
- System 2: Analytical system. It’s slow (Thinking Fast and Slow)
Inconsistency-avoidance: Reluctant to change when information given conflicts with what they already believe
Fairness tendency: tolerating a little unfairness to get a greater fairness for all is a the model we should all strive for
Envy/Jealousy Tendency: If you’re comfortably rich and someone else is getting richer fast, so what? There will always be someone
Reciprocation Tendency: Humans reciprocate favours and disfavours in an extreme manner
Influence from association: Brands associate with other brands or people that other like
Pain avoidance psychological denial: One should recognize reality even if one doesn’t like it
Over-Optimism Tendency: People tend to underestimate
Deprival super reaction tendency (loss aversion)
- we feel losses about 2 or 2.5 times more than gains

Supply-side economies of scale
- Average costs fall when more of a product or service is produced
Demand-side economies of scale
- Network effects
- when a product becomes more valuable as more people use it
Brand
Regulation
Patents and intellectual property