The Passion of Chamath Palihapitiya - Part II

Bets

Mar 29, 2024

I must create a system, or be enslaved by another man's. I will not reason and compare: my business is to create.

- Blake, Jerusalem

Preface

This is the second in a series of posts attempting to explicate, in his own words, Chamath Palihapitiya’s approach to markets and decision-making.

Disclaimer

The following post is fashioned from Chamath Palihapitiya's public statements, interviews, annual letters, and blog posts. Sources are cited. Despite every attempt having been made to preserve their original intent, errors and misinterpretations are, of course, possible. Caveat lector.

Solo
System
Sizing
Risk
Mistakes
Bias
Value
Diligence
Prepared Mind
Sources & Footnotes

1. Solo

Social Capital Fund I was a $300 million fund, and the investments that performed well were in Crypto and SaaS. I was introduced to SaaS in 2011 by a close friend of mine, David Sacks, who back then was CEO of Yammer.1 In June 2011, David was running out of cash. I had just left Facebook, and was in Las Vegas when he called me saying, "I need money." I asked, "How much do you need?" He replied, "I don't know, like 15-16 million dollars." I said, "It'll be in your account tomorrow morning, but you're going to have to explain this thing to me," because I didn't really understand what Yammer was at the time. [1]

I met up with David at the end of that summer, and it was a real lightbulb moment. David was clearly building superior software at Yammer, but my real takeaway was that he could win even if Yammer’s software was inferior, simply because the delivery mechanism via the Cloud was so much better than the competition. Yammer’s cost structure would allow David to build a company that was materially cheaper than any equivalent traditional enterprise company, which was a significant competitive advantage.2 [1]

When we raised Fund II in 2013, I pushed the whole partnership to focus on the Cloud. Our biggest investment was Slack, but we also started to make some small bets in Deep tech, which eventually became the primary focus of Fund III in 2015. With the $500 million raised, we invested in companies like SpaceX, Relativity Space, Saildrone, and Grok. A lot of Deep tech stuff, very different to what Funds I and II had looked like. [1]

At the end of Fund III, my team were exhausted. They had been born and bred with a more traditional mindset, where the focus was on staying within a particular vertical, e.g “I worked at an enterprise SaaS company, I'm here to do enterprise SaaS deals," or, “I worked at a consumer business, I’m here to do consumer business deals.” Now, that's all well and good for a team approach, but I had come to define ‘winning’ as something else entirely. In fairness to them, I didn't tell them what ‘winning’ was, and that was my fault. That's on me. [1]

What does it actually mean to ‘win’ as an investor? I think Stanley Druckenmiller is someone who exemplifies it best, and I’d encourage you to look him up and listen to what he has to say.3 Basically, there are several ways to approach investing, and you can think of them in terms of an evolution: moving from simpler to more sophisticated methods. First, there's momentum investing, which encompasses a lot of what’s taken place in Silicon Valley over the past decade or two. Then, there's P&L investing where you’re looking at cash flows: money in, and money out. After that, there's macro investing, which is really about how systems of government and institutions work together. [1]

Finally, there's philosophical investing, where the absolute greats don't really care about any of the stuff I’ve just mentioned. Instead, they see investing as a philosophy, a philosophy that informs the particular system they have. When I looked at greats like Druckenmiller, they were constantly moving, constantly pushing themselves to retool their skill set, but ultimately, what I found was that they were exceptional at three things: finding the right entry point, managing risk, and making sure that they generated returns.4 [2]

I gradually came to realize that the fundamental underwriting decisions of great investors, over long periods of time, are actually individual decisions. Company building is very much a team sport, but investing is not. Nobody in the industry really wants to admit that. I think you can have average returns as a team, but if you want to be a star, you have to do it alone. That’s a hard thing for many people to swallow. It’s about developing a kind of personal pattern recognition that very few people have.5 [1]

I didn’t know if I had it, but in order to find out, I had to get rid of all this infrastructure around me that I had been using as a crutch, and do it alone. So with Fund IV, I took $1.5 billion dollars of my own money and told myself, “This is it. I'm on the hook for every single dollar, and I have to figure out what to do with it.” [1] [3]

Thus far, it’s paid off: the returns of Fund IV in the past three years have been better than all the funds before it, but I don’t think I’ve cracked the philosophy code, just yet. I'm scratching at it furiously, but I can’t break through, and I haven't broken through. A part of me knows that to break through, I just have to let go. [2]

2. System

As an allocator, I’ve tried to create a system over the last decade that is optimized for my idiosyncrasies, my insecurities, and my biases. First, there is a data layer. At Social Capital, we have a protocol where we look at a business in a very thorough, numeric fashion. We look at P&L, operating metrics, rates of growth, etc. We’re using tools that we initially developed at Facebook, and by applying them to investing it gives us a level of insight that allows us to suspend our biases and help us objectively decide whether we should go further. [4]

The second layer is a framework I have developed around how I think about an investment in terms of a spectrum. On one end of the spectrum is what I call early-stage decisions. These are no more than $10 million decisions. The goal with these investments is to buy the positive optionality of an idea, by partnering with smart people in a really compelling space, that may have the ability to find product-market fit. I try not to overthink these investment decisions: I put the money in and try to acquire as much of the optionality as I can. [4]

The key question in my mind is, “Can I tolerate this much risk?” The answer is yes. What’s the downside? The downside is 1X of $10 million. Obviously, that threshold has changed as our AUM (Assets Under Management) has increased. Previously, these sorts of decisions might have had an upper limit of $3 million. Before that, it may have been $500,000. The point isn’t the amount, the point is to make rapid-fire-decisions: if you see a good idea, take a position. If not, move on to the next one. [4]

In contrast, as the investment amount starts to increase, we go to the other end of the spectrum and take almost exactly the opposite approach. With these types of decisions, we need to be governed by a propensity for inaction. We’ll sit, come up with an idea, and do our due diligence. Then, I’ll try to introduce all kinds of indirection into the system to slow things down, all kinds of secondary and tertiary analyses. In my mind, I’m saying, “Oh, we’re going to make a $500 million decision? I’m going to slow it way down, and I'll make these guys take months to make a decision. Months and months and months.” [4]

We’re fortunate in that we typically don’t find ourselves in situations where there’s five or six other parties, and we’re having to rush decisions just to stay competitive. I hope that that continues. You need to make sure that it’s a really fat pitch before you swing, and you won’t really know if you act hastily and swing too quickly.6 [4]

The middle ground is just about getting enough data to move past our biases and see how the business is tracking objectively. Then we try to arrive at a judgement that’s as close to the right answer as can be in that particular juncture. [4]

In sum, I think investing is broadly three things:

1. The first part is the nuts and bolts, the ones and zeroes, being able to do the simple math, and looking at P&L. What can go right and what can go wrong?

2. Then, what are your biases telling you about the ones and zeros? How are you interpreting the math?

3. Finally, there’s judgement: when to listen to your biases, when to ignore them, and how to size based on how aggressively you want to compound.

I’ll give you one example. In 2014, I got on the Amazon train before most people at scale. I remember that process: we did the ones and zeroes, and the ones and zeroes were difficult to unpack because the company didn’t generate a ton of free cash flow at the time. To get around this, I said, “Let’s assume that Amazon is actually a hedge fund, and Jeff is a PM inside a hedge fund. Why don’t we calculate what his actual IRRs are? What’s his return on invested capital?” [4]

We looked at every single expense line, and we were able to systematically show how every item migrated to the revenue line over time. How much the company initially spent on payments became Amazon payments, how much they spent on contents became Kindle and Prime Video, how much they spent on compute became AWS, etc. We realized, at scales of billions of dollars of invested capital, Jeff had a 44% IRR. The numbers were so compelling, my biases no longer mattered. After that, it was simply all about sizing. [4]

So, there’s the P&L view, then a level of numerical judgment, and finally, there’s an innate idiosyncratic way of looking at the data to come to a conclusion. That’s how I think about allocating capital. [4]

I think the greatest investors are able to continually sum these three things together, and it’s an equation that’s constantly running through their minds. Depending on the type of risk involved, the greats have an ability to adopt very different frameworks in their decision-making, but still be entirely consistent with their underlying investing philosophy. [5]

This is why I think investing is, ultimately, a very individual trade craft, and it’s an impossible thing to really document. I don’t think Buffet’s, or Druckenmiller’s, or Tepper’s process is largely documentable. They could tell you in precise detail how they did something in the past, but it will not inform you how they’ll make a decision in the future.7 [4]

3. Sizing

In terms of sizing, this is actually a part of the job where I allow my emotions more input on my decision-making. On the way in, you should be very clinical and there’s very little room for emotion. Once you’re in, you have to appreciate that your margin of safety, and mental health, are now the biggest determinants of success. [4]

There’s a theory in poker about how you should play an early position versus a late position. Essentially, the person in the earliest position is at the biggest disadvantage because they have the least amount of information about what everybody else is going to do. As a result, the number of cards that you play, and the sizing of the bet, needs to be smaller because there’s too much uncertainty about events that come after you. Whereas when you’re the last person to act, you have perfect information, you’ve seen everybody, and what they’ve done before you. In that situation, the aperture is wide open, you can play more cards, and you can size differently. [4]

Apply this to investing. From my perspective, when I’m initiating a position early on, degrees of freedom matter more than anything else. It’s about sizing it up to a point where I still have the flexibility to move around. I never lever the book, so I never feel that I could get margin called or stopped out. [4]

People have incredible difficulty in doubling down when they’re succeeding. In fact, it tends to be the opposite. People want to find a way to re-underwrite failures. “Oh, I can dollar cost average down,” or “Oh, this is an idiosyncratic drawdown that isn’t applicable to my stock.” How can you be certain? What you can be certain about is that if you’re winning, you should keep sizing and building on success.8 [4]

A crucial mistake that fund managers often make is not having appropriate reserves for their winners. When I look back, the real profit dollars that I leaked didn’t result from investing too little upfront, but instead from when I didn't have enough in reserve for the ones that worked. So, you really need to allocate 40 — 50% of a total fund size for reserves. [6]

As a position matures, I continually reassess. Have management proved to be great capital allocators? Have they done anything to betray our belief that they’re still customer-obsessed? Is there still more growth ahead? I’m learning more about a business and, with additional information, I can get even more chips on the table. With this approach, if the data changes or the markets change, I’m not constrained, I can cut risk, and I can reallocate to different pools. [4]

4. Risk

If I'm being honest, Jay Powell probably deserves 80% of the credit for my returns. Around 15% is likely due to a combination of other factors: I'm in the right age category, I got an undergrad in electrical engineering, and I moved to Silicon Valley early on. At the margin, maybe 2-3% is attributable to me as an allocator. Most people aren’t willing to admit that. [7]

Now, let me tell you why that 2-3% is still valuable. What I do better than anybody that I have ever met is manage risk. Meaning, I know how to pound the money when things are working, but I also know how to take the gas off the throttle at key moments. I don't think this is an innate skill that I had, but I've been playing poker for 20 years, and I've really learned about my own temperament, which is critical for that 2-3% that I can control. [7]

The first time I sat at the poker table, I was so afraid. I didn't know what to do, but I took it seriously; I studied. When I lived in New York, I was grinding away at it every weekend. I didn't do anything else, and gradually I learned when to pound the money in, when to take the hand off, and when to fight my discomfort. That's what risk management is, and it’s absolutely a learnable skill. It’s just a case of building up experience; whether the game is chess, Scrabble, checkers, it doesn’t matter. [7]

If you look at the greats, the greats are exceptional risk managers. My batting average is maybe 51%. My slugging percentage is way better, though, because I know when to size. It turns out, in investing, a 2-3% edge is actually enormous; managing risk is central to that.9 [7]

5. Mistakes

Let's use poker as a microcosm to explain another aspect of investing that I mentioned earlier: what does success look like? Well, success looks like you have positive expected value. In poker, the simple way to summarize it is, basically, your mistakes minus my mistakes is the edge. If I make fewer mistakes than you make, I will make money and I will win. That’s the objective of the game. [2]

Translate this into a business context. You're running a company, and you have a team of employees that are creating a product for a particular market. Now, you are going to make mistakes in the making of that product. Maybe it doesn't completely fit the market, or it's priced incorrectly, or perhaps you employ too many people, so the margins are wrong. Then, there are also the alternatives that customers have in the form of your competition, but don’t forget, your competitors are going to make mistakes as well. So, their mistakes minus your mistakes is the expected value of your company. In fact, it’s the expected value of Google, Facebook, Apple, etc. [2]

Now, take investing. Every time you buy something, somebody else on the other side is selling it to you. Is that their mistake? We don't know yet. But their mistakes minus your mistakes, is how you make a lot of money over long periods of time as an investor. Somebody sold you Google at $40 a share, you bought it and you kept it. Huge mistake on their part, minimum mistakes on your part. The difference of that is the money that you made. [2]

So, in many ways, success in life can be reduced to their mistakes minus your mistakes, but the question is, what can you do about other people's mistakes? The answer is, nothing. That is somebody else's game. There may be minor things at the margin that you can try to do, but my firm belief is that success really boils down to how do you control your own mistakes. [2]

Now, this is a bit counterintuitive, but the way you control your mistakes is by making a lot of mistakes. Really successful people realize that it's the cycle time of mistakes that gets you to success. By observing your mistakes, you’ll gradually figure out where they’re coming from, and your error rate will diminish the more mistakes that you make. Is it a psychological thing? Is it a cognitive thing? Over time, you can start to identify your own psychological biases and begin to counteract them. [2] [7]

6. Bias

I often get asked something along the lines of, “If you had to choose between a business that has great people, but a mediocre product, versus a business with mediocre people, but a great product, who would you back?” There is an enormous amount presupposed in the framing of this question, and it’s related to the principle that success requires a level of objectivity and self-examination that a lot of people just aren’t willing to undertake. [4]

Take the business with a supposedly great team, but mediocre product. The team could be really kind, supportive, and inclusive, but somewhere along the way, they’ve forgotten that a company is a for-profit expression of intellect. They will lose in the market and the business suffers as a result. [4]

Now, if the other business creates a great product, what has that supposedly mediocre team actually done? They’ve actually put their biases to the side. They’ve found, either by listening, or by intuition, or by invention, an ability to create some level of product-market fit that is ultimately giving customers something that they are willing to pay for. Now that level of obsession can manifest in a group of people that may seem detached, aloof, or rude to others, but to the market and to their customers, they’re incredible. They’ve built a great product, and the business will thrive. [4]

Overall, I would probably be more inclined to invest in the former, but I have learned from my mistakes that to be successful in the market, I have to suppress my bias and actually allocate capital to the latter. [4]

I’ll give you one example of a mistake that shaped my thinking about this. A few months after I left Facebook, Kevin Systrom, the founder and CEO of Instagram, was looking to raise a round of capital. Given that I had been running growth at Facebook, many different people advised me to invest in Instagram, but I just couldn’t do it. I came up with plenty of excuses, “Oh, it’s a 12 person company. Oh, it’s never going to be as good as Facebook. Oh, it’s not going to grow as fast. Oh this, oh that,” but ultimately, it’s because I wasn’t being objective, and I had made up my mind about the company beforehand. [4]

Instagram raised money at a $500 million valuation and then within six months, they sold to Facebook for like a billion. I missed out on the opportunity to double my money in a really short space of time, but what was most galling was the error in my decision-making. It was so corrupt and, thinking about it now, had I let it compound it would have been so corrosive to any chance of future success I might have had. I wasn’t willing to look at the facts, and I wasn’t even willing to try to reach out to Kevin. Now, maybe he would have said that we weren’t a good fit or there’s no room left in the round, but I didn’t even give him a chance to turn me down. I didn’t even make it to the starting line. [4]

The biggest mistakes I’ve made in investing have never been due to actually making an investment because even if it was unsuccessful, I’ve learned a lot, and I’ve refined how I think about capital allocation and risk management. Where I’ve made enormous mistakes are mistakes of omission, where I didn’t even give myself a shot to be successful. It would have been better to say, “I called Kevin, and he said no,” instead of, “I was caught up in my own biases and couldn’t even reach out.” The latter is inexcusable if you want to succeed. This ties into what I said about successful people earlier. Really successful people don’t allow artificial barriers to get in the way of an opportunity. [4]

7. Value

Whenever I ask investors to define ‘value’, they find it difficult. It’s funny because we all know what it means, except it seems in relation to investing. I think what value means is that something is worthwhile, excellent, and important. That’s what value is. Is the Mona Lisa valuable? Yes, it’s excellent, it’s important. Are airplanes valuable? Yes, they’ve completely transformed GDP and transportation. They’re useful, they’re important. [4]

When you’re speaking about the financial markets, the concept appears to have become distorted. If you ask, “Is Google valuable?” People will come up with so many objections. They’ll say, “My God, no, it’s so expensive. Look at those huge multiples.” So I’ll ask, “Well, what is valuable?” The response will be, “Philip Morris is valuable.” Then they’ll point to some number: their ROI, their NOPAT, their dividend yield, their free cash flow yield, their multiple of sales, etc. Basically, as long as the number is small, people will stop thinking in any depth. If that’s your sole criterion, you could literally ask a monkey to rank growth stocks. All the monkey would have to do is choose a metric, rank by ascending order, and cut it off before the numbers change into double digits. Let’s be honest, that’s just nonsensical: Philip Morris causes cancer, Google organizes the world’s information.10 [4]

Today, you have to find value in other parts of the balance sheet. You have to go to things like brand or intangibles. This is where people’s mathematical models break, and they get confused. I think I’m a value investor. I want to find things that are worthwhile, and I want to buy them at a fair price. [3] [4]

8. Diligence

If you ever come and work for us at Social Capital, you’ll only be allowed to make small investments until you prove that you’re good enough to make medium-sized, and then large investments. How do we keep score of how everyone is doing? Well, we have a table of all of our historic winners and losers, we keep a running total of the dollar winners and losers, and we closely monitor that ratio. Currently, our ratio is about 24:1. We’ve been operating for over a decade, and we've never lost more than $27 million in a single deal. So when we win, we win in the billions. A lot of the time, we’re able to do so by simply paying attention to the boring stuff that most people overlook: due diligence, downside risk management, margin of safety, etc. Boring, boring stuff, but if you're going to be good at the game, that’s what it takes.11 [5]

If you look at the whole FTX debacle, a huge number of venture firms essentially talked their way into doing absolutely no due diligence. FTX actually pitched us when they were doing a round, and I did a Zoom call with Sam Bankman-Fried. After the call, I thought it didn't make much sense, but I decided to have my team do some work. We sent him a two-page deck with our recommendations for the next steps. One was the formation of a board, the second was the creation of dual-class stock, and the third involved representations and warranties around affiliated and related party transactions. A person who worked there called us back, and literally said, “go **** yourself.” It was an easy decision to pass after that, but at the time I thought they must have that level of confidence because they've created some money-making machine in the Bahamas. The truth is, people simply looked the other way, and didn't bother to do even the basic level of work. [8]

The thing about Silicon Valley, though, is that if there’s momentum, they don't have to do any of the boring stuff. If there’s momentum, then the rulebook goes out the window, and people clamor to invest. When the markets are up, nobody really cares about risk management, but when markets are going down or sideways, suddenly everybody does. That allows me to feel proud of our process. Ultimately, that’s all you can control.12 [2]

9. Prepared Mind

Before I got a job at Mayfield, I interviewed at Accel with the two founders, Arthur Patterson and Jim Swartz. They had this concept of the ‘Prepared Mind’ that really impressed me, and so I’ve made it a part of my process. For example, a phrase like ‘Energy Transition’, on its own, actually means nothing. A prepared mind would look to deconstruct it into all of its component parts, and then step-by-step create a detailed conceptual model, or mosaic, of what that term actually means.13 [5]

I’m now three years into analyzing the energy transition, so I'll tell you how I built my mosaic. In year one, I hired team at McKinsey to teach me all about climate change. They charge a lot of money, around $2-3 million, but they’re like the SEAL Team Six of teaching mosaics. They start with a really high-level overview of the issue, and then they drill down deep into all the fundamental aspects of the climate issue. That’s step one. [5]

After that, step two. Druckenmiller has this saying, which I love, that the best way to learn about something is to invest in it, and then do your research. I did that. I allocated around $500 million, and I said, I'm just going to rip some money into this sector, and I'm going to learn. That forces you to pay attention. From there, you learn by seeing which decisions you got right, and which ones you got wrong. What were the biases that caused you to go wrong? What were the tailwinds and extraneous factors that made things go right so that you don't give yourself too much credit? [5]

Eventually, by year three, I have a very detailed mosaic of what I'm looking for in energy transition, but it's a multi-year process to develop this competence. You can do it because it just requires a browser, some time, and the willingness to just double-click into it and go deep. Frankly, I don’t think it’s something that investors or entrepreneurs do enough of. Mastery of an area allows you to figure out all the things that have been tried, all the things that have worked, all the things that could work. That’s the prepared mind. [5]

10. Sources & Footnotes

Palihapitiya, Chamath and Oren Zeev. "Fireside Chat with Chamath Palihapitiya & Oren Zeev." ICON, 2022.
Palihapitiya, Chamath and Lex Fridman. "Chamath Palihapitiya: Money, Success, Startups, Energy, Poker & Happiness." Lex Fridman Podcast, 2022.
Celarier, Michelle. "The Unusual Ambitions of Chamath Palihapitiya." Institutional Investor. Accessed May 31, 2020. Available at: https://www.institutionalinvestor.com/article/2bsx50dfm3p7vduehik8w/culture/the-unusual-ambitions-of-chamath-palihapitiya.
Palihapitiya, Chamath and Trey Lockerbie. “ Building Berkshire 2.0 with Chamath Palihapitiya” The Investor’s Podcast, 2021.
Palihapitiya, Chamath and Aqil Pasha. "A Fireside Chat with Chamath Palihapitiya w/Aqil Pasha." MIT VCPE Club, 2022.
Palihapitiya, Chamath, Jason Calacanis, David Sacks, and David Friedberg. "E171: DOJ sues Apple, AI arms race, Reddit IPO, Realtor settlement & more." All-In Podcast. 2024.
Palihapitiya, Chamath. "Chamath Palihapitiya Interview: Wharton Private Equity and Venture Capital Club Fireside Chat Series." 2023.
Palihapitiya, Chamath, Jason Calacanis, David Sacks, and David Friedberg. "E104: FTX collapse with Coinbase CEO Brian Armstrong + election results, macro update & more." All-In Podcast. 2022.

Yammer was a cloud-based enterprise social network that was acquired by Microsoft in 2012 for $1.2 billion.

Greenwald: Strategic analysis should begin with two key questions: In the market in which the firm currently competes or plans to enter, do any competitive advantages actually exist? And if they do, what kind of advantages are they? The analysis is made easier because there are only three kinds of genuine competitive advantage: Supply, Demand, and Economies of Scale.

Bruce C. Greenwald. Competition Demystified (p. 24). Kindle Edition.

Druckenmiller: First and foremost, it’s the intellectual stimulation. Every event in the world affects some security somewhere, so it keeps me sharp. I don’t think it’s a coincidence that a lot of people in retirement invest for fun and invest for a living. I like trying to envision the world 18 months from now versus today and where security prices might be. Making money, that’s not the big motivator, but I do love winning. It’s a bit of a disease, but it is what it is, and I have to deal with it. So yes, I like to win. You get your grades in the paper every day. There’s no hiding when your investments are going bad. It’s right there in the newspaper to show you.

David M. Rubenstein. How To Invest (p. 203). Kindle Edition.

Druckenmiller: George Soros has a philosophy that I have also adopted: The way to build long-term returns is through preservation of capital and home runs. You can be far more aggressive when you’re making good profits. Many managers, once they’re up 30 or 40 percent, will book their year [i.e., trade very cautiously for the remainder of the year so as not to jeopardize the very good return that has already been realized]. The way to attain truly superior long-term returns is to grind it out until you’re up 30 or 40 percent, and then if you have the convictions, go for a 100 percent year. If you can put together a few near-100 percent years and avoid down years, then you can achieve really outstanding long-term returns.

Jack D. Schwager. The New Market Wizards. Kindle Edition.

Green: His description reminds me of Buffett’s politely dismissive response to Mohnish Pabrai after the latter offered to work for him for free: “I simply do best operating by myself.” Indeed, Buffett famously spends much of his time sitting alone in his office in Omaha with the blinds drawn, enraptured by the solitary joy of reading annual reports.

William Green. Richer, Wiser, Happier (p. 35). Kindle Edition.

Buffett: [At times when prices are high for both businesses and stocks], we try to exert a Ted Williams kind of discipline. In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his “best” cell, he knew, would allow him to bat .400; reaching for balls in his “worst” spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors.

Lawrence A. Cunningham. The Essays of Warren Buffett (p. 181). Kindle Edition.

Druckenmiller: I do feel a responsibility. Unlike Warren Buffett, who holds a position for 10 or 20 years, I can have total conviction in an idea and, if the circumstances change, have total conviction the other way in two weeks. My performance is more a matter of having an open mind or a thesis and taking the losses than it is on being right a greater percentage of time. So, whenever I give public comments on a position, I always say, “I could change my mind in two or three weeks. This is the way I operate. You really shouldn’t be listening to anything I’d say in terms of short term because my views could change.

David M. Rubenstein. How To Invest (p. 202). Kindle Edition.

Tudor Jones: Don’t ever average losers. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well...If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in. There is nothing better than a fresh start.

Jack D. Schwager. Market Wizards (p. 162). Kindle Edition.

Hite: So the very first rule we live by at Mint is: Never risk more than 1 percent of total equity on any trade. By only risking 1 percent, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical. For example, one manager I know had a large account that withdrew half the money he was trading. Instead of cutting his position size in half, this manager kept trading the same number of contracts. Eventually, that half of the original money became 10 percent of the money. Risk is a no-fooling-around game; it does not allow for mistakes. If you do not manage the risk, eventually they will carry you out.

Jack D. Schwager. Market Wizards (p. 222). Kindle Edition.

Buffett: Whether appropriate or not, the term “value investing” is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics—a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield—are in no way inconsistent with a “value” purchase.

Lawrence A. Cunningham. The Essays of Warren Buffett (pp. 167-168). Kindle Edition.

Green: Templeton claimed that diligence had played a much greater role in his success than innate talent. He often spoke of his determination to “give the extra ounce”—to make the extra call, to schedule the extra meeting, to take the extra research trip. He was similarly dedicated to his lifelong program of continuous self-education. As a young man, he said, “I searched for anything available in writing on the subject of investing, and I still do.” Even in his eighties, he said, “I try to be more knowledgeable each year as an investor.”

William Green. Richer, Wiser, Happier (p. 45). Kindle Edition.

Marks: The last four and a half years have been carefree, halcyon times for investors. That doesn’t mean it’ll stay that way. I’ll give Warren Buffett the last word, as I often do: “It’s only when the tide goes out that you find out who’s been swimming naked.” Pollyannas take note: the tide cannot come in forever.

Howard Marks. The Most Important Thing (p. 104). Kindle Edition.

Green: Second, said Templeton, beware of your own ignorance, which is “probably an even bigger problem than emotion.… So many people buy something with the tiniest amount of information. They don’t really understand what it is that they’re buying.” It pays to remember the simple fact that there are two sides in every investment transaction: “The one with the greatest information is likely to come out ahead. It takes a huge amount of work and study and investigation.”