Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.

Source:   Berkshire Hathaway Shareholder Letters

If the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter.

Source:   Berkshire Hathaway Shareholder Letters

Leaving aside tax factors, the formula we use for evaluating stocks and businesses is identical. Indeed, the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.)...The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was “a bird in the hand is worth two in the bush.” To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush, and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.

Source:   Berkshire Hathaway Shareholder Letters

Aesop’s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota — nor will the Internet. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.

Source:   Berkshire Hathaway Shareholder Letters

Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business. Indeed, growth can destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years. Market commentators and investment managers who glibly refer to “growth” and “value” styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component usually a plus, sometimes a minus in the value equation. Alas, though Aesop’s proposition and the third variable that is, interest rates are simple, plugging in numbers for the other two variables is a difficult task. Using precise numbers is, in fact, foolish; working with a range of possibilities is the better approach.

Source:   Berkshire Hathaway Shareholder Letters

Usually, the range must be so wide that no useful conclusion can be reached. Occasionally, though, even very conservative estimates about the future emergence of birds reveal that the price quoted is startlingly low in relation to value. (Let’s call this phenomenon the IBT: Inefficient Bush Theory.) To be sure, an investor needs some general understanding of business economics as well as the ability to think independently to reach a well-founded positive conclusion. But the investor does not need brilliance nor blinding insights.

Source:   Berkshire Hathaway Shareholder Letters

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

Source:   Berkshire Hathaway Shareholder Letters

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Source:   Berkshire Hathaway Shareholder Letters

When investing, pessimism is your friend, euphoria the enemy.

Source:   Berkshire Hathaway Shareholder Letters

Market price and intrinsic value often follow very different paths – sometimes for extended periods – but eventually they meet.

Source:   Berkshire Hathaway Shareholder Letters

Fund consultants like to require style boxes such as “long-short,” “macro,” “international equities.” At Berkshire our only style box is “smart.”

Source:   Berkshire Hathaway Shareholder Letters

Investing is forgoing consumption now in order to have the ability to consume more at a later date.

Source:   Berkshire Hathaway Shareholder Letters

You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

Source:   Berkshire Hathaway Shareholder Letters

Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.

Source:   Berkshire Hathaway Shareholder Letters

I can’t remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben’s adage: Price is what you pay, value is what you get. Of all the investments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses).

Source:   Berkshire Hathaway Shareholder Letters

My experience in business helps me as an investor and that my investment experience has made me a better businessman.

Source:   Berkshire Hathaway Shareholder Letters

The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.

Source:   Berkshire Hathaway Shareholder Letters

There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship.

Source:   Berkshire Hathaway Shareholder Letters

On Climate Change: This issue bears a similarity to Pascal’s Wager on the Existence of God. Pascal, it may be recalled, argued that if there were only a tiny probability that God truly existed, it made sense to behave as if He did because the rewards could be infinite whereas the lack of belief risked eternal misery. Likewise, if there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy. Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear.

Source:   Berkshire Hathaway Shareholder Letters

To us investing is the equivalent of going out and betting against the pari-mutuel system. We look for a horse with one chance in two of winning and which pays you three to one. You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.

Source:   Poor Charlie's Almanack

Opportunity meeting the prepared mind; that’s the game.

Source:   Poor Charlie's Almanack

Think forwards and backwards – invert, always invert.

Source:   Poor Charlie's Almanack

We try more to profit from always remembering the obvious than from grasping the esoteric. It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be intelligent.

Source:   Poor Charlie's Almanack

You must know the big ideas in the big disciplines and use them routinely – all of them, not just a few. Most people are trained in one model – economics, for example – and try to solve all problems in one way. You know the old saying: To the man with a hammer, the world looks like a nail. This is a dumb way of handling problems.

Source:   Poor Charlie's Almanack

Most people will see declining returns (due to inflation). One of the great defenses if you’re worried about inflation is not to have a lot of silly needs in your life – you don’t need a lot of material goods.

Source:   Poor Charlie's Almanack

Eighty or Ninety important models will carry about ninety percent of the freight in making you a worldly-wise person. And, of course, only a mere handful really carry very heavy freight.

Source:   Poor Charlie's Almanack

If you don’t get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest.

Source:   Poor Charlie's Almanack

Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns.

Source:   Poor Charlie's Almanack

Trying to minimize taxes too much is on the great standard causes of really dumb mistakes.

Source:   Poor Charlie's Almanack

Anytime somebody offers you a tax shelter from here on in life, my advice would be don’t buy it…In fact, anytime somebody offers you anything with a big commission and a 200-page prospectus, don’t buy it.

Source:   Poor Charlie's Almanack

I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.

Source:   Poor Charlie's Almanack

What is elementary worldly wisdom? Well, the first rule is that you can't really know anything if you just remember isolated facts and try to bang 'em back. If the facts don't hang together on a latticework of theory, you don't have them in a usable form. You've got to have models in your head. And you've got to array your experience - both vicarious and direct - on this latticework of models.

Source:   Poor Charlie's Almanack

You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don't, you're going to lose.

Source:   Poor Charlie's Almanack

The one thing all those winning bettors in the whole history of people who’ve beaten the pari-mutuel system is quite simple: they bet very seldom.

Source:   Poor Charlie's Almanack

…some of the worst dysfunctions in businesses [and professional investment managers] come from the fact that they balkanize reality into little individual departments with territoriality and turf protection and so forth. So if you want to be a good thinker, you must develop a mind that can jump the jurisdictional boundaries. You don't have to know it all. Just take in the best big ideas from all these disciplines. And it's not hard to do.

Source:   Poor Charlie's Almanack

Good literature makes the reader reach a little for understanding. If you've reached for it, the idea's pounded in better.

Source:   Poor Charlie's Almanack

The long term future of a company is at best “an educated guess”. Some of the best-educated guesses, derived from the most painstaking research, have turned out to be abysmally wrong.

Source:   The Intelligent Investor

You may take it as an axiom that you cannot profit in Wall Street by continuously doing the obvious or the popular thing.

Source:   The Intelligent Investor

This point is vital: The investor cannot enter the arena of the stock market with any real hope of success unless he is armed with mental weapons that distinguish him in KIND – not in a fancier superior degree – from the trading public. One possible weapon is indifference to market fluctuations; such an investor buys carefully when he has money to place and then lets prices take care of themselves.

Source:   The Intelligent Investor

…the prime test of the competent analyst is his power to distinguish between important and unimportant factors and figures in a given situation.

Source:   The Intelligent Investor

[The] function of margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.

Source:   The Intelligent Investor

Investment is most intelligent when it is most businesslike.

Source:   The Intelligent Investor

Mathematics is principally a tool to meditate, rather than to compute.

Source:   Fooled By Randomness

MBAs, typically, can interpret their superficial knowledge of the rules of the game into "expertise".

Source:   Fooled By Randomness

It can be disturbing for many self-styled "bottom line" oriented people to be questioned about the histories that did not take place rather than the ones that actually happened.

Source:   Fooled By Randomness

Remember that [almost] nobody accepts randomness in his own success, only his failure.

Source:   Fooled By Randomness

Professionals forget the following reality: It is not the estimate or the forecast that matters as the degree of confidence with the opinion.

Source:   Fooled By Randomness

I like to say "Experience is what you get when didn't get what you wanted."

Source:   The Most Important Thing

I’m sure “risk” is—first and foremost—the likelihood of losing money.

Source:   The Most Important Thing

Theory says high return is associated with high risk because the former exists to compensate for the latter. But pragmatic value investors feel just the opposite: They believe high return and low risk can be achieved simultaneously by buying things for less than they’re worth. In the same way, overpaying implies both low return and high risk.

Source:   The Most Important Thing

The bottom line is that, looked at prospectively, much of risk is subjective, hidden and unquantifiable.

Source:   The Most Important Thing

And that brings me to the quotation from Elroy Dimson that led off this chapter: “Risk means more things can happen than will happen.” Now we move toward the metaphysical aspects of risk.

Source:   The Most Important Thing

For the most part, I think it’s fair to say that investment performance is what happens when a set of developments—geopolitical, macro-economic, company-level, technical and psychological—collide with an extant portfolio. Many futures are possible, to paraphrase Dimson, but only one future occurs. The future you get may be beneficial to your portfolio or harmful, and that may be attributable to your foresight, prudence or luck.

Source:   The Most Important Thing

The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing—-these factors are near universal. Thus they have a profound collective impact on most investors and most markets. The result is mistakes, and those mistakes are frequent, widespread and recurring.

Source:   The Most Important Thing

One of the great things about investing is that the only real penalty is for making losing investments. There’s no penalty for omitting losing investments, of course, just rewards. And even for missing a few winners, the penalty is bearable.

Source:   The Most Important Thing

Investing in an unknowable future as an agnostic is a daunting prospect, but if foreknowledge is elusive, investing as if you know what’s coming is close to nuts. Maybe Mark Twain put it best: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Source:   The Most Important Thing

Of the two ways to perform as an investor—racking up exceptional gains and avoiding losses—I believe the latter is the more dependable.

Source:   The Most Important Thing

The markets are a classroom where lessons are taught every day. The keys to investment success lie in observing and learning.

Source:   The Most Important Thing

When the salesman on the phone offers you a guaranteed route to profit, you should wonder what made him offer it to you rather than hog it for himself. Likewise, but a little more subtly, if an economist or strategist offers a sure-to-be-right view of the future, you should wonder why he or she is still working for a living, since derivatives can be used to turn correct forecasts into vast profits without requiring much capital.

Source:   The Most Important Thing

The assertion that future outcomes are fully reflected in current expectations seems absurd, yet it is very much alive. It is at the basis of the prevailing paradigm in financial economics. Market prices are seen as passive reflections of the underlying fundamentals. The efficient market hypothesis claims that market prices fully reflect all extant information. The closely related rational expectations theory holds that, in the absence of exogenous shocks, financial markets tend toward an equilibrium that accurately reflects the participants' expectations. Together, these theories support the belief that financial markets, left to their own devices, assure the optimum allocation of resources. This paradigm is in deep trouble: the idea that financial markets tend toward such an equilibrium seems to be contradicted by the evidence. Most economists now recognize that financial markets are capable of producing multiple equilibria. Yet the idea that free, unregulated markets assure the optimum allocation of resources has not been abandoned. Great efforts have gone into reconciling the actual behavior of financial markets with the efficient market hypothesis, adopting ever more elastic definitions of rationality and ever more modest definitions of efficiency. These modifications do not go far enough. It is time for a paradigm shift.

Source:   The Alchemy of Finance

I can proclaim what I call the "human uncertainty principle". That principle holds that people's understanding of the world in which they live cannot correspond to the facts and be complete and coherent at the same time. Insofar as people's thinking is confined to the facts, it is not sufficient to reach decisions; and insofar as it serves as the basis of decisions, it cannot be confined to the facts. The human uncertainty principle applies to both thinking and reality. It ensures that our understanding is often incoherent and always incomplete and introduces an element of genuine uncertainty - as distinct from randomness - into the course of events. [and hence the need for margin of safety]

Source:   The Alchemy of Finance

In my investing career I operated on the assumption that all investment theses are flawed…The fact that a thesis is flawed does not mean that we should not invest in it as long as other people believe in it and there is a large group of people left to be convinced. The point was made by John Maynard Keynes when he compared the stock market to a beauty contest where the winner is not the most beautiful contestant but the one whom the greatest number of people consider beautiful.

Source:   The Alchemy of Finance

A strong case can be made that the slavish imitation of natural science has led economic theory down the wrong path. In their search for universally valid generalizations, economists largely ignored the complexities and uncertainties of the real world and constructed an elegant axiomatic structure based on unrealistic assumptions. The assumptions underlying perfect competition include perfect information, homogenous commodities, a large number of participants engaged in profit-maximizing behavior, and no transaction costs. The contention that unregulated financial markets lead to optimum allocation of resources rests on the assumption that participants base their decision on rational expectations. None of these assumptions prevail in the real world. The edifice that has been erected on these unsound foundations is extremely fragile...Remove even a few of the assumptions, and the edifice comes crashing down.

Source:   The Alchemy of Finance

…the financial markets offer an excellent laboratory for the pursuit of truth. The reason is to be found not only in the quantitative and public character of the data but even more in the emotional reality of financial markets…Playing the markets is about as real as a game can get. There is, of course, a divergence between expectations and outcomes, but the outcome has an inexorable quality about it.

Source:   The Alchemy of Finance

The financial markets are very unkind to the ego: those who have illusions about themselves have to pay a heavy price in the lateral sense. It turns out that a passionate interest in the truth is a good quality for financial success.

Source:   The Alchemy of Finance

…I replace the assertion that markets are always right with two others: 1) Markets are always biased in one direction or the other. 2) Markets can influence the events that they anticipate.

Source:   The Alchemy of Finance

If participants labor under the misapprehension that the market is always right, the feedback they get is misleading. Indeed, the belief in efficient markets renders markets more unstable by short-circuiting the corrective process that would occur if participants recognized that markets are always biased. The more the theory of efficient markets is believed, the less efficient the markets become.

Source:   The Alchemy of Finance

...the intelligent investor should not buy common stocks simply because they are cheap but only if they give promise of major gain to him.

Source:   Common Stocks and Uncommon Profits

The successful investor is usually an individual who is inherently interested in business problems.

Source:   Common Stocks and Uncommon Profits

If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never.

Source:   Common Stocks and Uncommon Profits

...practical investors usually learn their problem is finding enough outstanding investments, rather than choosing among too many. The occasional investor who does find more such unusual companies than he really needs seldom has the time to keep in close enough touch with all additional corporations.

Source:   Common Stocks and Uncommon Profits

Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself.

Source:   Common Stocks and Uncommon Profits

Don't follow the crowd.

Source:   Common Stocks and Uncommon Profits

Of one thing the investor can be certain: A large company's need to bring in a new chief executive from the outside is a damning sign of something basically wrong with the existing management—no matter how good the surface signs may have been as indicated by the most recent earnings statement.

Source:   Common Stocks and Uncommon Profits

There must always be a conscious and continuous effort, based on fact, not propaganda, to have employees at every level, from the most newly hired blue-collar or white-collar worker to the highest levels of management, feel that their company is a good place to work.

Source:   Common Stocks and Uncommon Profits

The largest profits in the investment field go to those who are capable of correctly zigging when the financial community is zagging...This matter of training oneself not to go with the crowd but to be able to zig when the crowd zags, in my opinion, is one of the most important fundamentals of investment success.

Source:   Common Stocks and Uncommon Profits

One of these [popular quotes at Dow Chemicals] was “Never promote someone who hasn't made some bad mistakes, because if you do, you are promoting someone who has never done anything.”

Source:   Common Stocks and Uncommon Profits

In the last few years, too much attention has been paid to a concept that I believe is quite fallacious. I refer to the notion that the market is perfectly efficient. Like other false beliefs in other periods, a contrary view may open up opportunities for the discerning.

Source:   Common Stocks and Uncommon Profits

“When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that stays intact.” [says Buffett]

Source:   The Warren Buffett Way

“Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do,” says Buffett. “It’s imperfect but that’s what it is all about.”

Source:   The Warren Buffett Way

Warren Buffett, [Graham's] most famous student, explains, “There are three important principles to Graham’s approach.” The first is simply looking at stocks as businesses, which “gives you an entirely different view than most people who are in the market.” The second is the margin-of-safety concept, which “gives you the competitive edge.” And the third is having a true investor’s attitude toward the stock market. “If you have that attitude,” says Buffett, “you start out ahead of 99 percent of all the people who are operating in the stock market—it is an enormous advantage.”

Source:   The Warren Buffett Way

“Most managers,” Buffett has said, “have very little incentive to make the intelligent-but-with-some-chance-of-looking-like-an-idiot decision. Their personal gain/loss ratio is all too obvious; if an unconventional decision works out well, they get a pat on the back, and if it works out poorly, they get a pink slip. Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming has ever received bad press.”

Source:   The Warren Buffett Way

“How did you get here? How did you become richer than God?” Buffett took a deep breath and began: “How I got here is pretty simple in my case. It is not IQ, I’m sure you will be glad to hear. The big thing is rationality. I always look at IQ and talent as representing the horsepower of the motor, but that the output—the efficiency with which the motor works—depends on rationality. A lot of people start out with 400 horsepower motors but only get 100 horsepower of output. It’s way better to have a 200 horsepower motor and get it all into output. “So why do smart people do things that interfere with getting the output they’re entitled to?” Buffett continued. “It gets into the habits and character and temperament, and behaving in a rational manner. Not getting in your own way. As I have said, everybody here has the ability absolutely to do anything I do and much beyond. Some of you will, and some of you won’t. For those who won’t, it will be because you get in your own way, not because the world doesn’t allow you.”

Source:   The Warren Buffett Way

When Buffett invests, he sees a business. Most investors see only a stock price. They spend far too much time and effort watching, predicting, and anticipating price changes and far too little time understanding the business they partly own. Elementary as this may be, it is the root of what distinguishes Buffett.

Source:   The Warren Buffett Way

“I have always found it easier to evaluate the weights dictated by fundamentals,” said Buffett, “than votes dictated by psychology.”

Source:   The Warren Buffett Way

Innovation is not sustainable, merely renewable.

Source:   Renewable Competitive Advantage

Simply put, in the short run strategy follows structure. In the long run, structure follows strategy.

Source:   Renewable Competitive Advantage

Ask yourself: Do you think of your advantage as merely sustainable-or as dynamically renewable?

Source:   Renewable Competitive Advantage

Renewal: [About] Seventy percent of a company’s value is determined by efforts in place to refresh ageing products. The company’s price/earnings ratio is a measure of this: the degree to which current earnings are multiplied by the expectations that earnings can be sustained and improved.

Source:   Renewable Competitive Advantage

Understanding does not have precede action. Sometimes it is useful to just do something. Careful analysis, thoughtful experimentation, done with an eye toward bridging the past with the future, is the goal: to gain knowledge of what might be possible. Through market research, and superior ability to select and reject projects, managers learn to place intelligent bets on the future. Willingness to experiment combined with the ability to learn quickly from what you find are increasingly valuable, indeed critical, renewable skills.

Source:   Renewable Competitive Advantage

Strategy has a fashionable nature to it. This simply reflects the fact that popular competitive ideas come and go, like fashions. The drive for market share, popular in the 1970s, was followed a decade later by an emphasis on profitable, smaller market niches. The early emphasis on centralized planning gave way to a widespread interest in decentralization, and still later to interest in the benefits of core competencies. These changes, although sometimes criticized as signs of weakness, are actually deeper signs of convergence and alignment at work.

Source:   Renewable Competitive Advantage

Long-term thinking is both a requirement and an outcome of true ownership. Owners are different from tenants. I know of a couple who rented out their house, and the family who moved in nailed their Christmas tree to the hardwood floors instead of using a tree stand. Expedient, I suppose, and admittedly these were particularly bad tenants, but no owner would be so short-sighted. Similarly, many investors are effectively short-term tenants, turning their portfolios so quickly they are really just renting the stocks that they temporarily “own.”

Source:   Amazon Shareholder Letters

Cash flow statements often don’t receive as much attention as they deserve. Discerning investors don’t stop with the income statement.

Source:   Amazon Shareholder Letters

A dreamy business offering has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time – with the potential to endure for decades. When you find one of these, don’t just swipe right, get married. Well, I’m pleased to report that Amazon hasn’t been monogamous in this regard. After two decades of risk taking and teamwork, and with generous helpings of good fortune all along the way, we are now happily wed to what I believe are three such life partners: Marketplace, Prime, and AWS. Each of these offerings was a bold bet at first, and sensible people worried (often!) that they could not work. But at this point, it’s become pretty clear how special they are and how lucky we are to have them. It’s also clear that there are no sinecures in business. We know it’s our job to always nourish and fortify them.

Source:   Amazon Shareholder Letters

Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions. But most decisions aren’t like that – they are changeable, reversible – they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups. As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention. We’ll have to figure out how to fight that tendency.

Source:   Amazon Shareholder Letters

There are many ways to center a business. You can be competitor focused, you can be product focused, you can be technology focused, you can be business model focused, and there are more. But in my view, obsessive customer focus is by far the most protective of Day 1 vitality. Why? There are many advantages to a customer-centric approach, but here’s the big one: customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it, and I could give you many such examples.

Source:   Amazon Shareholder Letters

As companies get larger and more complex, there’s a tendency to manage to proxies. This comes in many shapes and sizes, and it’s dangerous, subtle, and very Day 2. A common example is process as proxy. Good process serves you so you can serve customers. But if you’re not watchful, the process can become the thing. This can happen very easily in large organizations. The process becomes the proxy for the result you want. You stop looking at outcomes and just make sure you’re doing the process right. Gulp. It’s not that rare to hear a junior leader defend a bad outcome with something like, “Well, we followed the process.” A more experienced leader will use it as an opportunity to investigate and improve the process. The process is not the thing. It’s always worth asking, do we own the process or does the process own us? In a Day 2 company, you might find it’s the second.

Source:   Amazon Shareholder Letters

First, there’s a foundational question: are high standards intrinsic or teachable? If you take me on your basketball team, you can teach me many things, but you can’t teach me to be taller. Do we first and foremost need to select for “high standards” people? If so, this letter would need to be mostly about hiring practices, but I don’t think so. I believe high standards are teachable. In fact, people are pretty good at learning high standards simply through exposure. High standards are contagious. Bring a new person onto a high standards team, and they’ll quickly adapt. The opposite is also true. If low standards prevail, those too will quickly spread. And though exposure works well to teach high standards, I believe you can accelerate that rate of learning by articulating a few core principles of high standards, which I hope to share in this letter.

Source:   Amazon Shareholder Letters

A close friend recently decided to learn to do a perfect free-standing handstand. No leaning against a wall. Not for just a few seconds. Instagram good. She decided to start her journey by taking a handstand workshop at her yoga studio. She then practiced for a while but wasn’t getting the results she wanted. So, she hired a handstand coach. Yes, I know what you’re thinking, but evidently this is an actual thing that exists. In the very first lesson, the coach gave her some wonderful advice. “Most people,” he said, “think that if they work hard, they should be able to master a handstand in about two weeks. The reality is that it takes about six months of daily practice. If you think you should be able to do it in two weeks, you’re just going to end up quitting.” Unrealistic beliefs on scope – often hidden and undiscussed – kill high standards. To achieve high standards yourself or as part of a team, you need to form and proactively communicate realistic beliefs about how hard something is going to be – something this coach understood well.

Source:   Amazon Shareholder Letters

Building a culture of high standards is well worth the effort, and there are many benefits. Naturally and most obviously, you’re going to build better products and services for customers – this would be reason enough! Perhaps a little less obvious: people are drawn to high standards – they help with recruiting and retention. More subtle: a culture of high standards is protective of all the “invisible” but crucial work that goes on in every company. I’m talking about the work that no one sees. The work that gets done when no one is watching. In a high standards culture, doing that work well is its own reward – it’s part of what it means to be a professional.

Source:   Amazon Shareholder Letters

So, the four elements of high standards as we see it: they are teachable, they are domain specific, you must recognize them, and you must explicitly coach realistic scope. For us, these work at all levels of detail. Everything from writing memos to whole new, clean-sheet business initiatives. We hope they help you too.

Source:   Amazon Shareholder Letters

Two sources in particular have inspired my thinking on diversity. The first is the mental-models approach to investing, tirelessly advocated by Berkshire Hathaway’s Charlie Munger. The second is the Santa Fe Institute (SFI), a New Mexico-based research community dedicated to multidisciplinary collaboration in pursuit of themes in the natural and social sciences.

Source:   More Than You Know

Charlie Munger’s long record of success is an extraordinary testament to the multidisciplinary approach. For Munger, a mental model is a tool—a framework that helps you understand the problem you face. He argues for constructing a latticework of models so you can effectively solve as many problems as possible. The idea is to fit a model to the problem and not, in his words, to “torture reality” to fit your model.

Source:   More Than You Know

A quality investment philosophy is like a good diet: it only works if it is sensible over the long haul and you stick with it.

Source:   More Than You Know

Investment philosophy is really about temperament, not raw intelligence. In fact, a proper temperament will beat a high IQ all day. Once you’ve established a solid philosophical foundation, the rest is learning, hard work, focus, patience, and experience.

Source:   More Than You Know

First, in any probabilistic field—investing, handicapping, or gambling—you’re better off focusing on the decision-making process than on the short-term outcome.

Source:   More Than You Know

That leads to the second theme, the importance of taking a long-term perspective. You simply cannot judge results in a probabilistic system over the short term because there is way too much randomness.

Source:   More Than You Know

Leadership is tricky to define, let alone assess. But I look for three qualities in a senior manager that, taken together, seem like a reasonable means to judge leadership. These qualities are learning, teaching, and self-awareness.

Source:   More Than You Know

A quality manager can absorb and weigh contradictory ideas and information as well as think probabilistically. I add hesitantly that this aspect of learning is borderline academic. I like CEOs who read and think.

Source:   More Than You Know

[Gary] Gladstein, who has worked closely with Soros for fifteen years, describes his boss as operating in almost mystical terms, tying Soros’s expertise to his ability to visualize the entire world’s money and credit flows. “He has the macro vision of the entire world. He consumes all this information, digests it all, and from there he can come out with his opinion as to how this is going to be sorted out. He’ll look at charts, but most of the information he’s processing is verbal, not statistical.”

Source:   More Than You Know

In investing, our innate desire to connect cause and effect collides with the elusiveness of such links. So what do we do? Naturally, we make up stories to explain cause and effect. The stock market is not a good place to satiate the inborn human desire to understand cause and effect. Investors should take nonobvious explanations for market movements with a grain of salt. Read the morning paper explaining yesterday’s action for entertainment, not education.

Source:   More Than You Know