Finding Bargains 

• Investment is the discipline of relative selection 
• The tendency to mistake objective merit for investment opportunity, and the failure to distinguish between good assets and good buys, get most investors into trouble 
• Unlike assets that become the subject of manias, potential bargains usually display some objective defect – weak asset classes, company laggards, over-levered balance sheets, and inadequate structural protection are some examples of this 
• The necessary condition for the existence of bargains is that perception has to be considerably worse than reality 
• Given the way investors behave, whatever asset is considered the worst at a given point in time has a good likelihood of being the cheapest 

Patient Opportunism 

• Patient opportunism – waiting for bargains – is often your best strategy 
• The only real penalty in investing is making losing investments. There’s no penalty for omitting losing investments, just rewards. And even for missing a few winners, the penalty is bearable. 
• Many organizations fail because they choose to pursue high returns in a low return environment. When prices are high it’s inescapable that prospective returns are low (and risks are high). 
• The key during a crisis is to be insulated from the forces that require selling and positioned to be a buyer instead 
• Patient opportunism, buttressed by a contrarian attitude and a strong balance sheet, can yield amazing profits during melt downs 

Knowing What You Don’t Know 

• It’s hard to know what the macro future holds focus on smaller picture things where an investor can gain a knowledge advantage “know the knowable” 
• Make an effort to figure out where a business or market stands in terms of cycles and pendulums 
• Forecasts are of very little value. During “normal” times the future is much like the past and forecasts are mostly correct but of little value. When the future turns out to be very different than the past very few forecasts are correct although they would be of significant value 
• No one likes having to invest for the future under the assumption that the future is largely unknowable 
• Some of the biggest losses occur when overconfidence regarding predictive ability cause investors to underestimate the range of possibilities, the difficulty of predicting which one will materialize, and the consequences of a surprise 

Having a Sense for Where We Stand 

• The only thing we can predict about cycles is there inevitability 
• Investors should try to figure out where they stand in terms of each cycle and what that implies for their actions 
• Investors should try to gauge the present position which is knowable in order to understand the psyches of market participants, the investment climate, and thus how investor should respond (take the markets temperature) 

Appreciating the Role of Luck 

• A great deal of success of everything we do as investors will be heavily influenced by the roll of the dice 
• Investors much learn to decide which outcomes came about because of luck and which because of skill. Until one learns to identify the true source of success, one will be fooled by randomness 
• Every record should be considered in light of the other outcomes – Taleb calls them “alternative histories” – that could have occurred just as easily as the “visible histories” did 
• It is important not to look at investor’s track records but what they are doing to achieve those records. Does it make sense? Does it appear replicable? Why haven’t competitive forces priced away any apparent market inefficiencies that enables this investment success? 
• A correctness of a decision can’t be judged from the outcome. Nevertheless, that’s how people asses it. A good decision is one that’s optimal at the time it’s made, when the future is by definition unknown. 
• In the long run there’s no reasonable alternative to believing that good decisions will lead to investment profits. In the short run, however, we must be stoic when they don’t. 
• We need to practice defensive investing, since many of the outcomes are likely to go against us. It’s more important to ensure survival under negative outcomes than it is to guarantee maximum returns under favorable ones