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Billionaire Jeff Bezos points out that risking strikeouts in business is so worth it because a homerun can score a 1,000 runs, not just 4
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We all know that if you swing for the fences, you're going to strike out a lot, but you're also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score one thousand runs. This long-tailed distribution of returns is why it's important to be bold. Big winners pay for so many experiments.
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Diplomat Richard Haass says long-term decisions must consider cases for geopolitics since it will be more turbulent than in recent decades
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If you're looking through the windshield rather than the rearview mirror, the future is much more turbulent than the past. I think we'll look back on the recent past as a kind of golden age of stability and predictability. It's far, far messier now. And one can't make long-term decisions about anything without factoring in the kind of stuff we're talking about. Geopolitics are now anywhere and everywhere, so I think CEOs basically have to find ways of factoring that into their calculus.
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Buffett's successor Todd Combs emphasizes that it's much easier to predict the long term than the short term
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Peter Bernstein, the risk guru who wrote Against the Gods, always said it's much easier to predict the long term than the short term. So if you've got that North Star that's 20, 30, 50 years out, you can miss a lot along the way. You don't have to get the trajectory exactly correct. As long as you're two steps forward, one step back most of the time, it will all be perfectly fine. It's much, much harder to hit the short term with precision. You've almost got to invert that [short-term] thought process, that is, again, a little imbedded in us.
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Buffett: "Only formula you need is discounted future cash: how many birds are in the bush, when will you get them out & how sure are you."
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The only reason for making an investment and laying out money now is to get more money later on. That's what investing is all about. Now when you look at a government bond, it's very easy to know out how much money you're going to get back. It says it right on the bond. It says when you get the interest payments. It says when you get the principal. So it's very easy to figure out the value of a bond. It can change tomorrow if interest rates change, but the cash flows are printed on the bond.
The cash flows aren't printed on a stock certificate. That's the job of the analyst, is to change that stock certificate, which represents an interest in the business, to change that into a bond, and say, "This is what I think it's going to pay out in the future."
. .. The real question is, Berkshire is selling for $105B now, can we distribute enough cash to you soon enough to make it worth buying at present interest rates. If you can't answer that question, then you can't buy the stock. You can gamble in the stock if you want to . . . There are a lot of companies for which I can't answer that question. I can't answer it for internet companies, for example. But I just stay away from those.
. . . The only formula you need is discounted present value of future cash . . . In my most recent annual report, I used the example of Aesop . . . He said a bird in the hand is worth two in the bush. Now that's not quite complete, because the question is, "How sure are you that there are two in the bush, and how long do you have to wait to get them out?" But he was halfway there in 600 BC. That's all there is to investing, is how many birds are in the bush, when are you going to get them out, and how sure are you. Now if interest rates are 15%, roughly, you've got to get two birds out of the bush in five years to equal the bird in the hand. But if interest rates are 3%, and you can get two birds out in twenty years, it still makes sense to give up the bird in the hand, because it all gets back to discounting against an interest rate.
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$700B private equity LP CEO Mario Giannini argues investing environment is much more uncertain than ever, with this distinction from '08...
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The market day to day now is really uncertain.
I was telling someone the other day that in '08, it was a little easier. It was worse, but in '08, it was binary. Either the world was going to end economically, or we were going to be fine. And that was kind of it. It was one of the two. This doesn't feel binary. This feels like we don't know what's going to happen to inflation, we don't know what's going to happen to interest rates, we don't know what's going to happen to the economy, we don't know geopolitically.
I personally am far less bearish than what I think consensus is, but who cares, because you can create a scenario with a complete degree of credibility, that paints very, very different outcomes, so as we look at investing in that environment, whether you do it in public equity, private equity, whatever you're doing, it has a degree of uncertainty that I don't think we've really had to deal with for quite so time.
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Best-selling author Michael Mauboussin cautions against believing in "The Wisdom of Crowds" unless these 3 conditions are met
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Jim Surowiecki's great book The Wisdom of Crowds says crowds are wise when three conditions are in place:
- A, we have diversity of the underlying agents, or heterogeneity. So, this is one of the reasons that diversity is so important. It's because we need different points of view and different decision rules represented.
- Second is, an appropriate aggregation mechanism. You can have all the information in the world in the heads of people sitting around your board room, but if you're not extracting it and aggregating it, it's of no value.
- And then the third is incentives, which are rewards for being right and penalties for being wrong. In markets that's money, but it doesn't have to be money, it can be reputation, it can be fitness for a species, or other measures of incentives that allow you to propagate.
Why are crowds smart? The answer is that when those conditions are in place. And why do they go haywire from time to time, and we know that they do, and the answer is that one or more of those conditions are violated . . .
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Best-selling author & Harvard psychologist Steven Pinker describes how most people mess up conditional probability without tools
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A conditional probability is conceptually simple: it's just the probability of the THEN in IF-THEN. It's also arithmetically simple: it's just the probabilty of A and B divided by the probability of B. Nonetheless, it's the source of endless confusions, blunders, and paradoxes in reasoning about probability, starting with the hapless fellow in the xkcd cartoon on the following page. His error lies in confusing the simple probability or base rate of lightning deaths, prob(stuck-by-lightning) with the conditional probability of a lightning death given that one is outside during an electrical storm, prob(struck-by-lightning | outside-in-storm).
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Big Short investor Greg Lippmann: "If you spend your life looking for things that are 3:1 long-shots that pay between 6:1 and 10:1 . . . "
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. . . you walk away empty-handed most of the time, but if you look in your pocket, it's really full.
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Billionaire Howard Marks: "1st-level thinkers look for simple formulas & easy answers. 2nd-level thinkers know success in investing is..."
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...the antithesis of simple.
First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in “The outlook for the company is favorable, meaning the stock will go up.”
Second-level thinking is deep, complex, and convoluted. The second-level thinker takes a great many things into account:
- What is the range of likely future outcomes?
- What outcome do I think will occur?
- What’s the probability I’m right?
- What does the consensus think?
- How does my expectation differ from the consensus?
- How does the current price for the asset comport with the consensus view of the future, and with mine?
- Is the consensus psychology that’s incorporated in the price too bullish or bearish?
- What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?
The difference in workload between first-level and second-level thinking is clearly massive, and the number of people capable of the latter is tiny compared to the number capable of the former.
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#5 of "10 Lame Excuses for Not Quantifying Uncertainty": We don’t need to quantify uncertainty, we just need better forecasts
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Sam Savage says: If you’re about to play craps, do you waste your time trying to forecast the numbers on the individual dice or do you model that sevens are way more likely than twos or twelves when you roll two dice?
Doug Hubbard says: The only way to know if you have a better forecast is to quantify the reduction in uncertainty.
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