THEEDUCATION

OFAVALUE

INVESTORMyTransformativeQuestfor

Wealth,Wisdom,andEnlightenment

GuySpier

Theauthorandpublisherhaveprovidedthise-booktoyouforyourpersonaluseonly.Youmaynotmakethise-bookpubliclyavailableinanyway.Copyrightinfringementisagainstthelaw.Ifyoubelievethecopyofthise-bookyouarereadinginfringesontheauthor’scopyright,pleasenotifythepublisherat:us.macmillanusa.com/piracy.

Tomyparents,MarilynandSimonSpier,andtomysister,Tanya.

Tomychildren,Eva,Isaac,andSarah.

Tomywife,Lory:

Youareallmyreasons.

CONTENTS

Introduction

1:FromtheBellyoftheBeasttoWarrenBuffett

2:ThePerilsofanEliteEducation

3:TheFireWalk:MyFirstStepsasaValueInvestor

4:TheNewYorkVortex

5:MeetingaMaster

6:LunchwithWarren

7:TheFinancialCrisis:IntotheVoid

8:MyOwnVersionofOmaha:CreatingtheIdealEnvironment

9:LearningtoTapDance:ANewSenseofPlayfulness

10:InvestingTools:BuildingaBetterProcess

11:AnInvestor’sChecklist:SurvivalStrategiesfromaSurgeon

12:DoingBusinesstheBuffett-PabraiWay

13:TheQuestforTrueValue

Acknowledgments

BibliographyandGuidetoFurtherReading

Index

INTRODUCTION

MygoalinwritingthisbookistosharesomeofwhatI’velearnedonmypathasaninvestor.It’sabouttheeducationofthisinvestor,notanyotherinvestor.Thisstory isnotan investmenthow-to. It’snota roadmap.Rather, it’s thestoryofmy journey and ofwhat I’ve learned along theway.Withmy own flaws andfoiblesandidiosyncraticabilities—anddespitemyconsiderableblindspots.Over the years, I’ve stumbled across some profound insights and powerful

toolsthatI’dliketosharewithyou.Inmostcases,thesearenotthingsthatarewrittenaboutintextbooks.Becauseit’sastoryabouthowthingshappenintherealworld—andbecausetherealworldismessy—thetopicsarebroadinscope.TheyrangefromthemostinsignificantofhabitsthatI’vedeveloped,likewhatto read first, to thegrandest:whom tochooseasheroes andmentors andhowtheirwisdomcanchangeyourlife.Thisbooktracesthearcofatransformation.IstartedoffasaGordonGekko

wannabe—brash, shortsighted, and entirely out for myself. Then a series oftransformationsandself-realizationsledmeonapathfromBenjaminGraham’sTheIntelligentInvestortoRuaneCunnifftoPoorCharlie’sAlmanacktoRobertCialdini, then tomeetingMohnishPabraiand lunchwithWarrenBuffett.That$650,100mealhadalife-changingimpactonme,asyouwillsee.Within one year ofmymeetingwithBuffett, I let two-thirds ofmy staff in

NewYorkgo,stashedhalfofmyfamily’sbelongingsinstorage,andshippedtheotherhalftoZurich,wherewewenttolive.Istoppedchargingmanagementfeesto new investors in my funds. I switched off my Bloomberg monitor. And Irenouncedmyperilousaddictiontocheckingstockpricesonaminute-by-minutebasis.I’mnotnecessarilyadvocating thatyoushouldalsohave lunchwithWarren

Buffett—especially now that the price tag has soared, hitting a high of $3.46million in2012!AndI’mnotclaiming tohaveaspecialunderstandingofhimeither.WhatIcan tellyouisthathehashadanextraordinaryimpactonhowIinvestandonthewayIlivemylife.MyhopeisthatIcansharesomeoftheselessonsthatI’vederivedfromhimsothattheywillbenefityouasmuchastheyhavebenefitedme.Ittookmethebestpartoftwodecadestogetontoamoreenlightenedpathin

life,andI’vemademanymisstepsandlostmuchtimealongtheway.Hopefully,this bookwill help you to reach your enlightened path faster, andwith fewermissteps. As Buffett once said, “Try to learn from yourmistakes—better yet,learnfromthemistakesofothers!”I submit to you that if you learn only someof the lessons here, you cannot

help but become rich—and perhaps wildly rich. Certainly, the wisdom I’vegleaned—notjustfrommyheroes,butfrommyownmistakesandsuccesses—has helped me immeasurably as an investor. As I write this, I’ve had acumulativereturnof463percentsincefoundingtheAquamarineFundin1997,versus167percentfortheS&P500index.Inotherwords,$1millioninvestedinthefundwouldnowbeworth$5.63million,versus$2.7million if ithadbeeninvestedintheS&P500.Butthisbookisalsoabouttheinnergameofinvesting,andbyextension,the

innergameoflife.AsI’vecometodiscover,investingisaboutmuchmorethanmoney.Soasyourwealthgrows, Ihopeyouwillalsocometo realize that themoneyislargelyirrelevant.Andwhatyouwillwanttodowiththebulkofyourwealthisgiveitbacktosociety.You’renotquitesureaboutthatlastpart?That’sokay.Formuchofmylife,I

wasn’tsureaboutitmyself,andapartofmestilldoubtsit.Likeyou,I’maworkinprogress.We’retoldalotthesedaysaboutwhycapitalismhasfailedus.We’retoldthat

greedybankersandirresponsibleCEOsneedtobereinedinwithmorestringent

regulations,andthatwealthshouldbemoreaggressivelyredistributed.Perhaps.But greed can also be a vehicle to something deeper andmore soulful. Inmyexperience,youcanstartoutasahungryyoungcapitalist,drivenalmostentirelybygreed,andfindthatitgraduallyleadsyoutoamoreenlightenedmind-set.Inthatcase,greedmaybegoodafterall—notifitmerelymotivatesyoutoacquiremore, but if it drives you toward that inner journey of spiritual growth andenlightenment.Iexpandon that lessonat theveryend.But first, let’senter thebellyof the

beast.

1

FROMTHEBELLYOFTHEBEASTTOWARRENBUFFETT

Othatthistootoosulliedfleshwouldmelt,

Thawandresolveitselfintoadew!

...

Howweary,stale,flat,andunprofitable,

Seemtomealltheusesofthisworld!

Fieon’t!ahfie!’tisanunweededgarden,

Thatgrowstoseed;thingsrankandgrossinnature

Possessitmerely.—Hamlet,act1,scene2,lines129–130

and133–137

Haveyoueverfeltthatway?Utterself-loathing.UnlikeHamlet,atleastIwasn’tsuicidal.ButIfeltalmostaswretched.Iwasdisgustedwithinvestmentbankersasabreed,andespeciallytheonesIworkedwith.Ifeltthesamewayaboutmyinvestmentbankingfirm.Worstofall,though,Iwasdisgustedwithmyself.Lessthantwoyearsearlier,Ihadfeltreadytoconquertheworld.Backthen,I

wasastudentatHarvardBusinessSchool(HBS).Forgoodmeasure,IalsohadadegreefromOxfordUniversity,whereI’dcometopofmyclass ineconomics.Everythinghad seemedpossible—until I threw it all awaywithone recklesslyfoolishcareermove.In1993,afewmonthsbeforeIgraduatedfromHarvard,Istumbleduponajob

listingforanassistanttothechairmanatD.H.BlairInvestmentBankingCorp.I’d read a bit about investment banking and fancied myself as one of thesebuddingMastersoftheUniverse.

Brimmingwithyouthfulconfidence,IheadedtoNewYorkCitytomeetwithD.H.Blair’schairman,J.MortonDavis.MortyhadstartedoutasapoorJewishkid fromBrooklyn.He graduated fromHarvardBusiness School in 1959 andwent on to become the owner and chairman of D. H. Blair, which had beenfounded in 1904. People told me that he’d made hundreds of millions forhimself.Imetwithhiminhiswood-paneledcornerofficeat44WallStreet.Theplace

hadn’t been renovated in years, and it looked like a traditional investmentbanking partnership from John PierpontMorgan’s era. In fact, J. P.Morgan’sheadquarterswerealmostnextdoor.Mortywasaconsummatesalesman,andhedidabrilliantjobofbeguilingme.

Hetalkedtomeaboutsomeofthegreatdealshe’dpulledoff inhotareaslikebiotech,adding,“You’llbedoingdeals rightaway,workingdirectlywithme.”Heassuredmethattherewas“nolimit”towhatIcouldachievetherewithhimand later gaveme a book by FrankBettger calledHow I RaisedMyself fromFailure to Success in Selling. I liked the fact that Morty was an outsider—unconventional,self-made,andhighlysuccessful.Shortlyafterward,IreadaNewYorkTimesarticlethatreferredtoD.H.Blair

asan“infamous”brokeragehousewhose“brokershavebeenknowntorefusetoletcustomerssellwhentheyrequestthatastockbeliquidated.”Thearticlealsomentioned that securities regulators in Delaware had “tried to revoke Blair’slicense” and that regulators in Hawaii “said Blair was using fraudulent anddeceptivesalespractices.”WhenIwentbacktoaskhimaboutthearticle,Mortytoldmethatpeopleenvysuccessandtrytotakeyoudown.Iwasgullibleenoughtobelievewhateverhetoldme.SomeofmyfriendsfromHarvardraisedtheireyebrowswhentheyheardthat

IwasgoingtoworkforD.H.Blair,butIignoredtheirwarnings.Iwasarrogantandslightlyrebellious,andIwasdeterminednottofollowthestandardroutetoestablishmentfirmslikeGoldmanSachsandJ.P.Morgan.Iwantedtoblazemy

owntrailandbemoreentrepreneurial.ItfeltasifMortyhadmademeanofferthatIcouldn’trefuse,althoughIshouldhave.SoIsignedon,thinkingthatIwasgolden,expectingWallStreettoshowmethemoney.Highonhope,IjoinedD.H.BlairinSeptember1993withthegrandtitleof

vicepresident.Isharedadimlylit,wood-paneledroomonthesecondfloorwitha kind, elderly banker.Hehadn’t done a deal in years, but hewas part of thescenery,burnishingtheinvestmentbank’ssheenofrespectability.Onlysixmonthsintothejob,Iwasmiserable.Ihadreceivedandcontinuedto

receive a series of hard knocks. For a start, I had thought that I’d be thechairman’ssoleassistantandthatI’dhavetheopportunitytoobserveandlearnfromthemasterbyhelpinghimanalyze themultitudeofopportunitiescominghisway.Instead,itturnedoutthathehadtwootherassistants.All three of us had shiny new MBAs: Len had gone to Harvard Business

School;DrewwasfromWharton.Thiswasadog-eat-dogenvironment,andthethreeofuswerenotateam.AsIsoonrealized,therewasabsolutelynoneedformeontheanalysisfront. Iwas learningthehardwayaboutwhat isnormalonWall Street. There are alwaysmore people available, and they are abundantlycapableofdoingthejobthatneedstobedone.Thecompetitionisintense.Andtherearedozensofpeoplelineduprightbehindyou,readytotakeyourplace.Theonlyway I couldaddanyvalue in this environment, andwhat the firm

really neededme to do,was to bring in deals. I thought that I was up to thechallenge.Afterall,itwasabigsellingpointofthejob.Butthecompetitionwasfierce,bothinsideandoutsidethefirm.AndIwasnew.NewtoD.H.Blair,newtoinvestmentbankingandfinance,andnewtoNewYork.Iwasdeterminednottoquit, though.Thatwouldhavebeenanadmissionof

defeat.IwouldhavebeenmortifiedtoletmyclassmatesknowthatI’dmadeamistake. Even worse, I would have been called a quitter, and that reputationmighthavefollowedme.Morethananything,whatmotivatedmewashowotherpeopleviewedmeratherthanhowIviewedmyself.Ifthishadbeenreversed,I

don’t think I would have stuck around that place for aminute; I would havesimplyditched.ButIwasdesperatetolooksuccessful.Mysingulargoalbecametogetadealdone.Thatway,Icoulddeclarevictory

andthenchoosetoleave.SoIsmiledanddialedandpoundedthepavementformanymonths,followinguponeverydealleadIpossiblycould.ButIstillcameup empty-handed. Despite my massive testosterone-fueled determination tosucceed in this,my first job after graduatingwith anMBA, Iwas hopelesslyflailing.Myproblemwasn’tjustthatthebestdealsgotnabbedbythebignameslike

GoldmanSachsandMorganStanley,althoughthatwastrue.Therewereplentyofotheropportunitiesaround.Butsuccessfullybringing thosedeals intoD.H.BlairrequiredmetodothingswithfactsthatIhadneverdone.D. H. Blair’s specialty was venture capital and banking. It was one of the

things that had attractedme to the firm: the opportunity to be on the cuttingedge,fundingstart-upswithnewtechnologiesthatwouldchangetheworld.Oh,anddidImentionthatIwouldalsogetfilthyrichintheprocess?Inadditiontomyarroganceandhubris, I alsohadmy fair shareofWallStreetgreed. IwasconvincedthatIwasonthequickpathtoNirvana.The harsh reality was that companies with technologies or innovations that

reallyworkedandwerecertaintosucceedwereextremelyrare—evenamongthecrowdthatgotitsfundingfrommoreprominentinvestmentbankslikeGoldmanSachsandMorganStanley.Instead, the vast majority fell into the category of “might succeed.” There

were a greatmanymanagement teams that desperatelywanted to pursue theirdreams and that werewilling to do and say prettymuch anything if itmeantgetting funding. Before I knew it, I was drowning in a sea of crappy deals,assailedbyentrepreneurswhohopedthatIwouldlookkindlyuponthem.The inexorable logicofexpectedprobability that Ihadfirst learnedabout in

high school and then studied atHarvard in a course called “DecisionTheory”

wasthatifIwasgoingtorecommendadeal,ithadtohaveatleastafairchanceofmakingmoney.Givenhowmanydealsfailed,andtheverysmallnumberthatmadeinvestorsamultipleoftheiroriginalinvestment,myroughcalculationwasthat theprobabilityofsuccesshadtobeat least50percentfor thethingtogetfunded.Butafterawhile,IcametobelievethatD.H.Blair’sstandardswerefarlower.OnonememorableoccasionIwascalledintoameetingbetweenthebankand

anoutfit looking to raisemoney for a cold fusionventure.Having studied thematerialsandreadupalittleonthebackground,Iblurtedout,“Butthesciencejustdoesn’tmakesense!”Implicitly,whatImeantwas,“Doyoureallyexpectmetokeepastraightface

andtelloursalespeoplethatthiscrapisgoingtofly?”Inanotherexample,ourfirmIPO’dacompanythatwasgoingtobuildanew

spacestation—inconjunctionwiththeBaikonurCosmodromeinKazakhstan—based on contracts with companies and entities formed by ex-governmentofficialsofthisformerSovietrepublic.Thecompany’sonlyassetsseemedtobesketchy contracts written in a foreign language that were unlikely to beenforceableinaKazakhcourt,letaloneinNewYorkorLondon.Likethecoldfusionnonsense,theprobabilitythatthisthingwouldtakeflightwasprettylow.ButthiswasthebusinessofD.H.Blair:findsomeofthemoreextraordinary

outlier opportunities, then hawk them to a naïve and hopeful investing publicthatknewnobetter.Tobe fair,even thoughmanyof these“opportunities” turnedout tobeduds

and eventually failed, the firm also scored a big hit every now and then. Forexample,ithadtakenpubliconeofthefirstbiotechcompanies,EnzoBiochem,atatimewhenitwasunthinkabletodoanIPOforacompanywithoutearnings.Andfromtimetotime,D.H.BlairevenIPO’dbusinessesthatgeneratedrealandgrowingearnings.Butin between the good deals, the firm needed fodder to feed themoney-making

machine.Onthedealside,inadditiontocashinvestmentbankingfees,

D. H. Blair would take a healthy chunk of warrants in the companies that itfinanced.And on the investment side, D.H. Blair was often the onlymarketmaker in the shares that it took public. With bid-ask spreads as high as 20percent,therewerefatprofitstobemadejustbuyingandsellingthecompaniesthatwentpublic.LikesomanyinstitutionsonWallStreet,D.H.Blairhadaniceedgeonitsclients.But generating trading volume in the stocks and getting a broader group of

people interested in them required a lot of stagemanagement.Dressing up anopportunitywithquestionableoddsofsuccessandturningitintosomethingthatthe publicwas enthusiastic about buyingwas part of the role ofD.H.Blair’sanalysts and investment bankers. To make one of these deals succeed and togreasethewheelsoffinance,variouspeopleneededtoplaytheirpart.The cold fusion andCosmodrome dealswere not going to earn anymoney

soon, ifever.But theydidhavesizzle.Thesecompaniesrepresented ideas thatcouldcapturethepublic’simagination.Ifanenthusiasticinvestingpublicendedupdevelopingamaniaforcoldfusionorspacestations,thiscouldeasilypropelthenewlyIPO’dstockintothestratosphere,tomanymultiplesofitsIPOprice.Fromaninvestmentbankingstandpoint,thissortofpriceactionwouldmakethedeal a runaway success—even if the company eventually failed.As the stockrose, the bank would cash in on the warrants and make a profit trading theshares.If thecompanyultimatelywentbust, theshareswouldbebroadlyheld,anditwouldnotbeD.H.Blairoritsclientsthatborethebruntoftheloss.To get these sorts of situations going required aggressive salesmanship of

everykind.SoD.H.Blairhadaretailbrokerageunitfilledwithhard-chargingbrokers who called clients from a boiler room on the 14th floor. They werephysicallyandlegallyseparatedfromtheinvestmentbankerslikeme,andtheyofficiallyworkedforanothercompany.While theywerepartofD.H.Blair&

Co.,IwasemployedbyD.H.BlairInvestmentBankingCorp.Our tiny team of bankers constituted the acceptable, respectable face of the

company,whilethebrokerswerethebackroomboys,toutingthesedubiousdealsto unsophisticated retail investors. They were chillingly reminiscent of thebrokers in Martin Scorsese’s movie The Wolf of Wall Street, which wasexaggeratedbutnotmisleading.The14thfloorofD.H.Blairwasaswirlingseaof testosterone; someone once told me that hookers would sometimes go uptheretorewardthemostsuccessfulsalesmanoftheday.Ihadnodirectdealingswiththeseguys,buttheydependedonourinvestment

banking team to come upwith deals for them to tout. The bankers could livewith themselves because they were holed up in the handsome, wood-paneledcocoonof the second floor,while the really eye-openingactivitieswenton12floorsabove.Still,thebrokersneededusbankersasenablers.ItwasonlyafterayearorsoatD.H.Blairthatitreallystartedtodawnonme

thatthiswasabigpartoftheroleIwasexpectedtoplay.Iwassupposedtodressuptheleastsketchyofthesedealsinsuchawaythatthedownsideswereheavilyde-emphasized or ignored while the sizzle—the blue-sky upside—washighlighted.Iwasn’ttheretoactasacareful,well-trainedanalyst.Theyhadnousefora

forensicarbiterwhopainstakinglyresearchedanidea,examinedtheopportunity,and pronounced, as accurately and honestly as possible,what this thing reallywas. In hindsight, I can seewith clarity that the real value to the firm ofmyOxforddegreeandmyHarvardMBAwastoadornitsdealsanddocumentswithmypristinecredentials.ItherebyprovidedakindofIvyLeaguefigleaf.WhenIlookbacktoourmeetingwiththecoldfusioncompany,Icanseehow

naïve I was. In truth, everyone there was expectingme to playmy part. Theelephantintheroomwasanunspokendialoguethatwentsomethinglikethis:

COLD FUSION COMPANY MANAGEMENT: Execs of D. H. Blair, yes, we are

bullshittingyou.Thisisalmostcertainlynotgoingtowork,butwe’vebeenworkingonitforyearsandhaveinvestedsubstantialpersonalfundsinit.Inanycase,nobodycanprove100percentthatitwon’twork.Moreover,thinkoftheexcitementthatthisthingwillcauseamonginvestorsandthepress.Itwould be the only publicly traded nuclear fusion power company in theworld!

OTHERD.H.BLAIRINVESTMENTBANKERS:Yes,thisisextremelyunlikelytofly,but we need to fill our pipeline of deals so that you, the companymanagement,cangetrichonthefounderstockandwe,theinvestmentbank,canget richonfeesandfromtrading thestock.Andwhoknows, itmightevensucceed,inwhichcaseourclientsmightevenmakemoneytoo.

Inthemidstofthiscynicalritual,Iwasobliviousenoughtomentionthatthephysicswasapparentlybogus,remarking,“Therearesomanypeopleouttherewho’veclaimedthattheyhavemadecoldfusionwork,andthere’snothingnewhere.”IwassotactlessthatIactuallylaughedoutloud.Only in retrospect did I realize that I had instantly become the most hated

personinthatroom.Howcouldthisdealeverflyifnitwitslikemecouldn’tkeeptheir big mouths shut? There was no way I was going to succeed in thisenvironmentwiththatkindofrecklesshonesty.ButIdidn’twanttoconcededefeat.SoIdoubleddownonmyefforts,girding

myselfformoretoilandtrouble.Ismiledsomemoreanddialedsomemore.AndIpoundedmanymorepavements.Eventually,Ifoundadealwithfarbetterchancesthanmost.Thistime,Icould

putmyhandonmyheart and say that, in spiteof the risks, it deserved togetfunding. The company was called Telechips, and in 1994 it had acommunications device that was both a computer and a telephone. Themanagement teamwas led byC.A. (“Al”)Burns, formerly atBell Labs, andRandyPinato,aformersalesmanforoneoftheBabyBells.Theideawassolid,

although well before its time. This was before the commercialization of theInternet,andcellphoneshadonlyrecentlybeenintroduced.Ihadalsofoundanexperiencedinvestmentbanker,HowardPhillips,whowas

willingtoworkwithmeinstructuringthedealandraisingthefunding.Phillipshad a solid background at Oppenheimer and had come to D. H. Blair insemiretirement.Heworked in theoffice twoor threedaysaweek,andhehadtakenamildlikingtome.ButhavingfoundasolidmanagementteamandconvincedthemthatPhillips

and Iwere their path to funding, I discovered awholenew realmof pain andunpleasantness. In spite of my understanding that Phillips and I were equalpartners,Isoondiscoveredthatourfeesplitfordoingthedealwasn’tgoingtobe50–50,afterall.Hewastakingthelion’sshare.Ifeltthehittomypridemorekeenlythantheonetomypocketbook.Still,ifthedealwasgoingtogetdone,Ihadnochoicebuttoacceptthis.Thenextstepwastogetthedealapproved.Iimaginedthat,givensomeofthe

dreck I’d seen inmy short time there, thismoreplausibledealwould just sailthrough.PhillipsandIwentthroughtheinvestmentcommitteeandgotaletterofintentstatingthevaluationandtheamountwewouldraiseforTelechips,subjecttosomecursorydue-diligencechecks.Iwasecstatic.SowereAlandRandy,andwecelebrated.Theywereelated that theycould

stopexhaustingthemselvesintheirpursuitoffundingandcouldfocusinsteadonbuildingtheirbusiness.Randytoldmetheyhadalsobeenworkingonahighlycredible alternative source of funding, but theywere delighted to be workingwithmebecausetheylikedme.For my part, I was already pre-spending some of my (smaller) bonus and

thinking of how I’d report this news to Class Notes, a Harvard alumninewsletter.Somethingalongthelinesof“GuySpierdoeshisfirstdealwithin18monthsofleavingHBS.”HowardPhillips,anoldhandatthisgame,hadnotpre-spentanyofhis(much

larger)portionofourexpectedbonusbonanza.Hemusthaveunderstoodthatthecursory due-diligence checks were nothing of the sort. Our chairman, MortyDavis,hadassignedthistasktooneoftheotheryounginvestmentbankers,whothenproceeded tonitpick thedeal todeath. I couldn’t believe it.Hehadbeenperfectlyhappytocheerleadmanyother,muchworsedeals.Eventually,withTelechipsmanagementwonderingwhattheholdupwas,and

withmeat a loss for answers,wewere all summoned to anothermeeting.Bynow,theTelechipsteamwasdesperateforfundingasthecompanywasburningthrough cash. I learned that becauseof thenitpicks (sorry, Imean seriousduediligence), the deal could still get done, but at a far lower valuation than ouroriginal termsheethadpromised—andwithmuchheftier feesnowpayable totheinvestmentbank.I got a call from Randy, telling me how appalled he was by the bank’s

behaviorandwithmeforstringingthemalong.AllIcoulddowasapologizeandsay that I honestly hadn’t known that it would turn out this way. I hoped hebelievedme,butI’mstillnotsurehedid.Onapersonallevel,I’dcertainlylosthistrust,nottomentionhisfriendship.Adayortwolater,Telechipsacceptedthetermsheet—aseveryoneknewthey

would. They had been strung along until the investment committee wasconfident that the company would have no alternative. I was incensed anddisgusted—notleastwithmyself.Lookingback,Inowrealize thatIwaspotentially teeteringontheedgeofa

moral cliff. If I had been drawn any further into this firm’s culture, eitherwillinglyorunwillingly,Iwouldhavefallenirretrievablyoffthatcliff.Infact,afewyearsafterIleft,D.H.Blair,havingrunafouloftheregulators,

wasreducedtoashadowofitsformerself.Theretailbrokeragebusiness,D.H.Blair & Co., closed down entirely in 1998. In 2000, theWall Street Journalreportedthatthisretailbrokerageunitand15ofitsofficersandemployeeshadbeenindictedon173countsofstockfraud.

Amongotherthings,theretailbrokeragefirmwaschargedwithmanipulatingstock prices for its own benefit and engaging in illegal sales tactics. Fourexecutives at the retail firm—chairman Kenton Wood, vice chairmen AlanStahler andKalmanRenov, andhead traderVitoCapotorto—pleadedguilty tosecuritiesfraudandcollusiontofixstockprices.USATodayreportedthatD.H.Blair & Co. and its executives paid $21 million “to reimburse defraudedcustomers.”The investment bank,whichwas a separate company, emerged unscathed—

andnocriminalchargeswerebroughtagainstitschairman,MortyDavis.Butitmusthavebeenaterribletimeforhim,notleastbecauseStahlerandRenovwerehissons-in-law.Inthepress,Mortyhimselftookabeating.Forexample,a1998article inForbes referred to “the controversial figure of penny-stock king, J.Morton Davis,” who “got rich by raising money in the private and publicmarkets for companies that tonier firmswouldn’t touch.”When I leftHarvardandwenttoworkondealswithhim,thiswasn’tquitewhatIhadinmind.What’s sad is thatMorty trulywasn’t abadperson. I remembergoing for a

familydinnerathishouseoneFridayeveningandbeingtouchedbyhowkindlyandwarmlyheincludedme.Therewasmuchtoadmireinhim,andit’scertainlynotformetojudgeanyone.Still, fromwhat I had seen of the culture at D. H. Blair, its problemswith

regulatorswerehardlysurprising.Formypart,Idon’tknowforsurehowcloseIwastotheedgeofthatmoral

cliff.ButknowingwhatIknownow,Icantellyouthatathousandmilesawaywouldhavebeentooclose.Inretrospect,Ihadbeendangerouslyblindaboutthemotivesandethicsofmycolleagues.Thiswaspowerfulproofofjusthowdumbevensmart,well-educatedpeoplecanbe.Itcertainlytookmefartoolongtograspthatthisbusinesswassetupinsucha

waythat,ifIwantedtowin,Iwouldhavetolosewhateverwasleftofmymoralcompass.Formonths,Iwasfocusedonthewrongquestions,wonderingwhyI

washavingsomuchtroublegettingdealsdoneandfrettingthatsomethingmustbewrongwithme.Ididn’thavetheexperienceortheperspectivetounderstandthatthiswholeenvironmentwaswrong.Part of the problemwas that the competitionwas so fierce. This led to the

beliefthat,ifIwasn’twillingtodosomething,someoneelsewouldquicklystepintodoit.Thiskindofenvironmentisperfectlydesignedtogetpeopletopushtheboundariesinordertosucceed.It’sapatternthat’srepeatedagainandagainonWall Street. Through ambition, greed, arrogance, or naïveté, many bright,hard-workingpeoplehavestrayedintograyareas.Still, it’s important to clarify one point. No member of D. H. Blair’s

management ever directly asked me to lie or misrepresent anything—eventhough I believed that a big aspect of the place was about misrepresentingopportunitiestoacredulousmarketplace.For example, theywould have appreciatedmy claiming that I had donemy

duediligenceoncoldfusionandthatitcheckedout.Bang!Theywouldhavehadonepieceof the idealscenery theyneeded inorder toclose thedeal.But theyneversaidasmuchinsomanywords.Therulesofthegamewereimplicit.AtD.H.Blair,Iobservedanotherpatternthatplaysitselfoutcountlesstimes

onWallStreet.Everybodywantstomakemoney.Sotheseniorgreedybankerswho should know better turn a blind eye while the younger greedy, naïvebankers push the boundaries. At Lehman Brothers, they pushed leverage. AtCountrywide, they ignored default rates on subprime. At SAC Capital, theyturnedablindeyetorampantinsidertrading.MyexperienceatD.H.Blairhashelpedmetoseehowoftenthissortofthing

recursinawidevarietyofenvironmentsonWallStreet.Duringthetechbubbleof the late1990s, lousycompanieswere talkedupandsoldtoanunsuspectingpublic.Forexample,analysts likeHenryBlodgetatMerrillLynchwerewildlybullishaboutInternetstocks,dressinguppigswithlipstick.Yearslater,thesamethinghappened at credit-rating agencieswhere analysts issuedblindlypositive

ratingsfortheCMOsandCDOsthatwouldultimatelyleadtothehousingcrisis.As for me, my 18 gut-wrenching months at D. H. Blair had destroyed my

clean copybook and brought my career to an absolute low. The résumé andreputation I had built formyself at Oxford andHarvard had been reduced todust.Andreputationinbusiness—especiallytheinvestingworld—iseverything.ForyearsafterIleftD.H.Blair,IfeltsosulliedbytheexperiencethatitwasasifIcouldn’twashthedirtoffmyhands.Evenas Iwriteabout thisnow,myskincrawls.Partofmewonders if it’sa

mistaketowriteaboutitatall.ButIthinkit’simportanttodiscussjusthoweasyitisforanyofustogetcaughtupinthingsthatmightseemunthinkable—togetsucked into the wrong environment and make moral compromises that cantarnishusterribly.Weliketothinkthatwechangeourenvironment,butthetruthisthatitchangesus.Sowehavetobeextraordinarilycarefultochoosetherightenvironment—toworkwith, and even socializewith, the right people. Ideally,weshould stickclose topeoplewhoarebetter thanus so thatwecanbecomemorelikethem.IhopethedecisiontoworkatD.H.Blairwillturnouttobetheworstmistake

ofmyprofessionallife.But,thankfully,itdidn’tbreakme.Inanarticleentitled“TraumaRevealstheRootsofResilience,”thepsychologistDianaFoshaquotesalinefromErnestHemingway:“Theworldbreakseveryoneandafterwardsomearestrongatthebrokenplaces.”Whyisitthatsomepeoplearestrengthenedbytheirtraumasandnotbrokenbythem?It’s a great question that can also be asked about business and investing.

WarrenBuffettmadeoneofhisbiggermistakeswhen,inhisthirties,heinvestedin the loss-makingBerkshireHathaway textilemills.Thiscouldhavebeenhisundoing, but he later transformed Berkshire Hathaway into the toweringmonumentofhislife.Hedidsoinpartbylearningtoinvestinbetterbusinessesinsteadofbettingonthecigar-buttstocks(likeBerkshire)thatBenGrahamhadtaughthimtobuy.PerhapsD.H.Blairwasmyowncigar-buttmove:aformative

experienceoftoxicshock.It’snotjustaquaint,self-helpideathatthepeoplewhosucceedarethosewho

getupwhenlifeknocksthemdown.Anessentialcomponentofoureducationistolearnfromourmistakes—andifwedon’tmakemistakes,sometimeswemaynot learn at all. Certainly, the whole D. H. Blair debacle was an essentialcomponentofmyeducationasavalueinvestor.OneofthebiggestlessonswasthatImustneverdoanythingagainthatcould

taint my reputation. As Buffett once warned, “It takes 20 years to build areputationand fiveminutes to ruin it. Ifyou thinkabout that,you’lldo thingsdifferently.”AnotherlessonwasthatIhadtodoeverythingIcouldtochangemyprofessionalandintellectualenvironment.When I discovered theworld ofWarren Buffett, it was as if I had found a

lifeline. The discovery happened one summer day around the time that theTelechipsdealcameacrossmydesk.Bythen,Iwasalreadydeeplydisillusionedwith the life Iwas leading. I foundmyselfno longereating sandwichesatmydeskon thesecondflooratD.H.Blair. I’d lostmydesire tobuild thissortofcareer,butIhadnoideawhattodoandwasafraidtoleaveforfearofseeminglikealoseroraquitter.Looking for an escape, I’d sneak out at lunchtime and buy a falafel or a

shawarma from a street vendor. Then I’d wander into Zuccotti Park in theshadowoftheWorldTradeCenterandplayafewgamesofpick-upchess.Onthewayback,I’doftenduckintoabusinessbookshoponBroadwayjust

offWallStreetandbrowsetheshelves.ThefirstbookIboughttherewasFrankFabozzi’s Bond Markets, Analysis and Strategies. I was engrossed by histechnical discussions of asset/liabilitymatching and themeasurement of bondduration.Forawhile,Ievenimaginedmyselfasabondtrader.Onanother visit to this store, I pickedupBenGraham’s seminal book,The

Intelligent Investor, featuring a preface by Buffett. I could not put it down.Grahamspokeeloquentlyofowningastocknotasapieceofpapertotrade,but

asashareinarealbusiness.Healsotalkedoftreating“Mr.Market”likeamanicdepressive and taking advantage of his shifting moods. As the market veersbetweenfearandgreed,investorscanprofitrichlybyfocusinginaclearheadedwayontheintrinsicvalueofacompanyandexploitingthediscrepancybetweenthepriceand thevalue.Sometimesyouknow inyourbones that something istrue.Tome,thisvalue-investingphilosophymadesomuchsensethatitwasself-evident.Before long, I also read Buffett: The Making of an American Capitalist, a

brilliant biography by Roger Lowenstein. I was captivated by the details ofBuffett’s life.There couldnot havebeen amore flagrant contrast between thewayhelivedandthewayIwasliving.Andtherecouldnothavebeenastarkercontrast between my deal-making experiences at D. H. Blair and his ownbusinessethos.Buffettwasn’tworkinginasnakepit.Hewasn’tfindingpretextstoselldubiousdrecktohard-workingfolksonMainStreetorhustlingforafattershareofbrokeragefeesandthenstabbinghispeersintheback.Ihadnoclueyethow to implementanyof this inmyown life.But I felt a

deepanddesperateneedtogetoutofwhereIwasandmoveclosertowherehewas.ItwasasifhewereholdingouthishandtomesothatIcoulddragmyselfoutofthemoralquagmireinwhichIwassinking.Iclungtohimfordearlife.ThisbookisaboutmyjourneyfromthatdarkplacetowardtheNirvanawhere

Inowlive.

2

THEPERILSOFANELITEEDUCATION

Inordertomoveforward,Ihadtofixwhatwasbroken.Ihadtofigureoutwhatwas wrong with my wiring so that I could rewire myself. So I began to askmyself why I’d gone to D. H. Blair in the first place: what possessed apurportedly smart person to do something so spectacularly foolish? After all,thereweremanyotheroptionsopentome.Thisexplorationwasthebeginningofmyinwardjourney.AndoneofthethingsIcametorealizewasthatmyivorytowereducationhadleftmedangerouslyexposedandvulnerable.MyendingupatD.H.Blairwascertainlyabetrayalof thepurposesofmy

education at Oxford and Harvard. I’d attended two of the world’s finestinstitutions only to become an inadvertent accomplice in a perversion of thefinanceindustry.Didmyeducationfailme?Or,evenworse,didIfailmyeducation?There’sa

larger question to be asked here, too, since I’m also amicrocosm ofmy peergroup.Whydidsomanyhighlyeducatedpeoplefromelitebusinessschoolsandprivilegedbackgroundscontributetoandexacerbatethefinancialcrisisof2008–2009?Didoureducationfailus?Ordidwefailoureducation?Thesequestionshaven’tbeenansweredadequatelyby theprestigiousuniversities thatgroomedallthesehigh-poweredcreatorsofeconomicmayhem.I have to ask these questions even if I’m not qualified to answer them.

Because what was going on in my life was, in many ways, just an extremereflectionofwhatwasgoingon in the livesofmypeers.Somanyofuswent

intofinancewithtremendousconfidenceinourintelligenceandabilities,onlytodiscoverthat thesystemwebecamepartofwascapableofcausingmoreharmthangood.The unsettling truth is that there are elements of an elite education that are

positivelyadisadvantage.Iwasn’tawareofthesedisadvantagesatthetimethatIfinishedmyformaleducationorforaboutadecadeafterward.Onsomelevel,Ihadmyeyesclosedandwascruisingonautopilotforquiteawhile,wastingwhatshouldhavebeensomeof themostproductiveyearsofmy life. Ifyouhadaneducationalexperiencethatwasanythinglikemine,you—likeme—mayhavetoreprogramandrewireyourselfinsomefundamentalways.ThepersonwhohasinfluencedmemostasaninvestorisMohnishPabrai,an

IndianimmigranttotheUnitedStateswhohasrackedupfarbetterreturnsthanIhave. He studied at Clemson University in South Carolina, not at Oxford orHarvard.AndwhenMohnishandIhadourcharity lunchwithWarrenBuffett,you can be sure that Warren (who had failed to gain admission to HarvardBusinessSchool)couldn’thavecaredlesswhereeitherofushadstudied.Don’t get me wrong. Places like Oxford and Harvard are wonderful, and I

appreciatetheirimmensecontributiontoourcivilization.Butinlionizingthem,we can fail to discern their drawbacks. So if some of what I say about theseuniversitiessoundsoverlyharsh,pleaseunderstandthatit’saharshnessbornofaffectionandadesiretobuildup,ratherthanteardown.Partoftheproblemisthatafinelytrainedbutrarefiedacademicmindcanbe

damaging to your long-term success. You can easily end up with the mentalequivalent of a Formula 1Ferrari,whenwhat you need in the realworld is ahardyJeepthatcanoperateadequatelyinavarietyofenvironments.Toexplainthis,letmefirstgiveyousomebackgroundontheparticularitiesof

myownformaleducation.IcametoOxfordfromtheCityofLondonFreemen’sSchool—an independent high school originally founded for the benefit oforphans.Gullible parents imagined that itwas a fancyEnglish private school,

butitwasreallyaless-exaltedcrammer.Manyoftheeducationaldecisionstherewere made on the basis of what would get the most students into the bestuniversities. Someof the teacherswere remarkable.But for themost part, thegoalwasn’t to educate us in a broad sense. Instead, it wasmerely to analyzewhatitwouldtakeforustoperformwellinourA-Levelanduniversityentranceexams. The system then streamed and drilled us so we could get the highestscores.MyOxfordentrancepapersconsistedofMath,Physics,andaGeneralPaper.

And guess what? The system worked: I’d been so well trained that, despitedisastrously misreading the instructions on one exam, I was accepted atBrasenoseCollege,Oxford,tostudylaw.ButnowIwasalongsidestudentswhohadbeenmorebroadlyeducatedand

who knew stuff that I did not. Although I loved jurisprudence, or legalphilosophy, thecurriculumalsorequiredmetowadethroughdozensofBritishcommon-law cases each week. Now, British common law is a phenomenalsubject.Butnotforan18-year-oldwhosefamilyhadimmigratedtotheUnitedKingdomsevenyearsearlierandwhohadlittlesocialorhistoricalknowledgeofthecountry.IstartedtohaverecurringdreamsinwhichIcouldpressaspecialbuttonthatwouldincinerateeverytomeofcommonlawontheplanet.Ibelievethatit’snevergoodtoignoreyourrecurringdreamsforlong.Contrast thisexperiencewiththatofafriendatBrasenose,AndrewFeldman

(nowLordAndrewFeldman, chairman ofBritain’sConservative Party).He’dstudiedcopiousamountsofBritishandworldhistoryandwasabletosetthelawwithin its current and historical social context. For Andrew, the law was afascinating microcosm of everything he had already studied. For me, it wasmorassof intractablecase law.Ihadbeenpreparedtopassexams,butIdidn’thavethebenefitofhisbroaderframework.There’sanimportantlessonhere:It’snot enough to be in a great program at a great school. You need to be in aprogramthatmatchesyourparticularneedsatthatstageinyourlife.Backthen,

studyinglawwaswrongforme.ItwasinthisstateofdissatisfactionthatInoticedPeterSinclair,aBrasenose

economics professor, every time we passed each other in one of the collegequads.Healwayshadsuchakindsmileforme,ashedidforallofthestudents.Anybodywhomethimcould feel that hewas this incrediblybenevolent soul.Onedayattheendofmysecondyear,Iwokeupwiththerealizationthattherewas absolutely no way I could study law for another day. It felt as if aninexorableforcehadwelledupinmeuntilthiswasn’tevenadebate.Thesemomentsofclarityaresorareinlife,andeventhepeopleclosesttous

mayquestionwhetherwe should acton such instincts. I believe it’s crucial topayattentiontothesenonrationalconvictionsthatpercolateinsideusevenifwecan’texplain them.Myacademic training—with itsemphasisonhyperrationalanalysis—would deny the value of these almost inexplicable instincts andyearnings.Butweneedtorespectthesedeeperrecessesofourminds.ThisisnotdissimilartothewayGeorgeSoroslearnedtotuneintohisacutebackpainasasignal that“therewassomethingwrong” inhisportfolio.Who is tosaywherethemindendsandthebodybegins?IfeltasimilarsenseofclarityandcertaintywhenIdecidedtomarrymywife,

Lory. I knewwith allmybodyand soul thatwe shouldbe together. I had thesameabsoluteclaritywhenIdiscoveredvalueinvesting:Ididn’tthinkthiswastherightpathforme;Isimplyknewit.I’mconvincedthatWarrenBuffettmakeshis investmentdecisions the sameway,performinganextraordinarilycomplexsetofanalysesalmostunconsciously.Everyoneofushasahandfulofmomentslikethisinthecourseofalifetime.

Butweneedthecouragetoactonthem.In any case, Iwalked intoPeter Sinclair’s office and asked if I could study

economicsaspartofthePPE(Politics,Philosophy,andEconomics)curriculum.Tothisday,Ihavenoideawhatpossessedhimtosayyesandhelpmemakethechange.ButIfeelendlessgratitudetowardhimbecausethatsingleactmayhave

donemoretotransformmylifethananythingelse.TheminuteIbecameaPPEstudent,Istartedtofeelconnectedtotheworld.Insteadofreadinguponturgidcaselaw,myworkloadnowfeltlikeanin-depthexplorationofwhatlaybehindtheday’sheadlines.ItwasapowerfulexampleofwhathappenswhenweheedJosephCampbell’sinjunctionto“followourbliss”:newpathsopenup,andwefeelajoyatbeingalive.Butbefore long, Iwasflounderingagain.Even thoughIenjoyed thesubject

tremendously,Ifacedamajordisadvantage:twoyearsintomyuniversitycareer,Ihadn’tstudiedpolitics,philosophy,oreconomicsforasingleday,andIhadnoideawhat Iwas doing.Withinmonths, the academic authorities informedmethat if I didn’t improve my performance, I might be expelled for academicreasons.ThechillingOxfordtermwastobe“sentdown.”Feeling hopelessly ignorant, Iwould stay up formost of the night trying to

cobbletogetherahalf-decentessay.IknewhowfarbehindtheotherstudentsIwas.Oneof themwas the futureBritishprimeminister,DavidCameron,whowashighlyintelligentandarticulate,andsuperblypreparedbyhisyearsatEton.We’dsittogetherinaneconomicstutorialwiththreeorfourotherstudents,andIfeltintimidatedtospeakinfrontofhimbecausehewassomuchbetterinformedthanIwasaboutBritishhistoryandpolitics.Eventheprofessorswereimpressedwithhim,whereasIhadlittleclueaboutanything.Students would sometimes banter about Cameron’s erudite performances in

his politics tutorialswithVernonBogdanor, a renowned constitutional scholarwho is now an advisor to both the queen and the primeminister.Apparently,CameronandBogdanorwouldlaunchintodebatesoverwhichoftheVictorianprime ministers, Disraeli or Gladstone, was a more effective leader. Hearingthese tales, I felt woefully inadequate since I had scant knowledge of Britishhistoryandbarelyunderstoodthebasicsofthepoliticalsystem.MywayofcompetingwastofocusferociouslyontopicswhereIcouldstand

out. I fell in lovewithpoliticalphilosophyandspentcountlesshoursdebating

and pontificating about John Rawls’s theory of justice and other esotericsubjects. Fueled by fear of being sent down and exposed as stupid andundeservingofmyplaceatOxford,Ilearnedtodazzleintellectuallyasawayofconcealingmyinsecurities.Ihadaburningdesiretobeacceptedandrespectedwithinthisgroupofexceptionallysmartpeople.ThiswasfunwhenIwasdoingwellandwinningbutnotsomuchfunotherwise.IwasdriveninlargepartbywhatWarrenBuffettcalls“theouterscorecard”—

thatneedforpublicapprovalandrecognition,whichcansoeasilyleadusinthewrongdirection.Thisisadangerousweaknessforaninvestor,sincethecrowdisgovernedbyirrationalfearandgreedratherthanbycalmanalysis.Iwouldarguethatthiskindofprivilegedacademicenvironmentislargelydesignedtomeasurepeople by an external scorecard: winning other people’s approval was whatreallycounted.SoduringthoseformativeyearsIwasdevelopingaseriousflawthatIwould

laterneedtoidentifyandreverse.Valueinvestorshavetobeabletogotheirownway.Theentirepursuitofvalueinvestingrequiresyoutoseewherethecrowdiswrong so that you can profit from their misperceptions. This requires a shifttowardmeasuringyourselfbyan“innerscorecard.”Tobecomeagoodinvestor,Iwouldneedtocometoanacceptanceofmyself

as an outsider. The real goal, perhaps, is not acceptance by others, butacceptanceofoneself.Ofcourse,Ididn’trealizethisbackthen.SoIfocusedonmasteringtherules

ofthatexclusiveacademicworld.Ilearnedtothinkonmyfeetandcomebackwithquick,sharplywordedanswersthatwouldrequiremypeersandprofessorsto pay attention to me. To some extent, I still operate this way: when I getstressed or feel insecure, I revert to the dazzle-them-intellectuallymode that Ilearned atOxford.Only laterwould I see that this hard-earned skillwas onlyreally useful within the narrow confines of a university and a few otherintellectually elitist environments. Someone like Mohnish doesn’t have all of

these dazzling skills.But he’sway smarter than I amand educatedhimself inwaysthatarefarmorepracticalandeffectiveintherealworld.Andhere’stherub:whatwasthepointofhavingstudiedandappreciatedthe

deepeleganceofRawls’stheoryofjusticeifIwassoobtusethatIcouldn’tseethatD.H.Blairwasasnakepit?EvenonceIfinallyrealizedthatI’ddugmyselfintothishole,ittookmeseveralunnecessarymonthsbeforeIgalvanizedmyselftoclimbout.HowisitpossiblethatIcouldbesowelleducatedandyetnothavethecommonsenseormoralcouragetogetoutofD.H.Blairinstantly?Our top universities mold all these brilliant minds. But these people—

includingme—stillmakefoolishandoftenimmoralchoices.Thisalsogoesformy countless peerswho, despite their elite training, failed towalk away fromnefarious situations in other investment banks, brokerages, credit-ratingagencies, bond insurance companies, and mortgage lenders. For universityeducators,alittlesoul-searchingwouldalsonotberemiss.MystudyofeconomicsatOxforddidatleastdevelopmytechnicalskillsand

my ability to reason. I eventually learned to analyze and tease out theimplicationsofvariouseconomicpolicies.Someofthistechnicalknowledgeisnotonlyintellectuallyelegant,butisalsoofinestimablepracticalimportancetoanyone who wants to understand what policies drive economic success. Buttherearealsoeconomictheoriesthat,foralloftheirelegance,turnoutnottobeusefulatallintherealworld.Ididn’thavetheabilitytoevaluatethemcritically,and this academic environment wouldn’t have rewarded such heresy. So Iswallowedeverythingwholesale,withoutquestion.Themostimportantexampleofthisistheefficient-marketshypothesis,which

is a powerful and theoretically useful assumption about how theworldworks.Thishypothesisholdsthatfinancialpricesreflectalloftheinformationavailabletoparticipantsinthemarket.Thathasprofoundimplicationsforinvestors.Ifitwere true, there would be no bargains in the stock market since any priceanomalieswouldbeinstantlyarbitragedaway.

Intherealworld,thisissimplynottrue.Butittookmeadecadetorealizeit.Some aspects of my economics curriculum were so valuable that I somehowassumed that it was all equally valid. Part of the problem was that I hadsharpened my ability to appeal to the academicians who graded my papersinstead of training my mind to solve real-world problems. My professorsneglected to ask seriously whether the efficient-markets hypothesis reflectedreality—soIcouldsafelyneglectthisquestiontoo.I clung to this wrong-headed assumption with such unquestioning certainty

thatwhenIfirstencounteredWarrenBuffettatHarvardBusinessSchoolafewyearslater,Ihadnointerestinhimatall.Afterall,ifthemarketwereefficient,thewholeendeavorofsearchingforundervaluedstockswouldbefutile.Inmypursuitofacademicsuccess,IhadnarrowedmymindtosuchadegreethatIwasincapableofperceivingwhatwasinfrontofme.Inthisagain,I’masymptomofabroaderproblem.Theveryinstitutionsthat

wehaveestablishedtoteachustothinkindependentlyoftencloseourmindsinpotentially damaging ways. CharlieMunger discussed this very problem in aclassic talk he gave at Harvard Law School in 1995 on the “Twenty-FourStandard Causes of Human Misjudgment.” He described how B. F. Skinnerinfluencedanentiregenerationofpsychologiststoespousebehaviorisminspiteofplentyof disconfirming evidence.As the jokegoes, “Science advancesonefuneralatatime”aseminentbutwrong-headedscientistsbitethedust.AtOxford,itdidn’tmatterthatIwasmisguidedinequallyfundamentalways.

Despitemyreal-worldignorance,Igraduatedfirstinmyclassineconomics.Ifyoustopandthinkaboutit,thatshouldbeacauseofsomeconcern.Nonetheless,myself-confidence—andmyarrogance—soared.Withmyshinynewcredentials, I scoredaplum jobat a strategyconsulting

firm called Braxton Associates. The senior management had all attendedHarvardBusinessSchool,soIappliedacoupleofyearslaterandwasaccepted.AtHBS,thecurriculumisdevotedexclusivelytostudyingrealbusinesscase

studies.Ratherthanfocusontheoriesofhowtheworldshouldwork,wefocusedon practical discussions of what had actually happened. This approach toeducatingleadersisfarmorerobustandpracticalthantheOxfordmodelaseachcasestudyprovidesanewsetoffactsandcircumstancestoanalyze,creatingausefulreservoirofexperience.ButHarvardalsoaccentuatedmyhubris.Tousean Indian phrase that I love, I was a “topper,” and my glossy academiccredentialsreinforcedmyfeelingthat theworldowedmea livinginreturnformygeneralawesomeness.InmyfirstsemesteratHarvard,WarrenBuffettcametospeakatthebusiness

school. In my ignorance and arrogance, I instantly dismissed him as somespeculatorwhohadjustgottenlucky.Afterall,thetheoreticalmodelsI’dlearnedatOxfordmadeitaself-evidenttruththatsearchingforundervaluedstockswaspointless, given thatmarketswere efficient.Forme tograsp that he’dmade afortunepreciselybyexploitingmarketinefficiencieswouldhaverequiredmetoditch all ofmy painfully acquired academicmodels.And so I didwhatmanypeopledowhenthefactsdisagreewiththeirtheories:Idismissedthefactsandclung to the theory.What Imightwellhavesaid tohimat the timewas,“Mr.Buffett, don’t confuse me with the facts, because I already have my firmopinionsaboutefficientmarkets.”But if the truth be told, Iwas only in the lecture roomat all because Iwas

chasing after a woman in the second year who’d upset me by going out theprevious nightwith another classmate. I didn’t even sit downduringBuffett’slecture,andIcan’trememberasinglewordhesaid.It’satragicomicreminderthatmyfragileegomatteredfarmoretomethanthe

opportunity to learn. By contrast, part of what makes Warren himself sosuccessful is that he’s never stopped seeking to improve himself and that hecontinuestobealearningmachine.AsMungerhassaid,“Warrenisbetterinhis70s and 80s, in many ways, than he was when he was younger. If you keeplearning all the time, you have a wonderful advantage.” Back then, however,

Buffettwasutterlywastedonme.Still, as the saying goes,when the student is ready, the teacherwill appear.

Sure enough, Warren Buffett reappeared in my life four years later when Istumbleduponhis introduction toTheIntelligent Investor and then read abouthiminLowenstein’sbiography.Bythen,IwasgoingthroughhellatD.H.Blair.Myarrogancehadtakensuch

abeatingthatIwasopentoWarren’steachingsinawaythatIneverwouldhavebeen as an MBA student. I had been so humbled and humiliated by myexperienceatD.H.Blair that it forcedmetoreexamineeverythingIbelieved.Sucharethesweetusesofadversity.There is, of course, a certain irony here. JoiningD.H.Blairwas theworst

decision ofmy life. But it was also a gift—not only because this humiliationopenedmymindbutalsobecausemyexperiencetheretaughtmelessonsIcouldneverhavelearnedintheclassroomsandquadranglesofthefinestuniversities.Infact,D.H.Blairmayparadoxicallyhavebeentheperfectplaceformetostartmycareerbecauseitshowedme,inarawandunvarnishedform,everythingthatwaswrongwithWallStreet.Isawupclosethewillingnesstodistortthetruthinordertofurtherone’sownnarrowself-interest—thetendencytotreatclientsasmarkstobeexploited,notserved.Attheirworst,eliteinvestmentbankslikeGoldmanSachsand

J.P.Morganarenotallthatdifferent.Buttheshaftingofclientshappenswithamuchgreaterveneerofrespectability.When I began to understand the principles thatWarrenBuffett embodied, I

realizedthattherewasanotherwaytosucceed.Thisdiscoverychangedmylife.

3

THEFIREWALKMyFirstStepsasaValueInvestor

AfterleavingD.H.Blair,Ihadthehardesttimefindinganotherjob.Therewasthis stain—adamned spotonmyhithertopristine résumé that I couldn’twashout.IhadmistakenlygivenD.H.Blairthebenefitofthedoubt,butprospectiveemployerswere,understandably,notwillingtogivemethatsamebenefit.My résuméwas strong enough that I could land interviewswith companies

likeGoldmanSachs, SanfordBernstein, andCredit Suisse FirstBoston.But Iwasdamagedgoods,andnoneofthemwouldhireme.WallStreetinsiderswhounderstoodD.H.Blair’s reputation looked atme like this: either I’dbeen toostupid to figureoutwhatwasgoingon,or Iwasadangerous fellowwhowaswilling topush theboundariesofwhatwasprudent.Eitherway, theywouldn’ttouchme.Ifeltagrowingsenseofdespondencyastherejectionspiledup.Inthedeepest

emotional recesses ofmy brain,words like “rejection” and “can’t find a job”werecloselyconnectedtowordslike“failure”and“leprosy.”Ireallydidstarttofeellikealeper.Thentherewasmyinnercritic.Thevoiceinsidemyheadthatsaid,“What’sthepointindoingthis?It’snotgoingtogetyouanywhere.”Orthemore toxicversionof thisnegativeself-talk:“Thereyougoagain,youmoron,you’realwaysfailing.You’llneverhaveasuccessfulcareerinfinance.”Butbeforelong,Iwouldfindawaytogetunstuckandbeginrewiringmyself.

Thedetailsofhow thishappenedare specific tome,but theprocess relates toanybodywhohasbeenstuckandneedsdesperatelytofindawayforward.Ina

sense,whatIreallyneededtodowasreeducatemyself.Or,forthatmatter,un-educatemyself.Thisprocessbeganinthemostunexpectedway,withmydiscoveryoftheself-

helpguruTonyRobbins.Hisnamehadcomeupinaconversationwithaverysmart Swiss couplewho hadPhDs fromStanford. I pridedmyself on being aseriousthinkerwithapowerfulgraspofeconomicsandfinance.MyintellectualsnobberymadeiteasytodismisssomeonelikeRobbins.Withallmyeducation,howcouldIpossiblylearnanythingvaluablefromthiscrassAmerican?I don’t think I would have beenwilling to find outmore about Robbins if

thesefriendshadnotbeenEuropeanswithstellaracademicpedigrees.Ihatetoadmit this because it exposes the shallow intellectual values that I had at thetime.Forme,thebeginningofwisdomwastodropthesenarrowprejudicessothatIcouldbegintolearnfromeveryone.I had been planning to spend theweekend hanging out and relaxing in San

Francisco.ButoneofmySwissfriends,DianaWais,toldmethatRobbinswasdoingaseminarthereandthatitwouldchangemylife.Thetitleoftheeventwas“UnleashthePowerWithin.”Iwasfullofmisplacedskepticism,butIwasabletogetoutofmyownwaysufficientlythatIshowedup.Inretrospect,I’vecometoseethatthisisasmartstrategyforlife:wheneverI

have the choice of doing something with an uncertain but potentially highupside, I try to do it. The payoffs may be infrequent, but sometimes they’rehuge.AndthemoreoftenIpickuptheselotterytickets,themorelikelyIamtohit the jackpot. This is an application of a powerful philosophy thatMohnishdescribes in his book TheDhandho Investor: The Low-Risk ValueMethod toHighReturns.Asheputsit,“Heads,Iwin.Tails,Idon’tlosemuch.”Looking around the convention center on the outskirts of San Francisco, I

wonderedwhat thehell Iwasdoing there.This looked likesomekindofcult,with about two thousand people in the audience.What sort of self-promotingquack was this guy Robbins—and what sort of motley loser crowd had he

gatheredaroundhim?Robbins himself struck me as a rugged, quintessential Californian. He was

almostsevenfeettallandhisenergeticdeliverywasinfectious.Manypeopleintheaudiencewerejumpingupanddown,yellingoutthingslike:“Yes!Yes!Yes!Iamaforceforgood!”And:“Stepup!Stepup!Stepup!”This set off alarm bells in my head. Was Robbins just some poor player,

strutting and fretting his hour upon the stage?Was he just an idiot telling hisstory,fullofsoundandfury,butsignifyingnothing?Istoodattheback,barelyparticipating. But over several hours, in spite of myself, I found that I wasopeninguptothepossibilitythathehadsomethingtoteachme.Robbinswonmeoverinpartbybeingtransparentabouthismotives.Atone

point,hetoldus,“Look,I’manAmericanjustlikeyou.MymotivationistobehappyandsuccessfulandtolivethebestlifeIcan.Andlikemostofyou,Ialsowanttomakemoneyandberich.RicherthanIamtoday.AbigpartofhowIdothat isbyrunningseminarslikethis.ButasmuchasIwanttogetricher,evenmorethanthat,Ilikehelpingpeople.AndIknowthatIcanteachyouthingsthatwillhelpyou,andthatareworthmuchmorethantheentryfee.”Itwasagreatexampleofthepowerofauthenticity—ofspeakinghonestlyand

from theheart.His candidadmissionofhisown self-interest convincedme togivehimthebenefitofthedoubt.SoIstayed.In some ways, my original misgivings were right. Robbins seminars are a

formofbrainwashing.Shoutingthingsoutoftenenoughreallydoespounditin,andanyideacanbeimplantedbyrepeatingitoverandover.There’sadangertothis—one that can be exploited by religious fundamentalists and politicalextremists.Butinthiscase,itwasbrainwashingforthegood,designedtohelpusliveabetter,moresuccessfullife.I’mallforthatsortofbrainwashing.Our consciousness changes our reality, and I began to see that the positive

statementsRobbins got us to repeatwere a powerful tool in reconfiguringmyconsciousness.Sincethen,I’veoftenfoundthatwehaveto imagineourfuture

beforeithappens.The power of human consciousnesswas illustrated in an unforgettableway

that firstnightof theseminar.Robbinshadwhippedus intoamoodof intensejoycombinedwithextremedetermination.Inthisalteredstatewesteppedontoalawnoutside theconventioncenter, removedourshoesandsocks,and literallywalked on red-hot embers. I don’t know what the rational or scientificexplanation is for why our feet didn’t burn. But for many of us, this was atransformativeexperience.Icouldseethedifferenceinpeople’seyesafterwards,asifanewfireandpassionhadbeenignitedinthem—andinme.Hokeyas itmightseem, this20-foot firewalkcreatedametaphorforhowI

could break through my limitations and build a better reality. It was anexperientiallessonthatallowedmetounderstandhow,asRobbinsputsit,“Lifecan change in a heartbeat.” A goal that seems impossible in one instant canbecome entirely possible in the next if only you are willing to devote everyounceofyourmind,body,andsoultoreachit.My empiricallymindedOxford professors—whohad done somuch to train

meinthewaysoflogicalthought—wouldhavebeenamusedandbemusedattheimpactonmeofthismotivationalspeaker.ButhismessagewasexactlywhatIneededtohearatatimewhenmyformaleducationhadledmetoaprofessionaldeadend.Forexample,Robbinshammeredintomyheadtheideathat,ifyouwanttoget

somewhere, anywhere, and you’re stuck, “JustDo It! Justmake amove.Anymove!”Thismightbeobvioustomany.Hell,itwasobvioustome.Butmybiastoward analysis-paralysis meant that it was easier for me to pontificate in alibrary than to act. Robbins convincedme that I had to break the patterns ofnegativethought,pushthroughmyfears,andgetmoving.AsTheodoreRoosevelttoldanaudienceinParisin1910,“Itisnotthecritic

whocounts;notthemanwhopointsouthowthestrongmanstumbles,orwherethedoerof deeds couldhavedone thembetter.The credit belongs to theman

whoisactuallyinthearena,whosefaceismarredbydustandsweatandblood.”Having opened up toRobbins, I started voraciously reading books by other

self-helpgurus.Beforeattendinghisseminar,Iwouldhaverolledmyeyesatabook entitledHow to Win Friends and Influence People. ButWarren Buffetthimselfcredits theauthor,DaleCarnegie,withhavinghelpedhimenormously.In fact, Buffett has said that the only diploma he keeps in his office is acertificate confirming that he had “successfully completed the Dale CarnegieCourse in Effective Speaking, Leadership Training, and the Art of WinningFriendsandInfluencingPeople.”IwouldhavebeenequallydismissiveofThinkandGrowRichbyNapoleonHill,eventhoughithadwonoverPremWatsa,thehighly successful chairman and CEO of Fairfax Financial Holdings, who isfrequentlydescribedas“theCanadianWarrenBuffett.”Forawhile,thesebooksbecamemylifeinstructionmanuals.Iwasn’treading

themtosoundintelligentatdinnerparties;Iwasminingthemforusefulideastoimplementinmylife.Theyprovidedmewithcriticalfirststepsinmyeducationas a value investor and businessman, exposingme to amore practicalway ofthinkingabouthumannatureandhowtheworldreallyworks.Forexample,Carnegieexplains that thebestwayofconvincingsomeoneof

somethingistoappealtotheirself-interest.Likewise,hetalksaboutthepowerofusingpeople’snameswhenyouaddressthem,andtheimportanceofshowinggenuineinterestintheperson.ThesesimpleinsightshelpedmetoshiftthewayIinteracted with people. Previously, I would have focused on deploying myintellecttoshowthemhowsmartIwasortoappealtotherationalmind.Iwastoocleverbyhalf.Istartedusingthelessonsoftheself-helpgenreinaconsciousway,seekingto

brainwashmyselfintonewhabitsofsuccess.IevenchangedthewayItalkedtomyselfandothers.Insteadofsaying,“Ifeelsick,”I’dsay,“I’mlookingforwardto feeling better.” Trite as it may sound, having a positive attitude is crucialbecauseourmindshaveawayofmovingtowardwhatwefocuson.Schoolsand

universitiesaresodedicatedtodevelopingtheintellectthatwecaneasilyendupignoring these simple strategies that make for a happier andmore productivelife.At around the same time that I was learning these ideas, I was also taking

practicalstepstogetoutofmyrut.IjoinedtheNewYorkSocietyofSecuritiesAnalysts and started attending their lunchtime sessions in the World TradeCenter.I’drushacrossZuccottiParktoget there,nolongerhavingthetimetodawdlewiththechessplayers.I also bought some software from the American Association of Individual

InvestorstoscreenforBenGraham–style“net-net”stocks.IputtogethermockportfoliosinExcelspreadsheetsandupdatedthepricesbyhandeachweek.Ifelta rushof excitement as I saw thatmanyof theportfolios Ihadassembleddidmuchbetterthanthemarketasawhole.IalsoinvestedinasubscriptiontoValueLineandporedoverthenewissues.

It was in these pages that I noticed a company called the Burlington CoatFactory, which seemed cheap and had a long-term financial record thatimpressedme.ItwasthefirststockIeverbought.IwascaptivatedbyGraham’sinsightthatastockisn’tjustascrapofpapertotradebutapartownershipinabusiness.SoIvisitedthecompany’sstoresinNewYorkandOmahawithrelishandexcitement,feelinglikeatruecapitalistwhosemoneywasatworkinarealbusiness. I knew almost nothing at the time, but I held on to the stock for acoupleofyearsandmadeasmallprofit.Meanwhile,Istartedtoseethattherewasasmallecosystemofvalueinvestors

outtherewhooperatedwiththesamesortofintellectualandmoralintegritythatcharacterized Buffett. They were the antithesis of some of the people I’dencounteredatD.H.Blair:theyeschewedhype,focusinginsteadonservingthelong-term interestsof their shareholders. I felt aburningdesire tobeapartoftheirworld.Onecompanyinparticularstoodoutinmymindasabastionofthistypeofinvesting:Tweedy,Browne,whichhadbeenfoundedin1920.

Idreamedofgettingajobataplacelikethis.SoIboughtsomesharesintwoofthecompany’smutualfunds,thenaskedifIcouldcomebytoseethefirm’sofficesinManhattan.Ihadhopedtheywouldhireme,buttheyweren’tlookingforananalyst—atleastnotonelikeme.Still,Ifeltthethrillofwalkingonthishallowedground.IknewthatBuffett’soldfriendWalterSchlosshadworkedoutofanofficeherefordecadesandhadrackedupextraordinaryreturns.Onceagain,Ifeltthestingofrejection.Buttheywerekindenoughtogiveme

a copy of Buffett’s classic essay “The Superinvestors of Graham-and-Doddsville.” Ibrought ithomeanddiscovered in it the spectacular investmentrecordofanotherleadingvaluefirm,RuaneCunniff,whichmanagestheSequoiaFund. This was one of only two companies thatWarren recommended to hisclients after he closed his investment business in 1969 and returned hisshareholders’money.Sinceitsinceptionin1970,theSequoiaFundhasrisenby38,819percentversus8,916percentfortheS&P500index.Hopingtofindajobthere,IwrotealettertoRuaneCunniffandwasinvitedto

theirofficesbyCarleyCunniff,adirectorwhowasalsothedaughterofoneofthecompany’spartners.Iwasinaweofher.ShehadgrownupinaworldwhereGraham, Buffett, and intelligent investing would have been regular topics ofconversationover the family dinner table, and she hadbecome an exceptionalanalyst.Carley,whopassed away in 2005,was generous andgracious.Even though

therewasclearlynoopeningformetoworkthereandnothingIcoulddotohelpher,she tookmearoundandintroducedmetohercolleagues. Indoingso,sheshowed genuine care forme, and I was really touched. She also taughtme avaluablelifelesson:it’ssoimportanttoshowkindnessandbehelpfultopeopleearlyintheircareers,evenwhentheyhavedonenothingtodeserveit.Shesawanotherhumansoul,gavemethebenefitofthedoubt,anddidwhatshecouldtohelpafellowvalueinvestor.Oneway to stay in this orbit was to buy shares in the Sequoia Fund. That

would enable me to attend its annual meetings each spring at the New YorkAthleticClub.Butthefundhadbeenclosedtonewinvestorsformanyyears.SoI found someoneon eBaywhowaswilling to sellme a single share for $500even though thenetassetvaluewasonly$128. I thenadded tomyposition. Iexpecttokeepthesesharesfortherestofmylife.For me, the goal isn’t to make money, though I’m guessing Sequoia will

continuetooutperform.It’sreallyaquestionofchoosingtohavecertainpeopleinyour life (however tangentially)whoembody thevaluesyouadmire.Aswewilldiscussindetaillater,creatingtherightenvironmentornetworkhelpstotilttheplayingfieldsubtlyintherightdirectionsothatyoubecomefarmorelikelyto succeed. Advantages are often created imperceptible step by imperceptiblestep,soitmakesadifferencetoentertheuniverseofafirmlikeRuaneCunniff.Many of theSequoia attendeeswere alsoBerkshireHathaway shareholders,

and sometimes even the Berkshiremanagers attended.As a result, Imet LouSimpson,whomBuffetthadhandpickedtoinvestGEICO’smoneyinstocksandwhomheoncedescribedas“thebestIknow.”AnothercornerstoneofmyreeducationinvolvedstudyingBuffett’sinvestment

strategywithevengreaterintensity.There’snobetterwaytodothisthantoreadBerkshire Hathaway’s annual reports. In those pre-Internet days, that meantcallingupthecompanyandgivingthemmyaddressoverthephone.Afewdayslater,my first copyofaBerkshire report, addressedbyhand,arrived. Itwasarevelation.AtD.H.Blair,I’dreviewedsomanybusinessplanswithhockey-stickcharts

andpredictions thatonlywentup.Berkshire’s report camewithaplaincover,anditshighlightwasacandid,non-promotional,easilyunderstandableletterbyBuffett. The report also featured a table showing the annual increases in thecompany’s book value. It was pure information, not an attempt to lie withstatisticsortosugarcoatthetruthwithprettypicturesprintedonglossypaper.I’dneverseena report like this. Itwasdesigned toattract shareholderswho

were genuinely reading it for the right reasons. I’d assumed that the businessworldwasallaboutshoutinglouderthanthenextguysoyoucouldgetattention.ButBuffettwasreachingouttopeoplewhoweren’timpressedbynoise.AsIreadandrereadacompilationofBerkshire’soldannualreports,Ibegan

increasinglytothinkasWarrenBuffettwould.Iknowthissoundsodd,butIfeltthat he was smiling onmewhenever I behaved in a way that hemight havebehaved;andIfeltasifhehadturnedawayfrommewheneverIstrayedfromthatpath.Thiswasn’tamatterofidolworship.ItwasaboutchoosingateacherwhohadalreadydiscoveredthetruthsthatIstillneededtolearn.There is awisdomhere thatgoes farbeyond thenarrowworldof investing.

What I’m about to tell you may be the single most important secret I’vediscoveredinallmydecadesofstudyingandstumbling.Ifyoutrulyapplythislesson, I’m certain that you will have a much better life, even if you ignoreeverythingelseIwrite.WhatIstumbleduponwasthis.Desperatetofigureouthowtoleadalifethat

wasmorelikehis,Ibeganconstantlytoaskmyselfonesimplequestion:“WhatwouldWarrenBuffettdoifhewereinmyshoes?”I didn’t ask this question idly while sitting in a coffee shop sipping a

cappuccino.No.IsatdownatmydeskandactivelyimaginedthatIwasBuffett.I imagined what the first thing would be that he would do if he were inmyshoes,sittingatmydesk.Robbinsdescribesthisprocessas“modeling”ourheroes.Thekeyistobeas

precise as possible, picturing them in as much detail as we can. A relatedtechnique that he teaches is called “matching and mirroring,” which mightinvolvechangingthewayyoumoveorevenbreathetomatchtheotherperson’smovementorbreathing. Inmyexperience,youstart to feelwhat they feelandyouevenstarttothinklikethem.Thismightsoundpeculiar,buttheabilitytomimicisoneofthemostpowerful

waysinwhichhumansadvance.Justthinkabouthowchildrenlearnfromtheir

parents.Given that this isanaturalhuman instinct, it’s important tobecarefulaboutwhomwechoosetomodel.Thetruthis,theydon’tevenneedtobealive.AsCharlieMungerhasexplained,italsoworks“ifyougothroughlifemakingfriendswiththeeminentdeadwhohadtherightideas.”Luckilyforme,thisisn’tascientificbook,soIdon’thavetoproveorexplain

anyunderlyingscience(ifthereisany).ButIcantellyouauthoritativelythat,ona subjective level, this has worked for me. The minute I started mirroringBuffett,mylifechanged.ItwasasifIhadtunedintoadifferentfrequency.Mybehaviorshifted,andIwasnolongerstuck.So how can you apply these insights?We all know thatmentoring is a big

deal.Studentsandyoungprofessionalsareoftentoldtoseekoutmentors,justasthoseofuswhoarefurtheralongaresupposedtofindpeopletomentor.That’sall well and good if your heroes are accessible. Mine wasn’t. Buffett wasn’tsittinginhisofficeinOmahawaitingforacallfromthistaintedgraduateofD.H. Blair. Thankfully, this didn’t matter. I could get many—if not all—of thebenefits of having him as a mentor by studying him relentlessly, and thenimaginingwhathewouldhavedoneinmyshoes.Imagining that I was Buffett, I also began to study the companies in his

portfolio,wantingtoseethemthroughhiseyesandtounderstandwhyheownedthem.SoIordereduptheannualreportsforhismajorholdings,includingCoca-Cola,CapitalCities/ABC,AmericanExpress,andGillette.Thisagaingavemethat uncanny feeling thatWarren—and perhapsGodHimself—was smiling atme.Thentheannualreportsstartedtoarrive.Ivividlyrememberreadingthereport

forCapitalCities/ABC.Untilthen,Ihadneverlookedcloselyattheaccountsofsuchasuccessfulmediacompany.WhenIsawthecash-flowstatement,Ifoundithardtobelievemyeyes.Thecompanywasswimmingincash,andtheincomestatement didn’t come close to conveying the might of this cash-generatingmachine. Most of the companies I’d analyzed as an investment banker were

eitherhemorrhagingcashorgrosslyoverstating theircash-generatingability. ItfeltasifIwereembarkingonasecondMBA.I then decided to attend Berkshire Hathaway’s annual meeting. Through a

friendofafriendwhowasalreadyashareholder,IgotholdofaticketandflewouttoOmaha,notknowingasoulwhowouldbethere.IfeltarushofexcitementonseeingKiewitPlaza,thebuildingwhereBuffett

works—wherethemagichappens!Irentedacaranddrovepasthispleasantbutnondescripthousewiththatsamegiddysenseofchildlikejoy.Ialsodinedathisfavorite restaurant, Gorat’s Steak House, sitting with a group of BerkshireshareholderswhowerealsoinOmahaforthefirsttime.Ininvestingterms,Ihademergedfromthedesert,crossedtheRedSea,andfoundmypromisedland.ThereweretwoparticularlymemorablemeetingsformeinOmahathatyear.

One of them was with Rose Blumkin, a Russian Jewish immigrant who hadfounded theNebraskaFurnitureMart in1937,using$500 thatshe’dborrowedfrom her brother. She transformed it into America’s largest home furnishingscompany, and Berkshire bought a 90 percent stake in 1983 for $55 million,basedonahandshake,withoutevenauditingherbooks.Buffett laterdeclared,“Put her up against the top graduates of the top business schools or chiefexecutives of the Fortune 500 and, assuming an even start with the sameresources,she’drunringsaroundthem.”WhenImetMrs.B,asshewasknown,shewas101yearsold.Butshewas

still an unstoppable force. She was a tiny lady driving a cart, surrounded byadmiringfanswhoclearlyboredher.WhenIgotthechance,Ilookedherintheeye and asked, impertinently, “So,Warren tellsme you sell carpets. Can youmakeme a good price?”Her eyes lit up. “Aha,” she replied. “Are you a realcustomer,ordoyoujustvonttomakesmalltalklikeallzeseozerpeeple?”Inthatinstant,IcouldseewhyWarrenreveredher.Shewasallbusiness,all

the time,andshewascompletely transparent.Shehadbriefly tried to retireat95,buthadsoongonebacktowork.Hermottowas:“Sellcheap,tellthetruth,

anddon’tcheatnobody.”JustasIwantedWarrenBuffettinmylife,thisisthesort of person he wanted in his life. Over decades, he had created thisenvironment.Iwasjustbeginningtocreatemine,andIwaslearningtodiscernthetypeofpeopleIshouldhaveinit.The other encounter was with the oracle himself, shortly before the annual

meetingbegan. Iwasonmyway into the toiletsandwhowascomingoutbutWarren?He smiled atmeand said, “I alwaysget a little nervousbefore thesethings.”Andthenhewalkedon.WhenIhadlastseenBuffettinperson,backwhenIwasastudentatHarvard,

I couldn’t be bothered to listen to him at all. Now I was excited to see himcomingoutofthemen’sroom!Given his success, I had half-expected him to be a distant figure. It hadn’t

occurredtomethathe’dbesopersonableanddowntoearthtoatotalstranger.Evenfromthisbriefencounter,Icouldseethegoodwillheharboredtowardhisshareholders.Throughoutthemeeting,Icouldalsoseethathehadnopretenses,noairsandgraces.Heiswhoheis.InspiredbyRobbinsandBuffett,Ihadagrowingsenseofopportunity.Instead

offeelingthateverydoorwasclosed,Istartedtorealizethatitwaspossibletomove forward. Iwas soobsessedwithvalue investing that I hoped somebodywouldhiremeasastockanalyst.ButIstillcouldn’tgetajob.Then,outofnowhere,myfathercalledfromhishomeinLondontosuggest

thatImanagesomemoneyforhim.Itwas1996.Atthetime,hewasprobablytheonlypersonwhowouldhavetrustedme,givenmyD.H.Blairblemish.BorninIsraeltoGermanrefugeeparents,myfather,SimonSpier,hadfoundedasmallbut successful company, Aquamarine Chemicals, which trades and distributesproductstoprotectcrops.Hehadseenmymountingfascinationwithinvesting,and he told me, “Guy, if you don’t break out on your own now, you’d becompletelynuts.”That push gotme started.He entrustedmewith about $1million.Within a

year or so, he invested more, and two of his business associates investedalongside him. As a result, the fund’s initial assets amounted to around $15million.InamedittheAquamarineFund,feelingthatIwassomehowrejoiningthefamilybusiness.ThefundstartedtradingonSeptember15,1997.ForthelongesttimeIwantedtohideor,atleast,obfuscatethisaspectofmy

journey.Idesperatelywantedtoprovetotheworldthatmyachievementswereentirelymyown,anditseemedlikeanunfairadvantagetogetstartedwithmyfather’s help. But I was grateful for this opportunity—and daunted by theresponsibility. In a couple of years, I went from being a Buffett wannabe tomanagingtheoverwhelmingbulkofmyfather’slifesavings,alongwithassetsfromasmallcircleoffriendsandrelatives.Evenwiththisbacking,myoddsofsuccessweresmall.Thevastmajorityof

hedgefundsdon’tsurvivebeyond18months,andit’stoughtomakeitwithoutenoughassetstoachievescale.Tocutcosts,IranthefundoutofmyapartmentinNewYork.Itwasaprettymodestbeginning.ButIfeltthatIwasfinallydoingwhatIhad

beenborntodo.Still,nowtherealtestwouldbegin:wouldIsucceedinturningallthistheoryintotheelusivegoaloflong-term,market-beatingreturns?

4

THENEWYORKVORTEX

So I started running money for friends and family. I was 30 years old andrelativelyinexperienced.ButtherewereafewthingsthatIgotright.Inpart,thisinvolvedfiguringoutwhattoavoid.Warren Buffett, quoting Henry Ford, often talks about the importance of

keeping all your eggs in one basket, thenwatching that basket very carefully.OnethingthatappalledmeandthatI’dseentoomanytimeswastheWallStreetpracticeofhavingmanyeggsinmanybaskets.Eventhemostreputablemutualfundcompanieshaveapracticeofsellingmultiplefunds.Theonesthatdowellare those that then get the marketing dollars and raise more money frominvestors.Theonesthatdopoorlyareeithershutdownormergedintothebetter-performing funds. In the process, the failures are buried as if they’d neverexistedwhilethesuccessesarehighlighted.I’d seena similar thinghappenatD.H.Blair.There, thebrokerswouldput

different clients into different stocks. The clients whose accounts went downwouldbe a lost cause,but thosewhoseaccountswentupweregood formorebusiness. Similarly, the publishers of some investment newsletters have apracticeofsegmentingtheirmailinglistsandsendingdifferentpredictionsunderdifferenttitlestodifferentpeople.Theycanthenmakehaywiththosesegmentsoftheiroverallmailingliststhathavedonewell.Theserusesdisgustedmethenandtheydonow.IwasdeterminedthatIwould

go throughmy entire investing career running only one fund so that I wouldhavejustonetrackrecord.Period.If thelong-termperformanceofthatfundis

lousy,thiswillbeobvioustoeveryone;there’snoplaceformetohide.Equally important, my family’s money would also be in that one fund

alongsidemyinvestors’money.Indeed,I’veinvestedalmost100percentofmynet worth in the Aquamarine Fund. As a result, I’m truly eating my owncooking.This alignmentofmyown interests andmy shareholders’ interests isinestimably important.This isn’t a salespitch. It’s simplyamatterofpointingoutthatthisapproachisconducivetogoodinvesting,notleastbecauseitenablesmetofocusonthatoneportfolioinsteadofhavingscatteredinterests.Inthis,Iconsciously modeled Buffett, who has focused all of his investing energy onBerkshireHathawayfordecades.But therewereotherways inwhichIdeviatedfromthehard-wonprinciples

that he had taught me. For example, I should simply have copied the feestructure of his pre-Berkshire investment partnerships. He charged no annualmanagementfee,buttookaquarteroftheprofitsabovea6percenthurdle.Thisis an extremely unusual structure, but it’s the best alignment I’ve ever seenbetween an investor and his shareholders. It truly embodies the principle ofmakingmoneywith them,notoff them.Unlesstheydowell,thefundmanagerearnsnothing.However, in starting theAquamarine Fund, I opted instead for the standard

New York hedge fund fee structure. This meant that I’d receive a 1 percentannualmanagement fee (whichwould rewardmehoweverpoorly Iperformedforshareholders),plusanincentivefeeof20percentoftheprofits.WhydidIdothis?Ingettingthefundgoing,Iwasinevitablysurroundedby

lawyers, brokers, andother adviserswhoallwanted to tellme how this gameworks. To them, the idea that I would adopt Buffett’s unorthodox 1950s feestructure seemed outlandish. They wanted to protect me, explaining that Ineeded that steady income; they couldn’t conceive of someone living offincentivefeesthatareentirelyunpredictable.Whattheydidn’tseewasthatthe1-and-20 fee structure subtly misaligned my interests and my shareholders’

interests.Iallowedmyselftobeswayedbythem,butIshouldhavebeenmorepigheadedinthiscase.I alsowanted to copyBuffett by allowing investors to redeem theirmoney

onlyonceayear.Thishelpsthefundmanagertoinvestforthelongterm,whichbenefitshisshareholders.Italsohelpsthempsychologicallybecausetheythinklessoftenabouthowthefundisdoingandwhethertosell.Afterall,inactionandpatiencearealmostalwaysthewisestoptionsforinvestorsinthestockmarket.Forthesamereason,Ifinditbetternottochecktheperformanceofmystockseveryday(or,for thatmatter,everyweek)sincethismakesitharder tokeepalong-termfocus.In any case, my advisers thought this redemption policy was absurd. They

insistedthatIallowinvestorstoredeemwithjust30days’notice.Thetroubleis,thismeans that the fundmanager isalwaysworryingaboutwhenshareholderscanyankouttheirmoney.Later,whenthemarketcrashedin2008,thisstructuralflawwouldprovetobeamajorvulnerability.Failing to standmyground, Icapitulatedandaccepted that thesewerewell-

established practices inNewYork hedge fund circles. Thewhole institutionalenvironmentmadeithardformetoresist.Inspiteofmygoodintentions,Ifellintoacommontrap:it’salwayseasiertobewiththecrowdthantogoagainstit.It gave me false comfort to know that this was the “industry standard” eventhoughI’dmissedtheopportunitytocreatetheidealstructure.Itwasonlylater—whenImetMohnishPabrai,andagainwhenthefinancial

crisis hit—that I saw howmuch better it would have been to clone Buffett’spartnership structure as precisely as possible. These misguided compromisesweren’tdeadlysins.ButwhenIlookbackonmyinvestingcareer,it’spainfultoseehowquicklyIhadallowedmyselftodriftawayfromthetime-testedwisdomIhadgainedfromOmaha.Icouldhavegottenittotallyright.Aperfectscore.Istillhadasolidpassing

grade, but these tiny differences matter in investing—a pursuit where small

structuralchangescanadduptobigdifferencesinreturnsovertime.Long-termcompoundingisaninvestor’sbestfriend,sowhygetinitsway?There’sahugebenefittogettingtheseseeminglyminordetailsrightfromtheverystart.Partoftheproblemwasthatitwassoeasytogetsuckedintothevortexofthe

NewYorkfinancialworld,withitsskewedvaluesandseductions.IfeltthatmymindwasinOmaha,andIbelievedthatIcouldusetheforceofmyintellecttorise above my environment. But I was wrong: as I gradually discovered, ourenvironment is much stronger than our intellect. Remarkably few investors—either amateur or professional—truly understand this critical point. Greatinvestors likeWarrenBuffett (who leftNewYorkandreturned toOmaha)andSir John Templeton (who settled in the Bahamas) clearly grasped this idea,whichtookmemuchlongertolearn.At the time, I thought aboutmoving toOmahamyself, but I had toomany

connections inNewYork thatmademewant to stay.Still, in those firstyearsaftergettingstarted,ImostlykeptalooffromtheNewYorksceneandfromWallStreet.Iworkedinblissfulisolationoutofmyone-bedroomapartmentonWest66thStreetandtheninaseriesofthreeinformalofficespaces.OneofthesewasanapartmentonWest58thStreet,whereMonicaLewinsky

was a neighbor. Another was a two-bedroom apartment onWest 55th, whereDavidNeeleman,thefounderofJetBlue,wasmyneighbor.I’dreadthathe,likeme, had attention deficit disorder (ADD). Yet he’d still managed to build asuccessful company. I found this reassuring:havinghim in thebuildingwasafrequent reminder that I could also overcome my idiosyncratic wiring. Asinvestors,weallhaveshortcomings;asIcametoseeit,thekeyistoacceptwhoweare,understandourdifferencesandlimitations,andfigureoutwaystoworkaroundthem.In themeantime, evenwithout a professional-looking office, lifewas good.

Thefundwasstilltiny,butmyinvestmentreturnsweredecent.TheperformancewasdrivenbythesuccessofstockslikeDuff&PhelpsCreditRating,whichrose

seven-fold. It illustrated perfectly what I had learned from Buffett: findcompaniesthatarecheap,thathaveanexpanding“moat”aroundthem,andthatareawashincash.Whileothersgotcaughtup in the techbubbleof the late1990s, Ididn’tget

lured in at all, partly because Iwas in the orbit of cool-headed investors likeBuffett, Ruane Cunniff, and Tweedy, Browne. Their common sense helped toprotect me from tech fever. This proved once again that environment trumpsintellect.Afterfiveyears,myfundhadsignificantlyoutperformedthemarket.Aslow

butsteadytrickleofoutsideinvestorsentrustedtheirsavingstome.Eventually,Aquamarine’sassetsundermanagementedgedover$50million,andIstartedtogetnoticed.Iwasn’tinterestedinWallStreet,butWallStreetwasinterestedinme.Andthiswas,atbest,amixedblessing.Iwasnowontheradarofallsortsofpeoplewhowantedapieceofme.Some

hoped Iwouldhire themasa lawyerorananalyst.Somewanted to sellmeahigh-priced investment research service. Somewanted to bemy broker. Somewantedmetopaythemtomarketthefundinordertoattractmoreassets.ThesepeoplehopedthatImightbethenextChrisHohnorBillAckman,who

wererapidlygainingrecognitionastwoofthebrightestinvestmentstarsofmygeneration.AndthesepeoplewerebettingthattherewasmoneytobemadeifIlived up to their expectations (or wishful thinking). After all, I’d attendedHarvardBusinessSchoolwithChrisandBill,sotherewasasensethatImightbecutfromthesamecloth.I was dangerously flattered. Worse, all this attention had the effect of

stimulatingsomemachodesiresinme—competitivejuicesandtestosteronethatIhadn’tfeltinmyselfsincemyearlydaysasaninvestmentbanker.Afterall,ifall these marketing mavens, ambitious analysts, lawyers, and brokers werecomparingmetoBillandChris,whyshouldn’tImakethesamecomparison?Istill rememberoneof them tellingme that I shouldbe running$5billion, not

$50million.Atsomelevel,itwasasifmyverymanhoodwasinquestion.At the time,Bill andChriswere going from strength to strength. Based on

their stellar returns, they were running billions, while I was still a minnow.Before long, I felt adeep, avariciousneed for size and status.Thegreen-eyedmonsterhadgottenthebetterofme,andIwasconsumedwithenvy.This is an oversimplification of many crosscurrents, but it captures a key

componentofmyNewYorkvortex.Untilthatpoint,Ihadn’teverexperiencedenvyinsuchavisceralway,andIdidn’trecognizeitatthetime.Butthat’swhatitwas.BuffettandMungerjokethatenvyistheonlyoneofthesevendeadlysinsthat

isn’tanyfun.“Envyiscrazy,”remarksMunger.“It’s100percentdestructive....Ifyougetthosethingsoutofyourlifeearly,lifeworksalotbetter.”Inmyview,envyisalsoanemotionthatwedenyatourperil.Inthefinancial

markets,envyisasilentkiller:itleadspeopletobehaveinwaystheywouldn’tiftheyweremorehonestwiththemselves.Forexample,investorsseetheirfriendsmake a killing off tech stocks that are crazily overvalued, and they plunge inright before the bubble bursts. It’s important to be aware of these emotionalforcesbubblinginsideussincetheyfundamentallyskewourjudgment,messingwithourabilitytomakerationaldecisions.Asanancientrabbinicalsayingputsit:“Whoisstrong?Hewhomastershisownpassions.”BenGrahamwrotebrilliantlyabouttheirrationalityofMr.Market.Weneedto

recognizethatthisirrationalityisalsoaninextricablepartofourall-too-humanwiring.Akeyaspectofmyeducationasavalueinvestorwastolearntodetectthese emotional vulnerabilities inmyself so I could develop strategies—aswewill see later—that prevent them from subverting me. This process of self-correctionbeginswithself-knowledge.The reason all of this matters is that investing has a way of exposing our

psychologicalfaultlines—whetherit’sgreed,alustforpowerandsocialstatus,oranyotherflaw.Envywasoneofmybiggestweaknessesatthetime.Ishould

have been happywithmy lot, given that I wasn’t just amember of the “onepercent”but theonepercentof theonepercent. Iwas incontrolofmytime. IcouldliveandvacationwhereandwhenIwanted.IhadpeopletohelpmedothethingsthatIdidn’tliketodo.ButtheprobleminaplacelikeNewYorkorLondonisthattherearealways

somanypeoplewhoaredoingbetterthanyou.Myofficedidn’thavegleamingfloor-to-ceiling windows or panoramic views of the Manhattan skyline. Icouldn’tmatchtheeleganceofChrisHohn’sofficesinMayfair,London’shedgefund epicenter.My beautiful home on one of theUpperWest Side’s lovelieststreetslackedBillAckman’sleafyviewsofCentralPark.Iwantedtowinatthehedgefundgame.Rightlyorwrongly,Iwasconvinced

thatIwasassmartasmypeers,anditateawayatmethatIwasn’tattheverytopoftheheap.Doingwelldidn’tfeellikeenough.Idecided tomarketmyself,but Ididn’tknowhow.On those rareoccasions

whenIdidgetanaudiencewithpotentialinvestors,I’dgetnervousandreverttothebehaviorthathadworkedformeatuniversity,blastingoutatorrentofideasathighspeedinthehopethatI’dsoundimpressive.SometimesI’dfindmyselftrying todazzlepeoplewithLatinphrases like“ceterisparibus”and“sinequanon,”hoping theywould see themerit ofwhat Iwas saying if I spoke as if IwereinatutorialatOxford.But the truth is that I shouldn’t have botheredwith thismindless pursuit of

growth,whichwas primarilymotivated bymy own ego. The fundwas doingwell,andsomuchofmyfamily’smoneywasinvestedinitthatIdidn’tneedtowaste timeattractingadditionalassets fromoutside investors.Myenvy ledmeastraybecauseIwantedpeopletoseethatIwasmanaginghundredsofmillions,evenbillions, just likeBill andChris.That timewouldhavebeenbetter spentfocusingonpicking thebeststocksandallowingmyperformance tospeakforitself.I got sucked into the New York vortex in other equally ridiculous ways. I

rentedaplushofficeinCarnegieHallTower,andinonefellswoopdroveupmyannualrentalexpensefrom$60,000to$250,000.IrentedaBloombergterminal—theinformationalequivalentofsmokingcrackcocaine—forabout$20,000ayear. I also hired a chief operating officer, an analyst, and a high-poweredlawyer.Itturnsoutthatenvyandprideareexpensiveflaws.Butitwasn’tjustamatterofwinningotherpeople’sapproval.Italsomademe

feelbetteraboutmyselftohavethetrappingsofsuccess.IneededtoknowthatIwasontop,soIkeptchasingafterthesefalseidols.Myfatherwiselyaskedme,“Whyareyoudoingallthis?Whyareyoutryingtobeahedgefundmegastar?”Fortunately,Igotplentyofotherstuffright.Amongotherthings,Ididn’tplay

roulettewithmyshareholders’money,havinginternalizedBuffett’steachingthatthefirst ruleof investingis“Don’t losemoney,”andthesecondrule is“Don’tforget rule number one.” Iwas relatively risk-averse in away that served thefund well, particularly during the tech crash. But I think it’s more helpful tosharemymistakeswithyou than todwell excessivelyonwhat I got right.AsMungerputsit:“Ilikepeopleadmittingtheywerecompletestupidhorses’asses.IknowI’llperformbetterifIrubmynoseinmymistakes.Thisisawonderfultricktolearn.”ThereareplentyofthingsIregretaboutthatperiodinNewYork.ButImade

one decision that would prove hugely beneficial: I began to surround myselfwitha“mastermind”groupofinvestorswhowouldbecomelife-longfriendsandtrustedsoundingboards.It’sdifficult,ifnotimpossible,tobecomesuccessfulonyourown.Thegreatestopera starshavesinging teachers;RogerFedererhasacoach;andBuffettmeetsregularlywithlike-mindedpeople.Ourforum,whichwedubbed“thePosse,”metonceaweektodiscussstocks.

It includedinvestors likeDavidEigen,KenShubinStein,StefanRosen,GlennTongue, andoccasionallyBillAckman.Through it, I alsomet JoelGreenblattandbecameamemberoftheValueInvestorsClub.ThePossemetonemorningaweek,andatleastoneofushadtocomepreparedwithastockidea,whichthe

rest of us would debate and dissect. This expanded my knowledge beyondanything I could have learned from a textbook orMBA course.We not onlylearnedmoreaboutinvestingbutgainedadeeperunderstandingofeachother—aboutwhatmadeustick,ornottick.The Posse’s meetings produced friendships that are a reward in their own

right.Fromapureinvestingperspective,theseallieshavealsobecomeasourceofcompetitivestrengthbecausewelookoutforeachother.IfIcallmembersofthatgroupandrunanideabythem,it’snotjustwhattheysaythat’simportant;myknowledgeofthemalsoallowsmetoevaluatetheinformationtheygiveme.It’scriticalthatweunderstandoneanother’sbiasesandfilters.On one memorable occasion, this group saved me from myself—and

reinforcedformethebenefitofbeingopentootherperspectives.IhaddiscoveredwhatIthoughtwasafantasticcompany.ItwascalledFarmer

Mac. One way that I look for investments is to study the masters and thenexplore whether I should buy the same stock or a better one with similarcharacteristics.BuffetthadahugeinvestmentinFreddieMacandasubstantialstakeinFannieMae.Bothcompanieswouldsubsequentlylosetheirway.Butatthe time, Freddie and Fannie were great businesses. Their key asset was theimpliedfaith,backing,andcreditoftheUSgovernment,whichmeanttheycouldborrowatvirtually risk-freerates. I lookedfora firmwithasimilaradvantageandfoundFarmerMac—atinygovernment-sponsoredenterpriseintheUSfarmsector.Itstruckmeasanundiscoveredgemofthesameilk.In 2003, I invited the company’smanagement to give a presentation to the

Posse.WhitneyTilson,who is awell-knownhedge fundmanager, author, andTVcommentator, later shared the ideawithBillAckman.Bill,who startedaninvestment firm called Gotham Partners after graduating from Harvard, is abrilliantanalystwithanextraordinarygiftforseeingwhatotherinvestorsmiss.Afewweekslater,BilltookmeasideafterabreakfastmeetingwiththePosse

and said. “Guy, there’s something I want to talk to you about.” Knowing his

generosity and his relish for acting as amatchmakerwith his single friends, Iwasconvincedthathewantedtosetmeuponadate.Infact,hewantedtotellmemoreaboutFarmerMac,havingheard that Iowned the stock.Apparently,Billhadstayedupuntilabout4:00a.m.researchingthecompanyafterWhitneymentionedmyinterestinit.ThenextmorninghephonedWhitneyandthankedhimfor“themostincredibleopportunityI’veeverseen.”Butit turnedoutthatBill wasn’t buying the stock: he was shorting it. In other words, he wasconvincedthatFarmerMacwasgoingtoimplode.Aswewalkedabout20blockstohismidtownoffice,Billexplainedwhathe

thought Iwasmissing, andwhyhe’d established amassive short position.Hethoughtthestockwasnotjustgoingtoimplode,butfalltozero.HeproceededtotellmewhyFarmerMacwasnothinglikeFreddieandFannie.Ifeltmystomachturn. Seeing that I didn’t yet fully understand, he invitedme up to his office.There,tomyamazement,heshowedmeashelffilledwithmorethanadecade’sworthofprinted filings forFarmerMac.Thesewerecoveredwithannotationsandstickynotes.Hehadalsoprintedoutthefilingsformanyofthecompany’ssecuritizations.Atfirstglance,theyseemedjustlikeFreddieandFannie’ssecuritizations.But,

asBillexplained,theywereactuallyverydifferent.InFreddieandFannie’scase,one securitization typically contained hundreds, if not thousands, of similarsingle-familyhomes. InFarmerMac’scase, thesecuritizationsoftencontainedonlyahandfuloffarmloans,eachwithverydifferentcharacteristics.Bill’sviewwasthatthiswasnotanasset thatcouldbesecuritizedandthat thiswasreallymorelikeregularbusiness lending.Ashesawit, thesepackagesof loanswerefarriskierthantheyseemed,andthecompanycouldeasilygobankrupt.Atonepoint,Isaidtohim,“Butthisisagovernment-sponsoredenterprise.It’s

almostlikeanarmoftheUSgovernment.”Billreplied,“Guy,youhavefartoomuchtrustintheinstitutionsofourcountry.”As lunchtimeapproached, I foundmyself tornbetweenadesire to staywith

himandlearnmoreandacompulsiontorushbacktomyofficetosellthestock.By now it was absolutely clear tome that I didn’t understand nearly enoughabout FarmerMac to justify owning it. This was an important revelation: sooften,wefocusouranalyticaleffortsinthewrongdirectionandmisssomethingvital. So it’s crucial to be open to the possibility that wemight be mistaken.Duringourcharitylunch,Buffettlookedatmeinallseriousnessandsaidofhisinvestmentanalysis,“I’mneverwrong.”Inhiscase,thismightbetrue,oralmosttrue.ButasthehedgefundmanagerLisaRapuanooncesaid,“I’mnotWarrenBuffettandneitherareyou.”That day, I sold two-thirds ofmy holding; the next day, I dumped the rest.

Luckily,Iwasabletoselloutataprofit.I subsequently arrangedameetingwithFarmerMac’sCEOandCFO.Ona

rainyautumnafternoon,ImetBillandWhitneyatPennStation,andwetooktheAcelatraintothecompany’sheadquartersinWashington,DC.Themanagementteam was ready with a standard investor presentation, which emphasized thesuperficialsimilaritiesbetweenFarmerMac,Freddie,andFannie.Afteroneortwoslides,Billputuphishandandsaid,“Please,wedon’tneedtogothroughyourpresentation.Ijusthaveafewquestions.”He then made the same points he had previously made to me. The

management was either unable or unwilling to respond to Bill’s probingquestions, and theywere clearly offended.At one point, theCEO said, “Thismightnotbethecompanyforyou.”Iwasshockedtoseethathecouldn’tcomeupwithamorecompellingresponse.Aweeklater,Ishortedthestock.Thiswasoneofonlythreeoccasionsinmy

lifewhenI’vegoneshort.Temperamentally,thispracticedoesn’tsuitmynature.But, to my mind, the management’s reaction confirmed that Bill was right.Afterward, he told me that they had even excluded him from the company’squarterlyconferencecalls.Istartedtogetcarriedawaywiththewholecombatsportofshortingastock.I

got on these conference callsmyself and asked pointed questions designed tohighlight thecompany’sweaknesses. Iwasdeterminedtoshowother investorsthe risks that lurked behind the veneer. I also spoke to theNew York Times,explainingtheseconcerns.Thesewerevalidandimportantpoints,andinvestorshada right toknow that thecompanywas riskier than they thought.But therewasarighteous(orself-righteous) indignationinmyattitudethatdidn’treflectwellonme.Inretrospect,IfeelasifIlostmywayandactedlikeapettytyrant.Mygoalas

aninvestoristocompoundmoneyformyshareholders,nottopickunnecessaryfights or conduct myself like an avenging moral crusader. I’m not criticizingotherfundmanagerswhowanttodothis,butit’snotmyroleinlife,andIthinkitdistractedmymindandmuddiedmyhands.Notlongafterward,Igotmycomeuppance.TheWallStreetJournalpublished

an article suggesting that various hedge fund managers might be bandingtogether tomanipulate the price of stocks theywere shorting. These includedMBIA,AlliedCapital,andFarmerMac.EliotSpitzer,whowasthenNewYorkState’sattorneygeneral,launchedaninvestigation,asdidtheUSSecuritiesandExchange Commission. They wanted to know if any of the fund managersmentioned in the article had been involved in spreadingmisinformation aboutthesecompanies.I got roped into the investigation, along with Bill and the renowned hedge

fund manager David Einhorn. The investigation went nowhere, but it was astressfulandexpensivedistraction, since Ihad todigup lotsof information inresponse to the investigators’ research requests.During the financial crisis, allthree stocks imploded, vindicatingBill’s analysis. FarmerMac proved to be ahighlyprofitableshortforhimandme.Still,IwishIhadjustsoldthestockandwalkedaway,regardlessoftheprofits

that came from betting against it.As I see it, life is too short for this sort ofconflict,andtheseinvestmentgainsdidn’tjustifytheheadache.Oddasitmight

sound, I also thinkweoftenbringbad thingsonourselveswhenwepoint thefinger at others or act in a tyrannical way. In my experience, it’s karmicallybetter to focus on the positive and act as a force for good instead of gettinggratuitously embroiled in acrimonious battles. I wonder if Eliot Spitzer—whowashimselflaterdisgraced—discoveredthissametruthafteryearsofcrusadingtotakeotherpeopledown.Iyearnedtofindapaththatwassimplerandbetterformymentalhealth.In

NewYork,Ihaddriftedoffcourse,allowingmyselftogetcaughtupinaseriesof unnecessary distractions. But I was starting to realize that I didn’t need afancyoffice;Ididn’tneedtoattractmoreassetstomyfundasawayofprovingto others (andmyself) that I was a big shot; and I didn’t need the angst andacrimonythatcamewithshortingstocks.Inotherwords,Ihadlearnedenoughbynowtosensewhatdidn’tworkforme.

ButIstillneededtofindabetterway.LittledidIknowthatIwasabouttomeettwomastersofinvestingwhowouldhelptopointmeintherightdirection.

5

MEETINGAMASTER

Inmyearlyyearsasaninvestor,Iwantedtobeasuperstarandforotherpeopleto recognizemy brilliance. By nature, I was a lousy salesman, but I came tounderstandthatthiswassomethingIneededtolearn.Istartedtoexplorehowtomarketandsellmyselfmoreeffectively.Theresultwasstrangeandunexpected.WhatIlearnedaboutmarketingwouldchangemeasahumanbeing—somuchsothatIstoppedcaringaboutsellingmyselfatall.IhadstudiedmarketingatHarvard.Butmytrueeducationinthisfieldbegan

whenIattendedtheannualmeetingsoftheSequoiaFund.Ibecamefriendstherewith a delightful American businessman named John Lichter, who was aninvestorinbothBerkshireHathawayandSequoia.HegavemeaCDofCharlieMunger’stalkatHarvardonthe24standardcausesofhumanmisjudgment.I quickly realized that I’d been handed a mother lode of wisdom that was

unavailableanywhereelse,andIresolvedtolistentothislectureasmanytimesaspossible.ItsoondisplacedmyTonyRobbinsrecordings,andtherewasan18-month period during which this was the only CD in my car’s entertainmentsystem.Mungerhasanastonishingmind.MohnishPabrai,whohasspent timewith him, later told me that Charlie is the smartest guy he’s ever met—evensmarter than Buffett. What’s more, Munger has an extraordinary grasp ofdifferent disciplines, and this speech distilled and integrated his knowledge ofpsychology,economics,andbusinessinawaythatblewmymind.Forexample,hespokeaboutthewaythat“extra-vividevidence”distortsour

thinking.Duringacrazyrun-upintechstocks,say,aninvestorseesthatYahoo!

isskyrocketingandhearsonCNBChoweverybodyisgettingrichoffthesehotInternet investments. The investor’s reptilian brain reacts irrationally to thisextra-vivid evidence, making it harder to understand that the stock price nolonger reflects the company’s intrinsic value. This primitivewiring—which isdeeplyembeddedinallofus—washelpfulforcavemenfacedwithawildbeastorafire,butit’swoefullyill-suitedtoanalyzingthenuancesofthestockmarket.Mungeralsoexplainedthatthere’sa“lollapaloozaeffect”whenseveralforms

of misjudgment occur simultaneously. For instance, when an investor seesfriendsand relativesmakinga fortuneoff Internet stocks, itprovidesa“socialproof”thattheseinvestmentsareagreatbet,since10,000lemmingssurelycan’tbewrong.Theinvestor’samiablebrokerthencallstotoutthesestocks;thefactthathe’ssolikeableandthatwehaveabuilt-in“reciprocation”tendencymakesitevenharderfortheinvestortoresisthispitch.It’sdifficult forprofessional investors,not just foramateurswhoarenew to

themarket, to resist this kind of lollapalooza ofmind-bending distortions.Weliketothinkwe’reimmune,buttheseforcesaresopowerfulthattheyconstantlysubvert our judgment.And these are just a couple of examples of the kind ofmisjudgments that trip us up. In reality, there aremanymore, often occurringsimultaneously.Mungerhelpedmetounderstandthesetricksthatthemindplaysonus,andI

began to see these patterns all around me. Equally important, his speechmentioned Robert Cialdini, a renowned academic who had written a bookentitled Influence:ThePsychologyofPersuasion.MungersaidCialdini’sbookhad“filledinalotofholes”inhisown“crudesystem”ofpsychology.Eachyear,onthefirstweekendinMay,I’dmakemypilgrimagetoOmahafor

Berkshire’sannualmeeting.IwouldtypicallystayattheOmahaMarriott,closeto theheartof theaction.Thenightbefore themeeting,Mungerwouldhost aprivatedinnerthere.I’dhangoutinthelobbyandwatchwithfascinationashiseclecticgroupofguestspassedby—peoplelikeBillGates,AjitJain,andRobert

Cialdini.ThisreinforcedmysenseofCialdini’simportance,soIreadandrereadhisbooksmultipletimes,consciouslypoundinginhismessageoverandover.What affected me most was an extraordinary story Cialdini told about a

Chevroletsalesman,JoeGirard,whoregularlywroteholidaycardstothousandsofhisformercustomerswiththewords“Ilikeyou”printedoneachcard,alongwithhisname.Thispersonalexpressionofgoodwillhadanunbelievableeffect:GirardwonaplaceintheGuinnessWorldRecordsbookbyselling13,001carsin 15 years. As Cialdini writes, “We’re phenomenal suckers for flattery,” and“wetendtobelievepraiseandthosewhoprovideit.”I was fascinated. Was it really that simple? Was it all just a matter of

harnessingthis“liking”principle?Ihaveatendencytogototheextreme:ifanidearesonatesforme,Idon’tjustflirtwithit—Iembraceittothenthdegree.SoI decided that I wouldwrite three letters per working day, or 15 per week. Ibegan to thankpeople forgivingagreat speech, for sendingme their investorletter, for providing a great meal in their restaurant, for inviting me to theirconference.Iwouldsendpeoplecardstowishthemahappybirthday.I’dsendthemresearchreportsorbooksorarticlesthatIthoughtwouldinterestthem.I’dsendthemnotessayinghowmuchI’denjoyedmeetingthem.AtaroundthesametimethatIreadCialdini’sbooks,Ialsostumbledupona

book that includedmany ofRonaldReagan’s letters.Hewrote to an amazingrangeofpeople,andheseemedtohaveagenuineinterestineveryoneofthem.He shared jokes and advice, addressed their concerns, encouraged kids. Itseemedtomethatthiswaspartofthesecretofhissuccess.Hewasn’tthemostcerebralAmericanpresident,buthemasteredtheartofcaringforothers,andheexpressedhiscarethroughletters.IfthishadworkedforthepresidentaswellasforAmerica’stopcarsalesman,Iknewtherewassomethinginitforme.Atfirst,myletter-writingexperimentwasquitecalculated,sinceIdiditwith

anexplicitdesiretoimprovemybusiness.Ihadaclearexpectationofwhattheresultswouldbe.Butitstartedtofeelreallygood,andIbecameaddictedtothe

positive emotions that this activity stirred in me. As I looked for moreopportunities to thank people, I found that I truly did becomemore thankful.And the more I expressed goodwill, the more I began to feel it. There wassomethingmagicalaboutthisprocessofgettingoutsidemyselfandfocusingonotherpeople.TonyRobbins had taughtme that small differences in howwe behave can,

overtime,haveaprofoundimpact.Andthissmallactionofwritinghundredsoflettersayearwastransformationalforme.Initially,itwasn’teasy.Ioftendidn’tknowwhat towriteor towhom.So I’d endupwriting tomydoormanor theperson who’d served me coffee that morning. At times, I felt foolish. And Ididn’tseeanimmediateimpact.Myviewnowisthatitcantakeaslongasfiveyearstohaveasignificanteffect,somostpeoplegiveuplongbeforetheyreapthebenefits.Insendingout thiscascadeof letters, Ibegantoopenuptopeople inaway

that Ineverhadbefore,andI started toseeeveryonearoundmeassomeoneIcould learn from. As I now understand, this habit of writing letters is anincrediblyeffectivewayofcompoundinggoodwilland relationships insteadofmerelycompoundingmoney.Einsteinisoftensaidtohavecalledcompoundingthe eighth wonder of the world. But the narrowly financial application ofcompounding may be the least valuable and least interesting aspect of thisphenomenon.My letter-writing crusade had begun as away ofmarketingmy fund, but it

endedupgivingmearichnessoflifethatIcouldhardlyhaveimagined.Ratherthan becoming a good salesperson, I found myself starting to care about thepeopleIwaswritingtoandtothinkabouthowIcouldhelpthem.Theparadoxisthat,asIbecamemoreauthenticanddiscardedmyagenda,peoplebecamemoreinterested in investing in the fund. This was an unintended consequence ofbecominglessselfishandmorehonestaboutwhoIam.AcoupleofyearsafterI’d launchedthiswritingcampaign,ImetaWharton

student named Aaron Byrd. He was a lovely guy, and I felt an immediateconnection to him, so I invited him to do an internship with me. Later thatsummer,AarontoldmethathewasgoingtoChicagofortheannualmeetingofaninvestornamedMohnishPabrai.I’dneverheardofMohnish,butAaronsaidhehadphenomenalinvestmentreturns.SoIdecidedtogoalong.AsIlaterlearned,Mohnishhasacolorfulbackground.He’sthegrandsonofa

well-knownitinerantmagicianandthesonofabusinessmanwhohadatleastasmany failures as successes.Born in1964,Mohnishgrewup inMumbai,NewDelhi,andDubaiandarrived in theUnitedStatesasapennilessstudent in the1980s. He went on to build an IT consulting and services business calledTransTech, which he financed with $70,000 in credit card debt and about$30,000 from his 401k. TransTech’s revenues grew to $20 million and heultimatelysoldthecompanyfor$6million.Likeme,MohnishdiscoveredWarrenBuffettandvalueinvestingthroughthe

Lowenstein biography and by studying Berkshire’s annual “Letters toShareholders.”Hewassocaptivatedthat,in1999,hesetuphisowninvestmentfirm. The returns of the Pabrai funds have been superb. In September 2013,Forbespublishedanarticleheadlined“HowMohnishPabraiCrushedtheMarketby1100%since2000.”Backin2003,whenIattendedhisannualmeetinginChicago,itwasalready

clearthathewassomethingspecial.Hehadbeencompoundingcapitalatmorethan 30 percent per year. But I was equally struck by his understated andidiosyncraticwayofconductingbusiness.AnyoneintheNewYorkinvestmentworldhasbeentotheirfairshareof“rubberchickenlunches.”ThesetendtobeheldinfancyhotelslikeThePierre,andtheyinvolveamanagerormanagementteampresentingallofthereasonswhyyoushouldbuytheirstockorfund.The Pabrai meeting was completely different. It wasn’t held in an elegant

downtown hotel but in aCarlucci restaurantwith an auditorium, convenientlylocated nearChicago’sO’HareAirport.Also, it took place over theweekend.

Theguestsweredressedcasually,andsomehadevenbroughtfamilymemberswiththem.ThiswastypicalofMohnish.Hedidn’tbothertoconformtopeople’sstandard expectations. He wasn’t fearful of being different, but hisunconventionaldecisionsmadetotalsensetome.Duringthemeetingitself,hewentoverthefund’sperformance,thenprovided

acoupleofexamplesofhis investmentapproach:onesuccessandone failure.Theaudience,whichincludedabout100people,wasn’ttheretobepitched.Theywere there to learn.Mohnishspokehonestlyandstraightforwardly,unafraidofwhatanyonemightthinkabouthim.Iwasparticularlystruckbyhisdiscussionofasuccessful investmenthehad

made in Frontline Ltd. I sat there taking notes at a furious rate while heexplained that he had invested at a time when its oil-shipping tankers weretrading for less than their replacement cost. I understood well the concept ofbuying assets at less than replacement value, but he gaveme a deeper insightintothemechanismbywhichthelowpriceitselfwouldbeacatalysttoturnthemarketaroundsincethesupplyoftankerswasdryingup.Indoingthis,MohnishexhibitedwhatHowardMarkswouldlatercall“second-levelthinking”—agraspof nuance that is important but rare among investors.Mohnishhad a differentperspectiveon theworld thanothers, buthis rationale formaking thiskindofcontrarianinvestmentwasutterlypersuasive.Foradetachedobserver,itwasaninterestingscene.Forexample,Icouldsee

that twopeople in theaudiencewerebasically there topromote themselves. Inone case, a fund manager positioned his question as a way to tout his ownrecord.Aninvestmentbankerwasalsoclearlyouttopromotehisownservices.Icould sense the unease with which most of the audience responded. A goodmeeting isalwaysa teameffort.But these twowere there tosell,not to learn,andtheycameacrossasbrash.Bycontrast,Mohnish came fromaplaceof personal abundance,whichwas

notmerelyamatterof financialwealth:hewascomfortablewithwhohewas,

andhewashappy to sharehiswisdom.Characteristically,hehas sincemovedfromahouseinaposhCaliforniasuburbtoamoremodesthomethat’sclosertohisoffice.Tome,thisisevidenceonceagainthathedoesn’tmeasurehimselfbywhat Buffett calls an “outer˙ scorecard,” and this is a considerable source ofstrength.AfterMohnish’sannualmeeting, I returnedhome toNewYork,pickedupa

fountainpen,andwrotehimashortnote.Writteninmysemi-legiblescrawl,itsaidsomethinglike:“DearMr.Pabrai,Thankyousomuchforhavingmeasaguestatyourpartnershipmeeting.Ilearnedalotaboutlifeandinvesting,andIalsometsomegreatpeople.Warmregards,GuySpier.”ItwasonesimplenoteoutofatleastadozenlettersthatIsentthatweek.Ihad

noagendainwritingitandexpectednothinginreturn.Imaileditandthenforgotaboutit.ButMohnishlatertoldmethatIwastheonlypersonwhowrotetohimafterthatmeeting,andmynoteclearlystuckinhishead.Aboutsixmonthslater,he sent me an email to say that he was going to a meeting in Greenwich,Connecticut.DidIwanttomeetfordinner?Imostcertainlydid.That meal with Mohnish altered the trajectory of my life—even more,

perhaps,thanmysubsequentlunchwithWarrenBuffett.IfIhadn’tbotheredtothank Mohnish, many great things that have happened since our first dinnermightneverhaveoccurred. I didn’t understand this at the time,but I now seethat every letter I wrote was an invitation for serendipity to strike. To manypeople,itmightseemlikeawasteoftime.ButIcouldn’twinthelotterywithoutaticket,andtheseticketswerealmostfree.Inasense,thisisavalueinvestingapproach to life: pick up something cheap that may one day prove to beprecious.WemetattheDelamarGreenwichHarborHotel.Iarrivedhalfanhourearly

withasenseofanticipation,flatteredthat thisremarkable investorhadreachedouttome.Atthatstageinmylife,Istilltendedtogointomeetingswithaself-interestedideaofhowIwantedittoturnout.ButIconsciouslyshowedupthat

eveningwithnoagenda.Iresistedthetemptationtodominatetheconversationwithaslewofmyownquestionsdesignedtoreverseengineerwhathehaddonetogeneratesuchhighreturns.Iwasjustgratefulfortheopportunitytohangoutwithhim.PerhapsMohnish sensed this, and it helped to set the right tone.When you

have an agenda, people smell it, and this tends to put them on the defensive.Strangeasthismaysound,IfeelasifIhadsomekindofdivineinspirationthatenabled me to understand that I needed to be myself with him. His ownauthenticitymademeseethefoolishnessofbeingfakeorinsincere.WhatIsawduringthatmealwasamancompletelyateasewithhimself.The

person on the outside was the same as the person on the inside; he wasn’tpretendingtobeanythingtoanybody.Soofteninmylife,Iwasn’talignedoratpeacewithmyself.ButinMohnish’spresence,fromtheverystart,Iwasmyself.Misalignmentisadangerousthing,notjustinrelationshipsbutinbusinessandinvesting.Forexample,CharlieMungerpointsout that it’salwayseasier tobetruthfulbecauseyoudon’thavetorememberyourlies.Thisrelievesyourbrainofmuchunnecessarymentalworksothatitcanfocusonsomethingmoreuseful.MohnishtalkedtomeduringthatmealaboutabookcalledPowervs.Force:

The Hidden Determinants of Human Behavior. The author, David Hawkins,explores the theory that we have a greater capacity to influence others whenwe’re an authentic version of ourselves since this truthfulness evokes a deeppsychologicalresponseinothers.Mohnishhimselfseemedtoembodythisideathat realpowerresideswithapersonwhoishonestand in touchwithhimself.Ourdiscussionplantedaseedinme:inthefuture,Iwantedtobetrulyauthentic,completingthetransformationIhadbegunwhenIleftD.H.Blairandthatwholeworldoflies.I quickly realized that Mohnish, like me, had been on a quest for worldly

wisdom. But he had arrived at it from a different direction and with a verydifferentmind.FromTonyRobbinsIhaddiscoveredthepowerofmodelingthe

habits of successful people; Mohnish, who referred to this as “cloning,”sometimesjokesthathe’sneverhadanoriginalideainhislife,butthisdoesn’tbotherhimintheleast.Indeed,thisisoftenthewayprogressworks:wecopythebestideasandmakethemourown.Mohnishunderstoodthatthisappliestobusinessestoo.Companiescanprofit

richly by studying their competitors, figuring out what they do well, thenrecreatingit.Heusedtheexampleoftwogasstationsoneithersideofthesameroad. One has a smart owner who provides a full serve at a self-serve price,doing things like cleaning windscreens and checking fluid levels for free. Inotherwords,theownerconstantlytakessmallactionsthatimprovethebusiness,creatingavirtuouscycle.Thegasstationacrosstheroadfailstodothesethingsandlanguishes.Yet,asMohnishpointedout,itwouldbeeasyfortheownerofthe bad gas station to copy everything that hismore successful rival is doing.Manyofthebestideasarealreadyoutthereforustosee;wejusthavetoclonethem.ThisiswhatMohnishandIhadalsolearnedtodoinourinvestingcareers.We

saw what Buffett had done, and we consciously sought to copy him. ButMohnishwasamuchbetterclonerthanIwas,thankstohisrelentlessattentiontodetail.Forexample,hehadcarefullyreplicatedBuffett’soriginalinvestmentpartnerships,includingtheirfeestructureandredemptionterms;ittookmemorethanadecadetounderstandthatIshouldhavedonethismyselfwhenIopenedmyfund.Duringourdinner,IjoinedMohnishinpityingthefoolswhofailtocopythe

great ideas that are alreadyout there.But a fewyears later, Iwashumbled torealizethatIresembledtheownerofthegasstationontheothersideoftheroadwhileMohnishwas the owner of themore successful gas station.Aswewilldiscusslater,Ieventuallywisedupandlearnedfromhim.MynextmeetingwithMohnishhadanevengreaterimpactonmylife.Ihad

no ideawhetherhe’denjoyedourdinnerasmuchas Ihad, so Iwasdelighted

whenheemailedmesomemonthslaterandaskedmetojoinhimforbreakfastin New York. He was there to give a presentation at the Value InvestingCongress. I wanted to make sure that our meeting was memorable since Iintuitivelyknewthat itwas important tomy life. Ipicked the restaurantat theMandarinOrientalHotel,whichhasstunningviewsoverCentralParkandwasconvenient for Mohnish’s conference. The day before our breakfast, I evenvisitedtherestauranttomakesurethatwe’dhaveagoodtableandthatthebillwouldbepresentedtome,nottomyguest.This might sound over the top. But it’s an illustration of something I had

learned from Mohnish: some businesses succeed because they get one thingright,butmostsucceedbecausetheygetalotofsmallthingsright.Thisiswhatmade a company likeWal-Mart so successful.A key aspect ofmy real-worldeducation involved learning to take more and more of these intelligent butpracticalactionsonamicrolevel:writingthank-younotes,pickingagreatplaceforbreakfast,listeningactivelytowhatpeopletoldme,ortreatingthemthewayIwishedtobetreated.Overalifetime,amyriadofsimpleactionslikethesecanaccumulatetocreatebigreputationalandrelationshipadvantages.It’snotaboutluck.It’saboutworkinghardertogetthesethingsrightsothatitbecomesmorelikelythatsomethinggoodwillhappen.Thebreakfastwaswonderful.Atfirst,IwasinaweofMohnish.Afterall,my

investmentreturnsweregoodandIhadadecent intellect,buthisreturnswerespectacular,andhismindissoexceptionalthatitmademefeelpedestrian.Wealso have different cognitive styles: I can be scatterbrained, with a mind thatdartsallovertheplace,whilehe’stotallydirected.Butwehadmuchincommon,includingadeep-seatedsensethatwewerebothoutsiders.Icamefromafamilyof Jewish refugees from Germany who had achieved success in Israel andEngland; he was an Indian immigrant who had made it big in America. Forwhatever reason, I felt increasingly connected to him both emotionally andintellectually,eventhoughIwassurethatIhadnothingtoteachhim.

As we sat by the window at the Mandarin overlooking the park and theManhattan skyline,Mohnish raised an idea that hadneveroccurred tome.HewonderedifweshouldjoinforcestobidforacharitylunchwithWarrenBuffettthat is auctionedon eBay eachyear.At first, I thought itwas insane to spendhundredsof thousandsof dollars on a singlemeal, evenwith an investorwhohadalreadychangedmylife.Itriedtobepolite,remarking,“Thatseemslikeanawfullottopayforalunch.Whywouldanybodydoit?”Thiswas a conventionally sensible point, butMohnish patientlywalkedme

throughhisunconventionalanalysisofwhyitmadeallthesenseintheworldtobid for the lunch. He pointed out that themoneywould go to a very worthycharity, the GLIDE Foundation, with the added benefit of lunch withWarrenthrown in. As Mohnish understood, so many charitable donations come withnothingmore than ameaningless plaque featuring the donor’s name,which isdesignedprimarily toburnish their reputationor inflate their ego. In this case,thedonationwouldbringwithitsomethinginfinitelymorevaluable:ameetingwithatoweringrolemodelwhooffersafarmoreenlightenedexampleofhowtobeacapitalist.Mohnish also helped me to see that there was no need to seek anything

tangible from the lunch. Rather, it was our opportunity to enjoy Buffett’scompanyandthankhimforeverythinghehadtaughtus.Bytheendofbreakfast,Iwastotallyconvinced.SoweagreedtoteamupandbidtogetherforthelunchwithBuffett.Thatfirst

year,welosttheauctiontoahigherbidder.Butthefollowingyear,Mohnishwasdetermined to bid again. I was traveling in Europe when he rang me on mymobilephone.“Guy,”hesaid.“Thistimewe’vegottowinit.”Ifwewon,theplanwasthatMohnishwouldbringhiswifeanddaughterswith

him,while I’dbe joinedbymywifealone, asourchildrenwere tooyoung toattend. Since there would bemore Pabrais than Spiers at the lunch,Mohnishkindlyproposedtopayfortwo-thirdsofwhateveritcost,whileIwouldpayfor

one-third.Even so, Iwasworried that thebiddingmightget out of hand. Iwas still a

youngmoneymanagerrunningasmallfund,andLoryandIwereexpectingourthird child, sowemight need tomove to a bigger home inManhattan. I toldMohnishthatIwasgoodfor$250,000butsaidthatIdidn’tthinkitwasprudentformetogobeyondthat.Ifthebiddingwentabove$750,000,asheexpected,Imightwellhavetodropout.Mohnishpausedforamoment.Thenheassuredmethat, if this happened, he’d cover the balance himself so thatmy contributionwouldbecappedat$250,000.Iwasflabbergastedbyhisgenerosity.We didn’t even shake hands on this deal, let alone draw up a written

agreement.Ifoundthisleveloftrustdeeplytouching.ItremindedmeofthewaythatBuffetthimselfhadoftenmadefinancialagreementswithbarelyawrittendocument. Nobody in business other thanmy father had ever treatedme thisway.Intheend,wewontheauctionatoursecondattempt,withabidof$650,100.I

was so excited—and soanxious forMohnishnot to think that Imight lethimdown—that Iwiredmy thirdof themoney to theGLIDEFoundation theverynextmorning.Only then, once themoney had gone through and itwas a faitaccompli,didIcallMohnishtotellhimhowecstaticIwas.Our lunchwasset forJune25,2008.Thiswouldgivemeseveralmonths to

preparemyself—justenough time, Ihoped, tomakesure that Iwasworthyofmeeting the grandmaster himself.After all, if you’re going tomeet someonebetterthanyou,youhadbetterworkonyourselffirst.

6

LUNCHWITHWARREN

Forseveralyearsnow,I’dbeenmovingclosertoWarrenBuffett’sorbit.Inthelate 1990s, as tech stocks soared, Berkshire Hathaway lagged, and there wasplentyofmisguidedmutteringabouthowhehad“losthistouch.”Theskepticswonderedwhyhestucktohissupposedlyoutmodedstyleofinvestinginunsexy—buthighlyprofitable—businesseswhile theherdmadeakillingoffhot techstocksthattradedatcrazymultiplesoftheirrevenues.Amid this insanity, Berkshire’s unfashionable stock slumped to what struck

measanirrationallylowprice.SoIloadedup,investingover20percentofmyfund in the company. Since then, the stock has more than quadrupled whilemanyofthoseonce-hottechdarlingshavegonethewayofthedodo.Berkshirehas remained a big investment forme, providing an important anchor formyfund,andit’sstillcapableofgeneratinghighreturnsformanyyearstocome.Inthemeantime,IwasconstantlystrivingtomodelBuffett’swayofthinking

andinvesting.Ireadabouthimincessantly,studiedthestockshebought,anddidmybesttoreplicatewhatmadehimgreat.Bythetimeofourcharitylunch,IhadalsovisitedOmahaaboutadozentimestoattendhisannualmeeting.In those early years of going toOmaha, I was still stuck inmyNewYork

vortex, so I typically hung out at theOmahaMarriottwith other high-financetypesfromtheBigApple.Thisgraduallychanged.InsteadofminglingwiththeNewYorkcrowd,IbegantostayattheDoubleTreeHotel,joiningthemembersof a Buffett fan club called the Yellow BRKers. Their website warns: “TheYellow BRKer Gathering is a 100% informal and unofficial gathering of

Berkshireshareholders.Thegatheringisnotintendedasaforumtopromoteanyparticularproduct[or]service.”Thepeopleinthisgroupweren’tdressedforsuccess,andtheydidn’thavethe

slightestinterestindoingbusinessattheBerkshiremeeting.Theyweretheretolearn,tocelebratefriendship,andtodrinkfromthewellofwisdom.Thesewereprimarily amateurswho had invested their ownmoney in Berkshire. Inmanycases,theyhadownedthestockfordecades.Theyhadadifferentenergyfromthat ofmyNewYork colleagues—professional investors and networkers whooftenworeastandarduniformofkhakipantsandblueblazers.ThroughMohnish, Ialsometvarious Indian fansofWarren, someofwhom

had traveled thousands ofmiles to be inOmaha. I liked hanging outwith allthese nonprofessionals who weren’t interested in dealmaking or working theroom. They didn’t take themselves too seriously, andwe became a raucouslyfunny gang. For me, the values and ethos of this understated group seemedhealthierandmoredown-to-earth.Instead of showing up inmy jaded and superiorOxford-Harvard-NewYork

mode,IallowedmyselftoletgoandjointhefunasjustanotherBuffettfananddisciple.On thedayof theannualmeeting itself, Ino longer strolled inat the8:00a.m.starttimesothatIcouldavoidtherush.Instead,Ibegantogetupat5:30a.m.sothatIcouldjointhehard-corefaithfulinalinebythesouthdooroftheconventioncenter.Asaresult,IwouldfindmyselfsittingwithMohnishatthefrontoftheroom,

enjoying a perfect view ofWarren andCharlie. Thiswas amuch better placefromwhich to learn than the back row, where I had previously been a morepassiveandevenjudgmentalobserver.AsIhadcometorealize,ifyou’regoingtodosomething,it’sbesttocommittoitwithwholeheartedgusto.Otherseriousinvestors—includingPremWatsa,LiLu,andMarioGabelli—hadclearlycometo the sameconclusionbecause I found themat the front too.Onceagain, thepointisthatthesesmallactionsmakeamajordifferenceatthemargin.

OtherthanmyonedecidedlybriefexchangewithBuffettasheleftthemen’sroomintheOmahaconventioncenter,Ihadneverhadanypersonalinteractionwithhimatall.Foralltheseyears,I’dsimplywatchedhimandstudiedhimfromafar. But my letter-writing campaign—which had led to my meeting withMohnishandthentooursuccessfulbidforthecharitylunch—nowpropelledmeintoawholenewrealmofpossibility.Suddenly,Iwasabouttomeetmyheroinperson,forlunch!Itseemedunreal.Iwasonlyjustbeginningtoalignmyselfwiththeuniverse,

andIhadn’tevendonethatmuchthatwasright.Butwhenyoubegintochangeyourself internally, theworld around you responds. I hope this idea resonatesbecauseit’simportant—moreimportant,perhaps,thanthefact thatIhadlunchwithWarren Buffett. As I hope you can see frommy experience, when yourconsciousnessormentalattitudeshifts,remarkablethingsbegintohappen.Thatshiftistheultimatebusinesstoolandlifetool.I had already changed a lot in the years since D. H. Blair. But there were

aspects ofmy hedge fund’s businessmodel thatwere stillmisaligned.As thelunchwithBuffettapproached,Ifeltagrowingsenseofdiscomfortaboutthis.Apart ofme feared that hewould seeme and recoil at the sight of just anothergreedyhedgiefromNewYork,reaminginvestorsbycharginga1percentannualmanagementfeeand20percentoftheprofits.Mohnishdidn’tchargeanannualmanagementfee;hegotcompensatedonlyif

hisshareholdersdidwell.AsforWarren,hisannualsalaryforrunningBerkshirewas $100,000—almost comically low given the many billions of dollars inprofits he hadmade for his fellow shareholders. So I’d be showing up at thelunch with the highest fees and the most self-serving fee structure despiterunningtheleastamountofmoneyandhavingthelowestreturnsofthethreeofus.It’spainfultowritethis,butit’strue.I could have tried to exculpatemyself by pointing at themany hedge fund

managerswhochargea2percentannualmanagementfee.Butthefactthattheir

feestructurewasevenmoreegregiousthanminegavemelittlecomfort.Iwasn’ttheworstoffender,butIwantedtobeontherightsideoftheline.Buffettwasn’taware that hewas having this impact onme, but he set such a great examplewithhisownfeestructurethathemademewanttotreatmyownshareholdersmorefairly.Thiswaspartofthepowerofthemereexpectationofmeetinghim.There’sajokeonWallStreetthatahedgefundisreallyjustafeestructurein

searchofaninvestortofleece.Ididn’twanttobepartofthissystem,butIhadallowedittohappen,bucklingfartooreadilyunderpressurefromadviserswhohad told me that this was standard operating procedure. Now, faced with thecontrastbetweenBuffettandme,Ifeltthatitwouldbeunbearabletoshowupatthelunchastheonlypersonwhochargedanannualmanagementfee.So I instituted anew share class formy fund,mirroring the fee structureof

Buffett’s original partnerships. Existing shareholders could stick with the oldarrangementiftheypreferred,buttheynowalsohadabetterlong-termoption:inthenewshareclass,theywouldpaynoannualmanagementfee,andIwasn’tentitled to receive an incentive fee until after they had received a 6 percentannualreturnontheirinvestment.Abovethathurdle,I’dreceiveaquarteroftheprofits,gettinghandsomelycompensatedonlyifmyshareholdersdidwelltoo.Ishouldhavedonethisadecadeearlier,settingmyselfontherightpathfromdayone.Smart investors innatelyunderstandwhythisnewfeestructuremakessense.

So this shift would later have the benefit of attracting the right long-termpartnersforthefundwithoutmytryingtoselltopeoplewhocouldn’tgraspmyrealobjective.Inmyearlydaysasamoneymanager,slickmarketerswantedtohelpmesell

thefundtomoreinvestorssothatitwouldgrowbiggerandmoreprofitable.Thisneverreallyworked,andIwaschasingaftersuccess in thewrongplace.Whatended up working best was to look inward, changing myself internally andputtingmyshareholders’interestsbeforemyown.Asinsomanyareas,ittook

meyearstolearnwhatBuffettalreadyknew.Beforeourlunch,IalsowantedtovisittheGLIDEFoundation,thecharityhe

hadchosentosupport.Iwascurioustoseewhyhewasdonatinghistimetothisparticularorganization.AsI’vecometounderstand, ifyouencountersomeonewhohasexceptionalqualities,it’sworthinvestingthetimeandenergytotravelsothatyoucanbeintheirforcefield.GLIDEwasinBuffett’sforcefield,andIwantedtoknowwhy.So I flew to San Francisco to find out more about this remarkable charity,

which has the mission of creating “a radically inclusive, just and lovingcommunity.”Among its initiatives,GLIDE runs a church in the impoverishedTenderloin district, provides health services, and serves over 800,000meals ayeartotheneedy.WarrenhadbeenintroducedtoGLIDEbyhislatewife,Susan,whowas an extraordinarilygenerous soul.Hebegan to support the charitybyauctioninghisannuallunchonline,andhecontinuedtodosoafterSusanpassedawayin2004.IwasgreetedoutsideGLIDE’sheadquartersbyitsbeamingfounder,Reverend

Cecil Williams, a minister and social activist on behalf of the poor andmarginalized.Herewasamanwho,likeBuffett,didhisjobwitheveryounceofhis being. Later I had lunch with him in GLIDE’s soup kitchen, seeing formyself how he bantered with everyone and how they were drawn to him. Itdidn’t take long to realize that this is a wonderful organization that extendsgenuinewarmthandhumanitytopeoplewhohavegivenuponthemselves.AsBuffettonceputit,GLIDErecognizesthateveryonehas“apotential,nomatterwhat their circumstances.This is aprovenprocess, that a combinationof loveandtimeandenergyandresourcescanproduceadifferenthumanbeing.”What also dawned onmewas that ReverendWilliamswas a quintessential

Buffett manager—not that different from the CEOs who run Berkshire’sbusinesses.Hewasauthentictothecore.Therewasnofaçade.Hegavehisownattention and energy to the people he helped. And he obviously relished his

work.Later thatday, I recordedavideo forGLIDE inwhich Imentioned thatBuffettwasnotjust“averydiscerningpickerofbusinesses”buthadalsoclearlyidentified“averyspecialcharity.”Moreimportant,perhaps,theGLIDEvisitshowedmehowconcernedBuffett

was with using his power to do good. His example encouraged me to keeplooking outsidemyself to seewho I could help—and themore I did this, thehappiermylifebecame.According to the rulesof theauction,MohnishandIhadspecificallywona

“power lunch” for seven people—plus Warren—at the Smith & Wollenskysteakhouse inManhattan.Our partywould includeMohnish, hiswifeHarina,their twodaughtersMonsoonandMomachi,alongwithLoryandme. Inotherwords,therewereonlysixofus,whichmeantthattherewastechnicallyaspareseat. Various acquaintances had approached me to buy that last seat. OneLondon-based fund manager offered me $100,000 to join us. A swaggeringprivateequityguysuggested thatwegive theseat toDavidCameronandalsodisinviteourfamilies.WhenLoryheardaboutthesebids,sheselflesslyofferedtogiveupherown

seat so thatwecouldgive it to someonewhowouldvalue itmorehighly.Butthiswasn’tabusinessdeal, andher seatwasn’t for sale.Still, I feltobliged tomention the $100,000 offer to Mohnish. He was adamant: this was a familyeventandawayofthankingWarren.Therewasnohiddenagenda.Auctioningoff the seats or allowing nonfamily members to come with us would havequicklydestroyedthatspirit.Atlast,thedayoftheluncharrived.Itwasabeautifullysunnymorninginlate

June.LoryandIrodeinacabfromourapartmenttotherestaurant,whichison49thStreetandThirdAvenue.WearrivedanhourearlyasIwantedtosavorthemoment anddidn’twant to be late for such an important occasion.Televisioncameras from CNBC and elsewhere were already stationed outside therestaurant. With Warren’s permission, we had also hired our wedding

photographertomemorializetheevent.IwassonervousthatIwasrundownandhadacold.IknewthatBuffettwasa

penetratingjudgeofcharacter,andIwasafraidofbeingexposed.Whatifhesawthroughmeanddetected any lingering remnantsof theGordonGekko sideofmynature?ButIwasalsoenormouslyexcited.FrommymealswithMohnish,I’dseenwhatahuge impact itcanhavesimply tohangoutwithapersonyourevere.SoIwasthrilledattheprospectofseeingWarrenupclose,ofobservingwhatmadehimtick.Thiswouldbetheultimatecapitalistmasterclass.At around12:30 p.m., the seven of us sat down for lunch in a cozy,wood-

paneledalcovenear thekitchen.Itwasonlysemiprivate,andtherewasabuzzamong theotherdinerswhen theypeered into thealcoveandsaw thatWarrenBuffettwasthere.Heworeabusinesssuit,awhiteshirt,andabrightyellowtiewith a black pattern.Mohnish’s daughters sat on either side of him. I sat twoseats to his right, between Momachi and Lory. Mohnish and Harina sat toBuffett’sleft.ItwaslovelytohaveourwivesandMohnish’skidstheresincethismadeita

lightheartedandjoyfulfamilyaffairinsteadofamoreformalbusinessmeeting.Warren, who had brought gifts for the two girls, beamed with pleasure andgoodwill—morelikeanamiablegrandfatherthanoneoftheworld’srichestmenandthegreatestinvestorofalltime.AsI’dseenatBerkshire’sannualmeetings,hehadnopretensesorstuffiness

abouthim.Warmandfriendly,heinsistedonourcallinghimWarrenandwentoutofhiswaytoputusallatourease.Heaskedthegirlshowoldtheywere,andthenreplied:“You’re12,you’re11,andI’m77.”Then,whenthemenusarrived,hejokedwiththekidsthathedoesn’teatanythinghewouldn’t touchwhenhewaslessthanfiveyearsold.Sureenough,heorderedamedium-raresteak,hashbrowns,andaCherryCoke—anappropriatechoice,giventhatBerkshireisthebiggestshareholderinCoca-Cola.Notwantingtodwellonthemenu,Ifollowedhislead,orderingasteak,hashbrowns,andaDietCoke.

Beforethelunch,Buffetthadobviouslygonetothetroubleofreadinguponus. He asked Lory about Salisbury, North Carolina, where she was born,mentioning that he’d spent time there with a friend from his student days atColumbiaUniversity.Healsomadeapointofsayinghowimpressedhe’dbeenby a remarkable annual report forMohnish’s charitable foundation,Dakshana,whicheducateschildren inIndia.HeflooredMohnishbysayingthathe’dsentthereporttoCharlieMungerandBillGates.Indeed,whenBuffettspoketoFoxNewsaboutourlunch,hespecificallymentionedMohnish’scharity,remarking,“He thinks aswell aboutphilanthropyashedoes about investments. . . .Thisguyhasthoughtalotaboutwhathe’sgoingtodowiththemoneyhemakesovertime.He’sgoingtoturnittothebenefitofreally,Ithink,thousandsofpeople....Iadmirehimenormously.”Itwasclear thatBuffetthimselfhad thoughta lotaboutwhat todowithhis

money.Hetalkedtousabouthisthinkinginsettingupcharitablefoundationsforeach of his three children, and he added that “it’s usually not a good idea towait”togivemoneybacktosociety:it’sbesttogoaheadanddoitnow,hesaid,insteadofcompoundingthemoneyandgivingalargersumlater.Ijokedthathewastechnicallytheleastwealthypersonatthetable,sincehe’dalreadypledgedmost of his Berkshire Hathaway shares to the Bill and Melinda GatesFoundation; as a result, he was now working virtually for free, much likeGLIDE’s founder, Cecil Williams. He grinned happily and said that was“absolutely right.”He seemedglad that Iunderstoodhow littlehecares aboutpersonal enrichment and how much he cares about using his wealth to helpothers.WhenwethankedWarrenformakingthislunchpossible,hesaidthathewas

excitedtodoit.Foronething,itgavehimagreatopportunitytohonorReverendWilliams and also his own latewife, Susan.He said that he had known rightaway,at18,thatshewasthepersonhewantedtomarry,andthathewouldneverhave gotten where he is today without her. He spoke with tender admiration

aboutherkindness,recallinghowshehadtakenterminallyillAIDSpatientsintoherhomeandgiventhemherownbedroom,seekingtoease theirpain in theirfinaldays.He toldMohnish’schildren thatchoosing the rightperson tomarrywouldbethemostimportantdecisionoftheirlives.Forthreehours,werelishedthemostwonderfullywide-rangingconversation.

Forexample,HarinaandMohnishaskedWarrenaboutSirIsaacNewton,sincehe had once remarked that Newtonwas the historical figurewithwhom he’dmost like to have lunch. He explained to us that Newton was “probably thesmartesthumaninhistory”butjokedthathe’dthoughtthisthroughsomemoreand would actually prefer to have lunch with Sophia Loren. He said CharlieMungerwouldmostliketoshareamealwithBenFranklin,since“Newtonwassmarter,butFranklinwaswiser.”At one point,Warren also spoke about a trip he’d taken toChinawithBill

Gates.Cruisingup theYangtzeRiver, theyhad talkedabout amanwhose jobwasto“dragtheboatsin”whentheyreachedthedock.WarrenrecalledtellingGates that, nomatter how smart that guywas, he’d never get a chance to doanythingmorewithhislife.Hesaidthat, inhisownlife, itwouldhavebeenamajordisadvantagetobebornanywherebuttheUnitedStatessincehemightnothavereadBenGraham’sTheIntelligentInvestor,whichwasn’tavailabletheninanylanguagebutEnglish.HesaidGraham’sbookSecurityAnalysishadbeenhis“holy grail,” and added that he’d been amazed when he then discovered thatGrahamwasteachingatColumbia.HopingtograbGraham’sattention,hewrotehimaletterthatsaid,“Ithoughtyouweredead.”Early in the conversation, I made a confession: I told Warren how I had

changedmy fee structure so that hewouldn’t think Iwas just another greedy,two-and-twenty hedge fund guy. I also mentioned how hard it had been toconvincemyfund’s lawyers that thisunorthodoxapproachmadesensesince itwasfairertomyshareholders.I’llneverforgetWarren’sresponse:“Peoplewillalwaysstopyoudoing the right thing if it’sunconventional.” Iasked if itgets

anyeasierovertimetodowhat’sright.Hepaused,lookedawayforamoment,andreplied,“Alittle.”Hethenwentontoexplainhowcrucialitistoadheretovaluesthatyouknow

toyourcorearerightratherthanbeingswayedbyexternalforcessuchaspeerpressure.“It’sveryimportantalwaystoliveyourlifebyaninnerscorecard,notan outer scorecard,” he said. To illustrate this, he then asked us, “Would youprefertobeconsideredthebestloverintheworldandknowprivatelythatyou’retheworst—orwouldyouprefer toknowprivately thatyou’re thebest lover intheworld,butbeconsideredtheworst?”Atthatmoment,Irememberthinking,“Yes,that’strue.”Butitwasonlylater

that I felt the full forceof thisadvice. In themonths that followed, Ibegan torealize just how much of my life I had spent measuring myself by an outerscorecard.Ihadalwaysbeensoeagerforpeopletolikeandrespectme—towintheplauditsofmyprofessorsatOxfordandHarvard,tobeseenasasuccessfulinvestmentbankeranddealmakeratD.H.Blair, tobeadmiredasa top-notchfundmanager.Thisneedinesshadinevitablyledmeastray.WhatIreallyneededwas to measure myself by an inner scorecard. For a start, this would haveenabledmetorunformylifethemomentIrealizedhowtoxicitwasatD.H.Blair.It’shardtooverstatetheimportanceofBuffett’sinsight.Afterall,howmany

of the self-serving excesses andmoral compromises that caused the financialcrisisof2008–2009wouldhavebeenavoidedifmortgagebrokers,bankers,andothers had lived by an inner scorecard? AsWarren helpedme to understand,people too often justify their improper or misguided actions by reassuringthemselvesthateveryoneelseisdoingittoo.OneofBuffett’sdefiningcharacteristicsisthathesoclearlylivesbyhisown

inner scorecard. It isn’t just that he doeswhat’s right, but that he doeswhat’sright forhim.As I sawduringour lunch, there’snothing fakeor forcedabouthim. He sees no reason to compromise his standards or violate his beliefs.

Indeed,hehastoldBerkshire’sshareholdersthattherearethingshecoulddothatwouldmakethecompanybiggerandmoreprofitable,buthe’snotpreparedtodothem.Forexample,heresistslayingpeopleofforsellingholdingsthathecouldeasily replacewithmore profitable businesses. Likewise, some investors havecomplainedthatBerkshirewouldbemuchmoreprofitableifhe’dmoveditstaxdomiciletoBermudaasmanyotherinsurershavedone.ButBuffettdoesn’twanttobasehiscompanyinBermudaeventhoughitwouldbelegalandwouldhavesavedtensofbillionsintaxes.Thiswasoneofthegreatestlessonsofourlunch.Hisstrengthcomesinpart

fromthisrock-solidsenseofwhohereallyisandhowhewantstolive.There’sno artifice.No need to live according to other people’s standards or opinions.Sitting with him at Smith & Wollensky, I could see that he makes nocompromises in terms of his ownhappiness—even in something as small andinsignificantashisgleefulenjoymentoftherestaurant’sdesserts.Clearly,hehassetuphislifesothatitsuitshimandsothatheenjoysit.WhenIaskedifhehadconsciously created Berkshire’s unique decentralized structure, he emphasizedthatitoperatesthatwaybecauseitsuitshispersonality,notbecauseitmaximizesreturns.As an investor, he has always remained true to himself. During the tech

bubble,whensomanyotherpeoplegotcarriedaway,hehadnotroublestickingtohisprinciples,eventhoughthismeantthathemassivelyunderperformedthemarketbeforeitimploded.Likewise, it wasn’t difficult for Buffett to resist the temptation to invest

borrowedmoney,whichcouldhavemadehimricherbutcouldalsohavelandedhimintrouble.Indeed,oneofthekeylessonsofourlunchcamewhenMohnishasked what had become of Rick Guerin, a friend of Buffett’s whom he hadmentionedinhisarticleon“TheSuperinvestorsofGraham-and-Doddsville.”Forawhile,Guerin’s investment record had been spectacular. ButWarren told usthatGuerinhadbeen“inahurrytogetrich”andhadusedleveragetojuicehis

returns. When the market crashed in 1973–74, Guerin was hit hard and wasforced to sell various holdings, including thousands of shares of BerkshireHathawaythatwouldnowbeworthafortune.ForWarren, the travails of this gifted investor clearly provided a powerful

exampleoftheperilsofdebtandthevirtuesofpatience.“CharlieandIalwaysknewwewouldbecomeverywealthy,”hetoldus,“butweweren’tinahurry.”Afterall,hesaid,“Ifyou’reevenaslightlyaboveaverageinvestorwhospendsless than you earn, over a lifetime you cannot help but get very wealthy—ifyou’repatient.”IthelpsthatBuffetthascreatedapeacefulenvironmentforhimself inwhich

hecanoperatecalmlyandrationally.BystayinginOmaha,hehasremainedfarfromthemaddingcrowd.HislegendarypersonalassistantDebbieBosanek(whohasworkedatBerkshire formore than threedecades)alsohelps to shieldhimfrom unnecessary distractions. She once told Mohnish and me that Warrenusually keeps his cell phone switched off and doesn’t even have an emailaddress.Thefactthathehastherightfiltersclearlyhelpshimtoguardagainstlettinginthewrongtypeofinformation.Indeed, forallhischarmandaffability,Buffettdoesn’thesitate todisengage

himself from the world in order to avoid distractions that might impair hisjudgment.Hetoldusthatpeopleoftentrytoconvincehimtomeetthemsotheycanpitch investments tohim,buthe’scomfortable saying“no” farmoreoftenthanhesays“yes”—regardlessof theirattempts to flatterhim.Healso toldusthat he typically avoidsmeeting corporatemanagements, preferring to rely oncompanies’financialstatements.Similarly,hechoosesnottofillhisdayswithdistractingmeetings.Duringour

lunch,heshowedushisappointmentdiary,whichwasmostlyempty,andsaidhemanageshisschedulehimself.Bycontrast,hesaidBillGates’scalendarisfilledwithpreciseentrieslike“6:47shower”and“6:57shave.”It’snotthatonesystemisbetterorworse:it’sthatBuffetthaschosenasystemthatsuitshimperfectly,

givinghim the latitude to think inpeace, impervious to thenoise that tends todominateWall Street. As Buffett taught me, it’s not enough to rely on one’sintellecttofilteroutthisnoise:youneedtherightprocessesandenvironmenttodo so. For this reason, I decided tomove to Zurich just sixmonths after ourlunch,knowing that itwouldbeeasier forme to remainclearheaded there, farfromtheNewYorkvortex.Thankfully, this is one aspect of what Buffett does that other investors can

replicate:wecanclonetheenvironmentandprocesseshehascreatedtokeepthenoiseatbay.Forme,thishasmeantnotonlymovingawayfromWallStreet,butblockingoutothertypesofnoisethatwouldotherwisemuddymythinking.Forexample, I totally ignoremarket predictions and focus instead on investing incompanies that should grow significantly over the long term.At lunch, IwashappytoadmittheextenttowhichItriedtostudyandcloneBuffett’sactions.Iexplainedmyattitudeby tellinghimaTalmudicstoryabout twostudentswhoweresoeager to learnfromtheir rabbi that theyevenslippedunderhisbed towatchhimatnight.Warrenjokedthathe’dbecheckingunderhisbedfromnowontoseeifIwashidingthere.But there is at least one aspect of Buffett that is entirely inimitable: his

brainpower.Duringour lunch, I felt thathismindwasoperatingonabout fivedifferent levels simultaneously. His biographer Alice Schroeder has sincedescribedasimilarfeelinginhispresence.It’shardtoexplain.ButwhenIsatatthetablewithBuffettthatday,IfeltthesheerintensityofhismindandsimplyknewthathewasoperatingatamuchhigherclockspeedthanIwas.Inthepast,havingcome topofmyclass atOxford, I’d somehowconvincedmyself that Ihadthementalcapacitytocompetewithhim,andIhadhopedthatImightonedaylearntoperformequallywell.Seeinghiminpersonthatday,IwasleftwithnodoubtatallthatIcouldneverhopetomatchhim.Thiscouldhavebeendispiriting,butIfounditweirdlyliberating.Forme,the

lessonwasclear.InsteadoftryingtocompetewithBuffett,Ishouldfocusonthe

realopportunity,whichistobecomethebestversionofGuySpierthatIcanbe.ItremindedmeofanoldjokethatWarrenlikestotell:“HowdoyoubeatBobbyFisher?”Answer:“Playhimatanythingotherthanchess.”I couldn’t beat Warren at his own game. But I could certainly follow his

example.What impressedmemostabouthim thatdaywasnot justhismentalfirepower,butthefactthathelivedinawaythatwastotallycongruentwithhisownnature.Nothing seemed tobemisaligned.Hehadevidently spenthis lifetryingtobetruetohimself.Thisbecamemyowngoal:not tobeWarrenBuffett,but tobecomeamore

authentic version ofmyself. As he had taughtme, the path to true success isthroughauthenticity.

THEFINANCIALCRISIS

IntotheVoid

Value investors pride themselves on being able to buy when the market isimploding.Weliketothinkthatwepossessthecalmness,courage,andstrength—not to mention the intellectual clarity and understanding—to act rationallywhen almost everyone else is panicking. But what really happens when themarketcrashesandthere’sbloodinthestreets?Iwouldfindthisoutfirsthandin2008–2009whenthefinancialworldtumbledintothevoid,draggingmeandmyfund with it. AsWarren Buffett has said, if you weren’t scared, you weren’tpayingattention.GodknowsIwasscared.Theexperienceof thecrashwassufficientlypainful that it’sdifficult forme

even now towrite about it in a totally honest and forthrightway.This isn’t aconscious decision. There are memories from that time that I’ve no doubtsuppressed because they are almost too wrenching to face.William Green, afriendandshareholderwhoishelpingmetowritethisbook,recentlyremindedme of a callwe had back then inwhich I told him, only half joking, “We’rebleedingfromeveryorifice.”Ihavenorecollectionofthisatall.Still,therearecertainmomentsfromthattimethatareunforgettableevenifIwouldprefertoforgetthem.Oneof theworstof thosemomentscamewith thedeliveryof theFinancial

TimesonemorninginMarch2008.Overbreakfast,IreadonthefrontpagethatBearStearnswasteeteringonthebrinkofinsolvency.MyfundwasabrokerageclientofBearStearns,andthefirmheldallofourassetsinvariousaccounts.Iremembermywife,Lory,explodingatmebecauseIwassodistractedandhadbeentotallyignoringmyfamily.Iturnedtoherandsaid:“Don’tyougetit?AllofAquamarine’smoneyisinBearStearns.Itcouldalldisappeartomorrow.”

Ispentmuchofthatweekendinmyoffice,researchingthenamesofexpertswho,comeMonday,couldadvisemeonwhatitwouldmeanforthefundifBearStearnswentbankrupt. I needed toknowwhatwouldhappen toour accounts,whether itwaspossible that theycouldbefrozenforyearswhileabankruptcytrusteesiftedthroughtherubbleofthefirm.As a conservative, risk-averse investor, I had intentionally placed all of our

securities inBear Stearns cash accounts thatwere fully owned by our fund. Iknewthatborrowingmoneyandinvestingonmargincanbecatastrophicsinceabrokeragefirmcanthentakecontrolof theassets inamarginaccountandsellthemattheworstpossiblemoment.ThisiseffectivelywhathadhappenedyearsearliertoLong-TermCapitalManagement.I had beenmaniacally focused on avoiding such risks, acutely aware that I

neededtoprotectourassets,andIdidn’thaveasinglecentofleverageordebt—eitherpersonallyor in thefund.BearStearnswassimplyourcustodian,whichmeant thatourcashaccountswere theoreticallynotvulnerableat all.Evenso,theunpredictabilityofthesituationwasterrifying.Inreality,whocouldsaywhatwouldhappen to these segregated accounts ifBearwent under?All betswereoff.IwassittingatmydeskinmyofficeinManhattanontheafternoonofSunday,

March 16, watching financial history unfold. The office was eerily quiet.Everything seemed to be happening in slow motion. I knew that I wasn’t incontrol,thatmyfatewasinthehandsofHankPaulson,BenBernanke,andotherpolicymakers whose sole interest, rightly, was to protect the global financialsystem—notme,myfund,ormyinvestors.Potentially,almostallofmyfamily’snetworthwasatrisk,alongwiththesavingsofdozensoffriends,relatives,andbusinessassociates.Evenso,inthismomentofcrisisIfeltstrangelycalm.Allofasudden,myBloombergmonitorcametolife,lightingupwithanews

flashthatJPMorganChasehaddecidedtoacquireBearStearns.Ireachedforthephoneandcalledmyfathertosharethenews.Laterthatevening,Idialedintoa

conference call and listened with overwhelming relief to Jamie Dimon’sassurance that JPMorgan “stands behind Bear Stearns . . . guaranteeing [its]counter-partyrisk.”Neverhavesuchprosaicwordsmeantsomuchtome.EvenasIwritethis,Ifeelawaveofemotion.TheBearStearnsbullet,whichIhadnotevenknowntoexistuntilafewdays

earlier, had come appallingly close. But we had been saved. I’ve never metJamieDimon,but I’vesenthimaChristmascardeveryyearsince. IoncesawhimatacocktailpartyinDavosanddidn’tspeaktohim,butIwastemptedtogoovertohimandgivehimahug.Anotherordeal that is seared intomymemoryoccurred inSeptember2008.

Wehad just returned fromawonderful familyvacation inEurope.Lory and Ihad recently had our third child, and we were happily ensconced in a newapartment on Manhattan’s Upper West Side. Then, on that sunny Septemberafternoon, my father phoned me out of the blue to ask if I thought LehmanBrotherswouldgobankrupt.MostofhismoneywasinvestedintheAquamarineFund.But it turnedout thathehadalso stasheda sizeablechunkofhis liquidassets in LehmanBrothers bonds.Now it looked like Lehmanwas in a deathspiral.Iwasalmostspeechless.WehadrecentlyescapeddisasterwithBearStearns—

andnowthis?Ipacedaroundmylivingroom,listeningtomyfatherindisbelief.“LehmanBrothersbonds?YouboughtLehmanbonds!Why?”I couldn’t imagine how he could possibly have stepped into thisminefield.

Less thanayearearlier, Ihad listened toa superbpresentationonLehmanbyDavidEinhornattheValueInvestingCongress.Hehadpickedapartthebank’sfinancialstatementstoshowjusthowvulnerableitwas,soIknewnottotouchitwith a ten-foot pole.Yet I nowdiscovered thatmyown father had invested asignificantsuminLehmanbondswithoutthinkingtotellme.Heexplainedthatafinancialadviserfromoneoftheworld’slargestandmost

prominentbankshadcalledhimuptorecommendthesebonds,assuringhimthat

they had a triple-A rating fromMoody’s.He had felt particularly confident inbuyingthembecausehewasawarethatMoody’swasoneofmyholdings,andheknewthatIinvestedincompanieswithgoodproducts.ButIunderstoodexactlyhowthisgameworked.Professional investorswere

fleeingfromLehmanindroves.So theWallStreetsellingmachinehadkickedintohighgear,toutingthisdrosstooverlytrustingclients.WithLehman’susualinvestorsshunningitsbonds,thefirmhadtoseekoutamoregullibleclientbase.Myfather’sbanknodoubtpocketeda fatcommissionasa rewardforabusinghimtoserveitsownends.Iletlooseanangrytirade.“HowmanytimeshaveIsaidthatoneshouldnever

buyanything that’sbeingsoldbyWallStreet?Never. I likeMoody’sbusiness,nottheirratings.Theyalwayslagthemarket.”AsIspoke,itfeltasifmythroatwasburning.Myfatherwantedtoknowifheshouldgetridofthebonds,whichwerenow

beingquotedat around34centson thedollar. “Yes,” I said. “Sell themnow.”But it turned out that there was no liquidity at all, and his order was neverexecuted.A fewdays later, onSeptember 15,Lehman filed forChapter 11. ItwasthebiggestbankruptcyinUShistory.I felt angry and humiliated. A big part of my identity is wrapped up in an

imageofmyselfastheprotectorandbuilderofwealthformyfamilyandfriends.I’dfailed,andIwashurtthatmyfatherhadinadvertentlydisempoweredmebyneglectingtoinformmebeforeheboughtthebonds.Butthiswasn’tjustablowtomyego.ItalsorattledmebecauseitmademewonderwhatelseIdidn’tknowandwhatotherchinkstherewereinmyarmor.Ihadassumedthatmydefensesweretotallysolid,butIwasstartingtosense

thatthiswasn’tthecase.Foronething,myfatherwaseasilythelargestinvestorinmyfund.Thefact thathehadbeenduped intobuyingLehmanbondscouldhaveaseriousknock-oneffect.Withthemarketcrashing,Ihadalong-awaitedopportunitytobeadispassionatebuyerofcompanieswhoseshareshadplunged

to ridiculously lowprices. Iknew that Ihad topickmyspots,but Ihadspentenoughtimestudyingeconomichistoryand investors likeBuffett toknowthatthismightwellbethebesttimeinmyentirelifetobuystocks.Todothis,Ineededmyinvestors—especiallymyfather—tostaycalmduring

thestorm.Ifhisliquidassetsweregettingeroded,itwouldbethatmuchharderformetogoagainstthecrowdandcontinuebuyingwhilealmosteveryoneelsewasinapanic.KnowingthatmyshareholderswerefacingtheseemotionalandfinancialpressuresplacedanadditionalmentalburdenonmeatamomentwhenIneededtobeicilyanalytical.ThepressureintensifiedinotherwaysthatIcouldneverhavepredicted.For

example,atthetime,Iemployedabright,hard-workingequityanalystwhomIregardedasadependableally.Then,onedayinthefallof2008,hecameintomyoffice,whichIhadcometothinkofasmybunker,andtoldmethathe’dsoldallof the stocks in his personal brokerage account. “I’ve gone to cash,” he said.“I’mgoingtowaittillthingssettledownandtheoutlookisclearer.”Iwas stunned. “Are you out of yourmind?” I asked, unable to concealmy

disgust.Herewas a guywho had proudly claimed to be a value investor andwhomIwaspaying tobe rational.Hewassupposed tobea like-mindedsoul,helpingmetoseizetheseincredibleopportunitiesthatthemarketwasgiftingus.Yethisemotionsweresooutofcontrolthatevenhewasgettingsweptupinthepanic.Hejustcouldn’ttakeitanymore.Thisisameasureofhowacutethestresscanbecomeatatimelikethis—evenforanintelligentandlevel-headedanalystwho had previously come upwith some highly profitable investments for thefund.Iwouldlaterdecidenevertohireanotheranalyst,preferringnottoexposemy

ownmindtotheseinsidiousdistortions.Asusual,IshouldhavedoneabetterjobofcloningWarrenandMohnish,neitherofwhomemployedafull-timeanalyst.Needlesstosay,theywerebothbuyingcheapassetshandoverfistatpreciselythemomentwhenweaker-mindedinvestorswereseekingtheemotionalcomfort

ofcash.Astheglobalfinancialcrisisdeepened,theturmoilwasunbelievable.Yetthe

burstingofthehousingbubblewashardlyasurprisetome.Afewyearsearlier,IhadpaidcloseattentionwhenBuffettexplainedataBerkshireannualmeetingwhy he no longer owned FreddieMac: he andMunger had spotted the earlywarning signals when lending standards and accounting disclosures began todeterioratebeyondtheircomfortlevel.IhadalsoreadsomebrilliantinvestmentlettersbythehedgefundmanagerMichaelBurryinwhichhecogentlyexplainedwhytherewouldbeadisasterinhousingandrelatedfinancialmarkets.Thisisan important benefit of remaining in the right intellectual environment:clearheaded investors like Einhorn, Buffett,Munger, andBurry had helped tokeepmyeyeswideopen.Asaresult,Isteeredwellawayfromthegreatestdangerareas.Ishunnedall

housing-relatedbusinesses,includinganycompanythatfinancedthem.Instead,my fund owned things like gas pipeline companies, which were about as faraway from housing as I could get. Drilling for shale gas was a big growthmarket,andpipelinesprovidedthecheapestmodeoftransportationfromthegasfieldstoendusers.Ididownsomefinancialstocks,butIwascertainthattheyweresafeandhad

accesstotheliquiditytheyneeded.Forexample,MasterCarddidn’tparticipatedirectlyinthecapitalmarkets,anditprovidedoneofthetwodominantpaymentsystemsintheworld.TheclosestmyportfoliogottotheepicenterofthecrisiswasMoody’s,whichhadrated instruments thathelped to fuel it.ButMoody’sbalance sheetwasn’t at risk; itwasmerely issuinganopinionabout the creditworthinessofdifferentcompaniesrather thanprovidingaguarantee.Andtherewere plenty of precedents to show that they couldn’t be held liable forexpressinganopinion.Ihadworkedhardtoinvestincompaniesthatsoldforsignificantlylessthan

their intrinsic value. All of them had high-quality moats, and they were all

prodigious cash generators. None were highly leveraged or needed regularaccesstocapitalmarkets.Thecreditcrisiswasdangerousforanycompanythatwas leveragedandneededcontinuous access tomoney,whereas the long-termhealth of my companies looked remarkably sound. So when I first heard thenews that Lehmanwas imploding and that liquiditywas drying up, it seemedlikeanon-issue.Butitturnedoutthattherewasreallynoplacetohide,especiallyforalong-

onlyinvestorwithaconcentratedportfoliolikemine,whichconsistedofaround15stocks.IhadsuccessfullypilotedtheAquamarineFundthroughanumberofprevious market corrections, including the Asian crisis of 1997, the dot-comcrashof1999–2000,andthemarketjittersthatfollowedSeptember11,2001.Inthefund’sfirsttenyears,Ihadsubstantiallybeatentheindexes,quadruplingthemoneyofmyoriginalinvestors.Myworstyeareverhadbeena6.7percentlossin1999.But 2008was something else. I’d never experienced an avalanche like this

withinmyportfolio.The seriousdamagebegan in Junewhen the fund fell by11.8percent.The followingmonth, Iwasdownanother3.5percent.And thenthings started toget reallyugly. InSeptember, the fund fell by6.8percent; inOctober, it plunged by 20.3 percent; and inNovember, it tumbled by another12.5percent.Fortheyearasawhole,Iwasdown46.7percent.Onpaper,almosthalfofmyshareholders’moneyandmyfamily’smoneyhadgoneupinsmoke.Inthepast,Ihadexplicitlywarnedinmyletterstoshareholdersthatitwasa

statisticalcertainty that thefundwouldonedayfallbyasmuchas50percent.Youonlyhadtolookatthetumultuoushistoryoffinancialmarketstoknowthatthiswouldeventuallyhappen.Thedifficulty,ofcourse,ispredictingwhentheseavalancheswill occur.As a long-term investor,my choice—then andnow—isnottoattempttotimethemarket,whichstrikesmeasanimpossibletask,atleastforme.Ialsochosenottobuyinsurance(forexample,byshortinganindexorbuying puts) since this reduces volatility but lowers your long-term rate of

return.Formytemperament,thisapproachworks.Emotionally,2008waspainfulfor

me.ButIcoulddealwiththesemassivepaperlossesbecauseIunderstoodthattheydidn’treflecttheintrinsicvalueofmyinvestments.IknewthatI’dbefineifI made it through to the other side without being forced to fold by externalforces.Atsomelevel,Iwasalsomakingamacroeconomiccallthatweweren’theading intoa repeatof theGreatDepression sincewehadpolicymakerswhounderstood the risks and were willing to use every available tool to avertdisaster.ItalsohelpedthatIhadpreparedmyselfforpreciselythissortofturmoil.One

ofthekeyfinancialdecisionsIhadmadeasanadultwasthatIwouldneverlivebeyondmymeansorfallintodebt.ThemostI’veeverowedisafewthousanddollarsonmycreditcards,whichI’vealwaysrepaidpromptly.I’veneverleaseda car or taken out a mortgage to buy a house. In 2008, when the marketimploded,Iwasrentinganapartmentandhadenoughcashsetasidetorideoutthestorm.Thisattitudetowardmoneyisdeeplyembeddedinmyfamily’spsyche.After

fleeingfromNaziGermanyin1936,mygrandfatherusedallof thesavingshecouldtakewithhim—atotalof£1,000inBritishcurrency—tobuildahouseinIsrael without borrowing a penny. When my parents moved our family toEnglandin1977, theyboughtahouseina less-expensiveareaofLondonthantheycouldafford.AndwhenIboughtaplaceinupstateNewYork,Ididitwithcash, not debt. My wealthy ancestors had lost their fortune when they wereforcedtoescapefromGermany;atsomedeep-seatedlevel,Iliveinmortalfearofthishappeningagain.Understandingthatthisisanintegralpartofmywiring,IknewthatIneededtoavoiddebtsinceitwouldinterferewithmyabilitytoactrationally. Likewise, I don’t invest borrowedmoney because this added stresswouldmakeitimpossibleformetoremaincalmandclearheaded.My attitude toward debt had also been influenced byWarrenBuffett—even

beforehetoldusthestoryofRickGuerin’spainfulexperiencewithleverage.Atonepoint,Warrenhadamortgageonhishome inOmaha,buthe’s long sincepaid itoff. In thepast,hehasalsosaid thatheneverwants toget intoseriousdebt because he doesn’t want to discover how he’s capable of behaving. Imentioned tohimduringour lunch that,when Iwasgrowingup in Israel,myparents couldn’t afford to take us on vacation or buy a TV. Theywouldwaitpatientlyuntiltheycouldaffordwhattheywantedinsteadofborrowingtobuyit.Occasionally,foratreat,wewouldgoforicedcoffeeataneleganthotel,theDanAccadiainHerzliya.Itwasaninexpensiveandprudentwaytolivethegoodlife.From a societal point of view, debt is a vital economic lubricant. Used in

moderation, it’s positively healthy.But for an individual investor, debt can bedisastrous, making it even harder to stay in the game—both financially andemotionally—whenthemarketturnsagainstyou.AsBuffettwroteinhis2001LettertoShareholders,“Youonlyfindoutwhois

swimmingnakedwhenthetidegoesout.”Oneofmyshareholderswasathird-partymarketerwhohadpreviouslypersuadedmetotravelwithhertoEuropefordog-and-ponyshowsdesigned toattractnewinvestors tomyfund.Shewassokeenonthefund’slong-termvalueapproachthatshe’dinvested$2millioninitherself. But her faith in long-term investing suddenly disintegrated, and shecashedoutinJanuary2009.Iwasflabbergasted.Itwasn’tclearifshecouldn’tbearthepainorifshewasdesperateforcashbecauseshesimplycouldn’taffordthelossesweweresuffering.Whatwasclearwasthatherdespairwasanalmostperfect signal that we had reached the point of maximum pessimism. A fewmonthslater,themarketsbottomedandbegantoclimb.Allbutoneofmy institutional investorsalsobailedout,partlybecause they

hadaneedfor liquidity themselves.Still, thevastmajorityofmyshareholdersstayedfirm,trustingthatthingswouldturnaround.Mostimportant,myfather—who had faced life-threatening dangers as an Israeli soldier—remainedextraordinarily calm. At the height of the crisis, when nearly half of his life

savings had been vaporized, he askedme if he shouldwithdraw somemoneyfromthefund.Isaiditwastheworstpossiblemomenttosellstocks,andItoldhimthatI’dratherliveinashackthantakeanycashoffthetable.Tohiseternalcredit,hedidn’twithdrawadime,even thoughhecouldhave

yankedouthismoneyatshortnotice.Hisstakewaslargeenoughthathecouldeffectivelyhaveshutdownmybusiness.Butheneverlostconfidenceinme.Inretrospect,IrealizethatIwasstandingontheshouldersofagiant.Withouthisstrengthasasilentpartner,Iwouldn’thavesucceeded.Forfundmanagers,thiswholeissueofshareholderredemptionscanbefraught

withstressanddifficulty.Beforethecrisis,myfundhadabout$120millioninassets under management. The market crash had slashed this to barely $60million. To make matters worse, shareholders redeemed around $10 millionmore.Onereasonwasthatmyfund’s90-daynoticeperiodmadeitarelativelyeasyassettoliquidate.Someotherhedgefundsactuallysuspendedredemptions,taking advantage of self-serving clauses buried deep inside their offeringdocumentsbyshrewdlawyers.Ifoundthisunconscionable.Tomeetmyinvestors’redemptionrequests,Ihadtobeanetsellerofstocksin

an environmentwhere they had never looked so cheap.By bailing out at thisinopportunemoment,asmallminorityofmyinvestorsmadeitfarmoredifficultforme toact rationallyand takeadvantageof thesebargains. Instead, Ihad toallocatementalenergytotheinordinatelydifficulttaskofdecidingwhattosell.Thistaughtmeanimportantlesson.Atthatmoment,whatImostenviedabout

Buffettwasnothisprodigiousintelligence,buthisstructuraladvantage:hehadpermanentcapitaltoinvestsinceBerkshireisacompany,notafund.Thismeantthathedidn’thavetoworryatallabouthowtomeetshareholderredemptions.Asaresult,hewasfreetomakeenormousinvestmentsinequitiesattheperfectmoment.AccordingtoWarren,temperamentismoreimportantthanIQwhenitcomes to investing. This is no doubt true. But I’m convinced that having astructuraladvantageisevenmoreimportant.

AsforMohnish,hehadsetuphisfundsothatinvestorscouldredeemsharesonlyonceayear.Hisinvestmentlossesinthemarketmeltdownwereevenworsethanmine. But he had to dealwith redemption requests only once during thefinancial crisis, at the end of 2008. This structural advantage gave himmorelatitudethanIhadtothinkclearlyabouthisportfolio.Bycontrast,themajorityofmyinvestorsstillownedashareclassthatallowedthemtoredeemquarterly.TenyearshadpassedsinceIfoundedthefundwiththisstructure;now,afterallthistime,Iwaspayingthepriceformymistake.Itwasapotentreminderofhowimportantitistocreatetherightstructurefromtheverybeginning.In themidst of the crisis, I also enviedWarren for his physical detachment

fromWallStreetandtheinvestmentherd.Unlikemostprofessionalinvestors,heseemedperfectly insulated from the fear and irrationality that had gripped themarket.Hissmalllow-keyofficeinOmahaislocatedinKiewitPlaza,whichheshareswith theKiewitCorporation,acontractor thatbuilds infrastructuresuchasroads,bridges,andtunnels.It’sanidealspotforacontrarianinvestortothinkdispassionatelyaboutwherethecrowdmightbegoingwrong.Myownoffice—inManhattan’sCarnegieHallTower—wasaterribleplaceto

beinthemidstofafinancialcrash.NewYorkwasattheheartofthecrisis.Andthe building itself was filled with fearful investment professionals, includingmanyhedgefundmanagerswhoweregettingclobbered.EverymorningI’dtakea bus towork, no longer feeling that I should blow a few dollars on a cab. Iwouldpassthroughtheglassdoorsintothebuilding’simpressivelobby,whichexudesanatmosphereofunderstatedopulence.When I’d firstmoved into thisskyscraper,Ihadfelt likeaWallStreetking.Butnow,itfeltmoreasifIwereenteringahospital.Thefacesallaroundmeweredrawnandpensive.Thismightsound overstated, but these expressions remindedmemost of the looks I hadseenonpeople’sfacesastheywalkeduptownthroughManhattanon9/11.When I reachedmy office on the 25th floor, the mood was grim. In those

brutalmonths,myemployeeswerequieterandmoreserious thanusual.There

was no cheery banter. Nobody wanted to talk. While nothing was explicitlymentioned, theywereclearlyworriedabout theirpaychecks,and theywerealldusting off their résumés. In the past, I’d mostly kept the door to my cornerofficeajar. Increasingly, Inowclosed itbehindme,consciously trying tokeeptheoutsideworldatbaysothatthispalpablegloomdidn’tinfectmythinking.Lookingbacknowonthefinancialcrisis,I’mpleasedathowwellIkeptmy

emotions in check. By then, I had a sufficiently strong emotional core that Ididn’tgetsweptawaybyalloftheseintensepressures.ItalsohelpedthatIwasatrue believer in the enduring power of value investing. This approach hadworkedformeforadecade,andIhadabsolutelynodoubtthatitwouldcontinuetoworkformeoverthelongterm—ifonlyIcouldstaythecourse.Still,itwasn’teasytoremaincalmandpositive.OnewaythatIcopedwiththe

stresswastoapplyastrategyIhadlearnedfromTonyRobbins:studyingheroesofminewhohadsuccessfullyhandledadversity,thenimaginingthattheywerebymy side so that I couldmodel their attitudes and behavior. One historicalfigureIusedinthiswaywastheRomanemperorandStoicphilosopherMarcusAurelius.Atnight,IreadexcerptsfromhisMeditations.Hewroteoftheneedtowelcome adversity with gratitude as an opportunity to prove one’s courage,fortitude, and resilience. I found this particularly helpful at a time when Icouldn’tallowmyselftobecomefearful.IalsotriedtoimaginehowSirErnestShackletonwouldhavefeltinmyshoes.

He had made grievous mistakes on his great expedition to Antarctica—forexample, failing to land his ship, Endurance, when he could and thenabandoning his first camp too soon. Yet he succeeded in putting these errorsbehind him, and he ultimately saved the lives of everyone on his team. Thishelped me to realize that my own mistakes were an acceptable part of theprocess.Indeed,howcouldIpossiblypilotthewealthofmyfriendsandfamilywithout making mistakes or encountering the occasional storm? LikeShackleton, I needed to see that allwasnot lost and to retainmybelief that I

wouldmakeitthroughtotheotherside.With this support from the eminent dead, Imanaged to keepmywits about

me.Iquietlywentovermyportfolioagainandagain,double-andtriple-checkingto be sure thatmy holdings had thewherewithal to survive. Confident ofmyanalysis,IrefusedtosellasingleshareofmajorinvestmentssuchasAmericanExpress.ByMarch2009,itsstockhadplummetedtoaround$10.Iheldonandrodeittoanine-foldgainintheyearsthatfollowed.Only one of my holdings seemed too risky to keep: CarMax, a seller of

secondhand vehicles. Its stock had already halved, but I wasworried that thebusiness model might be broken, given how difficult it had become for carbuyers toobtain low-cost financing.Ultimately, Iwasprovedwrong,andevenCarMaxbouncedback.Inthiscasealone,Ihadallowedthefearsofthemarkettoaffectmyrationalthinking.ItwasahealthyreminderthatI’mnotimmunetoirrationalfears,howevercarefullyItrytoguardagainstthem.Atthesametime,Iwasalsobuyingsomeincrediblycheapstocks,despitethe

burdenofmeetingshareholderredemptions.Forexample,IinvestedinLondonMiningPLC,whichwassellingatadiscounttothevalueofitscash.IloadeduponBrookfieldOfficeProperties,whichownedprimerealestate thatwasbeingvalued at way below its replacement cost. I bought stock in Cresud, anArgentineanowneroflargetractsofvaluablefarmland,whichIwasgettingforfreesincethewholecompanywassellingforlessthanthevalueofitsstakeinIRSA, a publicly traded real estate firm. I also invested in Fortescue MetalsGroup,which had developed exceptionally low-cost reserves of seaborne ironore.Thepriceofironorehadcollapsed,butIwascertainthatChinesedemandwouldcontinuetogrow.Thesewereelegantideas.Notonlyweretheyremarkablycheap,buttheyeach

hadcatalyststhatwouldinevitablyemerge.Also,theydidn’tjusthavepowerfulearnings engines but also substantial collateral value. So the odds of successwereexceptionallyhigh.

All of these investment ideas emerged from conversations that I had withMohnish, and I benefited immeasurably from his analytical brilliance. Histhoughtsandinsightscameatmethickandfast,andIwassometimesslowontheuptake.Mohnish joked that I seemed tobe“drinking froma firehydrant.”Our growing friendship was one of the most precious rewards of the Buffettlunch,sincethatrichexperiencedrewMohnishandmesomuchclosertogether.Iwasamazedbyhisgenerosityinsharinghisunconventionalwisdomwithme,and it’s hard to do justice to his importance in helpingme tomake the rightinvestmentsthroughoutthecreditcrisis.Allinall,itwaslikeshootingfishinabarrel.Overthenextfewyears,asthe

global economy recovered and normality slowly returned, every one of thesestocks soared. For example, Brookfield doubled, Cresud tripled, and LondonMiningquadrupled.As Ihad thoughtat the time, the financialcrisismaywellhavebeenaonce-in-lifetimeopportunity.On the investing front, I’d acquitted myself well. My core stock-picking

processwasgood.ButIcouldseethattherewerestillfundamentalthingsthatIneeded tochangeabouthowI ran the fundand, for thatmatter,howI ranmylife.Thefinancialcrisishadshownmethatinvestmentsuccessisn’tjustamatterof identifyinggreatstock ideas.AsIhad learnedthroughpainfulexperience, Ialso had to create the best possible environment for myself—physically,intellectually, and emotionally—so that I could operate more effectively andmakemyself lessvulnerable to the sortofnegative influences I’dencounteredduringthefinancialcrisis.Like Warren and Mohnish, I needed to be more strategic in the way I

constructedthisenvironment.Icouldn’tclonetheirintelligence,butIcouldseewith increasing clarity that I needed to clone the aspects of their environmentthathadgiventhemsuchastructuraladvantage.SoIdecidedtohittheresetbutton.AmongthebiggestchangesIwouldmake:

leavingNewYorkforZurichinthesummerof2009.

MYOWNVERSIONOFOMAHA

CreatingtheIdealEnvironment

Oneof thebiggestchallengesforany investor is that therearesomanyforcesthatmesswithourminds.Welike to thinkofourselvesasrationalcreatures—which, to some extent,we are—but the truth is a littlemurkier. The financialcrisishaddemonstratedwithbrutal efficiency justhow irrational investors canbe,especiallyinextremesituations.The so-called professionals—myself included—are by nomeans immune to

these mind-warping distortions. I had witnessed this firsthand as my equityanalyst,myinstitutionalinvestors,andmythird-partymarketerallcrackedamidthepressureofamarketcrash,cashingoutatprecisely themomentwhentheyshouldhavebeenbuying. It’s reassuring to talksmuglyabout the“madnessofcrowds,”butwhatabout themadnessof the intellectual and financial elite? Inmyexperience,wearecapableofthesameinsanity.Indeed,it’softenpeopleofmyilkwhoaredrivingthecraziness.The mind itself is a confounded thing, woefully ill-suited to the task of

investing.Thisisnotasciencebookoraweightytomeaboutthestructureofthebrain,but it’sworth takinga fewmoments toponderwhy it’ssohard to thinkandinvestinarationalmanner.Peopleoftenmisguidedly regard thebrain asone structure: a neocortex that

rationally takes in information, computes it, and spits out the answer. DanielKahneman,atrailblazingpsychologistwhowonaNobelPrizeforeconomicsin2002, describes this aspect of the brain’s processes with the phrase “thinkingslow.”Formypart,Iusedtohaveadeludedimageofmyselfastheequivalentofafighterpilot, intenselyfocusingon the instrumentpanel in thecockpitofmyjet,making optimal decisions and operating in full control of all the aircraft’s

levers.Muchofwhatwedoat fineuniversities is intended todevelop this rational,

higher-thinking aspect of our minds.My friend Ken Shubin Stein teaches anadvanced investment class at Columbia Business School. It’s a phenomenalcourse thatprovidesanenormousamountofuseful insight into the investmentresearchprocess.Butallthislearningandanalysisisbasedupontheassumptionthat,when studentsgraduate, itwill be their rationalneocortex thatmakes theinvestmentdecisions.Theproblemisthatthereisalsoasubrational,instinctivepartofthebrain—whichKahnemandescribeswiththephrase“thinkingfast”—wheremuchofourdecisionmakingactuallytakesplace.Ofcourse,I’mgrosslyoversimplifyinganendlesslyrichsubject.Ifyou’dlike

to research this further, you can read more lucid explanations by people likeKahneman, DanAriely, Jason Zweig, Joseph LeDoux, andAntonio Damasio.Reading works by these and other experts on behavioral finance andneuroeconomics, I became fascinated by the quirks and complexities of ourdecision-making processes. For example, the neurologist Benjamin Libetshowedhowadecisiontotakeanactionoriginatesinthebrainbeforethesubjectisawarethatadecisionhasbeenmade.Thentherewasthefamousnineteenth-centurycaseofPhineasGage,whohadsufferedanaccidentthatinterferedwithonlyonepartofhisbrain;heappearedtofunctionnormally,buthewasunabletomakerationaldecisions.Iwasalsointriguedbyresearchshowinghowthebraindealswithsignalsthat

arrive at different times: the sight of a person’s lip movements arrivesinstantaneously,while the sound theymake arrives later, yetwe perceive thatthese signals occur simultaneously. In other words, our brain constructs ourreality,anditmaynotbedoingsoinanaccuratemanner.Researchofthiskindhelpedmetoseethatthebrainisamuchlesswieldytool

than we’d like to imagine. For participants in the stock market, one of thebiggestproblemsisthatthesubrational,instinctivepartofthebrainissubjectto

dire mood swings, including outbreaks of irrational optimism and irrationalpessimism.Indeed,money-relatedissuesoftenactivatethe“subrational”partsofourbrains.Insituationsofheightenedfinancialrisk,whenwefeelthatweareinjeopardy, our subconscious instincts are activated; the neocortex cansubsequentlyrationalizeourdecisions.Tounderstandwhowe really are ashumans (and investors), it alsohelps to

considertheenvironmentinwhichweevolved.Roughlyspeaking,anatomicallymodernhumanswithlargebrainshavebeenaroundforabout200,000years.Thepart of our brain that evolvedmost recently is the rational neocortex. But formuchofourhistory,weoperatedinadramaticallydifferentenvironment.Todaytherearesubstantialpartsofourmentalapparatusthatevolvedtohelpussurvivein the wilderness that was home to our hunter-gatherer ancestors. Theseprimitive survival routines embedded in our brains are easily capable ofbypassingtheneocortex.We might like to perceive ourselves as potential Isaac Newtons, but it’s

perilous to forget that we also have this other aspect of our nature. Indeed,Newtonhimselfwouldhavebeenbetteroffifhe’drecognizedthis,giventhathewas an infamously dumb investor who lost his life savings in the South SeaBubble.AsNewtonwrylyobserved:“Icancalculatethemovementofstars,butnotthemadnessofmen.”Theproblemisnot just thatourbrainsarehighlyirrational.It’salsothat the

economicuniverseoperates inways thataremind-blowinglycomplicated.Theelegant economic theories that I learnedatOxford andHarvardblindedme tothis awesome complexity. A few years after I started investing, the moneymanagerNickSleepintroducedmetotheSantaFeInstitute,atransdisciplinaryresearchcommunity.IknewthatBillMiller,aremarkablysmartfundmanageratLegg Mason, was on the institute’s board. So I started reading some of itsresearchpapers.ThekeyideathatIlearnedistothinkoftheeconomyasacomplexadaptive

system.Economistshatethisnotionbecausewecan’tmodelacomplexadaptivesystemorusethetypeofmathwe’vebeentrainedtodeploy.Wealsotendtobedrawn to attractive, harmonious, hard-to-learn ideas such as the generalequilibriumtheory.Thistheoryprovidesawonderfulaccountofhowtheworldoughttowork,anditcanbeausefulguideforpolicymakers.Butitdistortsourperceptionofreality.Polymath investors like Bill Miller and Charlie Munger were quick to

recognizethatthesestandardeconomicmodelsoftheworldareinadequatewhenitcomestothemarkets—andtoseethatmodelsderivedfrombiologymayworkbetter. Inspired by the Santa Fe Institute, I read Journey to the Ants by BertHölldoblerandEdwardO.Wilson.Muchof thebook isdevoted todescribingthedifferentsurvivalstrategiesusedbyantspeciesandtoexploringhowthesedifferentspecieshavecoevolvedandcompetedwitheachother.ThisonebooktaughtmemoreabouteconomicsthanI’dlearnedinallmyyearsatuniversity.That may sound nuts, but it’s true. Why? Because an ant colony, like theeconomy, is a complex adaptive system.Reading about antswas a revelation.Forexample,itturnsoutthatantcoloniesoperatebyasimplesetofbasicrulesthatenablethemtoresolveamyriadofdifficultsurvivalproblems.IrealizedinstantlythatIwasdiscoveringmodelsthatwouldbeusefulforme

inanalyzingthefinancialandeconomicworld.MythoughtswenttoMungerandhislatticeworkofmentalmodels.SoIsenthimacopyofJourneytotheAnts.Tomy delight, he repliedwith a short handwritten note, saying that he had longintended to read the book.Meanwhile, I resolved to spendmore time readingbooksaboutbiology.Thesestudiesdeepenedmysensethatit’shelpfultothinkof the economy as an evolving and infinitely complex biological ecosystem.Companies,likeantspecies,mustadoptstrategiesthatenablethemtothriveortheywillbeatriskofextinction.AsIsoondiscovered,otherareasofcomplexityresearchalsoprovidehelpful

models for how the economic world operates. For example, the Danish

theoreticalphysicistPerBakcoauthoredaclassicstudyofsandpilesthatshowedwhathappenswhenyoukeepdroppinggrainsofsandinonearea.Theresultingpilereachesastateof“self-organizedcriticality”;avalanchesthenoccur,butit’simpossible to predict either their timing or their size. This model offersintriguinginsightsintomarketcrashes,whichhavemuchincommonwiththeseavalanches. For investors, the bottom line is to avoid states of self-organizedcriticality, which is essentially what occurred in the stock market before thecrashof2008–2009.ThepointisthattheneateconomictheoriesIhadlearnedatuniversitydidn’t

comeclose todescribing the truecomplexitiesof theeconomyor thefinancialmarkets.Atthesametime,Ihadalsocometoseethatourbrainsarehopelesslylimitedinthefaceofthisoverwhelmingcomplexity.Thisimbalanceisaseriousproblem for investors. Here we are—with our little irrational brains and ouroverly simplistic economic theories—somehow hoping to make sense of thisunbelievablycomplexworld.Whatchancedowehave?This isn’t justacaseof self-indulgent intellectual theorizing. It’savery real

challengeforeveryinvestor.Isthereanyway,then,oftiltingthebalanceinourfavorsothatweincreasetheoddsofvictoryinagamethat’ssoheavilystackedagainstus?Thisisthequestionthatunderliesthenextfewchaptersofthisbook.In retrospect, I should have been far more skeptical about the economic

modelsIhadlearnedatuniversity.Soyou’llbegladtohearthatI’mnotgoingtoboreyouwitheruditediscussionsoftheBlack-Scholesmodelofoptionpricing,Keynesianmacroeconomicsandstickyprices,theIS/LMmacroeconomicmodel,rational expectations, the Herfindahl industrial concentration ratio, or theRüdigerDornbuschexchangerateovershootingmodel.This is,ofcourse, sexystuff thatmightserveyouwell ifyou’re looking for

loveataMensacocktailpartyoragatheringofcentralbankers.Itmightalsogetyouafirst-classdegreeandagreatteachinggig.Butinmyexperience,it’snotparticularly helpful when it comes to investing. The trouble is, economic

theories likethesetendtobebasedonintellectuallyelegantassumptionsabouthowtheworldoperates,notonthemessyrealityinwhichweactuallylive.That said, there are plenty of useful things I learned at university that

shouldn’tbejunked.Forexample,it’s indispensableforanyseriousinvestortoknowhowtoreadacompany’saccounts.Thisdoesn’tmeansimplygraspingthedifferencebetweencashandaccrualaccounting.Italso involvesunderstandingthevariouswaysthataccountingrulescanbeusedtoskewtheheadlineearningsnumbers, not to mention the ability to tell whether the quality of earnings isincreasingordecreasing.Ifyou’vepickedupanMBAoraCFA,you’vealreadygleaned the basic mechanics of this type of analysis. If not, there are lots ofbooksthatcanimpartthisfundamentalknowledge,includingseminalworksbyBenGrahamandDavidDodd,MartyWhitman,JohnMihaljevic,SethKlarman,and Joel Greenblatt. You don’t need me to go over that well-trodden groundagain.Unfortunately, most investment books tend to focus on technical skills. It’s

fine tostudybasicconcepts like returnon investment,P/Eratios,and the like.But these things aren’t hard, and theywill get youonly so far.Anyonewho’ssmartenoughtomakeit throughbusinessschoolcanfigureouthowtodissect10Ks,10Qs,andother financialdocuments.Therealchallenge, inmyview, isthatthebrainitself—whichgotustowhereweare—istheweakestlink.It’slikealittleboat,adriftinaseaofirrationalityandsubjecttounexpectedstorms.Andit’sincompletelyunderstoodbyeventhemostbrilliantneuroscientists,letalonebyinvestors.When I started to read up on behavioral finance and neuroeconomics, there

wasathrillingsensethatIwasfathomingsomeofthedeepestmysteriesofhowthebrainfunctionsandmalfunctions.But,initially,ImistakenlyassumedthatIcouldrelyonmyintellectualpowerstoovercometheseirrationaltendencies.AsIreadaboutthebrain’sshortcomings,Iwouldnodknowingly,reassuringmyselfthat I wouldn’t trip up now that I had a better understanding of where these

mentaltripwireslay.ButIgraduallylearnedthatintellectualknowledgeandself-awarenessaresimplynotenough.Thedifficultyisthatwecan’tusethebraintooverridethebrain.Soweremainvulnerabletothesementalshortcomingsevenwhenweknowaboutthem.What, then, is thesolution?This,Ihope, iswhereIcanhelpyoubysharing

whatI’velearnedsofar.Throughpainfulexperience—bothatD.H.Blairandinthefinancialcrisis—I

discoveredthatit’scriticaltobanishthefalseassumptionthatIamtrulycapableof rational thought. Instead, I’ve found that one ofmy only advantages as aninvestoristhehumblerealizationofjusthowflawedmybrainreallyis.OnceIaccepted this, I could design an array of practicalwork-arounds based onmyawarenessoftheminefieldwithinmymind.As it happens, this minefield may be particularly treacherous in my case.

Around 2004, a friend who is on the faculty of the Mount Sinai School ofMedicinesentmeforanexaminationwithhiscolleagueDr.MarySolanto.SheconductedabatteryoftestsandconcludedthatIhaveattentiondeficitdisorder(ADD).ThetestsshowedthatIwascapableofperiodsofextraordinaryhyper-focus,especiallyattimesofhighstress,butthatIwasequallycapableoffallingthroughattentiontrapdoorswhenitcametothemoremundanethingsinlife.Icouldthinkgreatthoughts,butmyattentioncouldshiftsoeasilythatIhadlittlegraspofbasicthingslikewhattimeitwasorwhereI’dleftmykeys.TodealwithmyADD,Ineededtodevelopanarrayofsimplework-arounds—

for example, installing big clocks inmyoffice to helpmekeep track of time,havingacleardesksothatIwouldn’tgetdistracted,andputtingobjects in thesame places so that I wouldn’t lose them quite so often. In hiring a personalassistant, I specified that akeypartof the jobwas towatchoverme so that Iwouldn’tmessupsimpletaskslikecatchingflights,rememberingappointments,orclosingthefrontdoorwhenIleftourofficebuilding.All of this focus on building work-arounds and circuit breakers into my

everydaylifeprovedtobeincrediblyhelpful—notjustindealingwithmyADDbut also in becoming a better investor. The truth is, all of us have mentalshortcomings,thoughyoursmaybedramaticallydifferentfrommine.Withthisinmind, Ibegantorealize justhowcritical it is for investors tostructure theirenvironment to counter theirmentalweaknesses, idiosyncrasies, and irrationaltendencies.Followingmymove toZurich, I focused tremendous energy on this task of

creatingtheidealenvironment inwhichto invest—oneinwhichI’dbeable toact slightly more rationally. The goal isn’t to be smarter. It’s to construct anenvironmentinwhichmybrainisn’tsubjectedtoquitesuchanextremebarrageofdistractionsanddisturbingforcesthatcanexacerbatemyirrationality.Forme,thishasbeenalife-changingidea.IhopethatIcandoitjusticeherebecauseit’sradicallyimprovedmyapproachtoinvesting,whilealsobringingmeahappierandcalmerlife.Asweshall see ina laterchapter, itwasn’t justmyenvironment thatwould

change. I would also overhaul my basic habits and investment procedures toworkaroundmyirrationality.Mybrainwouldstillbehopelesslyimperfect.Butthesechangeswouldsubtlytilttheplayingfieldtomyadvantage.Tomymind,this is infinitely more helpful than focusing on things like analysts’ quarterlyearnings reports, Tobin’s Q ratio, or pundits’ useless market predictions—thesortofnoisethatpreoccupiesmostinvestors.The financial crisis had shown me beyond doubt that managing the

nonrational part ofmy brain had to become an integral part ofmanagingmystock portfolio. It also highlighted how hard it was for me to do this inManhattan.We’reallwireda littledifferently,butNewYork—with its restlessenergy, competitive spirit, and pockets of extreme wealth—accentuated someaspects ofmy own irrational nature that aren’t conducive to good investing. IneededtobeinaplacewhereIcouldthinkcalmlyandinvestforthelongtermwithout thepressureofotherpeople’sexpectationsor thedistractionofall the

frenziedactivitybuffetingmeinNewYork.This is not to say that it isn’t a fine base for some great investors. David

Einhorn has thrived there; so have the managers of the Sequoia Fund. But Isuspect that it’s harder for people like me who flocked to New York fromelsewhere and therefore lack the local roots that give emotional stability topeople raised there. For outsiders, it’s too easy to get unbalanced by theunbridledappetites—includinggreedandenvy—thatfinancialcenterslikeNewYorkandLondoncaninflame.ToborrowamemorabletermfromNassimNicholasTaleb’sbookTheBlack

Swan:TheImpactoftheHighlyImprobable,thesebigcitiesare“Extremistan.”Asweknowfromvariousstudies,thedisparitybetweenourownwealthandourneighbors’wealthcanplayasignificantroleindeterminingourhappiness.Ifso,then reading about a New York–based multibillionaire like the BlackstoneGroup’s Stephen Schwarzmanmaywell trigger a destabilizing reaction inmyirrationalbrain.Unlesswehaverobustwaysofdealingwiththesemind-bendingforces, we can’t avoid being knocked off course by them. For example, theproximity of somuch extremewealthmightmake itmore tempting forme toswingforthefenceswithmyinvestmentsinsteadoffocusingcalmlyonmakingadecentcompoundedreturnwithoutunduerisk.Formeatleast,itseemedwisertoliveinaplacewherethedifferencesareless

extreme. Givenmy particular set of flaws and vulnerabilities, I figured that Iwould stand a better chance of operating somewhat rationally in the kind ofplacethatTalebdescribesas“Mediocristan,”wherelifeismoremundane.So I started actively to consider alternatives to Manhattan. For a while, I

thought seriously of moving to Omaha, given how well it had worked forWarren. I also considered Irvine, California, where Mohnish lives. Icontemplated other American cities like Boston, Grand Rapids, and Boulder.AndI thoughtabout relatively low-keyEuropeancitiessuchasMunich,Lyon,Nice,Geneva,andOxford.

Butintheend,LoryandIagreedonZurich.Ihadgonethereoftenasachildandhadalwayslikedit.Morerecently,I’dalsoreadstudiesinwhichZurichwasroutinelyrankedastheworld’sleadingcityforqualityoflife.Itwasn’thardtoseewhy.It’sasmall,safe,manageableplacewithhandsomearchitecture,cleanair and water, and superb physical infrastructure. It has good public schools.Therearebeautifulmountainsandgreatskiingjustminutesaway.Italsohasanexcellentairport,easilyaccessiblefromthedowntownarea,withdirectflightstoplaceslikeNewYork,SanFrancisco,Singapore,Shanghai,andSydney.WhileZurichisanexpensiveplacetolive,it’salsohighlyegalitarianbecause

everybody has access tomore or less the same things—from pristine lakes topublicswimmingpools thatareevenbetter than theprivateoneI’denjoyedatour fancy country club in upstate New York. Likewise, Zurich’s unsurpassedpublictransportsystemissoefficientthatevenlocalbillionairesuseit.Thefactthat the richdon’t exist inanalternate reality that seemswayoutof reach foreveryoneelsereducestheenvyandthesenseoflackthatit’seasytofeelincitieslikeNewYorkandLondon.I don’twant to suggest that Zurich is perfect, but it has one other trait that

seemsremarkabletome:it’sgenuinelybuiltontrust.Forexample,onthetrainsystem, tickets are seldom checked and there are no turnstiles. In stores,customers routinely buy wine and other products on credit and have themdeliveredtotheirhomes,alongwiththeinvoice.Residentsarepartofawebofdeserved trust, and this tends tobringout thebest in them. Inaway, this is aBuffettesque view of life. Warren treats the managers of his companies withconsiderable trust,granting themthe latitude tomake theirowndecisions, andtheyrespondbydoingeverythingtheycantoliveuptohisexpectations.ZurichalsostruckmeasaplacewhereIcouldliveinmentalpeace—aquiet,

pleasant,slightlyblandsettingwherethereisn’ttoomuchgoingon.HereIcouldfocus on my family and my fund without undue disturbance. Occasionallypeopleaskme,“Butisn’titboringthere?”Myanswer:“Boringisgood.Asan

investor,that’sexactlywhatIwant.”Becausedistractionisarealproblem.WhatIreallyneedisaplain,unobtrusivebackgroundthat’snotoverlyexciting.AndI’mcertainlynotaloneinfindingZurichconducivetoclearthought.Historically,the city has provided a space for free contemplation to residents as diverse asCarlJung,JamesJoyce,RichardWagner,VladimirLenin,andAlbertEinstein—nottomentionTinaTurner.ItwasalsoimportantthatinZurichIwouldn’tbesurroundedbypeopleinthe

investmentbusiness.Thiswouldmakeiteasiertogoagainstthecrowdwithoutthe risk that their thinking would seep into my ownmind. Zurich is also farenoughoffthebeatentrackthatnottoomanypeoplewouldvisitme;thefriendsandrelativeswhocaredthemostwouldcome,butIwouldn’thavetodevotetoomuch time to relationships thatwere less central tomy life.Thismight soundcoldandunsentimental,butthesearethesortofthingsthatIneededtoconsideras I constructed an environment that suited my idiosyncratic character andpriorities.Afterall,inmovingtoZurichIhadachancetostartoverwithacleanslate,puttingintopracticeallthatIhadlearnedabouthowIcouldfunctionmoreeffectively.Ididn’twanttoblowit.Next, I set about finding the perfect office—another key component of my

newenvironment.Initially,Imadeamistake,rentinganofficeforayearontheBahnhofstrasse,aritzystreetthatisZurich’sownenclaveofExtremistan.It’sanelegant area, full of expensive stores. But super-rich settings like this are notidealformesincetheystimulateunhealthyappetites.SoIsoondecidedtomoveto an office on the other side of the river, a 15-minute walk from theBahnhofstrasse’sglitzandglamour.Forme,thisfeelslikeasafedistance.The psychologist Roy Baumeister has shown that willpower is a limited

resource, sowehave tobecarefulnot todeplete it. In fact,his labdiscoveredthateventhesimpleactofresistingchocolatechipcookiesleftpeoplewithlesswillpower to perform subsequent tasks. Inmy case, I don’twant towastemylimitedenergyguardingmyselfagainsttheenvyandgreedthataplacelikethe

Bahnhofstrasse might trigger in me. It’s better simply to construct myenvironment so that I’m not exposed to these destabilizing forces, which arelikely to intensify my irrationality. The key is to free my mind from anyunnecessarymental effort so I can use it formore constructive tasks that arelikelytobenefitmeandmyshareholders.As I pondered these issues, I also began to recognize that other investors I

admire had adopted a similar approach to building their environment,whetherconsciouslyornot.Mohnish,forone,worksinaless-than-glamorousofficeparkinSouthernCaliforniawithnoother financial institutionsnearby. Ionceaskedhimwhyhehadn’tsethimselfupinanattractiveofficeinoneofIrvine’sfancyshopping centers, close to his favorite restaurants. “Oh, Guy,” he replied. “Idon’t need all that razzmatazz!” I havenodoubt that heunderstandswhat theareaaroundhimcandotohismind.Likewise,SethKlarman,oneof themost successful investorson theplanet,

worksoutofadecidedlyunflashyofficeinBoston,farfromtheintoxicationsofWall Street. If he wanted, he could easily rent the top floor of a gleamingskyscraperoverlookingtheCharlesRiver.NickSleepsetuphisofficeinLondonnearaCornishpastyshopontheKing’sRoad,farfromthegrandeurofMayfair,whichhasbecomeBritain’shedge fundmecca.AllenBenello, themanagerofWhite River Investment Partners, works out of a nondescript office in SanFrancisco, nowhere near the city’s financial district. And Buffett, as we’vediscussed,istuckedawayinOmaha’sKiewitPlaza—anotherbuildingthatisnotexactlyknownforitsrazzmatazz.Thisstrikesmeasasignificantyetlargelyunrecognizedfactorinthesuccess

oftheseinvestors.Smallwonder,then,thatIwantedtocreatemyownversionofOmaha.Thatsaid,I’mdifferentfromBuffett—andnotjustintermsofIQpoints.For

onething,it’simportantformetohaveapleasantviewfrommyoffice,whereashe’snotfussedaboutsuchaestheticconsiderations.WhileIliketolookouton

treesorsomethingsimilarlycheering,heroutinelykeepstheblindsdrawninhisoffice. But in other substantiveways, I consciouslymodeled the environmenthe’dcreatedinOmaha.Forexample,Warrenlivesaboutaten-minutedrivefromhisoffice,whichisslightlyoutsidethecitycenter.Mohnish’sofficeinIrvineisalsoabouttenminutesfromhishome,andit’sslightlyoutsidethecitycenter.Imirroredthem,selectinganofficethat’sa twelve-minutewalkorseven-minutetram ride frommy home and that’s slightly outside the city center. Forme, itworkstobeoutsidetheheartofthecity,partlybecausethismakesitlesslikelythat too many people will drop by the office opportunistically. They need astrongerreasontomakethiseffort,sotheirvisitstendtobemoreworthwhile.Thesedecisionswerecarefullyconsidered.Forexample,Mohnishand Ihad

specifically discussed commuting times, reaching the conclusion that the idealcommute takesaround ten to twentyminutes.This iscloseenough to improveone’squalityoflife,butfarenoughtoestablishaseparationbetweenworkandhome.Forpeoplelikemewhogetobsessiveabouttheirjobs,it’susefultohavethisseparation.Weneedtoseeourfamiliesandspendtimeathomewhenwe’renot just buried in work. For the same reason, it’s important to have hobbies.Among other things, I run and ski, which not only makes me healthier andhappier, but clears my mind and strengthens my detachment from the moodswingsofthemarket.IfIspentthattimeholedupinmyoffice,single-mindedlyanalyzing stocks, I’m certain that my decision making and my investmentreturnswouldsuffer,alongwithmyhealthandmyfamilylife.Inanycase,everythingisinterconnected.Myoriginalmotivationforcreating

abetterenvironmenthadbeentoboostmyreturns.Butthesedecisionsalsoledtoabetterlife.Withintheofficeitself,Iwasequallycarefultoconstructanenvironmentthat

would help me to operate rationally and effectively despite my balky wiring.Onceagain, ithelps toknowthyself—and toadapt thysettingaccordingly.AsI’vementioned, one ofmy flaws is that I’m amazingly easy to distract, and I

need to address this problem in designing my physical environment. UnlikeBuffett,who can operate brilliantlywithout a computer or an email address, Irelyonmycomputer.ButI’malsoawarethattheInternetandemailcanbecomeappallingdistractionsforme.Tocounteractthisandtohelpmeremainfocused,Iphysicallydividedmyoffice.Atoneendofthecorridor,Ihavea“busyroom,”withaphone,acomputer,

andfourmonitors.ButIkeepthecomputerandthemonitorsonanadjustable-height desk, which I typically position so that I have to stand beside it.Respondingtoemailsisalowmentaltask,butit’seasytogetsuckedintoitforlong stretches of time. So I’ve intentionally set up the desk in a way thatpreventsmefromsittingatit.Thismightseemperverse,butthegoalistocreateanofficethatgivesmethespacetothinkquietlyandcalmly.Minoradjustmentslikethisawkwardpositioningofthecomputerhelptostacktheoddsinmyfavor.At the other endof the corridor, I have a room that I call the library.Here,

there’snophoneor computer. Iwant to encouragemyself to spendmore timesittingandthinking,sothisroomisdesignedtobewarmandwelcoming.Icantake piles of financial documents to study in there or select a book from theshelvesthatlinethewalls.IfIclosethedoor,itmeansthatnobodyisallowedtobotherme.The libraryalsoservesasanaproom.Notcoincidentally,Mohnishalsonapsinhisoffice,andWarrentoldusthathehasaplaceinhisofficewherehecannaptoo.Thisisn’tamatterofsloth—or,atleast,notentirely!Adaytimesnoozekeepsthemindfresh,shutsoutthenoise,andprovidesachancetorebootthesystem.Trivialasitmightseem,eventhewayyoudecorateyourofficematters.Think

of Oxford colleges, where the dining halls are adorned with portraits ofillustriousalumni.Onsomelevel, theirpresencesendsaninspiringmessagetothe current flock of students. In a similar way, I positioned a bronze bust ofCharlieMunger inmyoffice. I’mnot deifyinghim, but Iwant to activate hispresenceinmymind—notleastasacuetoremindmeofthedangersofthose24

formsofmisjudgmentthatheidentifiedinhistalkatHarvard.Likewise,Ikeepphotographs inmy busy room andmy library that showmewithWarren andMohnishonthedayofourlunch.Ican’texplainallofthisonarigorousscientificlevel.Butmyimpressionis

thatmirrorneuronshelpustomodeltheinfluentialpeopleinourpresence.ByhavingimagesofMungerandBuffettinmyoffice,I’mtryingonceagaintotilttheplayingfieldonasubconscious level,using theirpresence to influencemythoughts. My sense is that this is quite common. When I visited WinstonChurchill’sstudyatChartwell,Iwasstruckbytheobjectshekeptonhisdesk,including a bust of Napoleon, a porcelain figurine of Admiral Nelson, and aphotograph of theSouthAfrican primeminister JanSmuts. I don’t think theywere there merely for decoration. I’m guessing there were moments whenChurchill would ask himself what these famous leaders would do in hissituation. Religious objects such as crucifixes can presumably serve a similarpurpose, providing a cue for the devout to improve their behavior. Given thepowerofmirroring,it’simportanttochooseourheroesandrolemodelswithrealcare.I also have photographs in my office of my father and some of my first

investors,includingacoupleofhisbusinesspartners.ThisistoremindmewhoI’m working for so that I never lose sight of my responsibility to myshareholders.Lately,I’vebeenthinkingofcommissioningasinglephotographertotakeblack-and-whiteportraitsofallmyinvestors.Aboutayearafterourcharitylunch,WarrenBuffettgenerouslygaveMohnish

andmeanimpromptutourofhisofficeinOmaha.Iwasfascinatedtoseehowhehad structuredhisownenvironment to enhancehis ability tomake rationaldecisions.Perhapsthemoststrikingfeatureofhisofficewasthatitcontainedsolittlethatcouldclutterhismind.Hehadonlytwochairsandnospaceforlargemeetings—a practical means of discouraging unnecessary interactions. Hiswindow shades were closed, presumably helping him to focus on the task at

hand.Onthewallbehindhisdesk,Warrenhadaprominentlydisplayedphotoofhis

father, Howard Buffett, whom he greatly admires. Lowenstein’s biography ofWarren describes Howard as an “unshakably ethical” Congressman who“refusedoffers of junkets and even turneddown a part of his pay.During hisfirst term,when the congressional salarywas raised from$10,000 to$12,500,HowardlefttheextramoneyintheCapitoldisbursementoffice,insistingthathehad been elected at the lower salary.” It’s not hard to see this influence onWarren,whosemodest salary for runningBerkshire reflects a similar sense ofintegrityandaltruism.Moretothepoint,thephotoisareminderofhowhelpfulitcanbetoincludeimagesofourrolemodelswhenweareconstructingourownworkenvironment.As for Warren’s desk, it was so small that there was no room for piles,

obliginghimtoprocesshisreadingefficiently.Anin-boxandanout-boxlayontopofhisdesk,alongwithaboxlabeled“TooHard”—avisualreminderthatheshouldwaitpatientlyuntiltheperfectopportunityarrives.Asheputsit,“IwillonlyswingatpitchesIreallylike.”There’sanelementofplayfulnessabouthis“TooHard”box,but itspresencemustalsohaveasubtleeffecton thewayhethinks. These cues wouldn’t help much if Buffett didn’t also have anextraordinarymind.Butit’s interestingthatevenamanofhisintelligenceseesfittokeepthatboxonhisdeskasaphysicalaidthatkeepshismindontrack.Tome,thisshowsaremarkablehumilityabouthisabilities.IalsofoundittellingthattherewasnoBloombergterminalinBuffett’soffice.

Apparently, there’s one at the other end of the building, used by a Berkshireemployeewhomanagesabondportfolio.Buffettcouldnodoubtaccessitifhewanted to,buthe’sconsciouslychosennot tohave this informational firehosewithineasyreach.Likewise, when I visited Nick Sleep’s office in London, I was intrigued to

discoverthathekepthisBloombergawkwardlypositionedsothathecoulduseit

only while sitting on an uncomfortably low chair. Like Buffett, he hadconsciously designed his environment to discourage his use of a terminal thatcosts more than $20,000 a year to rent. Why? After all, a constant flow ofinformationissurelythelifebloodofanyprofessionalinvestor.MyownrelationshipwiththeBloombergterminalissimilarlyambivalentand

tortured.It’saformidabletool,andtherearetimeswhenI’vefoundithelpfulasaway togetstockdataornews inahurry. InmyNewYorkvortexyears,myBloombergsubscriptionalsoservedthedubiouspurposeofbolsteringmyego.Itmade me feel like a privileged member of a club that could afford the mostexpensive toys;without it, Imight not have felt equal tomy peer group. Butbeyond this foolishness, there’s also a more serious downside to using aBloomberg—or, for thatmatter, rival systems sold by companies like ReutersandFactSet.Allof theseproducts—butespecially thecoveted, top-of-the-lineBloomberg

—areingeniouslydesignedtolurethesubscriberwiththeseductivepromiseofnonstop information.The terminaldeliverssucharelentlessfloodofnewsanddata into investors’brains that it’shard tomuster theself-discipline to turnoffthespigotandconcentrateonwhatmattersmost.Youseestocktickersflashingbefore your eyes, news alerts blaring for your attention. Everything links tosomething else, so you often find yourself ricocheting into deeper and deeperrecesseswithinthisinformationalnetherworld.Initially,Iwastotallyhooked.Inmyearlyyearsasamoneymanager,Iwould

arriveinmyManhattanofficeandimmediatelyfireupmyBloomberg.ItwouldlightuplikeaChristmastree,itsbrightcolorssubconsciouslyspurringitsusersto action.But as I becamemore self-aware, I began to realize that this call toaction wasn’t helping me at all; nor were the endless hours of informationsurfing. I started to askmyself, “Is this really the best and highest use ofmyattention?”IfIhaveonlyalimitedamountofwillpower,howmuchofitshouldIsquander in trying to resist the temptation tosnackonallof this informational

sugar?During the financial crisis, I sawmore clearly than everwhat an unhealthy

addiction theBloomberghadbecome.Theconstantbarrageofbadnewscouldeasilyhaveexacerbatedmyirrationaltendencies,whenwhatIneededmostwastoscreenout thenoiseandfocusonthelong-termhealthofmyportfolio.SoIwentcoldturkey.Inlate2008andearly2009,asthemarketcollapsed,Iturnedthemonitor off for days on end.Another tactic that I used to distancemyselffromtheBloombergwastostophavingapersonallogin,thoughwestillhadacompany login. Ialsochanged thecolorschemeonmyhomescreenso that itwasdull andmuted, therebyminimizing the risk that all thosebright, flashingcolorsmightjoltmyirrationalbrainintounnecessaryaction.InsettingupmyofficeinZurich,Ihadtodecideonceagainhowtotacklethe

Bloomberg conundrum. By now, I was used to having the service.Psychologically, it would have been painful to let it go. I also knew thatoccasionallyitwasextraordinarilyuseful.ButIwasequallyawarethat,forme,itdidmoreharmthangood.So,intheend,Icametoanuneasycompromise.IrelegatedtheBloombergtotheadjustable-heightdeskinmybusyroom.ThefactthatthedeskisadjustedsothatIusuallyhavetostandmeansthatthere’slittledangerthatI’llbetemptedtousetheBloombergforhours,grazinginastateofhelpless distraction. Nowadays, I often go weeks without turning on theBloomberg at all. Still, it’s there if I ever need it—my own exceptionallyexpensiveversionofatoddler’ssecurityblanket.Ofcourse,therationalpartofmybraintellsmethatI’dbebetteroffgetting

ridoftheBloombergentirely.Whybotherpayingmorethan$20,000ayearforadistractionthatIcansoeasilydowithout?ButIacceptmyfallibility.Insteadofpretending to be perfectly rational, I find it more helpful to be honest withmyselfaboutmyirrationality.AtleastthenIcantakepracticalstepsthathelpmetomanagemyirrationalself.Perhapsthisisthebestthatanyofuscando.

LEARNINGTOTAPDANCE

ANewSenseofPlayfulness

InmovingtoZurich,IdecidedthatIneededtochangeotheraspectsofmylifetoo.Itwasn’tjustamatterofconstructinganenvironmentthatwouldhelpmetobemorerational,lessdistracted,andcalmer.Iwantedtoaltermyattitudetolifeitself.Theexperiencesof2008–2009weresoheightenedandintensethatithadbeen

difficult forme to remain inbalance.This isoneof thebiggestchallenges forinvestors.We all know that it’s important to be physically healthy, to have asatisfyingpersonallife,andtomaintainsomekindofemotionalequilibrium.Butthisholisticperspectiveisnotjustanairy-fairy,new-agedream:thetruthisthatit’shard to investwell if yournon-investing life is outofwhack, in chaos, orstunted.Greatinvestorsdon’toftentalkpubliclyabouttheiremotionalchallenges.But

GeorgeSorosgavesomesenseof thestressesof investingwhenhewrote thatthereweremomentswhenhewasn’t sure if hewas runninghis fundor if hisfundwasrunninghim.Bycontrast,Buffetthassaidthathetapdancestoworkevery morning. His playfulness and zest for life are reflected in his sense ofhumor and his love of bridge. He has found his passions, and he delights inthem.Iwantedtoinjectmorejoyinmyownlife,torecapturetheplayfulnessIhad

lost over the years.During the financial crisis, thereweremomentswhenmycareer seemed in real jeopardy. The market carnage was so extreme thatcountless funds went out of business. Even investors as famed as BillMillerweremauledsobadlythattheirreputationswereseverelydamaged.Oneofthecleverest investors I knew, a guy from the year aboveme atHarvard, lost 80

percent and had to close his fund.Hewas still in his early 40s, but his once-glitteringcareer as an investorwasapparently finished.Forme, thecrashwasthe investing equivalent of a near-death experience. It forcedme to reappraisehowIwantedtoliveandwhatwastrulyimportanttome.Amidthissoul-searching,IbegantoseethatIhadlockedmyselfintoaview

ofmycareerasalife-or-deathstruggle.Myapproachwassimplytooextreme:Ididn’t justwant to be a great investor, but to beWarrenBuffett. For somanyyears,Ihaddrivenmyself inanalmostmaniacallyfocusedwaytoachievemygoals,actingas ifmyexamresults,myuniversityperformance,andmyfund’sinvestmentreturnswereeverything,asiftheydefinedwhoIwasanddeterminedmyvalue.PerhapsthisstemmedfromtheethosofmyEnglisheducation.Attheageof

11,IhadgoneofftoaBritishboardingschoolasanimmigrantmisfitwhohadalready lived in Iran, Israel, and South Africa. Everything at school was astruggleforme,andIfeltatthetimethatitwasallaboutsurvival.Inasense,Icarried this attitudeblindly intomyadult life, seeingmy investingcareer as akind of gladiatorial contest. In the wake of the financial crisis, I belatedlyrecognized that this tendency to approach life as a battle to the deathwas notnecessarilyuseful,letalonearecipeforhappiness.Ineededtolightenup.Figurativelyatleast,Iwantedtolearntotapdance.Aspartofthisreinventionofmyself,Iwasdeterminedtohavealotmorefun.

OneaspectofthiswasthatIbegantotravelmore.In2009,forexample,Itookaten-daytriptoIndiawithMohnish.Inthepast,Iwouldneverhaveembarkedonan adventure like this. I had felt obliged to work nonstop, so I would haveconvincedmyselfthatIneededtostayhomeandwatchovermystockportfolio.But I went to India with no agenda, and it turned out to be a marvelouslyenrichingexperience,helpingmetoseetheworldanew.Among other things, I got to observe the remarkable work that Mohnish’s

Dakshana Foundation is doing to help educate kids on an industrial scale. It

might sound like a platitude, but it also affectedmedeeply to see howhappymanypeoplewereinIndia,despitehavingsolittleonapurelymateriallevel.Ithelpedmetorecognizehowtwistedourvaluescanbecomeinrichercountries.And then therewas the fascination ofwatchingMohnish in a nonprofessionalsetting, of seeingup closehowhe’swired.Forme, therewere lessons simplyfromobservinghisreactiontomissedappointmentsandtopeoplewhobehavedbadly. I’ve seldom encountered anybody with his blend of calm and rationalequanimity.Onthatsametrip,wealsoattendedaTEDIndiaconferenceinMysore.Iloved

it.Intheyearsthatfollowed,IcofoundedtheTEDxZurichconference,attendedevents like the Art Basel show in Switzerland, and got more involved withsupportinginstitutionssuchasOxford,Harvard,andtheWeizmannInstituteofScience in Israel. Idon’tknowif these thingshavemademeabetter investor,but they have certainly broadened my thinking, brought me many interestingrelationships, and invigorated my life. Equally important, these activities areanotheraspectofbeingtruetomyselfandwhoIam.Meanwhile,inZurich,Iconsciouslyavoidedcertaintypesofpeople.AsI’ve

mentioned,livinginSwitzerlandandbasingmyselfoutsidethecitycentermadeitharderforthe“wrong”peopletovisitme.Theyneededagoodreasontomaketheeffort,andthisactedasausefulfilteringmechanism.MovingtoZurichalsoallowedmetocutthroughthewholeGordianknotofmyunhealthyrelationshipswithfundmarketers,equityanalysts,andotherprofessional“helpers”whohadunhelpfullyorientedmetowardastandard,New-York-hedgiemodeloflife.ButIwasn’tlookingtobecomeashut-in.Onthecontrary,Iwasincreasingly

willing to invest large amounts of time andmoney to travel anywhere to seepeoplewhowereimportanttome.IwenttoIsraelwithKenShubinStein.IflewtoCaliforniatospendafewdayswithMohnish,againwithnoagendaotherthanthepleasureofhangingoutwithapersonIlikeandadmire.MohnishandIalsosetupamastermindgroupofeightpeople, theLatticeworkClub,whichmeets

every few months to share what’s going on in our lives and to support oneanother.Thisgrouphashelpedmetoopenupemotionallyandtointrospectinamoresystematicway.Forgoodmeasure,IalsoteamedupwithmyfriendJohnMihaljevictocreate

an annual event inSwitzerland calledVALUEx—acommunityof like-mindedpeoplewho share investment ideas andwisdomwhile also forging friendshipsover meals and on the ski slopes of Klosters. In 2014, more than 70 peopleflockedtoSwitzerlandfromaroundtheworldtojoinusatVALUEx.I had always enjoyed sports. But after moving to Zurich, I embraced them

withmoreenthusiasmthanever.Iranorbikedafewdaysaweek,andItookmykidsskiingonweekends.Likewise, I rediscoveredmy love of games, not least because the financial

crisishadgivenmearenewedappreciationforhowimportantitistobeplayfuland not to take myself too seriously. I’d started to play bridge around 2007,promptedbyMohnish,whoisanardentplayer,andbytheexampleofBuffett,Munger, andBillGates, allofwhomarebridge fanatics. Initially, I joined theManhattanBridgeClubandstartedtakinglessons.OnceI’dlearnedthebasics,Iquicklyrealizedthatbridgewasnotonlyapleasurablediversionbutwouldhelptohonemyskillsinlife,nottomentioninvesting.Indeed,asapreparation for investing,bridge is truly theultimategame. If I

were putting together a curriculum on value investing, bridge wouldundoubtedlybeapartofit.AsIbegantodiscoverthesubtletiesofthegame,Iwas reminded of an intriguing comment thatCharlieMunger hadmade aboutinvestinginhislectureonthecausesofhumanmisjudgment:“Therightwaytothink is theway that Zeckhauser plays bridge. It’s just that simple.And yourbrain doesn’t naturally knowhow to think thewayZeckhauser knowshow toplay bridge.” Richard Zeckhauser is a professor of political economy and achampion bridge player who chairs the Investment Decisions and BehavioralFinance Executive Program at Harvard. An expert on economic behavior in

acutelyuncertainsituations,hehasauthoredpaperswithtitleslike“InvestingintheUnknownandUnknowable.”Forinvestors,thebeautyofbridgeliesinthefactthatitinvolveselementsof

chance,probabilisticthinking,andasymmetricinformation.Whenthecardsaredealt,theonlyonesyoucanlookatareyourown.Butasthecardsareplayed,the probabilistic and asymmetric nature of the game becomes exquisite. Forexample,duringthebidding,Imightaskmyselfaquestionlikethis:“Giventhattheplayertomyrighthasbidtwoclubs,howdoesthatupdatemyprobabilisticassessmentofwhatcardshe’sholding?”Asplaycontinues,Imightfindmyselfthinking,“Aha,mypartnerhasjustledwiththeaceofspades.Thatmustmeanthatshe’salsogotakingorisshortspades.”Ininvesting,weconstantlyoperatewithlimitedinformation.Forexample,not

so long ago, Mohnish and I researched a Chinese manufacturer of cars andbatteries,BYDAuto.WhatinitiallytriggeredourinterestwasastoryintheWallStreetJournal,whichmentioned thatMunger had liked the company and hadspokentoBuffettaboutit.Warrenthensenthistoplieutenantatthetime,DavidSokol, to China. Shortly after that, Berkshiremade an investment, and SokoljoinedBYD’sboard.As investors, we began to make probabilistic assessments about all of this

publicinformation.Forexample,weknewthatLiLu,whoisChinese-American,managedmoney forMunger.Wehadalso readMunger’spublic comment thatBYD’sCEO,WangChuan-Fu, “is a combination of ThomasEdison and JackWelch—something like Edison in solving technical problems, and somethinglikeWelchingettingdonewhatheneedstodo.Ihaveneverseenanythinglikeit.”In isolation, individual pieces of information like these don’t count for that

much.Buttheyhelpedustobuildabroaderpictureofwhatwasgoingonandtoupdateourknowledgeofthecompany,promptingustoaskwhatMunger,LiLu,Buffett,andSokolmighthaveseeninBYDthatotherinvestorshadoverlooked.

I remember talkingwithMohnish at the time and expressingmy skepticismabout the stock, given that this Chinese company lay outside my circle ofcompetence.Intheend,ittookmemorethanayeartogetcomfortableenoughto investwithrealconfidence that Iunderstood thebusiness.Mohnish,amoreadeptbridgeplayerandalessrisk-averseinvestor,wasabletobuyearlierthanmebecausehewascomfortablewiththeinferenceshecoulddrawfrompartialinformation.Asheputittome,itcountedforalottoknowthatBuffett,Munger,Sokol,andLiLuallconsideredthestockawinner.Mohnish’swillingnesstoactonincompleteinformationenabledhimtobuyBYDatamuchlowerpricethanIpaidoncetheinformationwasmorecomplete.Withmybridgehaton, I’malwayssearchingfor theunderlying truth,based

on insufficient information. The game has helped me to recognize that it’ssimplynotpossibletohaveacompleteunderstandingofanything.We’renevertrulygoingtogettothebottomofwhat’sgoingoninsideacompany,sowehavetomakeprobabilisticinferences.Thiswayof thinkingprovedparticularly helpful after the credit crisiswhen

almost everybody detested American money-center banks such as Citigroup,BankofAmerica,andJPMorganChase.Istudiedthemcarefully,askingmyselfbridge-like questions such as: “How on earth can I claim to understand thenuancesofJPMorgan’s$2trillionbalancesheet?”Theanswer:Icouldn’t.Moreimportant,neithercouldJPMorgan’sownmanagement—atleast,notwithgreataccuracy. But I could make useful probabilistic inferences about the bank’sbalance sheets and earning power. I asked myself, “Going forward, are theselikelytobebetterorworsethanotherinvestorsexpect?”Meanwhile, I read in the news that Buffett had just made a $5 billion

investment in the preferred stock of Bank ofAmerica. Based on probabilisticthinking, this suggested to me that he believed the Fed was committed toensuringthatmoney-centerbankswouldbeabletorebuildtheirbalancesheets.Buffett’sinvestmenthelpedmetounderstandthattheFedwashighlyunlikelyto

raiseinterestratesuntilthebankswereonceagainhugelyprofitableandhealthy.Forme,hisweighingoftheseoddswasrevelatory.AsMohnishhadpointedout,Buffett’s involvementwithbanking stockswentback as far as1969, andhe’dalmostneverlostmoneyonabankbet.Giventhatnobodyisabetterinvestorinbanks,Buffett’ssealofapprovalmeantalot.Forgoodmeasure,atleasthalfofBankofAmerica’srivalshadfallenbythe

wayside,leavingthecompanyinanevenstrongerposition.Smallerbankswouldstruggle to compete, given the mounting cost of technology in the bankingsector. And the legal risks facing the bank seemed lower than most peoplerealized:afterall,thelitigationovertheExxonValdezoilspillisstillgoingonafter25years.Soitseemedlikely tous that thebankingsectorcoulddragoutanylawsuitsformanyyears,providingampletimetocoverthepotentialcostofanyclaims.Iendedupinvestingheavilyinanarrayofmoney-centerbankswhosestocks

subsequently rebounded, much asWarren, Mohnish, and I had expected. Myfamiliaritywithbridgehadhelpedmetobecomemoreadeptatoperatingamidthiskindofuncertainty.Thekey,perhaps,isthatmanyinvestmentsareacutelyuncertain,butnotasriskyastheymightatfirstseem.Peopleoftenassumethatinvestors like me are great risk takers, perhaps little more than gamblers.Certainly,thereareplentyofrecklessinvestorswithscantregardfortheriskofloss,buttheytendnottosurviveverylongintheinvestinggame.Thelong-termsurvivorspossessamoresophisticatedgraspofrisk,includingtheabilitytoseewhen thesituation ismuch less risky than thestockpricemight suggest.WithJPMorgan Chase and the other money-center banks there was a lot ofuncertainty,butverylittlerisk.Bridge wasn’t the only game that captured my imagination or refined my

mental habits. I also rediscovered the joys of chess, a wonderful game ofanalysisandpatternrecognition.IfirstfellinlovewithchessatHarvard,thanksto my classmate Mark Pincus, who later founded Zynga, a social gaming

companythatmadehimabillionaire.Backinourstudentdays,Marknoticedanunusedchesssetinmydormandaskedmetoplay.Hethrashedme.Iboughtastackofchessbooksandwecontinuedtoplay.Igraduallygotbetterandstartedtowinsomegames.Aftergraduating,IbecameamemberoftheManhattanChessClubandplayed

pickupgamesintheparktoescapefromthehorrorsofmyjobatD.H.Blair.Butmyerrantmindisn’tquietenough,soI’veneverbecomemorethanahalf-decentplayer.Back then, I had no sense ofwhy chesswas useful, not just enjoyable.But

over the years, I’ve come to see that there are real tactical benefits tounderstanding how such games work. For example, in chess, there’s a setrepertoire of opening tricks and mistakes that lead unsuspecting players to aquickdemise,usuallywithinthefirstfewmoves.Initially,whenIfellintothesetraps,Ifeltangrywithmyopponent.Itseemedlikeanunderhandedwaytowin.Then I’d become angry with myself for missing what’s known as a “gotchagame.”AsIstudiedchessmore,Ibecamelesspronetothesebasicmistakes.Thereareusefulparallelsinthegameofinvesting.Forexample,accountingis

full of gotcha gambits. Corporations often manipulate accounting rules topresenttheirnumbersindeceptiveways—andtheunsuspectinginvestoriseasilydupedintothinkingthatthesituationislessdangerousthanitreallyis.In the late ’90s, I analyzed a company that sold legal insurance. Like life

insurance,thisproductwassoldbybrokerswhoreceivedheftycommissionsinreturn.Thekey toanalyzinghowprofitable thefirmreallywas lay in figuringoutthecorrectrateatwhichtoamortizethecostofacquiringitscustomers.This,in turn,wasdeterminedbyhowlongthosecustomersremainedasclientsaftersigningup. Inmyopinion, the company’s accountspresented anoverly sunnyviewofthis,thusgivingamisleadingpictureofthefuture.Thisstruckmeastheaccountingequivalentofagotchagameofchess.SoIsteeredclearofthestock,which subsequently tumbled, triggering lawsuits and much hand-wringing

amongeveryoneexcept the short-sellers,whohadbet against thecompanyonthebasisofthisdubiousaccounting.Therewas another way inwhich I found chess instructive. Early on, I had

oftenfoundmyselfplayinggamesagainstso-calledduffers—aderisivetermforplayers who make snap decisions based on emotions rather than on carefulanalysis. They either couldn’t or wouldn’t analyze the board in a consideredmanner.Initially,Ioftenlosttotheduffers.TheirmovesweresounpredictablethatitwouldunnervemeandI’dlosemycool.ButasIgotbetteratthegame,Ibecamemore disciplined, developing themental fortitude to remain calm andcarefulevenwhilemyopponentplayedwithwildabandon.Inthefinancialmarkets,plentyofinvestors—bothamateurandprofessional—

takefoolhardyswingsforthefences,bettingoneverythingfromhottechstocksto overhyped IPOs. Sometimes these risky long shots pay off spectacularly,temptingotherinvestorstofollowtheirleadinmakingtheseduffermoves.But,asinchess,I’vefoundthatitultimatelyworksbettertomaintainmydisciplineand pursue a careful strategy with better odds of long-term success. In 2009,whenmanyinvestorsbailedoutofstocks,theywereonceagainmakingaclassicduffermove.Myopponentinthatparticulargamewasn’tanidioticchessplayerbut themadnessofMr.Market. Iknewthat Isimplyhad tokeepmycoolandusethismadnesstomyadvantagebybuyingstocksthatthedufferswereselling.I was also struck by the memorable mantra of a chess champion, Edward

Lasker, who remarked, “When you see a good move, look for a better one.”Applying this insight to stocks, I modified his mantra, often telling myself,“When you see a good investment, look for a better investment.” Indeed, asMungerhaspointedout,there’sacommontendencytolikeaparticularidea—whether it’s a chessmove or an investment—because itwas the first one thatpopped into our heads. But is it really superior? Chess highlights the need tokeepsearchingforabettermoveevenafterthebrainhaslatchedontothatfirstidea.Playingchessalsostrengthensthisparticularmentalmuscle.

At the same time, I drew another fundamental lesson from my amateuradventuresintheworldofbridgeandchess.Yes,it’struethatthesegamestaughtmehelpfultacticallessonsandmentalhabitswhilereinforcingmyunderstandingofhowcritical it is tocontrolmyemotions.But thesegamesalso taughtmeasimplertruth:aftersomanyyearsoftakinglifetooseriously,Ineededtoadoptamoreplayfulattitude.Soinsteadofseeingeverything—includingmywork—asaformofmortalcombat,Ibegantoapproachitinadifferentspirit,asifitwereagame.IhavenodoubtthatMarkPincushadactedlikethisallalong.Asaloverofall

sorts of games, he innately saw life as a game, and his playful attitude is anintegralreasonforhissuccess.AfterHarvard,manyofourclassmatesrushedtotake dull positions at gold-standard investment banks and consulting firms.Therewasacommonbutshortsightedfeelingthatthefirstjoboutofschoolwasa life-or-death decision. In reality, these first jobs are often all but irrelevant,giventhedirectionthatourcareerslatertake.Whilemanyofourclassmateshadsewnuptheirplumjobsasmuchasayear

beforegraduating,Markhadnoclearsenseofwhathe’ddoonleavingHarvard.Helookedinsteadforcompaniesthatsimplycaughthisinterest,wherehecouldkeepplayingthegameoflife.Asaresult,hewenttoworkforJohnMaloneatTCIinasuburbofDenver,learninglessonsaboutthecommunicationsindustrythatlaterprovedinvaluable.Themomentamorecompellingopportunityarose,helefttofoundhisfirstcompany.WhenIvisitedhiminSanFranciscointhoseearlydays,he toldme, “It’snot abouthowmuchmoneyyoumake. It’s aboutchangingtheworld.”Steve Jobs took a similarly adventurous and playful approach to life.As he

whimsically put it in his commencement speech at Stanford, “Stay foolish.”Likewise,Buffett treats the investment business as a game anddoes little thatcompromiseshisday-to-dayhappiness.Aftersurvivingthefinancialcrisis,Ibecamemoreconsciousofthebenefitsof

this lighter,moreplayfulapproach.FollowingWarren’s lead, IstoppedforcingmyselftodothingsthatIdidn’twanttodo.Tothisday,Iworkhard,butIworkmyownhours;ifIwanttotakeanapduringtheday,Itakeanap.In2009,myfundhadafantasticyear,thanksinlargeparttothestocksI’dboughtduringthecrash.Onebusinessassociate toldme that I shouldgooutandmarketmyself,pounding the table to getmore people to investwithme. I told him, “I don’twantto.Iwanttohaveahappylife.Idon’tneedtohavethebiggestfund.”This attitudehasundoubtedlymade for a calmerandmore joyful life.But I

suspect it’salsomademeabetter investor.Togiveyouananalogy,whenyoudropastoneinacalmpond,youseetheripples.Likewise,ininvesting,ifIwanttoseethebigideas,Ineedapeacefulandcontentedmind.ThisremindsmeofalinethatMohnishoftenquotesfromBlaisePascal:“Allofhumanity’sproblemsstemfromman’sinabilitytositquietlyinaroomalone.”Amongthemanygiftsof my life in Zurich, none has been more important than my sense of quietcontentment.When I’m in this state, the right investment ideashaveawayofburstingthroughtome.Surprisinglyoften,theseideasseizemewhileI’monabike ride or enjoying my life in some other way that’s unconnected to themarkets.That said, someofmyprofessional investor friends arebemusedwhen they

seemeheadingoffontripstoIndiaandthelike.Oneofthemchidedme,“Guy,these thingswon’t contribute to your returns.” I had to explain that I was nolongertryingtobethegreatestinvestoratallcosts.MygoalisnolongertobeWarrenBuffett, even if I could be.My realmission is to be amore authenticversionofmyself.Ata recentannualmeeting formy fund, someone in theaudienceaskedme

howIhandletheprocessofsellingstocks.Ireplied,“Badly.”Tosomeextent,Iwasbeingfacetious.ButIwasalsobeinglight-heartedlyhonestbecauseIdon’tbelieve that anyone handles the selling process particularly well. We can allclaimtohaveclearrules—forexample,declaringthatastockmustbesoldwhen

it reaches 80 percent of its intrinsic value. But the truth is that this is anincredibly inexact science. There are stocks in my portfolio that, on a purelyrationalbasis, I shouldprobablysell.But Ioftenholdonto themanyway.OnereasonisthatI’mtryingtomanagemyself,notjustmyportfolio.AndIbelievethatmy investment returnswill be better over several decades if Imaster thetrigger-happysideofmynature.More to the point, in confessing publicly that I’m not particularly good at

selling,Iwasnolongertryingtodazzleanybodywithmybrillianceorconvincepeopletoinvestinmyfund.Iwasmorefocusedongivinganhonestaccountofmyselfthanonselling.Ifpeoplewanttoinvestalongsidemeandmyfamily,I’mdelighted.Ifnot,InolongerfeelthestabofrejectionthatIfeltinthepast.Afterall,thisisnotlifeanddeath.It’snotmortalcombat.ButifI’mhonestaboutit,there’sstilladeep-seatedpartofmethatcannever

quiteletgooftheideathatmoneyisamatterofsurvival.Thisissimplypartofmywiring.Intellectually,Iseetheabundantbenefitsofviewingthestockmarketas a game—and I’ve no doubt improved as an investor by taking this moreplayfulapproach.ButIalsoknowthatmyshareholders’lifesavingsareontheline.Soinvestingmaybeagame,butforme,it’sadeadlyseriousgame.

10

INVESTINGTOOLSBuildingaBetterProcess

If ants can use a handful of simple rules to develop an infinitely complexsurvivalstrategy,whatabout investors?Canwecreateasimilarlyrobustsetofrulesthatwillmakeourinvestmentdecisionssmarterandlessvulnerabletothedistortionsofourirrationalbrains?Here’sonewaytothinkaboutthis:thehumanbrainissaidtorunonabout12

watts—inotherwords,onlyafifthofthepowerthat’sneededbya60-wattlightbulb. That’s not much at all, given the power consumption of some of thecomputersthatexisttoday.Yetweexpectthisrelativelypunyhardwaretomakeimmensely complex calculations about the investingworld, andwe even havetheaudacitytohopethatwemightgetthesecalculationsright.Aswe’ve discussed, oneway to tilt the playing field to our advantage is to

constructanenvironment inwhichwecanoperatemorerationally—orat leastlessirrationally.Butthere’salsoanothertoolatourdisposal:ifwe’relookingtomakebetter investmentdecisions, ithelps immeasurably todevelopaseriesofrulesandroutinesthatwecanapplyconsistently.In theaftermathof thefinancialcrisis, Iworkedhard toestablishformyself

this more structured approach to investing, thereby bringing more order andpredictabilitytomybehaviorwhilealsoreducingthecomplexityofmydecision-makingprocess.Simplifyingeverythingmakessense,given thebrain’s limitedprocessing power. The rules that I developed encompass a wide-rangingassortmentofcritical investmentprocesses, includingwhatI read(andinwhat

order) when I’m researching stocks; whom I speakwith (and refuse to speakwith)aboutpotentialinvestments;howIdealwithcorporatemanagement;howItradestocks;andhowIcommunicate(anddon’t)withmyshareholders.Someoftheserulesarebroadlyapplicable;othersaremoreidiosyncraticand

may work better for me than for you. What’s more, this remains a work inprogress—a game plan that I keep revising as I learn from experience whatworks best. Still, I’m convinced that it will help you enormously if you startthinkingaboutyourowninvestmentprocessesinthisstructured,systematicway.Pilots internalize an explicit set of rules andprocedures that guide their everyactionandensure thesafetyof themselvesand theirpassengers. Investorswhoareseriousaboutachievinggoodreturnswithoutundueriskshouldfollowtheirexample.Why?Becauseininvesting,asinflying,humanerrorcanbeabitch.Likesomanythingsinmyinvestinglife,myunderstandingofthisissuegrew

outofconversationswithMohnish.Duringour trip toIndia in2009,Iquizzedhimaboutallmannerofthings,includinghisapproachtotradingstocks.Itwasclearthathe’dthoughtthroughthesequestionsinarelentlesslylogicalwayandconstructedrulesthatgovernedeverythinghedid.Forexample,aswe’lldiscuss,hehaddecidedthathe’dneverputinanordertobuyorsellastockduringthehourswhenthemarketisopen.When I returned from that trip, I said tomyself, “Guy,you’redoing this all

wrong.” Mohnish is wired differently from me in many ways, including areadiness to assume more apparent risk—or uncertainty—than I’m willing orable to deal with emotionally. But I was determined to follow his lead inbringing this analytical rigor tomy own process. Here, then, are eight of therules, routines, and habits that I’ve subsequently put in place. This isn’t anexhaustive list by any means. But I hope it gives you a flavor of what I’velearnedsofar.

1.StopCheckingtheStockPrice

When I settled in Zurich, I made a conscious decision to keep renting aBloombergterminalbutnottoswitchitonwhenIgottoworkeachmorning.AsI’vementioned,InowkeeptheBloombergswitchedoffforweeksonend.Butthisisjustoneaspectofmyefforttodetachmyselffromthedailynoiseofthemarketplace.Many investors check their stock prices not only on a daily basis but also

sometimes minute-by-minute. There’s a peculiar glitch in our brains thatsomehowmakesusthinkthatthestockknowswe’rewatchingit.Wemayevenhaveanaggingfearthatifwestoppayingconstantattention,somethingbadwillhappen.Maybeabignewsstorywillsideswipeuswhilewe’renotwatchingandthestockwillsuddenlyblowup.Seeingthestockpriceonthemonitorgivestheinvestorafalsemeasureofreassurancethateverythingisokay,thattheearthisstillrevolvinginitsusualorbit.Theproblemis,theconstantmovementofthestockpriceisacalltoaction.If

I seeabrightly lit tickersymbol flashingonmyBloombergscreen, it tellsmyirrationalbrain that Ineed todo something. Ifyou’re speculatingon the latesthot biotech or Internet stock, it may make some sense to follow every madgyration:abrokeragefirmissuesawildlybullishreportandyourstocksuddenlysurgesby20percent asother speculatorspile in.But I’m trying to invest inamoremeasuredway, buying stakes in companies that I’m looking to hold foryears,ifnotindefinitely.AsBuffetthassaid,whenweinvestinabusiness,weshouldbewillingtoownitevenifthestockmarketweretoclosethenextdayandnotreopenforfiveyears.Ican’tswitchoffmymonitorforfiveyearsbecauseIneedtoapprovethenet

assetvalueofmyfundonceamonthsothatIcansendamonthlyupdatetomyshareholders on the value of their stake in our partnership. But if I were

managingsolelymyownaccount, I’dsetupasysteminwhichI’d lookat thepriceofmyholdingsonlyonceaquarter,orpossiblyevenonceayear.Asthingsstand, I check the price of my holdings no more than once a week. It’s awonderfulreleasetoseethatyourportfoliodoesjustfinewhenyoudon’tcheckit.Forgoodmeasure,Idon’thavemycomputerorBloombergmonitorsetuptoshowmethepriceofallmyholdingsononescreen;ifIneedtocheckthepriceofastock,IdoitindividuallysothatIwon’tseethepriceofallmyotherstocksat the same time. I don’t want to see these other prices unnecessarily and tosubjectmyselftothisbarrageofcallstoaction.It’sworththinkingalittlemoreabouttheeffectofallthisgratuitousnoiseon

my poor brain. Checking the stock price too frequently uses up my limitedwillpower since it requires me to expend unnecessary mental energy simplyresistingthesecallstoaction.Giventhatmymentalenergyisascarceresource,Iwanttodirectitinmoreconstructiveways.We also know from behavioral finance research by Daniel Kahneman and

AmosTverskythatinvestorsfeelthepainoflosstwiceasacutelyasthepleasureofgain.SoIneedtoprotectmybrainfromtheemotionalstormthatoccurswhenIseethatmystocks—orthemarket—aredown.Ifthere’saveragevolatility,themarket is typically up in most years over a 20-year period. But if I check itfrequently, there’s a much higher probability that it will be down at thatparticular moment. (Nassim Taleb explains this in detail in his superb bookFooledbyRandomness.)Why,then,putmyselfinapositionwhereImayhaveanegativeemotional reaction to this short-termdrop,whichsendsall thewrongsignalstomybrain?Inanycase,withthetypeofbusinessesIinvestin,it’snotimperativetoknow

what’sgoingonfromdaytoday.Virtuallyallmyinvestmentsareincompanieswhere the long-termoutcome is all but inexorable: the company is heading inthat positive direction, and it’s really just a question of how long it takes.Buffett’s holdings clearly possess this same precious characteristic. Indeed, he

uses theword “inevitable” to describe the positive outcome that he ultimatelyexpects.ConsiderhisstakeinBurlingtonNorthernSantaFe.There’snoquestionthat its transportationnetworkwill becomemorevaluable as theUSeconomygrows,thecountrybecomesmorebuiltup,andtherailwayindustryconsolidates.Plus,nobodywillbuildarivalrailwaytracknextdoor,soBurlingtonwon’tbedisplaced.Ifyouinvestinbusinesseslikethisthataretrulyinexorable,itshouldn’treally

matterifyouswitchoffthemonitor,curluponthesofa,andreadabook.Afterall,Buffettdidn’tmakebillionsoffcompanieslikeAmericanExpressandCoca-Colabyfocusingonthemeaninglessdailymovementsofthestockticker.TheRule:Checkstockpricesasinfrequentlyaspossible.

2.IfSomeoneTriestoSellYouSomething,Don’tBuyIt

IntheearlyyearsofmyNewYorkvortexperiod,myfund’sreturnsweredecent,and Iwashurt thatnobody seemed tobepayingattention tome.Then Imusthavelandedonvariousdatabasesbecausethephonestartedringingoffthehook.Everybodywantedtosellmesomething.Brokersrangtopitchmestocks.Salesreps called to sell me high-priced research systems, investment newslettersubscriptions,newphoneservices,andcountlessotherproducts.At first, thesecallsseemedameasureofmysuccess,asifallthisattentionputmeonthemap.But Isoonbegan tosee that Imade lousydecisionswhenIbought things thatsalespeoplewerehawkingtome.The problem is that my brain (and most likely your brain too) is awful at

making rational decisions when confronted with a well-argued, detailed pitchfrom a gifted salesperson. So I adopted a simple rule that has provedextraordinarilybeneficial.Whenpeoplecalltopitchmeanythingatall,Ireplyin as pleasant amanner as possible, “I’m sorry.But I have a rule that I don’tallowmyselftobuyanythingthat’sbeingsoldtome.”

Aghast, salespeople counterwith questions like: “But howare yougoing topick the right phone service?” Sell-side equity analysts opine: “But don’t youthinkthisisagreatstock?”Sometimesthey’renodoubtright.Logically,perhaps,Ishould switchphone

servicesorloadupontheirbrilliantinvestmentidea.ButIjustwon’tdoit.Imaymissout in theshort term.Butovera lifetimeIhavenodoubt thatI’llbenefitmuchmorebydetachingmyselffrompeoplewithaself-interestingettingmetobuystuff.Thisisasimpleapplicationof“adverseselection.”AsCharlieMungerhasjoked,“AllIwanttoknowiswhereI’mgoingtodiesoI’llnevergothere.”Forme, ifan investment isbeingsold, that’saplacewhereIcertainlywant toavoidgoing.IevenapplythisruleifI’matacocktailpartyandsomeonestartstellingme

aboutagreatstock theyownoraprivatecompany inwhich they’d likeme toinvest.Imaylisten.Imaybeimpressed.Imayevenbetempted.ButIwon’tbuyitiftheywouldgainsomethingfrommydoingso.Insomecases,thismightnotbeasalescommissionoranyotherfinancialbenefit:itmightsimplybethattheyderivepsychologicalvalidationfromsuccessfullysellingtheiridea.Eitherway,thisisano-gozoneformebecausetheprovenanceoftheideaiswrongsinceitstemsfromtheseller’spersonalagenda.Asusual,BuffettknewthislongbeforeIdid.Forexample,hehasarulenever

toparticipateinanopenoutcryauction.Followinghislead,I’veneverinvestedinanIPOandprobablyneverwill.Whenacompanyisgoingpublic,ithasallofthemind-warping sales power ofWall Street behind it.Of course, some IPOscatch thewindperfectlyandsoar.But theprovenance is toxic,so it’ssafer forme to cross all IPOs off my buy list, even if this means missing out on anoccasionalwinner.TheRule:Ifthesellerhasaself-interestinmebuying,Iain’tbuying.

3.Don’tTalktoManagement

Formuch the same reason, I don’twant to speakwith themanagementof thecompanies I’m researching.Many smart investorswould disagreewithme onthis.For them, it’spossible that regularcontactwith seniorexecutivesmaybefruitful.Also, thispromiseofhigh-levelaccesscanbeausefulmarketingtool,appealing to existing shareholders and prospective investors who may notunderstandthattalkingtomanagementhasapotentialdownside.Heretical as thismight sound,myownexperience is that close contactwith

management is more likely to be detrimental to my investment returns. Thetrouble is, senior managers—particularly CEOs—tend to be highly skilledsalespeople. Nomatter how their business is performing, they have a gift formakingthelistenerfeeloptimisticaboutthecompany’sprospects.Thisabilitytowinovertheiraudience,includingboardmembersandshareholders,maybethemost important talent thatgot themto the topof thecorporatefoodchain.Butthis gift of the gab doesn’t necessarily make them a dependable source ofinformation.Thisisn’ttosaythatCEOs,CFOs,andothertopexecutivesaremaliciousor

immoral. Far be it fromme to suggest anything so disrespectful! It’s just thattheirjob,theiragenda,andtheirskillsleadthemtopresentinformationinawaythat accentuates the positive while discounting any business problems bydescribing them as either temporary or solvable. They may be skewinginformation subconsciously, without any bad intent. But it doesn’t matter.Knowingmy own rational limitations, I’d prefer not to exposemyself to thispotentially distorting influence. And it strikes me as especially dangerous forinvestorstoallowmanagementtohelpformtheirfirstimpressionsofacompany.Iknowsomemoneymanagerswhowilldotheirresearch,thensay,“Ineedto

meetmanagementsoIcangetcomfortable.”Butwhoknowshowmanagementwill mess with their minds? If I have to meet the CEO to understand why Ishould buy the stock, that’s a seriouswarning sign. It should be clear enoughfrom all of my other research. And if I want to assess the quality of the

management,I’dratherdoitinadetachedandimpersonalwaybystudyingtheannual reports and other public data, along with news stories. It’s better toobservethemindirectlylikethisinsteadofventuringintotheirdistortionfieldbymeetingthemone-on-one.In retrospect, I realize that it was observingMohnish that convincedme to

stop speakingwithmanagement.Whenwe first discussed this around2008, itwasa foreignconcept tomesince it flew in the faceofconventionalwisdom,even among value investors. Now I wonder why it took me so long tounderstandthatthissimplepracticecutsoutawholelotofnoise.The Rule: Beware of CEOs and other top management, no matter how

charismatic,persuasive,andamiabletheyseem.Exceptionstotherule:Berkshire’schairmanandCEO,WarrenE.Buffett,and

a small but growing minority of CEOs (at companies like Fairfax Financial,LeucadiaNationalCorporation, andMarkel Insurance)who take seriously theideaofsharingwhattheywouldliketoknowiftheywereintheirshareholders’shoes.

4.GatherInvestmentResearchintheRightOrder

WeknowfromMunger’sspeechonthecausesofhumanmisjudgment that thefirstideatoenterthebraintendstobetheonethatsticks.Asheexplained,“thehuman mind is a lot like the human egg, and the human egg has a shut-offdevice.Whenonespermgetsin,itshutsdownsothenextonecan’tgetin.Thehumanmind has a big tendency of the same sort.” If that’s true, I need to beextremely careful about the order in which I gather research and exploreinvestment ideas. I want to evaluate them from a position of strength, notweakness. If the idea comes from a salesperson, it immediately puts me in a

weak position. So, as we’ve discussed, I simply eliminate ideas fromsalespeople: I don’t want to allow a sell-side analyst’s pitch (however well-reasoned)tobethefirstideathatsettlesinsidiouslyinsidemybrain.ButwhatifafriendorpeerIrespectsuggeststhatIlookataparticularstock

thattheythinkIshouldbuy?Evenhearingaboutanideaverballylikethisisn’tidealbecause it’sdifficult for any investor tobedetachedand rationalwhenasmartpersontellsthemwhysomethingisgreat.SoItrytostopthemshortandsay something like, “Wow, it sounds really interesting. Let me read up on itbeforewetalksowecanhaveaninformedconversationaboutit.”IfIhaveabusinessrelationshipwiththeperson,Icantellthem,“I’dloveto

hearaboutyourinvestmentidea.Pleasecouldyousendittomeinwriting?”Iftheyobject and say, “Oh, but I really need to talk to you about it first,” I tellthemthatIjustcan’tdoit.Socially,itmightseemawkwardtoinsistongettinganideainwritingfirst.But it’s important totakeasmuchheatandemotionaspossible out of the research process. In my experience, I’m much better atfilteringwhatIreadthanwhatIhear.OnceIdecidethataninvestmentideaispromisingenoughformetoexploreit

further, I stillneed tobecareful todo the research in the right sequence.Thismightnotseemimportant tomany investors,but theorder inwhichI read thematerialsmattersgreatlysincewhateverItakeinfirstwillaffectmeunduly.Myroutineistostartwiththeleastbiasedandmostobjectivesources.These

are typically the company’s public filings, including the annual report, 10K,10Q, and proxy statement. These aren’t perfect, but they are prepared with agood deal of care and attention, especially in the United States, and they arereviewed by lawyers. The company doesn’t want to get sued, so there’s anincentive to produce financial statements that investors can rely upon. Theaccountant’s audit letter is also key. Occasionally, accountants may be underintensepressuretosignoffontheaccounts,overlookinganyirregularities.Buttheauditor’slettercansubtlysignalthattheaccountsarenotallthattheyappear

tobe.Readingfinancialstatementsismoreofanartthanascience.Evenifit’snot explicit, you sometimes sense that management is trying to provide lessinformation than investorsmight find useful.As in poker, unconscious “tells”canappeareveninafootnote,makingyouwonderifsomethingisamiss.Intheannualreport,themanagement’sintroductoryletterisalsoimportant.Is

it a public relations puff piece, or is there a genuine desire to communicatewhat’s going on? I want to avoid promotional companies that are bent onshowingthingsin thebestpossible light.Bycontrast,whenBerkshirereleasedtheofferingdocumentfor itsB-classshares, itcandidlystatedthatWarrenandCharliewouldn’tbuythematthatprice.Afterworkingmyway through the corporate filings, I typically turn to less

objective corporate documents—things like earnings announcements, pressreleases, and transcripts of conference calls. There might also be helpfulinformation toglean fromabookabout thecompanyor its founder.Thesearefairlyusefulifthey’renotjustvanitypiecessincemanyhoursofworkhavegoneinto them; in some cases, they have such depth that I’d read them before thecorporatefilings.InvestorslookingatBerkshireforthefirsttimewoulddowellto read the books that Roger Lowenstein and Alice Schroeder wrote aboutBuffett. Likewise, in studyingWal-Mart, a good place to start would be SamWalton’sbookMadeinAmerica.These ideas about the sequencing of informationmay seem trite.Butminor

shiftsinhowweoperatecanhaveamajorimpact.ByconsistentlyimprovingthewayIconsumeinformation,I’mlookingtocreatebetterconditionsforsuccessovermanyyears.Still,we’reallwireddifferently,somyideaofahealthyandbalancedinformationaldietmaybedifferentfromyours.TheWallStreetJournaloncenotedthatBuffetthadasmallTVinhisoffice, tuned toCNBC,butwiththe volume muted. I’d find it terribly distracting to have a TV at work as itwouldstimulatemybraininunhelpfulways.Ialsotry(andsometimesfail)tominimizemyexposuretotheInternet,which

canleadmeinathousanddifferentdirections.Itrequiresalotofmentalenergyto read a web page, with all its links to other information. I don’t want mymind’schaintobeyanked.SoIprefertoreadthephysicaleditionsofthingsliketheWallStreetJournal,theFinancialTimes,theEconomist,Barron’s,Fortune,Bloomberg Businessweek, and Forbes, along with more abstruse publicationslikeAmericanBankerandtheInternationalRailwayJournal.Still,IavoidreadinganypresscoverageuntilafterI’vestudiedthecorporate

filings. There are plenty of good journalists who provide useful context andinsight.Butformypurposes,it’simportantnottoprioritizenewsstories,sincetheygivemybrain reasons toact,oftenwithoutproviding real substance.Thecorporatefilingsaremymeatandvegetables—lessenjoyable,butusuallymorenutritious.Asfortheequityresearchpublishedbybrokeragefirms,Ireadlittleofit,and

Ineverrelyonit.OnceI’mfinishedwithallofmyotherresearch,IsometimespullupthesereportssothatIknowwhatWallStreetissayingaboutacompanyor industry.But I’mcareful tomake this research the last thing I read, so thatI’vealreadyformedmyownimpression.Idon’tdenythattherearesmartpeopleworking on the sell side. In some cases, they provide remarkable insight,particularly about industry dynamics. So it would be unwise and unfair todismiss an entire community.But theirwork is paid for by brokerage dollars.When I read it, I’m exposingmyself toWall Street, which is one big sellingmachine.Also,mygoalincreatingallofthesehabitsistogetoutofsyncwiththemarkets;movinginlockstepwiththemisarecipeforaverageresults.TheRule:Payattentiontotheorderinwhichyouconsumeinformation.And

don’teatyourdessertuntilyou’vefinishedyourmeatandvegetables.

5.DiscussYourInvestmentIdeasOnlywithPeopleWhoHaveNoAxetoGrind

BynowIprobably sound like someweirdmixof socialoutcast andappalling

snob—refusingtospeakwithCEOs,sell-sideanalysts,oranyoneelsefromtheworldofsales.Manyof themarenodoubtcharming,upstandingcitizenswithmortgages to pay and angelic children to support. But, in my eyes, theirunderlying sales agenda is a fatal flaw. So is there anyone that I am actuallyhappy to speak with about potential investments? Good question. Thanks forasking.IfIwantsomebodyelse’sperspective(andIoftendo),Ifinditmoreusefulto

seekouttheopinionofatrustedpeeronthebuyside.Overtheyears,I’vehadinvaluablediscussionswithinvestorslikeNickSleep,ChrisHohn,BillAckman,StevenWallman, Allen Benello, Ken Shubin Stein, Dante Albertini, JonathanBrandt, andGregAlexander.All of themhave taughtme agreat dealwithouttrying to teachme anything. Inmy experience, the best people to speakwithaboutinvestmentsaren’tjustintelligentbuthaveanabilitytokeeptheiregooutoftheconversation.Asaresult,thesediscussionstendtobeplayfulandfun,andthey don’t disturb my calm pond. Increasingly, the person I speak with mostaboutpotentialinvestmentsisMohnish,partlybecausehisanalyticalgiftsareoffthecharts,butalsobecausehedoesn’thaveanyaxetogrind.I’ve found that investment discussionswork bestwhen they adhere to three

ground rules that I borrowed from groups like the Young Presidents’Organization. First, the conversation must be strictly confidential. Second,neither person can tell the otherwhat to do as this tends tomake people feeljudged, so they become defensive. In fact, it helps if you don’t even knowwhether the other person is thinking of buying or selling the stock since thatknowledgemuddies thewaters.Third,wecan’thaveanybusiness relationshipbecause this could skew the conversation by adding a subtle or not-so-subtlefinancialagenda.Ofcourse,whatmattersmostintheseconversationsismutualtrust. So no action should be taken unless the other person gives clearpermission.IfI’minterestedinbuyingthestockordiscussingitwithsomeoneelse,Ineedtoaskspecificallyifthat’sokay.Ifit’snot,Ican’tdoit.

Thegoaloftheseconversationsisn’ttoreachthe“rightanswer”orengageinintelligentdebate.It’stoshareourexperiencesandinformation.Toachievethis,it helps to ask open-ended questions. For example, instead of asking what acompanywillearnnextyear,it’smoreusefultoasksomethinglike,“Whatneedstohappenforthemtogeneratealotofcashnextyear?”I remembera specific conversation that IhadwithShaiDardashti, amoney

managerfriendwhohasgivenmepermissiontosharewhatwediscussed.Atthetime,hewasresearchingK-Swiss,amanufacturerofathleticshoes.Ihaddonealot of research into Nike and had looked at the impact of its sponsorship ontennisandsoccer.InsteadoftellingShaithatIthoughtK-Swisswasanalso-ranin the sneakerbusiness, I suggested thatheproducea listof the top20 tennisplayers,seewhosponsoredthem,thenestimatewhichofthoseplayersattractedthemostviewersinwhatistypicallyawinner-take-allmarket.Intheprocess,hediscoveredthatK-Swisshadonlyoneplayeronthe list,whileNikehadsixorseven—anindicationthatK-SwissfacedanallbutinsuperablechallengetowinmarketshareawayfromNike.AtnopointdidwediscusswhetherShaialreadyowned the stock or was thinking of buying it. But I’m guessing that ourdiscussionhelpedtoclarifythatitwasn’tthebestplaceforhimtoinvest.The Rule:Pool your knowledge with other investors, but stick with people

who can keep their ego in check. If the other person happens to be Buffett,Munger,orPabrai,somuchthebetter.

6.NeverBuyorSellStocksWhentheMarketIsOpen

WallStreetisperfectlydesignedtotakeadvantageofweaknessesinthehumanbrain. For example, unscrupulous brokerages create well-honed scripts thatenable their brokers to call theirmarks—Imean clients—to convince them tobuy particular stocks. The underlying goal is to generate lucrative tradingactivityforthefirmitself.Asalong-termvalueinvestor,myinterestsareinstark

oppositiontotheinterestsofWallStreet.WhatIneedtodoissimplyinvestinahandful of great but undervalued businesses and then stay put.Wall Street isrewardedforactivity.MyshareholdersandIarerewardedforinactivity.Tohelpmyselffunctionthisway,Ineedaseriesofcircuitbreakersthatslow

medownandpreventmefromactingprecipitously.Someoftheseroutinesandprocedures are so obvious that it might seem as if they are not even worthmentioning.ButI’vefoundthemimmenselybeneficial,anditdoesn’ttakealotofenergyorthoughttoimplementthem.Whenitcomestobuyingandsellingstocks,Ineedtodetachmyselffromthe

priceactionofthemarket,whichcanstirupmyemotions,stimulatemydesiretoact,andcloudmyjudgment.SoIhavearule,inspiredbyMohnish,thatIdon’ttradestockswhilethemarketisopen.Instead,Iprefertowaituntiltradinghourshaveended. I thenemailoneofmytwobrokers—preferringnot tospeakwiththemdirectly—andasktotradethestockattheaveragepricefortheupcomingday. I’m not trying to get an edge on themarket because I don’twant to getsweptupinitsconstantmoodswings.AsBenGrahamexplained,wehavetotrytomakethemarketourservant,notourmaster.OccasionallyIbreakthisrulebecausethere’saparticularlycompellingreason

totradeastockduringmarkethours.Aswithalloftheserules,thepointisnottoletthembecomeastraitjacketbuttohavethemguidemybehaviorinagenerallyhealthier direction. In the case of this trading rule, what matters is that I’mgivingmyselfpermissiontodisengagefromthemarket.Bycontrast, inmyearlyyearsas a fundmanager, Ihadan in-house trading

desk.Thiswasaterribleideabecauseitbroughtthemarketintotheheartofmyoffice inaway thatwasevenworse thanhavingaBloomberg terminal. I alsousedtotalkdirectlytotraders,whowouldaskmequestionslike,“Doyouwantmetotakealookonthefloorandgetsomecoloronthemarket?”Ididn’tknowany better so I letmyself be exposed to this head-spinning barrage ofmarketaction.All this informationmademefeelpowerfulandgavemean illusionof

control.Myviewnowisthatwe’resimplynotwiredtodealwiththisconstantfloodof

priceinformation.Butittookyearsformetolearnthisandalsotodevelopthediscipline to say, “I’m justgoing to ignoreall thisnoise.”At first, this canbequitescary.Butinmyexperience,it’smarvelouslyliberating.TheRule:Keepthemarketatasafedistance.Don’tletitinvadeyourofficeor

yourbrain.

7.IfaStockTumblesafterYouBuyIt,Don’tSellItforTwoYears

Whenastockhassurged,sellingitcanbeajoy.Butitcanalsobebittersweet,likepartingwithanoldfriend.Whenastockhastumbled,sellingitisevenmoreemotionally fraught. After all, it’s hard to make rational decisions about aninvestmentthathasalreadylostyoualotofmoneysincenegativeemotionssuchas remorse, self-loathing, and fear can short-circuit the ability to think clearly.Mohnishdevelopedaruletodealwiththepsychologicalforcesarousedinthesesituations:ifhebuysastockanditgoesdown,hewon’tallowhimselftosellitfortwoyears.HeexplainedthistomearoundthetimeofourlunchwithWarrenBuffett,and

itmadesomuchsensethatIinstantlyadoptedthisrule.Onceagain,itactsasacircuitbreaker,awaytoslowmedownandimprovemyoddsofmakingrationaldecisions.Evenmoreimportant,itforcesmetobemorecarefulbeforebuyingastocksinceIknowthatI’llhavetolivewithmymistakesforatleasttwoyears.That knowledge helps me to avoid a lot of bad investments. In fact, beforebuyingastock,Iconsciouslyassumethatthepricewillimmediatelyfallby50percent, and I askmyself if I’ll be able to live through it. I thenbuyonly theamountthatIcouldhandleemotionallyifthisweretohappen.Mohnish’sruleisavariationonanimportantideathatWarrenhasoftenshared

withstudents.AsWarrenonceput it,“Icould improveyourultimate financialwelfare by giving you a ticket with only 20 slots in it, so that you had 20punches—representinginvestmentsthatyougottomakeinalifetime.Andonceyou’dpunchedthroughthecard,youcouldn’tmakeanymoreinvestmentsatall.Underthoserules,you’dreallythinkcarefullyaboutwhatyoudid,andyou’dbeforcedtoloaduponwhatyou’dreallythoughtabout.Soyou’ddomuchbetter.”TheRule:Beforebuyinganystock,makesureyoulikeitenoughtoholdon

foratleasttwoyears,evenifthepricehalvesrightafteryoubuyit.

8.Don’tTalkaboutYourCurrentInvestments

Overtheyears,IbegantorealizethatitwasabadideatospeakpubliclyaboutstocksthatIown.Theissueisn’tthatotherinvestorsmightstealmybestideas.The real problem is that it messeswithmy head. Oncewe’vemade a publicstatement, it’s psychologically difficult to back away fromwhatwe’ve said—evenifwe’vecometoregretthatopinion.SothelastthingIwanttodoiswalkintothetrapofmakingapublicstatementaboutastock,giventhatthesituationmightlaterchangeorthatImightsubsequentlydiscoverthatIwaswrong.I first encountered this idea in Munger’s talk on the causes of human

misjudgment, which ledme to Robert Cialdini’s book Influence: Science andPractice. Cialdini described this peculiar feature of our mental wiring as the“commitment and consistency principle.” To demonstrate this idea, he wroteabouta1966psychologyexperimentinwhichresidentsofPaloAltowereaskedif they’d do something that wouldn’t cost much money but would help theirneighborhood.A few days later, theywere asked to put an ugly sign on theirfront lawns to stopdrivers speeding through theneighborhood.Residentswhohad previously committed to doing something inexpensive to help theirneighborhood found it extraordinarily hard to change their stated position sotheytypicallyfeltobligedtoinstallthesesignsontheirlawns.

Likewise, if you tell a child that you’re going to give them a treat, they’reliable to reply, “You promise?” They intuitively understand that you’ll find ithardtoreversecourseaftertakingaposition.IexperiencedthisfirsthandwithastockcalledEVCI,whichIboughtaround

2003.Within 18 months, it surged seven-fold, making it the most successfulinvestmentIhadmadeuptothatpoint.Aswe’lldiscusslater,Ishouldhavesoldallofmyshares.ButIhadgivenaninterviewtoValueInvestorInsight,extollingEVCI as an example of my investing prowess. As a result, I was publiclyinvested in the stock and couldn’t part with it even though it was no longercheap.Forvariousreasons,thestocksubsequentlyhalved.Inretrospect,IcouldseethatIwouldhavebeenmuchbetteroffifI’dneverspokenaboutitsincethiswouldhavegivenmemorelatitudetoselloncethecircumstanceschanged.Still, it took me a long time to act on this knowledge and actually stop

speaking publicly aboutmy holdings. Sometimes it was necessary to disclosewhatIwasdoing.Forexample,aftermyfundwasbatteredinthefinancialcrisis,Ineededtoreassuremyshareholderssothattheywouldn’tloseheart.Italkedtothem at length about current holdings such as Cresud and London Mining,makingitclearthatthesewereremarkablycheapstockswithgreatprospects.In 2010, aftermy fund had rebounded sharply, I finallymade the change: I

stopped discussing my current investments in public settings, including myannualmeetings,interviewswithjournalists,andletterstoshareholders.Atfirst,this wasn’t an easy shift to make. Once you create an expectation in themarketplace,it’sdifficulttoreverseyourselfwithoutpeoplefeelingthatthey’rebeing shortchanged. But this change in procedure was well worth the risk ofleavingafewnosesbentoutofshape.I’mnotdogmaticaboutthisrule.IfI’mchattingprivatelywithashareholder,I

might end up talking about a particular stock thatwe own.But even in theseprivate conversations, I try to remain neutral and understated, resisting thetemptationtotalkheatedlyaboutwhyIthinkastockisgreat.Iknowhowhardit

cansubsequentlybetomakeadecisionthat’sinconsistentwiththesestatements.Sowhycreatethispotentialheadachewhenit’ssoeasilyavoidable?Instead of discussing current holdings in my letters to shareholders, I now

provide a detailed postmortem on stocks that I’ve already sold. This givesshareholdersaclearinsightintohowtheirmoneyisbeinginvested,butitdoesn’tinterferewithmyabilitytoactasrationallyaspossiblegoingforward.Forme,thishascertainlyremovedapsychologicalburden.I’darguethatmostindividualinvestorswouldalsobenefitfromkeepingquietabouttheircurrentinvestmentssince this talk onlymakes it harder to operate in a rationalway. It’s somucheasierwhenyoudon’thavetoworryabouthowotherpeoplemightjudgeyou.TheRule:Don’t sayanythingpubliclyaboutyour investments thatyoumay

livetoregret.

11

ANINVESTOR’SCHECKLIST

SurvivalStrategiesfromaSurgeon

Evenwithawell-constructedenvironmentandarobustsetofinvestmentrules,we’re still going to mess up. The brain is simply not designed to work withmeticulous logic through all of the possible outcomes of our investmentdecisions.Thecomplexityof thebusinessandeconomicworld,combinedwithourirrationalityinthefaceofmoney-relatedissues,guaranteesthatwe’llmakeplentyofdumbmistakes.Thehabitsandprocesses thatwe’vediscussedsofarshouldhelpus toedge in therightdirection.But there isoneother investmenttoolthatissoinvaluablethatitmeritsachapterofitsown:achecklist.The goal in creating a checklist is to avoid obvious and predictable errors.

BeforeImakethefinaldecisiontobuyanystock,Iturntomychecklistinalast-ditch effort to prevent my unreliable brain from overlooking any potentialwarningsignsthatImighthavemissed.Thechecklististhefinalcircuitbreakerinmydecision-makingprocess.Theideaforthisdidn’toriginatewithme,butwithAtulGawande.Aformer

Rhodes Scholar at Oxford, he is now a surgeon at Brigham and Women’sHospital in Boston, a professor of surgery at HarvardMedical School, and arenownedauthor.He’saremarkableblendofpractitionerandthinker,andalsoanexceptionallyniceguy.In December 2007, Gawande published a story in The New Yorker entitled

“TheChecklist,”whichdrewheavilyonhisexperienceasasurgeontoexploreaproblem that is both profound and practical. As he put it, “intensive-caremedicine has grown so far beyond ordinary complexity that avoiding dailymistakesisprovingimpossibleevenforoursuper-specialists.”Asheexplained,this reflects a fundamental challenge that exists in other fields, too—namely,

“the art ofmanaging extreme complexity,” and the question of “whether suchcomplexitycan,infact,behumanlymastered.”HisarticlewentontodescribethegroundbreakingworkofPeterPronovost,a

critical-carespecialistatJohnsHopkinsHospital,whodesignedachecklistafteraparticularpatientnearlydied.Pronovosttookasinglesheetofpaperandlistedall of the steps required to avoid the infection that had almost killed theman.Thesestepswereall“no-brainers,”yetitturnedoutthatdoctorsskippedatleastone step with over a third of their patients. When the hospital began to usechecklists,numerousdeathswereprevented.Thiswaspartlybecausechecklistshelped with memory recall, “especially with mundane matters that are easilyoverlooked,” and partly because theymade explicit the importance of certainprecautions. Other hospitals followed suit, adopting checklists as a pragmaticwayofcopingwithcomplexity.WhenMohnish read Gawande’s article, he had a eureka moment, instantly

recognizing that the idea of a checklist could also be applied to investing—another field inwhich thecomplexity is soextreme thatevensuper-specialistsroutinelytripup,makingeasilypreventablemistakes.Inourcase,it isn’tfatal.Butinvestingerrorscanbeterriblycostlytoshareholderswiththeirlifesavingsontheline.IwassittinginmyofficeinManhattanoneafternoonwhenMohnishemailed

meacopyofGawande’sarticle.Wethenspokeonthephone,anditwasclearthat he was really excited. Mohnish has the kind of mind that easily makesunusual connections, so it was immediately obvious to him that the checklistidea was a big deal. I thought it was interesting, but it took me longer tounderstand just how significant itmight be.Bynow, I’mused to the fact thatMohnishisquickerontheuptakethanIam.Iconsolemyselfbycontemplatingasage observation of Buffett’s: “The key to life is figuring out who to be thebatboy for.” As I realized long ago, there’s no dishonor in being Mohnish’sbatboy. Far from it. And while I’m busy cloning Mohnish Pabrai, he’s busy

cloningAtulGawande.Mohnish pursued the checklist idea with ferocious intensity and rigor. He

beganbymarshalingagroupofustorecallaslewofinvestingmistakeswehadmade.Ineachcase,wehadtoworkoutwhytheyhadhappenedandiftherewasacausethatweshouldhaveseenbeforehand.SometimesIwouldlookbackatasituationwhereIhadmissedsomevitalclue,shakemyhead,andsay,“HowdidInotseethat?”Mohnishaddedhisownmistakes to themix.Wecombined thesewithsome

(infrequent) errors thatwehad seenBuffett andMungermake, including theirinvestments in NetJets, Dexter Shoe Company, and Diversified Retailing—areminderthatretailisatougherplacetomakemoneythanmostpeoplerealize.Buffett,withcharacteristiccandor,confessedinhis2007lettertoshareholders:“Todate,DexteristheworstdealI’vemade.ButI’llmakemoremistakesinthefuture—you can bet on that.A line fromBobbyBare’s country song explainswhattoooftenhappenswithacquisitions:‘I’venevergonetobedwithanuglywoman,butI’vesurewokeupwithafew.’”Mohnish and I also discussed Berkshire’s ill-timed investment in CORT

Furniture in 2000. CORT had made a fortune leasing furniture to start-upcompanies during the heady years of the 1990s tech boom. But Buffett andMungerhadunderestimatedjusthowvulnerable itsprofitswouldbewhenthisbubbleburst.CompanieslikeeBayandCraigslistalsoateintoCORT’ssalesbymaking it cheap and easy to buy used furniture. Munger later described thisinvestmentasa“macro-economicmistake.”IhelpedMohnishbycarefullyanalyzingmyownerrors,alongwiththoseof

other investors.Mohnishhimselfworked at such abreakneckpace that itwasalmost unnerving.Afterwe had compiled our initial list ofmistakes—and thelessonsweshoulddrawfromthem—hehiredacoupleofgraduatestudentsfromHarvardBusinessSchooltoundertakeapainstakingforensicinvestigation.Theystudied the13F filingsof about 20 smart value investors (including firms like

SoutheasternAssetManagementandFairholmeCapitalManagement),countingas a mistake any investment they had sold at a loss. The students then readthrough the investors’ public statements and annual letters to reconstruct thethinkingbehindthesefailedinvestments.Gawandehimself became intriguedbywhatweweredoing.He interviewed

Mohnishandme,andhewroteafewpagesaboutusinhis2009bestsellerTheChecklist Manifesto: How to Get Things Right. Among other things, hementioned Mohnish’s realization that he had “repeatedly erred” inunderestimating the riskiness of leveraged companies. As I suggested toGawande,partoftheproblemmightlieinwhatIdescribedas“cocainebrain”:theintoxicatingprospectofmakingmoneycanarousethesamerewardcircuitsin the brain that are stimulated by drugs, making the rational mind ignoresupposedly extraneous details that are actually very relevant.Needless to say,this mental state is not the best condition in which to conduct a cool anddispassionateanalysisofinvestmentrisk.By the time I settled inZurich,wehadassembledaveritable cornucopiaof

cock-ups.TheseincludedseveralmistakesthatMohnishandIhadmadeintherun-up to the credit crisis,when someof our stocksplungedbymore than80percent.Inourpostmortemanalysis,wewereabletoexplorewherewehadgonewrong—and,moreimportant,designchecklistitemsthatwouldhelptopreventusfromrepeatingthesemistakes.Mohnish,whodidthelion’sshareoftheworkinthiswholeendeavor,ended

up grouping his checklist into about six broader categories, including themessuch as leverage and corporate management. It’s an incredible piece ofintellectual property.My own checklist, which borrows shamelessly from his,includesabout70items,butitcontinuestoevolve.Beforepullingthetriggeronanyinvestment,IpulloutthechecklistfrommycomputerorthefilingcabinetnearmydesktoseewhatImightbemissing.Sometimes,thistakesmeaslittleas15minutes,but it’s ledmetoabandonliterallydozensof investments thatI

might otherwise have made. In a typical case, I might conclude, “Okay, thisstock is failing on four ofmy checklist items.”On that basis, I’m unlikely toinvestinit.Butthisisn’tablack-and-whitemechanicalprocess.As I’vediscovered fromhavingADD, themindhasawayof skippingover

certainpiecesof information—including rudimentary stuff likewhere I’ve leftmy keys. This also happens during the investment process. The checklist isinvaluablebecauseitredirectsandchallengestheinvestor’swanderingattentionin a systematic manner. I sometimes use my checklist in the middle of theinvestingprocesstodeepenmyunderstandingofacompany,butit’smostusefulrightattheendasawayofbackstoppingmyself.That said, it’s important to recognize that my checklist should not be your

checklist. This isn’t something you can outsource since your checklist has toreflect your own unique experience, knowledge, and previous mistakes. It’scriticaltogothroughthearduousprocessofanalyzingwherethingshavegonewrongforyou in thepast soyoucansee if thereareanyrecurringpatternsorparticularareasofvulnerability.We’realldifferent,andwemessupinwaysthatareoftenquitepersonaltous.Forexample,someinvestorsaretemperamentallydrawntotheopportunitiesavailableinhighlyleveragedcompanies.I’mnot,soIdon’tneedtohaveasmanychecklistitemsthatwarnmetotreadcarefullyinthiskind of risky environment. By contrast, Mohnish is less fearful of heavilyindebted companies, so this is one area where he might need to be morecautious.Similarly, an investor like Bill Ackman seems drawn to opportunities

involving controversial stocks where the management may be bamboozlinggullibleinvestors.IfIwereBill,I’dhaveachecklistitemthatsaid,“AmIbeingdrawn into this situation not because it’s the best investment I canmake, butbecauseIenjoythethrilloftheinvestigativechaseandwanttorightthewrongsoftheworld?”ThisisnotacriticismofBill,whoisasuperbinvestorandwouldhave made an equally outstanding investigative journalist. It’s a matter of

lookingatouridiosyncrasiesandunderstandingwheretheytendtoleadus.Inmycase,it’sparticularlyimportantformetofeelthatpeoplelikeme;Ialso

find it hard to say “no” to people I like.Thismakesme vulnerable in certainsituationsastheseemotionalneedscouldshort-circuitmyrationaljudgment.Tohelpcounterthis,mychecklistincludesquestionssuchas:“Istheresomewayinwhichthisinvestmentideaisbeingsoldtome?Doessomeoneinthissituationhave an axe to grind? Who benefits if I make this investment? Does thisinvestmentappealtoanypersonalbiasesofminethatshouldbereexamined?”Givenmynature,itmakessensetoexplorethisquestionofwhetherImightbe

tryingtofulfillsomeotherpartofmypersonalityinsteadofjustmaximizingmyreturns.Achecklistisawayofmanagingyourownmindandguardingagainstyourownproclivities,soitneedstobebasedonthiskindofself-awareness.Myothercaveat is thatachecklist isemphaticallynotashopping listof the

desirable attributes that we’re looking for in a business. I’ve seen investmentcheckliststhataskquestionslike:“Isthiscompanycheap?”Or:“Doesithaveahighreturnonequity?”Inmyopinion,thisisamisguidedwaytousechecklists.Iprefertousetheminmuchthesamewaythatpilotsusethem.Theydon’task:“Doesthisplaneflyfast?”Or:“AmIflyingtoasunnydestination?”Rather,theitems on their checklists are designed to help them avoid mistakes that havepreviouslyledtoplanecrashes.Ininvestingtoo,therealpurposeofachecklististoserveasasurvivaltool,basedonthehauntingremembranceofthingspast.But the best way to explain this is to provide you with some real-world

examples of how I developed my checklist. Here, then, are four brief casestudies—situationsinwhichImadecostlyinvestmenterrorsthatthenledmetodevelop specific checklist items. The point is not just to relish this humblingaccount of various low points inmy stock-picking career. It’s to get a clearersense of how you might analyze your mistakes and blind spots in order toconstructachecklistofyourown.

CaseStudyOne:TheManWhoLostHisCool

Back in 2001, when I was living inManhattan, I began tomake an array ofinvestments incompanies thatprovidedfor-profiteducation. I traveledalloverthe world to learn more about these businesses, searching wide and deep forgoodcompaniesinthesamesector.IflewtoSingapore,Shanghai,andMumbaito research one of the global leaders, Raffles Education Corporation, and IdispatchedmyanalysttothePhilippines.Butitturnedoutthatsomeofthemostintriguingcompaniesintheindustrywereinmyownbackyard.Iputtogetheralistofallthefor-profiteducationalinstitutionsinNewYorkCityandwentdoor-to-door onmyBMWmotorcycle to check themout.At the time, Imust haveknownmoreaboutthesectorthanalmostanyotherinvestorinAmerica.AndIlovedridingthatbike!Duringthesevisits,IcameacrossanobscurecollegecalledInterboroInstitute,

whichwasownedbyEVCICareerHoldingsCorp.Thiscompany’senterprisingmanagement teamhadcomeupwithan innovativewayofprovidingacollegeeducation to students with limited resources, many of whom had failed tograduate fromhighschool.Thestudents typically received financialaidgrantsthat exceeded the cost of Interboro’s bare-bones education. So they wereeducatedforfreewhileEVCImademoneyintheprocess.Thismodellatercameunderfire.ButIattendedat least threegraduationceremoniesat Interboroandsawformyselfthatitprovidedrealsocialvalue.Essentially,ithelpedless-than-stellarstudentstogetadegreeandmoveontojobsinfieldslikemedicalbillingand insurance administration instead of remaining in menial work such aspackinggroceries.Duringtheearlystagesofmyresearch,ImentionedEVCItoWhitneyTilson,

andweendedupvisiting the company together inYonkers.The businesswasdoingwell, butEVCIwas hobbled by $2million in debt that it had issued toacquire Interboro. In June 2003, Whitney and I invested $1 million each in

EVCI, which relieved the company of this debt burden and invigorated thebusiness.Meanwhile, thenumberof students at Interborogrew rapidly,profitssurged,andmy$1millioninvestmentsoaredto$7millionin18months.ThiswaspartofthebenefitofrunningasmallfundlikeAquamarine:Icould

take a meaningful position in a tiny company like this, which operated waybelowtheradaroflargerfunds.Itwasthrilling,too,toseehowmylegworkhadpaidoff.Allinall,thisinvestmentfeltlikeatriumph.Ifeltreallyproud.Whenastocktakesflightlikethis,there’sasenseofjoyouswonder:“Wow,”youthink.“That’srealmoney.”WithEVCI’soperatingincomeandstockbothupseven-fold,theboardagreed

togranthugepayrisestothecompany’stwotopexecutives.Thechairman/CEOwould see his base salary leap from $326,000 a year to $621,000, and thepresident’sbase salarywould jumpfrom$267,000 to$483,000. Iwasgratefulfortheirastutemanagementofthecompanyuptothatpoint,andIwantedthemtogetrichalongsidetheirinvestors.Butthiswasaminisculecompanythathadgeneratedlessthan$3.5millioninoperatingprofitsthepreviousyear.Theirpayhikemeant that these twoexecutiveswouldnow take roughlyaquarterof theoperatingprofitsincashforthemselves.Tomeandtootherinvestors,thatwasan outrageous amount for a company of this size. After all, who owns thecompany? The management or the shareholders? In retrospect, I should havesoldmysharesrightthen.Iwas shocked andupset.This struckme as a short-sighted and self-serving

businessdecision,and I firedoffa forthright letter to themanagementand theboard, describing the compensation plan (somewhat tactlessly) as “inane” andcomplaining that it undermined investors’ confidence in them. For a start, Iexplained, the plan was financially inefficient since a big slug of the profitswouldnowgototheIRStopayincometaxes.Evenworse,theseheftysalarieswould have to be declared in the company’s proxy documents for all to read.Interboro’scompetitorswereinthestatesector,whereeducationaladministrators

hadnoopportunitytoearnthatkindofmoney.Iwasworriedthattheseinflatedsalarieswould spark resentment, not least amongNewYork State’s educationauthorities. This could result in unwanted reviews of Interboro’s business andpossiblyevenawithdrawalofitseducationlicense.Mylettersuggestedwhatseemedtomeacompellingalternative.IsaidIwas

willingtousemyinfluenceasasubstantialshareholdertopassacompensationplanthatwouldgivethetwotopexecutivesagenerousgrantofstockoptions.Ifthestockkeptclimbing, theycouldeachmaketensofmillionsofdollars.Thisstruckme as a strong incentive and an appropriate reward for enriching theirshareholders. But I received no reply from the management or the board ofdirectors. I found this inexplicable.Here Iwas, offering to help themmake afortune.Yettheydidn’tevendeigntorespond.Convincedthatmyargumentswouldwinhimover,IarrangedtomeetEVCI’s

chairman/CEO for lunch at a restaurant near his office in Yonkers. Ourconversation seemed cordial until suddenly all hell broke loose. He beganshoutingatmeatthetopofhisvoice,andthewholerestaurantfellintostunnedsilence.Itfeltlikeascenefromamovie.Idon’trememberhisexactwords,butIthinkheyelled,“Areyouaccusingmeoflying?”Healsosaidsomethingtotheeffectof,“Whothehelldoyouthinkyouare?”I froze and had no idea how to react. I thought I was offering him an

opportunity to make enormous sums. In return, he seemed determined tohumiliatemepublicly.Thiswasanastoundingturnofevents.WhatIdiscoveredmuchlaterwasthathewasgoingthroughabitterdivorce.Accordingtoa2009decision from theNewYorkCourt ofAppeals, he and hiswifewere fightingover their marital assets, including his stock in EVCI. His wife commenceddivorceproceedingsin2003,atrialensued,andshewaslatergrantedadivorceon thegroundsofabandonment. In2006, the trial court “rejected”his“claimsthat the appreciation in the value of the EVCI stock was due solely to hisefforts,” and it used the trial date “for valuation purposes” of his stock and

options.In other words, he was in themidst of a wrenchingwar overmoney—and

specificallyoverhisstakeinEVCI.ThishelpstoexplainwhyheblewupatmewhenIproposed thathereverse thedecision to increasehissalaryand insteadreceiveamassivepaydayonlyifthestockperformedwell.Perhaps,hisconcernwasthatamajorportionofthisfuturewealthmightendupgoingtohisex-wife.Inanyevent,hemusthavefeltunderattackfromeveryside.And,ofcourse,weknowhowdifficultitistoactrationallywhenmoneyisatstake.Inmyopinion,thechairman/CEOwasasmartanddecentperson.Butitseemedtomethathehadlandedinadifficultpositionthatdidn’tbringoutthebestinhim.Ourcontentiouslunchwasanauguryofmoretroubletocome.EVCI’sstock

soonhalved—atwhichpoint, I finally soldmyshares.As Ihadpredicted, thecompany also lost favorwith the state education authorities: in 2007 theNewYorkBoardofRegentsenactednewtestregulationsthatmadeitmuchharderforInterboro students to receive financial aid. The company was also ordered torepaymillionsofdollarsinstudent-aidfundsafteritturnedoutthatsomeofitsstudentshadbeenineligibleforthemoneytheyreceived.InDecember2007theChronicle of Higher Education reported that EVCI had decided to closeInterboro down “after it realized that most of its students would no longerqualifyforstateorfederalstudentaid.”Thecompanywasalsohitwithaclass-actionlawsuitforsecuritiesfraud.Itwasanignominiousendtowhathadonceseemedaninspiringsuccessstory.Later,when I performed a postmortem onmy various investingmistakes, I

reexaminedwhathadhappenedatEVCIandtriedtodrawsomepracticallessonsfromtheexperience.Forme,oneofthemostimportantwasthatIneededtobemoreconsciousof theextent towhich the lifecircumstancesof topexecutivescan affect their decisionmaking and their ability tomanage the business. If Ihaveevenamildargumentwithmywife,itcanputmeoutofsortsfortheday,affectingbothmymoodandmyability tomake intelligentdecisions.So Ican

onlyimaginehowharditwouldbetogothroughacontentiousdivorce.Indeed,thisisjustoneexampleofthemanylifeeventsthatcanknockanexecutiveofftrack: itmight also be a family bereavement, amajor disputewith a businesspartner,orevenextremelevelsofpersonaldebt.Life is messy, and we all go through trying times. But it’s important to

recognizethatseniormanagement—liketherestofus—canbederailedbythiskindofpersonalturmoil.Afterall,whenaperson’sbackisupagainstthewall,itincreases the likelihood that their judgmentwill suffer.So Iaddedacoupleofitems to my checklist as a formal reminder of some hard-earned lessons,courtesyofthiseducationcompany.ChecklistItems:Areanyof thekeymembersof thecompany’smanagement

team going through a difficult personal experience that might radically affecttheir ability to act for the benefit of their shareholders? Also, has thismanagementteampreviouslydoneanythingself-servingthatappearsdumb?

CaseStudyTwo:ATortuousTaleofTupperware

TheTupperwarePlasticsCompanywas founded in1938byEarlSilasTupper,who had previously worked at DuPont Chemical. He fashioned Tupperware’sfirst containers out of polyethylene slag, a waste product from oil refining.Today,hisiconicbrandofplasticcontainersissoldinaboutahundredcountries.Instead of selling these goods in stores, the company’s strategy relies upon alegionof“consultants”whoorganizeTupperware“homeparties,”atwhichthehostreceivesfreeitemsinreturnforinvitinggueststoseetheproductline.Backin thelate’90s,IbecameintriguedwithTupperware,whichseemedto

embody all of the attributes of a high-quality business. I was particularlyimpressedwith itsexceptionalprofitmarginsandreturnonequity.Herewasacompany that could take $5 worth of plastic and turn it into a piece ofTupperwarethatsoldfor$50.Thecompanygeneratedlotsofcash,anditdidn’t

needmuchcapital.Plus,IrememberedMungertalkingaboutTupperwarepartiesinhislectureonhumanmisjudgment.Hesaidthesepartiesexemplifiedanarrayofthe“manipulativepsychologicaltricks”thatRobertCialdinihaddiscussedinhisbooks.TheoveralleffectwassaidtobesopowerfulthathousewivesboughtmassesofTupperwaredespiteitshighprice.Iwanted toexperience thisfirsthand.SoafriendandIhostedaTupperware

party in my apartment in New York. I was awed to see these psychologicalforcesatplay.Forastart,therewasthereciprocationprinciple.Asthehosts,weknewthatwe’dgetsomefreeTupperware,basedonhowmuchwassoldattheparty. So we were already grateful to the Tupperware lady for agreeing toorganizetheevent,andwewereexcitedaboutthefreecontainerswe’dreceiveasourreward.Then,atthestartoftheevent,theTupperwareladyhandedoutasmallgifttoeveryonesothatnoneofourguestswouldleaveempty-handed.Theresult:everybodyatthepartywasitchingtoreciprocate,justasCialdiniwouldhavepredicted.Another psychological force at play was the liking principle. We liked the

friendswehadinvited,andtheylikedus.OncetheTupperwareladyhadhandedoutfreegifts,wealllikedhertoo.Halfanhourearliershehadbeenacompletestranger;nowshewasnotjustafriendbutamemberofourteam.Thelistgoeson.Forexample,theauthorityprinciplewasalsoatworksince

sheknewa remarkableamountabout food,whichenhancedherauthorityasaTupperwaresalesperson.Therewasalsoascarcityfactoratplaysinceshehadn’tbroughtenoughitemstosatisfyallofthedemandamongourguests.AnddidImention that the Tupperware containers came in all these really bright, vividcolorsthatalsocaughtourattention?Inshort,thepartywasabrilliantexampleofsalespsychologyat itsmosteffective.Inacoupleofhours,ourTupperwareladysoldmorethan$2,000worthoftheproduct,earningherselfnearly$1,000.Having seen this phenomenon in person, I felt that I understood why the

company was so successful: its superior performance was based on the

remarkablepsychologicaleffectsunleashedattheseparties.Plus,IcouldseethattherewasendlessopportunityforTupperwareinemergingmarketseventhoughthe developedworldmight already be saturated. Armedwith these insights, Iprettymuchracedouttobuythestock.IwassecureintheknowledgethateverytwominutessomeonewashostingaTupperwarepartysomewhereintheworld,andthattheseprincipleswouldbeplayingthemselvesout.Sadly, I was wrong. While some investments fail quickly, this one failed

slowly—andthatcanbefarmoredamagingtoaninvestmentportfoliobecausethese slow losers suckupanenormousamountofyourmental energyoveranextended period of time. For as long as I owned Tupperware, one region oranotherwas always performing badly. Sales simplyweren’t growing. Iwouldlisteninonthecompany’squarterlyconferencecallstofindoutwhatwasgoingwrong. These calls reassuredme that management was highly competent andworking hard. But as I gradually realized, the company faced a fundamentalproblem:therewastoomuchcompetition,andthehighpriceofitsproductshadbecomeaseriousobstacletogrowth.ItwasonlyafteracoupleofyearsthatIreallyfiguredoutwhatwasgoingon.

When Tupperware first hit the market, its products were unique. Customerswillinglypaidapremiumforitspromiseof“sealed-infreshness.”Butoverthedecades, many other competitors got into the game, and their seals improveduntil they were just as good. These rival products may not have been asattractive,buttheywerecheaper,andtheywereeasilyavailableinsupermarkets.As a result, Tupperware could no longer justify its high price for a simpleproduct.Despitethemanagementteam’sabundantskills,theycouldn’talterthisharsheconomic reality.AsBuffettonce remarked,“Whenamanagement teamwith a reputation for brilliance tackles a business with a reputation for badeconomics,itisthereputationofthebusinessthatremainsintact.”Ifinallycapitulatedinthesummerof1999,sellingthestockformoreorless

what I had paid for it a couple of years earlier. Looking back on this

disappointinginvestment,itwasclearthatIhadfailedtoaskthemostobviousquestion: does this product offer good value for money? After the positiveexperience of hosting a Tupperware party, I had become too committedpsychologicallytotheideaofowningthestock,andIlackedthedetachmenttoseethepitfalls.Thismisadventure taughtme an invaluable lesson: Iwant to invest only in

companies that are a win-win for their entire ecosystem. In consultant speak,we’d refer to the ecosystem as “the value chain.” The terminology doesn’tmatter.What’simportantistheideathatagreatcompanymakestonsofmoneywhileaddingrealvalueforitscustomers.Originally,Tupperwarehaddonethisbyintroducinganinnovativeproduct.Now,nomore.By contrast, consider a world-beating business like Wal-Mart (or, for that

matter, Costco, GEICO, or Amazon.com). Wal-Mart works hard to makeeverythingitsellslessexpensivefortheconsumer,constantlydrivingmorecostsoutofitsdistributionsystem.Thispleasesitscustomers,sotheybringmoreoftheirbusinesstoWal-Marteachyear.YoumightthinkthatWal-Mart’ssupplierswould be resentful since theirmargins are getting squeezed.But the suppliersbenefit from the sheer volume of sales generated in Wal-Mart’s stores.Everybodyinthisecosystemwins:Wal-Martanditsshareholders,itssuppliers,and its customers. (That said, I’ve never ownedWal-Mart since the companywasalreadytoolargeandthestocktooexpensivetomeetmycriteria.And,ofcourse, Wal-Mart has critics who would argue that its success comes at theexpenseoflocalbusinessesanditsownworkforce.)Infuture,Ideterminedtodoabetterjobofanalyzingthewholevaluechainto

identifycompaniesthatmakeitmoreefficient.ThisanalysiswouldhavesavedmefrommyTupperwaremistake.IthasalsokeptmeawayfromcompaniesasdiverseasPhilipMorris(aphenomenallyprofitablebusinessthatisdamagingtoitscustomers’health)andGreece’snationallotteryfirmOPAP(aphenomenallyprofitable business that is damaging to its customers’ wealth). Both of these

companieshavealicensetoprintmoney.Buttheydosobypreyingonpeople’sweaknesses. For the consumer and for society at large, this is not a win-winproposition.Personally,Idon’twanttoinvestincompaniesthatmakesocietyworseeven

iftheirproductsarelegal.Callmeirrational,butI thinkit’sbadkarma.Inanycase, Imuchprefer to invest inbusinesses thatbenefit society.Onceagain, inlearningthislesson,IrealizedthatBuffettalreadyknewit;asfarasI’maware,everyoneofhisholdingsmeetsthishighstandard.ChecklistItem:Isthiscompanyprovidingawin-winforitsentireecosystem?

CaseStudyThree:WhatLiesBeneath?

MystudyofcompanieslikeWal-MartandCostcoledmetoinvestinCarMax—the Wal-Mart or Costco of secondhand cars. Since opening its first store inVirginia in1993,CarMaxhas soldover4million cars, and it currentlyboastsabout ahundred stores acrossAmerica. It’s ahighly efficientoperationwith anarrowspreadbetweenwhatitpaysforcarsandthepriceatwhichitsellsthem.Customersknowthatthesalespricesinitsbig-boxstoresareamongthelowestaround.Andthere’sahugeselectionofcarsondisplay,rangingfromtwo-year-oldMercedesSUVstoMustangconvertiblesfromthe1950s.There is one other key aspect to the CarMax business model: it provides

customerswithaccesstofinancing.IntheUnitedStates,asignificantportionofcarsareleased.Withoutfinancing,manyCarMaxcustomerswouldn’tbeabletobuy its cars. In fact, if CarMax were to find that it couldn’t access the debtmarkets,itswholebusinessmodelwouldfallapart.Andin2008itdidfallapart.Sales plummeted because CarMax and its customers could no longer obtaincreditamidtheglobalfinancialcrisis.Asaresult,thestockpricecrashed.Onceagain,Idiscoveredtheimportanceofunderstandingacompany’sentire

valuechain.Ihadn’tgivensufficientthoughttojusthowdependentCarMaxwas

onthecreditmarkets,andhowvulnerablethismadethebusiness.Imightwellhave made the purchase anyway. After all, I could never have predicted theseverity of the credit crisis. But this situation taught me how critical it is todiscernwhetherabusiness isoverlyexposed topartsof thevaluechain that itcan’tcontrol.Ifthisisthecase(asitoftenis),Ineedtobecompensatedforthatheightenedriskwithalowerpurchaseprice.Inresponsetothisexperience,Idevelopedachecklistitemthatallowsmeto

get a deeper sense of the quality of the business. Oneway toword this itemmightbe:“Arethecompany’srevenuesleveragedtothecreditmarkets?”ButIdon’tget toohungupontheexactwordingthatIuse inmychecklist.Amoregeneral version of this itemmight be: “Howdoes this company sitwithin thevalue chain, andwhat parts of this business could be impacted by changes inotherpartsofthevaluechainthatthiscompanyhasverylittleinfluenceover?”ThepointisthatIwanttoinvestincompaniesthatcontroltheirowndestiny,

not in companies that have their destiny determined by forces beyond theircontrol.It’salsopossibletousethiswayofthinkingtoidentifysomegreatinvestment

opportunities.Thegoalinthesesituationsistofindcompanieswhereoneaspectofthevaluechainhasgoneawry,draggingdownthewholebusiness.IfIbelievethisproblemistemporary,Icanbuythestockatabeaten-downpriceandthenbenefitoncethisissuewithinthevaluechainisresolved.In 2007 this thought process ledme to invest inAlaskaMilk, the dominant

producer of condensedmilk in the Philippines. The company’s key ingredientwaspowderedmilkthathadtobeimportedfromabroad.Whentheglobalpriceofpowderedmilkshotup,thecompany’sprofitmarginsweresqueezedanditsstock plunged. I was convinced that the price of powdered milk wouldeventually return to normal as supply rose to match increased demand fromChina.As a result,AlaskaMilk’s profitswould rebound.This proved correct,andImadeaboutfivetimesmymoneyinfiveyears.

ChecklistItem:Howcouldthisbusinessbeaffectedbychangesinotherpartsof thevaluechain that liebeyond thecompany’scontrol?Forexample,are itsrevenuesperilouslydependentonthecreditmarketsorthepriceofaparticularcommodity?

CaseStudyFour:HowILostMyBalance

Smart Balance, which has since been renamed Boulder Brands, was aninnovativefoodcompanyledbyasuperstarmarketernamedStephenHughes.ItsflagshipproductisablendofvegetableandfruitoilsthatcompeteswithleadingmargarinessuchasShedd’sCountryCrockandICan’tBelieveIt’sNotButter.Smart Balance’s spread is based on an oil-blending process patented by foodscientistsatBrandeisUniversity,anditoffersagenuinelyhealthyalternativetorival spreads that are rich in trans-fatty acids. By contrast, Smart Balance’sspread is said to lower consumers’ “bad” cholesterol and to raise their “good”cholesterol. Following its launch in 1997, it breezed past Land O’Lakes tobecomethenumber-threebrandinthemargarinecategory.AsalongtimeshareholderofNestlé,Ihadseen“functional”productslikethis

become a fast-growing and increasingly profitable niche within the foodindustry. I figured thatSmartBalance, as a smaller andnimblerplayer,wouldgrow rapidly for the next five or so years in both themargarine category andrelatedbusinessessuchaspeanutbutterandpopcorn.Atthatpoint,itwouldgetboughtoutbya largercompetitor. Ialso liked the fact thatSmartBalancehadoutsourced itsmanufacturing and distribution, so itwas a puremarketing andbrandingcompany.Anditsmanagementteamwasquitesomething.Hughes enjoyed a remarkable reputation. He had famously turned around

Tropicana’s juice business in the United States before achieving similarlyimpressivefeatswithbrandslikeCelestialSeasoningsteaandSilkSoymilk.Anarticle about Smart Balance in Fortune began with the line, “Success has

followedSteveHugheswherever he has roamed in the food industry over thepast twodecades.”Hugheshimselfwasquotedas saying, “Wearepositioningthisasabrandthatcouldgrowtoabilliondollars,atruemega-brand.”Backthen,Ihadn’tyetabandonedmypracticeofmeetingwithmanagement.

Hughescametomyoffice,andIquicklyfellunderhisspell.Itwasn’tjustthathe had a superb résumé. He was also incredibly smart and charismatic—awonderfulguywho,forgoodreason,waswidelylikedandadmired.Already,histop-notchteamhadbeensuccessfulingainingdistributionforSmartBalanceatWal-Mart,andIobservedformyselfhowmuchshopperstherelikedthebrand.Atthesametime,ananalystwhowasworkingformelovedthestockandwasdesperateformetobuyit,partlybecauseitwasfrustratingtoworkforalong-term investor who so rarely acquired a new holding. Confident that we hadfoundawinner,IboughtSmartBalancein2007.Therewasjustoneproblem.Ioverpaid.Ofcourse,Ididn’trealizethisatthetime.Thestockhadjustfallenmorethan

30 percent from its peak. But it still traded at a high multiple of its currentearnings and cash flow. I made the classic mistake of thinking about thevaluation in relative terms. I should simplyhave askedmyself, “Is it cheap inabsoluteterms?”Instead,Ireassuredmyselfthatitwasrelativelycheapnowthatthepricehaddropped from itshighs. Iwas alsobankingonHughes to justifythissteepvaluationbydeliveringonhisambitiousgrowthtargets.Givenhis—andmy—visionofagloriousfuture,IthoughtSmartBalancewasasteal.What followed was no catastrophe, but it was hardly the triumph I had

expected.Whenthefinancialcrisisstruck,consumersreinedintheirspendingonhigher-priceditemslikeSmartBalancemargarine;insteadoffrettingabouttheirbad cholesterol, they fretted about their finances. It didn’t help that SmartBalance’s rivals, stung by its success, retaliated with a price war that furthererodedprofits.Hughes and his team responded well in a tough environment. They kept a

carefulwatchonpricing.Seeing the importanceofofferingacheaperproduct,they also acquired a value brand called Best Life. Throughout this difficultperiod,thecompanygeneratedalotoffreecash,whichitdeployedintelligentlyformarketing,debt reduction, and share repurchases. Itwashard to complain,giventhattheydideverythingright.Still,bythetimeIfinallycashedoutofthestockin2012afterfivelongyears,Ihadlostabout30percentofmymoney.I had onlymyself to blame. I had paid a high entry price thatwas justified

onlyif thecompanyliveduptoitsfullpotential.Imadethemistakeofbasingmyinvestmentonwhatthissuperstarmanagermightachievewithhispromisingbrandinsteadoffocusingonthevalueofthebusinessasitexistedatthetimeofmypurchase.WithoutHughes at thehelm,knowledgeablebuyers fromwithinthe food industry would probably have acquired Smart Balance for 60 to 70percentofthepricethatIhadpaidtoinvest.Ishouldhavepaidevenless.Thiswouldhavesavedmealotofheartache.Ihadalsooverlookedtherealitythatallbrands are not created equal: Smart Balance was a fine brand with plenty ofupside,butitwasnoNestlé.I’ve bought many cheap stocks over the years, but I’m intermittently

astoundedbymycapacitytopayanexcessivepriceforwhatIperceivetobeahigh-qualitybusiness.ThisflawlayattheheartofmymistakeinbuyingSmartBalance.Akeylessonformeisthat,inthelongrun,IwillsaveanawfullotofmoneyifIsucceedincounteringthistendencytooverpay.Thisshouldalsosavealotofmybraincells.Afterall,ifIpaytoomuchupfront,I’dbetterunderstandeverythingthereistoknowaboutthecompanysincethereisnomarginofsafety.If I investwhen it’sundervalued, Icanbewrongaboutawholehostof issuesandstillmakeagoodreturn.Thiskindof self-awareness isvital sinceyoucanonlydesigna checklist to

addressyourweaknessesifyouknowwhatthoseweaknesseshappentobe.Tociteasimilarexample,IalsooverpaidforsharesinDiscoverFinancialServices(DFS),acreditcardbusinessthatwasspunoutfromMorganStanleyin2007.In

retrospect,IcanseethatoneidiosyncraticreasonwhyIwasdrawntoDFSwasthat it was so intellectually difficult to analyze: it was a highly profitablecompany, but it’s such a complex business that it was virtually impossible toknow whether the moat around it would widen or narrow. My internalmonologuewentsomethinglikethis:“Alltheseotherinvestorsthinkthisstockis tooexpensive.But they’re justnot smartenough toappreciate thesubtletiesthatmakethissuchanincrediblepurchase.I,ontheotherhand,amnotfearfulofpaying a high price because I’m smarter and can understand the nuances thatthey’remissing.”Peoplelikeme—whoprideourselvesonbeingcleverandwelleducated—are

particularlypronetothistypeofnarcissistichubris.Wecaneasilygetcaughtupinanalyzingcompaniesthat,likeDFS,shouldreallyberelegatedtowhatBuffettcalls the “too hard” pile. Unfortunately, I wasn’t sufficiently aware of thesedangerous tendencies ofmine back then. So I boughtDFS at around $26 pershareinJanuary2006despiteitsanalyticalcomplexities.Isooncametoregretit.At the height of the credit crisis, the stock fell below $5, and I couldn’t be

absolutely certain that the businesswould survive. I didn’twant to compoundmy mistake of overpaying for it with the equally dumb mistake of selling itprematurely.SoIheldon.ThestockreboundedsharplybeforeIfinallysolditinNovember2011foraround$24—notfarfrommyoriginalpurchaseprice.Still,Icould have avoided all of this pain and frustration if I had beenmore keenlyaware of those dual weaknesses of mine: my tendency to overpay and myirrational enthusiasm for analytical challenges thatmakeme feel smart.ThesebruisingexperienceswithSmartBalanceandDFSledmetoaddsomeadditionalitemstomychecklist.ChecklistItems:Isthisstockcheapenough(notjustinrelativeterms)?AmI

surethatI’mpayingforthebusinessasitistoday—notforanexcessivelyrosyexpectationofwhereitmightbeinthefuture?Doesthisinvestmentsatisfyme

psychologicallybymeetingsomeunmetpersonalneed?Forexample,amIkeentobuyitbecauseitmakesmefeelsmart?

12

DOINGBUSINESSTHEBUFFETT-PABRAIWAY

SittingonmyshelfinZurichisabookcalledThe48LawsofPowerbyRobertGreene.Ithasapparentlysoldmorethan1.2millioncopiesintheUnitedStatesaloneandhasbeenhailedbyFastCompanyasa“megacultclassic.”Youcangetaflavorofitsdarkmessagebypondering“Law14,”whichrecommendsthatwe should “Pose as a Friend,Work as a Spy.” A brief summary of this lawexplains: “Knowing about your rival is critical. Use spies to gather valuableinformationthatwillkeepyouastepahead.Betterstill:Playthespyyourself.Inpolitesocialencounters, learntoprobe.Askindirectquestions togetpeople toreveal their weaknesses and intentions. There is no occasion that is not anopportunityforartfulspying.”Insomeways, thisschemingMachiavellian,approachto lifeandbusiness is

quiteseductive.Inmyyouth,therewasapartofmethatcertainlyidentifiedwithit, fancying myself as a budding Gordon Gekko, with the intelligence andcunningtomanipulatemywaytothetop.AndasmyexperienceatD.H.Blairtaughtme,thereisplentyofopportunityonWallStreetforcynicaloperatorstogetrichbyputtingtheirowninterestsfirst.ButasIlaterdiscovered,thereisalsoamoreenlightenedpathtosuccess,evenwithinthedog-eat-dogfinancialworld—anapproachthatIhavecometothinkofas“TheBuffett-PabraiWay.”By observingWarren andMohnish—both from a distance and up close—I

graduallylearnedtobecomeabetterinvestor,abetterbusinessman,and(Ihope)abetterperson.ThisprocessbeganwhenIfirstreadLowenstein’sbiographyof

Buffettduringmy timeatD.H.Blair.Thatbookchangedmebecause it filledmyheadwithBuffett’sthoughts,introducingmetotherightpersonandtherightideasatacriticalmomentwhenIdesperatelyneededguidancetogetoutofthemoralmaze inwhich Iwas lost. Indeed, the bestway to learn is to surroundyourselfwith the rightpeople.AsWarren toldMohnishandmeatour charitylunch:“Hangoutwithpeoplebetterthanyou,andyoucannothelpbutimprove.”Thosewordshavehadanenormous impactonme.AsBuffetthelpedme to

understand,nothingismoreimportant thangettingbetterpeople intoyourlife.Toputitanotherway,relationshipsarethekillerapp.Indeed,I’mconvincedthatthis is the singlemost importantway thatwe can tilt the playing field in ourfavortoachievesuccessasinvestorsandinotherareasoflife.How,then,dowecreateandnurturetherightrelationshipssothatwecanlearnfromthemwhatweneedtolearnandbecomewhoweoughttobe?I’m not sure that I fully grasped the overwhelming importance of our peer

group until I came across a fascinating book and a subsequent TED talk byNicholas Christakis. He and his colleagues at Harvard had studied obesity inhumannetworks, and this research led them to an important discovery: if youhaveobesefriends,you’remorelikelytobeobese.Similarly,ifyouhavefitandhealthy friends, you’re more likely to be fit and healthy. In other words, ourclosesocialconnectionscountnotonly in theobviousways,butalso insubtlewaysthatwebarelyunderstand.Ihavenodoubtthatthisisalsothecaseinbusiness.Ifso,itstandstoreason

that I shouldmake a conscious effort to have the best possible people inmysocialnetworks.Atfirst,Iapproachedthisideainacalculatedandself-servingmanner, hoping that my attempts to build “social capital” would lead me togreater financialandprofessionalsuccess.But therelationships that Ibegan toformweresolifeenrichingthatmycynicalmotivesgraduallyreceded.I’mnotsaying that I’mMahatmaGandhi.Butmy deepening bondswith great peoplebecameasourceofsuchsincere joy tomethat Ino longerneededanyhidden

agenda:thesefriendshipsbecameawonderfulendinthemselves,notameanstoself-advancement.Serendipitously, I’mwriting thesewords in theDelamarGreenwichHarbor

HotelinConnecticut—theveryplacewhereIhadmyfirstdinnerwithMohnishadecadeago,onFebruary11,2004.Thatmeeting led toa friendship thathasbeenoneofthegreatestpleasuresofmylife—arelationshipthatreallyillustrateseverythingthatIhopetoconveyinthischapter.Justyesterday,IreceivedanemailfromMohnishwiththesubjectline:“Need

toputbookonhold.ThenextideaisUponUs!!!!”Hisfive-wordemailmessagethennamed anAsian company, alongwith the phrase “a 4x!” In otherwords,he’dfoundastockthathethoughtcouldgoupfour-fold,andhewantedmetoknowabout it too.At the same time, he trustedme to look into it further andgive him a useful second opinion, just as Buffett has, for decades, turned toCharlieMunger—though,admittedly,thequalityoftheresponsemightbeatadhigherinCharlie’scase.Think about this. Here isMohnish, one of the great investors of our time,

happily sharing his latest investment idea with me. At one level, this act ofkindnesscouldbeatremendousfinancialgiftformeandmyshareholdersifmyresearch leadsme to thesameconclusionand Ibuy thestock.Butatadeeperlevel, that simple email is a gift of true friendship—an act of sharing, trust,generosity, and affection. This act is also built on an understanding of theunsurpassedpoweroffriendship—arecognitionthat,whenwejointogetherwithgoodintentions,wearemuchmorethanthesumofourparts.AsMohnishoftensays,quotinganoldadagethatRonaldReaganloved,“There’snolimittowhatyoucando ifyoudon’tmindwhogets thecredit.”WhatmorecouldIaskforthanafriendlikethis?IhopethatI’mmakingthissufficientlyclearbecauseit’salmostcertainlythe

mostimportantpointinthisbook—eventhoughitmayseemblindinglyobvioustoyou.Nothing,nothingatall,mattersasmuchasbringingtherightpeopleinto

yourlife.Theywillteachyoueverythingyouneedtoknow.In countless ways, this relationship withMohnish has been an eye-opening

educationforme.Forexample,overthepasttenyears,I’verepeatedlyobservedhowhe looks to seewhat he cando for others, not the otherway around.Henever satme down and explained the thinking behind this behavior. I simplywitnessedhowhe actedwithme andwithothers, and I triedmybest to learnfromit.Isawhowhewouldfocusfirstoncreatingarealrelationshipandwouldthenconstantlylookforwaystogive,nottake.Hewasn’tpushy.Hedidn’tputpeopleunderanyobligation.Heseemedsimplytoaskhimself,“WhatcanIdoforthem?”Sometimesthiswasakindwordorapieceofadvice;sometimesitwas an introduction to someone else; sometimes itwas a book that hewouldsendasagiftandasawayofsayingthathewasthinkingofthatperson.Byactinginthisway,IcouldseethatMohnishcreatedanincrediblenetwork

ofpeoplewhowishhimwellandwouldlovetofindwaystohelphimandthankhimforhiskindness.Thisistheextraordinarilypowerfuleffectofcompoundinggoodwillbybeingagiver,notataker.Andashehastaughtme,theparadoxisthat you end up receiving infinitely more in life by giving than by taking.There’s a real irony here: in focusing on helping others, you end up helpingyourselftoo.Forsomepeople,thisisnoteasytounderstand.Theyactinsteadasiflifewereazerosumgame,inwhichthepersonwhogivessomethingawayisthepoorerforit.Buffett, of course, understands this perfectly, thanks in no small part to the

influence and example of his latewife, Susan,whowas the kindest andmostgivingofpeople.Aftervisitingherinhospital,hetoldaclassatGeorgiaTech,“When you get tomy age, you’ll reallymeasure your success in life by howmanyofthepeopleyouwanttohaveloveyouactuallyloveyou.Iknowpeoplewhohavealotofmoney,andtheygettestimonialdinnersandtheygethospitalwingsnamedafterthem.Butthetruthisthatnobodyintheworldlovesthem.Ifyouget tomyage in lifeandnobodythinkswellofyou, Idon’tcarehowbig

yourbankaccountis,yourlifeisadisaster.That’stheultimatetestofhowyouhavelivedyourlife.”Hecontinued,“Thetroublewithloveisthatyoucan’tbuyit.Youcanbuysex.

Youcanbuytestimonialdinners.Youcanbuypamphletsthatsayhowwonderfulyouare.Buttheonlywaytogetloveistobelovable.It’sveryirritatingifyouhave a lot ofmoney. You’d like to think you couldwrite a check: I’ll buy amilliondollars’worthoflove.Butitdoesn’tworkthatway.Themoreyougivelove away, the more you get.” Of all the lessons thatWarren has taught me,perhapsthisisthemostimportant.AnybodywhoseesBuffettmerelyasagreatstockpickerisclearlymissingthe

point. At our charity lunch, his kindness and generosity of spirit wereunmistakable.Hewas evidently determined to delivermuchmore value to usthanwecouldpossiblyhavehopedfororexpected.Hewastheretogive,bothtothe GLIDE Foundation and to us, not to receive. He wasn’t just polite andcordial. He was there with every ounce of his being, trying to make this anoccasion thatwewould never forget. Herewas one of the richestmen in theworld,amanwhocouldgainnothingfromus,yethe took thecare to treatusthisway.I also saw this in the years that followed when he made the effort to give

Mohnishandmea tourofhisofficeor to sendmeanote that said somethinglike, “Enjoyed reading your annual report,Guy.”Thismessage, scrawled in afew seconds,was a small act of kindness that—coming fromhim—meant theworld tome. If there’s a reward for acting thisway, Iwould suggest that it’ssimplythehappinessandlightnessofheartthathederivesfromthisapproachtolife.Idon’tbelievethathebehavesthiswaywithanyagenda.ButWarren,likeMohnish,innatelyunderstandsthatthisisthewaytheuniverseworks:themorewegive,themorewereceive.Warren’slifeisoneofthegreatexamplesofthisbenevolentcycle.Butperhapsthemostimportantpointtomakehereisthatthisishowwelearn

—by watching people who are better than us, modeling their behavior, thenexperiencing forourselveswhy theirapproach iswiseandworks.Thepoint isnottolionizeWarrenorMohnish,whohaveflawsandfoiblesjustliketherestofus.It’stosharethisideathatthereisnomoreimportantaspectofoureducationas investors, businesspeople, and human beings than to find these exceptionalrolemodelswhocanguideusonourownjourney.Booksareapricelesssourceofwisdom.Butpeoplearetheultimateteachers,andtheremaybelessonsthatwe can only learn from observing them or being in their presence. In manycases, theselessonsarenevercommunicatedverbally.Yetyoufeel theguidingspiritofthatpersonwhenyou’rewiththem.One of my favorite examples of this is from Li Lu’s introduction to the

Chinese edition of Poor Charlie’s Almanack. He tells a wonderful anecdoteabout Charlie Munger in which, no matter how early he showed up for anappointment, Munger was always there before him. Each time, Li Lu wouldshow up earlier and earlier. And each time, Munger was already there.Eventually,LiLuwasshowingupasmuchasonehourearly,sotheywouldeachreadtheirnewspapersseparatelyuntilthemeetingbeganattheappointedtime.Apparently,Charliehadoncebeenlateforanimportantmeetingthroughnofaultofhisown,andhehadvowedtohimselfnevertoletithappenagain.AsforWarren,he’sasocialanimalandhasbuiltanecosystemaroundhimself

ofremarkablepeoplewhoreflectandreinforcehisownvalues.Hisinnercircleincludes Charlie Munger, Bill Gates, Ajit Jain, Debbie Bosanek, and CarolLoomis.But therearemanyothers too.Thesepeople lookoutforhim,andhelooks out for them. Again and again, he has proved to be an astute judge ofcharacter, allying himselfwith outstanding people andmaking amazingly fewmistakes.Attimes,Isuspectthatheboughtcertaincompaniesnotjustbecausetheseweregreatbusinesses,butbecausetheywererunbygreatpeoplewhomhewanted in this ecosystem—people like ThomasMurphy (who headed CapitalCities/ABC) and Rose Blumkin. He loved to tell stories about Blumkin’s

astonishingworkethic,andheclearlysawherasarolemodel.Inmyown experience, there are countlessways of improving the circles in

whichweoperate.Someofthesearesoobviousthatit’stemptingnottomentionthematall.Butthesesimple,practicalstepshavemadesuchadifferencetomylifethatI’llbrisklymentionsomeofthem,evenattheriskofsoundingtrite.Forexample, I joined various organizationswhere I could regularly rub shoulderswithpeoplewhoarebetter thanme inamultitudeofways.This includes twoextraordinarybusinessgroupsthatteachleadershipqualities:theEntrepreneurs’OrganizationandtheYoungPresidents’Organization.IalsojoinedToastmasters,which teaches leadership through public speaking. Likewise, I met with awonderful assortment of value investors once amonth atManhattan’s Colbehrestaurant as part of a group organized by Shai Dardashti. Some ofmymostvaluablebusinessrelationshipsgrewoutofthesemonthlylunches.Havingseenhowmuchithelpstobepartofagrouplikethis,Ilaterteamed

up with John Mihaljevic to create VALUEx as a place where “like-mindedpeople can develop their worldly wisdom, learn to be better investors, andbecomebetterpeopleintheprocess.”Thegoalistobuildacommunityinwhichwecanallhaveapositiveinfluenceononeanother.Afterall,it’ssomucheasierto stay on trackwhen you have support instead of going it alone. For similarreasons,myfamilybecamemembersofthelocalJewishcommunityinZurich.AsChristakishadshownme,ourpeergrouphasafar-reachinginfluenceonus.SoIfiguredthatbeingamemberofareligiouscommunitywouldincrease theoddsthatwewouldelevateourselvesspirituallyandmorallyasafamily—muchasIfiguredthatattendingtheannualmeetingsofBerkshireinOmahaandWescoinPasadenawouldelevatemeasaninvestor.Initially,Ihadthoughtthatparticipatingingroupsandeventslikethesewould

allowmetomeetbetterpeopleandthatthesecontactswouldhelpmetoadvancemyself.Certainly,therearebenefitstothatkindofnetworking.Butforme,thegreatestbenefittohangingoutinthesepositiveenvironmentswasamoresubtle

one:theopportunitytoobservepeoplewhowerefarbetteratbusinessandlifethan Iwas.This is oneof themany reasonswhyattendingBerkshire’s annualmeetingissucharichlearningexperience.Forexample,oneyear,IwashavingadrinkinOmahawithafriendnamedJonathanBrandtwhenInoticedthatDonKeoughwas standing nearby.Keough is a renowned business leaderwho hasservedontheboardsofcompanieslikeBerkshire,Coca-Cola,andMcDonald’s.He recognized Jonathan (whose father had been Buffett’s stockbrocker),exchangedsomethoughtswithhim,thentookthetroubletointroducehimselftome.Ihadanelectricfeeling,asifallhisenergieswerefocusedonme.Forthatinstant,IfeltlikeIwastheonlypersonwhomatteredtohim.Ofcourseyoucouldsay that thiswassimply thepoliteanddecentbehavior

thatweshouldexpectfromanyone,whichistrue.Butevenafleetingencounterlikethishelpedmetodiscernsomeofthequalitiesthatallowpeopletoshineinbusiness. For example, I could see from Keough’s impact on me just howimportant it is to be fully present and engaged whenever I meet someone—particularlyifthatpersonisatanearlierstageintheircareer,oriftheymightbeill at ease.Hisexamplemademeaspire tobebetter so thatmyownmeetingswithstrangersmightonedaybesimilarlymemorableandgenuine.Likewise,I’mstruckbyhowoftenandenthusiasticallyBuffettspeakstoMBA

students.It’satimeintheirliveswhentheyareparticularlyopentonewideas.And if they haven’t yet secured a post-MBA job, theymight also feel a littlevulnerable.Sohisgenerousspiritmaymeanallthemoretothem.There’sagreatlesson in this forme: ifWarrencan take the time toact like thiswithstudents(nottomentionwithinvestorslikeme),thenItooneedtoactwithrealkindnesstoward the students I meet at business schools, and I should also respondencouraginglytoeveryyounggraduatewhosendsmearésumé.At our lunch,Mohnish askedWarren how he’smanaged to select the right

peoplewithwhomtoassociate.Warrenrepliedthathecansurveyaroomfilledwithahundredpeopleandeasilyidentifythetenhe’ddobusinesswithandthe

tenhe’davoid.Theother80wouldgointohis“notsure”category.Atthetime,Ididn’t find this insightparticularly satisfying.But I later realized that I shouldhaveappliedthisthinkingbeforegoingtoworkforD.H.Blair.Therehadbeenenough smoke to raise real concerns about the existence of fire, including thecritical article I had read about the firm in theNewYorkTimes.On that basisalone, the company and its charismatic leaderMortyDavis should have goneintomyown“notsure”category.Temperamentally,Iliketobefairandtogivepeoplethebenefitofthedoubt.Butinthisinstance,circumspectionwouldhaveservedmebetter.Inanycase,thekeylessonfromWarrenwastoinvesttimeandenergyinthehandfulofpeopleyou’resureaboutandleavetherestalone.Onthisbasis,IdecidedthatIneededtobecomemoreefficientateliminating

people frommy network if Iwasn’t sure about them. The first placewhere Iapplied this idea was inmy hiring process. I had originally assumed that therightway to hire is to place an advertisement and then sift through themanyrésumés that camemy way, trying to give every candidate the benefit of thedoubt.Afterall, thisishowconsultingfirmsandinvestmentbanksdiditwhentheywentabouthiringpeoplelikeme.Butonewell-documentedproblemwiththis approach is that a high proportion of these job candidates have someattributethatmakesthemhardtoemploywhilethebestcandidatesgetsnappedupfast.Thosewhodon’tgetsnappedupfastalsotendtogetbetteratdisguisingtheirflaws,whichbecomeharderandhardertodiscern.SoIstoppedadvertising.Instead,IendeduphiringpeoplewhosebehaviorI

hadachancetoobserveinunguardedmoments.Forexample,IhiredDanMooreasananalystaftercontactinghimaboutapieceofequityresearchhehaddone.Hewouldn’tshareitwithmebecauseIwasn’taclientofhisbuy-sidefirm.Theexemplarywaythathehandledthissituationshowedmethehighqualityofhisethicsandhisloyaltytohisemployer.Thisinsightintohischaracterwasakeyreasonformyofferinghima job.Likewise,IhiredOrlyHindi,mydirectorofoperations,aftermeetingherataColbehdinner,whereIsawhowgracefullyshe

handledadifficultsocialencounter.Thisprovidedmewithaperfectexampleofher remarkablepeople skills. Indeed,mymost successfulhireshavehappenednot because I advertised the position, but because I observed the person incandidmomentslikethese,whentheyweresimplybeingthemselves.At thesame time, Ialsoconsciouslymovedawayfromdealingwithanyone

whostruckmeasmysteriousoropaqueinanyway.Inmyimpressionableyouth,I had a number of glittering, socially prominent “friends” who were obscureabout who they really were. After leaving Oxford, I was naïvely dazzled bysomeonewhoclaimedtobeaTatarprince.Thatsummer,wegallivantedaroundLondonandtheFrenchRiviera,meetingothersupposedprincesandprincesses.I found it exciting,and Ienjoyed the feeling that Iwasentering these rarefiedsocialcircles.Inaway,itwasjustabitoffrivolousfun,butitwasalsomildlypernicioustobecaptivatedbythisworldofsuperficialglamour.Mohnishshowedmeabetterway.Inhisview,lifeisjusttooshorttodealwith

peoplewhoaren’tstraightforwardandforthcomingaboutwhotheyare.Thebeststrategyissimplytoleavethemysteriousobfuscatorsalone.Thegoal isnot tofigure them out, but to keep a distance. Warren and Mohnish, who are bothdown-to-earth and entirely lacking in pretense, are only interested in dealingwithpeoplewhoareanopenbook.Theydistancethemselvesfromalltheothers,leaving them in the “not sure” category,which is thehumanequivalentof the“toohard”boxonWarren’sdesk.BeforeIhaveanappointmentwithapersonIdon’talreadyknow,Itypically

providethemwithwritteninformationaboutmyself—forexample,mybioandmyfund’sannual report. Iwant tomake itaseasyaspossible for them toseewhereI’mcomingfromandtoformanaccurateimpressionofme.Likewise,Iroutinelyask them to sendmesomebackgroundmaterial about themselves. Ifpeopleareenigmaticorelusiveinanyway,IapplyBuffett’s“notsure”ruleanddecideagainstacloserrelationship.Bythesametoken,IhopetheywillseethatIreallyamwhoIappeartobe—

notafakewhodeceiveseitherhimselforothers.Iwanttobethesamepersonontheinsideasontheoutside.Inbusiness,asinotherareasoflife,Iwouldarguethatwe attract peoplewho are similar to us,who reflect the level of our ownconsciousness.IfIstrivetobehonestanddecent,I’mmorelikelytobringintomylifepeoplewhoarehonestanddecent.ThishelpstoexplainwhyBuffetthasdrawnsuchremarkablepeopleintohisorbit:theyprovideareflectionofwhoheis.ByobservingMohnish,Ialsolearnedanotherkeylessonabouthowtobehave,

bothinbusinessandinotherareasoflife.Icouldseethathewasneverneedyordemanding in the way that he dealt with people. There was no sense ofentitlement or desire to encroach on their time. In the early days of ourrelationship,I’dcallhiminCaliforniaandsayapologetically,“Ihopeyou’renotbusyandthatI’mnotdisturbingyou.”He’dreply,“Busy?Onthecontrary,Iwasjusttwiddlingmythumbs.”Itwasn’ttrue,butitwashiswayofmakingmefeelthatnothingwasmore important thanmycall. Indeed,oncountlessoccasions,I’ve received emails in which he says, “Call if you’re twiddling.” Similarly,whenwetraveledtoOmahatomeetDebbieBosanekforlunchin2010,hewrotetoher,“Ourscheduleisveryflexible....Feelfreetosuggestwhateverisidealforu.”Thisisn’taquestionofbeingsycophanticorlosinghisownsenseofself.On

thecontrary,Mohnishhasahealthyego.ButI’verepeatedlyseenhowcarefulheisnottoimposehimselfonothersortorideroughshodovertheirinterests.Hewantstoshowuponlywherehe’sneededorwanted.Hetakesgreatcarenottobeaburdentoanyoneortomakethemfeelthattheyhaveanyobligationtohim.WatchinghimactlikethishadaprofoundimpactonmebecauseIcouldseeso

clearly that it was a great way to behave. I remember discussing with him asituation inwhich an investorwanted to sell his stake inmy fund.My fatherinitiallysuggestedthatItrytodissuadetheperson.ButMohnishtoldme,“Don’ttrytoconvincethem.It’stheirmoney.Iftheywanttotakeitout,letthemdoit,

noquestionsasked.”Therelationshipwithmyinvestormighthavebeenending,butMohnishhelpedme tosee that thereshouldbenoguiltor recrimination—and,aboveall,nosenseofobligation.Thissimplebutrobustideahasradiatedoutintomanyotherareasofmylife.

Togiveyoujustoneexample,Inevertrytosolicitmyfriends(oranyoneelse,forthatmatter)toinvestinmyfund.I’mhappyforthemjusttobemyfriends.Thereisneveranyobligation.Yet,lookingback,IcanseehowappallinglyneedyIwasinmyearlyyearsas

a fund manager. Back then, I had somehow convinced myself that it wasimportanttosellmyselfandmyfundtoprospectiveinvestors,asif thisbrazenpushinesswereanintegralpartofbeingasmartbusinessmanandahigh-flyingfundmanager.Inreality,thiswasjustanembarrassingexampleofmyneediness.Ialsocametoseewhataturn-offithadbeenwhenIcold-calledsomeoneinanattempttodrumupbusiness,orwhenIsentoutamassemailinthevainhopeofseizingtheattentionofprospectiveinvestorswhohadexpressednointerestatallinthefund.Thiscanonlyhavemadeitlesslikelythatdiscerningpeoplewouldwanttoestablishclosertieswithme.By contrast, I love the story of Ian Jacobs, a Columbia Business School

graduate who successfully applied for a job with Buffett at Berkshire’sheadquarters.Alongwithhiscoverletter,JacobsapparentlyenclosedachecktorecompenseWarrenforhistimeinevaluatingthisjobapplication.Somepeoplesaw this as a ridiculous gimmick. But the check—which I’m sure was nevercashed—wouldhaveinstantlycommunicatedthemessagethatJacobsrespectedthevalueofBuffett’stime.Itwasapowerfulsignalthathedidnotwanttobeaburden.Thisisasmartwaytoact,not leastbecausepeoplegetdefensivewhenthey

sensethatwewantsomethingfromthemorharborahiddenagenda.Ibegantorealize that my attempts to grab attention or impose myself on others wereparticularlyannoyingwhenIwasdealingwith importantpeoplesince theyare

sooftentargetedinthisway.Notlongago,IhadanunforgettablelunchwiththeCEOofamajorbank.Earlyinourmeeting,ItoldhimsincerelythatIjustfeltsoblessedinmylifeandsofortunatetobetherewithhim.Herelaxedvisiblywhenhe realized that I wasn’t angling for anything but just wanted to enjoy hiscompany.Thekey,inmyexperience,istovaluepeopleasanendinthemselves,notasameanstoourownends.Mohnish often quotes a beautiful line from the Bible, “I am but dust and

ashes.”Now,likeme,he’saworkinprogress,andthere’sahintofironyinhisvoicewhenhesaysthis—asiftoacknowledgethathehasnotquitereachedthislevelofhumilityandself-abnegation.Neitherofuscouldlayconvincingclaimstosainthoodquiteyet.Still, I’verepeatedlyseenhisdesire toserveothersandnottoputhisneedsabovetheirs.Hisexamplehashelpedmetounderstandthatit’s possible to be a servant without losing your autonomy, self-respect, orambition.Inmyearlyyearsasafundmanager,Iwouldhavemockedtheideaofbeing a servant. I preferred to see myself as a smart manipulator. But at ourcharitylunchWarrenwasalsoaservantofsortsdespitebeingtheworld’smostfamousinvestor.ThanksinlargeparttoMohnishandWarren,IbegantorealizethatIoughtto

focusmoreonwhatothersneedfrommeinsteadofconstantlytryingtogetthemto fulfill my own needs. This might sound obvious, but it’s been a hugepsychologicalshiftforme,andit’sreallychangedthewaythatIlivemylife.In my New York vortex days, I would go to a networking event, meet a

stranger, andwonder how they could helpme.Often, they’d talkatme aboutwhatever product or service they wanted to sell, and I started to see howrepulsivethissortofagenda-drivenapproachtobusinesscanbe.So,overtime,Idevelopedadifferentattitudetonetworking.Mysimplerulewasthat,wheneverImet someone, Iwould try to do something for them. Itmight simply be anintroduction to someone else or even just a sincere compliment. What wasintriguingtomewasthewaytheyreacted.Insomecases,Isensedthattheywere

sayingtothemselves,“That’snice.Iwonderwhatelsethisguyisgoingtodoforme,orwhatelseIcanaskhimfor.”Inothercases,Icouldseethattheywantedto help me too. These seemingly trivial interactions provided a barometer ofwhetherpeopleapproachedtheworldasgiversortakers.At first, I attracted a high proportion of takers. For awhile, I foundmyself

getting ridiculously upset about it,wonderingwhy they didn’t understand thatthis was a lousy way to live. But by observing people closely, I graduallybecameabetterjudgeofwhowasagiverandwhowasataker,andIbegantoattractbetterpeopleintomylife.Ihopethisdoesn’tsoundmorecalculatedthanitis.BecausewhatI’mtryingtodoissimplycreateanecosystemformyselfinwhicheverybodyisthetypeofpersonwhowantstofindwaysofhelpingothers.When you’re surrounded by people like this, all of them trying to help one

another, it sometimes feels likeheavenon earth.People likeMohnishor JohnMihaljevic, forexample,are justgems—always looking tohelp, to support, toshare.Thesearethekeepers.Thepeoplewewantinourinnercircle.Thepeopleweshouldflyacrosstheworldtoseeiftheyliveabroad.And,ofcourse,thisiswhatIneedtobeforothers.Thecrazythingisthat,whenyoustarttolivethisway,everythingbecomesso

muchmorejoyful.ThereisasenseofflowandalignmentwiththeuniversethatInever feltwheneverythingwasaboutwhat I could take formyself.Again, Idon’twanttomakethissoundlikeI’msomekindofsaint.Butthisexperienceoffindingways to serve others has been so overwhelmingly positive that I nowfindmyself looking formore andmore opportunities to help.These days,myfocusisn’tjustonhelpingindividualsbutalsoorganizations,suchasmyOxfordcollege, Harvard Business School, and the Weizmann Institute. I recentlyrealizedthattheEntrepreneurs’Organizationdoesn’thaveachapterinIsrael,soI set one up. I also learned that there was no TEDx event in Zurich, so Icofoundedone.I’mnottellingyouthistobeself-congratulatoryastherearecountlesspeople

who do so much more good than I do. The point is simply that my life hasimproved immeasurably since I began to live this way. In truth, I’ve becomeincreasingly addicted to the positive emotions awakened in me by theseactivities. I also love thedeepening senseof connection that I’vegained to somanygreatpeopleandinstitutions.Onethingisforsure:Ireceivewaymorebygiving thanIeverdidby taking.So,paradoxically,myattemptsatselflessnessmayactuallybeprettyselfish.Warren and Mohnish, who are two of the smartest guys on earth, clearly

understand this.Asan investor andabusinessman,Warren’s achievements arealmostinconceivable.Yethisgreatestlegacymaywellbehisphilanthropicworkin supporting the Bill and Melinda Gates Foundation, which could affectmillionsofpeople.Likewise,Mohnishhasn’tdevotedhisconsiderablegifts tothe single-minded pursuit of wealth. His Dakshana Foundation is alreadytransformingthelivesofcountlessyoungIndians,givingthemopportunitiesthatmightotherwisebeunthinkable.Hehas toldmemorethanoncethathewouldprefertoberememberedforDakshanathanasaninvestor.ThegoalfortherestofusisnottobeWarrenBuffettorMohnishPabrai,but

tolearnfromthem.Inbigwaysandsmall,I’vecometoseethembothasgrandmastersinthegameoflife.Torepeatthatall-importantlinefromWarren,“Hangoutwithpeoplebetterthanyou,andyoucannothelpbutimprove.”

13

THEQUESTFORTRUEVALUE

Ifyourgoalinlifeistogetrich,valueinvestingisprettyhardtobeat.Sure,thereare timeswhen it falls out of favor, when even the greatest practitioners findthemselvesdismissedasfustyhas-beenswhohavelosttheirtouch.Butit’ssucha robust and fundamentally sound way to invest that it eventually regains itsluster.Irrationalexuberancecomesandgoes.Thequestforvalueendures.Still, this isnot justastock-pickingstrategy thatcanmakeyourich.Tome,

even the phrase itself—“value investing”—implies something deeper thanmerelyaccumulatingthemillionsrequiredtobuyamansioninGreenwich,askichalet inGstaad,andagleamingFerrari.AsWarrenBuffett’s lifeexemplifies,whatwearealsotalkingabouthereisaquestfortruevalue—forsomekindofmeaningthatgoesbeyondmoney,professionaladvancement,orsocialcachet.I don’tmean to dismiss or deride those things.While I’m slightly sheepish

aboutmybaser,morecapitalistinstincts,I’mnotthatsheepish...IdostilldriveaconvertiblePorsche,eventhoughI’mmildlyembarrassedtoadmitit.AndI’msoobsessedwithmypursuitoftheperfectcappuccinothatIspent$6,000onanexquisiteLaMarzoccocoffeemachine,whichIimportedfromFlorence.ItrytojustifytheseexcessesbycontemplatingtheimageofSirJohnTempleton—whogaveafortunetocharity—drivingaRollsRoyce.Ofcourse,evenBuffettboughtaprivatejet,whichheself-mockinglynamed“TheIndefensible.”(Later,havingchangedhismind,herechristenedit“TheIndispensable.”)And,forthatmatter,CharlieMungerspentmillionsonaluxurycatamarancalledthe“ChannelCat.”If stuff like this turnsyouon, thenvalue investing is a greatmeans toyour

self-indulgent ends. Enjoy. As I see it, this is the outer journey of the valueinvestor—thequestforwealth,physicalcomfort,and(forwantofabetterword)success.Butit’simportantnottogetsocaughtupinthismeaninglesschasethat

weforgetwhatmattersmost—theinnerjourneytowardsomethinglesstangibleyetmorevaluable.Theinnerjourneyisthepathtobecomingthebestversionofourselves that we can be, and this strikesme as the only true path in life. Itinvolvesaskingquestionssuchas:What ismywealthfor?Whatgivesmylifemeaning?andhowcanIusemygiftstohelpothers?Relatively early in his investing career, Buffett closed down his limited

partnerships and returned the assets to his shareholders. Even then, he justwasn’tthatinterestedintheunbridledpursuitofwealth.Clearly,it’snotmoneythatmakeshimtapdancetowork.Likewise,Mungerhassaidthat,onceyou’vemade a certain amount (I think it was $100million), there would have to besomething wrong in your head for you to continue dedicating yourself to theaccumulation ofwealth. Templeton also devotedmuch of his life to the innerjourney.Indeed,hisgreatestlegacyishischaritablefoundation,whichexplores“the Big Questions of human purpose and ultimate reality,” includingcomplexity, evolution, infinity, creativity, forgiveness, love, gratitude, and freewill.Thefoundation’smottois“Howlittleweknow,howeagertolearn.”Inmyexperience,theinnerjourneyisnotonlymorefulfillingbutisalsoakey

to becoming a better investor. If I don’t understand my inner landscape—including my fears, insecurities, desires, biases, and attitude to money—I’mlikelytobemuggedbyreality.Thishappenedearlyinmycareer,whenmygreedand arrogance ledme toD.H.Blair.My desperate need to appear successfulthenmadeitdifficulttoadmitmymistakeandleavethecompanyquicklyafterconcludingthatitwasamorallycorrosiveenvironment.Later,inmyNewYorkvortexyears,myenvyofpeoplewithbiggerfundsandmoreglamoroushomesledme astray again, convincingme that I needed tomarketmyself and try tobecomesomethingthatwasn’ttruetowhoIam.Byembarkingon the inner journey, Ibecamemore self-awareandbegan to

see these flaws more clearly. I could work to overcome them only once Iacknowledgedthem.Butthesetraitsweresodeep-seatedthatIalsohadtofind

practicalways to navigate around them. For example, bymoving to Zurich, IphysicallyremovedmyselffromanenvironmentinManhattanthatexacerbatedmy greed and envy. Knowing that cities like New York and London—theepicentersofExtremistan—hadthisdestabilizingeffectonme,itseemedsafesttogetaway.Butthisisanongoingprocess.AsIwrite,mywifeisexploringthepossibility

ofmoving our family to London so thatwe can be closer tomy parents,mysister,andourchildren’scousins.Insomeways,thisscaresme.WillIbeabletodealwiththeemotionalturmoilthatLondon,withitsextremesofwealth,mightstirinme?HaveIgrownenoughinternallythatIcanmovetherewithoutbeingemotionallydestabilized?CanIcreateapeacefulenvironment formyselfevenwithinLondon—forexample,inaquietsuburb,farfromtherealitydistortionofthe “super-prime” areas—where my mind can remain a calm pond? At themoment, the answers are unclear.But this is all part ofmy inner journey as Igrapplewiththeidiosyncrasiesthatmakeithardformetobearationalinvestor.Ignoranceisnotblisswhenitcomestoinvestingbecausethefinancialmarkets

are mercilessly effective at exposing these emotional weaknesses. During thecreditcrisis,forexample,itwasvitaltounderstandmyowncomplexattitudetomoney since this affected my judgment and my ability to deal with thepsychological impact of the crashing stock market. Intellectually, it’s easyenough tomaster the technical tools of investing—the ability to read balancesheets, say, and to identify undervalued companies. But what good are theseskillstoinvestorswhoaredrowninginaseaoffearthatutterlyoverwhelmstherationalneocortex?Takingpersonalresponsibilityratherthanblamingothersiscrucial.Insteadof

criticizingthefickleshareholderswhobailedoutofmyfundatthebottomofthemarket,itwasmuchmoreusefulformetothinkcarefullyaboutwhatitwouldmeantomeif themarketcontinuedtocrashandIhadtoclosemyfund.Whywoulditbesounbearablypainful?

Forme, this inner aspect of themarketmeltdownwasverydifferent than itwasforMohnish,whoseemedentirelyunaffectedbytheplungingpricesofthestocks in his portfolio. AsMohnish tells it, he spent an important part of hisyouth witnessing the many ups and downs of his father’s business career.Apparently, thereweremultipleoccasionswhenhis fatherwason thebrinkoffinancialcollapseoractuallywentbroke.Yetevenamidthattumult,hisfamilyinteractionswere remarkablyserene.So forMohnish, theprospectof financialdisasterisnotasemotionallyfraughtasitmightbeforme.Onehappyresultofhisemotional fortitudewas thathewasable tokeepbuyingbustedstocksatapointwhenother investorsmighthavebeenmore inclined tocurlup ina fetalpositioninaquietcorneroftheoffice.My own attitude to money is deeply influenced by the painful history of

EuropeanJewry.Mygreat-grandparentswerewealthyGermanindustrialistswhoownedamajorhatfactoryoutsideBerlin.ThentheNazisseizedtheirassetsanddestroyed their life of privilege.My family escaped to Israel (then Palestine),wheretheysetaboutreconstructingwhattheyhadlost.Mygrandfather,whohadbeen a lawyer in Germany, became an unsuccessful Israeli chicken farmer. Igrewuphearingtalesoffoodshortagesandofyoungmengoingoff todefendthecountryduringthoseearlyyearsinIsrael.Myfather,havinggrownuponhisparents’ chicken farm, spentmuchof his career as a corporate salaryman; hethenstartedabusinessthatgeneratedexcesscash,whichIinvestedforhim.Bynow,I’vemultipliedourfamily’swealthfive-fold.ButIstillhaveadeep-seatedfearthatfactorsbeyondmycontrolcouldsweepeverythingaway.Why does any of this matter? Because this narrative subtly but powerfully

shapesmyentireapproachtobusinessandinvesting.Forexample, Ineveruseborrowedmoney,andallmyinvestmentsaresoberandconservative.Forme,thestoryofmyfamilyandmoneyhasbeenoneofrestoration—offixingthedamagethatHitlerwrought.Ifeelatremendoussenseofresponsibilitywhenitcomestomyfamily’sfinances(mostofwhichareinvestedinmyfund),notleastbecause

I’m attempting to repair what was shattered more than 70 years ago and toprovide enduring security in an insecureworld. I lovewhat I do, but this is aserious business forme. Andwe know thatmoney is closely associatedwithsurvival in the human mind, so these emotional issues have the potential totorpedomy rational brain.By contrast,Mohnish canbuy stockswith a higherlevelofuncertaintyandvolatilitysince, forhim, thepossibilityof lossdoesn’ttriggerthekindoffearsthatarehardwiredintomysystem.Iwould argue that serious investors need to understand the complexities of

their relationship tomoney, given its capacity to wreak havoc. Based on thatunderstanding,wecanmakeadjustments—for example, changingourphysicalenvironment or adding certain items to our investment checklist. But I’m notconvinced that it’sentirelypossible tochange thewiring itself,however smartwemight be. I certainly haven’t managed it yet. I used to think that I couldovercomemyfearoffinancialloss,therebyfreeingmyselftotakemoreriskandachievehigherreturns.ButI’vegraduallycometoacceptthatthisisjustpartofwhoIam.There’snodoubtthatWarrenandMohnishhaveinnerlandscapesthatbetter equip them tomakeclearheadeddecisions involvingmoney.But I can’tspendmylifeyearningtobethem.Instead,Ineedtounderstandwhatmakesmedifferent, thenmake investments that I can handle emotionally, based on thisself-knowledge.Intheend,Ihandledthefinancialcrisiswell,partlybecauseIconfrontedmy

fearsoflossandfoundwaystoworkaroundthem.IfIhadn’tbeenawareofthisaspect of my inner life, I might have panicked when a stock like DiscoverFinancialServicesfell80percent.Instead,Iheldsteadyasitrebounded.HavinggainedadeepersenseofwhoIam,I’vealsostoppedworryingabout tryingtogetthebestreturns.I’mmorecomfortableaimingfordecentreturnsthatbeatthemarket indexes over the long term despitemy personal limitations. Similarly,I’vealwaysinvestedaheftyportionofmyfundinBerkshireHathaway.Giventhe company’s enormous size, I could probably get better returns by investing

elsewhere. But Berkshire’s presence in my portfolio provides a ballast—bothfinanciallyandemotionally.It’spsychologicallyimportanttohaveBuffettinmyecosystem.Isthisrational?Forme,yes.ForMohnish,maybenot.Giventheimportanceofthisinnerjourney,how—inpracticalterms—should

wegoaboutit?Personally,I’veusedcountlesstoolstoacceleratethisprocessofinwardgrowth,andI’vefoundthemallhelpful(orinteresting)atdifferentstagesof my life. I’ve done lots of psychotherapy, even though this would haveappalledmeinmyclosed-mindedyouth.Amongotherthings,Ididsevenyearsof Jungian therapy once a week, and I’ve dabbled in things like emotionallyfocusedtherapy,cognitivebehavioraltherapy,neurolinguisticprogramming,andeven eye movement desensitization and reprocessing. As I came to realize,humans are infinite in their variety, and there is an almost infinite variety oftherapiestohelpusundertakethisjourney.I’vealsodelvedintoreligionwithvariousrabbisandotherspiritualteachers,

including my friend Isaac Sassoon, who is the author of a book calledDestinationTorah:ReflectionsontheWeeklyTorahReadings. I’vehadregularsessionswithcareercoaches. I’ve studiedphilosophyandbecame friendswithLou Marinoff, a “philosophical counselor” who is the author of Plato, NotProzac! Applying Eternal Wisdom to Everyday Problems. And I’ve readcountless self-helpbooks.Temperamentally, I’mnotwell suited tomeditation.ButI’mopentoprettymuchanythingaslongasImightlearnsomething.Another fantastic tool for internal growth is the experience of adversity.

Indeed,thisshouldreallybethefirsttoolofall.Ifwetakeresponsibilityforourmistakesandfailures,theyofferpricelessopportunitiestolearnaboutourselvesandhowweneed to improve.Mymistake in joiningD.H.Blair, forexample,enabledme to see that I had todealwithmyavarice andalso stopmeasuringmyselfbyanouterscorecard.Adversitymay,infact,bethebestteacherofall.Theonlytroubleisthatittakesalongtimetolivethroughourmistakesandthenlearnfromthem,andit’sapainfulprocess.

Forme,thegreatestspringboardfortheinnerjourneyhasbeentoparticipatein what Napoleon Hill would call a “mastermind” group. Harvard BusinessSchool calls it a study group, and theYoung Presidents’ Organization calls it“Forum.”Thenamedoesn’tmatter.Theideaisforaclose-knitgroupofabouteight to tenprofessionals to share their issues confidentially, guidedby a peermoderator.Ononememorableoccasion,Igavea20-minutepresentationaboutmy tortured relationship with a key business associate who was also a closefriendfromuniversity.Thegroupthensubjectedmetotworoundsofclarifyingquestions,whichleftallthedetailsoftherelationshipoutintheopenforthemtoexamine.Mychestburnedwithanger.Iwasconvincedthatmyfriendhaddonethingsthatwerewrongandunfairandthatshewastakingadvantageofme.ButIalso felt guilty and embarrassed since it became increasingly clear during thissessionthatIhadn’tbehavedthatwelleither.Then, one by one, the other eight members of the group shared their own

experiences of business relationships with friends or relatives that had goneawry.My first reaction was intense relief as I realized that I wasn’t alone inmakingsuchmistakes.IalsocametoseethatneithermyfriendnorIhadactedquiteasbadlyasIhadbelieved.Equallyimportant,nobodypassedjudgmentonme,andIreceivednoexplicitadvicesincethiswouldhaveviolatedthegroup’srules.Still,bytheendofthediscussion,Inolongerfeltthatmyguiltandangerwere controllingme.And the eight storieswere repletewith examples of thetypeofactionsthatIcouldtaketofixthesituation.Insteadoffeelingpowerless,Inowhadlotsofoptions.Asaresult,Iresolvedmyconflictinapositiveway,andmy formerbusinessassociate remainsadear friend—anda shareholder inmyfund—tothisday.Suchisthepowerofamastermindgroup—whetherit’sarrangedbytheYoung

Presidents’Organization,theEntrepreneurs’Organization,orahandfuloftrustedfriendslikethemembersoftheLatticeworkClub,whichMohnishandIcreated.Twiceayear,thisgroupofeightprofessionalsheadsoffforathree-dayretreatto

discusswhatever is on ourminds. Forme,meetings like these have been thesinglebestacceleratorofinnergrowth.Thetruthisthatitdoesn’tmatterhowyoudothisinnerjourney.Whatmatters

isthatyoudoit.Whicheverrouteyouchoose,thegoalistobecomemoreself-aware, strip away your façades, and listen to the interior. For an investor, thebenefits are immeasurable because this self-knowledge helps us to becomestronger internally and to be better equipped to deal with adversity when itinevitably comes.The stockmarket has an uncannywayof finding us out, ofexposingweaknesses as diverse as arrogance, jealousy, fear, anger, self-doubt,greed, dishonesty, and the need for social approval. To achieve sustainablesuccess, we need to confront our vulnerabilities, whatever they may be.Otherwise,wearebuildingour successona fragile structure that isultimatelyliabletofalldown.Buttherealrewardofthisinnertransformationisnotjustenduringinvestment

success.It’sthegiftofbecomingthebestpersonwecanbe.That,surely,istheultimateprize.

ACKNOWLEDGMENTS

Whensomeonehasbeenextraordinarilygenerous,perhapsthebestwaytothankthemisinwriting—eitherinalettertothemorinastorythatattemptstorecounttheirkindness.Inthatsense,thisbookisonelongthankyounotetofourofthegreatestteachersinmylife:myfather,SimonSpier;WarrenBuffett;CharlieMunger;andMohnishPabrai.Forme,thefourofyouarenotjustalimitlesswellofwisdombutalsoaninspiringexampleofhowtoactintheworld.

Ialsowanttothankanumberofpeoplewhomadeitpossibleforthisbooktoexist:

WILLIAMGREENWhat I thoughtwouldbe light edits to the finaldraftquickly turned into amajor collaborationentailingheavyrevisionandentirerewritesofeverychapterinrecordtime.Yourcompulsivededicationtomakingthe text theverybest that it canbe,nomatterwhat thecost,has improved thebookbeyondmywildestexpectations.

Myownwriting tends to comeout in eddies, not tomention the occasionalwild vortex.You, on theotherhand,knowhowtoputsentencesandparagraphstogetherbeautifullyandinsuchawaythatmakesthemajoytoread.Yoursenseofnarrativestructurehasshapedeachandeverychapter,ensuringthattheyhadabeginning,middle,andend,nottomentionapayoffforthereader.

Moreimportant,perhaps,throughyourrichknowledgeofthesubjectmatterofthebook,aswellasofme,youwereable toquestionmedeeply.Topushmetocompletehalf-finishedthoughtsandhelpmetosurfaceideasthatIcouldnotquitefigureouthowtoexpress.EvenmoreimpressivehasbeenyourregularcapacitytosenseintuitivelywhatIwasreachingforandalsoputthatintowords.

Thisexperiencegaveme theprivilegeofbeingable to learnmoreaboutwriting fromamasterof thecraft,anditleavesmewithanewfoundunderstandingandrespectforwhatgreatwritersandeditorsdo.Iam deeply grateful to you for having directed your talents towardme and this book for several intensemonthsinZurich,Klosters,Greenwich,ShaveiTzion,andNewYork.

But perhaps the greatest reward of this collaboration has been the deeper friendship with you. Todiscoverandenjoyyourwickedsenseofhumor(includingyourgleefulderisionwhenIrepeatedlyspelledtheword“the”as“teh”!),andbywayofyourintroductiontotheKabbalah,todiscovernewgatesthoughwhichtoconnectwiththeuniversalwisdomofthecosmos.

Thanksalsotoyourwife,Lauren.Andtoyourchildren,HenryandMadeleine:I’mgratefultoyouforsharingyourfather’stimewithme.Itwasyourtemporaryloss,butapermanentgainformeandthereader.

JESSAGAMBLEWithoutyou,Ineverwouldhavestartedthisbookbecausemyfearsofwritingweresimplytoogreat.UponfirstmeetingyouatTEDGlobal,IcouldseethatyoubelievedinmymessageandinthisbookevenbeforeIdid.Youalonesustainedtheideaofthisbookthroughourearlyconversationsandinterviews.YouwonthepreciousattentionofWilliamClark,ouragent.And,whileIwasquiveringwithfear,itwasyourexcellentbookproposalthatbroughtusintothehandsofPalgraveMacmillanandLaurieHarting.

Evenoncewestarted,thereweremanymoremomentsthanIcaretorememberwhen,haditnotbeenforyourconstantandquietencouragement,Imightnothavestuckwithit.Andyourcalmingpresenceatourearlymorningwritingsessionswasinstrumentalingivingmethecouragetofaceuptomyterrorandputpentopaper.Butmorethananything,thanksforyourfriendshipandloyaltytomeandtothebookthroughthevariouschangesandtransformationsoftheproject.

Thanksalsotoyourson,Oliver,forhavingpartedwithyouduringyourvisitstoZurich.

LAURIEHARTINGAtfirst,IthinkIwasafraidofyou!Ihadnoideawhyonearthyouhadtakensuchariskwithme.Let’snotmincewords:atthestart,mywritingwasabitofamess.ItisonlyasIgraduallyimprovedandbegantounderstandwhatweweretryingtocreatethatIfullyunderstoodwhatagreatally,champion,andfriendIhadfoundinyou.Icannowseejusthowmasterfullyyouhavebeenabletocoaxthebestoutofme.

JENAPINCOTTANDPETERHORNICKThankyouforyourfriendshipandcare,andforplantingthefirstseedsofthisbook.Initially,thoseseedsfellonbarrenground,buttheydideventuallyfindmoistureandbegintogerminate.Youwerealwaystherethroughthedryspells tohelpandencourageme.Andwithoutyou, thebookwouldneverhavefounditstitle.

COLLEAGUESIhadtofitthewritingofthisbookinwithmyworkasthemanageroftheAquamarineFund.KeithSmith,LyndaBrandt,andOrlyHindi:thankyousomuchforhelpingmetofindthetimeandcreatingthestructureformetowrite.Inthisandsomanyotherways,youkeepmylifeontrack.

Iamalsograteful tothealumniofAquamarine:MariyaSklyar,DanMoore,JenniferDavies,AmandaPullinger, David Kessler, Ori Eyal, Julie Schottenstein, Sahil Gujral, Mark Soukup, Pushkar Bedekar,AbhishekRai,SarahStephenson,OliverSuess,MengTian,andRinaEndo.

PRODUCTIONAsthisbookhasgrown,ithasattractedagrowingbandofincredibletalenttoproduceit.Inadditiontothepeoplementioned above,many thanks toWilliamClark,my superb agent.Also,my thanks toMichelleFitzgerald, Lauren LoPinto, Heather Florence, Alan Bradshaw, and the rest of the team at PalgraveMacmillan.Withoutyourinputandenthusiasmthisbookmightsimplyhavebeenaproposal,languishinginadrawerorfilingcabinet.ThanksalsotoMarkFortierforputtingusonthemap,toCharlieCampbelloftheEdVictorLiteraryAgency, toCeceliaWong for yourwonderful designof the book cover, and to JelisaCastrodaleforyourcareinfact-checkingthemanuscript.

PUBLISHINGThanks also toDebbieEnglander, Jenny and Jane-AnneHobbs,MylesThompson,MaggieStuckey, andotherfriendsfromthepublishingworldwhohavehelpedinvariouswaystonudgethisbookalong.

WRITINGSPOTSEarlyon,Lory(mywife)andIrealizedthatIjusthadtowritewhereverIfoundmyself,andsotherearenumerousplaceswherethisbookwaswritten.EberhardvonKoerberandIrisSchedler:ourofficeinZurichis truly an oasis. Joyce and Rene: so is Villa Florence, which you keep so immaculately. Flor Soriano,thanksfortakingcareofmeandmyfamilyinZurichandKlosters,andforhelpingtomakeourhomesuchawarmenvironment.Thanksalsotothekindandfriendlystaffatawholehostofotherlocations,includingVia Quadronno, Ristorante Sant Ambroeus, Stumptown Coffee Roasters, Tmol Shilshom, Intelligentsia,Rizzoli, La Stanza, the New York Society Library, the London Library, the Zurich Central Library,Brasenose College, Uniklinik Balgrist, Widener Library, the Delamar Greenwich Harbor Hotel, HotelPardenn Piz Buin, Schulthess Klinik, Chesa Grischuna, the Mamilla Hotel, the Westin Resort CostaNavarino,FessParkerWineCountryInn&Spa,theGrasshopperClub,HotelIrvine,BacaraResort&Spa,theRacquetandTennisClubofNewYork,LaPalestra, thePhillipsClub, theQueen’sClub, theTuxedoClub,andParagraph.

TEACHERSWhilehelpingmetowritethisbook,WilliamGreentaughtmeabeautifullinefromHenryJamesthatlifeis“all inclusion and confusion” while art is “all selection and discrimination.” In telling the story of myeducation as a value investor, there has—inevitably—been a great deal of selection since we couldn’tincludeeverything.ThishasmeantthatIhaven’trecountedinsufficientdepththeimportanceofmanygreatteachersinmylife.Here,Iwanttothankthesepeoplewhohavebeeninstrumentalinmyeducation:

I havebeenblessedwithmany extraordinary teachers and educators, includingPeterSinclair,VernonBogdanor,andTonyCourakis,whotutoredmeineconomicsandpolitics;MaryStokes,JohnDavies,HughCollins,PeterBirks,andBernardRudden,whotutoredmeinlaw;andDianaHughes,CharlesStewart,andotherswhotaughtmeattheCityofLondonFreemen’sSchool.RichardNolan,DickPoorvu,RawiAbdelal,Clayton Christensen, Boris Groysberg, Len Schlesinger, Jan Hammond, David Joffe, Amar Bhide, BillSahlman, andRayGoldberg are some, but not all, of the brilliant professors I had atHarvardBusinessSchool.

Inmy professional life, I have also been tremendously fortunate to have hadwonderful teachers andcollaborators.JohnMihaljevic: Iamsograteful thatyouchose tomove toZurichwhenyoudid; I relishyourfriendshipandoursquashsessions!KenShubinStein:ourmanyconversationshaveservedtodeepenvastlymyunderstandingofinvestingandhowtoimplementtheBuffett-Pabraiwayinourownlives.BryanLawrence,RichardBergin,JaneBuchanandMartinCalderbank:youshowedmethatbusinessschooldoesnot have to be a shallow experience. Nick Sleep and Qais Zakaria: you have instructed me with greatgenerosity,evenifIhaveprovedtobeapoorstudent.Othercolleagues,teachers,andfriendsfromwhomIhavelearnedagreatdealincludeJonathanBrandt,CiccioAzzolini,GaryAlexander,DavidCameron,ChrisHohn,LloydKhaner,GirishBhakoo,AllenBenello,JoshTarasoff,CarleyCunniff,ShaiDardashti,JeffreyHamm,BillAckman,BorisZhilin,TomGayner,AndyKilpatrick,AmitabhSinghi,FranzHeinsen,SteveWallman, Alice Schroeder, Eitan Wertheimer, Rolando Matalon, Tom Russo, Jens Heinemann, VitaliyKatsenelson, Terry and Anne Plochman, Joanna Samuels, Norman Rentrop, Whitney Tilson, RachelGartner,JackSkeen,BruceHalev,DanielAegerter,BenjySchmelz,IsaacSassoon,AkshayJain,PasqualeManocchia,DianaWais,GregPeters,PeterBevelin,MiguelBarbosa,YaqubHanna,MeghManseta, JeffGrant, Soren Ekstrom, Mo Fathelbab, Roni Witkin, Ken Tyler, Sanjeev Parsad, Gillian Ward, MichaelSanson, Debbie Bosanek, Satyabrata Dam, Ned Hallowell, Claude Chemtob,Michael Silverman, JacobWolinsky, VerneHarnish, Jono Rubinstein, Jorge Cherbosque, AjayDesai, Susan Tross, Natasha Prenn,MarySolanto,andAlexRubalcava.

THETEDCONFERENCEThankstoBrunoGiussaniattheTEDGlobalconferenceinEdinburgh,throughwhomImetJessaGamble,withoutwhomthisbookwouldnothavehappened.IattendedmyfirstTEDconferenceinMysore,India,fiveyearsago.Atthatconference,ChrisAnderson’svisionof“IdeasWorthSpreading”immediatelytookroot in me, and I have been a regular attendee and participant in the community ever since. The TEDconferences have contributed hugely to my becoming a more open, playful, and (hopefully) moreenlightened person. Many thanks to everyone from TED who has touched my life, including ChrisAnderson,LiLu,HugoSchotman, JuneCohen, JasonWishnow,TomWujec,ErikBrenninkmeijer,LisaStringle,JaneWulf,MayaElhalal-Levavi,JanetEchelman,KathrynSchulz,AbigailTenembaum,ClaudiaMarcelloni,RobertGupta,KatherineMcCartney,LiorZoref,MichaelWeitz,andAlexKnight.Itwasalsothrough TED that I connected to my friend Rolf Dobelli of Zurich Minds, which has become anotherextraordinaryforceforchangeinmylife.

PARTNERS,FRIENDS,ANDFORUMMATESIhavebeenprivilegedtohaveawonderfulgroupoffriendsandforummateswhohavetaughtmecountlesslessonsaboutinvesting,business,andlife.TheyincludeTimMonahan,JesperHart-Hansen,JohnMeckert,Etienne Zackenfels, David Eigen, Stefan Rosen, Drew Pizzo, Len Katz, Marek Lis, Jim Tormey, TonyCoretto,BryanDavid, JayLee,RayCarile,MarcStöckli,VitoCritti,AdrianLocher,PaloStacho,MarkO’Malley,ChristianWey,PhilipRyffel,JochenWerz,NicolasPlakopitas,JenniferVoss,FranciscoNegrin,Jeremy Lack,MattWeiss, AndrewWeeks, Spencer Young, Gilles Bonaert, SarahMarshall, Roy Engel,AndreasSchweitzer,DanielSchwartz,GrantSchreiber,PhongNguyen,BeylaZivGuest,ChrisDetweiler,Michael Baer, Mark Pincus, Maurice Ostro, Hossein Amini, Roger Glickman, Franz Heinsen, KateSouthgate, JochenWermuth,HaroldTittman,PerryBritton,MunaAbuSulayman,Naifal-Mutawa,ZoharMenshes,PatrickQuestembert,TimBeardson,ArturoZapata,FrançoisGutzwiller,RichardHarris,ArthurMikaelyan,AndersHvide,FredUytengsu,WilliamO’Chee,ShiraKaplan,KaranBilimoria,LukeBenfield,CharlesHipps,BobLowery, FrankRichter,DanaHamilton,Raffaello d’Andrea,NoemieDelfassy,AnilKumar,GeneBrowne,YildizBlackstone,AhalBesorai,AndyBender,DavidRettig,ArminStruckmeier,DavidSomen,AndrewWeeks,ShimonElkabetz,AdamEiseman,ArthurFish,CharlesDauber,FranziskaMüller-Tiberini,GlennTongue,AdrianBeer, ShaiMisan,DominicBarton,AndyBender,LouMarinoff,Martin Seager, Phil Holthouse, Nick Soulsby, Eveline Carn, SeanGorvy, SarahMoney, John Schwartz,EyalRonen,PhilipandHerbertOchtman,JimHawkins,MuhammadHabib,PeterWilson,SherryCoutu,Andrew Feldman, Stephanie Goff, Alan Hassenfeld, Sony Mordechai, Christian Stolz, ChristinaAnagnostara,DanSachs, JeffreyHamm,StephenRoseman,ChungMong-gyu, JamesKralik,YongPingDuan, Ion Yadigaroglu, Jeff Pintar, and Dante Albertini. Organizations, forums, and other mastermindgroupsthathavehadadeepinfluenceonmeincludevariouschaptersoftheYoungPresidents’OrganizationandtheEntrepreneurs’Organization,theZuribergandNewYorkPacersToastmasterschapters,aswellasthePosse,Fulani,Ararat,theFawkesforum,theLatticeworkClub,andVALUEx.

MYEXTENDEDFAMILYHavinglivedinmanycountries,mydeepestrootsliewithmyextensivefamily,scatteredaroundtheworldfromMexicoandtheUnitedStatesintheWesttoIsraelandAustraliaintheEastandtoLondon,Munich,andZurichinthemiddle.Saskia,Petra,Josh,Ramon,Gloria,Jules,Judy,Yochanan,Varda,Miriam,Amos,Ido, Zohar, Boaz, Michael, Shai, Hagai, Ori, Bridgit, Harvey, Jo, Clea, Hubertus, Raphael, Rosemarie,Klaus,Peter,Gaby,George,Frank,Rita,Dorothy,Selmar,Marlene,Paul,Erika,Andrea,Raquel,andallmyothercousins:youhaveblessedmeandmyfamilywithyourrichdiversity.

MYIMMEDIATEFAMILYMyfather,Simon,whotrustedme.Mymother,Marilyn,whotaughtmeempathy.Mysister,Tanya:earlyon,Iwasabletolearnvicariouslyfromyourexperience.Andthatmademylifeimmeasurablyeasierandmychallengessomuchmoremanageable.

Mychildren:Sarah,Isaac,andEva.Becomingafatherhasbeenaneducationinitsownright,andI’mconstantlyastonishedathowmuchyoualreadyknowandhavebeenabletoteachme.It’sbeensuchajoyto seeyourgrowingknowledgeand loveofdiverse subjects—from theGreekmyths toStarWars, fromHarryPottertotheBerenstainBears—andyourburgeoningtalentsinsportsandmusic.It’samarveltoseethewayyoumoveeffortlesslybetweenSpanish,English,German,andFrench,nottomentionHebrew.Buteachofyouhasalsotaughtmeinadeeperway:fromyou,Ihavelearnedmoreaboutqualitieslikeempathy,playfulness, perseverance, and drive than I have learned from many adults. Thank you for being myultimateteachers.

Finally,tomywife,Lory:thankyoufromthedepthsofmyheartforgivingmeallofthetime,love,andemotional support that I needed to write this book—and for putting up with me, my moods, and mydistractions.Withmuchgratitudeandlove,

GuySpierZurich,2014

BIBLIOGRAPHYANDGUIDETOFURTHERREADING

Allofthebookslistedbelowhaveplayedabigpartinmyeducation,notjustasavalueinvestorbutasaperson insearchofhappiness, fulfillment,andadeeperunderstandingofhowtheworldworks.Mygoalhereissimplytosharewithyouaselectionofbooksthathavehadanimpactonmeandthathaveenrichedmylife.Thisisadecidedlyidiosyncraticlist,rangingfromseminalworksoninvestingtoesotericstudiesofcomplexity, psychology, and games. It’s not a comprehensive list by anymeans. But I hope you’ll findmuchinherethat’suseful,enlightening,andlife-enhancing.

INVESTINGTheIntelligentInvestor:TheDefinitiveBookonValueInvestingbyBenjaminGrahamiswhereitallstartedforme. Four other books that deserve to be read and rereadmany times are SethKlarman’sMargin ofSafety:Risk-AverseValueInvestingStrategiesfortheThoughtfulInvestor;JoelGreenblatt’sYouCanbeaStock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits; The AggressiveConservativeInvestorbyMartinJ.Whitman,MartinShubik,andGeneIsenberg;andJohnMihaljevic’sTheManualofIdeas:TheProvenFrameworkforFindingtheBestValueInvestments.BeforeIdiscoveredvalueinvesting,Iwasalsocaptivatedbytwootherinvestmentclassics:EdwinLefèvre’sReminiscencesofaStockOperatorandTheAlchemyofFinancebyGeorgeSoros.

HEROES,MENTORS,ANDROLEMODELSRoger Lowenstein’s biographyBuffett: TheMaking of an American Capitalist was the first book that Iconsciously used to help me “model” Warren Buffett. Other seminal works on Buffett include AliceSchroeder’sThe Snowball: Warren Buffett and the Business of Life andTap Dancing to Work: WarrenBuffettonPracticallyEverything,1966–2013byhisfriendCarolLoomis,arenownedwriterwhoworkedatFortunefor60years.ThereisalsoadeepwellofwisdomfromBuffettinBerkshireHathawayLetterstoShareholders, 1965–2013. Another marvelous glimpse inside the mind of a master is Poor Charlie’sAlmanack: TheWit andWisdom of Charles T. Munger, which includes his eye-opening analysis of thecausesofhumanmisjudgment.

INNEREXPLORATIONSThebestguideto“forum”isMoFathelbab’sForum:TheSecretAdvantageofProfessionalLeaders.Thetitlesaysitall.ButIhighlyrecommendthatyoudiscoverthepowerofsuchmastermindgroupsbyjoiningone.SomeofthebestarerunbytheEntrepreneurs’OrganizationandtheYoungPresidents’Organization,whichdevoteenormousresourcestohelpingtheirmembershaveapositiveforumexperience.Toastmastersworks slightlydifferentlybut is also excellent. (It’s also a lotmoreegalitariananda lot less expensive.)AlcoholicsAnonymous,whichIhavenotattended,producesawonderfulbookentitledTwelveStepsandTwelveTraditions.Althoughcreatedtohelprecoveringalcoholics,itslessonsareapplicabletoeveryone.

SELF-HELPIt’s tempting for cerebral people to raise their eyebrows at the very thought of self-help books, but I’vefoundagreatdealofpracticalwisdomwithinthisgenre.Forme,thecentralfigurehereisTonyRobbins.Awaken the Giant Within: How to Take Immediate Control of Your Mental, Emotional, Physical, andFinancialDestiny!providesasgoodanintroductionasanytohisideas,asdohisvariousrecordings.Buttoexperiencethefullbenefitofwhathehastoteach,Iwouldrecommendattendingoneofhisseminars.

PSYCHOLOGYWe all embark on the inner journeywithout a good roadmap. But there are signposts. I first began todiscover this rich territorywhen I readTheGrail Legend by Emma Jung andMarie-Louise von Franz,followedbyTheFisherKingandtheHandlessMaiden:UnderstandingtheWoundedFeelingFunctioninMasculineandFemininePsychologybyRobertJohnson.Duringmyseven-yearstintinJungiantherapy,IfoundEdwardWhitmont’sThe SymbolicQuest: Basic Concepts of Analytical Psychology a very usefulhandbook. My first explorations into the power of emotion came from reading Diana Fosha’s TheTransformingPower of Affect: AModel for AcceleratedChange, which then ledme toworks byAllanSchore,AntonioDamasio,JosephLeDoux,andothers,someofwhichI’velistedbelow.

ARANDOMWALKTHROUGHMYLIBRARYWhat follows is a brief list of additional books that I’ve found intriguing and enriching for countlessreasons.Aretheyrelevanttoyoureducationasaninvestor?Someyes.Somenotsomuch.ButI’vefoundallofthesebooksrichlyrewarding.Theyarefilledwithwisdomnotjustonstock-pickingbutoneverythingfromantstoanarchy,financetolove.Thereshouldbesomethinghereforeveryone.

BusinessDelivering Happiness: A Path to Profits, Passion, and Purpose by Tony HsiehDifferent: Escaping theCompetitiveHerdbyYoungmeMoonGettingtoYes:NegotiatingAgreementwithoutGivingInbyRogerFisher,WilliamUry, and Bruce PattonGive and Take: Why Helping Others Drives Our Success byAdamGrantHowIRaisedMyselffromFailuretoSuccessinSellingbyFrankBettgerLoveIstheKillerApp:How toWinBusiness and InfluenceFriendsbyTimSandersMastering the Rockefeller Habits:What You Must Do to Increase the Value of Your Growing Firm by Verne Harnish MatsushitaLeadership:Lessonsfromthe20thCentury’sMostRemarkableEntrepreneurbyJohnKotterOgilvyonAdvertisingbyDavidOgilvy

Overhaul:AnInsider’sAccountoftheObamaAdministration’sEmergencyRescueoftheAutoIndustrybySteven Rattner Sam Walton: Made in America by SamWalton with John Huey The Box: How theShippingContainerMade theWorld Smaller and theWorld EconomyBiggerbyMarc LevinsonTheEssaysofWarrenBuffett:LessonsforCorporateAmericabyWarrenBuffettandLawrenceCunninghamTheGo-Giver:ALittleStoryaboutaPowerfulBusinessIdeabyBobBurgandJohnDavidMannTheHaloEffectand theEightOtherBusinessDelusionsThatDeceiveManagersbyPhilRosenzweigTheOneMinuteManagerbyKennethBlanchard andSpencer JohnsonTheOrigin and Evolution of NewBusinessesbyAmarBhidéThePowerofFullEngagement:ManagingEnergy,NotTime,IstheKeytoHighPerformanceandPersonalRenewalbyJimLoehrandTonySchwartzThePowerofHabit:WhyWeDoWhatWeDoinLifeandBusinessbyCharlesDuhiggTheStartupGame:InsidethePartnershipbetween Venture Capitalists and Entrepreneurs byWilliam Draper The Talent Code: Greatness Isn’tBorn: It’sGrown,Here’sHow.byDanielCoyleWhaleDone!ThePowerofPositiveRelationshipsbyKenneth Blanchard, Thad Lacinak, Chuck Tompkins, and Jim BallardWho Moved My Cheese? AnAmazingWaytoDealwithChangeinYourWorkandinYourLifebySpencerJohnsonWorkingTogether:WhyGreatPartnershipsSucceedbyMichaelEisnerwithAaronCohenEconomics

Modern International Economics by Shelagh Heffernan and Peter Sinclair Predictably Irrational: TheHiddenForcesThatShapeOurDecisionsbyDanArielyTheEconomyasanEvolvingComplexSystembyPhilipAnderson,KennethArrow,andDavidPinesTheRationalOptimist:HowProsperityEvolvesbyMattRidleyGames

500MasterGamesofChessbyS.TartakowerandJ.duMontHomoLudens:AStudyofthePlayElementinCulturebyJohanHuizingaRealityIsBroken:WhyGamesMakeUsBetterandHowTheyCanChangetheWorldbyJaneMcGonigalWinningChessTacticsforJuniorsbyLouHays

Wise Choices: Decisions, Games, and Negotiations by Richard Zeckhauser, Ralph Keeney, and JamesSebeniusInvesting

AZebrainLionCountrybyRalphWangerwithEverettMattlinActiveValueInvesting:MakingMoneyinRange-BoundMarketsbyVitaliyKatsenelsonBeatingtheStreetbyPeterLynch

CommonStocksandUncommonProfitsbyPhilipFisherFooledbyRandomness:TheHiddenRoleofChanceinLifeandintheMarketsbyNassimNicholasTalebFoolingSomeofthePeopleAlloftheTime:ALongShortStorybyDavidEinhornandJoelGreenblattFortune’sFormula:TheUntoldStoryof theScientificBettingSystem thatBeat theCasinosandWallStreetbyWilliamPoundstoneInvesting:TheLastLiberalArtbyRobertHagstrom

InvestmentBiker:AroundtheWorldwithJimRogersbyJimRogersMoreMortgageMeltdown:6WaystoProfit in These Bad Times by Whitney Tilson and Glenn TongueMore Than You Know: FindingFinancialWisdominUnconventionalPlacesbyMichaelMauboussinOfPermanentValue:TheStoryofWarrenBuffettbyAndrewKilpatrickPioneeringPortfolioManagement:AnUnconventionalApproachtoInstitutionalInvestmentbyDavidSwensenSecurityAnalysisbyBenjaminGrahamandDavidDodd

Seeking Wisdom: From Darwin to Munger by Peter Bevelin Short Stories from the Stock Market:Uncovering Common Themes behind Falling Stocks to Find Uncommon Ideas by Amit Kumar The

Dhandho Investor: The Low-Risk ValueMethod to High Returns byMohnish Pabrai TheManual ofIdeas: The Proven Framework for Finding the Best Value Investments by John Mihaljevic TheMisbehavior ofMarkets: AFractal View of Financial TurbulencebyBenoitMandelbrot andRichardHudsonTheMostImportantThing:UncommonSensefortheThoughtfulInvestorbyHowardMarksTheWarrenBuffettWaybyRobertHagstrom

ValueInvesting:FromGrahamtoBuffettandBeyondbyBruceGreenwald,JuddKahn,PaulSonkin,andMichaelvanBiemaWhereAre theCustomers’Yachts?Or,AGoodHardLookatWallStreetbyFredSchwedYourMoney andYourBrain:How theNewScience ofNeuroeconomicsCanHelpMakeYouRichbyJasonZweigLiterature

100YearsofSolitudebyGabrielGarcíaMárquezHamletbyWilliamShakespeareJonathanLivingstonSeagullbyRichardBachOliverTwistbyCharlesDickensZenandtheArtofMotorcycleMaintenance:AnInquiryintoValuesbyRobertPirsigMiscellaneousAutobiography:TheStoryofMyExperimentswiththeTruthbyMahatmaGandhiCityPolicebyJonathan

RubinsteinEndurance:Shackleton’sIncredibleVoyagebyAlfredLansingLongWalktoFreedom:TheAutobiographyofNelsonMandelabyNelsonMandelaMetaphorsWe Live By byGeorge Lakoff andMark JohnsonReagan:ALifeinLettersbyRonaldReagan

The Autobiography of Benjamin Franklin by Benjamin Franklin The Checklist Manifesto: How to GetThingsRightbyAtulGawandeTheHerowithaThousandFacesbyJosephCampbell

TheNewBritishConstitutionbyVernonBogdanorThe Power of Myth by Joseph Campbell with Bill Moyers Vor 1914: Erinnerungen an FrankfurtgeschriebeninIsraelbySelmarSpierWalden:or,LifeintheWoodsbyHenryDavidThoreau

WhyAmericaIsNotaNewRomebyVaclavSmil

PhilosophyandTheologyATheoryofJusticebyJohnRawlsAnarchy,theState,andUtopiabyRobertNozickDestinationTorah:Reflectionson theWeeklyTorahReadingsbyIsaacSassoonHalakhicManby Joseph

SoloveitchikLettersfromaStoicbyLuciusAnnaeusSenecaMan’sSearchforMeaningbyViktorFranklMeditationsbyMarcusAureliusPirke Avot: AModern Commentary on Jewish Ethics by LeonardKravits andKerry OlitzkyPlato, notProzac!ApplyingEternalWisdomtoEverydayProblemsbyLouMarinoffTaoTeChingbyLaoTsu

TheArtofWarbySunTzuTheConsolationsofPhilosophybyAlaindeBotton

TheMahabharataThePowerTacticsofJesusChristandOtherEssaysbyJayHaleyTheTalmud

PsychologyAffectDysregulationandDisordersoftheSelfbyAllanSchoreAffectRegulationandtheRepairoftheSelf

byAllanSchoreAttachmentandLossbyJohnBowlbyDeepSurvival:WhoLives,WhoDies,andWhy;TrueStoriesofMiraculousEnduranceandSuddenDeath

byLaurenceGonzalesDescartes’Error:Emotion,Reason,andtheHumanBrainbyAntonioDamasioDriventoDistraction:RecognizingandCopingwithAttentionDeficitDisorderfromChildhoodthroughAdulthoodbyEdwardHallowellandJohnRateyEMDR:TheBreakthroughEyeMovementTherapyforOvercoming Anxiety, Stress, and Trauma by Francine Shapiro Flow: The Psychology of OptimalExperiencebyMihaly CsikszentmihalyiGut Feelings: The Intelligence of the Unconscious by GerdGigerenzer Influence: The Psychology of PersuasionbyRobertCialdiniLove,Medicine&Miracles:LessonsLearnedaboutSelf-HealingfromaSurgeon’sExperiencewithExceptionalPatientsbyBernieSiegel Power vs. Force: The Hidden Determinants of Human Behavior by David Hawkins SimpleHeuristics That Make Us Smart by Gerd Gigerenzer and Peter Todd The Archaeology of Mind:NeuroevolutionaryOriginsofHumanEmotionsbyJaakPankseppandLucyBivenTheArtofThinkingClearlybyRolfDobelliTheDevelopingMind:HowRelationshipsandtheBrainInteracttoShapeWhoWe Are by Daniel Siegel The Feeling of What Happens: Body and Emotion in the Making ofConsciousnessbyAntonioDamasioThe48LawsofPowerbyRobertGreene

TheNeuroscienceofPsychotherapy:HealingtheSocialBrainbyLouisCozolinoThereAreNoAccidents:Synchronicity and the Stories of Our Lives by Robert Hopcke Thinking, Fast and Slow by DanielKahneman

Waking the Tiger: Healing Trauma by Peter Levine with Ann FrederickWillpower: Rediscovering theGreatestHumanStrengthbyRoyBaumeisterandJohnTierneyScience

AtHomeintheUniverse:TheSearchfortheLawsofSelf-OrganizationandComplexitybyStuartKauffmanConnected:TheSurprisingPowerofOurSocialNetworksandHowTheyShapeOurLivesbyNicholasChristakisandJamesFowlerDeepSimplicity:BringingOrdertoChaosandComplexitybyJohnGribbinEmergence:TheConnectedLivesofAnts,Brains,Cities,andSoftwarebyStevenJohnsonHowNatureWorks:TheScienceofSelf-OrganizedCriticalitybyPerBakJourneytotheAnts:AStoryofScientificExploration by Bert Hölldobler and Edward O. Wilson Linked: How Everything Is Connected toEverythingElseandWhatItMeansforBusiness,Science,andEverydayLifebyAlbert-LászlóBarabásiPhantomsintheBrain:ProbingtheMysteriesoftheHumanMindbyV.S.RamachandranandSandraBlakesleeSignsofLife:HowComplexityPervadesBiologybyRicardSoléandBrianGoodwinSynapticSelf:HowOurBrainsBecomeWhoWeArebyJosephLeDouxSelf-help

AMessagetoGarciabyElbertHubbardASimpleAct ofGratitude:HowLearning to Say Thank YouChangedMyLifeby JohnKralikAcres ofDiamondsbyRussellConwell

AsaManThinkethbyJamesAllenDaringGreatly:HowtheCouragetoBeVulnerableTransformstheWayWeLive,Love,Parent,andLead

byBrenéBrownFocusingbyEugeneGendlinGetting theLoveYouWant:AGuide forCouplesbyHarvilleHendrixGettingThingsDone: TheArt ofStress-FreeProductivitybyDavidAllenHow toWinFriendsand InfluencePeoplebyDaleCarnegieHowWillYouMeasureYourLife?byClaytonChristensen,JamesAllworth,andKarenDillonKeepingtheLoveYouFind:APersonalGuidebyHarvilleHendrixManifestYourDestiny:TheNineSpiritualPrinciplesforGettingEverythingYouWantbyWayneDyerSuccess:AdviceforAchievingYourGoalsfromRemarkablyAccomplishedPeoplebyJenaPincottThanks!:HowPracticingGratitudeCanMakeYouHappierbyRobertA.EmmonsTheGo-Getter:A StoryThat Tells YouHow toBeOnebyPeterKyneTheLawsofLifetimeGrowth:AlwaysMakeYourFutureBiggerThanYourPastbyDanSullivanand Catherine Nomura The Power of Positive Thinking by Norman Vincent Peale The Power ofVulnerability: Teachings on Authenticity, Connection, and Courage by Brené Brown The Road Less

Traveled:ANewPsychologyofLove,TraditionalValuesandSpiritualGrowthbyM.ScottPeckThinkandGrowRichbyNapoleonHill

ThriftandGenerosity:TheJoyofGivingbyJohnTempletonJr.

INDEX

TheindexthatappearedintheprintversionofthistitledoesnotmatchthepagesinyoureBook.PleaseusethesearchfunctiononyoureReadingdevicetosearchfortermsofinterest.Foryourreference,thetermsthatappearintheprintindexarelistedbelow.

48LawsofPower,The(Greene),171

Ackman,Bill,49,51,53–6,144,155–6adversity,valueof,30,96,193–4AlaskaMilk,166–7Albertini,Dante,144Alexander,Greg,144AmericanAssociationofIndividualInvestors,36AmericanExpress,40,97,137annualreports,38–41,78,140–2,181.SeealsoletterstoshareholdersAquamarineChemicals,42–3

AquamarineFundassetsreach$50million,49–50andBearStearns,86–7creationandnamingof,43cumulativereturn,2andfeestructures,46–7andfinancialcrisisof2008–2009,86–99investmentofnetworthin,46andLehmanBrothers,87–8

Ariely,Dan,102attentiondeficitdisorder(ADD),48,107–8,155authenticity,33,42,63,66–7,76,81,84,132

Bak,Per,105BankofAmerica,126–7BearStearns,86–7behavioralfinance,60,102–9,115,117–18,125,135–8,140–1,143,147–50,154,191behaviorism,28Benello,Allen,112,144BerkshireHathaway,46,59,82,142,192annualmeetings,41,61,71–2,178annualreports,38–9,63,142andBuffett’ssalary,73,116asacompanyratherthanafund,94–5decentralizedstructureof,81holdings,40–1,78,125,137,153andthetechbubble,71textileoperations,17–18SeealsoBuffett,Warren

Bernanke,Ben,87Bettger,Frank,6BillandMelindaGatesFoundation,78,185BlackSwan:TheImpactoftheHighlyImprobable,The(Taleb),109Blodget,Henry,17Bloombergterminal/monitor,2,52,87,116–19,135–6,146Blumkin,Rose,41–2,177Bogdanor,Vernon,25BondMarkets,AnalysisandStrategies(Fabozzi),18–19Bosanek,Debbie,82,176,181BoulderBrands,167–70Brandt,Jonathan,144,178BraxtonAssociates,28–9bridge,122,124–8,130BrookfieldOfficeProperties,97–8Buffett,Howard,116Buffett,Susan,75,79,174–5Buffett,Warren,37,53,55,90annualBerkshiresalary,73,116andbridge,124ondebt,93

fatherof,116onfear,85andfeestructures,46–7,67,74andfinancialcrisisof2008–2009,90onfirstruleofinvesting,52generosityof,115,175–6,178–9,185guesttalkatHBS,28–30,42andthe“inner/outerscorecard,”26,65,80–1integrityof,36andinvestmentdecisions,17–18,24,53,90,127,136–7,148,165onlearningfrommistakes,2LetterstoShareholders,39,63,93aslife-longlearner,29–30onlove,175Lowenstein’sbiographyof,19,30,63,116,142lunchwith,1–2,22,69–84,98andmanagement,110–11,163mistakesof,17–18,153officeof,35,95,111–17,143playfulnessof,116,121–2,131prefacetoTheIntelligentInvestor,19,30onreputation,18asrolemodel,39–40,46,63,71,83,96,113,115–16,122,176Schroeder’sbiographyof,83,142“TheSuperinvestorsofGraham-and-Doddsville,”37,82“TooHard”boxof,116,170,180andwealth,78,82,188SeealsoBerkshireHathawayBuffett:TheMakingofanAmericanCapitalist(Lowenstein),19,30,63,116,142Buffett-PabraiWayofdoingbusiness,171–85BurlingtonCoatFactory,36BurlingtonNorthernSantaFe,137Burns,C.A.,13Burry,Michael,90buyingandselling,rulefortimingof,145–6BYDAuto,125–6Byrd,Aaron,63

Cameron,David,25,76Campbell,Joseph,25Capotorto,Vito,15CarMax,97,165–6checkingstockprices,rulefor,135–7“Checklist,The”(Gawande),152–3ChecklistManifesto:HowtoGetThingsRight,The(Gawande),154chess,18,36,128–30Christakis,Nicholas,172,177Churchill,Winston,115Cialdini,Robert,1,60–1,148,162Coca-Cola,40,78,137,178

commutingtowork,113complexityofeconomicworld,104–5,151–2CORTFurniture,153Costco,164–5Cresud,97–8,149Cunniff,Carley,37–8.SeealsoRuaneCunniff

D.H.Blair&Co.,11,15D.H.BlairInvestmentBankingCorp.,6–19,21,27,30–1,45,171–2,189,193DakshanaFoundation,78,123,185Damasio,Antonio,102Dardashti,Shai,145,177Davis,J.Morton,6–7,14–15,179debt,82,86,92–3“DecisionTheory”(Harvardcourse),9DestinationTorah:ReflectionsontheWeeklyTorahReadings(Sassoon),192DexterShoeCompany,153DhandhoInvestor:TheLow-RiskValueMethodtoHighReturns,The(Pabrai),32–3Dimon,Jamie,87DiscoverFinancialServices(DFS),169–70,192discussionsofinvestments,rulesfor,144–5,148–50Dodd,David,106dot-comcrash,91.Seealsotechbubbleduediligence,14,16Duff&PhelpsCreditRating,49duffers(chessterm),129

education,perilsofelite,21–30efficient-marketshypothesis,27–8Eigen,David,53Einhorn,David,56,88,90,109Einstein,Albert,62,111Entrepreneurs’Organization,177,185,194envy,50–2,109–10,112,189EnzoBiochem,10EVCICareerHoldingsCorp.,149,157–60

Fabozzi,Frank,18–19FairfaxFinancialHoldings,35,140FannieMac,53–5FarmerMac,53–7feestructures,hedgefund,46–7,67,73–4,79–80Feldman,Andrew,23financialcrisisof2008–2009,21,57,101andaddictiontoBloomberg,118andAquamarineFund,86–99,192andbehavioralfinance,107–9andfindingbalance,121–2andinnerscorecard,80andredemptionpolicies,47FooledbyRandomness(Taleb),136

Ford,Henry,45FortescueMetalsGroup,97Fosha,Diana,17FreddieMac,53–5,90

Gabelli,Mario,73Gage,Phineas,102Gates,Bill,61,78–9,83,124,176Gawande,Atul,151–4GEICO,38,164Girard,Joe,61GLIDEFoundation,69–70,75–6,175GoldmanSachs,7–8,30–1GothamPartners,54Graham,Benjamin,1,18–19,30,36–7,50,79,106,146greed,3,8,16,50,112,189,193Green,William,85,195Greenblatt,Joel,53,106Greene,Robert,171Guerin,Rick,82,93

Hamlet(Shakespeare),5HarvardBusinessSchool(HBS),5–7,9,21–2,28–9,42,49,128,130,184Hawkins,David,66Hemingway,Ernest,17heroes,modelinghabitsof,39–40,46,67,71,96,113,115–16,176–7Hill,Napoleon,35Hindi,Orly,180Hohn,Chris,49–50,51,144Hölldobler,Bert,104housingcrisis,17,90.Seealsofinancialcrisisof2008–2009HowIRaisedMyselffromFailuretoSuccessinSelling(Bettger),6HowtoWinFriendsandInfluencePeople(Carnegie),35Hughes,Stephen,167–9

Influence:ScienceandPractice(Cialdini),148Influence:ThePsychologyofPersuasion(Cialdini),60innergrowthandmeaning,187–94IntelligentInvestor,The(Graham),1,19,30,79

investingchecklistfor,151–70asagame,123–32guidelineforcheckingstockprices,135–7guidelineforresearching,140guidelineforrespondingtosalespitches,137–9guidelinefortalkingtomanagement,139–40guidelinesforbuyingandselling,145–8guidelinesfordiscussing,144–5,148–50rulesandtoolsfor,133–50useofthephrase“valueinvesting,”187Seealsovalueinvesting

IPOs(initialpublicofferings),9–10,129,138–9

J.P.Morgan,6–7,30Jacobs,Ian,182Jain,Ajit,61,176Jobs,Steve,131JourneytotheAnts(HölldoblerandWilson),104JPMorganChase,87,126,128,172

K-Swiss,145Kahneman,Daniel,102,136Keough,Don,178Klarman,Seth,106,112

Lasker,Edward,129–30LatticeworkClub,124,194LeDoux,Joseph,102LehmanBrothers,16,87–9,91letterwritingcampaign,61–3,65,73letterstoshareholders,91,93,149–50,153.SeealsoannualreportsLiLu,73,125–6,176Libet,Benjamin,102Lichter,John,59LondonMiningPLC,97–8,149Long-TermCapitalManagement,86Lowenstein,Roger,19,30,63,116,142

MadeinAmerica(Walton),142Malone,John,130management,rulefortalkingto,139–40MarcusAurelius,96Marinoff,Lou,192Marks,Howard,64mastermindgroups,52–4,124,193–4mentoring.SeemodelinghabitsofsuccessfulpeopleMerrillLynch,17Mihaljevic,John,106,124,177,184Miller,Bill,104,122mirrorneurons,115

mirroring,39–40,74,113,115.Seealsomodelinghabitsofsuccessfulpeoplemodelinghabitsofsuccessfulpeople,39–40,46,67,71,96,113,115–16,176–7Moody’s,88,90–1Morgan,JohnPierpont,6MorganStanley,8,169“Mr.Market,”19,50,129Munger,Charles“Charlie,”61,78–9,90,138onadmittingmistakes,52andbridge,124–5andBuffett,173,176onBuffett,29–30onenvy,50oninitialideas,130intelligenceof,59–60andLiLu,125–6,176andmistakes,153aspolymath,60,104–5asrolemodel,115onrolemodels,40ontruthfulness,66“Twenty-FourStandardCausesofHumanMisjudgment,”28,59–60,140,148andwealth,82,188SeealsoPoorCharlie’sAlmanack:TheWitandWisdomofCharlesT.Munger

Murphy,Thomas,177

NebraskaFurnitureMart,41Neeleman,David,48Nestlé,167neuroeconomics,102–9.SeealsobehavioralfinanceNewYorkSocietyofSecuritiesAnalysts,36Newton,Isaac,79,103Nike,145

officespaces,48–9,51–2,57,95–6,107–8,111–19,146–7OPAP,165“outerscorecard”(needforapproval),26,65,80–1,193OxfordUniversity,5–6,11,21–9,83,104,115,123,184

Pabrai,Mohnish,1,47,72,90,98–9,110,115,131,152–5backgroundof,63,190andbridge,124,126andBuffett-PabraiWayofdoingbusiness,171–85andchecklists,152–5andDakshanaFoundation,78,123,185DhandhoInvestor,The,31–2educationof,22,27emotionalfortitudeof,190–1andfeestructures,73generosityof,70,98,173–4andLatticeworkClub,124,194lunchwithBuffett,22,69–70,76–9,81–2

onMunger,59–60officeof,112–14PabraiInvestmentFunds,63–5redemptionscheduleof,95asrolemodelandinfluence,90,98–9,123,134–5,140,144,146–8,153,172–85Spierattendsannualmeetingof,63–4Spier’sfirstmeetingswith,65–70

Pascal,Blaise,131Paulson,Hank,87PhilipMorris,164Phillips,Howard,13–14Pinato,Randy,13–14Pincus,Mark,128,130Plato,NotProzac!ApplyingEternalWisdomtoEverydayProblems(Marinoff),192playfulness,116,121–32,144PoorCharlie’sAlmanack:TheWitandWisdomofCharlesT.Munger,1,176“Posse,the”(Spier’sinvestmentforum),52–4Powervs.Force:TheHiddenDeterminantsofHumanBehavior(Hawkins),66Pronovost,Peter,152psychology,17,51,66,112,148–50,162–4,183,189–90behavioralfinance,60,102–9,115,117–18,125,135–8,140–1,143,147–50,154,191behaviorism,28psychotherapy,192Seealsoself-helpgenre

Rapuano,Lisa,55Rawls,John,26–7Reagan,Ronald,61–2,173–4redemption,shareholder,47,67,94–5,97relationships,62,123–4,172–4,177,181–2,193–4Renov,Kalman,15Robbins,Tony,32–5,39–40,42,59,62,67,96rolemodels,39–40,46,67,71,96,113,115–16,176–7Roosevelt,Theodore,35Rosen,Stefan,53RuaneCunniff,1,37–8,49

salespitches,ruleforrespondingto,137–9SantaFeInstitute,104Sassoon,Isaac,192Schloss,Walter,37Schroeder,Alice,83,142Schwarzman,Stephen,109Scorsese,Martin,11SecurityAnalysis(GrahamandDodd),79self-helpgenre,32,35–6,192.Seealsopsychologyselling,rulesfor,145–8SequoiaFund,37–8,59,109Shackleton,Ernest,96–7Shakespeare,William,5

Simpson,Lou,38Sinclair,Peter,24–5Skinner,B.F.,28Sleep,Nick,104,112,117,144SmartBalance,167–70Sokol,David,125–6Solanto,Mary,107Soros,George,24,121Spier,GuyandADD,48,107–8,155childhoodandbackgroundof,92,122,190–1atD.H.Blair,6–19,21fatherof,42–3,52,70,87–9,92,94,115,182,190atHBS,5–6,9,21–2,28–9,42,49,128,184lunchwithBuffett,1–2,22,69–84,98movetoZurich,1,83,99,108–11,131,189atOxford,5–6,11,21–9,83,104,184SeealsoAquamarineFund

Spier,Lory,24,70,76–8,86–7,110Spier,Simon,42–3,52,70,87–9,92,94,115,182,190Spitzer,Eliot,56–7Stahler,Alan,15Stein,KenShubin,53,102,124,144“SuperinvestorsofGraham-and-Doddsville,The,”37,82

Taleb,NassimNicholas,109,136techbubble,16–17,49,81,91TEDIndiaconference,123TEDxZurichconference,123,185Telechips,12–14,18thank-youletters,61–3,65,73ThinkandGrowRich(Hill),35Tilson,Whitney,54,157–8Toastmasters,177Tongue,Glenn,53transparency,33,42.SeealsoauthenticityTransTech,63“TraumaRevealstheRootsofResilience”(Fosha),17truthfulness,66–7.SeealsoauthenticityTupper,EarlSilas,161TupperwarePlasticsCompany,161–4Tversky,Amos,136Tweedy,Browne,37,49

valueinvesting,24,26,35,42approachtolife,65bridgeand,124–5andthefinancialcrisisof2008–2009,85,96innerjourneyof,26,50–1,187–8andmoralintegrity,36–7

andrationalthought,19,50–1,85useofthephrase,187versusWallStreet,146Seealsoinvesting

ValueInvestingCongress,68,88ValueInvestorsClub,53ValueLine,36VALUEx,124,177venturecapital,8–9

Wais,Diana,32Wallman,Steven,144Wal-Mart,68,142,164–5,168Walton,Sam,142WangChuan-Fu,126Watsa,Prem,35,73wealth,2–3,65,78,82,109,185,188–91WeizmannInstituteofScience,123,184Whitman,Marty,106Williams,Cecil,75–6,78–9Wilson,EdwardO.,104WolfofWallStreet,The(film),11Wood,Kenton,15

YellowBRKers(Buffettfanclub),72YoungPresidents’Organization,145,177,193–4

Zeckhauser,Richard,125Zweig,Jason,102Zynga,128

ABOUTTHEAUTHOR

GuySpierhas run theAquamarineFundfor17years,achievingan impressiverecordofmarket-beatingreturns.AnardentdiscipleofWarrenBuffett,Guy launched the fundwith$15million in assets, closelyreplicatingtheapproachofBuffett’soriginalpartnerships.GuywaseducatedatOxfordUniversity,wherehewasatutorialpartnerofthecurrentBritishPrimeMinisterDavidCameronandcametopofhisclassineconomics.Afterastintinmanagementconsulting,heattendedHarvardBusinessSchool,thenworkedasan investment banker before starting his own fund. He is a regular commentator in the media, havingappearedonCNN,CNBC,BloombergTelevision,andFoxBusinessNews.

THEEDUCATIONOFAVALUEINVESTOR.Copyright©2014byGuySpier.Allrightsreserved.Forinformation,addressPalgraveMacmillanTrade,175FifthAvenue,NewYork,N.Y.10010.

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